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<SEC-DOCUMENT>0000912057-02-020848.txt : 20020515
<SEC-HEADER>0000912057-02-020848.hdr.sgml : 20020515
<ACCEPTANCE-DATETIME>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
</SEC-HEADER>
<DOCUMENT>
<TYPE>10QSB
<SEQUENCE>1
<FILENAME>a2080395z10qsb.txt
<DESCRIPTION>10QSB
<TEXT>
<Page>

                                  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

<Page>

                              DOCUCON, INCORPORATED


                                      INDEX

<Table>
<Caption>
                                                                      PAGE
<S>                                                                  <C>
      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
</Table>

<Page>

                             DOCUCON, INCORPORATED

                            CONDENSED BALANCE SHEETS

                                  (Unaudited)


<Table>
<Caption>
                                                                                     MARCH 31,       DECEMBER 31,
                                                                                       2002              2001
                                                                                   ------------      ------------
<S>                                                                                <C>               <C>
                  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
                                                                                   ============      ============
</Table>

                 The accompanying notes are an integral part of
                      these condensed financial statements

                                       1
<Page>

                              DOCUCON INCOPORATED

                       CONDENSED STATEMENTS OF OPERATIONS
                   Three Months Ended March 31, 2002 and 2001

                                  (UNAUDITED)

<Table>
<Caption>
                                                           2002           2001
                                                       -----------    -----------
<S>                                                    <C>            <C>
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
                                                       ===========    ===========
</Table>


                 The accompanying notes are an integral part of
                     these condensed financial statements.


                                       2
<Page>

                             DOCUCON, INCORPORATED

                       CONDENSED STATEMENTS OF CASH FLOWS
                          Three months ended March 31,
                                 2002 and 2001
                                  (Unaudited)


<Table>
<Caption>
                                                                             2002          2001
                                                                         -----------   -----------
<S>                                                                      <C>               <C>
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
                                                                         ===========   ===========
</Table>

              The accompanying notes are an integral part of these
                        condensed financial statements.

                                       3
<Page>

                             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
<Page>

                             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
<Page>

                                 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
<Page>

                                 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
<Page>

                                 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
<Page>

                             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
<Page>

         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
<Page>

         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
<Page>

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
<Page>

                                   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


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