-----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, LV7GmYmjSkV8xmmrKbyVG48ISyZnC3lm/otWaYYwLi3av1vv3TgGSYsq9wvjXCDW AG2MBQ0APnByyTPjf73Y5w== /in/edgar/work/20000815/0000909143-00-000249/0000909143-00-000249.txt : 20000922 0000909143-00-000249.hdr.sgml : 20000921 ACCESSION NUMBER: 0000909143-00-000249 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20000630 FILED AS OF DATE: 20000815 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DOCUCON INCORPORATED CENTRAL INDEX KEY: 0000843006 STANDARD INDUSTRIAL CLASSIFICATION: [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: 703407 BUSINESS ADDRESS: STREET 1: 140 E HOUSTON ST SUITE 200 CITY: SAN ANTONIO STATE: TX ZIP: 78205 BUSINESS PHONE: 2105259221 MAIL ADDRESS: STREET 1: 140 E HOUSTON ST SUITE 200 CITY: SAN ANTONIO STATE: TX ZIP: 78205 10QSB 1 0001.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB (Mark One) [X] Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Quarterly Period Ended June 30, 2000 ---------------------------- 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.) 8 Airport Park Boulevard Latham, New York 12110 (Address of principal executive offices) (518) 786-7733 (Issuer's telephone number) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ---- --- State the number of shares outstanding of each of the issuer's classes of common equity as of August 9, 2000 3,658,767 ------------------- DOCUCON, INCORPORATED --------------------- INDEX ------ Page ---- PART I. FINANCIAL INFORMATION (Unaudited) - ------- --------------------------------- Item 1: Balance Sheets - June 30, 2000, and December 31, 1999 3 Statements of Operations - For the Three and Six Months Ended June 30, 2000 and 1999 5 Statements of Cash Flows - For the Six Months Ended June 30, 2000 and 1999 6 Notes to Financial Statements 7 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations 13 PART II. OTHER INFORMATION 17 - -------- ----------------- SIGNATURES 19 - ---------- -2- DOCUCON, INCORPORATED BALANCE SHEETS June 30, 2000 December 31, ASSETS (Unaudited) 1999 ---------- ---------- CURRENT ASSETS: Cash and temporary cash investments $590,334 $ 28,835 Escrow account 251,149 - Prepaid expenses and other 11,749 13,323 Deposits - 73,249 -------- -------- Total current assets 853,232 115,407 -------- -------- PROPERTY AND EQUIPMENT: Office equipment 129,802 129,802 Furniture and fixtures 1,000 37,445 Leasehold improvements - 26,680 -------- -------- Total property and equipment 130,802 193,927 Less- Accumulated depreciation and amortization (52,302) (66,069) -------- -------- Net property and equipment 78,500 127,858 -------- -------- OTHER, net - -------- 9,653 -------- NET LONG-TERM ASSETS OF DISCONTINUED OPERATIONS - 291,888 -------- -------- Total assets $931,732 $544,806 ======== ======== The accompanying notes are an integral part of these financial statements. -3- DOCUCON, INCORPORATED BALANCE SHEETS (Continued) June 30, December 31, 2000 LIABILITIES AND STOCKHOLDERS' (Unaudited) 1999 EQUITY (DEFICIT) ----------- ----------- CURRENT LIABILITIES: Accounts payable $ 36,270 $ 156,219 Accrued liabilities 119,141 324,542 Retirement benefit payable 37,834 45,886 Payable to TAB Products Co. 204,895 - Income taxes payable 100,000 - Current maturities of capital leases 8,610 8,124 Related-party notes 108,333 254,335 Net current liabilities of discontinued operations - 1,422,072 ----------- ------------ Total current liabilities 615,083 2,211,178 ----------- ------------ CAPITAL LEASE OBLIGATIONS 10,527 14,957 ----------- ------------ OTHER LONG-TERM OBLIGATIONS - 226,310 ----------- ------------ COMMITMENTS AND CONTINGENCIES (Note 8) STOCKHOLDERS' EQUITY (DEFICIT): Preferred stock, $1.00 par value, 10,000,000 shares authorized- Series A, 60 shares authorized, 7 shares issued and outstanding as of June 30, 2000, and December 31, 1999 7 7 Common stock, $.01 par value, 25,000,000 shares authorized; 3,658,767 shares and 3,508,767 shares outstanding as of June 30, 2000, and December 31, 1999, respectively 36,588 35,088 Additional paid-in capital 10,145,928 10,209,903 Accumulated deficit (9,872,165) (12,148,401) Treasury stock, at cost, 4,495 shares (4,236) (4,236) ----------- ------------ Total stockholders' equity (deficit) 306,122 (1,907,639) ----------- ------------ Total liabilities and stockholders' equity (deficit) $ 931,732 $ 544,806 =========== ============ The accompanying notes are an integral part of these financial statements. -4- DOCUCON, INCORPORATED STATEMENTS OF OPERATIONS (Unaudited) Three Months Six Months Ended June 30 Ended June 30 --------------------------- --------------------------- 2000 1999 2000 1999 -------------- ----------- ------------ ------------- OPERATING REVENUES $ - $ - $ - $ - ----------- ---------- ---------- ------------ COSTS AND EXPENSES: General and administrative 259,972 353,880 750,034 774,074 Depreciation and amortization 5,379 3,888 10,881 7,495 ----------- ---------- ---------- ------------ 265,351 357,768 760,915 781,569 ----------- ---------- ---------- ------------ OPERATING LOSS FROM CONTINUING OPERATIONS (265,351) (357,768) (760,915) (781,569) OTHER INCOME (EXPENSE): Interest expense (15,529) - (24,266) - Interest income 1,149 - 1,149 - ----------- ---------- ---------- ---------- LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES (279,731) (357,768) (784,032) (781,569) INCOME TAX EXPENSE - - - - ----------- ---------- ---------- ----------- NET LOSS FROM CONTINUING OPERATIONS (279,731) (357,768) (784,032) (781,569) PREFERRED STOCK DIVIDEND REQUIREMENTS 4,813 4,813 9,625 9,625 ----------- ---------- ---------- ------------ NET LOSS FROM CONTINUING OPERATIONS APPLICABLE TO COMMON STOCKHOLDERS (284,544) (362,581) (793,657) (791,194) LOSS FROM DISCONTINUED OPERATIONS (407,003) (341,140) (913,510) (1,056,282) GAIN ON DISPOSAL OF OPERATING ASSETS, net of income tax expense of $100,000 3,973,778 - 3,973,778 - ----------- ---------- ---------- ------------ NET INCOME (LOSS) APPLICABLE TO COMMON STOCKHOLDERS $3,282,231 $ (703,721) $2,266,611 $ (1,847,476) ========== ========== ========== ============ BASIC AND DILUTED LOSS FROM CONTINUING OPERATIONS PER COMMON SHARE $ (.08) $ (.11) $(.23) $ (.24) BASIC AND DILUTED INCOME (LOSS) FROM DISCONTINUED OPERATIONS PER COMMON SHARE 1.00 (.10) .87 (.32) ---------- --------- ---------- ------------ BASIC AND DILUTED INCOME (LOSS) PER COMMON SHARE $ .92 $ (.21) $ .64 $ (.56) ========== ========= ========== ============ WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 3,558,218 3,327,633 3,516,918 3,315,654 ========== ========= ========== ============
The accompanying notes are an integral part of these financial statements. -5- DOCUCON, INCORPORATED STATEMENTS OF CASH FLOWS (Unaudited) Six Months Ended June 30 ------------------------ 2000 1999 ------------ ---------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss from continuing operations $(784,032) $(781,569) Adjustments to reconcile net loss from continuing operations to net cash used in operating activities- Depreciation and amortization 10,881 8,728 Common stock issued to officer 22,838 - Loss on sale or abandonment of assets 25,222 - Gain on retirement debt forgiveness (156,444) - Changes in current assets and current liabilities- Decrease (increase)in prepaid expenses and other 84,475 (15,307) (Decrease) increase in accounts payable and accrued liabilities (43,154) 115,611 --------- --------- Net cash used in operating activities (840,214) (672,537) ---------- --------- NET CASH PROVIDED BY (USED IN) DISCONTINUED OPERATIONS 1,692,190 (99,971) ---------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures - (26,818) ---------- --------- Net cash used in investing - (26,818) activities ---------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from short-term notes 1,075,000 - Principal payments on short-term notes (1,075,000) - Principal payments on long-term debt and (286,533) (22,590) other obligations Principal payments under capital lease obligations (3,944) - Payment of preferred stock dividends - (88,816) Purchase of treasury stock - (25,792) ---------- --------- Net cash used in financing activities (290,477) (137,198) ---------- --------- NET INCREASE (DECREASE) IN CASH AND TEMPORARY CASH INVESTMENTS 561,499 (936,524) CASH AND TEMPORARY CASH INVESTMENTS, beginning of period 28,835 1,082,321 ---------- --------- CASH AND TEMPORARY CASH INVESTMENTS, end of period $ 590,334 $ 145,797 ========== ========= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Noncash investing and financing activities- Cancellation of warrants issued in connection with related-party debt $ 85,313 $ - ========== ========= Capital lease obligations incurred $ - $ 44,355 ========== ========= Treasury stock issued for Employee Stock Purchase Plan $ - $ 23,805 ========== ========= Stock issued in satisfaction of accrued liabilities $ - $ 85,701 ========== ========= Cash paid during the period for- Interest $ 30,174 $ 7,923 ========== ========= Income taxes $ - $ - ========== ========= 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, 1999. Certain reclassifications have been made in the prior period financial statements to conform with the current period presentation. Pursuant to Rule 10-01(d) of Regulation S-X recently adopted by the U.S. Securities and Exchange Commission, registrants must obtain an independent auditor's review of the financial information included in quarterly reports on Form 10-Q or 10-QSB for all fiscal quarters ended on or after March 15, 2000. The Company did not obtain such a review in connection with the filing of its Form 10-QSB for the quarter ended March 31, 2000. However, the Company is aware of its obligations under Rule 10-01(d) and will comply with such obligations in the future. 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 $9.9 million, including losses of approximately $3.6 million in 1999 and approximately $0.8 million from continuing operations in the first six months of 2000. For the year ended December 31, 1999, and the six months ended June 30, 2000, the Company had negative cash flows from operating activities of approximately $2.7 million and $0.8 million, respectively. In addition, as discussed in Note 9, the Company sold substantially all of its operating assets to TAB Products Co (TAB) during the second quarter of 2000. 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. NOTE 2 - ------ Allowance for unbilled revenues- Included as a component of net current liabilities of discontinued operations is a current asset, unbilled revenues, net of an allowance. The allowance for unbilled revenues relates to conversion services performed for agencies of the U.S. Government. The Company's ability to collect these unbilled revenues was dependent -7- 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 the work that had been placed in production for this customer. As a result, the Company was unable to collect for 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 were shipped to the customer and is in various stages of quality control review. Management of the Company believes that a significant portion of such unbilled revenues represent valid assets. However, due to the continued aging of the unbilled revenues, the Company believed it was appropriate to provide an allowance on these unbilled revenues for the entire amount during the year ended December 31, 1998. The unbilled revenues and related allowance for unbilled revenues were a component of the net operating assets sold in the transaction described in Note 9. 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. 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. The Company cannot make distributions to common stockholders until cumulative undeclared dividends on the preferred stock are paid. As of June 30, 2000, cumulative undeclared dividends on the preferred stock approximated $188,000. 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. The Company has never paid cash dividends on its common stock. 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. From June 19, 1998, through December 31, 1998, the Company acquired 36,250 treasury shares for approximately $50,000. Approximately 33,333 of such shares were reissued during 1998 in connection with the conversion of Series A preferred stock. In 1999, the Company acquired 26,400 treasury shares for approximately $26,000, of which 24,822 shares were reissued pursuant to the Company's Employee Stock Purchase Plan. NOTE 4 - ------ Property and equipment- In January 1999, the Company sold its San Antonio operations center building. In connection with the sale, the Company paid off the remaining balance of the related secured indebtedness. The Company's net cash proceeds from the sale, net of debt repayments, approximated $800,000. The Company entered into a noncancelable operating leaseback of the building through December 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 gain on the sale of the building was deferred and was recognized over the term of the operating leaseback as a component of other income. The Company moved into a new operations facility in December 1999. -8- In May 2000, the Company completed an agreement with the lessor for early termination of the lease of the Company's corporate headquarters. Pursuant to this agreement, the Company paid the lessor approximately $131,000 from the TAB proceeds at closing and gave up its rights to security deposits in the amount of approximately $51,000. Accelerated rent in the approximate amount of $96,000 is reflected as a component of the loss from continuing operations in the quarter and six months ended June 30, 2000. 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. Because the Company had losses from continuing operations during the quarters and six months ended June 30, 2000 and 1999, options, warrants and shares from the assumed conversion of preferred stock were excluded as they are antidilutive in periods with losses from continuing operations. NOTE 6 - ------ Accounts receivable financing- On June 18, 1999, the Company entered into an accounts receivable purchase agreement (the Financing Agreement) with Silicon Valley Bank (SVB). Under the terms of the agreement as amended, the Company was eligible to receive funding from SVB for up to $1,500,000 of eligible accounts receivable with full recourse by SVB to the Company. The Company received cash advances from the eligible receivables equal to the face amount of the eligible receivables financed, less a reserve established by SVB of not less than 20 percent of the aggregate face amount of the receivables. The Company was obligated to repay on demand the unpaid portion of any receivable financed by SVB under certain conditions including (i) an account receivable that remained uncollected 90 calendar days after the invoice date, (ii) the bankruptcy or insolvency of any account debtor or (iii) any breach of the Financing Agreement by the Company. During the fourth quarter of 1999, and subsequent to December 31, 1999, the Company was in technical default under certain provisions of the Financing Agreement. While SVB did not make a declaration of default or demand for payment, it had the right to do so under the provisions of the Financing Agreement. Pursuant to the agreement discussed in Note 9, TAB assumed the accounts receivable financing obligation in the net amount of approximately $636,000 and related accrued interest and fees in the amount of $55,831. The Company was released from the terms of the Financing Agreement when TAB promptly paid the obligation, interest and fees. The interest and fees are reported as a component of net loss from discontinued operations in the quarter and six months ended June 30, 2000. NOTE 7 - ------ Related-party loan transaction- On September 29, 1999, two directors of the Company loaned the Company an aggregate of $325,000. The promissory notes (the Notes) issued in conjunction with these loans carried a 12 percent annual interest rate. Principal and interest on the Notes were payable on the earlier of (i) September 28, 2000, or (ii) within 10 days of an equity-based-financing (the Financing), as defined. In conjunction with the Notes, the two directors were issued an aggregate of 243,750 warrants to purchase common stock of the Company. Pursuant to an agreement with the two directors, the warrants were canceled and interest payable on these related-party loans was waived upon consummation of the transaction with TAB described in Note 9. -9- Related-party transaction- In May 2000, as consideration for acceptance of service as the Company's president the Company's board of directors authorized the issuance of 150,000 shares of the Company's common stock to a company in which the Company's president has material ownership. The stock was fully vested on June 1, 2000, and the fair value on date of grant has been recorded as a component of general and administrative expenses for the three and six months ended June 30, 2000. NOTE 8 - ------ Commitments and contingencies- 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 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, might be perceived by the government as a technical violation of Department of Defense (DOD) billing procedures. As described in Note 2, the unbilled revenues related to this matter were sold. However, the Company remains contingently liable as further described below. The DOD Inspector General formally admitted the Company into the Voluntary Disclosure Program in June 1999 and commenced its investigation of the Company's voluntary disclosure in the second half of that year. In February 2000, Company counsel was orally advised that the Government's investigation of the Company's voluntary disclosure is complete and that criminal prosecution has been declined. While the Company remains potentially liable for civil damages, it does not believe that it is probable that material civil damages, if any, will ultimately be assessed. The Company is involved in various claims and legal actions arising in the ordinary course of business. The Company believes it is unlikely that the final outcome of any of the claims or proceedings to which the Company is a party, including those described above, would have a material adverse effect on the Company's financial position or results of operations; however, due to the inherent uncertainty of litigation, there can be no assurance that the resolution of any particular claim or proceeding would not have a material adverse effect on the Company's results of operations for the fiscal period in which such resolution occurred. Except as noted above, no material actions are currently pending against the Company. The Company maintains general liability insurance and other insurance coverages that it believes to be adequate and typical in the industry. NOTE 9 - ------ Discontinued operations- In May 2000, the Company's shareholders approved the sale of substantially all of its operating assets to TAB for cash of approximately $2.7 million and the assumption of approximately $2.3 million of operating liabilities, resulting in a pre tax gain of approximately $4.1 million. As a result, the operating activity related to the -10- operating assets and liabilities has been accounted for as a discontinued operation and, accordingly, the Company has restated its financial statements for all periods reported in accordance with Accounting Principles Board Opinion No. 30. The following table provides certain information related to the discontinued operations: Three Months Six Months Ended June 30 Ended June 30 ------------------------ --------------------------- 2000 1999 2000 1999 ------------ ---------- ------------- ------------ Revenues $ 429,117 $1,613,055 $1,213,204 $ 2,464,134 ========== ========== ========== ============ Loss from discontinued operations $ (407,003) $ (341,140) $ (913,510) $ (1,056,282) ========== ========== ========== ============ Gain on disposal of discontinued operations, net of income tax expense of $100,000 $3,973,778 $ - $3,973,778 $ - ========== ========== ========== ============
The components of net current liabilities and net long-term assets of discontinued operations at December 31, 1999, are shown below: Accounts receivable, net $ 992,243 Unbilled revenue, net 523,014 Prepaid expenses and other 100,834 Accounts payable (1,229,416) Accrued liabilities (862,140) Current maturities of capital leases (47,603) Secured indebtedness (899,004) ------------ Net current liabilities of discontinued operations $ (1,422,072) ============ Property and equipment, net $334,486 Other, net 17,647 Capital lease obligations (60,245) ------------ Net long-term assets of discontinued operations $ 291,888 ============ In conjunction with entering into a nonbinding letter of intent in January 2000, and definitive asset purchase agreement (TAB Asset Purchase Agreement), in March 2000, TAB loaned the Company cash evidenced by secured promissory notes in the amount of $1,075,000 to fund working capital deficits. This amount, plus accrued interest, was deducted from cash proceeds at closing. In addition, in accordance with the TAB Asset Purchase Agreement, promptly after closing, the Company paid from the cash proceeds substantially all liabilities not assumed by TAB, except for certain amounts due under employment agreements with certain Company officers, a retirement obligation due to a former officer of the Company and the related-party loans discussed in Note 7. Prior to the closing of the TAB transaction, certain Company officers and a former Company officer agreed to reductions in the amounts due under employment agreements and a retirement agreement, respectively, among other terms. The two directors of the Company who had loaned the Company an aggregate of $325,000 agreed to waive the accrued interest due on the notes and to the cancellation of the related warrants (as described in Note 7), among other terms. In accordance with these revised agreements, the Company paid two-thirds of the obligations promptly after closing and the remaining one-third will be satisfied upon release of the escrow fund, described below, from available cash less a reasonable provision for any net costs necessary to wind-down and/or dispose of the Company. Under the terms of the TAB Asset Purchase Agreement, TAB paid $250,000 of the purchase price into an Escrow Fund (Escrow Fund) for the purposes of indemnifying TAB from certain "Indemnifiable losses," as defined therein, including any failure of Company to discharge any liability not assumed by TAB. The escrow balance -11 will be released in November 2000, net of any indemnification claims that have been agreed to by TAB and the Company and any unresolved claims. The Company believes that it will receive the escrowed amount in its entirety. Unresolved claims will be satisfied or the related escrow balance released after the claims resolution procedure detailed in the TAB Asset Purchase Agreement has been completed. At June 30, 2000, the Company owed TAB approximately $205,000 consisting primarily of the Company's cash balances that were acquired by TAB as well as certain purchase price adjustments to the net assets acquired by TAB pursuant to the TAB Asset Purchase Agreement. These amounts will be paid upon final agreement of the parties. Pursuant to the TAB Asset Purchase Agreement, TAB acquired substantially all of the Company's operating assets and assumed substantially all of the Company's operating liabilities. Consequently, the Company's on- going activities are related to the efforts to realize value, if any, from the remaining assets (which may include the Company's publicly traded "shell"), payment of remaining liabilities including income taxes, and a potential distribution to shareholders. Because the value to be realized from the remaining assets, the amount of the remaining liabilities and the net balance to be released from the Escrow Fund are uncertain, the amount of cash that will ultimately be available for distribution to stockholders, if any, is not determinable at this time. -12- DOCUCON, INCORPORATED MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS In May 2000, the Company sold substantially all of its operating assets to TAB Products Co. (TAB), for cash of approximately $2.7 million and the assumption of approximately $2.3 million of operating liabilities, resulting in a pretax gain of approximately $4.1 million. As a result, the operating activity related to the operating assets and liabilities has been accounted for as a discontinued operation. Consequently, the Company's ongoing activities are related to efforts to realize value, if any, from the remaining assets (which may include the Company's publicly traded "shell"), payment of remaining liabilities, including income taxes and a potential distribution to shareholders. The Company does not expect to have future operating revenues and related operating costs and expenses. The Company reported net income applicable to common stockholders of approximately $3,282,000 and approximately $2,267,000, in the quarter and six months ended June 30, 2000, respectively. The Company reported a net loss applicable to common stockholders of approximately $(704,000) and approximately $(1,847,000) in the quarter and six month periods ended June 30, 1999, respectively. The improvement in both 2000 periods was due to the net gain of approximately $3,974,000 from the sale of the Company's operating assets to TAB as described above and in Note 9. The Company reported a net loss from continuing operations applicable to common stockholders of approximately $(285,000) and approximately $(794,000) in the quarter and six months ended June 30, 2000, as compared to losses of approximately $(363,000) and approximately $(791,000) in the 1999 periods. The reduction of the loss in the 2000 quarter was due to an approximately $156,000 gain from partial forgiveness of a retirement obligation. Discontinued operations produced losses of approximately $(407,000) and approximately $(341,000) in the quarters ended June 30, 2000 and 1999, respectively, and approximately $(914,000) and approximately $(1,056,000) for the six months ended June 30, 2000 and 1999, respectively. Revenues from discontinued operations were approximately $429,000 and $1,613,000 for the quarters ended June 30, 2000 and 1999, respectively, and approximately $1,213,000 and $2,464,000 for the six months ended June 30, 2000 and 1999, respectively. The decrease for the six months occurred primarily in the second quarter of 2000 and was the result of 37 fewer days of operations in the 2000 period due to the sale of substantially all of the operating assets to TAB in late May. In addition, the 1999 second quarter revenues reflected significant increases in production due to new contracts, compared to the second quarter of 2000 which had production from fewer new contracts. Production costs from discontinued operations were approximately $464,000 for the quarter ended June 30, 2000, as compared to approximately $1,288,000 for the 1999 quarter and approximately $1,242,000 for the six months ended June 30, 2000, as compared to approximately $2,141,000 for the 1999 period. The decreases in the quarter and six-month periods were due to fewer days of operations in the 2000 periods due to the TAB transaction and to lower compensation costs as a result of reduced headcount related to reduced revenue levels. General and administrative expenses, research and development expenses and marketing expenses from discontinued operations all decreased in the quarter and six months ended June 30, 2000, when compared to the same periods in 1999, primarily due to fewer days of operations in the 2000 periods and reduced revenue levels. Interest expense from discontinued operations increased in the quarter and six months ended June 30, 2000, as compared to 1999, due primarily to increased accounts receivable financing. -13- LIQUIDITY AND CAPITAL RESOURCES In May 2000, the Company sold substantially all of its operating assets to TAB for cash of approximately $2.7 million and the assumption of $2.3 million of operating liabilities. Consequently, the Company's primary remaining assets at June 30, 2000, are cash of approximately $590,000, an escrow account in the amount of approximately $251,000 and office equipment with a net book value of approximately $78,000. Remaining liabilities include accounts payable and accrued expenses of approximately $193,000, a payable to TAB in the amount of approximately $205,000, income taxes payable of approximately $100,000, capital lease liability of approximately $19,000 and the related-party notes balance of approximately $108,000. The remaining assets will be used to pay the remaining liabilities, fund efforts to realize value, if any, from the remaining assets and pay a distribution to shareholders, if any. The Company's only current source of liquidity is realization of value from Company assets and there can be no assurance that the remaining assets will yield material value. 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 the work that had been placed in production for this customer. As a result, the Company was unable to invoice and collect for 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 were shipped to the customer and are in various stages of quality control review. Management of the Company believes that a significant portion of such unbilled revenues represent valid assets. However, due to the continued aging of the unbilled revenues, the Company believed it was appropriate to provide an allowance of $1.6 million on these unbilled revenues for the entire amount during the year ended December 31, 1998. The unbilled revenues and related allowance for unbilled revenues were a component of the net operating assets sold in the transaction described in Note 9 and above. In May 2000, the Company completed an agreement with the lessor for early termination of the lease of the Company's corporate headquarters. Pursuant to this agreement, the Company paid the lessor approximately $131,000 from the TAB proceeds at closing and gave up its rights to security deposits in the amount of approximately $51,000. On June 18, 1999, the Company entered into an accounts receivable purchase agreement (the Financing Agreement) with Silicon Valley Bank (SVB). Under the terms of the agreement as amended, the Company was eligible to receive funding from SVB for up to $1,500,000 of eligible accounts receivable with full recourse by SVB to the Company. The Company received cash advances from the eligible receivables equal to the face amount of the eligible receivables financed, less a reserve established by SVB of not less than 20 percent of the aggregate face amount of the receivables. The Company was obligated to repay on demand the unpaid portion of any receivable financed by SVB under certain conditions including (i) an account receivable that remains uncollected 90 calendar days after the invoice date, (ii) the bankruptcy or insolvency of any account debtor or (iii) any breach of the Financing Agreement by the Company. During the fourth quarter of 1999, and subsequent to December 31, 1999, the Company was in technical default under certain provisions of the Financing Agreement. While SVB did not make a declaration of default or demand for payment, it had the right to do so under the provisions of the Financing Agreement. Pursuant to the agreement discussed in Note 9 and above, TAB assumed the accounts receivable financing obligation in the net amount of approximately $636,000 and the related accrued interest and fees in the amount of approximately $56,000. The Company was released from the terms of the Financing Agreement when TAB promptly paid the obligation, interest and fees. -14- On September 29, 1999, two directors of the Company loaned the Company an aggregate of $325,000. The promissory notes (the Notes) issued in conjunction with these loans carried a 12 percent annual interest rate. Principal and interest on the Notes were payable on the earlier of (i) September 28, 2000, or (ii) within 10 days of an equity-based-financing (the Financing), as defined. In conjunction with the Notes, the two directors were issued an aggregate of 243,750 warrants to purchase common stock of the Company. Pursuant to an agreement with the two directors, the warrants were canceled and interest payable on these related-party loans was waived upon consummation of the TAB transaction described above. 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 $9.9 million, including losses of approximately $3.6 million in 1999 and approximately $0.8 million from continuing operations in the first six months of 2000. For the year ended December 31, 1999, and the six months ended June 30, 2000, the Company had negative cash flows from operating activities of approximately $2.7 million and $0.8 million, respectively. In addition, as discussed above, the Company sold substantially all of its operating assets to TAB during the second quarter of 2000. 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. YEAR 2000 COMPLIANCE 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. During 1999, the Company evaluated 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, such systems may not properly recognize such information and could generate erroneous data or cause a system to fail to operate properly. To date, the Company has not experienced any significant problems or disruptions in its operations or management information systems as a result of the year 2000 issue. Although there can be no assurances that it will not encounter any year 2000 issues in the future, the Company believes that the risk of any such issues posing a significant operational problem for the Company is remote. The Company has not incurred significant costs and/or capital expenditures associated with year 2000 compliance and does not expect to incur any significant costs relating to the year 2000 problem in the future. OUTLOOK In May 2000, the Company sold substantially all of its operating assets to TAB Products Co. (TAB), for cash of approximately $2.7 million and the assumption of approximately $2.3 million of operating liabilities, resulting in a pretax gain of approximately $4.1 million. Consequently, the Company's ongoing activities are related to efforts to realize value, if any, from the remaining assets (which may include the Company's publicly traded "shell"), payment of remaining liabilities, including income taxes and a potential distribution to shareholders. The Company does not expect to have future operating revenues and related operating costs and expenses. Because the value to be realized from the remaining assets, the amount of the remaining liabilities and the net balance to be released from the Escrow Fund are uncertain, the amount of cash that will ultimately be available for distribution to stockholders, if any, is not determinable at this time. -15- Prior to the closing of the TAB transaction, certain Company officers and a former Company officer agreed to reductions in the amounts due under employment agreements and a retirement agreement, respectively, among other terms. The two directors of the Company who had loaned the Company an aggregate of $325,000 agreed to waive the accrued interest due on the notes and to the cancellation of the related warrants (as described in Note 7), among other terms. In accordance with these revised agreements, the Company paid two-thirds of the obligations promptly after closing and the remaining one-third will be satisfied upon release of the escrow fund, described below, from available cash less a reasonable provision for any net costs necessary to wind-down and/or dispose of the Company. Under the terms of the TAB Asset Purchase Agreement, TAB paid $250,000 of the purchase price into an Escrow Fund (Escrow Fund) for the purposes of indemnifying TAB from certain "Indemnifiable losses," as defined therein, including any failure of Company to discharge any liability not assumed by TAB. The escrow balance will be released in November 2000, net of any indemnification claims that have been agreed to by TAB and the Company and any unresolved claims. The Company believes that it will receive the escrowed amount in its entirety. Unresolved claims will be satisfied or the related escrow balance released after the claims resolution procedure detailed in the TAB Asset Purchase Agreement has been completed. At June 30, 2000, the Company owed TAB approximately $205,000 consisting primarily of the Company's cash balances that were acquired by TAB as well as certain purchase price adjustments to the net assets acquired by TAB pursuant to the TAB Asset Purchase Agreement. These amounts will be paid upon final agreement of the parties. -16- 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 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, might be perceived by the government as a technical violation of Department of Defense (DOD) billing procedures. As described in Note 2, the unbilled revenues related to this matter were sold. However, the Company remains contingently liable as further described below. The DOD Inspector General formally admitted the Company into the Voluntary Disclosure Program in June 1999 and commenced its investigation of the Company's voluntary disclosure in the second half of that year. In February 2000, Company counsel was orally advised that the Government's investigation of the Company's voluntary disclosure is complete and that criminal prosecution has been declined. While the Company remains potentially liable for civil damages, it does not believe that it is probable that material civil damages, if any, will ultimately be assessed. The Company is involved in various claims and legal actions arising in the ordinary course of business. The Company believes it is unlikely that the final outcome of any of the claims or proceedings to which the Company is a party, including those described above, would have a material adverse effect on the Company's financial position or results of operations; however, due to the inherent uncertainty of litigation, there can be no assurance that the resolution of any particular claim or proceeding would not have a material adverse effect on the Company's results of operations for the fiscal period in which such resolution occurred. Except as noted above, no material actions are currently pending against the Company. The Company maintains general liability insurance and other insurance coverages that it believes to be adequate and typical in the industry. Item 2. Changes in Securities - None Item 3. Defaults Upon Senior Securities - None Item 4. Submission of Matters to a Vote of Security Holders The Annual Meeting of Stockholders of the Company was held on Friday, May 19, 2000. The proposals and the results are listed below: Proposal 1 To elect six directors to serve until the next Annual Meeting of Stockholders and until their successors are duly elected and qualified. Proposal 2 To approve the sale of substantially all operating assets of the Company. -17- PART II - OTHER INFORMATION (Continued) The following persons were nominated for election as directors of the Company, and all nominees were elected. The shares voted for and those withheld from each nominee are set forth below opposite such nominee's name: Shares Director Nominees Shares Voted For Withheld -------------------- ---------------- ------------ Edward P. Gistaro 2,783,347 356,225 Douglas P. Gill 2,753,179 386,393 Ralph Brown 2,767,843 371,729 Al R. Ireton 2,769,797 369,775 Chauncey E. Schmidt 2,782,926 356,646 Robert W. Schwartz 2,753,179 386,393 The shares voted for Proposal 2 were 1,910,484 FOR, 199,236 AGAINST and 10,718 ABSTAIN. 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 - 8-K filed June 9, 2000, reporting the sale of substantially all of the Registrant's operating assets and certain liabilities and obligations to a subsidiary of TAB Products Co. -18- 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/ Robert W. Schwartz ------------------------- Robert W. Schwartz, President and Chief Executive Officer By /s/ MARK G. HARDIN ------------------------ Mark G. Hardin Chief Accounting Officer Dated: August 15, 2000 EX-11 2 0002.txt EXHIBIT 11 DOCUCON, INCORPORATED COMPUTATION OF EARNINGS PER SHARE (Unaudited) Three Months Six Months Ended June 30 Ended June 30 -------------------------- -------------------------- 2000 1999 2000 1999 ------------- ----------- ------------ ----------- COMPUTATION OF BASIC EARNINGS (LOSS) PER SHARE: Net loss from continuing $ (279,731) $ (357,768) $ (784,032) $ (781,569) operations Preferred stock dividend requirements 4,813 4,813 9,625 9,625 ----------- ---------- ---------- ------------ Net loss from continuing operations applicable to common stockholders (284,544) (362,581) (793,657) (791,194) Net earnings (loss) from discontinued operations 3,566,775 (341,140) 3,060,268 (1,056,282) ----------- ---------- ---------- ------------ Net income (loss) applicable to common stockholders $ 3,282,231 $ (703,721) $2,266,611 $ (1,847,476) =========== ========== ========== ============ WEIGHTED AVERAGE NUMBER OF SHARES OF COMMON STOCK OUTSTANDING 3,558,218 3,327,633 3,516,918 3,315,654 ========== ========== ========== ============ BASIC LOSS FROM CONTINUING OPERATIONS PER COMMON SHARE $ (.08) $ (.11) $ (.23) $ (.24) BASIC EARNINGS (LOSS) FROM DISCONTINUED OPERATIONS PER COMMON 1.00 (.10) .87 (.32) SHARE ----------- ---------- ---------- ----------- BASIC EARNINGS (LOSS) PER COMMON $ .92 $ (.21) $ .64 $ (.56) SHARE =========== ========== ========== =========== COMPUTATION OF DILUTED EARNINGS (LOSS) PER SHARE: Net loss from continuing operations $ (279,731) $ (357,768) $ (784,032) $ (781,569) Preferred stock dividend 4,813 4,813 9,625 9,625 requirements Preferred stock dividends not incurred upon assumed conversion of preferred stock (4,813) (4,813) (9,625) (9,625) ----------- ---------- ---------- ------------ Net loss from continuing operations applicable to common stockholders used for computation (279,731) (357,768) (784,032) (781,569) Net earnings (loss) from discontinued operations 3,566,775 (341,140) 3,060,268 (1,056,282) ----------- ---------- ---------- ----------- Net income (loss) applicable to common stockholders used for $ 3,287,044 $ (698,908) $2,276,236 $(1,837,851) computation =========== ========== ========== ============ Weighted average number of shares of common stock outstanding 3,558,218 3,327,633 3,516,918 3,315,654 Weighted average incremental shares outstanding upon assumed conversion of options and warrants 55,971 112 110,203 389 Weighted average incremental shares outstanding upon assumed conversion of the preferred stock 58,331 58,331 58,331 58,331 ----------- ---------- ---------- ------------ WEIGHTED AVERAGE NUMBER OF SHARES OF COMMON STOCK AND COMMON STOCK EQUIVALENTS OUTSTANDING USED FOR COMPUTATION 3,672,520 3,386,076 3,685,452 3,374,374 ============ ========== ========== ============ DILUTED LOSS FROM CONTINUING OPERATIONS PER COMMON SHARE AND COMMON SHARE EQUIVALENTS $ (.08) $ (.11) $ (.21) $ (.23) DILUTED EARNINGS (LOSS) FROM DISCONTINUED OPERATIONS PER COMMON SHARE AND COMMON SHARE EQUIVALENTS .97 (.10) 83 (.31) ------------ ---------- ---------- ----------- DILUTED EARNINGS (LOSS) PER COMMON SHARE AND COMMON SHARE EQUIVALENTS $ .89(a) $ (.21)(a)$ .62(a) $ (.54)(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 0003.txt
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM DOCUCON, INCORPORATED'S CONDENSED BALANCE SHEET AS OF JUNE 30, 2000, AND ITS CONDENSED STATEMENT OF OPERATIONS FOR THE SIX MONTHS THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 6-MOS DEC-31-2000 JAN-01-2000 JUN-30-2000 590,334 0 0 0 0 853,232 130,802 (52,302) 931,732 615,083 10,527 0 7 36,588 269,527 931,732 0 0 0 760,915 0 0 24,266 (784,032) 0 (793,657) 3,060,268 0 0 2,266,611 .64 .64
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