SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-QSB |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000. |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER 000-28451 DOCUPORT, INC. ------------------------------------------------ (Exact name of registrant as specified in its charter) DELAWARE 22-3649272 - ----------------------------- ------------------- (State or Other Jurisdiction (I.R.S.Employer or Incorporation of Organization) Identification No.) 81 Two Bridges Road Fairfield, New Jersey 07004 (973) 882-3177 ------------------------------------------------- (Address and telephone number, including area code, of registrant's principal executive office) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 |_| Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the last practicable date. As of March 31, 2000 there were 6,227,500 shares of Common Stock, $.001 par value, outstanding. Documents Incorporated by reference: The Company incorporates by reference various exhibits from the Company's Annual Report on Form 10-KSB, file No. 000-28451, which was filed on April 17, 2000. -------- ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis should be read in conjunction with the Company's financial statements and the notes related thereto. The discussion of results, causes and trends should not be construed to infer conclusions that such results, causes or trends necessarily will continue in the future. RESULTS OF OPERATIONS The following table sets forth for the periods indicated the amounts included in the Company's consolidated statement of operations: Three Months Ended Three Months Ended March 31,2000 March 31,1999 ------------- ------------- Revenues 0 0 Expenses General and administrative (696,072) (1,336,524) Other income and expenses Interest income 578 0 Interest expense (145,091) (125,716) Net loss for the quarter (840,585) (1,462,240) REVENUES As of March 31, 2000, the Company had not generated any revenues from operations and, accordingly is still within its developmental stage. In the past, the Canadian government has provided companies with research and development grants which were available to the Company as a reimbursement to the Company of taxes payable to the Canadian government. Research and development grants are available as a percentage of research and development expenses, and are not available for expenses related to currency exchange losses, financing fees or other expenses outside of Canada. During the three months ended March 31, 2000 and 1999, the Company was not eligible for any of these grants. 12 GENERAL AND ADMINISTRATIVE EXPENSE General and administrative expenses decreased to $696,072 for the three months ended March 31, 2000 compared to $1,336,524 for the three months ended March 31, 1999. This decrease in expenses is primarily due to a decrease in non-cash charges of $1,252,300 associated with the cost of services paid through the issuance of Common Stock, during the three month period ended March 31, 1999. This decrease was offset, to some extent, by increased expenditures in consulting and travel costs, as well as establishing the Company's headquarters in the United States. INTEREST EXPENSE Interest expense was $145,091 for the three months ended March 31, 2000 compared to $125,623 for the three months ended March 31, 1999. This increase was principally attributable to the increase in the Company's short-term debt. LIQUIDITY AND CAPITAL RESOURCES The Company's working capital and capital requirements will depend upon numerous factors, including the level of resources that the Company devotes to the purchase of manufacturing equipment to support start-up production and to the marketing aspects of its products. The Company intends to construct production and/or assembly centers abroad to manufacture, market and sell the Docuport in the international market. The Company has entered into an agreement with Thomson Consumer Electronics, Inc. to manufacture, market and sell the Docuport in Canada and the United States under its RCA brand name. The Company intends to begin distribution of the Docuport in the United States, Canada, Europe and Asia in the third quarter of the year ending December 31, 2000. The Company's success will be dependent upon raising sufficient capital to establish a production and assembly facility to manufacture the Docuport. The Company believes the Docuport will be commercially accepted throughout the national and international markets. The Company does not have all the financing in place at this time, nor may it ever, to meet these objectives. During the year ending December 31, 1999 the Company raised funds through the sale of securities in order satisfy its cash requirements and liquidity obligations. During March, 1999 and April, 1999 the Company sold 1,135,000 shares of Common Stock for an aggregate sum of $792,836 net of $147,164 of offering costs. Commencing in February, 2000 and through April, 2000 the Company, through a private offering, sold a combination of convertible debentures and warrants for a sum of $850,000. Subsequent to March 31, 2000, the Company has raised an additional $400,000 through a 13 private offering of convertible promissory notes and warrants. The Company contemplates seeking additional financing or conducting a public offering in order to satisfy additional cash requirements and its liquidity obligations. The Company's computer systems and equipment successfully transitioned to the Year 2000 with no significant issues. The Company continues to monitor its systems for latent problems that could surface at key dates or events in the future. It is not anticipated that there will be any significant problems related to these events. This Management's Discussion and Analysis of Financial Condition and Results of Operations includes forward-looking statements that may or may not materialize. Additional information on factors that could potentially affect the Company's financial results may be found in the Company's filings with the Securities and Exchange Commission. OTHER MATTERS The Form 10-QSB, other than historical financial information, may consist of forward-looking statements that include risks and uncertainties, including, but not limited to, statements contained in "Management's Discussion and Analysis of Financial Condition and Results of Operations". Such statements are based upon many assumptions and are subject to risks and uncertainties. Actual results could differ materially from the results discussed in the forward-looking statements due to a number of factors, including, but not limited to, those identified in the preceding paragraphs. 14 PART II. Other Information Item 1. Legal Proceedings None Item 2. Changes in Securities and Use of Proceeds During the three months ending March 31, 2000, the Company issued 225,000 shares of Common Stock upon the exercise of warrants for $.10 per share. Item 3. Defaults Upon Senior Securities None Item 4. Submission of Matters to Vote of Security Holders No matters were submitted to a vote of the Company's shareholders during the quarterly period ended March 31, 2000. Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: In accordance with Item 601 of Regulation S-B, the following Exhibit from the Company's 8-K filed February 10, 2000 is incorporated by reference: Exhibit 10.1 Marketing Rights and Supply Agreement, dated January 14, 2000, by and between Docuport and Thomson Consumer Electronics, Inc. (b) During the quarter ended March 31, 2000, a Form 8-K was filed by the registrant on February 10, 2000, with respect to a Marketing Rights and Supply Agreement entered into between the Company and Thomson Consumer Electronics, Inc. 15 (c) A Form 8-K was filed by the registrant on April 3, 2000 with respect to a change of the Company's principal accountant from BDO Dunwoody to J.H. Cohn, LLP, effective March 30, 2000. 16 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. DOCUPORT, INC. By: /s/ Norman Docteroff ---------------------------------------- Norman Docteroff, President Date: May 22, 2000 17 DOCUPORT, INC. AND SUBSIDIARY (A Development Stage Company) PAGE ---- Part I - Financial Information Item 1. Financial Statements Report of Independent Public Accountants 2 Condensed Consolidated Balance Sheets March 31, 2000 (Unaudited) and December 31, 1999 3 Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) Three Months Ended March 31, 2000 and 1999 and Period from February 1, 1992 (Date of Inception) to March 31, 2000 (Unaudited) 4 Condensed Consolidated Statement of Changes in Stockholders' Deficiency Three Months Ended March 31, 2000 and Period from February 1, 1992 (Date of Inception) to March 31, 2000 (Unaudited) 5-6 Condensed Consolidated Statements of Cash Flows Three Months Ended March 31, 2000 and 1999 and Period from February 1, 1992 (Date of Inception) to March 31, 2000 (Unaudited) 7 Notes to Condensed Consolidated Financial Statements (Unaudited) 8-11 Item 2. Management's Discussion and Analysis or Plan of Operation 12-14 Part II - Other Information Item 6. Exhibits and Reports on Form 8-K 15 Signatures 17 1 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors and Stockholders Docuport, Inc. We have reviewed the accompanying condensed consolidated balance sheet of DOCUPORT, INC. AND SUBSIDIARY (A Development Stage Company) as of March 31, 2000, and the related condensed consolidated statements of operations and comprehensive income (loss), changes in stockholders' deficiency and cash flows for the three months ended March 31, 2000 and for the period from February 1, 1992 (date of inception) to March 31, 2000. These condensed consolidated financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review of the condensed consolidated financial statements referred to above, we are not aware of any material modifications that should be made to the accompanying condensed consolidated financial statements for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet of the Company as of December 31, 1999, and the related consolidated statements of operations and comprehensive income (loss), changes in stockholders' deficiency and cash flows for the year then ended and for the period from February 1, 1992 (date of inception) to December 31, 1999, which are not presented herein, and in our report dated April 7, 2000, we expressed an unqualified opinion on those consolidated financial statements. Our opinion on the consolidated statements of operations and comprehensive income (loss), changes in stockholders' deficiency and cash flows for the period from February 1, 1992 (date of inception) to December 31,1999, insofar as it related to amounts for the period from February 1, 1992 (date of inception) through December 31, 1998, was based solely on the report of other auditors. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 1999, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. The accompanying condensed consolidated statements of operations and comprehensive income (loss) and cash flows for the three months ended March 31, 1999 were not audited or reviewed by us and, accordingly, we do not express an opinion or any other form of assurance on them. J.H. Cohn LLP Roseland, New Jersey May 16, 2000 2 DOCUPORT, INC. AND SUBSIDIARY (A Development Stage Company) CONDENSED CONSOLIDATED BALANCE SHEETS MARCH 31, 2000 AND DECEMBER 31, 1999 March December ASSETS 31, 2000 31, 1999 ----------- ----------- (Unaudited) (Note 1) Current assets: Cash and cash equivalents $ 235,484 $ 77,486 Research and development grants receivable, net of allowance of $150,000 39,186 39,363 Prepaid expenses and sundry receivables 60,061 23,664 Advances to employees 18,815 22,955 ----------- ----------- Total current assets 353,546 163,468 Furniture and equipment, net of accumulated depreciation of $13,713 and $11,780 29,977 25,662 Loan financing costs, net of accumulated amortization of $24,246 and $4,871 95,754 30,129 Other assets 26,831 26,698 ----------- ----------- Totals $ 506,108 $ 245,957 =========== =========== LIABILITIES AND STOCKHOLDERS' DEFICIENCY Current liabilities: Accounts payable and accrued expenses $ 523,388 $ 427,229 Due to related parties 46,528 25,486 Current portion of long-term debt 1,775,000 925,000 ----------- ----------- Total liabilities 2,344,916 1,377,715 ----------- ----------- Commitments Stockholders' deficiency: Preferred stock, par value $.001 per share; 2,000,000 shares authorized; none issued -- -- Common stock, par value $.001 per share; 12,000,000 shares authorized; 6,227,500 and 6,002,500 shares issued and outstanding 6,227 6,002 Additional paid-in capital 2,781,281 2,759,006 Deficit accumulated during the development stage (4,594,352) (3,753,767) Unamortized interest cost (88,645) (199,986) Accumulated other comprehensive income - foreign currency translation 56,681 56,987 ----------- ----------- Total stockholders' deficiency (1,838,808) (1,131,758) ----------- ----------- Totals $ 506,108 $ 245,957 =========== =========== See Notes to Condensed Consolidated Financial Statements. 3 DOCUPORT, INC. AND SUBSIDIARY (A Development Stage Company) CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) THREE MONTHS ENDED MARCH 31, 2000 AND 1999 AND PERIOD FROM FEBRUARY 1, 1992 (DATE OF INCEPTION) TO MARCH 31, 2000 (Unaudited) 2000 1999 Cumulative ----------- ----------- ----------- Revenue $ -- $ -- $ 334,702 General and administrative expenses 696,072 1,336,524 3,996,630 ----------- ----------- ----------- Loss from operations (696,072) (1,336,524) (3,661,928) Other income (expense): Interest income 578 22,186 Interest expense (145,091) (125,716) (950,161) ----------- ----------- ----------- Net loss (840,585) (1,462,240) (4,589,903) Other comprehensive income (loss) - foreign currency translation (306) (12,623) 56,681 ----------- ----------- ----------- Comprehensive income (loss) $ (840,891) $(1,474,863) $(4,533,222) =========== =========== =========== Basic net loss per common share $ (.14) $ (.30) $ (.98) =========== =========== =========== Basic weighted average common shares outstanding 6,077,500 4,868,333 4,634,014 =========== =========== =========== See Notes to Condensed Consolidated Financial Statements. 4 DOCUPORT, INC. AND SUBSIDIARY (A Development Stage Company) CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIENCY THREE MONTHS ENDED MARCH 31, 2000 AND PERIOD FROM FEBRUARY 1, 1992 (DATE OF INCEPTION) TO MARCH 31, 2000 (Unaudited) Accmu- lated Other Compre- Deficit hensive Accumulated Income - Common Stock Additional During the Unamortized Foreign -------------------------- Paid-in Development Interest Currency Shares Amount Capital Stage Cost Translation ----------- ----------- ----------- ----------- ----------- ----------- Issuance of common stock in 1992 for $.0000251 per share 2,900,000 $ 73 Issuance of common stock in 1996 for no consideration 115,000 Recapitalization to effect the ex- change of shares on reverse acquisition 1,507,500 4,449 $ (4,449) Net loss from inception to December 31, 1997 (515,703) Other comprehensive income - foreign currency translation adjust- ment from inception to December 31, 1997 $ 25,285 ---------- ----------- ----------- ----------- Balance, December 31, 1997 4,522,500 4,522 (520,152) 25,285 Transfer of common stock in 1998 from existing stockholders in ex- change for consulting services $ 70,000 Net loss (226,479) Other comprehensive income - foreign currency translation adjustment 32,453 ---------- ----------- ----------- ----------- ----------- Balance, December 31, 1998 4,522,500 4,522 70,000 (746,631) 57,738 Issuance of common stock in January 1999 to existing stockholders in exchange for consulting services 230,000 230 22,770 Recapitalization to effect the exchange of shares on reverse acquisition 115,000 115 (115) Issuance of common stock in March 1999 for $.10 per share 53,000 53 5,247 Issuance of common stock in March 1999 for $2.00 per share, including services valued at $1.90 per share 647,000 647 1,293,353 Issuance of common stock in April 1999 for $2.00 per share, net of offering costs of $147,164 435,000 435 722,401 Effect of repricing outstanding warrants 645,350 $ (645,350) Amortization of interest cost 445,364 Net loss (3,007,136) Other comprehensive income (loss) - foreign currency trans- lation adjustment (751) ----------- ----------- ----------- ----------- ----------- ----------- Balance, December 31, 1999 6,002,500 6,002 2,759,006 (3,753,767) (199,986) 56,987 ----------- ----------- ----------- ----------- ----------- ----------- Total ----------- Issuance of common stock in 1992 for $.0000251 per share $ 73 Issuance of common stock in 1996 for no consideration Recapitalization to effect the ex- change of shares on reverse acquisition Net loss from inception to December 31, 1997 (515,703) Other comprehensive income - foreign currency translation adjust- ment from inception to December 31, 1997 25,285 ----------- Balance, December 31, 1997 (490,345) Transfer of common stock in 1998 from existing stockholders in ex- change for consulting services 70,000 Net loss (226,479) Other comprehensive income - foreign currency translation adjustment 32,453 ----------- Balance, December 31, 1998 (614,371) Issuance of common stock in January 1999 to existing stockholders in exchange for consulting services 23,000 Recapitalization to effect the exchange of shares on reverse acquisition Issuance of common stock in March 1999 for $.10 per share 5,300 Issuance of common stock in March 1999 for $2.00 per share, including services valued at $1.90 per share 1,294,000 Issuance of common stock in April 1999 for $2.00 per share, net of offering costs of $147,164 722,836 Effect of repricing outstanding warrants Amortization of interest cost 445,364 Net loss (3,007,136) Other comprehensive income (loss) - foreign currency trans- lation adjustment (751) ----------- Balance, December 31, 1999 (1,131,758) ----------- 5 DOCUPORT, INC. AND SUBSIDIARY (A Development Stage Company) CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIENCY THREE MONTHS ENDED MARCH 31, 2000 AND PERIOD FROM FEBRUARY 1, 1992 (DATE OF INCEPTION) TO MARCH 31, 2000 (Unaudited) Accmu- lated Other Compre- Deficit hensive Accumulated Income - Common Stock Additional During the Unamortized Foreign -------------------------- Paid-in Development Interest Currency Shares Amount Capital Stage Cost Translation ----------- ----------- ----------- ----------- ----------- ----------- Balance, January 1, 2000 6,002,500 $ 6,002 $ 2,759,006 $(3,753,767) $ (199,986) $ 56,987 Issuance of common stock in March 2000 upon the exercise of warrants for $.10 per share 225,000 225 22,275 Amortization of interest cost 111,341 Net loss (840,585) Other comprehensive income (loss) - foreign currency trans- lation adjustment (306) ----------- ----------- ----------- ----------- ----------- ----------- Balance, March 31, 2000 6,227,500 $ 6,227 $ 2,781,281 $(4,594,352) $ (88,645) $ 56,681 =========== =========== =========== =========== =========== =========== Total ----------- Balance, January 1, 2000 $(1,131,758) Issuance of common stock in March 2000 upon the exercise of warrants for $.10 per share 22,500 Amortization of interest cost 111,341 Net loss (840,585) Other comprehensive income (loss) - foreign currency trans- lation adjustment (306) ----------- Balance, March 31, 2000 $(1,838,808) =========== See Notes to Condensed Consolidated Financial Statements. 6 DOCUPORT, INC. AND SUBSIDIARY (A Development Stage Company) CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS THREE MONTHS ENDED MARCH 31, 2000 AND 1999 AND PERIOD FROM FEBRUARY 1, 1992 (DATE OF INCEPTION) TO MARCH 31, 2000 (Unaudited) 2000 1999 Cumulative ----------- ----------- ----------- Operating activities: Net loss $ (840,585) $(1,462,240) $(4,589,903) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 2,182 367 15,186 Amortization of loan financing costs 19,375 24,246 Amortization of interest expense 111,341 111,341 556,705 Foreign exchange loss 65,966 Costs of services paid through issuance of common stock and stock options 1,252,300 1,322,300 Reserve for bad debt 150,000 Changes in operating assets and liabilities: Research and development grants receivable 177 3,474 (189,186) Prepaid expenses and sundry receivables (36,397) (70,004) (59,995) Other assets (115) 250 (1,445) Accounts payable and accrued expenses 96,159 6,285 523,436 ----------- ----------- ----------- Net cash used in operating activities (647,863) (158,227) (2,182,690) ----------- ----------- ----------- Investing activities: Purchases of furniture and equipment (6,248) (90) (44,658) Deposit on purchases of equipment (16,726) Payments of costs in connection with acquisition of patents (267) (9,163) Repayments from (advances to) employees 4,140 (18,815) ----------- ----------- ----------- Net cash used in investing activities (2,375) (90) (89,362) ----------- ----------- ----------- Financing activities: Proceeds from long-term debt 850,000 1,775,000 Proceeds from sale of common stock 22,500 70,000 815,409 Loan financing costs (85,000) (120,000) Proceeds from (repayment to) related parties 21,042 (176) 46,527 ----------- ----------- ----------- Net cash provided by financing activities 808,542 69,824 2,516,936 ----------- ----------- ----------- Effect of exchange rate changes on cash (306) (1,139) (9,400) ----------- ----------- ----------- Net increase (decrease) in cash and cash equivalents 157,998 (89,632) 235,484 Cash and cash equivalents, beginning of period 77,486 117,899 -- ----------- ----------- ----------- Cash and cash equivalents, end of period $ 235,484 $ 28,267 $ 235,484 =========== =========== =========== See Notes to Condensed Consolidated Financial Statements. 7 DOCUPORT, INC. AND SUBSIDIARY (A Development Stage Company) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note 1 - Unaudited interim financial statements: In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments, consisting of normal recurring accruals, necessary to present fairly the financial position of Docuport, Inc. and its subsidiary, a company in the development stage, (the "Company") as of March 31, 2000, and their results of operations and cash flows for the three months ended March 31, 2000 and 1999 and the period from February 1, 1992 (date of inception) to March 31, 2000, and changes in stockholders' deficiency for the three months ended March 31, 2000 and the period from February 1, 1992 (date of inception) to March 31, 2000. Information included in the condensed consolidated balance sheet as of December 31, 1999 has been derived from, and certain terms used herein are defined in, the audited consolidated financial statements of the Company as of December 31, 1999 and for the years ended December 31, 1999 and 1998 and the period from February 1, 1992 (date of inception) to March 31, 2000, (the "Audited Financial Statements") included in the Company's Annual Report on Form 10-KSB (the "10-KSB") for the year ended December 31, 1999 that was previously filed with the United States Securities and Exchange Commission (the "SEC"). Pursuant to the rules and regulations of the SEC, certain information and disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted from these condensed consolidated financial statements unless significant changes have taken place since the end of the most recent fiscal year. Accordingly, these unaudited condensed consolidated financial statements should be read in conjunction with the Audited Financial Statements and the other information also included in the 10-KSB. The results of the Company's operations for the three months ended March 31, 2000 are not necessarily indicative of the results of operations for the full year ending December 31, 2000. As of March 31, 2000, the Company had not generated any revenues from operations and, accordingly, it is still in the development stage. Management does not expect the Company to generate any revenues from its planned operations prior to the fourth quarter of the year ending December 31, 2000. Note 2 - Earnings (loss) per common share: As further explained in Note 2 of the notes to the Audited Financial Statements, the Company presents basic and, if appropriate, diluted earnings (loss) per share in accordance with the provisions of Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128"). Diluted per share amounts have not been presented in the accompanying unaudited condensed consolidated statements of operations because the Company incurred losses in 2000 and 1999, and the assumed effects of the exercise of warrants were anti-dilutive. Such warrants however, could dilute basic earnings per share in the future. 8 DOCUPORT, INC. AND SUBSIDIARY (A Development Stage Company) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note 3 - Long-term debt: At March 31, 2000, long-term debt consists of notes payable that bear interest at 10% and which is due and payable upon the maturity of the notes as follows: Note payable, due August 28, 1998 (A) $ 50,000 Notes payable, due August 1, 2000 (B) 525,000 Notes payable, due November 10, 2000 350,000 Notes payable, due February 15, 2001 (C) 850,000 ---------- Total $1,775,000 ========== (A) The Company is currently in default and, as a result, the note is due on demand. (B) On February 10, 1999, the Company negotiated with the noteholders for an extension until August 1, 2000, in which to repay these obligations. In consideration for the extension, the Company reduced the exercise price of the existing warrants from $1.67 per share, split adjusted to $.10 per share, and issued to the noteholders an additional 157,500 warrants having an exercise price of $.10 per share. The cost of these additional warrants is estimated to be $645,350, of which $111,341 has been expensed for each of the three month periods ended March 31, 2000 and 1999. The balance of $88,645 is reflected as unamortized interest cost at March 31, 2000. (C) On January 28, 2000, the Company commenced a private offering (the "New Offering") to "Accredited Investors" of units of 10% convertible promissory notes that are due February 15, 2001 (the "10% Notes"). The New Offering expired on February 15, 2000 (unless extended by the Company at its sole and absolute discretion) and is intended to be exempt from registration pursuant to the provisions of Regulation D of the Securities Act of 1933. The 10% Notes are convertible at any time at the holder's option, subject to Company approval, at the rate of $8.00 per share. Interest on the 10% Notes is payable upon the payment of the principal balance. However, if the Company intends to pay the full principal amount plus any accrued interest upon the closing of any equity or debt financing of at least $3,000,000, the 10% Notes may be converted earlier at $6.40 per share. The Company has extended the New Offering and issued $400,000 of 10% Notes subsequent to March 31, 2000. Note 4 - Warrants: During the three months ended March 31, 2000, warrantholders exercised 225,000 warrants and purchased 225,000 shares of common stock at $.10 per share. 9 DOCUPORT, INC. AND SUBSIDIARY (A Development Stage Company) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note 4 - Warrants (concluded): At March 31, 2000, the Company had outstanding warrants to purchase 430,000 shares of common stock that are exercisable through August 28, 2002. The following table summarizes the outstanding warrants as of March 31, 2000: Exercisable Number Price Outstanding ----------- ----------- $4.00 10,000 2.00 315,000 1.67 15,000 .10 90,000 -------- 430,000 ======= The compensation cost, pro forma loss and net loss per share for 2000 and 1999 using a fair value based method of accounting for the warrants granted, as required by SFAS 123, would not differ materially from the corresponding historical amounts. Note 5 - Income taxes: As of March 31, 2000, the Company had net operating loss carryforwards of approximately $4,000,000 available to reduce future Federal taxable income which, if not used, will expire at various dates through 2020. The Company had no other material temporary differences as of that date. Due to the uncertainties related to, among other things, the changes in the ownership of the Company, which could subject those loss carryforwards to substantial annual limitations, and the extent and timing of its future taxable income, the Company offset the deferred tax assets attributable to the potential benefits of approximately $1,197,000 from the utilization of those net operating loss carryforwards by an equivalent valuation allowance as of March 31, 2000. The Company had also offset the potential benefits from net operating loss carryforwards by equivalent valuation allowances during 1999. As a result of the increases in the valuation allowance of $336,000 and $545,000 during the three months ended March 31, 2000 and 1999, respectively, no credits for income taxes are included in the accompanying condensed consolidated statements of operations. 10 DOCUPORT, INC. AND SUBSIDIARY (A Development Stage Company) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note 6 - Segment and geographic information: Pursuant to the provisions of SFAS 131, "Disclosures about Segments of an Enterprise and Related Information," the Company is required to report segment information in the same format reviewed by the Company's management (the "management approach"). The Company operates principally in one industry segment consisting of the development, manufacture and sale of highly portable imaging devices. Prior to 1999, the Company conducted its operations principally in Canada. Commencing in 1999, the Company also expanded its operations to the United States. Information about the Company's operations and assets in different geographic locations as of and for the three months ended March 31, 2000 and 1999 is shown below: United States Canada Consolidated ----------- ----------- ------------ 2000 ---- Revenue $ -- $ -- $ -- Expenses, net of interest income 569,981 270,604 840,585 ----------- ----------- ----------- Net loss $ (569,981) $ (270,604) $ (840,585) =========== =========== =========== Total assets $ 380,066 $ 126,042 $ 506,108 =========== =========== =========== 1999 ---- Revenue $ -- $ -- $ -- Expenses, net of interest income 1,239,002 223,238 1,462,240 ----------- ----------- ----------- Net loss $(1,239,002) $ (223,238) $(1,462,240) =========== =========== =========== Total assets $ 58,113 $ 72,031 $ 130,144 =========== =========== =========== * * * 11