-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, D7S1zyVua3nnmRRsCAAyClyUybAAD0PkLDHGYhnMtUEacnsUaapB8KxEQQtatkM+ 3+bm1xz2sai296S8RAUaxg== 0000890566-96-000168.txt : 19960401 0000890566-96-000168.hdr.sgml : 19960401 ACCESSION NUMBER: 0000890566-96-000168 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960329 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: DOCUCON INCORPORATED CENTRAL INDEX KEY: 0000843006 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROGRAMMING, DATA PROCESSING, ETC. [7370] IRS NUMBER: 742418590 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-10185 FILM NUMBER: 96540496 BUSINESS ADDRESS: STREET 1: 7461 CALLAGHAN RD CITY: SAN ANTONIO STATE: TX ZIP: 78229 BUSINESS PHONE: 2105259221 MAIL ADDRESS: STREET 1: 7461 CALLAGHAN ROAD CITY: SAN ANTONIO STATE: TX ZIP: 78229 10-K 1 CURRENT REPORT ON FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-KSB (Mark One) [x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995; OR [o] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] FOR THE TRANSITION PERIOD FROM ______ TO ______ COMMISSION FILE NUMBER 1-10185 DOCUCON, INCORPORATED (Name of Small Business Issuer in its Charter) DELAWARE 74-2418590 - --------------------------------- ------------------------------------ (State or Other Jurisdiction (I.R.S. Employer Identification No.) of Incorporation or Organization) 7461 CALLAGHAN ROAD SAN ANTONIO, TEXAS 78229 - --------------------------------- ------------------------------------ (Address of Principal Executive (Zip Code) Offices) Issuer's Telephone Number, Including Area Code: (512) 525-9221 -------------- Securities Registered Under Section 12(b) of the Exchange Act: Name of Each Exchange TITLE OF EACH CLASS ON WHICH REGISTERED - --------------------------------- ------------------------------------ COMMON STOCK, PAR VALUE $.01 PER SHARE BOSTON STOCK EXCHANGE Securities Registered Under Section 12(g) of the Exchange Act: NONE Check whether the Issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 [o] Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B in this form, and no disclosure will be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [x] State Issuer's revenues for its most recent fiscal year: $11,038,000 State the aggregate market value of the voting stock held by non-affiliates as of March 15, 1996: Common Stock, par value $.01 per share - $12,626,407 State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date. CLASS OUTSTANDING AT MARCH 15, 1996 - -------------------------------------------------------------------------------- COMMON STOCK, PAR VALUE 11,891,144 SHARES $.01 PER SHARE DOCUMENTS INCORPORATED BY REFERENCE No documents are incorporated by reference into this Annual Report on Form 10-KSB. Transitional Small Business Issuer Format: Yes No [x] PART I ITEM 1. DESCRIPTION OF BUSINESS. GENERAL Docucon, Incorporated ("Docucon" or the "Company") was incorporated under the laws of the State of Delaware in 1988 and is the successor by merger to a Texas corporation organized in 1986. The Company divides its business into two areas: backfile conversion services and software products. BACKFILE CONVERSION SERVICES The automated conversion of source documents into electronic form, including computer accessible images, indices and formats is referred to as "backfile conversion". These source documents may include letters, contracts, manuals, drawings, aperture cards, transcripts, microfilm and microfiche. After conversion, these documents are stored on various optical and magnetic media. These media are then accessed by document management systems which may be based on a wide range of computer systems. The process of document conversion involves the preparation and grading of the documents to be stored, the physical scanning of the documents and the creation of indices to facilitate retrieval of the converted documents. The indexing of the information to be stored is a significant activity in any document conversion system, and because Docucon creates custom indices and formats, the ultimate users can retrieve information from their own documents utilizing their own systems. Additionally, each of Docucon's document conversion systems can customize the format of the converted materials. Throughout all its operations, Docucon maintains a quality control program to ensure the integrity of the indexing, editing and grading processing of the databases which are converted. The Company provides backfile conversion services at its headquarters in San Antonio, Texas. Upon client request, the Company can provide equipment to process documents at remote client-site locations. LITIGATION SUPPORT SOFTWARE PRODUCTS The Company develops, markets and supports software products for use by attorneys engaged in litigation. The principal product marketed by the Company is the JFS Litigator's Notebook. Lawyers involved in litigation routinely keep witnesses, issues and facts files in spiral bound notebooks called "binders". Unlike paralegals who have been using computer systems for some time to assist them in the assembly of document sets to extract information required by the attorneys, the attorneys themselves have rarely used computers for anything other than word processing. The JFS Litigator's Notebook provides attorneys with electronic "binders". In addition, since the Notebook is based on Lotus Development Corporation's Lotus Notes(R), attorneys on a litigation team can work from the same "binders", send and receive notes and marginalia within the binders, and associate other documents with the "binders". With the advent of large and powerful "lap-top" computers, the attorney can now carry his entire case file with him, wherever he might be, and not only have access to it, but also be able to share updates with the other members of the litigation team in other cities or countries. 2 The Company maintains a support and training staff for its software products in its facility in Parsippany, New Jersey. JFS TRANSACTION On March 16, 1994, the Company purchased substantially all of the assets, having an approximate book value of $1,015,000 and assumed certain liabilities in the approximate amount of $1,179,000 of J. Feuerstein Systems, Inc. ("JFS"), for consideration in the approximate amount of $200,000. JFS was based in Parsippany, New Jersey and was engaged in the business of providing consulting and support services and software products to the legal market. The consideration was paid to Mr. Jim Feuerstein, Ms. Jane Gennarelli and a finder/consultant who helped all of the parties consummate the transaction. The transaction was negotiated on an arms-length basis between independent parties. In connection with the transaction, the Company entered into Employment Agreements with Jim Feuerstein and Jane Gennarelli, the principal executives of JFS, who became officers in the JFS division of the Company. See "Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act - Directors, Executive Officers and Key Technical Personnel" in Item 9, Note 1 of "Notes to Financial Statements" and Item 6 "Management's Discussion and Analysis of Financial Condition or Plan of Operation". See also, this Item, "Business - Product and Service Markets - Litigation Support Software Services Market and Litigation Support Software Products Market". PRODUCT AND SERVICE MARKETS The Company currently markets backfile conversion and litigation support software products. The primary customers for backfile conversion services are governmental and private organizations which have substantial document storage and retrieval needs. These documents may be logistic support documents for the Department of Defense ("DOD"), land files for petro-chemical companies and county governments, personnel and financial records for corporations and institutions, or a number of other similar requirements. The Company markets a line of software products whose purpose is to facilitate the creation and use of electronic "ring binders" commonly used by lawyers during litigation. The flagship product is the JFS Litigator's Notebook, which has enjoyed broad acceptance by large law firms and the corporate legal departments of several major corporations. The Company plans to continue to make significant investment in the continued marketing and development of these products. For the years ended December 31, 1995, 1994, and 1993, the Company spent $497,000, $652,000, and $455,000, respectively, for research and development activities. The Company does not own any patents. The Company uses the word "Docucon" alone and in combination with various designs and logos as a service mark to identify the Company's services. The Company has obtained federal trademark registration for the name "Docucon" and uses it to identify its products and services. 3 BACKFILE CONVERSION SERVICES MARKETS The Company has performed backfile conversion services since 1987 under two consecutive contracts awarded by the DOD. Although the original 1987 contract totalled $9.3 million, the Company received orders for only $5.4 million before the expiration of the contract in 1991. The subsequent 1991 contract was increased from $12.3 million to $16.8 million and the delivery date extended to April 1996. The Company provided services totalling $16.75 million under this contract from 1991 through 1995. In November 1994, the Company was notified that it was not the successful bidder on a new similar contract. However, that contract was subsequently terminated at the government's convenience, and additional contract awards to the Company in 1995 totalled $2,000,000. In early 1996 the Company received a $14.8 million contract from the DOD for services similar to those provided for in the aforementioned contracts. These services are to be provided over the next 18 months. In 1995, 1994, and 1993 approximately 38 percent, 48 percent, and 57 percent, respectively, of the Company's revenues were derived from services provided under DOD contracts. The Company has also performed conversion services for various commercial companies and governmental agencies including Texaco Exploration and Production, Inc.,Computer Science Corporation, QED, Amoco, Dowell Schlumberger, and Ericsson GE. The Company presently has six non-federal contracts. LITIGATION SUPPORT SOFTWARE PRODUCTS MARKET The Company's strategic intent with its software products is to "capture the attorney's desktop". At present, the majority of revenues for the Company's products has come from large law firms and corporations. It has been the Company's strategy to aggressively market to these large organizations early in the product life of the JFS Litigator's Notebook, a strategy which management believes has been successful. Strategies for the future of these products include the migration of the product to smaller firms. Present and future sales strategies will be carried out by the Company's direct product sales force and through relationships with companies having access to the legal market. COMPETITION The Company's services are sold in highly competitive markets, and its sales and earnings can be affected by changes in competitive prices, fluctuations in the level of activity in major markets or general economic conditions. The Company believes that the document conversion industry is highly fragmented, with numerous relatively small companies seeking to establish market positions. In addition, the Company believes that major hardware, software and service providers may seek to enter the field in the future. Many potential competitors have larger marketing organizations and greater resources than the Company. Due to the rapidly changing technology used in connection with providing such services, competitive positions within the industry are subject to change. 4 GOVERNMENT REGULATION The Company's ability to obtain contracts from the DOD is dependent upon its compliance with rules and regulations promulgated by that department, including regulations related to security and technological standards. Although the Company believes it is currently in compliance, there is no assurance that it will be able to comply with such rules and regulations promulgated in the future or to maintain its current clearances. See this Item, "Business - Product and Service Markets" and "Business -Competition" and Item 6, "Management's Discussion and Analysis of Financial Condition and Results of Operations". EMPLOYEES At March 15, 1996, the Company had 187 full-time employees. In addition, at such date, the Company was retaining the services of 85 temporary employees to meet current production needs. None of the Company's employees is represented by a labor union, and the Company is not aware of any current activities to unionize its employees. Management believes the relationship between the Company and its employees is good. ITEM 2. DESCRIPTION OF PROPERTY. In October 1992, the Company purchased an eight-story, 52,000-square foot office building in San Antonio, Texas. This facility is located on 2.5 acres of land which at the time of purchase was expected to provide the Company with adequate office and parking facilities for the foreseeable future. The Company currently occupies approximately 50,000 square feet in the building, utilizing it for office and production space. The remaining space is currently leased to outside tenants. As these leases expire, the Company plans to occupy the remainder of the building to fulfill its anticipated expansion needs. In Management's opinion, the Company's physical properties are adequate for the Company's current needs, and are consistent with the Company's plans described elsewhere in this Annual Report on Form 10-KSB; however, in the event that the Company experiences a significant influx of new business, additional space will be required. ITEM 3. LEGAL PROCEEDINGS. In the ordinary course of its business, the Company may be subject, from time to time, to claims and legal actions by clients, suppliers and others. No material actions are currently pending against the Company. The Company maintains general liability insurance and other insurance coverages typical in the industry. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matters were submitted to a vote of security holders of the Company during the fourth quarter of 1995. 5 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The Company's Common Stock, par value $.01 per share, is traded on The Nasdaq Stock Market'sSM SmallCap Market (Symbol: DOCU), and on the Boston Stock Exchange (Symbol: DOC). The following table sets forth for the fiscal periods indicated the high and low bid prices for the Company's Common Stock in the Nasdaq Stock Market's SmallCap Market, the principal market upon which the Company's Common Stock is traded, as reported to the Company in monthly reports from Nasdaq. REPORTED BID PRICE ---------------------- HIGH LOW - -------------------------------------------------------------------------------- 1994 - ------------------- First Quarter.................................. $1.34 $ .75 Second Quarter................................. .81 .50 Third Quarter.................................. .72 .50 Fourth Quarter................................. .72 .31 1995 - ------------------- First Quarter.................................. $ .63 $ .41 Second Quarter................................. .63 .34 Third Quarter.................................. .49 .38 Fourth Quarter................................. .56 .31 The last reported sale price for the Common Stock on The Nasdaq Stock Market on March 15, 1996, was $1.19. Bid and asked prices reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not necessarily represent actual transactions. There were approximately 246 holders of record of the Common Stock as of March 15, 1996, excluding those shares held by depository companies for certain beneficial owners. The Company has never paid cash dividends on its Common Stock and does not anticipate the payment of cash dividends in the foreseeable future. The Company currently anticipates that any future earnings will be retained to finance the Company's operations. Under the terms of the Company's Series A Convertible Preferred Stock, the Company cannot pay dividends on its Common Stock until all accumulated but unpaid dividends on such Preferred Stock have been paid. At December 31, 1995, cumulative undeclared dividends on the Series A Convertible Preferred Stock were approximately $317,000. 6 ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. FISCAL YEAR 1995 COMPARED TO FISCAL YEAR 1994 The Company's operations resulted in a net loss applicable to common stockholders of $665,897 for fiscal 1995, compared to a net loss applicable to common stockholders of $1,785,871 in 1994. The smaller loss was attributable to improved results in the backfile conversion service division and increased sales of the JFS Litigator's Notebook and related products. In addition, the 1994 loss included a $283,000 writedown of capitalized software. These improvements were offset by losses incurred by the services portion of the litigation support division. The Company reduced the scope of its litigation support services in June of 1995 as a result of continuing losses incurred by the division. Although the losses from those operations were reduced to a nominal amount by the end of the fiscal year, the operations were discontinued at the end of 1995. Operating revenues totaled $11,037,846 in fiscal 1995, a 28% increase over 1994 revenues. The majority of the increase was due to an increase in software product sales. Backfile conversion service revenues also increased. Revenues earned under the DOD contracts increased slightly, from approximately $3,900,000 to $4,200,000, resulting from several contract awards throughout the fiscal year (see "Liquidity and Capital Resources"). Revenues earned under commercial and government-related subcontracts also increased. Litigation support services revenue increased during the first six months of fiscal 1995. However, the contracts for these services were largely unprofitable and the scope of the services was reduced in June of 1995 and discontinued in full at year end. Overall, total litigation support service revenues were slightly lower than the 1994 comparable revenues, and represented 21% and 29% of the Company's 1995 and 1994 revenues, respectively. Revenues from software product sales and support increased 450% to $2,200,000, and composed 19% of total revenues in 1995 as compared to 4% of 1994 total revenues. Production costs increased $1,345,000, or 25%, in 1995 as compared to 1994, commensurate with the increase in revenues. A disproportionate share of production costs were incurred in the litigation support service area as compared to the Company's other areas of production including document conversion and software products. The Company devoted a portion of its research and development resources to a software development project in 1995, and capitalized $153,000 of costs related to the project. Thus, research and development expenses decreased 24 percent from 1994 to 1995. The Company continued to devote resources to the expansion of the capabilities of its JFS Litigator's Notebook and related software products as well as the development and enhancement of its document conversion capabilities. Marketing expenses increased 38% percent during 1995 as compared to 1994. The Company built national marketing teams in the latter part of 1994 to support new and aggressive marketing efforts for litigation support services and its line of software products. Although the marketing efforts 7 of litigation support services were curtailed in June of 1995, the Company continued aggressive marketing efforts for the remaining government and commercial and software product divisions. Depreciation and amortization decreased 15 percent during fiscal 1995 as compared to fiscal 1994. The decrease in depreciation and amortization charges is due to equipment becoming fully depreciated. The Company added approximately $200,000 of equipment shortly after year end in order to expand its production capabilities to accommodate the new DOD contract. FISCAL YEAR 1994 COMPARED TO FISCAL YEAR 1993 The Company's operations during fiscal year 1994 resulted in a net loss applicable to common stockholders of $1,785,871, compared to net income applicable to common stockholders of $115,696 in 1993. Operating revenues totaled $8,616,480 in fiscal 1994. Although this total represents a $1,728,000, or 17 percent, decline from 1993 revenues, there were shifts in divisional revenue levels which the Company believes establishes an improved position for future stability. Revenues earned under the DOD contract decreased 30 percent from approximately $5,900,000 to $4,125,000 and declined steadily throughout the year as the 1991 DOD Contract neared completion. The Company received notification in November 1994 that it was not the low bidder and did not receive a new contract with the DOD. Commercial revenues decreased from approximately $2,500,000 to $1,590,000 due to the completion of a $4.0 million conversion project with Texaco, $2,142,000 of which was earned in 1993. There were no revenues earned under this contract in 1994. Approximately $1,300,000 of these commercial revenues was earned under government-related non-DOD contracts which were issued through commercial enterprises. Other commercial revenues in 1994 included those earned under continuing contracts with Amoco, Alabama Power Company, Norfolk Southern and SAIC, as well as several other new contracts. The litigation support division experienced growth in 1994; divisional revenues increased approximately $1,000,000, or 53 percent in 1994 as compared to 1993. The increase was concentrated in the latter nine months of the year, subsequent to the JFS transaction and is attributable to the opportunities afforded by such transaction. Both conversion service revenues and product sales of JFS Litigator's Notebook contributed to the increase. Production costs during 1994 decreased $664,000, or 11 percent compared to 1993. These decreases occurred in the government area due to reduced temporary labor costs and a reduction in personnel by attrition, as well as a decrease in required supplies. These decreased costs were offset by additional production costs within the JFS division. In the latter part of the year, the Company relocated its New Jersey offices to less expensive facilities and tightened labor costs to reduce production costs of the division. Research and development costs increased 43 percent during 1994 as compared to 1993. The Company continued development and enhancement of its document conversion capabilities, as well as expansion of the capabilities of its JFS Litigator's Notebook and related software products, which the Company purchased in the JFS transaction. General and administrative expenses decreased 5 percent from year to year, primarily as a result of decreased occupancy expenses. During the first six months of 1993, the Company incurred costs related to the building acquired in 1992 while it was being refurbished for occupancy in addition to the rental expense 8 associated with its prior headquarters. The Company has been able to hold other general and administrative expenses constant despite the increased demands arising from the JFS transaction. Marketing expenses increased 20 percent during 1994 as compared to 1993. The Company built a new sales team for the JFS division and opened new regional sales offices in New York City, San Francisco, Los Angeles, and Washington, D.C. The Company continued to build its presence in the legal industry, and opened an office in Minneapolis shortly after year end. Depreciation and amortization increased 16 percent during fiscal 1994 as compared to fiscal 1993, primarily as a result of depreciation and amortization costs arising from the additional assets of JFS and the related goodwill. Interest expense increased slightly in 1994 due to obligations the Company assumed in connection with JFS. In 1994, the Company wrote off the carrying value of its litigation support software which was developed prior to 1993. The write off of approximately $283,500 was recorded when it became apparent that the remaining carrying cost would not be realized due to a redirection of development and support efforts to JFS Litigator's Notebook. LIQUIDITY AND CAPITAL RESOURCES Since its inception, the Company's operations have been supplemented through bank borrowings, capital contributions, borrowings from affiliated and unaffiliated lenders, capital lease agreements, an initial public offering of the Company's Common Stock in 1989, the conversion of warrants into Common Stock and private preferred stock placements. In 1991, the Company was awarded a contract from the Defense Printing Services Office (DPS) to provide conversion services for the Department of Defense (DOD) totaling $12.3 million. The award was increased in 1994 and 1995 by a total of $4.5 million and extended in time until April 1996. Additionally, in 1995, DPS awarded contracts totaling approximately $2.0 million to the Company. During 1995, the Company generated $4,200,000, or 38% of total revenues through DOD contracts. In February of 1996, DPS awarded a contract to the Company. This contract allows the Company to provide up to $14.8 million of document services to DOD agencies through August 1997. With the addition of J. Feuerstein Systems (JFS) in 1994, the Company made significant investments in the marketing and development areas of its litigation support products and services. These investments resulted in substantially increased revenues in both the services and product areas. However, lower than expected margins in the litigation support service area resulted in the Company's decision to substantially reduce the scope of those operations in June of 1995 and ultimately to terminate those operations at year end. As a result of the decision, the losses of the division were reduced steadily during the year. The Company is currently negotiating long term financing on its $1,500,000 8 percent promissory note due in December 1996. This note is secured by the Company's office building. In connection with the purchase of the Company's office building in 1992, the Company issued 900,000 warrants to purchase an equivalent number of shares of Common Stock at an exercise price of $2.00 per share. The Company now occupies approximately five sixths of the building with the remaining 9 space being leased to third party tenants. The Company believes that the building will fulfill its needs for the foreseeable future. Accounts receivable and unbilled revenues increased approximately $828,000 from December 31, 1994 to December 31, 1995. The higher balances reflect the increased services provided to the DOD in the fourth quarter of 1995 and also include final balances due from litigation support service customers, most of which have been collected subsequent to year end. The Company expects to fund its operations and marketing activities through utilization of cash on hand and cash generated from operations. During 1995, the Company fully extended its $400,000 line of credit to fund short-term cash needs. At March 15, 1996, $300,000 was outstanding under this line of credit. The Company believes its negotiations with the bank to extend the line of credit beyond the current maturity date of April 1996 will be successful. These funds are expected to be adequate for the Company's needs for at least the next 12 months. Subsequent to year end, the Company expended over $200,000 from internally generated funds for capital equipment to fulfill the requirements of the new DOD contract awarded in February 1996. While the Company may consider and evaluate, from time to time, acquisitions and opportunities for future growth, the Company has not entered into any agreements with respect to future acquisitions. Should the Company enter into any such agreements, the Company would, in all likelihood, be required to raise outside capital to consummate such transactions. OUTLOOK The Company enters 1996 with a profit outlook which is stronger than in any other year in its history. The reasons for this are: the acquisition of the new DOD contract, the expansion of the software products business, and the elimination of the historically unprofitable litigation support services business. * In 1996 the Company will significantly increase the capacity of its conversion lines to accommodate the buildup in revenues under the new DOD contract. * The JFS division will expand its product offerings during the year. These actions will not only strengthen the market position of Litigator's Notebook but will also allow the penetration of the non-litigation portion of the legal market and markets beyond the legal market. * JFS will increase its direct sales force from four to six sales representatives in order to broaden its national coverage. * The Company intends to obtain conventional financing for its San Antonio facility. 10 ITEM 7. FINANCIAL STATEMENTS. Financial statements of the Company meeting the requirements of Regulation S-B are filed on the succeeding pages of this Item 7 of this Annual Report on Form 10-KSB, as listed below: PAGE ---- Report of Independent Public Accountants 12 Balance Sheets as of December 31, 1995 and 1994 13 Statements of Operations for the Years Ended December 31, 1995, 1994 and 1993 15 Statements of Stockholders' Equity for the Years Ended December 31, 1995, 1994 and 1993 16 Statements of Cash Flows for the Years Ended December 31, 1995, 1994 and 1993 17 Notes to Financial Statements 18 11 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors and Stockholders of Docucon, Incorporated: We have audited the accompanying balance sheets of Docucon, Incorporated (a Delaware corporation), as of December 31, 1995 and 1994, and the related statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Docucon, Incorporated, as of December 31, 1995 and 1994, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP San Antonio, Texas February 27, 1996 DOCUCON, INCORPORATED BALANCE SHEETS
DECEMBER 31 --------------------------- ASSETS 1995 1994 ------------ ------------ CURRENT ASSETS: Cash and temporary cash investments $ 139,167 $ 376,798 Accounts receivable-trade, net of allowance for doubtful accounts of $7,683 and $28,093 in 1995 and 1994, respectively- U.S. Government 594,090 119,249 Commercial 1,278,796 1,347,075 Unbilled revenues 579,821 156,305 Other receivables 1,648 3,830 Prepaid expenses and other 69,634 169,543 ------------ ------------ Total current assets 2,663,156 2,172,800 ------------ ------------ PROPERTY AND EQUIPMENT: Conversion systems 4,540,302 4,083,892 Building and improvements 1,515,608 1,467,287 Land 230,000 230,000 Furniture and fixtures 278,805 253,280 ------------ ------------ Total property and equipment 6,564,715 6,034,459 Less- Accumulated depreciation 4,182,671 3,286,816 ------------ ------------ Net property and equipment 2,382,044 2,747,643 ------------ ------------ SOFTWARE DEVELOPMENT COSTS, net 358,879 280,901 ------------ ------------ GOODWILL, net 338,824 357,433 ------------ ------------ Total assets $ 5,742,903 $ 5,558,777 ============ ============
See Notes to Financial Statements. DOCUCON, INCORPORATED BALANCE SHEETS
DECEMBER 31 ----------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY 1995 1994 -------------- ------------- CURRENT LIABILITIES: Accounts payable $ 697,980 $ 755,305 Accrued liabilities 774,955 597,148 Line of credit 400,000 - Note payable - 10,560 Current maturities of capital lease obligations 3,107 20,930 Deferred revenues 339,558 91,018 Current maturities of long-term debt 1,500,000 - ------------- ------------- Total current liabilities 3,715,600 1,474,961 ------------- ------------- LONG-TERM DEBT - 1,500,000 CAPITAL LEASE OBLIGATIONS, less current maturities - 3,094 ------------- ------------- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Preferred stock, $1.00 par value, 10,000,000 shares authorized- Series A, 60 shares authorized, 21 and 23 shares outstanding as of December 31, 1995 and 1994, respectively 21 23 Common Stock, $.01 par value, 25,000,000 shares authorized; 11,771,228 and 11,544,280 shares outstanding as of December 31, 1995 and 1994, respectively 117,712 115,442 Additional paid-in capital 9,506,553 9,456,677 Accumulated deficit (7,596,983) (6,991,420) ------------- ------------- Total stockholders' equity 2,027,303 2,580,722 ------------- ------------- Total liabilities and stockholders' equity $ 5,742,903 $ 5,558,777 ============ ============
See Notes to Financial Statements. DOCUCON, INCORPORATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31 ---------------------------------------------- 1995 1994 1993 ------------- ------------- ------------- OPERATING REVENUES $ 11,037,846 $ 8,616,480 $ 10,344,393 ------------- ------------- ------------- COSTS AND EXPENSES: Production 6,810,976 5,465,746 6,129,557 Research and development 497,123 651,629 455,319 General and administrative 990,162 1,034,371 1,092,611 Marketing 2,214,310 1,610,291 1,343,152 Depreciation and amortization 992,154 1,167,177 1,003,942 Writeoff of software development costs - 283,442 - ------------- ------------- ------------- 11,504,725 10,212,656 10,024,581 ------------- ------------- ------------- OPERATING INCOME (LOSS) (466,879) (1,596,176) 319,812 OTHER INCOME (EXPENSE): Interest expense (152,410) (140,010) (134,087) Other, net 13,726 26,685 47,384 ------------- ------------- ------------- INCOME (LOSS) BEFORE INCOME TAXES AND EXTRAORDINARY ITEM (605,563) (1,709,501) 233,109 INCOME TAX EXPENSE - 13,200 25,600 ------------- ------------- ------------- NET INCOME (LOSS) (605,563) (1,722,701) 207,509 ------------- ------------- ------------- PREFERRED STOCK DIVIDEND REQUIREMENTS 60,334 63,170 91,813 ------------- ------------- ------------- NET INCOME (LOSS) APPLICABLE TO COMMON STOCKHOLDERS $ (665,897) $ (1,785,871) $ 115,696 ============= ============= ============= PRIMARY EARNINGS (LOSS) PER COMMON SHARE AND COMMON SHARE EQUIVALENTS $(.06) $(.15) $.01 ============= ============= ============ WEIGHTED AVERAGE NUMBER OF COMMON SHARES AND COMMON SHARE EQUIVALENTS OUTSTANDING 11,690,161 11,549,909 11,627,383 ============= ============= =============
See Notes to Financial Statements
DOCUCON, INCORPORATED STATEMENTS OF STOCKHOLDERS' EQUITY COMMON STOCK PREFERRED STOCK -------------------- --------------- NUMBER NUMBER Additional Total OF OF PAID-IN ACCUMULATED STOCKHOLDERS' SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT EQUITY ---------- -------- --- ---- ----------- ----------- ----------- BALANCE, December 31, 1992 ............................ 10,711,616 $107,116 41 $ 41 $ 9,455,835 $(5,476,228) $ 4,086,764 Shares issued pursuant to employee stock plans ..... 130,000 1,300 -- -- 29,700 -- 31,000 Conversion of Series A preferred stock ............. 566,661 5,666 (17) (17) (5,649) -- -- Shares issued to pay preferred stock dividends ..... 102,670 1,027 -- -- (1,027) -- -- Net income ......................................... -- -- -- -- -- 207,509 207,509 ---------- -------- --- ---- ----------- ----------- ----------- BALANCE, December 31, 1993 ............................ 11,510,947 115,109 24 24 9,478,859 (5,268,719) 4,325,273 Conversion of Series A preferred stock ............. 33,333 333 (1) (1) (332) -- -- Stock registration costs ........................... -- -- -- -- (21,850) -- (21,850) Net loss ........................................... -- -- -- -- -- (1,722,701) (1,722,701) ---------- -------- --- ---- ----------- ----------- ----------- BALANCE, December 31, 1994 ............................ 11,544,280 115,442 23 23 9,456,677 (6,991,420) 2,580,722 Shares issued pursuant to employee stock plans ..... 70,983 710 -- -- 51,434 -- 52,144 Conversion of Series A preferred stock ............. 66,666 667 (2) (2) (665) -- -- Shares issued to pay preferred stock dividends ..... 89,299 893 -- -- (893) -- -- Net loss ........................................... -- -- -- -- -- (605,563) (605,563) ---------- -------- --- ---- ----------- ----------- ----------- BALANCE, December 31, 1995 ............................ 11,771,228 $117,712 21 $ 21 $ 9,506,553 $(7,596,983) $ 2,027,303 ========== ======== === ==== =========== =========== ===========
See Notes to Financial Statements. DOCUCON, INCORPORATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31 --------------------------------------------- 1995 1994 1993 ------------- ------------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ (605,563) $ (1,722,701) $ 207,509 Adjustments to reconcile net income (loss) to net cash provided by operating activities- Depreciation and amortization 992,154 1,167,177 1,003,942 Writeoff of software development costs - 283,442 - Changes in current assets and current liabilities- (Increase) decrease in receivables and unbilled revenues (827,896) 1,087,891 (346,292) Decrease in prepaid expenses and other 99,909 101,554 36,521 Increase (decrease) in accounts payable and accrued liabilities 120,482 (135,591) 73,113 Increase in deferred revenues 248,540 29,153 6,014 ------------- ------------- ------------- Net cash provided by operating activities 27,626 810,925 980,807 ------------- ------------- ------------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (533,123) (513,507) (1,346,854) Capitalized software development costs (152,801) (21,527) (130,050) ------------- ------------- ------------- Net cash used in investing activities (685,924) (535,034) (1,476,904) ------------- ------------- ------------- CASH FLOWS FROM FINANCING ACTIVITIES: Advances under line of credit 400,000 - - Principal payments on notes payable (10,560) (489,259) - Principal payments under capital lease obligations (20,917) (21,125) (14,392) Proceeds from employee stock purchase plan 52,144 - - Proceeds from exercise of options - - 31,000 Stock registration costs - (21,850) - ------------- ------------- ------------- Net cash provided by (used in) financing activities 420,667 (532,234) 16,608 ------------- ------------- ------------- NET DECREASE IN CASH AND TEMPORARY CASH INVESTMENTS (237,631) (256,343) (479,489) ------------- ------------- ------------- CASH AND TEMPORARY CASH INVESTMENTS, beginning of period 376,798 633,141 1,112,630 ------------- ------------- ------------- CASH AND TEMPORARY CASH INVESTMENTS, end of period $ 139,167 $ 376,798 $ 633,141 ============= ============= =============
See Notes to Financial Statements. DOCUCON, INCORPORATED NOTES TO FINANCIAL STATEMENTS 1. ORGANIZATION AND DESCRIPTION OF THE COMPANY: Docucon, Incorporated (the Company), was incorporated in June 1986. The Company's primary business is the conversion of paper and microform documents to a computer accessible medium for commercial and governmental customers. Paper or microform documents are scanned by sophisticated computer equipment and stored and indexed on optical disks or magnetic media. The Company also sells software products to the legal market. Substantially all of the Company's customers are located in the U.S. In March 1994, the Company acquired substantially all of the assets and assumed selected liabilities of J. Feuerstein Systems, Inc. (JFS), a company which provided consulting and support services and software products to the legal market. Since its inception, the Company has incurred losses of approximately $7.6 million including a loss of approximately $606,000 in 1995. These losses have been funded primarily through the Company's public offering, issuances of preferred stock, the exercise of warrants and debt financing. The Company has taken steps to improve its 1996 operating results. The steps taken include exiting the litigation support services market and focusing on the Company's core higher margined businesses. The Company also intends to refinance its $1,500,000 note payable which is currently due in December 1996. The note payable is secured by the Company's building and is nonrecourse to the Company. (See Note 5.) The Company's management believes that it is likely that the Company's operating results for 1996 will improve over 1995 and will generate sufficient working capital to sustain its operations throughout the year. However, if operating results do not improve, the Company will be unable to ensure its continuing operations independent of additional capital infusions. See Note 3 and "Outlook" and "Liquidity and Capital Resources" included in Item 6 under "Management's Discussion and Analysis of Financial Condition and Results of Operations." 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: PROPERTY AND EQUIPMENT Property and equipment are recorded at original cost. Maintenance and repairs are charged to expense as incurred and betterments which increase the value or extend the useful life of the property are capitalized. Gains or losses on sales or other dispositions of property and equipment are credited or charged to income. Depreciation is provided using the straight-line method over the lesser of the capital lease term or estimated useful lives of the related assets. The Company's conversion system and furniture and fixtures are currently depreciated over periods ranging from two to five years beginning in the month the property is placed in service. The Company's building is being depreciated over 40 years. REVENUE RECOGNITION Revenues from conversion service contracts are recognized at the time services are provided and are based upon the number of documents converted and the conversion rates established in the contracts. Revenues from software licensing fees are recognized upon delivery of the software. Revenues from maintenance and telephone support contracts are recognized ratably over the term of the contract, typically one year. DOCUCON, INCORPORATED NOTES TO FINANCIAL STATEMENTS - (CONTINUED) SOFTWARE DEVELOPMENT COSTS The Company capitalizes software development costs and amortizes those costs over the estimated useful life of the software. During 1993 and prior, the Company incurred approximately $417,000 related to the development of software (WIN.LAW), which was to be used to supplement the Company's litigation support services. During 1994, the Company wrote off the unamortized cost of WIN.LAW ($283,442) when it became apparent that the carrying value would not be realized. Included in software development costs is $250,000 for advanced litigation support software (Litigator's Notebook(TM)) which was acquired from JFS in 1994. Also included in software development costs is approximately $150,000 of costs which were incurred during 1995 to develop software which will support and complement Litigator's Notebook(TM). These costs are being amortized over a five-year period. During 1995, amortization expense of approximately $75,000 was recorded relating to software development costs. As of December 31, 1995, accumulated amortization of $164,000 was netted against software development costs. GOODWILL In connection with the acquisition discussed in Note 1 above, the Company recognized goodwill of approximately $372,000. This goodwill is being amortized on a straight-line basis over 20 years. Accumulated amortization as of December 31, 1995, totaled approximately $33,000. STATEMENTS OF CASH FLOWS- SUPPLEMENTAL DISCLOSURES The Company considers funds invested in highly liquid investments having a maturity of 90 days or less when acquired to be temporary cash investments. During 1994, as a result of the JFS acquisition, noncash investing and financing activities include the acquisition of approximately $1,015,000 in assets and approximately $372,000 in goodwill in exchange for the assumption of approximately $1,179,000 in liabilities. The following relates to cash interest and income taxes paid by the Company for the periods indicated:
YEAR ENDED DECEMBER 31 ----------------------------------- 1995 1994 1993 ----------------------------------- Cash paid during the year for interest $ 181,769 $ 143,980 $ 123,725 Cash paid during the year for income taxes - 39,000 31,600
POST RETIREMENT AND POST EMPLOYMENT BENEFITS The Company does not provide post retirement nor post employment benefits to its employees. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make certain estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 3. SHORT-TERM BORROWING ARRANGEMENTS: The Company's bank credit agreement consists of a $400,000 revolving line of credit which bears interest at prime plus 1.25 percent (9.75 percent as of December 31, 1995). The line is due on demand, or if no demand is made, payment of principal and accrued interest is due in April 1996. Borrowings pursuant to the revolving line of credit are secured by the Company's accounts receivable. As of December 31, 1995, the entire $400,000 was outstanding under this line. Subsequent to December 31, 1995, the Company repaid $100,000 on the line. Discussions with the bank have led the Company's management to believe that the bank will extend the maturity date of the line of credit to beyond December 1996. 4. LEASES: Certain office equipment and office space is leased under various noncancelable operating leases with lease terms ranging from one to five years. Rent expense under all cancelable and noncancelable operating leases was approximately $395,000, $293,000 and $207,000 for the years ended December 31, 1995, 1994 and 1993, respectively. Future minimum lease payments for all noncancelable operating leases, as of December 31, 1995, are as follows: Year ending December 31- 1996 $ 181,048 1997 160,892 1998 160,892 1999 131,371 2000 1,484 ---------- Total future minimum lease payments $ 635,687 ========== 5. LONG-TERM DEBT: In connection with the purchase of its headquarter's building, the Company issued a four-year, 8 percent promissory note with the principal amount of $1,500,000 due in December 1996 and interest payable quarterly. The note is secured by land and the building with a net book value of approximately $1,595,000 at December 31, 1995, and is nonrecourse. Also in connection with the purchase of its headquarter's building, the Company paid a loan origination fee of $60,000 and issued 900,000 warrants, which expire in December 1996, to purchase an equivalent number of shares of Common Stock at an exercise price of $2.00 per share. As the exercise price exceeded the current market price and the financing terms of the debt were arm's length, no value was recorded for the warrants issued. The fair value of the Company's long-term debt approximates its carrying value based upon the borrowing rates available to the Company for long-term debt with similar terms. 6. MAJOR CUSTOMER: The Company has historically earned a significant portion of its total revenues from conversion services performed for the Department of Defense (DOD). Specifically, the Company earned approximately $4,194,000, $4,125,000 and $5,900,000 during the years ended December 31, 1995, 1994 and 1993, respectively, from services provided to the DOD. Subsequent to December 31, 1995, the Company announced that it was awarded a $14.8 million contract by the DOD to provide document conversion services to DOD agencies through August 1997. 7. PREFERRED STOCK: In 1990, the Company issued 46 shares of 11 percent Series A Preferred Stock at $25,000 per share. Each share of the Preferred Stock is convertible into 33,333 shares of Common Stock. Through December 31, 1995, 25 shares of Preferred Stock have been converted. Additionally, 191,969 shares of Common Stock have been issued in lieu of accumulated dividends on the Preferred Stock which was converted. As of December 31, 1995, cumulative undeclared dividends on the Preferred Stock approximated $317,000. 8. STOCK OPTIONS AND UNIT PURCHASE OPTIONS: The Company adopted the 1988 Stock Option Plan (the 1988 Plan) which allows for the granting of stock options at the current market value of the Common Stock at the date of the grant to key employees. An aggregate of 1,360,000 shares of Common Stock has been reserved for issuance pursuant to the 1988 Plan. The 1991 Director Non-Statutory Stock Option Plan (the Director Plan) provides for the granting of options at the Common Stock's current market value to members of the board of directors of the Company who are not employees of the Company. The Director Plan authorizes the granting of options to purchase up to 500,000 shares of the Company's Common Stock. The stock options granted under the 1988 Plan and the Director Plan are exercisable pursuant to the individual agreements between the Company and the grantee and range from a six-month to a three-year vesting period. All options granted under these plans must be exercised within 10 years from the date of grant and expire within three months after termination of employment or service as a director. Additionally, the Company adopted the 1991 Employees' Non-Statutory Stock Option Plan (the Employees' Plan) which provided for the granting of options to purchase Common Stock of the Company at below market value and immediate vesting. An aggregate of 100,000 shares had been reserved for issuance pursuant to the Employees' Plan, all of which were granted to a former officer of the Company at an option price of $.10 per share and were exercised during 1993. The following summarizes the activity in the Company's stock option plans during 1995:
MARKET PRICE OPTION PRICE AT DATE OF GRANT ----------------------------- --------------------------- SHARES PER SHARE TOTAL PER SHARE TOTAL --------- ------------- ------------ ------------- ----------- Outstanding, December 31, 1994 1,192,450 $.56 -2.44 $ 1,216,918 $.56 -2.44 $ 1,216,918 Price reduction - - 546,165 - - Granted 164,200 .41 -.56 83,930 .41 -.56 83,930 Exercised - - - - - Terminated 69,100 .53 -.56 38,644 .53 -2.44 43,385 ---------- ------------ ----------- Outstanding, December 31, 1995 1,287,550 .41 -.56 $ 716,039 .41 -2.44 $ 1,257,463 ========== ============ =========== Exercisable, December 31, 1995 1,029,384 .53 -.56 $ 577,753 .53 -2.44 $ 1,067,723 ========== ============ ===========
On February 14, 1995, the Company's board of directors voted to reduce the exercise price for all outstanding options granted under the 1988 Plan and the Director Plan to $.5625 per share, the current market price of the Company's Common Stock on that date. This reduction is shown in the above table. In addition to the above stock option agreements, the Company has warrants and options outstanding with certain lenders and other parties. As of December 31, 1995, the total number of shares issuable under these warrants and options was 972,727, at exercise prices ranging from $1.375 to $2.00 per share. 9. EMPLOYEE BENEFIT PLANS: Effective January 1, 1994, the Company adopted the 1993 Employee Stock Purchase Plan (the Stock Purchase Plan). Under the Stock Purchase Plan, eligible employees may elect to have up to 10 percent of their base pay (as defined) deducted and utilized to purchase Common Stock of the Company in annual or semiannual offerings. The Company has reserved 800,000 shares of Common Stock for issuance pursuant to the Stock Purchase Plan. In January 1996 and 1995, the Company issued 100,583 and 70,983 shares of Common Stock at purchase prices of $.32 and $.35 per share, respectively. The purchase prices represent 85 percent of the closing price on December 29, 1995, and December 30, 1994, respectively. The Stock Purchase Plan is administered by the Compensation Committee of the Board of Directors and will expire on December 31, 1997, unless sooner terminated or amended by the Board of Directors. The Company also maintains a qualified employee benefit plan under Section 401(k) of the Internal Revenue Code. Under this plan, employees meeting certain eligibility requirements may contribute up to 15 percent of their eligible compensation to the plan on a pretax basis. In addition, the Company may make voluntary matching contributions to the plan. The Company contributed $0 and $25,000 during 1995 and 1994, respectively, to the plan. 10. INCOME TAXES: Effective January 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 109 (SFAS No. 109), "Accounting for Income Taxes." This statement establishes financial accounting and reporting standards for deferred income tax liabilities that arise as a result of differences between the reported amounts of assets and liabilities for financial reporting and income tax purposes. The adoption of SFAS No. 109 had no effect on the Company's financial position or net income. As of December 31, 1995, the Company had net operating loss carryforwards of approximately $6.5 million for federal income tax purposes which are available to reduce future taxable income and will expire in 2004 through 2010 if not utilized. The components of income tax expense attributable to continuing operations are as follows: YEAR ENDED DECEMBER 31 ------------------------------ 1995 1994 1993 -------- -------- -------- Federal $ - $ - $ 1,800 State - 13,200 23,800 -------- -------- -------- Total income tax expense $ - $13,200 $ 25,600 ======== ======= ======== Total income tax expense differs from the amount computed by applying the statutory federal income tax rate to income before income taxes. The reasons for these differences are as follows:
YEAR ENDED DECEMBER 31 --------------------------------------- 1995 1994 1993 ---------- ----------- ---------- Expected federal income tax expense (benefit) $ (206,000) $ (581,000) $ 79,300 State income taxes, net of federal income tax benefit - 13,200 15,700 Deferred compensation - - (23,700) Other, net - 19,000 1,500 Utilization of tax loss carryforwards - - (47,200) Provision for valuation reserve 206,000 562,000 - ---------- ----------- ---------- Total income tax expense $ - $ 13,200 $ 25,600 ========== =========== ==========
The tax effect of significant temporary differences representing income tax assets is as follows: DECEMBER 31 ------------------------- 1995 1994 ----------- ----------- Deferred income tax assets- Tax loss carryforwards $ 2,200,000 $ 2,187,000 Depreciation 135,000 55,000 Deferred revenues 115,000 28,000 Other 74,000 48,000 ----------- ----------- $ 2,524,000 $ 2,318,000 =========== =========== A valuation reserve of $2,524,000 and $2,318,000 as of December 31, 1995 and 1994, respectively, representing the total of deferred tax assets has been recognized by the Company as it cannot determine that it is more likely than not that all of the deferred tax assets will be realized. 11. RELATED-PARTY TRANSACTIONS: During 1993 and prior, the Company leased its offices at a market rate from a joint venture partially comprised of an investor in the Company. Office rent expense under this lease for the year ended December 31, 1993, was approximately $120,000. 12. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED): The results of operations by quarter for the years ended December 31, 1995 and 1994, were as follows: EARNINGS OPERATING NET INCOME (LOSS) REVENUES (LOSS) PER SHARE ---------------------------------------- 1995- Quarter ended- March 31 $ 2,618,941 $ (434,066) $(.04) June 30 3,267,566 (272,876) (.02) September 30 2,304,773 (182,273) (.02) December 31 2,846,566 283,652 .02 ------------ ---------- Total $ 11,037,846 $ (605,563) ============ ========== 1994- Quarter ended- March 31 $ 1,995,232 $ (160,106) $(.02) June 30 2,274,443 (403,674) (.04) September 30 2,230,335 (496,763) (.04) December 31 2,116,470 (662,158) (.06) ------------- ------------- Total $ 8,616,480 $ (1,722,701) ============= ============ ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. The Company has not changed independent accountants within the twenty-four months prior to December 31, 1995 or subsequent to that date. PART III ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT. DIRECTORS, EXECUTIVE OFFICERS AND KEY TECHNICAL PERSONNEL The following table sets forth certain information with respect to the Company's Directors, executive officers and key technical personnel: NAME AGE POSITION ----------------------------------------------------- Edward P. Gistaro 60 Chairman of the Board and Chief Executive Officer and Director Allan H. Hobgood 57 President and Chief Operating Officer and Director Lori A. Turner 38 Vice President of Finance and Treasurer Ralph Brown 62 Secretary and Director Al R. Ireton 61 Director Philip J. Romano 56 Director Chauncey E. Schmidt 64 Director Jim Feuerstein * 46 Senior Vice President and Chief Technical Officer, JFS Division Jane Gennarelli * 40 Vice President/Senior Consultant * Not considered "executive officers", as defined in Rule 405 promulgated by the Securities and Exchange Commission under the Securities Act of 1933, as amended. 28 Edward P. Gistaro has served as Chief Executive Officer of the Company since June 4, 1988 and served as President from July 10, 1988 until March 18, 1991. Mr. Gistaro was employed by Datapoint Corporation, a company involved in the manufacturing of computer systems, in various managerial positions from 1973 to 1987. From 1982 to 1985 Mr. Gistaro served as the President and Chief Operating Officer of Datapoint Corporation, and he served from 1985 to 1987 as its President and Chief Executive Officer. Allan H. Hobgood was elected Chief Operating Officer of the Company on April 16, 1991 and President of the Company on November 4, 1992. Mr. Hobgood had served as the Company's Vice President of Marketing from August 25, 1988 to April 16, 1991. From January 1988 until August 1988, Mr. Hobgood served as Vice President of Sales for Advanced Signing, Inc., a commercial sign firm, and from 1981 to March, 1987, Mr. Hobgood held several managerial positions relating to marketing, including Vice President of U.S. Sales, at Datapoint Corporation. Lori A. Turner, C.P.A., C.M.A., was appointed Vice President in early 1996. She joined the Company in May 1990 as Controller and was appointed Treasurer in June 1990. In July 1991, Ms. Turner was elected Assistant Secretary to the Company. From 1984 through 1989, Ms. Turner held various financial positions at Fuddruckers, Inc., a fast-food restaurant chain. Prior to joining Docucon, she worked as a consultant for Fuddruckers and other firms. Ralph Brown, an attorney in private practice since 1968, has served as Secretary of the Company since May 1, 1987. From 1987 to 1989, he served also as Treasurer of the Company. Mr. Brown has also served since 1975 as President of Cherokee Ventures, Inc., a real estate leasing firm, since 1978 as President of East Central Development Corporation and since 1982 as President of Southeast Suburban Properties, Inc. The latter two businesses are real estate development firms. Al R. Ireton was elected as a Director of the Company in May 1993. Mr. Ireton has been Chairman of Manchester Partners, an investment and growth strategy advisory organization providing capital and strategic assistance to growing companies, since October 1988. From 1985 through September 1988, he served as President and Chief Executive Officer of Texet Corporation, a desktop publishing company. Mr. Ireton has 25 years' experience serving as president and chief executive officer of growth-oriented companies, and has served on several corporate boards. Philip J. Romano served as Chairman of the Board of the Company from September 6, 1988 until June 4, 1989. Mr. Romano founded Fuddruckers, Inc. and served as a director of that company from its inception in 1979 until November 1988. Mr. Romano was President of Fuddruckers, Inc. from its inception until January 1985. Since January 1985, Mr. Romano has been a private investor. Chauncey E. Schmidt was elected to the Board of Directors of the Company in February 1993. He has been Chairman of C. E. Schmidt & Associates, an investment firm, since April 1989. From 1987 to March 1989, he was Vice Chairman of the Board of AMFAC, Inc., a New York Stock Exchange-listed company engaged in diversified businesses. He has previously served as President of The First National Bank of Chicago and Chairman of the Board and Chief Executive Officer of The Bank of California, N.A. Mr. Schmidt is on the Board of Trustees of the U. S. Naval War College Foundation and is active in several civic and charitable organizations. Jim Feuerstein joined the Company as Senior Vice President and Chief Technical Officer of the JFS Division in March 1994 in connection with the JFS transaction. Mr. Feuerstein founded J. Feuerstein 29 Systems in 1981 as a consulting firm for information management in large-scale litigation, establishing a strong reputation in the pharmaceutical, insurance and legal markets. Jane Gennarelli was appointed Vice President/Senior Consultant in January 1996. She joined the Company as Vice President of Operations of the JFS Division in March 1994 in connection with the JFS transaction. Ms. Gennarelli served J. Feuerstein Systems as Project Manager and as Director of Litigation Support Services from September 1985 to March 1994. Previously, she was employed by Control Data Corporation (now Quorum Systems) of Minneapolis, Minnesota and Informatics of Rockville, Maryland. GENERAL Directors of the Company hold office until the next Annual Meeting of Stockholders of the Company and until their successors are elected and qualified. Executive officers of the Company are elected annually by, and serve at the discretion of the Board of Directors. There are no arrangements or understandings known to the Company between any of the Directors, nominees for Director or executive officers of the Company and any other person pursuant to which any of such persons was elected as a Director or an executive officer, except as set forth below under Item 10, "Executive Compensation Employment Agreements". There are no family relationships between any Directors, nominees for Director or executive officers of the Company. COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934 Section 16(a) of the Securities Exchange Act of 1934 requires the Company's officers and Directors, and persons who beneficially own more than 10% of a registered class of the Company's equity securities, to file reports of ownership and changes in ownership with the Securities and Exchange Commission (the "SEC") and the Boston Stock Exchange. Officers, Directors and beneficial owners of more than 10% of the Company's Common Stock are required by SEC regulations to furnish the Company with copies of all Section 16(a) forms that they file. Based solely on review of the copies of such forms furnished to the Company, or written representations that no reports on Form 5 were required, the Company believes that for the period from January 1, 1995 through March 31, 1996, all officers, Directors and greater-than-10% beneficial owners complied with all Section 16(a) filing requirements applicable to them. 30 ITEM 10. EXECUTIVE COMPENSATION. EXECUTIVE COMPENSATION GENERAL The following table sets forth compensation paid or awarded to the Chief Executive Officer and the only other executive officer of the Company whose compensation exceeded $100,000 for all services rendered to the Company in 1995, 1994 and 1993:
SUMMARY COMPENSATION TABLE ANNUAL COMPENSATION LONG-TERM COMPENSATION BONUS/ANNUAL SECURITIES LONG-TERM ALL INCENTIVE UNDERLYING INCENTIVE OTHER COM- NAME AND PRINCIPAL POSITION YEAR SALARY AWARD (1) OPTIONS PAYOUTS PENSATION (2) - ------------------------------------------------------------------------------------------------------------------ Edward P. Gistaro 1995 $129,192 $ --- --- $ --- $ 697 Chairman of the Board 1994 102,701 20,000 45,000 --- 1,541 and Chief Executive Officer 1993 99,998 43,760 50,000 --- 2,220 Allan H. Hobgood 1995 100,256 68,637 --- --- President and 1994 99,732 48,047 45,000 --- 2,250 Chief Operating Officer 1993 96,000 106,421 40,000 --- 2,539
- -------------------- (1) Mr. Gistaro is eligible to receive target bonus payments totalling $76,000 under the 1996 Management Incentive Bonus Plan as approved by the Compensation Committee of the Board of Directors. These payments may be increased or decreased depending upon the percentage of achievements of specified goals, which include revenues and returns on assets. Mr. Hobgood is eligible to receive 5.5% of the government and commercial division profits. (2) Matching contributions under the Company's 401(k) Plan. STOCK OPTION GRANTS IN 1995 There were no stock options granted in 1995 to the Chief Executive Officer or any other executive officer of the Company whose compensation exceeded $100,000 for all services rendered to the Company. STOCK OPTION EXERCISES IN 1995 AND OPTION VALUES AT DECEMBER 31, 1995
VALUE OF UNEXERCISED SHARES NUMBER OF UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS ACQUIRED AT DECEMBER 31, 1995 AT DECEMBER 31, 1995 ON VALUE ----------------------------------------------------------------- NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - ----------------------------------------------------------------------------------------------------------------- Edward P. Gistaro........ --- --- 250,000 15,000 $ _ $ _ Allan H. Hobgood......... --- --- 240,000 15,000 _ _
31 EMPLOYMENT AGREEMENTS Both Edward P. Gistaro and Allan H. Hobgood have employment agreements with the Company. Pursuant to such agreements, Mr. Gistaro is to be paid $100,000 per annum and Mr. Hobgood is to be paid $96,000 per annum and 5.5% of the profits of the government and commercial divisions. The agreements do not have fixed terms, and are terminable upon 30 days' prior written notice by either the Company or the employee, or by the Company "for cause" at any time. Further, each agreement requires that the employee keep Company matters confidential, restricts the employee from being directly or indirectly involved with any entity in a business competitive with that of the Company for a period of years following the termination of the agreement, and provides for a severance payment to the employee in the event he is terminated by the Company without cause. STOCK OPTIONS 1988 STOCK OPTION PLAN The Company has a 1988 Stock Option Plan, currently covering an aggregate of 1,360,000 shares of Common Stock. The 1988 Stock Option Plan provides for the grant to officers, Directors and key employees of the Company of incentive stock options ("ISOs") intended to qualify under Section 422(b) of the Internal Revenue Code of 1986, as amended (the "Code") and non-qualified stock options ("NQSOs"). The 1988 Stock Option Plan was approved by the stockholders of the Company on November 15, 1988. Amendments to the 1988 Stock Option Plan increasing the number of shares covered thereby were approved by the stockholders of the Company on April 21, 1989, May 14, 1991 and May 7, 1992. As of March 15, 1996, under the 1988 Stock Option Plan there were outstanding options to purchase 1,144,650 shares of the Company's Common Stock at prices ranging from $.41 to $.875 per share. Under the 1988 Stock Option Plan, which is administered by the Stock Option Committee of the Board of Directors, key employees may be granted options to purchase shares of the Company's Common Stock at 100% of fair market value on the date of grant (or 110% of fair market value in the case of an ISO granted to a 10% stockholder/grantee). The 1988 Stock Option Plan expires on October 31, 1998. Options granted under the 1988 Stock Option Plan must be exercised within ten years from the date of grant, vest at varying times, as determined by the Stock Option Committee, are nontransferable except by will or pursuant to the laws of descent and distribution, are protected against dilution and expire within three months after termination of employment, unless such termination is by reason of death or disability or for cause. All shares purchased upon exercise of any option must be paid in full at the time of purchase, in accordance with the terms set forth in the option. Such payment must be made in cash or through delivery of shares of Common Stock or a combination of cash and Common Stock, all as determined by the Stock Option Committee. The Stock Option Committee may determine other terms applicable to particular options. No one person may receive ISO options for which the aggregate fair market value (determined at the time each ISO is granted) of options exercisable for the first time during any calendar year exceeds $100,000. 32 1991 DIRECTOR NON-STATUTORY STOCK OPTION PLAN The Company also has a 1991 Director Non-Statutory Stock Option Plan (the "1991 Director Plan"), currently covering an aggregate of 500,000 shares of Common Stock. The 1991 Director Plan was approved by the stockholders of the Company on May 7, 1992 and provides for the grant of NQSOs to non-employee Directors of the Company. As of March 15, 1996, there were outstanding under the 1991 Director Non-Statutory Stock Option Plan options to purchase 320,000 shares of the Company's Common Stock at prices ranging from $.53 to $.56 per share. Under the 1991 Director Plan, which is administered by the Board of Directors, non-employee Directors are granted options to purchase 40,000 shares of the Company's Common Stock upon their initial election as Directors and 30,000 shares on the second anniversary date of such election at the then-current market price of such shares. One-third of the initial grant shall vest on each anniversary of the date of grant, and one-third of the second grant shall vest every six months after the date of grant. The 1991 Director Plan expires on February 10, 2001. Under an amendment to the 1991 Director Plan adopted by the Board of Directors in February 1992, each eligible Director will receive an additional annual grant of options covering 10,000 shares of Common Stock, commencing with the fiscal year of the Company immediately following the fiscal year in which all shares of Common Stock covered by the initial grant and the second grant described above are fully vested, and such annual grant will continue each fiscal year thereafter until options covering all shares reserved for issuance under the 1991 Director Plan have been granted. Options granted under the 1991 Director Plan must be exercised within ten years from the date of grant, are nontransferable except by will or pursuant to the laws of descent and distribution, are protected against dilution and expire within three months after termination of service as a Director of the Company, unless such termination is by reason of death or disability or for cause. All shares purchased upon exercise of any option must be paid in full at the time of purchase, in accordance with the terms set forth in the option. Such payment must be made in cash or through delivery of shares of Common Stock or a combination of cash and Common Stock. The 1991 Director Plan may be amended at any time by vote of the Board of Directors. During 1995, Messrs. Ralph Brown and Philip J. Romano, both Directors of the Company, were granted options covering 10,000 shares each of Common Stock at an exercise price of $.53 per share. Messrs. Schmidt and Ireton were granted options covering 30,000 shares each of Common Stock, also at an exercise price of $.53 per share. The exercise price per share of each such option was not less than the closing bid price of the Common Stock reported on The Nasdaq Stock Market on the date of the grant. 33 REPRICING OF OUTSTANDING OPTIONS Set forth below is certain information concerning a repricing of options held by the executive officers named in the Summary Compensation Table set forth in Item 10, "Executive Compensation General", during the period October 24, 1986 through February 28, 1995:
LENGTH OF ORIGINAL MARKET PRICE EXERCISE OPTION TERM NUMBER OF OF STOCK AT PRICE AT REMAINING AT OPTIONS/ TIME OF TIME OF DATE OF SARS REPRICING REPRICING NEW REPRICING OR REPRICED OR OR OR EXERCISE AMENDMENT NAME DATE AMENDED AMENDMENT AMENDMENT PRICE (MONTHS) ----------------------------------------------------------------------------------------------------------- Edward P. Gistaro 6/23/89 90,000 .56 .70 .56 51 8/28/91 50,000 .56 1.25 .56 77 8/13/92 30,000 .56 1.375 .56 88 8/10/93 50,000 .56 1.218 .56 100 Allan H. Hobgood 6/23/89 60,000 .56 .70 .56 51 5/28/91 50,000 .56 1.25 .56 74 8/28/91 30,000 .56 1.25 .56 77 8/13/92 30,000 .56 1.375 .56 88 8/10/93 40,000 .56 1.218 .56 100
In order to ensure that the Company's equity-based compensation programs meet their goals of providing motivation and incentive for key executives of the Company, the Board of Directors determined at a meeting held on February 14, 1995, that it was desirable to reprice all outstanding options held by officers, Directors and employees of the Company to bring their exercise prices into line with the then-current market price of the Company's Common Stock. The Company's stock option plans generally provide that the Board of Directors has the discretion to effect such a repricing in the exercise of their business judgment. EMPLOYEE STOCK PURCHASE PLAN In order to promote ownership of the Company's Common Stock by its employees, effective January 1, 1994, the Board of Directors adopted the Company's 1993 Employee Stock Purchase Plan (the "Stock Purchase Plan"), which was approved by the stockholders at the 1994 Annual Meeting of Stockholders. Under the Stock Purchase Plan, eligible employees may elect to have up to 10% of their Base Pay (as defined) deducted and utilized for the purchase of Common Stock of the Company in annual or semiannual offerings to be made by the Company to eligible employees. The Company has reserved 800,000 shares of Common Stock for issuance pursuant to the Stock Purchase Plan. The Company issued 100,583 and 70,983 shares in January 1996 and 1995 pursuant to this Plan at purchase prices of $.32 and $.345 per share, which represents 85% of the closing price on December 29, 1995 and December 30, 1994, respectively. Under the Stock Purchase Plan, the Company will make available in each year from January 1, 1994 through December 31, 1997 up to 200,000 shares of Common Stock (plus any unused balance from prior years). Such shares will be offered to participating employees in annual or semiannual offerings. Participating employees will be deemed to have been granted options to purchase Common Stock in each offering in an amount equal to the amount of their respective payroll deductions divided by 85% of the market value of the Common Stock of the Company on the applicable Offering Commencement Date. The option price shall be the lesser of 85% of the closing price of the Common Stock on the Offering 34 Commencement Date (or the next preceding trading day) or 85% of the closing price of Common Stock on the Offering Termination Date (or the next preceding trading day). Unless a participating employee terminates participation as provided in the Stock Purchase Plan, such employee shall be deemed to have exercised such option on the Offering Termination Date and shall be issued a corresponding number of shares of Common Stock. The Stock Purchase Plan is administered by the Compensation Committee of the Board of Directors and will expire on December 31, 1997 unless sooner terminated or amended by the Board of Directors. 35 ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The following table sets forth certain information regarding beneficial ownership of the Company's Common Stock as of March 1, 1996, by all persons known to the Company to own beneficially more than 5% of the Company's Common Stock.
NAME AND AMOUNT AND ADDRESS OF NATURE OF PERCENT TITLE OF CLASS BENEFICIAL OWNERS BENEFICIAL OWNERSHIP OF CLASS(3) ------------------------------------------------------------------------------------------------------------------ Common Stock, Demuth, Folger & Terhune 900,000 (1) 7.0% par value $.01 One Exchange Plaza per share 55 Broadway New York, New York 10006
(1) Consists of 900,000 shares of Common Stock underlying a Warrant to Purchase Common Stock exercisable at an exercise price of $2.00 per share. The percentage of ownership is calculated based on 13,491,137 shares of outstanding. The following table sets forth certain information regarding beneficial ownership of the Company's Common Stock as of March 1, 1996 (a) by each of the Company's directors, (b) by the Company's Chief Executive Officer and its only other executive officer whose 1995 compensation exceeded $100,000, and (c) by all Directors and executive officers as a group.
NAME AND AMOUNT AND ADDRESS OF NATURE OF PERCENT TITLE OF CLASS BENEFICIAL OWNER (1) BENEFICIAL OWNERSHIP (2) OF CLASS (3) ---------------------------------------------------------------------------------------------------------------- Common Stock, Edward P. Gistaro 488,529 (4) 3.80% par value $.01 Allan H. Hobgood 327,687 (5) 2.55% per share Ralph Brown 273,100 (6) 2.15% Al R. Ireton 36,666 (7) .29% Philip J. Romano 220,763 (6) 1.74% Chauncey E. Schmidt 50,000 (8) .40% All Directors and Executive Officers as a Group (7 persons including the above) 1,461,504 (9) 10.9 %
- -------------------- (1) The address for all persons named is 7461 Callaghan Road, San Antonio, Texas 78229. (2) The persons named in the table have sole voting and investment power with respect to all shares of Common Stock shown as beneficially owned by them, except as otherwise indicated. 36 (3) Unless otherwise indicated below, the percentage of ownership is based upon 12,591,137 shares of Common Stock outstanding, which includes 766,659 shares of Common Stock into which outstanding shares of Preferred Stock are convertible and which the holders of the Preferred Stock are entitled to vote. (4) Includes 265,000 shares subject to currently exercisable stock options. The percentage of ownership is based on 12,856,137 shares outstanding. (5) Includes 255,000 shares subject to currently exercisable stock options. The percentage of ownership is based on 12,846,137 shares outstanding. (6) Includes 85,000 shares subject to currently exercisable stock options. The percentage of ownership is based on 12,676,137 shares outstanding. (7) Includes 36,666 shares subject to currently exercisable stock options. The percentage of ownership is based on 12,627,803 shares outstanding. (8) Includes 50,000 shares subject to currently exercisable stock options. The percentage of ownership is based on 12,641,137 shares outstanding. (9) Includes 813,833 shares subject to currently exercisable stock options. The percentage of ownership is based on 13,404,970 shares outstanding. ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. Since January 1, 1995, no officer, executive officer, or affiliate of the Company has entered into any direct or indirect material transaction, or series of transactions, or had any direct or indirect material interest in any proposed transaction, or series of transactions, to which the Company is to be a party where the amount involved exceeds $60,000. ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits. The Exhibits required by Regulation S-B are set forth in the following list and are filed either by incorporation by reference from previous filings with the Securities and Exchange Commission or by attachment to this Annual Report on Form 10-KSB, as so indicated in such list. 2.1 Asset Purchase Agreement dated March 15, 1994, between Docucon, Incorporated and J. Feuerstein Systems, Inc., including the related Letter Agreement, dated January 28, 1994, between Jim Feuerstein and Docucon, Incorporated, as filed as Exhibit 2.1 to the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1993, is hereby incorporated herein by reference. 37 3.1 Certificate of Incorporation of Docucon, Incorporated, filed as Exhibit 3.1 to the Company's Registration Statement on Form S-1 (Registration No. 33-25561), is hereby incorporated herein by reference. 3.2 Certificate of Amendment to Certificate of Incorporation of Docucon, Incorporated, filed as Exhibit 3.2 to the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1992, is hereby incorporated herein by reference. 3.3 Bylaws of Docucon, Incorporated, filed as Exhibit 3.2 to the Company's Registration Statement on Form S-1 (Registration No. 33-25561), is hereby incorporated herein by reference. 3.4 Certificate of Merger of Docucon, Incorporated, a Delaware corporation, and Docucon, Incorporated, a Texas corporation, October 11, 1988. 3.5 Certificate of Designation Preferences of Series A Convertible Preferred Stock of Docucon, Incorporated, May 29, 1990. 3.6 Certificate of Designation Preferences of Series B Non-Convertible, Cumulative, Non-Voting, Redeemable Preferred Stock of Docucon, Incorporated, June 12, 1991. 3.7 Certificate of Correction of Certificate of Designation Preferences of Series A Convertible Preferred Stock of Docucon, Incorporated, June 1, 1990. 4.1 Warrant to Purchase Common Stock of Docucon, Incorporated, entitling D. H. Blair Investment Banking Corp. to purchase 80,000 shares of Common Stock at an exercise price of $.75 per share, expiring on November 5, 1995, as filed as Exhibit 4.1 to Amendment No. 1 to the Company's Registration Statement on Form SB-2 (Registration No. 33-82018), is hereby incorporated by reference. 4.2 Warrant to Purchase Common Stock of Docucon, Incorporated, entitling D. H. Blair Investment Banking Corp. to purchase 160,000 shares of Common Stock at an exercise price of $.70 per share, expiring on November 5, 1995, as filed as Exhibit 4.2 to Amendment No. 1 to the Company's Registration Statement on Form SB-2 (Registration No. 33-82018), is hereby incorporated by reference. 4.3 Warrant to Purchase Common Stock of Docucon, Incorporated, entitling James Coleman to purchase 20,000 shares of Common Stock at an exercise price of $.75 per share, expiring on November 5, 1995, as filed as Exhibit 4.5 to Amendment No. 1 to the Company's Registration Statement on Form SB-2 (Registration No. 33-82018), is hereby incorporated by reference. 4.4 Warrant to Purchase Common Stock of Docucon, Incorporated, entitling James Coleman to purchase 40,000 shares of Common Stock at an exercise price of $.70 per share, expiring on November 5, 1995, as filed as Exhibit 4.6 to Amendment No. 1 to the Company's Registration Statement on Form SB-2 (Registration No. 33-82018), is hereby incorporated by reference. 38 4.5 Stock Option Agreement, dated August 31, 1992, in which Docucon, Incorporated granted The Wall Street Group, Inc. a stock option to purchase up to 72,727 shares of Common Stock at a price of $1.375 per share, as filed as Exhibit 4.14 to Amendment No. 1 to the Company's Registration Statement on Form SB-2 (Registration No. 33-82018), is hereby incorporated by reference. 10.1 Contract, dated as of May 8, 1991, between the Company and the U. S. Department of Defense, filed as Exhibit 10.2 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1991, is hereby incorporated herein by reference. 10.2 Employment Agreements between the Company and each of Edward P. Gistaro and Allan H. Hobgood, filed as Exhibit 10.5 to the Company's Registration Statement on Form S-1 (Registration No. 33-25561), are hereby incorporated herein by reference. 10.3 Amendment to Employment Agreement between the Company and Allan H. Hobgood, filed as Exhibit 10.7 to the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1992, is hereby incorporated herein by reference. 10.5 1988 Stock Option Plan, filed as Exhibit 10.9 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1991, is hereby incorporated herein by reference. 10.6 1991 Director Non-Statutory Stock Option Plan, filed as Exhibit 10.10 to the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1992, is hereby incorporated herein by reference. 10.8 Note and Warrant Purchase Agreement, dated as of December 15, 1992, between the Company and Demuth, Folger & Terhune, including all Exhibits thereto (which include the form of Promissory Note, the form of Common Stock Purchase Warrant and the form of Deed of Trust executed and delivered in connection with the transaction), filed as Exhibit 5.1 to the Company's Current Report on Form 8-K dated December 16, 1992, is hereby incorporated herein by reference. 10.9 Employment Agreement, dated March 15, 1994, between Docucon, Incorporated and James Feuerstein, filed as Exhibit 10.9 to the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1993, is hereby incorporated herein by reference. 10.10 Employment Agreement, dated March 15, 1994, between Docucon, Incorporated and Jane Gennarelli, filed as Exhibit 10.10 to the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1993, is hereby incorporated herein by reference. 10.11 1993 Employee Stock Purchase Plan, filed as Exhibit 10.11 to the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1993, is hereby incorporated herein by reference. 11 Computation of Earnings Per Share. 39 23 Consent of Arthur Andersen, L.L.P. (b) Reports on Form 8-K. The Company filed a Current Report on Form 8-K on January 23, 1996 for the purpose of reporting fourth quarter 1995 earnings and to evidence the Company's compliance with the NASDAQ alternative capital and surplus requirement of $2,000,000. 40 SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. DOCUCON, INCORPORATED By: /s/ EDWARD P. GISTARO Edward P. Gistaro Chairman of the Board and Chief Executive Officer Date: March 29, 1996 In accordance with the Exchange Act, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
SIGNATURE CAPACITY DATE ------------------------------------------------------------------------------------------- EDWARD P. GISTARO March 29, 1996 - ----------------------------------------- Chairman of the Board and Edward P. Gistaro Chief Executive Officer and Director (Principal Executive and Financial Officer) ALLAN H. HOBGOOD March 29, 1996 - ----------------------------------------- President and Allan H. Hobgood Chief Operating Officer and Director LORI TURNER March 29, 1996 - ----------------------------------------- Vice President, Finance Lori Turner Treasurer (Principal Accounting Officer) RALPH BROWN - ----------------------------------------- Director March 29, 1996 Ralph Brown AL R. IRETON - ----------------------------------------- Director March 29, 1996 Al R. Ireton PHILIP J. ROMANO - ----------------------------------------- Director March 29, 1996 Philip J. Romano CHAUNCEY E. SCHMIDT - ----------------------------------------- Director March 29, 1996 Chauncey E. Schmidt
41 EX-3.4 2 STATE OF DELAWARE OFFICE OF THE SECRETARY OF STATE -------------------------------- I, MICHAEL RATCHFORD, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF MERGER OF DELAWARE & FOREIGN CORPORATIONS OF "DOCUCON, INCORPORATED"FILED IN THIS OFFICE ON THE SEVENTEENTH DAY OF OCTOBER, A.D. 1988, AT 9 O'CLOCK A.M. ------------------------------------ MICHAEL RATCHFORD, SECRETARY OF STATE AUTHENTICATION: *3696187 DATE: 12/11/1992 CERTIFICATE OF MERGER OF DOCUCON, INCORPORATED (a Delaware corporation) AND DOCUCON, INCORPORATED - - - - - - - - - - - - - - - - - - - - - - - - - - - - Under Section 252 of the General Corporation Law of the State of Delaware - - - - - - - - - - - - - - - - - - - - - - - - - - - - DOCUCON, INCORPORATED, a corporation formed under the laws of the State of Delaware ("Docucon-Delaware"), and DOCUCON, INCORPORATED, a Corporation formed under the laws of the State of Texas ("DOCUCON-TEXAS"), desiring to effectuate a merger of the DOCUCON-TEXAS with and the General Corporation Law of the State of Delaware, do hereby certify as follows: FIRST: The constituent corporation involved in the merger are DOCUCON-DELAWARE and DOCUCON-TEXAS. DOCUCON-DELAWARE is a corporation organized and existing under the laws of the State of Delaware. The Certificate of Incorporation for DOCUCON-DELAWARE was filed in the Office of the Secretary of State of the State of Delaware on the 11th day of October, 1988. DOCUCON-TEXAS is a corporation organized and existing under the laws of the State of Texas. The Articles of Incorporation for DOCUCON-TEXAS were filed in the Office of the Secretary of State of the State of Texas on June 27, 1986. SECOND: DOCUCON-TEXAS is, as of the date hereof, the lawful owner of all of the issued and outstanding capital stock of DOCUCON-DELAWARE. THIRD: A Plan and Agreement of Merger has been approved, adopted, certified, executed and acknowledged by each of the constituent corporation in accordance with the laws of the applicable jurisdictions under which the constituent corporations have been formed. FOURTH: The surviving corporation in the merger shall be DOCUCON-DELAWARE. The name of the surviving corporation in the merger shall be "DOCUCON, INCORPORATED". FIFTH: The Certificate of Incorporation of the surviving corporation shall be the Certificate of Incorporation of DOCUCON-DELAWARE. SIXTH: The executed Plan and Agreement of Merger is on file at the principle place of business of the surviving corporation at 9100 I.H. 10 West, Suite 100, San Antonio, Texas 78230. SEVENTH: A copy of the Plan and Agreement of Merger will be furnished by the surviving corporation on request and without cost to any shareholder of any constituent corporation. EIGHT: The authorized capital stock of DOCUCON-TEXAS is Fifty Million (50,000,000) shares, consisting of Thirty Million (30,000,000) shares of $1.00 par value per share preferred stock, and twenty Million (20,000,000) shares of $0.01 par value per share common stock. NINTH: The merger herein described shall become effective upon the latest to occur of (i) the filing of this Certificate of Merger with the Secretary of Stare of the State of Delaware, (ii) the recording of this Certificate of Merger with the appropriate authorities in New Castle County, Delaware, and (iii) the filing of Articles of Merger (and/or such other instruments as may be required by the Texas Business Corporation Act, or related statutes) with the Secretary of State of the State of Texas. IN WITNESS WHEREOF, DOCUCON-DELAWARE and DOCUCON-TEXAS have each duly caused this Certificate of Merger to be executed by its duly authorized officers as of the 11th day of October, 1988. DOCUCON, INCORPORATED, a Delaware Corporation By: /s/ EDWARD P. GISTARO EDWARD P. GISTARO, President ATTEST: /s/ RALPH BROWN RALPH BROWN, Secretary DOCUCON, INCORPORATED, a Delaware Corporation By: /s/ EDWARD P. GISTARO EDWARD P. GISTARO, President ATTEST: /s/ RALPH BROWN RALPH BROWN, Secretary EX-3.5 3 EXHIBIT 3.5 STATE OF DELAWARE OFFICE OF SECRETARY OF STATE ------------------------- I, MICHAEL HARKINS, SECRETARY OF STATE OF THE STATE OF DELAWARE DO HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF STOCK DESIGNATION OF DOCUCON, INCORPORATED FILED IN THIS OFFICE ON THE THIRTIETH DAY OF MAY, A.D. 1990, AT 4:30 O'CLOCK P.M. : : : : : : : : : : : : : : : : : : : - ------------------------------------------ Michael Harkins, Secretary of State AUTHENTICATION: :2673386 DATE: 05/31/1990 CERTIFICATION OF DESIGNATION PREFERENCES OF SERIES A CONVERTIBLE PREFERRED STOCK OF DOCUCON, INCORPORATED The undersigned, Edward P. Gistaro and S. E. Faye, do hereby certify: A. That said Edward P. Gistaro is, and at all times herein mentioned was, the duly elected and acting President and Chief Executive Officer of Docucon, Incorporated a Delaware corporation (the "Company"), and that said Stanley E. Faye, is, and at all times herein mentioned was, the duly elected and acting Assistant Secretary of the Company. B. That by the unanimous written consent of the Board of Directors dated May 22, 1990, the following preamble and resolutions were duly adopted and remain in effect: WHEREAS, the Board of Directors of the Company is authorized, within the limitations and restrictions stated in the Certificate of Incorporation, to fix by resolution or resolutions the designation of each series of Preferred Stock and the powers, preferences and relative participating, optional or other special rights, and qualifications, limitations or restrictions thereof, including, without limiting the generality of the foregoing, such provisions as may be desired concerning voting, redemption dividends, dissolution or the distribution of assets, conversion or exchange, and such other subject or matters as may be fixed by resolution or resolutions of the Board of Directors under the General Corporation Law of Delaware, and WHEREAS, it is the desire of the Board of Directors of the Company, pursuant to its authority as aforesaid, to fix the terms of the series of Preferred Stock and the number shares constituting such series: NOW, THEREFORE, BE IT RESOLVED: (1) Designation. The Board of Directors does hereby provide for the issue of a series of Preferred Stock of the Company, to be designated and known as Series A Convertible Preferred Stock (the "Convertible Preferred Stock"). (2) Number of Shares. The number of shares constituting the Convertible Preferred Stock be and the same is hereby fixed at sixty (60). (3) Allocation to Capital. The amount to be represented in capital at all times in respect of each share of Convertible Preferred Stock shall be its par value of $1.00 per share. (4) Dividends. (a) The holders of shares of Convertible preferred Stock, in preference to the holders of Common Stock and of any other capital stock of the Company which ranks junior to the Convertible Preferred Stock in respect of dividends or distributions of assets on liquidation of the Company (all of which classes, other than the Convertible Preferred Stock, are hereinafter referred to as "Junior Securities"), shall be entitled to receive, as and when declared by the Board of Directors, out of the assets of the Company which are by law available for the payment of dividends, cumulative cash dividends at the rate of 11% per annum, assigning a value of $25,000 to each share. Except as otherwise provided herein, the declaration or payment of dividends is at the discretion of the Company's Board of Directors, and is not mandatory, and any accrued but unpaid dividends shall not be deemed to be in arrears. An arrearage shall be deemed to occur when dividends which have been declared by the Board of Directors are not paid in full within 15 days after the dividend payment date. The holders of the shares of Convertible Preferred Stock shall be entitled to receive dividends payable semi-annually on June 15 and December 15 of each year, commencing December 15, 1990. Dividends on shares of Convertible Preferred Stock shall accrue from the date of issuance. Such dividends shall be paid to the holders of record at the close of business on the record date specified by the Board of Directors of the Company at the time such dividends is declared. Unpaid accrued dividends shall not bear interest. (b) All dividends paid with respect to shares of the Convertible Preferred Stock pursuant to Paragraph (4) (a) shall be paid pro rata to the holders entitled thereto. (c) Each fractional share of the Convertible Preferred Stock outstanding shall be entitled to a ratably proportionate amount of all dividends accruing with respect to each outstanding share of Convertible Preferred Stock pursuant to Paragraph (4) (a) hereof. (d) Notwithstanding anything contained herein to the contrary, no dividends on shares of the Convertible Preferred Stock shall be declared by the Board of Directors or paid or set apart for payment by the Company at such time as the terms and provisions of any agreement of the Company, including any agreement relating to its indebtedness, specifically prohibits such declaration, payment or setting apart for payment; provided, however, that nothing herein contained shall in any way or under any circumstance be construed or deemed to require the Board of Directors to declare or the Company to pay or set apart for payment any dividends on shares of the Convertible Preferred Stock at any time, whether permitted by any of such agreements or not. (e) If at any time the Company shall have failed to pay all cash dividends which have accrued on any outstanding shares of any other series of Preferred Stock having cumulative dividend rights ranking prior to or on a parity with the shares of the Convertible Preferred Stock at the times such dividends are payable, no dividend shall be declared by the Board of Directors or paid or set apart for payment by the Company on shares of the Convertible Preferred Stock unless prior to or concurrently with such declaration, payment or setting apart for payment, all accrued and unpaid cash dividends on all outstanding shares of such other series of Preferred stock shall have been or be declared, paid or set apart for payment, without interest; provided, however, that in the event such failure to pay accrued dividends is with respect only to the outstanding shares of the Convertible Preferred Stock and any outstanding shares of any other series of the Preferred Stock having cumulative dividends rights on a parity with the shares of the Convertible Preferred Stock, cash dividends may be declared, paid or set apart for payment, without interest, pro rata on shares of the Convertible Preferred Stock and shares of such other series of the Preferred Stock so that the amounts of any cash dividends declared, paid or set apart for payment on shares of the Convertible Preferred Stock and shares of such other series of the Preferred Stock shall in all cases bear to each other the same ratio that, at the time of such declaration, payment or setting apart for payment, all accrued declaration, payment setting apart for payment, all accrued but unpaid cash dividends on all outstanding shares of the Convertible Preferred Stock and all outstanding shares of such other series of Preferred Stock and all outstanding shares of such other series of Preferred Stock bear to each other. For the purpose of this Paragraph 4(e), dividends on any other series of Preferred Stock that are payable at the Company's option either in cash or in other property shall not be deemed to be cash dividends. Any dividend not paid pursuant to Paragraph (4)(a) or (d) hereof or this Paragraph (4) (e) shall be fully cumulative and shall accrue and compound quarterly (whether or not declared), without interest, as set forth in Paragraph (4) (a) hereof. (f) Holders of shares of convertible Preferred Stock shall be entitled to receive the dividends provided for in Paragraph (4) (a) hereof in preference to and in priority over any dividends or other distributions upon any of the Junior Securities, whether payable in cash or other property. So long as any shares of Convertible Preferred Stock are outstanding, the Company shall not declare, pay or set apart for payment any dividends on any of the Junior Securities or make any payment on account of, or set apart for payment money for, a sinking or other similar fund for the purchase, redemption or other retirement of, any of the Junior Securities or any warrants, rights, calls, or options exercisable for any of the Junior Securities, or make any distribution respect thereof, either directly or indirectly, and whether in cash, obligations or shares of the Company or other property (other holders of Junior Securities), and shall not purchase or redeem, and shall not permit any corporation or other entity directly or indirectly controlled by the Company to purchase or redeem, any Convertible Preferred Stock or any other Junior Securities or any warrants, rights, calls or options exercisable for any of the Junior Securities, unless prior to or concurrently with such declaration, payment, setting apart for payment, purchase or redemption, as the case may be, all accrued dividends on shares of Convertible Preferred Stock not paid on the dates provided for in Paragraph (4) (a) hereof (including if not paid pursuant to the terms and conditions of Paragraph (4) (d) or Paragraph (4) (e) hereof) shall have been or be paid. (g) Subject to the foregoing provisions of this Paragraph (4), the Board of Directors may declare and the Company may pay or set apart for payment dividends and other distributions on any of the Junior Securities, and may purchase or otherwise redeem any of the Junior Securities or any warrants, rights or options exercisable for any of the Junior Securities, and the holders of the shares of Convertible Preferred Stock shall not be entitled to share therein. (h) The record holders of Convertible Preferred Stock converted or redeemed during the interval between the record date and the succeeding payment date applicable to any dividend declared thereon shall be entitled to receive on such succeeding payment date the dividend declared on such Convertible Preferred Stock notwithstanding that such conversion redemption occurred. The Company shall pay all accrued but unpaid dividends on converted shares of Convertible Preferred Stock at the time of the conversion thereof either in cash or in shares of Common Stock (based on the closing market price on the last trading day prior to the date of conversion). (5) Liquidation Preference. (a) In the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Company, the holders of shares of Convertible Preferred Stock then outstanding shall be entitled to be paid out of the assets of the Company available for distribution to its stockholders an amount in cash equal to $25,000 for each share outstanding, plus an amount in cash equal to all accrued but unpaid dividends thereon to the date fixed for liquidation, before any payment shall be made or any assets distributed to the holders of any of the Junior Securities; provided, however, that the holders of outstanding shares of Convertible Preferred Stock shall be entitled to receive such liquidation payment until the liquidation payments on all outstanding shares of any other series of Preferred Stock having liquidation rights ranking prior to the shares of Convertible Preferred Stock shall have been paid in full. If the assets of the Company are not sufficient to pay in full the liquidation payments payable to the holders of outstanding shares of any other series of the Preferred Stock having liquidation rights on a parity with the shares of Convertible Preferred Stock, then the holders of all such shares shall share ratably in such distribution of assets in accordance with the amounts which would be payable on such distribution if the amounts to which the holders of all outstanding shares of Convertible Preferred Stock and the holders of outstanding shares of such other series of the Preferred Stock are entitled were paid in full. The consolidation or merger of the Company with another entity shall not be deemed a voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Company and shall not give rise to any rights provided for in this Paragraph (5). (b) The liquidation payment with respect to each fractional share of the Convertible Preferred Stock outstanding or accrued but unpaid, shall be equal to a ratably proportionate amount of the liquidation payment with respect to each outstanding share of Convertible Preferred Stock. (6) Conversion Rights. (a) Each share of Convertible Preferred Stock shall be convertible at the option of the holder thereof at the office of the Company or at the office of the transfer agent, if any, for the Convertible Preferred Stock, into shares of duly authorized, fully paid, and non-assessable shares of Common Stock at the conversion price of $1.375 per share of Common Stock (the "Conversion Rate"), subject to adjustment as provided in this Paragraph. The number of shares of Common Stock to be delivered upon conversion of the Convertible Preferred Stock shall be determined by dividing the liquidation amount ($25,000 per share) of the shares surrendered by the Conversion Rate at the time of surrender, calculated to the nearest 1/100th of a share (fractions of less than 1/100 being disregarded). (b) Before any Convertible Preferred Stock shall be converted, the holder thereof shall surrender the certificate or certificates therefor, duly endorsed, at the office of the Company, or transfer agent, if any, for such stock, and shall give written notice to the Company at said office that he elects to convert the same or part thereof and shall state in writing therein the name or names in which he wishes the certificate or certificates for Common Stock to be issued. The date of receipt of such documents by the Company or the transfer agent, as the case may be, in proper form is herein referred to as the "Conversion Date. " The Company will as soon as practicable thereafter, issue and deliver at said office to such holder of convertible Preferred Stock, or to his nominee of nominees, certificates for the number of whole share or shares of Common Stock to which they shall be entitled as aforesaid, together with cash in lieu of any fraction of a share as hereinafter provided. No fractional shares of Common Stock are to be issued upon conversion, but the Company shall pay a cash adjustment in respect of any fraction of a share which would otherwise be issuable in an amount equal to the same fraction of the closing price (which shall be determined in accordance with the last sentence of subparagraph (g) below) per share of Common Stock on the Conversion Date, unless the Board of Directors shall determine to make such adjustment by the issuance of fractional scrip certificates or in some other manner. The shares of Convertible Preferred Stock so converted shall be deemed to have been converted as of the close of business on the Conversion Date and the person or persons entitled to receive the Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such Common Stock as of the close of business on such Conversion Date. (c) In case the Company shall, with respect to its Common Stock, (i) pay a dividend in its Common Stock or in securities convertible into or exchangeable for its Common Stock (in which latter event the number of shares of Common Stock initially issuable upon the conversion or exchange of such securities shall be deemed to have been distributed), (ii) subdivide its outstanding shares of Common Stock, (iii) combine its outstanding Common stock into a smaller number of shares, or (iv) issue by reclassification of its Common Stock any shares of capital stock of the Company, the conversion Rate in effect immediately following such action had such Convertible Preferred Stock been converted immediately prior thereto. An adjustment made pursuant to this subparagraph shall become effective immediately after the record date, in the case of a dividend, and shall become effective immediately after the effective date, in the case of a subdivision, combination or reclassification. (d) In case of the Company shall issue to all holders of outstanding shares of Common Stock any rights or warrants to subscribe for or purchase shares of its Common Stock, at a price per share less than the current market price per share of Common Stock (determined as provided in subparagraph (f) below) on the record date mentioned below, the Conversion Rate shall be changed to a price determined by dividing (A) an amount equal to the sum of (x) the product derived by multiplying the Conversion Rate in effect immediately prior thereto by the number of shares of Common Stock outstanding immediately prior to the issuance of such rights of warrants ( including all shares of Common Stock issuable upon conversion of the Convertible Preferred Stock ), plus (y) the consideration, if any, received by the Company upon the grant of such rights or warrants, plus any consideration to be received by the Company upon exercise of such rights or warrants, by (B) the number of shares of Common Stock to be outstanding after the exercise of such rights or warrants. Such adjustment shall not be made (i) for the grant of employee stock options pursuant to the Company's 1988 Stock Option Plan. or any other plan or plans adopted by the Company's Board of Directors, or upon the exercise thereof, (ii) upon exercise of any other options or warrants outstanding on June 1, 1990 (iii) upon the occurrence of any transaction specified in Paragraph (c) above, or (iv) in the event of the adjustment of the Conversion Rate as provided in subparagraph (e) below. Such adjustment shall become effective immediately after the opening of business on the day following the record date for issuing such shares or rights or warrants. (e) In the event that the Company shall at any time after June 1, 1990 grant any rights or options to subscribe for or to purchase Common Stock or any other stock or securities convertible into or exchangeable for Common Stock (such rights or options being herein called "Options" and such convertible or exchangeable stock or securities being herein called "Convertible Securities"), (other than (a) shares of Common Stock which may be issued upon exercise of the Convertible Preferred Stock, (b) shares of Common Stock which may be issued as a stock dividend or stock split for which adjustment of the Conversion Rate is made as provided in Paragraph (c) above, (c) shares of Common Stock which may be issued upon exercise of rights or warrants for which adjustment of the Conversion Rate is made as provided in Paragraph (d) above, (d) share os Common Stock which may be issued upon exercise of options granted pursuant to the Company's 1988 Stock Option Plan, or any other plan or plans adopted by the Company's Board of Directors, or any warrants outstanding on May 31, 1990) and the price per share for which Common Stock is issuable upon the exercise of such Options or upon conversion or exchange of such Convertible Securities is less than the Conversion Rate on the date of such grant, the Conversion Rate in effect immediately prior to such grant shall be changed to a price determined by dividing (A) an amount equal to the sum of (x) the product immediately prior thereto by the number of shares of Common Stock outstanding immediately prior to such grant (including Convertible Preferred Stock), plus (y) the consideration, if any, received by the Company upon the grant of such Options or issue or sale of the Convertible Securities plus any consideration to be received by the Company upon the exercise of such Options or conversion or exchange, by (B) the number of shares of Common Stock to be outstanding immediately after the exercise of such Options or conversion of exchange of such Convertible Securities (including as outstanding all shares of Common Stock issuable upon conversion of all the Convertible Preferred Stock). Except as provided in Paragraphs (6) (c), (d), (e) and (h) hereof, no other event shall effect a change in the Conversion Rate. (f) For the purpose of any computation under Paragraphs (6) (a), (d) and (e) above, the current market price per share of Common Stock on any date shall be deemed to be the average of the daily closing prices for the 30 consecutive business days commencing 45 business days before the day in question. The closing price for each day shall be the last reported sale price regular way or, in case no such reported sale takes place on such day, the mean of the reported closing bid and asked prices regular way on the relevant securities exchange on such day or, if the Common Stock is not listed or admitted to trading on any national securities exchange, or it such national exchange is not the principle trading market for the Company's Common Stock, the mean of the closing bid quotations in the over-the-counter market on such day as reported by the National Quotation Bureau of similar reporting service. (g) No adjustment or readjustment in the Conversion Rate shall be required unless such adjustment or readjustment would require an increase or decrease of at least 1% in the Conversion Rate, as adjusted and readjusted from time to time; provided, however, that any adjustments which by reason of this Paragraph (6) (g) are not required to be, and are not, made shall be carried forward and taken into account in any subsequent adjustment or readjustment. (h) On the expiration of any rights or warrants referred to in Paragraph (6) (d) or (e), or the termination of any rights of conversion or exchange referred to in Paragraph (6) (c) (i), the Conversion Rate then in effect shall forthwith be readjusted to such Conversion Rate as would have obtained had the adjustment made upon the issuance of such rights or warrants or convertible or exchangeable securities been made upon the basis of the delivery of only the number of shares of Common Stock actually delivered upon the exercise of such rights or warrants or upon the conversion or exchange of such securities. (i) Whenever the Conversion Rate is adjusted as herein provided, the Chief Financial Officer of the Company shall compute the adjusted Conversion Rate in accordance with the provisions of this Paragraph (6) and shall prepare a certificate setting forth such Conversion Rate showing in detail the facts upon which such adjustment is made. Such Certificate shall forthwith t\be filed with the transfer agent, if any, for the Company's Convertible Preferred Stock and a notice thereof mailed to the holders or record of the outstanding shares of such series. (j) In case of the consolidation or merger of the Company with or into another corporation resulting in an exchange or recapitalization of all of the Company's Common Stock, or the conveyance of all or substantially all of the assets of the Company to another corporation, each share of Convertible Preferred Stock shall thereafter be convertible into the kind and number of shares of stock or other securities or property receivable upon such consolidation, merger or conveyance by a holder of the number of shares of Common Stock into which each share of Convertible Preferred Stock might have been converted immediately prior to such consolidation, merger or conveyance; and, in any such case, appropriate adjustment (as determined by the Board of Directors) shall be made in the application of the provisions herein set forth with respect to the rights and interests thereafter of the holders of such shares of Convertible Preferred Stock, to the end that the provisions set forth herein (including provisions with respect to changes in and other adjustments of the Conversion Rate) shall thereafter be applicable, as nearly as reasonable may be, in relation to any shares of stock or other property thereafter deliverable upon the conversion of the shares of Convertible Preferred Stock. (k) The Company shall at all times reserve and keep available, out of its authorized but unissued shares of Common Stock or out of shares of Common stock held in its treasury, solely for the purpose of effecting the conversion of the Convertible Preferred Stock, the full number of shares of Common Stock deliverable upon the conversion of all Convertible Preferred Stock from time to time outstanding. (1) The Company will pay all documentary and other taxes that may be payable in respect of any issue or delivery of shares of Common Stock on conversion of Convertible Preferred Stock. The Company shall not, however, be required to pay any tax which may be payable in respect of any transfer involved in the issue and delivery of shares of Common Stock in a name other than that in which the shares of Convertible Preferred Stock so converted were registered, and no such issue or delivery shall be made unless and until the person requesting such transfer has paid to the Company the amount of any such tax or has established to the satisfaction of the Company that such tax has been paid. (m) Shares of Convertible Preferred Stock which have been issued and required in any manner, including shares purchased or redeemed and shares which have been converted into shares of Common Stock, shall (upon compliance with any applicable provisions of the laws of the State of Delaware) have the status of authorized and unissued shares of the Preferred Stock undesignated as to series and may be redesignated and reissued as part of any series of the Preferred Stock; provided, however that no such issued and reacquired Convertible Preferred Stock shall be reissued or sold as Convertible Preferred Stock. (7) Voting Rights. (a) Each holder of record of Convertible Preferred Stock shall be entitled to one vote for each share of Common Stock into which the shares of Convertible Preferred Stock held by him are convertible. Except as otherwise provided by law and subject to Paragraphs (7) (b) and (8), Convertible Preferred Stock and Common Stock (and any other capital stock of the Company at that time entitled thereto) shall vote together as a single class on all matters upon which stockholders are entitled to vote. (b) So long as any shares of Convertible Preferred Stock are outstanding, the Company will not without the affirmation vote or consent of at least 66 2/3% of the outstanding shares of Convertible Preferred Stock (excluding treasury shares and shares held by subsidiaries) voting as separate series, create any class or series of shares ranking prior to the Convertible Preferred Stock either as to dividends or upon liquidation, or amend the Company's Certificate of Incorporation to affect adversely the powers (except as such powers may be limited rights given to additional shares of any class), rights or preferences of the Convertible Preferred Stock. For the purposes of this subparagraph (b), each holder of Convertible Preferred Stock shall be entitled to one vote for each share held. (8) Voting Rights of Convertible Preferred Stock Upon Default in Payment of Dividends. (a) In addition to the voting rights set forth in Paragraph (7) above, if and when dividends payable on all the outstanding shares of Convertible Preferred Stock shall be in arrears for four full consecutive quarters, then, until, but not after, such time as all accrued and unpaid dividends on all outstanding shares of Convertible Preferred Stock shall have been declared and either paid or a sum set apart sufficient for the payment thereof, the holders of record of all shares of Convertible Preferred Stock then outstanding, voting separately as one class, and with one vote for each share held, shall be entitled to elect one member of the Board of Directors. (b) At any time after such voting power shall have so vested in the holders of Convertible Preferred Stock, the Secretary of the Company may, and upon the written request of the holders of record of 10% of the shares of Convertible Preferred Stock shall, call a meeting of the holders of Convertible Preferred Stock for the election of the director to be elected by then as herein provided, to be held within 30 days after such call and at the place and upon the notice provided by law and the by-laws for the holding of meetings of stockholders; provided, however, the Secretary shall not be required to call such special meeting in the case of any such request received less than 90 days before the date fixed for any annual meeting of stockholders. if any such special meeting required to be called as above provided shall not be called by the Secretary within 30 days of receipt of any such request, then the holders of record of at least 10% of the shares of Convertible Preferred Stock then outstanding may designate in writing one of their number to call such meeting, and the person so designated may call such meeting to be held at the place and upon the notice above provided, and for that purpose shall have access to the stock ledger of the Company. No such special meeting and no adjournment thereof shall be held on a date later than 30 days before the annual meeting of stockholders or a special meeting held in place thereof next succeeding the time when the holders of Convertible Preferred Stock become entitled to elect directors and provided above. (c) Notwithstanding any other provisions of these capital stock provisions of the By-laws to the contrary, if any meeting of stockholders for the election of directors shall be held while holders of the outstanding shares of Convertible Preferred Stock voting as a class are entitled to elect one director, as herein provided, and if the holders of at least a majority of such shares shall be present or represented by proxy at such meeting, or any adjournment thereof, then by vote of the holders of a least a majority of the shares of Convertible preferred Stock present or so represented at such meeting, the then authorized number of directors of the Company shall be increased by one, and at such meeting the holders of Convertible Preferred Stock shall be entitled to elect, by such vote, the additional director so provided for, but no such additional director so elected shall hold office beyond the next annual meeting of stockholders or special meeting held in place thereof. Whenever the holders of Convertible Preferred Stock shall be divested of the power to elect one director as above provided, the term of office of the person, if any, elected as director by the holders of Convertible Preferred Stock, voting as a class, shall forthwith terminate and the authorized number of directors of the company shall be reduced accordingly. RESOLVED FURTHER, that the Chairman of the Board of Directors and Chief Executive Officer or the President or any Vice President, and the Secretary or any Assistant Secretary of the Company are each authorized to execute, verify and file a certificate of designation of preferences in accordance with Delaware law. C. That the authorized number of share of Preferred Stock of the Company is 30,000,000 and that the authorized number of shares of Preferred Stock constituting the Series A Convertible Preferred Stock, none of which has be issued, is 60. D. That the Certificate is the act and deed of the Company. IN WITNESS WHEREOF, the undersigned have executed this certificate in the name and on behalf of Docucon, Incorporated, this 29th day of May, 1990. BY: /s/ EDWARD P. GISTARO Edward P. Gistaro President ATTEST: BY: /s/ S.E. FAYE S.E. Faye Assistant Secretary Each of the undersigned signing on behalf of Docucon, Incorporated declares under penalties of perjury that the matters set forth in the foregoing certificate are true and correct of their own knowledge. BY: /s/ EDWARD P. GISTARO Edward P. Gistaro President BY: /s/ S.E. FAYE S.E. Faye Assistant Secretary EX-3.6 4 STATE OF DELAWARE OFFICE OF SECRETARY OF STATE ------------------------- I, MICHAEL HARKINS, SECRETARY OF STATE OF THE STATE OF DELAWARE DO HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF STOCK DESIGNATION OF DOCUCON, INCORPORATED FILED IN THIS OFFICE ON THE THIRTIETH DAY OF MAY, A.D. 1991, AT 9:00 O'CLOCK A.M. : : : : : : : : : : : : : : : : : : : - ------------------------------------------ MICHAEL HARKINS, SECRETARY OF STATE AUTHENTICATION: :3696192 DATE: 12/11/92 CERTIFICATE OF DESIGNATION PREFERENCES OF SERIES B NON-CONVERTIBLE, CUMULATIVE, NON-VOTING, REDEEMABLE PREFERRED STOCK OF DOCUCON, INCORPORATED The undersigned, Edward P. Gistaro and Ralph Brown, do hereby certify: A. That said Edward P. Gistaro is, and at all times herein mentioned was, the duly elected and acting Chief Executive Officer of Docucon, Incorporated a Delaware corporation (the "Company"), and that said Ralph Brown, is, and at all times herein mentioned was, the duly elected and acting Secretary of the Company. B. That the unanimous written consent of the Board of Directors dated June 10, 1991, the following preamble and resolutions were duly adopted and remain in effect: WHEREAS, the Board of Directors of the Company is authorized, within the limitations and restrictions stated in the Certificate of Incorporation, to fix by resolution or resolutions the designation of each series of Preferred Stock and the powers, preferences and relative participating, optional or other special rights, and qualifications, limitations or restrictions thereof, including, without limiting the generality of the foregoing, such provisions as may be desired concerning voting, redemption, dividends, dissolution or the distribution of assets, conversion of exchange, and such other subjects or matters as may be fixed by resolution or resolutions of the Board of Directors under the General Corporation Law of Delaware; and WHEREAS, it is the desire of the Board of Directors of the Company, pursuant to its authority as aforesaid, to fix the terms of a series of Preferred Stock and the number shares constituting such series; NOW, THEREOF, BE IT RESOLVED: (1) Designation. The Board of Directors does hereby provide for the issue of a series of Preferred Stock of the Company, to be designated and known as Series B Non-Convertible, Cumulative, Non-Voting, Redeemable Preferred Stock (the "Series B Preferred Stock"). (2) Number of Shares. The number of shares constituting the Series B preferred Stock is hereby fixed at 476,200. (3) Allocation to Capital. The amount to be represented in capital at all times in respect of each share of the Series B Preferred Stock shall be its par value of $1.00 per share. (4) Dividends. (a) The holders of shares of Series B Preferred Stock, in preference to the holders of Common Stock and of any other capital stock of the Company which ranks junior to the Series B Preferred Stock but subordinate to the holders of Series A Preferred Stock in respect of dividends or distributions of assets on liquidation of the Company (all of which classes, other than the Series A Preferred Stock, are hereinafter referred to as "Junior Securities"), shall be entitled to receive, as and when declared by the Board of Directors, out of the assets of the Company which are by law available for the payment of dividends, cumulative cash dividends at a rate of 15% per annum. Except as otherwise provided herein, the declaration of payment of dividends is at the sole discretion of the Company's Board of Directors, and is not mandatory, and any accrued but unpaid dividends shall not be deemed to be in arrears. An arrearage shall be deemed to occur when dividends which have been declared by the Company's Board of Directors are not paid in full within 15 days after the dividend payment date. The holders of the shares of Series B Preferred Stock shall be entitled to receive dividends payable semi-annually on June 15 and December 15 of each year, commencing December 15, 1991. Dividends on shares of Series B Preferred Stock shall accrue from the date of issuance. Such dividends shall be paid to the holders of record at the close of business on the record date specified by the Board of Directors of the Company at the time such dividend is declared. Unpaid accrued dividends shall not bear interest. (b) Notwithstanding anything contained herein to the contrary, no dividends on shares of the Series b Preferred Stock shall be declared by the Board of Directors or paid or set apart for payment by the Company at such time as the terms and provisions of any agreement of the Company, including any agreement relating to its indebtness, specifically prohibits such declaration, payment or setting apart for payment; provided, however, that nothing herein contained shall in any way or under any circumstance be construed or deemed to require the Board of Directors to declare or the Company to pay or set apart for payment any dividends on shares of the Series B Preferred Stock at any time, whether permitted by any of such agreements or not. (c) Holders of shares of the Series B Preferred Stock shall be entitled to receive the dividends provided for in Paragraph (4) (a) hereof in preference to and in priority over any dividends or other distributions upon any of the Junior Securities, whether payable in cash or other property. So long as any shares of Series B Preferred Stock are outstanding, the Company shall not declare, pay or set apart for payment any dividend on any of the Junior Securities or make any payment on account of, or set apart for payment money for, a sinking or other similar fund for the purchase, redemption or other retirement of, any of the Junior Securities or any warrants, rights, calls, or options exercisable for any of the Junior Securities, or make any distribution in respect thereof, either directly or indirectly, and whether in cash, obligations of shares of the Company or other property (other distributions or dividends in Junior Securities to the holders of Junior Securities), and shall not purchase or redeem, and shall not permit any corporation of other entity directly or indirectly controlled by the Company to purchase or redeem, any Series B Preferred Stock or any of the Junior Securities or warrants, rights, calls or options - exercisable for any of the Junior Securities, unless prior to or concurrently with such declaration, payment, setting apart for payment, purchase redemption, as the case may be, all accrued but unpaid dividends on shares of Series B Preferred Stock shall have been or be paid. (d) Subject to the foregoing provisions of this Paragraph (4), the Board of Directors may declare and the Company may pay or set apart for payment dividends and other distributions on any of the junior Securities, and may purchase or otherwise redeem any of the Junior Securities or any warrants, rights or options exercisable for any of the Junior Securities, and the holders of the shares of Series B Preferred Stock shall not be entitled to share therein. (5) Liquidation Preference. (a) In the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Company, the holders of shares of the Series B Preferred Stock then outstanding shall be entitled to be paid out of the assets of the Company available for distribution to its stockholders, but only from the amount available after the payout to holders of Series A Preferred Stock. (6) Redemption. (a) The Series B Preferred Stock will be redeemable in whole or in part at the sole discretion of the Board of Directors of the Company for $1.00 per share. (7) Voting Rights. The Series B Preferred Stock will have no voting rights. FURTHER RESOLVED: That the officers of this Company are hereby authorized to do and perform all such further actions and things and to sign all such further documents and certificates and to take all such further steps as may be necessary or advisable or convenient or proper to carry out the intent of the foregoing. IN WITNESS WHEREOF, the undersigned have executed this certificate in the name and on behalf of Docucon, Incorporation this 12th day of June, 1991. BY: /s/ EDWARD P. GISTARO Edward P. Gistaro Chief Executive Officer ATTEST: BY: /s/ RALPH BROWN Ralph Brown Secretary Each of the undersigned signing on behalf of Docucon, Incorporated declares under penalties of perjury that the matters set forth in the foregoing certificate are true and correct of their own knowledge. BY: /s/ EDWARD P. GISTARO Edward P. Gistaro BY: /s/ RALPH BROWN Ralph Brown EX-3.7 5 EXHIBIT 3.7 CERTIFICATE OF CORRECTION OF CERTIFICATE OF DESIGNATION PREFERENCES OF SERIES A CONVERTIBLE PREFERRED STOCK OF DOCUCON, INCORPORATED Docucon, Incorporated, a corporation incorporated under the laws of the State of Delaware, does hereby certify pursuant to Section 103(f) of the General Corporation Law: FIRST: That the Certificate of Designation, Preferences of Series A Convertible Preferred Stock of Docucon, Incorporated that was filed with the Secretary of State of Delaware on May 30, 1990 in an inaccurate record of the corporate action referred to therein. SECOND: That the Certificate of Designation, Preferences of Series A Convertible Preferred Stock of Docucon, Incorporated was inaccurate in the following respect: The conversion price of each share of Convertible Preferred Stock should be $.075 per share of Common Stock, instead of $1.37 per share of Common Stock. In correction form, Section (6) should be read as follows: (6) Conversion Rights (a) Each share of Convertible Preferred Stock shall be convertible at the option of the holder thereof at the office of the Company or at the office of the transfer agent, if any, for the Convertible Preferred Stock, into shares of Common Stock at the conversion price of $.075 per share of Common Stock (the "Conversion Rate"), subject to adjustment as provided in this paragraph. The number of shares of Common Stock to be delivered upon conversion of the Convertible Preferred Stock shall be determined by dividing the liquidation amount ($25,000 per share) of the shares surrendered by the Conversion Rate at the time of surrender, calculated to the nearest 1/100th of a share (fractions of less than 1/100 being disregarded)." IN WITNESS WHEREOF, the undersigned have executed this certificate of correction in the name and on behalf of Docucon, Incorporated, this 1st day of June, 1990. BY: /s/ EDWARD P. GISTARO Edward P. Gistaro President ATTEST: BY: /s/ STANLEY E. FAYE Stanley E. Faye Assistant Secretary Each of the undersigned signing on behalf of Docucon, Incorporated declares under penalties of perjury that the matters set forth in the foregoing certificate are true and correct of their own knowledge. BY: /s/ EDWARD P. GISTARO Edward P. Gistaro President BY: /s/ STANLEY E. FAYE Stanley E. Faye Assistant Secretary EX-11 6 EXHIBIT 11 DOCUCON, INCORPORATED COMPUTATION OF EARNINGS (LOSS) PER SHARE YEAR ENDED DECEMBER 31 --------------------------------------------- 1995 1994 1993 ------------- ------------- ------------- COMPUTATION OF PRIMARY EARNINGS (LOSS) PER SHARE: Net income (loss) $ (605,563) $ (1,722,701) $ 207,509 Less- Preferred stock dividend requirements (60,334) (63,170) (91,813) ------------- ------------- ------------- Net income (loss) applicable to common stockholders used for computation $ (665,897) $ (1,785,871) $ 115,696 ============= ============= ============= WEIGHTED AVERAGE NUMBER OF SHARES OF COMMON STOCK OUTSTANDING 11,690,161 11,542,636 11,096,093 WEIGHTED AVERAGE INCREMENTAL SHARES OUTSTANDING UPON ASSUMED CONVERSION OF OPTIONS AND WARRANTS - 7,273 531,290 ------------- ------------- ------------- WEIGHTED AVERAGE COMMON SHARES AND COMMON SHARE EQUIVALENTS USED FOR COMPUTATION 11,690,161 11,549,909 11,627,383 ============= ============= ============= PRIMARY EARNINGS (LOSS) PER COMMON SHARE AND COMMON SHARE EQUIVALENT $(.06) $(.15) $.01 ============= ============= ============= COMPUTATION OF FULLY DILUTED EARNINGS (LOSS) PER SHARE: Net income (loss) $ (605,563) $ (1,722,701) $ 207,509 Preferred stock dividend requirements (60,334) (63,170) (91,813) Increase in net income applicable to Common Stock forPreferred stock dividends not incurred upon assumed conversion of preferred stock 60,334 63,170 91,813 ------------- ------------- ------------- Net income (loss) applicable to common stockholders used for computation $ (605,563) $ (1,722,701) $ 207,509 ============= ============= ============= WEIGHTED AVERAGE NUMBER OF SHARES OF COMMON STOCK OUTSTANDING 11,690,161 11,542,636 11,096,093 WEIGHTED AVERAGE INCREMENTAL SHARES OUTSTANDING UPON ASSUMED CONVERSION OF OPTIONS AND WARRANTS - 7,273 531,290 WEIGHTED AVERAGE INCREMENTAL SHARES OUTSTANDING UPON ASSUMED CONVERSION OF THE PREFERRED STOCK 731,542 766,659 1,102,547 ------------- ------------- ------------- WEIGHTED AVERAGE SHARES USED FOR COMPUTATION 12,421,703 12,316,568 12,729,930 ============= ============= ============= EARNINGS (LOSS) PER COMMON SHARE AND COMMON SHARE EQUIVALENT ASSUMING FULL DILUTION (a) $(.05)(a) $(.14)(a) $.02(a) ===== ===== ====
(a) This calculation is submitted in accordance with Item 601(b)(11) of Regulation S-K although it is not required by APB Opinion No. 15 because it results in dilution of less than 3 percent or is antidilutive. EX-23 7 EXHIBIT 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTS As independent public accountants, we hereby consent to the incorporation of our report included in this Form 10-KSB into the Company's previously filed Registration Statement on Form S-8 (File no. 1-10185). San Antonio, Texas February 27, 1996 EX-27 8
5 THE FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM DOCUCON INC.'S FINANCIAL STATEMENTS AS OF AND FOR THE TWELVE MONTHS ENDED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 12-MOS DEC-31-1995 DEC-31-1995 139,167 0 1,880,569 7,683 10,957 2,663,156 6,564,715 4,182,671 5,742,903 3,715,600 0 0 21 117,712 1,909,570 5,742,903 11,037,846 11,037,846 6,810,976 11,504,725 (13,726) 0 152,410 (605,563) 0 (605,563) 0 0 0 (605,563) (.06) (.05)
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