-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, H5Lrx8YR9+pfvVDuukKiW0WBdWCy97UTyPsRMsHt3FORRyX2dZyyMQFm1QKgaRe8 S2abr5aynh+0H9N1eO7SjQ== 0000912057-01-528784.txt : 20010816 0000912057-01-528784.hdr.sgml : 20010816 ACCESSION NUMBER: 0000912057-01-528784 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010630 FILED AS OF DATE: 20010814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DOCUCON INCORPORATED CENTRAL INDEX KEY: 0000843006 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROGRAMMING, DATA PROCESSING, ETC. [7370] IRS NUMBER: 742418590 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 001-10185 FILM NUMBER: 1714349 BUSINESS ADDRESS: STREET 1: 140 E HOUSTON ST SUITE 200 CITY: SAN ANTONIO STATE: TX ZIP: 78205 BUSINESS PHONE: 2105259221 MAIL ADDRESS: STREET 1: 140 E HOUSTON ST SUITE 200 CITY: SAN ANTONIO STATE: TX ZIP: 78205 10QSB 1 a2057009z10qsb.txt 10QSB UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB (Mark One) [X] Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Quarterly Period Ended June 30, 2001 --------------------- OR [ ] Transition Report Under Section 13 or 15(d) of the Exchange Act For the Transition Period From _______ to ________ Commission File Number 1-10185 DOCUCON, INCORPORATED (Exact name of small business issuer as specified in its charter) Delaware 74-2418590 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 8 Airport Park Boulevard Latham, New York 12110 (Address of principal executive offices) (518) 786-7733 (Issuer's telephone number) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] State the number of shares outstanding of each of the issuer's classes of common equity as of August 14, 2001 3,658,767 DOCUCON, INCORPORATED INDEX PAGE PART I. FINANCIAL INFORMATION (UNAUDITED) Item 1: Condensed Balance Sheets - June 30, 2001 and December 31, 2000 1 Condensed Statements of Operations - For the Six and Three Months Ended June 30, 2001 and 2000 2 Condensed Statements of Cash Flows - For the Six Months Ended June 30, 2001 and 2000 3 Notes to Condensed Financial Statements 4 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations 9 PART II. OTHER INFORMATION 11 SIGNATURE 13 DOCUCON, INCORPORATED CONDENSED BALANCE SHEETS (Unaudited)
JUNE 30, DECEMBER 31, 2001 2000 ------------ ------------ ASSETS CURRENT ASSETS Cash $ 92,459 $ 238,370 Other current assets 20,735 7,351 ------------ ------------ TOTAL CURRENT ASSETS 113,194 245,721 PROPERTY AND EQUIPMENT, NET 68,847 74,000 RESTRICTED CASH AND OTHER ASSETS 264,407 264,257 ------------ ------------ $ 446,448 $ 583,978 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 63,388 $ 18,012 Accrued expenses and other current liabilities 259,673 260,575 Related party notes payable 108,333 108,334 ------------ ------------ TOTAL CURRENT LIABILITIES 431,394 386,921 ------------ ------------ OTHER LIABILITY 858 5,280 ------------ ------------ COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY Preferred stock, $1.00 par value, 10,000,000 shares authorized- Series A, 60 shares authorized, 7 shares issued and outstanding 7 7 Common stock $.01 par value, 25,000,000 shares authorized, 3,658,767 shares issued 36,588 36,588 Additional paid-in capital 10,231,240 10,231,240 Accumulated deficit (10,249,403) (10,071,822) Treasury stock, at cost, 4,495 shares (4,236) (4,236) ------------ ------------ TOTAL STOCKHOLDERS' EQUITY 14,196 191,777 ------------ ------------ $ 446,448 $ 583,978 ============ ============
The accompanying notes are an integral part of these condensed financial statements 1 DOCUCON, INCORPORATED CONDENSED STATEMENTS OF OPERATIONS (Unaudited)
SIX MONTHS THREE MONTHS ENDED JUNE 30 ENDED JUNE 30 ----------------------------- ----------------------------- 2001 2000 2001 2000 ----------- ----------- ----------- ----------- Revenues $ -- $ -- $ -- $ -- ----------- ----------- ----------- ----------- COSTS AND EXPENSES General and administrative 176,915 750,034 99,629 259,972 Depreciation and amortization 4,500 10,881 2,250 5,379 ----------- ----------- ----------- ----------- TOTAL COSTS AND EXPENSES 181,415 760,915 101,879 265,351 ----------- ----------- ----------- ----------- OPERATING LOSS FROM CONTINUING OPERATIONS (181,415) (760,915) (101,879) (265,351) OTHER INCOME (LOSS), NET 3,833 (23,117) 1,606 (14,380) ----------- ----------- ----------- ----------- LOSS FROM CONTINUING OPERATIONS (177,582) (784,032) (100,273) (279,731) DISCONTINUED OPERATIONS Loss from discontinued operations (913,510) (407,003) Gain on disposal of discontinued operations 3,973,778 3,973,778 ----------- ----------- ----------- ----------- NET INCOME (LOSS) (177,582) 2,276,236 (100,273) 3,287,044 ----------- ----------- ----------- ----------- PREFERRED STOCK DIVIDEND REQUIREMENT (9,625) (9,625) (4,813) (4,813) ----------- ----------- ----------- ----------- NET INCOME (LOSS) APPLICABLE TO COMMON STOCKHOLDERS $ (187,207) $ 2,266,611 $ (105,086) $ 3,282,231 =========== =========== =========== =========== EARNINGS (L0SS) PER COMMON SHARE: Basic and diluted From continuing operations $ (0.05) $ (0.23) $ (0.03) $ (0.08) From discontinued operations 0.87 1.00 ----------- ----------- ----------- ----------- Net income (loss) $ (0.05) $ 0.64 $ (0.03) $ 0.92 =========== =========== =========== =========== WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 3,658,767 3,516,918 3,658,767 3,558,218 =========== =========== =========== ===========
The accompanying notes are an integral part of these condensed financial statements. 2 DOCUCON, INCORPORATED CONDENSED STATEMENTS OF CASH FLOWS Six Months Ended June 30, 2000 and 2001 (Unaudited)
2001 2000 ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $ (177,582) $ 2,276,236 Adjusted for net income from discontinued operations 3,060,268 ----------- ----------- Loss from continuing operations (177,582) (784,032) Adjustments to reconcile loss from continuing operations to net cash used in continuing operations Depreciation and amortization 4,500 10,881 Common stock issued to officer 22,838 Loss on sale or abandonment of assets 25,222 Gain on forgiveness of certain accrued liabilities (156,444) Noncash interest 70,666 Increase (decrease) in cash attributable to changes in operating assets and liabilities Other current assets (13,430) 84,475 Other assets (43,154) Accounts payable 45,376 Accrued expenses and other current liabilities (903) ----------- ----------- Net cash used in continuing operations (142,039) (769,548) Net cash used in discontinued operations (909,210) ----------- ----------- Net cash used in operating activities (142,039) (1,678,758) ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from TAB transaction, net of amount paid to escrow fund 2,464,254 $250,000 and cash acquired by TAB of $92,433 Proceeds from Sales of Assets 550 ----------- ----------- Net cash provided by investing activities 550 2,464,254 ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from secured short-term notes 1,075,000 Principal payments on short-term notes (1,075,000) Principal payments under capital lease obligations (4,422) (7,330) Principal payments on long-term debt and other obligations (216,667) ----------- ----------- Net cash used in financing activities (4,422) (223,997) ----------- ----------- NET INCREASE (DECREASE) IN CASH (145,911) 561,499 CASH, BEGINNING OF PERIOD 238,370 28,835 ----------- ----------- CASH, END OF PERIOD $ 92,459 $ 590,334 =========== =========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Noncash investing and financing activities- Assumption of liabilities by Tab Products, Inc. $ -- $ 2,311,000 =========== =========== Cash paid during the period for interest $ 1,885 $ 30,174 =========== ===========
The accompanying notes are an integral part of these condensed financial statements. 3 DOCUCON, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS 1. DESCRIPTION, BACKGROUND AND GOING CONCERN CONSIDERATION Docucon, Incorporated (the "Company"), a Delaware corporation, was incorporated in June 1986. Through May 2000, the Company's primary business was the conversion of paper and microform documents to optical and other types of storage media for use in document management systems and internet applications for customers in the federal and commercial markets. In May 2000, the Company completed the sale of substantially all of its operating assets and certain liabilities to Tab Products Co, ("TAB"). The accompanying condensed financial statements have been prepared assuming the Company will continue as a going concern. As discussed above and in Note 4, the Company sold substantially all of its operating assets and certain liabilities to TAB and effectively became a "shell" company with no revenues and continuing general and administrative expenses. Further, at June 30, 2001, the Company has cumulative losses of approximately $ 10.3 million and a working capital deficit of approximately $318,000. For the six months ended June 30, 2001, and the year ended December 31, 2000, the Company had negative operating cash flows of approximately $0.14 million and $2.0 million, respectively. These conditions 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 this uncertainty. In June 2001, the Company agreed to the terms of a letter of intent to acquire all outstanding and issued shares of an unrelated manufacturer and distributor of video surveillance systems. The proposed transaction is subject to various significant conditions including, but not limited to, the unrelated manufacturer's commitment to fund an additional $2.5 million in operating capital, and approval of both companies shareholders. If the Company is unsuccessful in completing this transaction, management's alternative plan includes a further search for a similar business combination or strategic alliance. There can be no assurances that the transaction described above or management's alternative plan will be realized. 2. UNAUDITED STATEMENTS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Unaudited statements The accompanying condensed financial statements of Docucon, Incorporated as of June 30, 2001 and for the six and three months ended June 30, 2001 and 2000 are unaudited and reflect all adjustments of a normal and recurring nature to present fairly the financial position, results of operations and cash flows for the interim periods. These unaudited condensed financial statements have been prepared by the Company pursuant to instructions to Form 10-QSB. Pursuant to such instructions, certain financial information and footnote disclosures normally included in such financial statements have been omitted. These unaudited condensed financial statements should be read in conjunction with the audited financial statements and notes thereto, together with management's discussion and analysis or plan of operations, contained in the Company's Annual Report on Form 10-KSB for the year ended December 31, 2000. The results of operations for the six and three months ended June 30, 2001 are not necessarily indicative of the results that may occur for the year ending December 31, 2001. Cash The Company maintains its cash with financial institutions in accounts that at times may exceed insured limits. The Company has not experienced any losses in such accounts and believes it is not subject to any significant credit risk on cash. Property and Equipment Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are provided using the straight-line method over 3 to 5 years. 4 DOCUCON, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS Revenue Recognition Revenues from conversion service contracts were recognized at the time services were provided and were based upon the number of documents converted and the conversion rates established in the contracts. Earnings (loss) per Common Share ("EPS") The Company complies with Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share" which requires dual presentation of basic and diluted earnings per share. Basic EPS excludes dilution and is computed by dividing income (loss) available to common stockholders by the weighted-average common shares outstanding for the year. 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 entity. As the Company had a net loss from continuing operations for the six and three Months ended June 30, 2001 and 2000, diluted EPS equals basic EPS as potentially dilutive common stock equivalents are antidilutive. Income Taxes The Company complies with SFAS No. 109, "Accounting for Taxes," which requires an asset and liability approach to financial accounting and reporting for income taxes. Deferred income tax assets and liabilities are computed for differences between the financial statement and tax bases of assets and liabilities that will result in future taxable or deductible amounts, based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred income tax assets to the amounts expected to be realized. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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. 3. NEW ACCOUNTING PRONOUNCEMENTS In July 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard ("SFAS") No.'s 141 and 142, "Business Combinations" and "Goodwill and Other Intangibles". SFAS 141 requires all business combinations initiated after June 30, 2001 to be accounted for using the purchase method. Under SFAS 142, effective the first quarter of the year ending December 31, 2002, goodwill is no longer subject to amortization over its estimated useful life. Rather, goodwill is subject to at least an annual assessment for impairment applying a fair-value based test. Additionally, an acquired intangible asset should be separately recognized if the benefit of the intangible asset is obtained through contractual or other legal rights, or if the intangible asset can be sold, transferred, licensed, rented, or exchanged, regardless of the acquirer's intent to do so. 4. DISCONTINUED OPERATIONS AND RELATED CONTINGENCY In May 2000, the Company's shareholders approved the sale of substantially all of the Company's operating assets to TAB for cash of approximately $2.8 million and the assumption of approximately $2.3 million of operating liabilities, resulting in a gain of approximately $4.1 million. As a result, the operating activity related to the operating assets and liabilities has been accounted for as a discontinued operation and, accordingly, the Company has reflected its condensed financial statements for 2000 in accordance with Accounting Principles Board ("APB") Opinion No. 30, "Reporting the Results of Operations". The following table provides certain information related to the discontinued operations for the six and three months ended June 30, 2000:
Six Months Three Months Ended Ended 6/30/00 6/30/00 ----------- ----------- Revenues $ 1,231,204 $ 429,117 ----------- ----------- Costs and expenses Production 1,242,170 459,250 All other 902,544 376,870 ----------- ----------- Total costs and expenses 2,144,714 836,120 ----------- ----------- Loss from discontinued operations $ (913,510) $ (407,003) =========== ===========
5 DOCUCON, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS 4. DISCONTINUED OPERATIONS AND RELATED CONTINGENCY (CONTINUED) In conjunction with entering into a nonbinding letter of intent in January 2000, and definitive asset purchase agreement dated March 7, 2000, by and among TAB and TAB's wholly-owned subsidiary, Bunt Acquisition Corp., on one hand, and the Company on the other hand ("TAB Asset Purchase Agreement"), TAB loaned the Company cash, evidenced by secured promissory notes in the amount of $1,075,000, to fund working capital deficits. This amount, plus accrued interest of approximately $23,000, was deducted from cash proceeds at the closing. In addition, in accordance with the TAB Asset Purchase Agreement, promptly after closing, the Company paid from the cash proceeds substantially all liabilities not assumed by TAB, except for certain amounts due under employment agreements with certain Company officers, a retirement obligation due to a former officer of the Company, and related party notes payable. Prior to the closing of the TAB transaction, certain Company officers and a former Company officer agreed to reductions in the amounts due under the employment agreements and a retirement agreement, respectively, among other terms. The two directors of the Company who had loaned the Company an aggregate of $325,000 agreed to waive the accrued interest due on the notes and to the cancellation of the related warrants, among other terms. In accordance with these revised agreements, the Company paid two-thirds of the obligations after closing, and the remaining one-third will be satisfied upon release of the escrow fund, described below, from available cash less a reasonable provision for any net costs necessary to wind-down and/or dispose of the Company. Under the terms of the TAB Asset Purchase Agreement, TAB paid $250,000 of the purchase price into an Escrow Fund ("Escrow Fund") for the purposes of indemnifying TAB from certain "Indemnifiable losses,", as defined therein, including any failure of the Company to discharge any liability not assumed by TAB. The Escrow Fund, which is classified as restricted cash in the accompanying June 30, 2001 and December 31, 2000 condensed balance sheets, was scheduled to be released in November 2000, net of any indemnification claims that have been agreed to by TAB and the Company and any unresolved claims. Unresolved claims will be satisfied or the related Escrow Fund released after the claims resolution procedure detailed in the TAB Asset Purchase Agreement has been completed. On November 9, 2000, TAB asserted claims against the Escrow Fund pursuant to Article XII of the TAB Asset Purchase Agreement and pursuant to Section 6 of the Escrow Agreement, based upon certain claims asserted by the Department of Labor ("DOL") against TAB relating to government wage and benefit orders, and that certain employees may not have been paid in compliance with these orders. DOL has not asserted these claims against the Company. On December 7, 2000, the Company objected to the entirety of all claims made by TAB against the Escrow Fund. Additionally, the Company notified TAB of its intention to participate in defense of the DOL's claims. TAB consented to the Company's participation. The Company and TAB agreed to a 90-day good-faith negotiation period through March 7, 2001, extended to June 30, 2001, and further extended to August 30, 2001. The Company and TAB are negotiating a potential resolution of this matter and continuing discussions with DOL. The Company expects resolution of this matter in the third quarter 2001; however, at the present time, the Company is unable to determine with any certainty the outcome of the claims asserted. Under the TAB Asset Purchase Agreement, all claims by TAB are limited to the amount of the Escrow Fund except as to claims asserted on the basis of fraud, willful misconduct or the failure of the Company to perform postclosing obligations. The Company does not believe the foregoing exceptions apply. The Company is unable to determine the likelihood that TAB will recover a portion, if any, of the Escrow Fund. The Company believes that recovery by TAB in excess of the Escrow Fund is remote. The condensed financial statements do not include any adjustments relating to this uncertainty. 6 DOCUCON, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS 5. CONDENSED BALANCE SHEET ITEMS At June 30, 2001 and December 31, 2000, property and equipment consists of the following:
2001 2000 -------- -------- Computer Software $ 56,090 $ 56,090 Furniture and equipment 72,755 74,712 -------- -------- 128,845 130,802 Less: Accumulated depreciation and amortization 59,998 56,802 -------- -------- $ 68,847 $ 74,000 ======== ========
At June 30, 2001 and December 31, 2000, accrued expenses and other current liabilities consist of the following:
2001 2000 -------- -------- Accrued salaries $102,943 $102,943 Accrued professional fees 21,673 46,383 Payable to TAB 61,246 40,008 Retirement benefits payable 37,834 37,834 Other 35,977 33,407 -------- -------- $259,673 $260,575 ======== ========
6. PREFERRED STOCK AND COMMON 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 year. Each share of preferred stock is entitled to vote the equivalent of 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. The Company cannot make distributions to common stockholders until cumulative undeclared dividends on the preferred stock are paid. As of June 30, 2001 and December 31, 2000, cumulative undeclared dividends on the preferred stock approximated $208,000 and $198,000 respectively. Common stock is subordinate to preferred stock in the event of liquidation. The Company has never paid cash dividends on its common stock. 7. OTHER CONTINGENCY On February 2, 1999, the Company contacted the Department of Defense's ("DOD") Voluntary Disclosure Program Office to request admission into its Voluntary Disclosure Program. The Voluntary Disclose 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. 7 DOCUCON, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS 7. OTHER CONTINGENCY (CONTINUED) 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. Since February 2000, the Company has received no further inquiry nor claim from DOD relating to this or any other matter. While the Company remains potentially liable for civil damages, it does not believe that it is probable that material civil damages, if any, will ultimately be assessed. 8 DOCUCON, INCORPORATED MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS In May 2000, the Company sold substantially all of its operating assets to TAB Products Co. (TAB) for cash of approximately $2.8 million and the assumption of approximately $2.3 million of operating liabilities, resulting in a gain of approximately $4.1 million. As a result, the operating activity related to the operating assets and liabilities has been accounted for as a discontinued operation. Consequently, the Company's ongoing activities are related to efforts to realize value, if any, from the remaining assets (which may include the Company's publicly traded "shell"), payment of remaining liabilities and a potential distribution to shareholders. Based upon the current financial condition of the Company, it is unlikely that any assets will be available for distribution to shareholders. The Company reported a net loss applicable to common stockholders of approximately $ 187,000 in the six months ended June 30, 2001. The Company reported net income applicable to common stockholders of approximately $2,267,000 in the six months ended June 30, 2000. The decreased net loss applicable to common stockholders can be attributed to the Company's May 2000 sale to TAB, discussed in the preceding paragraph. Since the sale, the Company has operated as a shell company and during the six and three months ended June 30, 2001, has incurred nominal ongoing general and administrative expenses as shown below:
6 Months 3 Months Ended Year-To-Date June 30, 2001 June 30, 2001 Professional Fees $ 82,000 $ 47,000 Temporary Labor 40,000 22,000 Office rent 20,000 10,000 D & O Insurance 15,000 6,000 Other items 20,000 15,000 -------- -------- Totals $177,000 $100,000 ======== ========
LIQUIDITY AND CAPITAL RESOURCES The Company's primary remaining assets at June 30, 2001 are cash of approximately $ 92,000, other current assets of approximately $21,000, an escrow account, including interest, in the amount of approximately $264,000, and office equipment with a net book value of approximately $69,000. Remaining liabilities include accounts payable, accrued expenses and other current liabilities of approximately $323,000, and the related party notes balance of approximately $108,000. The remaining assets will be used to pay the remaining liabilities, fund efforts to realize value, if any, from the remaining assets and pay a distribution to shareholders, if any. Because the value to be realized from the remaining assets, the amount of the remaining liabilities and the net balance to be released from the Escrow Fund are uncertain, the amount of cash that will ultimately be available for distribution to stockholders, if any, is not determinable at this time. 9 As discussed under Part II-Item 1 and Note 4 to the condensed financial statements, on November 9, 2000, TAB asserted claims against the $250,000 Escrow Fund, as defined. The Company and TAB are negotiating potential resolution of this matter. The Company is unable to determine the likelihood that TAB will recover a portion, if any, of the Escrow Fund. The Company believes that recovery by TAB above and beyond the Escrow Fund amount is remote. The accompanying condensed financial statements of the Company have been prepared on the basis of accounting principles applicable to a going concern. As previously discussed throughout, the Company sold substantially all of its operating assets and certain liabilities to TAB and effectively became a shell company with no revenues and continuing general and administrative expenses. Since its inception, the Company has incurred cumulative net losses of approximately $10.3 million, including losses of approximately $0.1 million for the six month period ended June 30, 2001. For the year ended December 31, 2000 and the six months ended June 2001, the Company had negative cash flows from operating activities of approximately $2.0 million and $0.14 million respectively. These matters raise substantial doubt about the Company's ability to continue as a going concern. The condensed financial statements do not include any adjustments that might result from the outcome of these uncertainties. OUTLOOK On April 2, 2001, the Company announced that its Board of Directors had agreed to the terms of a letter of intent calling for Docucon's acquisition of all outstanding and issued shares of Digital Vision Systems, Inc., a Nevada corporation (DVS). As contemplated in the original letter of intent, The proposed reverse merger of DVS into Docucon would result in DVS shareholders owning 90.5% of the combined entity. Additionally, Docucon's shareholders would receive warrants for an additional 2.0% of the combined entity, depending upon future performance of the combined entity's common stock market price. Docucon and DVS has hoped to conclude the proposed combination in June 2001, but Docucon and DVS are continuing negotiations relating to the terms of the combination, and if successful, expect a definitive agreement to be completed by the end of the third quarter. DVS, a privately held Nevada corporation chartered in May 2000, manufactures and distributes video surveillance systems based upon digital compression technology. DVS' software management system and related digital video recording hardware are marketed worldwide for camera surveillance security applications by retail, education, manufacturing, government and military users, among others. DVS is based in San Antonio, Texas. The proposed combination is subject to various, significant conditions including but not limited to negotiation and execution of definitive agreements, DVS' pre-merger commitment to fund an additional $2.5 million in operating capital, and, if required by applicable law, approval by both Docucon and DVS shareholders. If the Company is unsuccessful in completing this transaction, management's alternative plan includes a further search for a similar business combination or strategic alliance. There can be no assurances that the transaction described above or management's alternative plan will be realized. 10 PART II - OTHER INFORMATION Item 1. Legal Proceedings DOD. 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 Department of Defense (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. Since February 2000, the Company has received no further inquiry nor claim from DOD relating to this or any other matter. While the Company remains potentially liable for civil damages, it does not believe that it is probable that material civil damages, if any, will ultimately be assessed. DOL. Under the terms of the TAB Asset Purchase Agreement, TAB paid $250,000 of the purchase price into an Escrow Fund (Escrow Fund) for the purposes of indemnifying TAB from certain "Indemnifiable losses," as defined therein, including any failure of the Company to discharge any liability not assumed by TAB. The Escrow Fund was scheduled to be released in November 2000, net of any indemnification claims that have been agreed to by TAB and the Company and any unresolved claims. Unresolved claims will be satisfied or the related Escrow Fund released after the claims resolution procedure detailed in the TAB Asset Purchase Agreement has been completed. On November 9, 2000, TAB asserted claims against the Escrow Fund pursuant to Article XII of the TAB Asset Purchase Agreement and pursuant to Section 6 of the Escrow Agreement, based upon certain claims asserted by the Department of Labor (DOL) relating to government wage and benefit orders, and that certain employees may not have been paid in compliance with these orders. DOL has not asserted these claims against the Company. On December 7, 2000, the Company objected to the entirety of all claims made by TAB against the Escrow Fund. Additionally, the Company notified TAB of its intention to participate in defense of DOL's claims. TAB consented to Docucon's participation. Docucon and TAB agreed to a 90-day good-faith negotiation period commencing December 7, 2000, and ending on March 7, 2001. This period was subsequently extended to June 30, 2001, and further extended to August 30, 2001. The Company and TAB are negotiating a potential resolution of this matter and continuing discussions with DOL. The Company expects resolution of this matter in the third quarter 2001; however, at the present time, the Company is unable to determine with any certainty the outcome of the claims asserted. Under the TAB Asset Purchase Agreement, all claims by TAB are limited to the amount of the Escrow Fund except as to claims asserted on the basis of fraud, willful misconduct or the failure of the Company to perform postclosing obligations. The Company does not believe the foregoing exceptions apply. The Company is unable to determine the likelihood that TAB will recover a portion, if any, of the Escrow Fund. The Company believes that recovery by TAB in excess of the Escrow Fund is remote. 11 Except as noted above, no actions are currently pending against the Company. 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 - 1. The Company filed a Current Report on Form 8-K on April 4, 2001 to announce the approval of the Letter of Intent proposing the reverse merger of Digital Vision Systems, Inc. into Company. 12 SIGNATURE 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/ ROBERT W. SCHWARTZ ---------------------- Robert W. Schwartz, President and Chief Executive Officer Dated: August 14, 2001 13 -----END PRIVACY-ENHANCED MESSAGE-----