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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
AMENDMENT NO. 1
TO
FORM 10-KSB/A
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998; OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______ TO ______
COMMISSION FILE NUMBER 1-10185
DOCUCON, INCORPORATED
(Name of Small Business Issuer in its Charter)
DELAWARE 74-2418590
(State or Other Jurisdiction (I.R.S. Employer Identification No.)
of Incorporation or Organization)
565 E. SWEDESFORD ROAD, SUITE 209
WAYNE, PENNSYLVANIA 19087
(Address of Principal Executive Offices) (Zip Code)
Issuer's Telephone Number, Including Area Code: (610) 995-9500
Securities Registered Under Section 12(b) of the Exchange Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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COMMON STOCK, PAR VALUE $.01 PER SHARE BOSTON STOCK EXCHANGE
Securities Registered Under Section 12(g) of the Exchange Act: NONE
Check whether the Issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the Registrant was required to file such Reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B in this form, and no disclosure will be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [X]
State Issuer's revenues for its most recent fiscal year: $2,693,497
State the aggregate market value of the voting stock held by
non-affiliates as of March 1, 1999:
Common Stock, par value $.01 per share - $2,547,898
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date.
CLASS OUTSTANDING AT MARCH 19, 1999
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COMMON STOCK, PAR VALUE 3,304,214 SHARES
$.01 PER SHARE
DOCUMENTS INCORPORATED BY REFERENCE
Certain documents are incorporated by reference into this Annual
Report on Form 10-KSB. See Item 13.
Transitional Small Business Issuer Format: Yes [ ] No [X]
<PAGE>
PART I
Certain statements contained in this Form 10-KSB, including statements regarding
the anticipated development and expansion of the Company's business,
expenditures, the intent, belief or current expectations of the Company, its
directors or its officers, primarily with respect to the future operating
performance of the Company and other statements contained herein regarding
matters that are not historical facts, are "forward-looking" statements (as such
term is defined in the Private Securities Litigation Reform Act of 1995).
Because such statements include risks and uncertainties, actual results may
differ materially from those expressed or implied by such forward-looking
statements.
ITEM. DESCRIPTION OF BUSINESS.
GENERAL
Docucon, Incorporated ("Docucon" or the "Company") was incorporated under
the laws of the State of Delaware in 1988 and is the successor by merger to a
Texas corporation organized in 1986. The Company's primary business is document
conversion.
DOCUMENT CONVERSION SERVICES AND MARKETS
Document conversion is an automated process in which source documents are
converted into electronic form, including computer accessible images, indices
and formats. These source documents may include letters, contracts, manuals,
drawings, aperture cards, transcripts, microfilm and microfiche. After
conversion, these documents are stored on various optical and magnetic media.
These media are then accessed by document management systems which may be based
on a wide range of computer systems.
The process of document conversion involves the preparation and grading of
the documents to be stored, the physical scanning of the documents and the
creation of indices to facilitate retrieval of the converted documents. The
indexing of the information to be stored is a significant activity in any
document conversion system, and because Docucon creates custom indices and
formats, the ultimate users can retrieve information from their own documents
utilizing their own systems. Additionally, each of Docucon's document conversion
systems can customize the format of the converted materials. Throughout all its
operations, Docucon maintains a quality control program to ensure the integrity
of the indexing, editing and grading processing of the databases which are
converted. The Company provides document conversion services primarily at its
operations center in San Antonio, Texas. The Company can also process documents
at client-site locations.
The Company currently markets conversion services to government and
commercial customers that have substantial document storage and retrieval needs.
Examples of the type of documents which the Company may convert include logistic
support documents and technical manuals for the United States Department of
Defense ("DOD"), land files for petro-chemical companies and county governments,
and personnel, financial and other records and forms for public and private
companies and institutions.
For the years ended December 31, 1998 and 1997, the Company spent
approximayely $281,000, and $98,000, respectively, for research and development
activities related to ongoing operations. The Company does not own any patents.
The Company uses the word "Docucon" alone and in combination with various
designs and logos as a service mark to identify the Company's services. The
Company has obtained federal trademark registration for the name "Docucon".
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The Company has performed conversion services since 1987 under four major
contracts awarded by the DOD. A $14.8 million contract was awarded by the DOD in
early 1996 and subsequently increased by $5.6 million and extended through
February 1998. The Company provided approximately $14.7 million of services
under this contract, which expired in February 1998. In December 1997 the DOD
awarded an additional, similar contract with a term of one year for
approximately $15.5 million. The terms of the contract includes four additional
option years so that the entire contract has a potential value of approximately
$77.4 million. As of March 1, 1999, the Company had provided approximately $1.2
million of services under this contract. In 1998, 1997, and 1996 approximately
78%, 87%, and 85%, respectively, of the Company's operating revenues were
derived from services provided under DOD contracts.
The Company has also performed conversion services for various commercial
companies including Lucent Technologies, Loral Federal Systems, Westinghouse,
QED, Texaco Exploration and Production, Inc., Computer Science Corporation,
Amoco, Dowell Schlumberger, and Ericsson GE, DuPont Pharmaceuticals and Johnson
& Johnson.
COMPETITION
The Company's services are sold in highly competitive markets, and its
sales and earnings can be affected by changes in competitive prices,
fluctuations in the level of activity in major markets or general economic
conditions. The Company believes that the document conversion industry is highly
fragmented, with numerous relatively small companies seeking to establish market
positions. In addition, the Company believes that major hardware, software and
service providers may seek to enter the field in the future. Many competitors
and potential competitors have larger marketing organizations and greater
resources than the Company. In addition, many government and commercial entities
have or may develop in-house document conversion capabilities. Due to the
rapidly changing technology used in connection with providing such services,
competitive positions within the industry are subject to change.
JFS TRANSACTION
On March 16, 1994, the Company purchased substantially all of the assets,
having a book value of approximately $1.0 million, and assumed certain
liabilities in the approximate amount of $1.2 million of J. Feuerstein Systems,
Inc. ("JFS"), for consideration of approximately $0.2 million. JFS was based in
Parsippany, New Jersey and was engaged in the business of providing consulting
and support services and software products to the legal market.
On November 26, 1997, the Company sold all of the assets of the JFS
division to Bowne & Co., Inc., a worldwide financial printing and services
company, for approximately $6.5 million. The Company realized a gain of
approximately $4.5 million on the sale. Operations relating to the software
portion of the JFS division resulted in losses totaling approximately $1.4
million since the date of its purchase. All operations relating to the software
portion of the JFS division are considered discontinued operations for this
report on Form 10-KSB.
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GOVERNMENT REGULATION
The Company's ability to obtain contracts from the DOD is dependent upon
its compliance with rules and regulations promulgated by that department,
including regulations related to security and technological standards. Although
the Company believes it is currently in compliance, there is no assurance that
it will be able to comply with such rules and regulations promulgated in the
future or to maintain its current clearances. See this Item, "Description of
Business - Document Conversion Services and Markets" and "Description of
Business - Competition," Item 3, "Legal Proceedings" and Item 6, "Management's
Discussion and Analysis of Financial Condition and Results of Operations".
EMPLOYEES
At March 19, 1999, the Company had approximately 144 full-time employees
and 69 part-time employees. None of the Company's employees is represented by a
labor union, and the Company is not aware of any current activities to unionize
its employees. Management believes the relationship between the Company and its
employees is good.
ITEM 2. DESCRIPTION OF PROPERTY.
In October 1992, the Company purchased an eight-story, 52,000-square foot
office building in San Antonio, Texas. In January 1999, the Company sold this
building and is currently leasing it back from the new owner. This facility is
utilized for the Company's San Antonio operations center. Approximately 13,000
square feet of this space is sub-leased on a month-to-month basis to Bowne &
Co., Inc. to headquarter operations of the JFS division which was sold to Bowne
& Co. Inc. in November 1997.
The Company leases approximately 2,000 square feet of space in Wayne,
Pennsylvania for its corporate headquarters and approximately 1,000 square feet
in Vienna, Virginia for its federal government sales office.
The Company has signed a new lease for approximately 31,000 square feet of
space where the Company will relocate its San Antonio operations center when the
lease in the current building expires in November 1999. The new space is
currently under construction and is expected to be ready for occupancy in the
fourth quarter of 1999. In Management's opinion, the Company's physical
properties are adequate for the Company's current needs, and are consistent with
the Company's plans described elsewhere in this Annual Report on Form 10-KSB;
however, in the event that the Company experiences significant growth,
additional space may be required.
ITEM 3. LEGAL PROCEEDINGS.
In the ordinary course of its business, the Company may be subject, from
time to time, to claims and legal actions by clients, suppliers and others.
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 is currently performing its
initial review of the Company's request to determine if the Company satisfies
the requirements for inclusion into the Voluntary Disclosure Program. The
Company has no reason to believe that it will not be accepted into the Program.
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The Company's request for admission into the Voluntary Disclosure Program
was the result of an internal review by the Company that brought to light a
billing practice, with respect to certain invoices submitted during the period
from September 1996 through July 1997, that may 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 significant 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. At December 31, 1998 the Company has established a
reserve for estimated legal costs and other expenses, which it believes is
adequate for the resolution of this matter.
Except as noted above, no material actions are currently pending against
the Company. The Company maintains general liability insurance and other
insurance coverages which it believes to be adequate and typical in the
industry.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders of the Company
during the fourth quarter of 1998.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock, par value $.01 per share, is traded on The
NASDAQ Stock Market'sSM SmallCap Market (Symbol: DOCU), and on the Boston Stock
Exchange (Symbol: DOC).
In June 1998, the Company's stockholders approved a one-for-four reverse
common stock split. All common stock and share information has been adjusted to
reflect the reverse stock split.
The following table sets forth for the fiscal periods indicated the high
and low bid prices per share for the Company's Common Stock in the NASDAQ Stock
Market's SmallCap Market, the principal market upon which the Company's Common
Stock is traded, as reported to the Company in monthly reports from NASDAQ.
REPORTED
BID PRICE
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HIGH LOW
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1998
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First Quarter....................................... $4.00 $2.52
Second Quarter...................................... 3.00 1.13
Third Quarter....................................... 2.06 0.78
Fourth Quarter...................................... 1.31 0.78
1997
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First Quarter....................................... $5.36 $2.76
Second Quarter...................................... 4.12 2.52
Third Quarter....................................... 4.88 2.36
Fourth Quarter...................................... 5.24 3.36
The last reported sale price for the Common Stock on The NASDAQ Stock
Market on March 19, 1999, was $0.81 per share. Bid and asked prices reflect
inter-dealer prices, without retail mark-up, mark-down or commission, and may
not necessarily represent actual transactions.
There were approximately 228 holders of record of the Common Stock as of
March 19, 1999, excluding those shares held by depository companies for certain
beneficial owners.
The Company has never paid cash dividends on its Common Stock and does not
anticipate the payment of cash dividends in the foreseeable future. The Company
currently anticipates that any future earnings will be retained to finance the
Company's operations. Under the terms of the Company's Series A Convertible
Preferred Stock, the Company cannot pay dividends on its Common Stock until all
accumulated but unpaid dividends on such Preferred Stock have been paid. At
December 31, 1998, cumulative undeclared dividends on the Series A Convertible
Preferred Stock were approximately $159,000.
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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 thirty-day
period. The notice provides that the Company's shares are subject to delisting
ninety days after receipt of the notice, unless the Company's Common Stock per
share bid price is $1.00 or greater for ten consecutive trading days within the
ninety day period. In addition, the Company may be subject to delisting due to a
failure to meet the NASDAQ's minimum tangible net assets requirement for
continued listing.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
1998 COMPARED TO 1997
The Company reported a net loss applicable to common stockholders of
approximately $5,113,000 for 1998, as compared to net income applicable to
common stockholders of $3,379,000 in 1997. Net income in 1997 included an
approximate $4,472,000 gain recognized on the sale of the Company's JFS software
division.
Revenues were approximately $2,693,000 in 1998 as compared to
approximately $6,664,000 in 1997. This decrease is primarily attributable to the
loss of funding on a significant DOD project and the completion of several
contracts that generated significant revenues in 1997 that were not replaced
with a comparable volume of new contracts in 1998.
Production costs decreased from approximately $4,636,000 in 1997 to
approximately $2,626,000 in 1998. This decrease is primarily attributable to the
corresponding reduction in revenues in 1998. Production costs as a percentage of
revenues increased from 70% in 1997 to 98% in 1998. This increase is primarily
attributable to the Company's decision to retain substantially all of its highly
trained engineering and operations management personnel in anticipation of new
contracts in 1999, despite the lower revenue volume in 1998.
Research and development costs increased to approximately $280,000 in 1998
as compared to approximately $98,000 in 1997. This increase is primarily
attributable to a substantial increase in the amount of software engineering
devoted to development of the Company's proprietary document conversion
processes and controls.
General and administrative expenses increased from approximately
$1,029,000 in 1997 to approximately $1,916,000 in 1998. This increase is
primarily attributable to a charge of approximately $340,000 relating to the
buyout of the employment agreement for the Company's former President and COO,
costs relating to the transition to new management and the new corporate
headquarters office opened in April 1998 and legal and other costs and an
accrual relating to the Company's request for admission into the DOD Voluntary
Disclosure Program (see Item 3 - "Legal Proceedings").
Marketing costs increased from approximately $633,000 in 1997 to
approximately $1,040,000 in 1998. This increase is primarily a result of the
development of government and commercial sales forces.
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Allowance for unbilled receivables was $1,600,000 in 1998 as compared to
zero in 1997. The allowance in 1998 relates to certain work performed primarily
during 1997 under its contract with the DOD (see "Liquidity and Capital
Resources" below).
Depreciation and amortization expense decreased from approximately
$412,000 in 1997 to approximately $348,000 in 1998. This decrease is primarily
attributable to an increase in fully- depreciated assets and the Company's sale
of its JFS software division in November 1997.
1997 COMPARED TO 1996
The Company reported net income applicable to common stockholders of
approximately $3,379,000 in 1997, as compared to net income applicable to common
stockholders of approximately $709,000 in 1996. The improvement in net income
was primarily attributable to the approximately $4,472,000 gain recognized on
the sale of the Company's JFS software division. Operating results from
continuing operations applicable to common stock resulted in a loss for the year
ended December 31, 1997, of approximately $324,000 as compared to net income of
approximately $812,000 in 1996 due primarily to a decrease in revenues.
Revenues from continuing operations were approximately $6,664,000 in 1997
as compared to approximately $10,427,000 in 1996. This decrease was primarily
attributable to the discontinuation of funding for a specific project, which the
Company had been performing under the DOD contract. Revenues from discontinued
operations decreased by 25% to approximately $2,322,000 due to a shorter revenue
period in 1997 as well as the receipt of two large nonrecurring orders in 1996.
Production costs from continuing operations decreased from approximately
$6,813,000 in 1996 to approximately $4,636,000 in 1997. This decrease
is primarily attributable to the corresponding reduction in revenues in 1997.
Research and development costs decreased from approximately $205,000 in
1996 to approximately $98,000 in 1997. This decrease was primarily the result of
the Company employing much of its engineering resources to improving existing
production lines, as opposed to research and development relating to new
business development and technologies.
General and administrative expenses decreased from approximately
$1,139,000 in 1996 to approximately $1,029,000 in 1997. This decrease is
primarily a result of the Company's decreased operations.
Depreciation and amortization expense decreased from approximately
$516,000 in 1996 to approximately $412,000 in 1997 primarily due to an increase
in fully depreciated equipment.
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LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company's operations have been supplemented
through bank borrowings, capital contributions, borrowings from affiliated and
unaffiliated lenders, an initial public offering of the Company's Common Stock
in 1989, the conversion of warrants into Common Stock and private preferred
stock placements.
The Company has performed conversion services for the DOD through
contracts from the Defense Automated Printing Services Office (DAPS). A 1991
award resulted in a contract totaling $16.8 million through April 1996. A 1996
award for $14.8 million was amended and extended by $5.6 million through April
1998. In 1998, approximately $1.4 million, or 51% of the Company's revenues were
attributable to work performed under DOD contracts. During 1997, the Company
generated approximately $5.8 million, or 87% of operating revenues through DOD
contracts. In December 1997 the DOD awarded an additional, similar contract with
a term of one year for approximately $15.5 million. 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 March 1, 1999, the Company had
provided approximately $1.2 million of services under this contract.
At December 31, 1998 and 1997, the Company had approximately $0.2 million
and $1.5 million, respectively, of unbilled revenues. Substantially all of these
unbilled revenues were related to conversion services performed under a delivery
order for a customer under the Company's contract with the DOD. 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 invoice
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 invoice the unbilled revenues. Management of the Company, based
upon its past operating history and its ongoing discussions with various
government personnel regarding the availability of additional funding, believes
that all of 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.
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.
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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 $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 remaining
approximately $400,000 is scheduled to be released to the Company on November
25, 1999. Management does not anticipate any material claims to be made against
the representations and warranties and expects the funds will be released from
escrow on or before November 25, 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 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%, 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 headquarters building.
In connection with the sale, the Company paid off its 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.
Net cash and cash equivalents at December 31, 1998 were approximately $1.1
million. Trade accounts receivable, net of allowance for doubtful accounts were
approximately $373,000 at December 31, 1998 and unbilled revenues, net of
allowance were $194,000. In addition, other receivables included the
approximately $400,000 escrow deposit that the Company expects to receive on or
before November 25, 1999. Accounts payable and accrued liabilities were
approximately $1.4 million at December 31, 1998. Net working capital was
approximately $1.4 million at December 31, 1998.
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 $8.5
million, including a loss of approximately $5.1 million in 1998. For the year
ended December 31, 1998, the Company had negative cash flows from operating
activities of approximately $2.1 million. A significant portion of the Company's
historical revenues has been earned from conversion services performed for
agencies of the U.S. Government. The Company experienced significant declines in
revenues from these agencies in 1998 and 1997. There can be no assurances that
such revenues will be increased in the future. During the year ended December
31, 1997, the Company reported net income of approximately $3.4 million. The
1997 net income amount included a net gain on disposal of the discontinued
software division of approximately $4.5 million, a loss from discontinued
operations of approximately $0.8 million and a loss from continuing operations
of approximately $0.3 million. 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.
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The Company has taken steps to improve its operating results including
selling its software division in 1997 and focusing on the Company's document
conversion business. While the current year's operating loss is 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 late 1998 and early 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, file 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 1999 will
improve and will generate sufficient working capital, along with available cash,
to sustain its operations throughout the year. However, there can be no
assurances that the Company's efforts in the above areas will improve its
operating results.
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.
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 non-compliant 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 part of 1999, the
Company has made several changes in its senior management team and has been
focused on initiating 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
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Sales and six full-time sales professionals to focus on new business development
in both the federal government and commercial markets. With its existing
contracts with the Department of Defense and the General Services
Administration, 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 newly developed
commercial sales force will significantly enhance its ability to penetrate
non-federal government markets.
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ITEM 7. FINANCIAL STATEMENTS.
Financial statements of the Company meeting the requirements of Regulation
S-B are filed on the succeeding pages of this Item 7 of this Annual Report on
Form 10-KSB, as listed below:
PAGE
Report of Independent Public Accountants F-1
Balance Sheets as of December 31, 1998 and 1997 F-2
Statements of Operations for the Years Ended
December 31, 1998 and 1997 F-4
Statements of Stockholders' Equity for the
Years Ended December 31, 1998 and 1997 F-5
Statements of Cash Flows for the Years Ended
December 31, 1998 and 1997 F-6
Notes to Financial Statements F-7
13
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Docucon, Incorporated:
We have audited the accompanying balance sheets of Docucon, Incorporated, as of
December 31, 1998 and 1997, and the related statements of operations,
stockholders' equity and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Docucon, Incorporated, as of
December 31, 1998 and 1997, and the results of its operations and its cash flows
for the years then ended in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has experienced recurring operating losses,
negative cash flows from operations in 1998, a significant revenue decline and
has an accumulated deficit, all of which raise substantial doubt about its
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 1. The financial statements do not include
any adjustments that might result from the outcome of these uncertainties.
/S/ ARTHUR ANDERSEN LLP
San Antonio, Texas
February 3, 1999
F-1
<PAGE>
DOCUCON, INCORPORATED
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
ASSETS 1998 1997
----------- -----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents .............................. $ 1,082,321 $ 4,597,183
Accounts receivable, trade, net of allowance for
doubtful accounts
of $4,444 ............................................. 373,366 956,234
Unbilled revenues, net of allowance of $1,600,000 and $0
at December 31, 1998 and 1997, respectively ........... 193,722 1,472,075
Other receivables ...................................... 374,379 405,336
Prepaid expenses and other ............................. 123,921 77,044
Asset held for sale, net ............................... 1,668,467 --
----------- -----------
Total current assets ................. 3,816,176 7,507,872
----------- -----------
PROPERTY AND EQUIPMENT:
Conversion systems ..................................... 4,858,930 4,589,473
Building and improvements .............................. 9,476 1,744,499
Land ................................................... -- 230,000
Furniture and fixtures ................................. 243,167 205,602
----------- -----------
Total property and equipment ......... 5,111,573 6,769,574
Less- Accumulated depreciation and amortization ........ 4,704,152 4,680,368
----------- -----------
Net property and equipment ........... 407,421 2,089,206
----------- -----------
OTHER ASSETS, net ........................................ 48,896 472,490
----------- -----------
Total assets ......................... $ 4,272,493 $10,069,568
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE>
DOCUCON, INCORPORATED
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997
------------ ------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable ...................................... $ 218,059 $ 482,076
Accrued liabilities ................................... 1,191,351 616,615
Taxes payable ......................................... -- 191,000
Revolving term note ................................... -- 504,000
Deferred revenues ..................................... 40,601 --
Other current liabilities ............................. 44,087 --
Current maturities of long-term debt .................. 927,502 30,722
Current maturities of capital lease obligations ....... 29,537 15,798
------------ ------------
Total current liabilities ........... 2,451,137 1,840,211
------------ ------------
LONG-TERM DEBT .......................................... -- 1,485,079
------------ ------------
CAPITAL LEASE OBLIGATIONS ............................... 76,141 49,547
------------ ------------
OTHER LONG-TERM OBLIGATIONS ............................. 269,476 --
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 5)
STOCKHOLDERS' EQUITY:
Preferred stock, $1.00 par value, 10,000,000 shares
authorized-
Series A, 60 shares authorized, 7 and 12 shares issued
and outstanding as of
December 31, 1998 and 1997,
respectively ....................................... 7 12
Common stock, $.01 par value, 25,000,000 shares
authorized; 3,306,216 and 3,260,889 shares
outstanding as of December 31, 1998 and 1997,
respectively ......................................... 33,062 32,609
Additional paid-in capital ............................ 10,027,337 10,069,173
Accumulated deficit ................................... (8,581,573) (3,407,063)
Treasury stock, at cost, 2,917 shares and 0 shares as
of December 31, 1998 and 1997, respectively .......... (3,094) --
------------ ------------
Total stockholders' equity .......... 1,475,739 6,694,731
------------ ------------
Total liabilities and stockholders'
equity .................................................. $ 4,272,493 $ 10,069,568
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
DOCUCON, INCORPORATED
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------------
1998 1997
----------- -----------
<S> <C> <C>
OPERATING REVENUES ........................................ $ 2,693,497 $ 6,664,325
----------- -----------
COSTS AND EXPENSES:
Production .............................................. 2,626,315 4,636,087
Research and development ................................ 280,088 97,710
General and administrative .............................. 1,916,489 1,029,073
Allowance for unbilled revenues ......................... 1,600,000 --
Marketing ............................................... 1,039,768 632,632
Depreciation and amortization ........................... 347,556 412,193
----------- -----------
7,810,216 6,807,695
------------ -----------
OPERATING LOSS FROM CONTINUING OPERATIONS ................. (5,116,719) (143,370)
OTHER INCOME (EXPENSE):
Interest expense ........................................ (193,892) 207,805
Interest income ......................................... 200,037 73,736
----------- -----------
LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES ....... (5,110,574) (277,439)
Income tax benefit ........................................ 24,880 --
----------- -----------
NET LOSS FROM CONTINUING OPERATIONS ....................... (5,085,694) (277,439)
Preferred stock dividend requirements ..................... (27,462) (46,420)
----------- -----------
NET LOSS FROM CONTINUING OPERATIONS APPLICABLE
TO COMMON STOCKHOLDERS .................................. (5,113,156) (323,859)
----------- -----------
Loss from discontinued operations ......................... -- (769,721)
Gain on disposal of discontinued software
division, net of income tax expense of $191,000 ......... -- 4,472,409
----------- -----------
NET INCOME (LOSS) APPLICABLE TO COMMON STOCKHOLDERS ....... $(5,113,156) $ 3,378,829
=========== ===========
Basic and diluted loss from continuing operations per
common share and common share equivalents ............... $ (1.55) $ (.10)
Basic and diluted earnings from discontinued operations per
common share and common share equivalents ............... -- 1.18
BASIC AND DILUTED EARNINGS (LOSS) PER COMMON SHARE ........ $ (1.55) $ 1.08
=========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING ...... 3,300,056 3,130,371
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
DOCUCON, INCORPORATED
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
---------------------------- ---------------------------- ADDITIONAL
NUMBER NUMBER OF PAID-IN
OF SHARES AMOUNT SHARES AMOUNT CAPITAL
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1996 ............. 19 $ 19 3,008,139 $ 30,081 $ 9,730,281
Stock option exercises ............... -- -- 85,667 857 202,407
Shares issued pursuant to employee
stock plans ............................ -- -- 71,513 715 90,434
Conversion of Series A preferred stock (7) (7) 58,333 583 (576)
Shares issued to pay preferred stock
dividends .............................. -- -- 37,237 373 (373)
Compensation expense ................. -- -- -- -- 47,000
Net income ........................... -- -- -- -- --
------------ ------------ ------------ ------------ ------------
BALANCE, December 31, 1997 ............. 12 12 3,260,889 32,609 10,069,173
Stock option exercises ............... -- -- 2,500 25 5,475
Shares issued pursuant to employee
stock plans ............................ -- -- 26,809 268 (268)
Shares issued to pay preferred stock
dividends .............................. -- -- 10,318 103 (103)
Purchase of treasury stock ........... -- -- (36,250) (362) --
Conversion of Series A preferred stock (5) (5) 41,950 419 (46,940)
Accrued dividends on preferred stock . -- -- -- -- --
Net loss ............................. -- -- -- -- --
------------ ------------ ------------ ------------ ------------
BALANCE, December 31, 1998 ............. 7 $ 7 3,306,216 $ 33,062 $ 10,027,337
============ ============ ============ ============ ============
<CAPTION>
TOTAL
ACCUMULATED TREASURY STOCKHOLDERS'
DEFICIT STOCK EQUITY
------------ ------------ ------------
BALANCE, December 31, 1996 ............. $ (6,832,312) $ -- $ 2,928,069
Stock option exercises ............... -- -- 203,264
Shares issued pursuant to employee
stock plans ............................ -- -- 91,149
Conversion of Series A preferred stock -- -- --
Shares issued to pay preferred stock
dividends .............................. -- -- --
Compensation expense ................. -- -- 47,000
Net income ........................... 3,425,249 -- 3,425,249
------------ ------------ ------------
BALANCE, December 31, 1997 ............. (3,407,063) -- 6,694,731
Stock option exercises ............... -- -- 5,500
Shares issued pursuant to employee
stock plans ............................ -- -- --
Shares issued to pay preferred stock
dividends .............................. -- -- --
Purchase of treasury stock ........... -- (49,620) (49,982)
Conversion of Series A preferred stock -- 46,526 --
Accrued dividends on preferred stock . (88,816) -- (88,816)
Net loss ............................. (5,085,694) -- (5,085,694)
------------ ------------ ------------
BALANCE, December 31, 1998 ............. $ (8,581,573) $ (3,094) $ 1,475,739
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
DOCUCON, INCORPORATED
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------------
1998 1997
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss from continuing operations ................... $(5,085,694) $ (277,439)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities-
Depreciation and amortization ...................... 347,556 412,193
Allowance for unbilled revenues .................... 1,600,000 --
Noncash compensation accrual ....................... 313,563 --
Changes in current assets and current liabilities-
Decrease in net receivables and unbilled revenues . 688,057 1,246,834
(Increase) decrease in prepaid expenses and other . (25,351) 92,751
Increase (decrease) in accounts payable and accrued
liabilities ..................................... 221,904 (1,359,040)
Increase (decrease) in taxes payable .............. (191,000) 149,761
Increase (decrease) in deferred revenues .......... 40,601 (20,300)
----------- -----------
Net cash (used in) provided by operating
activities .............................................. (2,090,364) 244,760
----------- -----------
NET CASH PROVIDED BY DISCONTINUED OPERATIONS ............ -- 4,369,828
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures .................................. (270,951) (220,146)
----------- -----------
Net cash used in investing activities ....... (270,951) (220,146)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances under revolving term note .................... -- 3,395,500
Payments on revolving term note ....................... (504,000) (3,641,500)
Principal payments on long-term debt .................. (588,299) (29,898)
Principal payments under capital lease obligations .... (16,766) (13,926)
Proceeds from employee stock purchase plan ............ -- 91,149
Proceeds from exercise of stock options ............... 5,500 203,264
Purchase of treasury stock ............................ (49,982) --
----------- -----------
Net cash (used in) provided by financing
activities .............................................. (1,153,547) 4,589
----------- -----------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS .... (3,514,862) 4,399,031
-----------
CASH AND CASH EQUIVALENTS, beginning of year ............ 4,597,183 198,152
----------- -----------
CASH AND CASH EQUIVALENTS, end of year .................. $ 1,082,321 $ 4,597,183
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
DOCUCON, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION, DESCRIPTION OF THE
COMPANY, FUTURE OPERATIONS,
LIQUIDITY AND CAPITAL RESOURCES:
Docucon, Incorporated (the Company), a Delaware corporation, was incorporated in
June 1986. The Company's primary business is the conversion of paper and
microform documents to a computer accessible medium for commercial and
government customers. Paper or microform documents are scanned by sophisticated
computer equipment and stored and indexed on optical disks or magnetic media.
Substantially all of the Company's customers are located in the U.S.
In March 1994, the Company acquired substantially all of the assets and assumed
certain liabilities of J. Feuerstein Systems, Inc. (JFS), a company which
provided software products to the legal market. In November 1997, the Company
sold this division as disclosed in Note 12.
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 $8.5
million, including a loss of approximately $5.1 million during 1998. For the
year ended December 31, 1998, the Company had negative cash flows from operating
activities of approximately $2.1 million. As discussed in Notes 3 and 7, a
significant portion of the Company's historical revenues has been earned from
conversion services performed for agencies of the U.S. Government. The Company
experienced significant declines in revenues from these agencies in 1997 and
1998 and, during 1998, provided an allowance of $1.6 million on certain unbilled
revenues. There can be no assurances that the Company will be able to maintain
or increase the level of services that it has historically provided to various
governmental agencies. During the year ended December 31, 1997, the Company
reported net income of approximately $3.4 million. The 1997 net income amount
included a net gain on disposal of the discontinued software division of
approximately $4.5 million, a loss from discontinued operations of approximately
$.8 million and a loss from continuing operations of $.3 million. 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.
The Company has taken steps to improve its operating results including selling
its software division in 1997 and focusing on the Company's document conversion
business. While the current year's operating loss is 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 late 1998 and early 1999. Expansion of the Company's
F-7
<PAGE>
DOCUCON, INCORPORATED
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
marketing efforts has been made to include a wide range of vertical markets and
formal and informal partnering relationships with systems integrators, file
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 1999 will improve and will generate sufficient
working capital, along with available cash, to sustain its operations throughout
the year. However, there can be no assurances that the Company's efforts in the
above areas will improve its operating results.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PROPERTY AND EQUIPMENT
Property and equipment are recorded at original cost. Maintenance and repairs
are charged to expense as incurred and betterments which increase the value or
extend the useful life of the property are capitalized. Gains or losses on sales
or other dispositions of property and equipment are credited or charged to
income.
Depreciation is provided using the straight-line method over the lesser of the
capital lease term or estimated useful lives of the related assets. The
Company's conversion system and furniture and fixtures are currently depreciated
over periods ranging from two to five years beginning in the month the property
is placed in service. The Company's building was being depreciated over 40
years. In January 1999, the Company sold its building as described in Note 13.
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 December 31, 1998, cumulative undeclared dividends on the preferred
stock approximated $159,000. Subsequent to December 31, 1998, the Company paid
cash of $88,816 related to cumulative dividends on preferred stock that was
converted during the fourth quarter of 1998. This is reflected as a component of
accrued liabilities on the accompanying balance sheet at December 31, 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 the board of directors authorized the
repurchase of up to 500,000 shares of the Company's common stock in the open
market. From June 19, 1998, through December 31, 1998, the Company acquired
36,250 treasury shares for approximately $49,982. Approximately 33,333 of such
shares were reissued in connection with the conversion of Series A preferred
stock.
F-8
<PAGE>
DOCUCON, INCORPORATED
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
REVERSE STOCK SPLIT
In June 1998, the Company's stockholders 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.
REVENUE RECOGNITION
Revenues from conversion service contracts are recognized at the time services
are provided and are based upon the number of documents converted and the
conversion rates established in the contracts. The Company maintains an
estimated reserve for returns and reconversions based upon an historical
analysis. Such amounts have not been significant.
Statements of Cash Flows-
SUPPLEMENTAL DISCLOSURES
The Company considers funds invested in highly liquid investments having
original maturities of 90 days or less to be cash equivalents.
The following relates to cash interest and income taxes paid by the Company for
the periods indicated:
YEAR ENDED
DECEMBER 31
-------------------
1998 1997
-------- --------
Cash paid during the year for interest ... $168,892 $220,599
======== ========
Cash paid during the year for income taxes $157,622 $ 62,478
======== ========
During the years ended December 31, 1998 and 1997, the Company had noncash
investing and financing activities consisting of new capital lease obligations
entered into of $57,099 and $16,240, respectively.
POST RETIREMENT AND POST EMPLOYMENT BENEFITS
The Company does not provide post retirement or post employment benefits to its
employees.
SELF-INSURANCE RISK
The Company self insures under its medical coverage for employees and dependents
based upon monthly attachment limits which are calculated based upon the number
of participants and monthly participant charges. The Company accrues for known
claims and an estimate of claims incurred but not reported up to the maximum
anticipated costs to the Company. The Company believes that such accruals are
adequate.
During 1998 and 1997, the Company recognized approximately $180,000 and
$400,000, respectively, in self-insurance expense under the attachment limits.
The Company's insurer will pay cumulative claims above the attachment limit up
to $1 million lifetime per covered individual. The Company does not believe that
claims reported and claims incurred but not reported will exceed the amounts to
be covered by the insurer.
F-9
<PAGE>
DOCUCON, INCORPORATED
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per
Share." SFAS No. 128 replaced the presentation of Primary Earnings Per Share
(EPS) with Basic EPS and requires dual presentation of Basic and Diluted EPS on
the face of the statements of operations. Basic EPS excludes dilution and is
computed by dividing income available to common stockholders by the weighted
average number of common shares outstanding for the period. Diluted EPS reflects
the potential dilution that could occur if securities or other contracts to
issue common stock were exercised or converted into common stock or resulted in
the issuance of common stock that then shared in the earnings of the Company. As
the Company had a net loss from continuing operations for the years ended
December 31, 1998 and 1997, Diluted EPS equals Basic EPS as potentially dilutive
common stock equivalents are antidilutive in loss periods. The average market
price per share of the Company's common stock for the years ended December 31,
1998 and 1997, was $2.01 and $3.66, respectively. Note 9 provides a detail of
options and warrants outstanding and their corresponding exercise prices. If the
Company would have had income from continuing operations for the years ended
December 31, 1998 and 1997, the denominator (weighted average number of common
shares and common share equivalents outstanding) in the Diluted EPS calculation
would have been increased, through application of the treasury stock method, for
each class of option or warrant for which the average market price per share of
the Company's common stock exceeded the common stock equivalent's exercise
price. The following shows the weighted average number of common shares
outstanding used to compute Basic and Diluted EPS:
YEAR ENDED
DECEMBER 31
---------------------
1998 1997
--------- ---------
Weighted average number of common shares
outstanding for Basic and Diluted EPS...... 3,300,056 3,130,371
========= =========
RECLASSIFICATIONS
Certain reclassifications have been made to prior period amounts to conform to
the 1998 presentation.
3. UNBILLED REVENUES:
The majority of the Company's unbilled revenues at December 31, 1998 and 1997,
relate to conversion services performed for agencies of the U.S. Government. The
Company's ability to invoice these unbilled revenues is dependent upon a number
of factors including quality control acceptance and the availability of funding
to the respective agencies. The Company was informed by a U.S. Government
customer in mid-1997 that funding for certain conversion services being
performed had been depleted. Management completed
F-10
<PAGE>
DOCUCON, INCORPORATED
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
work that had been placed in production at that time. As a result, the Company
has been unable to invoice approximately $1.6 million of conversion services
that were performed prior to 1998. A significant portion of the conversion
products associated with the $1.6 million of unbilled revenues have been shipped
to the customer and are 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 invoice the unbilled revenues. Management of the Company, based
upon its past operating history and its ongoing discussions with various
government personnel regarding the availability of additional funding, believes
that all of such unbilled revenues totaling approximately $1.6 million 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 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.
4. REVOLVING TERM NOTE:
In connection with the refinancing of the note payable discussed in Note 6, the
Company also obtained a $750,000 revolving term note (the Revolver) which was
originally scheduled to mature on October 31, 1997. During 1997, the maturity
date was extended to May 31, 1998. At December 31, 1997, $504,000 was
outstanding under the Revolver. The Revolver bore interest at the bank's Base
Rate (as defined) plus .75 percent (9.25 percent at December 31, 1997). Interest
was payable monthly and the Revolver was secured by the same collateral as the
note payable. During 1998, the Company repaid the entire balance outstanding
under the Revolver and voluntarily terminated the Revolver.
5. COMMITMENTS AND CONTINGENCIES:
Certain office equipment and office space is leased under various noncancelable
operating leases with lease terms ranging from one to five years. Rent expense
under all cancelable and noncancelable operating leases was approximately
$59,000 and $175,000 for the years ended December 31, 1998 and 1997,
respectively. Future minimum lease payments for all noncancelable operating
leases, including the $27,000 monthly operating leaseback described in Note 13,
net of noncancelable subleases, as of December 31, 1998, are as follows:
Year ending December 31-
1999 $299,534
2000 38,987
2001 2,093
2002 2,093
2003 1,570
--------
Total future minimum lease payments $344,277
========
In April 1998, the Company appointed a new president and chief executive
officer. The Company and the employee have entered into a seven-year employment
agreement providing for base compensation of $200,000 per year. The employment
agreement is terminable by either party with 30 days' notice. In the event the
employee were to be terminated by the Company without cause, the Company would
be required to make a severance payment of $300,000.
In December 1998, the Company appointed a new senior vice president and
chief financial officer. The Company and the employee have entered into a
three-year employment agreement providing for base compensation of $140,000 per
year. The employment agreement is terminable by either party with 30 days'
notice. In the event the employee were to be terminated by the Company without
cause, the employee's compensation would continue to be paid for a period of one
year from the effective date of termination.
In January 1999, the Company appointed a new vice president, operations
and technology. The Company have entered into a three-year employment agreement
providing for base compensation of $130,000 per year. The employment agreement
is terminable by either party with 30 days' notice. In the event the employee
were to be terminated by the Company without cause, the employee's compensation
would continue to be paid for a period of one year from the effective date of
termination.
F-11
<PAGE>
DOCUCON, INCORPORATED
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
In September 1998, the Company granted early retirement to a member of senior
management and terminated the related employment agreement. The employee will be
retained as a consultant to the Company for a period of two years following his
September 1998 retirement at the rate of $2,500 per month. For the same two-year
period during the employee's consultancy, he will receive retirement pay at the
rate of $5,500 per month. For a 10-year period following the employee's
consultancy, he will receive retirement pay at the rate of $2,500 per month. The
consulting payments will be expensed as the services are provided. The present
value of the post-retirement payments, discounted at 5 percent, resulted in
noncash compensation expense of $341,333 during the year ended December 31,
1998. The present value of the post-retirement obligation is recorded as other
long-term obligations on the accompanying balance sheet, with the current
portion of $44,087 included as other current liabilities.
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 is currently performing its
initial review of the Company's request to determine if the Company satisfies
the requirements for inclusion into the Voluntary Disclosure Program. The
Company has no reason to believe that it will not be accepted into the Program.
The Company's request for admission into the Voluntary Disclosure Program
was the result of an internal review by the Company that brought to light a
billing practice, with respect to certain invoices submitted during the period
from September 1996 through July 1997, that may 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 significant 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. At December 31, 1998, the Company has established a
reserve for estimated legal costs and other expenses which it believes is
adequate for the resolution of this matter.
6. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS:
In connection with the purchase of its headquarters building, the Company issued
a four-year, 8 percent, $1.5 million promissory note originally due in December
1996. Additionally, the Company issued 225,000 warrants, which expire in
December 1999, to purchase an equivalent number of shares of common stock at an
exercise price of $8.00 per share. In October 1996, the Company refinanced the
$1.5 million note. The new note was payable to a commercial bank, bore interest
at a fixed rate of 9.5 percent per annum and required monthly principal and
interest payments of $14,448 with the remaining balance maturing in October
2001. The note payable was secured by the Company's building, other fixed
assets, accounts receivable and inventory. Debt issuance costs of approximately
$68,000 incurred in October 1996 related to this refinancing were capitalized
and were being amortized over the five-year term. Subsequent to December 31,
1998, this note was paid in its entirety with proceeds from the sale of the
building as discussed below.
F-12
<PAGE>
DOCUCON, INCORPORATED
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
During 1998, the Company decided to sell its headquarters building. 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 have been classified as a current asset
held for sale at December 31, 1998. In January 1999, the Company sold its
headquarters building and paid off the related secured indebtedness. See Note 13
for additional information related to this sale.
Equipment held under capital leases and related obligations at December 31,
1998, are as follows:
Office equipment requiring monthly principal and
interest payments of $2,310, interest at 9.5 percent
to 14.56 percent and maturing April 2001 to October
2003 ........................................................... $ 94,710
Telecommunications equipment requiring monthly principal
and interest payments of $977, interest at 9.3 percent
and maturing July 2001 ......................................... 30,292
--------
Total capital lease payments ..................................... 125,002
Less- Amounts representing interest .............................. 19,324
--------
Capital lease obligations ........................................ $105,678
========
Maturities of capital lease obligations as of December 31, 1998, are as follows:
Year ending December 31-
1999 $29,537
2000 32,834
2001 27,674
2002 8,530
2003 7,103
-------
Total $105,678
=======
7. MAJOR CUSTOMER:
The Company has historically earned a significant portion of its total revenues
from conversion services performed for the Department of Defense (DOD). The
Company had revenues of approximately $2.1 million and $5.8 million during the
years ended December 31, 1998 and 1997, respectively, from services provided to
the DOD. The Company had trade receivables of approximately $.3 million and $.6
million from DOD at December 31, 1998 and 1997, respectively.
8. PREFERRED STOCK:
In 1990, the Company issued 46 shares of 11 percent Series A preferred stock at
$25,000 per share. Each share of preferred stock is convertible into 8,333
shares of common stock. Through December 31, 1998, 39 shares of preferred stock
have been converted. Additionally, 92,154 shares of common stock have been
issued in lieu of accumulated dividends on the preferred stock which was
converted. As of December 31, 1998, cumulative undeclared dividends on the
outstanding preferred stock approximated $159,000.
F-13
<PAGE>
DOCUCON, INCORPORATED
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
9. STOCK OPTIONS:
The Company adopted the 1988 Stock Option Plan (the 1988 Plan) which allows for
the granting of stock options at the current market value of the common stock at
the date of the grant to key employees. In August 1997, the Company's
shareholders authorized a 75,000 share increase in the number of shares of
common stock reserved for issuance pursuant to the 1988 Plan. As a result, an
aggregate of 415,000 shares of common stock has been reserved for issuance
pursuant to the 1988 Plan.
The 1988 Plan terminated on October 31, 1998.
The 1991 Director Non-Statutory Stock Option Plan (the Director Plan) provides
for the granting of options at the common stock's current market value to
members of the board of directors of the Company who are not employees of the
Company. In June 1998, the Company's shareholders authorized an 85,000 share
increase in the number of shares of common stock reserved for issuance under the
Director Plan. As a result, the Director Plan authorizes the granting of options
to purchase up to 210,000 shares of the Company's common stock. The stock
options granted under the 1988 Plan and the Director Plan are exercisable
pursuant to the individual agreements between the Company and the grantee and
range from a six-month to a three-year vesting period. All options granted under
these plans must be exercised within 10 years from the date of grant and expire
within three months after termination of employment or service as a director.
On April 1, 1998, the Company approved the 1998 Employee Stock Option Plan (the
1998 Employee Plan), covering 187,500 shares of common stock. Unless terminated
earlier by the board of directors, the 1998 Plan will terminate on March 31,
2008. The purpose of the plan is to supplement and replace the Company's 1988
Stock Option Plan (the 1988 Plan) which terminated on October 31, 1998. The 1998
Employee Plan provides for the grant to key employees of the Company of
incentive stock options (ISOs) intended to qualify under Section 422(b) of the
Internal Revenue Code and nonqualified stock options (NQSO).
Under the 1998 Employee Plan, which is administered by the Stock Option
Committee of the board of directors, key employees may be granted options to
purchase shares of the Company's common stock at 100 percent of fair market
value on the date of grant (or 110 percent of fair market value in the case of
an ISO granted to a 10 percent stockholder/grantee). The 1998 Employee Plan
expires on March 31, 2008. Options granted under the 1998 Employee Plan must be
exercised within 10 years from the date of grant, vest at varying times, as
determined by the Stock Option Committee, are nontransferable except by will or
pursuant to the laws of descent and distribution and expire within three months
after termination of employment, unless such termination is by reason of death
or disability or for cause. All shares purchased upon exercise of any option
must be paid in full at the time of purchase, in accordance with the terms set
forth on the option. Such payment must be made in cash or through delivery of
shares of common stock or a combination of cash and common stock, all as
determined by the Stock Option Committee. The Stock Option Committee may
determine other terms applicable to particular options. The aggregate fair
market value (determined at the time each ISO is granted) of the shares of
common stock with respect to which ISOs issued to any one person under the 1998
Employee Plan are exercisable for the first time during any calendar year may
not exceed $100,000.
F-14
<PAGE>
DOCUCON, INCORPORATED
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
The 1998 Employee Plan may be amended at any time by a vote of the board of
directors. However, no amendment made without approval of the stockholders of
the Company may increase the total number of shares which may be issued under
options granted pursuant to the 1998 Employee Plan, reduce the maximum exercise
price or extend the latest date upon which options may be granted or change the
class of employees eligible to receive the options.
In 1998, the Company approved the 1998 Executive Non-Statutory Plan (the 1998
NQSO Plan), covering 375,000 shares of common stock. Unless terminated earlier
by the board of directors, the 1998 NQSO Plan will terminate on March 31, 2008.
The 1998 NQSO Plan provides for the grant to executives of the Company
nonqualified stock options (NQSO) through the added incentive of
performance-based compensation and stock ownership. The purpose of the plan is
to stimulate the efforts of executive management to increase shareholder wealth
by the performance of specific goals designed to increase shareholder wealth in
the form of an increased market price of the Company's stock.
Under the 1998 NQSO Plan, identified executives may be granted long-term options
to purchase shares of the Company's common stock at a price specified on the
date of the grant subject to certain acceleration rights upon attainment of
specific goals. The 1998 NQSO Plan is administered by the Stock Option
Committee. The 1988 NQSO Plan expires on March 31, 2008. Options granted under
the 1998 NQSO Plan will expire 10 years from the date of grant, vest at varying
times, as determined by the NQSO Committee, are nontransferable except by will
or pursuant to the laws of descent and distribution. All shares purchased upon
exercise of any option must be paid in full at the time of purchase, in
accordance with the terms set forth on the option. Such payment must be made in
cash or through delivery of shares of common stock or a combination of cash and
common stock, all as determined by the NQSO Committee. The NQSO Committee may
determine other terms applicable to particular options. The 1998 NQSO Plan may
be amended at any time by a vote of the board of directors.
In April 1998, the Company's board of directors granted options to certain
members of the Company's senior management to purchase 125,000 shares of the
Company's common stock at an exercise price of $4 per share under the 1998 NQSO
Plan. Additionally, in April 1998, the Company appointed a new president and
chief executive officer. The Company's board of directors granted this employee
options to purchase 225,000 shares of the Company's common stock at an exercise
price of $4 per share under a time accelerated restricted stock award. In
December 1998, the exercise price on these options was reset to $1 per share.
The time accelerated restricted stock award options become exercisable in March
2005. Exercisability of the time accelerated restricted stock award options is
accelerated, in 20,000 share increments, for each $2 per share incremental
increase in the quoted market price per share of the Company's common stock
above $4 per share.
F-15
<PAGE>
DOCUCON, INCORPORATED
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
A summary of activity in the Company's stock option plans is set forth below:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE MARKET PRICE
PRICE OPTION PRICE AT DATE OF GRANT
SHARES PER SHARE PER SHARE TOTAL PER SHARE TOTAL
----------- ------------- ------------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Outstanding,
December 31, 1996 366,188 $ 2.52 $1.64 - $4.88 $ 916,447 $1.64 - $9.76 $ 1,429,553
=========== =========== ===========
Exercisable,
December 31, 1996 296,068 2.36 1.64 - 4.88 702,410 1.64 - 9.76 1,187,191
=========== =========== ===========
Granted ............ 73,363 3.13 2.64 - 5.52 229,341 2.64 - 5.52 229,341
Exercised .......... (85,667) 2.43 2.12 - 4.12 (208,264) 2.24 - 5.76 (289,954)
Terminated ......... (80,106) 2.93 1.64 - 5.52 (234,953) 1.64 - 5.52 (269,437)
----------- ----------- -----------
Outstanding,
December 31, 1997 273,778 2.57 2.12 - 5.52 $ 702,571 1.64 - 9.76 $ 1,099,503
=========== =========== ===========
Exercisable,
December 31, 1997 230,157 2.46 2.12 - 5.52 $ 565,547 1.64 - 9.76 $ 933,045
=========== =========== ===========
Granted ............ 875,501 2.45 .88 - 4.12 2,147,024 .88 - 4.00 1,697,102
Exercised .......... (2,500) 2.24 2.24 - 2.24 (5,600) 2.24 - 2.24 (5,600)
Terminated ......... (329,638) 3.80 2.12 - 4.88 (1,252,540) 2.12 - 4.88 (1,609,052)
----------- ----------- -----------
Outstanding,
December 31, 1998 817,141 1.95 .88 - 5.52 $ 1,591,455 .88 - 9.76 $ 1,181,953
=========== =========== ===========
Exercisable,
December 31, 1998 238,213 2.49 2.00 - 5.52 $ 593,150 1.64 - 9.76 $ 977,481
=========== =========== ===========
</TABLE>
The weighted average remaining contractual life of options outstanding at
December 31, 1998, is approximately seven years. In October 1995, SFAS No. 123,
"Accounting for Stock-Based Compensation," was issued. SFAS No. 123 defines a
fair value based method of accounting for employee stock options or similar
equity instruments and encourages all entities to adopt that method of
accounting for all of their employee stock compensation plans. Under the fair
value based method, compensation cost is measured at the grant date based on the
value of the award and is recognized over the service period of the award, which
is usually the vesting period. However, SFAS No. 123 also allows entities to
continue to measure compensation costs for employee stock compensation plans
using the intrinsic value method of accounting
F-16
<PAGE>
DOCUCON, INCORPORATED
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
prescribed by Accounting Principles Board (APB) Opinion No. 25, "Accounting for
Stock Issued to Employees" (APB 25). Entities electing to remain with the
accounting prescribed by APB 25, as the Company has, must make pro forma
disclosures of net income (loss) and earnings (loss) per share as if the fair
value based method recommended by SFAS No. 123 had been applied. The following
provides pro forma disclosures of net income (loss) and earnings (loss) per
share as if the fair value based method of accounting under SFAS No. 123 had
been applied.
Had compensation cost for these plans been determined consistent with SFAS No.
123, the Company's net income (loss) applicable to common stockholders and basic
and diluted earnings (loss) per share would have been changed to the following
pro forma amounts:
1998 1997
------------- -------------
Net Income (Loss)
Applicable to Common
Stockholders ............ As Reported $ (5,113,156) $ 3,378,829
Pro Forma $ (5,389,493) $ 3,262,818
Basic and Diluted Earnings
(Loss) Per Share ........ As Reported $ (1.55) $ 1.08
Pro Forma $ (1.63) $ 1.04
Because the SFAS No. 123 method of accounting has not been applied to options
granted prior to January 1, 1995, the resulting pro forma compensation cost may
not be representative of that to be expected in future years.
The weighted average fair values per share of options granted during 1998 and
1997 were $1.51 and $2.40, respectively. The fair value of each option grant is
estimated on the date of grant using the Black-Scholes option pricing model with
the following weighted average assumptions used for grants in 1998 and 1997,
respectively: risk-free interest rates of 6.0 percent and 6.0 percent, expected
dividend yields of 0 percent and 0 percent, expected lives of 5 years and 5
years and expected volatility of 110 percent and 125 percent.
Included as a component of pro forma expense for 1998 and 1997 is compensation
expense of approximately $3,318 and $17,000, respectively, related to the 1993
Employee Stock Purchase Plan described in Note 10.
In addition to the above stock option agreements, the Company has warrants
outstanding with certain lenders and other parties. As of December 31, 1998, the
total number of shares issuable under these warrants was 240,000. Warrants to
purchase 225,000 shares of common stock at $8.00 per share expire in December
1999 and warrants to purchase 15,000 shares of common stock at $5.00 per share
expire in June 2001.
10. EMPLOYEE BENEFIT PLANS:
Effective January 1, 1994, the Company adopted the 1993 Employee Stock Purchase
Plan (the Stock Purchase Plan). Under the Stock Purchase Plan, eligible
employees may elect to have up to 10 percent of their base pay (as defined)
deducted and utilized to purchase common stock of the Company in annual or
semiannual offerings. In August 1997 and June 1998, the Company's shareholders
authorized an increase in the number of shares of common stock reserved for
issuance pursuant to the Stock Purchase Plan by 50,000 shares and 100,000
shares, respectively. The Company has reserved 350,000 shares of common stock
for issuance
F-17
<PAGE>
DOCUCON, INCORPORATED
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
pursuant to the Stock Purchase Plan. In January 1999 and 1998, the Company
issued 24,398 and 26,809 shares of common stock at purchase prices of $.77 and
$3.40 per share, respectively. The annual purchase price is 85 percent of the
lesser of the closing price of the Company's common stock at the beginning or
end of each calendar year. The purchase prices represent 85 percent of the
closing price on December 31, 1998, and December 30, 1997, respectively. The
Stock Purchase Plan is administered by the Compensation Committee of the board
of directors. In June 1998, the Company's shareholders amended the Stock
Purchase Plan's termination date from December 31, 1998, to December 31, 2001.
At December 31, 1998, 184,390 shares remain available for issuance.
The Company also maintains a qualified employee benefit plan under Section
401(k) of the Internal Revenue Code. Under this plan, employees meeting certain
eligibility requirements may contribute up to 15 percent of their eligible
compensation to the plan on a pretax basis. In addition, the Company may make
voluntary matching contributions to the plan. At December 31, 1998 and 1997,
respectively, the Company had accrued approximately $23,000 and $56,000 as its
matching contributions to the plan.
11. INCOME TAXES:
The Company follows SFAS No. 109, "Accounting for Income Taxes." This statement
establishes financial accounting and reporting standards for deferred income tax
assets and liabilities that arise as a result of differences between the
reported amounts of assets and liabilities for financial reporting and income
tax purposes.
As of December 31, 1998, the Company had net operating loss carryforwards of
approximately $6.2 million for federal income tax purposes which are available
to reduce future taxable income and will expire in 2005 through 2018 if not
utilized.
Income tax expense (benefit) is included in the financial statements as follows:
YEAR ENDED
DECEMBER 31
-----------------------
1998 1997
-------- --------
Continuing operations ............................. $(24,880) $ --
Discontinued operations ........................... -- 191,000
-------- --------
Total income tax expense (benefit) ......... $(24,880) $191,000
======== ========
The components of income tax expense (benefit) are as follows:
YEAR ENDED
DECEMBER 31
-----------------------
1998 1997
-------- --------
Federal ........................................... $(24,880) $ 61,000
State ............................................. -- 130,000
-------- --------
Total income tax expense (benefit) ......... $(24,880) $191,000
======== ========
F-18
<PAGE>
DOCUCON, INCORPORATED
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
Total income tax expense (benefit) from continuing operations differs from the
amount computed by applying the statutory federal income tax rate to income
(loss) from continuing operations before income taxes. The reasons for these
differences are as follows:
YEAR ENDED
DECEMBER 31
--------------------------
1998 1997
----------- -----------
Expected federal income tax expense (benefit) .... $(1,725,000) $ (94,000)
Other ............................................ (24,880) --
Tax loss carryforwards generated (utilized) ...... 1,725,000 94,000
----------- -----------
Total income tax expense (benefit)
from continuing operations ........... $ (24,880) $ --
=========== ===========
The tax effect of significant temporary differences representing income tax
assets (liabilities) is as follows:
DECEMBER 31
-----------------------------
1998 1997
---------- ----------
Deferred income tax assets (liabilities)-
Tax loss carryforwards ................... $2,110,000 $ 885,000
Tax credit carryforwards ................. 81,000 81,000
Depreciation ............................. 94,000 135,000
Accruals ................................. 555,000 41,000
Other .................................... 14,000 20,000
---------- ----------
$2,854,000 $1,162,000
========== ==========
A valuation reserve of $2,854,000 and $1,162,000 as of December 31, 1998 and
1997, respectively, representing the total of net deferred tax assets has been
recognized by the Company as it cannot determine that it is more likely than not
that all of the deferred tax assets will be realized.
12. DISCONTINUED OPERATIONS:
In November 1997, the Company sold its software division to a third party for
$6.5 million, resulting in a pretax gain of approximately $4.7 million. As a
result of the sale, the division has been accounted for as a discontinued
operation and, accordingly, the Company has restated its financial statements
for all periods presented in accordance with APB No. 30. The following table
provides certain information related to the discontinued operation for the year
ended December 31, 1997:
Revenues $2,322,221
==========
Loss from discontinued operations $(769,721)
==========
Gain on disposal of discontinued
software division, net of income
tax expense of $191,000 $4,472,409
==========
F-19
<PAGE>
DOCUCON, INCORPORATED
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
Under the provisions of the Asset Purchase Agreement (Agreement) between the
Company and the purchaser (Purchaser) of the software division, the Company sold
all of the assets related to this division with the exception of certain office
furniture and equipment and the Purchaser agreed to assume all of the
liabilities of the division with the exception of trade payables, accrued
liabilities and tax liabilities of the Company associated with the operations
and disposition of the division. Under the terms of the Agreement, the Purchaser
paid $800,000 of the purchase price into an escrow fund for purposes of securing
payment for any liability of the Company to the Purchaser under the Agreement,
including the Purchaser's right to indemnification for uncollectible purchased
receivables. The funds in the escrow account, net of any liabilities of the
Company to the Purchaser under the Agreement, were paid to the Company in the
amount of $400,000 in November 1998 and the remaining $400,000 is to be released
to the Company in November 1999. Management of the Company believes that the
remainder held in escrow at December 31, 1998, will be paid to the Company and,
accordingly, such amount is reflected as a component of other current
receivables on the accompanying balance sheet at December 31, 1998. The Company
continued to fund the payroll for the employees of the software division from
the date of purchase through December 31, 1997, on behalf of the Purchaser. Such
amount is reflected as a component of accounts receivable at December 31, 1997,
and was reimbursed by the Purchaser subsequent to December 31, 1997. In
connection with the sale of the software division, certain terms of stock
options to purchase Company common stock held by employees of the division were
modified resulting in compensation expense of $47,000 which has been reflected
as a reduction of the gain on disposal of the discontinued software division.
13. SUBSEQUENT EVENTS:
In January 1999, the Company sold its headquarters building. In connection with
the sale, the Company paid off its 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 intends to locate replacement facilities and believes that
suitable facilities will be available. The gain on the sale of the building,
which was not significant, was deferred and is being recognized over the term of
the operating leaseback.
14. QUARTERLY RESULTS OF OPERATIONS
(UNAUDITED):
The results of operations by quarter for the years ended December 31, 1998 and
1997, were as follows:
<TABLE>
<CAPTION>
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 TOTAL
----------- ----------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
1998
Operating revenues ... $ 612,996 $ 869,982 $ 591,786 $ 618,733 $ 2,693,497
=========== =========== =========== =========== ===========
Net loss ............. $ (614,491) $ (455,214) $(1,993,217) $(2,022,772) $(5,085,694)
=========== =========== =========== =========== ===========
Basic and diluted loss
per common share ... $ (0.19) $ (0.14) $ (0.60) $ (0.61)
=========== =========== =========== ===========
</TABLE>
F-20
<PAGE>
DOCUCON, INCORPORATED
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
<TABLE>
<CAPTION>
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 TOTAL
------------- ------------- ------------- ------------- -----------
<S> <C> <C> <C> <C> <C>
1997
Operating revenues ..... $ 2,489,648 $ 2,096,083 $ 1,317,352 $ 761,242 $ 6,664,325
============= ============= ============= ============= ===========
Net income (loss) from
continuing operations $ 98,093 $ 277,797 $ (135,587) $ (517,742) $ (277,439)
Net income (loss) from
discontinued
operations ........... (142,193) (215,698) (281,983) 4,342,562 3,702,688
------------- ------------- ------------- ------------- -----------
Net income (loss) ...... $ (44,100) $ 62,099 $ (417,570) $ 3,824,820 $ 3,425,249
============= ============= ============= ============= ===========
Basic income (loss) per
common share-
Continuing operations $ .03 $ .09 $ (.05) $ (.16)
Discontinued
operations ............. (.05) (.07) (.09) 1.34
------------- ------------- ------------- -------------
Basic income (loss) per
common share ......... $ (.02) $ .02 $ (.14) $ 1.18
============= ============= ============= =============
Diluted income (loss)
per common share-
Continuing operations $ .03 $ .08 $ (.05) $ (.16)
Discontinued
operations ............. (.04) (.06) (.09) 1.34
------------- ------------- ------------- -------------
Diluted income (loss)
per common share ..... $ (.01) $ .02 $ (.14) $ 1.18
============= ============= ============= =============
</TABLE>
F-21
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES.
The Company has had no disagreements with its independent accountants
within the twenty-four months prior to December 31, 1998 or subsequent to that
date.
14
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
DIRECTORS, EXECUTIVE OFFICERS AND KEY TECHNICAL PERSONNEL
The following table sets forth certain information with respect to the
Company's Directors, executive officers and key technical personnel:
NAME AGE POSITION
------ ----- -----------
Edward P. Gistaro 63 Chairman of the Board of Directors
Douglas P. Gill 50 President, Chief Executive Officer, and
Director
Warren D. Barratt 39 Senior Vice President, Chief
Financial Officer and Treasurer
Michael C. Mooney 60 Senior Vice President - Sales
Michael Nunley 54 Vice President - Operations and
Technology
Ralph Brown 65 Secretary and Director
Al R. Ireton 64 Director
Chauncey E. Schmidt 66 Director
Robert W. Schwartz 54 Director
Edward P. Gistaro has served as Chairman of the Board since 1990. He
served as Chief Executive Officer of the Company from June 4, 1988 until April
1, 1998, when the Board of Directors accepted his recommendation that he be
replaced by Douglas P. Gill as Chief Executive Officer. Pursuant to Mr.
Gistaro's retirement, the Board requested that he continue to serve as Chairman,
and he accepted. Mr. Gistaro also served as President of the Company from July
10, 1988 until March 18, 1991. Mr. Gistaro was employed by Datapoint
Corporation, a company involved in the manufacturing of computer systems, in
various managerial positions from 1973 to 1987. From 1982 to 1985 Mr. Gistaro
served as the President and Chief Operating Officer of Datapoint Corporation,
and he served from 1985 to 1987 as its President and Chief Executive Officer.
15
<PAGE>
Douglas P. Gill was elected President and Chief Executive Officer on April
1, 1998. Mr. Gill was a general partner of Foster Management Company, a venture
capital firm, from 1994 until 1998. From 1984 to 1994 Mr. Gill served as First
Vice President of Janney Montgomery Scott, Inc., a regional investment banking
and brokerage firm, and in various management capacities at Scott Paper Company
from 1977 to 1984. Mr. Gill also served as a senior auditor at Arthur Andersen &
Co. (now LLP) from 1972 to 1975.
Warren D. Barratt was named Senior Vice President and Chief Financial
Officer in December 1998 and was subsequently appointed Treasurer in March 1999.
Mr. Barratt was Senior Vice President and Chief Financial Officer for U.S.
Physicians, Inc., a physician practice management company, from 1996 to 1998.
From 1994 to 1996, Mr. Barratt was Chief Financial Officer for The Pet Practice,
Inc., a veterinary services company. Mr. Barratt was a Senior Manager with Price
Waterhouse LLP from 1992 to 1994.
Michael C. Mooney was named Senior Vice President, Federal Programs in
July 1998. Prior to joining Docucon, Mr. Mooney served Litton-PRC as Vice
President, General Manager for Business Development for Outsourcing Systems and
Services and as a manager for PRC Logistics Systems. Mr. Mooney was Senior Vice
President of Sales and Marketing for Raxco Software from 1989 to 1990 and from
1977 to 1989 held various senior sales positions at Boeing Computer Services,
Computer Sciences Corporation, VM Software and Legent Corporation. Prior to his
career in the private sector, Mr. Mooney served in the U.S. Marine Corps from
1961-1967
Michael Nunley was named Vice President Operations and Technology in
January 1999. From 1985 to 1998 Mr. Nunley served in various positions with
Lockheed Martin Corporation, most recently as Program Manager for Citibank
Projects. Prior to joining Lockheed Martin, Mr. Nunley spent twenty years with
the U.S. Air Force in various roles including the development and testing of
automated communications systems and maintaining long radar systems.
Ralph Brown, an attorney in private practice since 1968, has served as
Secretary of the Company since May 1, 1987. From 1987 to 1989, he served also as
Treasurer of the Company. Mr. Brown has also served since 1975 as President of
Cherokee Ventures, Inc., a real estate leasing firm, since 1978 as President of
East Central Development Corporation and since 1982 as President of Southeast
Suburban Properties, Inc. The latter two businesses are real estate development
firms.
Al R. Ireton was elected as a Director of the Company in May 1993. Mr.
Ireton has been Chairman of Manchester Partners, an investment and growth
strategy advisory organization providing capital and strategic assistance to
growing companies, since October 1988. From 1985 through September 1988, he
served as President and Chief Executive Officer of Texet Corporation, a desktop
publishing company. Mr. Ireton has 25 years' experience serving as president and
chief executive officer of growth-oriented companies, and has served on several
corporate boards.
Chauncey E. Schmidt was elected to the Board of Directors of the Company
in February 1993. He has been Chairman of C. E. Schmidt & Associates, an
investment firm, since April 1989. From 1987 to March 1989, he was Vice Chairman
of the Board of AMFAC, Inc., a New York Stock Exchange-listed company engaged in
diversified businesses. He has previously served as President of The First
National Bank of Chicago and Chairman of the Board and Chief Executive Officer
of The Bank of California, N.A. Mr. Schmidt is on the Board of Trustees of the
U. S. Naval War College Foundation and is active in several civic and charitable
organizations.
16
<PAGE>
Robert W. Schwartz was elected to the Board of Directors of the Company in
April 1998. Mr. Schwartz founded the Schwartz Heslin Group, Inc. ("SHG"), an
investment banking firm, in 1985. As Managing Director of SHG, Mr. Schwartz
specializes in corporate planning, finance and development. From 1980 to 1985,
he was founder, President and Chief Executive Officer of Winsource, Inc., a high
tech firm which packaged and marketed integrated telephone and computer systems.
Mr. Schwartz served as President, Chief Operating Officer and Director of
Coradian Corporation and as Vice President and Chief Financial Officer of Garden
Way Manufacturing Corporation from 1975 to 1980 and 1970 to 1975, respectively.
SHG has been retained by the Company to provide investment and financial advice.
GENERAL
Directors of the Company hold office until the next Annual Meeting of
Stockholders of the Company and until their successors are elected and
qualified. Executive officers of the Company are elected annually by, and serve
at the discretion of the Board of Directors. There are no arrangements or
understandings known to the Company between any of the Directors, nominees for
Director or executive officers of the Company and any other person pursuant to
which any of such persons was elected as a Director or an executive officer,
except as set forth below under Item 10, "Executive Compensation Employment
Agreements". There are no family relationships between any Directors, nominees
for Director or executive officers of the Company.
Prior to joining the company, Mr. Barratt served as Senior Vice President
and Chief Financial Officer of U.S. Physicians, Inc. In October 1998, U.S.
Physicians, Inc. filed a bankruptcy case under Chapter 11 of the U.S. Code(the
Bankruptcy Code) and such case was subsequently converted to a case under
Chapter 7 of the Bankruptcy Code.
COMPLIANCE WITH SECTION 16(A) OF THE
SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's officers and Directors, and persons who beneficially own more than 10%
of a registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
(the "SEC") and the Boston Stock Exchange. Officers, Directors and beneficial
owners of more than 10% of the Company's Common Stock are required by SEC
regulations to furnish the Company with copies of all Section 16(a) forms that
they file. Based solely on review of the copies of such forms furnished to the
Company, or written representations that no reports on Form 5 were required, the
Company believes that for the period from January 1, 1998 through March 1, 1999,
all officers, Directors and greater-than-10% beneficial owners complied with all
Section 16(a) filing requirements applicable to them.
17
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION.
EXECUTIVE COMPENSATION -- GENERAL
The following table sets forth compensation paid or awarded to the Chief
Executive Officer for all services rendered to the Company in 1998, 1997 and
1996. No other executive officer of the Company had compensation that exceeded
$100,000 in 1998.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
------------------------------------------ ----------------------------- ALL
BONUS/ANNUAL OTHER SECURITIES LONG-TERM OTHER
NAME AND PRINCIPAL INCENTIVE ANNUAL UNDERLYING INCENTIVE COMPEN-
POSITION(1) YEAR SALARY AWARD(2) COMPENSATION(3) OPTIONS(4) PAYOUTS SATION(5)
- ------------------ ------ --------- ------------- ---------------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Douglas P. Gill 1998 $149,020 $50,000 $ --- 275,000 $ --- $20
President and Chief
Executive Officer
</TABLE>
(1) Edward P. Gistaro resigned as Chief Executive Officer on April 1, 1998 and
is currently Chairman of the Board. Allan H. Hobgood resigned as
Vice-Chairman and Chief Operating Officer in September 1998 and Lori A.
Turner resigned as Vice President and Chief Financial Officer in December
1998.
(2) Mr. Gill is eligible to receive an annual bonus under his employment
contract of up to 50% of his annual base salary, to be awarded at the
discretion of the Board of Directors. For 1998, Mr. Gill was entitled to a
bonus of 25% of his base salary which was accrued at December 31, 1998 but
had not been paid as of March 31, 1999.
(3) Aggregate perquisites and other personal benefits did not exceed the lesser
of either $50,000 or 10% of the total annual salary and bonus reported
above.
(4) In April 1998, Mr. Gill was awarded options to purchase 225,000 shares of
the Company's common stock at an exercise price of $4.00 per share. In
December 1998, the exercise price of these options was reset to $1.00 per
share.
(5) Consists of premiums paid under the Company's group term life insurance
program.
STOCK OPTION GRANTS IN 1998
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
----------------------------------------------------------------
NUMBER OF % OF TOTAL
SECURITIES OPTIONS GRANTED EXERCISE
UNDERLYING TO EMPLOYEES PRICE EXPIRATION
NAME OPTIONS GRANTED IN FISCAL YEAR PER SHARE DATE
------ --------------- ----------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Douglas P. Gill....... 50,000 5.7% $2.76 04/01/08
Douglas P. Gill....... 225,000(1) 25.7% 1.00 04/01/05
</TABLE>
(1) In April 1998, Mr. Gill was awarded options to purchase 225,000 shares of
the Company's common stock at an exercise price of $4.00 per share under the
Company's 1998 Non-Statutory Stock Option Plan. These options become
exercisable in March 2005. Exercisability of the options is accelerated in
20,000 share increments for each $2.00 per share incremental increase in the
quoted market price per share of the Company's common stock above $4.00 per
share. In December 1998, the exercise price of these options was reset to
$1.00 per share.
18
<PAGE>
STOCK OPTION EXERCISES IN 1998 AND OPTION VALUES AT DECEMBER 31, 1998
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
SHARES NUMBER OF UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
ACQUIRED AT DECEMBER 31, 1998 AT DECEMBER 31, 1998
ON VALUE -----------------------------------------------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Douglas P. Gill...... -- $ --- 16,667 258,333 $ --- $ ---
</TABLE>
TEN-YEAR OPTION REPRICINGS
<TABLE>
<CAPTION>
SECURITIES LENGTH OF
UNDERLYING MARKET PRICE EXERCISE PRICE ORIGINAL OPTION
NUMBER OF OF STOCK AT OF STOCK AT TERM REMAINING
OPTIONS TIME OF TIME OF NEW EXERCISE AT DATE OF
NAME DATE REPRICED REPRICING REPRICING PRICE REPRICING
-------- -------- -------------- --------------- --------------- ------------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Douglas P. Gill..... 12/15/98 225,000 $1.00 $4.00 $1.00 6 years, 5 months
</TABLE>
EMPLOYMENT AGREEMENTS
The Company entered into an employment agreement with Mr. Gill on April 1,
1998, which carries a seven-year term. Pursuant to the terms of the agreement,
Mr. Gill is to be paid $200,000 per annum, an auto allowance, and an annual
performance bonus to be determined by the Board of Directors.
The Company entered into employment agreements with Messrs. Warren D.
Barratt and Michael Nunley in December 1998 and January 1999, respectively. Each
of the agreements carries a three-year term and provides for a base salary and
an annual performance bonus to be determined by the board of directors.
Each of the agreements for Messrs. Gill, Barratt and Nunley are terminable
upon 30 days prior written notice by either the Company or the employee, or by
the Company "for cause" at any time. Further, each agreement requires that the
employee keep Company matters confidential, restricts the employee from being
directly or indirectly involved with any entity in a business competitive with
that of the Company for specified periods of time following the termination of
the agreement, and provides for a severance payment to the employee in the event
he is terminated by the Company without cause.
19
<PAGE>
STOCK OPTIONS
1988 STOCK OPTION PLAN
The Company has a 1988 Stock Option Plan, currently covering an aggregate
of 415,000 shares of Common Stock. The 1988 Stock Option Plan provides for the
grant to officers, Directors and key employees of the Company of incentive stock
options ("ISOs") intended to qualify under Section 422(b) of the Internal
Revenue Code of 1986, as amended (the "Code") and non-qualified stock options
("NQSOs"). The 1988 Stock Option Plan was approved by the stockholders of the
Company on November 15, 1988. Amendments to the 1988 Stock Option Plan
increasing the number of shares covered thereby were approved by the
stockholders of the Company on April 21, 1989, May 14, 1991 May 7, 1992, and
August 12, 1997. As of March 1, 1999, under the 1988 Stock Option Plan there
were outstanding options to purchase 246,066 shares of the Company's Common
Stock at prices ranging from $1.00 to $5.52 per share.
Under the 1988 Stock Option Plan, which is administered by the Stock
Option Committee of the Board of Directors, key employees may be granted options
to purchase shares of the Company's Common Stock at 100% of fair market value on
the date of grant (or 110% of fair market value in the case of an ISO granted to
a 10% stockholder/grantee). The 1988 Stock Option Plan expired on October 31,
1998. Options granted under the 1988 Stock Option Plan must be exercised within
ten years from the date of grant, vest at varying times, as determined by the
Stock Option Committee, are nontransferable except by will or pursuant to the
laws of descent and distribution, and are protected against dilution. All shares
purchased upon exercise of any option must be paid in full at the time of
purchase, in accordance with the terms set forth in the option. Such payment
must be made in cash or through delivery of shares of Common Stock or a
combination of cash and Common Stock, all as determined by the Stock Option
Committee. The Stock Option Committee may determine other terms applicable to
particular options. No one person may receive ISOs for which the aggregate fair
market value (determined at the time each ISO is granted) of options exercisable
for the first time during any calendar year exceeds $100,000.
1991 DIRECTOR NON-STATUTORY STOCK OPTION PLAN
The Company also has a 1991 Director Non-Statutory Stock Option Plan (the
"1991 Director Plan"), currently covering an aggregate of 210,000 shares of
Common Stock. The 1991 Director Plan was approved by the stockholders of the
Company on May 7, 1992 and provides for the grant of NQSOs to non-employee
Directors of the Company. An amendment to increase the number of shares offered
and reserved for the 1991 Director Plan was approved by the stockholders of the
Company on June 9, 1998. As of March 1, 1999, there were outstanding under the
1991 Director Non-Statutory Stock Option Plan options to purchase 96,250 shares
of the Company's Common Stock at prices ranging from $2.00 to $5.52 per share.
Under the 1991 Director Plan, which is administered by the Board of
Directors, non-employee Directors are granted options to purchase 10,000 shares
of the Company's Common Stock upon their initial election as Directors and 7,500
shares on the second anniversary date of such election at the then-current
market price of such shares. One-third of the initial grant shall vest on each
anniversary of the date of grant, and one-third of the second grant shall vest
every six months after the date of grant. The 1991 Director Plan expires on
February 10, 2001. Under an amendment to the 1991 Director Plan adopted by the
Board of Directors in June 1998, each eligible Director will receive an
additional annual grant of options covering 6,250 shares of Common Stock,
commencing with the fiscal year of the Company immediately following the fiscal
year in which all shares of Common Stock covered by the initial grant and the
20
<PAGE>
second grant described above are fully vested, and such annual grant will
continue each fiscal year thereafter until options covering all shares reserved
for issuance under the 1991 Director Plan have been granted. Options granted
under the 1991 Director Plan must be exercised within ten years from the date of
grant, are nontransferable except by will or pursuant to the laws of descent and
distribution, are protected against dilution and expire within three months
after termination of service as a Director of the Company, unless such
termination is by reason of death or disability or for cause. All shares
purchased upon exercise of any option must be paid in full at the time of
purchase, in accordance with the terms set forth in the option. Such payment
must be made in cash or through delivery of shares of Common Stock or a
combination of cash and Common Stock. The 1991 Director Plan may be amended at
any time by vote of the Board of Directors.
During 1998, Messrs. Ralph Brown, Al Ireton, and Chauncey Schmidt, all
Directors of the Company, were granted options covering 6,250 shares each of
Common Stock at an exercise price of $2.00 per share. Messrs. Edward Gistaro and
Robert Schwartz, both Directors of the Company, were each granted options
covering 10,000 shares of Common Stock at an exercise price of $2.76 and $2.00,
respectively. The exercise price per share of each such option was not less than
the closing bid price of the Common Stock reported on The NASDAQ Stock Market on
the date of the grant.
1998 EMPLOYEE STOCK OPTION PLAN
On April 1, 1998, the Company approved the 1998 Employee Stock Option
Plan (the 1998 Employee Plan), covering 187,500 shares of common stock. Unless
terminated earlier by the board of directors, the 1998 Plan will terminate on
March 31, 2008. The purpose of the plan is to supplement and replace the
Company's 1988 Stock Option Plan (the 1988 Plan) which terminated on October 31,
1998. The 1998 Employee Plan provides for the grant to key employees of the
Company of incentive stock options (ISOs) intended to qualify under Section
422(b) of the Internal Revenue Code and nonqualified stock options (NQSOs).
Under the 1998 Employee Plan, which is administered by the Stock Option
Committee of the board of directors, key employees may be granted options to
purchase shares of the Company's common stock at 100 percent of fair market
value on the date of grant (or 110 percent of fair market value in the case of
an ISO granted to a 10 percent stockholder/grantee). Options granted under the
1998 Employee Plan must be exercised within 10 years from the date of grant,
vest at varying time, as determined by the Stock Option Committee, are
nontransferable except by will or pursuant to the laws of descent and
distribution and expire within three months after termination of employment,
unless such termination is by reason of death or disability or for cause. All
shares purchased upon exercise of any option must be paid in full at the time of
purchase, in accordance with the terms set forth on the option. Such payment
must be made in cash or through delivery of shares of common stock or a
combination of cash and common stock, all as determined by the Stock Option
Committee. The Stock Option Committee may determine other terms applicable to
particular options. The aggregate fair market value (determined at the time each
ISO is granted) of the shares of common stock with respect to which ISOs issued
to any one person under the 1998 Employee Plan are exercisable for the first
time during any calendar year may not exceed $100,000.
The 1998 Employee Plan may be amended at any time by a vote of the
board of directors. However, no amendment made without approval of the
stockholders of the Company may increase the total number of shares which may be
issued under options granted pursuant to the 1998 Employee Plan, reduce the
maximum exercise price or extend the latest date upon which options may be
granted or change the class of employees eligible to receive the options.
21
<PAGE>
1998 EXECUTIVE NON-STATUTORY PLAN
In 1998, the Company approved the 1998 Executive Non-Statutory Plan (the
1998 NQSO Plan), covering 375,000 shares of common stock. Unless terminated
earlier by the board of directors, the 1998 NQSO Plan will terminate on March
31, 2008. The 1998 NQSO Plan provides executives of the Company the added
incentive of performance-based compensation and stock ownership through the
grant of nonqualified stock options. The purpose of the plan is to incentivise
executive management to achieve specified goals which are intended to be aligned
with the objectives of increasing the market price of the Company's Common Stock
and enhancing shareholder wealth.
Under the 1998 NQSO Plan, identified executives may be granted long-term
options to purchase shares of the Company's common stock at a price specified on
the date of the grant subject to certain acceleration rights upon attainment of
specific goals. The 1998 NQSO Plan is administered by the Stock Option
Committee. Options granted under the 1998 NQSO Plan will expire 10 years from
the date of grant, vest at varying times, as determined by the NQSO Committee,
are nontransferable except by will or pursuant to the laws of descent and
distribution. All shares purchased upon exercise of any option must be paid in
full at the time of purchase, in accordance with the terms set forth on the
option. Such payment must be made in cash or through delivery of shares of
common stock or a combination of cash and common stock, all as determined by the
NQSO Committee. The NQSO Committee may determine other terms applicable to
particular options. The 1998 NQSO Plan may be amended at any time by a vote of
the board of directors.
EMPLOYEE STOCK PURCHASE PLAN
The Company's 1993 Employee Stock Purchase Plan (the "Stock Purchase
Plan") was approved by the stockholders at the 1994 Annual Meeting of
Stockholders and amended on August 12, 1997 and June 9, 1998. Under the Stock
Purchase Plan, eligible employees may elect to have up to 10% of their Base Pay
(as defined) deducted and utilized for the purchase of Common Stock of the
Company in annual or semiannual offerings to be made by the Company to eligible
employees. The Company has reserved 350,000 shares of Common Stock for issuance
pursuant to the Stock Purchase Plan. The Company's stockholders approved an
increase of an additional 100,000 shares and an extension of the Stock Purchase
Plan until December 31, 2001 in June 1998. The Company issued 24,398, 26,809,
and 71,512 shares in January 1999, 1998 and 1997 pursuant to this plan at
purchase prices of $.77, $3.40 and $1.28 per share, which represents 85% of the
closing price on December 31, 1998, December 30,1997, and January 2, 1996,
respectively. At March 1, 1999, 184,390 shares remain available for ISSUANCE.
Under the Stock Purchase Plan, the Company will make available in each
year from January 1, 1994 through December 31, 2001 up to 50,000 shares of
Common Stock. Such shares will be offered to participating employees in annual
or semiannual offerings. Participating employees will be deemed to have been
granted options to purchase Common Stock in each offering in an amount equal to
the amount of their respective payroll deductions divided by 85% of the market
value of the Common Stock of the Company on the applicable Offering Commencement
Date. The option price shall be the lesser of 85% of the closing price of the
Common Stock on the Offering Commencement Date (or the next preceding trading
day) or 85% of the closing price of Common Stock on the Offering Termination
Date (or the next preceding trading day). Unless a participating employee
terminates participation as provided in the Stock Purchase Plan, such employee
shall be deemed to have exercised such option on the Offering Termination Date
and shall be issued a corresponding number of shares of Common Stock.
22
<PAGE>
The Stock Purchase Plan is administered by the Compensation Committee of
the Board of Directors and will expire on December 31, 2001, unless sooner
terminated or amended by the Board of Directors.
23
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of March 1, 1999, by all persons
known to the Company to own beneficially more than 5% of the Company's Common
Stock.
NAME AND AMOUNT AND
ADDRESS OF NATURE OF PERCENT
TITLE OF CLASS BENEFICIAL OWNERS BENEFICIAL OWNERSHIP OF CLASS
- --------------------------------------------------------------------------------
Common Stock, Demuth, Folger & Terhune 225,000 (1) 6.26
par value $.01 One Exchange Plaza
per share 55 Broadway
New York, New York 10006
Edward P. Gistaro 195,385 (2) 5.79
565 E. Swedesford Rd.
Suite 209
Wayne, PA 19087
- ----------------------
(1) Consists of 225,000 shares of Common Stock underlying a Warrant to
Purchase Common Stock exercisable at an exercise price of $8.00 per share.
The percentage of ownership is calculated based on 3,594,393 shares
outstanding.
(2) Includes 3,333 shares subject to currently exercisable stock options.
The percentage of ownership is based on 3,372,726 shares outstanding.
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of March 1, 1999 (a) by each of the
Company's directors, (b) by the Company's Chief Executive Officer (there were no
other executive officers whose 1998 compensation exceeded $100,000), and (c) by
all Directors and executive officers as a group.
NAME AND AMOUNT AND
ADDRESS OF NATURE OF PERCENT
TITLE OF CLASS BENEFICIAL OWNER (1) BENEFICIAL OWNERSHIP (2) OF CLASS (3)
- --------------------------------------------------------------------------------
Common Stock, Edward P. Gistaro 195,385 (4) 5.79
par value $.01 Douglas P. Gill 34,634 (5) 1.02
per share Ralph Brown 75,150 (6) 2.22
Al R. Ireton 23,125 (7) 0.68
Chauncey E. Schmidt 60,625 (7) 1.79
Robert W. Schwartz --- 0.00
All Directors and
Executive Officers
as a Group (9
persons including
the above) 388,919 (8) 11.20
24
<PAGE>
- --------------------
(1) The address for all persons named is 565 E. Swedesford Road, Suite 209,
Wayne, Pennsylvania 19087.
(2) The persons named in the table have sole voting and investment power with
respect to all shares of Common Stock shown as beneficially owned by them,
except as otherwise indicated.
(3) Unless otherwise indicated below, the percentage of ownership is based
upon 3,369,393 shares of Common Stock outstanding, which includes 61,838
shares of Common Stock into which outstanding shares of Preferred Stock
are convertible and which the holders of the Preferred Stock are entitled
to vote.
(4) Includes 3,333 shares subject to currently exercisable stock options. The
percentage of ownership is based on 3,372,726 shares outstanding.
(5) Includes 33,334 shares subject to currently exercisable stock options. The
percentage of ownership is based on 3,402,727 shares outstanding.
(6) Includes 20,625 shares subject to currently exercisable stock options. The
percentage of ownership is based on 3,390,018 shares outstanding.
(7) Includes 23,125 shares subject to currently exercisable stock options. The
percentage of ownership is based on 3,392,518 shares outstanding.
(8) Includes 103,542 shares subject to currently exercisable stock options.
The percentage of ownership is based on 3,472,935 shares outstanding.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
In December 1996 the Company's former chief executive officer loaned the
Company $100,000 for a period of 5 days. In January 1997 the former chief
executive officer loaned the Company up to $420,000 over a period of 20 days.
The loans were unsecured and bore interest at 9.5% and were paid in full in
December 1996 and February 1997. In September and October 1997, the chief
executive officer loaned the Company $45,000 and $150,000. The loan balances
were applied to the amount due from the officer when he exercised employee stock
options in October 1997. Interest at 9.5% was paid for 11 and 3 days
respectively on the unsecured loans, and the balance after the stock option
exercise was repaid to the officer. Since January 1, 1996, no officer, executive
officer, or affiliate of the Company has entered into any other direct or
indirect material transactions, or series of transactions, or had any direct or
indirect material interest in any proposed transaction, or series of
transactions, to which the Company is to be a party where the amount involved
exceeds $60,000.
25
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
The Exhibits required by Regulation S-B are set forth in the following
list and are filed either by incorporation by reference from previous filings
with the Securities and Exchange Commission or by attachment to this Annual
Report on Form 10-KSB, as so indicated in such list.
2.1 Asset Purchase Agreement dated March 15, 1994, between Docucon,
Incorporated and J. Feuerstein Systems, Inc., including the
related Letter Agreement, dated January 28, 1994, between Jim
Feuerstein and Docucon, Incorporated, as filed as Exhibit 2.1 to
the Company's Annual Report on Form 10-KSB for the fiscal year
ended December 31, 1993, is hereby incorporated herein by
reference.
3.1 Certificate of Incorporation of Docucon, Incorporated, filed as
Exhibit 3.1 to the Company's Registration Statement on Form S-1
(Registration No. 33-25561), is hereby incorporated herein by
reference.
3.2 Certificate of Amendment to Certificate of Incorporation of
Docucon, Incorporated, filed as Exhibit 3.2 to the Company's
Annual Report on Form 10-KSB for the fiscal year ended December
31, 1992, is hereby incorporated herein by reference.
3.3 Bylaws of Docucon, Incorporated, filed as Exhibit 3.2 to the
Company's Registration Statement on Form S-1 (Registration No.
33-25561), is hereby incorporated herein by reference.
3.4 Certificate of Merger of Docucon, Incorporated, a Delaware
corporation, and Docucon, Incorporated, a Texas corporation,
October 11, 1988, filed as Exhibit 3.4 to the Company's Annual
Report on Form 10-KSB for the fiscal year ended December 31,
1995, is hereby incorporated herein by reference.
3.5 Certificate of Designation Preferences of Series A Convertible
Preferred Stock of Docucon, Incorporated, May 29, 1990, filed as
Exhibit 3.5 to the Company's Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1995, is hereby incorporated
herein by reference.
3.6 Certificate of Designation Preferences of Series B
Non-Convertible, Cumulative, Non-Voting, Redeemable Preferred
Stock of Docucon, Incorporated, June 12, 1991, filed as Exhibit
3.6 to the Company's Annual Report on Form 10-KSB for the fiscal
year ended December 31, 1995, is hereby incorporated herein by
reference.
3.7 Certificate of Correction of Certificate of Designation
Preferences of Series A Convertible Preferred Stock of Docucon,
Incorporated, June 1, 1990, filed as Exhibit 3.7 to the Company's
Annual Report on Form 10-KSB for the fiscal year ended December
31, 1995, is hereby incorporated herein by reference.
4.1 Warrant to Purchase Common Stock of Docucon, Incorporated,
entitling D. H. Blair Investment Banking Corp. to purchase 80,000
shares of Common Stock at an exercise price of $.75 per share,
expiring on November 5, 1995, as filed as Exhibit 4.1 to
Amendment No. 1 to the Company's Registration Statement on Form
SB-2 (Registration No. 33-82018), is hereby incorporated herein
by reference.
26
<PAGE>
4.2 Warrant to Purchase Common Stock of Docucon, Incorporated,
entitling D. H. Blair Investment Banking Corp. to purchase
160,000 shares of Common Stock at an exercise price of $.70 per
share, expiring on November 5, 1995, as filed as Exhibit 4.2 to
Amendment No. 1 to the Company's Registration Statement on Form
SB-2 (Registration No. 33-82018), is hereby incorporated by
reference.
4.3 Warrant to Purchase Common Stock of Docucon, Incorporated,
entitling James Coleman to purchase 20,000 shares of Common Stock
at an exercise price of $.75 per share, expiring on November 5,
1995, as filed as Exhibit 4.5 to Amendment No. 1 to the Company's
Registration Statement on Form SB-2 (Registration No. 33-82018),
is hereby incorporated herein by reference.
4.4 Warrant to Purchase Common Stock of Docucon, Incorporated,
entitling James Coleman to purchase 40,000 shares of Common Stock
at an exercise price of $.70 per share, expiring on November 5,
1995, as filed as Exhibit 4.6 to Amendment No. 1 to the Company's
Registration Statement on Form SB-2 (Registration No. 33-82018),
is hereby incorporated herein by reference.
4.5 Stock Option Agreement, dated August 31, 1992, in which Docucon,
Incorporated granted The Wall Street Group, Inc. a stock option
to purchase up to 72,727 shares of Common Stock at a price of
$1.375 per share, as filed as Exhibit 4.14 to Amendment No. 1 to
the Company's Registration Statement on Form SB-2 (Registration
No. 33-82018), is hereby incorporated herein by reference.
10.1 Contract, dated as of May 8, 1991, between the Company and the U.
S. Department of Defense, filed as Exhibit 10.2 to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31,
1991, is hereby incorporated herein by reference.
10.2 Employment Agreements between the Company and each of Edward P.
Gistaro and Allan H. Hobgood, filed as Exhibit 10.5 to the
Company's Registration Statement on Form S-1 (Registration No.
33-25561), are hereby incorporated herein by reference.
10.3 Amendment to Employment Agreement between the Company and Allan
H. Hobgood, filed as Exhibit 10.7 to the Company's Annual Report
on Form 10-KSB for the fiscal year ended December 31, 1992, is
hereby incorporated herein by reference.
10.5 1988 Stock Option Plan, filed as Exhibit 10.9 to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31,
1991, is hereby incorporated herein by reference.
10.6 1991 Director Non-Statutory Stock Option Plan, filed as Exhibit
10.10 to the Company's Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1992, is hereby incorporated
herein by reference.
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10.8 Note and Warrant Purchase Agreement, dated as of December 15,
1992, between the Company and Demuth, Folger & Terhune, including
all Exhibits thereto (which include the form of Promissory Note,
the form of Common Stock Purchase Warrant and the form of Deed of
Trust executed and delivered in connection with the transaction),
filed as Exhibit 5.1 to the Company's Current Report on Form 8-K
dated December 16, 1992, is hereby incorporated herein by
reference.
10.9 1993 Employee Stock Purchase Plan, filed as Exhibit 10.11 to the
Company's Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1993, is hereby incorporated herein by reference.
10.10 Form of Promissory Note, Revolving, dated as of September 30,
1996, between Docucon, Incorporated and Bank One, Texas, N.A.,
filed as Exhibit 10.12 to the Company's Quarterly Report on Form
10-QSB for the quarter ended September 30, 1996, is hereby
incorporated herein by reference.
10.11 Form of Promissory Note, dated as of September 30, 1996, between
Docucon, Incorporated and Bank One, Texas, N.A., filed as Exhibit
10.13 to the Company's Quarterly Report on Form 10-QSB for the
quarter ended September 30, 1996, is hereby incorporated herein
by reference.
10.12 Deed of Trust, Security Agreement and Financing Statement, dated
as of September 30, 1996, executed in connection with the
issuance of Promissory Notes in Exhibits 10.12 and 10.13, filed
as Exhibit 10.14 to the Company's Quarterly Report on Form 10-QSB
for the quarter ended September 30, 1996 is hereby incorporated
herein by reference.
10.13 Asset Sale and Purchase agreement, November 26, 1997, between
Docucon, Incorporated and Bowne of Dallas, Inc., and Bowne
Litigation Solutions, L.P., filed as Exhibit 10.13 to the
Company's Annual Report on Form 10-KSB for the year ended
December 31, 1997 is herein incorporated by reference.
10.14 Employment Agreement, January 5, 1998, between Docucon,
Incorporated and Lori Turner, filed as Exhibit 10.14 to the
Company's Annual Report on Form 10-KSB for the year ended
December 31, 1997 is herein incorporated by reference.
10.15 Employment Agreement, April 1, 1998, between Docucon,
Incorporated and Douglas P. Gill, filed as Exhibit 10.15 to the
Company's Annual Report on Form 10-KSB for the year ended
December 31, 1997 is herein incorporated by reference.
10.16 Employment Agreement, December 20, 1998, between Docucon,
Incorporated and Warren D. Barratt.
10.7 Employment Agreement, January 4, 1999, between Docucon,
Incorporated and Michael Nunley.
11 Computation of Earnings (Loss) Per Share.
23 Consent of Arthur Andersen LLP
28
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27 Financial Data Schedule
(b) Reports on Form 8-K.
none
29
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this Report to be signed on its behalf by the undersigned, thereunto duly
authorized.
DOCUCON, INCORPORATED
By DOUGLAS P. GILL
/S/ Douglas P. Gill
President, Chief Executive
Officer, and Director
Date: April 26, 1999
In accordance with the Exchange Act, this Report has been signed below by
the following persons on behalf of the Registrant and in the capacities and on
the dates indicated.
SIGNATURE CAPACITY DATE
---------- ---------- ------
DOUGLAS P. GILL President, Chief Executive April 26, 1999
/S/ Douglas P. Gill Officer and Director
(Principal Executive Officer)
WARREN D. BARRATT Senior Vice President April 26, 1999
/S/ Warren D. Barratt Chief Financial Officer and Treasurer
(Principal Financial Officer)
EDWARD P. GISTARO Chairman of the Board of Directors April 26, 1999
/S/ Edward P. Gistaro
RALPH BROWN Director April 26, 1999
/S/ Ralph Brown
AL R. IRETON Director April 26, 1999
/S/ Al R. Ireton
CHAUNCEY E. SCHMIDT Director April 26, 1999
/S/ Chauncey E. Schmidt
ROBERT W. SCWARTZ Director April 26, 1999
/S/ Robert W. Schwartz
30
EXHIBIT 10.16
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered as of the 20th
day of December, 1998 by and between Docucon, Incorporated, a corporation
organized and existing under the laws of the State of Delaware ("Company"), and
Warren D. Barratt, an individual residing in Westtown, Chester County,
Pennsylvania ("Employee").
FOR AND IN CONSIDERATION of the mutual covenants herein contained and the
mutual benefits to be gained by the performance thereof and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto hereby agree as follows:
1. INTRODUCTION. It is the intent and purpose of Company and Employee to
specify in this Agreement the terms and conditions of Employee's employment with
Company.
2. EMPLOYMENT. Company hereby employs Employee and Employee hereby accepts
employment with Company on the terms and conditions herein set forth. In
consideration of Employee's employment by Company, Employee agrees to the terms,
conditions and covenants of this Agreement.
3. TERM OF EMPLOYMENT. This Agreement shall be effective as of December
20, 1998 and shall continue through the third anniversary of such date.
4. DUTIES AND RESPONSIBILITIES. Employee is hereby employed as, and shall
serve in the capacity of, Senior Vice President and Chief Financial Officer of
Company. Employee shall have the duties and responsibilities normally performed
by an executive officer in such position, and shall perform services
commensurate with such position for Company as may be determined from time to
time by the Board of Directors of Company. Employee shall report to the
President/Chief Executive Officer of Company and shall perform services
hereunder as directed by the President/Chief Executive Officer of Company.
During the term of this Agreement Employee's primary business interest shall be
the Company, and Employee shall devote such of his time, attention, skills and
energies as may be necessary to discharge his duties and responsibilities
hereunder. Employee shall, in the performance of services hereunder, use his
best efforts to serve and advance the interest of Company well and faithfully.
5. COMPENSATION AND BENEFITS. The compensation and other benefits payable
to or accruing to Employee under this Agreement shall constitute the full
consideration to be paid to Employee for all services to be rendered by Employee
to Company and all other agreements of Employee hereunder.
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5.01 SALARY. As compensation for all services of whatever type
rendered by Employee in the performance of these duties under this Agreement and
for all other agreements and undertakings of Employee hereunder, Company shall
pay to Employee a minimum annual salary as set forth in this Section 5.01.
Employee's annual salary ("Base Salary") shall initially be One Hundred Forty
Thousand Dollars ($140,000.00). Such Base Salary shall be payable in equal
regular installments in accordance with Company's customary payroll payment
policy.
Employee's Base Salary will be reviewed annually by the Compensation
Committee of the Board of Directors of the Company for adjustment based on
performance in accordance with Company's normal compensation policies and
practices. Employee's Base Salary shall never be decreased below its then
current level. It is specifically understood and agreed that a portion of
Employee's Base Salary hereunder is attributable to Employee's agreement,
pursuant to Section 10 hereof, to maintain the confidentiality of "Confidential
Information" (as herein defined), both during and after the term of this
Agreement, and that Employee's Base Salary would be reduced significantly if
Employee did not agree to be bound by the terms of Section 10. It is further
understood and agreed that a portion of Employee's annual salary is attributable
to Employee's agreement, pursuant to Section 11 hereof, not to compete with
Company either during or for a specified period of time after the expiration or
termination of this Agreement and that Employee's Base Salary would be reduced
significantly if Employee did not agree to be bound by the terms of Section 11
hereof. Employee agrees that he is being fairly and reasonable compensated for
the agreements undertaken by Employee pursuant to Sections 10 and 11 hereof.
5.02 BONUS. In addition to the Base Salary set forth above, Employee shall
be eligible for a targeted annual bonus of 50% of Employee's Base Salary, the
amount of such annual bonus to be determined by the Compensation Committee of
the Board of Directors. Such annual bonus will be paid not later than one
hundred twenty (120) days after the end of the Company's fiscal year.
5.03 BENEFITS. Employee shall be entitled to a paid vacation each year of
not less than four (4) weeks, the times for such vacation to be mutually agreed
upon by Employee and Company. As an executive officer of Company, Employee shall
be entitled to participate in the Company benefit programs designed for Company
employees with similar salaries, duties and/or responsibilities.
5.04 EXPENSES. Company shall pay or reimburse Employee for all reasonable
and necessary expenses actually incurred or paid by Employee during the term of
this Agreement in the performance of Employee's services under this Agreement,
upon presentation of expense statements or vouchers or such other supporting
documents as Company may reasonably require.
5.05 STOCK OPTIONS. Upon the Effective Date, Company shall award to
Employee stock options to purchase (i) up to 25,000 shares of common stock of
the Company under the 1998 Employee Stock Option Plan and (ii) up to 75,000
shares of common stock of the Company under
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<PAGE>
the 1998 Executive Non-Statutory Plan. The terms and conditions of the foregoing
stock options and awards shall be governed exclusively by the applicable plan
and related stock option agreements. Acceptance by Employee of the form and
terms (including but not limited to option price and exercise and vesting
rights) of agreements to be executed with respect to the award of stock options
specified above is a condition precedent to effectiveness of this Agreement.
6. INSURANCE. Company may, in its sole and absolute discretion, at any
time after the Effective Date, apply for and procure, as owner and for its own
benefit, insurance on the life of Employee, in such amounts and in such forms as
Company may choose. Employee shall have no interest whatsoever in any insurance
policy or policies obtained by Company, but Employee shall, at Company's
request, submit to such medical examinations, supply such information and
execute and deliver such documents as may be required or reasonably requested by
Company or the insurance company or companies to which Company has applied for
such insurance.
7. REPRESENTATIONS, WARRANTIES AND AGREEMENTS. Employee represents,
warrants and agrees that: (i) Employee is not currently bound by any employment
agreement, restriction or other obligation of any kind which would in any way
materially interfere with or be inconsistent with the services to be provided by
Employee to Company hereunder, (ii) Employee will not, during the term of this
Agreement, become engaged as an employee, consultant, independent contractor or
representative or in any other capacity or otherwise perform services of any
kind for any person or entity or assume any such obligations or restrictions, in
whatever capacity, which would in any way materially interfere with or be
inconsistent with the services to be provided by Employee to Company hereunder;
and, (iii) Employee is free to enter into this Agreement and the services and
work product provided by Employee to Company hereunder will be original works of
Employee and no portion of such services or work product, or the use or
distribution thereof by Company, violates or will violate, or is or will be
protected by, the right, title or interest of any patent, copyright, license or
other similar property or proprietary right of any third person or entity. The
representations contained in this Section shall survive the expiration or
termination of this Agreement.
8. REGULATIONS AND POLICIES. Employee shall, during the term of
this Agreement, comply with all Company regulations and policies, including,
without limitation, security regulations.
9. CONFIDENTIAL INFORMATION. The term "Confidential Information", as used
herein, shall mean and include any and all documents, knowledge, data or
information (in whatever medium) know, communicated, provided or made available
to Employee, whether before or after the execution of this Agreement, which are
marked with a confidentiality legend by Company or which Employee knows or
reasonably should know constitute trade secrets of Company or information
belonging to third parties to whom Company may have an obligation of
confidentiality or which embody, comprise, relate to, are incorporated in or
constitute
3
<PAGE>
"Intellectual Property" (as herein defined) in any stage of development;
including, in each case, all trade secrets and other proprietary ideas,
concepts, know-how, methodologies and information incorporated therein;
PROVIDED, HOWEVER, that Confidential Information shall not include any
information or materials which are or become generally available to the public
other than as a result of any breach of the provisions of this Agreement or any
other agreement between Employee and Company (or their respective successors,
assigns or affiliates). The term "Intellectual Property", as used herein, shall
include any and all information or materials, in any medium, of a technical or a
business nature relating to the actual or reasonably anticipated business of
Company, such as ideas, discoveries, designs, inventions, improvements, trade
secrets, know-how, manufacturing processes, product formulae, design
specifications, writings and other works of authorship, computer software,
financial figures, marketing plans, customer lists and data, business plans or
methods and any other material relating to the actual or reasonably anticipated
business of the Company. In connection with computer software, the term
"Intellectual Property" shall include, without limitation, the data bases, data
processing and communications networking systems, practices and procedures and
other internal systems, logic and controls, and the object code, source code,
source listings, programming systems, programming or systems documentation and
specifications, and user, operations or systems manuals or documentation related
thereto or incorporated therein, firmware, models, sketches, writings, flow
charts, diagrams, graphs or data related thereto, together with all
modifications, enhancements, improvements, accessions, amendments, supplements
or other additions to any of the foregoing.
10. CONFIDENTIALITY. Employee acknowledges and agrees that in his
employment by Company he occupies a position of trust and confidence and that
during the term of his employment under this Agreement he will have access to
and will become familiar with Company's Confidential Information. Employee
further acknowledges and agrees that the Confidential Information, including any
and all copies thereof, constitutes trade secrets of Company and is confidential
and proprietary information of Company. Employee further acknowledges and agrees
that he has no right, title, interest or claim in or to any of the Confidential
Information or any copies thereof. Employee agrees to maintain the
confidentiality of the Confidential Information and agrees that he will not
take, or permit to be taken, any action with respect to the Confidential
Information (or any portion thereof) which is inconsistent with the confidential
and proprietary nature of such information. Without limiting the generality of
the foregoing, Employee agrees that he will not, directly or indirectly, without
the prior specific written consent of Company, except as specifically required
in the course of his employment,
(i) communicate, divulge, transmit or otherwise disclose any
Confidential Information to any person, firm, partnership, corporation or other
entity, or
(ii) use any confidential Information in any manner except as
specifically required in connection with the performance of services hereunder,
or
4
<PAGE>
(iii) copy, reproduce or otherwise duplicate any Confidential
Information in any fashion, in whole or in part.
Employee agrees to take any and all steps reasonably necessary to protect the
confidentiality of the Confidential Information. Employee shall, upon
termination of this Agreement, immediately return to Company all Confidential
Information in Employee's control or possession, including, without limitation,
any and all copies thereof. This Section shall survive the expiration or
termination of this Agreement.
11. RESTRICTIVE COVENANT AND NONCOMPETITION.
11.01 NONCOMPETE. During the term of this Agreement, Employee shall
not, directly or indirectly, own, manage, operate, join, control or participate
in, or be connected with, directly or indirectly, as an officer, director,
stockholder, employee, advisor, consultant, partner, owner, agent,
representative or in any other capacity, any "Competitive Business"; PROVIDED,
HOWEVER, that the foregoing shall not prohibit Employee from becoming a
shareholder owning less than five percent (5%) of the shares of a corporation
whose shares are publicly traded. As used herein, the term "Competitive
Business" shall mean and include any person, firm, corporation or other entity
which offers services relating to the conversion or transferring of information
from paper or microform to computer accessible media or which engages in
document conversion, storage and/or retrieval services or which otherwise
competes in any fashion with any products or services offered by Company or
which it is reasonably anticipated will be offered by Company or which it is
reasonably anticipated will be offered by Company in the foreseeable future.
11.02 UPON TERMINATION. As an independent covenant, Employee agrees
that, for a period of one (1) year commencing upon the termination or expiration
of this Agreement for any reason, he will not, unless granted express written
permission by the Board of Directors of Company, directly or indirectly, own,
manage, operate, join, control or participate in, or be connected with, directly
or indirectly, as an officer, director, stockholder, employee, advisor,
consultant, partner, owner, agent, representative or in any other capacity, any
Competitive Business; PROVIDED, HOWEVER, that the foregoing shall not prohibit
Employee from becoming a shareholder owning less than five percent (5%) of the
shares of a corporation whose shares are publicly traded.
11.03 NO USURPATION. As an independent covenant, Employee agrees,
during the term of this Agreement and, upon termination or expiration of this
Agreement for any reason, for a period of one (1) year thereafter, unless
granted express written permission by the Board of Directors of Company, not to
divert, take, solicit and/or accept on his own behalf or on behalf of any other
person, firm, company or other entity, any business of any customer or client of
Company whose identity became known to Employee through his employment by or
involvement with Company which constitutes business relating to the actual or
reasonably anticipated business of Company.
5
<PAGE>
11.04 COMPANY EMPLOYEES. As an independent covenant, Employee
agrees, during the term of this Agreement and, upon termination or expiration of
this Agreement for any reason, for a period of one (1) year thereafter, not to
induce or attempt to influence any employee of Company to terminate his or her
employment with Company.
11.05 REASONABLENESS. Employee acknowledges and agrees that the
covenants and agreements set forth in this Section are made to protect the
legitimate business interests of Company, including Company's interest in
Confidential Information, and not to restrict his mobility or to prevent him
from utilizing his skills. Employee recognizes and acknowledges the necessarily
national and international scope of the market served by Company and agrees that
the restrictions set forth in this Section are reasonable.
11.06 SURVIVAL. This Section 11 shall survive the expiration or
termination of this Agreement.
12. OWNERSHIP OF DEVELOPMENTS AND WORK PRODUCTS.
12.01 DEVELOPMENT. Employee agrees that any and all Intellectual
Property and any and all other material relating to the actual or reasonably
anticipated business or services of Company, developed, prepared, conceived,
made, discovered or suggested by Employee, solely or jointly with others, during
the term of this Agreement, whether on or off the premises of Company
(collectively "Developments"), including all such Developments as are originated
or conceived during the term of this Agreement but which are completed or
reduced to practice thereafter, shall be deemed to be "works made for hire"
within the meaning of Title 17, U.S.C. 101, and shall be and remain the sole and
exclusive property of Company. To the extent that any such Developments may not,
by operation of law, be "works made for hire", Employee hereby assigns,
transfers and conveys to Company the ownership of all right, title and interest
in and to such Developments, including, without limitation, all copyrights,
patents and other proprietary and property rights applicable thereto, and
Company shall have the right to obtain and hold in its own name such copyrights,
patents or other proprietary protection which may be available or become
available in such Developments. Employee agrees that Company shall have the
right to keep such Developments as trade secrets, if Company chooses.
12.02 COOPERATION. Employee agrees, at any time during the term of
this Agreement and thereafter, to execute such documents and provide such
additional cooperation as Company may reasonably request or require in order to
perfect, evidence, protect or secure Company's right, title and interest in and
to any and all such Developments. Without limiting the generality of the
foregoing, either during or subsequent to Employee's employment, upon the
request and at the expense of Company, and for no remuneration in addition to
that due Employee hereunder pursuant to his employment by Company, Employee
agrees to execute, acknowledge and deliver to Company or its attorneys any and
all instruments which in the judgment of
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Company or its attorneys may be necessary or desirable to secure or maintain for
the benefit of Company adequate patent, copyright and/or other property or
proprietary rights protection in the United States and/or foreign countries with
respect to any Developments, including, but not limited to: (i) domestic and
foreign patents, trademarks, service marks and copyright applications, (ii) any
other applications for securing, protecting or registering any property or
proprietary right, and (iii) powers of attorney, assignments, oaths,
affirmations, supplemental oaths and sworn statements.
12.03 DISCLOSURE TO COMPANY. Employee shall, during the term of this
Agreement and for a period of one (1) year thereafter, disclose promptly in
writing to Company all Developments, whether copyrightable, patentable or not,
made, discovered, written, conceived, first reduced to practice or developed by
Employee, either alone or in conjunction with any other person or entity while
employed by Company.
12.04 SURVIVAL. This Section 12 shall survive the expiration or
termination of this Agreement.
13. PERFORMANCE BY EMPLOYEE. Employee acknowledges and agrees that the
value of the Confidential Information and the success and long-term viability of
Company depends largely upon Employee's performance of his obligation under
Sections 10, 11 and 12 of this Agreement.
14. INJUNCTIVE RELIEF. Employee acknowledges and agrees that in the event
of any unauthorized use or disclosure of Confidential Information in violation
of the terms and conditions of Section 10 of this Agreement by Employee, or any
breach of any of the terms and conditions of Sections 11 or 12 of this Agreement
by Employee, Company will suffer irreparable injury not compensable by money
damages and therefore will not have an adequate remedy available at law.
Accordingly, if Company institutes an action or proceeding to enforce the
provisions of Sections 10, 11 or 12 of this Agreement, Company shall be entitled
to obtain such injunctive relief or other equitable remedy from a court of
competent jurisdiction as may be necessary or appropriate to prevent or curtail
any such breach, threatened or actual. The foregoing shall be in addition to and
without prejudice to such other rights as Company may have at law or in equity.
15. TERMINATION.
15.01 TERMINATION. Employee's employment hereunder is terminable,
with or without cause, at the will of either Company or Employee upon the giving
of 30 days' prior written notice by either party. If Employee's termination is
voluntary or "for cause," Company shall discontinue Employee's compensation as
of the effective date of the termination of Employee's employment. If Employee's
termination is involuntary and/or without cause or good reason, including,
without limitation, termination resulting from the death or mental or physical
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disability of Employee, Employee's compensation hereunder shall continue to be
paid for a period of twelve (12) months from the effective date of termination
of employment. For purposes of this Agreement, "for cause" shall mean:
(a) Any willful or intentional act of Employee which has or will have
the effect of injuring the reputation or business relationships of
Company or its affiliates;
(b) Employee's conviction of or entering a plea of nolo contendere to a
charge of felony or a misdemeanor involving dishonesty or fraud;
(c) Employee's material breach of any of the terms, covenants or
conditions contained in this Agreement; PROVIDED, HOWEVER, that with
respect to any breach which can be effectively cured by some act of
Employee, such termination of this Agreement shall be revoked if,
within fourteen (14) days after receipt of notice of such breach
from Company, Employee cures such breach to the reasonable
satisfaction of Company or, if such cure cannot reasonably be
accomplished within such fourteen (14) day period, if Employee
initiates efforts to cure such breach within such fourteen (14) day
period and diligently pursues such cure efforts thereafter until
such cure is accomplished; or
(d) Employee's repeated or continuous failure, neglect or refusal to
perform his duties under this Agreement.
For purposes of this Agreement, "good reason" shall mean:
(a) The assignment to Employee of a job position or title that is junior
or inferior to that of Senior Vice President and Chief Financial
Officer;
(b) The assignment to Employee of duties that are materially different
from the duties of Senior Vice President and Chief Financial
Officer;
(c) Any reduction in Employee's Base Salary or bonus opportunity (such
bonus opportunity as defined in paragraph 5.02 above);
(d) Any breach by Company of any stock option agreement to which
employee is a party;
(e) The Company's material breach of its obligations under this
Agreement or any other plan or agreement relating to Employee's
employment or compensation;
(f) Any request or directive by the Company or its Board of Directors
calling for Employee to commit, implement or participate in actions
that are dishonest,
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unlawful or a material violation of Company policy;
(g) Any change in control (defined below); or
(h) Any failure by Company to obtain the assumption of this Agreement by
an assignee or successor, as required in Section 18.02 below.
For purposes of this Agreement, "change in control" shall mean:
A transaction or series of transactions (including any cash tender or securities
exchange offer, merger, sale of asset, or other business combinations or
contested election of directors, or any combination thereof) as the result of
which (a) any person (other than the Company, a subsidiary of the Company, an
employee benefit plan of the Company or of a subsidiary of the Company) together
with all affiliates and associates of such persons (within the meaning of Rule
12b-2 of the General Rules and Regulations under the Securities Exchange Act of
1934, as amended), shall become the Beneficial Owner of 40% or more of the
aggregate combined Voting Power of all Voting Securities of the Company then
outstanding, or (b) during any period of two consecutive calendar years there is
a change of 50% or more in the composition of the Board of Directors of the
Company in office at the beginning of such two-year period except for changes
approved by at least two-thirds of the directors then in office who were
directors at the beginning of the period. For purposes of this Agreement, a
Change of Control shall be deemed to have occurred on the date upon which either
of the foregoing results is consummated or becomes effective. For purposes of
this Agreement, "Voting Power" means with respect to any Voting Security the
maximum number of votes that such security is or would be entitled to cast
generally for the election of directors, and in the case of a convertible,
exercisable, or exchangeable Voting Security, considering such security both on
an unconverted, unexercised, or unexchanged basis, as the case may be. "Voting
Securities" means to the common stock and any other securities of the Company
entitled to vote generally for the election of directors, any security
convertible into or exchangeable for or exercisable for the purchase of common
stock of the Company (other than employee stock options or other employee stock
purchase rights), and other securities of the Company entitled to vote generally
for the election of directors.
Until the effective date of termination, Employee, if requested to do so by
Company, shall continue to render services to Company.
15.02 EXCESS PARACHUTE PAYMENTS. Notwithstanding the foregoing
provisions of this Section 15, if Employee will be considered (as determined in
the sole opinion of a national accounting firm employed by Employee) as
receiving payments, any part of which constitutes excess parachute payments,
such payments shall be reduced by or, if already paid, refunded to Company in
the minimum amount (such minimum amount shall be determined by the national
accounting firm employed by Employee, who shall interpret and apply all
applicable law and regulations in the way which results in the most favorable
results for Employee and who shall
9
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so instruct Company of its determination) required to result in there being no
excess parachute payments; PROVIDED, HOWEVER, (i) the payments to be made to
Employee pursuant to this Section 15 shall be reduced first and in the manner
requested by Employee, and (ii) if the compensation to be paid to Employee after
the termination of his employment is reduced to $0.00 as a result of the
operation of this subparagraph, no further reduction of any kind in any other
payments to Employee shall be made, notwithstanding that any part of such
remaining payments may constitute excess parachute payments. As used herein, the
terms excess parachute payment and parachute payment shall have the same
definition as such terms are given in Section 280G of the Internal Revenue Code
of 1986, as amended and as may be amended after the date hereof ("IRC"), or as
defined in any section of the IRC hereafter enacted to succeed Section 280G.
15.03 NO DUTY TO MITIGATE. Employee shall not be required to
mitigate the amount of any post employment payment or benefit paid or provided
to Employee under this Agreement by seeking other employment or otherwise, nor
shall the amount of any such payment or benefit paid or provided to Employee
under this Agreement be reduced or offset by any compensation earned by Employee
as the result of employment by another employer or otherwise.
16. EFFECT OF TERMINATION. Upon the termination or expiration of this
Agreement: (i) Employee shall immediately return to Company and all Confidential
Information in his possession or control (including, without limitation, all
copies thereof and all materials incorporating such Confidential Information),
(ii) Employee shall have no further obligation to perform services for Company
hereunder, PROVIDED, HOWEVER, that Employee shall continue to be bound by the
terms of Sections 10, 11 and 12 hereof, and (iii) except to the extent
specifically provided in Section 15 above, Company shall have no further
obligation to compensate or provide benefits to Employee hereunder.
17. BUSINESS KNOWLEDGE AND EXPERIENCE. Notwithstanding anything to the
contrary contained in this Agreement, it is specifically understood and agreed
that Employee has, prior to entering into this Agreement, developed significant
business expertise, ideas and experience (collectively "Business Experience")
and that such Business Experience, to the extent it applies to business
operations generally and not to the specific operations, technologies or trade
secrets of Company, shall not be deemed to constitute Confidential Information,
and nothing contained in Section 10 of this Agreement shall be deemed to prevent
Employee from using such general Business Experience in such a manner as does
not violate any of the other terms and conditions of this Agreement.
18. GENERAL.
18.01 SURVIVAL OF REPRESENTATIONS, WARRANTIES AND Covenants. All
representations, warranties and covenants contained herein shall survive the
execution of this Agreement and the consummation of the transactions
contemplated hereby.
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18.02 SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon
and inure to the benefit of the parties hereto and their respective heirs,
successors, assigns and legal representatives, but shall not be assignable by
Employee. Any purported assignment in violation of the foregoing shall be
invalid and of no force and effect. No assignment of this Agreement shall
relieve the assigning party of any obligation or liability hereunder.
In the event the Company wishes to assign this Agreement, it must require the
assignee expressly to assume this Agreement and agree to perform under it in the
same manner and to the same extent that the Company would be required to perform
if no such succession had taken place. Such assumption, however, shall not
constitute a release or novation with respect to the Company's obligations
hereunder.
18.03 NOTICES. Any notice, demand, payment, request, response or
other communication provided for herein or given hereunder to a party hereto
shall be in writing and shall be deemed to have been duly given if signed by the
party giving it. Notice shall be deemed effective upon delivery by hand, or on
the third business day after it is deposited in the United States mail, postage
prepaid (registered or certified mail) or on the business day after it is sent
by federal express or similar overnight service to the address of the parties
listed below:
if to Company: 565 East Swedesford Road, Suite 209
Wayne, PA 19087
if to Employee: Warren D. Barratt
1419 Evie Lane
Westtown, PA 19382
or to such other address as the party to receive such communication has last
designated by notice delivered to the other party in accordance with the
foregoing provisions.
18.04 WAIVER. Failure or delay in insisting upon strict compliance
with any provision hereof shall not be deemed a waiver of such provision or any
other provision hereof with respect to prior, such provision or any other
provision hereof with respect to prior, contemporaneous or subsequent
occurrences. No waiver by either party of any right hereunder or of any default
shall be binding upon such party unless such waiver is in writing and signed by
Employee (in the case of Employee) or a duly authorized officer or partner of
Company in the case of Company.
18.05 GOVERNING LAW; VENUE. This Agreement shall be governed by and
construed in accordance with the laws of the state in which the corporate
headquarters is located as of the date when the course of action arose or the
events in question occurred.
18.06 ENTIRE AGREEMENT. Any and all previous employment agreements,
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whether written or oral, existing between Company and Employee shall be deemed
to be revoked and cancelled for all purposes on the Effective Date. This
Agreement, as may be amended from time to time, shall represent the sole and
entire agreement between Employee and Company respecting the employment
relationship between Company and Employee. There are no representations,
agreements, arrangements or understandings, oral or written, between or among
the parties hereto relating to the employment relationship between Company and
Employee which are not fully expressed in this Agreement.
18.07 SEVERABILITY. The provisions of this Agreement are severable
and the invalidity or unenforceability of any provision hereof shall not affect
the validity or enforceability of any other provision. In addition, in the event
that any provision of this Agreement (or portion thereof) is determined by a
court to be unenforceable as drafted by virtue of the scope, duration, extent or
character of any obligation contained therein, the parties acknowledge that it
is their intention that such provision (or portion thereof) shall be construed
in a manner designed to effectuate the purposes of such provision to the maximum
extent enforceable under applicable law.
18.08 ATTORNEY'S FEES. If any legal action or other proceeding is
brought for the enforcement of this Agreement, or because of an alleged dispute,
breach, default or misrepresentation in connection with any of the provisions of
this Agreement, the prevailing party shall be entitled to recover reasonable
attorneys' fees and other costs incurred in that action or proceeding, in
addition to any other relief to which it may be entitled.
18.09 REMEDIES CUMULATIVE. All remedies provided for in this
Agreement shall be cumulative and in addition to and not in lieu of any other
remedies available to either party under this or any other agreement between the
parties or at law, in equity or otherwise.
18.10 LANGUAGE. The language used in this Agreement shall be deemed
to be language chosen by the parties hereto to express their mutual intent, and
no rule of strict construction against any party shall apply to any term or
condition of this Agreement.
18.11 AMENDMENT. This Agreement may not be modified or amended
except by written agreement executed by all of the parties to this Agreement at
the time of such amendment.
18.12 HEADINGS. The descriptive headings of the sections, paragraphs
and subparagraphs hereof are inserted for convenience only and do not constitute
a part of this Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day
and year first above written.
DOCUCON, INCORPORATED ("Company")
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_______________________________ By: /s/ DOUGLAS P. GILL
Warren D. Barratt ("Employee") Its: PRESIDENT AND CHIEF EXECUTIVE OFFICER
13
EXHIBIT 10.17
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered as of the 4th
day of January, 1999 by and between Docucon, Incorporated, a corporation
organized and existing under the laws of the State of Delaware ("Company"), and
Paul M. Nunley, an individual residing in Glenmore, Pennsylvania ("Employee").
FOR AND IN CONSIDERATION of the mutual covenants herein contained and the
mutual benefits to be gained by the performance thereof and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto hereby agree as follows:
1. INTRODUCTION. It is the intent and purpose of Company and Employee to
specify in this Agreement the terms and conditions of Employee's employment with
Company.
2. EMPLOYMENT. Company hereby employs Employee and Employee hereby accepts
employment with Company on the terms and conditions herein set forth. In
consideration of Employee's employment by Company, Employee agrees to the terms,
conditions and covenants of this Agreement.
3. TERM OF EMPLOYMENT. This Agreement shall be effective as of January 4,
1999 and shall continue through the third anniversary of such date.
4. DUTIES AND RESPONSIBILITIES. Employee is hereby employed as, and shall
serve in the capacity of, Vice President, Operations and Technology of Company.
Employee shall have the duties and responsibilities normally performed by an
executive officer in such position, and shall perform services commensurate with
such position for Company as may be determined from time to time by the Board of
Directors of Company. Employee shall report to the President/Chief Executive
Officer of Company and shall perform services hereunder as directed by the
President/Chief Executive Officer of Company. During the term of this Agreement
Employee's primary business interest shall be the Company, and Employee shall
devote such of his time, attention, skills and energies as may be necessary to
discharge his duties and responsibilities hereunder. Employee shall, in the
performance of services hereunder, use his best efforts to serve and advance the
interest of Company well and faithfully.
5. COMPENSATION AND BENEFITS. The compensation and other benefits payable
to or accruing to Employee under this Agreement shall constitute the full
consideration to be paid to Employee for all services to be rendered by Employee
to Company and all other agreements of Employee hereunder.
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5.01 SALARY. As compensation for all services of whatever type
rendered by Employee in the performance of these duties under this Agreement and
for all other agreements and undertakings of Employee hereunder, Company shall
pay to Employee a minimum annual salary as set forth in this Section 5.01.
Employee's annual salary ("Base Salary") shall initially be One Hundred Thirty
Thousand Dollars ($130,000.00). Such Base Salary shall be payable in equal
regular installments in accordance with Company's customary payroll payment
policy.
Employee's Base Salary will be reviewed annually by the Compensation
Committee of the Board of Directors of the Company for adjustment based on
performance in accordance with Company's normal compensation policies and
practices. Employee's Base Salary shall never be decreased below its then
current level. It is specifically understood and agreed that a portion of
Employee's Base Salary hereunder is attributable to Employee's agreement,
pursuant to Section 10 hereof, to maintain the confidentiality of "Confidential
Information" (as herein defined), both during and after the term of this
Agreement, and that Employee's Base Salary would be reduced significantly if
Employee did not agree to be bound by the terms of Section 10. It is further
understood and agreed that a portion of Employee's annual salary is attributable
to Employee's agreement, pursuant to Section 11 hereof, not to compete with
Company either during or for a specified period of time after the expiration or
termination of this Agreement and that Employee's Base Salary would be reduced
significantly if Employee did not agree to be bound by the terms of Section 11
hereof. Employee agrees that he is being fairly and reasonable compensated for
the agreements undertaken by Employee pursuant to Sections 10 and 11 hereof.
5.02 BONUS. In addition to the Base Salary set forth above, Employee shall
be eligible for a targeted annual bonus of 50% of Employee's Base Salary, the
amount of such annual bonus to be determined by the Compensation Committee of
the Board of Directors. Such annual bonus will be paid not later than one
hundred twenty (120) days after the end of the Company's fiscal year.
5.03 BENEFITS. Employee shall be entitled to a paid vacation each year of
not less than four (4) weeks, the times for such vacation to be mutually agreed
upon by Employee and Company. As an executive officer of Company, Employee shall
be entitled to participate in the Company benefit programs designed for Company
employees with similar salaries, duties and/or responsibilities.
5.04 EXPENSES. Company shall pay or reimburse Employee for all reasonable
and necessary expenses actually incurred or paid by Employee during the term of
this Agreement in the performance of Employee's services under this Agreement,
upon presentation of expense statements or vouchers or such other supporting
documents as Company may reasonably require.
5.05 STOCK OPTIONS. On January 11, 1999, Company shall award to Employee
stock options to purchase (i) up to 25,000 shares of common stock of the Company
under the 1998 Employee Stock Option Plan and (ii) up to 75,000 shares of common
stock of the Company under
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the 1998 Executive Non-Statutory Plan. The terms and
conditions of the foregoing stock options and awards shall be governed
exclusively by the applicable plan and related stock option agreements.
Acceptance by Employee of the form and terms (including but not limited to
option price and exercise and vesting rights) of agreements to be executed with
respect to the award of stock options specified above is a condition precedent
to effectiveness of this Agreement.
6. INSURANCE. Company may, in its sole and absolute discretion, at any
time after the Effective Date, apply for and procure, as owner and for its own
benefit, insurance on the life of Employee, in such amounts and in such forms as
Company may choose. Employee shall have no interest whatsoever in any insurance
policy or policies obtained by Company, but Employee shall, at Company's
request, submit to such medical examinations, supply such information and
execute and deliver such documents as may be required or reasonably requested by
Company or the insurance company or companies to which Company has applied for
such insurance.
7. REPRESENTATIONS, WARRANTIES AND AGREEMENTS. Employee represents,
warrants and agrees that: (i) Employee is not currently bound by any employment
agreement, restriction or other obligation of any kind which would in any way
materially interfere with or be inconsistent with the services to be provided by
Employee to Company hereunder, (ii) Employee will not, during the term of this
Agreement, become engaged as an employee, consultant, independent contractor or
representative or in any other capacity or otherwise perform services of any
kind for any person or entity or assume any such obligations or restrictions, in
whatever capacity, which would in any way materially interfere with or be
inconsistent with the services to be provided by Employee to Company hereunder;
and, (iii) Employee is free to enter into this Agreement and the services and
work product provided by Employee to Company hereunder will be original works of
Employee and no portion of such services or work product, or the use or
distribution thereof by Company, violates or will violate, or is or will be
protected by, the right, title or interest of any patent, copyright, license or
other similar property or proprietary right of any third person or entity. The
representations contained in this Section shall survive the expiration or
termination of this Agreement.
8. REGULATIONS AND POLICIES. Employee shall, during the term of
this Agreement, comply with all Company regulations and policies, including,
without limitation, security regulations.
9. CONFIDENTIAL INFORMATION. The term "Confidential Information", as used
herein, shall mean and include any and all documents, knowledge, data or
information (in whatever medium) know, communicated, provided or made available
to Employee, whether before or after the execution of this Agreement, which are
marked with a confidentiality legend by Company or which Employee knows or
reasonably should know constitute trade secrets of Company or information
belonging to third parties to whom Company may have an obligation of
confidentiality or which embody, comprise, relate to, are incorporated in or
constitute
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"Intellectual Property" (as herein defined) in any stage of development;
including, in each case, all trade secrets and other proprietary ideas,
concepts, know-how, methodologies and information incorporated therein;
PROVIDED, HOWEVER, that Confidential Information shall not include any
information or materials which are or become generally available to the public
other than as a result of any breach of the provisions of this Agreement or any
other agreement between Employee and Company (or their respective successors,
assigns or affiliates). The term "Intellectual Property", as used herein, shall
include any and all information or materials, in any medium, of a technical or a
business nature relating to the actual or reasonably anticipated business of
Company, such as ideas, discoveries, designs, inventions, improvements, trade
secrets, know-how, manufacturing processes, product formulae, design
specifications, writings and other works of authorship, computer software,
financial figures, marketing plans, customer lists and data, business plans or
methods and any other material relating to the actual or reasonably anticipated
business of the Company. In connection with computer software, the term
"Intellectual Property" shall include, without limitation, the data bases, data
processing and communications networking systems, practices and procedures and
other internal systems, logic and controls, and the object code, source code,
source listings, programming systems, programming or systems documentation and
specifications, and user, operations or systems manuals or documentation related
thereto or incorporated therein, firmware, models, sketches, writings, flow
charts, diagrams, graphs or data related thereto, together with all
modifications, enhancements, improvements, accessions, amendments, supplements
or other additions to any of the foregoing.
10. CONFIDENTIALITY. Employee acknowledges and agrees that in his
employment by Company he occupies a position of trust and confidence and that
during the term of his employment under this Agreement he will have access to
and will become familiar with Company's Confidential Information. Employee
further acknowledges and agrees that the Confidential Information, including any
and all copies thereof, constitutes trade secrets of Company and is confidential
and proprietary information of Company. Employee further acknowledges and agrees
that he has no right, title, interest or claim in or to any of the Confidential
Information or any copies thereof. Employee agrees to maintain the
confidentiality of the Confidential Information and agrees that he will not
take, or permit to be taken, any action with respect to the Confidential
Information (or any portion thereof) which is inconsistent with the confidential
and proprietary nature of such information. Without limiting the generality of
the foregoing, Employee agrees that he will not, directly or indirectly, without
the prior specific written consent of Company, except as specifically required
in the course of his employment,
(i) communicate, divulge, transmit or otherwise disclose any
Confidential Information to any person, firm, partnership, corporation or other
entity, or
(ii) use any confidential Information in any manner except as
specifically required in connection with the performance of services hereunder,
or
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(iii) copy, reproduce or otherwise duplicate any Confidential
Information in any fashion, in whole or in part.
Employee agrees to take any and all steps reasonably necessary to protect the
confidentiality of the Confidential Information. Employee shall, upon
termination of this Agreement, immediately return to Company all Confidential
Information in Employee's control or possession, including, without limitation,
any and all copies thereof. This Section shall survive the expiration or
termination of this Agreement.
11. RESTRICTIVE COVENANT AND NONCOMPETITION.
11.01 NONCOMPETE. During the term of this Agreement, Employee shall
not, directly or indirectly, own, manage, operate, join, control or participate
in, or be connected with, directly or indirectly, as an officer, director,
stockholder, employee, advisor, consultant, partner, owner, agent,
representative or in any other capacity, any "Competitive Business"; PROVIDED,
HOWEVER, that the foregoing shall not prohibit Employee from becoming a
shareholder owning less than five percent (5%) of the shares of a corporation
whose shares are publicly traded. As used herein, the term "Competitive
Business" shall mean and include any person, firm, corporation or other entity
which offers services relating to the conversion or transferring of information
from paper or microform to computer accessible media or which engages in
document conversion, storage and/or retrieval services or which otherwise
competes in any fashion with any products or services offered by Company or
which it is reasonably anticipated will be offered by Company or which it is
reasonably anticipated will be offered by Company in the foreseeable future.
11.02 UPON TERMINATION. As an independent covenant, Employee agrees
that, for a period of one (1) year commencing upon the termination or expiration
of this Agreement for any reason, he will not, unless granted express written
permission by the Board of Directors of Company, directly or indirectly, own,
manage, operate, join, control or participate in, or be connected with, directly
or indirectly, as an officer, director, stockholder, employee, advisor,
consultant, partner, owner, agent, representative or in any other capacity, any
Competitive Business; PROVIDED, HOWEVER, that the foregoing shall not prohibit
Employee from becoming a shareholder owning less than five percent (5%) of the
shares of a corporation whose shares are publicly traded.
11.03 NO USURPATION. As an independent covenant, Employee agrees,
during the term of this Agreement and, upon termination or expiration of this
Agreement for any reason, for a period of one (1) year thereafter, unless
granted express written permission by the Board of Directors of Company, not to
divert, take, solicit and/or accept on his own behalf or on behalf of any other
person, firm, company or other entity, any business of any customer or client of
Company whose identity became known to Employee through his employment by or
involvement with Company which constitutes business relating to the actual or
reasonably anticipated business of Company.
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11.04 COMPANY EMPLOYEES. As an independent covenant, Employee
agrees, during the term of this Agreement and, upon termination or expiration of
this Agreement for any reason, for a period of one (1) year thereafter, not to
induce or attempt to influence any employee of Company to terminate his or her
employment with Company.
11.05 REASONABLENESS. Employee acknowledges and agrees that the
covenants and agreements set forth in this Section are made to protect the
legitimate business interests of Company, including Company's interest in
Confidential Information, and not to restrict his mobility or to prevent him
from utilizing his skills. Employee recognizes and acknowledges the necessarily
national and international scope of the market served by Company and agrees that
the restrictions set forth in this Section are reasonable.
11.06 SURVIVAL. This Section 11 shall survive the expiration or
termination of this Agreement.
12. OWNERSHIP OF DEVELOPMENTS AND WORK PRODUCTS.
12.01 DEVELOPMENT. Employee agrees that any and all Intellectual
Property and any and all other material relating to the actual or reasonably
anticipated business or services of Company, developed, prepared, conceived,
made, discovered or suggested by Employee, solely or jointly with others, during
the term of this Agreement, whether on or off the premises of Company
(collectively "Developments"), including all such Developments as are originated
or conceived during the term of this Agreement but which are completed or
reduced to practice thereafter, shall be deemed to be "works made for hire"
within the meaning of Title 17, U.S.C. 101, and shall be and remain the sole and
exclusive property of Company. To the extent that any such Developments may not,
by operation of law, be "works made for hire", Employee hereby assigns,
transfers and conveys to Company the ownership of all right, title and interest
in and to such Developments, including, without limitation, all copyrights,
patents and other proprietary and property rights applicable thereto, and
Company shall have the right to obtain and hold in its own name such copyrights,
patents or other proprietary protection which may be available or become
available in such Developments. Employee agrees that Company shall have the
right to keep such Developments as trade secrets, if Company chooses.
12.02 COOPERATION. Employee agrees, at any time during the term of
this Agreement and thereafter, to execute such documents and provide such
additional cooperation as Company may reasonably request or require in order to
perfect, evidence, protect or secure Company's right, title and interest in and
to any and all such Developments. Without limiting the generality of the
foregoing, either during or subsequent to Employee's employment, upon the
request and at the expense of Company, and for no remuneration in addition to
that due Employee hereunder pursuant to his employment by Company, Employee
agrees to execute, acknowledge and deliver to Company or its attorneys any and
all instruments which in the judgment of
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Company or its attorneys may be necessary or desirable to secure or maintain for
the benefit of Company adequate patent, copyright and/or other property or
proprietary rights protection in the United States and/or foreign countries with
respect to any Developments, including, but not limited to: (i) domestic and
foreign patents, trademarks, service marks and copyright applications, (ii) any
other applications for securing, protecting or registering any property or
proprietary right, and (iii) powers of attorney, assignments, oaths,
affirmations, supplemental oaths and sworn statements.
12.03 DISCLOSURE TO COMPANY. Employee shall, during the term of this
Agreement and for a period of one (1) year thereafter, disclose promptly in
writing to Company all Developments, whether copyrightable, patentable or not,
made, discovered, written, conceived, first reduced to practice or developed by
Employee, either alone or in conjunction with any other person or entity while
employed by Company.
12.04 SURVIVAL. This Section 12 shall survive the expiration or
termination of this Agreement.
13. PERFORMANCE BY EMPLOYEE. Employee acknowledges and agrees that the
value of the Confidential Information and the success and long-term viability of
Company depends largely upon Employee's performance of his obligation under
Sections 10, 11 and 12 of this Agreement.
14. INJUNCTIVE RELIEF. Employee acknowledges and agrees that in the event
of any unauthorized use or disclosure of Confidential Information in violation
of the terms and conditions of Section 10 of this Agreement by Employee, or any
breach of any of the terms and conditions of Sections 11 or 12 of this Agreement
by Employee, Company will suffer irreparable injury not compensable by money
damages and therefore will not have an adequate remedy available at law.
Accordingly, if Company institutes an action or proceeding to enforce the
provisions of Sections 10, 11 or 12 of this Agreement, Company shall be entitled
to obtain such injunctive relief or other equitable remedy from a court of
competent jurisdiction as may be necessary or appropriate to prevent or curtail
any such breach, threatened or actual. The foregoing shall be in addition to and
without prejudice to such other rights as Company may have at law or in equity.
15. TERMINATION.
15.01 TERMINATION. Employee's employment hereunder is terminable,
with or without cause, at the will of either Company or Employee upon the giving
of 30 days' prior written notice by either party. If Employee's termination is
voluntary or "for cause," Company shall discontinue Employee's compensation as
of the effective date of the termination of Employee's employment. If Employee's
termination is involuntary and/or without cause or good reason, including,
without limitation, termination resulting from the death or mental or physical
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disability of Employee, Employee's compensation hereunder shall continue to be
paid for a period of twelve (12) months from the effective date of termination
of employment. For purposes of this Agreement, "for cause" shall mean:
(a) Any willful or intentional act of Employee which has or will have
the effect of injuring the reputation or business relationships of
Company or its affiliates;
(b) Employee's conviction of or entering a plea of nolo contendere to a
charge of felony or a misdemeanor involving dishonesty or fraud;
(c) Employee's material breach of any of the terms, covenants or
conditions contained in this Agreement; PROVIDED, HOWEVER, that
with respect to any breach which can be effectively cured by some
act of Employee, such termination of this Agreement shall be revoked
if, within fourteen (14) days after receipt of notice of such breach
from Company, Employee cures such breach to the reasonable
satisfaction of Company or, if such cure cannot reasonably be
accomplished within such fourteen (14) day period, if Employee
initiates efforts to cure such breach within such fourteen (14) day
period and diligently pursues such cure efforts thereafter until
such cure is accomplished; or
(d) Employee's repeated or continuous failure, neglect or refusal to
perform his duties under this Agreement.
For purposes of this Agreement, "good reason" shall mean:
(a) The assignment to Employee of a job position or title that is junior
or inferior to that of Vice President Operations and Technology;
(b) The assignment to Employee of duties that are materially different
from the duties of Vice President Operations and Technology;
(c) Any reduction in Employee's Base Salary or bonus opportunity (such
bonus opportunity as defined in paragraph 5.02 above);
(d) Any breach by Company of any stock option agreement to which
employee is a party;
(e) The Company's material breach of its obligations under this
Agreement or any other plan or agreement relating to Employee's
employment or compensation;
(f) Any request or directive by the Company or its Board of Directors
calling for Employee to commit, implement or participate in actions
that are dishonest,
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unlawful or a material violation of Company policy;
(g) Any change in control (defined below); or
(h) Any failure by Company to obtain the assumption of this Agreement by
an assignee or successor, as required in Section 18.02 below.
For purposes of this Agreement, "change in control" shall mean:
A transaction or series of transactions (including any cash tender or securities
exchange offer, merger, sale of asset, or other business combinations or
contested election of directors, or any combination thereof) as the result of
which (a) any person (other than the Company, a subsidiary of the Company, an
employee benefit plan of the Company or of a subsidiary of the Company) together
with all affiliates and associates of such persons (within the meaning of Rule
12b-2 of the General Rules and Regulations under the Securities Exchange Act of
1934, as amended), shall become the Beneficial Owner of 40% or more of the
aggregate combined Voting Power of all Voting Securities of the Company then
outstanding, or (b) during any period of two consecutive calendar years there is
a change of 50% or more in the composition of the Board of Directors of the
Company in office at the beginning of such two-year period except for changes
approved by at least two-thirds of the directors then in office who were
directors at the beginning of the period. For purposes of this Agreement, a
Change of Control shall be deemed to have occurred on the date upon which either
of the foregoing results is consummated or becomes effective. For purposes of
this Agreement, "Voting Power" means with respect to any Voting Security the
maximum number of votes that such security is or would be entitled to cast
generally for the election of directors, and in the case of a convertible,
exercisable, or exchangeable Voting Security, considering such security both on
an unconverted, unexercised, or unexchanged basis, as the case may be. "Voting
Securities" means to the common stock and any other securities of the Company
entitled to vote generally for the election of directors, any security
convertible into or exchangeable for or exercisable for the purchase of common
stock of the Company (other than employee stock options or other employee stock
purchase rights), and other securities of the Company entitled to vote generally
for the election of directors.
Until the effective date of termination, Employee, if requested to do so by
Company, shall continue to render services to Company.
15.02 EXCESS PARACHUTE PAYMENTS. Notwithstanding the foregoing
provisions of this Section 15, if Employee will be considered (as determined in
the sole opinion of a national accounting firm employed by Employee) as
receiving payments, any part of which constitutes excess parachute payments,
such payments shall be reduced by or, if already paid, refunded to Company in
the minimum amount (such minimum amount shall be determined by the national
accounting firm employed by Employee, who shall interpret and apply all
applicable law and regulations in the way which results in the most favorable
results for Employee and who shall
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so instruct Company of its determination) required to result in there being no
excess parachute payments; PROVIDED, HOWEVER, (i) the payments to be made to
Employee pursuant to this Section 15 shall be reduced first and in the manner
requested by Employee, and (ii) if the compensation to be paid to Employee after
the termination of his employment is reduced to $0.00 as a result of the
operation of this subparagraph, no further reduction of any kind in any other
payments to Employee shall be made, notwithstanding that any part of such
remaining payments may constitute excess parachute payments. As used herein, the
terms excess parachute payment and parachute payment shall have the same
definition as such terms are given in Section 280G of the Internal Revenue Code
of 1986, as amended and as may be amended after the date hereof ("IRC"), or as
defined in any section of the IRC hereafter enacted to succeed Section 280G.
15.03 NO DUTY TO MITIGATE. Employee shall not be required to
mitigate the amount of any post employment payment or benefit paid or provided
to Employee under this Agreement by seeking other employment or otherwise, nor
shall the amount of any such payment or benefit paid or provided to Employee
under this Agreement be reduced or offset by any compensation earned by Employee
as the result of employment by another employer or otherwise.
16. EFFECT OF TERMINATION. Upon the termination or expiration of this
Agreement: (i) Employee shall immediately return to Company and all Confidential
Information in his possession or control (including, without limitation, all
copies thereof and all materials incorporating such Confidential Information),
(ii) Employee shall have no further obligation to perform services for Company
hereunder, PROVIDED, HOWEVER, that Employee shall continue to be bound by the
terms of Sections 10, 11 and 12 hereof, and (iii) except to the extent
specifically provided in Section 15 above, Company shall have no further
obligation to compensate or provide benefits to Employee hereunder.
17. BUSINESS KNOWLEDGE AND EXPERIENCE. Notwithstanding anything to the
contrary contained in this Agreement, it is specifically understood and agreed
that Employee has, prior to entering into this Agreement, developed significant
business expertise, ideas and experience (collectively "Business Experience")
and that such Business Experience, to the extent it applies to business
operations generally and not to the specific operations, technologies or trade
secrets of Company, shall not be deemed to constitute Confidential Information,
and nothing contained in Section 10 of this Agreement shall be deemed to prevent
Employee from using such general Business Experience in such a manner as does
not violate any of the other terms and conditions of this Agreement.
18. GENERAL.
18.01 SURVIVAL OF REPRESENTATIONS, WARRANTIES AND Covenants. All
representations, warranties and covenants contained herein shall survive the
execution of this Agreement and the consummation of the transactions
contemplated hereby.
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18.02 SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon
and inure to the benefit of the parties hereto and their respective heirs,
successors, assigns and legal representatives, but shall not be assignable by
Employee. Any purported assignment in violation of the foregoing shall be
invalid and of no force and effect. No assignment of this Agreement shall
relieve the assigning party of any obligation or liability hereunder.
In the event the Company wishes to assign this Agreement, it must require the
assignee expressly to assume this Agreement and agree to perform under it in the
same manner and to the same extent that the Company would be required to perform
if no such succession had taken place. Such assumption, however, shall not
constitute a release or novation with respect to the Company's obligations
hereunder.
18.03 NOTICES. Any notice, demand, payment, request, response or
other communication provided for herein or given hereunder to a party hereto
shall be in writing and shall be deemed to have been duly given if signed by the
party giving it. Notice shall be deemed effective upon delivery by hand, or on
the third business day after it is deposited in the United States mail, postage
prepaid (registered or certified mail) or on the business day after it is sent
by federal express or similar overnight service to the address of the parties
listed below:
if to Company: 565 East Swedesford Road, Suite 209
Wayne, PA 19087
if to Employee: Paul M. Nunley
110 Waterview Drive
Glenmore, Pa. 19343
or to such other address as the party to receive such communication has last
designated by notice delivered to the other party in accordance with the
foregoing provisions.
18.04 WAIVER. Failure or delay in insisting upon strict compliance
with any provision hereof shall not be deemed a waiver of such provision or any
other provision hereof with respect to prior, such provision or any other
provision hereof with respect to prior, contemporaneous or subsequent
occurrences. No waiver by either party of any right hereunder or of any default
shall be binding upon such party unless such waiver is in writing and signed by
Employee (in the case of Employee) or a duly authorized officer or partner of
Company in the case of Company.
18.05 GOVERNING LAW; VENUE. This Agreement shall be governed by and
construed in accordance with the laws of the state in which the corporate
headquarters is located as of the date when the course of action arose or the
events in question occurred.
18.06 ENTIRE AGREEMENT. Any and all previous employment agreements,
11
<PAGE>
whether written or oral, existing between Company and Employee shall be deemed
to be revoked and cancelled for all purposes on the Effective Date. This
Agreement, as may be amended from time to time, shall represent the sole and
entire agreement between Employee and Company respecting the employment
relationship between Company and Employee. There are no representations,
agreements, arrangements or understandings, oral or written, between or among
the parties hereto relating to the employment relationship between Company and
Employee which are not fully expressed in this Agreement.
18.07 SEVERABILITY. The provisions of this Agreement are severable
and the invalidity or unenforceability of any provision hereof shall not affect
the validity or enforceability of any other provision. In addition, in the event
that any provision of this Agreement (or portion thereof) is determined by a
court to be unenforceable as drafted by virtue of the scope, duration, extent or
character of any obligation contained therein, the parties acknowledge that it
is their intention that such provision (or portion thereof) shall be construed
in a manner designed to effectuate the purposes of such provision to the maximum
extent enforceable under applicable law.
18.08 ATTORNEY'S FEES. If any legal action or other proceeding is
brought for the enforcement of this Agreement, or because of an alleged dispute,
breach, default or misrepresentation in connection with any of the provisions of
this Agreement, the prevailing party shall be entitled to recover reasonable
attorneys' fees and other costs incurred in that action or proceeding, in
addition to any other relief to which it may be entitled.
18.09 REMEDIES CUMULATIVE. All remedies provided for in this
Agreement shall be cumulative and in addition to and not in lieu of any other
remedies available to either party under this or any other agreement between the
parties or at law, in equity or otherwise.
18.10 LANGUAGE. The language used in this Agreement shall be deemed
to be language chosen by the parties hereto to express their mutual intent, and
no rule of strict construction against any party shall apply to any term or
condition of this Agreement.
18.11 AMENDMENT. This Agreement may not be modified or amended
except by written agreement executed by all of the parties to this Agreement at
the time of such amendment.
18.12 HEADINGS. The descriptive headings of the sections, paragraphs
and subparagraphs hereof are inserted for convenience only and do not constitute
a part of this Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day
and year first above written.
DOCUCON, INCORPORATED ("Company")
12
<PAGE>
_______________________________ By: DOUGLAS P. GILL
Paul M. Nunley ("Employee") Its: PRESIDENT AND CHIEF EXECUTIVE OFFICER
EXHIBIT 11
DOCUCON, INCORPORATED
COMPUTATION OF EARNINGS (LOSS) PER SHARE
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------
1998 1997
----------- -----------
<S> <C> <C>
COMPUTATION OF BASIC EARNINGS (LOSS) PER SHARE:
Net loss from continuing operations ...................... $(5,085,694) $ (277,439)
Less- Preferred stock dividend requirements ............. (27,462) (46,420)
----------- -----------
Net loss from continuing operations applicable to common
stockholders ............................................ (5,113,156) (323,859)
Net income from discontinued operations applicable to
common stockholders ..................................... -- 3,702,688
----------- -----------
Net income (loss) applicable to common
stockholders used for computation .............. $(5,113,156) $ 3,378,829
=========== ===========
WEIGHTED AVERAGE NUMBER OF SHARES OF COMMON STOCK
OUTSTANDING USED FOR COMPUTATION ......................... 3,300,056 3,130,371
=========== ===========
Basic loss from continuing operations per common share ... $ (1.55) $ (.10)
Basic earnings from discontinued operations per common
share ................................................... -- 1.18
----------- -----------
BASIC EARNINGS (LOSS) PER COMMON SHARE ..................... $ (1.55) $ 1.08
=========== ===========
COMPUTATION OF DILUTED EARNINGS (LOSS) PER SHARE:
Net loss from continuing operations ...................... $(5,085,694) $ (277,439)
Preferred stock dividend requirements .................... (27,462) (46,420)
Decrease in net loss applicable to common stock for
preferred stock dividends not incurred upon assumed
conversion of preferred stock ........................... 27,462 46,420
----------- -----------
Net loss from continuing operations applicable to
common stockholders used for computation ....... (5,085,694) (277,439)
Net income from discontinued operations applicable to
common stockholders ..................................... -- 3,702,688
----------- -----------
Net income (loss) applicable to common
stockholders used for computation .............. $(5,085,694) $ 3,425,249
=========== ===========
Weighted average number of shares of common stock
outstanding ............................................. 3,300,056 3,130,371
Weighted average incremental shares outstanding upon
assumed conversion of options and warrants .............. 91,073 127,983
Weighted average incremental shares outstanding upon
assumed conversion of the preferred stock ............... 82,975 140,683
----------- -----------
WEIGHTED AVERAGE NUMBER OF SHARES OF COMMON STOCK AND
COMMON STOCK EQUIVALENTS OUTSTANDING USED FOR
COMPUTATION .............................................. 3,474,104 3,399,037
=========== ===========
</TABLE>
<PAGE>
EXHIBIT 11
(Continued)
-2-
YEAR ENDED DECEMBER 31
----------------------
1998 1997
----- -----
Diluted loss from continuing operations per
common share and common share equivalents ......... $(1.46)(a) $(.08)(a)
Diluted earnings from discontinued operations
per common share and common share equivalents ..... -- 1.09
----- -----
DILUTED EARNINGS (LOSS) PER COMMON SHARE AND
COMMON SHARE EQUIVALENTS ........................... $(1.46)(a) $1.01
===== =====
(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.
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report, included in this Form 10-KSB, into the Company's previously filed
Registration Statement on Form S-8 (File No. 1-10185).
/S/ ARTHUR ANDERSEN LLP
San Antonio, Texas
March 25, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM DOCUCON,
INCORPORATED'S BALANCE SHEET AS OF DECEMBER 31, 1998, AND ITS STATEMENT OF
OPERATIONS FOR THE YEAR THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,082,321
<SECURITIES> 0
<RECEIVABLES> 2,545,911
<ALLOWANCES> 1,604,444
<INVENTORY> 0
<CURRENT-ASSETS> 3,816,176
<PP&E> 5,111,573
<DEPRECIATION> 4,704,152
<TOTAL-ASSETS> 4,272,493
<CURRENT-LIABILITIES> 2,451,137
<BONDS> 345,617
0
7
<COMMON> 33,062
<OTHER-SE> 1,442,670
<TOTAL-LIABILITY-AND-EQUITY> 4,272,493
<SALES> 2,693,497
<TOTAL-REVENUES> 2,693,497
<CGS> 2,626,315
<TOTAL-COSTS> 2,626,315
<OTHER-EXPENSES> 1,667,412
<LOSS-PROVISION> 1,600,000
<INTEREST-EXPENSE> 193,892
<INCOME-PRETAX> (5,110,574)
<INCOME-TAX> (24,880)
<INCOME-CONTINUING> (5,085,694)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,113,156)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
