-----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, OHFbqbrLayHCN97DjNlThXL4GcQz5qJX4JHcEo2JyLZ49X9F00UffNqzqp//0F12 eb4Qk1f4CYDrb2m4sUOS5Q== 0000890566-98-001388.txt : 19980812 0000890566-98-001388.hdr.sgml : 19980812 ACCESSION NUMBER: 0000890566-98-001388 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980810 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: 10QSB SEC ACT: SEC FILE NUMBER: 001-10185 FILM NUMBER: 98681127 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 10QSB 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB (Mark One) [X] Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Quarterly Period Ended JUNE 30, 1998 OR [ ] Transition Report Under Section 13 or 15(d) of the Exchange Act For the Transition Period From to Commission File Number 1-10185 DOCUCON, INCORPORATED (Exact name of small business issuer as specified in its charter) Delaware 74-2418590 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 7461 Callaghan Road San Antonio, Texas 78229 (Address of principal executive offices) (210) 525-9221 (Issuer's telephone number) 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 State the number of shares outstanding of each of the issuer's classes of common equity as of August 3, 1998. 3,299,133 DOCUCON, INCORPORATED INDEX PAGE PART I. FINANCIAL INFORMATION (UNAUDITED) Item 1: Balance Sheets - June 30, 1998, and December 31, 1997 3 Statements of Operations - For the Three and Six Months Ended June 30, 1998 and 1997 5 Statements of Cash Flows - For the Six Months Ended June 30, 1998 and 1997 7 Notes to Financial Statements 8 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations 13 PART II. OTHER INFORMATION 16 SIGNATURES 18 -2- DOCUCON, INCORPORATED BALANCE SHEETS
JUNE 30, 1998 DECEMBER 31, ASSETS (UNAUDITED) 1997 ------------ ------------ CURRENT ASSETS: Cash and temporary cash investments ........... $ 2,815,279 $ 4,597,183 Accounts receivable-trade, net of allowance for doubtful accounts of $4,444- U.S. Government ............................ 259,752 620,934 Commercial ................................. 147,328 335,300 Unbilled revenues ............................. 1,814,818 1,472,075 Other receivables ............................. 408,860 405,336 Prepaid expenses and other .................... 106,827 77,044 Asset held for sale ........................... 1,693,881 -- ------------ ------------ Total current assets ........... 7,246,745 7,507,872 ------------ ------------ PROPERTY AND EQUIPMENT: Conversion systems ............................ 4,670,830 4,589,473 Building and improvements ..................... -- 1,744,499 Land .......................................... -- 230,000 Furniture and fixtures ........................ 212,955 205,602 ------------ ------------ Total property and equipment ... 4,883,785 6,769,574 Less- Accumulated depreciation ................ (4,562,526) (4,680,368) ------------ ------------ Net property and equipment ..... 321,259 2,089,206 ------------ ------------ OTHER, net ...................................... 490,659 472,490 ------------ ------------ Total assets ................... $ 8,058,663 $ 10,069,568 ============ ============
The accompanying notes are an integral part of these financial statements. -3- DOCUCON, INCORPORATED BALANCE SHEETS (Continued)
JUNE 30, 1998 DECEMBER 31, LIABILITIES AND STOCKHOLDERS' EQUITY (UNAUDITED) 1997 ------------ ------------ CURRENT LIABILITIES: Accounts payable ................................. $ 258,387 $ 482,076 Accrued liabilities .............................. 521,184 616,615 Income taxes payable ............................. 98,918 191,000 Revolving term note .............................. -- 504,000 Current maturities of long-term debt ............. 1,500,212 30,722 Current maturities of capital lease obligations .. 16,626 15,798 ------------ ------------ Total current liabilities .............. 2,395,327 1,840,211 ------------ ------------ LONG-TERM DEBT ..................................... -- 1,485,079 ------------ ------------ CAPITAL LEASE OBLIGATIONS .......................... 41,743 49,547 ------------ ------------ OTHER LONG-TERM OBLIGATIONS ........................ 7,500 -- ------------ ------------ COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Preferred stock, $1.00 par value, 2,500,000 shares authorized- Series A, 60 shares authorized, 12 shares outstanding as of June 30, 1998, and December 31, 1997 ............................. 12 12 Common stock, $.01 par value, 6,250,000 shares authorized; 3,290,481 and 3,260,889 shares outstanding as of June 30, 1998, and December 31, 1997, respectively ........................ 32,905 32,609 Additional paid-in capital ....................... 10,069,354 10,069,173 Accumulated deficit .............................. (4,476,768) (3,407,063) Treasury stock, at cost, 6,300 shares and 0 shares as of June 30, 1998, and December 31, 1997, respectively .................................. (11,410) -- ------------ ------------ Total stockholders' equity ............. 5,614,093 6,694,731 ------------ ------------ Total liabilities and stockholders' equity .............................. $ 8,058,663 $ 10,069,568 ============ ============
The accompanying notes are an integral part of these financial statements. -4- DOCUCON, INCORPORATED STATEMENTS OF OPERATIONS (Unaudited)
THREE MONTHS SIX MONTHS ENDED JUNE 30 ENDED JUNE 30 -------------------------- -------------------------- 1998 1997 1998 1997 ----------- ----------- ----------- ----------- OPERATING REVENUES ............................ $ 869,982 $ 2,096,083 $ 1,482,978 $ 4,585,731 ----------- ----------- ----------- ----------- COSTS AND EXPENSES: Production .................................. 672,628 1,183,039 1,356,964 2,963,177 Research and development .................... 56,893 30,879 124,644 87,443 General and administrative .................. 328,724 279,087 623,162 501,079 Marketing ................................... 206,640 178,429 323,863 353,551 Depreciation and amortization ............... 82,822 107,011 171,397 222,673 ----------- ----------- ----------- ----------- 1,347,707 1,778,445 2,600,030 4,127,923 ----------- ----------- ----------- ----------- OPERATING INCOME (LOSS) FROM CONTINUING OPERATIONS .................................. (477,725) 317,638 (1,117,052) 457,808 OTHER INCOME (EXPENSE): Interest income ............................. 52,179 (443) 116,204 -- Interest expense ............................ (37,265) (50,841) (73,981) (99,196) Other, net .................................. 10,597 20,443 16,124 29,278 ----------- ----------- ----------- ----------- INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES ................................ (452,214) 286,797 (1,058,705) 387,890 Income tax expense .......................... 3,000 9,000 11,000 12,000 ----------- ----------- ----------- ----------- NET INCOME (LOSS) FROM CONTINUING OPERATIONS .. (455,214) 277,797 (1,069,705) 375,890 Preferred stock dividend requirements ....... 8,250 11,688 16,500 24,751 ----------- ----------- ----------- ----------- NET INCOME (LOSS) FROM CONTINUING OPERATIONS APPLICABLE TO COMMON STOCKHOLDERS ........... (463,464) 266,109 (1,086,205) 351,139 Loss from discontinued operations ........... -- (215,698) -- (357,891) ----------- ----------- ----------- ----------- NET INCOME (LOSS) APPLICABLE TO COMMON STOCKHOLDERS ................................ $ (463,464) $ 50,411 $(1,086,205) $ (6,752) =========== =========== =========== =========== Basic earnings (loss) from continuing operations per common share ................ $ (.14) $ .09 $ (.33) $ .11 Basic loss from discontinued operations per common share ............................... -- (.07) -- (.11) ----------- ----------- ----------- ----------- BASIC EARNINGS (LOSS) PER COMMON SHARE ........ $ (.14) $ .02 $ (.33) $ -- =========== =========== =========== =========== WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING ................................. 3,290,217 3,109,397 3,289,316 3,095,252 =========== =========== =========== ===========
-5-
THREE MONTHS SIX MONTHS ENDED JUNE 30 ENDED JUNE 30 ------------------------ ------------------------ 1998 1997 1998 1997 ---------- ---------- ---------- ---------- Diluted earnings (loss) from continuing operations per common share and common share equivalents ................................ $ (.14) $ .08 $ (.33) $ .11 Diluted loss from discontinued operations per common share and common share equivalents .. -- (.06) -- (.11) ---------- ---------- ---------- ---------- DILUTED EARNINGS (LOSS) PER COMMON SHARE AND COMMON SHARE EQUIVALENTS .................... $ (.14) $ .02 $ (.33) $ -- ========== ========== ========== ========== WEIGHTED AVERAGE NUMBER OF COMMON SHARES AND COMMON SHARE EQUIVALENTS OUTSTANDING ........ 3,290,217 3,204,756 3,289,316 3,219,769 ========== ========== ========== ==========
The accompanying notes are an integral part of these financial statements. -6- DOCUCON, INCORPORATED STATEMENTS OF CASH FLOWS (Unaudited)
SIX MONTHS ENDED JUNE 30 -------------------------- 1998 1997 ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) from continuing operations ........... $(1,069,705) $ 375,890 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities- Depreciation and amortization ....................... 171,397 222,673 Changes in current assets and current liabilities- Decrease in receivables and unbilled revenues ...... 202,887 690,596 (Increase) decrease in prepaid expenses and other .. (53,206) 100,676 Decrease in accounts payable and accrued liabilities (319,120) (921,358) Decrease in income taxes payable ................... (92,082) (23,756) ----------- ----------- Net cash provided by (used in) operating activities ................................ (1,159,829) 444,721 ----------- ----------- NET CASH USED BY DISCONTINUED OPERATIONS ................. -- (343,855) ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures ................................... (89,702) (101,349) ----------- ----------- Net cash used in investing activities ........ (89,702) (101,349) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Advances under line of credit ............................ -- 1,344,500 Payments under line of credit .......................... (504,000) (1,485,000) Principal payments under capital lease obligations ..... (6,976) (8,747) Net proceeds from exercise of stock options ............ 5,602 4,259 Principal payments on long-term debt ................... (15,589) (13,720) Purchase of treasury stock ............................. (11,410) -- ----------- ----------- Net cash used in financing activities ........ (532,373) (158,708) ----------- ----------- NET DECREASE IN CASH AND TEMPORARY CASH INVESTMENTS ...... (1,781,904) (159,191) CASH AND TEMPORARY CASH INVESTMENTS, beginning of period . 4,597,183 198,152 ----------- ----------- CASH AND TEMPORARY CASH INVESTMENTS, end of period ....... $ 2,815,279 $ 38,961 =========== =========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for- Interest .............................................. $ 75,523 $ 100,118 =========== =========== Income taxes .......................................... $ 93,562 $ 19,868 =========== ===========
The accompanying notes are an integral part of these financial statements. -7- DOCUCON, INCORPORATED NOTES TO FINANCIAL STATEMENTS (Unaudited) NOTE 1 The financial statements included herein have been prepared by Docucon, Incorporated (the Company), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. However, all adjustments have been made which are, in the opinion of the Company, necessary for a fair presentation of the results of operations for the periods covered. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. It is recommended that these financial statements be read in conjunction with the financial statements and the notes thereto included in the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1997. Certain reclassifications have been made in the prior period financial statements to conform with the current period presentation. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make certain estimates and assumptions that 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. Since its inception, the Company has incurred cumulative net losses of approximately $4.5 million. The cumulative net losses have been funded primarily through the Company's public offering of common stock, issuances of preferred stock, the exercise of warrants and options, debt financing and the sale of its software division in the fourth quarter of 1997 for $6.5 million. The Company has taken steps which it believes will improve its operating results including selling its software division and focusing on the Company's document conversion business. The Company's management believes that it is likely that the Company's operating results for the remainder of 1998 will improve and will generate sufficient working capital, along with available cash, to sustain its operations throughout the year. However, there can be no assurances that the Company's focus on document conversion will improve its operating results. NOTE 2 Discontinued operations- As previously discussed, in November 1997, the Company sold its software division to a third party for $6.5 million. Included in other current receivables and in other, net, on the accompanying balance sheets are escrowed amounts of approximately $400,000 each related to the sale of the software division. These escrowed funds secure the payment of any liability of the Company to the purchaser under the terms of the purchase agreement and are scheduled to be released to the Company in the amount of $400,000 in November 1998 and $400,000 in November 1999. Management of the Company believes that the entire $800,000 held in escrow will be paid to the Company. Including the escrowed funds, net cash proceeds after expenses relating to the sale were approximately $5.7 million. As a result of the sale, the division has been accounted for as a discontinued operation and, accordingly, the Company has restated its financial statements for all periods presented in accordance with Accounting Principle Board Opinion No. 30. The following table provides certain information related to the discontinued operation: THREE SIX MONTHS ENDED MONTHS ENDED JUNE 30, 1997 JUNE 30, 1997 ------------- ------------- Revenues ................................... $ 592,494 $ 1,299,880 ============= ============= Loss from discontinued operations .......... $ (215,698) $ (357,891) ============= ============= -8- NOTE 3 Substantially all of the Company's unbilled revenues at June 30, 1998, and December 31, 1997, relate to conversion services performed for agencies of the U.S. Government. The Company's ability to invoice these unbilled revenues is dependent upon a number of factors including quality control acceptance and the availability of funding to the respective agencies. The Company was contacted in mid-1997 and informed that funding for certain conversion services being performed had been depleted. Management elected to complete work that had been placed in production at that time despite the lack of assurance that funding would become available. As a result, the Company has been unable to invoice approximately $1.2 million of conversion services that were performed during 1997. The conversion products associated with the $1.2 million of unbilled revenues have been shipped to the customer and are in various stages of quality control review. During the three and six months ended June 30, 1998, the Company recognized approximately $370,000 in additional unbilled revenues relating to additional conversion services performed through June 1998. Management of the Company, based upon its past operating history and its ongoing discussions with various governmental personnel regarding the availability of additional funding, believes that all of such unbilled revenues totaling approximately $1.6 million will be invoiced and collected during 1998. However, there can be no assurances that the customer will accept all of the work product nor are there any assurances that sufficient funding will be made available to enable the Company to invoice the unbilled revenues. The inability of the Company to realize its unbilled revenues would have a material adverse effect on the Company's future results of operations and its financial position. NOTE 4 Common stock and preferred stock- Each share of the Company's preferred stock ($25,000 stated value) is convertible into 8,334 shares of common stock and earns cash dividends of 11 percent per annum. Each share of preferred stock is entitled to vote 8,334 common shares. 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 preferred stock, the Company cannot pay dividends on its common stock until all accumulated but unpaid dividends on such preferred stock have been paid. As of June 30, 1998, cumulative undeclared dividends on the preferred stock approximated $259,000. As these dividends are undeclared, they have not been recorded as a reduction of the Company's equity. Common stock is subordinate to preferred stock in the event of liquidation. Treasury stock- On June 18, 1998, the Company announced the board of directors authorized the repurchase of up to 500,000 shares of the Company's common stock in the open market. In June 1998, the Company acquired 6,300 treasury shares for $11,410. Reverse stock split- In June 1998, the Company's board of directors approved a one-for-four reverse common stock split. Accordingly, all common stock and share information has been adjusted to reflect the reverse stock split. -9- NOTE 5 Time Accelerated Restricted Stock Award Plan (TARSAP) and stock option grants- In April 1998, the Company's board of directors granted options to certain members of the Company's senior management, subject to shareholder approval, to purchase 125,000 shares of the Company's common stock at an exercise price of $4 per share under a TARSAP. In April 1998, the Company appointed a new president and chief executive officer. The Company's board of directors granted this employee options, subject to shareholder approval, to purchase 225,000 shares of the Company's common stock at an exercise price of $4 per share under a TARSAP. Fifty thousand of the TARSAP options vest and become exercisable in September 2001 while the remainder vest and become exercisable in March 2005. Vesting and exercisability of the TARSAP options is accelerated, in 20,000 share increments, for each $2 per share incremental increase in the quoted market price per share of the Company's common stock above $4 per share. In April 1998, the Company's board of directors approved conditional stock option grants to certain members of the Company's senior management. The conditional grants provide that, for each $2 per share increase in the quoted market value of the Company's common stock above $4 per share (up to $40 per share), the employees shall receive options to purchase shares of the Company's common stock as follows: OPTIONS TO BE GRANTED FOR EMPLOYEE EACH $2 INCREASE TERM -------- -------------------------- --------- A 12,500 7 years B 5,000 30 months C 4,167 7 years Each option will expire 10 years after date of grant. The term, vesting period and option price for each grant will be determined by a committee to be selected by the Company's board of directors. NOTE 6 Debt covenants and asset held for sale- As a result of the disposition of the Company's software division in 1997, in April 1998, certain of the affirmative covenants relating to the Company's mortgage note payable to a financial institution were modified. The note agreement contains various affirmative and negative covenants and requires the Company to maintain (as modified and as defined in the note agreement): (i) a current ratio of not less than 1:1, (ii) a debt-to-net worth ratio of not more than .75:1, (iii) a quarterly debt coverage ratio of not less than 1.25:1 beginning in the quarterly period ending September 30, 1998, and (iv) a minimum tangible net worth of $5.5 million. Based upon operating results subsequent to June 30, 1998, the Company was unable to maintain compliance with certain affirmative financial covenants. As a result, the lender has the right to demand immediate repayment of the entire amount outstanding. Accordingly, all amounts due this lender have been classified as a current liability at June 30, 1998. The Company believes that sufficient resources are available to fund repayment in the event of such acceleration. In connection with obtaining modifications to the note agreement, the Company was required to reserve, out of its cash balances, one year's worth of debt service payments of approximately $173,000. The mortgage note payable is secured by substantially all of the Company's assets including the Company's office building. In response to a favorable real estate market, the Company's building has been listed for sale. Management of the Company believes that the building will be sold during 1998 at an amount exceeding net book value and, accordingly, the carrying value of the land, building and associated improvements have been classified as a current asset held for sale at June 30, 1998. The Company would be required to pay the mortgage note payable with proceeds from the disposition of the building. Management of the Company believes that suitable replacement facilities will be available. -10- NOTE 7 Earnings (loss) per share- In February 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share." SFAS No. 128 replaces the presentation of Primary Earnings Per Share (EPS) with Basic EPS and requires dual presentation of Basic and Diluted EPS on the face of the statements of operations. Basic EPS excludes dilution and is computed by dividing income (loss) available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company. SFAS No. 128 is effective for financial statements issued after December 15, 1997, and, accordingly, the accompanying financial statements reflect the adoption of SFAS No. 128. As the Company had a net loss from continuing operations for the three months and six months ended June 30, 1998, Diluted EPS equals Basic EPS as potentially dilutive common stock equivalents are antidilutive in loss periods. Prior period EPS data has been restated as required by SFAS No. 128. The following table provides a reconciliation of the denominator (weighted average number of common shares and common share equivalents outstanding) used to compute Basic and Diluted EPS and the number of common share equivalents relating to preferred stock that have been excluded as a result of antidilution:
THREE MONTHS SIX MONTHS ENDED JUNE 30 ENDED JUNE 30 --------------------- --------------------- 1998 1997 1998 1997 --------- --------- --------- --------- Weighted average number of common shares outstanding for Basic EPS .................. 3,290,217 3,109,397 3,289,316 3,095,252 Weighted average incremental shares outstanding upon assumed conversion of dilutive options and warrants ...................................... -- 95,359 -- 124,517 --------- --------- --------- --------- Weighted average number of common shares and common share equivalents outstanding for Diluted EPS ....................................... 3,290,217 3,204,756 3,289,316 3,219,769 ========= ========= ========= ========= Potential common shares from assumed conversion of preferred shares excluded as a result of antidilution ...................................... 100,008 141,665 100,008 149,632 ========= ========= ========= =========
-11- NOTE 8 Commitments- In April 1998, the Company amended a member of senior management's employment agreement. The employee will be retained as a consultant to the Company for a period of five years following his retirement in 2000 at the rate of $2,500 per month. For a five-year period following the employee's consultancy, he will receive retirement pay at the rate of $2,500 per month. The consulting payments will be expensed as paid. The present value of the postretirement payments, discounted at 6 percent, will result in monthly expense, including interest, to the Company of approximately $3,200 through September 2000. The present value of the postretirement obligation is being recorded as other long-term obligations on the accompanying balance sheet. In April 1998, the Company appointed a new president and chief executive officer. The Company and the employee have entered into a seven-year employment agreement providing for base compensation of $200,000 per year. The employment agreement is terminable by either party with 30 days notice. In the event the employee were to be terminated by the Company without cause, the Company would be required to make a severance payment of $300,000. -12- DOCUCON, INCORPORATED MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS The Company's operations during the quarter ended June 30, 1998, resulted in a net loss applicable to common stockholders of $463,464 compared to net income applicable to common stockholders of $50,411 for the same quarter in 1997. The 1997 quarter included a loss from discontinued operations of $215,698. In November 1997, the Company sold its software division to a third party for $6.5 million. The Company incurred a net loss applicable to common shareholders of $1,086,205 for the six months ended June 30, 1998, as compared to a net loss of $6,752 for the same period in 1997. Revenues from continuing operations decreased 58 percent to $869,982 for the quarter ended June 30, 1998, as compared to the same quarter in 1997. Revenues from continuing operations decreased 68 percent to $1,482,978 for the six-month period ended June 30, 1998, as compared to the 1997 six-month period. The decrease in both periods is due to what management believes to be a temporary discontinuation of funding for a specific project being performed under a Department of Defense (DOD) contract. Production costs from continuing operations decreased 43 percent and 54 percent, respectively, for the quarter and six months ended June 30, 1998, as compared to the 1997 periods due to the decreased revenue levels. Research and development costs from continuing operations increased 84 percent and 43 percent, respectively, for the quarter and six months ended June 30, 1998, compared to the same periods in 1997 as the Company continues to devote resources to the development of new conversion capabilities. General and administrative expenses increased 18 percent and 24 percent, respectively, for the three- and six-month periods ended June 30, 1998, as compared to the same periods in 1997. The increases are due to increased expenses associated with the Company's annual shareholder meeting and the related proxy solicitation, as well as additional board meetings held in relation to the Company's transition to new management. Marketing expenses from continuing operations increased 16 percent and decreased 8 percent for the quarter and six months ended June 30, 1998, respectively, as compared to the same periods in 1997. A decrease in commission expenses resulting from a decrease in revenue was offset by the expenses related to the opening and staffing of a Washington, D.C., office. LIQUIDITY AND CAPITAL RESOURCES Since its inception, the Company's operations have been primarily supplemented through borrowings, capital lease agreements, an initial public offering of the Company's common stock in 1989, the exercise of warrants and options, private preferred stock placements and the sale of its software division in the fourth quarter of 1997. As of June 30, 1998, the Company had positive working capital of approximately $4.85 million and expects to fund its 1998 operations and marketing activities through utilization of cash on hand and anticipated cash generated from operations. Substantially all of the Company's unbilled revenues at June 30, 1998, and December 31, 1997, relate to conversion services performed for agencies of the U.S. Government. The Company's ability to invoice these unbilled revenues is dependent upon a number of factors including quality control acceptance and the availability of funding to the respective agencies. The Company was contacted in mid-1997 and informed that funding for certain conversion services being performed had been depleted. Management elected to -13- DOCUCON, INCORPORATED MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) complete work that had been placed in production at that time despite the lack of assurance that funding would become available. As a result, the Company has been unable to invoice approximately $1.2 million of conversion services that were performed during 1997. The conversion products associated with the $1.2 million of unbilled revenues have been shipped to the customer and are in various stages of quality control review. During the three and six months ended June 30, 1998, the Company recognized approximately $370,000 in additional unbilled revenues relating to additional conversion services performed through June 1998. Management of the Company, based upon its past operating history and its ongoing discussions with various governmental personnel regarding the availability of additional funding, believes that all of such unbilled revenues totaling approximately $1.6 million will be invoiced and collected during 1998. However, there can be no assurances that the customer will accept all of the work product nor are there any assurances that sufficient funding will be made available to enable the Company to invoice unbilled revenues. The inability of the Company to realize its unbilled revenues would have a material adverse effect on the Company's future results of operations and its financial position. The Company has performed services under two DOD contracts. One contract was awarded in 1996 and extended through April 1998. The other contract was awarded in December 1997 for a term of one year with four additional option years. The contracts have a potential value of $77.8 million. However, there can be no assurances that the full potential value of the contracts will be realized or that the terms of the contracts will extend through the optional years. In March 1998, the General Services Administration (GSA) awarded a Federal Supply Schedule to the Company which is effective until September 30, 2002. Federal Supply Schedules are centralized contracts established by the GSA for the use of all government agencies. There are no limitations to order size or cumulative order value under such contracts. Under the Federal Supply Schedule awarded to the Company, any government agency can buy a wide variety of document conversion services directly from the Company. The Company began providing services under the GSA during the second quarter of 1998. In March 1994, the Company purchased the assets and assumed certain liabilities of J. Feuerstein Systems. In November 1997, the Company sold the assets of the division to Bowne & Co., Inc., for $6.5 million. A total of $800,000 was placed in an escrow account as security for certain representations and warranties made to the buyer. Management does not anticipate any material claims to be made against the representations and warranties and expects the funds will be released from escrow on November 25, 1998, and November 25, 1999, in two amounts of $400,000 each. Including the escrowed funds, net cash proceeds after expenses relating to the sale were approximately $5.7 million. Cash proceeds were used to pay down the Company's $504,000 line-of-credit balance after year-end and to fund continuing operations. The Company plans to invest excess proceeds in short-term securities which would be available for capital or operational needs. In October 1996, the Company obtained long-term financing to replace the existing mortgage note for its office building with a December 1996 maturity. The new note bears interest at a fixed rate of 9.5 percent, payable monthly to a commercial bank, and is being amortized over a 20-year term with a 5-year maturity. The note is secured by the Company's building, other fixed assets, accounts receivable and inventory. Approximately $68,000 of debt issuance costs were incurred in connection with this refinancing. In April 1998, certain of the affirmative covenants relating to this note were modified. Based upon operating results subsequent to June 30, 1998, the Company was unable to maintain compliance with certain affirmative financial covenants. As a result, the lender has the right to demand immediate repayment of the entire amount outstanding. The Company believes that sufficient resources are available to fund repayment in the event of such acceleration. In connection with obtaining modifications to the note agreement, the -14- DOCUCON, INCORPORATED MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Company was required to reserve, out of its cash balances, one year's worth of debt service payments of approximately $173,000. In response to a favorable real estate market, the Company's building has been listed for sale. Although the current facility is satisfactory, management believes that certain production efficiencies can be achieved by utilizing single- or double-level production space as opposed to the existing high-rise configuration. Management of the Company believes that the building will be sold during 1998 at an amount exceeding net book value and, accordingly, the carrying value of the land, building and associated improvements have been classified as a current asset held for sale at June 30, 1998. The Company would be required to pay the mortgage note payable with proceeds from the disposition of the building. Management of the Company believes that suitable replacement facilities will be available. On March 31, 1998, the Company received notice that it was subject to delisting on the NASDAQ SmallCap Market System because the Company's average closing bid price per share had not exceeded $1.00 during the prior 30-day period. The Company effected a one-to-four reverse split of its common stock on June 12, 1998. On June 29, 1998, the Company received notification that the Company was deemed to be in compliance with the new bid requirement for continued listing on The Nasdaq Stock MarketSM. On June 18, 1998, the Company announced the board of directors authorized the repurchase of up to 500,000 shares of its common stock in the open market. Through August 3, 1998, the Company had repurchased 10,000 such shares at prices varying from $1-5/8 to $2-1/16. The efficient operations of the Company's business is dependent on its computer software programs and operating systems (collectively, Programs and Systems). These Programs and Systems are used in several key areas of the Company's business, including information management services and financial reporting, as well as in various administrative functions. The Company has been evaluating its Programs and Systems to identify potential year 2000 compliance problems, as well as manual processes, external interfaces with customers and services supplied by vendors to coordinate year 2000 compliance and conversion. The year 2000 problem refers to the limitations of the programming code in certain existing software programs to recognize data-sensitive information for the year 2000 and beyond. Unless modified prior to the year 2000, such systems may not properly recognize such information and could generate erroneous data or cause a system to fail to operate properly. Based on current information, the Company expects to attain year 2000 compliance and institute appropriate testing of its modifications and replacements in a timely fashion and in advance of the year 2000 date change. It is anticipated that modification or replacement of the Company's Programs and Systems will be performed in-house by Company personnel. The Company believes that, with modifications to existing software and conversions to new software, the year 2000 problem will not pose a significant operational problem for the Company. However, because most computer systems are, by their very nature, interdependent, it is possible that noncompliant third-party computers may not interface properly with the Company's computer systems. The Company could be adversely affected by the year 2000 problem if it or unrelated parties fail to successfully address this issue. Management of the Company currently anticipates that the expenses and capital expenditures associated with its year 2000 compliance project will not have a material effect on its financial position or results of operations. -15- PART II - OTHER INFORMATION Item 1. Legal Proceedings - None Item 2. Changes in Securities - None Item 3. Defaults Upon Senior Securities - None Item 4. Submission of Matters to a Vote of Security Holders - The annual meeting of stockholders of the Company was held on Tuesday, June 9, 1998. The proposals and the results are listed below: Proposal No. 1 To elect seven directors to serve until the next annual meeting of stockholders and until their successors are duly elected and qualified. Proposal No. 2 To approve the 1998 Employee Stock Option Plan of the Company. Proposal No. 3 To amend the 1993 Employee Stock Purchase Plan of the Company to increase the number of shares offered and reserved for issuance thereunder by 400,000 shares to 1,400,000 shares of Common Stock, par value $.01 per share, to be offered in up to six additional annual or semiannual offerings, and amend the termination date from December 31, 1998, to December 31, 2001. Proposal No. 4 To approve the 1998 Executive Non Statutory Stock Option Plan of the Company. Proposal No. 5 To authorize the extension of the vesting and exercise period of certain stock options from 90 days to one year. These options were granted to employees of the JFS division which the Company sold in November 1997 and cover an aggregate of 53,778 shares of the Company's stock. Proposal No. 6 To amend the 1991 Directors Stock Option Plan of the Company to increase the number of shares offered and reserved for issuance thereunder by 340,000 shares to 840,000 shares of Common Stock, par value $.01 per share. Proposal No. 7 To authorize the board of directors, in its discretion, to implement one of three alternative reverse splits of the Company's Common Stock at a ratio of one share for two, three or four shares of Common Stock. -16- The following persons were nominated for election as directors of the Company, and all nominees were elected. The shares voted for and those withheld from each nominee are set forth below opposite such nominee's name: SHARES DIRECTOR NOMINEES SHARES VOTED FOR WITHHELD ----------------- ---------------- -------- Edward P. Gistaro 11,651,655 20,282 Douglas P. Gill 11,653,237 16,700 Allan H. Hobgood 11,662,937 9,000 Ralph Brown 11,658,037 13,900 Al R. Ireton 11,655,837 16,100 Chauncey E. Schmidt 11,658,837 13,100 Robert W. Schwartz 11,662,137 9,800 PROPOSALS FOR AGAINST ABSTAIN --------- --- ------- ------- No. 2 4,874,297 957,445 106,750 No. 3 4,518,894 1,290,583 129,015 No. 4 4,380,714 1,437,563 120,215 No. 5 4,626,544 1,326,479 106,015 No. 6 4,278,395 1,554,082 106,015 No. 7 10,853,241 981,156 100,843 Item 5. Other Matters - None Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit 10.16 - Employment Agreement, April 14, 1998, between Docucon, Incorporated and Allan Hobgood Exhibit 10.17 - Employment Agreement, May 5, 1998, between Docucon, Incorporated and Michael Mooney Exhibit 11 - Computation of Earnings Per Share Exhibit 27 - Financial Data Schedule (b) Reports on Form 8-K - None -17- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. DOCUCON, INCORPORATED (Registrant) By /s/ DOUGLAS P. GILL Douglas P. Gill, President and Chief Executive Officer By /s/ LORI TURNER Lori Turner, Chief Financial Officer and Treasurer Dated: August 6, 1998 -18- EX-10.16 2 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered as of the 14th day of April 14, 1998 by and between Docucon, Incorporated, a corporation organized and existing under the laws of the State of Delaware ("Company"), and Allan H. Hobgood, an individual residing in San Antonio, Bexar County, Texas ("Employee"). FOR AND IN CONSIDERATION of the mutual covenants herein contained and the mutual benefits to be gained by the performance thereof and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows: 1. INTRODUCTION. It is the intent and purpose of Company and Employee to specify in this Agreement the terms and conditions of Employee's employment with Company. 2. EMPLOYMENT. Company hereby employs Employee and Employee hereby accepts employment with Company on the terms and conditions herein set forth. In consideration of Employee's employment by Company, Employee agrees to the terms, conditions and covenants of this Agreement. 3. TERM OF EMPLOYMENT. This Agreement shall be effective as of April 1, 1998 and shall continue thereafter until terminated as provided HEREIN. 4. DUTIES AND RESPONSIBILITIES. Employee is hereby employed as, and shall serve in the capacity of, Vice Chairman and Chief Operating Officer of Company. Employee shall have the duties and responsibilities normally performed by an executive officer in such position, and shall perform services commensurate with such position for Company as may be determined from time to time by the Board of Directors of Company. Employee shall report to the President/Chief Executive Officer of Company and shall perform services hereunder as directed by the President/Chief Executive Officer of Company, as further clarified in Exhibit I. During the term of this Agreement Employee's primary business interest shall be the Company, and Employee shall devote such of his time, attention, skills and energies as may be necessary to discharge his duties and responsibilities hereunder. Employee shall, in the performance of services hereunder, use his best efforts to serve and advance the interest of Company well and faithfully. 5. COMPENSATION AND BENEFITS. The compensation and other benefits payable to or accruing to Employee under this Agreement shall constitute the full consideration to be paid to Employee for all services to be rendered by Employee to Company and all other agreements of Employee hereunder. 5.01 SALARY. As compensation for all services of whatever type rendered by Employee in the performance of these duties under this Agreement and for all other agreements and undertakings of Employee hereunder, Company shall pay to Employee a minimum annual salary as set forth in this Section 5.01. Employee's annual base salary ("Base Salary") shall be Ninety Six Thousand Dollars ($96,000.00). Such Base Salary shall be payable in equal regular installments in accordance with Company's customary payroll payment policy. In addition to Employee's Base Salary, Company shall, once each month, on a customary payroll payment date, pay to Employee a sum calculated by the following formula: 5.5% OF MONTHLY OPERATING PROFITS (AS DEFINED IN THE COMPANY'S ACCOUNTING RECORDS), FROM THE COMPANY'S DOCUMENT CONVERSION BUSINESS IN THE GOVERNMENT AND COMMERCIAL MARKETS, INCLUDING "OUTSOURCING DAY-FORWARD" ACCOUNTS, BUT EXCLUDING NON-CONVERSION" BUSINESSES SUCH AS DATA WAREHOUSING, PRINT-ON-DEMAND AND OTHER NEW BUSINESS THAT THE COMPANY MAY ENTER. IT IS ALSO UNDERSTOOD THAT THE OPERATING PROFITS ON WHICH THIS CALCULATION SHALL BE PERFORMED WILL EXCLUDE ANY ALLOCATION OF CORPORATE OVERHEAD (EXCEPT FOR EXPENSES DIRECTLY RELATED TO THE CONVERSION OPERATION, SUCH AS, OCCUPANCY, EMPLOYEE BENEFITS, ETC.). Employee's annual salary will be reviewed periodically by the Board of Directors of the Company for adjustment based on performance in accordance with Company's normal compensation policies and practices. It is specifically understood and agreed that a portion of Employee's annual salary hereunder is attributable to Employee's agreement, pursuant to Section 10 hereof, to maintain the confidentiality of "Confidential Information" (as herein defined), both during and after the term of this Agreement, and that Employee's salary would be reduced significantly if Employee did not agree to be bound by the terms of Section 10. It is further understood and agreed that a portion of Employee's annual salary is attributable to Employee's agreement, pursuant to Section 11 hereof, not to compete with Company either during or for a specified period of time after the expiration or termination of this Agreement and that Employee's annual salary would be reduced significantly if Employee did not agree to be bound by the terms of Section 11 hereof. Employee agrees that he is being fairly and reasonable compensated for the agreements undertaken by Employee pursuant to Sections 10 and 11 hereof. 5.02 BENEFITS. Employee shall be entitled to a reasonable paid vacation each year, the times for such vacation to be mutually agreed upon by Employee and Company. As an executive officer of Company, Employee shall be entitled to participate in the Company benefit programs designed for Company employees with similar salaries, duties and/or responsibilities. 5.03 EXPENSES. Company shall pay or reimburse Employee for all reasonable and necessary expenses actually incurred or paid by Employee during the term of this Agreement in the performance of Employee's services under this Agreement, upon presentation of expense statements or vouchers or such other supporting documents as Company may reasonably require; PROVIDED, HOWEVER, that the maximum amount available for such expenses during any period may, upon written notice to Employee, be fixed in advance by the Board of Directors of Company. 6. INSURANCE. Company may, in its sole and absolute discretion, at any time after the Effective Date, apply for and procure, as owner and for its own benefit, insurance on the life of Employee, in such amounts and in such forms as Company may choose. Employee shall have no interest whatsoever in any insurance policy or policies obtained by Company, but Employee shall, at Company's request, submit to such medical examinations, supply such information and execute and deliver such documents as may be required or reasonably requested by Company or the insurance company or companies to which Company has applied for such insurance. 7. REPRESENTATIONS, WARRANTIES AND AGREEMENTS. Employee represents, warrants and agrees that: (i) Employee is not currently bound by any employment agreement, restriction or other obligation of any kind which would in any way materially interfere with or be inconsistent with the services to be provided by Employee to Company hereunder, (ii) Employee will not, during the term of this Agreement, become engaged as an employee, consultant, independent contractor or representative or in any other capacity or otherwise perform services of any kind for any person or entity or assume any such obligations or restrictions, in whatever capacity, which would in any way materially interfere with or be inconsistent with the services to be provided by Employee to Company hereunder; (iii) Employee is free to enter into this Agreement and the services and work product provided by Employee to Company hereunder will be original works of Employee and no portion of such services or work product, or the use or distribution thereof by Company, violates or will violate, or is or will be protected by, the right, title or interest of any patent, copyright, license or other similar property or proprietary right of any third person or entity; and (iv) in no event and at no time shall Employee, whether during or after the term of this Agreement, disparage, denigrate or otherwise defame Company or the business, services, properties or assets, or any of the officers, directors, employees, agents or other representatives, of Company to any person or entity. The representations contained in this Section shall survive the expiration or termination of this Agreement. 8. REGULATIONS AND POLICIES. Employee shall, during the term of this Agreement, comply with all Company regulations and policies, including, without limitation, security regulations. 9. CONFIDENTIAL INFORMATION. The term "Confidential Information", as used herein, shall mean and include any and all documents, knowledge, data or information (in whatever medium) know, communicated, provided or made available to Employee, whether before or after the execution of this Agreement, which are marked with a confidentiality legend by Company or which Employee knows or reasonably should know constitute trade secrets of Company or information belonging to third parties to whom Company may have an obligation of confidentiality or which embody, comprise, relate to, are incorporated in or constitute "Intellectual Property" (as herein defined) in any stage of development; including, in each case, all trade secrets and other proprietary ideas, concepts, know-how, methodologies and information incorporated therein; PROVIDED, HOWEVER, that Confidential Information shall not include any information or materials which are or become generally available to the public other than as a result of any breach of the provisions of this Agreement or any other agreement between Employee and Company (or their respective successors, assigns or affiliates). The term "Intellectual Property", as used herein, shall include any and all information or materials, in any medium, of a technical or a business nature relating to the actual or reasonably anticipated business of Company, such as ideas, discoveries, designs, inventions, improvements, trade secrets, know-how, manufacturing processes, product formulae, design specifications, writings and other works of authorship, computer software, financial figures, marketing plans, customer lists and data, business plans or methods and any other material relating to the actual or reasonably anticipated business of the Company. In connection with computer software, the term "Intellectual Property" shall include, without limitation, the data bases, data processing and communications networking systems, practices and procedures and other internal systems, logic and controls, and the object code, source code, source listings, programming systems, programming or systems documentation and specifications, and user, operations or systems manuals or documentation related thereto or incorporated therein, firmware, models, sketches, writings, flow charts, diagrams, graphs or data related thereto, together with all modifications, enhancements, improvements, accessions, amendments, supplements or other additions to any of the foregoing. 10. CONFIDENTIALITY. Employee acknowledges and agrees that in his employment by Company he occupies a position of trust and confidence and that during the term of his employment under this Agreement he will have access to and will become familiar with Company's Confidential Information. Employee further acknowledges and agrees that the Confidential Information, including any and all copies thereof, constitutes trade secrets of Company and is confidential and proprietary information of Company. Employee further acknowledges and agrees that he has no right, title, interest or claim in or to any of the Confidential Information or any copies thereof. Employee agrees to maintain the confidentiality of the Confidential Information and agrees that he will not take, or permit to be taken, any action with respect to the Confidential Information (or any portion thereof) which is inconsistent with the confidential and proprietary nature of such information. Without limiting the generality of the foregoing, Employee agrees that he will not, directly or indirectly, without the prior specific written consent of Company, except as specifically required in the course of his employment, (i) communicate, divulge, transmit or otherwise disclose any Confidential Information to any person, firm, partnership, corporation or other entity, or (ii) use any confidential Information in any manner except as specifically required in connection with the performance of services hereunder, or (iii) copy, reproduce or otherwise duplicate any Confidential Information in any fashion, in whole or in part. Employee agrees to take any and all steps reasonably necessary to protect the confidentiality of the Confidential Information. Employee shall, upon termination of this Agreement, immediately return to Company all Confidential Information in Employee's control or possession, including, without limitation, any and all copies thereof. This Section shall survive the expiration or termination of this Agreement. 11. RESTRICTIVE COVENANT AND NONCOMPETITION. 11.01 NONCOMPETE. During the term of this Agreement, Employee shall not, directly or indirectly, own, manage, operate, join, control or participate in, or be connected with, directly or indirectly, as an officer, director, stockholder, employee, advisor, consultant, partner, owner, agent, representative or in any other capacity, any "Competitive Business"; PROVIDED, HOWEVER, that the foregoing shall not prohibit Employee from becoming a shareholder owning less that five percent (5%) of the shares of a corporation whose shares are publicly traded. As used herein, the term "Competitive Business" shall mean and include any person, firm, corporation or other entity which offers services relating to the conversion or transferring of information form paper or microform to computer accessible media or which engages in document conversion, storage and/or retrieval services or which otherwise competes in any fashion with any products or services offered by Company or which it is reasonably anticipated will be offered by Company or which it is reasonably anticipated will be offered by Company in the foreseeable future. 11.02 UPON TERMINATION. As an independent covenant, Employee agrees that, for a period of one (1) year commencing upon the termination or expiration of this Agreement for any reason, he will not, unless granted express written permission by the Board of Directors of Company, directly or indirectly, own, manage, operate, join, control or participate in, or be connected with, directly or indirectly, as an officer, director, stockholder, employee, advisor, consultant, partner, owner, agent, representative or in any other capacity, any Competitive Business; PROVIDED, HOWEVER, that the foregoing shall not prohibit Employee from becoming a shareholder owning less than five percent (5%) of the shares of a corporation whose shares are publicly traded. 11.03 NO USURPATION. As an independent covenant, Employee agrees, during the term of this Agreement and, upon termination or expiration of this Agreement for any reason, for a period of one (1) year thereafter, unless granted express written permission by the Board of Directors of Company, not to divert, take, solicit and/or accept on his own behalf or on behalf of any other person, firm, company or other entity, any business of any customer or client of Company whose identity became known to Employee through his employment by or involvement with Company which constitutes business relating to the actual or reasonably anticipated business of Company. 11.04 COMPANY EMPLOYEES. As an independent covenant, Employee agrees, during the term of this Agreement and, upon termination or expiration of this Agreement for any reason, for a period of one (1) year thereafter, not to induce or attempt to influence any employee of Company to terminate his or her employment with Company. 11.05 REASONABLENESS. Employee acknowledges and agrees that the covenants and agreements set forth in this Section are made to protect the legitimate business interests of Company, including Company's interest in Confidential Information, and not to restrict his mobility or to prevent him from utilizing his skills. Employee recognizes and acknowledges the necessarily national and international scope of the market served by Company and agrees that the restrictions set forth in this Section are reasonable. 11.06 SURVIVAL. This Section 11 shall survive the expiration or termination of this Agreement. 12. OWNERSHIP OF DEVELOPMENTS AND WORK PRODUCTS. 12.01 DEVELOPMENT. Employee agrees that any and all Intellectual Property and any and all other material relating to the actual or reasonably anticipated business or services of Company, developed, prepared, conceived, made, discovered or suggested by Employee, solely or jointly with others, during the term of this Agreement, whether on or off the premises of Company (collectively "Developments"), including all such Developments as are originated or conceived during the term of this Agreement but which are completed or reduced to practice thereafter, shall be deemed to be "works made for hire" within the meaning of Title 17, U.S.C. 101, and shall be and remain the sole and exclusive property of Company. To the extent that any such Developments may not, by operation of law, be "works made for hire", Employee hereby assigns, transfers and conveys to Company the ownership of all right, title and interest in and to such Developments, including, without limitation, all copyrights, patents and other proprietary and property rights applicable thereto, and Company shall have the right to obtain and hold in its own name such copyrights, patents or other proprietary protection which may be available or become available in such Developments. Employee agrees that Company shall have the right to keep such Developments as trade secrets, if Company chooses. 12.02 COOPERATION. Employee agrees, at any time during the term of this Agreement and thereafter, to execute such documents and provide such additional cooperation as Company may reasonably request or require in order to perfect, evidence, protect or secure Company's right, title and interest in and to any and all such Developments. Without limiting the generality of the foregoing, either during or subsequent to Employee's employment, upon the request and at the expense of Company, and for no remuneration in addition to that due Employee hereunder pursuant to his employment by Company, Employee agrees to execute, acknowledge and deliver to Company or its attorneys any and all instruments which in the judgment of Company or its attorneys may be necessary or desirable to secure or maintain for the benefit of Company adequate patent, copyright and/or other property or proprietary rights protection in the United States and/or foreign countries with respect to any Developments, including, but not limited to: (i) domestic and foreign patents, trademarks, service marks and copyright applications, (ii) any other applications for securing, protecting or registering any property or proprietary right, and (iii) powers of attorney, assignments, oaths, affirmations, supplemental oaths and sworn statements. 12.03 DISCLOSURE TO COMPANY. Employee shall, during the term of this Agreement and for a period of one (1) year thereafter, disclose promptly in writing to Company all Developments, whether copyrightable, patentable or not, made, discovered, written, conceived, first reduced to practice or developed by Employee, either alone or in conjunction with any other person or entity. Any Developments disclosed by Employee within one (1) year following termination of his employment with Company shall be deemed to be owned by Company under the terms of Section 12.01 hereof, unless proved by Employee to have been conceived after termination of Employee's employment. 12.04 SURVIVAL. This Section 12 shall survive the expiration or termination of this Agreement. 13. PERFORMANCE BY EMPLOYEE. Employee acknowledges and agrees that the value of the Confidential Information and the success and long-term viability of Company depends largely upon Employee's performance of his obligation under Sections 10, 11 and 12 of this Agreement. 14. INJUNCTIVE RELIEF. Employee acknowledges and agrees that in the event of any unauthorized use or disclosure of Confidential Information in violation of the terms and conditions of Section 10 of this Agreement by Employee, or any breach of any of the terms and conditions of Sections 11 or 12 of this Agreement by Employee, Company will suffer irreparable injury not compensable by money damages and therefore will not have an adequate remedy available at law. Accordingly, if Company institutes an action or proceeding to enforce the provisions of Sections 10, 11 or 12 of this Agreement, Company shall be entitled to obtain such injunctive relief or other equitable remedy from a court of competent jurisdiction as may be necessary or appropriate to prevent or curtail any such breach, threatened or actual. The foregoing shall be in addition to and without prejudice to such other rights as Company may have at law or in equity. 15. TERMINATION. 15.01 TERMINATION. Employee's employment hereunder is terminable, with or without cause, at the will of either Company or Employee upon the giving of 30 days' prior written notice by either party. If Employee's termination is voluntary or "for cause," Company shall discontinue Employee's compensation as of the effective date of the termination of Employee's employment. If Employee's termination is involuntary and/or without cause, including, without limitation, termination resulting from the death or mental or physical disability of Employee, Employee's regular Base Salary shall continue to be paid until September 30, 2000. In addition, Company shall, on each of its customary payroll payment dates until September 30, 2000, pay to Employee a sum equal to the bonuses as calculated in paragraph 5.01 for "Gross Margins Attributable to Employee" (as herein defined) of the Company during the Payroll Payment Period terminating on the day immediately preceding such payroll payment date. As used herein, the term "Gross Margins Attributable to Employee" shall mean and include (i) gross margins attributable to contracts existing, in place and executed as of the effective date of termination of Employee's employment hereunder. In addition, employee will retain the right to exercise all vested options granted under the 1998 Stock Option Plan and the 1998 Executive Stock Option Plan (TARSOP) until September 30, 2000. So long as (1) Employee has not been terminated "for cause", or (2) Employee has not voluntarily terminated employment with Company, prior to September 30, 2000, then the Company agrees to employ Employee as a consultant commencing September 30, 2000 until September 30, 2005 at the annual rate of $30,000. In addition, the Company will purchase a financial instrument ("instrument") which will provide Employee $30,000 annual income each year commencing September 30, 2005 TO September 30, 2010; provided, however, should (1) Employee voluntarily terminate his employment, or (2) Company terminate Employee "for cause", prior to September 30, 2000, then such instrument shall be the sole property of Company, and Employee shall have no rights or claims of any kind in the instrument or the annual income to be derived from the instrument. (In the event of Employee's death or disability, the above-described compensation shall be paid to Employee's estate or legal representative). For purposes of this Agreement, "for cause" shall mean: a) Any willful or intentional act of Employee which has or will have the effect of injuring the reputation or business relationships of Company or its affiliates; b) Employee's conviction of or entering a plea of nolo contendere to a charge of felony or a misdemeanor involving dishonesty or fraud; c) Employee's material breach of any of the terms, covenants or conditions contained in this Agreement; PROVIDED, HOWEVER, that with respect to any breach which can be effectively cured by some act of Employee, such termination of this Agreement shall be revoked if, within ten (10) days after receipt of notice of such breach from Company, Employee cures such breach to the reasonable satisfaction of Company or, if such cure cannot reasonably be accomplished within such ten (10) day period, if Employee initiates efforts to cure such breach within such ten (10) day period and diligently pursues such cure efforts thereafter until such cure is accomplished; or d) Employee's repeated or continuous failure, neglect or refusal to perform his duties under this Agreement. Until the effective date of termination, Employee, if requested to do so by Company, shall continue to render services to Company. 15.02 EXCESS PARACHUTE PAYMENTS. Notwithstanding the foregoing provisions of this Section 15, if Employee will be considered (as determined in the sole opinion of a national accounting firm employed by Employee) as receiving payments, any part of which constitutes excess parachute payments, such payments shall be reduced by or, if already paid, refunded to Company in the minimum amount (such minimum amount shall be determined by the national accounting firm employed by Employee, who shall interpret and apply all applicable law and regulations in the way which results in the most favorable results for Employee and who shall so instruct Company of its determination) required to result in there being no excess parachute payments; PROVIDED, however, (i) the payments to be made to Employee pursuant to this Section 15 shall be reduced first and in the manner requested by Employee, and (ii) if the compensation to be paid to Employee after the termination of his employment is reduced to $0.00 as a result of the operation of this subparagraph, no further reduction of any kind in any other payments to Employee shall be made, notwithstanding that any part of such remaining payments may constitute excess parachute payments. As used herein, the terms excess parachute payment and parachute payment shall have the same definition as such terms are given in Section 280G of the Internal Revenue Code of 1986, as amended and as may be amended after the date hereof ("IRC"), or as defined in any section of the IRC hereafter enacted to succeed Section 280G. 15.03 NO DUTY TO MITIGATE. Employee shall not be required to mitigate the amount of any post employment payment or benefit paid or provided to Employee under this Agreement by seeking other employment or otherwise, nor shall the amount of any such payment or benefit paid or provided to Employee under this Agreement be reduced or offset by any compensation earned by Employee as the result of employment by another employer or otherwise. 16. EFFECT OF TERMINATION. Upon the termination or expiration of this Agreement: (i) Employee shall immediately return to Company and all Confidential Information in his possession or control (including, without limitation, all copies thereof and all materials incorporating such Confidential Information), (ii) Employee shall have no further obligation to perform services for Company hereunder, PROVIDED, HOWEVER, that Employee shall continue to be bound by the terms of Sections 10, 11 and 12 hereof, and (iii) except to the extent specifically provided in Section 15 above, Company shall have no further obligation to compensate or provide benefits to Employee hereunder. 17. BUSINESS KNOWLEDGE AND EXPERIENCE. Notwithstanding anything to the contrary contained in this Agreement, it is specifically understood and agreed that Employee has, prior to entering into this Agreement, developed significant business expertise, ideas and experience (collectively "Business Experience") and that such Business Experience, to the extent it applies to business operations generally and not to the specific operations, technologies or trade secrets of Company, shall not be deemed to constitute Confidential Information, and nothing contained in Section 10 of this Agreement shall be deemed to prevent Employee from using such general Business Experience in such a manner as does not violate any of the other terms and conditions of this Agreement. 18. GENERAL. 18.01 SURVIVAL OF REPRESENTATIONS, WARRANTIES AND Covenants. All representations, warranties and covenants contained herein shall survive the execution of this Agreement and the consummation of the transactions contemplated hereby. 18.02 SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, successors, assigns and legal representatives, but shall not be assignable by Employee. Any purported assignment in violation of the foregoing shall be invalid and of no force and effect. No assignment of this Agreement shall relieve the assigning party of any obligation or liability hereunder. 18.03 NOTICES. Any notice, demand, payment, request, response or other communication provided for herein or given hereunder to a party hereto shall be in writing and shall be deemed to have been duly given if signed by the party giving it. Notice shall be deemed effective upon delivery by hand, or on the third business day after it is deposited in the United States mail, postage prepaid (registered or certified mail) or on the business day after it is sent by federal express or similar overnight service to the address of the parties listed below: if to Company: 7461 Callaghan Road San Antonio, Texas 78238 if to Employee: Allan H. Hobgood 9100 IH-10 West, Suite 100 San Antonio, Texas 78230 or to such other address as the party to receive such communication has last designated by notice delivered to the other party in accordance with the foregoing provisions. 18.04 WAIVER. Failure or delay in insisting upon strict compliance with any provision hereof shall not be deemed a waiver of such provision or any other provision hereof with respect to prior, such provision or any other provision hereof with respect to prior, contemporaneous or subsequent occurrences. No waiver by either party of any right hereunder or of any default shall be binding upon such party unless such waiver is in writing and signed by Employee (in the case of Employee) or a duly authorized officer or partner of Company in the case of Company. 18.05 GOVERNING LAW; VENUE. This Agreement shall be governed by and construed in accordance with the laws of the State of Texas. Employee and Company hereby agree that the sole and exclusive place of jurisdiction and venue for resolution of any disputes arising hereunder or relating hereto shall be San Antonio, Bexar County, Texas, and Employee hereby specifically consents to personal jurisdiction in such location. 18.06 ENTIRE AGREEMENT. Any and all previous employment agreements, whether written or oral, existing between Company and Employee shall be deemed to be revoked and cancelled for all purposes on the Effective Date. This Agreement, as may be amended from time to time, shall represent the sole and entire agreement between Employee and Company respecting the employment relationship between Company and Employee. There are no representations, agreements, arrangements or understandings, oral or written, between or among the parties hereto relating to the employment relationship between Company and Employee which are not fully expressed in this Agreement. 18.07 SEVERABILITY. The provisions of this Agreement are severable and the invalidity or unenforceability of any provision hereof shall not affect the validity or enforceability of any other provision. In addition, in the event that any provision of this Agreement (or portion thereof) is determined by a court to be unenforceable as drafted by virtue of the scope, duration, extent or character of any obligation contained therein, the parties acknowledge that it is their intention that such provision (or portion thereof) shall be construed in a manner designed to effectuate the purposes of such provision to the maximum extent enforceable under applicable law. 18.08 ATTORNEY'S FEES. If any legal action or other proceeding is brought for the enforcement of this Agreement, or because of an alleged dispute, breach, default or misrepresentation in connection with any of the provisions of this Agreement, the prevailing party shall be entitled to recover reasonable attorneys' fees and other costs incurred in that action or proceeding, in addition to any other relief to which it may be entitled. 18.09 REMEDIES CUMULATIVE. All remedies provided for in this Agreement shall be cumulative and in addition to and not in lieu of any other remedies available to either party under this or any other agreement between the parties or at law, in equity or otherwise. 18.10 LANGUAGE. The language used in this Agreement shall be deemed to be language chosen by the parties hereto to express their mutual intent, and no rule of strict construction against any party shall apply to any term or condition of this Agreement. 18.11 AMENDMENT. This Agreement may not be modified or amended except by written agreement executed by all of the parties to this Agreement at the time of such amendment. 18.12 HEADINGS. The descriptive headings of the sections, paragraphs and subparagraphs hereof are inserted for convenience only and do not constitute a part of this Agreement. IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first above written. DOCUCON, INCORPORATED ("COMPANY") /S/ ALLAN H. HOBGOOD BY: /S/ DOUGLAS P. GILL (ALLAN H. HOBGOOD "EMPLOYEE") ITS: CHIEF EXECUTIVE OFFICER EX-10.17 3 EMPLOYMENT AGREEMENT THIS AGREEMENT is made and entered as of the 5th day of May 5, 1998 by and between Docucon, Incorporated, a corporation organized and existing under the laws of the State of Delaware ("Company"), and Michael C. Mooney, an individual residing in Virginia ("Employee"). It is the intent and purpose of the Company and Employee to specify in this Agreement the terms and conditions of Employee's employment with the company. In consideration of Employee's employment by Company, Employee agrees to the terms, conditions, and covenants of this Agreement. This Agreement shall be effective on the date it is signed by Company and Employee and will be effective for 36 months from the signing date. Employee is hereby employed as, and shall serve in the capacity of Senior Vice President, Federal Government Business Development. Employee shall have the duties and responsibilities normally performed by an executive officer in such position, and shall perform services commensurate with such position for Company. Employee shall report to the Chief Operating Officer of Company and shall perform services hereunder as directed by the Chief Operating Officer. During the term of this Agreement Employee's primary business interest shall be the Company, and Employee shall devote such of his time, attention, skills, and energies as may be necessary to discharge his duties and responsibilities hereunder. Employee shall, in the performance of services hereunder, use his best efforts to serve and advance the interests of Company well and faithfully. The compensation and other benefits payable to Employee under this Agreement are as stated in the Offer Letter dated April 15, 1998. Employee represents, warrants, and agrees that: (i) Employee is not currently bound by any employment agreement, restriction or other obligation of any kind which would materially interfere with or be inconsistent with the services to be provided by Employee to Company hereunder, (ii) Employee shall not, during the term of this Agreement, become engaged as an employee, consultant, independent contractor or representative or in any other capacity which would materially interfere with the or be inconsistent with the services to be provided by Employee to Company hereunder, (iii) in no event and at no time shall Employee, whether during or after the term of this Agreement, disparage, denigrate or otherwise defame Company or the business, services, properties or assets, or any of the officers, directors, employees, agents or other representatives of Company to any person or entity Employee shall, during the term of this Agreement, comply with all Company regulations and policies, including, without limitation, security regulations. Employee acknowledges and agrees that in his employment by Company he occupies a position of trust and confidence and that during the term of his employment under this Agreement he will have access to and will become familiar with Company's Confidential Information. Employee further acknowledges and agrees that the Confidential Information, including any and all copies thereof, constitutes trade secrets of Company and is confidential and proprietary information of Company. Employee further acknowledges and agrees that he has no right, title, interest or claim in or to any of the Confidential Information or any copies thereof. Employee agrees to maintain the confidentiality of the Confidential Information and agrees that he will not take, or permit to be taken, any action with respect to the Confidential Information (or any portion thereof) which is inconsistent with the confidential and proprietary nature of such information. Employee agrees to take any and all steps reasonably necessary to protect the confidentiality of the Confidential Information and shall, upon termination of this Agreement, immediately return to Company all Confidential Information in Employee's possession or control, including, without limitation, any and all copies thereof. During the term of this Agreement and for a period of one (1) year commencing upon the termination of this Agreement, Employee shall not, directly or indirectly, own, manage, operate, join, control or participate in, or be connected with, directly or indirectly, as an officer, owner, agent, director, employee, advisor, consultant, partner, or in any other capacity, any "Competitive Business". As used herein, the term "Competitive Business" shall mean and include any person, firm, corporation, or any other entity that offers services or products offered by Company or which it is reasonably anticipated will be offered by Company in the foreseeable future. Employee acknowledges and agrees that the value of the Confidential Information and the success and long-term viability of Company depends largely upon Employees performance of his obligations under this Agreement. Employee's employment is terminable, with or without cause, at the will of either Company or Employee upon the giving of 30 days' prior written notice by either party. If Employee's termination is voluntary or "for cause", Company shall discontinue Employee's compensation as of the effective date of the termination of Employee's employment. If Employee's termination is involuntary and/or without cause, including, without limitation, termination resulting from the death or mental or physical disability of Employee, Employee's regular base compensation shall continue to be paid for a period of eighteen (18) months from the effective date of termination of employment. For purpose of this Agreement, "for cause" shall mean: (a) Any willful or intentional act of Employee which has or will have the effect of injuring the reputation or business relationships of Company or its affiliates. (b) Employee's conviction of or entering a plea of nolo contendere to a charge of felony. (c) Employee's material breach of any of the terms, covenants or conditions contained in this Agreement; PROVIDED, HOWEVER, that with respect to any breach which can be effectively cured by some act of Employee, such termination of this Agreement shall be revoked if, within ten (10) days after receipt of notice of such breach from Company, Employee cures such breach to the reasonable satisfaction of Company or, if such cure cannot reasonably be accomplished within such ten (10) day period, if Employee initiates efforts to cure such breach within such ten (10) day period and diligently pursues such cure efforts thereafter until such cure is accomplished; or (c) Employee's repeated or continuous failure, neglect or refusal to perform the duties specified in this Agreement. From time to time, the Board of Directors may grant employee options to purchase shares of the Company's common stock. Such grants will vest to the employee over varying periods of time as stated specifically in each grant. In the event that a Change of Control of the Company occurs, all unvested grants will become fully vested on the effective date of the Change of Control. Change of Control is defined as; the acquisition of more than 50% of the Company's voting stock by another company or entity, or the replacement of a majority of the Board of Directors. IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first above written. DOCUCON, INCORPORATED BY: /S/ ALLAN H. HOBGOOD Allan H. Hobgood Chief Operating Officer /S/ MICHAEL C. MOONEY Michael C. Mooney EX-11 4 EXHIBIT 11 DOCUCON, INCORPORATED COMPUTATION OF EARNINGS PER SHARE (Unaudited)
Three Months Six Months ENDED JUNE 30 ENDED JUNE 30 --------------------------- --------------------------- 1998 1997 1998 1997 ----------- ----------- ----------- ----------- COMPUTATION OF BASIC EARNINGS (LOSS) PER SHARE: Net income (loss) from continuing operations ................................... $ (455,214) $ 277,799 $(1,069,705) $ 375,890 Less- Preferred stock dividend requirements ................................. (8,250) (11,688) (16,500) (24,751) ----------- ----------- ----------- ----------- Net income (loss) from continuing operations applicable to common stockholders ............................... (463,464) 266,111 (1,086,205) 351,139 Loss from discontinued operations ........... -- (215,698) -- (357,891) ----------- ----------- ----------- ----------- Net income applicable to common stockholders ............................... $ (463,464) $ 50,413 $(1,086,205) $ (6,752) =========== =========== =========== =========== WEIGHTED AVERAGE NUMBER OF SHARES OF COMMON STOCK OUTSTANDING ....................... 3,290,217 3,109,397 3,289,316 3,095,252 =========== =========== =========== =========== Basic earnings (loss) from continuing operations per common share ......................................... $ (.14) $ .09 $ (.33) $ .11 Basic loss from discontinued operations per common share .............................. -- (.07) -- (.11) ----------- ----------- ----------- ----------- BASIC EARNINGS (LOSS) PER COMMON SHARE ........... $ (.14) $ .02 $ (.33) $ -- =========== =========== =========== =========== COMPUTATION OF DILUTED EARNINGS (LOSS) PER SHARE: Net income (loss) from continuing operations .................................... $ (455,214) $ 277,799 $(1,069,705) $ 375,890 Preferred stock dividend requirements .......... (8,250) (11,688) (16,500) (24,751) Increase applicable to common stock for preferred stock dividends not incurred upon assumed conversion of preferred stock ............................... 8,250 11,688 16,500 24,751 ----------- ----------- ----------- ----------- Net income (loss) from continuing operations applicable to common stockholders used for computation ........... (455,214) 277,799 (1,069,705) 375,890 Net (loss) from discontinued operations applicable to common stockholders ............. -- (215,698) -- (357,891) ----------- ----------- ----------- ----------- Net income (loss) applicable to common stockholders used for computation ............. $ (455,214) $ 62,101 $(1,069,705) $ 17,999 =========== =========== =========== =========== Weighted average number of shares of common stock outstanding ...................... 3,290,217 3,109,397 3,289,316 3,095,252 Weighted average incremental shares outstanding upon assumed conversion of options and warrants .......................... 2,520 95,359 50,501 124,517 Weighted average incremental shares outstanding upon assumed conversion of the preferred stock ........................... 100,008 141,665 100,008 149,632 ----------- ----------- ----------- ----------- WEIGHTED AVERAGE NUMBER OF SHARES OF COMMON STOCK AND COMMON STOCK EQUIVALENTS OUTSTANDING USED FOR COMPUTATION .................................... 3,392,745 3,346,421 3,439,825 3,369,401 =========== =========== =========== =========== Diluted earnings (loss) from continuing operations per common share and common share equivalents .......... $ (.13) $ .08 $ (.31) $ .11 Diluted loss from discontinued operations per common share and common share equivalents .................... -- (.06) -- (.11) ----------- ----------- ----------- ----------- DILUTED EARNINGS (LOSS) PER COMMON SHARE AND COMMON SHARE EQUIVALENTS ................... $ (.13)(a) $ .02 $ (.31)(a) $ -- ============== =========== ============== ===========
(a) This calculation is submitted in accordance with Item 601(b)(11) of Regulation S-K although it is not required by SFAS No. 128 because it is antidilutive. EX-27 5
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM DOCUCON, INCORPORATED'S CONDENSED BALANCE SHEET AS OF JUNE 30, 1998, AND ITS CONDENSED STATEMENT OF OPERATIONS FOR THE SIX MONTHS THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 6-MOS DEC-31-1998 JUN-30-1998 2,815,279 0 2,635,202 4,444 0 7,246,745 4,883,785 (4,562,526) 8,058,663 2,395,327 41,743 0 12 32,905 5,581,176 8,058,663 1,482,978 1,482,978 1,356,964 2,600,030 0 0 73,981 (1,058,705) 11,000 (1,069,705) 0 0 0 (1,086,205) (.33) (.33)
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