SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
AMENDMENT NO. 1
TO
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED] FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996; OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED] FOR THE TRANSITION PERIOD FROM
______ TO ______
COMMISSION FILE NUMBER 1-10185
DOCUCON, INCORPORATED
(Name of Small Business Issuer in its Charter)
DELAWARE 74-2418590
(State or Other Jurisdiction (I.R.S. Employer Identification No.)
of Incorporation or Organization)
7461 CALLAGHAN ROAD
SAN ANTONIO, TEXAS 78229
(Address of Principal Executive (Zip Code)
Offices)
Issuer's Telephone Number, Including Area Code: (210) 525-9221
Securities Registered Under Section 12(b) of the Exchange Act:
Name of Each Exchange
Title Of Each Class On Which Registered
------------------- -------------------
COMMON STOCK, PAR VALUE $.01 PER SHARE BOSTON STOCK EXCHANGE
Securities Registered Under Section 12(g) of the Exchange Act: NONE
Check whether the Issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the Registrant was required to file such Reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B in this form, and no disclosure will be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [X]
State Issuer's revenues for its most recent fiscal year: $13,524,000
State the aggregate market value of the voting stock held by
non-affiliates as of March 14, 1997:
Common Stock, par value $.01 per share - $11,554,946
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date.
CLASS OUTSTANDING AT MARCH 14, 1997
- ------------------------------ --------------------------------------------
COMMON STOCK, PAR VALUE 12,325,276 SHARES
$.01 PER SHARE
DOCUMENTS INCORPORATED BY REFERENCE
No documents are incorporated by reference into this Annual Report on Form
10-KSB.
Transitional Small Business Issuer Format: Yes [_] No [X]
<PAGE>
PART I
Certain statements contained in this Form 10-KSB, including statements regarding
the anticipated development and expansion of the Company's business,
expenditures, the intent, belief or current expectations of the Company, its
directors or its officers, primarily with respect to the future operating
performance of the Company and other statements contained herein regarding
matters that are not historical facts, are "forward-looking" statements (as such
term is defined in the Private Securities Litigation Reform Act of 1995).
Because such statements include risks and uncertainties, actual results may
differ materially from those expressed or implied by such forward-looking
statements.
ITEM 1. DESCRIPTION OF BUSINESS.
GENERAL
Docucon, Incorporated ("Docucon" or the "Company") was incorporated under
the laws of the State of Delaware in 1988 and is the successor by merger to a
Texas corporation organized in 1986. The Company divides its business into two
areas: backfile conversion services and software products.
BACKFILE CONVERSION SERVICES
The automated conversion of source documents into electronic form,
including computer accessible images, indices and formats is referred to as
"backfile conversion". These source documents may include letters, contracts,
manuals, drawings, aperture cards, transcripts, microfilm and microfiche. After
conversion, these documents are stored on various optical and magnetic media.
These media are then accessed by document management systems which may be based
on a wide range of computer systems.
The process of document conversion involves the preparation and grading of
the documents to be stored, the physical scanning of the documents and the
creation of indices to facilitate retrieval of the converted documents. The
indexing of the information to be stored is a significant activity in any
document conversion system, and because Docucon creates custom indices and
formats, the ultimate users can retrieve information from their own documents
utilizing their own systems. Additionally, each of Docucon's document conversion
systems can customize the format of the converted materials. Throughout all its
operations, Docucon maintains a quality control program to ensure the integrity
of the indexing, editing and grading processing of the databases which are
converted. The Company provides backfile conversion services at its headquarters
in San Antonio, Texas. Upon client request, the Company can provide equipment to
process documents at remote client-site locations.
LITIGATION SUPPORT SOFTWARE PRODUCTS
The Company develops, markets and supports software products for use by
attorneys engaged in litigation. The principal product marketed by the Company
is the JFS Litigator's Notebook. Lawyers involved in litigation routinely keep
witnesses, issues and facts files in spiral bound notebooks called "binders".
Unlike paralegals who have been using computer systems for some time to assist
them in the assembly of document sets to extract information required by the
attorneys, the attorneys themselves have rarely used computers for anything
other than word processing. The JFS Litigator's
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Notebook provides attorneys with electronic "binders". In addition, since the
Notebook is based on Lotus Development Corporation's Lotus Notes(R), attorneys
on a litigation team can work from the same "binders", send and receive notes
and marginalia within the binders, and associate other documents with the
"binders". With the advent of large and powerful "lap-top" computers, the
attorney can now carry his entire case file with him, wherever he might be, and
not only have access to it, but also be able to share updates with the other
members of the litigation team in other cities or countries.
The Company maintains a support and training staff for its software
products in its facilities in San Antonio, Texas, and Parsippany, New Jersey.
JFS TRANSACTION
On March 16, 1994, the Company purchased substantially all of the assets,
having an approximate book value of $1,015,000 and assumed certain liabilities
in the approximate amount of $1,179,000 of J. Feuerstein Systems, Inc. ("JFS"),
for consideration in the approximate amount of $200,000. JFS was based in
Parsippany, New Jersey and was engaged in the business of providing consulting
and support services and software products to the legal market. The
consideration was paid to Mr. Jim Feuerstein, Ms. Jane Gennarelli and a
finder/consultant who helped all of the parties consummate the transaction. The
transaction was negotiated on an arms-length basis between independent parties.
In connection with the transaction, the Company entered into Employment
Agreements with Jim Feuerstein and Jane Gennarelli, the principal executives of
JFS, who became officers in the JFS division of the Company. See "Directors,
Executive Officers, Promoters and Control Persons; Compliance with Section 16(a)
of the Exchange Act - Directors, Executive Officers and Key Technical Personnel"
in Item 9, Note 1 of "Notes to Financial Statements" and Item 6 "Management's
Discussion and Analysis of Financial Condition and Results of Operations". See
also, this Item, "Business - Product and Service Markets - Legal Software
Products Market".
PRODUCT AND SERVICE MARKETS
The Company currently markets backfile conversion and litigation support
software products. The primary customers for backfile conversion services are
governmental and private organizations which have substantial document storage
and retrieval needs. These documents may be logistic support documents for the
Department of Defense ("DOD"), land files for petro-chemical companies and
county governments, personnel and financial records for corporations and
institutions, or a number of other similar requirements.
The Company markets a line of software products whose purpose is to
facilitate the creation and use of electronic "ring binders" commonly used by
lawyers during litigation. The flagship product is the JFS Litigator's Notebook,
which has enjoyed broad acceptance by large law firms and the corporate legal
departments of several major corporations. The recent addition of JFS/NetTM is
intended to extend the market for the Litigator's Notebook to smaller law firms.
The Company plans to continue to make significant investments in the continued
marketing and development of these products.
For the years ended December 31, 1996, 1995, and 1994, the Company spent
$787,000, $497,000, and $652,000, respectively, for research and development
activities. The Company does
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not own any patents. The Company uses the word "Docucon" alone and in
combination with various designs and logos as a service mark to identify the
Company's services. The Company also uses the name "JFS Litigator's Notebook"
and "JFS Litigation Workgroup" alone and in combination with various designs and
logos as a service mark to identify the Company's software product and product
lines. The Company has obtained federal trademark registration for the names
"Docucon", "JFS Litigator's Notebook" and "JFS Litigation Workgroup" and uses
them to identify its products and services.
BACKFILE CONVERSION SERVICES MARKETS
The Company has performed backfile conversion services since 1987 under
three major contracts awarded by the DOD. It is currently providing services to
the DOD under a $14.8 million contract awarded by the DOD in early 1996. The
contract provides for orders to be placed through May 1997. As of March 1, 1997,
the Company had provided $8,940,000 of services under this contract.
The Company has recently submitted a bid to the DOD along with several
other competitors for a contract for services similar to those already being
provided by the Company to the DOD. The size of this contract is believed to be
substantially larger than those previously awarded. The Company believes that it
is in good position to win all or part of this new contract but to date has
received no word from the DOD.
The Company also provided services to the DOD from 1991 to 1995 totaling
$16.75 million under a 1991 contract award. Prior to that time, the Company
provided services to the DOD totaling $5.4 million under a 1987 contract award.
Although the Company was notified that it was not the successful bidder on a new
similar contract in November 1994, it obtained additional smaller DOD contracts
and subcontracts in 1995. The 1994 contract was terminated at the government's
convenience, and the Company was awarded the above mentioned $14.8 million
contract. In 1996, 1995, and 1994 approximately 66 percent, 38 percent, and 48
percent, respectively, of the Company's revenues were derived from services
provided under DOD contracts.
The Company has also performed conversion services for various commercial
companies and governmental agencies including Lucent Technologies, Loral Federal
Systems, Westinghouse, QED, Texaco Exploration and Production, Inc., Computer
Science Corporation, Amoco, Dowell Schlumberger, and Ericsson GE.
LEGAL SOFTWARE PRODUCTS MARKET
The Company's strategic intent with its software products is to "capture
the attorney's desktop". At present, the majority of revenues for the Company's
products has come from large law firms and corporations. It has been the
Company's strategy to aggressively market to these large organizations early in
the product life of the JFS Litigator's Notebook, a strategy which management
believes has been successful.
Strategies for the future of these products include the migration of the
product to smaller firms. To facilitate this migration the Company has recently
announced the introduction of JFS/NetTM in partnership with IBM(R) and utilizing
IBM's Global Network. This arrangement allows JFS clients to access servers
maintained by IBM and running JFS server software. This access eliminates the
need for smaller clients to purchase and maintain their own servers and allows
them access to the Litigator's
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Notebook by paying a monthly fee per user. JFS/NetTM will be available in the
second quarter of 1997.
Present and future sales strategies will be carried out by the Company's
direct product sales force and through relationships with companies having
access to the legal market.
COMPETITION
The Company's services are sold in highly competitive markets, and its
sales and earnings can be affected by changes in competitive prices,
fluctuations in the level of activity in major markets or general economic
conditions. The Company believes that the document conversion industry is highly
fragmented, with numerous relatively small companies seeking to establish market
positions. In addition, the Company believes that major hardware, software and
service providers may seek to enter the field in the future. Many competitors
and potential competitors have larger marketing organizations and greater
resources than the Company. Due to the rapidly changing technology used in
connection with providing such services, competitive positions within the
industry are subject to change.
GOVERNMENT REGULATION
The Company's ability to obtain contracts from the DOD is dependent upon
its compliance with rules and regulations promulgated by that department,
including regulations related to security and technological standards. Although
the Company believes it is currently in compliance, there is no assurance that
it will be able to comply with such rules and regulations promulgated in the
future or to maintain its current clearances. See this Item, "Business - Product
and Service Markets" and "Business Competition" and Item 6, "Management's
Discussion and Analysis of Financial Condition and Results of Operations".
EMPLOYEES
At March 14, 1997, the Company had 265 full-time employees. In addition,
at such date, the Company was retaining the services of 181 temporary employees
to meet current production needs. None of the Company's employees is represented
by a labor union, and the Company is not aware of any current activities to
unionize its employees. Management believes the relationship between the Company
and its employees is good.
ITEM 2. DESCRIPTION OF PROPERTY.
In October 1992, the Company purchased an eight-story, 52,000-square foot
office building in San Antonio, Texas. This facility is located on 2.5 acres of
land and is utilized for office and production space. In Management's opinion,
the Company's physical properties are adequate for the Company's current needs,
and are consistent with the Company's plans described elsewhere in this Annual
Report on Form 10-KSB; however, in the event that the Company experiences a
significant influx of new business, additional space will be required.
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ITEM 3. LEGAL PROCEEDINGS.
In the ordinary course of its business, the Company may be subject, from
time to time, to claims and legal actions by clients, suppliers and others. No
material actions are currently pending against the Company. The Company
maintains general liability insurance and other insurance coverages typical in
the industry.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders of the Company
during the fourth quarter of 1996.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The Company's Common Stock, par value $.01 per share, is traded on The
Nasdaq Stock Market'sSM SmallCap Market (Symbol: DOCU), and on the Boston Stock
Exchange (Symbol: DOC).
The following table sets forth for the fiscal periods indicated the high
and low bid prices for the Company's Common Stock in the Nasdaq Stock Market's
SmallCap Market, the principal market upon which the Company's Common Stock is
traded, as reported to the Company in monthly reports from Nasdaq.
REPORTED
BID PRICE
-----------------------
HIGH LOW
------ -----
1995
First Quarter ............................. $ .63 $.41
Second Quarter ............................ .63 .34
Third Quarter ............................. .49 .38
Fourth Quarter ............................ .56 .31
1996
First Quarter ............................. $1.44 $.34
Second Quarter ............................ 1.53 .94
Third Quarter ............................. 1.31 .99
Fourth Quarter ............................ 1.25 .83
The last reported sale price for the Common Stock on The Nasdaq Stock
Market on March 14, 1997, was $.9375. Bid and asked prices reflect inter-dealer
prices, without retail mark-up, mark-down or commission, and may not necessarily
represent actual transactions.
There were approximately 264 holders of record of the Common Stock as of
March 14, 1997, excluding those shares held by depository companies for certain
beneficial owners.
The Company has never paid cash dividends on its Common Stock and does not
anticipate the payment of cash dividends in the foreseeable future. The Company
currently anticipates that any future earnings will be retained to finance the
Company's operations. Under the terms of the Company's Series A Convertible
Preferred Stock, the Company cannot pay dividends on its Common Stock until all
accumulated but unpaid dividends on such Preferred Stock have been paid. At
December 31, 1996, cumulative undeclared dividends on the Series A Convertible
Preferred Stock were approximately $345,000.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
FISCAL YEAR 1996 COMPARED TO FISCAL YEAR 1995
The Company's operations resulted in a net income applicable to common
stockholders of $708,983 for fiscal 1996, compared to a net loss applicable to
common stockholders of $665,897 in 1995. The improvement in operating income was
attributable to improved results from backfile conversion service revenues and
the absence of losses incurred from litigation support conversion services. The
Company discontinued providing litigation support services in 1995 as a result
of continuing losses incurred by the division.
Operating revenues totaled $13,523,000 in fiscal 1996, a 23% increase over
1995 revenues. A large portion of the increase, approximately $1,500,000, was
due to an increase in conversion service revenues despite the absence of
litigation support conversion revenues. Software product revenues also increased
by approximately $1,000,000, or 46% over 1995 revenues.
Revenues earned under the DOD contracts increased from approximately
$4,200,000 to $8,900,000, resulting from the $14.8 million contract awarded in
early 1996. Revenues earned under commercial and government-related subcontracts
decreased as the Company devoted substantial production resources to the DOD
conversion contract.
Production costs increased slightly in 1996 as compared to 1995. The 13%
increase was smaller than the increase in revenues as the Company realized
margin improvements resulting from discontinuation of litigation support
conversion revenues.
The Company continued to devote a portion of its research and development
resources to software development projects in 1996, and capitalized $222,000 of
costs related to the projects. Additionally, research and development expenses
increased 58 percent from 1995 to 1996 as the Company continued to devote
resources to the expansion of the capabilities of its JFS Litigator's Notebook
and related software products as well as the enhancement of its document
conversion capabilities.
General and administrative expenses increased 15% during 1996 as compared
to 1995. The increase was due primarily to management incentive bonus plans
activated by the increase in profitability in 1996 as compared to prior years,
as well as to increases in personnel.
Depreciation and amortization expense decreased 23 percent during fiscal
1996 as compared to fiscal 1995 primarily due to equipment becoming fully
depreciated.
FISCAL YEAR 1995 COMPARED TO FISCAL YEAR 1994
The Company's operations resulted in a net loss applicable to common
stockholders of $665,897 for fiscal 1995, compared to a net loss applicable to
common stockholders of $1,785,871 in 1994. The smaller loss was attributable to
improved results in the backfile conversion service division and increased sales
of the JFS Litigator's Notebook and related products. In addition, the 1994 loss
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included a $283,000 writedown of capitalized software. These improvements were
offset by losses incurred by the services portion of the litigation support
division. The Company reduced the scope of its litigation support services in
June of 1995 as a result of continuing losses incurred by the division. Although
the losses from those operations were reduced to a nominal amount by the end of
the fiscal year, the operations were discontinued at the end of 1995.
Operating revenues totaled $11,037,846 in fiscal 1995, a 28% increase over
1994 revenues. The majority of the increase was due to an increase in software
product sales. Backfile conversion service revenues also increased.
Revenues earned under the DOD contracts increased slightly, from
approximately $3,900,000 to $4,200,000, resulting from several contract awards
throughout the fiscal year (see "Liquidity and Capital Resources"). Revenues
earned under commercial and government-related subcontracts also increased.
Litigation support services revenue increased during the first six months
of fiscal 1995. However, the contracts for these services were largely
unprofitable and the scope of the services was reduced in June of 1995 and
discontinued in full at year end. Overall, total litigation support service
revenues were slightly lower than the 1994 comparable revenues, and represented
21% and 29% of the Company's 1995 and 1994 revenues, respectively. Revenues from
software product sales and support increased 450% to $2,200,000, and composed
19% of total revenues in 1995 as compared to 4% of 1994 total revenues.
Production costs increased $1,345,000, or 25%, in 1995 as compared to
1994, commensurate with the increase in revenues. A disproportionate share of
production costs were incurred in the litigation support service area as
compared to the Company's other areas of production including document
conversion and software products.
The Company devoted a portion of its research and development resources to
a software development project in 1995, and capitalized $153,000 of costs
related to the project. Thus, research and development expenses decreased 24
percent from 1994 to 1995. The Company continued to devote resources to the
expansion of the capabilities of its JFS Litigator's Notebook and related
software products as well as the development and enhancement of its document
conversion capabilities.
Marketing expenses increased 38% percent during 1995 as compared to 1994.
The Company built national marketing teams in the latter part of 1994 to support
new and aggressive marketing efforts for litigation support services and its
line of software products. Although the marketing efforts of litigation support
services were curtailed in June of 1995, the Company continued aggressive
marketing efforts for the remaining government and commercial and software
product divisions.
Depreciation and amortization decreased 15 percent during fiscal 1995 as
compared to fiscal 1994. The decrease in depreciation and amortization charges
is due to equipment becoming fully depreciated. The Company added approximately
$200,000 of equipment shortly after year end in order to expand its production
capabilities to accommodate the new DOD contract.
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LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company's operations have been supplemented
through bank borrowings, capital contributions, borrowings from affiliated and
unaffiliated lenders, capital lease agreements, an initial public offering of
the Company's Common Stock in 1989, the conversion of warrants into Common Stock
and private preferred stock placements.
In 1991, the Company was awarded a contract from the Defense Printing
Services Office (DPS) to provide conversion services for the Department of
Defense (DOD) totaling $12.3 million. The award was increased in 1994 and 1995
by a total of $4.5 million and extended in time until April 1996. Additionally,
in 1995, DPS awarded contracts totaling approximately $2.0 million to the
Company. In February of 1996, DPS awarded a contract to the Company. This
contract allows the Company to provide up to $14.8 million of document services
to DOD agencies. During 1996, the Company generated $8,890,000, or 66% of total
revenues through DOD contracts. The Company has recently submitted a bid to the
DOD along with several other competitors for a contract for services similar to
those already being provided by the Company to the DOD. The size of this
contract is believed to be substantially larger than those previously awarded.
The Company believes that it is in good position to win all or part of this new
contract but to date has received no word from the DOD.
With the addition of J. Feuerstein Systems (JFS) in 1994, the Company made
significant investments in the marketing and development areas of its litigation
support products and services. These investments resulted in substantially
increased revenues in both the services and product areas. However, lower than
expected margins in the litigation support service area resulted in the
Company's decision to substantially reduce the scope of those operations in June
of 1995 and ultimately to terminate those operations at the end of fiscal 1995.
The absence of losses from these services resulted in improved operating results
in 1996.
It is the strategic intent of management to expand its software revenue
base. To achieve this goal, the Company continued to invest in the marketing and
development of its line of software products in 1996, increasing expenditures by
$1,000,000 over 1995. Such investment has enabled the Company to offer enhanced
versions of Litigator's Notebook and the Optical Notebook and a recently
announced product, JFS Net to the market place. Additional complementary
products are also now available, and another major product will be released by
the end of 1997.
In October 1996 the Company obtained long term financing to replace the
existing mortgage note for its office building with a December 1996 maturity.
The new note bears interest at a fixed rate of 9.5%, payable monthly to a
commercial bank, and is being amortized over a 20-year term with a 5-year
maturity. The note is secured by the Company's building, other fixed assets,
accounts receivable and inventory. Approximately $68,000 of debt issuance costs
were incurred and will be amortized over a five-year period. (See Note 5). The
Company utilizes the building for office and production space and believes that
the building will fulfill its needs for the foreseeable future.
Accounts receivable and unbilled revenues increased approximately
$1,750,000 from December 31, 1995 to December 31, 1996. The higher balances
primarily reflect the increased services provided to the DOD in 1996. Accounts
payable and accrued liabilities increased approximately $816,000 for the
comparable periods as a result of additional expenses for the increased services
provided to the DOD.
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The Company expects to fund its operations and marketing activities
through utilization of cash on hand and cash generated from operations. During
1996, the Company fully extended its $750,000 revolving term note to fund
short-term cash needs. This was repaid in its entirety in January 1997. The
revolving term note was subsequently fully extended and, at March 14, 1997,
$750,000 was outstanding under this revolving term note. These funds are
expected to be adequate for the Company's needs for at least the next 12 months.
While the Company may consider and evaluate, from time to time, acquisitions and
opportunities for future growth, the Company has not entered into any agreements
with respect to future acquisitions. Should the Company enter into any such
agreements, the Company would, in all likelihood, be required to raise outside
capital to consummate such transactions.
OUTLOOK
The Company enters 1997 having established a profitable base of operations
in 1996. To build on that profitability the Company plans to continue to
emphasize its two principal business areas; document conversion services and
applications software for the legal market. Therefore the main thrusts for 1997
will be:
o Increasing the Company's technical and production capabilities in the
areas of SGML (Standard Generalized Markup Language) and PDF (Portable
Document Format) conversion, anticipating an award from the DOD to extend
the contract life of those services currently being provided.
o The JFS division will put marketing programs in place to take advantage of
the JFS/Net product offering announced late in 1996. This offering is
based on a partnership with IBM and utilizes their International Global
Network.
o The JFS division will expand its product offerings during the year. These
actions will not only strengthen the market position of Litigator's
Notebook but will also allow the penetration of the non-litigation portion
of the legal market and markets beyond the legal market.
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ITEM 7. FINANCIAL STATEMENTS.
Financial statements of the Company meeting the requirements of Regulation
S-B are filed on the succeeding pages of this Item 7 of this Annual Report on
Form 10-KSB, as listed below:
Page
----
Report of Independent Public Accountants 13
Balance Sheets as of December 31, 1996 and 1995 14
Statements of Operations for the Years Ended
December 31, 1996, 1995 and 1994 16
Statements of Stockholders' Equity for the
Years Ended December 31, 1996, 1995 and 1994 17
Statements of Cash Flows for the Years Ended
December 31, 1996, 1995 and 1994 18
Notes to Financial Statements 19
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Docucon, Incorporated:
We have audited the accompanying balance sheets of Docucon, Incorporated (a
Delaware corporation), as of December 31, 1996 and 1995, and the related
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1996. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Docucon, Incorporated, as of
December 31, 1996 and 1995, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1996, in conformity
with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
San Antonio, Texas
February 14, 1997
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DOCUCON, INCORPORATED
BALANCE SHEETS
DECEMBER 31
-----------------------
ASSETS 1996 1995
---------- ----------
CURRENT ASSETS:
Cash and cash equivalents ........................... $ 198,152 $ 139,167
Accounts receivable-trade, net of allowance for
doubtful accounts
of $4,444 and $7,683 in 1996 and 1995, respectively-
U.S. Government .................................. 1,492,509 594,090
Commercial ....................................... 1,054,288 1,278,796
Unbilled revenues ................................... 1,655,428 579,821
Other receivables ................................... 6,834 1,648
Prepaid expenses and other .......................... 185,302 69,634
---------- ----------
Total current assets .............. 4,592,513 2,663,156
---------- ----------
PROPERTY AND EQUIPMENT:
Conversion systems .................................. 5,252,834 4,540,302
Building and improvements ........................... 1,736,666 1,515,608
Land ................................................ 230,000 230,000
Furniture and fixtures .............................. 275,279 278,805
---------- ----------
Total property and equipment ...... 7,494,779 6,564,715
Less- Accumulated depreciation and amortization ..... 4,798,200 4,182,671
---------- ----------
Net property and equipment ........ 2,696,579 2,382,044
---------- ----------
SOFTWARE DEVELOPMENT COSTS AND OTHER, net ............. 527,926 358,879
---------- ----------
GOODWILL, net ......................................... 320,214 338,824
---------- ----------
Total assets ...................... $8,137,232 $5,742,903
========== ==========
The accompanying notes are an integral part of these financial statements.
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DOCUCON, INCORPORATED
BALANCE SHEETS
DECEMBER 31
--------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY 1996 1995
----------- -----------
CURRENT LIABILITIES:
Accounts payable ............................... $ 1,403,419 $ 697,980
Accrued liabilities ............................ 885,659 774,955
Revolving term note ............................ 750,000 --
Line of credit ................................. -- 400,000
Deferred revenues .............................. 561,355 339,558
Current maturities of long-term debt ........... 27,729 1,500,000
Current maturities of capital lease
obligations ................................. 11,820 3,107
----------- -----------
Total current liabilities .............. 3,639,982 3,715,600
----------- -----------
LONG-TERM DEBT ................................... 1,517,970 --
CAPITAL LEASE OBLIGATIONS ........................ 51,211 --
COMMITMENTS AND CONTINGENCIES (Note 4)
STOCKHOLDERS' EQUITY:
Preferred stock, $1.00 par value,
10,000,000 shares authorized-
Series A, 60 shares authorized, 19 and 21
shares outstanding as of December 31,
1996 and 1995, respectively ................. 19 21
Common stock, $.01 par value, 25,000,000
shares authorized; 12,032,559 and
11,771,228 shares outstanding as of
December 31, 1996 and 1995, respectively .... 120,326 117,712
Additional paid-in capital ..................... 9,640,036 9,506,553
Accumulated deficit ............................ (6,832,312) (7,596,983)
----------- -----------
Total stockholders' equity ............. 2,928,069 2,027,303
----------- -----------
Total liabilities and stockholders'
equity ............................ $ 8,137,232 $ 5,742,903
=========== ===========
The accompanying notes are an integral part of these financial statements.
15
<PAGE>
DOCUCON, INCORPORATED
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
OPERATING REVENUES ................................ $ 13,523,500 $ 11,037,846 $ 8,616,480
COSTS AND EXPENSES:
Production ...................................... 7,706,001 6,810,976 5,465,746
Research and development ........................ 786,945 497,123 651,629
General and administrative ...................... 1,138,711 990,162 1,034,371
Marketing ....................................... 2,192,907 2,214,310 1,610,291
Depreciation and amortization ................... 760,875 992,154 1,167,177
Write-off of software development costs ......... -- -- 283,442
------------ ------------ ------------
12,585,439 11,504,725 10,212,656
OPERATING INCOME (LOSS) ........................... 938,061 (466,879) (1,596,176)
OTHER INCOME (EXPENSE):
Interest expense ................................ (164,476) (152,410) (140,010)
Other, net ...................................... 28,086 13,726 26,685
------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES ................. 801,671 (605,563) (1,709,501)
INCOME TAX EXPENSE ................................ 37,000 -- 13,200
------------ ------------ ------------
NET INCOME (LOSS) ................................. 764,671 (605,563) (1,722,701)
------------ ------------ ------------
PREFERRED STOCK DIVIDEND REQUIREMENTS ............. 55,688 60,334 63,170
------------ ------------ ------------
NET INCOME (LOSS) APPLICABLE TO COMMON STOCKHOLDERS $ 708,983 $ (665,897) $ (1,785,871)
============ ============ ============
PRIMARY EARNINGS (LOSS) PER COMMON SHARE AND
COMMON SHARE EQUIVALENTS ........................ $ .06 $ (.06) $ (.15)
============ ============ ============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES AND
COMMON SHARE EQUIVALENTS OUTSTANDING ............ 12,485,322 11,690,161 11,549,909
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
16
<PAGE>
DOCUCON, INCORPORATED
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Preferred Stock
--------------------- ---------------- Additional Total
Number of Number Paid-In Accumulated Stockholders'
Shares Amount Of Shares Amount Capital Deficit Equity
---------- -------- ------ ------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1993 ..................... 11,510,947 $115,109 24 $ 24 $ 9,478,859 $(5,268,719) $ 4,325,273
Conversion of Series A preferred stock ....... 33,333 333 (1) (1) (332) -- --
Stock registration costs ..................... -- -- -- -- (21,850) -- (21,850)
Net loss ..................................... -- -- -- -- -- (1,722,701) (1,722,701)
---------- -------- ------ ------ ----------- ----------- -----------
BALANCE, December 31, 1994 ..................... 11,544,280 115,442 23 23 9,456,677 (6,991,420) 2,580,722
Shares issued pursuant to employee stock plans 70,983 710 -- -- 51,434 -- 52,144
Conversion of Series A preferred stock ....... 66,666 667 (2) (2) (665) -- --
Shares issued to pay preferred stock dividends 89,299 893 -- -- (893) -- --
Net loss ..................................... -- -- -- -- -- (605,563) (605,563)
---------- -------- ------ ------ ----------- ----------- -----------
BALANCE, December 31, 1995 ..................... 11,771,228 117,712 21 21 9,506,553 (7,596,983) 2,027,303
Director stock option exercise ............... 40,000 400 -- -- 22,000 -- 22,400
Stock option exercise ........................ 26,382 265 -- -- 14,465 -- 14,730
Options issued to vendor ..................... -- -- -- -- 7,787 -- 7,787
Shares issued pursuant to employee stock plans 100,583 1,006 -- -- 90,172 -- 91,178
Conversion of Series A preferred stock ....... 66,666 666 (2) (2) (664) -- --
Shares issued to pay preferred stock dividends 27,700 277 -- -- (277) -- --
Net income ................................... -- -- -- -- -- 764,671 764,671
---------- -------- ------ ------ ----------- ----------- -----------
BALANCE, December 31, 1996 ..................... 12,032,559 $120,326 19 $ 19 $ 9,640,036 $(6,832,312) $ 2,928,069
========== ======== ====== ====== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
17
<PAGE>
DOCUCON, INCORPORATED
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------------------
1996 1995 1994
----------- --------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ..................................... $ 764,671 $(605,563) $(1,722,701)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities-
Depreciation and amortization ...................... 760,875 992,154 1,167,177
Write-off of software development costs ............ -- -- 283,442
Changes in current assets and current
liabilities-
(Increase) decrease in receivables and
unbilled revenues ............................... (1,754,704) (827,896) 1,087,891
(Increase) decrease in prepaid expenses
and other ....................................... (115,668) 99,909 101,554
Increase (decrease) in accounts payable
and accrued liabilities ......................... 816,143 120,482 (135,591)
Increase in deferred revenues ..................... 221,797 248,540 29,153
----------- --------- -----------
Net cash provided by operating activities ......... 693,114 27,626 810,925
----------- --------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures .................................. (867,740) (533,123) (513,507)
Capitalized software development costs ................ (289,603) (152,801) (21,527)
----------- --------- -----------
Net cash used in investing activities ............. (1,157,343) (685,924) (535,034)
----------- --------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances under revolving term note .................... 750,000 -- --
Advances under line of credit ......................... -- 400,000 --
Payments on line of credit ............................ (400,000) -- --
Proceeds from notes payable ........................... 1,550,000 -- --
Principal payments on notes payable ................... (1,504,301) (10,560) (489,259)
Principal payments under capital lease
obligations ........................................ (8,580) (20,917) (21,125)
Proceeds from employee stock purchase plan ............ 91,178 52,144 --
Proceeds from exercise of options ..................... 44,917 -- --
Stock registration costs .............................. -- -- (21,850)
----------- --------- -----------
Net cash provided by (used in) financing activities 523,214 420,667 (532,234)
----------- --------- -----------
NET CHANGE IN CASH AND CASH EQUIVALENTS ................. 58,985 (237,631) (256,343)
----------- --------- -----------
CASH AND CASH EQUIVALENTS, beginning of year ............ 139,167 376,798 633,141
----------- --------- -----------
CASH AND CASH EQUIVALENTS, end of year .................. $ 198,152 $ 139,167 $ 376,798
=========== ========= ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
18
<PAGE>
DOCUCON, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND DESCRIPTION OF THE COMPANY:
Docucon, Incorporated (the Company), was incorporated in June 1986. The
Company's primary business is the conversion of paper and microform documents to
a computer accessible medium for commercial and governmental customers. Paper or
microform documents are scanned by sophisticated computer equipment and stored
and indexed on optical disks or magnetic media. The Company also sells software
products to the legal market. Substantially all of the Company's customers are
located in the U.S.
In March 1994, the Company acquired substantially all of the assets and assumed
certain liabilities of J. Feuerstein Systems, Inc. (JFS), a company which
provided litigation support services and software products to the legal market.
Since its inception, the Company has incurred cumulative net losses of
approximately $6.8 million. However, during the year ended December 31, 1996,
the Company reported net income of approximately $765,000. The cumulative net
losses have been funded primarily through the Company's public offering of
common stock, issuances of preferred stock, the exercise of warrants and debt
financing. The Company has taken steps to improve its operating results
including exiting the litigation support services market and focusing on the
Company's core higher margined businesses. In October 1996, the Company also
refinanced its $1.5 million note payable which was originally due in December
1996. (See Note 5.) The Company's management believes that it is likely that the
Company's operating results for 1997 will continue to improve and will generate
sufficient working capital to sustain its operations throughout the year.
However, if improved operating results are not sustained, the Company will be
unable to ensure its continuing operations independent of additional capital
infusions. See "Outlook" and "Liquidity and Capital Resources" included in Item
6 under "Management's Discussion and Analysis of Financial Condition and Results
of Operations" for further discussion.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PROPERTY AND EQUIPMENT
Property and equipment are recorded at original cost. Maintenance and repairs
are charged to expense as incurred and betterments which increase the value or
extend the useful life of the property are capitalized. Gains or losses on sales
or other dispositions of property and equipment are credited or charged to
income.
Depreciation is provided using the straight-line method over the lesser of the
capital lease term or estimated useful lives of the related assets. The
Company's conversion system and furniture and fixtures are currently depreciated
over periods ranging from two to five years beginning in the month the property
is placed in service. The Company's building is being depreciated over 40 years.
REVENUE RECOGNITION
Revenues from conversion service contracts are recognized at the time services
are provided and are based upon the number of documents converted and the
conversion rates established in the contracts.
Revenues from software licensing fees are recognized upon delivery of the
software. Revenues from maintenance and telephone support contracts are
recognized ratably over the term of the contract, typically one year.
19
<PAGE>
DOCUCON, INCORPORATED
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
SOFTWARE DEVELOPMENT COSTS
The Company capitalizes software development costs and amortizes those costs
over the estimated useful life of the software. Prior to 1994, the Company
incurred approximately $417,000 related to the development of software
(WIN.LAW), which was to be used to supplement the Company's litigation support
services. During 1994, the Company wrote off the unamortized cost of WIN.LAW
($283,442) when it became apparent that the carrying value would not be
realized.
Included in software development costs and other on the accompanying balance
sheets is $250,000 for advanced litigation support software (Litigator's
Notebook TM) which was acquired from JFS in 1994. Also included in software
development costs and other is approximately $374,000 of costs which were
incurred during 1995 and 1996 to develop software which will support and
complement Litigator's NotebookTM. These costs are being amortized over a
five-year period. During 1996, 1995 and 1994, amortization expense of
approximately $93,000, $50,000 and $39,000, respectively, was recorded relating
to software development costs. As of December 31, 1996, accumulated amortization
of $182,000 was netted against software development costs.
GOODWILL
In connection with the acquisition discussed in Note 1 above, the Company
recognized goodwill of approximately $372,000. This goodwill is being amortized
on a straight-line basis over 20 years. Accumulated amortization as of December
31, 1996, totaled approximately $52,000.
Statements of Cash Flows-
SUPPLEMENTAL DISCLOSURES
The Company considers funds invested in highly liquid investments having a
maturity of 90 days or less when acquired to be cash equivalents. During 1994,
as a result of the JFS acquisition, noncash investing and financing activities
include the acquisition of approximately $1,015,000 in assets and approximately
$372,000 in goodwill in exchange for the assumption of approximately $1,179,000
in liabilities. During 1996, the Company also entered into $68,504 of capital
leases.
The following relates to cash interest and income taxes paid by the Company for
the periods indicated:
YEAR ENDED DECEMBER 31
------------------------------
1996 1995 1994
-------- -------- --------
Cash paid during the year for interest ........ $149,287 $181,769 $143,980
Cash paid during the year for income taxes .... 13,173 -- 39,000
POST RETIREMENT AND POST EMPLOYMENT BENEFITS
The Company does not provide post retirement nor post employment benefits to its
employees.
SELF-INSURANCE RISK
The Company self insures under its medical coverage for employees and dependents
based upon monthly attachment limits which are calculated based upon the number
of participants and monthly participant charges. The Company accrues for known
claims and an estimate of claims incurred but not reported up to the maximum
anticipated costs to the Company.
20
<PAGE>
DOCUCON, INCORPORATED
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
During 1996, the Company recognized approximately $300,000 in self-insurance
expense under the attachment limits. The Company's insurer will pay cumulative
claims above the attachment limit up to $1 million. The Company does not believe
that claims reported and claims incurred but not reported related to 1996 will
exceed the amount to be covered by the insurer.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards (SFAS) No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities," in June 1996. This
statement provides accounting and reporting standards for, among other things,
the transfer and servicing of financial assets, such as factoring receivables
with recourse and will require the Company to classify its financial assets
pledged as collateral separately in the financial statements. This statement is
effective for transactions occurring after December 31, 1996, and is to be
applied prospectively. Earlier or retroactive application is not permitted. In
December 1996, the FASB issued SFAS No. 127, "Deferral of the Effective Date of
Certain Provisions of SFAS No. 125." SFAS No. 127 moves forward some, but not
all, of the provisions of SFAS No. 125 to December 31, 1997. The Company
believes the adoption of these statements will not have an impact on the
financial condition or results of operations of the Company.
In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share." SFAS No.
128 replaces the presentation of Primary Earnings Per Share (EPS) with Basic EPS
and requires dual presentation of Basic and Diluted EPS on the face of the
statements of operations and requires a reconciliation of the numerator and
denominator of the Basic EPS computation to the numerator and denominator of the
Diluted EPS computation. Basic EPS excludes dilution and is computed by dividing
income available to common stockholders by the weighted-average number of common
shares outstanding for the period. Diluted EPS reflects the potential dilution
that could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common
stock that then shared in the earnings of the Company. Diluted EPS is computed
similarly to Fully Diluted EPS pursuant to Accounting Principles Board Opinion
No. 15, "Earnings Per Share." SFAS No. 128 is effective for financial statements
issued after December 15, 1997, and earlier application is not permitted. SFAS
No. 128 requires restatement of all prior-period EPS data presented.
3. REVOLVING TERM NOTE:
In connection with the refinancing of the note payable discussed in Note 5, the
Company also obtained a $750,000 revolving term note (the Revolver) maturing on
October 31, 1997. At December 31, 1996, $750,000 was outstanding under the
Revolver. The Revolver bears interest at the bank's Base Rate (as defined) plus
.75 percent (9.00 percent at December 31, 1996). Interest is payable monthly and
the Revolver is secured by the same collateral as the note payable. In January
1997, the Revolver was repaid in its entirety for a period of 30 days. At
February 14, 1997, amounts outstanding under the Revolver totaled $320,000.
21
<PAGE>
DOCUCON, INCORPORATED
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
4. LEASES:
Certain office equipment and office space is leased under various noncancelable
operating leases with lease terms ranging from one to five years. Rent expense
under all cancelable and noncancelable operating leases was approximately
$285,000, $395,000 and $293,000 for the years ended December 31, 1996, 1995 and
1994, respectively. Future minimum lease payments for all noncancelable
operating leases, as of December 31, 1996, are as follows:
Year ending December 31-
1997 .............................. $117,754
1998 .............................. 106,580
1999 .............................. 89,284
2000 .............................. 1,484
--------
Total future minimum lease payments $315,102
========
5. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS:
In connection with the purchase of its headquarters' building, the Company
issued a four-year, 8 percent promissory note with the principal amount of $1.5
million due in December 1996 and interest payable quarterly. Additionally, the
Company issued 900,000 warrants, which expire in December 1999, to purchase an
equivalent number of shares of common stock at an exercise price of $2.00 per
share. In October 1996, the Company refinanced the $1.5 million note. The new
note is payable to a commercial bank, bears interest at a fixed rate of 9.5
percent per annum and requires monthly principal and interest payments of
$14,448 with the remaining balance maturing in October 2001. The note payable is
secured by the Company's building, other fixed assets, accounts receivable and
inventory. Debt issuance costs of approximately $68,000 incurred in October 1996
related to this refinancing were capitalized and are being amortized over the
five-year term. These costs are reflected as a component of software development
costs and other on the accompanying balance sheet. The note agreement contains
various affirmative and negative covenants and requires the Company to maintain
(as defined in the note agreement); (i) a current ratio of not less than 1:1,
(ii) a debt-to-net worth ratio of not more than 2:1, (iii) a debt coverage ratio
of not less than 1.25:1 and (iv) a minimum tangible net worth of $1.9 million.
At December 31, 1996, the Company was in compliance with these requirements with
the exception of a negative covenant prohibiting the incurrence of additional
indebtedness. The Company has obtained a waiver from its lender for additional
indebtedness that was incurred relating to capital lease obligations and
short-term borrowings from one of the Company's officers. The fair value of the
Company's long-term debt approximates its carrying value based upon the
borrowing rates available to the Company for long-term debt with similar terms.
Maturities of this note payable as of December 31, 1996, are as follows:
Year ending December 31-
1997 ................. $ 27,729
1998 ................. 30,480
1999 ................. 33,506
2000 ................. 36,831
2001 ................. 1,417,153
----------
Total ....... $1,545,699
==========
22
<PAGE>
Equipment held under capital leases and related obligations at December 31,
1996, are as follows:
Telecommunications equipment requiring monthly principal
and interest payments of $977, interest at 9.3 percent
and maturing July 2001 ......................................... $ 53,745
Office equipment requiring monthly principal and interest
payments of $458, interest at 9.5 percent and maturing
April 2001 ..................................................... 23,812
--------
Total capital lease payments ..................................... 77,557
Less- Amounts representing interest .............................. (14,526)
--------
Capital lease obligations ........................................ $ 63,031
========
Maturities of capital lease obligations as of December 31, 1996, are as follows:
Year ending December 31-
1997 ................. $11,820
1998 ................. 12,974
1999 ................. 14,245
2000 ................. 15,637
2001 ................. 8,355
-------
Total ....... $63,031
=======
6. MAJOR CUSTOMER:
The Company has historically earned a significant portion of its total revenues
from conversion services performed for the Department of Defense (DOD).
Specifically, the Company earned approximately $8,890,000, $4,194,000 and
$4,125,000 during the years ended December 31, 1996, 1995 and 1994,
respectively, from services provided to the DOD.
7. PREFERRED STOCK:
In 1990, the Company issued 46 shares of 11 percent Series A preferred stock at
$25,000 per share. Each share of preferred stock is convertible into 33,333
shares of common stock. Through December 31, 1996, 27 shares of preferred stock
have been converted. Additionally, 219,669 shares of common stock have been
issued in lieu of accumulated dividends on the preferred stock which was
converted. As of December 31, 1996, cumulative undeclared dividends on the
preferred stock approximated $345,000.
8. STOCK OPTIONS:
The Company adopted the 1988 Stock Option Plan (the 1988 Plan) which allows for
the granting of stock options at the current market value of the common stock at
the date of the grant to key employees. An aggregate of 1,360,000 shares of
common stock has been reserved for issuance pursuant to the 1988 Plan. In
February 1997, the Company's Board of Directors authorized an increase in the
number of shares of common stock reserved for issuance pursuant to the 1988 Plan
by 700,000 shares. The 1991 Director Non-Statutory Stock Option Plan (the
Director Plan) provides for the granting of options at the common stock's
current market value to members of the board of directors of the Company who are
not employees of the Company. The Director Plan authorizes the granting of
options to purchase up to 500,000 shares of the Company's common stock. The
stock options granted under the 1988 Plan and the Director Plan are exercisable
pursuant to the individual agreements between the Company and the grantee and
range
23
<PAGE>
from a six-month to a three-year vesting period. All options granted under these
plans must be exercised within 10 years from the date of grant and expire within
three months after termination of employment or service as a director.
A summary of activity in the Company's stock option plans is set forth below:
<TABLE>
<CAPTION>
Weighted
Average Market Price
Exercise Option Price At Date Of Grant
Price ---------------------------- ---------------------------
Shares Per Share Per Share Total Per Share Total
--------- ----- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding,
December 31, 1993 ............... 936,100 $1.17 $.70-$2.44 $1,091,955 $.70-$2.44 $1,091,955
--------- ----- ----------- ---------- ---------- ----------
Granted ........................... 351,850 .72 .56-.95 253,210 .56-.95 253,210
Exercised ......................... -- -- -- -- -- --
Terminated ........................ 95,500 1.34 .70-1.63 128,247 .70-1.63 128,247
--------- ----- ----------- ---------- ---------- ----------
Outstanding,
December 31,1994 ................ 1,192,450 1.02 .56-2.44 $1,216,918 .56-2.44 $1,216,918
========= ===== =========== ========== ========== ==========
Exercisable,
December 31, 1994 ............... 825,195 1.01 .70-2.44 $ 836,656 .70-2.44 $ 836,656
========= ===== =========== ========== ========== ==========
Price reduction ................... -- -- -- 546,165 -- --
Granted ........................... 164,200 .51 .41-.56 83,930 .41-.56 83,930
Exercised ......................... -- -- -- -- -- --
Terminated ........................ 69,100 .56 .53-.56 38,644 .53-2.44 43,385
--------- ----- ----------- ---------- ---------- ----------
Outstanding,
December 31, 1995 ............... 1,287,550 .56 .41-.56 $ 716,039 .41-2.44 $1,257,463
========= ===== =========== ========== ========== ==========
Exercisable,
December 31, 1995 ............... 1,029,384 .56 .53-.56 $ 577,753 .53-2.44 $1,067,723
========= ===== =========== ========== ========== ==========
Granted ........................... 284,200 .93 .88-1.22 265,194 .88-1.22 265,194
Exercised ......................... 66,383 .56 .53-.56 37,111 .53-1.44 61,653
Terminated ........................ 40,617 .68 .44-.56 27,675 .44-1.44 31,451
--------- ----- ----------- ---------- ---------- ----------
Outstanding,
December 31, 1996 ............... 1,464,750 .63 .41-1.22 $ 916,447 .41-2.44 $1,429,553
========= ===== =========== ========== ========== ==========
Exercisable,
December 31, 1996 ............... 1,184,272 .59 .41-1.22 $ 702,410 .41-2.44 $1,187,191
========= ===== =========== ========== ========== ==========
</TABLE>
On February 14, 1995, the Company's board of directors voted to reduce the
exercise price for all outstanding options granted under the 1988 Plan and the
Director Plan to $.5625 per share, the current market price of the Company's
common stock on that date. This reduction is shown in the above table.
24
<PAGE>
In October 1995, Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" (SFAS 123), was issued. SFAS 123
defines a fair value based method of accounting for employee stock options or
similar equity instruments and encourages all entities to adopt that method of
accounting for all of their employee stock compensation plans. Under the fair
value based method, compensation cost is measured at the grant date based on the
value of the award and is recognized over the service period of the award, which
is usually the vesting period. However, SFAS 123 also allows entities to
continue to measure compensation costs for employee stock compensation plans
using the intrinsic value method of accounting prescribed by Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB
25). Entities electing to remain with the accounting prescribed by APB 25, as
the Company has, must make pro forma disclosures of net income and earnings per
share as if the fair value based method recommended by SFAS 123 had been
applied. The following provides pro forma disclosures of net income and earnings
per share as if the fair value based method of accounting under SFAS 123 had
been applied.
Had compensation cost for these plans been determined consistent with SFAS 123,
the Company's net income (loss) and earnings (loss) per share would have been
reduced (increased) to the following pro forma amounts:
1996 1995
------------- --------------
Net Income (Loss) As Reported $ 764,671 $ (605,563)
Pro Forma 592,978 (1,029,798)
Primary Earnings (Loss) Per Share As Reported $ .06 $ (.06)
Pro Forma .05 (.09)
Because the SFAS 123 method of accounting has not been applied to options
granted prior to January 1, 1995, the resulting pro forma compensation cost may
not be representative of that to be expected in future years.
The weighted average fair value per share of options granted during 1996 and
1995 were $.65 and $.39, respectively. The fair value of each option grant is
estimated on the date of grant using the Black-Scholes option pricing model with
the following weighted average assumptions used for grants in 1996 and 1995,
respectively: risk-free interest rates of 6.0 percent and 6.1 percent, expected
dividend yields of 0 percent and 0 percent, expected lives of 5 years and 4.2
years and expected volatility of 87 percent and 91 percent.
Included as a component of pro forma expense for 1996 and 1995 is compensation
expense of approximately $71,000 and $26,000, respectively, related to the 1993
Employee Stock Purchase Plan described in Note 9. Included as a component of the
1995 pro forma compensation expense is approximately $222,000 related to the
February 14, 1995, price reduction discussed above.
In addition to the above stock option agreements, the Company has warrants and
options outstanding with certain lenders and other parties. As of December 31,
1996, the total number of shares issuable under these warrants and options was
1,032,727, at exercise prices ranging from $1.25 to $2.00 per share.
9. EMPLOYEE BENEFIT PLANS:
Effective January 1, 1994, the Company adopted the 1993 Employee Stock Purchase
Plan (the Stock Purchase Plan). Under the Stock Purchase Plan, eligible
employees may elect to have up to 10 percent of their base pay (as defined)
deducted and utilized to purchase common stock of the Company in annual or
semiannual offerings. The Company has reserved 800,000 shares of common stock
for issuance pursuant to the Stock Purchase Plan. In February 1997, the
Company's Board of Directors authorized 800,000 shares of common stock for
issuance pursuant to a new 1997 Stock Purchase Plan for the years 1998 through
2001. In January 1997, 1996 and 1995, the Company issued
25
<PAGE>
286,048, 100,583 and 70,983 shares of common stock at purchase prices of $.32,
$.32 and $.35 per share, respectively. The annual purchase price is 85 percent
of the lesser of the closing price of the Company's common stock at the
beginning or end of each calendar year. The purchase prices represent 85 percent
of the closing price on December 29, 1995, December 29, 1995, and December 30,
1994, respectively. The Stock Purchase Plan is administered by the Compensation
Committee of the Board of Directors and will expire on December 31, 1997. At
December 31, 1996, 342,386 shares remain available for issuance.
The Company also maintains a qualified employee benefit plan under Section
401(k) of the Internal Revenue Code. Under this plan, employees meeting certain
eligibility requirements may contribute up to 15 percent of their eligible
compensation to the plan on a pretax basis. In addition, the Company may make
voluntary matching contributions to the plan. At December 31, 1996, 1995 and
1994, respectively, the Company had accrued approximately $28,000, $28,000 and
$25,000 as its matching contributions to the plan.
10. INCOME TAXES:
The Company follows SFAS No. 109, "Accounting for Income Taxes." This statement
establishes financial accounting and reporting standards for deferred income tax
liabilities that arise as a result of differences between the reported amounts
of assets and liabilities for financial reporting and income tax purposes.
As of December 31, 1996, the Company had net operating loss carryforwards of
approximately $5.7 million for federal income tax purposes which are available
to reduce future taxable income and will expire in 2004 through 2010 if not
utilized.
The components of income tax expense attributable to continuing operations are
as follows:
YEAR ENDED DECEMBER 31
-----------------------------
1996 1995 1994
------- ----- -------
Federal ...................................... $ 3,000 $-- $ --
State ........................................ 34,000 -- 13,200
------- ----- -------
Total income tax expense ........ $37,000 $-- $13,200
======= ===== =======
Total income tax expense differs from the amount computed by applying the
statutory federal income tax rate to income before income taxes. The reasons for
these differences are as follows:
YEAR ENDED DECEMBER 31
1996 1995 1994
--------- --------- ---------
Expected federal income tax
expense (benefit) ....................... $ 273,000 $(206,000) $(581,000)
State income taxes, net of federal
income tax benefit ...................... 34,000 -- 13,200
Alternative minimum tax expense ......... 3,000 -- --
Other, net .............................. -- -- 19,000
Utilization of tax loss carryforwards ... (273,000) -- --
Provision for valuation reserve ......... -- 206,000 562,000
--------- --------- ---------
Total income tax expense ...... $ 37,000 $ -- $ 13,200
========= ========= =========
26
<PAGE>
The tax effect of significant temporary differences representing income tax
assets (liabilities) is as follows:
DECEMBER 31
------------------------------
1996 1995
----------- ----------
Deferred income tax assets
(liabilities)-
Tax loss carryforwards ................. $ 1,932,000 $2,200,000
Tax credit carryforwards ............... 20,000 --
Depreciation ........................... 135,000 135,000
Deferred revenues ...................... 191,000 115,000
Other .................................. 46,000 74,000
Software development costs ............. (61,000) --
----------- ----------
$ 2,263,000 $2,524,000
=========== ==========
A valuation reserve of $2,263,000 and $2,524,000 as of December 31, 1996 and
1995, respectively, representing the total of net deferred tax assets has been
recognized by the Company as it cannot determine that it is more likely than not
that all of the deferred tax assets will be realized.
11. BUSINESS SEGMENT INFORMATION:
The Company's operations have been classified into two business segments:
conversion and software products. The conversion segment is comprised of
document conversion services for the government, commercial and litigation
support customers. The software products segment includes sales of software,
service, training and installation.
Summarized financial information by business segment for 1996, 1995 and 1994 is
as follows (in thousands):
1996 1995 1994
-------- -------- -------
Net sales-
Conversion .......................... $ 10,427 $ 8,916 $ 8,231
Software products ................... 3,097 2,122 385
-------- -------- -------
$ 13,524 $ 11,038 $ 8,616
======== ======== =======
Operating income (loss)-
Conversion .......................... $ 2,161 $ 546 $ 159
Software products ................... (99) (48) (508)
Corporate and unallocated ........... (1,124) (965) (1,247)
-------- -------- -------
$ 938 $ (467) $(1,596)
======== ======== =======
Total assets-
Conversion .......................... $ 4,814 $ 3,561 $ 3,492
Software products ................... 2,396 1,324 1,134
Corporate ........................... 927 858 1,097
-------- -------- -------
$ 8,137 $ 5,743 $ 5,723
======== ======== =======
27
<PAGE>
1996 1995 1994
-------- -------- -------
Depreciation and amortization-
Conversion .......................... $ 390 $ 738 $ 957
Software products ................... 249 180 140
Corporate ........................... 122 74 70
-------- -------- -------
$ 761 $ 992 $ 1,167
======== ======== =======
Capital expenditures-
Conversion .......................... $ 499 $ 438 $ 239
Software products ................... 268 57 195
Corporate ........................... 101 38 80
-------- -------- -------
$ 868 $ 533 $ 514
======== ======== =======
12. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED):
The results of operations by quarter for the years ended December 31, 1996 and
1995, were as follows:
Earnings
Operating Net Income (Loss)
Revenues (Loss) Per Share
----------- --------- ----
1996-
Quarter ended-
March 31 ................... $ 2,333,653 $ 4,824 $--
June 30 .................... 3,351,968 198,965 .02
September 30 ............... 4,092,477 492,213 .04
December 31 ................ 3,745,402 68,669 --
----------- ---------
Total ............ $13,523,500 $ 764,671
=========== =========
1995-
Quarter ended-
March 31 ................... $ 2,618,941 $(434,066) $(.04)
June 30 .................... 3,267,566 (272,876) (.02)
September 30 ............... 2,304,773 (182,273) (.02)
December 31 ................ 2,846,566 283,652 .02
----------- ---------
Total ............ $11,037,846 $(605,563)
=========== =========
28
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
The Company has not changed independent accountants within the twenty-four
months prior to December 31, 1996 or subsequent to that date.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
DIRECTORS, EXECUTIVE OFFICERS AND KEY TECHNICAL PERSONNEL
The following table sets forth certain information with respect to the
Company's Directors, executive officers and key technical personnel:
NAME AGE POSITION
---- --- --------
Edward P. Gistaro 61 Chairman of the Board and Chief Executive
Officer and Director
Allan H. Hobgood 58 President and Chief Operating Officer and
Director
Lori A. Turner 39 Vice President of Finance and Treasurer
Ralph Brown 63 Secretary and Director
Al R. Ireton 62 Director
Philip J. Romano 57 Director
Chauncey E. Schmidt 65 Director
Jim Feuerstein * 47 Senior Vice President and Chief Technical
Officer, JFS Division
Jane Gennarelli * 41 Vice President/Senior Consultant
- ------------
* Not considered "executive officers", as defined in Rule 405 promulgated by
the Securities and Exchange Commission under the Securities Act of 1933, as
amended.
30
<PAGE>
Edward P. Gistaro has served as Chief Executive Officer of the Company
since June 4, 1988 and served as President from July 10, 1988 until March 18,
1991. Mr. Gistaro was employed by Datapoint Corporation, a company involved in
the manufacturing of computer systems, in various managerial positions from 1973
to 1987. From 1982 to 1985 Mr. Gistaro served as the President and Chief
Operating Officer of Datapoint Corporation, and he served from 1985 to 1987 as
its President and Chief Executive Officer.
Allan H. Hobgood was elected Chief Operating Officer of the Company on
April 16, 1991 and President of the Company on November 4, 1992. Mr. Hobgood had
served as the Company's Vice President of Marketing from August 25, 1988 to
April 16, 1991. From January 1988 until August 1988, Mr. Hobgood served as Vice
President of Sales for Advanced Signing, Inc., a commercial sign firm, and from
1981 to March, 1987, Mr. Hobgood held several managerial positions relating to
marketing, including Vice President of U.S. Sales, at Datapoint Corporation.
Lori A. Turner, C.P.A., C.M.A., was appointed Vice President in early
1996. She joined the Company in May 1990 as Controller and was appointed
Treasurer in June 1990. In July 1991, Ms. Turner was elected Assistant Secretary
to the Company. From 1984 through 1989, Ms. Turner held various financial
positions at Fuddruckers, Inc., a fast-food restaurant chain. Prior to joining
Docucon, she worked as a consultant for Fuddruckers and other firms.
Ralph Brown, an attorney in private practice since 1968, has served as
Secretary of the Company since May 1, 1987. From 1987 to 1989, he served also as
Treasurer of the Company. Mr. Brown has also served since 1975 as President of
Cherokee Ventures, Inc., a real estate leasing firm, since 1978 as President of
East Central Development Corporation and since 1982 as President of Southeast
Suburban Properties, Inc. The latter two businesses are real estate development
firms.
Al R. Ireton was elected as a Director of the Company in May 1993. Mr.
Ireton has been Chairman of Manchester Partners, an investment and growth
strategy advisory organization providing capital and strategic assistance to
growing companies, since October 1988. From 1985 through September 1988, he
served as President and Chief Executive Officer of Texet Corporation, a desktop
publishing company. Mr. Ireton has 25 years' experience serving as president and
chief executive officer of growth-oriented companies, and has served on several
corporate boards.
Philip J. Romano served as Chairman of the Board of the Company from
September 6, 1988 until June 4, 1989. Mr. Romano founded Fuddruckers, Inc. and
served as a director of that company from its inception in 1979 until November
1988. Mr. Romano was President of Fuddruckers, Inc. from its inception until
January 1985. Since January 1985, Mr. Romano has been a private investor.
Chauncey E. Schmidt was elected to the Board of Directors of the Company
in February 1993. He has been Chairman of C. E. Schmidt & Associates, an
investment firm, since April 1989. From 1987 to March 1989, he was Vice Chairman
of the Board of AMFAC, Inc., a New York Stock Exchange-listed company engaged in
diversified businesses. He has previously served as President of The First
National Bank of Chicago and Chairman of the Board and Chief Executive Officer
of The Bank of California, N.A. Mr. Schmidt is on the Board of Trustees of the
U. S. Naval War College Foundation and is active in several civic and charitable
organizations.
Jim Feuerstein joined the Company as Senior Vice President and Chief
Technical Officer of the JFS Division in March 1994 in connection with the JFS
transaction. Mr. Feuerstein founded
31
<PAGE>
J. Feuerstein Systems in 1981 as a consulting firm for information management in
large-scale litigation, establishing a strong reputation in the pharmaceutical,
insurance and legal markets.
Jane Gennarelli was appointed Vice President/Senior Consultant in January
1996. She joined the Company as Vice President of Operations of the JFS Division
in March 1994 in connection with the JFS transaction. Ms. Gennarelli served J.
Feuerstein Systems as Project Manager and as Director of Litigation Support
Services from September 1985 to March 1994. Previously, she was employed by
Control Data Corporation (now Quorum Systems) of Minneapolis, Minnesota and
Informatics of Rockville, Maryland.
GENERAL
Directors of the Company hold office until the next Annual Meeting of
Stockholders of the Company and until their successors are elected and
qualified. Executive officers of the Company are elected annually by, and serve
at the discretion of the Board of Directors. There are no arrangements or
understandings known to the Company between any of the Directors, nominees for
Director or executive officers of the Company and any other person pursuant to
which any of such persons was elected as a Director or an executive officer,
except as set forth below under Item 10, "Executive Compensation Employment
Agreements". There are no family relationships between any Directors, nominees
for Director or executive officers of the Company.
COMPLIANCE WITH SECTION 16(A) OF THE
SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's officers and Directors, and persons who beneficially own more than 10%
of a registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
(the "SEC") and the Boston Stock Exchange. Officers, Directors and beneficial
owners of more than 10% of the Company's Common Stock are required by SEC
regulations to furnish the Company with copies of all Section 16(a) forms that
they file. Based solely on review of the copies of such forms furnished to the
Company, or written representations that no reports on Form 5 were required, the
Company believes that for the period from January 1, 1996 through March 31,
1997, all officers, Directors and greater-than-10% beneficial owners complied
with all Section 16(a) filing requirements applicable to them.
ITEM 10. EXECUTIVE COMPENSATION.
EXECUTIVE COMPENSATION -- GENERAL
The following table sets forth compensation paid or awarded to the Chief
Executive Officer and the only other executive officer of the Company whose
compensation exceeded $100,000 for all services rendered to the Company in 1996,
1995 and 1994:
32
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
-------------------------------- ----------------------
BONUS/ANNUAL SECURITIES LONG-TERM ALL
INCENTIVE UNDERLYING INCENTIVE OTHER COM-
NAME AND PRINCIPAL POSITION YEAR SALARY AWARD (1) OPTIONS PAYOUTS PENSATION (2)
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Edward P. Gistaro ......... 1996 $131,682 $ 97,850 50,000 $ -- $1,468
Chairman of the Board ..... 1995 129,192 -- -- -- 2,238
and Chief Executive Officer 1994 102,701 20,000 45,000 -- --
Allan H. Hobgood .......... 1996 100,712 112,647 50,000 -- 1,468
President and ............. 1995 100,256 68,637 -- -- 2,250
Chief Operating Officer ... 1994 99,732 48,047 45,000 -- --
</TABLE>
- --------------------
(1) Mr. Gistaro is eligible to receive target bonus payments totalling
$76,000 under the 1996 Management Incentive Bonus Plan as approved by
the Compensation Committee of the Board of Directors. These payments may
be increased or decreased depending upon the percentage of achievements
of specified goals, which include revenues and returns on assets.
Mr. Hobgood is eligible to receive 5.5% of the government and commercial
division profits.
(2) Matching contributions under the Company's 401(k) Plan.
STOCK OPTION GRANTS IN 1996
INDIVIDUAL GRANTS
----------------------------------------------------------
NUMBER OF % OF TOTAL
SECURITIES OPTIONS GRANTED EXERCISE
UNDERLYING TO EMPLOYEES PRICE EXPIRATION
NAME OPTIONS GRANTED IN FISCAL YEAR PER SHARE DATE
- --------------------------------------------------------------------------------
Edward P. Gistaro..... 50,000 17.59% $.875 05/12/06
Allan H. Hobgood...... 50,000 17.59% .875 05/12/06
STOCK OPTION EXERCISES IN 1996 AND OPTION VALUES AT DECEMBER 31, 1996
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
SHARES NUMBER OF UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
ACQUIRED AT DECEMBER 31, 1996 AT DECEMBER 31, 1996
ON VALUE --------------------------------- ---------------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------ ---------- ---------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Edward P. Gistaro -- -- 281,667 33,333 $ 94,708 $ 19,974
Allan H. Hobgood -- -- 271,667 33,333 90,857 19,974
</TABLE>
33
<PAGE>
EMPLOYMENT AGREEMENTS
Both Edward P. Gistaro and Allan H. Hobgood have employment agreements
with the Company. Pursuant to such agreements, Mr. Gistaro is to be paid
$100,000 per annum and Mr. Hobgood is to be paid $96,000 per annum and 5.5% of
the profits of the government and commercial divisions. The agreements do not
have fixed terms, and are terminable upon 30 days' prior written notice by
either the Company or the employee, or by the Company "for cause" at any time.
Further, each agreement requires that the employee keep Company matters
confidential, restricts the employee from being directly or indirectly involved
with any entity in a business competitive with that of the Company for a period
of years following the termination of the agreement, and provides for a
severance payment to the employee in the event he is terminated by the Company
without cause.
STOCK OPTIONS
1988 STOCK OPTION PLAN
The Company has a 1988 Stock Option Plan, currently covering an aggregate
of 1,360,000 shares of Common Stock. The 1988 Stock Option Plan provides for the
grant to officers, Directors and key employees of the Company of incentive stock
options ("ISOs") intended to qualify under Section 422(b) of the Internal
Revenue Code of 1986, as amended (the "Code") and non-qualified stock options
("NQSOs"). The 1988 Stock Option Plan was approved by the stockholders of the
Company on November 15, 1988. Amendments to the 1988 Stock Option Plan
increasing the number of shares covered thereby were approved by the
stockholders of the Company on April 21, 1989, May 14, 1991 and May 7, 1992. As
of March 14, 1997, under the 1988 Stock Option Plan there were outstanding
options to purchase 1,155,350 shares of the Company's Common Stock at prices
ranging from $.41 to $1.38 per share.
Under the 1988 Stock Option Plan, which is administered by the Stock
Option Committee of the Board of Directors, key employees may be granted options
to purchase shares of the Company's Common Stock at 100% of fair market value on
the date of grant (or 110% of fair market value in the case of an ISO granted to
a 10% stockholder/grantee). The 1988 Stock Option Plan expires on October 31,
1998. Options granted under the 1988 Stock Option Plan must be exercised within
ten years from the date of grant, vest at varying times, as determined by the
Stock Option Committee, are nontransferable except by will or pursuant to the
laws of descent and distribution, are protected against dilution and expire
within three months after termination of employment, unless such termination is
by reason of death or disability or for cause. All shares purchased upon
exercise of any option must be paid in full at the time of purchase, in
accordance with the terms set forth in the option. Such payment must be made in
cash or through delivery of shares of Common Stock or a combination of cash and
Common Stock, all as determined by the Stock Option Committee. The Stock Option
Committee may determine other terms applicable to particular options. No one
person may receive ISO options for which the aggregate fair market value
(determined at the time each ISO is granted) of options exercisable for the
first time during any calendar year exceeds $100,000.
34
<PAGE>
1991 DIRECTOR NON-STATUTORY STOCK OPTION PLAN
The Company also has a 1991 Director Non-Statutory Stock Option Plan (the
"1991 Director Plan"), currently covering an aggregate of 500,000 shares of
Common Stock. The 1991 Director Plan was approved by the stockholders of the
Company on May 7, 1992 and provides for the grant of NQSOs to non-employee
Directors of the Company. As of March 14, 1997, there were outstanding under the
1991 Director Non-Statutory Stock Option Plan options to purchase 310,000 shares
of the Company's Common Stock at prices ranging from $.53 to $1.38 per share.
Under the 1991 Director Plan, which is administered by the Board of
Directors, non-employee Directors are granted options to purchase 40,000 shares
of the Company's Common Stock upon their initial election as Directors and
30,000 shares on the second anniversary date of such election at the
then-current market price of such shares. One-third of the initial grant shall
vest on each anniversary of the date of grant, and one-third of the second grant
shall vest every six months after the date of grant. The 1991 Director Plan
expires on February 10, 2001. Under an amendment to the 1991 Director Plan
adopted by the Board of Directors in February 1992, each eligible Director will
receive an additional annual grant of options covering 10,000 shares of Common
Stock, commencing with the fiscal year of the Company immediately following the
fiscal year in which all shares of Common Stock covered by the initial grant and
the second grant described above are fully vested, and such annual grant will
continue each fiscal year thereafter until options covering all shares reserved
for issuance under the 1991 Director Plan have been granted. Options granted
under the 1991 Director Plan must be exercised within ten years from the date of
grant, are nontransferable except by will or pursuant to the laws of descent and
distribution, are protected against dilution and expire within three months
after termination of service as a Director of the Company, unless such
termination is by reason of death or disability or for cause. All shares
purchased upon exercise of any option must be paid in full at the time of
purchase, in accordance with the terms set forth in the option. Such payment
must be made in cash or through delivery of shares of Common Stock or a
combination of cash and Common Stock. The 1991 Director Plan may be amended at
any time by vote of the Board of Directors.
During 1996, Messrs. Ralph Brown and Philip J. Romano, both Directors of
the Company, were granted options covering 10,000 shares each of Common Stock at
an exercise price of $1.03 per share. The exercise price per share of each such
option was not less than the closing bid price of the Common Stock reported on
The Nasdaq Stock Market on the date of the grant.
35
<PAGE>
REPRICING OF OUTSTANDING OPTIONS
Set forth below is certain information concerning a repricing of options
held by the executive officers named in the Summary Compensation Table set forth
in Item 10, "Executive Compensation General", during the period October 24, 1986
through February 28, 1995:
<TABLE>
<CAPTION>
LENGTH OF
ORIGINAL
MARKET PRICE EXERCISE OPTION TERM
NUMBER OF OF STOCK AT PRICE AT REMAINING AT
OPTIONS/ TIME OF TIME OF DATE OF
SARS REPRICING REPRICING NEW REPRICING OR
REPRICED OR OR OR EXERCISE AMENDMENT
NAME DATE AMENDED AMENDMENT AMENDMENT PRICE (MONTHS)
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Edward P. Gistaro 6/23/89 90,000 .56 .70 .56 51
8/28/91 50,000 .56 1.25 .56 77
8/13/92 30,000 .56 1.375 .56 88
8/10/93 50,000 .56 1.218 .56 100
Allan H. Hobgood 6/23/89 60,000 .56 .70 .56 51
5/28/91 50,000 .56 1.25 .56 74
8/28/91 30,000 .56 1.25 .56 77
8/13/92 30,000 .56 1.375 .56 88
8/10/93 40,000 .56 1.218 .56 100
</TABLE>
In order to ensure that the Company's equity-based compensation programs
meet their goals of providing motivation and incentive for key executives of the
Company, the Board of Directors determined at a meeting held on February 14,
1995, that it was desirable to reprice all outstanding options held by officers,
Directors and employees of the Company to bring their exercise prices into line
with the then-current market price of the Company's Common Stock. The Company's
stock option plans generally provide that the Board of Directors has the
discretion to effect such a repricing in the exercise of their business
judgment.
EMPLOYEE STOCK PURCHASE PLAN
In order to promote ownership of the Company's Common Stock by its
employees, effective January 1, 1998, the Board of Directors adopted the
Company's 1997 Employee Stock Purchase Plan (the "1997 Purchase Plan"), subject
to approval by the stockholders at the 1997 Annual Meeting of Stockholders.
Under the Stock Purchase Plan, eligible employees may elect to have up to 15% of
their Base Pay (as defined) deducted and utilized for the purchase of Common
Stock of the Company in annual or semiannual offerings to be made by the Company
to eligible employees. The Company has reserved 800,000 shares of Common Stock
for issuance pursuant to the 1997 Purchase Plan.
The Company's 1993 Employee Stock Purchase Plan (the "1993 Purchase Plan")
was approved by the stockholders at the 1994 Annual Meeting of Stockholders.
Under the 1993 Purchase Plan, eligible employees may elect to have up to 10% of
their Base Pay (as defined) deducted and utilized for the purchase of Common
Stock of the Company in annual or semiannual offerings to be made by the Company
to eligible employees. The Company has reserved 800,000 shares of Common Stock
for issuance pursuant to the Stock Purchase Plan. The Company issued 286,048,
100,583 and 70,983 shares in January 1997, 1996 and 1995 pursuant to this Plan
at purchase prices of $.32, $.32 and $.345 per share, which represents 85% of
the closing price on December 29, 1995, December 29, and December 30, 1994,
respectively.
36
<PAGE>
Under the 1993 and 1997 Purchase Plans, the Company will make available in
each year from January 1, 1994 through December 31, 1997 and January 1, 1998
through December 31, 2001, respectively, up to 200,000 shares of Common Stock.
Such shares will be offered to participating employees in annual or semiannual
offerings. Participating employees will be deemed to have been granted options
to purchase Common Stock in each offering in an amount equal to the amount of
their respective payroll deductions divided by 85% of the market value of the
Common Stock of the Company on the applicable Offering Commencement Date. The
option price shall be the lesser of 85% of the closing price of the Common Stock
on the Offering Commencement Date (or the next preceding trading day) or 85% of
the closing price of Common Stock on the Offering Termination Date (or the next
preceding trading day). Unless a participating employee terminates participation
as provided in the Stock Purchase Plan, such employee shall be deemed to have
exercised such option on the Offering Termination Date and shall be issued a
corresponding number of shares of Common Stock.
The 1993 and 1997 Purchase Plans are administered by the Compensation
Committee of the Board of Directors and will expire on December 31, 1997 and
December 31, 2001, respectively, unless sooner terminated or amended by the
Board of Directors.
37
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of March 1, 1997, by all persons
known to the Company to own beneficially more than 5% of the Company's Common
Stock.
Name and Amount and
Address of Nature of Percent
Title of Class Beneficial Owners Beneficial Ownership of Class
- --------------------------------------------------------------------------------
Common Stock, Demuth, Folger & Terhune 900,000 (1) 6.5
par value $.01 One Exchange Plaza
per share 55 Broadway
New York, New York 10006
- ------------
(1) Consists of 900,000 shares of Common Stock underlying a Warrant to
Purchase Common Stock exercisable at an exercise price of $2.00 per share.
The percentage of ownership is calculated based on 13,856,936 shares of
outstanding.
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of March 1, 1997 (a) by each of the
Company's directors, (b) by the Company's Chief Executive Officer and its only
other executive officer whose 1996 compensation exceeded $100,000, and (c) by
all Directors and executive officers as a group.
Name and Amount and
Address of Nature of Percent
Title of Class Beneficial Owner (1) Beneficial Ownership (2) of Class (3)
- --------------------------------------------------------------------------------
Common Stock, Edward P. Gistaro 588,663 (4) 4.44%
par value $.01 Allan H. Hobgood 407,586 (5) 3.05%
per share Ralph Brown 273,100 (6) 2.1%
Al R. Ireton 70,000 (7) .54%
Philip J. Romano 230,763 (6) 1.77%
Chauncey E. Schmidt 115,000 (8) .88%
All Directors and
Executive Officers
as a Group (7
persons including
the above) 1,704,424 (9) 12.54%
- --------------------
(1) The address for all persons named is 7461 Callaghan Road, San Antonio,
Texas 78229.
(2) The persons named in the table have sole voting and investment power with
respect to all shares of Common Stock shown as beneficially owned by them,
except as otherwise indicated.
38
<PAGE>
(3) Unless otherwise indicated below, the percentage of ownership is based
upon 12,956,936 shares of Common Stock outstanding, which includes 633,327
shares of Common Stock into which outstanding shares of Preferred Stock
are convertible and which the holders of the Preferred Stock are entitled
to vote.
(4) Includes 298,334 shares subject to currently exercisable stock options.
The percentage of ownership is based on 13,255,270 shares outstanding.
(5) Includes 288,334 shares subject to currently exercisable stock options.
The percentage of ownership is based on 13,245,270 shares outstanding.
(6) Includes 55,000 shares subject to currently exercisable stock options. The
percentage of ownership is based on 13,011,936 shares outstanding.
(7) Includes 70,000 shares subject to currently exercisable stock options. The
percentage of ownership is based on 13,026,936 shares outstanding.
(8) Includes 70,000 shares subject to currently exercisable stock options. The
percentage of ownership is based on 13,026,936 shares outstanding.
(9) Includes 919,502 shares subject to currently exercisable stock options.
The percentage of ownership is based on 13,876,438 shares outstanding.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
In December 1996 the chief executive officer loaned the Company $100,000
for a period of 5 days in December 1996. Additionally, in January 1997, the
chief executive officer loaned the Company up to $420,000 over a period of 20
days. The loans were unsecured and bore interest at 9.5% and were paid in full
in December 1996 and February 1997. Since January 1, 1995, no officer, executive
officer, or affiliate of the Company has entered into any other direct or
indirect material transactions, or series of transactions, or had any direct or
indirect material interest in any proposed transaction, or series of
transactions, to which the Company is to be a party where the amount involved
exceeds $60,000.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
The Exhibits required by Regulation S-B are set forth in the following
list and are filed either by incorporation by reference from previous filings
with the Securities and Exchange Commission or by attachment to this Annual
Report on Form 10-KSB, as so indicated in such list.
2.1 Asset Purchase Agreement dated March 15, 1994, between Docucon,
Incorporated and J. Feuerstein Systems, Inc., including the related
Letter Agreement, dated January 28, 1994, between Jim Feuerstein and
Docucon, Incorporated, as filed as Exhibit
39
<PAGE>
2.1 to the Company's Annual Report on Form 10-KSB for the fiscal
year ended December 31, 1993, is hereby incorporated herein by
reference.
3.1 Certificate of Incorporation of Docucon, Incorporated, filed as
Exhibit 3.1 to the Company's Registration Statement on Form S-1
(Registration No. 33-25561), is hereby incorporated herein by
reference.
3.2 Certificate of Amendment to Certificate of Incorporation of Docucon,
Incorporated, filed as Exhibit 3.2 to the Company's Annual Report on
Form 10-KSB for the fiscal year ended December 31, 1992, is hereby
incorporated herein by reference.
3.3 Bylaws of Docucon, Incorporated, filed as Exhibit 3.2 to the
Company's Registration Statement on Form S-1 (Registration No.
33-25561), is hereby incorporated herein by reference.
3.4 Certificate of Merger of Docucon, Incorporated, a Delaware
corporation, and Docucon, Incorporated, a Texas corporation, filed
as Exhibit 3.4 to the Company's Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1995 October 11, 1988, is hereby
incorporated by reference.
3.5 Certificate of Designation Preferences of Series A Convertible
Preferred Stock of Docucon, Incorporated, filed as Exhibit 3.5 to
the Company's Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1995 May 29, 1990, is hereby incorporated by reference.
3.6 Certificate of Designation Preferences of Series B Non-Convertible,
Cumulative, Non-Voting, Redeemable Preferred Stock of Docucon,
Incorporated, filed as Exhibit 3.6 to the Company's Annual Report on
Form 10-KSB for the fiscal year ended December 31, 1995 June 12,
1991, is hereby incorporated by reference.
3.7 Certificate of Correction of Certificate of Designation Preferences
of Series A Convertible Preferred Stock of Docucon, Incorporated,
filed as Exhibit 3.7 to the Company's Annual Report on Form 10-KSB
for the fiscal year ended December 31, 1995 June 1, 1990, is hereby
incorporated by reference.
4.1 Warrant to Purchase Common Stock of Docucon, Incorporated, entitling
D. H. Blair Investment Banking Corp. to purchase 80,000 shares of
Common Stock at an exercise price of $.75 per share, expiring on
November 5, 1995, as filed as Exhibit 4.1 to Amendment No. 1 to the
Company's Registration Statement on Form SB-2 (Registration No.
33-82018), is hereby incorporated by reference.
4.2 Warrant to Purchase Common Stock of Docucon, Incorporated, entitling
D. H. Blair Investment Banking Corp. to purchase 160,000 shares of
Common Stock at an exercise price of $.70 per share, expiring on
November 5, 1995, as filed as Exhibit 4.2 to Amendment No. 1 to the
Company's Registration Statement on Form SB-2 (Registration No.
33-82018), is hereby incorporated by reference.
4.3 Warrant to Purchase Common Stock of Docucon, Incorporated, entitling
James Coleman to purchase 20,000 shares of Common Stock at an
exercise price of $.75 per share, expiring on November 5, 1995, as
filed as Exhibit 4.5 to Amendment No. 1 to the Company's
Registration Statement on Form SB-2 (Registration No. 33-82018), is
hereby incorporated by reference.
4.4 Warrant to Purchase Common Stock of Docucon, Incorporated, entitling
James Coleman to purchase 40,000 shares of Common Stock at an
exercise price of $.70 per share, expiring on November 5, 1995, as
filed as Exhibit 4.6 to Amendment
40
<PAGE>
No. 1 to the Company's Registration Statement on Form SB-2
(Registration No. 33-82018), is hereby incorporated by reference.
4.5 Stock Option Agreement, dated August 31, 1992, in which Docucon,
Incorporated granted The Wall Street Group, Inc. a stock option to
purchase up to 72,727 shares of Common Stock at a price of $1.375
per share, as filed as Exhibit 4.14 to Amendment No. 1 to the
Company's Registration Statement on Form SB-2 (Registration No.
33-82018), is hereby incorporated by reference.
10.1 Contract, dated as of May 8, 1991, between the Company and the U. S.
Department of Defense, filed as Exhibit 10.2 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1991, is
hereby incorporated herein by reference.
10.2 Employment Agreements between the Company and each of Edward P.
Gistaro and Allan H. Hobgood, filed as Exhibit 10.5 to the Company's
Registration Statement on Form S-1 (Registration No. 33-25561), are
hereby incorporated herein by reference.
10.3 Amendment to Employment Agreement between the Company and Allan H.
Hobgood, filed as Exhibit 10.7 to the Company's Annual Report on
Form 10-KSB for the fiscal year ended December 31, 1992, is hereby
incorporated herein by reference.
10.5 1988 Stock Option Plan, filed as Exhibit 10.9 to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31,
1991, is hereby incorporated herein by reference.
10.6 1991 Director Non-Statutory Stock Option Plan, filed as Exhibit
10.10 to the Company's Annual Report on Form 10-KSB for the fiscal
year ended December 31, 1992, is hereby incorporated herein by
reference.
10.8 Note and Warrant Purchase Agreement, dated as of December 15, 1992,
between the Company and Demuth, Folger & Terhune, including all
Exhibits thereto (which include the form of Promissory Note, the
form of Common Stock Purchase Warrant and the form of Deed of Trust
executed and delivered in connection with the transaction), filed as
Exhibit 5.1 to the Company's Current Report on Form 8-K dated
December 16, 1992, is hereby incorporated herein by reference.
10.9 Employment Agreement, dated March 15, 1994, between Docucon,
Incorporated and James Feuerstein, filed as Exhibit 10.9 to the
Company's Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1993, is hereby incorporated herein by reference.
10.10 Employment Agreement, dated March 15, 1994, between Docucon,
Incorporated and Jane Gennarelli, filed as Exhibit 10.10 to the
Company's Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1993, is hereby incorporated herein by reference.
41
<PAGE>
10.11 1993 Employee Stock Purchase Plan, filed as Exhibit 10.11 to the
Company's Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1993, is hereby incorporated herein by reference.
10.12 Form of Promissory Note, Revolving, dated as of September 30, 1996,
between Docucon, Incorporated and Bank One, Texas, N.A., filed as
Exhibit 10.2 to the Company's Quarterly Report on From 10-QSB for
the quarter ended September 30, 1996 is hereby incorporated herein
by reference.
10.13 Form of Promissory Note, dated as of September 30, 1996, between
Docucon, Incorporated and Bank One, Texas, N.A., filed as Exhibit
10.3 to the Company's Quarterly Report on From 10-QSB for the
quarter ended September 30, 1996 is hereby incorporated herein by
reference.
10.14 Deed of Trust, Security Agreement and Financing Statement, dated as
of September 30, 1996, executed in connection with the issuance of
Promissory Notes in Exhibits 10.12 and 10.13, filed as Exhibit 10.4
to the Company's Quarterly Report on From 10-QSB for the quarter
ended September 30, 1996 is hereby incorporated herein by reference.
10.15 1997 Employee Stock Purchase Plan
11 Computation of Earnings (Loss) Per Share.
23 Consent of Arthur Andersen LLP
27 Financial Data Schedule
(b) Reports on Form 8-K.
None.
42
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this Report to be signed on its behalf by the undersigned, thereunto duly
authorized.
DOCUCON, INCORPORATED
By /s/ EDWARD P. GISTARO
Edward P. Gistaro
Chairman of the Board and
Chief Executive Officer
Date: March 28, 1997
In accordance with the Exchange Act, this Report has been signed below by
the following persons on behalf of the Registrant and in the capacities and on
the dates indicated.
SIGNATURE CAPACITY DATE
--------- -------- ----
/s/ EDWARD P. GISTARO Chairman of the Board and March 28, 1997
Edward P. Gistaro Chief Executive Officer and Director
(Principal Executive and Financial
Officer)
/s/ ALLAN H. HOBGOOD President and March 28, 1997
Allan H. Hobgood Chief Operating Officer
and Director
/s/ LORI TURNER Vice President, Finance March 28, 1997
Lori Turner Treasurer
(Principal Accounting Officer)
/s/ RALPH BROWN Director March 28, 1997
Ralph Brown
/s/ AL R. IRETON Director March 28, 1997
Al R. Ireton
/s/ PHILIP J. ROMANO Director March 28, 1997
Philip J. Romano
/s/ CHAUNCEY E. SCHMIDT Director March 28, 1997
Chauncey E. Schmidt
43
EXHIBIT 10.15
DOCUCON, INCORPORATED
1997 EMPLOYEE STOCK PURCHASE PLAN
ARTICLE 1
PURPOSE
Section 1.1 PURPOSE. The Docucon, Incorporated 1997 Employee Stock
Purchase Plan (the "Plan") is intended to provide a method whereby employees of
Docucon, Incorporated (hereinafter referred to, unless the context otherwise
requires, as the "Company") and its subsidiary corporations will have an
opportunity to acquire a proprietary interest in the Company through the
purchase of shares of the Common Stock, par value $.01 per share (the "Common
Stock"), of the Company. It is the intention of the Company that the Plan
qualify as an "employee stock purchase plan" under Section 423 of the Internal
Revenue Code of 1986, as amended (the "Code"). The provisions of the Plan shall
be construed so as to extend and limit participation in a manner consistent with
the requirements of that section of the Code.
ARTICLE II
DEFINITIONS
Section 2.1 BASE PAY. "Base Pay" shall mean regular straight-time
earnings, excluding payments for overtime, shift premium, bonuses and other
special payments, commissions and other marketing incentive payments.
Section 2.2 COMMITTEE. "Committee" shall mean the individuals described in
Article XI.
Section 2.3 EMPLOYEE. "Employee" shall mean any person who is customarily
employed on a full-time or part-time basis by the Company and is regularly
scheduled to work more than 30 hours per week.
Section 2.4 SECTION 16 EMPLOYEE. "Section 16 Employee" shall mean any
Employee who is an officer (as such term is defined for purposes of Section 16
of the Securities Exchange Act of 1934, as amended, and the regulations
promulgated thereunder) or a Director of the Company; provided, however, that if
at any time participation in the Plan is open to Employees who, directly or
indirectly, beneficially own more than 10% of any class of the Company's equity
securities, such term shall also be deemed to include such Employees regardless
of their status as officers or Directors of the Company.
<PAGE>
Section 2.5 SUBSIDIARY CORPORATION. "Subsidiary Corporation" shall mean
any present or future corporation which (I) would be a "subsidiary corporation"
of Docucon, Incorporated as that term is defined in Section 424 of the Code and
(ii) is designated as a participant in the Plan by the Committee.
ARTICLE III
ELIGIBILITY AND PARTICIPATION
Section 3.1 INITIAL ELIGIBILITY. Any Employee who shall be employed by the
Company on the date of his participation in the Plan is to become effective (an
"Eligible Employee") shall be eligible to participate in offerings under the
Plan which commence on or after such 90-day period has concluded.
Section 3.2 LEAVE OF ABSENCE. For purposes of participation in the Plan, a
person on leave of absences shall be deemed to be an Employee for the first 90
days of such leave of absence and such Employee's employment shall be deemed to
have terminated at the close of business on the 90th day of such leave of
absence unless such Employee shall have returned to regular full-time or
part-time employment (as such the case may be) prior to the close of business on
such 90th day. Termination by the Company of any Employee's leave of absence,
other than termination of such leave of absence on return to full-time or
part-time employment, shall terminate an Employee's employment for all purposes
of the Plan and shall terminate such Employee's participation in the Plan and
right to exercise any option.
Section 3.3 RESTRICTIONS OF GRANT OF OPTIONS. Notwithstanding any
provisions of the Plan to the contrary, no Employee shall be granted an option
under the Plan:
(a) if, immediately after the grant of the option, such Employee would
own Common Stock, and/or hold outstanding options to purchase Common
Stock, possessing 5% or more of the total combined voting power or
value of all classes of stock of the Company (for purposes of this
paragraph, the rules of Section 424(d) of the Close shall apply in
determining stock ownership of any Employee); or
(b) which permits his rights to purchase Common Stock under all employee
stock purchase plans of the Company of a type described in Section
423 of the Code to accrue at a rate which exceeds $25,000 in fair
market value of the Common Stock (determined at the time such option
is granted) for each calendar year in which such option is
outstanding at any time.
Section 3.4 COMMENCEMENT OF PARTICIPATION. An Eligible Employee may become
a participant in the Plan by completing an authorization for a payroll deduction
on the form provided by the Company and filing it with the office of the Vice
President,
<PAGE>
Finance of the Company on or before the date therefor by the Committee, which
date shall be prior to the Offering Commencement Date for the Offering (as such
terms are defined below) (a "Participant"). Payroll deductions for a Participant
shall commence on the applicable Offering Commencement Date when his
authorization foe a payroll deduction becomes effective and shall end on the
Offering Termination Date of the Offering to which such authorization is
applicable unless sooner terminated by the Participant as provided in Article
VII.
ARTICLE IV
OFFERINGS
Section 4.1 ANNUAL OFFERINGS. The Plan will be implemented by four annual
offerings of the Company's Common Stock (the "Offerings") beginning on the 1st
say of January in each of the years 1998, 1999, 2000 and 2001, such offering
terminating on December 31st of the following year, provided, however, that each
annual Offering may, in the discretion of the Committee exercised prior to the
commencement thereof, be divided into two six-month Offerings commencing,
respectively, on January 1 and July 1 of such year and terminating on June 30th
of the following year and December 31st of such year, respectively. The maximum
number of shares issued in the respective years shall be:
(a) From January 1, 1998, to December 31, 1998: 200,000 shares.
(b) From January 1, 1999, to December 31, 1999: 200,000 shares plus
unissued shares from the prior Offerings, whether offered or not.
(c) From January 1, 2000, to December 31, 2000: 200,000 shares plus
unissued shares from prior Offerings, whether offered or not
(d) From January 1, 2001, to December 31, 2001: 200,000 shares plus
unissued shares from the prior Offerings, whether offered or not.
If a six-month Offering is made, the maximum number of shares to be issued
shall be one-half of the number of shares set forth for the annual period in
which the six-month Offering falls, plus, if the Offering is a July 1 to
December 31 Offering, unissued shares, whether offered or not, from the
immediately preceding six-month Offering. As used in the Plan, the term
"Offering Commencement Date" means the January 1 or July 1, as the case may be,
on which the particular Offering begins and "Offering Termination Date" means
the June 30 or December 30, as the case may be, on which the particular Offering
terminates.
ARTICLE V
PAYROLL DEDUCTIONS
Section 5.1 AMOUNT OF DEDUCTION. At the time a Participant files his
authorization for payroll deduction, he shall elect to have deductions made from
his Base Pay for each pay period during the time he is a Participant in an
Offering at the rate of
<PAGE>
1,2,3,4,5,6,7,8,9,10,11,12,13,14 or 15% of his Base Pay in effect at the
Offering Commencement Date of such Offering. In the case of a part-time hourly
Employee, such Employee's Base pay during an Offering shall be determined by
multiplying such Employee's hourly rate of pay in effect in the Offering
Commencement Date by the number of regularly scheduled hours of work for such
Employee during such Offering.
Section 5.2 PARTICIPANT'S ACCOUNT. All payroll deductions made by the
Company for a Participant shall be credited to such Participant's account under
the Plan. A Participant may not make any separate cash payment into such
account, except when on leave of absence, and then only as provided in Section
5.4 hereof.
Section 5.3 CHANGE IN PAYROLL DEDUCTION. A Participant may discontinue his
participation in the Plan as provided in Article VII, but no other change can be
made by a Participant during an Offering. Without limiting the generality of the
foregoing, a Participant may not alter the rate of his payroll deductions for
that Offering.
Section 5.4 LEAVE OF ABSENCE. If a Participant goes on a leave of absence,
such Participant may elect to (a) withdraw the balance in his or her account
pursuant to Section 7.2 hereof, (b) discontinue contributions to the Plan but
remain a Participant in the Plan, or (c) remain a Participant in the Plan during
such leave of absence, authorizing deductions to be made from payments by the
Company to the Participant during such leave of absence and undertaking to make
cash payments to the Plan at the end of each payroll period to the extent that
amounts payable by the Company to such Participant are insufficient to meet such
Participant's authorized payroll deductions.
ARTICLE VI
GRANTING OF OPTION
Section 6.1 NUMBER OF OPTION SHARES. On the Offering Commencement Date of
each Offering, a Participant shall be deemed to have been granted an option to
purchase a maximum number of shares of the Common Stock of the Company equal to
an amount determined as follows: an amount equal to the product of (I) that
percentage of the Employee's Base Pay which he has authorized deduction of (but
not in any case in excess of 15% of Base Pay) multiplied by (ii) the Employee's
Base Pay during the period of the Offering, divided by (iii) 85% of the market
value of the Common Stock of the Company on the applicable Offering Commencement
Date. The market value of the Company's Common Stock shall be determined as
provided in Section 6.2(a) and (b) hereof. An Employee's Base Pay during the
period of an Offering shall be determined by multiplying, in the case of a
one-year Offering, his normal weekly rate of pay (as in effect on the last day
prior to the Offering Commencement Date of such Offering) by 52 or his normal
hourly rate by 2,080 or, in the case of a six-month Offering, by 26 or 1040, as
the case may be, provided that, in the case of a part-time hourly Employee, the
Employee's Base Pay during the period of an Offering shall be determined by
multiplying such
<PAGE>
Employee's hourly rate by the number of regularly scheduled hours of work for
such Employee during such Offering.
Section 6.2 OPTION PRICE. The option price of Common Stock purchased with
authorized payroll deductions during such annual Offering for a Participant
shall be the lesser of:
(a) 85% of the closing price of the Common Stock on the Offering
Commencement Date or the nearest prior business day on which trading
occurred on the Market, as defined herein below; or
(b) 85% of the closing price of the Common Stock on the Offering
Termination Date or the nearest prior business day on which trading
occurred on the Market, as defined herein below.
For purposes of this Section 6.2, "Market" shall mean, if the shares of Common
Stock are traded on the New York Stock Exchange or American Stock Exchange, such
exchanges, or, if the shares if Common Stock are not traded on such exchanges,
the over-the-counter market (or if the Common Stock shall be quoted by the
National Association of Securities Dealers Automated Quotation System, them the
NASDAQ System), or if the shares of Common Stock are not traded in the
over-the-counter market, then, for purposes of Section 602(a) and (b), the
closing price of the Common Stock shall be such fair market value as determined
by the Board of Directors of the Company (which determination shall be
conclusive and binding for all purposes).
ARTICLE VII
EXERCISE OF OPTION
Section 7.1 AUTOMATIC EXERCISE. Unless a Participant gives written notice
to the Company as hereinafter provided, his option for the purchase of Common
Stock with authorized payroll deductions during any Offering will be deemed to
have been exercised automatically on the Offering Termination Date applicable to
such Offering , for the purchase of the number of full shares off Common Stock
which the accumulated authorized payroll deductions in his account at such time
will purchase at the applicable option price (but not in excess of the number of
shares for which options have been granted to the Participant pursuant to
Section 6.1 hereof), and any excess in his account at such time will be returned
to him.
Section 7.2 WITHDRAWAL OF ACCOUNT. By written notice to the Vice
President, Finance of the Company, at any time prior to the Offering Termination
Date applicable to any Offering, a Participant may elect to withdraw the balance
of the accumulated authorized payroll deductions in his account at such time.
<PAGE>
Section 7.3 FRACTIONAL SHARES. Fractional shares will not be issued under
the Plan and any accumulated authorized payroll deductions which would have been
used to purchase fractional shares will be returned to the Participant promptly
following the termination of an Offering, without interest.
Section 7.4 EXERCISE AND TRANSFERABILITY OF OPTION. During a Participant's
lifetime, options held by such Participant shall be exercisable only by that
Participant and subject to Sections 12.1 and 12.2 hereof, shall not be
transferable.
Section 7.5 DELIVERY OF COMMON STOCK. As promptly as practicable after the
Offering Termination Date of each Offering, the Company will deliver to each
Participant, as appropriate, the Common Stock purchased upon exercise of his
option.
ARTICLE VIII
WITHDRAWAL
Section 8.1 IN GENERAL. As indicated in Section 7.2 hereof, a Participant
may withdraw authorized payroll deductions credited too his account under the
Plan at any time by giving written notice to the Vice President, Finance of the
Company. All of the Participant's authorized payroll deductions credited to his
account will be paid to him promptly after receipt of his notice of withdrawal,
and no further payroll deductions will be made from his Base Pay during such
offering. The Company may, at its option, treat any attempt to borrow by a
participant on the security of his accumulated authorized payroll deductions as
an election, under Section 7.2 hereof, to withdraw such deductions.
Section 8.2 EFFECT ON SUBSEQUENT PARTICIPATION. A Participant's withdrawal
from any offering will not have any effect upon his eligibility to participate
in any succeeding Offering or in any similar plan which may hereafter be adopted
by the Company.
Section 8.3 TERMINATION OF EMPLOYMENT. Upon termination of the
Participant's employment for any reason, including retirement (but excluding
death while in the employ of the Company or continuation of a leave of absence
for a period exceeding 90 days), the authorized payroll deductions credited to
his account will be returned to him, or, in the case of his subsequent to the
termination of his employment, to the person or persons designated on accordance
with Section 12.1 hereof.
Section 8.4 TERMINATION OFF EMPLOYMENT DUE TO DEATH. Upon termination of
employment because of a participant's death, his beneficiary (as defined in
Section 12.1 hereof) shall have the right to elect, by written notice given to
the Vice President, Finance of the Company prior to the earlier of the Offering
Termination Date or the expiration of a period of 60 days commencing with the
date of the death of the Participant, either:
<PAGE>
(a) to withdraw all of the authorized payroll deductions credited to the
Participant's account under the Plan, or
(b) to exercise the Option for the purchase of Common Stock on the
Offering Termination Date following the date of the Participant's
death for the purchase of the number of full shares of Common Stock
which the accumulated authorized deductions in the Participant's
account at the date of the Participant's death will purchase at the
applicable option price, and any excess in such account will be
remitted to said beneficiary, without interest.
In the event that no such written notice of election shall be duly received by
the office of the Vice President, Finance of the Company, the beneficiary shall
automatically be deemed to have elected, pursuant to paragraph (a) above, to
withdraw all of the Participant's account balance.
Section 8.5 LEAVE OF ABSENCE. A Participant on leave of absence shall,
subject to the election made by such Participant pursuant to Section 5.4 hereof,
continue to be a Participant in the Plan so long as such Participant is on
continuous leave of absence. A participant who has been on leave of absence for
more than 90 days and who therefore is not an Employee for the purpose of the
Plan shall not be entitled to participate in any Offering commencing after the
90th day of such leave of absence. Not withstanding any other provisions of the
Plan, unless a Participant on leave of absence returns to regular full time or
part time employment with the Company at the earlier of: (a) the termination of
such leave or absence of (b) three months following the 90th day of such leave
of absence, such Participant's participation in the Plan shall terminate on
whichever of such dates first occurs.
ARTICLE IX
SPECIAL PROVISIONS APPLICABLE
TO SECTION 16 EMPLOYEES
Section 9.1 WAIVER OF RIGHT FROM PARTICIPATION DURING ANY OFFERING PERIOD.
Notwithstanding any contrary provision contained in this Plan, a Participant who
is a Section 16 Employee shall be subject to the restrictions on withdrawal from
participation in the Plan and disposition of shares of Common Stock obtained
through exercise of options granted under the Plan set forth in Sections 9.2 and
9.3 hereof unless such Participant shall, not later than six months prior to any
Offering Termination Date deliver to the Committee a waiver, of such
Participant's rights under Sections 7.2 and 8.1 to withdraw from participation
in the Offering which concludes on such Offering Termination Date. The
Committee, in its discretion, may prescribe forms on which such waivers must be
made.
<PAGE>
Section 9.2 EFFECT OF WITHDRAWAL FROM PARTICIPATION BY A SECTION 16
EMPLOYEE. Ant Participant who is a Section 16 Employee who makes a withdrawal
from his account as provided in Section 7.2 and 8.5 or otherwise ceases to
participate in the Plan may not resume participation in the Plan until the
expiration of six months from the date of such withdrawal or cessation.
Section 9.3 HOLDING PERIOD FOR STOCK ACQUIRED ON EXERCISE OF OPTION. Any
Participant who is a Section 16 Employee and who, to any Offering, has not
delivered to the Committee the waiver contemplated by Section 9.1 hereof not
later than six months prior to the Offering Termination Date, may not sell or
otherwise transfer or dispose of shares of Common Stock acquired upon exercise
of the option granted to him during such Offering until at least the earlier of
(a) six months after the Offering Termination Date or (b) six months after the
date on which such a waiver is delivered to the Committee with respect to such
Offering, except as otherwise permitted under Rule 16b-3(d)(2)(I) promulgated
under the Securities Exchange Act of 1934, as such regulation may be amended
from time to time, or any successor regulation thereto.
ARTICLE X
INTEREST
Section 10.1 PAYMENT OF INTEREST. No interest will be paid or allowed on
any authorized payroll deductions paid into the Plan or credited to the account
of any Participant Employee.
ARTICLE XI
STOCK
Section 11.1 MAXIMUM SHARES. The maximum number of shares which shall be
issued under the Plan, subject to adjustment upon changes in capitalization of
the Company as provided in Section 12.4 hereof shall be 200,000 shares in each
annual Offering (100,000 shares in each six-month Offering), plus in each
Offering all unissued shares from prior Offerings, whether offered or not, not
to exceed 800,000 shares for all Offerings. If the total number of shares for
which options are exercised on any Offering Termination Date in accordance with
Article VI exceeds the maximum number of shares for the applicable Offering, the
Company shall make a pro rata allocation of the shares available for delivery
and distribution in as nearly a uniform manner as shall be practicable and as it
shall determine to be equitable, and the balance of authorized payroll
deductions credited to the account of each Participant under the Plan shall be
disbursed to him as promptly as possible.
Section 11.2 PARTICIPANT'S INTEREST IN COMMON STOCK UNDERLYING OPTION. The
Participant will have no interest in Common Stock covered until such option has
been exercised.
<PAGE>
Section 11.3 REGISTRATION OF COMMON STOCK. Common Stock to be delivered to
a Participant under the Plan will be registered in the name of the Participant,
or, if the Participant so directs by written notice to the Vice President,
Finance of the Company prior to the Offering Termination Date applicable
thereto, in the names of the names if the Participant and one such other person
as may be designated by the Participant, as joint tenants with rights of
survivorship or as tenants by the entireties, to the extent permitted by
applicable law.
Section 11.4 RESTRICTIONS ON EXERCISE. The Board of Directors may, in its
discretion, require as conditions to the exercise of any option that the shares
of Common Stock reserved for issuance upon the exercise of the option shall have
been duly listed, upon official notice of issuance, upon a stock exchange, and
that either:
(a) a Registration Statement under the Securities Act of 1933, as
amended, with respect to said shares shall be effective, or
(b) the Participant shall have represented at the time of purchase in
form and substance satisfactory to the Company, that is his
intention to purchase the shares for investment and not for resale
or distribution.
ARTICLE XII
ADMINISTRATION
Section 12.1 APPOINTMENT OF COMMITTEE. The Compensation Committee of the
Board of Directors (the "Committee") shall administer the Plan. No member of the
Committee shall be eligible to purchase Common Stock under the Plan.
Section 12.2 AUTHORITY OF COMMITTEE. Subject to the express provisions of
the Plan, the Committee shall have plenary authority in its discretion to
interpret and construe any and all provisions off the Plan, to adopt rules and
regulations for administering the Plan, and to make all other determinations
deemed necessary or advisable for administering the Plan. The Committee's
determination on the foregoing matters shall be conclusive.
Section 12.3 RULES GOVERNING THE ADMINISTRATION OF THE COMMITTEE. All
determinations of the Committee shall be made by a majority of it members. The
Committee may correct any defect or omission or reconcile any inconsistency in
the Plan, in manner and to the extent it shall deem desirable. Any decision or
determination reduced to writing and signed by a majority of the members of the
Committee shall be as fully effective as if it had been made by a majority vote
at a meeting duly called and held. The Committee may appoint a secretary and
shall make such rules and regulations for the conduct of its business as it
shall deem advisable.
<PAGE>
ARTICLE XIII
MISCELLANEOUS PROVISIONS
Section 13.1 DESIGNATION OF BENEFICIARY. A Participant may file a written
designation of a beneficiary who is to receive any Common Stock and/or cash
under the Plan with the Vice President, Finance of the Company. Such designation
of beneficiary may be changed by the Participant at any time by written notice
to the Vice President, Finance of the Company. Upon the death of a Participant
and upon receipt by the Company of proof of identity and existence at the
Participant's death of a beneficiary validly designated by him under the Plan,
the Company shall deliver such Common Stock and/or cash to such beneficiary
pursuant to the terms of the Plan. In the event of the death of a Participant
and in the absence of a beneficiary validly designated under the Plan who is
living at the time of such Participant's death, the Company shall deliver such
Common Stock and/or cash to the executor or administrator of the estate of the
Participant, or if no such executor or administrator has been appointed (to the
knowledge of the Company), the Company, in its discretion, may deliver such
Common Stock and/or cash to the spouse or to any one or more dependents of the
Participant as the Company may designate. No beneficiary shall, prior to the
death of the Participant by whom he has been designated, acquire any interest in
the Common Stock or cash credited to the Participant or his account under the
Plan.
Section 13.2 TRANSFERABILITY. Neither authorized payroll deductions
credited to a Participant's account nor any rights with regard to the exercise
of an option or to receive Common Stock under the Plan may be assigned,
transferred, pledged, or otherwise disposed of in any way by the Participant
other than by will or the laws of descent and distribution. Any such attempted
assignment, transfer, pledge or other disposition shall be without effect,
except that the Company may treat such act as an election to withdraw funds in
accordance with Section 7.2 hereof.
Section 13.3 USE OF FUNDS. All authorized payroll deductions withheld by
the Company under this Plan may be used by the Company for any corporate purpose
and the Company shall not be obligated to segregate such authorized payroll
deductions.
Section 13.4 ADJUSTMENT UPON CHANGES IN CAPITALIZATION.
(a) If, while any options are outstanding, the outstanding shares of
Common Stock of the Company have increased, changes to, or have been
exchanged for a different number or kind of shares or securities of
the Company through reorganization, merger, recapitalization,
reclassification, stock split, reverse stock split or similar
transaction, appropriate and proportionate adjustments may be made
by the Committee in the number and/or kind of shares which are
subject to purchase under outstanding options and on the option
exercise price
<PAGE>
or prices applicable to such outstanding options. In addition, in
any such event, the number and/or kind of shares which may be
offered in the Offerings described in Article IV hereof shall also
be proportionately adjusted. No adjustments shall be made for stock
dividends. For the purpose of this paragraph, any distribution of
shares to stockholders in an amount aggregating 20% or more of the
outstanding shares shall be deemed a stock split and any
distributions of shares aggregating less than 20% of the outstanding
shares shall be deemed a stock dividend.
(b) Upon the dissolution or liquidation of the Company, or upon a
reorganization, merger or consolidation of the Company with one or
more corporations as a result of which the Company is not the
surviving corporation, or upon sale of substantially all of the
property or capital stock of the Company to another corporation, the
holder of each option then outstanding under the Plan will
thereafter be entitled to receive at the next Offering Termination
Date upon the exercise of such option for each share as to which
such option shall be exercised, as nearly as reasonably may be
determined, the cash, securities and/or property which a holder of
one share of the Common Stock was entitled to receive upon and at
the time of such transaction. The Board of Directors shall take such
steps in connection with such transactions as the Board shall deem
necessary to assure that the provisions of this Section 12.4 shall
thereafter be applicable, as nearly as reasonably may be determined,
in relation to the said cash, securities and/or property as to which
such holder of such option might thereafter be entitled to receive.
Section 13.5 AMENDMENT AND TERMINATION. The Board of Directors shall have
complete power and authority to terminate or amend the Plan; provided, however,
that the Board of Directors shall not, without the approval of the stockholders
of the Corporation (I) increase the maximum number of shares which may be issued
under any Offering (except pursuant to Section 12.4 hereof), or (ii) amend the
requirements as to the class of Employees eligible to purchase Common Stock
under the Plan or permit the members of the Committee to purchase Common Stock
under the Plan. No termination, modification, or amendment of the Plan may,
without the consent of an Employee then having an option under the Plan to
purchase Common Stock, adversely effect the rights of such Employee under such
option.
Section 13.6 EFFECTIVE DATE. The Plan shall become effective as of October
1,1997, subject to approval by the holders of the majority of the Common Stock
present and represented at a special or annual meeting of the shareholders held
on or before December 31, 1997. If the Plan is not so approved, the Plan shall
not become effective and all transactions under the Plan prior to such
stockholder vote, if any, shall be deemed to be null and void.
Section 13.7 NO EMPLOYMENT RIGHTS. The Plan does not, directly or
indirectly, create any right for the benefit of any Employee or class of
Employee or class of Employees to purchase any shares under the Plan, or create
in any Employee or class of
<PAGE>
Employees any right with respect to continuation of employment by the Company,
and it shall not be deemed to interfere in any way with the Company's right to
terminate, or otherwise modify, an Employee's employment at any time.
Section 13.8 EFFECT OF PLAN. The provisions of the Plan shall, in
accordance with its term, be binding upon, and inure to the benefit of, all
successors of each Employee participating in the Plan, including, without
limitation, such Employee's estate and the executors, administrators or trustees
thereof, heirs and legatees, and any receiver, trustee in bankruptcy or
representative of creditors of such Employee.
Section 13.9 GOVERNING LAW. The law of the State of Delaware will govern
all matters relating to this Plan except to the extent it is superseded by the
laws of the United States.
EXHIBIT 11
DOCUCON, INCORPORATED
COMPUTATION OF EARNINGS (LOSS) PER SHARE
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
COMPUTATION OF PRIMARY EARNINGS (LOSS) PER SHARE:
Net income (loss) ................................ $ 764,671 $ (605,563) $ (1,722,701)
Less- Preferred stock dividend requirements ..... (55,688) (60,334) (63,170)
------------ ------------ ------------
Net income (loss) applicable to common
stockholders used for computation ......... $ 708,983 $ (665,897) $ (1,785,871)
============ ============ ============
WEIGHTED AVERAGE NUMBER OF SHARES OF COMMON STOCK
OUTSTANDING ...................................... 11,945,504 11,690,161 11,542,636
WEIGHTED AVERAGE INCREMENTAL SHARES OUTSTANDING UPON
ASSUMED CONVERSION OF OPTIONS AND WARRANTS ....... 539,818 -- 7,273
------------ ------------ ------------
WEIGHTED AVERAGE COMMON SHARES AND COMMON SHARE
EQUIVALENTS USED FOR COMPUTATION ................. 12,485,322 11,690,161 11,549,909
============ ============ ============
PRIMARY EARNINGS (LOSS) PER COMMON SHARE AND COMMON
SHARE EQUIVALENT ................................. $ .06 $ (.06) $ (.15)
============ ============ ============
COMPUTATION OF FULLY DILUTED EARNINGS (LOSS) PER
SHARE:
Net income (loss) ............................... $ 764,671 $ (605,563) $ (1,722,701)
Preferred stock dividend requirements ........... (55,688) (60,334) (63,170)
Increase in net income applicable to
Common Stock for-
Preferred stock dividends not incurred upon
assumed conversion of preferred stock ........ 55,688 60,334 63,170
------------ ------------ ------------
Net income (loss) applicable to common
stockholders used for computation ......... $ 764,671 $ (605,563) $ (1,722,701)
============ ============ ============
WEIGHTED AVERAGE NUMBER OF SHARES OF COMMON STOCK
OUTSTANDING ...................................... 11,945,504 11,690,161 11,542,636
WEIGHTED AVERAGE INCREMENTAL SHARES OUTSTANDING UPON
ASSUMED CONVERSION OF OPTIONS AND WARRANTS ....... 539,818 -- 7,273
WEIGHTED AVERAGE INCREMENTAL SHARES OUTSTANDING UPON
ASSUMED CONVERSION OF THE PREFERRED STOCK ........ 672,779 731,542 766,659
------------ ------------ ------------
WEIGHTED AVERAGE SHARES USED FOR COMPUTATION ....... 13,158,101 12,421,703 12,316,568
============ ============ ============
EARNINGS (LOSS) PER COMMON SHARE AND COMMON SHARE
EQUIVALENT ASSUMING FULL DILUTION (a) ............ $ .06(a) $ (.05)(a) $ (.14)(a)
============ ============ ============
</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 or is antidilutive.
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report, included in this Form 10-KSB, into the Company's previously filed
Registration Statement on Form S-8 (File No. 1-10185).
/s/ ARTHUR ANDERSEN LLP
San Antonio, Texas
February 14, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM DOCUCON INC.'S FINANCIAL STATEMENTS AS OF AND FOR THE TWELVE MONTHS ENDED
DECEMBER 31, 1996 INCLUDED IN THIS FORM 10-KSB AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 198,152
<SECURITIES> 0
<RECEIVABLES> 2,551,241
<ALLOWANCES> 4,444
<INVENTORY> 54,994
<CURRENT-ASSETS> 4,592,513
<PP&E> 7,494,779
<DEPRECIATION> 4,798,200
<TOTAL-ASSETS> 8,137,232
<CURRENT-LIABILITIES> 3,639,982
<BONDS> 1,517,970
0
19
<COMMON> 120,326
<OTHER-SE> 2,807,724
<TOTAL-LIABILITY-AND-EQUITY> 8,137,232
<SALES> 13,523,500
<TOTAL-REVENUES> 13,523,500
<CGS> 7,706,001
<TOTAL-COSTS> 12,585,439
<OTHER-EXPENSES> (28,086)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 164,476
<INCOME-PRETAX> 801,671
<INCOME-TAX> 37,000
<INCOME-CONTINUING> 764,671
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 764,671
<EPS-PRIMARY> 0.06
<EPS-DILUTED> 0.06
</TABLE>
