SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[ X ] Quarterly Report Pursuant To Section 13 Or 15(d) Of The Securities
Exchange Act Of 1934 For the quarterly period ended June 30, 2001
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
(formerly 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) 614-3484
(Registrant's telephone number, including area code)
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___.
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 June 30, 2001, 10,000,000 shares of Dynacore Holdings Corporation
Common Stock were outstanding.
DYNACORE HOLDINGS CORPORATION AND SUBSIDIARIES
INDEX
Page
Number
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets -
June 30, 2001 and December 31, 2000 3
Consolidated Statements of Operations -
Quarter and Six Months Ended June 30, 2001 and 2000 4
Consolidated Statements of Cash Flows -
Six Months Ended June 30, 2001 and 2000 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Part II. Other Information
Item 1. Legal Proceedings 17
Item 6. Exhibits and Reports on Form 8-K 17
Signature 18
---------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED BALANCE SHEETS
Dynacore Holdings Corporation and Subsidiaries
(In thousands, except share data)
------------------------------------------------------------------------------------------------------------
(unaudited)
June 30, 2001 Dec. 31, 2000
------------- -------------
Assets
Current assets:
Cash and cash equivalents $3,554 $7,304
Restricted cash and cash equivalents -- 317
Investment in limited partnership 1,300 --
Accounts receivable, net 329 359
Prepaid expenses and other current assets 47 309
-------------------------------------------------------------------------------------------------------
Total current assets 5,230 8,289
Fixed assets, net 59 102
Other assets, net 614 535
Reorganization value in excess of amounts allocable to identifiable assets 3,507 3,768
----------------------------------------------------------------------------------------------------------
$9,410 $12,694
==========================================================================================================
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Accounts payable $7 $297
Accrued expenses 407 1,616
----------------------------------------------------------------------------------------------------------
Total current liabilities 414 1,913
Accrued pension and post employment liabilities 2,924 3,192
Deferred federal income tax 400 400
Stockholders' equity:
Common stock of $0.01 par value. Shares authorized 30,000,000;
shares issued 10,000,000. 100 100
Paid in capital 7,400 7,400
Retained equity (deficit) (1,828) (311)
-----------------------------------------------------------------------------------------------------------
Total stockholders' equity 5,672 7,189
----------------------------------------------------------------------------------------------------------
$9,410 $12,694
==========================================================================================================
See accompanying Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF OPERATIONS
Dynacore Holdings Corporation and Subsidiaries
(Unaudited)
--------------------------------------------------------------------------------------------------------------------------
(In thousands, except share data)
--------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------
Quarter Ended Six Months Ended
--------------------------------------------------------------------------------------------------------------------------
(Successor) (Predecessor) (Successor) (Predecessor)
June 30, 2001 June 30, 2000 June 30, 2001 June 30, 2000
------------- ------------- ------------- -------------
Revenue:
Sales $-- $21,028 $-- $37,799
Service and other -- 12,217 9 25,126
-------------------------------------------------------------------------------------------------------------------------
Total revenue -- 33,245 9 62,925
Operating costs and expenses:
Cost of sales -- 16,268 -- 28,817
Cost of service and other -- 9,636 -- 19,502
Research and development -- 242 -- 491
Selling, general and administrative 899 7,862 1,550 15,576
Patent Litigation Trust expenses 82 -- 82
Restructuring costs 110 -- 210 --
--------------------------------------------------------------------------------------------------------------------------
Total operating costs and expenses 1,091 34,008 1,842 64,386
--------------------------------------------------------------------------------------------------------------------------
Operating loss (1,091) (763) (1,833) (1,461)
Non-operating income (expense):
Interest expense -- (302) -- (1,993)
Equity in loss of limited partnership (200) -- (200) --
Other, net 154 (662) 517 210
Reorganization items:
Gain on sale of European Operations -- 49,164 -- 49,164
---------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes (1,137) 47,437 (1,516) 45,920
Income tax benefit -- (703) -- (1,712)
--------------------------------------------------------------------------------------------------------------------------
Net income (loss) $(1,137) $48,140 $(1,516) $47,632
==========================================================================================================================
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 $(1,137) $48,026 (1,516) $47,411
===========================================================================================================================
Basic Earnings (Loss) Per Common Share:
Net income (loss) per common share $(.11) $11.57 $(.15) $11.43
Gain on exchange of preferred stock -- .01 -- .02
---------------------------------------------------------------------------------------------------------------------------
Net income (loss) per common share $(.11) $11.58 $(.15) $11.45
===========================================================================================================================
Diluted Earnings (Loss) Per Common Share:
Net income (loss) per common share $(.11) $9.49 $(.15) $9.64
Gain on exchange of preferred stock -- .01 -- .02
---------------------------------------------------------------------------------------------------------------------------
Net income (loss) per common share $(.11) $9.50 $(.15) $9.66
===========================================================================================================================
Average Common Shares Outstanding:
Basic 10,000,000 4,147,171 10,000,000 4,141,830
Diluted 10,000,000 5,119,573 10,000,000 5,114,231
See accompanying Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Dynacore Holdings Corporation and Subsidiaries
(Unaudited)
(In Thousands)
------------------------------------------------------------------------------------------------------------
Six Months Ended
----------------------------
(Successor) (Predecessor)
June 30, 2001 June 30, 2000
------------- ---------
Cash flows from operating activities:
Net income (loss) $(1,516) $47,632
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 64 785
Amortization of reorganized value in excess of amounts allocable to
identifiable assets 121 --
Loss in equity of investee 200 --
Provisions for accounts receivable -- 35
Deferred income taxes -- 116
Gain on sale of European Operations -- (49,164)
Changes in assets and liabilities:
(Increase) decrease in receivables 29 (5,050)
(Increase) decrease in inventory -- (53)
Increase (decrease) in accounts payable and accrued expenses (1,182) 14,572
Increase (decrease) in other liabilities and deferred credits -- (2,308)
Other, net 10 (1,827)
-----------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities (2,274) 4,738
Cash flows from investing activities:
Payments for fixed assets -- (1,513)
Proceeds from sale of fixed assets 24 --
Investment in limited partnership (1,500) --
Other, net -- 153
-------------------------------------------------------------------------------------------------------
Net cash used in investing activities (1,476) (1,360)
Cash flows from financing activities:
Proceeds from borrowings -- 46,902
Payments on borrowings -- (50,450)
Restricted cash for letters of credit -- 298
-------------------------------------------------------------------------------------------------------
Net cash used in financing activities -- (3,250)
Cash retained by European subsidiaries -- (1,819)
-----------------------------------------------------------------------------------------------------------
Effect of foreign currency translation on cash -- (140)
-----------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (3,750) (1,831)
Cash and cash equivalents at beginning of period 7,304 2,089
----------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $3,554 $258
====== ====
Cash payments for:
Interest $-- $341
Income taxes, net $-- $258
Non-cash investing activities:
Receivable from sale of European Operations, net of amounts held in escrow $-- $43,500
See accompanying Notes to Consolidated Financial Statements.
DYNACORE HOLDINGS CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In thousands, except per share data)
(Unaudited)
1. Basis of Presentation
In June 2000, Dynacore Holdings Corporation (the "Company") (formerly
Datapoint Corporation), elected to change its fiscal year from a July year end
to a calendar year end, effective January 1, 2000. The transition period was 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 are for the
fiscal year ended July 31, 1999.
It is recommended that these statements be read in conjunction with the
financial statements and notes thereto included in the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 2000.
The accompanying unaudited consolidated financial statements have been prepared
by Dynacore Holdings Corporation in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, the information furnished reflects all adjustments which are
necessary for a fair statement of the results of the interim periods presented.
All adjustments made in the interim statements are of a normal recurring nature.
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 these estimates.
The results for the quarter and six months ended June 30, 2001, are not
necessarily indicative of the results to be expected for the full year.
2. Sale of European Operations
The Company entered into a Letter of Intent, dated January 26, 2000, with the
European based CallCentric Ltd. ("CallCentric") to sell certain of its European
based subsidiaries (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, as more fully described below, the Company
sold (the "Sale") its European Operations to Datapoint Newco I 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 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 United States Bankruptcy Court (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.
3. Reorganization Plan
Reorganization Under Chapter 11
On May 3, 2000 (the "Petition Date"), 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 then outstanding 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 were
prepared in conformity with principles of accounting applicable to a going
concern and reflect all adjustments relating to settlement of the claims of any
class of creditors that were 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. For both the quarter and six months ended June 30, 2001, the amount
of such loan is $82 thousand. The Patent Litigation Trust is accounted for as
a consolidated subsidiary of the Company. As such, the loan amount is
eliminated in consolidation and the Patent Litigation Trust expenses of $82
thousand are included in the Company's Consolidated Statements of Operations.
None of the Patent Litigation Trust expenses have been allocated to the 43.5%
minority interest because the minority interest has no obligation to fund
cumulative losses of the Patent Litigation Trust. Future income of the Patent
Litigation Trust, if any, will be allocated entirely to the Company until the
loan and interest have been fully recovered.
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 prepared
a 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. The accumulated
deficit of the Company was eliminated and its capital structure was recast in
conformity with the Plan. As such, the accompanying consolidated balance sheet
at June 30, 2001, represents that of a successor company.
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. After
the revaluation of the reorganized Company was completed, an intangible asset of
$3,775 reflecting the reorganization value in excess of identifiable assets was
established, which is being amortized on a straight-line basis over 15 years.
Under the recently issued Statement of Financial Accounting No. 142 -Goodwill
and Other Intangible Assets, amortization of the reorganization value in excess
of identifiable assets will cease on January 1, 2002. Subsequently, the value
will be subjected to periodic impairment testing and will be reduced through a
charge to income or loss if there is insufficient future value to support its
carrying amount. During the first quarter ended March 31, 2001, a favorable
settlement of certain contested bankruptcy claims existing at the Fresh Start
date resulted in a gain of $140. This gain of $140 was applied directly to the
intangible asset. Therefore at June 30, 2001, the intangible asset was $3,635
less accumulated amortization of $128 resulting in a net balance of $3,507.
4. Investment in Limited Partnership
On May 1, 2001, the Company, with the approval of its Board of Directors, agreed
to become a Limited Partner of a partnership (the "Partnership"), of which Asher
B. Edelman & Associates, LLC ("Edelman & Associates") is the General Partner for
an initial investment of $1.5 million. Edelman & Associates is an entity
controlled by Asher B. Edelman, who is Dynacore's Chairman of the Board and
Chief Executive Officer and of which Gerald N. Agranoff, Dynacore's Vice
Chairman of the Board, Chief Operating Officer and Acting President, is a
member. The primary purpose of the Partnership is to acquire by open market
purchase, privately negotiated purchase or otherwise, securities of a specific
publicly traded company in the natural resource industry. Edelman & Associates
has expressly waived all management and incentive fees associated with the
Company's investment which would ordinarily be payable by an investor in this
Partnership. As of June 30, 2001, based upon the closing prices of the
securities as of that date, the Partnership had approximately $3.2 million of
assets and approximately $0.9 of liabilities for a net asset value of
approximately $2.3 million. The Company's ownership interest in the Partnership
approximated 56% and the Company's share of the Partnership's capital was
approximately $1.3 million. As an investment partnership, the Partnership
accounts for its investments in the publicly traded securities at fair value.
Changes in the fair value of the Partnership's securities are reflected in the
partnership's net income for the period. The Company carries its investment in
the Partnership on the equity method. Under the equity method, the Company's
allocable share of the earnings and losses of the Partnership is included in the
determination of the Company's net income. The Company's approximate $200,000
share of the Partnership's loss for the quarter ended June 30, 2001 is included
in non-operating income/(expense) on the statement of operations. This
investment is reflected as a short term investment as the Company intends to
liquidate this investment, as permitted by the Partnership agreement, prior to
the end of the fourth quarter of 2001.
5. Commitments and 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.
6. Net Income (Loss) Applicable to Common Share
Net income (loss) applicable to common share is as follows. 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.
Quarter Ended
-------------
(Successor) (Predecessor)
06/30/01 06/30/00
Income Shares EPS Income Shares EPS
------------------------------------------------------------------ -------------------------
Income (loss) before extraordinary credit $(1,137) $48,140
Preferred stock dividends accumulated -- (160)
Gain on the exchange and retirement of
preferred stock -- 46
-------------------------------------------------------------------------------------------------
Basic EPS $(1,137) 10,000 $(.11) $48,026 4,147 $11.58
------------------------------------------------------------------ ---------------------------
Dilutives:
Convertible preferred stock 160 289 (.75)
Convertible debentures 428 683 (1.33)
--------------------------------------------------------------------------------------------------
Diluted EPS $(1,137) 10,000 $(.11) $48,614 5,119 $9.50
--------------------------------------------------------------------------------------------------
Six Months Ended
----------------
(Successor) (Predecessor)
06/30/01 06/30/00
Income Shares EPS Income Shares EPS
------------------------------------------------------------------ -------------------------
Income (loss) before extraordinary credit $(1,516) $47,632
Preferred stock dividends accumulated -- (321)
Gain on the exchange and retirement of
preferred stock 100
-------------------------------------------------------------------------------------------------
Basic EPS $(1,516) 10,000 $(.15) $47,411 4,142 $11.45
------------------------------------------------------------------ ---------------------------
Dilutives:
Convertible preferred stock 321 289 (.70)
Convertible debentures 1,643 683 (1.09)
----- --- -----
Diluted EPS $(1,516) 10,000 $(.15) $49,375 5,114 $9.66
======= ====== ===== ======= ===== =====
The EPS computations for the quarter and six months ended June 30, 2001
and 2000, respectively, exclude the following shares for stock options,
because their effect would have been antidilutive:
Quarter Ended Six Months Ended
------------- ----------------
(Successor) (Predecessor) (Successor) (Predecessor)
06/30/01 06/30/00 06/30/01 06/30/00
-------- -------- -------- --------
Stock options 750 796 750 796
7. Other Non-operating Income (Expense)
Quarter Ended Six Months Ended
-------------- ----------------
(Successor) (Predecessor) (Successor) (Predecessor)
(In thousands) 06/30/01 06/30/00 06/30/01 06/30/00
-------- -------- -------- --------
Interest earned $53 $-- $234 $210
Foreign currency gains (losses) 101 (151) 283 120
Equity in loss of limited partnership (200) -- (200) --
Other -- (511) -- (120)
-- ----- -- -----
$(46) $(662) $317 $210
===== ====== ==== ====
8. Operating Segments
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.
Following the sale of the Company's European Operations, there are no longer any
reportable separate segments.
9. Acquisitions
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
then 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 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.
The Company's results of operations for the quarter and six month period ended
June 30, 2001 includes revenue of approximately $0 and $9, respectively and
expenses of approximately $21 and $199, respectively (including approximately
$90 of severance paid during the quarter ended March 31, 2001) related to the
Corebyte operations.
10. 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 $284, which represents the present value of the
estimated payments at a discount rate of 12.5% per annum. The remaining $21
receivable from Vugate represents rental and related charges to Vugate as a
sub-tenant of the Company's San Antonio facility. An additional $24 is
receivable from other parties.
11. Accrued Expenses
June 30, 2001 Dec. 31, 2000
-----------------------------------------------------------------------------
Salaries, commissions, bonuses and other benefits $30 $370
Accrued professional fees-bankruptcy & sale
of European Operations 19 680
Other 358 566
-----------------------------------------------------------------------------
$407 $1,616
=============================================================================
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
(For the Quarter and Six Months Ended June 30, 2001 and 2000)
Overview
The operations of Dynacore for the quarter and six month period ended June 30,
2001 (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. In
addition, the financial data for the quarter and six-month period ended June 30,
2001 reflects the adoption of Fresh Start Accounting on December 18, 2000, the
Effective Date of the approved Plan.
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. 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. Accordingly, the accompanying financial
data for the quarter and six-month period ended June 30, 2001 represents that of
a successor company and as such, is not comparable to prior periods.
Since the confirmation of the Company's Amended Plan of Reorganization (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.
Although 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, the
Company has received expressions of interest regarding such a possibility from
several businesses. After preliminary due diligence was conducted in this
regard, formal presentations from two of these businesses were made to the
Company's Board of Directors. Upon careful consideration, the Company's Board of
Directors concluded that neither opportunity was in the best interests of the
Company and its shareholders, and therefore terminated any further discussions
with these businesses. The Company's executive management also reviewed a third
business opportunity. However, after the completion of preliminary due
diligence, both parties could not agree upon a proposal to enter into serious
negotiations. The Company is however, actively pursuing additional opportunities
for an acquisition or merger transaction.
Since the sale of its European Operations, 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 and a
limited Partnership (as more fully described below) 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,
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.
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
During the quarter ended June 30, 2001, the Company and the Dynacore Patent
Litigation Trust filed suit in the Southern District of New York against U.S.
Philips Corporation, STMicroelectronics, Inc., Compaq Computer Corporation,
Hewlett-Packard Corporation, Epson America, Inc., Fujitsu America, Inc.,
Matsushita Electric Corporation of America, Texas Instruments Incorporated,
Eastman Kodak Company, Dell Computer Corporation, Dell Marketing Corporation,
Gateway, Inc., Motorola, Inc., Apple Computer, Inc., and NEC Computers, Inc. for
patent infringement regarding United States Patent No. 5,077,732. This patent
incorporates into a single network multiple different operational capabilities
and a method of communicating information between at least three devices. The
suit alleges that The Institute of Electrical and Electronic Engineers ("IEEE")
standard for the computer and electronics industry known as 1394 utilizes
technology that falls within the scope of the subject matter of the `732 Patent.
Any recovery by way of judgment or settlement will be received, net of expenses,
by the Dynacore Patent Litigation Trust. Dynacore Holdings Corporation holds
56.5% of the Dynacore Patent Litigation Trust interests. The balance of the
interests were distributed to former unsecured creditors and preferred
shareholders of the Company when it emerged from bankruptcy proceedings in
December 2000.
As 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 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. No. CV 96 4534;
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(3) Datapoint Corporation* v. Dayna Communications, Inc., Sun
Microsystems, Inc., Adaptec, Inc. International Business Machines
Corp., Lantronix, SVEC America Computer Corporation, and Nbase
Communications, No. CV 96 6334; and
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(4) Datapoint Corporation* v. Standard Microsystems Corp. and Intel
Corp., 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 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 certificate for one of the patents has been issued upon
re-examination. The other patent, after appeal in re-examination, has been
allowed, but has not yet been certified. The appeal has been stayed pending the
complete outcome 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.
Results of Operations
On June 30, 2000, the Company sold its European Operations, which constituted
substantially all of the Company's operations. As such, the results of
operations for the quarter and six-month period ended June 30, 2000 included the
performance of these operations and therefore are not comparable to the quarter
and six-month period ended June 30, 2001.
The following is a summary of the Company's sources of revenue (prior to the
consummation of the Sale, approximately 99 percent of Dynacore's international
revenue was derived from customers in Western Europe):
Quarter Ended Six Months Ended
-------------- ----------------
(Successor) (Predecessor) (Successor) (Predecessor)
(In thousands) 06/30/01 06/30/00 06/30/01 06/30/00
-------- -------- -------- --------
Sales:
U.S. $-- $54 $-- $83
Foreign -- 20,974 -- 37,716
------ ------
-- 21,028 -- 37,799
Service and other:
U.S. -- 134 9 $344
Foreign -- 12,083 -- 24,782
------ ------
-- 12,217 9 25,126
------ ------
Total revenue $-- $33,245 $9 $62,925
=== ======= == =======
For the quarter and six-month period ended June 30, 2001, the Company reported a
net loss of $1,137 and $1,516, respectively. For the same periods, the Company
reported an operating loss of $1,091 and $1,833, respectively, which included
approximately $110, and $210, respectively of severance expenses related to the
termination of seven employees of the Company's Corebyte subsidiary and one
employee of the Company during the quarter ended March 31,2001 and four
employees of the Company during the quarter ended June 30, 2001.
Non operating income/(loss) for the quarter and six month period ended June 30,
2001, was approximately $(46) and $317, respectively, and consisted of interest
income of $53 and $234, respectively, and a foreign currency transaction gain of
$101 and $283, respectively, primarily related to the liability for the pension
benefits and other post employment obligations for all employees of the
Company's German subsidiary who did not transfer to DNL at the time of the Sale.
Also included was a loss of $200, for the quarter and six months ended June 30,
2001, representing the equity in loss of a limited partnership.
For the quarter and six month period ended June 30, 2000, the Company reported
operating losses of $763 and $1.5 million, respectively and net income of $48.1
million and $47.6 million, respectively. Substantially all of the Company's
revenue of $33.2 million and $62.9 million, respectively, recorded for the
quarter and six-month period ended June 30, 2000, related to the Company's
European Operations.
Financial Condition
During the first six months of 2001, the Company's cash and cash equivalents
decreased approximately $3.8 million. Primarily, this decrease was the result of
the payment of the Company's current operating expenses for the first six months
of 2001, the $1.5 million investment described below and payment during the
first six months of 2001 of certain liabilities related to the finalization of
the Company's "Plan".
On May 1, 2001, the Company, with the approval of its Board of Directors,
agreed to become a Limited Partner of a partnership (the "Partnership"), of
which Asher B. Edelman & Associates, LLC ("Edelman & Associates") is the General
Partner for an initial investment of $1.5 million. Edelman & Associates is an
entity controlled by Asher B. Edelman, who is Dynacore's Chairman of the Board
and Chief Executive Officer and of which Gerald N. Agranoff, Dynacore's Vice
Chairman of the Board, Chief Operating Officer and Acting President, is a
member. The primary purpose of the Partnership is to acquire by open market
purchase, privately negotiated purchase or otherwise, securities of a specific
publicly traded company in the natural resource industry. Edelman & Associates
has expressly waived all management and incentive fees associated with the
Company's investment which would ordinarily be payable by an investor in this
Partnership. As of June 30, 2001, based upon the closing prices of the
securities as of that date, the Partnership had approximately $3.2 million of
assets and approximately $0.9 of liabilities for a net asset value of
approximately $2.3 million. The Company's ownership interest in the Partnership
approximated 56% and the Company's share of the Partnership's capital was
approximately $1.3 million. As an investment partnership, the Partnership
accounts for its investments in the publicly traded securities at fair value.
Changes in the fair value of the Partnership's securities are reflected in the
partnership's net income for the period. The Company carries its investment in
the Partnership on the equity method. Under the equity method, the Company's
allocable share of the earnings and losses of the Partnership is included in the
determination of the Company's net income. The Company's approximate $200,000
share of the Partnership's loss for the quarter ended June 30, 2001 is included
in non-operating income/(expense) on the statement of operations. This
investment is reflected as a short term investment as the Company intends to
liquidate this investment, as permitted by the Partnership agreement, prior to
the end of the fourth quarter of 2001.
As of June 30, 2001, the Company had cash and cash equivalents of approximately
$3.6 million, which the Company believes is sufficient to meet its cash
requirements for 2001.
Restructuring Costs
(In thousands)
During the quarter and six months ended June 30, 2001, the Company incurred
restructuring costs for employee termination costs of $110 and $210,
respectively. These costs related primarily to the termination of seven
employees of the Company's Corebyte subsidiary and one employee of the Company
during the quarter ended March 31, 2001 and four employees of the Company during
the quarter ended June 30, 2001. Of such four former employees, three still
provide services on an as needed basis to the Company. At June 30, 2001, accrued
but unpaid restructuring costs were approximately $28. Such costs are expected
to be paid during the third quarter of 2001. During the quarter and six months
ended June 30, 2000, the Company did not incur any restructuring costs.
Restructuring charges are not recorded until specific employees are determined
(and notified of termination) by management in accordance with its overall
restructuring plan.
Cautionary Statement Regarding Risks and Uncertainties That May Affect
Future Results
This Quarterly Report on Form 10-Q 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, actions which may be taken by trade creditors of
the Company or holders of the Company's Debentures, changes in product demand,
the availability of products, changes in competition, economic conditions, new
product development, 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 Quarterly Report on Form 10-Q, 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 3. Quantitative and Qualitative Disclosures About Market Risk
Information concerning market risk is contained on page 16 of the Registrant's
Annual Report on Form 10-K for the year ended December 31, 2000 and is
incorporated by reference to such annual report.
On May 1, 2001, the Company, with the approval of its Board of Directors, agreed
to become a Limited Partner of a partnership (the "Partnership"), of which Asher
B. Edelman & Associates, LLC ("Edelman & Associates") is the General Partner for
an initial investment of $1.5 million. Edelman & Associates is an entity
controlled by Asher B. Edelman, who is Dynacore's Chairman of the Board and
Chief Executive Officer and of which Gerald N. Agranoff, Dynacore's Vice
Chairman of the Board, Chief Operating Officer and Acting President, is a
member. The primary purpose of the Partnership is to acquire by open market
purchase, privately negotiated purchase or otherwise, securities of a specific
publicly traded company in the natural resource industry. Edelman & Associates
has expressly waived all management and incentive fees associated with the
Company's investment which would ordinarily be payable by an investor in this
Partnership. As of June 30, 2001, based upon the closing prices of the
securities as of that date, the Partnership had approximately $3.2 million of
assets and approximately $0.9 of liabilities for a net asset value of
approximately $2.3 million. The Company's ownership interest in the Partnership
approximated 56% and the Company's share of the Partnership's capital was
approximately $1.3 million. As an investment partnership, the Partnership
accounts for its investments in the publicly traded securities at fair value.
Changes in the fair value of the Partnership's securities are reflected in the
partnership's net income for the period. The Company carries its investment in
the Partnership on the equity method. Under the equity method, the Company's
allocable share of the earnings and losses of the Partnership is included in the
determination of the Company's net income. The Company's approximate $200,000
share of the Partnership's loss for the quarter ended June 30, 2001 is included
in non-operating income/(expense) on the statement of operations. This
investment is reflected as a short term investment as the Company intends to
liquidate this investment, as permitted by the Partnership agreement, prior to
the end of the fourth quarter of 2001.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
See Item 3 of Registrant's Report on Form 10-K for the fiscal year ended
December 31, 2000, for a description of certain legal proceedings heretofore
reported.
The Company is a Plaintiff in a number of actions related to its patents and
trademarks, which are more fully described in the Management's Discussion and
Analysis overview section of this Form 10Q.
Item 6. Exhibits and Reports on Form 8-K
There were no reports on Form 8-K that were filed during the quarter ended June
30, 2001.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DYNACORE HOLDINGS CORPORATION
(Registrant)
DATE: August 8, 2001 /s/ Phillip P. Krumb
-----------------------------
Phillip P. Krumb
Chief Financial Officer
(Chief Accounting Officer)