UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarterly Period Ended JUNE 30, 1998
OR
[ ] Transition Report Under Section 13 or 15(d)
of the Exchange Act
For the Transition Period From to
Commission File Number 1-10185
DOCUCON, INCORPORATED
(Exact name of small business issuer as specified in its charter)
Delaware 74-2418590
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
7461 Callaghan Road
San Antonio, Texas 78229
(Address of principal executive offices)
(210) 525-9221
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
State the number of shares outstanding of each of the issuer's classes of
common equity as of August 3, 1998. 3,299,133
<PAGE>
DOCUCON, INCORPORATED
INDEX
PAGE
PART I. FINANCIAL INFORMATION (UNAUDITED)
Item 1: Balance Sheets - June 30, 1998, and December 31, 1997 3
Statements of Operations - For the Three and Six Months
Ended June 30, 1998 and 1997 5
Statements of Cash Flows - For the Six Months Ended
June 30, 1998 and 1997 7
Notes to Financial Statements 8
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
PART II. OTHER INFORMATION 16
SIGNATURES 18
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<PAGE>
DOCUCON, INCORPORATED
BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30,
1998 DECEMBER 31,
ASSETS (UNAUDITED) 1997
------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and temporary cash investments ........... $ 2,815,279 $ 4,597,183
Accounts receivable-trade, net of allowance for
doubtful accounts
of $4,444-
U.S. Government ............................ 259,752 620,934
Commercial ................................. 147,328 335,300
Unbilled revenues ............................. 1,814,818 1,472,075
Other receivables ............................. 408,860 405,336
Prepaid expenses and other .................... 106,827 77,044
Asset held for sale ........................... 1,693,881 --
------------ ------------
Total current assets ........... 7,246,745 7,507,872
------------ ------------
PROPERTY AND EQUIPMENT:
Conversion systems ............................ 4,670,830 4,589,473
Building and improvements ..................... -- 1,744,499
Land .......................................... -- 230,000
Furniture and fixtures ........................ 212,955 205,602
------------ ------------
Total property and equipment ... 4,883,785 6,769,574
Less- Accumulated depreciation ................ (4,562,526) (4,680,368)
------------ ------------
Net property and equipment ..... 321,259 2,089,206
------------ ------------
OTHER, net ...................................... 490,659 472,490
------------ ------------
Total assets ................... $ 8,058,663 $ 10,069,568
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
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<PAGE>
DOCUCON, INCORPORATED
BALANCE SHEETS (Continued)
<TABLE>
<CAPTION>
JUNE 30,
1998 DECEMBER 31,
LIABILITIES AND STOCKHOLDERS' EQUITY (UNAUDITED) 1997
------------ ------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable ................................. $ 258,387 $ 482,076
Accrued liabilities .............................. 521,184 616,615
Income taxes payable ............................. 98,918 191,000
Revolving term note .............................. -- 504,000
Current maturities of long-term debt ............. 1,500,212 30,722
Current maturities of capital lease obligations .. 16,626 15,798
------------ ------------
Total current liabilities .............. 2,395,327 1,840,211
------------ ------------
LONG-TERM DEBT ..................................... -- 1,485,079
------------ ------------
CAPITAL LEASE OBLIGATIONS .......................... 41,743 49,547
------------ ------------
OTHER LONG-TERM OBLIGATIONS ........................ 7,500 --
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $1.00 par value, 2,500,000 shares
authorized- Series A, 60 shares authorized, 12
shares outstanding as of June 30, 1998, and
December 31, 1997 ............................. 12 12
Common stock, $.01 par value, 6,250,000 shares
authorized; 3,290,481 and 3,260,889 shares
outstanding as of June 30, 1998, and December
31, 1997, respectively ........................ 32,905 32,609
Additional paid-in capital ....................... 10,069,354 10,069,173
Accumulated deficit .............................. (4,476,768) (3,407,063)
Treasury stock, at cost, 6,300 shares and 0 shares
as of June 30, 1998, and December 31, 1997,
respectively .................................. (11,410) --
------------ ------------
Total stockholders' equity ............. 5,614,093 6,694,731
------------ ------------
Total liabilities and stockholders'
equity .............................. $ 8,058,663 $ 10,069,568
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
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<PAGE>
DOCUCON, INCORPORATED
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30 ENDED JUNE 30
-------------------------- --------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
OPERATING REVENUES ............................ $ 869,982 $ 2,096,083 $ 1,482,978 $ 4,585,731
----------- ----------- ----------- -----------
COSTS AND EXPENSES:
Production .................................. 672,628 1,183,039 1,356,964 2,963,177
Research and development .................... 56,893 30,879 124,644 87,443
General and administrative .................. 328,724 279,087 623,162 501,079
Marketing ................................... 206,640 178,429 323,863 353,551
Depreciation and amortization ............... 82,822 107,011 171,397 222,673
----------- ----------- ----------- -----------
1,347,707 1,778,445 2,600,030 4,127,923
----------- ----------- ----------- -----------
OPERATING INCOME (LOSS) FROM CONTINUING
OPERATIONS .................................. (477,725) 317,638 (1,117,052) 457,808
OTHER INCOME (EXPENSE):
Interest income ............................. 52,179 (443) 116,204 --
Interest expense ............................ (37,265) (50,841) (73,981) (99,196)
Other, net .................................. 10,597 20,443 16,124 29,278
----------- ----------- ----------- -----------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES ................................ (452,214) 286,797 (1,058,705) 387,890
Income tax expense .......................... 3,000 9,000 11,000 12,000
----------- ----------- ----------- -----------
NET INCOME (LOSS) FROM CONTINUING OPERATIONS .. (455,214) 277,797 (1,069,705) 375,890
Preferred stock dividend requirements ....... 8,250 11,688 16,500 24,751
----------- ----------- ----------- -----------
NET INCOME (LOSS) FROM CONTINUING OPERATIONS
APPLICABLE TO COMMON STOCKHOLDERS ........... (463,464) 266,109 (1,086,205) 351,139
Loss from discontinued operations ........... -- (215,698) -- (357,891)
----------- ----------- ----------- -----------
NET INCOME (LOSS) APPLICABLE TO COMMON
STOCKHOLDERS ................................ $ (463,464) $ 50,411 $(1,086,205) $ (6,752)
=========== =========== =========== ===========
Basic earnings (loss) from continuing
operations per common share ................ $ (.14) $ .09 $ (.33) $ .11
Basic loss from discontinued operations per
common share ............................... -- (.07) -- (.11)
----------- ----------- ----------- -----------
BASIC EARNINGS (LOSS) PER COMMON SHARE ........ $ (.14) $ .02 $ (.33) $ --
=========== =========== =========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING ................................. 3,290,217 3,109,397 3,289,316 3,095,252
=========== =========== =========== ===========
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30 ENDED JUNE 30
------------------------ ------------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Diluted earnings (loss) from continuing
operations per common share and common share
equivalents ................................ $ (.14) $ .08 $ (.33) $ .11
Diluted loss from discontinued operations per
common share and common share equivalents .. -- (.06) -- (.11)
---------- ---------- ---------- ----------
DILUTED EARNINGS (LOSS) PER COMMON SHARE AND
COMMON SHARE EQUIVALENTS .................... $ (.14) $ .02 $ (.33) $ --
========== ========== ========== ==========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES AND
COMMON SHARE EQUIVALENTS OUTSTANDING ........ 3,290,217 3,204,756 3,289,316 3,219,769
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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<PAGE>
DOCUCON, INCORPORATED
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30
--------------------------
1998 1997
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) from continuing operations ........... $(1,069,705) $ 375,890
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities-
Depreciation and amortization ....................... 171,397 222,673
Changes in current assets and current liabilities-
Decrease in receivables and unbilled revenues ...... 202,887 690,596
(Increase) decrease in prepaid expenses and other .. (53,206) 100,676
Decrease in accounts payable and accrued liabilities (319,120) (921,358)
Decrease in income taxes payable ................... (92,082) (23,756)
----------- -----------
Net cash provided by (used in) operating
activities ................................ (1,159,829) 444,721
----------- -----------
NET CASH USED BY DISCONTINUED OPERATIONS ................. -- (343,855)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ................................... (89,702) (101,349)
----------- -----------
Net cash used in investing activities ........ (89,702) (101,349)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances under line of credit ............................ -- 1,344,500
Payments under line of credit .......................... (504,000) (1,485,000)
Principal payments under capital lease obligations ..... (6,976) (8,747)
Net proceeds from exercise of stock options ............ 5,602 4,259
Principal payments on long-term debt ................... (15,589) (13,720)
Purchase of treasury stock ............................. (11,410) --
----------- -----------
Net cash used in financing activities ........ (532,373) (158,708)
----------- -----------
NET DECREASE IN CASH AND TEMPORARY CASH INVESTMENTS ...... (1,781,904) (159,191)
CASH AND TEMPORARY CASH INVESTMENTS, beginning of period . 4,597,183 198,152
----------- -----------
CASH AND TEMPORARY CASH INVESTMENTS, end of period ....... $ 2,815,279 $ 38,961
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for-
Interest .............................................. $ 75,523 $ 100,118
=========== ===========
Income taxes .......................................... $ 93,562 $ 19,868
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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<PAGE>
DOCUCON, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
NOTE 1
The financial statements included herein have been prepared by Docucon,
Incorporated (the Company), without audit, pursuant to the rules and regulations
of the Securities and Exchange Commission. However, all adjustments have been
made which are, in the opinion of the Company, necessary for a fair presentation
of the results of operations for the periods covered. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations, although the Company believes
that the disclosures are adequate to make the information presented not
misleading. It is recommended that these financial statements be read in
conjunction with the financial statements and the notes thereto included in the
Company's Annual Report on Form 10-KSB for the fiscal year ended December 31,
1997. Certain reclassifications have been made in the prior period financial
statements to conform with the current period presentation.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make certain estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Since its inception, the Company has incurred cumulative net losses of
approximately $4.5 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 options, debt financing and the sale of its
software division in the fourth quarter of 1997 for $6.5 million. The Company
has taken steps which it believes will improve its operating results including
selling its software division and focusing on the Company's document conversion
business. The Company's management believes that it is likely that the Company's
operating results for the remainder of 1998 will improve and will generate
sufficient working capital, along with available cash, to sustain its operations
throughout the year. However, there can be no assurances that the Company's
focus on document conversion will improve its operating results.
NOTE 2
Discontinued operations-
As previously discussed, in November 1997, the Company sold its software
division to a third party for $6.5 million. Included in other current
receivables and in other, net, on the accompanying balance sheets are escrowed
amounts of approximately $400,000 each related to the sale of the software
division. These escrowed funds secure the payment of any liability of the
Company to the purchaser under the terms of the purchase agreement and are
scheduled to be released to the Company in the amount of $400,000 in November
1998 and $400,000 in November 1999. Management of the Company believes that the
entire $800,000 held in escrow will be paid to the Company. Including the
escrowed funds, net cash proceeds after expenses relating to the sale were
approximately $5.7 million. As a result of the sale, the division has been
accounted for as a discontinued operation and, accordingly, the Company has
restated its financial statements for all periods presented in accordance with
Accounting Principle Board Opinion No. 30. The following table provides certain
information related to the discontinued operation:
THREE SIX
MONTHS ENDED MONTHS ENDED
JUNE 30, 1997 JUNE 30, 1997
------------- -------------
Revenues ................................... $ 592,494 $ 1,299,880
============= =============
Loss from discontinued operations .......... $ (215,698) $ (357,891)
============= =============
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<PAGE>
NOTE 3
Substantially all of the Company's unbilled revenues at June 30, 1998, and
December 31, 1997, relate to conversion services performed for agencies of the
U.S. Government. The Company's ability to invoice these unbilled revenues is
dependent upon a number of factors including quality control acceptance and the
availability of funding to the respective agencies. The Company was contacted in
mid-1997 and informed that funding for certain conversion services being
performed had been depleted. Management elected to complete work that had been
placed in production at that time despite the lack of assurance that funding
would become available. As a result, the Company has been unable to invoice
approximately $1.2 million of conversion services that were performed during
1997. The conversion products associated with the $1.2 million of unbilled
revenues have been shipped to the customer and are in various stages of quality
control review. During the three and six months ended June 30, 1998, the Company
recognized approximately $370,000 in additional unbilled revenues relating to
additional conversion services performed through June 1998. Management of the
Company, based upon its past operating history and its ongoing discussions with
various governmental personnel regarding the availability of additional funding,
believes that all of such unbilled revenues totaling approximately $1.6 million
will be invoiced and collected during 1998. However, there can be no assurances
that the customer will accept all of the work product nor are there any
assurances that sufficient funding will be made available to enable the Company
to invoice the unbilled revenues. The inability of the Company to realize its
unbilled revenues would have a material adverse effect on the Company's future
results of operations and its financial position.
NOTE 4
Common stock and preferred stock-
Each share of the Company's preferred stock ($25,000 stated value) is
convertible into 8,334 shares of common stock and earns cash dividends of 11
percent per annum. Each share of preferred stock is entitled to vote 8,334
common shares. 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 preferred
stock, the Company cannot pay dividends on its common stock until all
accumulated but unpaid dividends on such preferred stock have been paid. As of
June 30, 1998, cumulative undeclared dividends on the preferred stock
approximated $259,000. As these dividends are undeclared, they have not been
recorded as a reduction of the Company's equity. Common stock is subordinate to
preferred stock in the event of liquidation.
Treasury stock-
On June 18, 1998, the Company announced the board of directors authorized the
repurchase of up to 500,000 shares of the Company's common stock in the open
market. In June 1998, the Company acquired 6,300 treasury shares for $11,410.
Reverse stock split-
In June 1998, the Company's board of directors approved a one-for-four reverse
common stock split. Accordingly, all common stock and share information has been
adjusted to reflect the reverse stock split.
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<PAGE>
NOTE 5
Time Accelerated Restricted Stock Award Plan
(TARSAP) and stock option grants-
In April 1998, the Company's board of directors granted options to certain
members of the Company's senior management, subject to shareholder approval, to
purchase 125,000 shares of the Company's common stock at an exercise price of $4
per share under a TARSAP. In April 1998, the Company appointed a new president
and chief executive officer. The Company's board of directors granted this
employee options, subject to shareholder approval, to purchase 225,000 shares of
the Company's common stock at an exercise price of $4 per share under a TARSAP.
Fifty thousand of the TARSAP options vest and become exercisable in September
2001 while the remainder vest and become exercisable in March 2005. Vesting and
exercisability of the TARSAP options is accelerated, in 20,000 share increments,
for each $2 per share incremental increase in the quoted market price per share
of the Company's common stock above $4 per share.
In April 1998, the Company's board of directors approved conditional stock
option grants to certain members of the Company's senior management. The
conditional grants provide that, for each $2 per share increase in the quoted
market value of the Company's common stock above $4 per share (up to $40 per
share), the employees shall receive options to purchase shares of the Company's
common stock as follows:
OPTIONS TO BE GRANTED FOR
EMPLOYEE EACH $2 INCREASE TERM
-------- -------------------------- ---------
A 12,500 7 years
B 5,000 30 months
C 4,167 7 years
Each option will expire 10 years after date of grant. The term, vesting period
and option price for each grant will be determined by a committee to be selected
by the Company's board of directors.
NOTE 6
Debt covenants and asset held for sale-
As a result of the disposition of the Company's software division in 1997, in
April 1998, certain of the affirmative covenants relating to the Company's
mortgage note payable to a financial institution were modified. The note
agreement contains various affirmative and negative covenants and requires the
Company to maintain (as modified and 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 .75:1, (iii) a quarterly debt coverage ratio of not less than 1.25:1
beginning in the quarterly period ending September 30, 1998, and (iv) a minimum
tangible net worth of $5.5 million. Based upon operating results subsequent to
June 30, 1998, the Company was unable to maintain compliance with certain
affirmative financial covenants. As a result, the lender has the right to demand
immediate repayment of the entire amount outstanding. Accordingly, all amounts
due this lender have been classified as a current liability at June 30, 1998.
The Company believes that sufficient resources are available to fund repayment
in the event of such acceleration. In connection with obtaining modifications to
the note agreement, the Company was required to reserve, out of its cash
balances, one year's worth of debt service payments of approximately $173,000.
The mortgage note payable is secured by substantially all of the Company's
assets including the Company's office building. In response to a favorable real
estate market, the Company's building has been listed for sale. Management of
the Company believes that the building will be sold during 1998 at an amount
exceeding net book value and, accordingly, the carrying value of the land,
building and associated improvements have been classified as a current asset
held for sale at June 30, 1998. The Company would be required to pay the
mortgage note payable with proceeds from the disposition of the building.
Management of the Company believes that suitable replacement facilities will be
available.
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<PAGE>
NOTE 7
Earnings (loss) per share-
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (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. Basic EPS excludes dilution and is
computed by dividing income (loss) 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. SFAS No. 128 is effective for financial statements issued after
December 15, 1997, and, accordingly, the accompanying financial statements
reflect the adoption of SFAS No. 128. As the Company had a net loss from
continuing operations for the three months and six months ended June 30, 1998,
Diluted EPS equals Basic EPS as potentially dilutive common stock equivalents
are antidilutive in loss periods. Prior period EPS data has been restated as
required by SFAS No. 128. The following table provides a reconciliation of the
denominator (weighted average number of common shares and common share
equivalents outstanding) used to compute Basic and Diluted EPS and the number of
common share equivalents relating to preferred stock that have been excluded as
a result of antidilution:
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30 ENDED JUNE 30
--------------------- ---------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Weighted average number of common
shares outstanding for Basic EPS .................. 3,290,217 3,109,397 3,289,316 3,095,252
Weighted average incremental shares
outstanding upon assumed
conversion of dilutive options
and warrants ...................................... -- 95,359 -- 124,517
--------- --------- --------- ---------
Weighted average number of common
shares and common share
equivalents outstanding for
Diluted EPS ....................................... 3,290,217 3,204,756 3,289,316 3,219,769
========= ========= ========= =========
Potential common shares from
assumed conversion of preferred
shares excluded as a result of
antidilution ...................................... 100,008 141,665 100,008 149,632
========= ========= ========= =========
</TABLE>
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<PAGE>
NOTE 8
Commitments-
In April 1998, the Company amended a member of senior management's employment
agreement. The employee will be retained as a consultant to the Company for a
period of five years following his retirement in 2000 at the rate of $2,500 per
month. For a five-year period following the employee's consultancy, he will
receive retirement pay at the rate of $2,500 per month. The consulting payments
will be expensed as paid. The present value of the postretirement payments,
discounted at 6 percent, will result in monthly expense, including interest, to
the Company of approximately $3,200 through September 2000. The present value of
the postretirement obligation is being recorded as other long-term obligations
on the accompanying balance sheet.
In April 1998, the Company appointed a new president and chief executive
officer. The Company and the employee have entered into a seven-year employment
agreement providing for base compensation of $200,000 per year. The employment
agreement is terminable by either party with 30 days notice. In the event the
employee were to be terminated by the Company without cause, the Company would
be required to make a severance payment of $300,000.
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<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 June 30, 1998, resulted in a
net loss applicable to common stockholders of $463,464 compared to net income
applicable to common stockholders of $50,411 for the same quarter in 1997. The
1997 quarter included a loss from discontinued operations of $215,698. In
November 1997, the Company sold its software division to a third party for $6.5
million. The Company incurred a net loss applicable to common shareholders of
$1,086,205 for the six months ended June 30, 1998, as compared to a net loss of
$6,752 for the same period in 1997.
Revenues from continuing operations decreased 58 percent to $869,982 for the
quarter ended June 30, 1998, as compared to the same quarter in 1997. Revenues
from continuing operations decreased 68 percent to $1,482,978 for the six-month
period ended June 30, 1998, as compared to the 1997 six-month period. The
decrease in both periods is due to what management believes to be a temporary
discontinuation of funding for a specific project being performed under a
Department of Defense (DOD) contract.
Production costs from continuing operations decreased 43 percent and 54 percent,
respectively, for the quarter and six months ended June 30, 1998, as compared to
the 1997 periods due to the decreased revenue levels.
Research and development costs from continuing operations increased 84 percent
and 43 percent, respectively, for the quarter and six months ended June 30,
1998, compared to the same periods in 1997 as the Company continues to devote
resources to the development of new conversion capabilities.
General and administrative expenses increased 18 percent and 24 percent,
respectively, for the three- and six-month periods ended June 30, 1998, as
compared to the same periods in 1997. The increases are due to increased
expenses associated with the Company's annual shareholder meeting and the
related proxy solicitation, as well as additional board meetings held in
relation to the Company's transition to new management.
Marketing expenses from continuing operations increased 16 percent and decreased
8 percent for the quarter and six months ended June 30, 1998, respectively, as
compared to the same periods in 1997. A decrease in commission expenses
resulting from a decrease in revenue was offset by the expenses related to the
opening and staffing of a Washington, D.C., office.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company's operations have been primarily supplemented
through borrowings, capital lease agreements, an initial public offering of the
Company's common stock in 1989, the exercise of warrants and options, private
preferred stock placements and the sale of its software division in the fourth
quarter of 1997. As of June 30, 1998, the Company had positive working capital
of approximately $4.85 million and expects to fund its 1998 operations and
marketing activities through utilization of cash on hand and anticipated cash
generated from operations.
Substantially all of the Company's unbilled revenues at June 30, 1998, and
December 31, 1997, relate to conversion services performed for agencies of the
U.S. Government. The Company's ability to invoice these unbilled revenues is
dependent upon a number of factors including quality control acceptance and the
availability of funding to the respective agencies. The Company was contacted in
mid-1997 and informed that funding for certain conversion services being
performed had been depleted. Management elected to
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<PAGE>
DOCUCON, INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
complete work that had been placed in production at that time despite the lack
of assurance that funding would become available. As a result, the Company has
been unable to invoice approximately $1.2 million of conversion services that
were performed during 1997. The conversion products associated with the $1.2
million of unbilled revenues have been shipped to the customer and are in
various stages of quality control review. During the three and six months ended
June 30, 1998, the Company recognized approximately $370,000 in additional
unbilled revenues relating to additional conversion services performed through
June 1998. Management of the Company, based upon its past operating history and
its ongoing discussions with various governmental personnel regarding the
availability of additional funding, believes that all of such unbilled revenues
totaling approximately $1.6 million will be invoiced and collected during 1998.
However, there can be no assurances that the customer will accept all of the
work product nor are there any assurances that sufficient funding will be made
available to enable the Company to invoice unbilled revenues. The inability of
the Company to realize its unbilled revenues would have a material adverse
effect on the Company's future results of operations and its financial position.
The Company has performed services under two DOD contracts. One contract was
awarded in 1996 and extended through April 1998. The other contract was awarded
in December 1997 for a term of one year with four additional option years. The
contracts have a potential value of $77.8 million. However, there can be no
assurances that the full potential value of the contracts will be realized or
that the terms of the contracts will extend through the optional years. In March
1998, the General Services Administration (GSA) awarded a Federal Supply
Schedule to the Company which is effective until September 30, 2002. Federal
Supply Schedules are centralized contracts established by the GSA for the use of
all government agencies. There are no limitations to order size or cumulative
order value under such contracts. Under the Federal Supply Schedule awarded to
the Company, any government agency can buy a wide variety of document conversion
services directly from the Company. The Company began providing services under
the GSA during the second quarter of 1998.
In March 1994, the Company purchased the assets and assumed certain liabilities
of J. Feuerstein Systems. In November 1997, the Company sold the assets of the
division to Bowne & Co., Inc., for $6.5 million. A total of $800,000 was placed
in an escrow account as security for certain representations and warranties made
to the buyer. Management does not anticipate any material claims to be made
against the representations and warranties and expects the funds will be
released from escrow on November 25, 1998, and November 25, 1999, in two amounts
of $400,000 each. Including the escrowed funds, net cash proceeds after expenses
relating to the sale were approximately $5.7 million. Cash proceeds were used to
pay down the Company's $504,000 line-of-credit balance after year-end and to
fund continuing operations. The Company plans to invest excess proceeds in
short-term securities which would be available for capital or operational needs.
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 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 in connection with this refinancing. In April 1998, certain of the
affirmative covenants relating to this note were modified. Based upon operating
results subsequent to June 30, 1998, the Company was unable to maintain
compliance with certain affirmative financial covenants. As a result, the lender
has the right to demand immediate repayment of the entire amount outstanding.
The Company believes that sufficient resources are available to fund repayment
in the event of such acceleration. In connection with obtaining modifications to
the note agreement, the
-14-
<PAGE>
DOCUCON, INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Company was required to reserve, out of its cash balances, one year's worth of
debt service payments of approximately $173,000. In response to a favorable real
estate market, the Company's building has been listed for sale. Although the
current facility is satisfactory, management believes that certain production
efficiencies can be achieved by utilizing single- or double-level production
space as opposed to the existing high-rise configuration. Management of the
Company believes that the building will be sold during 1998 at an amount
exceeding net book value and, accordingly, the carrying value of the land,
building and associated improvements have been classified as a current asset
held for sale at June 30, 1998. The Company would be required to pay the
mortgage note payable with proceeds from the disposition of the building.
Management of the Company believes that suitable replacement facilities will be
available.
On March 31, 1998, the Company received notice that it was subject to delisting
on the NASDAQ SmallCap Market System because the Company's average closing bid
price per share had not exceeded $1.00 during the prior 30-day period. The
Company effected a one-to-four reverse split of its common stock on June 12,
1998. On June 29, 1998, the Company received notification that the Company was
deemed to be in compliance with the new bid requirement for continued listing on
The Nasdaq Stock MarketSM. On June 18, 1998, the Company announced the board of
directors authorized the repurchase of up to 500,000 shares of its common stock
in the open market. Through August 3, 1998, the Company had repurchased 10,000
such shares at prices varying from $1-5/8 to $2-1/16.
The efficient operations of the Company's business is dependent on its computer
software programs and operating systems (collectively, Programs and Systems).
These Programs and Systems are used in several key areas of the Company's
business, including information management services and financial reporting, as
well as in various administrative functions. The Company has been evaluating its
Programs and Systems to identify potential year 2000 compliance problems, as
well as manual processes, external interfaces with customers and services
supplied by vendors to coordinate year 2000 compliance and conversion. The year
2000 problem refers to the limitations of the programming code in certain
existing software programs to recognize data-sensitive information for the year
2000 and beyond. Unless modified prior to the year 2000, such systems may not
properly recognize such information and could generate erroneous data or cause a
system to fail to operate properly.
Based on current information, the Company expects to attain year 2000 compliance
and institute appropriate testing of its modifications and replacements in a
timely fashion and in advance of the year 2000 date change. It is anticipated
that modification or replacement of the Company's Programs and Systems will be
performed in-house by Company personnel. The Company believes that, with
modifications to existing software and conversions to new software, the year
2000 problem will not pose a significant operational problem for the Company.
However, because most computer systems are, by their very nature,
interdependent, it is possible that noncompliant third-party computers may not
interface properly with the Company's computer systems. The Company could be
adversely affected by the year 2000 problem if it or unrelated parties fail to
successfully address this issue. Management of the Company currently anticipates
that the expenses and capital expenditures associated with its year 2000
compliance project will not have a material effect on its financial position or
results of operations.
-15-
<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 -
The annual meeting of stockholders of the Company was held on
Tuesday, June 9, 1998. The proposals and the results are listed
below:
Proposal No. 1 To elect seven directors to serve until the next
annual meeting of stockholders and until their
successors are duly elected and qualified.
Proposal No. 2 To approve the 1998 Employee Stock Option Plan of the
Company.
Proposal No. 3 To amend the 1993 Employee Stock Purchase Plan of the
Company to increase the number of shares offered and
reserved for issuance thereunder by 400,000 shares to
1,400,000 shares of Common Stock, par value $.01 per
share, to be offered in up to six additional annual
or semiannual offerings, and amend the termination
date from December 31, 1998, to December 31, 2001.
Proposal No. 4 To approve the 1998 Executive Non Statutory Stock
Option Plan of the Company.
Proposal No. 5 To authorize the extension of the vesting and
exercise period of certain stock options from 90 days
to one year. These options were granted to employees
of the JFS division which the Company sold in
November 1997 and cover an aggregate of 53,778 shares
of the Company's stock.
Proposal No. 6 To amend the 1991 Directors Stock Option Plan of the
Company to increase the number of shares offered and
reserved for issuance thereunder by 340,000 shares to
840,000 shares of Common Stock, par value $.01 per
share.
Proposal No. 7 To authorize the board of directors, in its
discretion, to implement one of three alternative
reverse splits of the Company's Common Stock at a
ratio of one share for two, three or four shares of
Common Stock.
-16-
<PAGE>
The following persons were nominated for election as directors of the
Company, and all nominees were elected. The shares voted for and those
withheld from each nominee are set forth below opposite such nominee's
name:
SHARES
DIRECTOR NOMINEES SHARES VOTED FOR WITHHELD
----------------- ---------------- --------
Edward P. Gistaro 11,651,655 20,282
Douglas P. Gill 11,653,237 16,700
Allan H. Hobgood 11,662,937 9,000
Ralph Brown 11,658,037 13,900
Al R. Ireton 11,655,837 16,100
Chauncey E.
Schmidt 11,658,837 13,100
Robert W.
Schwartz 11,662,137 9,800
PROPOSALS FOR AGAINST ABSTAIN
--------- --- ------- -------
No. 2 4,874,297 957,445 106,750
No. 3 4,518,894 1,290,583 129,015
No. 4 4,380,714 1,437,563 120,215
No. 5 4,626,544 1,326,479 106,015
No. 6 4,278,395 1,554,082 106,015
No. 7 10,853,241 981,156 100,843
Item 5. Other Matters - None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 10.16 - Employment Agreement, April 14, 1998, between
Docucon, Incorporated and Allan Hobgood
Exhibit 10.17 - Employment Agreement, May 5, 1998, between
Docucon, Incorporated and Michael Mooney
Exhibit 11 - Computation of Earnings Per Share
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K - None
-17-
<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/ DOUGLAS P. GILL
Douglas P. Gill,
President and Chief
Executive Officer
By /s/ LORI TURNER
Lori Turner,
Chief Financial Officer
and Treasurer
Dated: August 6, 1998
-18-
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered as of the 14th
day of April 14, 1998 by and between Docucon, Incorporated, a corporation
organized and existing under the laws of the State of Delaware ("Company"), and
Allan H. Hobgood, an individual residing in San Antonio, Bexar County, Texas
("Employee").
FOR AND IN CONSIDERATION of the mutual covenants herein contained and the
mutual benefits to be gained by the performance thereof and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto hereby agree as follows:
1. INTRODUCTION. It is the intent and purpose of Company and Employee to
specify in this Agreement the terms and conditions of Employee's employment with
Company.
2. EMPLOYMENT. Company hereby employs Employee and Employee hereby accepts
employment with Company on the terms and conditions herein set forth. In
consideration of Employee's employment by Company, Employee agrees to the terms,
conditions and covenants of this Agreement.
3. TERM OF EMPLOYMENT. This Agreement shall be effective as of April 1,
1998 and shall continue thereafter until terminated as provided HEREIN.
4. DUTIES AND RESPONSIBILITIES. Employee is hereby employed as, and shall
serve in the capacity of, Vice Chairman and Chief Operating Officer of Company.
Employee shall have the duties and responsibilities normally performed by an
executive officer in such position, and shall perform services commensurate with
such position for Company as may be determined from time to time by the Board of
Directors of Company. Employee shall report to the President/Chief Executive
Officer of Company and shall perform services hereunder as directed by the
President/Chief Executive Officer of Company, as further clarified in Exhibit I.
During the term of this Agreement Employee's primary business interest shall be
the Company, and Employee shall devote such of his time, attention, skills and
energies as may be necessary to discharge his duties and responsibilities
hereunder. Employee shall, in the performance of services hereunder, use his
best efforts to serve and advance the interest of Company well and faithfully.
5. COMPENSATION AND BENEFITS. The compensation and other benefits payable
to or accruing to Employee under this Agreement shall constitute the full
consideration to be paid to Employee for all services to be rendered by Employee
to Company and all other agreements of Employee hereunder.
5.01 SALARY. As compensation for all services of whatever type
rendered by Employee in the performance of these duties under this Agreement and
for all other agreements and undertakings of Employee hereunder, Company shall
pay to Employee a minimum annual salary as set forth in this Section 5.01.
Employee's annual base salary ("Base Salary") shall be Ninety Six Thousand
Dollars ($96,000.00). Such Base Salary shall be payable in equal regular
installments in accordance with Company's customary payroll payment policy. In
addition to Employee's Base Salary, Company shall, once each month, on a
customary payroll payment date, pay to Employee a sum calculated by the
following formula:
5.5% OF MONTHLY OPERATING PROFITS (AS DEFINED IN THE COMPANY'S ACCOUNTING
RECORDS), FROM THE COMPANY'S DOCUMENT CONVERSION BUSINESS IN THE GOVERNMENT
AND COMMERCIAL MARKETS, INCLUDING "OUTSOURCING DAY-FORWARD" ACCOUNTS, BUT
EXCLUDING NON-CONVERSION" BUSINESSES SUCH AS DATA WAREHOUSING,
PRINT-ON-DEMAND AND OTHER NEW BUSINESS THAT THE COMPANY MAY ENTER. IT IS ALSO
UNDERSTOOD THAT THE OPERATING PROFITS ON WHICH THIS CALCULATION SHALL BE
PERFORMED WILL EXCLUDE ANY ALLOCATION OF CORPORATE OVERHEAD (EXCEPT FOR
EXPENSES DIRECTLY RELATED TO THE CONVERSION OPERATION, SUCH AS, OCCUPANCY,
EMPLOYEE BENEFITS, ETC.).
Employee's annual salary will be reviewed periodically by the Board of Directors
of the Company for adjustment based on performance in accordance with Company's
normal compensation policies and practices. It is specifically understood and
agreed that a portion of Employee's annual salary hereunder is attributable to
Employee's agreement, pursuant to Section 10 hereof, to maintain the
confidentiality of "Confidential Information" (as herein defined), both during
and after the term of this Agreement, and that Employee's salary would be
reduced significantly if Employee did not agree to be bound by the terms of
Section 10. It is further understood and agreed that a portion of Employee's
annual salary is attributable to Employee's agreement, pursuant to Section 11
hereof, not to compete with Company either during or for a specified period of
time after the expiration or termination of this Agreement and that Employee's
annual salary would be reduced significantly if Employee did not agree to be
bound by the terms of Section 11 hereof. Employee agrees that he is being fairly
and reasonable compensated for the agreements undertaken by Employee pursuant to
Sections 10 and 11 hereof.
5.02 BENEFITS. Employee shall be entitled to a reasonable paid
vacation each year, the times for such vacation to be mutually agreed upon by
Employee and Company. As an executive officer of Company, Employee shall be
entitled to participate in the Company benefit programs designed for Company
employees with similar salaries, duties and/or responsibilities.
5.03 EXPENSES. Company shall pay or reimburse Employee for all
reasonable and necessary expenses actually incurred or paid by Employee during
the term of this Agreement in the performance of Employee's services under this
Agreement, upon presentation of expense statements or vouchers or such other
supporting documents as Company may reasonably require; PROVIDED, HOWEVER, that
the maximum amount available for such expenses during any period may, upon
written notice to Employee, be fixed in advance by the Board of Directors of
Company.
6. INSURANCE. Company may, in its sole and absolute discretion, at any time
after the Effective Date, apply for and procure, as owner and for its own
benefit, insurance on the life of Employee, in such amounts and in such forms as
Company may choose. Employee shall have no interest whatsoever in any insurance
policy or policies obtained by Company, but Employee shall, at Company's
request, submit to such medical examinations, supply such information and
execute and deliver such documents as may be required or reasonably requested by
Company or the insurance company or companies to which Company has applied for
such insurance.
7. REPRESENTATIONS, WARRANTIES AND AGREEMENTS. Employee represents,
warrants and agrees that: (i) Employee is not currently bound by any employment
agreement, restriction or other obligation of any kind which would in any way
materially interfere with or be inconsistent with the services to be provided by
Employee to Company hereunder, (ii) Employee will not, during the term of this
Agreement, become engaged as an employee, consultant, independent contractor or
representative or in any other capacity or otherwise perform services of any
kind for any person or entity or assume any such obligations or restrictions, in
whatever capacity, which would in any way materially interfere with or be
inconsistent with the services to be provided by Employee to Company hereunder;
(iii) Employee is free to enter into this Agreement and the services and work
product provided by Employee to Company hereunder will be original works of
Employee and no portion of such services or work product, or the use or
distribution thereof by Company, violates or will violate, or is or will be
protected by, the right, title or interest of any patent, copyright, license or
other similar property or proprietary right of any third person or entity; and
(iv) in no event and at no time shall Employee, whether during or after the term
of this Agreement, disparage, denigrate or otherwise defame Company or the
business, services, properties or assets, or any of the officers, directors,
employees, agents or other representatives, of Company to any person or entity.
The representations contained in this Section shall survive the expiration or
termination of this Agreement.
8. REGULATIONS AND POLICIES. Employee shall, during the term of this
Agreement, comply with all Company regulations and policies, including, without
limitation, security regulations.
9. CONFIDENTIAL INFORMATION. The term "Confidential Information", as used
herein, shall mean and include any and all documents, knowledge, data or
information (in whatever medium) know, communicated, provided or made available
to Employee, whether before or after the execution of this Agreement, which are
marked with a confidentiality legend by Company or which Employee knows or
reasonably should know constitute trade secrets of Company or information
belonging to third parties to whom Company may have an obligation of
confidentiality or which embody, comprise, relate to, are incorporated in or
constitute "Intellectual Property" (as herein defined) in any stage of
development; including, in each case, all trade secrets and other proprietary
ideas, concepts, know-how, methodologies and information incorporated therein;
PROVIDED, HOWEVER, that Confidential Information shall not include any
information or materials which are or become generally available to the public
other than as a result of any breach of the provisions of this Agreement or any
other agreement between Employee and Company (or their respective successors,
assigns or affiliates). The term "Intellectual Property", as used herein, shall
include any and all information or materials, in any medium, of a technical or a
business nature relating to the actual or reasonably anticipated business of
Company, such as ideas, discoveries, designs, inventions, improvements, trade
secrets, know-how, manufacturing processes, product formulae, design
specifications, writings and other works of authorship, computer software,
financial figures, marketing plans, customer lists and data, business plans or
methods and any other material relating to the actual or reasonably anticipated
business of the Company. In connection with computer software, the term
"Intellectual Property" shall include, without limitation, the data bases, data
processing and communications networking systems, practices and procedures and
other internal systems, logic and controls, and the object code, source code,
source listings, programming systems, programming or systems documentation and
specifications, and user, operations or systems manuals or documentation related
thereto or incorporated therein, firmware, models, sketches, writings, flow
charts, diagrams, graphs or data related thereto, together with all
modifications, enhancements, improvements, accessions, amendments, supplements
or other additions to any of the foregoing.
10. CONFIDENTIALITY. Employee acknowledges and agrees that in his
employment by Company he occupies a position of trust and confidence and that
during the term of his employment under this Agreement he will have access to
and will become familiar with Company's Confidential Information. Employee
further acknowledges and agrees that the Confidential Information, including any
and all copies thereof, constitutes trade secrets of Company and is confidential
and proprietary information of Company. Employee further acknowledges and agrees
that he has no right, title, interest or claim in or to any of the Confidential
Information or any copies thereof. Employee agrees to maintain the
confidentiality of the Confidential Information and agrees that he will not
take, or permit to be taken, any action with respect to the Confidential
Information (or any portion thereof) which is inconsistent with the confidential
and proprietary nature of such information. Without limiting the generality of
the foregoing, Employee agrees that he will not, directly or indirectly, without
the prior specific written consent of Company, except as specifically required
in the course of his employment,
(i) communicate, divulge, transmit or otherwise disclose any
Confidential Information to any person, firm, partnership, corporation or other
entity, or
(ii) use any confidential Information in any manner except as
specifically required in connection with the performance of services hereunder,
or
(iii) copy, reproduce or otherwise duplicate any Confidential
Information in any fashion, in whole or in part.
Employee agrees to take any and all steps reasonably necessary to protect the
confidentiality of the Confidential Information. Employee shall, upon
termination of this Agreement, immediately return to Company all Confidential
Information in Employee's control or possession, including, without limitation,
any and all copies thereof. This Section shall survive the expiration or
termination of this Agreement.
11. RESTRICTIVE COVENANT AND NONCOMPETITION.
11.01 NONCOMPETE. During the term of this Agreement, Employee
shall not, directly or indirectly, own, manage, operate, join, control or
participate in, or be connected with, directly or indirectly, as an officer,
director, stockholder, employee, advisor, consultant, partner, owner, agent,
representative or in any other capacity, any "Competitive Business"; PROVIDED,
HOWEVER, that the foregoing shall not prohibit Employee from becoming a
shareholder owning less that five percent (5%) of the shares of a corporation
whose shares are publicly traded. As used herein, the term "Competitive
Business" shall mean and include any person, firm, corporation or other entity
which offers services relating to the conversion or transferring of information
form paper or microform to computer accessible media or which engages in
document conversion, storage and/or retrieval services or which otherwise
competes in any fashion with any products or services offered by Company or
which it is reasonably anticipated will be offered by Company or which it is
reasonably anticipated will be offered by Company in the foreseeable future.
11.02 UPON TERMINATION. As an independent covenant, Employee
agrees that, for a period of one (1) year commencing upon the termination or
expiration of this Agreement for any reason, he will not, unless granted express
written permission by the Board of Directors of Company, directly or indirectly,
own, manage, operate, join, control or participate in, or be connected with,
directly or indirectly, as an officer, director, stockholder, employee, advisor,
consultant, partner, owner, agent, representative or in any other capacity, any
Competitive Business; PROVIDED, HOWEVER, that the foregoing shall not prohibit
Employee from becoming a shareholder owning less than five percent (5%) of the
shares of a corporation whose shares are publicly traded.
11.03 NO USURPATION. As an independent covenant, Employee agrees,
during the term of this Agreement and, upon termination or expiration of this
Agreement for any reason, for a period of one (1) year thereafter, unless
granted express written permission by the Board of Directors of Company, not to
divert, take, solicit and/or accept on his own behalf or on behalf of any other
person, firm, company or other entity, any business of any customer or client of
Company whose identity became known to Employee through his employment by or
involvement with Company which constitutes business relating to the actual or
reasonably anticipated business of Company.
11.04 COMPANY EMPLOYEES. As an independent covenant, Employee
agrees, during the term of this Agreement and, upon termination or expiration of
this Agreement for any reason, for a period of one (1) year thereafter, not to
induce or attempt to influence any employee of Company to terminate his or her
employment with Company.
11.05 REASONABLENESS. Employee acknowledges and agrees that the
covenants and agreements set forth in this Section are made to protect the
legitimate business interests of Company, including Company's interest in
Confidential Information, and not to restrict his mobility or to prevent him
from utilizing his skills. Employee recognizes and acknowledges the necessarily
national and international scope of the market served by Company and agrees that
the restrictions set forth in this Section are reasonable.
11.06 SURVIVAL. This Section 11 shall survive the expiration or
termination of this Agreement.
12. OWNERSHIP OF DEVELOPMENTS AND WORK PRODUCTS.
12.01 DEVELOPMENT. Employee agrees that any and all Intellectual
Property and any and all other material relating to the actual or reasonably
anticipated business or services of Company, developed, prepared, conceived,
made, discovered or suggested by Employee, solely or jointly with others, during
the term of this Agreement, whether on or off the premises of Company
(collectively "Developments"), including all such Developments as are originated
or conceived during the term of this Agreement but which are completed or
reduced to practice thereafter, shall be deemed to be "works made for hire"
within the meaning of Title 17, U.S.C. 101, and shall be and remain the sole and
exclusive property of Company. To the extent that any such Developments may not,
by operation of law, be "works made for hire", Employee hereby assigns,
transfers and conveys to Company the ownership of all right, title and interest
in and to such Developments, including, without limitation, all copyrights,
patents and other proprietary and property rights applicable thereto, and
Company shall have the right to obtain and hold in its own name such copyrights,
patents or other proprietary protection which may be available or become
available in such Developments. Employee agrees that Company shall have the
right to keep such Developments as trade secrets, if Company chooses.
12.02 COOPERATION. Employee agrees, at any time during the term
of this Agreement and thereafter, to execute such documents and provide such
additional cooperation as Company may reasonably request or require in order to
perfect, evidence, protect or secure Company's right, title and interest in and
to any and all such Developments. Without limiting the generality of the
foregoing, either during or subsequent to Employee's employment, upon the
request and at the expense of Company, and for no remuneration in addition to
that due Employee hereunder pursuant to his employment by Company, Employee
agrees to execute, acknowledge and deliver to Company or its attorneys any and
all instruments which in the judgment of Company or its attorneys may be
necessary or desirable to secure or maintain for the benefit of Company adequate
patent, copyright and/or other property or proprietary rights protection in the
United States and/or foreign countries with respect to any Developments,
including, but not limited to: (i) domestic and foreign patents, trademarks,
service marks and copyright applications, (ii) any other applications for
securing, protecting or registering any property or proprietary right, and (iii)
powers of attorney, assignments, oaths, affirmations, supplemental oaths and
sworn statements.
12.03 DISCLOSURE TO COMPANY. Employee shall, during the term of
this Agreement and for a period of one (1) year thereafter, disclose promptly in
writing to Company all Developments, whether copyrightable, patentable or not,
made, discovered, written, conceived, first reduced to practice or developed by
Employee, either alone or in conjunction with any other person or entity. Any
Developments disclosed by Employee within one (1) year following termination of
his employment with Company shall be deemed to be owned by Company under the
terms of Section 12.01 hereof, unless proved by Employee to have been conceived
after termination of Employee's employment.
12.04 SURVIVAL. This Section 12 shall survive the expiration or
termination of this Agreement.
13. PERFORMANCE BY EMPLOYEE. Employee acknowledges and agrees that the
value of the Confidential Information and the success and long-term viability of
Company depends largely upon Employee's performance of his obligation under
Sections 10, 11 and 12 of this Agreement.
14. INJUNCTIVE RELIEF. Employee acknowledges and agrees that in the event
of any unauthorized use or disclosure of Confidential Information in violation
of the terms and conditions of Section 10 of this Agreement by Employee, or any
breach of any of the terms and conditions of Sections 11 or 12 of this Agreement
by Employee, Company will suffer irreparable injury not compensable by money
damages and therefore will not have an adequate remedy available at law.
Accordingly, if Company institutes an action or proceeding to enforce the
provisions of Sections 10, 11 or 12 of this Agreement, Company shall be entitled
to obtain such injunctive relief or other equitable remedy from a court of
competent jurisdiction as may be necessary or appropriate to prevent or curtail
any such breach, threatened or actual. The foregoing shall be in addition to and
without prejudice to such other rights as Company may have at law or in equity.
15. TERMINATION.
15.01 TERMINATION. Employee's employment hereunder is terminable,
with or without cause, at the will of either Company or Employee upon the giving
of 30 days' prior written notice by either party. If Employee's termination is
voluntary or "for cause," Company shall discontinue Employee's compensation as
of the effective date of the termination of Employee's employment. If Employee's
termination is involuntary and/or without cause, including, without limitation,
termination resulting from the death or mental or physical disability of
Employee, Employee's regular Base Salary shall continue to be paid until
September 30, 2000. In addition, Company shall, on each of its customary payroll
payment dates until September 30, 2000, pay to Employee a sum equal to the
bonuses as calculated in paragraph 5.01 for "Gross Margins Attributable to
Employee" (as herein defined) of the Company during the Payroll Payment Period
terminating on the day immediately preceding such payroll payment date. As used
herein, the term "Gross Margins Attributable to Employee" shall mean and include
(i) gross margins attributable to contracts existing, in place and executed as
of the effective date of termination of Employee's employment hereunder. In
addition, employee will retain the right to exercise all vested options granted
under the 1998 Stock Option Plan and the 1998 Executive Stock Option Plan
(TARSOP) until September 30, 2000. So long as (1) Employee has not been
terminated "for cause", or (2) Employee has not voluntarily terminated
employment with Company, prior to September 30, 2000, then the Company agrees to
employ Employee as a consultant commencing September 30, 2000 until September
30, 2005 at the annual rate of $30,000. In addition, the Company will purchase a
financial instrument ("instrument") which will provide Employee $30,000 annual
income each year commencing September 30, 2005 TO September 30, 2010; provided,
however, should (1) Employee voluntarily terminate his employment, or (2)
Company terminate Employee "for cause", prior to September 30, 2000, then such
instrument shall be the sole property of Company, and Employee shall have no
rights or claims of any kind in the instrument or the annual income to be
derived from the instrument. (In the event of Employee's death or disability,
the above-described compensation shall be paid to Employee's estate or legal
representative). For purposes of this Agreement, "for cause" shall mean:
a) Any willful or intentional act of Employee which has or will have
the effect of injuring the reputation or business relationships of
Company or its affiliates;
b) Employee's conviction of or entering a plea of nolo contendere to a
charge of felony or a misdemeanor involving dishonesty or fraud;
c) Employee's material breach of any of the terms, covenants or conditions
contained in this Agreement; PROVIDED, HOWEVER, that with respect to
any breach which can be effectively cured by some act of Employee, such
termination of this Agreement shall be revoked if, within ten (10) days
after receipt of notice of such breach from Company, Employee cures
such breach to the reasonable satisfaction of Company or, if such cure
cannot reasonably be accomplished within such ten (10) day period, if
Employee initiates efforts to cure such breach within such ten (10) day
period and diligently pursues such cure efforts thereafter until such
cure is accomplished; or
d) Employee's repeated or continuous failure, neglect or refusal to
perform his duties under this Agreement.
Until the effective date of termination, Employee, if requested to do so
by Company, shall continue to render services to Company.
15.02 EXCESS PARACHUTE PAYMENTS. Notwithstanding the foregoing
provisions of this Section 15, if Employee will be considered (as determined in
the sole opinion of a national accounting firm employed by Employee) as
receiving payments, any part of which constitutes excess parachute payments,
such payments shall be reduced by or, if already paid, refunded to Company in
the minimum amount (such minimum amount shall be determined by the national
accounting firm employed by Employee, who shall interpret and apply all
applicable law and regulations in the way which results in the most favorable
results for Employee and who shall so instruct Company of its determination)
required to result in there being no excess parachute payments; PROVIDED,
however, (i) the payments to be made to Employee pursuant to this Section 15
shall be reduced first and in the manner requested by Employee, and (ii) if the
compensation to be paid to Employee after the termination of his employment is
reduced to $0.00 as a result of the operation of this subparagraph, no further
reduction of any kind in any other payments to Employee shall be made,
notwithstanding that any part of such remaining payments may constitute excess
parachute payments. As used herein, the terms excess parachute payment and
parachute payment shall have the same definition as such terms are given in
Section 280G of the Internal Revenue Code of 1986, as amended and as may be
amended after the date hereof ("IRC"), or as defined in any section of the IRC
hereafter enacted to succeed Section 280G.
15.03 NO DUTY TO MITIGATE. Employee shall not be required to
mitigate the amount of any post employment payment or benefit paid or provided
to Employee under this Agreement by seeking other employment or otherwise, nor
shall the amount of any such payment or benefit paid or provided to Employee
under this Agreement be reduced or offset by any compensation earned by Employee
as the result of employment by another employer or otherwise.
16. EFFECT OF TERMINATION. Upon the termination or expiration of this
Agreement: (i) Employee shall immediately return to Company and all Confidential
Information in his possession or control (including, without limitation, all
copies thereof and all materials incorporating such Confidential Information),
(ii) Employee shall have no further obligation to perform services for Company
hereunder, PROVIDED, HOWEVER, that Employee shall continue to be bound by the
terms of Sections 10, 11 and 12 hereof, and (iii) except to the extent
specifically provided in Section 15 above, Company shall have no further
obligation to compensate or provide benefits to Employee hereunder.
17. BUSINESS KNOWLEDGE AND EXPERIENCE. Notwithstanding anything to the
contrary contained in this Agreement, it is specifically understood and agreed
that Employee has, prior to entering into this Agreement, developed significant
business expertise, ideas and experience (collectively "Business Experience")
and that such Business Experience, to the extent it applies to business
operations generally and not to the specific operations, technologies or trade
secrets of Company, shall not be deemed to constitute Confidential Information,
and nothing contained in Section 10 of this Agreement shall be deemed to prevent
Employee from using such general Business Experience in such a manner as does
not violate any of the other terms and conditions of this Agreement.
18. GENERAL.
18.01 SURVIVAL OF REPRESENTATIONS, WARRANTIES AND Covenants. All
representations, warranties and covenants contained herein shall survive the
execution of this Agreement and the consummation of the transactions
contemplated hereby.
18.02 SUCCESSORS AND ASSIGNS. This Agreement shall be binding
upon and inure to the benefit of the parties hereto and their respective heirs,
successors, assigns and legal representatives, but shall not be assignable by
Employee. Any purported assignment in violation of the foregoing shall be
invalid and of no force and effect. No assignment of this Agreement shall
relieve the assigning party of any obligation or liability hereunder.
18.03 NOTICES. Any notice, demand, payment, request, response or
other communication provided for herein or given hereunder to a party hereto
shall be in writing and shall be deemed to have been duly given if signed by the
party giving it. Notice shall be deemed effective upon delivery by hand, or on
the third business day after it is deposited in the United States mail, postage
prepaid (registered or certified mail) or on the business day after it is sent
by federal express or similar overnight service to the address of the parties
listed below:
if to Company: 7461 Callaghan Road
San Antonio, Texas 78238
if to Employee: Allan H. Hobgood
9100 IH-10 West, Suite 100
San Antonio, Texas 78230
or to such other address as the party to receive such communication has last
designated by notice delivered to the other party in accordance with the
foregoing provisions.
18.04 WAIVER. Failure or delay in insisting upon strict
compliance with any provision hereof shall not be deemed a waiver of such
provision or any other provision hereof with respect to prior, such provision or
any other provision hereof with respect to prior, contemporaneous or subsequent
occurrences. No waiver by either party of any right hereunder or of any default
shall be binding upon such party unless such waiver is in writing and signed by
Employee (in the case of Employee) or a duly authorized officer or partner of
Company in the case of Company.
18.05 GOVERNING LAW; VENUE. This Agreement shall be governed by
and construed in accordance with the laws of the State of Texas. Employee and
Company hereby agree that the sole and exclusive place of jurisdiction and venue
for resolution of any disputes arising hereunder or relating hereto shall be San
Antonio, Bexar County, Texas, and Employee hereby specifically consents to
personal jurisdiction in such location.
18.06 ENTIRE AGREEMENT. Any and all previous employment
agreements, whether written or oral, existing between Company and Employee shall
be deemed to be revoked and cancelled for all purposes on the Effective Date.
This Agreement, as may be amended from time to time, shall represent the sole
and entire agreement between Employee and Company respecting the employment
relationship between Company and Employee. There are no representations,
agreements, arrangements or understandings, oral or written, between or among
the parties hereto relating to the employment relationship between Company and
Employee which are not fully expressed in this Agreement.
18.07 SEVERABILITY. The provisions of this Agreement are
severable and the invalidity or unenforceability of any provision hereof shall
not affect the validity or enforceability of any other provision. In addition,
in the event that any provision of this Agreement (or portion thereof) is
determined by a court to be unenforceable as drafted by virtue of the scope,
duration, extent or character of any obligation contained therein, the parties
acknowledge that it is their intention that such provision (or portion thereof)
shall be construed in a manner designed to effectuate the purposes of such
provision to the maximum extent enforceable under applicable law.
18.08 ATTORNEY'S FEES. If any legal action or other proceeding is
brought for the enforcement of this Agreement, or because of an alleged dispute,
breach, default or misrepresentation in connection with any of the provisions of
this Agreement, the prevailing party shall be entitled to recover reasonable
attorneys' fees and other costs incurred in that action or proceeding, in
addition to any other relief to which it may be entitled.
18.09 REMEDIES CUMULATIVE. All remedies provided for in this
Agreement shall be cumulative and in addition to and not in lieu of any other
remedies available to either party under this or any other agreement between the
parties or at law, in equity or otherwise.
18.10 LANGUAGE. The language used in this Agreement shall be
deemed to be language chosen by the parties hereto to express their mutual
intent, and no rule of strict construction against any party shall apply to any
term or condition of this Agreement.
18.11 AMENDMENT. This Agreement may not be modified or amended
except by written agreement executed by all of the parties to this Agreement at
the time of such amendment.
<PAGE>
18.12 HEADINGS. The descriptive headings of the sections,
paragraphs and subparagraphs hereof are inserted for convenience only and do not
constitute a part of this Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day
and year first above written.
DOCUCON, INCORPORATED
("COMPANY")
/S/ ALLAN H. HOBGOOD BY: /S/ DOUGLAS P. GILL
(ALLAN H. HOBGOOD "EMPLOYEE")
ITS: CHIEF EXECUTIVE OFFICER
EMPLOYMENT AGREEMENT
THIS AGREEMENT is made and entered as of the 5th day of May 5, 1998 by and
between Docucon, Incorporated, a corporation organized and existing under the
laws of the State of Delaware ("Company"), and Michael C. Mooney, an individual
residing in Virginia ("Employee").
It is the intent and purpose of the Company and Employee to specify in this
Agreement the terms and conditions of Employee's employment with the company. In
consideration of Employee's employment by Company, Employee agrees to the terms,
conditions, and covenants of this Agreement.
This Agreement shall be effective on the date it is signed by Company and
Employee and will be effective for 36 months from the signing date.
Employee is hereby employed as, and shall serve in the capacity of Senior Vice
President, Federal Government Business Development. Employee shall have the
duties and responsibilities normally performed by an executive officer in such
position, and shall perform services commensurate with such position for
Company. Employee shall report to the Chief Operating Officer of Company and
shall perform services hereunder as directed by the Chief Operating Officer.
During the term of this Agreement Employee's primary business interest shall be
the Company, and Employee shall devote such of his time, attention, skills, and
energies as may be necessary to discharge his duties and responsibilities
hereunder. Employee shall, in the performance of services hereunder, use his
best efforts to serve and advance the interests of Company well and faithfully.
The compensation and other benefits payable to Employee under this Agreement are
as stated in the Offer Letter dated April 15, 1998.
Employee represents, warrants, and agrees that: (i) Employee is not currently
bound by any employment agreement, restriction or other obligation of any kind
which would materially interfere with or be inconsistent with the services to be
provided by Employee to Company hereunder, (ii) Employee shall not, during the
term of this Agreement, become engaged as an employee, consultant, independent
contractor or representative or in any other capacity which would materially
interfere with the or be inconsistent with the services to be provided by
Employee to Company hereunder, (iii) in no event and at no time shall Employee,
whether during or after the term of this Agreement, disparage, denigrate or
otherwise defame Company or the business, services, properties or assets, or any
of the officers, directors, employees, agents or other representatives of
Company to any person or entity
Employee shall, during the term of this Agreement, comply with all Company
regulations and policies, including, without limitation, security regulations.
Employee acknowledges and agrees that in his employment by Company he occupies a
position of trust and confidence and that during the term of his employment
under this Agreement he will have access to and will become familiar with
Company's Confidential Information. Employee further acknowledges and agrees
that the Confidential Information, including any and all copies thereof,
constitutes trade secrets of Company and is confidential and proprietary
information of Company. Employee further acknowledges and agrees that he has no
right, title, interest or claim in or to any of the Confidential Information or
any copies thereof. Employee agrees to maintain the confidentiality of the
Confidential Information and agrees that he will not take, or permit to be
taken, any action with respect to the Confidential Information (or any portion
thereof) which is inconsistent with the confidential and proprietary nature of
such information. Employee agrees to take any and all steps reasonably necessary
to protect the confidentiality of the Confidential Information and shall, upon
termination of this Agreement, immediately return to Company all Confidential
Information in Employee's possession or control, including, without limitation,
any and all copies thereof.
During the term of this Agreement and for a period of one (1) year commencing
upon the termination of this Agreement, Employee shall not, directly or
indirectly, own, manage, operate, join, control or participate in, or be
connected with, directly or indirectly, as an officer, owner, agent, director,
employee, advisor, consultant, partner, or in any other capacity, any
"Competitive Business". As used herein, the term "Competitive Business" shall
mean and include any person, firm, corporation, or any other entity that offers
services or products offered by Company or which it is reasonably anticipated
will be offered by Company in the foreseeable future.
Employee acknowledges and agrees that the value of the Confidential Information
and the success and long-term viability of Company depends largely upon
Employees performance of his obligations under this Agreement.
Employee's employment is terminable, with or without cause, at the will of
either Company or Employee upon the giving of 30 days' prior written notice by
either party. If Employee's termination is voluntary or "for cause", Company
shall discontinue Employee's compensation as of the effective date of the
termination of Employee's employment. If Employee's termination is involuntary
and/or without cause, including, without limitation, termination resulting from
the death or mental or physical disability of Employee, Employee's regular base
compensation shall continue to be paid for a period of eighteen (18) months from
the effective date of termination of employment. For purpose of this Agreement,
"for cause" shall mean:
(a) Any willful or intentional act of Employee which has or will
have the effect of injuring the reputation or business relationships
of Company or its affiliates.
(b) Employee's conviction of or entering a plea of nolo contendere
to a charge of felony.
(c) Employee's material breach of any of the terms, covenants or
conditions contained in this Agreement; PROVIDED, HOWEVER, that with
respect to any breach which can be effectively cured by some act of
Employee, such termination of this Agreement shall be revoked if,
within ten (10) days after receipt of notice of such breach from
Company, Employee cures such breach to the reasonable satisfaction
of Company or, if such cure cannot reasonably be accomplished within
such ten (10) day period, if Employee initiates efforts to cure such
breach
<PAGE>
within such ten (10) day period and diligently pursues such cure
efforts thereafter until such cure is accomplished; or
(c) Employee's repeated or continuous failure, neglect or refusal to
perform the duties specified in this Agreement.
From time to time, the Board of Directors may grant employee options to purchase
shares of the Company's common stock. Such grants will vest to the employee over
varying periods of time as stated specifically in each grant. In the event that
a Change of Control of the Company occurs, all unvested grants will become fully
vested on the effective date of the Change of Control. Change of Control is
defined as; the acquisition of more than 50% of the Company's voting stock by
another company or entity, or the replacement of a majority of the Board of
Directors.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and
year first above written.
DOCUCON, INCORPORATED
BY: /S/ ALLAN H. HOBGOOD
Allan H. Hobgood
Chief Operating Officer
/S/ MICHAEL C. MOONEY
Michael C. Mooney
EXHIBIT 11
DOCUCON, INCORPORATED
COMPUTATION OF EARNINGS PER SHARE
(Unaudited)
<TABLE>
<CAPTION>
Three Months Six Months
ENDED JUNE 30 ENDED JUNE 30
--------------------------- ---------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
COMPUTATION OF BASIC EARNINGS (LOSS) PER
SHARE:
Net income (loss) from continuing
operations ................................... $ (455,214) $ 277,799 $(1,069,705) $ 375,890
Less- Preferred stock dividend
requirements ................................. (8,250) (11,688) (16,500) (24,751)
----------- ----------- ----------- -----------
Net income (loss) from continuing
operations applicable to common
stockholders ............................... (463,464) 266,111 (1,086,205) 351,139
Loss from discontinued operations ........... -- (215,698) -- (357,891)
----------- ----------- ----------- -----------
Net income applicable to common
stockholders ............................... $ (463,464) $ 50,413 $(1,086,205) $ (6,752)
=========== =========== =========== ===========
WEIGHTED AVERAGE NUMBER OF SHARES OF
COMMON STOCK OUTSTANDING ....................... 3,290,217 3,109,397 3,289,316 3,095,252
=========== =========== =========== ===========
Basic earnings (loss) from
continuing operations per common
share ......................................... $ (.14) $ .09 $ (.33) $ .11
Basic loss from discontinued operations
per common share .............................. -- (.07) -- (.11)
----------- ----------- ----------- -----------
BASIC EARNINGS (LOSS) PER COMMON SHARE ........... $ (.14) $ .02 $ (.33) $ --
=========== =========== =========== ===========
COMPUTATION OF DILUTED EARNINGS (LOSS)
PER SHARE:
Net income (loss) from continuing
operations .................................... $ (455,214) $ 277,799 $(1,069,705) $ 375,890
Preferred stock dividend requirements .......... (8,250) (11,688) (16,500) (24,751)
Increase applicable to common stock
for preferred stock dividends not
incurred upon assumed conversion of
preferred stock ............................... 8,250 11,688 16,500 24,751
----------- ----------- ----------- -----------
Net income (loss) from continuing
operations applicable to common
stockholders used for computation ........... (455,214) 277,799 (1,069,705) 375,890
Net (loss) from discontinued operations
applicable to common stockholders ............. -- (215,698) -- (357,891)
----------- ----------- ----------- -----------
Net income (loss) applicable to common
stockholders used for computation ............. $ (455,214) $ 62,101 $(1,069,705) $ 17,999
=========== =========== =========== ===========
Weighted average number of shares of
common stock outstanding ...................... 3,290,217 3,109,397 3,289,316 3,095,252
Weighted average incremental shares
outstanding upon assumed conversion of
options and warrants .......................... 2,520 95,359 50,501 124,517
Weighted average incremental shares
outstanding upon assumed conversion of
the preferred stock ........................... 100,008 141,665 100,008 149,632
----------- ----------- ----------- -----------
WEIGHTED AVERAGE NUMBER OF SHARES OF
COMMON STOCK AND COMMON STOCK
EQUIVALENTS OUTSTANDING USED FOR
COMPUTATION .................................... 3,392,745 3,346,421 3,439,825 3,369,401
=========== =========== =========== ===========
Diluted earnings (loss) from
continuing operations per common
share and common share equivalents .......... $ (.13) $ .08 $ (.31) $ .11
Diluted loss from discontinued
operations per common share and
common share equivalents .................... -- (.06) -- (.11)
----------- ----------- ----------- -----------
DILUTED EARNINGS (LOSS) PER COMMON SHARE
AND COMMON SHARE EQUIVALENTS ................... $ (.13)(a) $ .02 $ (.31)(a) $ --
============== =========== ============== ===========
</TABLE>
(a) This calculation is submitted in accordance with Item 601(b)(11) of
Regulation S-K although it is not required by SFAS No. 128 because
it is antidilutive.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM DOCUCON,
INCORPORATED'S CONDENSED BALANCE SHEET AS OF JUNE 30, 1998, AND ITS CONDENSED
STATEMENT OF OPERATIONS FOR THE SIX MONTHS THEN ENDED AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 2,815,279
<SECURITIES> 0
<RECEIVABLES> 2,635,202
<ALLOWANCES> 4,444
<INVENTORY> 0
<CURRENT-ASSETS> 7,246,745
<PP&E> 4,883,785
<DEPRECIATION> (4,562,526)
<TOTAL-ASSETS> 8,058,663
<CURRENT-LIABILITIES> 2,395,327
<BONDS> 41,743
0
12
<COMMON> 32,905
<OTHER-SE> 5,581,176
<TOTAL-LIABILITY-AND-EQUITY> 8,058,663
<SALES> 1,482,978
<TOTAL-REVENUES> 1,482,978
<CGS> 1,356,964
<TOTAL-COSTS> 2,600,030
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 73,981
<INCOME-PRETAX> (1,058,705)
<INCOME-TAX> 11,000
<INCOME-CONTINUING> (1,069,705)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,086,205)
<EPS-PRIMARY> (.33)
<EPS-DILUTED> (.33)
</TABLE>
