U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the Quarterly Period Ended MARCH 31, 1997
OR
[_] Transition Report Under Section 13 or 15(d) of the Exchange Act
For the Transition Period From ________________ to _______________
Commission File Number 1-10185
DOCUCON, INCORPORATED
(Exact name of small business issuer as specified in its charter)
Delaware 74-2418590
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
7461 Callaghan Road
San Antonio, Texas 78229 (210) 525-9221
(Address of principal executive offices) (Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [_]
State the number of shares outstanding of each of the issuer's classes of
common equity as of May 1, 1997. 12,443,222
----------
<PAGE>
DOCUCON, INCORPORATED
INDEX
Page
PART I. FINANCIAL INFORMATION (UNAUDITED)
Item 1: Balance Sheets - March 31, 1997, and December 31, 1996 3
Statements of Operations - For the Three Months Ended
March 31, 1997 and 1996 5
Statements of Cash Flows - For the Three Months Ended
March 31, 1997 and 1996 6
Notes to Financial Statements 7
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
PART II. OTHER INFORMATION 11
SIGNATURES 12
-2-
<PAGE>
DOCUCON, INCORPORATED
BALANCE SHEETS
March 31,
1997 December 31,
ASSETS (UNAUDITED) 1996
---------- ----------
CURRENT ASSETS:
Cash and temporary cash investments ................ $ 25,208 $ 198,152
Accounts receivable-trade, net of allowance
for doubtful accounts of $4,444-
U.S. Government ................................. 708,283 1,492,509
Commercial ...................................... 951,745 1,054,288
Unbilled revenues ................................. 2,088,634 1,655,428
Other receivables ................................. 6,538 6,834
Prepaid expenses and other ........................ 128,355 185,302
---------- ----------
Total current assets ............. 3,908,763 4,592,513
---------- ----------
PROPERTY AND EQUIPMENT:
Conversion systems ................................ 5,248,496 5,252,834
Building and improvements ......................... 1,750,672 1,736,666
Land .............................................. 230,000 230,000
Furniture and fixtures ............................ 327,908 275,279
---------- ----------
Total property and equipment ..... 7,557,076 7,494,779
Less- Accumulated depreciation ..................... 4,951,344 4,798,200
---------- ----------
Net property and equipment ....... 2,605,732 2,696,579
---------- ----------
SOFTWARE DEVELOPMENT COSTS AND OTHER, net ............ 559,105 527,926
---------- ----------
GOODWILL, net ........................................ 315,562 320,214
---------- ----------
Total assets ..................... $7,389,162 $8,137,232
========== ==========
See Notes to Financial Statements.
-3-
<PAGE>
DOCUCON, INCORPORATED
BALANCE SHEETS (Continued)
March 31,
1997 December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY (UNAUDITED) 1996
----------- -----------
CURRENT LIABILITIES:
Accounts payable .................................. $ 886,975 $ 1,403,419
Accrued liabilities ............................... 850,695 885,659
Line of credit .................................... 570,000 750,000
Current maturities of capital lease obligations ... 12,099 11,820
Deferred revenues ................................. 580,205 561,355
Current maturities of long-term debt .............. 28,617 27,729
----------- -----------
Total current liabilities ................ 2,928,591 3,639,982
----------- -----------
LONG-TERM DEBT .................................... 1,507,879 1,517,970
----------- -----------
CAPITAL LEASE OBLIGATIONS ......................... 64,465 51,211
----------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $1.00 par value, 10,000,000
shares authorized- Series A, 60 shares authorized,
17 and 19 shares outstanding as of March 31, 1997,
and December 31, 1996, respectively .............. 17 19
Common Stock, $.01 par value, 25,000,000 shares
authorized; 12,391,942 and 12,032,559 shares
outstanding as of March 31, 1997, and December 31,
1996, respectively ............................... 123,919 120,326
Additional paid-in capital ........................ 9,640,703 9,640,036
Accumulated deficit ............................... (6,876,412) (6,832,312)
----------- -----------
Total stockholders' equity ............... 2,888,227 2,928,069
----------- -----------
Total liabilities and stockholders' equity $ 7,389,162 $ 8,137,232
=========== ===========
See Notes to Financial Statements.
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<PAGE>
DOCUCON, INCORPORATED
STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended March 31
-----------------------------
1997 1996
------------ ------------
OPERATING REVENUES ........................... $ 3,197,034 $ 2,333,653
------------ ------------
COSTS AND EXPENSES:
Production ................................. 1,977,113 1,275,793
Research and development ................... 179,840 109,901
General and administrative ................. 231,832 252,154
Marketing .................................. 611,196 444,679
Depreciation and amortization .............. 199,079 197,987
------------ ------------
3,199,060 2,280,514
------------ ------------
OPERATING INCOME (LOSS) ...................... (2,026) 53,139
OTHER INCOME (EXPENSE):
Interest expense ........................... (47,912) (39,839)
Other, net ................................. 8,838 5,962
------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES ............ (41,100) 19,262
INCOME TAX EXPENSE ......................... 3,000 --
------------ ------------
NET INCOME (LOSS) .......................... (44,100) 19,262
PREFERRED STOCK DIVIDEND REQUIREMENTS ........ 13,063 14,438
------------ ------------
NET INCOME (LOSS) APPLICABLE TO
COMMON STOCKHOLDERS ........................ $ (57,163) $ 4,824
============ ============
PRIMARY INCOME (LOSS) PER COMMON SHARE
AND COMMON SHARE EQUIVALENT ................ $ -- $ --
============ ============
WEIGHTED AVERAGE COMMON SHARES AND
COMMON SHARE EQUIVALENTS ................... 12,318,872 12,318,937
============ ============
See Notes to Financial Statements.
-5-
<PAGE>
DOCUCON, INCORPORATED
STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months
Ended March 31
---------------------
1997 1996
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) .................................... $ (44,100) $ 19,262
Adjustments to reconcile net income (loss) to
net cash provided by operating activities-
Depreciation and amortization ..................... 199,079 197,987
Changes in current assets and current liabilities-
(Increase) decrease in receivables ............... 453,859 237,630
(Increase) decrease in prepaid expenses .......... 56,947 (97,866)
Increase (decrease) in accounts payable and
accrued liabilities ............................ (551,408) 5,817
Increase in deferred revenues .................... 18,850 38,600
--------- ---------
Net cash provided by operating activities ... 133,227 401,430
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ................................. (52,856) (269,787)
Capitalized software development costs ............... (65,664) (65,443)
--------- ---------
Net cash used in investing activities ....... (118,520) (335,230)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances under line of credit ........................ 570,000 --
Payments under line of credit ........................ (750,000) (150,000)
Principal payments under capital lease obligations ... (2,707) (1,528)
Net proceeds from exercise of stock options .......... 4,259 10,739
Proceeds from issuing note payable ................... -- 67,054
Principal payments on notes payable .................. (9,203) (14,537)
--------- ---------
Net cash used in financing activities ....... (187,651) (88,272)
--------- ---------
NET DECREASE IN CASH AND TEMPORARY CASH INVESTMENTS .... (172,944) (22,072)
CASH AND TEMPORARY CASH INVESTMENTS, beginning of period 198,152 139,167
--------- ---------
CASH AND TEMPORARY CASH INVESTMENTS, end of period ..... $ 25,208 $ 117,095
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for-
Interest .......................................... $ 47,319 $ 9,839
Income taxes ...................................... 13,491 --
--------- ---------
$ 60,810 $ 9,839
========= =========
See Notes to Financial Statements.
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<PAGE>
DOCUCON, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
NOTE 1
The financial statements included herein have been prepared by Docucon,
Incorporated (the Company), without audit, pursuant to the rules and regulations
of the Securities and Exchange Commission. However, all adjustments have been
made which are, in the opinion of the Company, necessary for a fair presentation
of the results of operations for the periods covered. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations, although the Company believes
that the disclosures are adequate to make the information presented not
misleading. It is recommended that these financial statements be read in
conjunction with the financial statements and the notes thereto included in the
Company's Annual Report on Form 10-KSB for the fiscal year ended December 31,
1996.
Since its inception, the Company has incurred cumulative net losses of
approximately $6.9 million. The cumulative net losses have been funded primarily
through the Company's public offering of common stock, issuances of preferred
stock, the exercise of warrants and 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,
which contributed to the Company earning net income of approximately $765,000
for the year ended December 31, 1996. In October 1996, the Company also
refinanced its $1.5 million note payable which was originally due in December
1996. 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.
NOTE 2
Organization and description of the Company-
Docucon, Incorporated, was incorporated in June 1986 to engage in the business
of providing technical services to its customers for the conversion of paper and
microform documents to computer-accessible media. Paper or microform documents
are scanned by sophisticated computer equipment and stored and indexed on
optical disks or magnetic media. The Company also sells software products to the
legal market. Substantially all of the Company's customers are located in the
U.S.
NOTE 3
Summary of significant accounting policies-
Property and equipment-
Property and equipment are recorded at original cost or the present value of the
capital lease payments for assets under capital lease arrangements. Maintenance
and repairs are charged to expense as incurred and betterments which increase
the value or extend the useful life of the property are capitalized. Gains or
losses on sales or other dispositions of property and equipment are credited or
charged to income.
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<PAGE>
DOCUCON, INCORPORATED
NOTES TO FINANCIAL STATEMENTS (Continued)
Depreciation is provided using the straight-line method over the lesser of the
capital lease term or estimated useful lives of the related assets. The
Company's fixed assets are currently depreciated over periods ranging from two
to five years beginning in the month the property is placed in service. The
Company's building is being depreciated over 40 years.
Revenue recognition-
Revenues from conversion service contracts are recognized at the time services
are provided and are based upon the number of documents converted and the
conversion rates established in the contracts.
Revenues from software licensing fees are recognized upon delivery of the
software. Revenues from maintenance and telephone support contracts are
recognized ratably over the term of the contract, typically one year.
Software development costs-
Included in software development costs is $250,000 for advanced litigation
support software (Litigator's Notebook(TM)) which was acquired during March
1994. Also included in software development costs is approximately $378,000 of
costs which were incurred during 1995, 1996 and 1997 to develop software which
will support and complement Litigator's Notebook(TM). These costs are being
amortized over periods ranging from three to five years.
Goodwill-
In connection with an acquisition in March 1994, the Company recognized goodwill
of approximately $372,000. This goodwill is being amortized on a straight-line
basis over 20 years.
Use of estimates-
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make certain estimates and
assumptions. These estimates and assumptions affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Statements of cash flows-
During the three months ended March 31, 1997, the Company had noncash investing
and financing activities consisting of a capital lease entered into for $16,240
and two shares of preferred stock that were converted into 66,666 shares of
common stock.
NOTE 4
Common stock and preferred stock-
Each share of the Company's preferred stock ($25,000 stated value) is
convertible into 33,333 shares of common stock and earns cash dividends of 11
percent per annum. As of March 31, 1997, cumulative undeclared dividends on the
preferred stock approximated $322,000. As these dividends are undeclared, they
have not been recorded as a reduction of the Company's equity. On March 28,
1997, two shares of preferred stock were converted into 66,666 shares of common
stock. Accrued dividends related to the converted preferred stock will be paid
in the form of common stock.
-8-
<PAGE>
DOCUCON, INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The Company's operations during the quarter ended March 31, 1997, resulted in a
net loss applicable to common stockholders of $57,163 compared to net income
applicable to common stockholders of $4,824 for the comparable period in 1996.
Revenues increased 37 percent to $3,197,034 for the three months ended March 31,
1997, as compared to the same period in 1996. Conversion service revenues earned
under the Department of Defense (DOD) and commercial contracts increased by 39
percent, or approximately $700,000, for the 1997 quarter as compared to the same
period in 1996. Revenues earned from sales of the Company's software products,
JFS Litigator's Notebook(TM) and the related product lines increased 30 percent
during the 1997 quarter over the 1996 quarter.
Production costs increased 55 percent for the quarter ended March 31, 1997, as
compared to the comparable 1996 quarter. Costs related to production of
conversion services, generally labor and supplies, increased at a higher rate
than the increase in conversion service revenues as the work performed under new
projects was more labor intensive than previous conversion services for the DOD.
Costs related to software product revenues decreased slightly.
Research and development costs increased 64 percent for the quarter ended March
31, 1997, as compared to the same period in 1996. The Company devoted increased
resources to development of internal conversion applications and capabilities
and expansion of the capabilities of its JFS Litigator's Notebook(TM).
Marketing expenses increased 37 percent for the quarter ended March 31, 1997, as
compared to the same period in 1996 due to increased marketing efforts for the
JFS Litigator's Notebook product line and sales commissions paid on the
increased revenues. In late 1996, the Company established a corporate marketing
department to oversee and coordinate the total marketing strategy of the JFS
division.
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.
-9-
<PAGE>
DOCUCON, INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
In 1991, the Company was awarded a contract from the Defense Printing Services
Office (DPS) to provide conversion services for the DOD totaling $12.3 million.
The award was increased in 1994 and 1995 by a total of $4.5 million and extended
in time until April 1996. Additionally, in 1995, DPS awarded contracts totaling
approximately $2.0 million to the Company. During 1996, the Company generated
$8,890,000, or 66 percent of total revenues through DOD contracts. In February
of 1996, DPS awarded an additional contract to the Company. This contract allows
the Company to provide up to $14.8 million of document services to DOD agencies.
The Company has recently submitted a bid to the DOD along with several other
competitors for a new 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 work 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 software
products and services. These investments resulted in substantially increased
revenues in both software products and services. It is the strategic intent of
management to expand its software revenue base. Such investment has enabled the
Company to offer enhanced versions of Litigator's Notebook and the Optical
Notebook and a recently announced product, JFSNet to the market place.
Additional complementary products are also now available and another major
product is anticipated to 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 which had a December 1996
maturity. The new note bears interest at a fixed rate of 9.5 percent, payable
monthly to a commercial bank, and is being amortized over a 20-year term with a
5-year maturity. The note is secured by the Company's building, other fixed
assets, accounts receivable and inventory. Approximately $68,000 of debt
issuance costs were incurred and are being amortized over a five-year period.
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 decreased approximately $450,000 from
December 31, 1996, to March 31, 1997, as the Company completed its billing and
collection related to a significant project for the DOD. Accounts payable and
accrued liabilities decreased approximately $550,000 for the comparable period
due to the completion of this project and the payment of subcontractors who
assisted in the performance of the project.
The Company expects to fund its operations and marketing activities through
utilization of cash on hand and cash generated from operations. At March 31,
1997, $570,000 was outstanding under the Company's $750,000 revolving term note
which has a current maturity date of October 31, 1997. 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.
-10-
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings - None
Item 2. Changes in Securities - None
Item 3. Defaults Upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders - None
Item 5. Other Matters - None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 11 - Computation of Earnings Per Share
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K - None
-11-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DOCUCON, INCORPORATED
(Registrant)
By /s/ EDWARD P. GISTARO
Edward P. Gistaro,
Chairman of the Board and
Chief Executive Officer
By /s/ LORI TURNER
Lori Turner,
Vice President of Finance
and Treasurer
Dated: May 12, 1997
-12-
EXHIBIT 11
DOCUCON, INCORPORATED
COMPUTATION OF EARNINGS PER SHARE
(Unaudited)
Three Months Ended March 31
---------------------------
1997 1996
------------ ------------
COMPUTATION OF PRIMARY EARNINGS PER SHARE:
Net income (loss) .............................. $ (44,100) $ 19,262
Less- Preferred stock dividend requirements .. (13,063) (14,438)
------------ ------------
Net income (loss) applicable to common
stockholders used for computation ........ $ (57,163) $ 4,824
============ ============
WEIGHTED AVERAGE NUMBER OF SHARES OF
COMMON STOCK OUTSTANDING ....................... 12,318,872 11,891,144
WEIGHTED AVERAGE INCREMENTAL SHARES
OUTSTANDING UPON ASSUMED CONVERSION OF
OPTIONS AND WARRANTS (b) ....................... -- 427,793
------------ ------------
WEIGHTED AVERAGE COMMON SHARES AND COMMON
SHARE EQUIVALENTS USED FOR COMPUTATION ......... 12,318,872 12,318,937
============ ============
PRIMARY INCOME (LOSS) PER COMMON SHARE AND
COMMON SHARE EQUIVALENT ........................ $ -- $ --
============ ============
COMPUTATION OF FULLY DILUTED EARNINGS PER SHARE:
Net income (loss) .............................. $ (44,100) $ 19,262
Preferred stock dividend requirements .......... (13,063) (14,438)
Decrease in net income (loss) applicable
to common stock for-
Preferred stock dividends not incurred
upon assumed conversion of preferred
stock (b) ................................. -- 14,438
------------ ------------
Net income (loss) available to common
stockholders used for computation
$ (57,163) $ 19,262
============ ============
WEIGHTED AVERAGE NUMBER OF SHARES OF COMMON
STOCK OUTSTANDING .............................. 12,318,872 11,891,144
WEIGHTED AVERAGE INCREMENTAL SHARES
OUTSTANDING UPON ASSUMED CONVERSION OF
OPTIONS AND WARRANTS (b) ....................... -- 427,793
WEIGHTED AVERAGE INCREMENTAL SHARES
OUTSTANDING UPON ASSUMED CONVERSION OF
THE PREFERRED STOCK (b) ........................ -- 699,993
------------ ------------
WEIGHTED AVERAGE SHARES USED FOR COMPUTATION ..... 12,318,872 13,018,930
============ ============
INCOME (LOSS) PER COMMON SHARE AND COMMON
SHARE EQUIVALENT ASSUMING FULL DILUTION ........ $ --(a) $ --(a)
============ ============
(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.
(b) The options, warrants and preferred stock have an antidilutive effect in
periods with losses and are, therefore, excluded from the computation.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM DOCUCON,
INCORPORATED'S CONDENSED CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 1997, AND
ITS CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE THREE MONTHS THEN
ENDED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 25,208
<SECURITIES> 0
<RECEIVABLES> 3,759,644
<ALLOWANCES> 4,444
<INVENTORY> 38,925
<CURRENT-ASSETS> 3,908,763
<PP&E> 7,557,076
<DEPRECIATION> 4,951,344
<TOTAL-ASSETS> 7,389,162
<CURRENT-LIABILITIES> 2,928,591
<BONDS> 1,507,879
0
17
<COMMON> 123,919
<OTHER-SE> 2,764,291
<TOTAL-LIABILITY-AND-EQUITY> 7,389,162
<SALES> 3,197,034
<TOTAL-REVENUES> 3,197,034
<CGS> 1,977,113
<TOTAL-COSTS> 3,199,060
<OTHER-EXPENSES> (8,838)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 47,912
<INCOME-PRETAX> (41,100)
<INCOME-TAX> (3,000)
<INCOME-CONTINUING> (44,100)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (44,100)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
