-----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, Shj/GFGIJ9roYXr6dOOpC9YzlTLYvgJyvBY7Yg5Jg+r0CQ44GMUUVUTJkgH2iC4m VVGs5ZY1iuBx6R9LOwbNJA== 0000890566-99-000683.txt : 19990518 0000890566-99-000683.hdr.sgml : 19990518 ACCESSION NUMBER: 0000890566-99-000683 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990517 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: 99626951 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 MARCH 31, 1999 -------------------------- 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.) 565 East Swedesford Road Suite 209 Wayne, Pennsylvania 19087 (Address of principal executive offices) (610) 995-9500 (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 April 30, 1999 3,304,214 DOCUCON, INCORPORATED INDEX PAGE PART I. FINANCIAL INFORMATION (UNAUDITED) Item 1: Balance Sheets - March 31, 1999, and December 31, 1998 3 Statements of Operations - For the Three Months Ended March 31, 1999 and 1998 5 Statements of Cash Flows - For the Three Months Ended March 31, 1999 and 1998 6 Notes to Financial Statements 7 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations 11 PART II. OTHER INFORMATION 15 SIGNATURES 16 -2- DOCUCON, INCORPORATED BALANCE SHEETS
March 31, 1999 December 31, ASSETS (Unaudited) 1998 ------------ ------------ CURRENT ASSETS: Cash and temporary cash investments ............. $ 756,858 $ 1,082,321 Accounts receivable-trade, net of allowance for doubtful accounts of $8,887 and $4,444, respectively ............. 377,364 373,366 Unbilled revenues, net of allowance of $1,600,000 404,336 193,722 Other receivables ............................... 376,887 374,379 Prepaid expenses and other ...................... 115,475 123,921 Asset held for sale ............................. -- 1,668,467 ------------ ------------ Total current assets ............. 2,030,920 3,816,176 ------------ ------------ PROPERTY AND EQUIPMENT: Conversion systems .............................. 4,989,205 4,858,930 Building and improvements ....................... 9,476 9,476 Furniture and fixtures .......................... 244,890 243,167 ------------ ------------ Total property and equipment ..... 5,243,571 5,111,573 Less- Accumulated depreciation .................. (4,771,342) (4,704,152) ------------ ------------ Net property and equipment ....... 472,229 407,421 ------------ ------------ OTHER, net ........................................ 60,042 48,896 ------------ ------------ Total assets ..................... $ 2,563,191 $ 4,272,493 ============ ============
The accompanying notes are an integral part of these financial statements. -3- DOCUCON, INCORPORATED BALANCE SHEETS (Continued)
March 31, 1999 December 31, LIABILITIES AND STOCKHOLDERS' EQUITY (Unaudited) 1998 ------------ ------------ CURRENT LIABILITIES: Accounts payable ................................... $ 572,390 $ 218,059 Accrued liabilities ................................ 1,107,364 1,191,351 Deferred revenues .................................. 54,056 40,601 Other current liabilities .......................... 103,127 44,087 Current maturities of long-term debt ............... -- 927,502 Current maturities of capital lease obligations .... 42,959 29,537 ------------ ------------ Total current liabilities ................ 1,879,896 2,451,137 ------------ ------------ CAPITAL LEASE OBLIGATIONS ............................ 96,440 76,141 ------------ ------------ OTHER LONG-TERM OBLIGATIONS .......................... 257,453 269,476 ------------ ------------ COMMITMENTS AND CONTINGENCIES (Note 2) STOCKHOLDERS' EQUITY: Preferred stock, $1.00 par value, 10,000,000 shares authorized- Series A, 60 shares authorized, 7 shares issued and outstanding as of March 31, 1999, and December 31, 1998 ............................... 7 7 Common stock, $.01 par value, 25,000,000 shares authorized; 3,304,214 and 3,306,216 shares outstanding as of March 31, 1999, and December 31, 1998, respectively ................... 33,042 33,062 Additional paid-in capital ......................... 10,021,950 10,027,337 Accumulated deficit ................................ (9,720,516) (8,581,573) Treasury stock, at cost, 4,919 shares and 2,917 shares as of March 31, 1999, and December 31, 1998, respectively ................................ (5,081) (3,094) ------------ ------------ Total stockholders' equity ............... 329,402 1,475,739 ------------ ------------ Total liabilities and stockholders' equity $ 2,563,191 $ 4,272,493 ============ ============
The accompanying notes are an integral part of these financial statements. -4- DOCUCON, INCORPORATED STATEMENTS OF OPERATIONS (Unaudited)
Three Months Ended March 31 -------------------------- 1999 1998 ----------- ----------- OPERATING REVENUES ...................................... $ 851,079 $ 612,996 ----------- ----------- COSTS AND EXPENSES: Production ............................................ 966,077 684,336 Research and development .............................. 63,379 67,751 General and administrative ............................ 515,399 294,438 Marketing ............................................. 421,952 117,223 Depreciation and amortization ......................... 68,035 88,575 ----------- ----------- 2,034,842 1,252,323 ----------- ----------- OPERATING LOSS .......................................... (1,183,763) (639,327) OTHER INCOME (EXPENSE): Interest income ....................................... 21,887 64,025 Interest expense ...................................... (7,561) (36,716) Other, net ............................................ 30,494 (2,473) ----------- ----------- LOSS BEFORE INCOME TAXES ................................ (1,138,943) (614,491) Income tax expense .................................... -- -- ----------- ----------- NET LOSS ................................................ (1,138,943) (614,491) Preferred stock dividend requirements ................. 4,813 8,250 ----------- ----------- NET LOSS APPLICABLE TO COMMON STOCKHOLDERS .............. $(1,143,756) $ (622,741) =========== =========== BASIC AND DILUTED LOSS PER COMMON SHARE ................. $ (.35) $ (.19) =========== =========== WEIGHTED AVERAGE NUMBER OF COMMON SHARES AND COMMON SHARE EQUIVALENTS OUTSTANDING ............................... 3,303,546 3,288,122 =========== ===========
The accompanying notes are an integral part of these financial statements. -5- DOCUCON, INCORPORATED STATEMENTS OF CASH FLOWS (Unaudited)
Three Months Ended March 31 -------------------------- 1999 1998 ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) ................................................. $(1,138,943) $ (614,491) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities- Depreciation and amortization .................................. 68,035 88,575 Gain on sale of assets ......................................... (24,487) -- Changes in current assets and current liabilities- (Increase) decrease in receivables and unbilled revenues ...... (217,120) 464,500 Increase in prepaid expenses and other ........................ (44,575) (22,304) Increase (decrease) in accounts payable and accrued liabilities 365,823 (406,694) Decrease in taxes payable ..................................... -- (66,000) Increase in deferred revenues ................................. 13,455 -- Increase in other current liabilities ......................... 10,406 -- ----------- ----------- Net cash provided by (used in) operating activities ..... (967,406) (556,414) ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures .............................................. (87,922) (33,375) Proceeds from sale of building .................................... 1,782,609 -- ----------- ----------- Net cash used in investing activities ................... 1,694,687 (33,375) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Payments under line of credit ..................................... -- (504,000) Principal payments under capital lease obligations ................ (10,634) (3,090) Net proceeds from exercise of stock options ....................... -- 5,603 Principal payments on long-term debt .............................. (927,502) (7,902) Payment of preferred stock dividends .............................. (88,816) -- Purchase of treasury stock ........................................ (25,792) -- ----------- ----------- Net cash used in financing activities ................... (1,052,744) (509,389) ----------- ----------- NET DECREASE IN CASH AND TEMPORARY CASH INVESTMENTS ................. (325,463) (1,099,178) CASH AND TEMPORARY CASH INVESTMENTS, beginning of period ............ 1,082,321 4,597,183 ----------- ----------- CASH AND TEMPORARY CASH INVESTMENTS, end of period .................. $ 756,858 $ 3,498,005 =========== =========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Noncash investing and financing activities- Capital lease obligations incurred ............................... $ 44,355 $ -- =========== =========== Treasury stock issued for Employee Stock Purchase Plan ........... $ 23,805 $ -- =========== =========== Cash paid during the period for- Interest ......................................................... $ 16,306 $ 37,487 =========== =========== Income taxes ..................................................... $ -- $ 64,225 =========== ===========
The accompanying notes are an integral part of these financial statements. -6- 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 year ended December 31, 1998. 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. The accompanying financial statements of the Company have been prepared on the basis of accounting principles applicable to a going concern. Since its inception, the Company has incurred cumulative net losses of approximately $9.6 million, including a loss of approximately $5.1 million during 1998. For the quarter ended March 31, 1999, the Company had negative cash flows from operating activities of approximately $967,000 and incurred a net loss for the same period of approximately $1.1 million. A significant portion of the Company's historical revenues has been earned from conversion services performed for agencies of the U.S. Government. The Company experienced significant declines in revenues from these agencies in 1997 and 1998, and, during 1998, provided an allowance of $1.6 million on certain unbilled revenues. There can be no assurances that the Company will be able to maintain or increase the level of services that it has historically provided to various governmental agencies. These matters raise substantial doubt about the Company's ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of these uncertainties. The ability of the Company to continue as a going concern is dependent upon the ongoing support of its customers, its ability to obtain capital resources to support operations and its ability to successfully market its services. If the Company is unable to generate positive cash flows from operations or obtain additional capital resources, or if the funds obtained in such efforts are not adequate to support the Company until a successful level of operations is attained, the Company would likely be unable to continue operating as a going concern. While the recent operating losses are significant, management believes that it has taken proper steps to significantly improve the Company's future operating results. Such steps include the sale of its San Antonio office building and repayment of substantially all of the Company's long-term debt in January 1999 and the hiring of experienced management personnel in key senior management positions in late 1998 and early 1999. Expansion of the Company's marketing efforts has been made to include a wide range of vertical markets and -7- DOCUCON, INCORPORATED NOTES TO FINANCIAL STATEMENTS (Continued) formal and informal partnering relationships with systems integrators, document management software developers and others. The Company's management is also seeking suitable financing for working capital, business expansion and other general corporate purposes. The Company's management believes that the Company's results from operations for 1999 are improving and will generate sufficient working capital, along with available cash and anticipated additional capital, to sustain its operations throughout the year. However, there can be no assurances that the Company's efforts in the above areas will continue to improve its operating results. NOTE 2 Unbilled revenues- The allowance for unbilled revenues at March 31, 1999, and December 31, 1998, relates to conversion services performed for agencies of the U.S. Government. The Company's ability to collect 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 informed by a U.S. Government customer in mid-1997 that funding for certain conversion services being performed had been depleted. Management completed work for this customer that had been placed in production at that time. As a result, the Company has been unable to collect approximately $1.6 million of conversion services for this customer, the substantial majority of which were performed during 1997. A substantial portion of the conversion products associated with the $1.6 million of unbilled revenues have been shipped to the customer and is in various stages of quality control review. 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 collect the unbilled revenues. Management of the Company, based upon its past operating history and its ongoing discussions with various government 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 for the entire amount during the year ended December 31, 1998. In the event that the Company collects any of the unbilled revenues in the future, such collections would have a favorable impact on the Company's liquidity and capital resources and results of operations in the period of collection. There are no assurances that the Company will ultimately be able to collect any of the fully reserved unbilled revenues. On February 2, 1999, the Company contacted the Department of Defense's Voluntary Disclosure Program Office to request admission into its Voluntary Disclosure Program. The Voluntary Disclosure Program is intended to encourage government contractors to voluntarily disclose potential violations of government contracting policies and procedures. In general, companies who volunteer information and cooperate with the government's investigation are not subject to criminal and administrative sanctions such as suspension and debarment from government contracting activities. Admission into the Voluntary Disclosure Program does not protect companies from any potential civil liability the government may assert. The Department of Defense Inspector General's preliminary review of the Company's disclosure is complete and has resulted in favorable consideration of its request for admission into the Voluntary Disclosure Program. The disclosure will be formally admitted upon execution by all parties of the Inspector General's Voluntary Disclosure Agreement. -8- DOCUCON, INCORPORATED NOTES TO FINANCIAL STATEMENTS (Continued) The Company's request for admission into the Voluntary Disclosure Program was the result of an internal review by the Company that indicated a billing practice, with respect to certain invoices submitted during the period from September 1996 through July 1997, that may be perceived by the government as a technical violation of DOD billing procedures. The Company's internal review is ongoing, but based on its investigation to date, the Company believes that the DOD sustained no actual damages as a result of the matter disclosed by the Company. However, the Company expects to incur legal and other out-of-pocket costs in connection with presenting the results of its internal review and assisting the government in its investigation, adjudication and resolution of this matter. The Company has established a reserve for estimated legal costs and other expenses which it believes is adequate for the resolution of this matter. NOTE 3 Common stock and preferred stock- Each share of the Company's preferred stock ($25,000 stated value) is convertible into 8,333 shares of common stock and earns cash dividends of 11 percent per annum. Each share of preferred stock is entitled to vote 8,333 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 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 March 31, 1999, cumulative undeclared dividends on the preferred stock approximated $164,000. In January 1999, the Company paid cash of $88,816 related to cumulative dividends on preferred stock that was converted 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 that its board of directors had authorized the repurchase of up to 500,000 shares of the Company's common stock in the open market. As of March 31, 1999, the Company had acquired 62,650 treasury shares for approximately $76,000. Approximately 33,333 of such shares were reissued during 1998 in connection with the conversion of Series A preferred stock, and approximately 24,398 shares were reissued under the Company's Employee Stock Purchase Plan in January 1999. 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 4 Asset held for sale- During 1998, the Company decided to sell its operations building in San Antonio, Texas. In November 1998, the Company entered into a contract to sell the building for an amount in excess of its net book value. Accordingly, the carrying value of the land, building and associated improvements have been classified as a current asset held for sale at December 31, 1998. -9- DOCUCON, INCORPORATED NOTES TO FINANCIAL STATEMENTS (Continued) In January 1999, the Company sold its operations building. In connection with the sale, the Company paid off its secured indebtedness. The Company's net cash proceeds from the sale, net of debt repayments, approximated $800,000. The Company has entered into a noncancelable operating leaseback of the building through October 1999 at a rate of approximately $27,000 per month, before a cancelable month-to-month sublease arrangement of approximately $15,000 per month. The Company has located replacement facilities. The gain on the sale of the building, which was not significant, has been deferred as a component of other current liabilities on the accompanying balance sheet and is being recognized over the term of the operating leaseback. NOTE 5 Earnings (loss) per share- Statement of Financial Accounting Standards No. 128, "Earnings Per Share," outlines methods for computing and presenting earnings per share. 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 Ended March 31 -------------------------- 1999 1998 --------- --------- Weighted average number of common shares outstanding for Basic EPS .............................. 3,303,546 3,288,122 Weighted average incremental shares outstanding upon assumed conversion of dilutive options and warrants .............. -- -- 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 ................ 3,303,546 3,288,122 ========= ========= Potential common shares from assumed conversion of preferred shares excluded as a result of antidilution ................... 58,338 99,999 ========= ========= As the Company had losses for the three months ended March 31, 1999 and 1998, options and warrants have been excluded as they are antidilutive in loss periods. -10- 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 March 31, 1999, resulted in a net loss applicable to common stockholders of approximately $1,144,000 compared to a net loss applicable to common stockholders of approximately $623,000 for the same quarter in 1998. Revenues were approximately $851,000 for the quarter ended March 31, 1999, as compared to approximately $613,000 for the same quarter in 1998. This increase is primarily attributable to new contracts obtained during the first quarter which resulted in a significant increase in production beginning in March 1999. Production costs increased to approximately $966,000 for the quarter ended March 31, 1999, as compared to approximately $684,000 for the 1998 period due primarily to the increased revenue levels. Research and development costs of approximately $63,000 for the quarter ended March 31, 1999, were comparable to approximately $68,000 of such costs in the same period in 1998. General and administrative expenses increased to approximately $515,000 for the quarter ended March 31, 1999, as compared to approximately $294,000 for the same period in 1998. The increase is primarily due to expenses associated with the transition to new senior management and new corporate headquarters office opened in April 1998. Marketing expenses increased to approximately $422,000 for the quarter ended March 31, 1999, as compared to approximately $117,000 for the same period in 1998. This increase is due to extensive new marketing efforts focused on new business development in both the federal and commercial markets and an increase in sales commissions attributable to higher revenue levels. 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, an initial public offering of the Company's Common Stock in 1989, the conversion of warrants into Common Stock and private preferred stock placements. The Company has historically performed a significant percentage of their conversion services for the Department of Defense (DOD) primarily through contracts from the Defense Automated Printing Services Office (DAPS). In December 1997, the DOD awarded a contract with a term of one year for approximately $15.5 million of potential value. The terms of the contract include four additional option years so that the entire contract has a potential value of approximately $77.4 million. As of March 31, 1999, the Company had provided approximately $1.5 million of services under this contract. The nature of this contract is such that it establishes the Company as an approved vendor for projects from DAPS. Since the contract in and of itself does not represent billable production, the Company must still engage in marketing to realize benefits under the contract. -11- DOCUCON, INCORPORATED MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) The Company has an allowance for unbilled receivables at March 31, 1999, of approximately $1.6 million. The Company was informed in mid-1997 that funding for certain conversion services being performed under this delivery order had been depleted. Management completed work in production on this delivery order at that time. As a result of the loss of funding for this delivery order, the Company has been unable to collect approximately $1.6 million of conversion services, the substantial majority of which were performed during 1997. A substantial portion of the conversion products associated with the $1.6 million of unbilled revenues has been shipped to the customer and is in various stages of quality control review. 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 collect the unbilled revenues. Management of the Company, based upon its past operating history and its ongoing discussions with various government personnel regarding the availability of additional funding, believes that all of such unbilled revenues 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 for the entire amount during the year ended December 31, 1998. In the event that the Company collects any of the unbilled revenues in the future, such collections would have a favorable impact on the Company's liquidity and capital resources and results of operations in the period of collection. There are no assurances that the Company will ultimately be able to collect any of the fully reserved unbilled revenues. 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 Docucon, any government agency can buy a wide variety of document conversion services directly from Docucon. The nature of this contract is such that it establishes the Company as an approved vendor for substantially all federal government agencies. Since the contract in and of itself does not represent billable production, the Company must still engage in marketing to realize benefits under the contract. In March 1994, the Company purchased the assets and assumed certain liabilities of J. Feuerstein Systems for approximately $0.2 million cash. In November 1997, the Company sold the assets of the division to Bowne & Co., Inc., for approximately $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. In accordance with the escrow agreement, approximately $400,000 of the total in escrow was released to the Company on November 25, 1998. The remainder was released to the Company in May 1999. 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 line of credit after the 1997 year-end and to fund continuing operations. The Company invested excess proceeds in short-term securities. In October 1996, the Company obtained long-term financing to replace the then existing mortgage note for its office building. The new note bore interest at a fixed rate of 9.5 percent, payable monthly to a commercial bank and was being amortized over a 20-year term with a 5-year maturity. The note was 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 January 1999, the Company sold its operations building in San Antonio, Texas. In connection with the sale, the Company paid off its secured indebtedness. The Company's proceeds from the sale, net of debt repayments, approximated $800,000. The gain on the sale of the building was not significant. -12- DOCUCON, INCORPORATED MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Net cash and cash equivalents at March 31, 1999, were approximately $757,000. Trade accounts receivable, net of allowance for doubtful accounts were approximately $377,000 at March 31, 1999, and unbilled revenues, net of allowance were approximately $404,000. Accounts payable and accrued liabilities were approximately $1.7 million at March 31, 1999. Net working capital was approximately $151,000 at March 31, 1999. The accompanying financial statements of the Company have been prepared on the basis of accounting principles applicable to a going concern. Since its inception, the Company has incurred cumulative net losses of approximately $9.6 million, including a loss of approximately $5.1 million in 1998 and approximately $1.1 million for the three months ended March 31, 1999. For the year ended December 31, 1998, and the quarter ended March 31, 1999, the Company had negative cash flows from operating activities of approximately $2.1 million and $1.0 million, respectively. A significant portion of the Company's historical revenues has been earned from conversion services performed for agencies of the U.S. Government. The Company experienced significant declines in revenues from these agencies in 1998 and 1997. There can be no assurances that such revenues will be increased in the future. These matters raise substantial doubt about the Company's ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of these uncertainties. The ability of the Company to continue as a going concern is dependent upon the ongoing support of its customers, its ability to obtain capital resources to support operations and its ability to successfully market its services. If the Company is unable to generate positive cash flows from operations or obtain additional capital resources, or if the funds obtained in such efforts are not adequate to support the Company until a successful level of operations is attained, the Company would likely be unable to continue operating as a going concern. While the recent operating losses are significant, management believes that it has taken proper steps to significantly improve the Company's future operating results. Such steps include the sale of its San Antonio office building and repayment of substantially all of the Company's long-term debt in January 1999 and the hiring of experienced management personnel in key senior management positions in late 1998 and early 1999. Expansion of the Company's marketing efforts has been made to include a wide range of vertical markets and formal and informal partnering relationships with systems integrators, document management software developers and others. The Company's management is also seeking suitable financing for working capital, business expansion and other general corporate purposes. The Company's management believes that the Company's results from operations for 1999 are improving and will generate sufficient working capital, along with available cash and anticipated additional capital, to sustain its operations throughout the year. However, there can be no assurances that the Company's efforts in the above areas will improve its operating results. 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 additional outside capital to consummate such transactions. On March 10, 1999, 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 notice provides that the Company's shares are subject to delisting 90 days after receipt of the notice, unless the per share bid price of the Company's Common Stock is $1.00 or greater for 10 consecutive trading days within the 90-day period. In addition, the Company may be subject to delisting due to a failure to meet the NASDAQ's minimum tangible net assets requirement for continued listing. -13- DOCUCON, INCORPORATED MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) YEAR 2000 COMPLIANCE The efficient operation of the Company's business is dependent on its computer software programs and operating systems (collectively, "Programs and Systems"). These Programs and Systems are used in several key areas of the Company's business, including information management services and financial reporting, as well as in various administrative functions. The Company has been evaluating its Programs and Systems to identify potential Year 2000 compliance problems, as well as manual processes, external interfaces with customers, and services supplied by vendors to coordinate Year 2000 compliance and conversion. The Year 2000 problem refers to the limitations of the programming code in certain existing software programs to recognize data sensitive information for the Year 2000 and beyond. Unless modified prior to the Year 2000, such systems may not properly recognize such information and could generate erroneous data or cause a system to fail to operate properly. Based on current information, the Company expects to attain Year 2000 compliance and institute appropriate testing of its modifications and replacements in a timely fashion and in advance of the Year 2000 date change. It is anticipated that modification or replacement of the Company's Programs and Systems will be performed in-house by Company personnel. The Company believes that, with modifications to existing software and conversions to new software, the Year 2000 problem will not pose a significant operational problem for the Company. However, because most computer systems are, by their very nature, interdependent, it is possible that noncompliant third-party computers may not interface properly with the Company's computer systems. The Company could be adversely affected by the Year 2000 problem if it or unrelated parties fail to successfully address this issue. Management of the company currently anticipates that the expenses and capital expenditures associated with its Year 2000 compliance project will not have a material effect on its financial position or results of operations. OUTLOOK During much of 1998 and continuing into the first quarter of 1999, the Company has made several changes in its senior management team and has been focused on initiating a strategy that it believes will more fully capitalize on the Company's core competencies in high volume, automated document conversion services. The Company hired a new president and CEO in April 1998 and added a new senior vice president and chief financial officer and vice president of technology and operations in December 1998 and January 1999, respectively. In addition, during 1998, the Company hired a senior vice president of sales and six full-time sales professionals to focus on new business development in both the Federal Government and commercial markets. With its existing contracts with the DOD and the GSA, the Company believes it is well positioned to service the Federal Government customers that have historically comprised a majority of the Company's revenues. In addition, the Company believes that its newly developed commercial sales force will significantly enhance its ability to penetrate non-Federal Government markets. The Company believes that the turnaround plan it initiated in 1998, which included a substantial investment in a sales and marketing organization, began to generate improved operating results late in the first quarter of 1999. Revenues for the month of March 1999 exceeded $450,000, more than double the average amount of monthly revenues during 1998 and the first two months of 1999. This increase in revenues contributed to a sharp reduction in the Company's loss from operations in the month of March 1999. The Company believes it can sustain or increase this higher revenue level during the remainder of 1999 and into 2000. -14- PART II - OTHER INFORMATION Item 1. Legal Proceedings On February 2, 1999, the Company contacted the Department of Defense's Voluntary Disclosure Program Office to request admission into its Voluntary Disclosure Program. The Voluntary Disclosure Program is intended to encourage government contractors to voluntarily disclose potential violations of government contracting policies and procedures. In general, companies who volunteer information and cooperate with the government's investigation are not subject to criminal and administrative sanctions such as suspension and debarment from government contracting activities. Admission into the Voluntary Disclosure Program does not protect companies from any potential civil liability the government may assert. The Department of Defense Inspector General's preliminary review of the Company's disclosure is complete and has resulted in favorable consideration of its request for admission into the Voluntary Disclosure Program. The disclosure will be formally admitted upon execution by all parties of the Inspector General's Voluntary Disclosure Agreement. The Company's request for admission into the Voluntary Disclosure Program was the result of an internal review by the Company that indicated a billing practice, with respect to certain invoices submitted during the period from September 1996 through July 1997, that may be perceived by the government as a technical violation of DOD billing procedures. The Company's internal review is ongoing, but based on its investigation to date, the Company believes that the DOD sustained no actual damages as a result of the matter disclosed by the Company. However, the Company expects to incur legal and other out-of-pocket costs in connection with presenting the results of its internal review and assisting the government in its investigation, adjudication and resolution of this matter. The Company has established a reserve for estimated legal costs and other expenses which it believes is adequate for the resolution of this matter. Item 2. Changes in Securities - None Item 3. Defaults Upon Senior Securities - None Item 4. Submission of Matters to a Vote of Security Holders - None 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 -15- 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/ WARREN D. BARRATT Warren D. Barratt, Senior Vice President, Chief Financial Officer and Treasurer Dated: May 17, 1999 -16- EX-11 2 EXHIBIT 11 DOCUCON, INCORPORATED COMPUTATION OF EARNINGS PER SHARE (Unaudited)
Three Months Ended March 31 ----------------------------- 1999 1998 ----------- ----------- COMPUTATION OF BASIC EARNINGS (LOSS) PER SHARE: Net income (loss) ..................................... $(1,138,943) $ (614,491) Less- Preferred stock dividend requirements .......... (4,813) (8,250) ----------- ----------- Net income (loss) applicable to common stockholders .. $(1,143,756) $ (622,741) =========== =========== WEIGHTED AVERAGE NUMBER OF SHARES OF COMMON STOCK OUTSTANDING ........................................... 3,303,546 3,288,122 =========== =========== BASIC EARNINGS (LOSS) PER COMMON SHARE .................. $ (.35) $ (.19) =========== =========== COMPUTATION OF DILUTED EARNINGS (LOSS) PER SHARE: Net income (loss) ..................................... $(1,138,943) $ (614,491) Preferred stock dividend requirements ................. (4,813) (8,250) Increase applicable to common stock for preferred stock dividends not incurred upon assumed conversion of preferred stock ................................... 4,813 8,250 ----------- ----------- Net income (loss) applicable to common stockholders used for computation ................................. $(1,138,943) $ (614,491) =========== =========== Weighted average number of shares of common stock outstanding .......................................... 3,303,546 3,288,122 Weighted average incremental shares outstanding upon assumed conversion of options and warrants ........... 322 82,955 Weighted average incremental shares outstanding upon assumed conversion of the preferred stock ............ 58,331 99,999 ----------- ----------- WEIGHTED AVERAGE NUMBER OF SHARES OF COMMON STOCK AND COMMON STOCK EQUIVALENTS OUTSTANDING USED FOR COMPUTATION ........................................... 3,362,199 3,471,076 =========== =========== DILUTED EARNINGS (LOSS) PER COMMON SHARE AND COMMON SHARE EQUIVALENTS ........................................... $ (.34)(a) $ (.18)(a) =========== ===========
(a) This calculation is submitted in accordance with Item 601(b)(11) of Regulation S-K although it is not required by SFAS No. 128 because it is antidilutive. EX-27 3
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM DOCUCON, INCORPORATED'S CONDENSED BALANCE SHEET AS OF MARCH 31, 1999, AND ITS CONDENSED STATEMENT OF OPERATIONS FOR THE THREE MONTHS THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 3-MOS DEC-31-1999 MAR-31-1999 756,858 0 2,767,474 1,608,887 0 2,030,920 5,243,571 (4,771,342) 2,563,191 1,879,896 353,893 0 7 33,042 296,353 2,563,191 851,079 851,079 966,077 2,034,842 0 0 7,561 (1,138,943) 0 (1,138,943) 0 0 0 (1,138,943) (.35) (.35)
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