UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarterly Period Ended MARCH 31, 2000
OR
[_] Transition Report Under Section 13 or 15(d)
of the Exchange Act
For the Transition Period From______to_______
Commission File Number 1-10185
DOCUCON, INCORPORATED
(Exact name of small business issuer as specified in its charter)
Delaware 74-2418590
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
20 Valley Stream Parkway
Suite 140
Malvern, Pennsylvania 19355
(Address of principal executive offices)
(610) 240-9600
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
State the number of shares outstanding of each of the issuer's classes of common
equity as of April 30, 2000. 3,508,767
1
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DOCUCON, INCORPORATED
INDEX
PAGE
PART I. FINANCIAL INFORMATION (UNAUDITED)
Item 1: Balance Sheets - March 31, 2000, and December 31, 1999 3
Statements of Operations - For the Three Months Ended
March 31, 2000 and 1999 5
Statements of Cash Flows - For the Three Months
Ended March 31, 2000 and 1999 6
Notes to Financial Statements 8
Management's Discussion and Analysis of Financial
Item 2: Condition and Results of Operations 14
PART II. OTHER INFORMATION 18
SIGNATURES 19
2
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DOCUCON, INCORPORATED
BALANCE SHEETS
<TABLE>
<CAPTION>
March 31,
2000 December 31,
ASSETS (UNAUDITED) 1999
----------- ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and temporary cash investments ............. $ 51,100 $ 28,835
Accounts receivable-trade, net of allowance for
doubtful accounts of $1,458 and $8,887,
respectively ................................... 697,605 992,243
Unbilled revenues, net of allowance of $1,600,000 431,073 523,014
Other receivables ............................... 3,876 3,876
Prepaid expenses and other ...................... 120,637 183,530
----------- ------------
Total current assets ............. 1,304,291 1,731,498
----------- ------------
PROPERTY AND EQUIPMENT:
Conversion systems .............................. 5,129,910 5,132,390
Furniture and fixtures .......................... 254,907 254,907
Leasehold improvements .......................... 71,351 55,047
----------- ------------
Total property and equipment ..... 5,456,168 5,442,344
Less- Accumulated depreciation .................. (5,050,450) (4,980,000)
----------- ------------
Net property and equipment ....... 405,718 462,344
----------- ------------
OTHER, net ........................................ 17,648 27,300
----------- ------------
Total assets ...................... $ 1,727,657 $ 2,221,142
=========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
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DOCUCON, INCORPORATED
BALANCE SHEETS (Continued)
<TABLE>
<CAPTION>
March 31,
2000 December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) (UNAUDITED) 1999
------------ ------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable ................................... $ 1,205,795 $ 1,385,635
Accrued liabilities ................................ 1,269,522 1,186,682
Other current liabilities .......................... 36,480 45,886
Current maturities of capital lease obligations .... 57,638 55,727
Secured indebtedness ............................... 1,528,706 899,004
Related-party notes, net of discount of $36,636
and $70,665 ...................................... 288,364 254,335
------------ ------------
Total current liabilities ................ 4,386,505 3,827,269
------------ ------------
CAPITAL LEASE OBLIGATIONS ............................ 60,097 75,202
------------ ------------
OTHER LONG-TERM OBLIGATIONS .......................... 221,440 226,310
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 8)
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock, $1.00 par value, 10,000,000 shares
authorized-
Series A, 60 shares authorized, 7 shares issued and
outstanding as of March 31, 2000, and
December 31, 1999 ............................... 7 7
Common stock, $.01 par value, 25,000,000 shares
authorized; 3,508,767 shares outstanding as of
March 31, 2000, and December 31, 1999 ............ 35,088 35,088
Additional paid-in capital.......................... 10,187,965 10,209,903
Accumulated deficit .............................. (13,159,209) (12,148,401)
Treasury stock, at cost, 4,495 shares ............. (4,236) (4,236)
------------ ------------
Total stockholders' equity (deficit) ..... (2,940,385) (1,907,639)
------------ ------------
Total liabilities and stockholders'
equity (deficit) ....................... $ 1,727,657 $ 2,221,142
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
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DOCUCON, INCORPORATED
STATEMENTS OF OPERATIONS
(Unaudited)
THREE MONTHS
ENDED MARCH 31,
----------------------------
2000 1999
----------- -----------
OPERATING REVENUES ........................... $ 802,087 $ 851,079
----------- -----------
COSTS AND EXPENSES:
Production ................................. 778,372 966,077
Research and development ................... 106,584 63,379
General and administrative ................. 560,553 515,399
Marketing .................................. 191,844 421,952
Depreciation and amortization .............. 70,450 68,035
----------- -----------
1,707,803 2,034,842
----------- -----------
OPERATING LOSS ............................... (905,716) (1,183,763)
OTHER INCOME (EXPENSE):
Interest income ............................ 290 21,887
Interest expense ........................... (95,342) (7,561)
Other, net ................................. (9,672) 30,494
----------- -----------
LOSS BEFORE INCOME TAXES ..................... (1,010,440) (1,138,943)
Income tax expense ......................... -- --
----------- -----------
NET LOSS ..................................... (1,010,440) (1,138,943)
Preferred stock dividend requirements ...... 4,813 4,813
----------- -----------
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS ... $(1,015,253) $(1,143,756)
=========== ===========
BASIC AND DILUTED LOSS PER COMMON SHARE ...... $ (0.29) $ (0.35)
=========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING ................................ 3,508,767 3,303,546
=========== ===========
The accompanying notes are an integral part of these financial statements.
5
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DOCUCON, INCORPORATED
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
---------------------------
2000 1999
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ........................................... $(1,010,808) $(1,138,943)
Adjustments to reconcile net loss to net cash
used in operating activities-
Depreciation and amortization ..................... 70,450 68,035
Amortization of discount on related-party notes ... 12,091 --
Gain on sale of assets ............................ -- (24,487)
Changes in current assets and current liabilities-
Decrease (increase) in receivables and unbilled
revenues ...................................... 386,579 (217,120)
Decrease (increase) in prepaid expenses and other 72,545 (44,575)
(Decrease) increase in accounts payable and
accrued liabilities ........................... (97,000) 376,229
Increase in deferred revenues ................... -- 13,455
----------- -----------
Net cash used in operating activities .... (566,143) (967,406)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ............................... (13,824) (87,922)
Proceeds from sale of building ..................... -- 1,782,609
----------- -----------
Net cash provided by (used in) investing
activities ............................. (13,824) 1,694,687
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from secured short-term notes ............. 825,000 --
Decrease in other secured indebtedness, net ........ (195,298) --
Principal payments under capital lease obligations . (13,194) (10,634)
Principal payments on long-term debt and other
obligations ...................................... (14,276) (927,502)
Payment of preferred stock dividends ............... -- (88,816)
Purchase of treasury stock ......................... -- (25,792)
----------- -----------
Net cash provided by (used in) financing
activities ............................. 602,232 (1,052,744)
----------- -----------
NET DECREASE IN CASH AND TEMPORARY CASH INVESTMENTS .. 22,265 (325,463)
CASH AND TEMPORARY CASH INVESTMENTS, beginning of
period ............................................. 28,835 1,082,321
----------- -----------
CASH AND TEMPORARY CASH INVESTMENTS, end of period ... $ 51,100 $ 756,858
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
DOCUCON, INCORPORATED
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months
ENDED MARCH 31,
--------------------
2000 1999
--------- -------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Noncash investing and financing activities-
Capital lease obligations incurred ................... $ -- $44,355
========== =======
Treasury stock issued for Employee Stock Purchase Plan $ -- $23,805
========== =======
Cash paid during the period for-
Interest ............................................. $ 66,584 $16,306
========== =======
Income taxes ......................................... $ -- $ --
========== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
7
<PAGE>
DOCUCON, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
NOTE 1
The financial statements included herein have been prepared by Docucon,
Incorporated (the Company), without audit, pursuant to the rules and regulations
of the Securities and Exchange Commission. However, all adjustments have been
made which are, in the opinion of the Company, necessary for a fair presentation
of the results of operations for the periods covered. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations, although the Company believes
that the disclosures are adequate to make the information presented not
misleading. It is recommended that these financial statements be read in
conjunction with the financial statements and the notes thereto included in the
Company's Annual Report on Form 10-KSB for the year ended December 31, 1999.
Certain reclassifications have been made in the prior period financial
statements to conform with the current period presentation.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make certain estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
The accompanying financial statements of the Company have been prepared on the
basis of accounting principles applicable to a going concern. Since its
inception, the Company has incurred cumulative net losses of approximately $13.2
million, including losses of approximately $3.6 million in 1999 and
approximately $1.0 million in the first quarter of 2000. For the year ended
December 31, 1999, and the quarter ended March 31, 2000, the Company had
negative cash flows from operating activities of approximately $2.7 million and
$0.6 million, respectively. At March 31, 2000, the Company had a working capital
deficit of approximately $3.1 million and a total stockholders' deficit of
approximately $2.9 million. A substantial portion of the Company's accounts
payable at March 31, 2000 are past due. 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. 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.
As discussed in Note 9, the Company has entered into a definitive agreement to
sell substantially all of the Company's operating assets to TAB Products Co.
(TAB). The agreement is subject to shareholder approval. In conjunction with
this transaction, TAB has agreed to fund the Company's working capital deficits
until the proposed acquisition can be consummated. However, there can be no
assurances that TAB will continue to fund all of the Company's working capital
deficits if the transaction does not close in a timely manner or that the
proposed acquisition will be consummated.
8
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DOCUCON, INCORPORATED
NOTES TO FINANCIAL STATEMENTS (Continued)
NOTE 2
Allowance for unbilled revenues-
The allowance for unbilled revenues at March 31, 2000, and December 31, 1999,
relates to conversion services performed for agencies of the U.S. Government.
The Company's ability to collect these unbilled revenues is dependent upon a
number of factors including quality control acceptance and the availability of
funding to the respective agencies. The Company was informed by a U.S.
Government customer in mid-1997 that funding for certain conversion services
being performed had been depleted. Management completed the work that had been
placed in production for this customer. As a result, the Company has been unable
to collect approximately $1.6 million of conversion services for this customer,
the substantial majority of which were performed during 1997. A substantial
portion of the conversion products associated with the $1.6 million of unbilled
revenues have been shipped to the customer and is in various stages of quality
control review. Management of the Company believes that a significant portion 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
customer will accept all of the work product nor are there any assurances that
sufficient funding will be made available to enable the Company to collect the
unbilled revenues.
NOTE 3
Common stock and preferred stock-
Each share of the Company's preferred stock ($25,000 stated value) is
convertible into 8,333 shares of common stock and earns cash dividends of 11
percent per annum. Each share of preferred stock is entitled to vote 8,333
common shares. 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. If the transaction described
in Note 9 is consummated, the Company can not make distributions to common
stockholders until cumulative undeclared dividends on the preferred stock are
paid. As of March 31, 2000, cumulative undeclared dividends on the preferred
stock approximated $184,000. In January 1999, the Company paid cash of $88,816
related to cumulative dividends on preferred stock that was converted during the
fourth quarter of 1998. As the remainder of these dividends are undeclared, they
have not been recorded as a reduction of the Company's equity. Common stock is
subordinate to preferred stock in the event of liquidation. The Company has
never paid cash dividends on its common stock.
Treasury stock-
On June 18, 1998, the Company announced that its board of directors had
authorized the repurchase of up to 500,000 shares of the Company's common stock
in the open market. From June 19, 1998, through December 31, 1998, the Company
acquired 36,250 treasury shares for approximately $50,000. Approximately 33,333
of such shares were reissued during 1998 in connection with the conversion of
Series A preferred stock. In 1999, the Company acquired 26,400 treasury shares
for approximately $26,000, of which 24,822 shares were reissued pursuant to the
Company's Employee Stock Purchase Plan.
9
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DOCUCON, INCORPORATED
NOTES TO FINANCIAL STATEMENTS (Continued)
Reverse stock split-
In June 1998, the Company's board of directors approved a one-for-four reverse
common stock split. Accordingly, all common stock and share information has been
adjusted to reflect the reverse stock split.
NOTE 4
Property and Equipment-
In January 1999, the Company sold its San Antonio operations center building. In
connection with the sale, the Company paid off the remaining balance of the
related secured indebtedness. The Company's net cash proceeds from the sale, net
of debt repayments, approximated $800,000. The Company entered into a
noncancelable operating leaseback of the building through December 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 gain on the sale of
the building was deferred and was recognized over the term of the operating
leaseback as a component of other income. The Company moved into a new facility
in December 1999.
NOTE 5
Earnings (loss) per share-
Statement of Financial Accounting Standards No. 128, "Earnings Per Share,"
outlines methods for computing and presenting earnings per share. The following
table provides a detail of the denominator (weighted average number of common
shares outstanding) used to compute Basic and Diluted EPS and the number of
common share equivalents relating to preferred stock that have been excluded as
a result of antidilution:
THREE MONTHS
ENDED MARCH 31
--------------------------
2000 1999
--------- ---------
Weighted average number of common
shares outstanding for Basic and
Diluted EPS ................................ 3,508,767 3,303,546
========= =========
Potential common shares from
assumed conversion of preferred
shares excluded as a result of
antidilution ............................... 58,338 58,338
========= =========
As the Company had losses for the three months ended March 31, 2000 and 1999,
options and warrants have been excluded, as they are antidilutive in loss
periods.
10
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DOCUCON, INCORPORATED
NOTES TO FINANCIAL STATEMENTS (Continued)
NOTE 6
Accounts receivable financing-
On June 18, 1999, the Company entered into an accounts receivable purchase
agreement (the Financing Agreement) with Silicon Valley Bank (SVB). Under the
terms of the agreement as amended, the Company can receive funding from SVB for
up to $1,500,000 of eligible accounts receivable with full recourse by SVB to
the Company. The Company receives cash advances from the eligible receivables
equal to the face amount of the eligible receivables financed, less a reserve
established by SVB of not less than 20 percent of the aggregate face amount of
the receivables. If the Company finances the maximum of $1,500,000 of accounts
receivable, new receivables can be financed to replace previously sold accounts
receivables that are collected. The Company is obligated to repay on demand the
unpaid portion of any receivable financed by SVB under certain conditions
including (i) an account receivable that remains uncollected 90 calendar days
after the invoice date, (ii) the bankruptcy or insolvency of any account debtor
or (iii) any breach of the Financing Agreement by the Company. During the fourth
quarter of 1999, and subsequent to December 31, 1999, the Company was in
technical default under certain provisions of the Financing Agreement. While SVB
has not made a declaration of default or demand for payment, it has the right to
do so under the provisions of the Financing Agreement. If such demand were made,
it is unlikely that the Company would have the resources to make such payment
except through the collections on the underlying secured receivables. The cash
advances are reflected in the accompanying financial statements as short-term
borrowings. The Company pays aggregate finance charges and administrative fees
on the average daily balance of uncollected accounts receivables sold equal to
approximately 2.38 percent per month. The aggregate amount of advances and fees
owing to SVB are secured by substantially all of the tangible assets of the
Company. At March 31, 2000, the aggregate cash advanced on such receivables was
approximately $704,000. Aggregate finance charges and administrative fees
related to the Financing Agreement were approximately $56,000 for the quarter
ended March 31, 2000, and are classified as interest expense.
NOTE 7
Related-party loan transaction-
On September 29, 1999, two directors of the Company loaned the Company an
aggregate of $325,000. The promissory notes (the Notes) issued in conjunction
with these loans carry a 12 percent annual interest rate. Principal and interest
on the Notes are payable on the earlier of (i) September 28, 2000, or (ii)
within 10 days of an equity-based financing (the Financing), as defined. In the
event the principal and interest become payable as a result of a Financing,
one-half of the then outstanding principal and accrued interest on the entire
principal amount of the Notes are payable in cash to the Note holders and such
Note holders will receive (i) a number of shares of Company securities, which
shall be the same class issued in the Financing, calculated by dividing the
remaining outstanding principal by the per share price of the securities issued
in the Financing and/or (ii) a debt instrument of the same class issued in the
Financing, the aggregate of such equity and/or debt securities equal to one-half
of the outstanding principal amount of the Notes prior to the Financing. In
conjunction with the Notes, the two directors were issued an aggregate of
243,750 warrants to purchase common stock of the Company. The warrants are
exercisable for a period of five years from the September 29, 1999, issuance
date of the warrants at a warrant price equal to 75 percent of (i) in the event
of a Financing, the common stock equivalent price per share of securities issued
to the investor under such Financing or (ii) in the event of a sale of greater
than 50 percent of the shares of common stock of the Company, the price per
share for such shares of common stock. In the event that there is neither a
Financing nor a sale of the Company, beginning on September 28, 2000, the
warrant price shall be $0.50 per share. The warrants have been valued at their
estimated fair market value of approximately $63,375 and have been recorded as
an original issue discount on the Notes. The original issue discount on the
Notes is being expensed as interest expense over the one-year maturity period of
the Notes. If the transaction described in Note 9 is consummated, the two
directors have agreed to cancel the warrants and waive all interest payable on
these related party loans.
11
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DOCUCON, INCORPORATED
NOTES TO FINANCIAL STATEMENTS (Continued)
NOTE 8
Commitments and contingencies-
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 Company's request
for admission into the Voluntary Disclosure Program was the result of an
internal review by the Company that indicated a billing practice, with respect
to certain invoices submitted during the period from September 1996 through July
1997, that might be perceived by the government as a technical violation of DOD
billing procedures.
The Department of Defense (DOD) Inspector General formally admitted the Company
into the Voluntary Disclosure Program in June 1999 and commenced its
investigation of the Company's voluntary disclosure in the second half of that
year. In February 2000, Company counsel was orally advised that the Government's
investigation of the Company's voluntary disclosure is complete and that
criminal prosecution has been declined. The Company remains potentially liable
for civil damages. In 1998, the Company established a reserve for estimated
legal costs and other expenses that it believes is adequate for the resolution
of this matter
In conjunction with the consummation of the proposed transaction described in
Note 9, certain officers of the Company who will not be employed by TAB will
receive payments from the Company in settlement of Company obligations under the
respective employment agreement with each officer. These payments include an
aggregate of approximately $121,000 for unpaid wages and accrued vacation plus
an aggregate of approximately $276,000 which represents thirty percent (30%) of
the amounts these officers would be entitled to receive as severance under their
respective employment contracts with the Company.
NOTE 9
Proposed sale of assets -
In January 2000, the Company entered into a nonbinding letter of intent (LOI)
and, subsequently, in March 2000, signed a definitive asset purchase agreement
(TAB Asset Purchase Agreement) with TAB Products Co. (TAB). Under the TAB Asset
Purchase Agreement, the Company has agreed, subject to stockholder approval, to
sell substantially all of the operating assets of the Company to TAB for cash
and the assumption of certain operating liabilities. The acquisition is expected
to be consummated during the second quarter of 2000. In conjunction with
entering into the LOI and subsequent TAB Asset Purchase Agreement, TAB has
agreed to advance the Company cash in the form of secured promissory notes to
fund the Company's working capital deficits until the transaction is
consummated. Under the TAB Asset Purchase Agreement, these advances from TAB
will be deducted from the cash proceeds paid at closing. As of April 30, 2000,
TAB had advanced $950,000 under secured promissory notes. The notes bear
interest at rates ranging from 10-13 percent per year and are payable on demand
as of April 30, 2000. The notes are secured by a second priority interest in
substantially all of the Company's assets. There are no assurances that TAB will
continue to fund the Company's working capital deficits indefinitely or that the
transaction will be consummated.
12
<PAGE>
DOCUCON, INCORPORATED
NOTES TO FINANCIAL STATEMENTS (Continued)
NOTE 9 (CONTINUED)
Under the TAB Asset Purchase Agreement, a portion of the cash consideration and
all of the liabilities assumed in the transaction are variable and are based on
the book value of specific operating assets acquired and liabilities assumed,
respectively, on the date of Closing. If the proposed sale to TAB is approved
and consummated, the Company intends to satisfy and discharge any expenses
associated with the asset sale; satisfy and discharge retained liabilities
(including interim funding from TAB); make an initial distribution to
stockholders; realize value, if any, from any remaining assets (which may
include the Company's publicly traded "shell"); and thereafter, if funds are
available, make a final distribution to stockholders in connection with winding
up the Company's affairs. Because the variable portion of the cash consideration
from the transaction will not be determined until the closing date and the
amount of liabilities not assumed by TAB that must be satisfied out of the cash
proceeds will not be known until after the closing, the amount of cash that will
ultimately be available for distribution to stockholders in 2000 is not
determinable at this time.
The Company's lease of its corporate headquarters in Pennsylvania requires
monthly payments of approximately $14,300 through June 2004. Under the
provisions of the TAB Asset Purchase Agreement, the remaining commitment under
this lease would not be assumed by TAB. In March 2000, the Company initiated
conversations with the lessor with respect to a potential buy-out of the
remaining term of this lease in anticipation of the consummation of the TAB
Asset Purchase Agreement. While there can be no assurances that the Company will
not be required to pay all future contractual amounts under this lease, the
Company believes that it is likely that it would be able to buy-out the
remaining term of the lease by making a payment to the lessor in an amount
substantially less than the contractual amount.
13
<PAGE>
DOCUCON, INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The Company's operations during the quarter ended March 31, 2000 resulted in a
net loss applicable to common stockholders of approximately $1,015,000 compared
to a net loss applicable to common stockholders of approximately $1,144,000 for
the same quarter in 1999.
Revenues were approximately $802,000 for the quarter ended March 31, 2000, as
compared to approximately $851,000 for the same quarter in 1998.
Production costs were approximately $778,000 for the quarter ended March 31,
2000, as compared to approximately $966,000 for the 1999 period. This decrease
is primarily attributable to a decrease in headcount.
Research and development costs were approximately $107,000 for the quarter ended
March 31, 2000, as compared to approximately $63,000 of such costs in the same
period in 1999. This increase is primarily attributable to the fact that a
relatively larger portion of the Company's engineering costs in the first
quarter of 2000 were devoted to development of the Company's proprietary
document conversion processes and controls as opposed to production support
activities.
General and administrative expenses increased to approximately $561,000 for the
quarter ended March 31, 2000, as compared to approximately $515,000 for the same
period in 1999. This increase is primarily attributable to higher outside legal
expenses relating to the pending sale of substantially all of the operating
assets of the Company and a net increase in office rent, net of a decrease in
expenses relating to reductions in headcount and travel costs.
Marketing expenses decreased to approximately $192,000 for the quarter ended
March 31, 2000, as compared to approximately $422,000 for the same period in
1999. This decrease is due primarily to a reduction in headcount and
corresponding reduction in trade show and travel expenses.
Interest expense was approximately $95,000 for the quarter ended March 31, 2000
as compared to approximately $8,000 for the 1999 period. This increase is
primarily attributable to interest expense relating to the Company's accounts
receivable finance agreement that commenced in June 1999.
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 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 include four additional
option years so that the entire contract has a potential value of approximately
$77.4 million. As of December 31, 1999, the Company had provided approximately
$4 million of services under this contract. In 1999, 1998, and 1997
approximately 63%, 78%, and 87%, respectively, of the Company's operating
revenues were derived from services provided to DOD customers or contractors,
including services provided under these DOD contracts.
At March 31, 2000 and 1999, the Company had approximately $0.4 million and $0.5
million, respectively, of unbilled revenues, net of an allowance of
approximately $1.6 million. The allowance for unbilled revenues relates
primarily to conversion services performed for a DOD customer primarily 1997.
The Company's ability to collect
14
<PAGE>
DOCUCON, INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
these unbilled revenues is dependent upon a number of factors including quality
control acceptance and the availability of funding to the DOD customer. The
Company was informed by its DOD customer in mid-1997 that funding for certain
conversion services being performed under this delivery order had been depleted.
Management completed the work that had been placed in production for this
customer. As a result, the Company has been unable to invoice and/or collect
approximately $1.6 million of conversion services for this customer, the
substantial majority of which were performed during 1997. A substantial portion
of the conversion products associated with the $1.6 million of unbilled revenues
have been shipped to the customer and are in various stages of quality control
review. Management of the Company believes that a significant portion of such
unbilled revenues represent valid assets of the Company. However, due to the
continued aging of the unbilled revenues, management believes it was prudent to
provide an allowance on these unbilled revenues for the entire amount during the
year ended December 31, 1998. There are 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 and collect the
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.
In November 1997, the Company sold its software division for $6.5 million.
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 operation and
disposition of the division. Under the terms of the Agreement, the Purchaser
paid approximately $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 1998 and the remainder was released to
the Company in 1999.
In October 1996, the Company obtained long-term financing to replace the then
existing mortgage note for its San Antonio operations center 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 San Antonio operations center building. In connection with the sale, the
Company paid off the remaining balance of the related secured indebtedness. The
Company's proceeds from the sale, net of debt repayments, approximated $800,000.
On June 18, 1999, the Company entered into an accounts receivable finance
agreement (the Financing Agreement) with Silicon Valley Bank (SVB). Under the
terms of the agreement, as amended, the Company can receive funding from SVB for
up to $1,500,000 of eligible accounts receivable with full recourse by SVB to
the Company. The Company receives cash advances from the eligible receivables
equal to the face amount of the eligible receivables financed, less a reserve
established by SVB of not less than 20 percent of the aggregate face amount of
the receivables. If the Company finances the maximum of $1,500,000 of accounts
receivable, new receivables can be financed to replace previous accounts
receivable that are collected. The Company is obligated to repay on demand the
unpaid portion of any receivable financed by SVB under certain conditions
including (i) an account receivable that remains uncollected 90 calendar days
after the invoice date, (ii) the bankruptcy or insolvency of any account debtor
or (iii) any breach of the Financing Agreement by the Company. During the fourth
quarter of 1999, and subsequent to December 31, 1999, the Company was in
technical default under certain provisions of the Financing Agreement. While SVB
has not made a declaration of default or demand for payment, it has the right to
do so under
15
<PAGE>
DOCUCON, INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
the provisions of the Financing Agreement. If such demand were made, it is
unlikely that the Company would have the resources to make such payment except
through the collections on the underlying secured receivables. The cash advances
are reflected in the accompanying financial statements as short-term borrowings.
The Company pays aggregate finance charges and administrative fees on the
average daily balance of the uncollected financed accounts receivables of
approximately 2.38 percent per month. The aggregate amount of advances and fees
owed to SVB are secured by substantially all of the tangible assets of the
Company. At March 31, 2000, the aggregate cash advanced on such receivables was
approximately $704,000. Aggregate finance charges and administrative fees
related to the Financing Agreement were approximately $56,000 for the quarter
ended March 31, 2000, and are classified as interest expense.
On September 29, 1999, two directors of the Company loaned the Company an
aggregate of $325,000. The promissory notes (the Notes), issued in conjunction
with these loans, carry a 12 percent annual interest rate. Principal and
interest on the Notes are payable on the earlier of (i) September 28, 2000, or
(ii) within 10 days of an equity-based financing (the Financing), as defined. In
the event the principal and interest become payable as a result of a Financing,
one-half of the then outstanding principal and accrued interest on the entire
principal amount of the Notes are payable in cash to the Note holders and such
Note holders will receive (i) a number of shares of Company securities, which
shall be the same class issued in the Financing, calculated by dividing the
remaining outstanding principal by the per share price of the securities issued
in the Financing and/or (ii) a debt instrument of the same class issued in the
Financing, the aggregate of such equity and/or debt securities equal to one-half
of the outstanding principal amount of the Notes prior to the Financing. In
conjunction with the Notes, the two directors were issued an aggregate of
243,750 warrants to purchase common stock of the Company. Warrants to purchase
162,500 shares of common stock of the Company were granted in September 1999 and
the remaining 81,250 were granted in December 1999 based upon the nonoccurrence
of certain events. The warrants are exercisable for a period of five years from
the September 29,1999, issuance date of the warrants at a price equal to 75
percent of (i) in the event of a Financing, the common stock equivalent price
per share of securities issued to the investor under such Financing or (ii) in
the event of a sale of greater than 50 percent of the shares of common stock of
the Company, the price per share for such shares of common stock. In the event
that there is neither a Financing nor a sale of the Company, beginning on
September 28, 2000, the warrant price shall be $0.50 per share. The warrants
have been valued at an estimated fair market value of approximately $63,375 and
have been recorded as an original issue discount on the Notes. The original
issue discount on the Notes is being charged to expense as interest expense over
the one-year maturity period of the Notes. If the transaction described below
and in Note 9 to the financial statements is consummated, the two directors have
agreed to cancel the warrants and waive all interest payable on these related
party loans.
Net cash and cash equivalents at March 31, 2000 were approximately $51,000.
Trade accounts receivable, net of allowance for doubtful accounts were
approximately $698,000 at March 31, 2000 and unbilled revenues, net of allowance
were $431,000. Other receivables were approximately $4,000 at March 31, 2000.
Accounts payable and accrued liabilities were approximately $2.5 million at
March 31, 2000. Also included in current liabilities is secured indebtedness
relating to the Company's accounts receivable Financing Agreement and related
party notes from two of the Company's directors. The Company had a net working
capital deficit of approximately $3.1 million at March 31, 2000.
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 $13.2
million, including losses of approximately $3.6 million in 1999 and $1.0 million
in the first quarter of 2000. For the year ended December 31, 1999, and the
quarter ended March 31, 2000, the Company had negative cash flows from operating
activities of approximately $2.7 million and $0.6 million, respectively. At
March 31, 2000, the Company had a working capital deficit of approximately $3.1
million and a total stockholders' deficit of approximately $2.9 million. A
substantial portion of the Company's accounts payable at March 31, 2000 are past
due. 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. 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
16
<PAGE>
DOCUCON, INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
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.
In January 2000, the Company entered into a nonbinding letter of intent (LOI)
and, subsequently, in March 2000, signed a definitive asset purchase agreement
(TAB Asset Purchase Agreement) with TAB Products Co. (TAB). Under the TAB Asset
Purchase Agreement, the Company has agreed, subject to stockholder approval, to
sell substantially all of the operating assets of the Company to TAB for cash
and the assumption of certain operating liabilities. The acquisition is expected
to be consummated during the second quarter of 2000. In conjunction with
entering into the LOI and subsequent TAB Asset Purchase Agreement, TAB has
agreed to advance the Company cash in the form of secured promissory notes to
fund the Company's working capital deficits until the transaction is
consummated. Under the TAB Asset Purchase Agreement, these advances from TAB
will be deducted from the cash proceeds paid at closing. As of April 30, 2000,
TAB has advanced $950,000 under secured promissory notes. The notes bear
interest at rates ranging from 10-13 percent per year and are payable on demand
as of April 30, 2000. The notes are secured by a second priority interest in
substantially all of the Company's assets. There are no assurances that TAB will
continue to fund the Company's working capital deficits indefinitely or that the
transaction will be consummated.
Under the TAB Asset Purchase Agreement, a portion of the cash consideration and
all of the liabilities assumed in the transaction are variable and are based on
the book value of specific operating assets acquired and liabilities assumed,
respectively, on the date of Closing. If the proposed sale to TAB is approved
and consummated, the Company intends to satisfy and discharge any expenses
associated with the asset sale; satisfy and discharge retained liabilities
(including interim funding from TAB); make an initial distribution to
stockholders; realize value, if any, from any remaining assets (which may
include the Company's publicly traded "shell"); and thereafter, if funds are
available, make a final distribution to stockholders in connection with winding
up the Company's affairs. Because the variable portion of the cash consideration
from the transaction will not be determined until the closing date and the
amount of liabilities not assumed by TAB that must be satisfied out of the cash
proceeds will not be known until after the closing, the amount of cash that will
ultimately be available for distribution to stockholders in 2000 is not
determinable at this time.
The Company's lease of its corporate headquarters in Pennsylvania requires
monthly payments of approximately $14,300 through June 2004. Under the
provisions of the TAB Asset Purchase Agreement, the remaining commitment under
this lease would not be assumed by TAB. In March 2000, the Company initiated
conversations with the lessor with respect to a potential buy-out of the
remaining term of this lease in anticipation of the consummation of the TAB
Asset Purchase Agreement. While there can be no assurances that the Company will
not be required to pay all future contractual amounts under this lease, the
Company believes that it is likely that it would be able to buy-out the
remaining term of the lease by making a payment to the lessor in an amount
substantially less than the contractual amount.
17
<PAGE>
PART II - OTHER INFORMATION
Item 1. 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 Company's request
for admission into the Voluntary Disclosure Program was the result of an
internal review by the Company that indicated a billing practice, with respect
to certain invoices submitted during the period from September 1996 through July
1997, that might be perceived by the government as a technical violation of DOD
billing procedures.
The DOD Inspector General formally admitted the Company into the Voluntary
Disclosure Program in June 1999 and commenced its investigation of the Company's
voluntary disclosure in the second half of that year. In February 2000, Company
counsel was orally advised that the Government's investigation of the Company's
voluntary disclosure is complete and that criminal prosecution has been
declined. The Company remains potentially liable for civil damages. In 1998, the
Company established a reserve for estimated legal costs and other expenses that
it believes is adequate for the resolution of this matter.
The Company's lease of its corporate headquarters in Pennsylvania requires
monthly payments of approximately $14,300 through June 2004. Under the
provisions of the TAB Asset Purchase Agreement, the remaining commitment under
this lease would not be assumed by TAB. In March 2000, the Company initiated
conversations with the lessor with respect to a potential buy-out of the
remaining term of this lease in anticipation of the consummation of the TAB
Asset Purchase Agreement. While there can be no assurances that the Company will
not be required to pay all future contractual amounts under this lease, the
Company believes that it is likely that it would be able to buy-out the
remaining term of the lease by making a payment to the lessor in an amount
substantially less than the contractual amount.
Except as noted above, no material actions are currently pending against the
Company. The Company maintains general liability insurance and other insurance
coverages that it believes to be adequate and typical in the industry.
Item 2. Changes in Securities - None
Item 3. Defaults Upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders - None
Item 5. Other Matters - None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 11 - Computation of Earnings Per Share
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K - None
18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DOCUCON, INCORPORATED
(Registrant)
By /S/ DOUGLAS P. GILL
-------------------
Douglas P. Gill,
President and Chief
Executive Officer
By/S/ WARREN D. BARRATT
---------------------
Warren D. Barratt,
Senior Vice President,
Chief Financial Officer
and Treasurer
Dated: May 12, 2000
19
EXHIBIT 11
DOCUCON, INCORPORATED
COMPUTATION OF EARNINGS PER SHARE
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31
------------------------------
2000 1999
----------- -----------
<S> <C> <C>
COMPUTATION OF BASIC LOSS PER SHARE:
Net loss ........................................ $(1,010,440) $(1,138,943)
Less- Preferred stock dividend requirements .... (4,813) (4,813)
----------- -----------
Net loss applicable to common stockholders ...... $(1,015,253) $(1,143,756)
=========== ===========
WEIGHTED AVERAGE NUMBER OF SHARES OF COMMON STOCK
OUTSTANDING ..................................... 3,508,767 3,303,546
=========== ===========
BASIC LOSS PER COMMON SHARE ....................... $ (.29) $ (.35)
=========== ===========
COMPUTATION OF DILUTED LOSS PER SHARE:
Net loss ........................................ $(1,010,440) $(1,138,943)
Preferred stock dividend requirements ........... (4,813) (4,813)
Preferred stock dividends not incurred upon
assumed conversion of preferred stock .......... 4,813 4,813
----------- -----------
Net loss applicable to common stockholders used
for computation ................................ $(1,010,440) $(1,138,943)
=========== ===========
Weighted average number of shares of common
stock outstanding .............................. 3,508,767 3,303,546
Weighted average incremental shares outstanding
upon assumed conversion of options and
warrants ....................................... 114,811 322
Weighted average incremental shares outstanding
upon assumed conversion of the preferred stock . 58,331 58,331
----------- -----------
WEIGHTED AVERAGE NUMBER OF SHARES OF COMMON STOCK
AND COMMON STOCK EQUIVALENTS OUTSTANDING USED FOR
COMPUTATION ..................................... 3,681,909 3,362,199
=========== ===========
DILUTED LOSS PER COMMON SHARE AND COMMON SHARE
EQUIVALENTS ..................................... $ (.27)(a) $ (.34)(a)
=========== ===========
</TABLE>
(a) This calculation is submitted in accordance with Item 601(b)(11) of
Regulation S-K although it is not required by SFAS No. 128 because it is
antidilutive.
20
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM DOCUCON,
INCORPORATED'S CONDENSED BALANCE SHEET AS OF MARCH 31, 2000, AND ITS CONDENSED
STATEMENT OF OPERATIONS FOR THE THREE MONTHS THEN ENDED AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 51,100
<SECURITIES> 0
<RECEIVABLES> 2,734,012
<ALLOWANCES> 1,601,458
<INVENTORY> 0
<CURRENT-ASSETS> 1,304,291
<PP&E> 5,456,168
<DEPRECIATION> (5,050,450)
<TOTAL-ASSETS> 1,727,657
<CURRENT-LIABILITIES> 4,386,505
<BONDS> 281,357
0
7
<COMMON> 35,088
<OTHER-SE> (2,975,480)
<TOTAL-LIABILITY-AND-EQUITY> 1,727,657
<SALES> 802,087
<TOTAL-REVENUES> 802,087
<CGS> 778,372
<TOTAL-COSTS> 1,707,803
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 95,342
<INCOME-PRETAX> (1,010,440)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,010,440)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,010,440)
<EPS-BASIC> (.29)
<EPS-DILUTED> (.29)
</TABLE>
