-----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, I7aD1OxmigbOYb2QlRRrf+YYnC5ogSkp2gxoPqE+Dg0oTrg3vC4buM1QxOWYV8xa +S+uMNvY+tTUSVw7H9ckQw== 0000890566-98-001837.txt : 19981118 0000890566-98-001837.hdr.sgml : 19981118 ACCESSION NUMBER: 0000890566-98-001837 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981116 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DOCUCON INCORPORATED CENTRAL INDEX KEY: 0000843006 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROGRAMMING, DATA PROCESSING, ETC. [7370] IRS NUMBER: 742418590 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: SEC FILE NUMBER: 001-10185 FILM NUMBER: 98752327 BUSINESS ADDRESS: STREET 1: 7461 CALLAGHAN RD CITY: SAN ANTONIO STATE: TX ZIP: 78229 BUSINESS PHONE: 2105259221 MAIL ADDRESS: STREET 1: 7461 CALLAGHAN ROAD CITY: SAN ANTONIO STATE: TX ZIP: 78229 10QSB 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB (Mark One) [X] Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Quarterly Period Ended SEPTEMBER 30, 1998 ------------------------------ OR [ ] Transition Report Under Section 13 or 15(d) of the Exchange Act For the Transition Period From to Commission File Number 1-10185 DOCUCON, INCORPORATED (Exact name of small business issuer as specified in its charter) Delaware 74-2418590 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 7461 Callaghan Road San Antonio, Texas 78229 (Address of principal executive offices) (210) 525-9221 (Issuer's telephone number) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] State the number of shares outstanding of each of the issuer's classes of common equity as of October 30, 1998. 3,308,716 DOCUCON, INCORPORATED INDEX PAGE PART I. FINANCIAL INFORMATION (UNAUDITED) Item 1: Balance Sheets - September 30, 1998, and December 31, 1997 3 Statements of Operations - For the Three and Nine Months Ended September 30, 1998 and 1997 5 Statements of Cash Flows - For the Nine Months Ended September 30, 1998 and 1997 7 Notes to Financial Statements 8 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations 13 PART II. OTHER INFORMATION 17 SIGNATURES 18 -2- DOCUCON, INCORPORATED BALANCE SHEETS
September 30, December 31, 1998 1997 ------------ ------------ ASSETS (UNAUDITED) CURRENT ASSETS: Cash and temporary cash investments .............. $ 2,196,675 $ 4,597,183 Accounts receivable-trade, net of allowance for doubtful accounts of $4,444- U.S. Government ............................... 452,247 620,934 Commercial .................................... 131,607 335,300 Unbilled revenues, net of allowance of $800,000 at September 30, 1998 ............................ 958,115 1,472,075 Other receivables ................................ 403,374 405,336 Prepaid expenses and other ....................... 97,523 77,044 Asset held for sale .............................. 1,682,517 -- ------------ ------------ Total current assets .............. 5,922,058 7,507,872 ------------ ------------ PROPERTY AND EQUIPMENT: Conversion systems ............................... 4,754,223 4,589,473 Building and improvements ........................ -- 1,744,499 Land ............................................. -- 230,000 Furniture and fixtures ........................... 240,992 205,602 ------------ ------------ Total property and equipment ...... 4,995,215 6,769,574 Less- Accumulated depreciation ................... (4,631,806) (4,680,368) ------------ ------------ Net property and equipment ........ 363,409 2,089,206 ------------ ------------ OTHER, net ......................................... 481,314 472,490 ------------ ------------ Total assets ...................... $ 6,766,781 $ 10,069,568 ============ ============
The accompanying notes are an integral part of these financial statements. -3- DOCUCON, INCORPORATED BALANCE SHEETS (Continued)
September 30, December 31, 1998 1997 LIABILITIES AND STOCKHOLDERS' EQUITY (UNAUDITED) ------------ ------------ CURRENT LIABILITIES: Accounts payable ................................. $ 296,828 $ 482,076 Accrued liabilities .............................. 695,427 616,615 Taxes payable .................................... 95,125 191,000 Preferred stock dividends payable ................ 88,815 -- Revolving term note .............................. -- 504,000 Current maturities of long-term debt ............. 1,492,735 30,722 Current maturities of capital lease obligations .. 20,830 15,798 Other current liabilities ........................ 56,469 -- Deferred revenues ................................ 149,351 -- ------------ ------------ Total current liabilities .............. 2,895,580 1,840,211 ------------ ------------ LONG-TERM DEBT ..................................... -- 1,485,079 ------------ ------------ CAPITAL LEASE OBLIGATIONS .......................... 62,422 49,547 ------------ ------------ OTHER LONG-TERM OBLIGATIONS ........................ 284,864 -- ------------ ------------ COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Preferred stock, $1.00 par value, 10,000,000 shares authorized- Series A, 60 shares authorized, 7 and 12 shares outstanding as of September 30, 1998, and December 31, 1997, respectively ............... 7 12 Common stock, $.01 par value, 25,000,000 shares authorized; 3,327,366 and 3,260,889 shares outstanding as of September 30, 1998, and December 31, 1997, respectively ................. 33,424 32,609 Additional paid-in capital ....................... 10,073,834 10,069,173 Accumulated deficit .............................. (6,558,798) (3,407,063) Treasury stock, at cost, 15,100 shares and 0 shares as of September 30, 1998, and December 31, 1997, respectively .............................. (24,552) -- Total stockholders' equity ............. 3,523,915 6,694,731 ------------ ------------ Total liabilities and stockholders' equity ................................ $ 6,766,781 $ 10,069,568 ============ ============
The accompanying notes are an integral part of these financial statements. -4- DOCUCON, INCORPORATED STATEMENTS OF OPERATIONS (Unaudited)
THREE MONTHS NINE MONTHS ENDED SEPTEMBER 30 ENDED SEPTEMBER 30 1998 1997 1998 1997 ----------- ----------- ----------- ----------- OPERATING REVENUES ................................. $ 591,786 $ 1,317,352 $ 2,074,764 $ 5,903,083 ----------- ----------- ----------- ----------- COSTS AND EXPENSES: Production ....................................... 600,404 855,515 1,957,368 3,818,692 Research and development ......................... 63,045 41,004 187,689 128,447 General and administrative ....................... 1,510,196 286,064 2,133,358 787,143 Marketing ........................................ 333,089 123,726 656,952 477,277 Depreciation and amortization .................... 84,873 104,688 256,270 327,361 ----------- ----------- ----------- ----------- 2,591,607 1,410,997 5,191,637 5,538,920 ----------- ----------- ----------- ----------- OPERATING INCOME (LOSS) FROM CONTINUING OPERATIONS ....................................... (1,999,821) (93,645) (3,116,873) 364,163 OTHER INCOME (EXPENSE): Interest income .................................. 41,102 -- 155,430 -- Interest expense ................................. (40,433) (52,094) (112,538) (151,290) Other, net ....................................... 5,935 10,152 22,061 39,430 ----------- ----------- ----------- ----------- INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES ..................................... (1,993,217) (135,587) (3,051,920) 252,303 Income tax expense ............................... -- -- 11,000 12,000 ----------- ----------- ----------- ----------- NET INCOME (LOSS) FROM CONTINUING OPERATIONS ....... (1,993,217) (135,587) (3,062,920) 240,303 Preferred stock dividend requirements ............ 6,149 11,688 22,649 36,439 ----------- ----------- ----------- ----------- NET INCOME (LOSS) FROM CONTINUING OPERATIONS APPLICABLE TO COMMON STOCKHOLDERS ................ (1,999,366) (147,275) (3,085,569) 203,864 Loss from discontinued operations ................ -- (281,983) -- (639,874) ----------- ----------- ----------- ----------- NET LOSS APPLICABLE TO COMMON STOCKHOLDERS ......... $(1,999,366) $ (429,258) $(3,085,569) $ (436,010) =========== =========== =========== =========== Basic earnings (loss) from continuing operations per common share ..................... $ (.60) $ (.05) $ (.94) $ .07 Basic loss from discontinued operations per common share .................................... -- (.09) -- (.21) ----------- ----------- ----------- ----------- BASIC LOSS PER COMMON SHARE ........................ $ (.60) $ (.14) $ (.94) $ (.14) =========== =========== =========== =========== WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING ...................................... 3,311,951 3,111,827 3,296,970 3,100,368 =========== =========== =========== =========== -5- THREE MONTHS NINE MONTHS ENDED SEPTEMBER 30 ENDED SEPTEMBER 30 -------------------------------- -------------------------------- 1998 1997 1998 1997 ------------- ------------- ------------- ------------- Diluted earnings (loss) from continuing operations per common share and common share equivalents ......................................... $ (.60) $ (.05) $ (.94) $ .06 Diluted loss from discontinued operations per common share and common share equivalents ........... -- (.09) -- (.20) ------------- ------------- ------------- ------------- DILUTED LOSS PER COMMON SHARE AND COMMON SHARE EQUIVALENTS .......................................... $ (.60) $ (.14) $ (.94) $ (.14) ============= ============= ============= ============= WEIGHTED AVERAGE NUMBER OF COMMON SHARES AND COMMON SHARE EQUIVALENTS OUTSTANDING ................. 3,311,951 3,111,827 3,296,970 3,208,521 ============= ============= ============= =============
The accompanying notes are an integral part of these financial statements. -6- DOCUCON, INCORPORATED STATEMENTS OF CASH FLOWS (Unaudited)
NINE MONTHS ENDED SEPTEMBER 30 1998 1997 ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) from continuing operations ........... $(3,062,920) $ 240,303 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities- Depreciation and amortization ....................... 256,270 327,361 Allowance for unbilled revenues ..................... 800,000 -- Noncash compensation accrual ........................ 341,333 -- Changes in current assets and current liabilities- Decrease in receivables and unbilled revenues ...... 88,302 915,340 (Increase) decrease in prepaid expenses and other .. (41,162) 26,579 Decrease in accounts payable and accrued liabilities (106,436) (959,844) Decrease in taxes payable .......................... (95,875) (11,554) Increase (decrease) in deferred revenues ........... 149,351 (20,300) ----------- ----------- Net cash provided by (used in) operating activities ............................................... (1,671,137) 517,885 ----------- ----------- NET CASH USED BY DISCONTINUED OPERATIONS ................. -- (591,878) ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures ................................... (172,386) (90,048) ----------- ----------- Net cash used in investing activities ........ (172,386) (90,048) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Advances under line of credit .......................... -- 2,408,500 Payments under line of credit .......................... (504,000) (2,433,500) Principal payments under capital lease obligations ..... (10,969) (10,202) Net proceeds from exercise of stock options ............ 5,602 7,882 Proceeds from issuing notes payable .................... -- 45,000 Principal payments on long-term debt ................... (23,066) (22,968) Purchase of treasury stock ............................. (24,552) -- ----------- ----------- Net cash used in financing activities ........ (556,985) (5,288) ----------- ----------- NET DECREASE IN CASH AND TEMPORARY CASH INVESTMENTS ...... (2,400,508) (169,329) CASH AND TEMPORARY CASH INVESTMENTS, beginning of period . 4,597,183 198,152 ----------- ----------- CASH AND TEMPORARY CASH INVESTMENTS, end of period ....... $ 2,196,675 $ 28,823 =========== =========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Noncash investing and financing activities- Capital lease obligations incurred .................... $ 28,877 $ 16,240 =========== =========== Preferred stock dividends payable ..................... $ 88,815 $ -- =========== =========== Cash paid during the period for- Interest .............................................. $ 113,309 $ 163,953 =========== =========== Income taxes .......................................... $ 106,875 $ 3,711 =========== ===========
-7- DOCUCON, INCORPORATED NOTES TO FINANCIAL STATEMENTS (Unaudited) NOTE 1 The financial statements included herein have been prepared by Docucon, Incorporated (the Company), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. However, all adjustments have been made which are, in the opinion of the Company, necessary for a fair presentation of the results of operations for the periods covered. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. It is recommended that these financial statements be read in conjunction with the financial statements and the notes thereto included in the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1997. Certain reclassifications have been made in the prior period financial statements to conform with the current period presentation. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Since its inception, the Company has incurred cumulative net losses of approximately $6.6 million. The cumulative net losses have been funded primarily through the Company's public offering of common stock, issuances of preferred stock, the exercise of warrants and options, debt financing and the sale of its software division in the fourth quarter of 1997 for $6.5 million. The Company has taken steps which it believes will improve its operating results including selling its software division and focusing on the Company's document conversion business. While the current quarter's operating loss is unsettling, management believes that it has taken proper steps to significantly improve the Company's operating results. Particularly encouraging to management are the initial results from new marketing efforts in both the federal and commercial arenas. Expansion of these efforts has been made to include a wide range of vertical markets and partnering agreements within related industries. The Company's management believes that it is likely that the Company's operating results for the remainder of 1998 will improve and will generate sufficient working capital, along with available cash, to sustain its operations throughout the year. However, there can be no assurances that the Company's focus on marketing efforts will improve its operating results. NOTE 2 Discontinued operations- In November 1997, the Company sold its software division to a third party for $6.5 million. Included in other current receivables and in other, net, on the accompanying balance sheets are escrowed amounts of approximately $400,000 each related to the sale of the software division. These escrowed funds secure the payment of any liability of the Company to the purchaser under the terms of the purchase agreement and are scheduled to be released to the Company in the amount of $400,000 in November 1998 and $400,000 in November 1999. Management of the Company believes that the entire $800,000 held in escrow will be paid to -8- DOCUCON, INCORPORATED NOTES TO FINANCIAL STATEMENTS (Continued) the Company. Including the escrowed funds, net cash proceeds after expenses relating to the sale were approximately $5.7 million. As a result of the sale, the division has been accounted for as a discontinued operation and, accordingly, the Company has restated its financial statements for all periods presented in accordance with Accounting Principle Board Opinion No. 30. The following table provides certain information related to the discontinued operation: THREE NINE MONTHS ENDED MONTHS ENDED SEPTEMBER 30, 1997 SEPTEMBER 30, 1997 ------------------ ------------------ Revenues ............................... $ 580,741 $ 1,880,621 =========== =========== Loss from discontinued operations ...... $ (281,983) $ (639,874) =========== =========== NOTE 3 Substantially all of the Company's unbilled revenues at September 30, 1998, and December 31, 1997, relate to conversion services performed for agencies of the U.S. Government. The Company's ability to invoice these unbilled revenues is dependent upon a number of factors including quality control acceptance and the availability of funding to the respective agencies. The Company was contacted in mid-1997 and informed that funding for certain conversion services being performed had been depleted. Work that had been placed in production at that time was completed despite the lack of assurance that funding would become available. As a result, the Company has been unable to invoice approximately $1.2 million of conversion services that were performed during 1997. The conversion products associated with the $1.2 million of unbilled revenues have been shipped to the customer and are in various stages of quality control review. During the three and nine months ended September 30, 1998, the Company recognized $0 and $370,000, respectively, in additional unbilled revenues relating to additional conversion services performed through September 1998. There can be no assurances that the customer will accept all of the work product nor are there any assurances that sufficient funding will be made available to enable the Company to invoice the unbilled revenues. Management of the Company, based upon its past operating history and its ongoing discussions with various governmental personnel regarding the availability of additional funding, believes that all of such unbilled revenues totaling approximately $1.6 million represent valid assets of the Company. However, due to the continued aging of the unbilled revenues, the Company believed it was prudent to provide an allowance on these unbilled revenues of $800,000 during the three months ended September 1998. This allowance is reflected as a component of general and administrative expense in the accompanying statements of operations. The inability of the Company to realize its remaining unbilled revenues would have a material adverse effect on the Company's future results of operations and its financial position. NOTE 4 Common stock and preferred stock- Each share of the Company's preferred stock ($25,000 stated value) is convertible into 8,334 shares of common stock and earns cash dividends of 11 percent per annum. Each share of preferred stock is entitled to vote 8,334 common shares. The Company has never paid cash dividends on its common stock and does not anticipate the payment of cash dividends on its common stock in the foreseeable future. The Company currently anticipates that any future earnings will be retained to finance the Company's operations. Under -9- the terms of the Company's preferred stock, the Company cannot pay dividends on its common stock until all accumulated but unpaid dividends on such preferred stock have been paid. As of September 30, 1998, cumulative undeclared dividends on the preferred stock approximated $243,000. The Company anticipates that it will pay approximately $88,000 of cumulative dividends on preferred stock during the fourth quarter of 1998. As the remainder of these dividends are undeclared, they have not been recorded as a reduction of the Company's equity. Common stock is subordinate to preferred stock in the event of liquidation. Treasury stock- On June 18, 1998, the Company announced the board of directors authorized the repurchase of up to 500,000 shares of the Company's common stock in the open market. As of September 30, 1998, the Company has acquired 15,100 treasury shares for $24,552. Reverse stock split- In June 1998, the Company's board of directors approved a one-for-four reverse common stock split. Accordingly, all common stock and share information has been adjusted to reflect the reverse stock split. NOTE 5 Time Accelerated Restricted Stock Award Plan (TARSAP) and stock option grants- In April 1998, the Company's board of directors granted options to certain members of the Company's senior management, subject to shareholder approval, to purchase 125,000 shares of the Company's common stock at an exercise price of $4 per share under a TARSAP. Additionally, in April 1998, the Company appointed a new president and chief executive officer. The Company's board of directors granted this employee options, subject to shareholder approval, to purchase 225,000 shares of the Company's common stock at an exercise price of $4 per share under a TARSAP. Fifty thousand of the TARSAP options vest and become exercisable in September 2001 while the remainder vest and become exercisable in March 2005. Vesting and exercisability of the TARSAP options is accelerated, in 20,000 share increments, for each $2 per share incremental increase in the quoted market price per share of the Company's common stock above $4 per share. In April 1998, the Company's board of directors approved conditional stock option grants to certain members of the Company's senior management. The conditional grants provide that, for each $2 per share increase in the quoted market value of the Company's common stock above $4 per share (up to $40 per share), the employees shall receive options to purchase shares of the Company's common stock as follows: OPTIONS TO BE GRANTED FOR EMPLOYEE EACH $2 INCREASE TERM -------- ---------------- ---- A 12,500 7 years B 4,167 7 years Each option will expire 10 years after date of grant. The conditions and option price for each grant will be determined by a committee to be selected by the Company's board of directors. -10- NOTE 6 Debt covenants and asset held for sale- As a result of the disposition of the Company's software division in 1997, in April 1998, certain of the affirmative covenants relating to the Company's mortgage note payable to a financial institution were modified. The note agreement contains various affirmative and negative covenants and requires the Company to maintain (as modified and as defined in the note agreement): (i) a current ratio of not less than 1:1, (ii) a debt-to-net worth ratio of not more than .75:1, (iii) a quarterly debt coverage ratio of not less than 1.25:1 beginning in the quarterly period ended September 30, 1998, and (iv) a minimum tangible net worth of $5.5 million. Based upon operating results in the third quarter of 1998, the Company was unable to maintain compliance with certain affirmative financial covenants. As a result, the lender has the right to demand immediate repayment of the entire amount outstanding. Accordingly, all amounts due this lender have been classified as a current liability at September 30, 1998. In connection with obtaining modifications to the note agreement, the Company was required to reserve, out of its cash balances, one year's worth of debt service payments of approximately $173,000. Subsequent to September 30, 1998, the Company obtained a waiver from its lender for additional indebtedness that was incurred relating to a new capital lease. The mortgage note payable is secured by substantially all of the Company's assets including the Company's office building. Management of the Company has decided to sell the building and believes that it will be sold during 1998 or early 1999 at an amount exceeding net book value and, accordingly, the carrying value of the land, building and associated improvements have been classified as a current asset held for sale at September 30, 1998. The Company would be required to pay the mortgage note payable with proceeds from the disposition of the building. In November 1998, the Company entered into a contract to sell the building for an amount in excess of its net book value and the related mortgage note payable. The contract includes provisions for the buyer to lease the building back to the Company on a short-term basis while the Company locates a replacement facility. Management of the Company believes that suitable replacement facilities will be available. NOTE 7 Earnings (loss) per share- In February 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share." SFAS No. 128 replaces the presentation of Primary Earnings Per Share (EPS) with Basic EPS and requires dual presentation of Basic and Diluted EPS on the face of the statements of operations. Basic EPS excludes dilution and is computed by dividing income (loss) available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company. SFAS No. 128 is effective for financial statements issued after December 15, 1997, and, accordingly, the accompanying financial statements reflect the adoption of SFAS No. 128. As the Company had a net loss from continuing operations for the three months and nine months ended September 30, 1998, and the three months ended September 30, 1997, Diluted EPS equals Basic EPS as potentially dilutive common stock equivalents are antidilutive in loss periods. Prior period EPS data has been -11- restated as required by SFAS No. 128. The following table provides a reconciliation of the denominator (weighted average number of common shares and common share equivalents outstanding) used to compute Basic and Diluted EPS and the number of common share equivalents relating to preferred stock that have been excluded as a result of antidilution:
THREE MONTHS NINE MONTHS ENDED SEPTEMBER 30 ENDED SEPTEMBER 30 1998 1997 1998 1997 --------- --------- --------- --------- Weighted average number of common shares outstanding for Basic EPS 3,311,951 3,111,827 3,296,970 3,100,368 Weighted average incremental shares outstanding upon assumed conversion of dilutive options and warrants .................... -- -- -- 108,153 Weighted average incremental shares outstanding upon assumed conversion of dilutive preferred shares .......................... -- -- -- -- --------- --------- --------- --------- Weighted average number of common shares and common share equivalents outstanding for Diluted EPS ..................... 3,311,951 3,111,827 3,296,970 3,208,521 ========= ========= ========= ========= Potential common shares from assumed conversion of preferred shares excluded as a result of antidilution .................... 78,541 141,665 92,774 146,957 ========= ========= ========= =========
NOTE 8 Commitments- In April 1998, the Company appointed a new president and chief executive officer. The Company and the employee have entered into a seven-year employment agreement providing for base compensation of $200,000 per year. The employment agreement is terminable by either party with 30 days notice. In the event the employee were to be terminated by the Company without cause, the Company would be required to make a severance payment of $300,000. In September 1998, the Company granted early retirement to a member of senior management and terminated the related employment agreement. The employee will be retained as a consultant to the Company for a period of two years following his retirement in September 1998 at the rate of $2,500 per month. For the same two-year period during the employee's consultancy, he will receive retirement pay at the rate of $5,500 per month. For a 10-year period following the employee's consultancy, he will receive retirement pay at the rate of $2,500 per month. The consulting payments will be expensed as the services are provided. The present value of the post-retirement payments, discounted at 5 percent, resulted in noncash compensation expense of $341,333 during the three months ended September 30, 1998. The present value of the post-retirement obligation is being recorded as other long-term obligations on the accompanying balance sheet, with the current portion of $56,469 included as other current liabilities. -12- DOCUCON, INCORPORATED MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS The Company's operations during the quarter ended September 30, 1998, resulted in a net loss applicable to common stockholders of $1,999,366 compared to a net loss applicable to common stockholders of $429,258 for the same quarter in 1997. The 1997 quarter included a loss from discontinued operations of $281,983. In November 1997, the Company sold its software division to a third party for $6.5 million. The Company incurred a net loss applicable to common shareholders of $3,085,569 for the nine months ended September 30, 1998, as compared to a net loss of $436,010 for the same period in 1997. The 1997 period included a loss from discontinued operations of $639,874. Revenues from continuing operations decreased 55 percent to $591,786 for the quarter ended September 30, 1998, as compared to the same quarter in 1997. Revenues from continuing operations decreased 65 percent to $2,074,764 for the nine-month period ended September 30, 1998, as compared to the 1997 nine-month period. The decrease in both periods is due to what management believes to be a temporary discontinuation of funding for a specific project being performed under a Department of Defense (DOD) contract. Production costs from continuing operations decreased 30 percent and 49 percent, respectively, for the quarter and nine months ended September 30, 1998, as compared to the 1997 periods due to the decreased revenue levels. Research and development costs from continuing operations increased 54 percent and 46 percent, respectively, for the quarter and nine months ended September 30, 1998, compared to the same periods in 1997 as the Company continues to devote resources to the development of new conversion capabilities. General and administrative expenses, net of charges of approximately $340,000 related to the buyout of an employment agreement and $800,000 related to an allowance for doubtful collection associated with unbilled revenues, increased 32 percent and 26 percent, respectively, for the three- and nine-month periods ended September 30, 1998, as compared to the same periods in 1997. The increases are due to increased expenses associated with the transition to new management, and the northeast U.S. corporate office presence discussed below, as well as the Company's annual shareholder meeting and the related proxy solicitation. Marketing expenses from continuing operations increased 169 percent and 38 percent for the quarter and nine months ended September 30, 1998, respectively, as compared to the same periods in 1997. The increase in expense is due to extensive new marketing efforts aimed at rebuilding the federal market and developing a commercial market. The Company developed a federal marketing organization in Washington, D.C., during the second quarter of 1998 and began building its commercial organization headquartered in Wayne, PA, during the third quarter of 1998. LIQUIDITY AND CAPITAL RESOURCES Since its inception, the Company's operations have been primarily supplemented through borrowings, capital lease agreements, an initial public offering of the Company's common stock in 1989, the exercise of warrants and options, private preferred stock placements and the sale of its software division in the fourth quarter of 1997. As of September 30, 1998, the Company had positive working capital of approximately $3.0 million and expects to fund its remaining 1998 operations and marketing activities through utilization of cash on hand. -13- DOCUCON, INCORPORATED MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Substantially all of the Company's unbilled revenues at September 30, 1998, and December 31, 1997, relate to conversion services performed for agencies of the U.S. Government. The Company's ability to invoice these unbilled revenues is dependent upon a number of factors including quality control acceptance and the availability of funding to the respective agencies. The Company was contacted in mid-1997 and informed that funding for certain conversion services being performed had been depleted. Work that had been placed in production at that time was completed despite the lack of assurance that funding would become available. As a result, the Company has been unable to invoice approximately $1.2 million of conversion services that were performed during 1997. The conversion products associated with the $1.2 million of unbilled revenues have been shipped to the customer and are in various stages of quality control review. During the three and nine months ended September 30, 1998, the Company recognized $0 and $370,000, respectively, in additional unbilled revenues relating to additional conversion services performed through September 1998. There can be no assurances that the customer will accept all of the work product nor are there any assurances that sufficient funding will be made available to enable the Company to invoice the unbilled revenues. Management of the Company, based upon its past operating history and its ongoing discussions with various governmental personnel regarding the availability of additional funding, believes that all of such unbilled revenues totaling approximately $1.6 million represent valid assets of the Company. However, due to the continued aging of the unbilled revenues, the Company believed it was prudent to provide an allowance on these unbilled revenues of $800,000 during the three months ended September 1998. This allowance is reflected as a component of general and administrative expense in the accompanying statements of operations. The inability of the Company to realize its remaining unbilled revenues would have a material adverse effect on the Company's future results of operations and its financial position. In 1998, the Company has performed services under two DOD contracts. One contract was awarded in 1996 and extended through April 1998. The other contract was awarded in December 1997 for a term of one year with four additional option years. The contracts have a potential value of $77.8 million. However, there can be no assurances that the full potential value of the contracts will be realized or that the terms of the latest contract will extend through the optional years. In March 1998, the General Services Administration (GSA) awarded a Federal Supply Schedule to the Company which is effective until September 30, 2002. Federal Supply Schedules are centralized contracts established by the GSA for the use of all government agencies. There are no limitations to order size or cumulative order value under such contracts. Under the Federal Supply Schedule awarded to the Company, any government agency can buy a wide variety of document conversion services directly from the Company. The Company began providing services under the GSA during the second quarter of 1998. The DOD and GSA contracts referred to herein enable the Company to act as an approved vendor within Federal Government markets. They do not, in and of themselves, represent purchase orders for work to be completed nor do they receive direct funding. The Company markets directly to customers within the Federal Government to obtain such funded orders. In March 1994, the Company purchased the assets and assumed certain liabilities of J. Feuerstein Systems. In November 1997, the Company sold the assets of the division to Bowne & Co., Inc., for $6.5 million. A total of $800,000 was placed in an escrow account as security for certain representations and warranties made to the buyer. Management does not anticipate any material claims to be made against the representations and warranties and expects the funds will be released from escrow on November 25, 1998, and November 25, 1999, in two amounts of $400,000 each. Including the escrowed funds, net cash proceeds after expenses relating to the sale were approximately $5.7 million. Cash proceeds were used to pay down the Company's $504,000 line-of-credit balance after the 1997 year-end and to fund continuing operations. The Company plans to invest excess proceeds in short-term securities which would be available for capital or operational needs. -14- DOCUCON, INCORPORATED MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) In October 1996, the Company obtained long-term financing to replace the existing mortgage note for its office building with a December 1996 maturity. The new note bears interest at a fixed rate of 9.5 percent, payable monthly to a commercial bank, and is being amortized over a 20-year term with a 5-year maturity. The note is secured by the Company's building, other fixed assets, accounts receivable and inventory. Approximately $68,000 of debt issuance costs were incurred in connection with this refinancing. In April 1998, certain of the affirmative covenants relating to this note were modified. Based upon operating results in the third quarter of 1998, the Company was unable to maintain compliance with certain affirmative financial covenants. As a result, the lender has the right to demand immediate repayment of the entire amount outstanding. Accordingly, all amounts due this lender have been classified as a current liability at September 30, 1998. In connection with obtaining modifications to the note agreement, the Company was required to reserve, out of its cash balances, one year's worth of debt service payments of approximately $173,000. During 1998, management of the Company decided to list the building for sale. Although the current facility is satisfactory, management believes that certain production efficiencies can be achieved by utilizing single- or double-level production space as opposed to the existing high-rise configuration. Management of the Company believes that the building will be sold during 1998 or early 1999 at an amount exceeding net book value and, accordingly, the carrying value of the land, building and associated improvements have been classified as a current asset held for sale at September 30, 1998. The Company would be required to pay the mortgage note payable with proceeds from the disposition of the building. In November 1998, the Company entered into a contract to sell the building for an amount in excess of its net book value and the related mortgage note payable. The contract includes provisions for the buyer to lease the building back to the Company on a short-term basis while the Company locates a replacement facility. Management of the Company believes that suitable replacement facilities will be available. On March 31, 1998, the Company received notice that it was subject to delisting on the NASDAQ SmallCap Market System because the Company's average closing bid price per share had not exceeded $1.00 during the prior 30-day period. The Company effected a one-to-four reverse split of its common stock on June 12, 1998. On June 29, 1998, the Company received notification that the Company was deemed to be in compliance with the new bid requirement for continued listing on The Nasdaq Stock MarketSM. On June 18, 1998, the Company announced the board of directors authorized the repurchase of up to 500,000 shares of its common stock in the open market. Through October 28, 1998, the Company had repurchased 33,500 such shares at prices varying from $29/32 to $2-1/16. The efficient operations of the Company's business is dependent on its computer software programs and operating systems (collectively, Programs and Systems). These Programs and Systems are used in several key areas of the Company's business, including information management services and financial reporting, as well as in various administrative functions. The Company has been evaluating its Programs and Systems to identify potential year 2000 compliance problems, as well as manual processes, external interfaces with customers and services supplied by vendors to coordinate year 2000 compliance and conversion. The year 2000 problem refers to the limitations of the programming code in certain existing software programs to recognize data-sensitive information for the year 2000 and beyond. Unless modified prior to the year 2000, such systems may not properly recognize such information and could generate erroneous data or cause a system to fail to operate properly. -15- DOCUCON, INCORPORATED MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Based on current information, the Company expects to attain year 2000 compliance and institute appropriate testing of its modifications and replacements in a timely fashion and in advance of the year 2000 date change. It is anticipated that modification or replacement of the Company's Programs and Systems will be performed in-house by Company personnel. The Company believes that, with modifications to existing software and conversions to new software, the year 2000 problem will not pose a significant operational problem for the Company. However, because most computer systems are, by their very nature, interdependent, it is possible that noncompliant third-party computers may not interface properly with the Company's computer systems. The Company could be adversely affected by the year 2000 problem if it or unrelated parties fail to successfully address this issue. Management of the Company currently anticipates that the expenses and capital expenditures associated with its year 2000 compliance project will not have a material effect on its financial position or results of operations. -16- PART II - OTHER INFORMATION Item 1. Legal Proceedings - None Item 2. Changes in Securities - None Item 3. Defaults Upon Senior Securities - None Item 4. Submission of Matters to a Vote of Security Holders - Item 5. Other Matters - None Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit 11 - Computation of Earnings Per Share Exhibit 27 - Financial Data Schedule (b) Reports on Form 8-K - None -17- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. DOCUCON, INCORPORATED (Registrant) By /s/ DOUGLAS P. GILL Douglas P. Gill, President and Chief Executive Officer By /s/ LORI TURNER Lori Turner, Chief Financial Officer and Treasurer Dated: November 12, 1998 -18- EX-11 2 EXHIBIT 11 DOCUCON, INCORPORATED COMPUTATION OF EARNINGS PER SHARE (Unaudited)
THREE MONTHS NINE MONTHS ENDED SEPTEMBER 30 ENDED SEPTEMBER 30 ------------------------------------ ----------------------------- 1998 1997 1998 1997 ----------- ----------- ----------- ----------- COMPUTATION OF BASIC EARNINGS (LOSS) PER SHARE: Net income (loss) from continuing operations $(1,993,217) $ (135,587) $(3,062,920) $ 240,303 Less- Preferred stock dividend requirements (6,149) (11,688) (22,649) (36,439) ----------- ----------- ----------- ----------- Net income (loss) from continuing operations applicable to common stockholders ............................. (1,999,366) (147,275) (3,085,569) 203,864 Loss from discontinued operations ......... -- (281,983) -- (639,874) ----------- ----------- ----------- ----------- Net income applicable to common stockholders ............................. $(1,999,366) $ (429,258) $(3,085,569) $ (436,010) =========== =========== =========== =========== WEIGHTED AVERAGE NUMBER OF SHARES OF COMMON STOCK OUTSTANDING ..................... 3,311,951 3,111,827 3,296,970 3,100,368 =========== =========== =========== =========== Basic earnings (loss) from continuing operations per common share ..................................... $ (.60) $ (.05) $ (.94) $ .07 Basic loss from discontinued operations per common share ............... -- (.09) -- (.21) ----------- ----------- ----------- ----------- BASIC EARNINGS (LOSS) PER COMMON SHARE ......... $ (.60) $ (.14) $ (.94) $ (.14) =========== =========== =========== =========== COMPUTATION OF DILUTED EARNINGS (LOSS) PER SHARE: Net income (loss) from continuing operations .................................. $(1,993,217) $ (135,587) $(3,062,920) $ 240,303 Preferred stock dividend requirements ........ (6,149) (11,688) (22,649) (36,439) Increase applicable to common stock for preferred stock dividends not incurred upon assumed conversion of preferred stock ............................. 6,149 11,688 22,649 36,439 ----------- ----------- ----------- ----------- Net income (loss) from continuing operations applicable to common stockholders used for computation ......... (1,993,217) (135,587) (3,062,920) 240,303 Net (loss) from discontinued operations applicable to common stockholders ........... -- (281,983) -- (639,874) ----------- ----------- ----------- ----------- Net income (loss) applicable to common stockholders used for computation ........... $(1,993,217) $ (417,570) $(3,062,920) $ (399,571) =========== =========== =========== =========== Weighted average number of shares of common stock outstanding .................... 3,311,951 3,111,827 3,296,970 3,100,368 Weighted average incremental shares outstanding upon assumed conversion of options and warrants ........................ -- 74,981 17,694 108,153 Weighted average incremental shares outstanding upon assumed conversion of the preferred stock ......................... 78,541 141,665 92,774 146,957 ----------- ----------- ----------- ----------- WEIGHTED AVERAGE NUMBER OF SHARES OF COMMON STOCK AND COMMON STOCK EQUIVALENTS OUTSTANDING USED FOR COMPUTATION .................................. 3,390,492 3,328,473 3,407,438 3,355,478 =========== =========== =========== =========== Diluted earnings (loss) from continuing operations per common share and common share equivalents ........ $ (.59) $ (.04) $ (.90) $ .07 Diluted loss from discontinued operations per common share and common share equivalents .................. -- (.08) -- (.19) ----------- ----------- ----------- ----------- DILUTED EARNINGS (LOSS) PER COMMON SHARE AND COMMON SHARE EQUIVALENTS ................. $ (.59)(a) $ (.12)(a) $ (.90)(a) $ (.12) =========== =========== =========== ===========
(a) This calculation is submitted in accordance with Item 601(b)(11) of Regulation S-K although it is not required by SFAS No. 128 because it is antidilutive. EX-27 3
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM DOCUCON, INCORPORATED'S CONDENSED BALANCE SHEET AS OF SEPTEMBER 30, 1998, AND ITS CONDENSED STATEMENT OF OPERATIONS FOR THE NINE MONTHS THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 9-MOS DEC-31-1998 SEP-30-1998 2,196,675 0 2,749,787 (804,444) 0 5,922,058 4,995,215 (4,631,806) 6,766,781 2,895,580 347,286 0 7 33,424 3,490,484 6,766,781 2,074,764 2,074,764 1,957,368 5,191,637 0 0 112,538 (3,051,920) 11,000 (3,062,920) 0 0 0 (3,085,569) (.94) (.94)
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