-----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, FBqaMoE9/MV1MyJk9Wvf/kmlPAceeJYlxdeHyz0OEaIib+Iq39vMjcbL0WCBpPZj kVXgtbus3Z440a7+jbq3eg== 0000890566-97-000834.txt : 19970415 0000890566-97-000834.hdr.sgml : 19970415 ACCESSION NUMBER: 0000890566-97-000834 CONFORMED SUBMISSION TYPE: 10KSB40/A PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970414 SROS: BSE 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: 10KSB40/A SEC ACT: 1934 Act SEC FILE NUMBER: 001-10185 FILM NUMBER: 97580096 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 10KSB40/A 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 AMENDMENT NO. 1 TO 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, 1996; OR [_] 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: (210) 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 [ ] 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: $13,524,000 State the aggregate market value of the voting stock held by non-affiliates as of March 14, 1997: Common Stock, par value $.01 per share - $11,554,946 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 14, 1997 - ------------------------------ -------------------------------------------- COMMON STOCK, PAR VALUE 12,325,276 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 Certain statements contained in this Form 10-KSB, including statements regarding the anticipated development and expansion of the Company's business, expenditures, the intent, belief or current expectations of the Company, its directors or its officers, primarily with respect to the future operating performance of the Company and other statements contained herein regarding matters that are not historical facts, are "forward-looking" statements (as such term is defined in the Private Securities Litigation Reform Act of 1995). Because such statements include risks and uncertainties, actual results may differ materially from those expressed or implied by such forward-looking statements. 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 2 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. The Company maintains a support and training staff for its software products in its facilities in San Antonio, Texas, and 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 and Results of Operations". See also, this Item, "Business - Product and Service Markets - Legal 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 recent addition of JFS/NetTM is intended to extend the market for the Litigator's Notebook to smaller law firms. The Company plans to continue to make significant investments in the continued marketing and development of these products. For the years ended December 31, 1996, 1995, and 1994, the Company spent $787,000, $497,000, and $652,000, respectively, for research and development activities. The Company does 3 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 also uses the name "JFS Litigator's Notebook" and "JFS Litigation Workgroup" alone and in combination with various designs and logos as a service mark to identify the Company's software product and product lines. The Company has obtained federal trademark registration for the names "Docucon", "JFS Litigator's Notebook" and "JFS Litigation Workgroup" and uses them to identify its products and services. BACKFILE CONVERSION SERVICES MARKETS The Company has performed backfile conversion services since 1987 under three major contracts awarded by the DOD. It is currently providing services to the DOD under a $14.8 million contract awarded by the DOD in early 1996. The contract provides for orders to be placed through May 1997. As of March 1, 1997, the Company had provided $8,940,000 of services under this contract. The Company has recently submitted a bid to the DOD along with several other competitors for a contract for services similar to those already being provided by the Company to the DOD. The size of this contract is believed to be substantially larger than those previously awarded. The Company believes that it is in good position to win all or part of this new contract but to date has received no word from the DOD. The Company also provided services to the DOD from 1991 to 1995 totaling $16.75 million under a 1991 contract award. Prior to that time, the Company provided services to the DOD totaling $5.4 million under a 1987 contract award. Although the Company was notified that it was not the successful bidder on a new similar contract in November 1994, it obtained additional smaller DOD contracts and subcontracts in 1995. The 1994 contract was terminated at the government's convenience, and the Company was awarded the above mentioned $14.8 million contract. In 1996, 1995, and 1994 approximately 66 percent, 38 percent, and 48 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 Lucent Technologies, Loral Federal Systems, Westinghouse, QED, Texaco Exploration and Production, Inc., Computer Science Corporation, Amoco, Dowell Schlumberger, and Ericsson GE. LEGAL 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. To facilitate this migration the Company has recently announced the introduction of JFS/NetTM in partnership with IBM(R) and utilizing IBM's Global Network. This arrangement allows JFS clients to access servers maintained by IBM and running JFS server software. This access eliminates the need for smaller clients to purchase and maintain their own servers and allows them access to the Litigator's 4 Notebook by paying a monthly fee per user. JFS/NetTM will be available in the second quarter of 1997. 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 competitors and 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. 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 14, 1997, the Company had 265 full-time employees. In addition, at such date, the Company was retaining the services of 181 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 and is utilized for office and production space. 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. 5 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 1996. 6 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 ------ ----- 1995 First Quarter ............................. $ .63 $.41 Second Quarter ............................ .63 .34 Third Quarter ............................. .49 .38 Fourth Quarter ............................ .56 .31 1996 First Quarter ............................. $1.44 $.34 Second Quarter ............................ 1.53 .94 Third Quarter ............................. 1.31 .99 Fourth Quarter ............................ 1.25 .83 The last reported sale price for the Common Stock on The Nasdaq Stock Market on March 14, 1997, was $.9375. 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 264 holders of record of the Common Stock as of March 14, 1997, 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, 1996, cumulative undeclared dividends on the Series A Convertible Preferred Stock were approximately $345,000. 7 ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. FISCAL YEAR 1996 COMPARED TO FISCAL YEAR 1995 The Company's operations resulted in a net income applicable to common stockholders of $708,983 for fiscal 1996, compared to a net loss applicable to common stockholders of $665,897 in 1995. The improvement in operating income was attributable to improved results from backfile conversion service revenues and the absence of losses incurred from litigation support conversion services. The Company discontinued providing litigation support services in 1995 as a result of continuing losses incurred by the division. Operating revenues totaled $13,523,000 in fiscal 1996, a 23% increase over 1995 revenues. A large portion of the increase, approximately $1,500,000, was due to an increase in conversion service revenues despite the absence of litigation support conversion revenues. Software product revenues also increased by approximately $1,000,000, or 46% over 1995 revenues. Revenues earned under the DOD contracts increased from approximately $4,200,000 to $8,900,000, resulting from the $14.8 million contract awarded in early 1996. Revenues earned under commercial and government-related subcontracts decreased as the Company devoted substantial production resources to the DOD conversion contract. Production costs increased slightly in 1996 as compared to 1995. The 13% increase was smaller than the increase in revenues as the Company realized margin improvements resulting from discontinuation of litigation support conversion revenues. The Company continued to devote a portion of its research and development resources to software development projects in 1996, and capitalized $222,000 of costs related to the projects. Additionally, research and development expenses increased 58 percent from 1995 to 1996 as 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 enhancement of its document conversion capabilities. General and administrative expenses increased 15% during 1996 as compared to 1995. The increase was due primarily to management incentive bonus plans activated by the increase in profitability in 1996 as compared to prior years, as well as to increases in personnel. Depreciation and amortization expense decreased 23 percent during fiscal 1996 as compared to fiscal 1995 primarily due to equipment becoming fully depreciated. 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 8 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 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. 9 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. 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. During 1996, the Company generated $8,890,000, or 66% of total revenues through DOD contracts. The Company has recently submitted a bid to the DOD along with several other competitors for a contract for services similar to those already being provided by the Company to the DOD. The size of this contract is believed to be substantially larger than those previously awarded. The Company believes that it is in good position to win all or part of this new contract but to date has received no word from the DOD. 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 the end of fiscal 1995. The absence of losses from these services resulted in improved operating results in 1996. It is the strategic intent of management to expand its software revenue base. To achieve this goal, the Company continued to invest in the marketing and development of its line of software products in 1996, increasing expenditures by $1,000,000 over 1995. Such investment has enabled the Company to offer enhanced versions of Litigator's Notebook and the Optical Notebook and a recently announced product, JFS Net to the market place. Additional complementary products are also now available, and another major product will be released by the end of 1997. 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%, 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 and will be amortized over a five-year period. (See Note 5). The Company utilizes the building for office and production space and believes that the building will fulfill its needs for the foreseeable future. Accounts receivable and unbilled revenues increased approximately $1,750,000 from December 31, 1995 to December 31, 1996. The higher balances primarily reflect the increased services provided to the DOD in 1996. Accounts payable and accrued liabilities increased approximately $816,000 for the comparable periods as a result of additional expenses for the increased services provided to the DOD. 10 The Company expects to fund its operations and marketing activities through utilization of cash on hand and cash generated from operations. During 1996, the Company fully extended its $750,000 revolving term note to fund short-term cash needs. This was repaid in its entirety in January 1997. The revolving term note was subsequently fully extended and, at March 14, 1997, $750,000 was outstanding under this revolving term note. These funds are expected to be adequate for the Company's needs for at least the next 12 months. 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 1997 having established a profitable base of operations in 1996. To build on that profitability the Company plans to continue to emphasize its two principal business areas; document conversion services and applications software for the legal market. Therefore the main thrusts for 1997 will be: o Increasing the Company's technical and production capabilities in the areas of SGML (Standard Generalized Markup Language) and PDF (Portable Document Format) conversion, anticipating an award from the DOD to extend the contract life of those services currently being provided. o The JFS division will put marketing programs in place to take advantage of the JFS/Net product offering announced late in 1996. This offering is based on a partnership with IBM and utilizes their International Global Network. o 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. 11 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 13 Balance Sheets as of December 31, 1996 and 1995 14 Statements of Operations for the Years Ended December 31, 1996, 1995 and 1994 16 Statements of Stockholders' Equity for the Years Ended December 31, 1996, 1995 and 1994 17 Statements of Cash Flows for the Years Ended December 31, 1996, 1995 and 1994 18 Notes to Financial Statements 19 12 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, 1996 and 1995, and the related statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1996. 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, 1996 and 1995, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. /s/ ARTHUR ANDERSEN LLP San Antonio, Texas February 14, 1997 13 DOCUCON, INCORPORATED BALANCE SHEETS DECEMBER 31 ----------------------- ASSETS 1996 1995 ---------- ---------- CURRENT ASSETS: Cash and cash equivalents ........................... $ 198,152 $ 139,167 Accounts receivable-trade, net of allowance for doubtful accounts of $4,444 and $7,683 in 1996 and 1995, respectively- U.S. Government .................................. 1,492,509 594,090 Commercial ....................................... 1,054,288 1,278,796 Unbilled revenues ................................... 1,655,428 579,821 Other receivables ................................... 6,834 1,648 Prepaid expenses and other .......................... 185,302 69,634 ---------- ---------- Total current assets .............. 4,592,513 2,663,156 ---------- ---------- PROPERTY AND EQUIPMENT: Conversion systems .................................. 5,252,834 4,540,302 Building and improvements ........................... 1,736,666 1,515,608 Land ................................................ 230,000 230,000 Furniture and fixtures .............................. 275,279 278,805 ---------- ---------- Total property and equipment ...... 7,494,779 6,564,715 Less- Accumulated depreciation and amortization ..... 4,798,200 4,182,671 ---------- ---------- Net property and equipment ........ 2,696,579 2,382,044 ---------- ---------- SOFTWARE DEVELOPMENT COSTS AND OTHER, net ............. 527,926 358,879 ---------- ---------- GOODWILL, net ......................................... 320,214 338,824 ---------- ---------- Total assets ...................... $8,137,232 $5,742,903 ========== ========== The accompanying notes are an integral part of these financial statements. 14 DOCUCON, INCORPORATED BALANCE SHEETS DECEMBER 31 -------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY 1996 1995 ----------- ----------- CURRENT LIABILITIES: Accounts payable ............................... $ 1,403,419 $ 697,980 Accrued liabilities ............................ 885,659 774,955 Revolving term note ............................ 750,000 -- Line of credit ................................. -- 400,000 Deferred revenues .............................. 561,355 339,558 Current maturities of long-term debt ........... 27,729 1,500,000 Current maturities of capital lease obligations ................................. 11,820 3,107 ----------- ----------- Total current liabilities .............. 3,639,982 3,715,600 ----------- ----------- LONG-TERM DEBT ................................... 1,517,970 -- CAPITAL LEASE OBLIGATIONS ........................ 51,211 -- COMMITMENTS AND CONTINGENCIES (Note 4) STOCKHOLDERS' EQUITY: Preferred stock, $1.00 par value, 10,000,000 shares authorized- Series A, 60 shares authorized, 19 and 21 shares outstanding as of December 31, 1996 and 1995, respectively ................. 19 21 Common stock, $.01 par value, 25,000,000 shares authorized; 12,032,559 and 11,771,228 shares outstanding as of December 31, 1996 and 1995, respectively .... 120,326 117,712 Additional paid-in capital ..................... 9,640,036 9,506,553 Accumulated deficit ............................ (6,832,312) (7,596,983) ----------- ----------- Total stockholders' equity ............. 2,928,069 2,027,303 ----------- ----------- Total liabilities and stockholders' equity ............................ $ 8,137,232 $ 5,742,903 =========== =========== The accompanying notes are an integral part of these financial statements. 15 DOCUCON, INCORPORATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31 -------------------------------------------- 1996 1995 1994 ------------ ------------ ------------ OPERATING REVENUES ................................ $ 13,523,500 $ 11,037,846 $ 8,616,480 COSTS AND EXPENSES: Production ...................................... 7,706,001 6,810,976 5,465,746 Research and development ........................ 786,945 497,123 651,629 General and administrative ...................... 1,138,711 990,162 1,034,371 Marketing ....................................... 2,192,907 2,214,310 1,610,291 Depreciation and amortization ................... 760,875 992,154 1,167,177 Write-off of software development costs ......... -- -- 283,442 ------------ ------------ ------------ 12,585,439 11,504,725 10,212,656 OPERATING INCOME (LOSS) ........................... 938,061 (466,879) (1,596,176) OTHER INCOME (EXPENSE): Interest expense ................................ (164,476) (152,410) (140,010) Other, net ...................................... 28,086 13,726 26,685 ------------ ------------ ------------ INCOME (LOSS) BEFORE INCOME TAXES ................. 801,671 (605,563) (1,709,501) INCOME TAX EXPENSE ................................ 37,000 -- 13,200 ------------ ------------ ------------ NET INCOME (LOSS) ................................. 764,671 (605,563) (1,722,701) ------------ ------------ ------------ PREFERRED STOCK DIVIDEND REQUIREMENTS ............. 55,688 60,334 63,170 ------------ ------------ ------------ NET INCOME (LOSS) APPLICABLE TO COMMON STOCKHOLDERS $ 708,983 $ (665,897) $ (1,785,871) ============ ============ ============ PRIMARY EARNINGS (LOSS) PER COMMON SHARE AND COMMON SHARE EQUIVALENTS ........................ $ .06 $ (.06) $ (.15) ============ ============ ============ WEIGHTED AVERAGE NUMBER OF COMMON SHARES AND COMMON SHARE EQUIVALENTS OUTSTANDING ............ 12,485,322 11,690,161 11,549,909 ============ ============ ============
The accompanying notes are an integral part of these financial statements. 16 DOCUCON, INCORPORATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common Stock Preferred Stock --------------------- ---------------- Additional Total Number of Number Paid-In Accumulated Stockholders' Shares Amount Of Shares Amount Capital Deficit Equity ---------- -------- ------ ------ ----------- ----------- ----------- 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 Director stock option exercise ............... 40,000 400 -- -- 22,000 -- 22,400 Stock option exercise ........................ 26,382 265 -- -- 14,465 -- 14,730 Options issued to vendor ..................... -- -- -- -- 7,787 -- 7,787 Shares issued pursuant to employee stock plans 100,583 1,006 -- -- 90,172 -- 91,178 Conversion of Series A preferred stock ....... 66,666 666 (2) (2) (664) -- -- Shares issued to pay preferred stock dividends 27,700 277 -- -- (277) -- -- Net income ................................... -- -- -- -- -- 764,671 764,671 ---------- -------- ------ ------ ----------- ----------- ----------- BALANCE, December 31, 1996 ..................... 12,032,559 $120,326 19 $ 19 $ 9,640,036 $(6,832,312) $ 2,928,069 ========== ======== ====== ====== =========== =========== ===========
The accompanying notes are an integral part of these financial statements. 17 DOCUCON, INCORPORATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31 --------------------------------------- 1996 1995 1994 ----------- --------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) ..................................... $ 764,671 $(605,563) $(1,722,701) Adjustments to reconcile net income (loss) to net cash provided by operating activities- Depreciation and amortization ...................... 760,875 992,154 1,167,177 Write-off of software development costs ............ -- -- 283,442 Changes in current assets and current liabilities- (Increase) decrease in receivables and unbilled revenues ............................... (1,754,704) (827,896) 1,087,891 (Increase) decrease in prepaid expenses and other ....................................... (115,668) 99,909 101,554 Increase (decrease) in accounts payable and accrued liabilities ......................... 816,143 120,482 (135,591) Increase in deferred revenues ..................... 221,797 248,540 29,153 ----------- --------- ----------- Net cash provided by operating activities ......... 693,114 27,626 810,925 ----------- --------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures .................................. (867,740) (533,123) (513,507) Capitalized software development costs ................ (289,603) (152,801) (21,527) ----------- --------- ----------- Net cash used in investing activities ............. (1,157,343) (685,924) (535,034) ----------- --------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Advances under revolving term note .................... 750,000 -- -- Advances under line of credit ......................... -- 400,000 -- Payments on line of credit ............................ (400,000) -- -- Proceeds from notes payable ........................... 1,550,000 -- -- Principal payments on notes payable ................... (1,504,301) (10,560) (489,259) Principal payments under capital lease obligations ........................................ (8,580) (20,917) (21,125) Proceeds from employee stock purchase plan ............ 91,178 52,144 -- Proceeds from exercise of options ..................... 44,917 -- -- Stock registration costs .............................. -- -- (21,850) ----------- --------- ----------- Net cash provided by (used in) financing activities 523,214 420,667 (532,234) ----------- --------- ----------- NET CHANGE IN CASH AND CASH EQUIVALENTS ................. 58,985 (237,631) (256,343) ----------- --------- ----------- CASH AND CASH EQUIVALENTS, beginning of year ............ 139,167 376,798 633,141 ----------- --------- ----------- CASH AND CASH EQUIVALENTS, end of year .................. $ 198,152 $ 139,167 $ 376,798 =========== ========= ===========
The accompanying notes are an integral part of these financial statements. 18 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 certain liabilities of J. Feuerstein Systems, Inc. (JFS), a company which provided litigation support services and software products to the legal market. Since its inception, the Company has incurred cumulative net losses of approximately $6.8 million. However, during the year ended December 31, 1996, the Company reported net income of approximately $765,000. 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 debt financing. The Company has taken steps to improve its operating results including exiting the litigation support services market and focusing on the Company's core higher margined businesses. In October 1996, the Company also refinanced its $1.5 million note payable which was originally due in December 1996. (See Note 5.) The Company's management believes that it is likely that the Company's operating results for 1997 will continue to improve and will generate sufficient working capital to sustain its operations throughout the year. However, if improved operating results are not sustained, the Company will be unable to ensure its continuing operations independent of additional capital infusions. See "Outlook" and "Liquidity and Capital Resources" included in Item 6 under "Management's Discussion and Analysis of Financial Condition and Results of Operations" for further discussion. 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. 19 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. Prior to 1994, 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 and other on the accompanying balance sheets 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 and other is approximately $374,000 of costs which were incurred during 1995 and 1996 to develop software which will support and complement Litigator's NotebookTM. These costs are being amortized over a five-year period. During 1996, 1995 and 1994, amortization expense of approximately $93,000, $50,000 and $39,000, respectively, was recorded relating to software development costs. As of December 31, 1996, accumulated amortization of $182,000 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, 1996, totaled approximately $52,000. 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 cash equivalents. 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. During 1996, the Company also entered into $68,504 of capital leases. The following relates to cash interest and income taxes paid by the Company for the periods indicated: YEAR ENDED DECEMBER 31 ------------------------------ 1996 1995 1994 -------- -------- -------- Cash paid during the year for interest ........ $149,287 $181,769 $143,980 Cash paid during the year for income taxes .... 13,173 -- 39,000 POST RETIREMENT AND POST EMPLOYMENT BENEFITS The Company does not provide post retirement nor post employment benefits to its employees. SELF-INSURANCE RISK The Company self insures under its medical coverage for employees and dependents based upon monthly attachment limits which are calculated based upon the number of participants and monthly participant charges. The Company accrues for known claims and an estimate of claims incurred but not reported up to the maximum anticipated costs to the Company. 20 DOCUCON, INCORPORATED NOTES TO FINANCIAL STATEMENTS - (CONTINUED) During 1996, the Company recognized approximately $300,000 in self-insurance expense under the attachment limits. The Company's insurer will pay cumulative claims above the attachment limit up to $1 million. The Company does not believe that claims reported and claims incurred but not reported related to 1996 will exceed the amount to be covered by the insurer. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make 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. NEW ACCOUNTING PRONOUNCEMENTS The Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," in June 1996. This statement provides accounting and reporting standards for, among other things, the transfer and servicing of financial assets, such as factoring receivables with recourse and will require the Company to classify its financial assets pledged as collateral separately in the financial statements. This statement is effective for transactions occurring after December 31, 1996, and is to be applied prospectively. Earlier or retroactive application is not permitted. In December 1996, the FASB issued SFAS No. 127, "Deferral of the Effective Date of Certain Provisions of SFAS No. 125." SFAS No. 127 moves forward some, but not all, of the provisions of SFAS No. 125 to December 31, 1997. The Company believes the adoption of these statements will not have an impact on the financial condition or results of operations of the Company. In February 1997, the FASB issued 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 and requires a reconciliation of the numerator and denominator of the Basic EPS computation to the numerator and denominator of the Diluted EPS computation. Basic EPS excludes dilution and is computed by dividing income 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. Diluted EPS is computed similarly to Fully Diluted EPS pursuant to Accounting Principles Board Opinion No. 15, "Earnings Per Share." SFAS No. 128 is effective for financial statements issued after December 15, 1997, and earlier application is not permitted. SFAS No. 128 requires restatement of all prior-period EPS data presented. 3. REVOLVING TERM NOTE: In connection with the refinancing of the note payable discussed in Note 5, the Company also obtained a $750,000 revolving term note (the Revolver) maturing on October 31, 1997. At December 31, 1996, $750,000 was outstanding under the Revolver. The Revolver bears interest at the bank's Base Rate (as defined) plus .75 percent (9.00 percent at December 31, 1996). Interest is payable monthly and the Revolver is secured by the same collateral as the note payable. In January 1997, the Revolver was repaid in its entirety for a period of 30 days. At February 14, 1997, amounts outstanding under the Revolver totaled $320,000. 21 DOCUCON, INCORPORATED NOTES TO FINANCIAL STATEMENTS - (CONTINUED) 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 $285,000, $395,000 and $293,000 for the years ended December 31, 1996, 1995 and 1994, respectively. Future minimum lease payments for all noncancelable operating leases, as of December 31, 1996, are as follows: Year ending December 31- 1997 .............................. $117,754 1998 .............................. 106,580 1999 .............................. 89,284 2000 .............................. 1,484 -------- Total future minimum lease payments $315,102 ======== 5. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS: In connection with the purchase of its headquarters' building, the Company issued a four-year, 8 percent promissory note with the principal amount of $1.5 million due in December 1996 and interest payable quarterly. Additionally, the Company issued 900,000 warrants, which expire in December 1999, to purchase an equivalent number of shares of common stock at an exercise price of $2.00 per share. In October 1996, the Company refinanced the $1.5 million note. The new note is payable to a commercial bank, bears interest at a fixed rate of 9.5 percent per annum and requires monthly principal and interest payments of $14,448 with the remaining balance maturing in October 2001. The note payable is secured by the Company's building, other fixed assets, accounts receivable and inventory. Debt issuance costs of approximately $68,000 incurred in October 1996 related to this refinancing were capitalized and are being amortized over the five-year term. These costs are reflected as a component of software development costs and other on the accompanying balance sheet. The note agreement contains various affirmative and negative covenants and requires the Company to maintain (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 2:1, (iii) a debt coverage ratio of not less than 1.25:1 and (iv) a minimum tangible net worth of $1.9 million. At December 31, 1996, the Company was in compliance with these requirements with the exception of a negative covenant prohibiting the incurrence of additional indebtedness. The Company has obtained a waiver from its lender for additional indebtedness that was incurred relating to capital lease obligations and short-term borrowings from one of the Company's officers. 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. Maturities of this note payable as of December 31, 1996, are as follows: Year ending December 31- 1997 ................. $ 27,729 1998 ................. 30,480 1999 ................. 33,506 2000 ................. 36,831 2001 ................. 1,417,153 ---------- Total ....... $1,545,699 ========== 22 Equipment held under capital leases and related obligations at December 31, 1996, are as follows: Telecommunications equipment requiring monthly principal and interest payments of $977, interest at 9.3 percent and maturing July 2001 ......................................... $ 53,745 Office equipment requiring monthly principal and interest payments of $458, interest at 9.5 percent and maturing April 2001 ..................................................... 23,812 -------- Total capital lease payments ..................................... 77,557 Less- Amounts representing interest .............................. (14,526) -------- Capital lease obligations ........................................ $ 63,031 ======== Maturities of capital lease obligations as of December 31, 1996, are as follows: Year ending December 31- 1997 ................. $11,820 1998 ................. 12,974 1999 ................. 14,245 2000 ................. 15,637 2001 ................. 8,355 ------- Total ....... $63,031 ======= 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 $8,890,000, $4,194,000 and $4,125,000 during the years ended December 31, 1996, 1995 and 1994, respectively, from services provided to the DOD. 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 preferred stock is convertible into 33,333 shares of common stock. Through December 31, 1996, 27 shares of preferred stock have been converted. Additionally, 219,669 shares of common stock have been issued in lieu of accumulated dividends on the preferred stock which was converted. As of December 31, 1996, cumulative undeclared dividends on the preferred stock approximated $345,000. 8. STOCK 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. In February 1997, the Company's Board of Directors authorized an increase in the number of shares of common stock reserved for issuance pursuant to the 1988 Plan by 700,000 shares. 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 23 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. A summary of activity in the Company's stock option plans is set forth below:
Weighted Average Market Price Exercise Option Price At Date Of Grant Price ---------------------------- --------------------------- Shares Per Share Per Share Total Per Share Total --------- ----- ----------- ---------- ---------- ---------- Outstanding, December 31, 1993 ............... 936,100 $1.17 $.70-$2.44 $1,091,955 $.70-$2.44 $1,091,955 --------- ----- ----------- ---------- ---------- ---------- Granted ........................... 351,850 .72 .56-.95 253,210 .56-.95 253,210 Exercised ......................... -- -- -- -- -- -- Terminated ........................ 95,500 1.34 .70-1.63 128,247 .70-1.63 128,247 --------- ----- ----------- ---------- ---------- ---------- Outstanding, December 31,1994 ................ 1,192,450 1.02 .56-2.44 $1,216,918 .56-2.44 $1,216,918 ========= ===== =========== ========== ========== ========== Exercisable, December 31, 1994 ............... 825,195 1.01 .70-2.44 $ 836,656 .70-2.44 $ 836,656 ========= ===== =========== ========== ========== ========== Price reduction ................... -- -- -- 546,165 -- -- Granted ........................... 164,200 .51 .41-.56 83,930 .41-.56 83,930 Exercised ......................... -- -- -- -- -- -- Terminated ........................ 69,100 .56 .53-.56 38,644 .53-2.44 43,385 --------- ----- ----------- ---------- ---------- ---------- Outstanding, December 31, 1995 ............... 1,287,550 .56 .41-.56 $ 716,039 .41-2.44 $1,257,463 ========= ===== =========== ========== ========== ========== Exercisable, December 31, 1995 ............... 1,029,384 .56 .53-.56 $ 577,753 .53-2.44 $1,067,723 ========= ===== =========== ========== ========== ========== Granted ........................... 284,200 .93 .88-1.22 265,194 .88-1.22 265,194 Exercised ......................... 66,383 .56 .53-.56 37,111 .53-1.44 61,653 Terminated ........................ 40,617 .68 .44-.56 27,675 .44-1.44 31,451 --------- ----- ----------- ---------- ---------- ---------- Outstanding, December 31, 1996 ............... 1,464,750 .63 .41-1.22 $ 916,447 .41-2.44 $1,429,553 ========= ===== =========== ========== ========== ========== Exercisable, December 31, 1996 ............... 1,184,272 .59 .41-1.22 $ 702,410 .41-2.44 $1,187,191 ========= ===== =========== ========== ========== ==========
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. 24 In October 1995, Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS 123), was issued. SFAS 123 defines a fair value based method of accounting for employee stock options or similar equity instruments and encourages all entities to adopt that method of accounting for all of their employee stock compensation plans. Under the fair value based method, compensation cost is measured at the grant date based on the value of the award and is recognized over the service period of the award, which is usually the vesting period. However, SFAS 123 also allows entities to continue to measure compensation costs for employee stock compensation plans using the intrinsic value method of accounting prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25). Entities electing to remain with the accounting prescribed by APB 25, as the Company has, must make pro forma disclosures of net income and earnings per share as if the fair value based method recommended by SFAS 123 had been applied. The following provides pro forma disclosures of net income and earnings per share as if the fair value based method of accounting under SFAS 123 had been applied. Had compensation cost for these plans been determined consistent with SFAS 123, the Company's net income (loss) and earnings (loss) per share would have been reduced (increased) to the following pro forma amounts: 1996 1995 ------------- -------------- Net Income (Loss) As Reported $ 764,671 $ (605,563) Pro Forma 592,978 (1,029,798) Primary Earnings (Loss) Per Share As Reported $ .06 $ (.06) Pro Forma .05 (.09) Because the SFAS 123 method of accounting has not been applied to options granted prior to January 1, 1995, the resulting pro forma compensation cost may not be representative of that to be expected in future years. The weighted average fair value per share of options granted during 1996 and 1995 were $.65 and $.39, respectively. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants in 1996 and 1995, respectively: risk-free interest rates of 6.0 percent and 6.1 percent, expected dividend yields of 0 percent and 0 percent, expected lives of 5 years and 4.2 years and expected volatility of 87 percent and 91 percent. Included as a component of pro forma expense for 1996 and 1995 is compensation expense of approximately $71,000 and $26,000, respectively, related to the 1993 Employee Stock Purchase Plan described in Note 9. Included as a component of the 1995 pro forma compensation expense is approximately $222,000 related to the February 14, 1995, price reduction discussed above. 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, 1996, the total number of shares issuable under these warrants and options was 1,032,727, at exercise prices ranging from $1.25 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 February 1997, the Company's Board of Directors authorized 800,000 shares of common stock for issuance pursuant to a new 1997 Stock Purchase Plan for the years 1998 through 2001. In January 1997, 1996 and 1995, the Company issued 25 286,048, 100,583 and 70,983 shares of common stock at purchase prices of $.32, $.32 and $.35 per share, respectively. The annual purchase price is 85 percent of the lesser of the closing price of the Company's common stock at the beginning or end of each calendar year. The purchase prices represent 85 percent of the closing price on December 29, 1995, 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. At December 31, 1996, 342,386 shares remain available for issuance. 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. At December 31, 1996, 1995 and 1994, respectively, the Company had accrued approximately $28,000, $28,000 and $25,000 as its matching contributions to the plan. 10. INCOME TAXES: The Company follows 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. As of December 31, 1996, the Company had net operating loss carryforwards of approximately $5.7 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 ----------------------------- 1996 1995 1994 ------- ----- ------- Federal ...................................... $ 3,000 $-- $ -- State ........................................ 34,000 -- 13,200 ------- ----- ------- Total income tax expense ........ $37,000 $-- $13,200 ======= ===== ======= 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 1996 1995 1994 --------- --------- --------- Expected federal income tax expense (benefit) ....................... $ 273,000 $(206,000) $(581,000) State income taxes, net of federal income tax benefit ...................... 34,000 -- 13,200 Alternative minimum tax expense ......... 3,000 -- -- Other, net .............................. -- -- 19,000 Utilization of tax loss carryforwards ... (273,000) -- -- Provision for valuation reserve ......... -- 206,000 562,000 --------- --------- --------- Total income tax expense ...... $ 37,000 $ -- $ 13,200 ========= ========= ========= 26 The tax effect of significant temporary differences representing income tax assets (liabilities) is as follows: DECEMBER 31 ------------------------------ 1996 1995 ----------- ---------- Deferred income tax assets (liabilities)- Tax loss carryforwards ................. $ 1,932,000 $2,200,000 Tax credit carryforwards ............... 20,000 -- Depreciation ........................... 135,000 135,000 Deferred revenues ...................... 191,000 115,000 Other .................................. 46,000 74,000 Software development costs ............. (61,000) -- ----------- ---------- $ 2,263,000 $2,524,000 =========== ========== A valuation reserve of $2,263,000 and $2,524,000 as of December 31, 1996 and 1995, respectively, representing the total of net 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. BUSINESS SEGMENT INFORMATION: The Company's operations have been classified into two business segments: conversion and software products. The conversion segment is comprised of document conversion services for the government, commercial and litigation support customers. The software products segment includes sales of software, service, training and installation. Summarized financial information by business segment for 1996, 1995 and 1994 is as follows (in thousands): 1996 1995 1994 -------- -------- ------- Net sales- Conversion .......................... $ 10,427 $ 8,916 $ 8,231 Software products ................... 3,097 2,122 385 -------- -------- ------- $ 13,524 $ 11,038 $ 8,616 ======== ======== ======= Operating income (loss)- Conversion .......................... $ 2,161 $ 546 $ 159 Software products ................... (99) (48) (508) Corporate and unallocated ........... (1,124) (965) (1,247) -------- -------- ------- $ 938 $ (467) $(1,596) ======== ======== ======= Total assets- Conversion .......................... $ 4,814 $ 3,561 $ 3,492 Software products ................... 2,396 1,324 1,134 Corporate ........................... 927 858 1,097 -------- -------- ------- $ 8,137 $ 5,743 $ 5,723 ======== ======== ======= 27 1996 1995 1994 -------- -------- ------- Depreciation and amortization- Conversion .......................... $ 390 $ 738 $ 957 Software products ................... 249 180 140 Corporate ........................... 122 74 70 -------- -------- ------- $ 761 $ 992 $ 1,167 ======== ======== ======= Capital expenditures- Conversion .......................... $ 499 $ 438 $ 239 Software products ................... 268 57 195 Corporate ........................... 101 38 80 -------- -------- ------- $ 868 $ 533 $ 514 ======== ======== ======= 12. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED): The results of operations by quarter for the years ended December 31, 1996 and 1995, were as follows: Earnings Operating Net Income (Loss) Revenues (Loss) Per Share ----------- --------- ---- 1996- Quarter ended- March 31 ................... $ 2,333,653 $ 4,824 $-- June 30 .................... 3,351,968 198,965 .02 September 30 ............... 4,092,477 492,213 .04 December 31 ................ 3,745,402 68,669 -- ----------- --------- Total ............ $13,523,500 $ 764,671 =========== ========= 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) =========== ========= 28 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, 1996 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 61 Chairman of the Board and Chief Executive Officer and Director Allan H. Hobgood 58 President and Chief Operating Officer and Director Lori A. Turner 39 Vice President of Finance and Treasurer Ralph Brown 63 Secretary and Director Al R. Ireton 62 Director Philip J. Romano 57 Director Chauncey E. Schmidt 65 Director Jim Feuerstein * 47 Senior Vice President and Chief Technical Officer, JFS Division Jane Gennarelli * 41 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. 30 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 31 J. Feuerstein 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, 1996 through March 31, 1997, all officers, Directors and greater-than-10% beneficial owners complied with all Section 16(a) filing requirements applicable to them. 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 1996, 1995 and 1994: 32 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 ......... 1996 $131,682 $ 97,850 50,000 $ -- $1,468 Chairman of the Board ..... 1995 129,192 -- -- -- 2,238 and Chief Executive Officer 1994 102,701 20,000 45,000 -- -- Allan H. Hobgood .......... 1996 100,712 112,647 50,000 -- 1,468 President and ............. 1995 100,256 68,637 -- -- 2,250 Chief Operating Officer ... 1994 99,732 48,047 45,000 -- --
- -------------------- (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 1996 INDIVIDUAL GRANTS ---------------------------------------------------------- NUMBER OF % OF TOTAL SECURITIES OPTIONS GRANTED EXERCISE UNDERLYING TO EMPLOYEES PRICE EXPIRATION NAME OPTIONS GRANTED IN FISCAL YEAR PER SHARE DATE - -------------------------------------------------------------------------------- Edward P. Gistaro..... 50,000 17.59% $.875 05/12/06 Allan H. Hobgood...... 50,000 17.59% .875 05/12/06 STOCK OPTION EXERCISES IN 1996 AND OPTION VALUES AT DECEMBER 31, 1996
VALUE OF UNEXERCISED SHARES NUMBER OF UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS ACQUIRED AT DECEMBER 31, 1996 AT DECEMBER 31, 1996 ON VALUE --------------------------------- --------------------------------- NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - ------------------ ---------- ---------- --------------- --------------- --------------- --------------- Edward P. Gistaro -- -- 281,667 33,333 $ 94,708 $ 19,974 Allan H. Hobgood -- -- 271,667 33,333 90,857 19,974
33 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 14, 1997, under the 1988 Stock Option Plan there were outstanding options to purchase 1,155,350 shares of the Company's Common Stock at prices ranging from $.41 to $1.38 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. 34 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 14, 1997, there were outstanding under the 1991 Director Non-Statutory Stock Option Plan options to purchase 310,000 shares of the Company's Common Stock at prices ranging from $.53 to $1.38 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 1996, 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 $1.03 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. 35 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, 1998, the Board of Directors adopted the Company's 1997 Employee Stock Purchase Plan (the "1997 Purchase Plan"), subject to approval by the stockholders at the 1997 Annual Meeting of Stockholders. Under the Stock Purchase Plan, eligible employees may elect to have up to 15% 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 1997 Purchase Plan. The Company's 1993 Employee Stock Purchase Plan (the "1993 Purchase Plan") was approved by the stockholders at the 1994 Annual Meeting of Stockholders. Under the 1993 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 286,048, 100,583 and 70,983 shares in January 1997, 1996 and 1995 pursuant to this Plan at purchase prices of $.32, $.32 and $.345 per share, which represents 85% of the closing price on December 29, 1995, December 29, and December 30, 1994, respectively. 36 Under the 1993 and 1997 Purchase Plans, the Company will make available in each year from January 1, 1994 through December 31, 1997 and January 1, 1998 through December 31, 2001, respectively, up to 200,000 shares of Common Stock. 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 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 1993 and 1997 Purchase Plans are administered by the Compensation Committee of the Board of Directors and will expire on December 31, 1997 and December 31, 2001, respectively, unless sooner terminated or amended by the Board of Directors. 37 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, 1997, 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 - -------------------------------------------------------------------------------- Common Stock, Demuth, Folger & Terhune 900,000 (1) 6.5 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 13,856,936 shares of outstanding. The following table sets forth certain information regarding beneficial ownership of the Company's Common Stock as of March 1, 1997 (a) by each of the Company's directors, (b) by the Company's Chief Executive Officer and its only other executive officer whose 1996 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 588,663 (4) 4.44% par value $.01 Allan H. Hobgood 407,586 (5) 3.05% per share Ralph Brown 273,100 (6) 2.1% Al R. Ireton 70,000 (7) .54% Philip J. Romano 230,763 (6) 1.77% Chauncey E. Schmidt 115,000 (8) .88% All Directors and Executive Officers as a Group (7 persons including the above) 1,704,424 (9) 12.54% - -------------------- (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. 38 (3) Unless otherwise indicated below, the percentage of ownership is based upon 12,956,936 shares of Common Stock outstanding, which includes 633,327 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 298,334 shares subject to currently exercisable stock options. The percentage of ownership is based on 13,255,270 shares outstanding. (5) Includes 288,334 shares subject to currently exercisable stock options. The percentage of ownership is based on 13,245,270 shares outstanding. (6) Includes 55,000 shares subject to currently exercisable stock options. The percentage of ownership is based on 13,011,936 shares outstanding. (7) Includes 70,000 shares subject to currently exercisable stock options. The percentage of ownership is based on 13,026,936 shares outstanding. (8) Includes 70,000 shares subject to currently exercisable stock options. The percentage of ownership is based on 13,026,936 shares outstanding. (9) Includes 919,502 shares subject to currently exercisable stock options. The percentage of ownership is based on 13,876,438 shares outstanding. ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. In December 1996 the chief executive officer loaned the Company $100,000 for a period of 5 days in December 1996. Additionally, in January 1997, the chief executive officer loaned the Company up to $420,000 over a period of 20 days. The loans were unsecured and bore interest at 9.5% and were paid in full in December 1996 and February 1997. Since January 1, 1995, no officer, executive officer, or affiliate of the Company has entered into any other direct or indirect material transactions, 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 39 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. 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, filed as Exhibit 3.4 to the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1995 October 11, 1988, is hereby incorporated by reference. 3.5 Certificate of Designation Preferences of Series A Convertible Preferred Stock of Docucon, Incorporated, filed as Exhibit 3.5 to the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1995 May 29, 1990, is hereby incorporated by reference. 3.6 Certificate of Designation Preferences of Series B Non-Convertible, Cumulative, Non-Voting, Redeemable Preferred Stock of Docucon, Incorporated, filed as Exhibit 3.6 to the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1995 June 12, 1991, is hereby incorporated by reference. 3.7 Certificate of Correction of Certificate of Designation Preferences of Series A Convertible Preferred Stock of Docucon, Incorporated, filed as Exhibit 3.7 to the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1995 June 1, 1990, is hereby incorporated by reference. 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 40 No. 1 to the Company's Registration Statement on Form SB-2 (Registration No. 33-82018), is hereby incorporated by reference. 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. 41 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. 10.12 Form of Promissory Note, Revolving, dated as of September 30, 1996, between Docucon, Incorporated and Bank One, Texas, N.A., filed as Exhibit 10.2 to the Company's Quarterly Report on From 10-QSB for the quarter ended September 30, 1996 is hereby incorporated herein by reference. 10.13 Form of Promissory Note, dated as of September 30, 1996, between Docucon, Incorporated and Bank One, Texas, N.A., filed as Exhibit 10.3 to the Company's Quarterly Report on From 10-QSB for the quarter ended September 30, 1996 is hereby incorporated herein by reference. 10.14 Deed of Trust, Security Agreement and Financing Statement, dated as of September 30, 1996, executed in connection with the issuance of Promissory Notes in Exhibits 10.12 and 10.13, filed as Exhibit 10.4 to the Company's Quarterly Report on From 10-QSB for the quarter ended September 30, 1996 is hereby incorporated herein by reference. 10.15 1997 Employee Stock Purchase Plan 11 Computation of Earnings (Loss) Per Share. 23 Consent of Arthur Andersen LLP 27 Financial Data Schedule (b) Reports on Form 8-K. None. 42 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 28, 1997 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 --------- -------- ---- /s/ EDWARD P. GISTARO Chairman of the Board and March 28, 1997 Edward P. Gistaro Chief Executive Officer and Director (Principal Executive and Financial Officer) /s/ ALLAN H. HOBGOOD President and March 28, 1997 Allan H. Hobgood Chief Operating Officer and Director /s/ LORI TURNER Vice President, Finance March 28, 1997 Lori Turner Treasurer (Principal Accounting Officer) /s/ RALPH BROWN Director March 28, 1997 Ralph Brown /s/ AL R. IRETON Director March 28, 1997 Al R. Ireton /s/ PHILIP J. ROMANO Director March 28, 1997 Philip J. Romano /s/ CHAUNCEY E. SCHMIDT Director March 28, 1997 Chauncey E. Schmidt 43 EX-10.15 2 EXHIBIT 10.15 DOCUCON, INCORPORATED 1997 EMPLOYEE STOCK PURCHASE PLAN ARTICLE 1 PURPOSE Section 1.1 PURPOSE. The Docucon, Incorporated 1997 Employee Stock Purchase Plan (the "Plan") is intended to provide a method whereby employees of Docucon, Incorporated (hereinafter referred to, unless the context otherwise requires, as the "Company") and its subsidiary corporations will have an opportunity to acquire a proprietary interest in the Company through the purchase of shares of the Common Stock, par value $.01 per share (the "Common Stock"), of the Company. It is the intention of the Company that the Plan qualify as an "employee stock purchase plan" under Section 423 of the Internal Revenue Code of 1986, as amended (the "Code"). The provisions of the Plan shall be construed so as to extend and limit participation in a manner consistent with the requirements of that section of the Code. ARTICLE II DEFINITIONS Section 2.1 BASE PAY. "Base Pay" shall mean regular straight-time earnings, excluding payments for overtime, shift premium, bonuses and other special payments, commissions and other marketing incentive payments. Section 2.2 COMMITTEE. "Committee" shall mean the individuals described in Article XI. Section 2.3 EMPLOYEE. "Employee" shall mean any person who is customarily employed on a full-time or part-time basis by the Company and is regularly scheduled to work more than 30 hours per week. Section 2.4 SECTION 16 EMPLOYEE. "Section 16 Employee" shall mean any Employee who is an officer (as such term is defined for purposes of Section 16 of the Securities Exchange Act of 1934, as amended, and the regulations promulgated thereunder) or a Director of the Company; provided, however, that if at any time participation in the Plan is open to Employees who, directly or indirectly, beneficially own more than 10% of any class of the Company's equity securities, such term shall also be deemed to include such Employees regardless of their status as officers or Directors of the Company. Section 2.5 SUBSIDIARY CORPORATION. "Subsidiary Corporation" shall mean any present or future corporation which (I) would be a "subsidiary corporation" of Docucon, Incorporated as that term is defined in Section 424 of the Code and (ii) is designated as a participant in the Plan by the Committee. ARTICLE III ELIGIBILITY AND PARTICIPATION Section 3.1 INITIAL ELIGIBILITY. Any Employee who shall be employed by the Company on the date of his participation in the Plan is to become effective (an "Eligible Employee") shall be eligible to participate in offerings under the Plan which commence on or after such 90-day period has concluded. Section 3.2 LEAVE OF ABSENCE. For purposes of participation in the Plan, a person on leave of absences shall be deemed to be an Employee for the first 90 days of such leave of absence and such Employee's employment shall be deemed to have terminated at the close of business on the 90th day of such leave of absence unless such Employee shall have returned to regular full-time or part-time employment (as such the case may be) prior to the close of business on such 90th day. Termination by the Company of any Employee's leave of absence, other than termination of such leave of absence on return to full-time or part-time employment, shall terminate an Employee's employment for all purposes of the Plan and shall terminate such Employee's participation in the Plan and right to exercise any option. Section 3.3 RESTRICTIONS OF GRANT OF OPTIONS. Notwithstanding any provisions of the Plan to the contrary, no Employee shall be granted an option under the Plan: (a) if, immediately after the grant of the option, such Employee would own Common Stock, and/or hold outstanding options to purchase Common Stock, possessing 5% or more of the total combined voting power or value of all classes of stock of the Company (for purposes of this paragraph, the rules of Section 424(d) of the Close shall apply in determining stock ownership of any Employee); or (b) which permits his rights to purchase Common Stock under all employee stock purchase plans of the Company of a type described in Section 423 of the Code to accrue at a rate which exceeds $25,000 in fair market value of the Common Stock (determined at the time such option is granted) for each calendar year in which such option is outstanding at any time. Section 3.4 COMMENCEMENT OF PARTICIPATION. An Eligible Employee may become a participant in the Plan by completing an authorization for a payroll deduction on the form provided by the Company and filing it with the office of the Vice President, Finance of the Company on or before the date therefor by the Committee, which date shall be prior to the Offering Commencement Date for the Offering (as such terms are defined below) (a "Participant"). Payroll deductions for a Participant shall commence on the applicable Offering Commencement Date when his authorization foe a payroll deduction becomes effective and shall end on the Offering Termination Date of the Offering to which such authorization is applicable unless sooner terminated by the Participant as provided in Article VII. ARTICLE IV OFFERINGS Section 4.1 ANNUAL OFFERINGS. The Plan will be implemented by four annual offerings of the Company's Common Stock (the "Offerings") beginning on the 1st say of January in each of the years 1998, 1999, 2000 and 2001, such offering terminating on December 31st of the following year, provided, however, that each annual Offering may, in the discretion of the Committee exercised prior to the commencement thereof, be divided into two six-month Offerings commencing, respectively, on January 1 and July 1 of such year and terminating on June 30th of the following year and December 31st of such year, respectively. The maximum number of shares issued in the respective years shall be: (a) From January 1, 1998, to December 31, 1998: 200,000 shares. (b) From January 1, 1999, to December 31, 1999: 200,000 shares plus unissued shares from the prior Offerings, whether offered or not. (c) From January 1, 2000, to December 31, 2000: 200,000 shares plus unissued shares from prior Offerings, whether offered or not (d) From January 1, 2001, to December 31, 2001: 200,000 shares plus unissued shares from the prior Offerings, whether offered or not. If a six-month Offering is made, the maximum number of shares to be issued shall be one-half of the number of shares set forth for the annual period in which the six-month Offering falls, plus, if the Offering is a July 1 to December 31 Offering, unissued shares, whether offered or not, from the immediately preceding six-month Offering. As used in the Plan, the term "Offering Commencement Date" means the January 1 or July 1, as the case may be, on which the particular Offering begins and "Offering Termination Date" means the June 30 or December 30, as the case may be, on which the particular Offering terminates. ARTICLE V PAYROLL DEDUCTIONS Section 5.1 AMOUNT OF DEDUCTION. At the time a Participant files his authorization for payroll deduction, he shall elect to have deductions made from his Base Pay for each pay period during the time he is a Participant in an Offering at the rate of 1,2,3,4,5,6,7,8,9,10,11,12,13,14 or 15% of his Base Pay in effect at the Offering Commencement Date of such Offering. In the case of a part-time hourly Employee, such Employee's Base pay during an Offering shall be determined by multiplying such Employee's hourly rate of pay in effect in the Offering Commencement Date by the number of regularly scheduled hours of work for such Employee during such Offering. Section 5.2 PARTICIPANT'S ACCOUNT. All payroll deductions made by the Company for a Participant shall be credited to such Participant's account under the Plan. A Participant may not make any separate cash payment into such account, except when on leave of absence, and then only as provided in Section 5.4 hereof. Section 5.3 CHANGE IN PAYROLL DEDUCTION. A Participant may discontinue his participation in the Plan as provided in Article VII, but no other change can be made by a Participant during an Offering. Without limiting the generality of the foregoing, a Participant may not alter the rate of his payroll deductions for that Offering. Section 5.4 LEAVE OF ABSENCE. If a Participant goes on a leave of absence, such Participant may elect to (a) withdraw the balance in his or her account pursuant to Section 7.2 hereof, (b) discontinue contributions to the Plan but remain a Participant in the Plan, or (c) remain a Participant in the Plan during such leave of absence, authorizing deductions to be made from payments by the Company to the Participant during such leave of absence and undertaking to make cash payments to the Plan at the end of each payroll period to the extent that amounts payable by the Company to such Participant are insufficient to meet such Participant's authorized payroll deductions. ARTICLE VI GRANTING OF OPTION Section 6.1 NUMBER OF OPTION SHARES. On the Offering Commencement Date of each Offering, a Participant shall be deemed to have been granted an option to purchase a maximum number of shares of the Common Stock of the Company equal to an amount determined as follows: an amount equal to the product of (I) that percentage of the Employee's Base Pay which he has authorized deduction of (but not in any case in excess of 15% of Base Pay) multiplied by (ii) the Employee's Base Pay during the period of the Offering, divided by (iii) 85% of the market value of the Common Stock of the Company on the applicable Offering Commencement Date. The market value of the Company's Common Stock shall be determined as provided in Section 6.2(a) and (b) hereof. An Employee's Base Pay during the period of an Offering shall be determined by multiplying, in the case of a one-year Offering, his normal weekly rate of pay (as in effect on the last day prior to the Offering Commencement Date of such Offering) by 52 or his normal hourly rate by 2,080 or, in the case of a six-month Offering, by 26 or 1040, as the case may be, provided that, in the case of a part-time hourly Employee, the Employee's Base Pay during the period of an Offering shall be determined by multiplying such Employee's hourly rate by the number of regularly scheduled hours of work for such Employee during such Offering. Section 6.2 OPTION PRICE. The option price of Common Stock purchased with authorized payroll deductions during such annual Offering for a Participant shall be the lesser of: (a) 85% of the closing price of the Common Stock on the Offering Commencement Date or the nearest prior business day on which trading occurred on the Market, as defined herein below; or (b) 85% of the closing price of the Common Stock on the Offering Termination Date or the nearest prior business day on which trading occurred on the Market, as defined herein below. For purposes of this Section 6.2, "Market" shall mean, if the shares of Common Stock are traded on the New York Stock Exchange or American Stock Exchange, such exchanges, or, if the shares if Common Stock are not traded on such exchanges, the over-the-counter market (or if the Common Stock shall be quoted by the National Association of Securities Dealers Automated Quotation System, them the NASDAQ System), or if the shares of Common Stock are not traded in the over-the-counter market, then, for purposes of Section 602(a) and (b), the closing price of the Common Stock shall be such fair market value as determined by the Board of Directors of the Company (which determination shall be conclusive and binding for all purposes). ARTICLE VII EXERCISE OF OPTION Section 7.1 AUTOMATIC EXERCISE. Unless a Participant gives written notice to the Company as hereinafter provided, his option for the purchase of Common Stock with authorized payroll deductions during any Offering will be deemed to have been exercised automatically on the Offering Termination Date applicable to such Offering , for the purchase of the number of full shares off Common Stock which the accumulated authorized payroll deductions in his account at such time will purchase at the applicable option price (but not in excess of the number of shares for which options have been granted to the Participant pursuant to Section 6.1 hereof), and any excess in his account at such time will be returned to him. Section 7.2 WITHDRAWAL OF ACCOUNT. By written notice to the Vice President, Finance of the Company, at any time prior to the Offering Termination Date applicable to any Offering, a Participant may elect to withdraw the balance of the accumulated authorized payroll deductions in his account at such time. Section 7.3 FRACTIONAL SHARES. Fractional shares will not be issued under the Plan and any accumulated authorized payroll deductions which would have been used to purchase fractional shares will be returned to the Participant promptly following the termination of an Offering, without interest. Section 7.4 EXERCISE AND TRANSFERABILITY OF OPTION. During a Participant's lifetime, options held by such Participant shall be exercisable only by that Participant and subject to Sections 12.1 and 12.2 hereof, shall not be transferable. Section 7.5 DELIVERY OF COMMON STOCK. As promptly as practicable after the Offering Termination Date of each Offering, the Company will deliver to each Participant, as appropriate, the Common Stock purchased upon exercise of his option. ARTICLE VIII WITHDRAWAL Section 8.1 IN GENERAL. As indicated in Section 7.2 hereof, a Participant may withdraw authorized payroll deductions credited too his account under the Plan at any time by giving written notice to the Vice President, Finance of the Company. All of the Participant's authorized payroll deductions credited to his account will be paid to him promptly after receipt of his notice of withdrawal, and no further payroll deductions will be made from his Base Pay during such offering. The Company may, at its option, treat any attempt to borrow by a participant on the security of his accumulated authorized payroll deductions as an election, under Section 7.2 hereof, to withdraw such deductions. Section 8.2 EFFECT ON SUBSEQUENT PARTICIPATION. A Participant's withdrawal from any offering will not have any effect upon his eligibility to participate in any succeeding Offering or in any similar plan which may hereafter be adopted by the Company. Section 8.3 TERMINATION OF EMPLOYMENT. Upon termination of the Participant's employment for any reason, including retirement (but excluding death while in the employ of the Company or continuation of a leave of absence for a period exceeding 90 days), the authorized payroll deductions credited to his account will be returned to him, or, in the case of his subsequent to the termination of his employment, to the person or persons designated on accordance with Section 12.1 hereof. Section 8.4 TERMINATION OFF EMPLOYMENT DUE TO DEATH. Upon termination of employment because of a participant's death, his beneficiary (as defined in Section 12.1 hereof) shall have the right to elect, by written notice given to the Vice President, Finance of the Company prior to the earlier of the Offering Termination Date or the expiration of a period of 60 days commencing with the date of the death of the Participant, either: (a) to withdraw all of the authorized payroll deductions credited to the Participant's account under the Plan, or (b) to exercise the Option for the purchase of Common Stock on the Offering Termination Date following the date of the Participant's death for the purchase of the number of full shares of Common Stock which the accumulated authorized deductions in the Participant's account at the date of the Participant's death will purchase at the applicable option price, and any excess in such account will be remitted to said beneficiary, without interest. In the event that no such written notice of election shall be duly received by the office of the Vice President, Finance of the Company, the beneficiary shall automatically be deemed to have elected, pursuant to paragraph (a) above, to withdraw all of the Participant's account balance. Section 8.5 LEAVE OF ABSENCE. A Participant on leave of absence shall, subject to the election made by such Participant pursuant to Section 5.4 hereof, continue to be a Participant in the Plan so long as such Participant is on continuous leave of absence. A participant who has been on leave of absence for more than 90 days and who therefore is not an Employee for the purpose of the Plan shall not be entitled to participate in any Offering commencing after the 90th day of such leave of absence. Not withstanding any other provisions of the Plan, unless a Participant on leave of absence returns to regular full time or part time employment with the Company at the earlier of: (a) the termination of such leave or absence of (b) three months following the 90th day of such leave of absence, such Participant's participation in the Plan shall terminate on whichever of such dates first occurs. ARTICLE IX SPECIAL PROVISIONS APPLICABLE TO SECTION 16 EMPLOYEES Section 9.1 WAIVER OF RIGHT FROM PARTICIPATION DURING ANY OFFERING PERIOD. Notwithstanding any contrary provision contained in this Plan, a Participant who is a Section 16 Employee shall be subject to the restrictions on withdrawal from participation in the Plan and disposition of shares of Common Stock obtained through exercise of options granted under the Plan set forth in Sections 9.2 and 9.3 hereof unless such Participant shall, not later than six months prior to any Offering Termination Date deliver to the Committee a waiver, of such Participant's rights under Sections 7.2 and 8.1 to withdraw from participation in the Offering which concludes on such Offering Termination Date. The Committee, in its discretion, may prescribe forms on which such waivers must be made. Section 9.2 EFFECT OF WITHDRAWAL FROM PARTICIPATION BY A SECTION 16 EMPLOYEE. Ant Participant who is a Section 16 Employee who makes a withdrawal from his account as provided in Section 7.2 and 8.5 or otherwise ceases to participate in the Plan may not resume participation in the Plan until the expiration of six months from the date of such withdrawal or cessation. Section 9.3 HOLDING PERIOD FOR STOCK ACQUIRED ON EXERCISE OF OPTION. Any Participant who is a Section 16 Employee and who, to any Offering, has not delivered to the Committee the waiver contemplated by Section 9.1 hereof not later than six months prior to the Offering Termination Date, may not sell or otherwise transfer or dispose of shares of Common Stock acquired upon exercise of the option granted to him during such Offering until at least the earlier of (a) six months after the Offering Termination Date or (b) six months after the date on which such a waiver is delivered to the Committee with respect to such Offering, except as otherwise permitted under Rule 16b-3(d)(2)(I) promulgated under the Securities Exchange Act of 1934, as such regulation may be amended from time to time, or any successor regulation thereto. ARTICLE X INTEREST Section 10.1 PAYMENT OF INTEREST. No interest will be paid or allowed on any authorized payroll deductions paid into the Plan or credited to the account of any Participant Employee. ARTICLE XI STOCK Section 11.1 MAXIMUM SHARES. The maximum number of shares which shall be issued under the Plan, subject to adjustment upon changes in capitalization of the Company as provided in Section 12.4 hereof shall be 200,000 shares in each annual Offering (100,000 shares in each six-month Offering), plus in each Offering all unissued shares from prior Offerings, whether offered or not, not to exceed 800,000 shares for all Offerings. If the total number of shares for which options are exercised on any Offering Termination Date in accordance with Article VI exceeds the maximum number of shares for the applicable Offering, the Company shall make a pro rata allocation of the shares available for delivery and distribution in as nearly a uniform manner as shall be practicable and as it shall determine to be equitable, and the balance of authorized payroll deductions credited to the account of each Participant under the Plan shall be disbursed to him as promptly as possible. Section 11.2 PARTICIPANT'S INTEREST IN COMMON STOCK UNDERLYING OPTION. The Participant will have no interest in Common Stock covered until such option has been exercised. Section 11.3 REGISTRATION OF COMMON STOCK. Common Stock to be delivered to a Participant under the Plan will be registered in the name of the Participant, or, if the Participant so directs by written notice to the Vice President, Finance of the Company prior to the Offering Termination Date applicable thereto, in the names of the names if the Participant and one such other person as may be designated by the Participant, as joint tenants with rights of survivorship or as tenants by the entireties, to the extent permitted by applicable law. Section 11.4 RESTRICTIONS ON EXERCISE. The Board of Directors may, in its discretion, require as conditions to the exercise of any option that the shares of Common Stock reserved for issuance upon the exercise of the option shall have been duly listed, upon official notice of issuance, upon a stock exchange, and that either: (a) a Registration Statement under the Securities Act of 1933, as amended, with respect to said shares shall be effective, or (b) the Participant shall have represented at the time of purchase in form and substance satisfactory to the Company, that is his intention to purchase the shares for investment and not for resale or distribution. ARTICLE XII ADMINISTRATION Section 12.1 APPOINTMENT OF COMMITTEE. The Compensation Committee of the Board of Directors (the "Committee") shall administer the Plan. No member of the Committee shall be eligible to purchase Common Stock under the Plan. Section 12.2 AUTHORITY OF COMMITTEE. Subject to the express provisions of the Plan, the Committee shall have plenary authority in its discretion to interpret and construe any and all provisions off the Plan, to adopt rules and regulations for administering the Plan, and to make all other determinations deemed necessary or advisable for administering the Plan. The Committee's determination on the foregoing matters shall be conclusive. Section 12.3 RULES GOVERNING THE ADMINISTRATION OF THE COMMITTEE. All determinations of the Committee shall be made by a majority of it members. The Committee may correct any defect or omission or reconcile any inconsistency in the Plan, in manner and to the extent it shall deem desirable. Any decision or determination reduced to writing and signed by a majority of the members of the Committee shall be as fully effective as if it had been made by a majority vote at a meeting duly called and held. The Committee may appoint a secretary and shall make such rules and regulations for the conduct of its business as it shall deem advisable. ARTICLE XIII MISCELLANEOUS PROVISIONS Section 13.1 DESIGNATION OF BENEFICIARY. A Participant may file a written designation of a beneficiary who is to receive any Common Stock and/or cash under the Plan with the Vice President, Finance of the Company. Such designation of beneficiary may be changed by the Participant at any time by written notice to the Vice President, Finance of the Company. Upon the death of a Participant and upon receipt by the Company of proof of identity and existence at the Participant's death of a beneficiary validly designated by him under the Plan, the Company shall deliver such Common Stock and/or cash to such beneficiary pursuant to the terms of the Plan. In the event of the death of a Participant and in the absence of a beneficiary validly designated under the Plan who is living at the time of such Participant's death, the Company shall deliver such Common Stock and/or cash to the executor or administrator of the estate of the Participant, or if no such executor or administrator has been appointed (to the knowledge of the Company), the Company, in its discretion, may deliver such Common Stock and/or cash to the spouse or to any one or more dependents of the Participant as the Company may designate. No beneficiary shall, prior to the death of the Participant by whom he has been designated, acquire any interest in the Common Stock or cash credited to the Participant or his account under the Plan. Section 13.2 TRANSFERABILITY. Neither authorized payroll deductions credited to a Participant's account nor any rights with regard to the exercise of an option or to receive Common Stock under the Plan may be assigned, transferred, pledged, or otherwise disposed of in any way by the Participant other than by will or the laws of descent and distribution. Any such attempted assignment, transfer, pledge or other disposition shall be without effect, except that the Company may treat such act as an election to withdraw funds in accordance with Section 7.2 hereof. Section 13.3 USE OF FUNDS. All authorized payroll deductions withheld by the Company under this Plan may be used by the Company for any corporate purpose and the Company shall not be obligated to segregate such authorized payroll deductions. Section 13.4 ADJUSTMENT UPON CHANGES IN CAPITALIZATION. (a) If, while any options are outstanding, the outstanding shares of Common Stock of the Company have increased, changes to, or have been exchanged for a different number or kind of shares or securities of the Company through reorganization, merger, recapitalization, reclassification, stock split, reverse stock split or similar transaction, appropriate and proportionate adjustments may be made by the Committee in the number and/or kind of shares which are subject to purchase under outstanding options and on the option exercise price or prices applicable to such outstanding options. In addition, in any such event, the number and/or kind of shares which may be offered in the Offerings described in Article IV hereof shall also be proportionately adjusted. No adjustments shall be made for stock dividends. For the purpose of this paragraph, any distribution of shares to stockholders in an amount aggregating 20% or more of the outstanding shares shall be deemed a stock split and any distributions of shares aggregating less than 20% of the outstanding shares shall be deemed a stock dividend. (b) Upon the dissolution or liquidation of the Company, or upon a reorganization, merger or consolidation of the Company with one or more corporations as a result of which the Company is not the surviving corporation, or upon sale of substantially all of the property or capital stock of the Company to another corporation, the holder of each option then outstanding under the Plan will thereafter be entitled to receive at the next Offering Termination Date upon the exercise of such option for each share as to which such option shall be exercised, as nearly as reasonably may be determined, the cash, securities and/or property which a holder of one share of the Common Stock was entitled to receive upon and at the time of such transaction. The Board of Directors shall take such steps in connection with such transactions as the Board shall deem necessary to assure that the provisions of this Section 12.4 shall thereafter be applicable, as nearly as reasonably may be determined, in relation to the said cash, securities and/or property as to which such holder of such option might thereafter be entitled to receive. Section 13.5 AMENDMENT AND TERMINATION. The Board of Directors shall have complete power and authority to terminate or amend the Plan; provided, however, that the Board of Directors shall not, without the approval of the stockholders of the Corporation (I) increase the maximum number of shares which may be issued under any Offering (except pursuant to Section 12.4 hereof), or (ii) amend the requirements as to the class of Employees eligible to purchase Common Stock under the Plan or permit the members of the Committee to purchase Common Stock under the Plan. No termination, modification, or amendment of the Plan may, without the consent of an Employee then having an option under the Plan to purchase Common Stock, adversely effect the rights of such Employee under such option. Section 13.6 EFFECTIVE DATE. The Plan shall become effective as of October 1,1997, subject to approval by the holders of the majority of the Common Stock present and represented at a special or annual meeting of the shareholders held on or before December 31, 1997. If the Plan is not so approved, the Plan shall not become effective and all transactions under the Plan prior to such stockholder vote, if any, shall be deemed to be null and void. Section 13.7 NO EMPLOYMENT RIGHTS. The Plan does not, directly or indirectly, create any right for the benefit of any Employee or class of Employee or class of Employees to purchase any shares under the Plan, or create in any Employee or class of Employees any right with respect to continuation of employment by the Company, and it shall not be deemed to interfere in any way with the Company's right to terminate, or otherwise modify, an Employee's employment at any time. Section 13.8 EFFECT OF PLAN. The provisions of the Plan shall, in accordance with its term, be binding upon, and inure to the benefit of, all successors of each Employee participating in the Plan, including, without limitation, such Employee's estate and the executors, administrators or trustees thereof, heirs and legatees, and any receiver, trustee in bankruptcy or representative of creditors of such Employee. Section 13.9 GOVERNING LAW. The law of the State of Delaware will govern all matters relating to this Plan except to the extent it is superseded by the laws of the United States. EX-11 3 EXHIBIT 11 DOCUCON, INCORPORATED COMPUTATION OF EARNINGS (LOSS) PER SHARE
YEAR ENDED DECEMBER 31 -------------------------------------------------- 1996 1995 1994 ------------ ------------ ------------ COMPUTATION OF PRIMARY EARNINGS (LOSS) PER SHARE: Net income (loss) ................................ $ 764,671 $ (605,563) $ (1,722,701) Less- Preferred stock dividend requirements ..... (55,688) (60,334) (63,170) ------------ ------------ ------------ Net income (loss) applicable to common stockholders used for computation ......... $ 708,983 $ (665,897) $ (1,785,871) ============ ============ ============ WEIGHTED AVERAGE NUMBER OF SHARES OF COMMON STOCK OUTSTANDING ...................................... 11,945,504 11,690,161 11,542,636 WEIGHTED AVERAGE INCREMENTAL SHARES OUTSTANDING UPON ASSUMED CONVERSION OF OPTIONS AND WARRANTS ....... 539,818 -- 7,273 ------------ ------------ ------------ WEIGHTED AVERAGE COMMON SHARES AND COMMON SHARE EQUIVALENTS USED FOR COMPUTATION ................. 12,485,322 11,690,161 11,549,909 ============ ============ ============ PRIMARY EARNINGS (LOSS) PER COMMON SHARE AND COMMON SHARE EQUIVALENT ................................. $ .06 $ (.06) $ (.15) ============ ============ ============ COMPUTATION OF FULLY DILUTED EARNINGS (LOSS) PER SHARE: Net income (loss) ............................... $ 764,671 $ (605,563) $ (1,722,701) Preferred stock dividend requirements ........... (55,688) (60,334) (63,170) Increase in net income applicable to Common Stock for- Preferred stock dividends not incurred upon assumed conversion of preferred stock ........ 55,688 60,334 63,170 ------------ ------------ ------------ Net income (loss) applicable to common stockholders used for computation ......... $ 764,671 $ (605,563) $ (1,722,701) ============ ============ ============ WEIGHTED AVERAGE NUMBER OF SHARES OF COMMON STOCK OUTSTANDING ...................................... 11,945,504 11,690,161 11,542,636 WEIGHTED AVERAGE INCREMENTAL SHARES OUTSTANDING UPON ASSUMED CONVERSION OF OPTIONS AND WARRANTS ....... 539,818 -- 7,273 WEIGHTED AVERAGE INCREMENTAL SHARES OUTSTANDING UPON ASSUMED CONVERSION OF THE PREFERRED STOCK ........ 672,779 731,542 766,659 ------------ ------------ ------------ WEIGHTED AVERAGE SHARES USED FOR COMPUTATION ....... 13,158,101 12,421,703 12,316,568 ============ ============ ============ EARNINGS (LOSS) PER COMMON SHARE AND COMMON SHARE EQUIVALENT ASSUMING FULL DILUTION (a) ............ $ .06(a) $ (.05)(a) $ (.14)(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 4 EXHIBIT 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS 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). /s/ ARTHUR ANDERSEN LLP San Antonio, Texas February 14, 1997 EX-27 5
5 THE FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM DOCUCON INC.'S FINANCIAL STATEMENTS AS OF AND FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1996 INCLUDED IN THIS FORM 10-KSB AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 12-MOS DEC-31-1996 DEC-31-1996 198,152 0 2,551,241 4,444 54,994 4,592,513 7,494,779 4,798,200 8,137,232 3,639,982 1,517,970 0 19 120,326 2,807,724 8,137,232 13,523,500 13,523,500 7,706,001 12,585,439 (28,086) 0 164,476 801,671 37,000 764,671 0 0 0 764,671 0.06 0.06
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