-----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, CektkGMlaV5UO0e4KYkPL6GLif/72/pygWrRlFRoHBfUelmdVhmRJuqleRFohBCn 6MqC9aD0PKB0n1bQMo/f4Q== 0000912057-02-020848.txt : 20020515 0000912057-02-020848.hdr.sgml : 20020515 20020515170619 ACCESSION NUMBER: 0000912057-02-020848 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20020331 FILED AS OF DATE: 20020515 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: 02653572 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 a2080395z10qsb.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 MARCH 31, 2002 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 (State or other jurisdiction of incorporation or organization) 74-2418590 (IRS Employer Identification No.) 329 E. Ramsey San Antonio, TX 78216 (Address of principal executive offices) (210) 342 1190 (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 March 31, 2002 3,658,767 DOCUCON, INCORPORATED INDEX
PAGE PART I. FINANCIAL INFORMATION (UNAUDITED) Item 1: Condensed Balance Sheets - March 31, 2002 and December 31, 2001 1 Condensed Statements of Operations - For the Three Months Ended March 31, 2002 and 2001 2 Condensed Statements of Cash Flows - For the Three Months Ended March 31, 2002 and 2001 3 Notes to Condensed Financial Statements 4-8 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations 9-11 PART II. OTHER INFORMATION 11-12 SIGNATURES 13
DOCUCON, INCORPORATED CONDENSED BALANCE SHEETS (Unaudited)
MARCH 31, DECEMBER 31, 2002 2001 ------------ ------------ ASSETS Current assets Cash and cash equivalents $ 12,258 $ 65,545 Accounts receivable - DVS 42,729 -- Other current assets 4,251 3,712 Restricted cash 10,235 267,500 ------------ ------------ TOTAL CURRENT ASSETS 69,473 336,757 PROPERTY AND EQUIPMENT HELD FOR DISPOSAL 10,266 10,266 OTHER ASSETS 861 1,760 ------------ ------------ $ 80,600 $ 348,783 ============ ============ LIABILITIES AND STOCKHOLDERS' DEFICIT CURRENT LIABILITIES Accounts payable $ 39,088 $ 224,612 Accrued expenses and other current liabilities 79,518 246,301 Notes payable - Related party 108,334 108,334 ------------ ------------ TOTAL CURRENT LIABILITIES 226,940 579,247 ------------ ------------ STOCKHOLDERS' DEFICIT Preferred stock, $1.00 par value, 10,000,000 shares authorized- Series A, 60 shares authorized, 7 shares issued and outstanding, liquidation preference of $175,000 7 7 Common stock $.01 par value, 25,000,000 shares authorized, 3,658,767 shares outstanding 36,588 36,588 Additional paid-in capital 10,231,240 10,231,240 Accumulated deficit (10,409,939) (10,494,063) Treasury stock, at cost, 4,495 shares (4,236) (4,236) ------------ ------------ TOTAL STOCKHOLDERS' DEFICIT (146,340) (230,464) ------------ ------------ $ 80,600 $ 348,783 ============ ============
The accompanying notes are an integral part of these condensed financial statements 1 DOCUCON INCOPORATED CONDENSED STATEMENTS OF OPERATIONS Three Months Ended March 31, 2002 and 2001 (UNAUDITED)
2002 2001 ----------- ----------- REVENUES $ -- $ -- ----------- ----------- COSTS AND EXPENSES General and administrative (63,085) 77,287 Depreciation and amortization -- 2,250 ----------- ----------- TOTAL COSTS AND EXPENSES (63,085) 79,537 OTHER INCOME (EXPENSE), NET 21,039 (2,228) ----------- ----------- NET INCOME (LOSS) 84,124 (77,309) ----------- ----------- PREFERRED STOCK DIVIDEND REQUIREMENT (4,813) (4,813) ----------- ----------- NET INCOME (LOSS) APPLICABLE TO COMMON STOCKHOLDERS $ 79,311 $ (82,122) =========== =========== BASIC INCOME (LOSS) PER COMMON SHARE $ 0.02 $ (0.02) =========== =========== DILUTED INCOME (LOSS) PER COMMON SHARE $ 0.02 $ (0.02) =========== =========== WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 3,658,767 3,658,767 =========== ===========
The accompanying notes are an integral part of these condensed financial statements. 2 DOCUCON, INCORPORATED CONDENSED STATEMENTS OF CASH FLOWS Three months ended March 31, 2002 and 2001 (Unaudited)
2002 2001 ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $ 84,124 (77,309) ----------- ----------- Adjustments to reconcile income (loss) to net cash provided by operating activities Depreciation and amortization -- 2,250 Increase (decrease) in cash attributable to changes in operating assets and liabilities Accounts receivable - DVS (42,729) -- Other current assets (539) (14,866) Restricted cash 257,265 (3,340) Other assets 899 -- Accounts payable (185,524) 15,339 Accrued expenses, other current liabilities (164,442) 17,925 ----------- ----------- Net cash used in operating activities (50,946) (60,001) ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale of assets -- 550 ----------- ----------- Net cash provided by investing activities -- 550 ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Principal payments under capital lease obligations (2,341) (2,753) ----------- ----------- Net cash used in financing activities (2,341) (2,753) ----------- ----------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (53,287) (62,204) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 65,545 238,370 ----------- ----------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 12,258 $ 176,166 =========== ===========
The accompanying notes are an integral part of these condensed financial statements. 3 DOCUCON, INCORPORATED 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 financial statements have been prepared assuming the Company will continue as a going concern. As discussed above and in Note 3, 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 March 31, 2002, the Company has cumulative losses of approximately $10.4 million and a working capital deficit of approximately $157,000. For the three months ended March 31, 2002, and the year ended December 31, 2001, the Company had negative operating cash flows of approximately $51,000 and $168,000, 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 March 2001, the Company agreed to the terms of a letter of intent to acquire all outstanding and issued shares of Digital Vision Systems, Inc. ("DVS"), a manufacturer and distributor of video surveillance systems. Based on the terms of the September 25, 2001 letter of intent that revised the March 2001 letter of intent, DVS shareholders would own 92.5% of the Company's common stock and the Company's shareholders would own the remaining 7.5% of the common stock of the combined entity. Robert W. Schwartz, the Company's CEO, would receive 0.5% share to be allocated from the 7.5% interest received by the Company's shareholders. In calculating the foregoing percentages, it is assumed that ownership percentages are determined by reference to fully diluted shares of the Company's common stock, as if converted shares of the Company's common stock were outstanding for both the Company and DVS. Through the merger, DVS would become a wholly owned subsidiary of the Company. As part of the letter of intent, DVS is responsible for certain merger related expenses. At March 31, 2002, the Company paid approximately $42,700 of these expenses. On February 14, 2002, the Company filed a preliminary proxy statement outlining the proposed merger between Docucon and DVS. There are five proposals within the preliminary proxy. Those proposals include: 1) the approval of the Agreement and Plan of Merger, as amended, by and among the Company, DocuconMerger, L.P., a wholly owned subsidiary of the Company, and DVS; 2) authorize the Board of Directors to effectuate a reverse split of one (1) share of common stock for fifteen (15) shares of the Company's issued and outstanding common stock, to facilitate the merger with DVS; 3) amend the Company's Articles of Incorporation to change the Company's name to "DVS Holdings, Inc."; 4) elect five new directors to a seven-person Board of Directors (two of the current directors will continue in office, and five new directors will be added by DVS); and 5) approve and adopt the 2002 Non- Qualified Stock Option Plan. 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 approval of the merger by both Docucon and DVS shareholders. If the Company is unsuccessful in completing the planned combination with DVS, management's alternative plan includes a further search for a similar business combination or strategic alliance. The Company is currently not in discussions with any other entity, other than DVS. There is no assurance that this transaction, or management's alternative plan, will be realized. 4 DOCUCON, INCORPORATED NOTES TO CONDENSED FINANCIAL STATEMENTS 2. UNAUDITED STATEMENTS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Unaudited statements The accompanying condensed financial statements of Docucon, Incorporated as of March 31, 2002 and for the three months ended March 31, 2002 and 2001 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, 2001. The results of operations for the three months ended March 31, 2002 are not necessarily indicative of the results that may occur for the year ending December 31, 2002. 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 quarter. 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. Diluted EPS for the three months ended March 31, 2002 includes potentially dilutive common stock equivalents such as the rights the preferred shareholders to convert the seven shares of preferred stock outstanding into 58,331 shares of common stock. Diluted earnings per share are based on 3,717,098 shares of the Company's common stock, consisting of outstanding common stock of 3,658,767 shares, plus 58,331 potentially dilutive common stock equivalents relating to the conversion rights of the outstanding preferred shareholders. As the Company had a net loss from continuing operations for the three months ended March 31, 2001, diluted EPS equals basic EPS as potentially dilutive common stock equivalents are antidilutive. 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. New Accounting Pronouncements In June 2001, the Financial Accounting Standards Board ("FASB") issued Statements of Financial Accounting Standards No. 141, Business Combinations, ("SFAS 141"), and No. 142, Goodwill and Other Intangible Assets ("SFAS 142"), effective for fiscal years beginning after December 15, 2001. SFAS 141 requires all business combinations initiated after June 30, 2001 to be accounted for using the purchase method. Under SFAS 142, goodwill and intangible assets that have indefinite useful lives are no longer subject to amortization over their estimated useful life. Rather, goodwill and indefinite-lived intangible assets are subject to at least an annual assessment for impairment applying a fair-value based test. Intangible assets with finite useful lives will continue to be amortized over their useful lives. 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. The Company adopted both statements on January 1, 2002. The Company believes the adoption of this statement has no material effect on the Company's financial position or results of operations. 5 DOCUCON, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS 2. UNAUDITED STATEMENTS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) New Accounting Pronouncements (continued) The Financial Accounting Standards Board issued SFAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." The provisions of SFAS 144 supersede SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be disposed of," and will take effect in fiscal 2003 for the Company. At that time, the Company will ensure existing policies are consistent with the provisions of SFAS 144. Management does not anticipate that the adoption of any other recent pronouncements will have a significant effect on earnings or the financial position of the Company. 3. 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 financial statements for 2000 in accordance with Accounting Principles Board ("APB") Opinion No. 30, "Reporting the Results of Operations". 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 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 the notes payable discussed in Note 5. Prior to the closing of the TAB transaction, certain Company officers and a former Company officer agreed to reductions in the amounts due under 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 (as described in Note 4), 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 December 31, 2001 balance sheet, 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 were to 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. The 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 April 30, 2001). 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 post-closing obligations. 6 DOCUCON, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS 3. DISCONTINUED OPERATIONS AND RELATED CONTINGENCY (CONTINUED) The Company effectively resolved this matter on December 3, 2001. Under the terms of the Settlement Agreement with TAB ("TAB Settlement Agreement"), the amount held in the Escrow Fund was released on January 22, 2002 to the extent of $250,000.00 plus accumulated interest, with TAB receiving $192,571.86, $10,000.00 remaining in escrow and the Company receiving the remainder or $65,387.39. The amounts released to TAB included approximately $147,000 owed to TAB for cash received on TAB's behalf, as well as approximately $46,000 in reimbursements for legal and other fees incurred by TAB and recorded in the fourth quarter of 2001, based on the terms of the settlement. The amount of $10,000 is to remain in the Escrow Fund until June 30, 2002 or may be released earlier, if the parties mutually agree. 4. NOTES PAYABLE In September 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, carried a 12 percent annual interest rate. Principal and interest on the Notes was payable on the earlier of (i) September 28, 2000, or (ii) within 10 days of an equity-based financing (the "Financing"), as defined. 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 were exercisable for a period of five years, however, upon consummation of the TAB transaction, the two directors agreed to cancel the warrants and waive accrued interest, among other terms. The warrants were valued at an estimated fair market value of $85,312 and were recorded as an original issue discount on the Notes. The original issue discount on the Notes was charged to interest expense. In accordance with these revised agreements, the Company paid two-thirds of the obligations promptly after closing and the remaining one third was to be negotiated upon release of the Escrow Fund. The Escrow Fund was settled in December 2001, and the Board of Directors approved settlements of the Notes for cash and stock in January 2002. It is anticipated that the Notes will be formally settled sometime in the second quarter of 2002. 5. EMPLOYMENT AGREEMENTS On March 31, 2000, and in conjunction with the TAB Sale, the Company entered into Employment Agreement Settlement Agreements with Messrs. Douglas P. Gill, President and Chief Executive Officer; Paul M. Nunley, Vice President, Operations and Technology; Warren D. Barratt, Chief Financial Officer; and, Mark G. Hardin, Controller of Company. Under the terms of these settlement agreements, the Company agreed to pay a total amount of $308,830.19. This amount included $196,500, which represented thirty percent (30%) of the amounts these officers would be entitled to receive as severance under their respective employment contracts with the Company. In addition, these officers were to be paid an aggregate of $112,330.19 for accrued, but unpaid wages and accrued vacation earned or to be earned through April 30, 2000. Two-thirds of the total payments, or $205,886.79, was paid at closing of the TAB Sale. The balance of the employment agreements was to be paid at the termination of the Escrow Agreement, from available cash of the Company less any reasonable provision for additional net costs to wind- down and/or dispose of the Company. Since there was no available cash at the termination of the Escrow Agreement in order to make any additional payments, the Company has no further obligation to the named, former executive officers. In January 2002, accrued salaries relating to these employment agreements, in the amount of approximately $103,000, was written down due to there being no further obligation by the Company. 7 DOCUCON, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS 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, earns cash dividends of 11 percent per year and 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 March 31, 2002 and December 31, 2001, cumulative undeclared dividends on the preferred stock approximated $222,063 and $217,250, respectively. As the cumulative dividends are undeclared, they have not been recorded as a reduction of the Company's equity. On January 24, 2002, the Board of Directors authorized the Company to offer and to issue 20,000 of the Company's Common Stock, in full satisfaction of each share of Series A Preferred Stock outstanding. It is anticipated that the preferred stock will be converted to shares of the Company's common stock sometime in the second quarter of 2002. 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 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, which 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 or 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. The Company does not expect to have future operating revenues unless it is successful in completing the planned business combination with DVS or another entity. The Company reported net income applicable to common stockholders of approximately $79,000 in the three months ended March 31, 2002. The gain is mainly attributable to the write down of accrued salaries, as more fully described in Note 5, in the approximate amount of $103,000, as well as the write down of other accrued expenses and the recovery of previously expensed items in the approximate amount of $21,000. The Company reported a net loss applicable to common stockholders of approximately $82,000 in the three months ended March 31, 2001. Since the Company sold substantially all of its operating assets to TAB, the Company has operated as a "shell" company and during the three months ended March 31, 2002, has incurred nominal ongoing general and administrative expenses of approximately $40,000, consisting primarily of professional fees of approximately $19,000, D&O insurance of approximately $6,000 and other items aggregating approximately $15,000. LIQUIDITY AND CAPITAL RESOURCES The Company's primary remaining assets at March 31, 2002 are cash of approximately $12,000, an escrow account, including interest, in the amount of approximately $10,000, a receivable for approximately $43,000 and office equipment with a net book value of approximately $10,000. Remaining liabilities include accounts payable, accrued expenses and other current liabilities of approximately $119,000 and the related-party notes balance of approximately $108,000. The remaining assets will be used to pay the remaining liabilities and fund efforts to realize value, if any, from the remaining assets of the Company. On September 29, 1999, two directors of the Company lent the Company a total of $325,000. The promissory notes (the "Notes") issued in conjunction with these loans carried a 12 percent annual interest rate. Principal and interest on the Notes were payable on the earlier of (i) September 28, 2000, or (ii) within 10 days of an equity-based financing (the "Financing"), as defined therein. In conjunction with the Notes, the two directors were issued a total of 243,750 warrants to purchase common stock of the Company. Upon consummation of the TAB Sale, the two directors agreed to waive the accrued interest due on the Notes and to cancel the related warrants, among other terms. In accordance with these revised agreements, the Company paid two-thirds of the obligations promptly after closing of the TAB Sale, with the remaining one-third to be negotiated upon release of the Escrow Fund. The Escrow Fund was settled in December 2001, and in January 2002 the Board of Directors approved settlements of the Notes for cash and stock. It is anticipated that the Notes will be formally settled sometime in the second quarter of 2002. The Company expects to be able to settle some liabilities for amounts that are less than recorded values. The Board of Directors approved settlements of the related-party notes of approximately $108,000, as well as a business consultant agreement of approximately $38,000, for cash and stock in January 2002. Payables of approximately $103,000 to former executives of the Company are to be settled at the time the Escrow Agreement is terminated, from available cash of the Company, less any reasonable provision for additional net costs to wind down and/or dispose of the Company, under agreements reached with those parties in 2000. Since there was no available cash at the time the Escrow Agreement was terminated in order to make any additional payments, the Company has no further obligation relating to the these employment agreements. In January 2002, accrued salaries relating to the employment agreements were written down due to there being no further obligation by the Company. Negotiations are currently in process to settle other remaining liabilities for less than the recorded amounts. 9 On November 9, 2000, TAB asserted claims against the $250,000 Escrow Fund. The Company and TAB negotiated a resolution of the matter on December 3, 2001. Under the terms of such Agreement, the funds in the Escrow Fund were distributed to TAB and to the Company in January 2002. The Company received $65,387; TAB received $192,572; and, the residual $10,000 remains in the Escrow Fund until June 30, 2002, or such sum may be released earlier, if the parties mutually agree. As part of the business combination between Docucon and DVS, DVS has agreed to pay all merger related expenses. The Company's only current source of liquidity is the realization of value from Company assets, and there is no assurance that the remaining assets will yield material value. Management cannot be certain that the remaining assets will be sufficient to settle the final negotiated liability balances. 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 $10.1 million, including losses of approximately $.08 million in the first three months of 2001. For the year ended December 31, 2000 and the three months ended March 2001, the Company had negative cash flows from operating activities of approximately $2.0 million and $.06 million, respectively. In addition, as discussed above, the Company sold substantially all of its operating assets to TAB during the second quarter of 2000. 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 3, 2001, the Company announced that its Board of Directors had agreed to the terms of a letter of intent calling for Docucon to acquire all of the outstanding and issued shares of Digital Vision Systems, Inc., a Nevada corporation ("DVS"). The proposed reverse merger (the "Merger") of DVS into Docucon would result in DVS shareholders owning approximately 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, as measured by the market price of such common stock. The Board of Directors subsequently approved changes to the terms of the letter of intent and, on September 25, 2001, reported on Form 8-K that DVS shareholders would receive an increased number of shares of common stock of the Company, such that DVS shareholders would own 92.5% of the Company's common stock and the Company's shareholders would own the remaining 7.5% of the common stock of the combined entity. Further changes provided that the Company's shareholders would not receive any warrants, and Robert W. Schwartz, the Company's CEO, would receive a reduced 0.5% share to be allocated from the 7.5% interest received by the Company's shareholders. In calculating the foregoing percentages, it is assumed that ownership percentages are determined by reference to fully diluted shares of the Company's common stock, as if converted shares of the Company's common stock were outstanding for both the Company and DVS. Through the Merger, DVS would become a wholly owned subsidiary of the Company. On February 14, 2002, the Company filed a preliminary proxy statement outlining the proposed merger between Docucon and DVS. There are five proposed proposals within the proxy in which the shareholders will have an opportunity to vote. Those proposals include the approval of the Agreement and Plan of Merger, as amended, by and among the Company, DocuconMerger, L.P., a wholly owned subsidiary of the Company, and DVS; authorize the Board of Directors to effectuate a reverse split of one (1) share of common stock for fifteen (15) shares of the Company's issued and outstanding common stock, to facilitate the merger with DVS; amend the Company's Articles of Incorporation to change the Company's name to "DVS Holdings, Inc."; elect five new directors to a seven-person Board of Directors (two of the current directors will continue in office, and five new directors will be added by DVS); and approve and adopt the 2002 Non-Qualified Stock Option Plan. 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 approval of the merger by both Docucon and DVS shareholders. If the Company is unsuccessful in completing the planned combination with DVS, management's alternative plan includes a further search for a similar business combination or strategic alliance. The Company is currently not in discussions with any other entity, other than DVS. There is no assurance that this transaction, or management's alternative plan, will be realized. 10 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. PART II - OTHER INFORMATION Item 1. Legal Proceedings On February 2, 1999, the Company contacted the Department of Defense's Voluntary Disclosure Program Office to request admission into its Voluntary Disclosure Program. The Voluntary Disclosure Program is intended to encourage government contractors to disclose voluntarily 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, which 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 advised informally that the Government's investigation of the Company's voluntary disclosure was complete and that criminal prosecution had been declined. Since February 2000, the Company has received no other notice of any further claims relating to this matter. While the Company remains potentially liable for civil damages, it does not believe that material civil damages, if any, will ultimately be assessed. Under the terms of the TAB Sale, TAB paid $250,000 of the purchase price into an Escrow Fund ("Escrow Fund") for the purposes of indemnifying TAB from certain indemnifiable losses, including any failure of the Company to discharge any liability not assumed by TAB. On November 9, 2000, TAB asserted claims against the Escrow Fund 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 these claims. TAB consented to Docucon's participation. Docucon and TAB then engaged in negotiations with the Department of Labor throughout 2001. The Company reached a settlement regarding this matter on December 3, 2001. Under the terms of a settlement between TAB and the Company, the amount held in the Escrow Fund was released in January 2002 to the extent of $250,000.00 plus accumulated interest, with TAB receiving $192,571.86, $10,000.00 remaining in escrow and the Company receiving the remainder or $65,387.39. The amounts released to TAB included approximately $147,000 owed to TAB for cash received on TAB's behalf, as well as approximately $46,000 in reimbursements for legal and other fees incurred by TAB and recorded in the fourth quarter of 2001, based on the terms of the settlement. The amount of $10,000 is to remain in the Escrow Fund until June 30, 2002 or may be released earlier, if the parties mutually agree. Except as noted above, no actions are currently pending against the Company. The Company maintains insurance coverage, which it believes to be adequate and typical in the industry. 11 Item 2. Changes in Securities - None Item 3. Defaults Upon Senior Securities - None Item 4. Submission of Matters to a Vote of Security Holders 1. On February 14, 2002, the Company filed a preliminary proxy statement relating to a proposed reverse merger with Digital Vision Systems, Inc. ("DVS"), of San Antonio Texas. The Company intends to file a final proxy statement on or about May 15, 2002, after updating all relevant financial data to conform to applicable disclosure requirements. In the final proxy statement, Docucon will seek shareholder approval of the proposed merger with DVS, at a shareholder meeting currently scheduled for June 18, 2002. Item 5. Other Matters - None Item 6. Exhibits and Reports on Form 8-K (a) Exhibits - None (b) Reports on Form 8-K - 1. The Company filed a Current Report on Form 8-K on March 20, 2002 for the purpose of reporting the Company's intent on filing a definitive proxy statement relating to reverse merger with Digital Vision Systems, Inc. once the auditors have completed year 2001 audited financial statements for both the Company and Digital Vision Systems, Inc. 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: May 15, 2002 13 -----END PRIVACY-ENHANCED MESSAGE-----