U.S. 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, 1996
OR
[ ] Transition Report Under Section 13 or 15(d)
of the Exchange Act
For the Transition Period From _________ to _________
Commission File Number 1-10185
DOCUCON, INCORPORATED
(Exact name of small business issuer as specified in its charter)
Delaware 74-2418590
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
7461 Callaghan Road
San Antonio, Texas 78229
(Address of principal executive offices)
(210) 525-9221
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
State the number of shares outstanding of each of the issuer's classes
of common equity as of May 9, 1996. 11,891,144
-2-
DOCUCON, INCORPORATED
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1: Balance Sheets - March 31, 1996,
and December 31, 1995 3
Statements of Operations - For
the Three Months Ended
March 31, 1996 and 1995 5
Statements of Cash Flows - For
the Three Months Ended
March 31, 1996 and 1995 6
Notes to Financial Statements 7
Item 2: Management's Discussion and
Analysis of Financial Condition
and Results of Operations 10
PART II. OTHER INFORMATION 12
SIGNATURES 13
-2-
DOCUCON, INCORPORATED
BALANCE SHEETS
<TABLE>
<CAPTION>
March 31,
1996 December 31,
ASSETS (Unaudited) 1995
---------- ----------
<S> <C> <C>
CURRENT ASSETS:
Cash and temporary cash investments ............................. $ 117,095 $ 139,167
Accounts receivable-trade, net of allowance for doubtful accounts
of $4,084 and $7,683 in 1996 and 1995, respectively-
U.S. Government ............................................. 531,631 594,090
Commercial .................................................. 998,603 1,278,796
Unbilled revenues ............................................... 685,561 579,821
Other receivables ............................................... 930 1,648
Prepaid expenses and other ...................................... 167,500 69,634
---------- ----------
Total current assets .................. 2,501,320 2,663,156
---------- ----------
PROPERTY AND EQUIPMENT:
Conversion systems .............................................. 4,841,992 4,540,302
Building and improvements ....................................... 1,524,756 1,515,608
Land ............................................................ 230,000 230,000
Furniture and fixtures .......................................... 234,540 278,805
---------- ----------
Total property and equipment .......... 6,831,288 6,564,715
Less- Accumulated depreciation .................................. 4,354,086 4,182,671
---------- ----------
Net property and equipment ............ 2,477,202 2,382,044
---------- ----------
SOFTWARE DEVELOPMENT COSTS, net .................................... 405,616 358,879
---------- ----------
GOODWILL, net ...................................................... 334,172 338,824
---------- ----------
Total assets .......................... $5,718,310 $5,742,903
========== ==========
</TABLE>
See Notes to Financial Statements.
-3-
DOCUCON, INCORPORATED
BALANCE SHEETS (Continued)
<TABLE>
<CAPTION>
March 31,
1995 December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY (UNAUDITED) 1995
----------- -----------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable .......................................................... $ 753,707 $ 697,980
Accrued liabilities ....................................................... 725,045 774,955
Line of credit ............................................................ 250,000 400,000
Note payable .............................................................. 52,516 --
Current maturities of capital lease obligations ........................... 1,579 3,107
Deferred revenues ......................................................... 378,158 339,558
Current maturities of long-term debt ...................................... 1,500,000 1,500,000
----------- -----------
Total current liabilities ....................... 3,661,005 3,715,600
----------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $1.00 par value, 10,000,000 shares authorizedSeries A, 60
shares authorized, 21 shares outstanding as of March 31, 1996,
and December 31, 1995 ................................................. 21 21
Common Stock, $.01 par value, 25,000,000 shares authorized; 11,891,144 and
11,771,228 shares outstanding as of March 31, 1996, and December 31, 1995 118,824 117,712
Additional paid-in capital ................................................ 9,516,181 9,506,553
Accumulated deficit ....................................................... (7,577,721) (7,596,983)
----------- -----------
Total stockholders' equity ...................... 2,057,305 2,027,303
----------- -----------
Total liabilities and stockholders' equity ...... $ 5,718,310 $ 5,742,903
=========== ===========
</TABLE>
See Notes to Financial Statements.
-4-
DOCUCON, INCORPORATED
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months
ENDED MARCH 31
----------------------------
1996 1995
------------ ------------
<S> <C> <C>
OPERATING REVENUES ................................................ $ 2,333,653 $ 2,618,941
------------ ------------
COSTS AND EXPENSES:
Production ..................................................... 1,275,793 1,675,746
Research and development ....................................... 109,901 172,042
General and administrative ..................................... 252,154 246,542
Marketing ...................................................... 444,679 647,474
Depreciation and amortization .................................. 197,987 280,319
------------ ------------
2,280,514 3,022,123
OPERATING INCOME (LOSS) ........................................... 53,139 (403,182)
OTHER INCOME (EXPENSE):
Interest expense ............................................... (39,839) (32,431)
Other, net ..................................................... 5,962 1,547
------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES ................................. 19,262 (434,066)
INCOME TAX EXPENSE ................................................ -- --
NET INCOME (LOSS) ................................................. 19,262 (434,066)
PREFERRED STOCK DIVIDEND REQUIREMENTS ............................. 14,438 15,813
------------ ------------
NET INCOME (LOSS) APPLICABLE TO COMMON STOCKHOLDERS ............... $ 4,824 $ (449,879)
============ ============
PRIMARY INCOME (LOSS) PER COMMON SHARE AND COMMON
SHARE EQUIVALENTS .............................................. $ -- $ (.04)
============ ============
WEIGHTED AVERAGE COMMON SHARES AND COMMON SHARE EQUIVALENTS ....... 12,318,937 11,613,686
============ ============
</TABLE>
See Notes to Financial Statements.
-5-
DOCUCON, INCORPORATED
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months
ENDED MARCH 31
--------------------------
1996 1995
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ......................................................................... $ 19,262 $(434,066)
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities-
Depreciation and amortization ......................................................... 197,987 280,319
Changes in current assets and current liabilities-
(Increase) decrease in receivables .................................................. 237,630 (690,839)
Increase in prepaid expenses ........................................................ (97,866) (20,138)
Increase in accounts payable and accrued liabilities ................................ 5,817 577,227
Increase in deferred revenues ....................................................... 38,600 126,427
--------- ---------
Net cash provided by (used in) operating activities ....................... 401,430 (161,070)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ...................................................................... (269,787) (218,573)
Capitalized software development costs .................................................... (65,443) --
Net cash used in investing activities ....................................... (335,230) (218,573)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances (payments) under line of credit .................................................. (150,000) 200,000
Principal payments under capital lease obligations ........................................ (1,528) (4,247)
Net proceeds from exercise of stock options ............................................... 10,739 20,099
Proceeds from issuing note payable ........................................................ 67,054 --
Principal payments on notes payable ....................................................... (14,537) (10,560)
--------- ---------
Net cash provided by (used in) financing activities ......................... (88,272) 205,292
--------- ---------
NET INCREASE (DECREASE) IN CASH AND TEMPORARY CASH INVESTMENTS ............................... (22,072) (174,351)
CASH AND TEMPORARY CASH INVESTMENTS, beginning of period ..................................... 139,167 376,798
--------- ---------
CASH AND TEMPORARY CASH INVESTMENTS, end of period ........................................... $ 117,095 $ 202,447
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for-
Interest ................................................................................ $ 9,839 $ 2,621
Income taxes ............................................................................ -- --
--------- ---------
$ 9,839 $ 2,621
========= =========
</TABLE>
DISCLOSURE OF ACCOUNTING POLICY:
The Company considers funds invested in highly liquid investments having a
maturity of 90 days or less to be temporary cash investments
See Notes to Financial Statements
-6-
DOCUCON, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
NOTE 1
The financial statements included herein have been prepared by Docucon,
Incorporated (the Company), without audit, pursuant to the rules and regulations
of the Securities and Exchange Commission. However, all adjustments have been
made which are, in the opinion of the Company, necessary for a fair presentation
of the results of operations for the periods covered. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations, although the Company believes
that the disclosures are adequate to make the information presented not
misleading. It is recommended that these financial statements be read in
conjunction with the financial statements and the notes thereto included in the
Company's Annual Report on Form 10-KSB for the fiscal year ended December 31,
1995.
Since its inception, the Company has incurred losses of approximately $7.6
million which have been funded primarily through the Company's public offering,
issuances of preferred stock, the exercise of warrants and debt financing. The
Company has taken steps to improve its 1996 operating results. The steps taken
include exiting the litigation support services market and focusing on the
Company's core higher margined businesses. The Company also intends to refinance
its $1,500,000 note payable which is currently due in December 1996. The note
payable is secured by the Company's building and is nonrecourse to the Company.
(See Note 5.) The Company's management believes that it is likely that the
Company's operating results for 1996 will continue to improve over 1995 and will
generate sufficient working capital to sustain its operations throughout the
year. However, if operating results do not improve, the Company will be unable
to ensure its continuing operations independent of additional capital infusions.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
NOTE 2
Organization and description of the Company-
Docucon, Incorporated, was incorporated in June 1986 to engage in the business
of providing technical services to its customers for the conversion of paper and
microform documents to computer-accessible media. Paper or microform documents
are scanned by sophisticated computer equipment and stored and indexed on
optical disks or magnetic media. The Company also sells software products to the
legal market. Substantially all of the Company's customers are located in the
U.S.
NOTE 3
Summary of significant accounting policies-
Property and equipment-
Property and equipment are recorded at original cost or the present value of the
capital lease payments for assets under capital lease arrangements. Maintenance
and repairs are charged to expense as incurred and betterments which increase
the value or extend the useful life of the property are capitalized. Gains or
losses on sales or other dispositions of property and equipment are credited or
charged to income.
-7-
DOCUCON, INCORPORATED
NOTES TO FINANCIAL STATEMENTS (Continued)
Depreciation is provided using the straight-line method over the lesser of the
capital lease term or estimated useful lives of the related assets. The
Company's fixed assets are currently depreciated over periods ranging from two
to five years beginning in the month the property is placed in service. The
Company's building is being depreciated over 40 years.
Revenue recognition-
Revenues from conversion service contracts are recognized at the time services
are provided and are based upon the number of documents converted and the
conversion rates established in the contracts.
Revenues from software licensing fees are recognized upon delivery of the
software. Revenues from maintenance and telephone support contracts are
recognized ratably over the term of the contract, typically one year.
Software development costs-
Included in software development costs is $250,000 for advanced litigation
support software (Litigator's Notebook(TM)) which was acquired during March
1994. Also included in software development costs is approximately $200,000 of
costs which were incurred during 1995 and 1996 to develop software which will
support and complement Litigator's Notebook(TM). These costs are being amortized
over a five-year period.
Goodwill-
In connection with an acquisition in March 1994, the Company recognized goodwill
of approximately $372,000. This goodwill is being amortized on a straight-line
basis over 20 years.
Use of estimates-
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make certain estimates and
assumptions. These estimates and assumptions 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.
NOTE 4
Common stock and preferred stock-
Each share of the Company's Preferred Stock ($25,000 stated value) is
convertible into 33,333 shares of Common Stock and earns cash dividends of 11
percent per annum. As of March 31, 1996, cumulative undeclared dividends on the
Preferred Stock approximated $332,000. As these dividends are undeclared, they
have not been recorded as a reduction of the Company's equity.
Stock options-
During the first quarter of 1995, the Company reduced the exercise price of all
outstanding options granted under the 1988 Stock Option Plan and the 1991
Director Non-Statutory Stock Option Plan to $.5625 per share.
-8-
NOTE 5
Long-term debt-
In December 1992, financing for the Company's office building was obtained from
a venture capital company. In connection with such financing, the Company issued
a four-year, 8 percent promissory note in the principal amount of $1,500,000
secured by the building and issued 900,000 warrants to purchase an equivalent
number of shares of Common Stock at an exercise price of $2.00 per share. As the
exercise price exceeded the current market price and the financing terms of the
debt were at market, no value was recorded for the warrants issued. The warrants
expire in December 1999. The principal balance of the promissory note matures
December 15, 1996, and interest is due quarterly.
Line of credit-
The Company's bank credit agreement consists of a $400,000 revolving line of
credit which bears interest at prime plus 1.25 percent. The line is due on
demand, or if no demand is made, payment of principal and accrued interest is
due in August 1996. Borrowings pursuant to the revolving line of credit are
secured by the Company's accounts receivable. As of March 31, 1996, $250,000 was
outstanding under this line.
-9-
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, 1996, resulted in
net income applicable to common stockholders of $4,824 compared to a net loss
applicable to common shareholders of $449,879 for the comparable quarter in
1995.
Revenues decreased 11 percent for the three months ended March 31, 1996, as
compared to the same period in 1995. Conversion service revenues earned under
the Department of Defense (DOD) and commercial contracts increased 25 percent,
but the absence of litigation support service revenues in the 1996 quarter
resulted in the overall decrease. Late in 1995, the Company discontinued
providing litigation support services due to lower than expected margins.
Revenues earned from sales of the Company's software products, JFS Litigator's
Notebook(TM) and the related product lines increased slightly for the quarter
ended March 31, 1996, as compared to the comparable 1995 quarter.
Production costs decreased 24 percent for the quarter ending March 31, 1996, as
compared to the same quarter in 1995. Termination of the unprofitable litigation
support services division in late 1995 has resulted in lower production costs as
a percentage of revenue.
Research and development costs decreased 36 percent for the quarter ending March
31, 1996, compared to the same period in 1995. The decrease was due to the
Company concentrating its efforts on developing new software products to
complement its JFS Litigator's Notebook(TM) software. The Company continued to
devote research and development resources to the expansion of the capabilities
of its JFS Litigator's Notebook(TM) and related software products, as well as
development and enhancement of its document conversion capabilities.
Marketing expenses decreased 31 percent during the first quarter of 1996 as
compared to the first quarter of 1995. While the Company continues to
aggressively market its conversion services and software products, marketing
efforts directed at litigation support services were discontinued in the second
quarter of 1995, leading to the decrease in expense.
Depreciation and amortization expenses decreased 29 percent in the first quarter
as compared to 1995. The decrease in depreciation and amortization charges is
due to previous large additions of equipment that are now fully depreciated.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company's operations have been supplemented through
bank borrowings, capital contributions, borrowings from affiliated and
unaffiliated lenders, capital lease agreements, an initial public offering of
the Company's Common Stock in 1989, the conversion of warrants into Common Stock
and preferred stock placements.
-10-
DOCUCON, INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
In 1991, the Company was awarded a contract from the Defense Printing Services
Office (DPS) to provide conversion services for the DOD totaling $12.3 million.
The award was increased in 1994 and 1995 by a total of $4.5 million and extended
in time until April 1996. Additionally, in 1995, DPS awarded contracts totaling
approximately $2.0 million to the Company. In February of 1996, DPS awarded a
new contract to the Company. This contract allows the Company to provide up to
$14.8 million of document services to DOD agencies through August 1997.
The Company is currently negotiating long-term financing on its $1,500,000 eight
percent promissory note due in December 1996. This note is secured by the
Company's office building. In connection with the purchase of the Company's
office building in 1992, the Company issued 900,000 warrants to purchase an
equivalent number of shares of Common Stock at an exercise price of $2.00 per
share. The Company now occupies approximately five-sixths of the building with
the remaining space being leased to third-party tenants. The Company believes
that the building will fulfill its needs for the foreseeable future.
The Company expects to fund its operations and marketing activities through
utilization of cash on hand and cash generated from operations. At March 31,
1996, $250,000 was outstanding under the Company's bank line of credit. The line
of credit has a current maturity date of August 1996. These funds are expected
to be adequate for the Company's needs for at least the next 12 months. During
the first quarter of 1996, the Company expended over $200,000 from internally
generated funds to purchase capital equipment needed to fulfill the requirements
of the new DOD contract awarded in February 1996. While the Company may consider
and evaluate, from time to time, acquisitions and opportunities for future
growth, the Company has not entered into any agreements with respect to future
acquisitions. Should the Company enter into any such agreements, the Company
would, in all likelihood, be required to raise outside capital to consummate
such transactions.
-11-
PART II - OTHER INFORMATION (Continued)
PART II - OTHER INFORMATION
Item 1. Legal Proceedings - None
Item 2. Changes in Securities - None
Item 3. Defaults Upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Annual Meeting of Shareholders was held on May 16, 1995.
(b) The following directors were elected to serve until the next
Annual Meeting of Shareholders, and until their successors are
elected and qualified:
Ralph Brown Edward P. Gistaro
Allan H. Hobgood Al Ireton
Philip Romano Chauncey Schmidt
(c) None.
(d) None.
Item 5. Other Matters - None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 11 - Computation of Earnings Per Share
(b) Reports on Form 8-K - None
-12-
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/__________________
Edward P. Gistaro,
Chief Executive Officer and
Principal Financial Officer
By: /s/__________________
Lori Turner,
Vice President of Finance
and Treasurer
Dated: May 10, 1996
-13-
EXHIBIT 11
DOCUCON, INCORPORATED
COMPUTATION OF EARNINGS PER SHARE
(Unaudited)
<TABLE>
<CAPTION>
Three Months
ENDED MARCH 31
----------------------------
1996 1995
------------ ------------
<S> <C> <C>
COMPUTATION OF PRIMARY EARNINGS PER SHARE:
Net income (loss) .................................................................... $ 19,262 $ (434,066)
Less- Preferred stock dividend requirements ........................................ (14,438) (15,813)
------------ ------------
Net income (loss) applicable to common stockholders used for computation ......... $ 4,824 $ (449,879)
============ ============
WEIGHTED AVERAGE NUMBER OF SHARES OF COMMON STOCK OUTSTANDING ........................... 11,891,144 11,613,686
WEIGHTED AVERAGE INCREMENTAL SHARES OUTSTANDING UPON ASSUMED CONVERSION OF OPTIONS AND
WARRANTS ............................................................................. 427,793 --
------------ ------------
WEIGHTED AVERAGE COMMON SHARES AND COMMON SHARE EQUIVALENTS USED FOR COMPUTATION ........ 12,318,937 11,613,686
============ ============
PRIMARY INCOME (LOSS) PER COMMON SHARE AND COMMON SHARE EQUIVALENT ...................... $ -- $ (.04)
============ ============
COMPUTATION OF FULLY DILUTED EARNINGS PER SHARE:
Net income (loss) .................................................................... $ 19,262 $ (434,066)
Preferred stock dividend requirements ................................................ (14,438) (15,813)
Decrease in net income (loss) applicable to common stock for-
Preferred stock dividends not incurred upon assumed conversion of preferred stock .. 14,438 15,813
------------ ------------
Net income (loss) available to common stockholders used for computation .......... $ 19,262 $ (434,066)
============ ============
WEIGHTED AVERAGE NUMBER OF SHARES OF COMMON STOCK OUTSTANDING ........................... 11,891,144 11,613,686
WEIGHTED AVERAGE INCREMENTAL SHARES OUTSTANDING UPON ASSUMED CONVERSION OF OPTIONS AND
WARRANTS ............................................................................. 427,793 --
WEIGHTED AVERAGE INCREMENTAL SHARES OUTSTANDING UPON ASSUMED CONVERSION OF THE
PREFERRED STOCK ...................................................................... 699,993 766,659
------------ ------------
WEIGHTED AVERAGE SHARES USED FOR COMPUTATION ............................................ 13,018,930 12,380,345
============ ============
INCOME (LOSS) PER COMMON SHARE AND COMMON SHARE EQUIVALENT ASSUMING FULL DILUTION ....... $ -- (a) $(.04) (a)
======= =======
</TABLE>
(a) This calculation is submitted in accordance with Item 601(b)(11) of
Regulation S-K although it is not required by APB Opinion No. 15
because it results in dilution of less than 3 percent.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM DOCUCON,
INC.'S FINANCIAL STATEMENTS AS OF AND FOR THE THREE MONTH PERIOD ENDED MARCH 31,
1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 117,095
<SECURITIES> 0
<RECEIVABLES> 1,534,318
<ALLOWANCES> 4,084
<INVENTORY> 34,219
<CURRENT-ASSETS> 2,501,320
<PP&E> 6,831,288
<DEPRECIATION> 4,354,086
<TOTAL-ASSETS> 5,718,310
<CURRENT-LIABILITIES> 3,661,005
<BONDS> 0
0
21
<COMMON> 118,824
<OTHER-SE> 1,938,460
<TOTAL-LIABILITY-AND-EQUITY> 5,718,310
<SALES> 2,333,653
<TOTAL-REVENUES> 2,333,653
<CGS> 1,275,793
<TOTAL-COSTS> 2,280,514
<OTHER-EXPENSES> (5,962)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 39,839
<INCOME-PRETAX> 19,262
<INCOME-TAX> 0
<INCOME-CONTINUING> 19,262
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 19,262
<EPS-PRIMARY> .00
<EPS-DILUTED> .00
</TABLE>
