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, 1999
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.)
20 Valley Stream Parkway
Suite 140
Malvern, Pennsylvania 19355
(Address of principal executive offices)
(610) 240-9600
(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 July 31, 1999 3,456,436
<PAGE>
DOCUCON, INCORPORATED
INDEX
PAGE
PART I. FINANCIAL INFORMATION (UNAUDITED)
Item 1: Balance Sheets - June 30, 1999, and December 31, 1998 3
Statements of Operations - For the Three and Six Months
Ended June 30, 1999 and 1998 5
Statements of Cash Flows - For the Six Months Ended
June 30, 1999 and 1998 6
Notes to Financial Statements 7
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
PART II. OTHER INFORMATION 17
SIGNATURES 19
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<PAGE>
DOCUCON, INCORPORATED
BALANCE SHEETS
June 30,
1999 December 31,
ASSETS (Unaudited) 1998
----------- ------------
CURRENT ASSETS:
Cash and temporary cash investments ............. $ 145,797 $ 1,082,321
Accounts receivable-trade, net of allowance for
doubtful accounts of $8,887 and $4,444,
respectively ................................... 619,710 373,366
Unbilled revenues, net of allowance of $1,600,000 904,570 193,722
Other receivables ............................... 5,414 374,379
Prepaid expenses and other ...................... 152,801 123,921
Asset held for sale ............................. -- 1,668,467
----------- ------------
Total current assets ............. 1,828,292 3,816,176
----------- ------------
PROPERTY AND EQUIPMENT:
Conversion systems .............................. 5,032,208 4,858,930
Building and improvements ....................... 22,146 9,476
Furniture and fixtures .......................... 251,611 243,167
----------- ------------
Total property and equipment ..... 5,305,965 5,111,573
Less- Accumulated depreciation .................. (4,835,493) (4,704,152)
----------- ------------
Net property and equipment ....... 470,472 407,421
----------- ------------
OTHER, net ........................................ 60,042 48,896
----------- ------------
Total assets ..................... $ 2,358,806 $ 4,272,493
=========== ============
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,
1999 December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) (Unaudited) 1998
------------ ------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable .................................. $ 745,527 $ 218,059
Accrued liabilities ............................... 1,101,704 1,191,351
Deferred revenues ................................. 49,612 40,601
Other current liabilities ......................... 79,473 44,087
Current maturities of long-term debt .............. -- 927,502
Current maturities of capital lease obligations ... 44,286 29,537
Secured indebtedness .............................. 291,977 --
------------ ------------
Total current liabilities ............... 2,312,579 2,451,137
------------ ------------
CAPITAL LEASE OBLIGATIONS ........................... 84,949 76,141
------------ ------------
OTHER LONG-TERM OBLIGATIONS ......................... 245,083 269,476
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 2)
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock, $1.00 par value, 10,000,000 shares
authorized-
Series A, 60 shares authorized, 7 shares issued
and outstanding as of June 30, 1999, and
December 31, 1998 .............................. 7 7
Common stock, $.01 par value, 25,000,000 shares
authorized; 3,456,436 and 3,306,216 shares
outstanding as of June 30, 1999, and December 31,
1998, respectively ............................... 34,564 33,062
Additional paid-in capital ........................ 10,106,129 10,027,337
Accumulated deficit ............................... (10,419,424) (8,581,573)
Treasury stock, at cost, 4,919 shares and 2,917
shares as of June 30, 1999, and December 31, 1998,
respectively ..................................... (5,081) (3,094)
------------ ------------
Total stockholders' equity (deficit) .... (283,805) 1,475,739
------------ ------------
Total liabilities and stockholders'
equity (deficit) ..................... $ 2,358,806 $ 4,272,493
============ ============
</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
-------------------------- --------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
OPERATING REVENUES ................................. $ 1,613,055 $ 869,982 $ 2,464,134 $ 1,482,978
----------- ----------- ----------- -----------
COSTS AND EXPENSES:
Production ...................................... 1,287,522 672,628 2,141,490 1,356,964
Research and development ........................ 84,211 56,893 259,699 124,644
General and administrative ...................... 523,342 328,724 1,038,741 623,162
Marketing ....................................... 373,976 206,640 795,928 323,863
Depreciation and amortization ................... 64,573 82,822 132,608 171,397
----------- ----------- ----------- -----------
2,333,624 1,347,707 4,368,466 2,600,030
----------- ----------- ----------- -----------
OPERATING LOSS ..................................... (720,569) (477,725) (1,904,332) (1,117,052)
OTHER INCOME (EXPENSE):
Interest income ................................. 9,435 52,179 31,322 116,204
Interest expense ................................ (10,439) (37,265) (18,000) (73,981)
Other, net ...................................... 22,665 7,597 53,159 5,124
----------- ----------- ----------- -----------
LOSS BEFORE INCOME TAXES ........................... (698,908) (455,214) (1,837,851) (1,069,705)
Income tax expense .............................. -- -- -- --
----------- ----------- ----------- -----------
NET LOSS ........................................... (698,908) (455,214) (1,837,851) (1,069,705)
Preferred stock dividend requirements ........... 4,813 8,250 9,625 16,500
----------- ----------- ----------- -----------
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS ......... $ (703,721) $ (463,464) $(1,847,476) $(1,086,205)
=========== =========== =========== ===========
BASIC AND DILUTED LOSS PER COMMON SHARE ............ $ (.21) $ (.14) $ (.56) $ (.33)
=========== =========== =========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 3,327,633 3,290,217 3,315,654 3,289,316
=========== =========== =========== ===========
</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
--------------------------
1999 1998
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss .................................................................. $(1,837,851) $(1,069,705)
Adjustments to reconcile net loss to net cash used in operating activities-
Depreciation and amortization .......................................... 132,608 171,397
Gain on sale of assets ................................................. (24,487) --
Changes in current assets and current liabilities-
(Increase) decrease in receivables and unbilled revenues ............. (588,227) 202,887
Increase in prepaid expenses and other ............................... (81,901) (53,206)
Increase (decrease) in accounts payable and accrued liabilities ...... 618,579 (319,120)
Decrease in taxes payable ............................................ -- (92,082)
Increase in deferred revenues ........................................ 9,011 --
Decrease in other current liabilities ................................ (13,248) --
----------- -----------
Net cash used in operating activities .................... (1,785,516) (1,159,829)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ...................................................... (150,316) (89,702)
Proceeds from sale of building ............................................ 1,782,609 --
----------- -----------
Net cash provided by (used in) investing activities ...... 1,632,293 (89,702)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments under line of credit ............................................. -- (504,000)
Increase in secured indebtedness .......................................... 291,977 --
Principal payments under capital lease obligations ........................ (20,798) (6,976)
Net proceeds from exercise of stock options ............................... -- 5,602
Principal payments on long-term debt ...................................... (939,872) (15,589)
Payment of preferred stock dividends ...................................... (88,816) --
Purchase of treasury stock ................................................ (25,792) (11,410)
----------- -----------
Net cash used in financing activities .................... (783,301) (532,373)
----------- -----------
NET DECREASE IN CASH AND TEMPORARY CASH INVESTMENTS .......................... (936,524) (1,781,904)
CASH AND TEMPORARY CASH INVESTMENTS, beginning of period ..................... 1,082,321 4,597,183
----------- -----------
CASH AND TEMPORARY CASH INVESTMENTS, end of period ........................... $ 145,797 $ 2,815,279
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Noncash investing and financing activities-
Capital lease obligations incurred ..................................... $ 44,355 $ --
=========== ===========
Treasury stock issued for Employee Stock Purchase Plan ................. $ 23,805 $ --
=========== ===========
Stock issued in satisfaction of accrued liabilities .................... $ 85,701 $ --
=========== ===========
Cash paid during the period for-
Interest ............................................................... $ 27,952 $ 75,523
=========== ===========
Income taxes ........................................................... $ -- $ 93,562
=========== ===========
</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 year ended December 31, 1998.
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.
The accompanying financial statements of the Company have been prepared on the
basis of accounting principles applicable to a going concern. Since its
inception, the Company has incurred cumulative net losses of approximately $10.4
million, including a loss of approximately $5.1 million during 1998. For the six
months ended June 30, 1999, the Company had negative cash flows from operating
activities of approximately $1.8 million and incurred a net loss for the same
period of approximately $1.8 million. At June 30, 1999, the Company had a
working capital deficit of approximately $484,000 and a total stockholders'
deficit of approximately $284,000. These matters raise substantial doubt about
the Company's ability to continue as a going concern. The financial statements
do not include any adjustments that might result from the outcome of these
uncertainties. The ability of the Company to continue as a going concern is
dependent upon the ongoing support of its customers, its ability to obtain
capital resources to support operations and its ability to successfully market
its services. If the Company is unable to generate positive cash flows from
operations or obtain additional capital resources, or if the funds obtained in
such efforts are not adequate to support the Company until a successful level of
operations is attained, the Company would likely be unable to continue operating
as a going concern.
While the recent operating losses are significant, management believes that it
has taken proper steps to significantly improve the Company's future operating
results. Such steps include the sale of its San Antonio office building and
repayment of substantially all of the Company's long-term debt in January 1999
and the hiring of experienced management personnel in key senior management
positions in 1998 and 1999. Expansion of the Company's marketing efforts has
been made to include a wide range of vertical markets and formal and informal
partnering relationships with systems integrators, document management software
developers and others. The Company's management is also seeking suitable
financing for working capital, business expansion and other general corporate
purposes. The Company's management believes that the Company's results from
operations for the remainder of 1999 will improve and will generate sufficient
working capital, along with available cash and anticipated additional capital,
to sustain its operations throughout the year. However, there can be no
assurances that the Company will be successful in obtaining additional financing
or capital or that the Company's efforts in the above areas will improve its
operating results.
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<PAGE>
DOCUCON, INCORPORATED
NOTES TO FINANCIAL STATEMENTS (Continued)
NOTE 2
Unbilled revenues-
The allowance for unbilled revenues at June 30, 1999, and December 31, 1998,
relates to conversion services performed for agencies of the U.S. Government.
The Company's ability to collect 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 informed by a U.S.
Government customer in mid-1997 that funding for certain conversion services
being performed had been depleted. Management completed work for this customer
that had been placed in production at that time. As a result, the Company has
been unable to collect approximately $1.6 million of conversion services for
this customer, the substantial majority of which were performed during 1997. A
substantial portion of the conversion products associated with the $1.6 million
of unbilled revenues have been shipped to the customer and is in various stages
of quality control review. 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 collect the unbilled
revenues. Management of the Company believes that such unbilled revenues
represent valid assets of the Company. However, due to the continued aging of
the unbilled revenues, the Company believed it was prudent to provide an
allowance on these unbilled revenues for the entire amount during the year ended
December 31, 1998. In the event that the Company collects any of the unbilled
revenues in the future, such collections would have a favorable impact on the
Company's liquidity and capital resources and results of operations in the
period of collection. There are no assurances that the Company will ultimately
be able to collect any of the fully reserved unbilled revenues.
On February 2, 1999, the Company contacted the Department of Defense's Voluntary
Disclosure Program Office to request admission into its Voluntary Disclosure
Program. The Voluntary Disclosure Program is intended to encourage government
contractors to voluntarily disclose potential violations of government
contracting policies and procedures. In general, companies who volunteer
information and cooperate with the government's investigation are not subject to
criminal and administrative sanctions such as suspension and debarment from
government contracting activities. Admission into the Voluntary Disclosure
Program does not protect companies from any potential civil liability the
government may assert. The Department of Defense Inspector General has completed
its preliminary review of the Company's disclosure and the Company has been
formally admitted into the Voluntary Disclosure Program.
The Company's request for admission into the Voluntary Disclosure Program was
the result of an internal review by the Company that indicated a billing
practice, with respect to certain invoices submitted during the period from
September 1996 through July 1997, might be perceived by the government as a
technical violation of DOD billing procedures. The Company's internal review is
ongoing, but based on its investigation to date, the Company believes that the
DOD sustained no actual damages as a result of the matter disclosed by the
Company. However, the Company expects to incur legal and other out-of-pocket
costs in connection with presenting the results of its internal review and
assisting the government in its investigation, adjudication and resolution of
this matter. The Company has established a reserve for estimated legal costs and
other expenses which it believes is adequate for the resolution of this matter.
-8-
<PAGE>
DOCUCON, INCORPORATED
NOTES TO FINANCIAL STATEMENTS (Continued)
NOTE 3
Common stock and preferred stock-
Each share of the Company's preferred stock ($25,000 stated value) is
convertible into 8,333 shares of common stock and earns cash dividends of 11
percent per annum. Each share of preferred stock is entitled to vote 8,333
common shares. The Company has never paid cash dividends on its common stock and
does not anticipate the payment of cash dividends on its common stock 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, 1999, cumulative undeclared dividends on the preferred
stock approximated $169,000. In January 1999, the Company paid cash of $88,816
related to cumulative dividends on preferred stock that was converted during the
fourth quarter of 1998. As the remainder of these dividends are undeclared, they
have not been recorded as a reduction of the Company's equity. Common stock is
subordinate to preferred stock in the event of liquidation.
Treasury stock-
On June 18, 1998, the Company announced that its board of directors had
authorized the repurchase of up to 500,000 shares of the Company's common stock
in the open market. As of June 30, 1999, the Company had acquired 62,650
treasury shares for approximately $76,000. Approximately 33,333 of such shares
were reissued during 1998 in connection with the conversion of Series A
preferred stock, and approximately 24,398 shares were reissued under the
Company's Employee Stock Purchase Plan in January 1999.
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.
NOTE 4
Asset held for sale-
During 1998, the Company decided to sell its operations building in San Antonio,
Texas. In November 1998, the Company entered into a contract to sell the
building for an amount in excess of its net book value. Accordingly, the
carrying value of the land, building and associated improvements were classified
as a current asset held for sale at December 31, 1998.
In January 1999, the Company sold its operations building. In connection with
the sale, the Company paid off its related secured indebtedness. The Company's
net cash proceeds from the sale, net of debt repayments, approximated $800,000.
The Company has entered into a noncancelable operating leaseback of the building
through October 1999 at a rate of approximately $27,000 per month, before a
cancelable month-to-month sublease arrangement of approximately $15,000 per
month. The Company has located replacement facilities that it intends to occupy
at the conclusion of its operating leaseback of its operations building. The
gain on the sale of the building, which was not significant, has been deferred
as a component of other current liabilities on the accompanying balance sheet
and is being recognized over the term of the operating leaseback.
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<PAGE>
DOCUCON, INCORPORATED
NOTES TO FINANCIAL STATEMENTS (Continued)
NOTE 5
Earnings (loss) per share-
Statement of Financial Accounting Standards No. 128, "Earnings Per Share,"
outlines methods for computing and presenting earnings per share. The following
table provides a detail of the denominator (weighted average number of common
shares 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
------------------------ ------------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Weighted average number of common shares outstanding for Basic
and Diluted EPS ..................................................... 3,327,633 3,290,217 3,315,654 3,289,316
========= ========= ========= =========
Potential common shares from assumed conversion of
preferred shares excluded as a result of antidilution ............... 58,331 100,008 58,331 100,008
========= ========= ========= =========
</TABLE>
As the Company had losses for the three and six months ended June 30, 1999 and
1998, options and warrants have been excluded as they are antidilutive in loss
periods.
NOTE 6
Accounts receivable financing-
On June 18, 1999, the Company entered into an accounts receivable purchase
agreement (the Financing Agreement) with Silicon Valley Bank (SVB). Under the
terms of the agreement as amended, the Company can sell to SVB up to $1,000,000
of eligible accounts receivable with full recourse by SVB to the Company. The
Company receives cash advances from the purchase of eligible receivables equal
to the face amount of the eligible receivables sold, less a reserve established
by SVB of not less than 20 percent of the aggregate face amount of receivables
sold. If the Company sells the maximum of $1,000,000 of accounts receivable, new
receivables can be sold to replace previously sold accounts receivables that are
collected. The Company is obligated to repurchase on demand the unpaid portion
of any receivable sold to SVB under certain conditions including (i) an account
receivable that remains uncollected 90 calendar days after the invoice date,
(ii) the bankruptcy or insolvency of any account debtor or (iii) any breach of
the Financing Agreement by the Company. The Company pays aggregate finance
charges and administrative fees on the average daily balance of uncollected
accounts receivables sold equal to 2.38 percent per month. The aggregate amount
of advances and fees owing to SVB are secured by substantially all of the
tangible assets of the Company. At June 30, 1999, the balance of face amount of
accounts receivables sold and aggregate cash advanced on such receivables was
approximately $365,000 and $292,000, respectively. The cumulative cash advances
from SVB are reflected on the accompanying balance sheet as short-term
borrowings. Aggregate finance charges and administrative fees related to the
Financing Agreement were approximately $1,200 for the quarter and six months
ended June 30, 1999, and are classified as interest expense.
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<PAGE>
DOCUCON, INCORPORATED
NOTES TO FINANCIAL STATEMENTS (Continued)
NOTE 7
Option grant-
In June 1999, the Compensation Committee of the Board of Directors recommended
and the Board approved, subject to stockholder approval of an increase in shares
issuable under an option plan as described below, a grant to management and key
employees of an aggregate of 460,000 options to purchase shares of common stock
at an exercise price per share equal to the greater of fair market value or
$1.00 on the effective date of the grant. The proposal to increase the number of
shares issuable under the Company's 1998 Employee Stock Option Plan was approved
by vote of the Company's stockholders on July 30, 1999. The closing price per
share of the Company's common stock on that date was $0.875.
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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, 1999, resulted in a
net loss applicable to common stockholders of approximately $704,000 as compared
to a net loss applicable to common stockholders of approximately $463,000 for
the same quarter in 1998. For the six months ended June 30, 1999, net loss
applicable to common shareholders was approximately $1,847,000 as compared to a
net loss applicable to common shareholders of approximately $1,086,000 for the
same period in 1998.
Revenues were approximately $1,613,000 for the quarter ended June 30, 1999, as
compared to approximately $870,000 for the same quarter in 1998. Revenues were
approximately $2,464,000 for the six months ended June 30, 1999, as compared to
approximately $1,483,000 for the same period in 1998. These increases were
primarily attributable to new contracts obtained during 1999 which resulted in a
significant increase in production during the periods.
Production costs increased to approximately $1,288,000 for the quarter ended
June 30, 1999, as compared to approximately $673,000 for the 1998 period.
Production costs increased to approximately $2,141,000 for the six months ended
June 30, 1999, as compared to approximately $1,357,000 for the same period in
1998. These increases were due primarily to the increased revenue levels.
Research and development costs were approximately $84,000 for the quarter ended
June 30, 1999, as compared to approximately $57,000 in the same period in 1998.
Research and development costs were approximately $260,000 and $125,000 for the
six months ended June 30, 1999 and 1998, respectively. These increases were
primarily attributable to research and development costs associated with new
document management technologies and ongoing development of the Company's
workflow systems.
General and administrative expenses increased to approximately $523,000 for the
quarter ended June 30, 1999, as compared to approximately $329,000 for the same
period in 1998. General and administrative expenses were approximately
$1,039,000 for the six months ended June 30, 1998, as compared to approximately
$623,000 for the same period in 1998. These increases were primarily due to
expenses associated with the hiring of new senior management and the opening of
a new corporate headquarters office.
Marketing expenses increased to approximately $374,000 for the quarter ended
June 30, 1999, as compared to approximately $207,000 for the same period in
1998. Marketing expenses were approximately $796,000 and $324,000 for the six
months ended June 30, 1999 and 1998, respectively. These increases were due to
extensive new marketing efforts focused on new business development in both the
federal and commercial markets and an increase in sales commissions attributable
to higher revenue levels.
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, an initial public offering of the Company's Common Stock
in 1989, the conversion of warrants into Common Stock and private preferred
stock placements.
-12-
<PAGE>
DOCUCON, INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
The Company has historically performed a significant percentage of their
conversion services for the Department of Defense (DOD) primarily through
contracts from the Defense Automated Printing Services Office (DAPS). In
December 1997, the DOD awarded a contract with a term of one year for
approximately $15.5 million of potential value. The terms of the contract
include four additional option years so that the entire contract has a potential
value of approximately $77.4 million. As of June 30, 1999, the Company had
provided approximately $2.3 million of services under this contract. The nature
of this contract is such that it establishes the Company as an approved vendor
for projects from DAPS. Since the contract in and of itself does not represent
billable production, the Company must still engage in marketing to realize
benefits under the contract.
The Company has an allowance for unbilled receivables at June 30, 1999, of
approximately $1.6 million. The Company was informed in mid-1997 that funding
for certain conversion services being performed under this delivery order had
been depleted. Management completed work in production on this delivery order at
that time. As a result of the loss of funding for this delivery order, the
Company has been unable to collect approximately $1.6 million of conversion
services, the substantial majority of which were performed during 1997. A
substantial portion of the conversion products associated with the $1.6 million
of unbilled revenues has been shipped to the customer and is in various stages
of quality control review. 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 collect the unbilled
revenues. Management of the Company believes that such unbilled revenues
represent valid assets of the Company. However, due to the continued aging of
the unbilled revenues, the Company believed it was prudent to provide an
allowance on these unbilled revenues for the entire amount during the year ended
December 31, 1998. In the event that the Company collects any of the unbilled
revenues in the future, such collections would have a favorable impact on the
Company's liquidity and capital resources and results of operations in the
period of collection. There are no assurances that the Company will ultimately
be able to collect any of the fully reserved unbilled revenues.
On February 2, 1999, the Company contacted the Department of Defense's Voluntary
Disclosure Program Office to request admission into its Voluntary Disclosure
Program. The Voluntary Disclosure Program is intended to encourage government
contractors to voluntarily disclose potential violations of government
contracting policies and procedures. In general, companies who volunteer
information and cooperate with the government's investigation are not subject to
criminal and administrative sanctions such as suspension and debarment from
government contracting activities. Admission into the Voluntary Disclosure
Program does not protect companies from any potential civil liability the
government may assert. The Department of Defense Inspector General has completed
its preliminary review of the Company's disclosure and the Company has been
formally admitted into the Voluntary Disclosure Program.
The Company's request for admission into the Voluntary Disclosure Program was
the result of an internal review by the Company that indicated a billing
practice, with respect to certain invoices submitted during the period from
September 1996 through July 1997, might be perceived by the government as a
technical violation of DOD billing procedures. The Company's internal review is
ongoing, but based on its investigation to date, the Company believes that the
DOD sustained no actual damages as a result of the matter disclosed by the
Company. However, the Company expects to incur legal and other out-of-pocket
costs in connection with presenting the results of its internal review and
assisting the government in its investigation, adjudication and resolution of
this matter. The Company has established a reserve for estimated legal costs and
other expenses which it believes is adequate for the resolution of this matter.
-13-
<PAGE>
DOCUCON, INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
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 Docucon, any government agency can buy a wide variety of document
conversion services directly from Docucon. The nature of this contract is such
that it establishes the Company as an approved vendor for substantially all
Federal Government agencies. Since the contract in and of itself does not
represent billable production, the Company must still engage in marketing to
realize benefits under the contract.
In March 1994, the Company purchased the assets and assumed certain liabilities
of J. Feuerstein Systems for approximately $0.2 million cash. In November 1997,
the Company sold the assets of the division to Bowne & Co., Inc., for
approximately $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. In
accordance with the escrow agreement, approximately $400,000 of the total in
escrow was released to the Company on November 25, 1998. The remainder was
released to the Company in May 1999. 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 line of credit after the 1997
year-end and to fund continuing operations. The Company invested excess proceeds
in short-term securities.
In October 1996, the Company obtained long-term financing to replace the then
existing mortgage note for its office building. The new note bore interest at a
fixed rate of 9.5 percent, payable monthly to a commercial bank and was being
amortized over a 20-year term with a 5-year maturity. The note was 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 January 1999, the Company sold its operations building in
San Antonio, Texas. In connection with the sale, the Company paid off its
related secured indebtedness. The Company's proceeds from the sale, net of debt
repayments, approximated $800,000. The gain on the sale of the building was not
significant.
On June 18, 1999, the Company entered into an accounts receivable purchase
agreement (the Financing Agreement) with Silicon Valley Bank (SVB). Under the
terms of the agreement as amended, the Company can sell to SVB up to $1,000,000
of eligible accounts receivable with full recourse by SVB to the Company. The
Company receives cash advances from the purchase of eligible receivables equal
to the face amount of the eligible receivables sold, less a reserve established
by SVB of not less than 20 percent of the aggregate face amount of receivables
sold. If the Company sells the maximum of $1,000,000 of accounts receivable, new
receivables can be sold to replace previously sold accounts receivables that are
collected. The Company is obligated to repurchase on demand the unpaid portion
of any receivable sold to SVB under certain conditions including (i) an account
receivable that remains uncollected 90 calendar days after the invoice date,
(ii) the bankruptcy or insolvency of any account debtor or (iii) any breach of
the Financing Agreement by the Company. The Company pays aggregate finance
charges and administrative fees on the average daily balance of uncollected
accounts receivables sold equal to 2.38 percent per month. The aggregate amount
of advances and fees owing to SVB are secured by substantially all of the
tangible assets of the Company. At June 30, 1999, the balance of face amount of
accounts receivables sold and aggregate cash advanced on such receivables was
approximately $365,000 and $292,000, respectively.
-14-
<PAGE>
DOCUCON, INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Net cash and cash equivalents at June 30, 1999, were approximately $146,000.
Trade accounts receivable, net of allowance for doubtful accounts were
approximately $620,000 at June 30, 1999, and unbilled revenues, net of allowance
were approximately $905,000. Accounts payable and accrued liabilities were
approximately $1,847,000 at June 30, 1999. Net working capital deficit was
approximately $484,000 at June 30, 1999.
The accompanying financial statements of the Company have been prepared on the
basis of accounting principles applicable to a going concern. Since its
inception, the Company has incurred cumulative net losses of approximately $10.4
million, including a loss of approximately $5.1 million in 1998 and
approximately $1.8 million for the six months ended June 30, 1999. For the year
ended December 31, 1998, and the six months ended June 30, 1999, the Company had
negative cash flows from operating activities of approximately $2.1 million and
$1.8 million, respectively. At June 30, 1999, the Company had a working capital
deficit of approximately $484,000 and a total stockholders' deficit of
approximately $284,000. These matters raise substantial doubt about the
Company's ability to continue as a going concern. The financial statements do
not include any adjustments that might result from the outcome of these
uncertainties. The ability of the Company to continue as a going concern is
dependent upon the ongoing support of its customers, its ability to obtain
capital resources to support operations and its ability to successfully market
its services. If the Company is unable to generate positive cash flows from
operations or obtain additional capital resources, or if the funds obtained in
such efforts are not adequate to support the Company until a successful level of
operations is attained, the Company would likely be unable to continue operating
as a going concern.
While the recent operating losses are significant, management believes that it
has taken proper steps to significantly improve the Company's future operating
results. Such steps include the sale of its San Antonio office building and
repayment of substantially of the Company's long-term debt in January 1999 and
the hiring of experienced management personnel in key senior management
positions in 1998 and 1999. Expansion of the Company's marketing efforts has
been made to include a wide range of vertical markets and formal and informal
partnering relationships with systems integrators, document management software
developers and others. The Company's management is also seeking suitable
financing for working capital, business expansion and other general corporate
purposes. The Company's management believes that the Company's results from
operations for the remainder of 1999 will improve and will generate sufficient
working capital, along with available cash and anticipated additional capital,
to sustain its operations throughout the year. However, there can be no
assurances that the Company's efforts in the above areas will improve its
operating results or that the Company will be successful in obtaining additional
financing.
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
additional outside capital to consummate such transactions.
On March 10, 1999, 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
notice provided that the Company's shares were subject to delisting 90 days
after receipt of the notice, unless the per share bid price of the Company's
Common Stock was $1.00 or greater for 10 consecutive trading days within the
90-day period. The Company's Common Stock was delisted from the NASDAQ SmallCap
Market on June 11, 1999. The Company's Common Stock now trades on the OTC
Bulletin Board.
-15-
<PAGE>
DOCUCON, INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
YEAR 2000 COMPLIANCE
The efficient operation 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.
OUTLOOK
During much of 1998 and continuing into the first half of 1999, the Company has
made several changes in its senior management team and has been focused on
implementing a strategy that it believes will more fully capitalize on the
Company's core competencies in high volume, automated document conversion
services. The Company hired a new president and CEO in April 1998 and added a
new senior vice president and chief financial officer and vice president of
technology and operations in December 1998 and January 1999, respectively. In
addition, during 1998, the Company hired a senior vice president of sales and
several sales professionals to focus on new business development in both the
Federal Government and commercial markets. With its existing contracts with the
DOD and the GSA, the Company believes it is well positioned to service the
Federal Government customers that have historically comprised a majority of the
Company's revenues. In addition, the Company believes that its new commercial
sales force will significantly enhance its ability to penetrate non-Federal
Government markets.
The Company believes that the turnaround plan it initiated in 1998, which
included a new senior management team and a substantial investment in a sales
and marketing organization, began to generate improved operating results late in
the first quarter of 1999. Monthly revenues have increased significantly since
the beginning of the year. Revenues for the month of June 1999 exceeded
$600,000, almost triple the average amount of monthly revenues during 1998 and
the first two months of 1999. This increase in revenues contributed to a sharp
reduction in the Company's loss from operations in the second quarter of 1999.
The Company believes it can sustain or increase this higher revenue level during
the remainder of 1999 and into 2000.
-16-
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On February 2, 1999, the Company contacted the Department of Defense's
Voluntary Disclosure Program Office to request admission into its
Voluntary Disclosure Program. The Voluntary Disclosure Program is intended
to encourage government contractors to voluntarily disclose potential
violations of government contracting policies and procedures. In general,
companies who volunteer information and cooperate with the government's
investigation are not subject to criminal and administrative sanctions
such as suspension and debarment from government contracting activities.
Admission into the Voluntary Disclosure Program does not protect companies
from any potential civil liability the government may assert. The
Department of Defense Inspector General has completed its preliminary
review of the Company's disclosure and the Company has been formally
admitted into the Voluntary Disclosure Program.
The Company's request for admission into the Voluntary Disclosure Program
was the result of an internal review by the Company that indicated a
billing practice, with respect to certain invoices submitted during the
period from September 1996 through July 1997, might be perceived by the
government as a technical violation of DOD billing procedures. The
Company's internal review is ongoing, but based on its investigation to
date, the Company believes that the DOD sustained no actual damages as a
result of the matter disclosed by the Company. However, the Company
expects to incur legal and other out-of-pocket costs in connection with
presenting the results of its internal review and assisting the government
in its investigation, adjudication and resolution of this matter. The
Company has established a reserve for estimated legal costs and other
expenses which it believes is adequate for the resolution of this matter.
Item 2. Changes in Securities - None
Item 3. Defaults Upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Stockholders of the Company was held on Friday, July
30, 1999. The proposals and the results are listed below:
Proposal 1 To elect six directors to serve until the next Annual
Meeting of Stockholders and until their successors are duly
elected and qualified.
Proposal 2 To approve the amendment of the 1998 Employee Stock Option
Plan of the Company to increase the number of shares
issuable thereunder from 187,500 shares of Common Stock to
687,500 shares of Common Stock.
-17-
<PAGE>
PART II - OTHER INFORMATION (Continued)
The following persons were nominated for election as directors of the
Company, and all nominees were elected. The shares voted for and those
withheld from each nominee are set forth below opposite such nominee's
name:
DIRECTOR NOMINEES SHARES VOTED FOR SHARES WITHHELD
----------------- ---------------- ---------------
Edward P. Gistaro 2,885,114 240,956
Douglas P. Gill 2,887,538 238,532
Ralph Brown 2,886,788 239,282
Al R. Ireton 2,887,538 238,532
Chauncey E. Schmidt 2,887,038 239,032
Robert W. Schwartz 2,887,038 239,032
The shares voted for Proposal 2 were 1,164,002 FOR, 296,352 AGAINST and
12,485 ABSTAIN.
Item 5. Other Matters - None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 10.18 - Amendment of Bylaws
Exhibit 10.19 - Accounts Receivable Purchase Agreement dated
June 18, 1999, between Silicon Valley Bank and
Docucon, Incorporated
Exhibit 11 - Computation of Earnings Per Share
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K - None
-18-
<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/ WARREN D. BARRATT
Warren D. Barratt,
Senior Vice President,
Chief Financial Officer
and Treasurer
Dated: August 16, 1999
-19-
EXHIBIT 10.18
By-Laws
Of
Docucon, Incorporated
Article I, Section I of these By-Laws is hereby amended to hereafter read as
follows:
ANNUAL MEETINGS. The annual meeting of the Stockholders of the
Corporation for the purpose of electing directors and for the transaction
of such other business as may be brought before the meeting, shall be held
at such time, on such business day, and at such a place within or without
the State of Delaware, as shall be fixed by the Board of Directors.
June 17, 1999
/s/ RALPH BROWN
Ralph Brown, Secretary
EXHIBIT 10.19
[LOGO]
SILICON VALLEY BANK
3003 Tasman Drive
Santa Clara, Ca. 95054
(408) 654-1000 - Fax (408) 980-6410
ACCOUNTS RECEIVABLE PURCHASE AGREEMENT
This Accounts Receivable Purchase Agreement (the "Agreement") is made on
this EIGHT-TENTH day of JUNE 1999, by and between Silicon Valley Bank ("Buyer")
having a place of business at the address specified above and DOCUCON,
INCORPORATED, a Delaware corporation, ("Seller") having its principal place of
business and chief executive office at 565 East Swedesford Road #209, Wayne,
Pennsylvania 19087.
1. DEFINITIONS. When used herein, the following terms shall have the following
meanings.
1.1. "Account Balance" shall mean, on any given day, the gross amount of
all Purchased Receivables unpaid on that day.
1.2. "Account Debtor" shall have the meaning set forth in the California
Uniform Commercial Code and shall include any person liable on any Purchased
Receivable, including without limitation, any guarantor of the Purchased
Receivable and any issuer of a letter of credit or banker's acceptance.
1.3. "Adjustments" shall mean all discounts, allowances, returns, disputes,
counterclaims, offsets, defenses, rights of recoupment, rights of return,
warranty claims, or short payments, asserted by or on behalf of any Account
Debtor with respect to any Purchased Receivable.
1.4. "Administrative Fee" shall have the meaning as set forth in Section
3.3 hereof.
1.5. "Advance" shall have the meaning set forth in Section 2.2 hereof.
1.6. "Collateral" shall have the meaning set forth in Section 8 hereof.
1.7. "Collections" shall mean all good funds received by Buyer from or on
behalf of an Account Debtor with respect to Purchased Receivables.
1.8 "Compliance Certificate" shall mean a certificate, in a form provided
by Buyer to Seller, which contains the certification of the chief financial
officer of Seller that, among other things, the representations and warranties
set forth in this Agreement are true and correct as of the date such certificate
is delivered.
1.9. "Event of Default" shall have the meaning set forth in Section 9
hereof.
1.10. "Finance Charges" shall have the meaning set forth in Section 3.2
hereof.
1.11. "Invoice Transmittal" shall mean a writing signed by an authorized
representative of Seller which accurately identifies the receivables which
Buyer, at its election, may purchase, and includes for each such receivable the
correct amount owed by the Account Debtor, the name and address of the Account
Debtor, the invoice number, the invoice date and the account code.
1.12. "Obligations" shall mean all advances, financial accommodations,
liabilities, obligations, covenants and duties owing, arising, due or payable by
Seller to Buyer of any kind or nature, present or future, arising under or in
connection with this Agreement or under any other document, instrument or
agreement, whether or not evidenced by any note, guarantee or other instrument,
whether arising on account or by overdraft, whether direct or indirect
(including those acquired by assignment) absolute or contingent, primary or
secondary, due or to become due, now owing or hereafter arising, and however
acquired; including, without limitation, all Advances, Finance Charges,
Administrative Fees, interest, Repurchase Amounts, fees, expenses, professional
fees and attorneys' fees and any other sums chargeable to Seller hereunder or
otherwise.
1.13. "Purchased Receivables" shall mean all those accounts, receivables,
chattel paper, instruments, contract rights, documents, general intangibles,
letters of credit, drafts, bankers acceptances, and rights to payment, and all
proceeds thereof (all of the foregoing being referred to as "receivables"),
arising out of the invoices and other agreements identified on or delivered with
any Invoice Transmittal delivered by Seller to Buyer which Buyer elects to
purchase and for which Buyer makes an Advance.
1.14. "Refund" shall have the meaning set forth in Section 3.5 hereof.
1.15. "Reserve" shall have the meaning set forth in Section 2.4 hereof.
1.16. "Repurchase Amount" shall have the meaning set forth in Section 4.2
hereof.
1.17. "Reconciliation Date" shall mean the last calendar day of each
Reconciliation Period.
1.18. "Reconciliation Period" shall mean each calendar month of every year.
2. PURCHASE AND SALE OF RECEIVABLES.
2.1. OFFER TO SELL RECEIVABLES. During the term hereof, and provided that
there does not then exist any Event of Default or any event that with notice,
lapse of time or otherwise would constitute an Event of Default, Seller may
request that Buyer purchase receivables and Buyer may, in its sole discretion,
elect to purchase receivables. Seller shall deliver to Buyer an Invoice
Transmittal with respect to any receivable for which a request for purchase is
made. An authorized representative of Seller shall sign each Invoice Transmittal
delivered to Buyer. Buyer shall be entitled to rely on all the information
provided by Seller to Buyer on or with the Invoice Transmittal and to rely on
the signature on any Invoice Transmittal as an authorized signature of Seller.
2.2. ACCEPTANCE OF RECEIVABLES. Buyer shall have no obligation to purchase
any receivable listed on an Invoice Transmittal. Buyer may exercise its sole
discretion in approving the credit of each Account Debtor before buying any
receivable. Upon acceptance by Buyer of all or any of the receivables described
on any Invoice Transmittal, Buyer shall pay to Seller 80 (%) percent of the face
amount of each receivable Buyer desires to purchase, net of deferred revenue and
deposits related to each specific Account Debtor. Such payment shall be the
"Advance" with respect to such receivable. Buyer may, from time to time, in its
sole discretion, change the percentage of the Advance. Upon Buyer's acceptance
of the receivable and payment to Seller of the Advance, the receivable shall
become a "Purchased Receivable." It shall be a condition to each Advance that
(i) all of the representations and warranties set forth in Section 6 of this
Agreement be true and correct on and as of the date of the related Invoice
Transmittal and on and as of the date of such Advance as though made at and as
of each such date, and (ii) no Event of Default or any event or condition that
with notice, lapse of time or otherwise would constitute an Event of Default
shall have occurred and be continuing, or would result from such Advance.
Notwithstanding the foregoing, in no event shall the aggregate amount of all
Purchased Receivables outstanding at any time exceed SEVEN HUNDRED FIFTY
THOUSAND AND NO/100***** Dollars ($750,000.00).
2.3. EFFECTIVENESS OF SALE TO BUYER. Effective upon Buyer's payment of an
Advance, and for and in consideration therefor and in consideration of the
covenants of this Agreement, Seller hereby absolutely sells, transfers and
assigns to Buyer, all of Seller's right, title and interest in and to each
Purchased Receivable and all monies due or which may become due on or with
respect to such Purchased Receivable. Buyer shall be the absolute owner of each
Purchased Receivable. Buyer shall have, with respect to any goods related to the
Purchased Receivable, all the rights and remedies of an unpaid seller under the
California Uniform Commercial Code and other applicable law, including the
rights of replevin, claim and delivery, reclamation and stoppage in transit.
Page 1 of 6
<PAGE>
2.4. ESTABLISHMENT OF A RESERVE. Upon the purchase by Buyer of each
Purchased Receivable, Buyer shall establish a reserve. The reserve shall be the
amount by which the face amount of the Purchased Receivable exceeds the Advance
on that Purchased Receivable (the "Reserve"); provided, the Reserve with respect
to all Purchased Receivables outstanding at any one time shall be an amount not
less than 20 (%) percent of the Account Balance at that time and may be set at a
higher percentage at Buyer's sole discretion. The reserve shall be a book
balance maintained on the records of Buyer and shall not be a segregated fund.
3. COLLECTIONS, CHARGES AND REMITTANCES.
3.1. COLLECTIONS. Upon receipt by Buyer of Collections, Buyer shall
promptly credit such Collections to Seller's Account Balance on a daily basis;
provided, that if Seller is in default under this Agreement, Buyer shall apply
all Collections to Seller's Obligations hereunder in such order and manner as
Buyer may determine. If an item of collection is not honored or Buyer does not
receive good funds for any reason, the amount shall be included in the Account
Balance as if the Collections had not been received and Finance Charges under
Section 3.2 shall accrue thereon.
3.2. FINANCE CHARGES. On each Reconciliation Date Seller shall pay to Buyer
a finance charge in an amount equal to 1.75 (%) percent per month of the average
daily Account Balance outstanding during the applicable Reconciliation Period
(the "Finance Charges"). Buyer shall deduct the accrued Finance Charges from the
Reserve as set forth in Section 3.5 below.
3.3. ADMINISTRATIVE FEE. On each Reconciliation Date Seller shall pay to
Buyer an Administrative Fee equal to .625 (%) percent of the face amount of each
Purchased Receivable first purchased during that Reconciliation Period (the
"Administrative Fee"). Buyer shall deduct the Administrative Fee from the
Reserve as set forth in Section 3.5 below.
3.4. ACCOUNTING. Buyer shall prepare and send to Seller after the close of
business for each Reconciliation Period, an accounting of the transactions for
that Reconciliation Period, including the amount of all Purchased Receivables,
all Collections, Adjustments, Finance Charges, and the Administrative Fee. The
accounting shall be deemed correct and conclusive unless Seller makes written
objection to Buyer within thirty (30) days after the Buyer mails the accounting
to Seller.
3.5. REFUND TO SELLER. Provided that there does not then exist an Event of
Default or any event or condition that with notice, lapse of time or otherwise
would constitute an Event of Default, Buyer shall refund to Seller by check
after the Reconciliation Date, the amount, if any, which Buyer owes to Seller at
the end of the Reconciliation Period according to the accounting prepared by
Buyer for that Reconciliation Period (the "Refund"). The Refund shall be an
amount equal to:
(A) (1) The Reserve as of the beginning of that Reconciliation Period,
PLUS
(2) the Reserve created for each Purchased Receivable purchased during
that Reconciliation Period, MINUS
(B) The total for that Reconciliation Period of:
(1) the Administrative Fee;
(2) Finance Charges;
(3) Adjustments;
(4) Repurchase Amounts, to the extent Buyer has agreed to accept
payment thereof by deduction from the Refund;
(5) the Reserve for the Account Balance as of the first day of the
following Reconciliation Period in the minimum percentage set
forth in Section 2.4 hereof; and
(6) all amounts due, including professional fees and expenses, as set
forth in Section 12 for which oral or written demand has been made by Buyer to
Seller during that Reconciliation Period to the extent Buyer has agreed to
accept payment thereof by deduction from the Refund.
In the event the formula set forth in this Section 3.5 results in an amount due
to Buyer from Seller, Seller shall make such payment in the same manner as set
forth in Section 4.3 hereof for repurchases. If the formula set forth in this
Section 3.5 results in an amount due to Seller from Buyer, Buyer shall make such
payment by check, subject to Buyer's rights under Section 4.3 and Buyer's rights
of offset and recoupment.
4. RECOURSE AND REPURCHASE OBLIGATIONS.
4.1. RECOURSE. Buyer's acquisition of Purchased Receivables from Seller
shall be with full recourse against Seller. In the event the Obligations exceed
the amount of Purchased Receivables and Collateral, Seller shall be liable for
any deficiency.
4.2. SELLER'S AGREEMENT TO REPURCHASE. Seller agrees to pay to Buyer on
demand, the full face amount, or any unpaid portion, of any Purchased
Receivable:
(A) which remains unpaid ninety (90) calendar days after the invoice date;
or
(B) which is owed by any Account Debtor who has filed, or has had filed
against it, any bankruptcy case, assignment for the benefit of creditors,
receivership, or insolvency proceeding or who has become insolvent (as defined
in the United States Bankruptcy Code) or who is generally not paying its debts
as such debts become due; or
(C) with respect to which there has been any breach of warranty or
representation set forth in Section 6 hereof or any breach of any covenant
contained in this Agreement; or
(D) with respect to which the Account Debtor asserts any discount,
allowance, return, dispute, counterclaim, offset, defense, right of recoupment,
right of return, warranty claim, or short payment;
together with all reasonable attorneys' and professional fees and expenses and
all court costs incurred by Buyer in collecting such Purchased Receivable and/or
enforcing its rights under, or collecting amounts owed by Seller in connection
with, this Agreement (collectively, the "Repurchase Amount").
4.3. SELLER'S PAYMENT OF THE REPURCHASE AMOUNT OR OTHER AMOUNTS DUE BUYER.
When any Repurchase Amount or other amount owing to Buyer becomes due, Buyer
shall inform Seller of the manner of payment which may be any one or more of the
following in Buyer's sole discretion: (a) in cash immediately upon demand
therefor; (b) by delivery of substitute invoices and an Invoice Transmittal
acceptable to Buyer which shall thereupon become Purchased Receivables; (c) by
adjustment to the Reserve pursuant to Section 3.5 hereof; (d) by deduction from
or offset against the Refund that would otherwise be due and payable to Seller;
(e) by deduction from or offset against the amount that otherwise would be
forwarded to Seller in respect of any further Advances that may be made by
Buyer; or (f) by any combination of the foregoing as Buyer may from time to time
choose.
4.4. SELLER'S AGREEMENT TO REPURCHASE ALL PURCHASED RECEIVABLES. Upon and
after the occurrence of an Event of Default, Seller shall, upon Buyer's demand
(or, in the case of an Event of Default under Section 9(B), immediately without
notice or demand from Buyer) repurchase all the Purchased Receivables then
outstanding, or such portion thereof as Buyer may demand. Such demand may, at
Buyer's option, include and Seller shall pay to Buyer immediately upon demand,
cash in an amount equal to the Advance with respect to each Purchased Receivable
then outstanding together with all accrued Finance Charges, Adjustments,
Administrative Fees, attorney's and professional fees, court costs and expenses
as provided for herein, and any other Obligations. Upon receipt of payment in
full of the Obligations, Buyer shall immediately instruct Account Debtors
Page 2 of 6
<PAGE>
to pay Seller directly, and return to Seller any Refund due to Seller. For the
purpose of calculating any Refund due under this Section only, the
Reconciliation Date shall be deemed to be the date Buyer receives payment in
good funds of all the Obligations as provided in this Section 4.4.
5. POWER OF ATTORNEY. Seller does hereby irrevocably appoint Buyer and its
successors and assigns as Seller's true and lawful attorney in fact, and hereby
authorizes Buyer, regardless of whether there has been an Event of Default, (a)
to sell, assign, transfer, pledge, compromise, or discharge the whole or any
part of the Purchased Receivables; (b) to demand, collect, receive, sue, and
give releases to any Account Debtor for the monies due or which may become due
upon or with respect to the Purchased Receivables and to compromise, prosecute,
or defend any action, claim, case or proceeding relating to the Purchased
Receivables, including the filing of a claim or the voting of such claims in any
bankruptcy case, all in Buyer's name or Seller's name, as Buyer may choose; (c)
to prepare, file and sign Seller's name on any notice, claim, assignment,
demand, draft, or notice of or satisfaction of lien or mechanics' lien or
similar document with respect to Purchased Receivables; (d) to notify all
Account Debtors with respect to the Purchased Receivables to pay Buyer directly;
(e) to receive, open, and dispose of all mail addressed to Seller for the
purpose of collecting the Purchased Receivables; (f) to endorse Seller's name on
any checks or other forms of payment on the Purchased Receivables; (g) to
execute on behalf of Seller any and all instruments, documents, financing
statements and the like to perfect Buyer's interests in the Purchased
Receivables and Collateral; and (h) to do all acts and things necessary or
expedient, in furtherance of any such purposes. If Buyer receives a check or
item which is payment for both a Purchased Receivable and another receivable,
the funds shall first be applied to the Purchased Receivable and, so long as
there does not exist an Event of Default or an event that with notice, lapse of
time or otherwise would constitute an Event of Default, the excess shall be
remitted to Seller. Upon the occurrence and continuation of an Event of Default,
all of the power of attorney rights granted by Seller to Buyer hereunder shall
be applicable with respect to all Purchased Receivables and all Collateral.
6. REPRESENTATIONS, WARRANTIES AND COVENANTS.
6.1. RECEIVABLES' WARRANTIES, REPRESENTATIONS AND COVENANTS. To induce
Buyer to buy receivables and to render its services to Seller, and with full
knowledge that the truth and accuracy of the following are being relied upon by
the Buyer in determining whether to accept receivables as Purchased Receivables,
Seller represents, warrants, covenants and agrees, with respect to each Invoice
Transmittal delivered to Buyer and each receivable described therein, that:
(A) Seller is the absolute owner of each receivable set forth in the
Invoice Transmittal and has full legal right to sell, transfer and assign such
receivables;
(B) The correct amount of each receivable is as set forth in the Invoice
Transmittal and is not in dispute;
(C) The payment of each receivable is not contingent upon the fulfillment
of any obligation or contract, past or future and any and all obligations
required of the Seller have been fulfilled as of the date of the Invoice
Transmittal;
(D) Each receivable set forth on the Invoice Transmittal is based on an
actual sale and delivery of goods and/or services actually rendered, is
presently due and owing to Seller, is not past due or in default, has not been
previously sold, assigned, transferred, or pledged, and is free of any and all
liens, security interests and encumbrances other than liens, security interests
or encumbrances in favor of Buyer or any other division or affiliate of Silicon
Valley Bank;
(E) There are no defenses, offsets, or counterclaims against any of the
receivables, and no agreement has been made under which the Account Debtor may
claim any deduction or discount, except as otherwise stated in the Invoice
Transmittal;
(F) Each Purchased Receivable shall be the property of the Buyer and shall
be collected by Buyer, but if for any reason it should be paid to Seller, Seller
shall promptly notify Buyer of such payment, shall hold any checks, drafts, or
monies so received in trust for the benefit of Buyer, and shall promptly
transfer and deliver the same to the Buyer;
(G) Buyer shall have the right of endorsement, and also the right to
require endorsement by Seller, on all payments received in connection with each
Purchased Receivable and any proceeds of Collateral;
(H) Seller, and to Seller's best knowledge, each Account Debtor set forth
in the Invoice Transmittal, are and shall remain solvent as that term is defined
in the United States Bankruptcy Code and the California Uniform Commercial Code,
and no such Account Debtor has filed or had filed against it a voluntary or
involuntary petition for relief under the United States Bankruptcy Code;
(I) Each Account Debtor named on the Invoice Transmittal will not object
to the payment for, or the quality or the quantity of the subject matter of, the
receivable and is liable for the amount set forth on the Invoice Transmittal;
(J) Each Account Debtor shall promptly be notified, after acceptance by
Buyer, that the Purchased Receivable has been transferred to and is payable to
Buyer, and Seller shall not take or permit any action to countermand such
notification; and
(K) All receivables forwarded to and accepted by Buyer after the date
hereof, and thereby becoming Purchased Receivables, shall comply with each and
every one of the foregoing representations, warranties, covenants and agreements
referred to above in this Section 6.1.
6.2. ADDITIONAL WARRANTIES, REPRESENTATIONS AND COVENANTS. In addition to
the foregoing warranties, representations and covenants, to induce Buyer to buy
receivables and to render its services to Seller, Seller hereby represents,
warrants, covenants and agrees that:
(A) Seller will not assign, transfer, sell, or grant , or permit any lien
or security interest in any Purchased Receivables or Collateral to or in favor
of any other party, without Buyer's prior written consent;
(B) The Seller's name, form of organization, chief executive office, and
the place where the records concerning all Purchased Receivables and Collateral
are kept is set forth at the beginning of this Agreement, Collateral is located
only at the location set forth in the beginning of this Agreement, or, if
located at any additional location, as set forth on a schedule attached to this
Agreement, and Seller will give Buyer at least thirty (30) days prior written
notice if such name, organization, chief executive office or other locations of
Collateral or records concerning Purchased Receivables or Collateral is changed
or added and shall execute any documents necessary to perfect Buyer's interest
in the Purchased Receivables and the Collateral;
(C) Seller shall (i) pay all of its normal gross payroll for employees,
and all federal and state taxes, as and when due, including without limitation
all payroll and withholding taxes and state sales taxes; (ii) deliver at any
time and from time to time at Buyer's request, evidence satisfactory to Buyer
that all such amounts have been paid to the proper taxing authorities; and (iii)
if requested by Buyer, pay its payroll and related taxes through a bank or an
independent payroll service acceptable to Buyer.
(D) Seller has not, as of the time Seller delivers to Buyer an Invoice
Transmittal, or as of the time Seller accepts any Advance from Buyer, filed a
voluntary petition for relief under the United States Bankruptcy Code or had
filed against it an involuntary petition for relief;
(E) If Seller owns, holds or has any interest in, any copyrights (whether
registered, or unregistered), patents or trademarks, and licenses of any of the
foregoing, such interest has been disclosed to Buyer and is specifically listed
and identified on a schedule to this Agreement, and Seller shall immediately
notify Buyer if Seller hereafter obtains any interest in any additional
copyrights, patents, trademarks or licenses that are significant in value or are
material to the conduct of its business;
(F) Seller shall provide Buyer with a Compliance Certificate (i) on a
quarterly basis to be received by Buyer no later than the fifth calendar day
following each calendar quarter, and; (ii) on a more frequent or other basis if
and as requested by Buyer; and
Page 3 of 6
<PAGE>
(G) Seller shall provide Buyer with a deferred revenue listing upon
request.
7. ADJUSTMENTS. In the event of a breach of any of the representations,
warranties, or covenants set forth in Section 6.1, or in the event any
Adjustment or dispute is asserted by any Account Debtor, Seller shall promptly
advise Buyer and shall, subject to the Buyer's approval, resolve such disputes
and advise Buyer of any adjustments. Unless the disputed Purchased Receivable is
repurchased by Seller and the full Repurchase Amount is paid, Buyer shall remain
the absolute owner of any Purchased Receivable which is subject to Adjustment or
repurchase under Section 4.2 hereof, and any rejected, returned, or recovered
personal property, with the right to take possession thereof at any time. If
such possession is not taken by Buyer, Seller is to resell it for Buyer's
account at Seller's expense with the proceeds made payable to Buyer. While
Seller retains possession of said returned goods, Seller shall segregate said
goods and mark them "property of Silicon Valley Bank."
8. SECURITY INTEREST. To secure the prompt payment and performance to Buyer of
all of the Obligations, Seller hereby grants to Buyer a continuing lien upon and
security interest in all of Seller's now existing or hereafter arising rights
and interest in the following, whether now owned or existing or hereafter
created, acquired, or arising, and wherever located (collectively, the
"Collateral"):
(A) All accounts, receivables, contract rights, chattel paper,
instruments, documents, letters of credit, bankers acceptances, drafts, checks,
cash, securities, and general intangibles (including, without limitation, all
claims, causes of action, deposit accounts, guaranties, rights in and claims
under insurance policies (including rights to premium refunds), rights to tax
refunds, copyrights, patents, trademarks, rights in and under license
agreements, and all other intellectual property);
(B) All inventory, including Seller's rights to any returned or rejected
goods, with respect to which Buyer shall have all the rights of any unpaid
seller, including the rights of replevin, claim and delivery, reclamation, and
stoppage in transit;
(C ) All monies, refunds and other amounts due Seller, including, without
limitation, amounts due Seller under this Agreement (including Seller's right of
offset and recoupment);
(D) All equipment, machinery, furniture, furnishings, fixtures, tools,
supplies and motor vehicles;
(E) All farm products, crops, timber, minerals and the like (including oil
and gas);
(F) All accessions to, substitutions for, and replacements of, all of the
foregoing;
(G) All books and records pertaining to all of the foregoing; and
(H) All proceeds of the foregoing, whether due to voluntary or involuntary
disposition, including insurance proceeds. Seller is not authorized to sell,
assign, transfer or otherwise convey any Collateral without Buyer's prior
written consent,
except for the sale of finished inventory in the Seller's usual course of
business. Seller agrees to sign UCC financing statements, in a form acceptable
to Buyer, and any other instruments and documents requested by Buyer to
evidence, perfect, or protect the interests of Buyer in the Collateral. Seller
agrees to deliver to Buyer the originals of all instruments, chattel paper and
documents evidencing or related to Purchased Receivables and Collateral.
9. DEFAULT. The occurrence of any one or more of the following shall constitute
an Event of Default hereunder.
(A) Seller fails to pay any amount owed to Buyer as and when due;
(B) There shall be commenced by or against Seller any voluntary or
involuntary case under the United States Bankruptcy Code, or any
assignment for the benefit of creditors, or appointment of a receiver or
custodian for any of its assets;
(C) Seller shall become insolvent in that its debts are greater than the
fair value of its assets, or Seller is generally not paying its debts as
they become due or is left with unreasonably small capital;
(D) Any involuntary lien, garnishment, attachment or the like is issued
against or attaches to the Purchased Receivables or any Collateral;
(E) Seller shall breach any covenant, agreement, warranty, or
representation set forth herein, and the same is not cured to Buyer's
satisfaction within ten (10) days after Buyer has given Seller oral or
written notice thereof; provided, that if such breach is incapable of
being cured it shall constitute an immediate default hereunder;
(F) Seller is not in compliance with, or otherwise is in default under,
any term of any document, instrument or agreement evidencing a debt,
obligation or liability of any kind or character of Seller, now or
hereafter existing, in favor of Buyer or any division or affiliate of
Silicon Valley Bank, regardless of whether such debt, obligation or
liability is direct or indirect, primary or secondary, joint, several or
joint and several, or fixed or contingent, together with any and all
renewals and extensions of such debts, obligations and liabilities, or any
part thereof;
(G) An event of default shall occur under any guaranty executed by any
guarantor of the Obligations of Seller to Buyer under this Agreement, or
any material provision of any such guaranty shall for any reason cease to
be valid or enforceable or any such guaranty shall be repudiated or
terminated, including by operation of law;
(H) A default or event of default shall occur under any agreement between
Seller and any creditor of Seller that has entered into a subordination
agreement with Buyer; or
(I) Any creditor that has entered into a subordination agreement with
Buyer shall breach any of the terms of or not comply with such
subordination agreement.
10. REMEDIES UPON DEFAULT. Upon the occurrence of an Event of Default, (1)
without implying any obligation to buy receivables, Buyer may cease buying
receivables or extending any financial accommodations to Seller; (2) all or a
portion of the Obligations shall be, at the option of and upon demand by Buyer,
or with respect to an Event of Default described in Section 9(B), automatically
and without notice or demand, due and payable in full; and (3) Buyer shall have
and may exercise all the rights and remedies under this Agreement and under
applicable law, including the rights and remedies of a secured party under the
California Uniform Commercial Code, all the power of attorney rights described
in Section 5 with respect to all Collateral, and the right to collect, dispose
of, sell, lease, use, and realize upon all Purchased Receivables and all
Collateral in any commercial reasonable manner. Seller and Buyer agree that any
notice of sale required to be given to Seller shall be deemed to be reasonable
if given five (5) days prior to the date on or after which the sale may be held.
In the event that the Obligations are accelerated hereunder, Seller shall
repurchase all of the Purchased Receivables as set forth in Section 4.4.
11. ACCRUAL OF INTEREST. If any amount owed by Seller hereunder is not paid when
due, including, without limitation, amounts due under Section 3.5, Repurchase
Amounts, amounts due under Section 12, and any other Obligations, such amounts
shall bear interest at a per annum rate equal to the per annum rate of the
Finance Charges until the earlier of (i) payment in good funds or (ii) entry of
a final judgment thereof, at which time the principal amount of any money
judgment remaining unsatisfied shall accrue interest at the highest rate allowed
by applicable law.
12. FEES, COSTS AND EXPENSES; INDEMNIFICATION. The Seller will pay to Buyer
immediately upon demand all fees, costs and expenses (including fees of
attorneys and professionals and their costs and expenses) that Buyer incurs or
may from time to time impose in connection with any of the following: (a)
preparing, negotiating, administering, and enforcing this Agreement or any other
agreement executed in connection herewith, including any amendments, waivers or
consents in connection with any of the foregoing, (b) any litigation or dispute
(whether instituted by Buyer, Seller or any other person) in any way relating to
the Purchased Receivables, the Collateral, this Agreement or any other agreement
executed in connection herewith or therewith, (d) enforcing any rights against
Seller or any guarantor, or any Account Debtor, (e) protecting or enforcing its
interest in the Purchased Receivables or the Collateral, (f) collecting the
Purchased Receivables and the Obligations, and (g) the representation of Buyer
in connection with any bankruptcy case or insolvency proceeding involving
Seller, any Purchased Receivable, the Collateral, any Account Debtor, or any
guarantor. Seller shall indemnify and hold Buyer harmless from and
Page 4 of 6
<PAGE>
against any and all claims, actions, damages, costs, expenses, and liabilities
of any nature whatsoever arising in connection with any of the foregoing.
13. SEVERABILITY, WAIVER, AND CHOICE OF LAW. In the event that any provision of
this Agreement is deemed invalid by reason of law, this Agreement will be
construed as not containing such provision and the remainder of the Agreement
shall remain in full force and effect. Buyer retains all of its rights, even if
it makes an Advance after an Event of Default. If Buyer waives an Event of
Default, it may enforce a later Event of Default. Any consent or waiver under,
or amendment of, this Agreement must be in writing. Nothing contained herein, or
any action taken or not taken by Buyer at any time, shall be construed at any
time to be indicative of any obligation or willingness on the part of Buyer to
amend this Agreement or to grant to Seller any waivers or consents. This
Agreement has been transmitted by Seller to Buyer at Buyer's office in the State
of California and has been executed and accepted by Buyer in the State of
California. This Agreement shall be governed by and interpreted in accordance
with the internal laws of the State of California.
14. ACCOUNT COLLECTION SERVICES. Certain Account Debtors may require or prefer
that all of Seller's receivables be paid to the same address and/or party, or
Seller and Buyer may agree that all receivables with respect to certain Account
Debtors be paid to one party. In such event Buyer and Seller may agree that
Buyer shall collect all receivables whether owned by Seller or Buyer and
(provided that there does not then exist an Event of Default or event that with
notice, lapse or time or otherwise would constitute an Event of Default, and
subject to Buyer's rights in the Collateral) Buyer agrees to remit to Seller the
amount of the receivables collections it receives with respect to receivables
other than Purchased Receivables. It is understood and agreed by Seller that
this Section does not impose any affirmative duty on Buyer to do any act other
than to turn over such amounts. All such receivables and collections are
Collateral and in the event of Seller's default hereunder, Buyer shall have no
duty to remit collections of Collateral and may apply such collections to the
obligations hereunder and Buyer shall have the rights of a secured party under
the California Uniform Commercial Code.
15. NOTICES. All notices shall be given to Buyer and Seller at the addresses or
faxes set forth on the first page of this Agreement and shall be deemed to have
been delivered and received: (a) if mailed, three (3) calendar days after
deposited in the United States mail, first class, postage pre-paid, (b) one (1)
calendar day after deposit with an overnight mail or messenger service; or (c)
on the same date of confirmed transmission if sent by hand delivery, telecopy,
telefax or telex.
16. JURY TRIAL. SELLER AND BUYER EACH HEREBY (a) WAIVE THEIR RESPECTIVE RIGHTS
TO A JURY TRIAL ON ANY CLAIM OR ACTION ARISING OUT OF OR IN CONNECTION WITH THIS
AGREEMENT, ANY RELATED AGREEMENTS, OR ANY OF THE TRANSACTIONS CONTEMPLATED
HEREBY OR THEREBY; (b) RECOGNIZE AND AGREE THAT THE FOREGOING WAIVER CONSTITUTES
A MATERIAL INDUCEMENT FOR IT TO ENTER INTO THIS AGREEMENT; AND (c) REPRESENT AND
WARRANT THAT IT HAS REVIEWED THIS WAIVER, HAS DETERMINED FOR ITSELF THE
NECESSITY TO REVIEW THE SAME WITH ITS LEGAL COUNSEL, AND KNOWINGLY AND
VOLUNTARILY WAIVES ALL RIGHTS TO A JURY TRIAL.
17. TERM AND TERMINATION. The term of this Agreement shall be for one (1) year
from the date hereof, and from year to year thereafter unless terminated in
writing by Buyer or Seller. Seller and Buyer shall each have the right to
terminate this Agreement at any time. Notwithstanding the foregoing, any
termination of this Agreement shall not affect Buyer's security interest in the
Collateral and Buyer's ownership of the Purchased Receivables, and this
Agreement shall continue to be effective, and Buyer's rights and remedies
hereunder shall survive such termination, until all transactions entered into
and Obligations incurred hereunder or in connection herewith have been completed
and satisfied in full.
18. TITLES AND SECTION HEADINGS. The titles and section headings used herein are
for convenience only and shall not be used in interpreting this Agreement.
Page 5 of 6
<PAGE>
19. OTHER AGREEMENTS. The terms and provisions of this Agreement shall not
adversely affect the rights of Buyer or any other division or affiliate of
Silicon Valley Bank under any other document, instrument or agreement. The terms
of such other documents, instruments and agreements shall remain in full force
and effect notwithstanding the execution of this Agreement. In the event of a
conflict between any provision of this Agreement and any provision of any other
document, instrument or agreement between Seller on the one hand, and Buyer or
any other division or affiliate of Silicon Valley Bank on the other hand, Buyer
shall determine in its sole discretion which provision shall apply. Seller
acknowledges specifically that any security agreements, liens and/or security
interests currently securing payment of any obligations of Seller owing to Buyer
or any other division or affiliate of Silicon Valley Bank also secure Seller's
obligations under this Agreement, and are valid and subsisting and are not
adversely affected by execution of this Agreement. Seller further acknowledges
that (a) any collateral under other outstanding security agreements or other
documents between Seller and Buyer or any other division or affiliate of Silicon
Valley Bank secures the obligations of Seller under this Agreement and (b) a
default by Seller under this Agreement constitutes a default under other
outstanding agreements between Seller and Buyer or any other division or
affiliate of Silicon Valley Bank.
IN WITNESS WHEREOF, Seller and Buyer have executed this Agreement on the
day and year above written.
SELLER: DOCUCON, INCORPORATED
By ________________________________________
Title _____________________________________
BUYER: SILICON VALLEY BANK
By _________________________________________
Title ______________________________________
Page 6 of 6
<PAGE>
EXHIBIT "A"
TO FINANCING STATEMENT AND SECURITY AGREEMENT
This FINANCING STATEMENT and SECURITY AGREEMENT covers the following types or
items of property (in addition to, and without limiting the types of property
set forth on page 1 hereof):
A) All accounts, receivables, contract rights, chattel paper, instruments,
documents, letters of credit, bankers acceptances, drafts, checks, cash,
securities, deposit accounts, and general intangibles (including, without
limitation, all claims, causes of action, guaranties, rights in and claims
under insurance policies (including rights to premium refunds), rights to
tax refunds, copyrights, patents, trademarks, rights in and under license
agreements, and all other intellectual property);
B) All inventory, including Seller's rights to any returned or rejected
goods, with respect to which Buyer shall have all the rights of any unpaid
seller, including the rights of replevin, claim and delivery, reclamation,
and stoppage in transit;
C) All monies, refunds and other amounts due Seller, including, without
limitation, amounts due Seller under this Agreement (including Seller's
right of offset and recoupment);
D) All equipment, machinery, furniture, furnishings, fixtures, tools,
supplies and motor vehicles;
E) All farm products, crops, timber, minerals and the like (including oil and
gas);
F) All accessions to, substitutions for, and replacements of, all of the
foregoing;
G) All books and records pertaining to all of the foregoing; and
H) All proceeds of the foregoing, whether due to voluntary or involuntary
disposition, including insurance proceeds.
INTITALS _____________________
EXHIBIT 11
DOCUCON, INCORPORATED
COMPUTATION OF EARNINGS PER SHARE
(Unaudited)
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30 Ended June 30
--------------------------- ----------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
COMPUTATION OF BASIC LOSS PER SHARE:
Net loss ...................................................... $ (698,908) $ (455,214) $(1,837,851) $(1,069,705)
Less- Preferred stock dividend requirements ................ (4,813) (8,250) (9,625) (16,500)
----------- ----------- ----------- -----------
Net loss applicable to common stockholders .................... $ (703,721) $ (463,464) $(1,847,476) $(1,086,205)
=========== =========== =========== ===========
WEIGHTED AVERAGE NUMBER OF SHARES OF COMMON STOCK OUTSTANDING .... 3,327,633 3,290,217 3,315,654 3,289,316
=========== =========== =========== ===========
BASIC LOSS PER COMMON SHARE ...................................... $ (.21) $ (.14) $ (.56) $ (.33)
=========== =========== =========== ===========
COMPUTATION OF DILUTED LOSS PER SHARE:
Net loss ...................................................... $ (698,908) $ (455,214) $(1,837,851) $(1,069,705)
Preferred stock dividend requirements ......................... (4,813) (8,250) (9,625) (16,500)
Preferred stock dividends not incurred upon assumed
conversion of preferred stock .............................. 4,813 8,250 9,625 16,500
----------- ----------- ----------- -----------
Net loss applicable to common stockholders used for computation $ (698,908) $ (455,214) $(1,837,851) $(1,069,705)
=========== =========== =========== ===========
Weighted average number of shares of common stock outstanding . 3,327,633 3,290,217 3,315,654 3,289,316
Weighted average incremental shares outstanding upon assumed
conversion of options and warrants ......................... 112 2,520 389 50,501
Weighted average incremental shares outstanding upon assumed
conversion of the preferred stock .......................... 58,331 100,008 58,331 100,008
----------- ----------- ----------- -----------
WEIGHTED AVERAGE NUMBER OF SHARES OF COMMON STOCK AND COMMON STOCK
EQUIVALENTS OUTSTANDING USED FOR COMPUTATION .................. 3,386,076 3,392,745 3,374,374 3,439,825
=========== =========== =========== ===========
DILUTED LOSS PER COMMON SHARE AND COMMON SHARE EQUIVALENTS ....... $ (.21)(a) $ (.13)(a) $ (.54)(a) $ (.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, 1999, 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-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 145,797
<SECURITIES> 0
<RECEIVABLES> 3,138,581
<ALLOWANCES> 1,608,887
<INVENTORY> 0
<CURRENT-ASSETS> 1,828,292
<PP&E> 5,305,965
<DEPRECIATION> (4,835,493)
<TOTAL-ASSETS> 2,358,806
<CURRENT-LIABILITIES> 2,312,579
<BONDS> 330,032
0
7
<COMMON> 34,564
<OTHER-SE> (318,376)
<TOTAL-LIABILITY-AND-EQUITY> 2,358,806
<SALES> 2,464,134
<TOTAL-REVENUES> 2,464,134
<CGS> 2,141,490
<TOTAL-COSTS> 4,368,466
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 18,000
<INCOME-PRETAX> (1,837,851)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,837,851)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,837,851)
<EPS-BASIC> (.56)
<EPS-DILUTED> (.56)
</TABLE>
