SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual Report Pursuant To Section 13 or 15(d) Of The Securities
Exchange Act Of 1934 For the fiscal year ended December 31, 2000
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OR
[ ] Transition Report Pursuant To Section 13 or 15(d) Of The Securities
Exchange Act Of 1934 For the transition period from _________ to _________
Commission file number 1-7636
DYNACORE HOLDINGS CORPORATION
(f/k/a DATAPOINT CORPORATION)
(Exact name of registrant as specified in its charter)
Delaware 74-1605174
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
8410 Datapoint Drive, San Antonio, Texas 78229-8500
(Address of principal executive office and zip code)
(210) 593-7000
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of each class Name of each exchange on which registered
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Common Stock, $.01 par value National Daily Quotation System "pink sheets"
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. Yes X No .
Applicable only to registrants involved in bankruptcy proceedings during the
preceding five years: Indicate by check mark whether the registrant has filed
all documents and reports required to be filed by Section 12, 13 or 15 (d) of
the Securities Exchange Act of 1934 subsequent to the distribution of securities
under a plan confirmed by a court. Yes X No .
As of March 31 2001, 10,000,000 shares of Dynacore Holdings Corporation
Common Stock were outstanding and the aggregate market value (based upon the
last reported sale price of the Common Stock) of the shares of Common Stock held
by non-affiliates was approximately $2.2 million. (For purposes of calculating
the preceding amount only, all directors and executive officers of the
registrant are assumed to be affiliates.)
PART I
ITEM 1. Business.
General
On May 3, 2000 (the "Petition Date" or the "Filing Date"), Dynacore Holdings
Corporation, then known as Datapoint Corporation (hereinafter "Dynacore" or the
"Company") filed a petition for relief under Chapter 11 of the Bankruptcy Code
with the United States Bankruptcy Court (the "Court") for the District of
Delaware. On October 12, 2000, Dynacore filed its Amended Plan of
Reorganization, which was subsequently approved by the Court on December 5,
2000.
Prior to the Petition Date, Dynacore, including its subsidiaries, was
principally engaged in the development, acquisition, marketing, servicing, and
system integration of computer and communication products -- both hardware and
software. These products and services were used for integrated computer,
telecommunication and video conferencing network systems. Through its 80% owned
subsidiary, Corebyte Inc. ("Corebyte"), the Company was also actively engaged in
the development and marketing of internet products having e-commerce
applications.
Dynacore was reincorporated in Delaware in 1976 as the successor corporation
to a Texas corporation originally incorporated in 1968 as Computer Terminal
Corporation. The Company's name was changed from Datapoint Corporation to
Dynacore Holdings Corporation in June 2000, in accordance with an order of the
Court. Pursuant to a Stock Purchase Agreement dated April 19, 2000 (the "Stock
Purchase Agreement"), the Company sold certain of its European based
subsidiaries (the "European Operations") to Datapoint Newco 1 Limited ("DNL").
In addition, the Company sold all of its interests in the name "Datapoint" and
was also required to change its name. (See below for a more complete description
of the sale of the European Operations). Dynacore's principal executive offices
are located at 8410 Datapoint Drive, San Antonio, Texas 78229-8500 (telephone
number (210) 593-7000).
As of the Petition Date, the Company's business consisted of three
operations. One operation consisted of a computer telephony integration system,
which offered integrated telecommunication products and services to meet the
requirements of large call centers, customer service organizations and
telemarketing firms. A second, the systems integration and proprietary hardware
and software operation, sold and marketed Dynacore's networking products to
end-users. The European Operations of the Company which were sold to DNL
comprised substantially all of the first and second operations described above
and accounted for more than 98% of the total assets and more than 98% of the
revenue of the Company for the past three fiscal years. The Company's third
operation consisted of its subsidiary Corebyte which is engaged in the creation
of internet networking software products.
Over the past many years, the Company's business suffered a significant
decline in total revenue, recurring losses and a reduction of its domestic work
force. This was primarily due to a mass entry of competitors in the networking
marketplace compounded by a marketplace demand for "Open Systems" and standard
interfaces, both of which adversely impacted the traditional networking and data
processing components of Dynacore's business. The marketplace was forced into a
uniformity of design that led to highly competitive pricing. At the same time,
the increasing availability of low cost, "off the shelf" software applications
written in a number of industry accepted programming languages adversely
affected Dynacore.
In 1981, Dynacore issued $100 million 8 7/8% Convertible Subordinated
Debentures, due 2006 (the "Debentures"). Among other features, the Trust
Indenture governing the Debentures contained an annual sinking fund obligation.
The sinking fund obligation provided that prior to June 1 of each year,
commencing in 1991, Dynacore was required to deposit an amount of not less than
$5 million with the Indenture Trustee in connection with the redemption of the
Debentures. The Company was also permitted to deliver outstanding Debentures,
other than any previously called for redemption, in partial or full satisfaction
of this annual sinking fund obligation, and in fact, from time to time, the
Company purchased Debentures for redemption, such that at the Petition Date, the
outstanding principal face amount of the Debentures had been reduced to
approximately $55 million.
The recurring operational losses and reduced cash flow adversely affected
the Company's ability to properly fund its business operations as it continued
to make the interest and sinking fund obligations to holders of the Debentures
under the Trust Indenture. To fund these obligations, Dynacore was forced to
sell virtually all of its fixed assets during the preceding years, including
real property in San Antonio, Texas in October, 1998 and in Gouda, The
Netherlands, approximately one year later. In addition, in October, 1999, the
Company discontinued its domestic video conferencing operations (MINX) as it was
not able to continue making the financial investment required, both in marketing
and product development to sustain profitability for this portion of the
business. In spite of these actions, as of the Petition Date, the Company had
defaulted on one semi-annual interest payment, totaling approximately $2.5
million, and was about to default on the sinking fund payment due June 1, 2000.
In late 1998, Dynacore hired Dain Rauscher Wessels ("Dain Rauscher") to
explore strategic alternatives. Although Dain Rauscher reviewed a series of
alternatives for Dynacore, the one that appeared most viable was the sale of its
European Operations to a strategic buyer.
Dain Rauscher was then retained to supervise a process to locate and sell
the European Operations to the highest bidder. Although numerous potential
purchasers were contacted and a private confidential memorandum was distributed
to over thirty (30) prospective purchasers, Dynacore initially received two bids
for the European Operations. Dain Rauscher and Dynacore's Board of Directors
agreed that the bid made by Reboot Systems, Inc. ("Reboot") represented the
better offer.
On May 17, 1999, the Company entered into a letter of intent to sell its
European Operations to Reboot for $49.5 million plus the assumption of certain
liabilities. Reboot was a newly formed corporation controlled by Mr. Blake
Thomas, the Company's then president. Following the letter of intent, a sale
agreement was executed with Reboot dated as of July 31, 1999 (the "Reboot
Agreement"). The Reboot Agreement contained several contingencies, the most
significant being Reboot's ability to secure financing necessary to close the
transaction. By November 1, 1999, Reboot still had not secured its financing and
Dynacore agreed to an amendment (the "Amendment") to the Reboot Agreement in
return for which Reboot posted a deposit of $750,000 which would be
non-refundable in the event that Reboot failed to close because it could not
secure financing. The Amendment obligated Reboot to loan Dynacore $2.5 million
on or prior to December 1, 1999. Although the termination date pursuant to the
Amendment was extended to March 1, 2000, this extension was contingent on
Reboot's loaning the Company the $2.5 million on or before December 1, 1999, and
in the event the loan was not made, the agreement terminated on December 1,
1999. Since the loan was not made, the agreement was then terminated.
In addition, consistent with the determination of its Board of Directors to
shift the focus of the Company towards acquiring, developing and marketing
products with internet and e-commerce applications, on July 27, 1999, the
Company, through its newly formed subsidiary, Corebyte Inc., conditionally
acquired (the "Corebyte Acquisition") the Corebyte communication and networking
software product family (the "Corebyte Products"). The acquisition was
accomplished pursuant to an Asset Purchase Agreement, by and among the Company,
SF Digital, LLC and John Engstrom ("Engstrom"), dated July 27, 1999. Given the
lack of a significant revenue stream resulting from longer than anticipated
software developmental and marketing efforts and the present availability of
similar Internet applications in the marketplace, in January 2001, the Company
began a thorough evaluation of the Corebyte operations, prospects, and strategic
options. Pending the outcome of this evaluation, which will include the
exploration and discussions with various parties for alternative uses and
markets for the Corebyte developed source code and underlying technologies, if
any, the Company has significantly restructured and curtailed Corebyte's
day-to-day operations, to include the elimination of its Web hosting services to
third parties.
Subsequent to the termination of the Reboot Agreement, as a result of the
lack of performance by Reboot, the Company entered into a Letter of Intent,
dated January 26, 2000, with the European based CallCentric Ltd. ("CallCentric")
to sell the European Operations. Pursuant to an agreement dated as of April 19,
2000 (the "Sale Agreement"), on June 30, 2000, after receipt of approval from
the Bankruptcy Court, the Company sold (the "Sale") its European Operations to
DNL, a United Kingdom corporation affiliated with CallCentric, for $49.5 million
in cash, less certain adjustments in the event that the aggregate shareholder's
deficit of the European Operations exceeded $10 million (the "Purchase Price").
The Sale Agreement contemplated, among other things, that the Company would file
for reorganization pursuant to Chapter 11 of the United States Bankruptcy Code,
which was filed on May 3, 2000 and that the sale of the European Operations to
DNL would be subject to higher and better offers, if any, and the approval of
the Court. The Court approved the sale on June 15, 2000 and the sale was
consummated on June 30, 2000 (the "Closing"). Pursuant to the Sale Agreement, at
Closing DNL deposited $6 million from the Purchase Price in escrow, $4 million
pending resolution of various issues relating to the UK Pension Plan and $2
million pending preparation of the closing balance sheet. Upon final resolution
of these issues the full $4 million escrow relating to the UK Pension Plan was
released to DNL and $1.625 million of the $2 million escrow was released to the
Company and $375 thousand was released to DNL. Accordingly, the final Purchase
Price after such adjustments was $45.125 million.
On December 5, 2000, the Court approved an order confirming Dynacore's
Amended Plan of Reorganization (the "Plan"). On December 18, 2000 (the
"Effective Date", as defined in the Plan), all of the then existing debt and
equity in Dynacore was cancelled and 10 million shares of new common stock, as
well as 10 million beneficial interests, representing interests in the Dynacore
Patent Litigation Trust, (as defined below) formed to pursue Dynacore's patent
litigations, were issued.
The confirmed Plan provided for the distribution of $34.8 million in cash
from the proceeds of the sale of the European Operations to Debenture holders
and other unsecured creditors of Dynacore on the Effective Date. In addition,
pursuant to the confirmed Plan: (i) Debenture holders and other unsecured
creditors received 25% of the equity of the reorganized corporation, the ability
to designate 3 out of 7 members on the Board of Directors, and 40% of a trust
(the "Patent Litigation Trust"), formed to pursue the patent litigations of
Dynacore, (ii) holders of Dynacore's preferred stock, par value $1.00 per share,
received 23.5% of the equity of the reorganized corporation, and 3.5% of the
Patent Litigation Trust, (iii) holders of the common stock, par value $.25 per
share, received 41.5% of the equity of the reorganized corporation, (iv) current
officer management received 10% of the equity of the reorganized corporation as
part of a settlement of certain officer administrative claims that included
employment contract cancellation and other contractual entitlements and (v) the
remaining 56.5% interest in the Patent Litigation Trust was retained by the
reorganized Dynacore.
The Plan contemplated that the beneficial interests in the Patent Litigation
Trust would be transferable and tradable. In addition, pursuant to the approved
Plan and as reflected in its Restated Certificate of Incorporation, Dynacore is
obligated to distribute to its then stockholders, 75% of the first $100 million
of net proceeds, if any, received on account of its beneficial interest in the
Patent Litigation Trust after adjustment for corporate tax and payment of all
patent litigation expenses. Also, as part of the Plan, Dynacore has committed to
lend the Patent Litigation Trust up to $1 million to pursue Dynacore's patent
litigations. As of December 31, 2000, the amount of such loan is $0 and the
status of the related patent litigations is set forth below under the heading
"Multi-Speed Networking Patents".
As of December 31, 2000, the Company had cash and cash equivalents of
approximately $7.6 million including $0.3 million of restricted cash, which was
restricted for the payment of contested bankruptcy claims.
Since the confirmation of the Plan, the Company has been actively pursuing
an acquisition of assets, property or business that may be beneficial to it and
its stockholders. In considering whether to complete any such acquisition, the
Board of Directors shall make the final determination, and the approval of
stockholders will not be sought unless required by applicable law, the Company's
Restated Certificate of Incorporation, Bylaws or contract. The Company can give
no assurance that any such endeavor will be successful or profitable.
The Company does not intend to restrict its search to any particular
business or industry, and the areas in which it will seek out acquisitions,
reorganizations or mergers may include, but will not be limited to, the fields
of high technology, manufacturing, natural resources, service, research and
development, communications, transportation, insurance, brokerage, finance and
all medically related fields, among others. The Company recognizes that because
of its lack of significant resources, the number of suitable potential business
ventures which may be available to it will be extremely limited, and may be
restricted to entities who desire to avoid what these entities may deem to be
the adverse factors related to an initial public offering. The most prevalent of
these factors include substantial time requirements, legal and accounting costs,
the inability to obtain an underwriter who is willing to publicly offer and sell
shares, the lack of or the inability to obtain the required financial statements
for such an undertaking, limitations on the amount of dilution public investors
will suffer to the benefit of the stockholders of any such entities, along with
other conditions or requirements imposed by various federal and state securities
laws, rules and regulations.
Management intends to consider a number of factors prior to making any
decision as to whether to participate in any specific business endeavor, none of
which may be determinative or provide any assurance of success. These may
include, but will not be limited to an analysis of the quality of the entity's
management personnel; the anticipated acceptability of any new products or
marketing concepts; the merit of technological changes; its present financial
condition, projected growth potential and available technical, financial and
managerial resources; its working capital, history of operations and future
prospects; the nature of its present and expected competition; the quality and
experience of its management services and the depth of its management; its
potential for further research, development or exploration; risk factors
specifically related to its business operations; its potential for growth,
expansion and profit; the perceived public recognition or acceptance of its
products, services, trademarks and name identification; and numerous other
factors which are difficult, if not impossible, to properly analyze without
referring to any objective criteria.
Regardless, the results of operations of any specific entity may not
necessarily be indicative of what may occur in the future, by reason of changing
market strategies, plant or product expansion, changes in product emphasis,
future management personnel and changes in innumerable other factors. Further,
in the case of a new business venture or one that is in a research and
development mode, the risks will be substantial, and there will be no objective
criteria to examine the effectiveness or the abilities of its management or its
business objectives. Also, a firm market for its products or services may yet
need to be established, and with no past track record, the profitability of any
such entity will be unproven and cannot be predicted with any certainty.
Management will attempt to meet personally with management and key personnel
of the entity sponsoring any business opportunity afforded to the Company, visit
and inspect material facilities, obtain independent analysis or verification of
information provided and gathered, check references of management and key
personnel and conduct other reasonably prudent measures calculated to ensure a
reasonably thorough review of any particular business opportunity.
The Company is unable to predict the time as to when and if it may actually
participate in any specific business endeavor. The Company anticipates that
proposed business ventures will be made available to it through personal
contacts of directors, executive officers and principal stockholders,
professional advisors, broker dealers in securities, venture capital personnel,
members of the financial community and others who may present unsolicited
proposals. In certain cases, the Company may agree to pay a finder's fee or to
otherwise compensate the persons who submit a potential business endeavor in
which the Company eventually participates.
While the Company and its management have had very preliminary discussions
with several businesses and initiated due diligence in this regard, to date the
Company has not entered into any proposals, arrangements or understandings with
the owners of any business or company regarding the possibility of an
acquisition by or merger transaction with the Company.
Since the sale of its European Operations as described above, substantially
all of the principal assets of the Company are currently the cash proceeds from
the sale of the European Operations which are being held in a money market
mutual fund pending future redeployment in an operating business other than an
investment company. Pursuant to the Investment Company Act of 1940, as amended
(the "40 Act"), a company that owns investment securities having a value
exceeding 40% of the value of its total assets (exclusive of government
securities and cash items) is subject to registration and regulation as an
investment company unless it qualifies for a statutory or regulatory exclusion
or exemption from investment company status. Furthermore, a company that is or
holds itself out as being engaged primarily, or proposes to engage primarily, in
the business of investing, reinvesting, or trading in securities is subject to
registration and regulation as an investment company.
Since the sale of its European Operations, the Company has been relying on a
temporary one-year exclusion from investment company status under the 40 Act
(which ends June 30, 2001), since as indicated above the Company's intent, as
soon as reasonably possible, is to engage in a business other than that of
investing, reinvesting, owning, holding or trading in securities. The Company
believes that following the temporary one-year exclusion, based on its current
asset mix, and its current activities it will not be treated as an investment
company. However, if the Company is unsuccessful in completing its initiatives,
the Company believes there is a future risk of becoming subject to regulation
and registration as an investment company. The Company does not believe that it
is feasible for the Company to register as an investment company because the 40
Act rules are inconsistent with the Company's strategy of acquiring, and
actively managing an operating business. In addition, if the Company were
required to register as an investment company, then it would incur substantial
additional expense as a result of the 40 Act's record keeping, reporting,
voting, proxy disclosure and other requirements. After the end of the one-year
grace period if the Company does not qualify for any other exclusion or
exemption afforded by the 40 Act, it may be required either to register as an
investment company or take significant business actions that are contrary to its
business objectives in order to avoid being required to register as an
investment company. For example, the Company might be compelled to acquire
additional assets that it might not otherwise have acquired, be forced to forgo
opportunities to acquire interests in companies or other assets or be forced to
sell or refrain from selling such interests or assets. In addition, the Company
might need to sell certain assets which are considered to be investment
securities.
In order to be certain of its status under the 40 Act, the Company may apply
to the Securities and Exchange Commission for an order finding that it is
primarily engaged in a business other than investing in securities. The Company
can give no assurance that such an order, if applied for, will be granted.
Dynacore believes that it had approximately $137 million of net operating
loss ("NOL") carryovers (after all reductions in such NOLs required by Section
108 of the Internal Revenue Code of 1986, as amended (the "Code")) and
approximately $35 million of capital loss carryovers prior to the consummation
of its Plan. Section 382 of the Code limits the full annual utilization of NOL
carryovers of a "loss corporation" that has undergone an Ownership Change (as
defined below). Dynacore believes that had it not qualified for the 382
Bankruptcy Exception described below its use of its NOL and capital loss
carryovers would have been subject to Section 382 limitations following its
reorganization under the Plan.
Generally, a "loss corporation" undergoes an ownership change (an "Ownership
Change") as defined by Section 382 of the Code if immediately after any "owner
shift involving a 5-percent shareholder" (in general, any change in the
respective ownership of stock of a corporation affecting the percentage of stock
of such corporation owned by any person who is a "5-percent shareholder" before
or after such change) or any "equity structure shift" (in general, except for
certain reorganizations, any tax-free reorganization under Section 368 of the
Code and, to the extent provided in Treasury regulations, taxable
reorganization-type transactions, public offerings and similar transactions):
(A) the percentage of the stock of the loss corporation owned by one or more
5-percent shareholders has increased by more than 50 percentage points over (B)
the lowest percentage of stock of the loss corporation (or any predecessor
corporation) owned by such shareholders at any time during the "testing period"
(in general, the 3-year period ending on the day of any owner shift involving a
5-percent shareholder or equity structure shift).
A "loss corporation", for purposes of Section 382 of the Code, is a
corporation, like Dynacore, that either is entitled to use an NOL carryover or
has an NOL for the taxable year in which an Ownership Change occurs and, except
as provided in Treasury regulations, any corporation with a net unrealized
built-in loss. A "5-percent shareholder" means any person holding 5 percent or
more (by value) of the stock of a loss corporation at any time during the
testing period. In general, in determining whether an Ownership Change has
occurred, all stock owned by shareholders of a loss corporation who are not
5-percent shareholders is treated as stock owned by a single 5-percent
shareholder (referred to as the "public group"), regardless of whether such
stock comprises an aggregate of 5 percent of the loss corporation's stock.
Notwithstanding the foregoing, the normal Code Section 382 rules generally
do not apply to any Ownership Change if (i) the loss corporation is (immediately
before such Ownership Change) under the jurisdiction of the court in a
bankruptcy under Title 11 of the United States Code or similar case ("Title 11
Case"), and (ii) the shareholders and creditors of the loss corporation
(determined immediately before such Ownership Change) own (after such Ownership
Change and as a result of being shareholders or creditors immediately before
such change) stock of such corporation possessing at least 50 percent of the
total voting power of the stock of such loss corporation and has a value equal
to at least 50 percent of the total value of the stock of such loss corporation
(the "382 Bankruptcy Exception"). Dynacore believes that the circumstances
surrounding its reorganization in accordance with the terms of the Plan were
such that it qualified for the 382 Bankruptcy Exception. In addition, subject to
certain "built-in-loss" rules that should have no appreciable effect on Dynacore
and, under certain circumstances, certain possible limitations set forth in the
consolidated return regulations, Dynacore does not expect to be subject to any
limitations on the use of its NOL carryovers under any other provisions of the
Code other than Section 382. Moreover, the Section 382 continuity of business
enterprise requirement normally applicable to loss corporations that have
experienced an Ownership Change should not apply to Dynacore since loss
corporations that qualify and elect to rely on the 382 Bankruptcy Exception are
exempted from such requirement.
However, due to its reliance on the 382 Bankruptcy Exception, Dynacore was
required to reduce its NOL carryovers by the amount of interest paid or accrued
during the preceding three year period on its Debentures that was converted into
the equity of the reorganized corporation pursuant to the Plan. Taking both the
reduction for such disallowed interest and all other reductions in its NOLs
required by Section 108 of the Code (relating to cancellation of indebtedness
income), Dynacore believes that its NOL carryovers were approximately $137
million following the consummation of the Plan.
In addition, if a loss corporation has taken advantage of the 382 Bankruptcy
Exception to one Ownership Change and subsequently experiences a second
Ownership Change within 2 years following the first Ownership Change, it must
reduce its NOL carryovers to zero for all tax periods ending after the date of
the second Ownership Change. The testing period for the second Ownership Change,
however, begins on the first day following the earlier Ownership Change to which
the 382 Bankruptcy Exception applied (rather than beginning on any prior date,
as would otherwise be the case under the three-year rule), meaning, in effect,
that the percentage ownership of Dynacore by 5-percent shareholders would have
to increase within two years by more than 50 percentage points over their
ownership as determined on the date of the Ownership Change in Dynacore subject
to the 382 Bankruptcy Exception. For periods following such latter date,
Dynacore will again be subject to the general Section 382 rules applicable to
changes of more than 50 percent in stock ownership by its 5-percent shareholders
within a rolling 3-year period as described above.
As part of the Plan the Company restated its Certificate of Incorporation
and in order to maintain its NOL and capital loss carryovers the Restated
Certificate of Incorporation includes certain provisions which impose
restrictions designed to prevent Ownership Changes from occurring. These
provisions, as well as structuring considerations, may interfere with the
Company's ability to acquire a business since use of the Company's stock as
consideration in any acquisition transaction may be limited if the Company
desires to retain its NOL and capital loss carryovers.
Risk Factors
In any business venture, there are substantial risks specific to the
particular enterprise which cannot be ascertained until a potential acquisition,
reorganization or merger candidate has been identified; however, at a minimum,
the Company's present and proposed business operations will be highly
speculative and subject to the same types of risks inherent in any new or
unproven venture, and will include those types of risk factors outlined below.
No Source of Revenue. The Company can provide no assurance that any acquired
business will produce any material revenues for the Company or its stockholders
or that any such business will operate on a profitable basis.
Absence of Substantive Disclosure Relating to Prospective Acquisitions.
Because the Company has not yet identified any assets, property or business that
it may potentially acquire, potential investors in the Company will have
virtually no substantive information upon which to base a decision whether or
not to invest in the Company. Potential investors would have access to
significantly more information if the Company had already identified a potential
acquisition or if the acquisition target had made an offering of its securities
directly to the public. The Company can provide no assurance that any investment
in the Company will not ultimately prove to be less favorable than such a direct
investment.
Unspecified Industry and Acquired Business; Unascertainable Risks. To date,
the Company has not identified any particular industry or business in which to
concentrate its acquisition efforts. Accordingly, prospective investors
currently have no basis to evaluate the comparative risks and merits of
investing in the industry or business in which the Company may invest. To the
extent that the Company may acquire a business in a highly risky industry, the
Company will become subject to those risks. Similarly, if the Company acquires a
financially unstable business or a business that is in the early stages of
development, the Company will become subject to the numerous risks to which such
businesses are subject. Although management intends to consider the risks
inherent in any industry and business in which it may become involved, there can
be no assurance that it will correctly assess such risks.
Uncertain Structure of Acquisition. While management has had preliminary
contact and discussions with several businesses, there are, presently, no formal
plans, proposals or arrangements to acquire any specific assets, property or
business. Accordingly, it is unclear whether such an acquisition would take the
form of an exchange of capital stock, a merger or an asset acquisition. However,
because the Company has limited cash resources as of the date of this Report,
management expects that any such acquisition would take the form of cash and an
exchange of capital stock.
Patents and Trademarks
Dynacore owns certain patents, copyrights, trademarks and trade secrets in
network technologies, which it considers valuable proprietary assets.
Multi-speed Networking Patents
Dynacore is the owner of United States Patent Nos. 5,008,879 and 5,077,732
related to network technology. The Company believes these patents cover most
products introduced by various suppliers to the networking industry and
dominates certain types of dual-speed technology on networking recently
introduced by various industry leaders. Dynacore has asserted one or both of
these patents in the United States District Court for the Eastern District of
New York against a number of parties:
(1) Datapoint Corporation* v. Standard Micro-Systems, Inc. and Intel
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Corporation, No.C.V.-96-1685;
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(2) Datapoint Corporation* v. Cisco Systems, Plaintree Systems Corp.,
Accton Technologies Corp., Cabletron Systems, Inc., Bay
Networks, Inc., Crosscom Corp. and Assante Technologies, Inc.
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No. CV 96 4534;
(3) Datapoint Corporation* v. Dayna Communications, Inc., Sun
Microsystems, Inc., Adaptec, Inc. International Business
Machines Corp., Lantronix, SVEC America Computer Corporation, and
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Nbase Communications, No. CV 96 6334; and
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(4) Datapoint Corporation* v. Standard Microsystems Corp.and Intel Corp.,
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No. CV-96-03819.
* The Company expects to make a motion with the Court to reflect the name change
to Dynacore Holdings Corporation.
These actions were consolidated for discovery, and for purposes of claim
construction. On January 20, 1998, a hearing commenced in the United States
District Court that concluded on January 23, 1998 during which claim
construction was submitted to a Special Master. The Special Master's report was
issued in April of 1998 adverse to Dynacore. The Company had filed two sets of
objections to certain portions of this report. The objections were overruled.
These objections will now have to be resolved at the Appellate Court level. The
briefing is completed. Both patents have been submitted to the Patent Office for
re-examination. A favorable action has been rendered on each patent and official
notification of the favorable action is expected shortly. The appeal has been
stayed pending the receipt of official notification of the re-examination
proceedings.
The above actions represent the trust property which the Company transferred
and assigned to the Patent Litigation Trust pursuant to the certain Patent
Litigation Trust Agreement, by and among the Company and the Patent Litigation
Trust trustees. As previously mentioned, the Company has retained a 56.5%
interest in the Patent Litigation Trust.
Employees
At December 31, 2000, the Company had nineteen employees. Included in this
number are seven employees of Corebyte, Inc. and three employees of Dynacore,
whose full-time employment was terminated in January 2001. Of such ten former
employees, three still provide services on an as needed basis to the Company.
The Company considers its relations with its employees to be satisfactory. The
aggregate annual salaries for the nine remaining full time employees is
approximately $850 thousand.
Environmental Matters
Compliance with current federal, state, and local regulations relating to
the protection of the environment has not had, and is not expected to have, a
material effect upon the capital expenditures, earnings, or competitive position
of the Company.
ITEM 2. Properties.
Dynacore's principal executive office is located in San Antonio, Texas. The
Company believes that its facilities are generally well maintained, in good
operating condition and are adequately equipped for their present use.
Information regarding the principal properties, excluding leases assigned or
subleased, as of December 31, 2000, is as follows:
Approximate
Facility
Location Use Sq. Footage Owned or Leased Land Area
-------- --- ----------- -------------------------
San Antonio, Texas Office 17,630 Leased; expires March 31, 2001
New York, New York Office 4,250 Leased; expires October 16, 2009
San Antonio, Texas Warehouse 4,900 Leased; expires January 31, 2004
Paris, France Office 1,450 Leased; expires June 16, 2008
with early cancellation options
on June 16, 2002 and
June 16, 2005
The aggregate annual rental for these leases, excluding sub-lease agreements
is approximately $250 thousand.
During the first quarter of 1999, the Company sold the building it owned in
Gouda, Netherlands to a private unaffiliated group for approximately $2.1
million (net of mortgage obligations and closing costs). The sales contract
provided for the leaseback by the Company of approximately 18,000 square feet
for an initial lease term of five years and approximately 12,000 square feet for
an initial lease term of one year. This lease obligation was transferred to DNL
as a result of the sale of the European Operations on June 30, 2000.
On October 27, 1997, the Company sold the three buildings it owned in San
Antonio, Texas to a private unaffiliated group for approximately $3.2 million
(net of mortgage obligations and closing costs). The sales contract provided for
the leaseback by the Company of one of the buildings (approximately 38,000
square feet) for an initial lease term of five years. As part of the Court
approved bankruptcy proceedings, the Company renegotiated the termination of the
lease to March 31, 2001.
ITEM 3. Legal Proceedings.
From time to time, the Company is a defendant in lawsuits generally
incidental to its business. The Company is not currently aware of any such suit,
which if decided adversely to the Company, would result in a material liability.
ITEM 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters.
Beginning August 24, 1998, the Company's common stock was quoted on the National
Association of Securities Dealers' Over-the Counter Bulletin Board under the
symbol "DTPT". The symbol changed to DTPTQ upon the filing for bankruptcy relief
and the symbol once again changed as the result of the Company's name change to
DYHGQ. On the Effective Date and through the present, the symbol is DYHC and the
stock is tradeable over-the-counter through the National Daily Quotation System
"pink sheets" published by the National Quotation Bureau, Inc. It is anticipated
that the common stock will be quoted on the National Association of Securities
Dealers Over-the Counter Bulletin Board. It is also anticipated that the shares
of beneficial interests in the Patent Litigation Trust will be traded
over-the-counter through the National Daily Quotation System "pink sheets"
published by the National Quotation Bureau, Inc. As of March 30, 2001 there were
approximately 2,790 holders of record and 10,000,000 outstanding shares of
Common Stock. The prices below represent the high and low prices for composite
transactions for stock traded during the applicable periods. As a result of the
new common stock which was issued on the Effective Date, all prices have been
adjusted to reflect its issuance at the rate of .225177 shares of New Common
Stock for each share of Old Common Stock. The Company has not paid cash
dividends to date on its common stock and has no present intention to pay cash
dividends on its common stock in the near future. As of March 30, 2001, the
closing price of the stock was $.28.
The stock prices for the periods listed below are all for the common stock
outstanding prior to the issuance of the new common stock on the Effective Date.
The New common stock did not trade during the period December 19, 2000 through
December 31, 2000.
High Low
March 30, 2000 6.52 1.24
June 30, 2000 3.05 .55
September 30, 2000 1.80 .62
December 18, 2000 .84 .26
High Low
March 30, 1999 7.63 2.49
June 30, 1999 9.16 2.91
September 30, 1999 3.74 2.36
December 31, 1999 2.63 .97
ITEM 6. Selected Financial Data.
The operations of Dynacore for the period of December 19, 2000 through December
31, 2000 (referred to as the "Successor Company"), and all prior periods
presented (referred to as the "Predecessor Company") in this report were
significantly affected by the Sale of the Company's European Operations on June
30, 2000 and the cessation of virtually all of the production operations of the
Company. As a result, the financial results of the Company for each of the
periods addressed by this report prior to December 18, 2000, (the Effective
Date), do not reflect the earnings capacity of the Company. In addition the
financial data for the period ended December 31, 2000 reflects the adoption of
Fresh Start Accounting and includes the period from December 19, 2000 to
December 31, 2000.
The Fresh Start basis of accounting is in accordance with the Statement of
Position (SOP) 90-7, "Financial Reporting by Entities in Reorganization Under
the Bankruptcy Code," issued in November 1990 by the Institute of Certified
Public Accountants and includes activity from December 19, 2000 to December 31,
2000. Under this accounting treatment, all assets and liabilities were restated
to reflect the reorganization value of the reorganized entity, which
approximates its fair value at the date of reorganization. In addition, the
accumulated deficit of the Company was eliminated and its capital structure was
recast in conformity with the Plan. As such, the accompanying financial data as
of December 31, 2000 represents that of a successor company which, in effect, is
a new entity with assets, liabilities and a capital structure having carrying
values not comparable with prior periods and with no beginning retained earnings
or deficit. As such, the financial data is considered that of a Successor
Company and is not comparable to prior periods.
Selected Financial Data
Five-Year Comparison
(Dollars in thousands, except per share data)
Successor Predecessor
---------- ---------------------------------------------------------------------
12/19/00 - 01/01/00 - 08/01/99 -
12/31/2000 12/18/2000 12/31/1999 1999 1998 1997 1996
Operating Results for the Fiscal Year
Total Revenue $ - $62,956 $51,860 $138,285 $151,445 $142,121 $179,541
Operating income (loss) (195) (3,004) (1,772) (2,886) 5,074 2,033 1,017
Income (loss) before extraordinary credits
and effect of change in accounting principle (311) 50,820 (4,513) (9,256) (1,224) 1,173 19,015
Net income (loss) (311) 81,079 (4,513) (7,549) (669) 2,383 19,342
Basic earnings (loss) per common share:
Income (loss) before extraordinary credits ($0.03) $12.10 ($1.13) ($2.45) ($0.49) $0.05 $5.65
Gain on the exchange and retirement of preferred stock - - - 0.09 - 1.05 -
Extraordinary credits - 10.94 - 0.40 0.14 0.33 0.11
Net income (loss) per share ($0.03) $23.04 ($1.13) ($1.96) ($0.35) $1.43 $5.76
Diluted earnings (loss) per common share:
Income (loss) before extraordinary credits ($0.03) $10.25 ($1.13) ($2.45) ($0.49) $0.05 $4.91
Gain on the exchange and retirement of preferred stock - - - 0.09 - 1.07 -
Extraordinary credits - 5.91 - 0.40 0.14 0.31 0.09
Net income (loss) per share ($0.03) $16.16 ($1.13) ($1.96) ($0.35) $1.43 $5.00
Financial Position at End of Fiscal Year
Current assets $8,289 $9,318 $36,093 $40,930 $50,807 $45,340 $69,995
Fixed assets, net 102 108 5,872 5,928 9,468 11,764 14,625
Total assets 12,694 13,740 44,054 49,333 66,816 62,388 93,818
Current liabilities 1,913 2,801 60,444 60,463 64,491 53,679 76,965
Long-term debt - - 50,000 50,000 55,000 60,875 63,945
Stockholders' equity (deficit) 7,189 7,500 (76,556) (72,128) (64,437) (64,084) (55,202)
Other Information
Average common shares outstanding 10,000,000 4,145,770 4,131,074 4,104,029 4,045,963 3,627,550 3,029,954
Number of common stockholders of record 2,641 2,732 2,810 2,860 2,966 3,070 3,142
Preferred shares outstanding - - 661,967 661,967 721,976 721,976 1,868,071
Dividends paid or accumulated on preferred stock - - 165 684 722 1,009 1,885
Number of employees 19 19 617 639 652 641 705
No cash dividends on common stock have been declared during the five-year period.
Net income for 1996 includes a gain of $32.2 million resulting from a divestiture.
Net income for the period ending 12/18/00 includes a gain of $52.5 million resulting from a divestiture.
Net income for the period ending 12/18/00 includes an extraordinary debt extinguishment gain of $26.5 million and Fresh start
adjustments of $3.8 million.
See notes to Consolidated Financial Statements and Management Discussion and Analysis of Financial Condition
and Results of Operations.
ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The operations of Dynacore for the period of December 19, 2000 through December
31, 2000 (referred to as the "Successor Company"), and all prior periods
presented (referred to as the "Predecessor Company") in this report were
significantly affected by the sale of the Company's European Operations on June
30, 2000 and the cessation of virtually all of the production operations of the
Company. As a result, the financial results of the Company for each of the
periods addressed by this report prior to December 18, 2000, (the Effective
Date) , do not reflect the earnings capacity of the Company. In addition the
financial data for the period ended December 31, 2000 reflects the adoption of
Fresh Start Accounting and includes the period from December 19, 2000 to
December 31, 2000.
The Fresh Start basis of accounting is in accordance with the Statement of
Position (SOP) 90-7, "Financial Reporting by Entities in Reorganization Under
the Bankruptcy Code," issued in November 1990 by the Institute of Certified
Public Accountants and includes activity from December 19, 2000 to December 31,
2000. Under this accounting treatment, all assets and liabilities were restated
to reflect the reorganization value of the reorganized entity, which
approximates its fair value at the date of reorganization. In addition, the
accumulated deficit of the Company was eliminated and its capital structure was
recast in conformity with the Plan. As such, the accompanying financial data as
of December 31, 2000 represents that of a successor company which, in effect, is
a new entity with assets, liabilities and a capital structure having carrying
values not comparable with prior periods and with no beginning retained earnings
or deficit. As such, the financial data is considered that of a Successor
Company and is not comparable to prior periods.
On May 17, 1999, the Company entered into a letter of intent to sell its
European Operations to Reboot for $49.5 million plus the assumption of certain
liabilities. Reboot was a newly formed corporation controlled by Mr. Blake
Thomas, the Company's then president. Following the letter of intent, a sale
agreement was executed with Reboot dated as of July 31, 1999 (the "Reboot
Agreement"). The Reboot Agreement contained several contingencies, the most
significant being Reboot's ability to secure financing necessary to close the
transaction. By November 1, 1999, Reboot still had not secured its financing and
Dynacore agreed to an amendment (the "Amendment") to the Reboot Agreement in
return for which Reboot posted a deposit of $750,000 which would be
non-refundable in the event that Reboot failed to close because it could not
secure financing. The Amendment obligated Reboot to loan Dynacore $2.5 million
on or prior to December 1, 1999. Although the termination date pursuant to the
Amendment was extended to March 1, 2000, this extension was contingent on
Reboot's loaning the Company the $2.5 million on or before December 1, 1999, and
in the event the loan was not made, the agreement terminated on December 1,
1999. Since the loan was not made, the agreement was then terminated.
Subsequent to the termination of the Reboot Agreement, as a result of the lack
of performance by Reboot, the Company entered into a Letter of Intent, dated
January 26, 2000, with the European based CallCentric Ltd. ("CallCentric") to
sell the European Operations. Pursuant to an agreement dated as of April 19,
2000 (the "Sale Agreement"), on June 30, 2000, after receipt of approval from
the Bankruptcy Court (the "Court"), the Company sold (the "Sale") its European
Operations to Datapoint Newco 1 Limited ("DNL"), a United Kingdom corporation
affiliated with CallCentric, for $49.5 million in cash, less certain adjustments
in the event that the aggregate shareholder's deficit of the European Operations
exceeded $10 million (the "Purchase Price"). The Sale Agreement contemplated,
among other things, that the Company would file for reorganization pursuant to
Chapter 11 of the United States Bankruptcy Code, which was filed on May 3, 2000
(the "Petition Date" or the "Filing Date") and that the sale of the European
Operations to DNL would be subject to higher and better offers, if any, and the
approval of the Court. The Court approved the sale on June 15, 2000 and the sale
was consummated on June 30, 2000 (the "Closing"). Pursuant to the Sale
Agreement, at Closing DNL deposited $6 million from the Purchase Price in
escrow, $4 million pending resolution of various issues relating to the UK
Pension Plan and $2 million pending preparation of the closing balance sheet.
Upon final resolution of these issues the full $4 million escrow relating to the
UK Pension Plan was released to DNL and $1.625 million of the $2 million escrow
was released to the Company and $375 thousand was released to DNL. Accordingly,
the final Purchase Price after such adjustments was $45.125 million.
As a result of the Sale, the Company recorded a gain of approximately $52.5
million during the period ended December 18, 2000. Included in this amount are
transaction costs and professional fees relating to both the Sale and Bankruptcy
of approximately $1.4 million as well as $1.2 million representing the
settlement of the Officers Administrative Claims.
On December 5, 2000, the Court approved an order confirming Dynacore's Amended
Plan of Reorganization (the "Plan"). On December 18, 2000 (the "Effective Date",
as defined in the Plan), all of the then existing debt and equity in Dynacore
was cancelled and 10 million shares of new common stock, as well as 10 million
beneficial interests, representing interests in the Dynacore Patent Litigation
Trust, (as defined below) formed to pursue Dynacore's patent litigations, were
issued.
The confirmed Plan provided for the distribution of $34.8 million in cash from
the proceeds of the sale of the European Operations to Debenture holders and
other unsecured creditors of Dynacore on the Effective Date. In addition,
pursuant to the confirmed Plan: (i) Debenture holders and other unsecured
creditors received 25% of the equity of the reorganized corporation, the ability
to designate 3 out of 7 members on the Board of Directors, and 40% of a trust
(the "Patent Litigation Trust"), formed to pursue the patent litigations of
Dynacore, (ii) holders of Dynacore's preferred stock, par value $1.00 per share,
received 23.5% of the equity of the reorganized corporation, and 3.5% of the
Patent Litigation Trust, (iii) holders of the common stock, par value $.25 per
share, received 41.5% of the equity of the reorganized corporation, (iv) current
officer management received 10% of the equity of the reorganized corporation as
part of a settlement of certain officer administrative claims that included
employment contract cancellation and other contractual entitlements and (v) the
remaining 56.5% interest in the Patent Litigation Trust was retained by the
reorganized Dynacore.
The Plan contemplated that the beneficial interests in the Patent Litigation
Trust would be transferable and tradable. In addition, pursuant to the approved
Plan and as reflect in its Restated Certificate of Incorporation, Dynacore is
obligated to distribute to its then stockholders, 75% of the first $100 million
of net proceeds, if any, received on account of its beneficial interest in the
Patent Litigation Trust after adjustment for corporate tax and payment of all
patent litigation expenses. Also, as part of the Plan, Dynacore has committed to
lend the Patent Litigation Trust up to $1 million to pursue Dynacore's patent
litigations. As of December 31, 2000, the amount of such loan is $0.
As of December 31, 2000, the Company had cash and cash equivalents of
approximately $7.6 million including $.3 million of restricted cash, which was
restricted for the payment of contested bankruptcy claims. Since the Effective
Date, the Company's management team has undertaken efforts to identify and
evaluate successor business opportunities. The Company believes its cash
resources are sufficient to satisfy its normal operating obligations for the
foreseeable future.
As of December 31, 2000, the Company had available federal tax net operating
losses aggregating approximately $137 million, expiring in various amounts
beginning in 2001. In the event that the Company's ability to utilize its net
operating losses to reduce its federal tax liability with respect to current and
future income becomes subject to limitation, the Company may be required to pay,
sooner than it otherwise might have to, any amounts owing with respect to such
federal tax liability, which would reduce the amount of cash otherwise available
to the Company (see note 6 to Consolidated Financial Statements).
As part of the Sale to DNL, the Company's German subsidiary assumed the
liability for the pension benefits for all German employees who did not transfer
to DNL. Presently, the German subsidiary has no revenue or cash inflow stream
and is not expected to derive any significant amounts of revenue or cash inflows
in the foreseeable future. While the pension liability of $2.8 million has been
reflected in the Company's consolidated financial statements, this obligation
remains with the German subsidiary. The Parent has however entered into an
exclusive distribution agreement with the subsidiary affording the German
subsidiary contractual distribution rights for future products of or services by
the Company, if any, in four major Western European countries.
Restructuring Costs
(In thousands)
The Company incurred restructuring costs as follows in connection with employee
termination programs implemented in these periods:
(Successor) (Predecessor)
----------- --------------------------------------
12/19/00 - 01/01/00 - 08/01/99 -
12/31/00 12/18/00 12/31/99 1999 1998
--------------------------------------- --------------------------------------
Employee termination costs $22 $0 $624 $813 $96
======================================= =======================================
For the period ended December 31, 2000, the Company incurred $22 for employee
termination costs relating to its downsizing efforts after its emergence from
bankruptcy. For the period ended December 31, 1999, the Company incurred
restructuring charges of $624 for employee termination costs. These costs
related to the termination of 28 employees at the Company's San Antonio
headquarters in connection with the Company's discontinuance of its domestic
video conferencing (MINX) employees.
At December 31, 2000, accrued but unpaid restructuring costs were $51.
The predecessor Company's 1999 and 1998 restructuring charges primarily had been
driven by management's efforts to implement cost cutting measures in light of
its overall plan to return to profitability. Restructuring costs incurred during
1999 included $650 for the termination of 25 employees at the Company's San
Antonio headquarters and $163 for the termination of 5 employees at the
Company's French subsidiary.
Restructuring charges are not recorded until specific employees are determined
(and notified of termination) by management in accordance with its overall
restructuring plan.
A rollforward of the restructuring accrual from August 2, 1997 through December
31, 2000 is as follows:
Predecessor TOTAL
------------ -----
Restructuring accrual as of August 2, 1997 $508
Additions 96
Payments (422)
Restructuring accrual as of August 1, 1998 $182
Additions 813
Payments (862)
Restructuring accrual as of July 31, 1999 $133
Additions 624
Payments (375)
----------------------------------------------------------------------
Restructuring accrual as of December 31, 1999 $382
Additions 0
Payments (350)
Restructuring accrual as of December 18, 2000 $ 32
Successor
Restructuring accrual as of December 18, 2000 $ 32
Additions 22
Payments (3)
Restructuring accrual as of December 31, 2000 $ 51
===
Results of Operations
The following is a summary of the Company's sources of revenue for each of the
periods listed below:
(In thousands) Predecessor
-------------------------------------------------
01/01/00 - 08/01/99 -
12/18/00 12/31/99 1999 1998
-------- -------- ---- ----
Sales:
U.S. $103 $385 $3,057 $3,182
Foreign 37,716 27,547 75,630 85,742
------ ------ ------ ------
37,819 27,932 78,687 88,924
Service and other:
U.S. 355 429 1,074 1,123
Foreign 24,782 23,499 58,524 61,398
------ ------ ------ ------
25,137 23,928 59,598 62,521
------ ------ ------ ------
Total revenue $62,956 $51,860 $138,285 $151,445
======= ======= ======== ========
December 19, 2000 - December 31, 2000
The Company did not record any revenue for this period. Operating expenses of
$195 thousand included approximately $50 thousand of expenses related to
severance obligations and other expenses related to employees whose full time
employment has been terminated. In addition, included in this period's operating
expenses are certain non-recurring items and therefore, the operating results
indicated are not necessarily indicative of future results. Non-operating
expense includes a foreign currency transaction adjustment of $139 thousand
related to the German pension plan, offset by approximately $19 thousand of
interest income earned during the period. The Company recorded depreciation and
amortization expenses of approximately $13 thousand during this period,
reflecting the revaluation of the assets due to the adoption of Fresh Start
Reporting.
January 1, 2000 - December 18, 2000
Substantially all of the approximately $63.0 million of revenue related to the
European subsidiaries, which were sold on June 30, 2000. The gross profit margin
for this period ended December 18, 2000 was 23.1%, compared with the 24.8% for
the five month period ended December 31, 1999. Operating expenses for this
period were approximately $17.6 million, which primarily included those expenses
incurred by the company's European subsidiaries until the time of sale on June
30, 2000.
As a result of the Sale, the Company recorded a gain of approximately $52.5
million during the period. Included in this amount are transaction costs and
professional fees relating to both the Sale and Bankruptcy of approximately $1.4
million as well as $1.2 million representing the settlement of the Officers
Administrative Claims.
Non operating expenses included interest expense of approximately $2.0 million,
offset by interest income of $1.5 million and $317 thousand related to
transaction gains as result of the strengthening U.S. Dollar, on average,
against foreign currencies.
Also included as extraordinary items are $26.5 million related to the gain on
the extinguishment of debt pursuant to the confirmation of the Company's amended
plan of reorganization and $3.8 million related to the adjustments required by
the adoption of Fresh Start Accounting.
August 1, 1999 - December 31, 1999
On June 27, 2000, the Company elected to change its fiscal year to a calendar
year basis. Therefore, the five months represented by this transitional period
are not comparable to the 12 month fiscal year ended July 31, 1999 or the 11 1/2
month period ended December 18, 2000. Of the $51.9 million revenue recorded
during this five month period, approximately $51.2 million related to the
European Operations which were sold on June 30, 2000. The gross profit margin
for this five month period was 24.8%, as compared to the 25.7% for the twelve
month period ended July 31, 1999. Operating expenses for the five months ended
December 31, 2000 were approximately $ 14 million, compared with approximately
$37.7 million for the twelve month period ended July 31, 1999. Non-operating
expenses consisted primarily of interest expense of $2.4 million.
Fiscal Year 1999 Compared to Fiscal Year 1998
During 1999, the Company had total revenue of $138.3 million, a decrease of
$13.2 million from the previous year. The decrease was primarily the result of
weak 1999 sales in the Company's Spanish and Italian subsidiaries and a large
volume of personal computer sales to the Swedish government in fiscal year 1998
which did not repeat in fiscal year 1999. This revenue decrease reflects the
impact of approximately $1.2 million, resulting from a stronger U.S. dollar, on
average, during fiscal 1999, as compared to the same period of 1998.
Gross profit margins during 1999 were 25.7% compared with 27.0% for 1998. The
decrease was evidenced in the service business as margins decreased from 35.3%
in 1998 to 29.6% in 1999. This decrease was primarily the result of an erosion
of the maintenance base in Western Europe as customers upgrade their hardware
with non-Datapoint equipment.
During the first quarter of 1999, the Company sold the building it owned in
Gouda, Netherlands to a private unaffiliated group for approximately $2.1
million (net of mortgage obligations and closing costs). The sales contract
provided for the leaseback by the Company of approximately 18,000 square feet
for an initial lease term of five years and approximately 12,000 square feet for
an initial lease term of one year. This lease obligation was transferred to DNL
as a result of the sale of the European Operations on June 30, 2000.
During fiscal year 1998, management reassessed the characteristics of its
intercompany notes with international subsidiaries (payable by the U.S. parent)
and determined that a substantial portion was long-term in nature and not
payable in the foreseeable future. As a result, during fiscal year 1999 and
1998, transaction gains of $1.6 million and $57 thousand, respectively, relating
to these loans are included as a foreign currency adjustment to accumulated
other comprehensive income included in Stockholders' Deficit, which in prior
years, would have been included in non-operating income and expense.
Operating expenses (research and development plus selling, general &
administrative) for 1999 were $37.7 million, an increase of $1.9 million from
the $35.8 million recorded in 1998. Principally this is due to the increased
year over year expense associated with the amortization of the unrecognized
actuarial losses with regard to the Company's United Kingdom pension plan. The
Company recorded restructuring charges of $813 thousand during 1999, compared
with $96 thousand recorded in the prior year. Research and development expenses
decreased from $2.5 million in 1998 to $2.0 million in 1999.
Fiscal Year 1998 Compared to Fiscal Year 1997
During 1998, the Company had total revenue of $151.4 million, an increase of
$9.3 million from the previous year. The increase in revenue was primarily due
to the receipt of several new contracts awarded to the Company's Spanish,
Italian and British subsidiaries and continued strong hardware sales in the
Swedish subsidiary. This revenue increase reflects the offset of approximately
$8.7 million, resulting from a stronger U.S. dollar, on average, during fiscal
1998, as compared to the same period of 1997.
Gross profit margins during 1998 were 27.0% compared with 29.5% for 1997. The
decrease was primarily the result of a large volume of sales by a Northern
European subsidiary of lower margin product and competitive pricing pressures
worldwide partially offset by higher service margins due to continued cost
cutting actions.
On October 27, 1997, the Company sold the three buildings it owned in San
Antonio, Texas to a private unaffiliated group for approximately $3.2 million
(net of mortgage obligations and closing costs). The sales contract provided for
the leaseback by the Company of one of the buildings (approximately 38,000
square feet) for an initial lease term of five years. As part of the Court
approved bankruptcy proceedings, the Company renegotiated the termination of the
lease to March 31, 2001.
In previous fiscal years, included in non-operating income and expense were
transaction gains or losses resulting from the strengthening or weakening of the
U.S. dollar against foreign currencies. These exchange gains or losses related
to short term intercompany notes and international subsidiary U.S. dollar
denominated cash were offset by translation adjustment to accumulated other
comprehensive income included in Stockholders' Deficit and therefore, had no
impact on the Company's financial position.
During fiscal year 1998, management reassessed the characteristics of its
intercompany notes with international subsidiaries (payable by the U.S. parent)
and determined that a substantial portion was long-term in nature and not
payable in the foreseeable future. As a result, during fiscal year 1998,
transaction gains of $57 thousand relating to these loans are included as a
foreign currency adjustment to Stockholders' Deficit, which in prior years would
have been included in non-operating income and expense, as described above.
During fiscal year 1997, a transaction gain of approximately $6.2 million was
included in non-operating income but was offset by translation adjustment to
accumulated other comprehensive income included in Stockholders' Deficit.
Operating expenses (research and development plus selling, general &
administrative) for 1998 were $35.8 million, a decrease of $1.7 million from the
$37.5 million recorded in 1997. Approximately $1.5 million of the decrease is
related to the effect of the strengthening U.S. dollar when compared with the
same period a year ago. The Company recorded restructuring charges of $96
thousand during 1998, compared with $2.4 million recorded in the prior year.
Research and development expenses increased from $2.1 million in 1997 to $2.5
million in 1998.
YEAR 2000 COMPLIANCE
The Year 2000 Issue was the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs or hardware that had date-sensitive software or embedded chips
may have recognized a date using "00" as the year 1900 rather than the year
2000. This could have resulted in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions, generate invoices, or engage in similar normal business
activities. Based on the Company's assessments, the Company modified and/or
replaced significant portions of hardware and software so that those systems
would properly utilize dates beyond December 31, 1999.
The Company also assessed and modified and/or replaced its non Information
Technology ("IT") operating systems to insure compliance with Year 2000 which
included those primarily related to the office and facilities' environment
(telephone systems, security systems, etc.).
As a result of its efforts, Dynacore was prepared for the transition to the Year
2000 and did not experience any significant malfunctions or errors in its
operating or business systems when the date changed from 1999 to 2000. Dynacore
is not currently aware of any year 2000 problems that have materially affected
its customers or suppliers. Based on operations since January 1, 2000, the
Company does not anticipate any material disruption in its operations as a
result of any continuing Year 2000 issues. However it is possible that latent
problems may arise in the future. The Company believes that any such problems
are likely to be minor and correctable. Dynacore's aggregate costs for its Year
2000 actions were approximately $1.2 million.
NEW EUROPEAN CURRENCY
In January 1999, certain European countries introduced a new currency unit
called the "euro". In conjunction with the preparation for the year 2000, the
Company also modified and/or adapted systems designed to properly handle the
euro. The costs required to be able to accommodate the euro were combined with
costs of becoming year 2000 compliant, and therefore not easily identifiable.
However, they are not considered to be so significant so as to have a material
effect on the Company's business.
Market Risk Sensitive Instruments
Management had determined that all of the Predecessor Company's foreign
subsidiaries operated primarily in local currencies, which represented the
functional currencies of the subsidiaries. All assets and liabilities of foreign
subsidiaries were translated into U.S. dollars using the exchange rate
prevailing at the balance sheet date, while income and expense accounts were
translated at average exchange rates during the year. As such, the Predecessor
Company's operating results were affected by fluctuations in the value of the
U.S. dollar as compared to currencies in European countries, as a result of the
sales of its products and services in these foreign markets. To illustrate, a
hypothetical, uniform 10% strengthening of the dollar relative to the currencies
in which the Predecessor Company's sales were denominated would have resulted in
a decrease to gross profit of approximately $3.0 million for the year ending
July 31, 1999. This calculation assumes that each exchange rate would have
changed in the same direction relative to the U.S. dollar. In addition to the
direct effects of changes in exchange rates, which are a changed dollar value of
the resulting sales, changes in exchange rates also affect the volume of sales
or the foreign currency sales price as competitors' products become more or less
attractive. The Predecessor Company's sensitivity analysis of the effects in
foreign currency exchange rates did not factor in a potential change in sales
levels or local currency prices.
In addition, the Predecessor Company had cash and intercompany receivables and
payables, which were denominated in various functional currencies of the
subsidiaries and parent. At July 31, 1999, the result of a uniform 10%
strengthening of the dollar relative to the currencies in which the Company's
intercompany balances were denominated would have resulted in $4.1 million of
foreign currency transaction gains that would have been reported as a
translation adjustment to stockholders' deficit.
The Successor Company's market risk is primarily limited to a pension liability
and other post employment liabilities which remain with the Company's German
subsidiary. As such, the Successor Company's future operating results could be
affected by fluctuations in the value of the U.S. dollar as compared to the
German currency. For example, a 10% strengthening of the dollar relative to the
German currency would result in a decrease of this liability and an increase to
operating performance of an approximate $300 thousand transaction gain.
The Company's long term debt consisted entirely of 8 7/8% convertible
subordinated debentures. As of July 31, 1999 the carrying amount of these
debentures was $54,960, with a fair value of $22,259, after consideration of
repurchases through July 31, 1999.
Cautionary Statement Regarding Risks and Uncertainties That May Affect
Future Results
This Annual Report on Form 10-K contains forward-looking statements about the
business, financial condition and prospects of the Company. The actual results
of the Company could differ materially from those indicated by the
forward-looking statements because of various risks and uncertainties including
without limitation changes in product demand, the availability of products,
changes in competition, economic conditions, new product development, various
inventory risks due to changes in market conditions, changes in tax and other
governmental rules and regulations applicable to the Company, and other risks
indicated in the Company's filings with the Securities and Exchange Commission.
These risks and uncertainties are beyond the ability of the Company to control,
and in many cases, the Company cannot predict the risks and uncertainties that
could cause its actual results to differ materially from those indicated by the
forward-looking statements. When used in this Annual Report on Form 10-K, the
words "believes," "estimates," "plans," "expects," and "anticipates" and similar
expressions as they relate to the Company or its management are intended to
identify forward- looking statements.
ITEM 8. Financial Statements and Supplementary Data.
INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page
Report of Marks Paneth & Shron LLP
Independent Auditors 18
Report of Ernst & Young LLP
Independent Auditors 19
Consolidated Financial Statements
Consolidated Statements of Operations for the period
December 19 - 31, 2000; January 1 - December 18, 2000;
Five months ended December 31, 1999; and fiscal years 1999 and 1998 20
Consolidated Balance Sheets as of December 31, 2000 and July 31, 1999 22
Consolidated Statements of Cash Flows for the period
December 19 - 31, 2000; January 1 - December 18, 2000;
Five months ended December 31, 1999; and fiscal years 1999 and 1998 23
Consolidated Statements of Stockholders' Equity (Deficit) for the period
December 19 - 31, 2000; January 1 - December 18, 2000;
Five months ended December 31, 1999; and fiscal years 1999 and 1998 24
Notes to Consolidated Financial Statements 25
REPORT OF MARKS PANETH & SHRON LLP
INDEPENDENT AUDITORS
The Board of Directors
Dynacore Holdings Corporation
We have audited the accompanying consolidated balance sheet of Dynacore Holdings
Corporation (formerly known as Datapoint Corporation) and subsidiaries as of
December 31, 2000, and the related consolidated statements of operations,
stockholders' equity (deficit), and cash flows for the period December 19 to
December 31, 2000, the period January 1 to December 18, 2000, and the five
months ended December 31, 1999. Our audits also included the financial statement
schedule listed in the index at Item 14(a) as of December 31, 2000 and for the
period December 19 to December 31, 2000, the period January 1 to December 18,
2000, and five months ended December 31, 1999. These financial statements and
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these consolidated financial statements based on our
audit.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatements. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Dynacore Holdings Corporation and subsidiaries as of December 31, 2000 and the
consolidated results of its operations and its cash flows for the period
December 19 to December 31, 2000, the period January 1 to December 18, 2000, and
five months ended December 31, 1999 in conformity with accounting principles
generally accepted in the United States of America.
As discussed in the notes to the consolidated financial statements, effective
December 18, 2000, the Company emerged from bankruptcy and applied fresh start
accounting. As a result, the consolidated balance sheet as of December 31, 2000,
and the related statements of consolidated operations and cash flows for the
period December 19 to December 31, 2000, are presented on a different basis than
that for the periods before fresh start, and therefore, are not comparable.
Marks Paneth & Shron LLP
New York, New York
March 23, 2001
REPORT OF ERNST & YOUNG LLP
INDEPENDENT AUDITORS
The Board of Directors
Dynacore Holdings Corporation
We have audited the accompanying consolidated balance sheet of Dynacore Holdings
Corporation (formerly Datapoint Corporation) and subsidiaries (the Company) as
of July 31, 1999 and the related consolidated statements of operations,
stockholders' equity (deficit) and cash flows for each of the two fiscal years
in the period ended July 31, 1999. Our audits also included the financial
statement schedule listed in the index at Item 14(a). These financial statements
and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of the
Company at July 31, 1999 and the consolidated results of its operations and its
cash flows for each of the two fiscal years in the period ended July 31, 1999 in
conformity with accounting principles generally accepted in the United States.
Also, in our opinion the related financial statement schedule, when considered
in relation to the basic financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
The accompanying consolidated financial statements and schedule have been
prepared assuming that the Company will continue as a going concern. As more
fully described in the Note 3 to the consolidated financial statements, the
Company incurred recurring net losses and had a working capital and net capital
deficiency at July 31, 1999. These conditions raised substantial doubt about the
Company's ability to continue as a going concern. The financial statements do
not include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and classification of
liabilities that may result from the outcome of this uncertainty.
Ernst & Young LLP
Dallas, Texas
November 1, 1999
CONSOLIDATED STATEMENTS OF OPERATIONS
Dynacore Holdings Corporation and Subsidiaries For the period December 19 - 31,
2000; January 1 - December 18, 2000; Five Months Ended December 31, 1999; and
Fiscal Years 1999 and 1998 (In thousands, except share and per share data)
Successor Predecessor
------------- -----------------------------------------------------------------
2000 2000 Five Months Ended
12/19 - 12/31 01/01 - 12/18 12/31/99 07/31/99 08/01/98
-------------------------------------------------------- -----------------------------------------------------------------
Revenue:
Sales $-- $37,819 $27,932 $78,687 $88,924
Service and other -- 25,137 23,928 59,598 62,521
-------------------------------------------------------- -----------------------------------------------------------------
Total revenue -- 62,956 51,860 138,285 151,445
Operating costs and expenses:
Cost of sales -- 28,884 21,831 60,740 70,029
Cost of service and other -- 19,502 17,143 41,958 40,480
Research and development -- 491 490 1,965 2,466
Selling, general and administrative 173 17,083 13,544 35,695 33,300
Restructuring costs 22 -- 624 813 96
---------------------------------------------------------- ---------------------------------------------------------------
Total operating costs and expenses 195 65,960 53,632 141,171 146,371
---------------------------------------------------------- ---------------------------------------------------------------
Operating income (loss) (195) (3,004) (1,772) (2,886) 5,074
Non-operating income (expense):
Interest expense -- (1,993) (2,378) (5,731) (6,148)
Other, net (116) 1,924 (35) 196 1,195
Reorganization items:
Gain on sale of European Operations -- 52,473 -- -- --
----------------------------------------------------------- ---------------------------------------------------------------
Income (loss) before income taxes
and extraordinary credit (311) 49,400 (4,185) (8,421) 121
Income taxes (benefit) -- (1,420) 328 835 1,345
----------------------------------------------------------- --------------------------------------------------------------
Income (loss) before
extraordinary credit (311) 50,820 (4,513) (9,256) (1,224)
Extraordinary credits:
Fresh start adjustments -- 3,771 -- 1,707 555
Debt extinguishment -- 26,488 -- -- --
----------------------------------------------------------- --------------------------------------------------------------
Net income (loss) $(311) $81,079 $(4,513) $(7,549) $(669)
=========================================================== ===============================================================
Net income (loss), adjusted for preferred
stock dividends paid or accumulated plus
gain on exchange and retirement of
preferred stock -
Net Income (loss) applicable to common $(311) $95,513 $(4,678) $(7,927) $(1,391)
=========================================================== ===============================================================
Basic income (loss) per common share:
Income (loss) before extraordinary credit $(.03) $12.10 $(1.13) $ (2.42) $(.48)
Gain on the exchange and retirement of
preferred stock -- -- .07 --
Extraordinary credit-fresh start adjustments .91 -- -- --
Extraordinary credit-debt extinguishment -- 10.03 -- .42 .14
----------------------------------------------------------- --------------------------------------------------------------
Net income (loss) per common share $(.03) $23.04 $(1.13) $(1.93) $(.34)
=========================================================== ==============================================================
Diluted income (loss) per common share:
Income (loss) before extraordinary credit $(.03) $10.25 $(1.13) $ (2.42) $(.48)
Gain on the exchange and retirement of
preferred stock -- -- .07 --
Extraordinary credit-fresh start adjustments .74 -- -- --
Extraordinary credit-debt extinguishment -- 5.17 -- .42 .14
---------------------------------------------------------------------------------------------------------------------------
Net income (loss) per common share $(.03) $16.16 $(1.13) $(1.93) $(.34)
===========================================================================================================================
Average common shares outstanding:
Basic 10,000,000 4,145,770 4,131,074 4,104,029 4,045,963
Diluted 10,000,000 5,118,172 4,131,074 4,104,029 4,045,963
See accompanying Notes to Consolidated Financial Statements.
CONSOLIDATED BALANCE SHEETS
Dynacore Holdings Corporation and Subsidiaries December 31, 2000 and July 31,
1999 (In thousands, except share data)
Successor Predecessor
2000 1999
----------------------------------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $7,304 $3,568
Restricted cash and cash equivalents 317 328
Accounts receivable, net of allowance for doubtful
accounts of $0 and $1,305, respectively 359 32,130
Inventories -- 2,632
Prepaid expenses and other current assets 309 2,272
------------------------------------------------------------------------------------------------------
Total current assets 8,289 40,930
Fixed assets, net 102 5,928
Other assets, net 535 2,475
Reorganization value in excess of amounts allocable to identifiable assets 3,768 --
----------------------------------------------------------------------------------------------------------
$12,694 $49,333
==========================================================================================================
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Payables to banks $-- $6,676
Current maturities of long-term debt -- 4,960
Accounts payable 297 14,451
Accrued expenses 1,616 22,890
Deferred revenue -- 9,311
Income taxes payable -- 2,175
----------------------------------------------------------------------------------------------------------
Total current liabilities 1,913 60,463
Long-term debt, exclusive of current maturities -- 50,000
Accrued pension and post employment liabilities 3,192 --
Deferred federal income tax 400 687
Other liabilities -- 10,311
Commitments and contingencies
Stockholders' equity (deficit):
Predecessor Preferred stock of $1.00 par value. Shares authorized 10,000,000;
shares issued and outstanding 661,967 in 1999 (aggregate liquidation
preference, including dividends in arrears, $16,549 in 1999). -- 662
Predecesssor Common stock of $0.25 par value. Shares authorized 9,007,080;
shares issued 4,726,739, including treasury shares of 598,066 in 1999. -- 5,248
Successor Common stock of $0.01 par value. Shares authorized 30,000,000;
shares issued 10,000,000 100 --
Paid in capital 7,400 212,733
Accumulated other comprehensive income -- (354)
Retained equity (deficit) (311) (288,292)
Treasury stock, at cost -- (2,125)
-----------------------------------------------------------------------------------------------------------
Total stockholders' equity (deficit) 7,189 (72,128)
-----------------------------------------------------------------------------------------------------------
$12,694 $49,333
==========================================================================================================
See accompanying Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Dynacore Holdings Corporation and Subsidiaries For the period December 19 - 31,
2000; January 1 - December 18, 2000; Five Months Ended December 31, 1999; and
Fiscal Years 1999 and 1998 (In thousands)
Successor Predecessor
---------- --------------------------------------------------------
2000 2000
12/19-12/31 01/01-12/18 12/31/99 1999 1998
---------------------------------------------------------------------- --------------------------------------------------------
Cash flows from operating activities:
Net income (loss) $(311) $81,079 $(4,513) $(7,549) $(669)
Adjustments to reconcile net income (loss) to net cash
provided from (used in) operating activities:
Depreciation 5 801 1,470 3,179 3,785
Amortization of reorganized value in excess of amounts
allocable to identifiable assets 8 -- -- -- --
Officer stock compensation 750 -- -- -- --
Provision for losses (recoveries) on accounts receivable -- 35 (203) (299) 33
Realized gain on sale of European Operations -- (52,473) -- (273) (1,205)
Gain on debt extinguishment -- (26,488) -- (1,707) (555)
Non-cash pension expense -- -- -- 2,761 2,047
Deferred income taxes -- 188 60 (616) 836
Fresh start accounting adjustments -- (3,771) -- -- --
Changes in assets and liabilities:
(Increase) Decrease in receivables (12) (4,303) 714 (406) (7,515)
(Increase) decrease in inventory -- (53) 1,008 354 1,139
Increase (Decrease) in accounts payable and accrued expenses(1,637) 12,568 1,044 (1,960) 2,359
Increase (Decrease) in other liabilities and deferred credits -- (3,487) (1,254) (1,948) (470)
Other, net (24) (1,293) (94) 1,302 (2,058)
--------------------------------------------------------------------------------------------------------------------------------
Net cash provided from (used in) operating activities (1,221) 2,803 (1,768) (7,162) (2,273)
Cash flows from investing activities:
Payments for fixed assets -- (1,513) (1,729) (3,312) (2,354)
Proceeds from disposition of European Operations -- 43,306 -- 2,111 3,200
(net of cash retained by European subsidiaries of $1,819)
Other, net -- 432 153 411 108
-------------------------------------------------------------------------------------------------------------------------------
Net cash provided from (used in) investing activities -- 42,225 (1,576) (790) 954
Cash flows from financing activities:
Payments on borrowings -- (50,467) (49,811) (90,289) (84,939)
Proceeds from borrowings -- 46,902 51,692 89,636 82,637
Debt extinguishment -- (34,868) -- -- --
Restricted cash for letters of credit -- (19) 30 24 (198)
--------------------------------------------------------------------------------------------------------------------------------
Net cash provided from (used in) financing activities -- (38,452) 1,911 (629) (2,500)
Effect of foreign currency translation on cash -- (140) (46) 48 430
-------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (1,221) 6,436 (1,479) (8,533) (3,389)
Cash and cash equivalents at beginning of period 8,525 2,089 3,568 12,101 15,490
-------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $7,304 $8,525 $2,089 $3,568 $12,101
===============================================================================================================================
Cash payments for:
Interest -- $341 $467 $5,778 $6,188
Income taxes -- $267 $324 778 807
See accompanying Notes to Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Dynacore Holdings Corporation and Subsidiaries For the period December 19 - 31,
2000; January 1 - December 18, 2000; Five Months Ended December 31, 1999; July
31, 1999, and August 1, 1998 (Dollars in thousands, except share data)
1. Summary of Significant Accounting Policies
Liquidity
The Company believes its available cash will be sufficient to satisfy its cash
requirements for 2001.
Fiscal Year
On June 30, 2000 the Company changed its fiscal year to a calendar year end and
also changed its name to Dynacore Holdings Corporation in conjunction with the
sale of its European Operations. The transition period is the period from August
1, 1999 to December 31, 1999. Prior to August 1, 1999, the Company utilized a
52-53 week fiscal year and references to 1999 and 1998 are for the fiscal years
ended July 31, 1999 and August 1, 1998, respectively. December 18, 2000 (January
1, 2000 to December 18, 2000) is the period in 2000, which was prior to the
Effective Date of the Company's reorganization plan ("Predecessor"). December
31, 2000 (December 19, 2000 - December 31, 2000) is the period, in 2000, which
was subsequent to the Effective Date of the Company's reorganization plan
("Successor").
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its majority-owned subsidiaries, all of which are wholly-owned except Corebyte,
Inc., which is 80% owned. Intercompany accounts and transactions have been
eliminated upon consolidation.
Cash and Cash Equivalents
Cash equivalents include short-term, highly-liquid investments with maturities
of three months or less from date of acquisition and, as a result, the carrying
value approximates fair value because of the short maturity of those
instruments.
Inventories
Inventories are stated at the lower of standard cost (approximates first-in,
first-out) or market (replacement cost as to raw materials and net realizable
value as to work in process and finished products).
Fixed Assets
Fixed assets are carried at cost and depreciated for financial purposes using
straight-line and accelerated methods at rates based on the economic lives of
the assets or the related lease terms for leasehold improvements:
Leasehold improvements 3-5 years
Machinery, equipment, furniture and fixtures 3-10 years
Equipment leased to customers 4 years
Field support spares 3 years
Major improvements that add to the productive capacity or extend the life of an
asset are capitalized while repairs and maintenance are charged to expense as
incurred.
Risk Concentration
Financial instruments that potentially subject the Company to concentrations of
credit risk consist of cash and cash equivalents, and prior to June 30, 2000, of
accounts receivable. Concentrations of credit risk with respect to the
receivables were limited due to the large number of customers in the Company's
customer base and their dispersion across industries. The Company primarily sold
to customers in Europe within, but not limited to, the banking, automotive,
government, libraries, and telecommunications industries. The Company maintained
an allowance for losses based upon the expected collectibility of accounts
receivable. At December 31, 2000, the Company had $966 on deposit with one
prominent Texas bank. At the same date $5,013 and $2,370, respectively of cash
equivalents were invested in very short term notes issued by the Federal
National Mortgage Association and the Federal Home Loan Bank, both of which are
federal government sponsored corporations with extensive, although not unlimited
United States Treasury backing. These amounts exceed the amount of cash and cash
equivalents included on the balance sheet because of outstanding checks.
Debt
The carrying amount and the fair value of the Company's debt at July 31, 1999
was:
Estimated
Carrying Amount Fair Value
8-7/8% convertible subordinated debentures $54,960 $22,259
The fair value of the Company's 8-7/8% convertible subordinated debentures was
based on a quoted market price at July 31, 1999.
Translation of Foreign Currencies
Management had determined that all of the Company's foreign subsidiaries
operated primarily in local currencies which represented the functional
currencies of the subsidiaries. All assets and liabilities of foreign
subsidiaries were translated into U.S. dollars using the exchange rate
prevailing at the balance sheet date, while income and expense accounts were
translated at average exchange rates during the year.
Reclassifications
Certain reclassifications to the financial statements for prior years have been
made to conform to the 2000 presentation. Unless stated otherwise, this includes
all data related to the Company's old common stock which has been restated to
reflect the equivalent number of new common stock at the rate of .225177 shares
of new common stock for each share of old common stock.
Revenue Recognition
The Company's Corebyte subsidiary derives its revenue from the sale of internet
based application software. For all other operations, the Company derived its
revenue from hardware and software products and services. Services provided by
the Company included hardware and software maintenance, installation, and basic
consulting services. Revenue was recognized in accordance with following
criteria:
Hardware Products. Sales revenue was generally recognized at the time of
shipment, provided no future vendor obligations existed and collection was
probable. If such obligations were present in the contract, revenue was not
recognized until such time as the contractual obligations were met.
Software Products. The Company generated software license revenue as an
authorized reseller of third-party software products. Revenue from software
license fees were generally recognized upon delivery, provided payment was due
within one year and was probable of collection. If acceptance was required,
software license revenue was recognized upon customer acceptance.
In fiscal 1999 the Company adopted, American Institute of Certified Public
Accountants Statement of Position 97-2, Software Revenue Recognition, which set
forth new guidelines for recognizing revenue on software sales. The statement
did not have a material effect on the Company's 1999 financial statements as
compared to prior years presented. In December 1998, Statement of Position 98-9,
Modification of SOP 97-2, Software Revenue Recognition, with Respect to Certain
Transactions" ("SOP 98-9") was released. SOP 98-9 amends certain provisions of
SOP 97-2 relating to revenue recognition for multiple element arrangements. SOP
98-9 was effective for transactions that were entered into in fiscal years
beginning after March 15, 1999. The requirements of SOP 98-9 did not materially
change the Company's financial reporting.
Services. Revenue from installation and consulting services were recognized as
services were performed or ratably over the contract period. Hardware and
software maintenance revenue was deferred at the time of product shipment and
was recognized ratably over the term of the support period.
Income Taxes
The Company accounts for income taxes under the liability method in accordance
with FASB Statement No. 109. No tax provision has been made for the
undistributed earnings of foreign subsidiaries as the undistributed earnings,
indefinitely reinvested in the international business, of the Company's
remaining foreign subsidiaries at December 31, 2000 was zero.
Net Income (Loss) per Common Share
The following tables depict the computation of basic and diluted net income
(loss) per common share.
As a result of the new common stock which was issued on the Effective Date, all
share data has been adjusted to reflect its issuance at the rate of .225177
shares of new common Stock for each share of old common stock.
SUCCESSOR COMPANY
12/19/00 - 12/31/00
Income Per
(Loss) Shares Share
------------------------------------------------------
Income (loss) before extraordinary
credit $(311)
Extraordinary credit --
-------------------------------------------------------
Basic and Diluted $(311) 10,000 $(0.03)
--------------------------------------------------------
The per share computations for the period ended 12/31/00 exclude the following
shares for stock options and convertible debentures because their effect would
have been antidilutive:
12/31/00
Stock options 750
Convertible preferred stock --
Convertible debentures --
PREDECESSOR COMPANY
01/01/00 - 12/18/00 08/01/99 - 12/31/99 1999 1998
------------------- ------------------- ---- ----
Income Per Income Per Income Per Income Per
(Loss) Shares Share (Loss) Shares Share (Loss) Shares Share (Loss) Shares Share
------------------------------------------------------------------------------------------------------------------------------------
Income (loss) before extraordinary
credit $50,820 $(4,513) $(9,256) $(1,224)
Preferred stock dividends
accumulated (641) (165) (684) (722)
Gain on the exchange and
retirement of preferred stock -- -- 306 --
Extraordinary credits:
Debt extinguishment 41,563 1,707 555
Fresh start adjustments 3,771
-- __
------------------------------------------------------------------------------------------------------------------------------------
Basic $95,513 4,146 $23.04 $(4,678) 4,131$(1.13) $(7,927) 4,104 $(1.93) $(1,391)4,046$(.34)
----------------------------------------------------------------------------------------------------------------------------------
01/01/00 - 12/18/00 08/01/99 - 12/31/99 1999 1998
-------------------------------------------------- ------------------- ---- ----
Income Per Income Per Income Per Income Per
(Loss) Shares Share (Loss) Shares Share (Loss) Shares Share (Loss) Shares Share
------------------------------------------------------------------------------------------------------------------------------------
Income (loss) before extraordinary
credit $50,820 $(4,513) $(9,256) $(1,224)
Preferred stock dividends
accumulated (641) (165) (684) (722)
Gain on the exchange and
retirement of preferred stock -- -- 306 --
Extraordinary credits:
Debt extinguishment 26,488 1,707 555
Fresh start adjustments 3,771 --
Dilutives:
8 7/8% subordinated debentures1,644 683
Convertible preferred stock 641 289
-----------------------------------------------------------------------------------------------------------------------------------
Diluted $82,723 5,118 $16.16 $(4,678) 4,131$(1.13) $(7,927) 4,104 $(1.93) $(1,391)4,046$(.34)
----------------------------------------------------------------------------------------------------------------------------------
For the period January 1, 2000 - December 31, 2000, the extraordinary credit
-debt extinguishment was reduced by the "forgiveness" of the liquidation
preference including dividends in arrears, of approximately $16.8 million offset
by the approximately $1.8 million received by preferred stock holders of New
common stock.
The per share computations for periods ended 12/18/00 and 12/31/99 and fiscal
years 1999 and 1998 exclude the following shares for stock options and
convertible debentures because their effect would have been antidilutive:
12/18/00 12/31/99 1999 1998
-------- -------- ---- ----
Stock options 796 796 796 836
Convertible preferred stock -- 298 298 325
Convertible debentures -- 683 683 723
Comprehensive Income
In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement
No. 130, Reporting Comprehensive Income. Statement No. 130 established new rules
for the reporting and display of comprehensive income and its components.
Comprehensive income is net income, plus certain other items that are recorded
directly to stockholders' equity. The only such items which were applicable to
the Company during the periods shown are foreign currency translation adjustment
and minimum pension liability adjustments. The Company adopted this Statement in
the first quarter of fiscal 1999.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
2. Sale of European Operations
On May 17, 1999, the Company entered into a letter of intent to sell its
European Operations to Reboot for $49.5 million plus the assumption of certain
liabilities. Reboot was a newly formed corporation controlled by Mr. Blake
Thomas, the Company's then president. Following the letter of intent, a sale
agreement was executed with Reboot dated as of July 31, 1999 (the "Reboot
Agreement"). The Reboot Agreement contained several contingencies, the most
significant being Reboot's ability to secure financing necessary to close the
transaction. By November 1, 1999, Reboot still had not secured its financing and
Dynacore agreed to an amendment (the "Amendment") to the Reboot Agreement in
return for which Reboot posted a deposit of $750,000 which would be
non-refundable in the event that Reboot failed to close because it could not
secure financing. The Amendment obligated Reboot to loan Dynacore $2.5 million
on or prior to December 1, 1999. Although the termination date pursuant to the
Amendment was extended to March 1, 2000, this extension was contingent on
Reboot's loaning the Company the $2.5 million on or before December 1, 1999, and
in the event the loan was not made, the agreement terminated on December 1,
1999. Since the loan was not made, the agreement was then terminated.
Subsequent to the termination of the Reboot Agreement, as a result of the lack
of performance by Reboot, the Company entered into a Letter of Intent, dated
January 26, 2000, with the European based CallCentric Ltd. ("CallCentric") to
sell the European Operations. Pursuant to an agreement dated as of April 19,
2000 (the "Sale Agreement"), on June 30, 2000, after receipt of approval from
the Bankruptcy Court, the Company sold (the "Sale") its European Operations to
DNL, a United Kingdom corporation affiliated with CallCentric, for $49.5 million
in cash, less certain adjustments in the event that the aggregate shareholder's
deficit of the European Operations exceeded $10 million (the "Purchase Price").
The Sale Agreement contemplated, among other things, that the Company would file
for reorganization pursuant to Chapter 11 of the United States Bankruptcy Code,
which was filed on May 3, 2000 and that the sale of the European Operations to
DNL would be subject to higher and better offers, if any, and the approval of
the Court. The Court approved the sale on June 15, 2000 and the sale was
consummated on June 30, 2000 (the "Closing"). Pursuant to the Sale Agreement, at
Closing DNL deposited $6 million from the Purchase Price in escrow, $4 million
pending resolution of various issues relating to the UK Pension Plan and $2
million pending preparation of the closing balance sheet. Upon final resolution
of these issues the full $4 million escrow relating to the UK Pension Plan was
released to DNL and $1.625 million of the $2 million escrow was released to the
Company and $375 thousand was released to DNL. Accordingly, the final Purchase
Price after such adjustments was $45.125 million.
As a result of the Sale, the Company recorded a gain of approximately $52.5
million during the period ended December 17, 2000. Included in this amount are
transaction costs and professional fees relating to both the Sale and Bankruptcy
of approximately $1.4 million as well as $1.2 million representing the
settlement of the Officers Administrative Claims. 3. Reorganization Plan
Reorganization Under Chapter 11
On May 3, 2000, the Company filed a petition for relief under Chapter 11 of the
United States Bankruptcy Code with the United States Bankruptcy Court. The
Chapter 11 filing was the result of a default related to the semi-annual
interest payment on the Company's 8 7/8% Convertible Subordinated Debentures
(the "Debentures"), recurring operating losses and cash flow problems. The
filing of a Chapter 11 petition operates as a stay of, among other actions, the
commencement or continuation of a judicial administrative or other action or
proceeding against a debtor that was or could have been initiated before the
commencement of a Chapter 11 case or the enforcement against the debtor or
against the property of the estate or a judgment obtained before the
commencement of the case. Under Chapter 11, substantially all prepetition
liabilities of debtors are subject to settlement under a plan of reorganization.
The consummation of a plan of reorganization is dependent upon the satisfaction
of numerous conditions, including, among other things, the acceptance by several
classes of interests and confirmation by the Bankruptcy Court.
On December 5, 2000, the Company's Amended Plan of Reorganization (the "Plan")
was approved by the Bankruptcy Court and became effective December 18, 2000 (the
"Effective Date"). The accompanying consolidated financial statements have been
prepared in conformity with principles of accounting applicable to a going
concern. Further, the accompanying consolidated financial statements reflect all
adjustments relating to settlement of the claims of any class of creditors that
are provided for in the Company's Plan of Reorganization.
On the Effective Date, as defined in the Plan, all of the then existing debt and
equity in Dynacore was cancelled and 10 million shares of new common stock, as
well as 10 million beneficial interests, representing interests in the Dynacore
Patent Litigation Trust (as defined below), formed to pursue Dynacore's patent
litigations, were issued.
The confirmed Plan provided for the distribution of $34.8 million in cash from
the proceeds of the sale of the European Operations to Debenture holders and
other unsecured creditors of Dynacore on the Effective Date. In addition,
pursuant to the confirmed Plan: (i) Debenture holders and other unsecured
creditors received 25% of the equity of the reorganized corporation, the ability
to designate 3 out of 7 members on the Board of Directors, and 40% of a trust
(the "Patent Litigation Trust"), formed to pursue the patent litigations of
Dynacore, (ii) holders of Dynacore's preferred stock, par value $1.00 per share,
received 23.5% of the equity of the reorganized corporation, and 3.5% of the
Patent Litigation Trust, (iii) holders of the common stock, par value $.25 per
share, received 41.5% of the equity of the reorganized corporation, (iv) current
officer management received 10% of the equity of the reorganized corporation as
part of a settlement of certain officer administrative claims that included
employment contract cancellation and other contractual entitlements and (v) the
remaining 56.5% interest in the Patent Litigation Trust was retained by the
reorganized Dynacore.
The Plan contemplated that the beneficial interests in the Patent Litigation
Trust would be transferable and tradable. In addition, pursuant to the approved
Plan and as reflected in its Restated Certificate of Incorporation, Dynacore is
obligated to distribute to its then stockholders, 75% of the first $100 million
of net proceeds, if any, received on account of its beneficial interest in the
Patent Litigation Trust after adjustment for corporate tax and payment of all
patent litigation expenses. Also, as part of the Plan, Dynacore has committed to
lend the Patent Litigation Trust up to $1 million to pursue Dynacore's patent
litigations. As of December 31, 2000, the amount of such loan is $0.
Fresh Start Reporting
Under the provision of Statement of Position (SOP) 90-7, "Financial Reporting by
Entities in Reorganization under the Bankruptcy Code," issued in November 1990
by the American Institute of Certified Public Accountants, the Company has
prepared the accompanying consolidated pro forma balance sheet as of the
Effective Date, December 18, 2000 on the basis of "fresh start" reporting since
the reorganization value, as defined, was less than the total of all
post-petition liabilities and pre-petition claims, and holders of voting shares
immediately before confirmation of the Plan received less than fifty percent of
the voting shares of the emerging entity. Under this concept, all assets and
liabilities were restated to reflect the reorganization value of the reorganized
entity, which approximates its fair value at the date of reorganization. In
addition, the accumulated deficit of the Company was eliminated and its capital
structure was recast in conformity with the Plan. As such, the accompanying
consolidated pro forma balance sheet as of December 18, 2000 represents that of
a successor company which, in effect, is a new entity with assets, liabilities
and a capital structure having carrying values not comparable with prior periods
and with no beginning retained earnings or deficit.
The Company estimated the fair value of the reorganized entity based upon
the issuance of 10 million shares of new common stock at a value of $0.75 per
share pursuant to the approved Plan While the estimated reorganization value of
the Company has been primarily allocated to specific asset categories pursuant
to Fresh Start Reporting, the effects of such are subject to further refinement
or adjustment. Current assets have been recorded at their book value, which the
Company believes approximates fair value. Equipment and other fixed assets, have
been recorded at their fair value as estimated by management after considering
replacement cost or potential sales value. Intellectual property has been
revalued as estimated by management after considering its remaining life. For
Fresh Start reporting purposes, Corebyte software has been valued at zero. After
the revaluation of the reorganized Company was completed, an intangible asset of
$3.8 million reflecting the reorganization value in excess of identifiable
assets was established, which is being amortized on a straight-line basis over
15 years. At December 31, 2000 the intangible asset was $3,775 less accumulated
amortization of $7 resulting in a net balance of $3,768.
Prior to Debt Fresh Start Reorganized
Reorganization Extinguishment Adjustments Balance Sheet
Assets
Current assets:
Cash and cash equivalents $43,393 (34,868) -- $8,525
Restricted cash and cash equivalents 317 -- -- 317
Accounts receivable, net 347 -- -- 347
Prepaid expenses and other current assets 129 -- -- 129
-----------------------------------------------------------------------------------------------------------------------
Total current assets 44,186 (34,868) -- 9,318
Fixed assets, net 108 -- -- 108
Other assets, net 746 (207) -- 539
Reorganization value in excess of identifiable assets -- -- 3,775 3,775
---------------------------------------------------------------------------------------------------------------------------
$45,040 (35,075) 3,775 $13,740
===========================================================================================================================
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Accounts payable $180 -- -- $180
Liabilities subject to compromise 61,348 (61,031) -- 317
Accrued expenses 3,710 (1,426) -- 2,284
Income taxes payable 20 -- -- 20
-----------------------------------------------------------------------------------------------------------------------
Total current liabilities 65,258 (62,457) -- 2,801
Other liabilities 5,165 (1,730) 4 3,439
Commitments and contingencies
Stockholders' equity (deficit):
Predecessor Preferred stock 642 -- (642) --
Predecesssor Common stock 5,248 -- (5,248) --
Successor Common stock -- -- 100 100
Paid in capital 212,733 2,624 (207,957) 7,400
Retained equity (deficit) (242,660) 26,488 216,172 --
Treasury stock, at cost (1,346) -- 1,346 --
---------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity (deficit) (25,383) 29,112 3,771 7,500
---------------------------------------------------------------------------------------------------------------------------
$45,040 (35,075) 3,775 $13,740
===========================================================================================================================
The estimated $7,500 reorganization value of the Company exceeded the
identifiable net assets primarily because of the pension and other post
employment obligations of the Company's German subsidiary, which are not
obligations of the parent Company.
4. Restructuring Costs
During the periods listed below, the Company incurred restructuring costs as
follows in connection with employee termination programs implemented in these
years:
Successor Predecessor
------------ ------------------------------------
12/19/00 - 01/01/00 - 08/01/99 -
12/31/00 12/18/00 12/31/99 1999 1998
------------------------------------------------------------------------------
Employee termination costs $22 $0 $624 $813 $96
===============================================================================
For the period ended December 31, 2000, the Company incurred $22 for employee
termination costs relating to its downsizing efforts after its emergence from
bankruptcy. For the period ended December 31, 1999, the Company incurred
restructuring charges of $624 for employee termination costs. These costs
related to the termination of 28 employees at the Company's San Antonio
headquarters in connection with the Company's discontinuance of its domestic
video conferencing (MINX) employees.
At December 31, 2000, accrued but unpaid restructuring costs were $51.
The predecessor Company's 1999 and 1998 restructuring charges primarily had been
driven by management's efforts to implement cost cutting measures in light of
its overall plan to return to profitability. Restructuring costs incurred during
1999 included $650 for the termination of 25 employees at the Company's San
Antonio headquarters and $163 for the termination of 5 employees at the
Company's French subsidiary.
Restructuring charges are not recorded until specific employees are determined
(and notified of termination) by management in accordance with its overall
restructuring plan.
A rollforward of the restructuring accrual from August 2, 1997 through December
31, 2000 is as follows:
Predecessor TOTAL
------------ -----
Restructuring accrual as of August 2, 1997 $508
Additions 96
Payments (422)
Restructuring accrual as of August 1, 1998 $182
Additions 813
Payments (862)
Restructuring accrual as of July 31, 1999 $133
Additions 624
Payments (375)
--------------------------------------------------------------------
Restructuring accrual as of December 31, 1999 $382
Additions 0
Payments (350)
Restructuring accrual as of December 18, 2000 $32
===
Successor Company
Restructuring accrual as of December 18, 2000 $32
Additions 22
Payments (3)
Restructuring accrual as of December 31, 2000 $51
===
5. Non-operating Income (Expense)
Successor Predecessor
------------ ------------------------------------------
12/19/00 - 01/01/00 - 08/01/99 -
12/31/00 12/18/00 12/31/99 1999 1998
----------------------------------------------------------------------------------------------
Interest earned $19 $1,510 $6 $313 $518
Foreign currency gains (losses) (135) 317 218 (89) (104)
Gain on the sale of buildings -- -- -- 273 1,205
Other -- 97 (259) (301) (424)
------------------------------------------------------------------------------------------------
$(116) $1,924 $(35) $196 $1,195
===============================================================================================
During fiscal year 1998, management reassessed the characteristics of its
intercompany notes with international subsidiaries (payable by the U.S. parent)
and determined that a substantial portion was long-term in nature and not
payable in the foreseeable future. As a result, during fiscal year 1999 and
1998, transaction gains of $1.6 million and of $57 thousand, respectively,
relating to these loans are included as a foreign currency adjustment to
accumulated other comprehensive income included in Stockholders' Deficit, which
in prior years, would have been included in non-operating income and expense.
6. Income Taxes
The provision for taxes consisted of the following:
Successor Predecessor
----------- --------------------------------------------------
12/19/00 - 01/01/00 - 08/01/99 -
12/31/00 12/18/00 12/31/99 1999 1998
-------------------------------------------------------------- --------------------------------------------------
Income (loss) before income taxes and extraordinary
credit:
U.S. $(311) $50,538 $(4,356) $(8,275) $(5,655)
Outside the U.S. -- (1,138) 171 (146) 5,776
-------------------------------------------------------------------------------------------------------------------
$(311) $49,400 $(4,185) $(8,421) $121
===================================================================================================================
U.S. federal:
Current $-- $-- $-- $-- --
Outside the U.S.:
Current -- (257) 38 1,451 509
Deferred -- (1,163) 290 (616) 836
-------------------------------------------------------------------------------------------------------------------
Total provision $-- $(1,420) $328 $835 $1,345
===================================================================================================================
The differences between the tax provision in the financial statements and
the tax benefit computed at the U.S. federal statutory rates are:
12/19/00 - 01/01/00 - 08/01/99 -
12/31/00 12/18/00 12/31/99 1999 1998
-------------------------------------------------------------------------------------------------------------------
Income taxes at statutory rate $(109) $17,290 $(1,465) $(2,947) $42
Increase in taxes resulting from:
Benefit of U.S. tax loss not recognized 106 20,279 1,523 2,895 2,057
Tax basis in excess of book basis on disposal
of assets -- (38,710) -- -- --
Foreign losses and other transactions on which
a tax benefit could not be recognized -- 708 686 753 33
Effect of federal tax rate less than (greater than)
foreign tax rates -- 150 (372) 325 190
Benefit of operating loss carryforwards -- (1,137) (46) (192) (979)
Other, net 3 -- 2 1 2
-------------------------------------------------------------------------------------------------------------------
Provision for income taxes $-- $(1,420) $328 $835 $1,345
===================================================================================================================
The undistributed earnings, indefinitely reinvested in international business,
of the Company's foreign subsidiaries aggregated approximately $0 at December
31, 2000
The primary components of deferred income tax assets and liabilities are as
follows:
2000 1999
---------------------------------------------------------------------------
Deferred income tax assets:
Property, plant and equipment $-- $1,711
Loss and credit carryforwards 61,007 76,206
Minimum pension liability adjustments -- --
Other -- 1,592
---------------------------------------------------------------------------
61,007 79,509
Less: valuation allowance 61,007 78,035
---------------------------------------------------------------------------
-- 1,474
Deferred income tax liabilities:
Accrued retirement costs (400) (679)
Foreign exchange gains -- (943)
Other -- (539)
---------------------------------------------------------------------------
(400) (2,161)
----------------------------------------------------------------------------
Net deferred income tax asset (liability) $(400) $(687)
============================================================================
Despite the current estimate, it is possible that some of the deferred tax
assets will be realized in the future. Should this happen the valuation
allowance will be reduced. After the reduction of the valuation allowance
relating to the first $106 of December 31, 2000 deferred tax assets to be
utilized (i.e., those arising after December 18, 2000), the reduction of the
valuation allowance relating to the next $3,768 will result in a corresponding
reduction of the reorganization value in excess of amounts allocable to
identifiable assets rather than a reduction of income tax expense.
At December 31, 2000, the net deferred income tax liability of $400 was
presented in the balance sheet, based on tax jurisdiction, as other liabilities
of $400. Realization of the Company's deferred tax assets is dependent on
generating sufficient taxable income in certain taxing jurisdictions prior to
the expiration of loss and credit carryforwards. In this regard, the Company
intends to utilize qualified tax planning strategies, if necessary, to utilize
deferred tax assets where valuation allowances have not been provided.
Management believes that more likely than not, deferred tax assets will not be
fully realized in the future and has therefore provided a valuation allowance to
reserve for those deferred tax assets not considered realizable.
At December 31, 2000, the Company had tax operating loss carryforwards
approximating $137,000 for U.S. federal tax purposes. Of this amount, $41,000
expires in years 2001 and 2002, $29,000 expires in years 2004 and 2005, and
$67,000 expires in various amounts through year 2021. U.S. federal long-term
capital loss carryforwards of $35,000 expire in various amounts beginning in
2004. Utilization of the ordinary and capital tax loss carryforwards is subject
to limitation in the event of a more than 50% change in ownership of the
Company.
The Company had unused investment, research, and alternative minimum tax credits
for income tax purposes at December 31, 2000 of approximately $328 expiring at
various dates beginning 2001 which may be used to offset future tax liabilities
of the Company. Utilization of these credits is subject to limitation in the
event of a more than 50% change in ownership of the Company.
7. Accounts Receivable
The Company has a receivable from Vugate, Inc. ("Vugate") the buyer of its
videoconferencing business (MINX). This receivable consists of a note with a
$375 face value that is payable out of certain Vugate cash flows. This note is
carried on the balance sheet at $267 which represents the present value of the
estimated payments at a discount rate of 12.5% per annum. The remaining $33
receivable from Vugate represents rental and related charges to Vugate as a
sub-tenant of the Company's San Antonio facility. An additional $59 is
receivable from other parties.
8. Inventories
On June 30, 2000, the Company included all of its inventory as part of the
Sale. The inventory at July 31, 1999, consisted of :
1999
Finished and purchased products $2,305
Work in process 234
Raw materials 93
-----------------------------------------------------
$2,632
9. Fixed Assets
Successor
Accumulated
Cost Depreciation Net
December 31, 2000
Property, plant and equipment:
Leasehold improvements $24 $1 $23
Machinery, equipment, furniture and fixtures 84 5 79
--------------------------------------------------------------------------
$108 $6 $102
==== == ====
Predecessor
Accumulated
Cost Depreciation Net
July 31, 1999
Property, plant and equipment:
Building and leasehold improvements $5,650 $4,477 $1,173
Machinery, equipment, furniture and fixtures 16,621 13,288 3,333
--------------------------------------------------------------------------
22,271 17,765 4,506
Field support spares 10,872 9,605 1,267
Equipment leased to customers 304 149 155
------------------------------------------------------------------------------
$33,447 $27,519 $5,928
==============================================================================
During the first quarter of 1999, the Company sold the building it owned in
Gouda, Netherlands to a private unaffiliated group for approximately $2.1
million (net of mortgage obligations and closing costs). The sales contract
provided for the leaseback by the Company of approximately 18,000 square feet
for an initial lease term of five years and approximately 12,000 square feet for
an initial lease term of one year. This lease obligation was transferred to DNL
as a result of the sale of the European operation on June 30, 2000.
On October 27, 1997, the Company sold the three buildings it owned in San
Antonio, Texas to a private unaffiliated group for approximately $3.2 million
(net of mortgage obligations and closing costs). The sales contract provided for
the leaseback by the Company of one of the buildings (approximately 38,000
square feet) for an initial lease term of five years. As part of the Court
approved bankruptcy proceedings, the Company renegotiated the termination of the
lease to March 31, 2001.
10. Lease Commitments
The Company leases certain facilities and equipment under various leases.
Substantially all of the leases are classified as operating leases. Rental
expense for operating leases are as follows:
Successor
12/19/00 to 12/31/00 $6
Predecessor
1/1/00 to 12/18/00 $2,048
8/1/99 to 12/31/99 $1,914
1999 $4,908
1998 $4,419
Most of the leases contain renewal options for various periods and require the
Company to maintain the property. Certain leases contain provisions for periodic
rate adjustments to reflect Consumer Price Index changes.
At December 31, 2000, future minimum lease payments for all noncancelable leases
totaled $1,882 and are payable as follows:
2001 $317
2002 $229
2003 $213
2004 $194
2005 and after $929
11. Payables to Bank
At December 31, 2000 no lines of credit or other credit facilities were in place
with any of the Company's banks or financial institutions. The Company's foreign
subsidiaries had available lines of credit from foreign banks, which were
generally secured by accounts receivable. The outstanding lines of credit to the
foreign subsidiaries at July 31, 1999, totaled $6.7 million. The weighted
average interest rate for these short term borrowings as of the fiscal year end
was 5.7% and 7.2%, for 1999 and 1998, respectively.
12. Accrued Expenses
Successor Predecessor
2000 1999
-----------------------------------------------------------------------------
Salaries, commissions, bonuses and other benefits $370 $12,204
Taxes other than income taxes -- 3,769
Accrued professional fees-bankruptcy & sale of Europe
Operations 680 --
Other 566 6,917
-----------------------------------------------------------------------------
$1,616 $22,890
=============================================================================
13. Long-Term Debt - Predecessor
1999
8-7/8% convertible subordinated debentures $54,960
Less: current maturities of long-term debt 4,960
----------------------------------------------------------------
$50,000
The Amended Plan of Reorganization under Chapter 11 of the Bankruptcy code was
confirmed by the United States Bankruptcy Court for the District Court of
Delaware and became effective December 18, 2000 (the "Effective Date"). In
accordance with the Plan, the Indenture as of the Effective Date was deemed
cancelled, terminated, and deemed null and void and of no further force and
effect, except as otherwise provided in the Plan. The Company and the Indenture
Trustee were released from any and all obligations under the Indenture except
with respect to the payments required to be made by the Indenture Trustee in
respect of its Claims, or with respect to such other rights of the Indenture
Trustee that, pursuant to the terms of the Indenture, survive the termination of
the Indenture. As provided for by the Plan, Debenture Holders, upon redeeming
their debentures to the Indenture Trustee, received 43.5701965 shares of New
Common Stock and 69.712318 units of Beneficial Interests in the Patent
Litigation Trust per $1,000 principal amount. Debenture Holders also received
$606.50 in cash per $1,000 principal amount.
During fiscal 1999, the Company repurchased debentures with a total face value
of $3,155, resulting in an extraordinary gain of $1,707.
14. Stockholders' Equity (Deficit)
On the Effective Date, all of the existing debt and equity in Dynacore was
cancelled. The Exchangeable Preferred Shareholders received 3.663683 shares of
New Common Stock (2.35 million shares) and .545655 units of the Dynacore Patent
Litigation Trust (350,000 Beneficial Interests).
The $1.00 preferred stock had a liquidation preference of $20.00 per share and
cumulative dividends of $1.00 annually. On January 16, 1996, the Company
announced that it was in arrears on its $1.00 preferred stock in an aggregate
amount equal to six full quarterly dividends. As a result, each holder of $1.00
preferred stock had the right to exchange each such share (inclusive of all
accrued and unpaid dividends) into two shares of the Company's then common
stock. In addition, as a result of the dividend arrearages the number of
directors constituting the Board of Directors of the Company was increased by
two with the vote of the holders of the $1.00 preferred stock (not including
those who had exchanged $1.00 preferred stock for the Company's then common
stock). These rights continued until such time as the arrearages had been paid
in full. Dividends of $3,310 were accumulated and unpaid at July 31, 1999.
Changes in other comprehensive income are as follows:
(all Predecessor Company related)
Pension Foreign Currency
Liability Translation
Adjustment Adjustment Total
Balance at August 2, 1997 $(4,488) $4,613 $125
Annual adjustments (2,386) 1,629 (757)
Tax effect 790 - 790
------------------------------------------------------------------------------
Balance at August 1, 1998 $(6,084) $6,242 $158
Annual adjustments 2,428 60 2,488
Tax effect (3,000) - (3,000)
-------------------------------------------------------------------------------
Balance at July 31, 1999 $(6,656) $6,302 $(354)
Annual adjustments 28 (110) (82)
Tax effect -- -- --
------------------------------------------------------------------------------
Balance at December 31, 1999 $(6,628) $6,192 $(436)
Annual adjustments 6,628 (6,192) 436
Tax effect -- -- --
------------------------------------------------------------------------------
Balance at December 18, 2000 $-- $-- $--)
=== === ====
15. Stock Option Plans
At December 31, 2000, there were 550,000 employee stock options outstanding. On
December 19, 2000, options were granted to Messrs. Edelman (300,000 options),
Agranoff ( 175,000 options) and Krumb (75,000 options) as part of their
employment agreements as defined in the Plan. However, these options are subject
to the approval of Dynacore's initial stock option plan by the Company's
stockholders. In addition, the initial plan shall be limited to an aggregate
amount of 1,500,000 shares. On January 28, 1998, the stockholders approved a
1997 Employee Stock Option Plan. The plan was similar to the Company's previous
employee stock option plans. Under the Company's employee stock option plans,
officers and other key employees may have been granted options to purchase
common stock and related stock appreciation rights. Under the terms of these
plans, options may have been granted at no less than 75% of fair market value
and expired no later than ten years from the date of grant. The Board also had
the discretion to grant options exercisable in full or in installments, and had
generally granted options at fair market value exercisable in two to four
installments beginning one year from the date of grant. In the event of a change
of control in the Company, all stock options would have fully vested. As of July
31, 1999, options for 734,505 shares had been granted and no appreciation rights
had been granted. These options were cancelled as of the Effective Date.
Employee Stock Option Plans
----------------------------------------------------------------------------------------
Price Range Number of Shares
------------------
of Shares Under Available
Under Option Option for Option
------------------------------------------------------------------------------------------
Predecessor Company
-------------------
Outstanding at August 2, 1997 $4.17-35.52 496,733 348,446
-------------------------------------------------------------------------------------------
Authorized -- -- 450,354
Granted $11.36-17.76 386,922 (386,922)
Exercised 4.17-11.94 (35,787) --
Canceled 4.17-35.52 (79,751) 79,751
------------------------------------------------------------------------------------------
Outstanding at August 1, 1998 $4.17-32.19 768,117 491,629
-------------------------------------------------------------------------------------------
Exercised 4.17-4.30 (5,014) --
Canceled 6.39-23.31 (28,598) 28,597
-------------------------------------------------------------------------------------------
Outstanding at July 31, 1999 $4.17-32.19 734,505 520,226
-------------------------------------------------------------------------------------------
Exercised -- -- --
Canceled -- -- --
-------------------------------------------------------------------------------------------
Outstanding at December 31, 1999 $4.17-32.19 734,505 520,226
Exercised -- -- --
Canceled 4.17-32.19 (734,505) (520,226)
Granted -- -- --
-------------------------------------------------------------------------------------------
Outstanding at December 18, 2000 $-- -- --
=== == ==
-------------------------------------------------------------------------------------------
Successor Company
Outstanding at December 18, 2000 $-- -- --
Granted .75 550,000 950,000
Canceled -- -- --
-------------------------------------------------------------------------------------------
Outstanding at December 31, 2000 $.75 550,000 950,000
=================================
On December 10, 1996, the stockholders approved a 1996 Director Stock Option
Plan. The plan was similar to the Company's previous director stock option
plans. The 1996 Director Plan provided for a one-time grant of an option to
purchase, at fair market value as of the date of the grant, 5,629 shares of
common stock to each director, and an additional 11,258 shares to the present
and any newly elected Chairman of the Board. A maximum of 112,588 shares of
common stock were reserved for the issuance of grants under the 1996 Director
Plan, and the options, which vested immediately upon grant, expired five years
from the date of grant. Total director options outstanding at of July 31, 1999,
totaled 61,923 with a weighted average exercise price of $5.46.
As part of the Bankruptcy Plan the new non-employee board of director members
were granted options of 50,000 each. The options vest immediately, have an
exercise price of $.75 and a ten year term.
Director Stock Option Plans
Price Range Number of Shares
of Shares Under Available
Under Option Option for Option
------------------------------------------------------------------------
Predecessor Company
-------------------
Outstanding at August 2, 1997 5.28-28.02 67,553 118,217
------------------------------------------------------------------------
Authorized -- -- --
Granted -- -- --
Expired -- -- --
------------------------------------------------------------------------
Outstanding at August 1, 1998 5.28-28.02 67,553 118,217
-------------------------------------------------------------------------
Authorized -- -- --
Granted -- -- --
Expired 28.02 (5,630) --
-------------------------------------------------------------------------
Outstanding July 31, 1999 $5.28-7.23 61,923 118,217
-------------------------------------------------------------------------
Authorized -- -- --
Granted -- -- --
Expired -- -- --
------------------------------------------------------------------------
Outstanding at December 31, 1999 $5.28-7.23 61,923 118,217
-------------------------------------------------------------------------
Authorized -- -- --
Granted -- -- --
Expired -- -- --
Canceled $5.28-7.23 (61,923) (118,217)
---------------------------------------------------------
Outstanding at December 18, 2000 $-- -- --
-------------------------------------------==----------==----------------
-------------------------------------------------------------------------
Successor Company
-----------------
Outstanding at December 18, 2000 $-- -- --
Granted .75 200,000 --
Canceled-- -- --
---------------------------------------------------------
Outstanding at December 31, 2000 $.75 200,000 --
==== ======= ==
The FASB has issued Statement No. 123, "Accounting for Stock-Based
Compensation", ("SFAS No. 123") which requires either recognition or disclosure
of a charge for the value of stock options granted. The Company adopted this
statement in 1997 and has elected to continue to apply the provisions of
Accounting Principles Board Opinion No. 25 and make the footnote disclosures
required by SFAS No. 123.
Accordingly, no compensation cost has been recognized for the stock option
plans. Had compensation cost been determined based on the fair value of the
options at the grant date for awards in 1998 and 1997 consistent with the
provisions of SFAS No. 123, the Company's net earnings and earnings per share
would have been the pro forma amounts indicated below. Because options vest over
several years and additional grants are expected, the effects of the
calculations below are not likely to be representative of similar future
calculations:
(In thousands, except per share amounts)
(Successor) (Predecessor)
------------ ----------------------------------------------------------
12/19/00 - 01/01/00 - 08/01/99
12/31/00 12/18/00 12/31/99 1999 1998
------------ -----------------------------------------------------------
Net income (loss) -- As reported $(311) $81,079 $(4,513) $(7,549) $(669)
-- Pro forma (387) 80,612 (4,893) (8,444) (1,395)
Basic earnings (loss) per share -- As reported $(.03) $23.04 $(1.13) $ (1.93) $(.34)
-- Pro forma (.04) 19.45 (1.19) (2.06) (.35)
The fair value of each option grant was estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions. No options were granted during the period 01/01/00 - 12/18/00,
08/01/99 - 12/31/99, nor for fiscal year 1999.
Successor Predecessor
12/19/00 - 12/31/00 1998
Risk-free interest rate
Employee stock option 5.19% 5.85%
Board of director stock option 5.19% --%
Expected dividend yield
Employee stock option 0 0
Board of director stock option 0 --
Expected volatility
Employee stock option .996 .653
Board of director stock option .996 --
Expected lives
Employee stock option 6 6
Board of director stock option 3 --
Weighted average remaining contractual life
Employee stock option 10 10
Board of director stock option 5 5
The weighted average fair value of options granted for the employee and director
stock option plans granted 12/19/00 - 12/31/00 was $.35. The weighted average
fair value of options granted for the employee stock option plans was $1.84 in
1998.
Summarized information about stock options outstanding as of December 31, 2000,
is as follows:
Range of Exercise Prices $0.75
-------------------------------------------------------------------------
Number of shares outstanding 750,000
Weighted average exercise price of shares outstanding $0.75
Weighted average remaining contractual life 10.0 years
Number of shares exercisable 200,000
Weighted average exercise price of shares exercisable $.75
16. Operating Segments and Geographic Operations
(all Predecessor Company)
Operating Segment Information
In fiscal 1999, the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 131, "Disclosures about Segments of an Enterprise and Related
Information," which requires the reporting of certain financial information by
operating segment and geographical area. Prior to the Petition Date, Dynacore
was principally engaged in the development, acquisition, marketing, servicing,
and system integration of computer and communication products - both hardware
and software. These products and services were for integrated computer,
telecommunication and video conferencing network systems. The Company's then
Chief Operating Decision Maker (CODM) assessed performance and allocated
resources based on a geographic reporting structure. Substantially all of the
Company's operations consisted of ten European subsidiaries and to a lesser
extent domestic operations. Reportable operating segments under SFAS No. 131
included the Company's subsidiaries residing in Sweden, the United Kingdom,
France, and Belgium. Each of these subsidiaries functioned as value-added
resellers of networking and telephony products.
Included in "Corporate and Other" are general corporate activities and related
expenses and activities from other foreign subsidiaries. The CODM used operating
income to measure results of operations from segments. Assets were those that
are used or generated exclusively by each operating segment. The eliminations
required to determine the consolidated amounts shown below consisted principally
of the elimination of intercompany receivables for loans provided by the
operating segments to the parent entity.
The following table presents certain information regarding the Company's
reportable operating segments for fiscal years 1997-1999: (For the period after
12/18/00, there are no longer reportable separate segments.)
Predecessor Company
01/01/00 - 08/01/99 -
Revenue 12/18/00 12/31/99 1999 1998
----------------------------------------------------------------------------------------------------------
Sweden $20,204 $17,567 41,868 $49,538
United Kingdom 14,075 14,164 35,814 37,602
France 7,057 5,211 17,419 15,750
Belgium 3,114 3,524 15,749 11,323
Corporate and Other 18,625 11,784 28,184 38,507
Eliminations (119) (390) (749) (1,275)
-----------------------------------------------------------------------------------------------------------
Total $62,956 $51,860 $138,285 $151,445
============================================================
01/01/00 - 08/01/99 -
Segment Profit (Loss) 12/18/00 12/31/99 1999 1998
----------------------------------------------------------------------------------------------------------
Sweden $2,111 $1,787 $2,834 $4,044
United Kingdom 658 1,230 4,547 4,930
France (441) (252) 1,102 1,981
Belgium 55 (78) 1,339 1,709
Corporate and Other (5,387) (4,459) (12,708) (7,590)
-----------------------------------------------------------------------------------------------------------
Operating Income (Loss) (3,004) (1,772) (2,886) 5,074
Interest Expense (1,993) (2,378) (5,731) (6,148)
Other Non-Operating Income, net 54,397 (35) 196 1,195
----------------------------------------------------------------------------------------------------------
Income Before Income Taxes and
Extraordinary Credit $49,400 (4,185) (8,421) $121
============================================================
01/01/00 - 08/01/99 -
Capital Expenditures: 12/18/00 12/31/99 1999 1998
----------------------------------------------------------------------------------------------------------
Sweden $110 $20 $238 $93
United Kingdom 432 702 1,732 1,619
France 36 24 231 87
Belgium 95 54 346 200
Corporate and Other 840 929 765 355
----------------------------------------------------------------------------------------------------------
Total $1,513 $1,729 3,312 $2,354
===========================================================
01/01/00 - 08/01/99 -
Depreciation: 12/18/00 12/31/99 1999 1998
----------------------------------------------------------------------------------------------------------
Sweden $139 $93 $292 $419
United Kingdom 311 306 1,655 1,679
France 54 52 123 103
Belgium 37 43 291 253
Corporate and Other 260 976 818 1,331
----------------------------------------------------------------------------------------------------------
Total $801 $1,470 $3,179 $3,785
=========================================================
01/01/00 - 08/01/99 -
Assets: 12/18/00 12/31/99 1999 1998
----------------------------------------------------------------------------------------------------------
Sweden $-- $14,408 $12,786 $12,213
United Kingdom -- 22,669 18,838 26,622
France -- 10,971 13,870 15,913
Belgium -- 13,028 15,677 13,996
Corporate and Other 13,740 39,723 44,614 51,862
Eliminations -- (56,745) (56,452) (53,790)
-----------------------------------------------------------------------------------------------------------
Total $13,740 $44,054 $49,333 $66,816
============================================================
Geographic Operations
The following geographic area data includes trade revenues and fixed assets:
01/01/00 - 08/01/99 -
12/18/00 12/31/99 1999 1998
-----------------------------------------------------------
Revenue - unaffiliated customers:
United States - domestic $458 $814 $4,131 $4,305
-- export sales 496 215 977 3,157
Europe 62,002 50,831 133,143 143,471
Other International -- -- 34 512
----------------------------------------------------------------------------------------------------------
Total revenue from unaffiliated customers 62,956 51,860 138,285 151,445
Revenue - Intercompany:
United States 116 385 719 1,219
Europe 3 5 30 56
Eliminations (119) (390) (749) (1,275)
-----------------------------------------------------------------------------------------------------------
Total consolidated revenue $62,956 $51,860 $138,285 $151,445
============================================================
01/01/00 - 08/01/99 -
Fixed Assets: 12/18/00 12/31/99 1999 1998
----------------------------------------------------------------------------------------------------------
United States $108 $189 $133 $402
Europe -- 5,683 5,795 9,066
----------------------------------------------------------------------------------------------------------
Total fixed assets $108 $5,872 $5,928 $9,468
=========================================================
17. Retirement Income Plans
Retirement expenses incurred by the Company were as follows:
Successor Predecessor
--------- -----------
12/19/00 - 01/01/00 - 08/01/99 -
12/31/00 12/18/00 12/31/99 1999 1998
----------------------------------------------------------------------------------------
U.S.:
Matching contributions $-- $23 $12 $81 $51
Outside the U.S.:
Defined benefit plans 14 1,461 1,223 2,761 2,047
Other plans -- 331 275 543 712
----------------------------------------------------------------------------------------
14 1,792 1,498 3,304 2,759
----------------------------------------------------------------------------------------
$14 $1,815 $1,510 $3,385 $2,810
========================================================================================
U.S. Plans
The Company has adopted a 401(k) retirement and savings plan which covers all
full-time employees who have been employed for at least 12 months. The Company's
retirement and savings plan contribution has been a 25% matching contribution
for employee contributions up to 5% of each employee's compensation. At the
Board's discretion, the Company may also contribute a profit sharing amount to
the plan that is contingent upon the performance level of the Company.
The Company maintains a Supplemental Executive Retirement Plan for certain
executive employees selected by the Board of Directors. The plan provides for
employee contributions of up to 10% of applicable compensation. In addition, at
the Board's discretion, the Company may also make contributions on an annual,
individual basis, allocated on a pro-rata basis according to participant's
applicable compensation up to a maximum contribution of 15% of applicable
compensation per employee. The last stock contribution the Company made to the
plan was for the fiscal year ended August 2, 1997, for credit to the accounts of
various executive officers. Under the terms of the plan, benefits accrue to the
various executive officers upon satisfaction of the plan's vesting criteria,
which is based upon length of employment with the Company.
Plans Outside the U.S.
Most of the Company's foreign subsidiaries provide retirement income plans which
conform to the practice of the country in which they do business, some of which
are government sponsored plans. The types of company-sponsored plans in use are
defined benefit and defined contribution.
Five of the Company's subsidiaries, including the United Kingdom, utilized
defined benefit plans with employee benefits generally being based on years of
service and wages near retirement. The plans cover all full-time employees who
have been employed for at least 12 months. Obligations under the Company's plans
are funded primarily through (a) fixed rate of return investments, mostly
insurance policies, (b) equity funds for the portion of the United Kingdom's
plan assets which are invested in the Edelman Value Fund, Ltd., and (c) for
Germany, where reserves are established for the obligations. The Trustees of the
Company's former United Kingdom operating subsidiary's defined benefit pension
plan have implemented an investment strategy which includes an investment of
approximately $6.5 million, %6.4 million and $7.2 million, respectively, in the
Edelman Value Fund, Ltd., a related party, as of June 30, 2000, December 31
1999, and July 31, 1999. The United Kingdom's defined benefit plan was capped
and was converted to a defined contribution plan in fiscal year 1993. During
1997, the Belgian defined benefit pension plan was closed to new employees and a
defined contribution plan initiated. During 1999, the Swiss defined benefit plan
was terminated. On June 30, 2000, as a result of the sale to DNL, the
Netherland's and United Kingdom's plans were assumed by DNL.
As part of the Sale to DNL, the Company's German subsidiary assumed the
liability for the pension benefits for all German employees who did not transfer
to DNL. Presently, the German subsidiary has no revenue or cash inflow stream
and is not expected to derive any significant amounts of revenue or cash inflows
in the foreseeable future. While the pension liability of $2.8 million has been
reflected in the Company's consolidated financial statements, this obligation
remains with the German subsidiary. The Parent has however entered into an
exclusive distribution agreement with the subsidiary affording the German
subsidiary contractual distribution rights for future products of or services by
the Company, if any, in four major Western European countries.
The Company's former United Kingdom operating subsidiary had a defined
contribution plan. The plan covers all full-time salaried employees who have
been employed for at least 12 months and contributions are based upon a
percentage of compensation. Obligations under this plan are funded primarily
through deposits in pooled investments.
Expenses of the defined benefit plans were as follows:
Successor Predecessor
12/19/00 - 01/01/00 - 08/01/99 -
12/31/00 12/18/00 12/31/99 1999 1998
-----------------------------------------------------------------------------------------------------
Service Cost $-- $484 $423 $217 $ 275
Interest Cost 14 1,219 995 2,291 2,325
Expected return on plan assets -- (895) (770) (1,690) (1,964)
Amortization of transition obligation -- 14 14 33 36
Amortization of net actuarial loss -- 639 561 1,910 1,375
--------------------------------------------------------------------------------------------------------
Total $14 $1,461 $1,223 $2,761 $ 2,047
Obligation and asset data for the defined benefit plans at December 31, 2000 and
July 31, 1999 were as follows:
2000 1999
----------------------------------------------------------------------------------------
Change in benefit obligations
Benefit obligation at beginning of period $2,694 $35,671
Service cost -- 217
Interest cost 14 2,291
Benefits paid -- (1,112)
Foreign exchange (gain) loss 139 --
Actuarial (gain) loss (5) 2,001
-------------------------------------------------------------------------------------
Benefit obligation at end of period $2,842 $39,068
-------------------------------------------------------------------------------------
Change in plan assets
Fair value of plan assets at beginning of period $-- $25,154
Actual return on plan assets -- 4,318
Benefits paid from plan assets -- (662)
--------------------------------------------------------------------------------------
Fair value of plan assets at end of period $-- $28,810
-------------------------------------------------------------------------------------
Funded Status $(2,837) $(10,258)
Unrecognized net actuarial (gain) loss (5) 6,611
Unrecognized prior service cost -- 300
Unrecognized transition obligation -- 491
-------------------------------------------------------------------------------------
Net amount recognized $(2,842) $(2,856)
========================
Amounts recognized in the balance sheet consist of:
Accrued retirement, non-current $(2,842) $(10,035)
Prepaid benefit cost -- 523
Deferred tax asset -- --
Accumulated other comprehensive loss -- 6,656
-------------------------------------------------------------------------------------
Total $(2,842) $(2,856)
========================
The range of assumptions used for the non-U.S. defined benefit plans reflect the
different economic environments within the various countries. The defined
benefit obligations were determined as of December 31, 2000 and July 31, 1999
using assumed discount rates of 6% for 2000, and a range of 5.75% to 6.25% in
1999, an assumed average long-term pay progression rate of 3%, and an assumed
weighted average expected rate of return on plan assets of 6 1/2% in 1999.
Benefit obligations exceed plan assets for each of the Company's plans at the
end of December 31, 2000 and July 31, 1999. Accrued pension costs include
accumulated benefit obligations of $2,842 and $34,807, respectively, versus plan
assets of $0 and $28,810, for the plans whose accumulated benefit obligations
exceeded their assets.
18. Certain Relationships and Related Transactions
Director Agranoff is the Company's Chief Operating Officer, Acting President and
Vice Chairman of the Board of Directors, and of counsel at the law firm Pryor
Cashman Sherman & Flynn LLP. During the period ended December 31, 2000, December
18, 2000, December 31,1999 and fiscal years 1999 and 1998, Dynacore paid legal
fees of $0, $420, $250, $265, and $0, respectively, to the law firm of Pryor
Cashman Sherman & Flynn LLP, for legal services provided by attorneys other than
Mr. Agranoff. In addition, at December 31, 2000, the Company owed Pryor Cashman
Sherman & Flynn LLP approximately $70 for services rendered.
During the period ended December 31, 2000, December 18, 2000, December 31, 1999,
and fiscal years 1999 and 1998, the Company paid secretarial expenses of $0,
$45, $0, $64, and $69, respectively, to Canal Capital Corporation. Chief
Executive Officer Edelman and Director Agranoff are Canal Capital Corporation
board members, with Chief Executive Officer Edelman serving as Chairman of the
Board.
The Company, along with co-tenants Canal Capital Corporation, of which Mr.
Edelman and Mr. Agranoff are directors and Plaza Securities Company LP, of which
Mr. Edelman is the controlling general partner and Mr. Agranoff is a general
partner, entered into an amendment of its New York office lease in February,
1999. While the Company is currently paying 50% of the monthly lease payment
based upon its pro-rata occupancy of the premises, each co-tenant of the lease
is jointly liable for the full lease obligation. The lease expires in October
2009 and the annual lease obligation for the entire premises is approximately
$400.
The Trustees of the Company's former United Kingdom operating subsidiary's
defined benefit pension plan have implemented an investment strategy which
includes an investment of approximately $6.5 million, $6.4 million and $7.2
million, respectively, in the Edelman Value Fund, Ltd., a related party, as of
June 30, 2000, December 31, 1999 and July 31, 1999.
Director Angel is the senior managing shareholder of Angel & Frankel, P.C.
During the period ended December 31, 2000, December 18, 2000, December 31,1999
and fiscal years 1999 and 1998, Dynacore paid legal fees of $0, $484, $0, $0,
and $0, respectively, to the law firm of Angel & Frankel, P. C. for legal
services.
On June 29, 1998, the Company had signed a letter of intent, which subsequently
expired on August 20, 1998, to acquire Dimensional Media Associates ("DMA"). Mr.
Robert D. Summer is the president of DMA and a former board member of Dynacore.
In addition to the letter, Dynacore advanced DMA $200. This advance was secured
by a promissory note, payment of which had been guaranteed by a principal of
DMA. The principal payment of $200 was repaid on July 20, 1999.
19. Contingencies
From time to time, the Company is a defendant in lawsuits generally incidental
to its business. The Company is not currently aware of any such suit, which if
decided adversely to the Company, would result in a material liability in
relation to the financial position and results of operations.
20. Acquisition
Consistent with the determination of its Board of Directors to shift the focus
of the Company towards acquiring, developing and marketing products with
internet and e-commerce applications, on July 27, 1999, the Company, through its
newly formed subsidiary, Corebyte Inc., conditionally acquired (the "Corebyte
Acquisition") the Corebyte communication and networking software product family
(the "Corebyte Products"). The acquisition was accomplished pursuant to an Asset
Purchase Agreement, by and among the Company, SF Digital, LLC and John Engstrom
("Engstrom"), dated July 27, 1999. Given the lack of a significant revenue
stream resulting from longer than anticipated software developmental and
marketing efforts and the present availability of similar Internet applications
in the marketplace, in January, 2001, the Company began a thorough evaluation of
the Corebyte operations, prospects, and strategic options. Pending the outcome
of this evaluation, which will include the exploration and discussions with
various parties for alternative uses and markets for the Corebyte developed
source code and underlying technologies, if any, the Company has significantly
restructured and curtailed Corebyte's day-to-day operations, to include the
elimination of its Web hosting services to third parties.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
As filed on Form 8-K dated December 11, 2000, and filed as an exhibit to this
report, on December 7, 2000, Ernst & Young LLP resigned as auditors of the
Company.
The reports of Ernst & Young LLP on the Company's financial statements for the
fiscal years ended July 31, 1999 and August 1, 1998 did not contain an adverse
or disclaimer of opinion and were not qualified or modified as to audit scope or
accounting principles. The report of Ernst & Young LLP for the fiscal year ended
July 31, 1999 was modified as to uncertainty regarding the ability of the
Company to continue as a going concern.
In connection with the audits of the Company's financial statements for each of
the fiscal years ended July 31, 1999 and August 1, 1998, and in the subsequent
interim periods, there were no disagreements with Ernst & Young LLP on any
matters of accounting principles or practices, financial statement disclosure,
or auditing scope or procedures, which if not resolved to the satisfaction of
Ernst & Young LLP would have caused Ernst & Young LLP to make reference to the
matter in their report. The Company had requested Ernst & Young to furnish and
Ernst & Young furnished a letter addressed to the Commission stating that it
agrees with the above.
Subsequent to the resignation of Ernst & Young LLP as the Company's auditors,
the Company retained Marks, Paneth & Shron LLP as its auditors.
PART III
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The names, ages, positions and offices with the Company of the current
directors and executive officers of the Company are set forth below.
Age as of Director/Officer
Name Dec. 31, 2000 Position Since
---- ------------- -------- -----
A. B. Edelman 61 Director-Chairman of the Board and Chief Executive Officer 1985
P. P. Krumb 58 Vice President, Chief Financial Officer, and Director 1994
G. N. Agranoff 54 Chief Operating Officer, Acting President, Vice Chairman
of the Board and Director 1994
N. W. Walsh 31 Director 2000
N. S. Subin 36 Director 2000
R. B. Smith 58 Director 2000
J. J. Angel 64 Director 2000
The principal occupations and business experience of each of the current
directors and executive officers of the Company are described below.
ASHER B. EDELMAN, age 61, joined Dynacore's (formerly Datapoint
Corporation) Board of Directors as its Chairman in March 1985, and has served in
that capacity to the present date, and as Chief Executive Officer since February
1993. Mr. Edelman has served as General Partner of Asco Partners, a general
partner of Edelman Securities Company L.P. since June 1984. Mr. Edelman is a
director, Chairman of the Board and Chairman of the Executive Committee of Canal
Capital Corporation, and is a General Partner and Manager of various investment
partnerships and funds. Mr. Edelman is also a member of the Board of Directors
of Chemi-Trol Chemical Co. The principal business address of Mr. Edelman is Ch.
Pecholettaz 9, 1066 EPALINGES, Switzerland.
PHILLIP P. KRUMB, age 58, is currently Vice President and Chief Financial
Officer and Director of Dynacore. Mr. Krumb joined the Company in September 1994
and was Vice President and Chief Financial Officer from September 1994 to June
1997. From June 1997 until March 31, 1999, Mr. Krumb served as Special Assistant
to the Chairman. From April 1, 1999 to December 17,2000, Mr. Krumb was acting
Chief Financial Officer. On December 18, 2000, he reassumed his position as Vice
President and Chief Financial Officer. Prior to joining the Company he was
employed by IOMEGA Corporation for 7 years as Senior Vice President Finance and
Chief Financial Officer. The principal business address of Mr. Krumb is 8410
Datapoint Drive, San Antonio, Texas 78229-8500.
GERALD N. AGRANOFF, age 54, is currently Chief Operating Officer, Acting
President, Vice Chairman of the Board of and Director of Dynacore. Mr. Agranoff
is a General Partner of Asco Partners, the General Partner of Edelman Securities
Company L.P. (formerly Arbitrage Securities Company) and a General Partner of
Plaza Securities Company. He has been affiliated with these companies for more
than five years. Mr. Agranoff is a director of Bull Run Corporation, Atlantic
Gulf Communities, and Canal Capital Corporation. Mr. Agranoff has also been the
General Counsel to Edelman Securities Company L.P. and Plaza Securities Company
for more than five years. The principal business address of Mr. Agranoff is 8410
Datapoint Drive, San Antonio, Texas 78229-8500.
NICHOLAS W. WALSH, age 31, is currently serving as Vice President-Portfolio
Manager with J. & W. Seligman & Co. Inc., New York., NY. He has held various
financial positions with the firm since 1993. Prior to joining Seligman in 1993,
he held the position of Portfolio Assistant with Alliance Capital Management
L.P., New York, NY. Mr. Walsh holds degrees from Tufts University and New York
University and is a Chartered Financial Analyst. The principal business address
of Mr. Walsh is 3 Sheridan Square, Suite #11E, New York, New York 10014.
NEIL S. SUBIN, age 36, is currently Managing Director and President of
Trendex Capital Management which he formed in 1991. Trendex is a private hedge
fund focusing primarily on financially distressed companies. Mr. Subin is
currently a member of the Board of Directors of Teletrac, a provider of fleet
management services using two-way wireless messaging and also a member of the
Board of Directors of Nucentrix Broadband Networks, Inc, a provider of wireless
broadband network and multichannel subscription television services, located in
Plano, Texas. He holds a degree from Brooklyn College. The principal business
address of Mr. Subin is 8 Palm Court, Sewalls Point, Florida 34996.
ROGER B. SMITH, age 58, is currently serving as Managing Director with Bear
Stearns & Co., Inc. He has held various positions with Bear Stearns since 1979.
He holds a degree from the University of Tennessee at Chattanooga and has
various security and commodities licenses. The principal business address of Mr.
Smith is 3424 Peachtree Road, Suite 1700, Atlanta, Georgia 30326.
JOSHUA J.ANGEL, age 64, is Founder and Senior Managing Shareholder of Angel
& Frankel, P.C., a New York law firm. He holds a law degree from Columbia
University School of Law (1959) and a BS degree from New York University, NY
(1956). He has served on Directorships of the Public Companies of Allegheny
International (now Sunbeam Oster Corporation) 1987-1990; Lancer Industries, Inc.
1993-1996; Gulf Resources Pacific Limited 1994-1996; and Vision America
Incorporated June 2000- December 2000. The principal business address of Mr.
Angel is 460 Park Avenue, New York, New York, 10022.
There are no family relationships between any of the executive officers of the
Company.
Audit, Compensation and Executive Committees
The Company has Audit and Compensation Committees of the Board of
Directors. The current members of the Audit Committee are Messrs. Walsh, Subin,
Angel and Smith. The current members of the Compensation Committee are Messrs.
Walsh, Subin, and Smith. The Company does not have a Nominating nor an Executive
Committee.
The Audit Committee annually recommends to the Board of Directors the
independent auditors for the Company and its subsidiaries. They meet with the
independent auditors concerning the audit; evaluate non-audit services and the
financial statements and accounting developments that may affect the Company;
meet with management concerning matters similar to those discussed with the
outside auditors; and make reports and recommendations to the Board of Directors
and the Company's management and independent auditors from time to time as it
deems appropriate. The Committee did not meet during the period December 19 -
31, 2000.
The Compensation Committee makes salary recommendations regarding senior
management to the Board of Directors and administers the Company's Bonus and
Stock Option Plan as described below. The Committee did not meet during the
period December 19, 2000 - December 31, 2000.
Meetings of the Board of Directors and Committees
The Board of Directors met once during the period December 19, 2000 - December
31, 2000. Each director was in attendance.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Dynacore believes that, during the fiscal year ended December 31, 2000, its
officers and directors complied with all filing requirements under Section 16(a)
of the Securities Exchange Act of 1934.
ITEM 11 EXECUTIVE COMPENSATION
COMPENSATION OF DIRECTORS
Directors who are employees of Dynacore receive no additional compensation for
serving on the Board of Directors or its committees. Each director who is not an
employee of Dynacore receives an annual fee of $15,000, payable in quarterly
installments. Non-employee directors receive no additional fee for serving on
any of the committees of the Board of Directors.
EXECUTIVE COMPENSATION
COMPENSATION COMMITTEE REPORT
Dynacore's executive compensation program is based on three fundamental
principles.
Dynacore must offer compensation opportunities sufficient to attract, retain and
reward talented executives who are sufficiently capable of addressing the
challenges of a worldwide business in a difficult industry.
Compensation should include a substantial component of pay-for-performance
sufficiently related to the financial results of the Company and/or the
executive's performance to financially motivate the executive's efforts to
increase stockholder value. This may cause individual compensation amounts to
change significantly from year to year.
Compensation should provide a direct link between the long-term interests of
executives and stockholders. Through the use of stock-based incentives, the
Compensation Committee focuses the attention of executives on managing the
Company from the perspective of an owner with an equity stake.
For executive officers, compensation now consists primarily of base salary, a
short-term performance incentive opportunity in the form of a variable cash
bonus based on either the financial performance of the Company or of their area
of responsibility, and a long-term incentive opportunity provided by stock
options. The committee also obtains ratification by the non-employee members of
the Board on most aspects of compensation and long-term incentives for executive
officers.
The remainder of this Report reviews the annual and long-term components of
Dynacore's executive compensation program, along with the decisions made by the
committee regarding the current compensation for both the CEO and the other
named executive officers.
Total Annual Compensation
Annual cash compensation consists of two components; a fixed base salary and a
variable annual bonus opportunity. As an executive's level of responsibility
increases, a larger portion of total annual pay is based on bonus and less on
salary. All of the named executives received a downward salary adjustment
pursuant to their current employment agreements, effective December 18, 2000.
The Committee sets the base salary of executive officers based upon a subjective
analysis of competitive salaries of equally qualified executives, occasionally
confirmed by reference to general salary surveys; prior compensation of the
individual or of previous holders of the position is also considered.
Contractual minimum base salaries are customarily negotiated with the
executives.
The short-term performance incentive bonus opportunity is established either as
a percentage, unique for each individual, of a numerical corporate performance
indicia, or as a target percentage of pay which is the amount that can be earned
based upon assigned objectives being met. Performance is measured as a percent
of attainment against these objectives. When performance exceeds objectives, an
executive's incentive pay can exceed the target rate, and when it falls below,
individual incentive pay is reduced accordingly.
Messrs. Edelman's, Agranoff's, and Krumb's bonuses are based on a contractually
specified percentage by which "EBITDA" exceeds 12 1/2% of Net Equity for the
applicable period. "EBITDA" shall mean, with respect to the applicable period,
earnings before interest, taxes, depreciation and amortization as determined by
the Company's accountants in accordance with generally accepted accounting
principles; provided however, "EBITDA" shall not include amounts received from
the Company's Patent Litigation Trust that must be distributed to shareholders
pursuant to Section 7.05 of the Amended Plan of Reorganization of Dynacore dated
October 12, 2000. Net Equity shall mean net assets less net liabilities
determined as of the last day of the applicable period.
Long Term Incentives
The committee believes that stock options appropriately link executive interests
to the enhancement of stockholder value and utilizes them as its long-term
incentive program; no additional long-term incentive programs are utilized.
Stock options generally are granted at fair market value as of the date of
grant, become exercisable over three years, and have a term of ten years. The
stock options provide value to the recipients only when the price of Dynacore
stock increases above the option grant price.
As specified in their employment agreements, Messrs. Edelman, Agranoff, and
Krumb received stock options of 300,000, 175,000 and 75,000, respectively In
determining the size of the option grants for Messrs. Edelman, Agranoff' and
Krumb, the committee assessed the following factors: their potential by position
and ability (i) to contribute to the creation of long-term stockholder value;
and (ii) to contribute to the successful execution of Dynacore's strategy; and
(iii) their relative levels of responsibility.
This report has been provided by the Compensation Committee.
Nicholas W. Walsh
Neil S. Subin
Roger B. Smith
Supplemental Executive Retirement Plan
The Company maintains a Supplemental Executive Retirement Plan for certain
executive employees selected by the Board of Directors. The plan provides for
employee contributions of up to 10% of applicable compensation. In addition, at
the Board's discretion, the Company may also make contributions on an annual,
individual basis, allocated on a pro-rata basis according to participant's
applicable compensation up to a maximum contribution of 15% of applicable
compensation per employee. During the periods of August 1, 1999 - December 31,
1999, January 1, 2000 - December 18, 2000, December 19, 2000 - December 31,
2000, and fiscal years ended July 31, 1999 and August 1, 1998, the Company did
not make a contribution to the plan. Under the terms of the plan, benefits
accrued to the various executive officers upon satisfaction of the plan's
vesting criteria which was based upon length of employment with the Company.
Summary Compensation Table
The following table sets forth certain information regarding all cash
compensation paid or accrued for services rendered by the Company's five most
highly compensated executive officers for the last three fiscal years.
----------------------------------------------------------------------------------------------------------------------------------
Annual Long-Term
Compensation
------------------------------------------
Name and Other Compensation All
--------------------
Principal Annual Stock Options Other
Position Year (10) Salary Bonus Compensation Granted (#)(5) Compensation
----------------------------------------------------------------------------------------------------------------------------------
Asher B. Edelman (1) 01/01/00-12/31/00 $300,534 $ 70,648 (2) 300,000 $300,000(9)
Chairman of the Board and 709,500(11)
Chief Executive Officer 08/01/99-07/29/00 300,534 - 82,863 (2) -
08/02/98-07/31/99 300,534 - 101,628 (2) 225,000 -
08/03/97-08/01/98 300,534 110,987 (2)
Gerald N. Agranoff (4) 01/01/00-12/31/00 $198,915 - $7,200 (4) 175,000 $700,000(9)
Chief Operating Officer, 08/01/99-07/29/00 200,000 - 7,200 (4) - 4,500(11)
Acting President 08/02/98-07/31/99 200,000 - 7,200 (4) 180,000 -
08/03/97-08/01/98 200,000 7,200 (4)
Roger Edmonds (6) 01/01/00-12/31/00 $83,491 $68,521 (3) - - -
Vice President, Technical 08/01/99-07/29/00 153,066 68,521 (3) - - -
Services 08/02/98-07/31/99 159,025 40,892 (3) - 37,500 -
08/03/97-08/01/98 138,020 41,406 (3)
.
Phillip P. Krumb (8) 01/01/00-12/31/00 $257,890(7) 75,000 $200,000(9)
Vice President and Chief 08/01/99-07/29/00 213,659(7) 36,000(11)
Financial Officer
John R. Perkins (6) (8) 01/01/00-12/31/00 $67,308
Vice President 08/01/99-07/29/00 115,385
Table Footnotes
(1) Asher B. Edelman was named Chief Executive Officer in February 1993.
(2) Represents payments incident to foreign assignment.
(3) Represents a performance bonus.
(4) Represents auto allowance
(5) Excludes options granted as a member of the Company's Board of Directors.
Options granted in fiscal year 2000 were issued pursuant to employment
agreements and are subject to the approval of the initial stock option plan
by the Company's stockholders.
(6) Messrs. Edmonds and Perkins were transferred to DNL June 30, 2000 as a result of the sale of the European subsidiaries.
(7) Included is $105,417 of deferred compensation for the period of April 1999 until February 2000.
(8) For prior years, Messrs. Krumb and Perkins were not one of the five most highly compensated executive officers.
(9) Represents cash portion of the officer settlement agreement.
(10) On June 30, 2000 the Company changed its fiscal year to a calendar year end
basis. The compensation information furnished in this table covers the
period of 8/1/99 - 7/29/00 as if the fiscal year had not changed, as well
as for the period of 1/1/00 - 12/31/00. Accordingly, there is an overlap of
compensation information for the period of 1/1/00 - 7/31/00.
(11) Represents the stock portion of the officer settlement agreement at a value of $.75/share issued.
Stock Option Grants in Last Fiscal Year (1)
The following table sets forth certain information regarding all stock option
grants made to the named executive officers for the period ended December 31,
2000.
------------------------------------------------------------
Options Granted for the period ended December 31, 2000
-------------------------------------------------------------
% of Total
-------------------------------
Options Potential Gain at Assumed
Number of Granted to Exercise Annual Rates of Stock Price
Options Employees in Price Expiration Appreciation for Option Term
-------------------------------
----------------------
Name Granted (1) Fiscal Year Per Share Date 5% 10%
------------------------------------------------------------------------------------------------------------------
Asher B. Edelman 300,000 54.54% $0.75 12/18/2010 $141,501 $358,592
Gerald N. Agranoff 175,000 31.82% $0.75 12/18/2010 $82,542 $209,179
Phillip P. Krumb 75,000 13.64% $0.75 12/18/2010 $35,375 $89,648
Roger Edmonds 0 0.00% 0 - $0 $0
John Perkins 0 0.00% 0 - $0 $0
------------------------------------------------------------------------------------------------------------------
(1)These options are subject to the approval of Dynacore's initial stock
option plan by the Company's stockholders. In addition, the initial plan
shall be limited to an aggregate amount of 1,500,000 shares. No Stock
Appreciation Rights (SARs) have ever been granted by Dynacore.
Aggregated Option Exercises for the period ended December 31, 2000 Option Values
The following table sets forth certain information regarding stock options
exercised by the Company's named executive officers for the period ended
December 31, 2000.
-------------------------------------------------- -----------------------------
Number of Value of Unexercised
-------------------------------
Shares Number of Unexercised In-the-Money Options
Acquired on Value Options at December 31, 2000 at December 31, 2000
------------------------------------------------------------
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
--------------------------------------------------------------------------------------------------------------
Asher B. Edelman 0 0 0 300,000 $0 $0
Gerald N. Agranoff 0 0 0 175,000 $0 $0
Phillip P. Krumb 0 0 0 75,000 $0 $0
Roger Edmonds 0 0 0 0 $0 $0
John Perkins 0 0 0 0 $0 $0
--------------------------------------------------------------------------------------------------------------
Performance Table
Set forth below is a table comparing the five-year cumulative total return
for Dynacore common stock with the Dow Jones 65-Composite Average, a broad
equity market index, and the Dow Jones computer systems index.
DYNACORE HOLDINGS CORPORATION
STOCK PRICE ANALYSIS
Dynacore Dow Jones Computer Dow Jones 65-Computer
Common Stock systems index Composite average
Actual Base Actual Base Actual Base
YE YE YE YE YE YE
(Successor)
2000 0.00 0.00 564.76 122.65 3,317.61 210.29
(Predecessor)
1999 1.53 40.80 760.05 417.84 3,214.38 196.58
1998 3.02 80.53 499.89 274.82 2,870.83 175.57
1997 15.27 407.20 281.41 154.71 2,607.40 159.46
1996 4.99 133.07 210.53 115.74 2,025.80 123.89
1995 1.50 40.00 460.48 253.15 1,577.65 96.49
The graph assumes $100 invested on January 1, 1996, in Dynacore common stock and
each of the Dow Jones indexes, and that all dividends were reinvested. During
the five-year period Dynacore did not pay any dividends on its common stock.
EMPLOYMENT AGREEMENTS
Effective December 18, 2000, Dynacore entered into a written employment
agreement concerning the employment of Mr. Edelman as Chief Executive Officer of
the Company and Chairman of the Board of Directors of the Company. The agreement
is for a period of eighteen (18) months. The agreement provides for a base
salary of $207,500, certain executive benefits and an annual bonus opportunity.
For each fiscal year or portion thereof, the Company will pay Mr. Edelman, a
bonus in an amount equal to five (5%) percent of the amount by which EBITDA
exceeds twelve and one-half percent (12 1/2%) of Net Equity. "EBITDA" shall
mean, with respect to the applicable period, earnings before interest, taxes,
depreciation and amortization as determined by the Company's accountants in
accordance with generally accepted accounting principles; provided however,
"EBITDA" shall not include amounts received from the Company's Patent Litigation
Trust that must be distributed to shareholders pursuant to Section 7.05 of the
Amended Plan of Reorganization of Dynacore dated October 12, 2000. Net Equity
shall mean net assets less net liabilities determined as of the last day of the
applicable period. In addition, pursuant to the employment agreement, Mr.
Edelman was granted 300,000 stock options at an exercise price of $.75, vesting
in equal installments on the date coinciding with 6, 12, and 18 months from the
effective date of the agreement. The agreement also provides that in the event
Mr. Edelman's employment is terminated without cause or with Good Reason, he
shall receive his base salary and bonus for the remaining duration of the Term
and for an additional period of six months from the end of the Term ("Severance
Period") as well as continuation of certain benefits during the severance
period. The agreement also provides that during the employment term, in the
event of Mr. Edelman's death or disability, his estate or legal representative
shall be entitled to receive the base salary through the end of the month in
which the death, or disability occurs, a pro rata portion of the bonus and
certain executive benefits.
Effective December 18, 2000, Dynacore entered into a written employment
agreement concerning the employment of Mr. Agranoff as Chief Operating Officer,
Acting President, and Vice Chairman of the Board of Directors of the Company.
The agreement is for a period of eighteen (18) months. The agreement provides
for a base salary of $157,500, certain executive benefits and an annual bonus
opportunity. For each fiscal year or portion thereof, the Company will pay Mr.
Agranoff, a bonus in an amount equal to four (4%) percent of the amount by which
EBITDA exceeds twelve and one-half percent (12 1/2%) of Net Equity. "EBITDA"
shall mean, with respect to the applicable period, earnings before interest,
taxes, depreciation and amortization as determined by the Company's accountants
in accordance with generally accepted accounting principles; provided however,
"EBITDA" shall not include amounts received from the Company's Patent Litigation
Trust that must be distributed to shareholders pursuant to Section 7.05 of the
Amended Plan of Reorganization of Dynacore dated October 12, 2000. Net Equity
shall mean net assets less net liabilities determined as of the last day of the
applicable period. In addition, pursuant to the employment agreement, Mr.
Agranoff was granted 175,000 stock options at an exercise price of $.75, vesting
in equal installments on the date coinciding with 6, 12, and 18 months from the
effective date of the agreement. The agreement also provides that in the event
Mr. Agranoff's employment is terminated without cause or with Good Reason, he
shall receive his base salary and bonus for the remaining duration of the Term
and for an additional period of six months from the end of the Term ("Severance
Period") as well as continuation of certain benefits during the severance
period. The agreement also provides that during the employment term, in the
event of Mr. Agranoff's death or disability, his estate or legal representative
shall be entitled to receive the base salary through the end of the month in
which the death, or disability occurs, a pro rata portion of the bonus and
certain executive benefits.
Effective December 18, 2000, Dynacore entered into a written employment
agreement concerning the employment of Mr. Krumb as Vice President, Chief
Financial Officer, and member of the Board of Directors of the Company. The
agreement is for a period of eighteen (18) months. The agreement provides for a
base salary of $82,500, certain executive benefits and an annual bonus
opportunity. For each fiscal year or portion thereof, the Company will pay Mr.
Krumb, a bonus in an amount equal to one (1%) percent of the amount by which
EBITDA exceeds twelve and one-half percent (12 1/2%) of Net Equity. "EBITDA"
shall mean, with respect to the applicable period, earnings before interest,
taxes, depreciation and amortization as determined by the Company's accountants
in accordance with generally accepted accounting principles; provided however,
"EBITDA" shall not include amounts received from the Company's Patent Litigation
Trust that must be distributed to shareholders pursuant to Section 7.05 of the
Amended Plan of Reorganization of Dynacore dated October 12, 2000. Net Equity
shall mean net assets less net liabilities determined as of the last day of the
applicable period. In addition, pursuant to the employment agreement, Mr. Krumb
was granted 75,000 stock options at an exercise price of $.75, vesting in equal
installments on the date coinciding with 6, 12, and 18 months from the effective
date of the agreement. The agreement also provides that in the event Mr. Krumb's
employment is terminated without cause or with Good Reason, he shall receive his
base salary and bonus for the remaining duration of the Term and for an
additional period of six months from the end of the Term ("Severance Period") as
well as continuation of certain benefits during the severance period. The
agreement also provides that during the employment term, in the event of Mr.
Krumb's death or disability, his estate or legal representative shall be
entitled to receive the base salary through the end of the month in which the
death, or disability occurs, a pro rata portion of the bonus and certain
executive benefits.
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a) Security Ownership of Certain Beneficial Owners. The following persons are
known to the Company to be beneficial owners of more than five percent (5%) of
the Company's securities as defined under Exchange Act Rule 13(d)(3).
Common Stock Percent
Name and Address Beneficially Owned of Class
---------------- ------------------ --------
Asher B. Edelman (1) (See Table under Security
c/o Dynacore Holdings Corporation Ownership of Management)(1)
717 Fifth Avenue
New York, NY 10222
(1) Mr. Edelman is part of a "group" as that term is used in Exchange Act
Section 13(d)(3). See subsection (b) below for detailed description as to the
amount and nature of beneficial ownership by the members of the group.
(b) Security Ownership of Management
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock by each director, by each of the executive
officers named in the table, and by the directors and executive officers as a
group as of March 15, 2001.
Common Stock
Beneficially Percent
Name of Officer/Director Owned (1) of Class(10)
------------------------- ----------------- ------------
Gerald N. Agranoff (O&D) 6,618(4) (8) *
Asher B. Edelman (O&D) 1,759,534(3)(4) 17.6%
Phillip P. Krumb (O&D) 54,454(9) *
Nicholas W. Walsh (D) 182,847(2)(5) *
Neil S. Subin (D) 107,723(2)(6) *
Roger B. Smith (D) 127,716(2)(7) *
Joshua J. Angel (D) 50,000(2) *
Executive Officers and Directors
Dynacore as a group (7 persons) 2,288,892 22.8%
Indicates less than 1% ownership as a percent of the outstanding class (10)
(1) Information relating to beneficial ownership is based upon ownership
information furnished by each person using "beneficial ownership"
definitions set forth in Section 13 of the Securities Exchange Act of 1934,
as amended (the "Exchange Act"). Under those rules, a person is deemed to
be a "beneficial owner" of a security if that person has or shares "voting
power", which includes the power to vote or to direct the voting of such
security, or "investment power", which includes the power to dispose or to
direct the disposition of such security. The person is also deemed to be a
beneficial owner of any security of which that person has a right to
acquire beneficial ownership (such as by exercise of options) within 60
days. Under such rules, more than one person may be deemed to be a
beneficial owner of the same securities, and a person may be deemed to be a
beneficial owner of securities as to which he or she may disclaim any
beneficial interest. Except as otherwise indicated in other table
footnotes, the indicated directors and executive officers possessed sole
voting and investment power with respect to all shares of Common Stock and
Preferred Stock attributed.
(2) The tabulation includes shares of Common Stock which may be deemed to
be beneficially owned by such persons by reason of stock options currently
exercisable or which may become exercisable within sixty (60) days after that
date. The number of shares deemed to be beneficially owned by reason of such
options is: Mr. Walsh, 50,000; Mr. Subin, 50,000; Mr. Smith, 50,000; and Mr.
Angel, 50,000; all directors as a group, 200,000.
(3) Mr. Edelman's listed beneficial ownership of 1,759,534 shares of Common
Stock is explained in detail in this paragraph, and is based upon his beneficial
ownership reported on Schedule 13D. Mr. Edelman owns 946,000 Common shares
directly. Mr. Edelman reports beneficial ownership jointly, as a group, with the
following named persons or entities. Those whose shares have been included
within Mr. Edelman's listed total are reported as beneficially owned pursuant to
Rule 13d-3 by Mr. Edelman. As the controlling general partner of each of Plaza
Securities Company, A.B. Edelman Limited Partnership and Citas Partners (which
is the sole general partner of Felicitas Partners, L.P.), Mr. Edelman may be
deemed to own beneficially the 99,381, 211,527 and 1,416 shares held,
respectively, by each of such entities for purposes of Rule 13d-3 under the
Exchange Act, and these shares are included in the listed ownership. Also
included are the 81,348 shares owned by Canal Capital Corporation ("Canal"), in
which company Mr. Edelman and various persons and entities with which he is
affiliated own interests. By virtue of investment management agreements between
A. B. Edelman Management Company Inc. and Canal, A. B. Edelman Management
Company Inc. has the authority to purchase, sell and trade in securities on
behalf of Canal. A. B. Edelman Management Company Inc. therefore may be deemed
to be the beneficial owner of the 81,348 shares owned by Canal. Mr. Edelman is
the sole stockholder of A. B. Edelman Management Company Inc. and these shares
are included. A. B. Edelman Management Company, Inc. is also the sole general
partner of Edelman Value Partners, L.P. which currently owns 130,031 shares of
Common Stock which are included. Also included are the 43,459 shares owned by
Mr. Edelman's spouse Maria Regina M. Edelman, 1,125 shares held by Mr. Edelman
in a Keough account, 4,728 shares beneficially owned by Mr. Edelman's children
in accounts for which he is the custodian, and 231,194 shares owned by Edelman
Value Fund, Ltd., for which Mr. Edelman serves as the sole investment manager.
Also included are the 9,325 shares owned by Edelman Family Partners, L.P. for
which Mr. Edelman serves as a general partner. As a Trustee of the Canal Capital
Corporation Retirement Plan ("Canal Plan") which owns 27,287 shares and the
Dynacore Plan described above which owns 71,253 shares, Mr. Edelman may be
deemed to own beneficially, and share voting and investment power over the
shares owned by each such Plan, which are excluded. Also excluded from the
listed ownership are 13,172 shares beneficially owned by Mr. Edelman's daughters
in accounts for which their mother, Penelope C. Edelman, is the custodian, the
411 shares owned directly by Penelope C. Edelman and the 36,755 shares
beneficially owned by Mr. Edelman's son in accounts for which Irving Garfinkel
is the custodian. Mr. Edelman disclaims beneficial ownership of these excluded
shares. Although disclaimed and excluded for purposes of Rule 13d-3, certain of
the disclaimed and excluded shares are nevertheless reported by Mr. Edelman as
beneficially owned on his Form 4's pursuant to the rules promulgated under
Section 16 of the Exchange Act.
(4) Mr. Agranoff is a general partner of Plaza Securities Company, which
owns 99,381 shares of Common Stock. He disclaims beneficial ownership of these
shares which are excluded in the party's listing in the beneficial ownership
table above due to the sole voting and dispositive powers attributed to Mr.
Edelman in his Schedule 13D. Mr. Agranoff is also a director of Canal which owns
81,348 shares. Mr. Agranoff disclaims beneficial ownership of these shares and
they are excluded from his beneficial ownership listing due to the sole voting
and dispositive powers attributed to Mr. Edelman.
(5) Mr. Walsh owns 132,847 Common shares directly in addition to the 50,000
shares represented by exercisable options.
(6) Mr. Subin owns 57,723 Common shares directly in addition to the 50,000
shares represented by exercisable options.
(7) Mr. Smith owns 77,716 Common shares directly in addition to the 50,000
shares represented by exercisable options.
(8) Mr. Agranoff owns 6,618 Common shares directly.
(9) Mr. Krumb owns 54,454 Common shares directly.
(10) The percentage of the outstanding class calculations are based upon
10,000,000 Common shares, outstanding as of March 15, 2001.
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Director Agranoff is the Company's Chief Operating Officer, Acting President and
Vice Chairman of the Board of Directors, and of counsel at the law firm Pryor
Cashman Sherman & Flynn LLP. During the period ended December 31, 2000, December
18, 2000, December 31,1999 and fiscal years 1999 and 1998, Dynacore paid legal
fees of $0, $420, $250, $265, and $0, respectively, to the law firm of Pryor
Cashman Sherman & Flynn LLP, for legal services provided by attorneys other than
Mr. Agranoff. In addition, at December 31, 2000, the Company owed Pryor Cashman
Sherman & Flynn LLP approximately $70 for services rendered.
During the period ended December 31, 2000, December 18, 2000, December 31, 1999,
and fiscal years 1999 and 1998, the Company paid secretarial expenses of $0,
$45, $0, $64, and $69, respectively, to Canal Capital Corporation. Chief
Executive Officer Edelman and Director Agranoff are Canal Capital Corporation
board members, with Chief Executive Officer Edelman serving as Chairman of the
Board.
The Company, along with co-tenants Canal Capital Corporation, of which Mr.
Edelman and Mr. Agranoff are directors and Plaza Securities Company LP, of which
Mr. Edelman is the controlling general partner and Mr. Agranoff is a general
partner, entered into an amendment of its New York office lease in February,
1999. While the Company is currently paying 50% of the monthly lease payment
based upon its pro-rata occupancy of the premises, each co-tenant of the lease
is jointly liable for the full lease obligation. The lease expires in October
2009 and the annual lease obligation for the entire premises is approximately
$400.
The Trustees of the Company's former United Kingdom operating subsidiary's
defined benefit pension plan have implemented an investment strategy which
includes an investment of approximately $6.5 million, $6.4 million and $7.2
million, respectively, in the Edelman Value Fund, Ltd., a related party, as of
June 30, 2000, December 31, 1999 and July 31, 1999.
Director Angel is the senior managing shareholder of Angel & Frankel, P.C.
During the period ended December 31, 2000, December 18, 2000, December 31,1999
and fiscal years 1999 and 1998, Dynacore paid legal fees of $0, $484, $0, $0,
and $0, respectively, to the law firm of Angel & Frankel, P. C. for legal
services.
On June 29, 1998, the Company had signed a letter of intent, which subsequently
expired on August 20, 1998, to acquire Dimensional Media Associates ("DMA"). Mr.
Robert D. Summer is the president of DMA and a former board member of Dynacore.
In addition to the letter, Dynacore advanced DMA $200. This advance was secured
by a promissory note, payment of which had been guaranteed by a principal of
DMA. The principal payment of $200 was repaid on July 20, 1999.
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a)1 Financial Statements
The consolidated financial statements listed in the accompanying index
to the financial statements are filed as part of this report.
(a)2 Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts and Reserves
All other schedules are omitted since they are either not applicable or
the required information is shown in the Company's financial statements
or notes thereto. Individual financial statements of the Company are
omitted because the Company is primarily an operating company and all
subsidiaries included in the Consolidated Financial Statements being
filed, in the aggregate, do not have minority equity interest and/or
indebtedness to any person other than the Company or its consolidated
subsidiaries in amounts which together exceed 5% of the total
consolidated assets as shown by the most recent year-end Consolidated
Balance Sheet.
(a)3 Exhibits
The exhibits listed on the accompanying index to exhibits are filed as
part of this report.
(b) Reports on Form 8-K: In a report filed on Form 8-K dated December 11,
2000, the Company reported that the Bankruptcy Court for the District
of Delaware had confirmed its Amended Plan of Reorganization and that
Ernst & Young LLP had resigned as auditors.
In a report on Form 8-K dated December 22, 2000, the Company reported
that the Amended Plan of Reorganization was declared effective on
December 18, 2000.
Subsequent to year end, in a report filed on Form 8-K dated January 4,
2001, the Company reported its new NASDAQ symbols for the Common Stock
and the Units of Beneficial Interest in the Dynacore Patent Litigation
Trust.
See Exhibit Index included herein on page 57.
INDEX TO EXHIBITS
Sequentially
Exhibit Numbered
Number Description of Exhibits Pages
(3)(a) Certificate of Incorporation of Datapoint Corporation, as amended (filed as Exhibit
(3)(a) to the Company's Annual Report on Form 10K for the year ended July 31, 1993, and
incorporated herein by reference).
(3)(b) Bylaws of Datapoint Corporation, as amended (filed as Exhibit (3)(b) to the Company's
Annual Report on Form 10-K for the year ended August 1, 1992, and incorporated herein by
reference).
(4)(a) Debenture holder Notice of Adjustment to Conversion Rate,
dated July 11, 1985, under Indenture dated as of June 1, 1981,
between Datapoint Corporation and Continental Illinois
National Bank and Trust Company of Chicago, as Trustee,
providing for 8-7/8% Convertible Subordinated Debentures Due
2006 (filed as Exhibit (4)(a) to the Company's Annual Report
on Form 10-K for the year ended July 27, 1985 and said
Indenture filed as Exhibit 4 to the Company's Registration
Statement on Form S-16 (No. 2-72395), each incorporated herein
by reference).
(4)(b) Certificate of Designation, Preferences, Rights and Limitations of Series of $1.00
Preferred Stock (filed as Exhibit (4)(e) to the Company's Registration Statement on Form
S-4 dated April 30, 1992 and incorporated herein by reference).
(10)(a) 1983 Employee Stock Option Plan (filed as Exhibit (4)(a)(4) to
the Company's Registration Statement on Form S-8 dated
November 9, 1983 and incorporated herein by reference).
(10)(b) 1985 Director Stock Option Plan (filed as Exhibit (10)(i) to
the Company's Annual Report on Form 10-K for the year ended
August 1, 1987 and incorporated herein by reference).
(10)(c) 1986 Employee Stock Option Plan (filed as Exhibit (10)(h) to
the Company's Annual Report on Form 10-K for the year ended
August 1, 1987 and incorporated herein by reference).
(10)(d) 1991 Director Stock Option Plan (filed as Exhibit (10)(b)(2) to Amendment No. 1 dated
February 6, 1992 to the Company's Registration Statement on Form S-4 (Registration No.
33-44097) and incorporated herein by reference).
(10)(e) 1992 Employee Stock Option Plan (filed as Exhibit (4)(a)(4) to
the Company's Registration Statement on Form S-8 dated January
19, 1993 and incorporated herein by reference).
(10)(f) Agreement for Transfer of Assets and Liabilities in Exchange
for Stock, dated as of June 28, 1985, between the Company and
Intelogic Trace, Inc. (filed as Exhibit (10)(a) to the
Company's Current Report on Form 8-K dated July 28, 1985 and
incorporated herein by reference).
(10)(g) Master Maintenance Agreement, dated as of June 28, 1985, between the Company and
Intelogic Trace, Inc. (filed as Exhibit (10)(b) to the Company's Current Report on Form
8-K dated July 28, 1985 and incorporated herein by reference).
(10)(h) Maintenance Agreement regarding open systems products between the Company and Intelogic
Trace, Inc., (filed as Exhibit (10)(g) to the Company's Annual Report on Form 10-K for
the year ended August 1, 1992, and incorporated herein by reference).
INDEX TO EXHIBITS
Sequentially
Exhibit Numbered
Number Description of Exhibits Pages
(10)(i) Agreement between the Company and Arbitrage Securities Company, as amended (filed as
Exhibit (10)(f) to the Company's Annual Report on Form 10-K for the year ended July 29,
1989 and incorporated herein by reference).
(10)(j) Indemnity Agreements with Officers and Directors (filed as Exhibit (10)(f) to the
Company's Annual Report on Form 10-K for the year ended August 1, 1987 and incorporated
herein by reference).
(10)(k) First Amendment to Indemnification Agreement with certain Officers and Directors. (filed
as Exhibit (10)(h) to the Company's Annual Report on Form 10-K for the year ended July
28, 1990 and incorporated herein by reference).
(10)(l) Second Amendment to Employment Agreement with A. B. Edelman (said amendment filed as
Exhibit (10)(h)(3) to the Company's Registration Statement on Form S-4 dated April 30,
1992), amending Employment Agreement dated January 9, 1991 (said agreement filed as
Exhibit (10)(j) to the Company's Annual Report on Form 10-K for the year ended July 28,
1990), as amended by Amendment No. 1 dated December 1, 1990 (said amendment filed as
Exhibit (10)(i) to the Company's Annual Report on Form 10-K for the year ended July 27,
1991), each of which are incorporated herein by reference.
(10)(m) Employment Agreement with D. Berger (filed as Exhibit (10)(m) to the Company's Annual
report on Form 10-K for the Year ended July 31, 1993 and incorporated herein by
reference).
(10)(n) Employment Agreement with J. Berger (filed as Exhibit (10)(l) to the company's Annual
Report on Form 10-K for the year ended August 1, 1992 and incorporated herein by
reference).
(10)(o) Employment Agreement with K. L. Thrower (filed as Exhibit (10)(o) to the company's Annual
Report on Form 10-K for the year ended August 1, 1992 and incorporated herein by
reference).
(10)(p) First Amendment to the Grantor Trust Agreement dated June 18, 1991. (filed as exhibit
(10)(n) to the Company's Annual Report on Form 10-K for the year ended July 27, 1991 and
incorporated herein by reference).
(10)(q) Manufacturing facilities Agreement of Lease between the
Company and Willis and Cox Associates dated June 21, 1991
(filed as Exhibit (10)(q) to the Company's Annual Report on
Form 10-K for the year ended August 1, 1992 and incorporated
herein by reference).
(10)(r) Employment Agreement with D. Bencsik (filed as exhibit (10)(r) to the Company's Annual
Report on the Form 10-K for the year ended July 30, 1994 and incorporated herein by
reference).
(10)(s) Employment Agreement with G. Agranoff and Amendment No. 1 to Employment Agreement (filed
as Exhibit (10) (s) to Amendment No. 2 to the Company's Registration Statement on Form
S-4 filed on September 27, 1996 and incorporated herein by reference).
(10)(t) Employment Agreement with B. Thomas (filed as Exhibit (10) (t) to Amendment No. 2 to the
Company's Registration Statement on Form S-4 filed on September 27, 1996 and
incorporated herein by reference).
INDEX TO EXHIBITS
Sequentially
Exhibit Numbered
Number Description of Exhibits Pages
(10)(u) Employment Agreement with P. Krumb (filed as Exhibit (10) (u) to Amendment No. 2 to the
Company's Registration Statement on Form S-4 filed on September 27, 1996 and
incorporated herein by reference).
(10)(v) Settlement Agreement with NTI (filed as Exhibit (10) (v) to Amendment No. 2 to the
Company's Registration Statement on Form S-4 filed on September 27, 1996 and
incorporated herein by reference).
(10)(w) Umbrella Acquisition Agreement between Kalamazoo and Datapoint (filed as Exhibit 2 to the
Company's Current Report on Form 8-K dated June 25, 1996 and incorporated herein by
reference).
(10)(x) Form of Agreement for sale of assets of Datapoint Group Vendor and Kalamazoo (filed as
Exhibit 3 to the Company's Current Report on Form 8-K dated June 25, 1996 and
incorporated herein by reference).
(10)(y) Agreement for sale of DARTS Software (filed as Exhibit 4 to
the Company's Current Report on Form 8-K dated June 25, 1996
and incorporated herein by reference).
(10)(z) 1996 Director Stock Option Plan (filed as Annex D to Amendment No. 3 dated October 31,
1996 to the Company's Registration Statement on Form S-4 (Registration No. 333-9627) and
incorporated herein by reference).
(10)(aa) 1996 Employee Stock Option Plan (filed as Annex E to Amendment No. 3 dated October 31,
1996 to the Company's Registration Statement on Form S-4 (Registration No. 333-9627) and
incorporated herein by reference).
(10)(bb) Employment Agreement with R. Conn.
(10)(cc) Employment Agreement with R. Edmonds.
(10)(dd) Employment Agreement with J. Perkins.
(10)(ee) Amendment No. 2 to Employment Agreement with G. Agranoff.
(10)(ff) Amendment No. 1 to Summary of Modified Employment Agreement - with P. Krumb.
(10)(gg) 1997 Employee Stock Option Plan (filed as Annex A to the Company's Definitive Proxy
Statement on Schedule 14(a) dated December 23, 1997, and incorporated herein by
reference).
(10)(hh) Announcement of the Letter of Intent to Sell the Company's European Operations (filed as
Exhibit 99 to the Company's Current Report Form 8-K dated May 19, 1999 and incorporated
by reference).
(10)(ii) Announcement of the Acquisition of Corebyte(TM) (filed as
Exhibit 99 to the Company's Current Report Form 8-K dated
August 3, 1999 and incorporated by reference).
(10)(jj) Stock Purchase Agreement between Reboot Systems, Inc. and Datapoint Corporation dated
July 31, 1999 and as amended on November 1, 1999.
(10)(kk) Asset Purchase Agreement between Datapoint Corporation, SF
Digital, LLC and John Engstrom, and John Engstrom d/b/a SF
Digital and Corebyte(TM) dated July 27, 1999.
(10) (ll) Employment agreement with A. B. Edelman.
(10)(mm) Employment agreement with G. N. Agranoff.
(10)(nn) Employment agreement with P. P. Krumb.
(10)(oo) Announcement of confirmation of Amended Plan of Reorganization and resignation of the
Company's auditors, Ernst & Young LLP (filed as Exhibits 99.1 and 99.3, respectively, to
the Company's Current Report Form 8-K dated December 11, 2000 and incorporated by
reference).
(10)(pp) Announcement of Effective Date of Amended Plan of Reorganization (filed as Exhibit 99.1
to the Company's Current Report Form 8-K dated December 22, 2000 and incorporated by
reference).
(10)(qq) Announcement of the Company's new NASDAQ symbols (filed as
Exhibit 99.1 to the Company's Current Report Form 8-K dated
January 4, 2001, and incorporated by reference).
(27) Article 5, Financial Data Schedule.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
DYNACORE HOLDINGS CORPORATION
(Registrant)
BY:/s/Phillip K.Krumb
------------------
Asher B. Edelman
Chief Executive Officer and
Chairman of The Board
By Phillip P. Krumb, Attorney In Fact
DATED: April 16, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ Phillip P. Krumb Chief Financial Officer April 16, 2001
--------------------
Phillip P. Krumb (Principal Accounting Officer)
Phillip P. Krumb, pursuant to powers of attorney which are being filed with this
report, has signed below as attorney-in- fact for the following directors of the
Registrant:
Gerald N. Agranoff Roger B. Smith
Nicholas W. Walsh Joshua J. Angel
Neil S. Subin
/s/ Phillip P. Krumb April 16, 2001
---------------------
Phillip P. Krumb
Schedule II
DYNACORE HOLDINGS CORPORATION AND SUBSIDIARIES
Valuation and Qualifying Accounts and Reserves
(In thousands)
(a) (b)
Balance Charged Charged
at to (to) from Other Balance
Beginning Costs and Other Additions at End
Classification of Year Expenses Accounts (Deductions) of Year
Allowance for doubtful accounts:
(Successor Company)
Period ended December 31, 2000 $-- $-- $-- $-- $--
(Predecessor Company)
Period ended December 18, 2000 $773 $(65) $-- $(708) $--
Period ended December 31, 1999 $880 $(31) $-- $(76) $773
Year ended July 31, 1999 $1,305 $(299) $(69) $(57) $880
Year ended August 1, 1998 $1,654 $33 $179 $(561) $1,305
(a) Transfers to and from other balance sheet reserve accounts.
(b) Accounts written-off net of recoveries, other expense accounts and
translation adjustments.
EXHIBIT 10 (ll)
EXECUTIVE EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT ("Agreement") dated as of ______ __, 2000
between Dynacore Holdings Corporation, a Delaware corporation (the "Company")
and Asher B. Edelman (the "Executive").
WHEREAS, the parties wish to establish the terms of
Executive's future employment with the Company.
Accordingly, the parties agree as follows:
1. Employment, Duties and Acceptance.
---------------------------------
1.1 Employment by the Company. The Company shall employ the Executive
effective as of Effective Date of the Company's Plan of Reorganization, as
defined therein (the "Effective Date") to render services to the Company. The
Executive will serve in the capacity of Chief Executive Officer of the Company
and Chairman of the Board of Directors of the Company (the "Board of
Directors"). The Executive shall report to the Board of Directors and perform
duties as may be assigned to him from time to time by the Board of Directors;
provided, however, that the Executive and the Company agree and acknowledge that
the Executive shall be permitted to engage in any other activity or business as
a director, stockholder, partner, owner, employee, consultant, agent or in any
other capacity so long as such activity or business does not conflict with the
business of the Company; and provided further, that the Executive and the
Company agree and acknowledge that the Executive is a resident of Switzerland
and will spend substantial periods of time outside of the United States.
1.2 Acceptance of Employment by the Executive. The Executive accepts such
employment and shall render the services described above.
2. Duration of Employment.
----------------------
This Agreement and the employment relationship hereunder will continue in
effect for eighteen (18) months from the Effective Date (the "Term"), unless
terminated sooner in accordance with Section 4 hereof.
3. Compensation by the Company.
---------------------------
3.1 Base Salary. As compensation for all services rendered pursuant to this
Agreement, the Company will pay to the Executive an annual base salary of Two
Hundred Seven Thousand Five Hundred Dollars ($207,500), subject only to upward
adjustment by the Compensation Committee of the Board of Directors of the
Company and payable in accordance with the payroll practices of the Company
("Base Salary").
3.2. Bonuses. For each Fiscal Year (as hereinafter defined) or portion
thereof during the Term and to the extent EBITDA (as hereinafter defined) for
the applicable period exceeds twelve and one-half percent (12 1/2%) of Net
Equity (as hereinafter defined) for the applicable period, the Company will pay
to the Executive, in addition to Base Salary set forth above, a bonus in an
amount equal to five percent (5%) of the amount by which EBITDA exceeds twelve
and one-half percent (12 1/2%) of Net Equity (the "Bonus"). The Bonus shall be
payable no later than 90 days following the end of the applicable period for
which it is paid.
"EBITDA" shall mean, with respect to the applicable period, earnings before
interest, taxes, depreciation and amortization as determined by the Company's
accountants in accordance with generally accepted accounting principles;
provided, however, EBITDA shall not include amounts received from the Company's
Patent Litigation Trust that must be distributed to shareholders pursuant to
Section 7.05 of the Amended Plan of Reorganization of Dynacore Holdings
Corporation dated October ___, 2000.
"Net Equity" shall mean net assets less net liabilities determined as of
the last day of the applicable period.
3.3 Participation in Employee Benefit Plans. The Executive shall be
eligible to participate in all retirement plans and other benefit plans of the
Company and the Executive and his dependents shall be eligible to participate in
the health benefit plans of the Company (specifically including, but not limited
to, mental health benefits and benefits under the Company's Supplemental
Executive Medical Plan). In addition to any company-wide life insurance plans,
the Company shall pay the premiums for a life insurance policy on the life of
the Executive for the benefit of Executive's designated beneficiaries which
provides a death benefit equal to one hundred percent (100%) of Base Salary (the
"Additional Life Insurance Policy").
3.4 Stock Options. On the Effective Date, the Executive shall be granted
incentive stocks options to the extent such options may be designated as such
under applicable law and to the extent that all or a portion of the options do
not so qualify non-qualified stock options for the purchase of three hundred
thousand (300,000) shares of Common Stock, at an exercise price of seventy-five
cents ($0.75) per share (the "Exercise Price"). The options shall vest in equal
installments on the date coinciding with six (6) months, twelve (12) months and
eighteen (18) months from the Effective Date. Vested options may be exercised by
the Executive at any time prior to the 10th anniversary of the Effective Date
(the "Option Term"). Options may be exercised (i) in cash, by check by, bank
draft or by money order payment to the Company, (ii) by delivering Common Stock
of the Company already owned by the Executive and having a total Fair Market
Value on the date of such delivery equal to the Exercise Price, (iii) through
the written election of the Executive to have shares of Common Stock withheld by
the Company from the shares otherwise to be received upon the exercise of the
option, with such withheld shares having an aggregate Fair Market Value on the
date of exercise equal to the Exercise Price, (iv) by wire transfer to an
account designated by the Company or (v) by any combination of the above methods
of payment.
"Fair Market Value" shall mean, on any day, with respect to shares of Common
Stock of the Company which are (a) listed on a United States securities
exchange, the last sales price of such shares of Common Stock on such day on the
largest United States securities exchange on which such Common Stock shall have
traded, or if such day is not a day on which a United States securities exchange
is open for trading, on the immediately preceding day on which such securities
exchange was open, (b) not listed on a United States securities exchange but are
included in The NASDAQ Stock Market System (including the NASDAQ National
Market), the last sales price of such shares of Common Stock on such day, or if
such day is not a trading day, on the immediately preceding trading day or (c)
neither listed on a United States securities exchange nor included in The NASDAQ
Stock Market System, the fair market value of such Common Stock as determined
from time to time by the Board of Directors in good faith in its sole
discretion.
3.5 Office Space. The Company shall provide the Executive with office space
at 717 Fifth Avenue, 15th Floor, New York, New York, substantially comparable to
the office space provided to the Executive immediately prior to the Effective
Date.
3.6 Secretarial Reimbursement. The Company shall provide the services of,
or at the election of the Executive, reimburse the Executive for the payment of
salary and benefits with respect to the equivalent of, one full time experienced
executive secretary, as selected by the Executive.
3.7 Expense Reimbursement. During the Term, the Executive shall be entitled
to receive prompt reimbursement of all reasonable out-of-pocket expenses
properly incurred by him in connection with his duties under this Agreement,
including reasonable expenses of entertainment and travel; provided, that
reimbursement of any expense in excess of Ten Thousand Dollars ($10,000) must be
approved in advance by the Compensation Committee.
3.8 Vacation. The Executive shall be entitled to twenty (20) days of
vacation per year.
4. Termination.
4.1 Termination Upon Death. If the Executive dies during the Term, (i) the
Executive's legal representatives shall be entitled to receive the Executive's
Base Salary through the end of the month in which the death of the Executive
occurs, (ii) the Executive's legal representatives shall be entitled to receive
a pro rata portion of the bonus pursuant to Section 3.2 hereof for the year of
the Executive's death, based on the period beginning on the first day of the
Fiscal Year in which the death of the Executive occurs and ending on the last
day of the month in which the death of the Executive occurs, (iii) the
Executive's dependents shall receive reimbursement from the Company for the cost
of continuation health coverage under the Consolidated Omnibus Budget
Reconciliation Act of 1985, as amended ("COBRA") for the entire period of COBRA
coverage determined under applicable law, (iv) the Executive's legal
representatives shall receive all benefits and entitlements under any benefit
plan of or other arrangement with the Company, including, but not limited to,
benefits under the Executive's Additional Life Insurance Policy, (v) all
unvested options shall vest and become immediately exercisable and all options
shall remain exercisable by the Executive's legal representatives until the
expiration of the Option Term, (vi) payment for all accrued but unused vacation
and (vii) the Executive's beneficiaries, heirs or legal representatives shall
receive reimbursement for all of the Executive's business expenses accrued to
the date of death.
4.2 Termination Upon Disability. If during the Term, the Executive's
employment is terminated as a result of a "Disability" (as defined below), (i)
the Executive (or his legal representatives, if applicable) shall be entitled to
receive the Executive's Base Salary through the end of the month in which the
Executive is terminated, (ii) the Executive (or his legal representatives, if
applicable) shall be entitled to receive a pro rata portion of the bonus
pursuant to Section 3.2 hereof for the year of the Executive's termination,
based on the period beginning on the first day of the Fiscal Year in which the
termination of the Executive's employment occurs and ending on the last day of
the month in which the termination of the Executive's employment occurs, (iii)
the Executive and the Executive's dependents shall receive reimbursement from
the Company for the cost of continuation health coverage under COBRA for the
entire period of COBRA coverage determined under applicable law, (iv) the
Executive (or his legal representatives, if applicable) shall receive all
benefits and entitlements under any benefit plan of or other arrangement with
the Company, (v) all unvested options shall vest and become immediately
exercisable and all options shall remain exercisable by the Executive (or his
legal representatives, if applicable) until the expiration of the Option Term,
(vi) payment for all accrued but unused vacation, (vii) the Executive (or his
legal representatives, if applicable) shall receive reimbursement for all of the
Executive's business expenses accrued to the date of termination and (viii) at
the election of the Executive (or his legal representative, if applicable), the
Company shall transfer to the Executive the Additional Life Insurance Policy.
Nothing in this Section 4.2 shall be deemed to in any way affect the Executive's
right to participate in or receive benefits from any disability plan maintained
by the Company and for which the Executive is otherwise eligible.
For the purposes of this Agreement, "Disability" shall mean a determination
by the Board of Directors in accordance with applicable law that, as a result of
a physical or mental illness, the Executive is unable to perform the essential
functions of his job with or without reasonable accommodation, for one hundred
eighty (180) consecutive days or two hundred seventy (270) days during any
eighteen (18) month period.
4.3 Termination without Cause or with Good Reason. The Executive's
employment hereunder may be terminated by the Company without "Cause" (as
defined below) upon ninety (90) days prior written notice to the Executive and
the Executive may terminate employment with "Good Reason" (as defined below) at
any time without notice. Upon a termination without Cause or with Good Reason,
the Executive shall receive (i) Base Salary and bonus for the remaining duration
of the Term and for an additional period of six (6) months from the end of the
Term (collectively, the "Severance Period") as if the Executive was employed by
the Company during the Severance Period, (ii) health insurance coverage for the
Executive and his dependents and all other benefits and perquisites that the
Executive was receiving immediately prior to the date of termination for the
duration of the Severance Period, (iii) immediate vesting of all unvested
options and all options shall remain exercisable until the expiration of the
Option Term, (iv) all benefits and entitlements under any benefit plan of or
other arrangement with the Company including, without limitation, the payment of
premiums on the Additional Life Insurance Policy during the Severance Period,
(v) payment for all accrued but unused vacation and (vi) at the election of the
Executive (or his legal representative, if applicable), the Company shall
transfer to the Executive at the end of the Severance Period the Additional Life
Insurance Policy. The decision by the Company not to renew the Agreement at the
end of the Term on terms and conditions at least as favorable as immediately
prior to the end of the Term shall be deemed a termination by the Company
without Cause.
For the purposes of this Agreement, "Cause" shall mean (i) the Executive's
gross negligence, recklessness or malfeasance in the performance of his duties
which results in material financial injury to the Company, (ii) the Executive
committing any act or acts of fraud, theft or embezzlement, which, if convicted,
would constitute a felony and which results or intends to result directly or
indirectly in gain or personal enrichment of the Executive at the expense of the
Company or (iii) the Executive willfully engaging in any conduct relating to the
business of the Company that could reasonably be expected to have a materially
detrimental effect on the business or financial condition of the Company;
provided that the Company must give the Executive written notice of its intent
to terminate the Executive with Cause and the Executive shall have thirty (30)
days from the date of the notice to cure the deficiency.
For purposes of this Agreement, "Good Reason" shall mean (i) the assignment
to the Executive of duties and responsibilities not commensurate with his status
as Chief Executive Officer of the Company and Chairman of the Board of Directors
or the diminution of the Executive's duties, change in the Executive's title or
status or removal from or failure to re-elect the Executive as a member of the
Board (except in conjunction with a termination for Cause), (ii) the failure of
the Company to provide compensation and benefits to the Executive at the levels
required by this Agreement, or (iii) the failure of the Company to adhere in any
substantial manner to any of its covenants contained in this Agreement.
Termination of the Executive's employment by the Executive following a Change of
Control (a sale of more than fifty percent (50%) of the shares of Common Stock
or sale of all or substantially all of the assets of the Company), will be
deemed a Good Reason termination.
4.4 Termination with Cause or without Good Reason. The Company may
terminate the Executive's employment with Cause (subject to the cure period set
forth above) and the Executive may terminate employment without Good Reason at
any time without notice. Upon a termination by the Company with Cause or by the
Executive without Good Reason, the Executive shall receive (i) a pro rata
portion of (A) Base Salary and (B) the bonus pursuant to Section 3.2 hereof for
the year of the Executive's termination, based on the period of employment prior
to the date of termination, (ii) all previously earned and accrued entitlements
under any benefit plan of or other arrangement with the Company, (iii)
reimbursement for all business expenses accrued to the date of termination, (iv)
all vested options shall remain exercisable until the expiration of the Option
Term, (v) payment for all accrued but unused vacation and (vi) at the election
of the Executive (or his legal representative, if applicable), the Company shall
transfer to the Executive the Additional Life Insurance Policy.
Registration Rights.
-------------------
5.1 Piggyback Registration Rights. If, at any time after the date hereof,
the Company shall file a registration statement under the Securities Act of
1933, as amended (the "Act") with the Securities and Exchange Commission (the
"SEC") covering shares of capital stock of the Company while any Registrable
Securities (as defined in the last sentence of this paragraph 5.1) shall be
outstanding, the Company shall give the Executive 30 days' prior written notice
of the filing of such registration statement. If requested by the Executive, in
writing, within 10 days after the date of any such notice, the Company shall, at
the Company's sole expense (other than the fees and disbursements of counsel for
the Executive and any underwriting discounts or commissions payable in respect
of the Registrable Securities sold by Executive), include in such registration
statement all or any portion of the Registrable Securities of Executive and any
of his affiliates, all to the extent required to permit the public offering and
sale of the Registrable Securities through the facilities of all appropriate
securities exchanges and the over-the-counter market, and will use its
reasonable best efforts through its officers, directors, auditors and counsel to
cause such registration statement to become effective as promptly as
practicable. Notwithstanding the foregoing, if the managing underwriter of any
such offering shall advise the Company that, in its opinion, the registration of
all or a portion of the Registrable Securities requested to be included in the
registration would materially adversely affect the distribution of such
securities by the Company, then the Company shall be required to include in the
registration only that number of Registrable Securities which the Company or the
managing underwriter believe will not jeopardize the success of the offering and
the number of shares of Common Stock otherwise to be included in the
registration statement shall be reduced as follows: (i) there shall be first
excluded shares of Common Stock proposed to be included by other shareholders
not possessing contractual rights to include the same and (ii) any further
reduction shall be first in accordance with the contractual priorities among all
other shareholders (having such contractual rights) requesting inclusion of
their Common Stock in such registration, including the Executive, and shall be
second reduced pro rata among all other shareholders in the proportion of the
number of shares of Common Stock submitted for registration by each such
shareholder. As used herein, "Registrable Securities" shall mean the shares of
Common Stock owned by the Executive or any affiliates of the Executive, which
have not been previously sold pursuant to a registration statement and which are
otherwise, at the time a request for registration is made, not able to be sold
pursuant to Rule 144 promulgated under the Act.
5.2 Demand Registration Rights. Upon receipt of a written request from
Executive, the Company shall, as promptly as practicable, prepare and file a
registration statement under the Act with the SEC sufficient to permit the
public offering and sale of the Registrable Securities through the facilities of
all appropriate securities exchanges and the over-the-counter market, and will
use its reasonable best efforts through its officers, directors, auditors and
counsel to cause such registration statement to become effective as promptly as
practicable.
5.3 Blue Sky Limitations. In the event of a registration pursuant to the
provisions of this Section 5, the Company shall use its reasonable best efforts
to cause the Registrable Securities so registered to be registered or qualified
for sale under the securities or blue sky laws of such jurisdictions as the
Executive may reasonably request; provided, however, that the Company shall not
by reason of this Section 5.3 be required to qualify to do business, or to
subject itself to taxation, or to file a general consent to service of process
in any jurisdiction.
5.4 Duration. The Company shall keep effective any registration or
qualification contemplated by this Section 5 at all times thereafter and shall
from time to time amend or supplement each applicable registration statement,
preliminary prospectus, final prospectus, application, document, and
communication for such period of time as shall be required to permit the
Executive to complete the offer and sale of the Registrable Securities covered
thereby or until the date on which all Registrable Securities can be sold
pursuant to Rule 144 under the Act.
5.5 Survival. Notwithstanding anything herein to the contrary the terms of
this Section 5 shall survive the termination of the Executive's employment with
the Company and shall survive for so long as Executive owns Registrable
Securities.
6. Other Provisions.
----------------
6.1. Notices. Any notice or other communication required or which may be
given hereunder shall be in writing and shall be delivered personally,
telegraphed, telexed, sent by facsimile transmission or sent by certified,
registered or express mail, postage prepaid, and shall be deemed given when so
delivered personally, telegraphed, telexed, or sent by facsimile transmission
or, if mailed, four (4) days after the date of mailing, as follows:
(a) If the Company, to:
Dynacore Holdings Corporation
717 Fifth Avenue, 15th Floor
New York, New York 10022
Attention: Board of Directors
Telephone: (212) 371-7711
Fax: (212) 223-0006
With a copy to:
Pryor Cashman Sherman & Flynn LLP
410 Park Avenue
New York, New York 10022
Attention: Selig D. Sacks, Esq.
Telephone: (212) 326-0879
Fax: (212) 326-0806
(b) If to the Executive, to his home address set
forth in the records of the Company.
6.2 Entire Agreement. This Agreement contains the entire agreement between
the parties with respect to the subject matter hereof and supersedes all prior
agreements, written or oral, with respect thereto.
6.3 Waiver and Amendments. This Agreement may be amended, modified,
superseded, canceled, renewed or extended, and the terms and conditions hereof
may be waived, only by a written instrument signed by the parties or, in the
case of a waiver, by the party waiving compliance. No delay on the part of any
party in exercising any right, power or privilege hereunder shall operate as a
waiver thereof, nor shall any waiver on the part of any right, power or
privilege hereunder, nor any single or partial exercise of any right, power or
privilege hereunder, preclude any other or further exercise thereof or the
exercise of any other right, power or privilege hereunder.
6.4 Governing Law. This Agreement shall be governed and construed in
accordance with the laws of the State of New York applicable to agreements made
and to be performed entirely within such state, without regard to conflicts of
laws principles.
6.5 Dispute Resolution. The Company and Executive agree to arbitrate any
controversy or claim arising out of this Agreement or otherwise relating to
Executive's employment by the Company during the Term or Executive's termination
of such employment prior to or as of the end of the Term. Any such controversy
or claim shall be resolved in binding arbitration in a proceeding administered
by and under the National Rules for the Resolution of Employment Disputes of the
American Arbitration Association, in the American Arbitration Association office
located in New York City. Except as otherwise provided under Section 6.9 hereof,
the arbitrator shall not have authority to modify or change any of the terms of
this Agreement. Both parties and the arbitrator will treat the arbitration
process and the activities which occur in the proceedings as confidential. The
decision of the arbitrator shall be rendered in writing, shall be final and may
be entered as a judgment in any federal or state court in New York County.
6.6 Assignability. This Agreement, and the Executive's rights and
obligations hereunder, may not be assigned by the Executive. The Company may
assign this Agreement and its rights, together with its obligations, to any
other entity which will substantially carry on the business of the Company.
6.7 Counterparts. This Agreement may be executed in two (2) or more
counterparts, each of which shall be deemed an original but all of which shall
constitute one and the same instrument, and it shall not be necessary in making
proof of this Agreement to produce or account for more than one such
counterpart.
6.8 Headings. The headings in this Agreement are for convenience of
reference only and shall not limit or otherwise affect the meaning of terms
contained herein.
6.9 Severability. If any term, provision, covenant or restriction of this
Agreement, or any part thereof, is held by a court of competent jurisdiction of
any foreign, federal, state, county or local government or any other
governmental, regulatory or administrative agency, arbitrator or authority to be
invalid, void, unenforceable or against public policy for any reason, the
remainder of the terms, provisions, covenants and restrictions of this Agreement
shall remain in full force and effect and shall in no way be affected or
impaired or invalidated.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
IN WITNESS WHEREOF, the parties hereto, intending to be
legally bound hereby, have executed this Agreement as of the day and year first
above mentioned.
EXECUTIVE
------------------------------------
Asher B. Edelman
DYNACORE HOLDINGS CORP.
By:
---------------------------------
Name:
Title:
EXHIBIT 10(mm)
EXECUTIVE EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT ("Agreement") dated as of ______ __, 2000
between Dynacore Holdings Corporation, a Delaware corporation (the "Company")
and Gerald N. Agranoff (the "Executive").
WHEREAS, the parties wish to establish the terms of
Executive's future employment with the Company.
Accordingly, the parties agree as follows:
1. Employment, Duties and Acceptance.
---------------------------------
1.1 Employment by the Company. The Company shall employ the Executive
effective as of Effective Date of the Company's Plan of Reorganization, as
defined therein (the "Effective Date") to render services to the Company. The
Executive will serve in the capacity of Chief Operating Officer and Acting
President of the Company and Vice Chairman of the Board of Directors of the
Company (the "Board of Directors"). The Executive shall report to the Chief
Executive Officer of the Company and Chairman of the Board of Directors and
perform duties as may be assigned to him from time to time by the Chief
Executive Officer of the Company and Chairman of the Board of Directors;
provided, however, that the Executive and the Company agree and acknowledge that
the Executive shall be permitted to engage in any other activity or business as
a director, stockholder, partner, owner, employee, consultant, agent or in any
other capacity so long as such activity or business does not conflict with the
business of the Company.
1.2 Acceptance of Employment by the Executive. The Executive accepts such
employment and shall render the services described above.
2. Duration of Employment.
----------------------
This Agreement and the employment relationship hereunder will continue in
effect for eighteen (18) months from the Effective Date (the "Term"), unless
terminated sooner in accordance with Section 4 hereof.
3. Compensation by the Company.
---------------------------
3.1 Base Salary. As compensation for all services rendered pursuant to this
Agreement, the Company will pay to the Executive an annual base salary of One
Hundred Fifty-Seven Thousand Five Hundred Dollars ($157,500), subject only to
upward adjustment by the Compensation Committee of the Board of Directors of the
Company and payable in accordance with the payroll practices of the Company
("Base Salary").
3.2. Bonuses. For each Fiscal Year (as hereinafter defined) or portion
thereof during the Term and to the extent EBITDA (as hereinafter defined) for
the applicable period exceeds twelve and one-half percent (12 1/2%) of Net
Equity (as hereinafter defined) for the applicable period, the Company will pay
to the Executive, in addition to Base Salary set forth above, a bonus in an
amount equal to four percent (4%) of the amount by which EBITDA exceeds twelve
and one-half percent (12 1/2%) of Net Equity (the "Bonus"). The Bonus shall be
payable no later than 90 days following the end of the applicable period for
which it is paid.
"EBITDA" shall mean, with respect to the applicable period, earnings before
interest, taxes, depreciation and amortization as determined by the Company's
accountants in accordance with generally accepted accounting principles;
provided, however, EBITDA shall not include amounts received from the Company's
Patent Litigation Trust that must be distributed to shareholders pursuant to
Section 7.05 of the Amended Plan of Reorganization of Dynacore Holdings
Corporation dated October ___, 2000.
"Net Equity" shall mean net assets less net liabilities determined as of
the last day of the applicable period.
3.3 Participation in Employee Benefit Plans. The Executive shall be
eligible to participate in all retirement plans and other benefit plans of the
Company and the Executive and his dependents shall be eligible to participate in
the health benefit plans of the Company (specifically including, but not limited
to, mental health benefits and benefits under the Company's Supplemental
Executive Medical Plan). In addition to any company-wide life insurance plans,
the Company shall pay the premiums for a life insurance policy on the life of
the Executive for the benefit of Executive's designated beneficiaries which
provides a death benefit equal to one hundred percent (100%) of Base Salary (the
"Additional Life Insurance Policy").
3.4 Stock Options. On the Effective Date, the Executive shall be granted
incentive stocks options to the extent such options may be designated as such
under applicable law and to the extent that all or a portion of the options do
not so qualify non-qualified stock options for the purchase of one hundred
seventy-five thousand (175,000) shares of Common Stock, at an exercise price of
seventy-five cents ($0.75) per share (the "Exercise Price"). The options shall
vest in equal installments on the date coinciding with six (6) months, twelve
(12) months and eighteen (18) months from the Effective Date. Vested options may
be exercised by the Executive at any time prior to the 10th anniversary of the
Effective Date (the "Option Term"). Options may be exercised (i) in cash, by
check by, bank draft or by money order payment to the Company, (ii) by
delivering Common Stock of the Company already owned by the Executive and having
a total Fair Market Value on the date of such delivery equal to the Exercise
Price, (iii) through the written election of the Executive to have shares of
Common Stock withheld by the Company from the shares otherwise to be received
upon the exercise of the option, with such withheld shares having an aggregate
Fair Market Value on the date of exercise equal to the Exercise Price, (iv) by
wire transfer to an account designated by the Company or (v) by any combination
of the above methods of payment.
"Fair Market Value" shall mean, on any day, with respect to shares of
Common Stock of the Company which are (a) listed on a United States securities
exchange, the last sales price of such shares of Common Stock on such day on the
largest United States securities exchange on which such Common Stock shall have
traded, or if such day is not a day on which a United States securities exchange
is open for trading, on the immediately preceding day on which such securities
exchange was open, (b) not listed on a United States securities exchange but are
included in The NASDAQ Stock Market System (including the NASDAQ National
Market), the last sales price of such shares of Common Stock on such day, or if
such day is not a trading day, on the immediately preceding trading day or (c)
neither listed on a United States securities exchange nor included in The NASDAQ
Stock Market System, the fair market value of such Common Stock as determined
from time to time by the Board of Directors in good faith in its sole
discretion.
3.5 Office Space. The Company shall provide the Executive with office space
at 717 Fifth Avenue, 15th Floor, New York, New York, substantially comparable to
the office space provided to the Executive immediately prior to the Effective
Date.
3.6 Secretarial Reimbursement. The Company shall provide the services of,
or at the election of the Executive, reimburse the Executive for the payment of
salary and benefits with respect to the equivalent of, one full time experienced
executive secretary, as selected by the Executive.
3.7 Expense Reimbursement. During the Term, the Executive shall be entitled
to receive prompt reimbursement of all reasonable out-of-pocket expenses
properly incurred by him in connection with his duties under this Agreement,
including reasonable expenses of entertainment and travel; provided, that
reimbursement of any expense in excess of Ten Thousand Dollars ($10,000) must be
approved in advance by the Compensation Committee.
3.8 Vacation. The Executive shall be entitled to twenty (20) days of
vacation per year.
4. Termination.
-----------
4.1 Termination Upon Death. If the Executive dies during the Term, (i) the
Executive's legal representatives shall be entitled to receive the Executive's
Base Salary through the end of the month in which the death of the Executive
occurs, (ii) the Executive's legal representatives shall be entitled to receive
a pro rata portion of the bonus pursuant to Section 3.2 hereof for the year of
the Executive's death, based on the period beginning on the first day of the
Fiscal Year in which the death of the Executive occurs and ending on the last
day of the month in which the death of the Executive occurs, (iii) the
Executive's dependents shall receive reimbursement from the Company for the cost
of continuation health coverage under the Consolidated Omnibus Budget
Reconciliation Act of 1985, as amended ("COBRA") for the entire period of COBRA
coverage determined under applicable law, (iv) the Executive's legal
representatives shall receive all benefits and entitlements under any benefit
plan of or other arrangement with the Company, including, but not limited to,
benefits under the Executive's Additional Life Insurance Policy, (v) all
unvested options shall vest and become immediately exercisable and all options
shall remain exercisable by the Executive's beneficiaries, heirs or legal
representatives until the expiration of the Option Term, (vi) payment for all
accrued but unused vacation and (vii) the Executive's beneficiaries, heirs or
legal representatives shall receive reimbursement for all of the Executive's
business expenses accrued to the date of death.
4.2 Termination Upon Disability. If during the Term, the Executive's
employment is terminated as a result of a "Disability" (as defined below), (i)
the Executive (or his legal representatives, if applicable) shall be entitled to
receive the Executive's Base Salary through the end of the month in which the
Executive is terminated, (ii) the Executive (or his legal representatives, if
applicable) shall be entitled to receive a pro rata portion of the bonus
pursuant to Section 3.2 hereof for the year of the Executive's termination,
based on the period beginning on the first day of the Fiscal Year in which the
termination of the Executive's employment occurs and ending on the last day of
the month in which the termination of the Executive's employment occurs, (iii)
the Executive and the Executive's dependents shall receive reimbursement from
the Company for the cost of continuation health coverage under COBRA for the
entire period of COBRA coverage determined under applicable law, (iv) the
Executive (or his legal representatives, if applicable) shall receive all
benefits and entitlements under any benefit plan of or other arrangement with
the Company, (v) all unvested options shall vest and become immediately
exercisable and all options shall remain exercisable by the Executive (or his
legal representatives, if applicable) until the expiration of the Option Term,
(vi) payment for all accrued but unused vacation, (vii) the Executive (or his
legal representatives, if applicable) shall receive reimbursement for all of the
Executive's business expenses accrued to the date of termination and (viii) at
the election of the Executive (or his legal representative, if applicable), the
Company shall transfer to the Executive the Additional Life Insurance Policy.
Nothing in this Section 4.2 shall be deemed to in any way affect the Executive's
right to participate in or receive benefits from any disability plan maintained
by the Company and for which the Executive is otherwise eligible.
For the purposes of this Agreement, "Disability" shall mean a determination
by the Board of Directors in accordance with applicable law that, as a result of
a physical or mental illness, the Executive is unable to perform the essential
functions of his job with or without reasonable accommodation, for one hundred
eighty (180) consecutive days or two hundred seventy (270) days during any
eighteen (18) month period.
4.3 Termination without Cause or with Good Reason. The Executive's
employment hereunder may be terminated by the Company without "Cause" (as
defined below) upon ninety (90) days prior written notice to the Executive and
the Executive may terminate employment with "Good Reason" (as defined below) at
any time without notice. Upon a termination without Cause or with Good Reason,
the Executive shall receive (i) Base Salary and bonus for the remaining duration
of the Term and for an additional period of six (6) months from the end of the
Term (collectively, the "Severance Period") as if the Executive was employed by
the Company during the Severance Period, (ii) health insurance coverage for the
Executive and his dependents and all other benefits and perquisites that the
Executive was receiving immediately prior to the date of termination for the
duration of the Severance Period, (iii) immediate vesting of all unvested
options and all options shall remain exercisable until the expiration of the
Option Term, (iv) all benefits and entitlements under any benefit plan of or
other arrangement with the Company including, without limitation, the payment of
premiums on the Additional Life Insurance Policy during the Severance Period,
(v) payment for all accrued but unused vacation and (vi) at the election of the
Executive (or his legal representative, if applicable), the Company shall
transfer to the Executive at the end of the Severance Period the Additional Life
Insurance Policy. The decision by the Company not to renew the Agreement at the
end of the Term on terms and conditions at least as favorable as immediately
prior to the end of the Term shall be deemed a termination by the Company
without Cause.
For the purposes of this Agreement, "Cause" shall mean (i) the Executive's
gross negligence, recklessness or malfeasance in the performance of his duties
which results in material financial injury to the Company, (ii) the Executive
committing any act or acts of fraud, theft or embezzlement, which, if convicted,
would constitute a felony and which results or intends to result directly or
indirectly in gain or personal enrichment of the Executive at the expense of the
Company or (iii) the Executive willfully engaging in any conduct relating to the
business of the Company that could reasonably be expected to have a materially
detrimental effect on the business or financial condition of the Company;
provided that the Company must give the Executive written notice of its intent
to terminate the Executive with Cause and the Executive shall have thirty (30)
days from the date of the notice to cure the deficiency.
For purposes of this Agreement, "Good Reason" shall mean (i) the assignment
to the Executive of duties and responsibilities not commensurate with his status
as Chief Operating Officer and Acting President of the Company and Vice Chairman
of the Board of Directors or the diminution of the Executive's duties, change in
the Executive's title or status or removal from or failure to re-elect the
Executive as a member of the Board (except in conjunction with a termination for
Cause), (ii) the failure of the Company to provide compensation and benefits to
the Executive at the levels required by this Agreement, or (iii) the failure of
the Company to adhere in any substantial manner to any of its covenants
contained in this Agreement. Termination of the Executive's employment by the
Executive following a Change of Control (a sale of more than fifty percent (50%)
of the shares of Common Stock or sale of all or substantially all of the assets
of the Company), will be deemed a Good Reason termination.
4.4 Termination with Cause or without Good Reason. The Company may
terminate the Executive's employment with Cause (subject to the cure period set
forth above) and the Executive may terminate employment without Good Reason at
any time without notice. Upon a termination by the Company with Cause or by the
Executive without Good Reason, the Executive shall receive (i) a pro rata
portion of (A) Base Salary and (B) the bonus pursuant to Section 3.2 hereof for
the year of the Executive's termination, based on the period of employment prior
to the date of termination, (ii) all previously earned and accrued entitlements
under any benefit plan of or other arrangement with the Company, (iii)
reimbursement for all business expenses accrued to the date of termination, (iv)
all vested options shall remain exercisable until the expiration of the Option
Term, (v) payment for all accrued but unused vacation and (vi) at the election
of the Executive (or his legal representative, if applicable), the Company shall
transfer to the Executive the Additional Life Insurance Policy.
Registration Rights.
-------------------
5.1 Piggyback Registration Rights. If, at any time after the date hereof,
the Company shall file a registration statement under the Securities Act of
1933, as amended (the "Act") with the Securities and Exchange Commission (the
"SEC") covering shares of capital stock of the Company while any Registrable
Securities (as defined in the last sentence of this paragraph 5.1) shall be
outstanding, the Company shall give the Executive 30 days' prior written notice
of the filing of such registration statement. If requested by the Executive, in
writing, within 10 days after the date of any such notice, the Company shall, at
the Company's sole expense (other than the fees and disbursements of counsel for
the Executive and any underwriting discounts or commissions payable in respect
of the Registrable Securities sold by Executive), include in such registration
statement all or any portion of the Registrable Securities of Executive and any
of his affiliates, all to the extent required to permit the public offering and
sale of the Registrable Securities through the facilities of all appropriate
securities exchanges and the over-the-counter market, and will use its
reasonable best efforts through its officers, directors, auditors and counsel to
cause such registration statement to become effective as promptly as
practicable. Notwithstanding the foregoing, if the managing underwriter of any
such offering shall advise the Company that, in its opinion, the registration of
all or a portion of the Registrable Securities requested to be included in the
registration would materially adversely affect the distribution of such
securities by the Company, then the Company shall be required to include in the
registration only that number of Registrable Securities which the Company or the
managing underwriter believe will not jeopardize the success of the offering and
the number of shares of Common Stock otherwise to be included in the
registration statement shall be reduced as follows: (iii) there shall be first
excluded shares of Common Stock proposed to be included by other shareholders
not possessing contractual rights to include the same and (iv) any further
reduction shall be first in accordance with the contractual priorities among all
other shareholders (having such contractual rights) requesting inclusion of
their Common Stock in such registration, including the Executive, and shall be
second reduced pro rata among all other shareholders in the proportion of the
number of shares of Common Stock submitted for registration by each such
shareholder. As used herein, "Registrable Securities" shall mean the shares of
Common Stock owned by the Executive or any affiliates of the Executive, which
have not been previously sold pursuant to a registration statement and which are
otherwise, at the time a request for registration is made, not able to be sold
pursuant to Rule 144 promulgated under the Act.
5.2 Demand Registration Rights. Upon receipt of a written request from
Executive, the Company shall, as promptly as practicable, prepare and file a
registration statement under the Act with the SEC sufficient to permit the
public offering and sale of the Registrable Securities through the facilities of
all appropriate securities exchanges and the over-the-counter market, and will
use its reasonable best efforts through its officers, directors, auditors and
counsel to cause such registration statement to become effective as promptly as
practicable.
5.3 Blue Sky Limitations. In the event of a registration pursuant to the
provisions of this Section 5, the Company shall use its reasonable best efforts
to cause the Registrable Securities so registered to be registered or qualified
for sale under the securities or blue sky laws of such jurisdictions as the
Executive may reasonably request; provided, however, that the Company shall not
by reason of this Section 5.3 be required to qualify to do business, or to
subject itself to taxation, or to file a general consent to service of process
in any jurisdiction.
5.4 Duration. The Company shall keep effective any registration or
qualification contemplated by this Section 5 at all times thereafter and shall
from time to time amend or supplement each applicable registration statement,
preliminary prospectus, final prospectus, application, document, and
communication for such period of time as shall be required to permit the
Executive to complete the offer and sale of the Registrable Securities covered
thereby or until the date on which all Registrable Securities can be sold
pursuant to Rule 144 under the Act.
5.5 Survival. Notwithstanding anything herein to the contrary the terms of
this Section 5 shall survive the termination of the Executive's employment with
the Company and shall survive for so long as Executive owns Registrable
Securities.
6. Other Provisions.
----------------
6.1. Notices. Any notice or other communication required or which may be
given hereunder shall be in writing and shall be delivered personally,
telegraphed, telexed, sent by facsimile transmission or sent by certified,
registered or express mail, postage prepaid, and shall be deemed given when so
delivered personally, telegraphed, telexed, or sent by facsimile transmission
or, if mailed, four (4) days after the date of mailing, as follows:
(a) If the Company, to:
Dynacore Holdings Corporation
717 Fifth Avenue, 15th Floor
New York, New York 10022
Attention: Asher B. Edelman
Telephone: (212) 371-7711
Fax: (212) 223-0006
With a copy to:
Pryor Cashman Sherman & Flynn LLP
410 Park Avenue
New York, New York 10022
Attention: Selig D. Sacks, Esq.
Telephone: (212) 326-0879
Fax: (212) 326-0806
(b) If to the Executive, to his home address set
forth in the records of the Company.
6.2 Entire Agreement. This Agreement contains the entire agreement between
the parties with respect to the subject matter hereof and supersedes all prior
agreements, written or oral, with respect thereto.
6.3 Waiver and Amendments. This Agreement may be amended, modified,
superseded, canceled, renewed or extended, and the terms and conditions hereof
may be waived, only by a written instrument signed by the parties or, in the
case of a waiver, by the party waiving compliance. No delay on the part of any
party in exercising any right, power or privilege hereunder shall operate as a
waiver thereof, nor shall any waiver on the part of any right, power or
privilege hereunder, nor any single or partial exercise of any right, power or
privilege hereunder, preclude any other or further exercise thereof or the
exercise of any other right, power or privilege hereunder.
6.4 Governing Law. This Agreement shall be governed and construed in
accordance with the laws of the State of New York applicable to agreements made
and to be performed entirely within such state, without regard to conflicts of
laws principles.
6.5 Dispute Resolution. The Company and Executive agree to arbitrate any
controversy or claim arising out of this Agreement or otherwise relating to
Executive's employment by the Company during the Term or Executive's termination
of such employment prior to or as of the end of the Term. Any such controversy
or claim shall be resolved in binding arbitration in a proceeding administered
by and under the National Rules for the Resolution of Employment Disputes of the
American Arbitration Association, in the American Arbitration Association office
located in New York City. Except as otherwise provided under Section 6.9 hereof,
the arbitrator shall not have authority to modify or change any of the terms of
this Agreement. Both parties and the arbitrator will treat the arbitration
process and the activities which occur in the proceedings as confidential. The
decision of the arbitrator shall be rendered in writing, shall be final and may
be entered as a judgment in any federal or state court in New York County.
6.6 Assignability. This Agreement, and the Executive's rights and
obligations hereunder, may not be assigned by the Executive. The Company may
assign this Agreement and its rights, together with its obligations, to any
other entity which will substantially carry on the business of the Company.
6.7 Counterparts. This Agreement may be executed in two (2) or more
counterparts, each of which shall be deemed an original but all of which shall
constitute one and the same instrument, and it shall not be necessary in making
proof of this Agreement to produce or account for more than one such
counterpart.
6.8 Headings. The headings in this Agreement are for convenience of
reference only and shall not limit or otherwise affect the meaning of terms
contained herein.
6.9 Severability. If any term, provision, covenant or restriction of this
Agreement, or any part thereof, is held by a court of competent jurisdiction of
any foreign, federal, state, county or local government or any other
governmental, regulatory or administrative agency, arbitrator or authority to be
invalid, void, unenforceable or against public policy for any reason, the
remainder of the terms, provisions, covenants and restrictions of this Agreement
shall remain in full force and effect and shall in no way be affected or
impaired or invalidated.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
IN WITNESS WHEREOF, the parties hereto, intending to be
legally bound hereby, have executed this Agreement as of the day and year first
above mentioned.
EXECUTIVE
------------------------------------
Gerald N. Agranoff
DYNACORE HOLDINGS CORP.
By:
--------------------------------
Name:
Title:
EXHIBIT 10 (nn)
EXECUTIVE EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT ("Agreement") dated as of ______ __, 2000
between Dynacore Holdings Corporation, a Delaware corporation (the "Company")
and Phillip P. Krumb (the "Executive").
WHEREAS, the parties wish to establish the terms of
Executive's future employment with the Company.
Accordingly, the parties agree as follows:
1. Employment, Duties and Acceptance.
---------------------------------
1.1 Employment by the Company. The Company shall employ the Executive
effective as of Effective Date of the Company's Plan of Reorganization, as
defined therein (the "Effective Date") to render services to the Company. The
Executive will serve in the capacity of Vice President and Chief Financial
Officer of the Company and a member of the Board of Directors of the Company
(the "Board of Directors"). The Executive shall report to the Chief Executive
Officer of the Company and Chairman of the Board of Directors and perform duties
as may be assigned to him from time to time by the Chief Executive Officer of
the Company and Chairman of the Board of Directors; provided, however, that the
Executive and the Company agree and acknowledge that the Executive shall be
permitted to engage in any other activity or business as a director,
stockholder, partner, owner, employee, consultant, agent or in any other
capacity so long as such activity or business does not conflict with the
business of the Company.
1.2 Acceptance of Employment by the Executive. The Executive accepts such
employment and shall render the services described above.
2. Duration of Employment.
----------------------
This Agreement and the employment relationship hereunder will continue in
effect for eighteen (18) months from the Effective Date (the "Term"), unless
terminated sooner in accordance with Section 4 hereof.
3. Compensation by the Company.
---------------------------
3.1 Base Salary. As compensation for all services rendered pursuant to this
Agreement, the Company will pay to the Executive an annual base salary of
Eighty-Two Thousand, Five Hundred Dollars ($82,500), subject only to upward
adjustment by the Compensation Committee of the Board of Directors of the
Company and payable in accordance with the payroll practices of the Company
("Base Salary").
3.2. Bonuses. For each Fiscal Year (as hereinafter defined) or portion
thereof during the Term and to the extent EBITDA (as hereinafter defined) for
the applicable period exceeds twelve and one-half percent (12 1/2%) of Net
Equity (as hereinafter defined) for the applicable period, the Company will pay
to the Executive, in addition to Base Salary set forth above, a bonus in an
amount equal to one percent (1%) of the amount by which EBITDA exceeds twelve
and one-half percent (12 1/2%) of Net Equity (the "Bonus"). The Bonus shall be
payable no later than 90 days following the end of the applicable period for
which it is paid.
"EBITDA" shall mean, with respect to the applicable period, earnings before
interest, taxes, depreciation and amortization as determined by the Company's
accountants in accordance with generally accepted accounting principles;
provided, however, EBITDA shall not include amounts received from the Company's
Patent Litigation Trust that must be distributed to shareholders pursuant to
Section 7.05 of the Amended Plan of Reorganization of Dynacore Holdings
Corporation dated October ___, 2000.
Net Equity shall mean net assets less net liabilities determined as of the
last day of the applicable period.
3.3 Participation in Employee Benefit Plans. The Executive shall be
eligible to participate in all retirement plans and other benefit plans of the
Company and the Executive and his dependents shall be eligible to participate in
the health benefit plans of the Company (specifically including, but not limited
to, mental health benefits and benefits under the Company's Supplemental
Executive Medical Plan). In addition to any company-wide life insurance plans,
the Company shall pay the premiums for a life insurance policy on the life of
the Executive for the benefit of Executive's designated beneficiaries which
provides a death benefit equal to one hundred percent (100%) of Base Salary (the
"Additional Life Insurance Policy").
3.4 Stock Options. On the Effective Date, the Executive shall be granted
incentive stocks options to the extent such options may be designated as such
under applicable law and to the extent that all or a portion of the options do
not so qualify non-qualified stock options for the purchase of seventy-five
thousand (75,000) shares of Common Stock, at an exercise price of seventy-five
cents ($0.75) per share (the "Exercise Price"). The options shall vest in equal
installments on the date coinciding with six (6) months, twelve (12) months and
eighteen (18) months from the Effective Date. Vested options may be exercised by
the Executive at any time prior to the 10th anniversary of the Effective Date
(the "Option Term"). Options may be exercised (i) in cash, by check by, bank
draft or by money order payment to the Company, (ii) by delivering Common Stock
of the Company already owned by the Executive and having a total Fair Market
Value on the date of such delivery equal to the Exercise Price, (iii) through
the written election of the Executive to have shares of Common Stock withheld by
the Company from the shares otherwise to be received upon the exercise of the
option, with such withheld shares having an aggregate Fair Market Value on the
date of exercise equal to the Exercise Price, (iv) by wire transfer to an
account designated by the Company or (v) by any combination of the above methods
of payment.
"Fair Market Value" shall mean, on any day, with respect to shares of
Common Stock of the Company which are (a) listed on a United States securities
exchange, the last sales price of such shares of Common Stock on such day on the
largest United States securities exchange on which such Common Stock shall have
traded, or if such day is not a day on which a United States securities exchange
is open for trading, on the immediately preceding day on which such securities
exchange was open, (b) not listed on a United States securities exchange but are
included in The NASDAQ Stock Market System (including the NASDAQ National
Market), the last sales price of such shares of Common Stock on such day, or if
such day is not a trading day, on the immediately preceding trading day or (c)
neither listed on a United States securities exchange nor included in The NASDAQ
Stock Market System, the fair market value of such Common Stock as determined
from time to time by the Board of Directors in good faith in its sole
discretion.
3.5 Expense Reimbursement. During the Term, the Executive shall be entitled
to receive prompt reimbursement of all reasonable out-of-pocket expenses
properly incurred by him in connection with his duties under this Agreement,
including reasonable expenses of entertainment and travel; provided, that
reimbursement of any expense in excess of Ten Thousand Dollars ($10,000) must be
approved in advance by the Compensation Committee.
3.6 Vacation. The Executive shall be entitled to twenty (20) days of
vacation per year.
4. Termination.
4.1 Termination Upon Death. If the Executive dies during the Term, (i) the
Executive's legal representatives shall be entitled to receive the Executive's
Base Salary through the end of the month in which the death of the Executive
occurs, (ii) the Executive's legal representatives shall be entitled to receive
a pro rata portion of the bonus pursuant to Section 3.2 hereof for the year of
the Executive's death, based on the period beginning on the first day of the
Fiscal Year in which the death of the Executive occurs and ending on the last
day of the month in which the death of the Executive occurs, (iii) the
Executive's dependents shall receive reimbursement from the Company for the cost
of continuation health coverage under the Consolidated Omnibus Budget
Reconciliation Act of 1985, as amended ("COBRA") for the entire period of COBRA
coverage determined under applicable law, (iv) the Executive's legal
representatives shall receive all benefits and entitlements under any benefit
plan of or other arrangement with the Company, including, but not limited to,
benefits under the Executive's Additional Life Insurance Policy, (v) all
unvested options shall vest and become immediately exercisable and all options
shall remain exercisable by the Executive's beneficiaries, heirs or legal
representatives until the expiration of the Option Term, (vi) payment for all
accrued but unused vacation and (vii) the Executive's beneficiaries, heirs or
legal representatives shall receive reimbursement for all of the Executive's
business expenses accrued to the date of death.
4.2 Termination Upon Disability. If during the Term, the Executive's
employment is terminated as a result of a "Disability" (as defined below), (i)
the Executive (or his legal representatives, if applicable) shall be entitled to
receive the Executive's Base Salary through the end of the month in which the
Executive is terminated, (ii) the Executive (or his legal representatives, if
applicable) shall be entitled to receive a pro rata portion of the bonus
pursuant to Section 3.2 hereof for the year of the Executive's termination,
based on the period beginning on the first day of the Fiscal Year in which the
termination of the Executive's employment occurs and ending on the last day of
the month in which the termination of the Executive's employment occurs, (iii)
the Executive and the Executive's dependents shall receive reimbursement from
the Company for the cost of continuation health coverage under COBRA for the
entire period of COBRA coverage determined under applicable law, (iv) the
Executive (or his legal representatives, if applicable) shall receive all
benefits and entitlements under any benefit plan of or other arrangement with
the Company, (v) all unvested options shall vest and become immediately
exercisable and all options shall remain exercisable by the Executive (or his
legal representatives, if applicable) until the expiration of the Option Term,
(vi) payment for all accrued but unused vacation, (vii) the Executive (or his
legal representatives, if applicable) shall receive reimbursement for all of the
Executive's business expenses accrued to the date of termination and (viii) at
the election of the Executive (or his legal representative, if applicable), the
Company shall transfer to the Executive the Additional Life Insurance Policy.
Nothing in this Section 4.2 shall be deemed to in any way affect the Executive's
right to participate in or receive benefits from any disability plan maintained
by the Company and for which the Executive is otherwise eligible.
For the purposes of this Agreement, "Disability" shall mean a determination
by the Board of Directors in accordance with applicable law that, as a result of
a physical or mental illness, the Executive is unable to perform the essential
functions of his job with or without reasonable accommodation, for one hundred
eighty (180) consecutive days or two hundred seventy (270) days during any
eighteen (18) month period.
4.3 Termination without Cause or with Good Reason. The Executive's
employment hereunder may be terminated by the Company without "Cause" (as
defined below) upon ninety (90) days prior written notice to the Executive and
the Executive may terminate employment with "Good Reason" (as defined below) at
any time without notice. Upon a termination without Cause or with Good Reason,
the Executive shall receive (i) Base Salary and bonus for the remaining duration
of the Term and for an additional period of six (6) months from the end of the
Term (collectively, the "Severance Period") as if the Executive was employed by
the Company during the Severance Period, (ii) health insurance coverage for the
Executive and his dependents and all other benefits and perquisites that the
Executive was receiving immediately prior to the date of termination for the
duration of the Severance Period, (iii) immediate vesting of all unvested
options and all options shall remain exercisable until the expiration of the
Option Term, (iv) all benefits and entitlements under any benefit plan of or
other arrangement with the Company including, without limitation, the payment of
premiums on the Additional Life Insurance Policy during the Severance Period,
(v) payment for all accrued but unused vacation and (vi) at the election of the
Executive (or his legal representative, if applicable), the Company shall
transfer to the Executive at the end of the Severance Period the Additional Life
Insurance Policy. The decision by the Company not to renew the Agreement at the
end of the Term on terms and conditions at least as favorable as immediately
prior to the end of the Term shall be deemed a termination by the Company
without Cause.
For the purposes of this Agreement, "Cause" shall mean (i) the Executive's
gross negligence, recklessness or malfeasance in the performance of his duties
which results in material financial injury to the Company, (ii) the Executive
committing any act or acts of fraud, theft or embezzlement, which, if convicted,
would constitute a felony and which results or intends to result directly or
indirectly in gain or personal enrichment of the Executive at the expense of the
Company or (iii) the Executive willfully engaging in any conduct relating to the
business of the Company that could reasonably be expected to have a materially
detrimental effect on the business or financial condition of the Company;
provided that the Company must give the Executive written notice of its intent
to terminate the Executive with Cause and the Executive shall have thirty (30)
days from the date of the notice to cure the deficiency.
For purposes of this Agreement, "Good Reason" shall mean (i) the assignment
to the Executive of duties and responsibilities not commensurate with his status
as Vice President and Chief Financial Officer of the Company and a member of the
Board of Directors or the diminution of the Executive's duties, change in the
Executive's title or status or removal from or failure to re-elect the Executive
as a member of the Board (except in conjunction with a termination for Cause),
(ii) the failure of the Company to provide compensation and benefits to the
Executive at the levels required by this Agreement, or (iii) the failure of the
Company to adhere in any substantial manner to any of its covenants contained in
this Agreement. Termination of the Executive's employment by the Executive
following a Change of Control (a sale of more than fifty percent (50%) of the
shares of Common Stock or sale of all or substantially all of the assets of the
Company), will be deemed a Good Reason termination.
4.4 Termination with Cause or without Good Reason. The Company may
terminate the Executive's employment with Cause (subject to the cure period set
forth above) and the Executive may terminate employment without Good Reason at
any time without notice. Upon a termination by the Company with Cause or by the
Executive without Good Reason, the Executive shall receive (i) a pro rata
portion of (A) Base Salary and (B) the bonus pursuant to Section 3.2 hereof for
the year of the Executive's termination, based on the period of employment prior
to the date of termination, (ii) all previously earned and accrued entitlements
under any benefit plan of or other arrangement with the Company, (iii)
reimbursement for all business expenses accrued to the date of termination, (iv)
all vested options shall remain exercisable until the expiration of the Option
Term, (v) payment for all accrued but unused vacation and (vi) at the election
of the Executive (or his legal representative, if applicable), the Company shall
transfer to the Executive the Additional Life Insurance Policy.
Registration Rights.
-------------------
5.1 Piggyback Registration Rights. If, at any time after the date hereof,
the Company shall file a registration statement under the Securities Act of
1933, as amended (the "Act") with the Securities and Exchange Commission (the
"SEC") covering shares of capital stock of the Company while any Registrable
Securities (as defined in the last sentence of this paragraph 5.1) shall be
outstanding, the Company shall give the Executive 30 days' prior written notice
of the filing of such registration statement. If requested by the Executive, in
writing, within 10 days after the date of any such notice, the Company shall, at
the Company's sole expense (other than the fees and disbursements of counsel for
the Executive and any underwriting discounts or commissions payable in respect
of the Registrable Securities sold by Executive), include in such registration
statement all or any portion of the Registrable Securities of Executive and any
of his affiliates, all to the extent required to permit the public offering and
sale of the Registrable Securities through the facilities of all appropriate
securities exchanges and the over-the-counter market, and will use its
reasonable best efforts through its officers, directors, auditors and counsel to
cause such registration statement to become effective as promptly as
practicable. Notwithstanding the foregoing, if the managing underwriter of any
such offering shall advise the Company that, in its opinion, the registration of
all or a portion of the Registrable Securities requested to be included in the
registration would materially adversely affect the distribution of such
securities by the Company, then the Company shall be required to include in the
registration only that number of Registrable Securities which the Company or the
managing underwriter believe will not jeopardize the success of the offering and
the number of shares of Common Stock otherwise to be included in the
registration statement shall be reduced as follows: (v) there shall be first
excluded shares of Common Stock proposed to be included by other shareholders
not possessing contractual rights to include the same and (vi) any further
reduction shall be first in accordance with the contractual priorities among all
other shareholders (having such contractual rights) requesting inclusion of
their Common Stock in such registration, including the Executive, and shall be
second reduced pro rata among all other shareholders in the proportion of the
number of shares of Common Stock submitted for registration by each such
shareholder. As used herein, "Registrable Securities" shall mean the shares of
Common Stock owned by the Executive or any affiliates of the Executive, which
have not been previously sold pursuant to a registration statement and which are
otherwise, at the time a request for registration is made, not able to be sold
pursuant to Rule 144 promulgated under the Act.
5.2 Demand Registration Rights. Upon receipt of a written request from
Executive, the Company shall, as promptly as practicable, prepare and file a
registration statement under the Act with the SEC sufficient to permit the
public offering and sale of the Registrable Securities through the facilities of
all appropriate securities exchanges and the over-the-counter market, and will
use its reasonable best efforts through its officers, directors, auditors and
counsel to cause such registration statement to become effective as promptly as
practicable.
5.3 Blue Sky Limitations. In the event of a registration pursuant to the
provisions of this Section 5, the Company shall use its reasonable best efforts
to cause the Registrable Securities so registered to be registered or qualified
for sale under the securities or blue sky laws of such jurisdictions as the
Executive may reasonably request; provided, however, that the Company shall not
by reason of this Section 5.3 be required to qualify to do business, or to
subject itself to taxation, or to file a general consent to service of process
in any jurisdiction.
5.4 Duration. The Company shall keep effective any registration or
qualification contemplated by this Section 5 at all times thereafter and shall
from time to time amend or supplement each applicable registration statement,
preliminary prospectus, final prospectus, application, document, and
communication for such period of time as shall be required to permit the
Executive to complete the offer and sale of the Registrable Securities covered
thereby or until the date on which all Registrable Securities can be sold
pursuant to Rule 144 under the Act.
5.5 Survival. Notwithstanding anything herein to the contrary the terms of
this Section 5 shall survive the termination of the Executive's employment with
the Company and shall survive for so long as Executive owns Registrable
Securities.
6. Other Provisions.
6.1. Notices. Any notice or other communication required or which may be
given hereunder shall be in writing and shall be delivered personally,
telegraphed, telexed, sent by facsimile transmission or sent by certified,
registered or express mail, postage prepaid, and shall be deemed given when so
delivered personally, telegraphed, telexed, or sent by facsimile transmission
or, if mailed, four (4) days after the date of mailing, as follows:
(a) If the Company, to:
Dynacore Holdings Corporation
717 Fifth Avenue, 15th Floor
New York, New York 10022
Attention: Asher B. Edelman
Telephone: (212) 371-7711
Fax: (212) 223-0006
With a copy to:
Pryor Cashman Sherman & Flynn LLP
410 Park Avenue
New York, New York 10022
Attention: Selig D. Sacks, Esq.
Telephone: (212) 326-0879
Fax: (212) 326-0806
(b) If to the Executive, to his home address set
forth in the records of the Company.
6.2 Entire Agreement. This Agreement contains the entire agreement between
the parties with respect to the subject matter hereof and supersedes all prior
agreements, written or oral, with respect thereto.
6.3 Waiver and Amendments. This Agreement may be amended, modified,
superseded, canceled, renewed or extended, and the terms and conditions hereof
may be waived, only by a written instrument signed by the parties or, in the
case of a waiver, by the party waiving compliance. No delay on the part of any
party in exercising any right, power or privilege hereunder shall operate as a
waiver thereof, nor shall any waiver on the part of any right, power or
privilege hereunder, nor any single or partial exercise of any right, power or
privilege hereunder, preclude any other or further exercise thereof or the
exercise of any other right, power or privilege hereunder.
6.4 Governing Law. This Agreement shall be governed and construed in
accordance with the laws of the State of New York applicable to agreements made
and to be performed entirely within such state, without regard to conflicts of
laws principles.
6.5 Dispute Resolution. The Company and Executive agree to arbitrate any
controversy or claim arising out of this Agreement or otherwise relating to
Executive's employment by the Company during the Term or Executive's termination
of such employment prior to or as of the end of the Term. Any such controversy
or claim shall be resolved in binding arbitration in a proceeding administered
by and under the National Rules for the Resolution of Employment Disputes of the
American Arbitration Association, in the American Arbitration Association office
located in New York City. Except as otherwise provided under Section 6.9 hereof,
the arbitrator shall not have authority to modify or change any of the terms of
this Agreement. Both parties and the arbitrator will treat the arbitration
process and the activities which occur in the proceedings as confidential. The
decision of the arbitrator shall be rendered in writing, shall be final and may
be entered as a judgment in any federal or state court in New York County.
6.6 Assignability. This Agreement, and the Executive's rights and
obligations hereunder, may not be assigned by the Executive. The Company may
assign this Agreement and its rights, together with its obligations, to any
other entity which will substantially carry on the business of the Company.
6.7 Counterparts. This Agreement may be executed in two (2) or more
counterparts, each of which shall be deemed an original but all of which shall
constitute one and the same instrument, and it shall not be necessary in making
proof of this Agreement to produce or account for more than one such
counterpart.
6.8 Headings. The headings in this Agreement are for convenience of
reference only and shall not limit or otherwise affect the meaning of
terms contained herein.
6.9 Severability. If any term, provision, covenant or restriction of this
Agreement, or any part thereof, is held by a court of competent jurisdiction of
any foreign, federal, state, county or local government or any other
governmental, regulatory or administrative agency, arbitrator or authority to be
invalid, void, unenforceable or against public policy for any reason, the
remainder of the terms, provisions, covenants and restrictions of this Agreement
shall remain in full force and effect and shall in no way be affected or
impaired or invalidated.
IN WITNESS WHEREOF, the parties hereto, intending to be legally bound
hereby, have executed this Agreement as of the day and year first above
mentioned.
EXECUTIVE
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Phillip P. Krumb
DYNACORE HOLDINGS CORP.
By:
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Name:
Title: