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, 2001
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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)
9901 IH 10 West, Suite 800; San Antonio, Texas 78230-2292
(Address of principal executive office and zip code)
(210) 558-2898
(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
---------------------- -----------------------------------------------
Common Stock, $.01 par value National Association of Securities Dealers'
Over-the Counter Bulletin Board
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 7, 2002, 9,984,726 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 $1.5 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.
2001 in Summary
Since its successful emergence from Chapter 11 bankruptcy in December 2000,
Dynacore Holdings Corporation, formerly known as Datapoint Corporation
(hereinafter "Dynacore" or the "Company"), has been concentrating its efforts
and resources in four primary areas:
1. Continuation of its Patent Management Activities,
2. Continuation of its Search for a Merger or Acquisition Transaction,
3. Continuation of its Evaluation of Current Operations and Cost Control, and
4. Liquidity.
Continuation of its Patent Management Activities
During the second quarter of 2001, the Company and the Dynacore Patent
Litigation Trust, established pursuant to the Patent Litigation Trust Agreement,
by and among the Company and the Patent Litigation Trust Trustees (as defined
therein), dated December 18, 2000, 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 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. Although this action was initially stayed, the stay has been
vacated and the action is proceeding (see "Patents and Trademarks" below for
more extensive discussion of the patents and patent litigations).
Continuation of its Search for a Merger or Acquisition Transaction
Since the sale of its European operations in June 2000 and the termination
of the Company's Corebyte operations during the third quarter of 2001, the
Company has been actively seeking a merger or acquisition partner with revenue
producing operations or cash infusion opportunities to support pre-revenue
research and development activities. 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. In addition, the Company has
conducted preliminary due diligence in this regard and formal presentations were
made to the Company's Board of Directors in connection with some of these
businesses. However, to date, the Company's Board of Directors and/or executive
management have concluded that the opportunities presented were not in the best
interests of the Company and its shareholders, and therefore terminated any
further discussions with these businesses. Currently, the Company is evaluating
the possibility of entering into serious negotiations and due diligence with an
additional company. Concurrently, the Company is continuing to pursue additional
opportunities for an acquisition or merger transaction.
Continuation of its Evaluation of Current Operations and Cost Control
In January 2001, the Company began a thorough evaluation of the Corebyte
operations, prospects, and strategic options given the lack of a significant
revenue stream resulting from longer than anticipated software development and
marketing efforts and the availability of similar Internet applications in the
marketplace. During its subsequent evaluation, which included the exploration
and discussions with various parties for alternative uses and markets for the
Corebyte developed source code and underlying technologies, the Company
significantly restructured and curtailed Corebyte's day-to-day operations, to
include the elimination of its Web hosting services to third parties. During the
third quarter of 2001, the Company concluded that the Corebyte operation was no
longer a viable and profitable opportunity for the Company and therefore
completely discontinued operations.
The Company maintains a leased office facility in Paris, France, which
served as the Company's European headquarters for the Company's former European
Operations. Since the Company sold its European Operations in June 2000, the
Company intends to dissolve the European Headquarters entity and exercise its
early cancellation option on the leased facility in June 2002.
For the year ended December 31, 2001, the Company incurred restructuring
costs for employee terminations and the Paris facility closing costs of $233
thousand. Of this amount, $183 thousand related to the termination of seven
employees of the Company's Corebyte subsidiary, 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.
Liquidity
As of December 31, 2001, the Company had cash and cash equivalents of
approximately $2.6 million. In addition, the Company has approximately $593
thousand invested in a limited partnership as more fully described in Footnote 4
to the Consolidated Financial Statements. Since the Effective Date, the
Company's management team has undertaken efforts to identify and evaluate
successor business opportunities. The Company believes that given its current
and forecasted cash requirements for the next twelve months of approximately
$1.7 million to $2.0 million, its cash and its interest in the limited
partnership, which are the Company's two major sources of liquidity, will be
sufficient for the remainder of 2002. This forecast assumes the continuation of
the selling, general and administrative expenses of the type referenced in the
income statement and assumes payments under the existing executive employment
agreements (see Item 11 Executive Compensation) and continuation of such
salaries at current amounts after the expiration of such contracts on June 18,
2002. This forecast also does not include the impact of any merger or
acquisition transaction, if any, does not include any net cash proceeds that may
be received from the patent management activities, if any, and does not include
any additional legal costs required by the Patent Litigation Trust for court
trial expenses, if any.
General
On May 3, 2000 (the "Petition Date" or the "Filing Date"), Dynacore Holdings
Corporation, then known as Datapoint Corporation 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. A final decree closing the Chapter 11 case was ordered by
the Court on December 20, 2001.
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 9901 IH 10 West, Suite 800; San Antonio, Texas 78230-2292
(telephone number (210) 558-2898).
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 last three fiscal years prior to the Sale. The
Company's third operation consisted of its Corebyte subsidiary, which was
engaged in the creation of internet networking software products.
Over the past many years preceding the Sale, 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., 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. In January 2001, the
Company began a thorough evaluation of the Corebyte operations, prospects, and
strategic options given the lack of a significant revenue stream resulting from
longer than anticipated software development and marketing efforts and the
availability of similar Internet applications in the marketplace. During its
subsequent evaluation, which included the exploration and discussions with
various parties for alternative uses and markets for the Corebyte developed
source code and underlying technologies, the Company significantly restructured
and curtailed Corebyte's day-to-day operations, to include the elimination of
its Web hosting services to third parties. During the third quarter of 2001, the
Company concluded that the Corebyte operation was no longer a viable and
profitable opportunity for the Company and therefore completely discontinued
operations.
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 and the Company is currently taking steps to comply with
the National Association of Securities Dealers' requests in order to obtain
approval to cause such interests to be tradable.
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, 2001, the amount of such loan is approximately
$262 thousand and the status of the related patent litigations is set forth
below under the heading "Multi-Speed Networking Patents".
As of December 31, 2001, the Company had cash and cash equivalents of
approximately $2.6 million. In addition, the Company has approximately $593
thousand invested in a limited partnership as more fully described in Footnote 4
to the Consolidated Financial Statements. Since the Effective Date, the
Company's management team has undertaken efforts to identify and evaluate
successor business opportunities. The Company believes that given its current
and forecasted cash requirements for the next twelve months of approximately
$1.7 million to $2.0 million, its cash and its interest in the limited
partnership, which are the Company's two major sources of liquidity, will be
sufficient for the remainder of 2002. This forecast assumes the continuation of
the selling, general and administrative expenses of the type referenced in the
income statement and assumes payments under the existing executive employment
agreements (see Item 11 Executive Compensation) and continuation of such
salaries at current amounts after the expiration of such contracts on June 18,
2002.This forecast also does not include the impact of any merger or acquisition
transaction, if any, does not include any net cash proceeds that may be received
from the patent management activities, if any, and does not include any
additional legal costs required by the Patent Litigation Trust for court trial
expenses, if any.
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 has not restricted its search to any particular business or
industry, and the areas in which it is seeking out acquisitions, reorganizations
or mergers includes, but is not 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 personally meets with management and key personnel of the entity
sponsoring any business opportunity afforded to the Company, visits and inspects
material facilities, obtains independent analysis or verification of information
provided and gathered, checks references of management and key personnel and
conducts 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. In addition, the Company has conducted preliminary due
diligence in this regard and formal presentations were made to the Company's
Board of Directors in connection with some of these businesses. However, to
date, the Company's Board of Directors and/or executive management have
concluded that the opportunities presented were not in the best interests of the
Company and its shareholders, and therefore terminated any further discussions
with these businesses. Currently, the Company is evaluating the possibility of
entering into serious negotiations and due diligence with an additional company.
Concurrently, the Company is continuing to pursue additional opportunities for
an acquisition or merger transaction.
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 and the termination of the
Corebyte operations, the Company relied 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, was to engage in a business
other than that of investing, reinvesting, owning, holding or trading in
securities. The Company believes that based on its current asset mix, and its
current activities, including the management of its patents, it will not be
treated as an investment company. However, given its current activities, the
Company believes there is a 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. However, 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. In the event that the Company's activities
and asset mix do not qualify for an exclusion or exemption, the Company 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 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 $172 million of tax loss
carryovers prior to the consummation of its Plan. Section 382 of the Internal
Revenue Code of 1986 (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. As of December 31, 2001, the Company has $149
million of NOL and $28 million of capital losses carryovers remaining.
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 tax loss
carryovers required by Section 108 of the Code (relating to cancellation of
indebtedness income), Dynacore believes that its tax loss carryovers were
approximately $172 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. In this
regard, the Company, and the Dynacore Patent Litigation Trust (the "PLT") have
been actively involved in not only maximizing such intellectual property through
licensing and/or royalty arrangements but also, in protecting these assets from
infringement by other parties.
In this regard, the Company and the PLT have retained the services of
"intellectual property" Counsel, who meets regularly with the Company's
executive management to discuss, among other things, the status of current,
pending, and future patent litigation, certain patent infringement settlement
proposals, and proposed patent royalty and license agreements.
Multi-speed Networking Patents
During the quarter ended June 30, 2001, the Company and the Dynacore Patent
Litigation Trust, established pursuant to the Patent Litigation Trust Agreement,
by and among the Company and the PLT Trustees (as defined therein), dated
December 18, 2000, 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.,
Civil Action No. 01-CV-5012 (LTS) (GWG); and Sony Electronics Inc., Nikon Inc.,
JVC Americas Corp., Adaptec, Inc., Smartdisk Corporation, Evergreen
Technologies, Inc., Ads Technologies, Inc., Western Digital Corporation,
Quadmation Incorporated, Lucent Technologies, Inc., and 3COM Corporation, Civil
Action No. 01-CV-10978 (LTS) (GWG), for patent infringement regarding United
States Patent No. 5,077,732. The suits allege 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 and that each defendant sells products that
comply with the 1394 standard. Although this action was initially stayed, the
stay has been vacated and the action is proceeding.
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 believed these patents covered most products
introduced by various suppliers to the networking industry and dominated certain
types of dual-speed technology on networking recently introduced by various
industry leaders. Dynacore had 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;
-----------------------------------------------------------------
(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;
-----------------------------------------------------------------------
(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
-------------------------------------------------------------------------
(4) Datapoint Corporation v. Standard Microsystems Corp. and
Intel Corp., No. CV-96-03819.
-------------------------------------------------------------------------
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.
Both patents have been submitted to the Patent Office for re-examination. After
re-examination, the patents were approved and a certificate for both patents has
been issued. After this re-examination the action proceeded and the appeal was
ultimately denied on February 15, 2002. Accordingly, these actions are now over.
The above actions represent the trust property which the Company transferred
and assigned to the Patent Litigation Trust pursuant to that 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, 2001, the Company had seven employees: four full time and
three part-time. The Company considers its relations with its employees to be
satisfactory. The aggregate annual salaries for the seven employees are
approximately $671 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, 2001, is as follows:
Approximate
Facility
Location Use Sq. Footage Owned or Leased Land Area
-------- --- ----------- -------------------------
San Antonio, Texas Office 805 Leased; expires August 31, 2002
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 (which the
Company intends to exercise)
and June 16, 2005
The aggregate annual rental for these leases, excluding sub-lease agreements
is approximately $253 thousand.
During the first quarter of fiscal 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. The Company occupied space on a month-to-month basis
ranging from 17,630 square feet in April 2001 to 1,670 square feet in September
2001, at which time the Company vacated the premises.
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.
There were no matters submitted during 2001 to a vote of security holders of
the Company through the solicitation of proxies. There was no annual meeting of
stockholders held during 2001.
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 June 18, 2001, the symbol was DYHC and
the stock was tradable over-the-counter through the National Daily Quotation
System "pink sheets" published by the National Quotation Bureau, Inc. On June
18, 2001, the Company announced that the National Association of Securities
Dealers' Inc. ("NASD") approved the application for listing and quotation of the
stock on the Over-the-Counter Bulletin Board, also under the symbol DYHC. The
Company is currently working to cause the beneficial interests in the Patent
Litigation Trust to be tradable as the Company has undertaken to have a set of
financial statements for the year 2001 for the Patent Litigation Trust prepared
in order to comply with the request by the NASD for such financial statements.
Accordingly, the Company believes that the shares of beneficial interests in the
Patent Litigation Trust will ultimately be traded over-the-counter through the
National Daily Quotation System "pink sheets" published by the National
Quotation Bureau, Inc. As of March 7, 2002 there were approximately 2,780
holders of record and 9,984,726 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 7, 2002, the closing price of the stock was $.20.
The stock prices for the last two years are as follows:
High Low
March 30, 2001 .50 .10
June 30, 2001 .37 .20
September 30, 2001 .28 .16
December 31, 2001 .29 .18
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
* The New common stock did not trade during the period December 19, 2000 through
December 31, 2000.
ITEM 6. Selected Financial Data.
The operations of Dynacore for the year ended December 31, 2001 and 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 -
2001 12/31/00 12/18/00 12/31/99 1999 1998 1997
-------------------------------------------------------------------------------------------------------------------------------
Operating Results for the Fiscal Year
Total Revenue $ 9 $ - $62,956 $51,860 $138,285 $151,445 $142,121
Operating income (loss) (3,321) (195) (3,004) (1,772) (2,886) 5,074 2,033
Income (loss) before extraordinary credits
and effect of change in accounting principle (3,793) (311) 50,820 (4,513) (9,256) (1,224) 1,173
Net income (loss) (3,793) (311) 81,079 (4,513) (7,549) (669) 2,383
Basic earnings (loss) per common share:
Income (loss) before extraordinary credits ($0.38) ($0.03) $12.10 ($1.13) ($2.45) ($0.49) $0.05
Gain on the exchange and retirement
of preferred stock - - - - 0.09 - 1.05
Extraordinary credits - - 10.94 - 0.40 0.14 0.33
Net income (loss) per share ($0.38) ($0.03) $23.04 ($1.13) ($1.96) ($0.35) $1.43
Diluted earnings (loss) per common share:
Income (loss) before extraordinary credits ($0.38) ($0.03) $10.25 ($1.13) ($2.45) ($0.49) $0.05
Gain on the exchange and retirement
of preferred stock - - - - 0.09 - 1.07
Extraordinary credits - - 5.91 - 0.40 0.14 0.31
Net income (loss) per share ($0.38) ($0.03) $16.16 ($1.13) ($1.96) ($0.35) $1.43
Financial Position at End of Fiscal Year
Current assets $ 3,659 $8,289 $9,318 $36,093 $40,930 $50,807 $45,340
Fixed assets, net 28 102 108 5,872 5,928 9,468 11,764
Total assets 7,077 12,694 13,740 44,054 49,333 66,816 62,388
Current liabilities 502 1,913 2,801 60,444 60,463 64,491 53,679
Long-term debt - - - 50,000 50,000 55,000 60,875
Stockholders' equity (deficit) 3,385 7,189 7,500 (76,556) (72,128) (64,437) (64,084)
Other Information
Average common shares outstanding 9,984,726 10,000,000 4,145,770 4,131,074 4,104,029 4,045,963 3,627,550
Number of common stockholders of record 2,780 2,641 2,732 2,810 2,860 2,966 3,070
Preferred shares outstanding - - - 661,967 661,967 721,976 721,976
Dividends paid or accumulated on preferred stock - - - 165 684 722 1,009
Number of employees 7 19 19 617 639 652 641
No cash dividends on common stock have been declared during any of the above periods.
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 of $3.8 million.
See notes to Consolidated Financial Statements and Management Discussion and Analysis of Financial Condition and Results
of Operations.
Per share amounts have been adjusted to reflect its issuance at the rate of .225177 shares of New Common stock for each share
of Old Common Stock.
ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
2001 in Summary
Since its successful emergence from Chapter 11 bankruptcy in December 2000,
Dynacore Holdings Corporation, formerly known as Datapoint Corporation
(hereinafter "Dynacore" or the "Company") has been concentrating its efforts and
resources in four primary areas:
1. Continuation of its Patent Management Activities,
2. Continuation of its Search for a Merger or Acquisition Transaction,
3. Continuation of its Evaluation of Current Operations and Cost Control, and
4. Liquidity.
Continuation of its Patent Management Activities
During the second quarter of 2001, the Company and the Dynacore Patent
Litigation Trust, established pursuant to the Patent Litigation Trust Agreement,
by and among the Company and the Patent Litigation Trust Trustees (as defined
therein), dated December 18, 2000, 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 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. Although this action was initially stayed, the stay has been
vacated and the action is proceeding.
Continuation of its Search for a Merger or Acquisition Transaction
Since the sale of its European operations in June 2000 and the termination of
the Company's Corebyte operations during the third quarter of 2001, the Company
has been actively seeking a merger or acquisition partner with revenue producing
operations or cash infusion opportunities to support pre-revenue research and
development activities. 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. In addition, the Company has conducted
preliminary due diligence in this regard and formal presentations were made to
the Company's Board of Directors in connection with some of these businesses.
However, to date, the Company's Board of Directors and/or executive management
have concluded that the opportunities presented were not in the best interests
of the Company and its shareholders, and therefore terminated any further
discussions with these businesses. Currently, the Company is evaluating the
possibility of entering into serious negotiations and due diligence with an
additional company. Concurrently, the Company is continuing to pursue additional
opportunities for an acquisition or merger transaction.
Continuation of its Evaluation of Current Operations and Cost Control
In January 2001, the Company began a thorough evaluation of the Corebyte
operations, prospects, and strategic options given the lack of a significant
revenue stream resulting from longer than anticipated software development and
marketing efforts and the availability of similar Internet applications in the
marketplace. During its subsequent evaluation, which included the exploration
and discussions with various parties for alternative uses and markets for the
Corebyte developed source code and underlying technologies, the Company
significantly restructured and curtailed Corebyte's day-to-day operations, to
include the elimination of its Web hosting services to third parties. During the
third quarter of 2001, the Company concluded that the Corebyte operation was no
longer a viable and profitable opportunity for the Company and therefore
completely discontinued operations.
The Company maintains a leased office facility in Paris, France, which served as
the Company's European headquarters for the Company's former European
Operations. Since the Company sold its European Operations in June 2000, the
Company intends to dissolve the European Headquarters entity and exercise its
early cancellation option on the leased facility in June 2002.
For the year ended December 31, 2001, the Company incurred restructuring costs
for employee termination costs and the Paris facility closing costs of $233
thousand. Of this amount, $183 thousand related to the termination of seven
employees of the Company's Corebyte subsidiary, 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.
Liquidity
As of December 31, 2001, the Company had cash and cash equivalents of
approximately $2.6 million. In addition, the Company has approximately $593
thousand invested in a limited partnership as more fully described in Footnote 4
to the Consolidated Financial Statements. Since the Effective Date, the
Company's management team has undertaken efforts to identify and evaluate
successor business opportunities. The Company believes that given its current
and forecasted cash requirements for the next twelve months of approximately
$1.7 million to $2.0 million, its cash and its interest in the limited
partnership, which are the Company's two major sources of liquidity, will be
sufficient for the remainder of 2002. This forecast assumes the continuation of
the selling, general and administrative expenses of the type referenced in the
income statement and assumes payments under the existing executive employment
agreements (see Item 11 Executive Compensation) and continuation of such
salaries at current amounts after the expiration of such contracts on June 18,
2002. This forecast also does not include the impact of any merger or
acquisition transaction, if any, does not include any net cash proceeds that may
be received from the patent management activities, if any, and does not include
any additional legal costs required by the Patent Litigation Trust for court
trial expenses, if any.
Overview
The operations of Dynacore for the year ended December 31, 2001, and 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 were
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 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, 2001, the amount of such loan is approximately
$262 thousand and the status of the related patent litigations is set forth
above under the heading "Multi-Speed Networking Patents".
As of December 31, 2001, the Company had cash and cash equivalents of
approximately $2.6 million. In addition, the Company has approximately $593
thousand invested in a limited partnership as more fully described in Footnote 4
to the Consolidated Financial Statements. Since the Effective Date, the
Company's management team has undertaken efforts to identify and evaluate
successor business opportunities. The Company believes that given its current
and forecasted cash requirements for the next twelve months of approximately
$1.7 million to $2.0 million, its cash and its interest in the limited
partnership, which are the Company's two major sources of liquidity, will be
sufficient for the remainder of 2002. This forecast assumes the continuation of
the selling, general and administrative expenses of the type referenced in the
income statement and assumes payments under the existing executive employment
agreements (see Item 11 Executive Compensation) and continuation of such
salaries at current amounts after the expiration of such contracts on June 18,
2002. This forecast also does not include the impact of any merger or
acquisition transaction, if any, does not include any net cash proceeds that may
be received from the patent management activities, if any, and does not include
any additional legal costs required by the Patent Litigation Trust for court
trial expenses, if any.
As of December 31, 2001, the Company had available federal tax net operating
losses aggregating approximately $149 million, expiring in various amounts
beginning in 2002. 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 7 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 one Eastern and three Western European countries.
Financial Condition
During the year ended December 31, 2001, the Company's unrestricted cash
and cash equivalents decreased approximately $4.7 million. Primarily, this
decrease was the result of the payment of the Company's operating expenses, the
$1.5 million investment described below and payment 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 PGM Associates, L.P., 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 December 31, 2001, based upon the
closing prices of the securities as of that date, the Partnership had
approximately $2.2 million of assets and approximately $1.1 million of
liabilities for a net asset value of approximately $1.1 million. The Company's
ownership interest in the Partnership approximated 56% and the Company's share
of the Partnership's capital was approximately $0.6 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 share of the Partnership's loss for the twelve months
ended December 31, 2001 of $907, is included in non-operating income/(expense)
on the statement of operations. This investment is reflected as a short-term
investment as the Company has the right to liquidate this investment, as
permitted by the Partnership agreement, prior to the end of the fourth quarter
of 2002.
As of December 31, 2001, the Company had cash and cash equivalents of
approximately $2.6 million. In addition, the Company has approximately $593
thousand invested in the Partnership as described above. Since the Effective
Date, the Company's management team has undertaken efforts to identify and
evaluate successor business opportunities. The Company believes that given its
current and forecasted cash requirements for the next twelve months of
approximately $1.7 million to $2.0 million, its cash and its interest in the
Partnership, which are the Company's two major sources of liquidity, will be
sufficient for the remainder of 2002. This forecast assumes the continuation of
the selling, general and administrative expenses of the type referenced in the
income statement and assumes payments under the existing executive employment
agreements (see Item 11 Executive Compensation) and continuation of such
salaries at current amounts after the expiration of such contracts on June 18,
2002.This forecast also does not include the impact of any merger or acquisition
transaction, if any, does not include any net cash proceeds that may be received
from the patent management activities, if any, and does not include any
additional legal costs required by the Patent Litigation Trust for court trial
expenses, if any.
Restructuring Costs
(In thousands)
The Company incurred restructuring costs primarily related to employee
termination programs implemented in these periods:
Successor Predecessor
---------- ------------
12/19/00 - 01/01/00 - 08/01/99-
2001 12/31/00 12/18/00 12/31/99 1999
--------------------------------------------------------------------------------
Restructuring costs $233 $22 $0 $624 $813
================================================================================
For the year ended December 31, 2001, the Company incurred restructuring costs
for employee termination and the Paris facility closing costs of $233. Of this
amount, $183 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. Of such four former employees, three still provide services on an as
needed basis to the Company. At December 31, 2001, accrued but unpaid
restructuring costs were $50, related to the closing of the Company's Paris
office, which will be paid during the first and second quarters of 2002.
For the period ending December 31, 2000, the Company had restructuring costs of
$22 related 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.
Restructuring costs incurred during for the fiscal year ended July 31, 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 relating to payroll costs are not recorded until specific
employees are determined (and notified of termination) by management in
accordance with its overall restructuring plan. Other restructuring costs are
not recorded until management has committed to an exit plan, all significant
actions to be taken have been identified and significant changes to the plan are
not likely.
A rollforward of the restructuring accrual from August 1, 1998 through December
31, 2001 is as follows:
Predecessor TOTAL
------------ -----
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
Additions 233
Payments (234)
-----------------------------------------------------------------------
Restructuring accrual as of December 31, 2001 $50
===
Results of Operations
The following is a summary of the Company's sources of revenue for each of the
periods listed below:
(In thousands) Successor Predecessor
--------- -------------------------------------
01/01/00 - 08/01/99 -
2001 12/18/00 12/31/99 1999
---- -------- -------- ----
Sales:
U.S. $9 $103 $385 $3,057
Foreign -- 37,716 27,547 75,630
-- ------ ------ ------
9 37,819 27,932 78,687
Service and other:
U.S. -- 355 429 1,074
Foreign -- 24,782 23,499 58,524
------ ------ ------
-- 25,137 23,928 59,598
------ ------ ------
Total revenue $9 $62,956 $51,860 $138,285
== ======= ======= ========
(Note that the Company did not record any revenue for the period of December 19,
2000 - December 31, 2000.)
Year ended December 31, 2001
During the year ended December 31, 2001, the revenue of $9 was derived from the
Company's Corebyte's operations, which were significantly curtailed in the first
quarter of 2001 and subsequently discontinued in the third quarter of 2001.
Of the $3,097 of selling, general and administrative expenses, $337 related to
depreciation and other "non-cash" amortization, $262 related to the Patent
Litigation Trust activities, and $212 incurred by operations and functions which
were terminated during the year. The remainder related to the Company's search
for a merger or acquisition transaction and other corporate expenses.
For the year ended December 31, 2001, and as described above, the Company
incurred restructuring costs for employee terminations and the Paris facility
closing of $233.
Restructuring charges relating to payroll costs are not recorded until specific
employees are determined (and notified of termination) by management in
accordance with its overall restructuring plan. Other restructuring costs are
not recorded until management has committed to an exit plan, all significant
actions to be taken have been identified and significant changes to the plan are
not likely.
Non operating expense for the year ended December 31, 2001, was approximately
$472 and primarily consisted of interest income of $248, imputed interest of
$54, and a foreign currency transaction gain of $136 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 $907 for the year ended December
31, 2001, representing the equity in loss of the Partnership.
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,
transaction gains of $1.6 million 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.
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 $280 thousand transaction gain.
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 22
Report of Ernst & Young LLP 23
Independent Auditors
Consolidated Financial Statements
Consolidated Statements of Operations for the period 2001;
December 19 - 31, 2000; January 1 - December 18, 2000;
Five months ended December 31, 1999; and fiscal year 1999 24
Consolidated Balance Sheets as of December 31, 2001 and 2000 26
Consolidated Statements of Cash Flows for the period 2001;
December 19 - 31, 2000; January 1 - December 18, 2000;
Five months ended December 31, 1999; and fiscal year 1999 27
Consolidated Statements of Stockholders' Equity (Deficiency)
for the period 2001; December 19 - 31, 2000;
January 1 - December 18, 2000; Five months ended
December 31, 1999; and fiscal year 1999 28
Notes to Consolidated Financial Statements 29
REPORT OF MARKS PANETH & SHRON LLP
INDEPENDENT AUDITORS
The Board of Directors
Dynacore Holdings Corporation
We have audited the accompanying consolidated balance sheets of Dynacore
Holdings Corporation (formerly known as Datapoint Corporation) and subsidiaries
as of December 31, 2001 and 2000, and the related consolidated statements of
operations, stockholders' equity (deficiency), and cash flows for the year
ending December 31, 2001, the period December 19, to December 31, 2000, the
period January 1, to December 18, 2000, and the five months ended December 31,
1999. These financial statements 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, 2001 and 2000
and the consolidated results of its operations and its cash flows for the year
ending December 31, 2001, 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 sheets as of December 31, 2001
and 2000, and the related statements of consolidated operations and cash flows
for the year ended December 31, 2001 and 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.
Our audits referred to above included the financial statement schedule
listed in the index at Item 14(a) as of December 31, 2001 and 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. In our opinion, this financial
statement schedule presents fairly, in all material respects, in relation to the
financial statements taken as a whole, the information required to be stated
therein.
Marks Paneth & Shron LLP
New York, New York
February 23, 2002
REPORT OF ERNST & YOUNG LLP
INDEPENDENT AUDITORS
The Board of Directors
Dynacore Holdings Corporation
We have audited the consolidated statements of operations, stockholders' equity
(deficiency) and cash flows of Dynacore Holdings Corporation (formerly Datapoint
Corporation) and subsidiaries (the Company) for the fiscal year ended July 31,
1999. Our audit 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 audit.
We conducted our audit 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 audit provides a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated results of operations and
cash flows, of the Company, for the fiscal year 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 consolidated financial statements and schedule referred to above, 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 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 year ended December 31,
2001, the period December 19 - 31, 2000; January 1 - December 18, 2000; Five
Months Ended December 31, 1999; and Fiscal Year 1999
(In thousands, except share and per share data)
Successor Predecessor
---------- -----------
2000 2000 Five Months Ended
2001 12/19 - 12/31 01/01 - 12/18 12/31/99 07/31/99
---------------------------------------------------------------------------------------------------------------------------
Revenue:
Sales $9 $-- $37,819 $27,932 $78,687
Service and other -- -- 25,137 23,928 59,598
---------------------------------------------------------------------------------------------------------------------------
Total revenue 9 -- 62,956 51,860 138,285
Operating costs and expenses:
Cost of sales -- -- 28,884 21,831 60,740
Cost of service and other -- -- 19,502 17,143 41,958
Research and development -- -- 491 490 1,965
Selling, general and administrative 3,097 173 17,083 13,544 35,695
Restructuring costs 233 22 -- 624 813
---------------------------------------------------------------------------------------------------------------------------
Total operating costs and expenses 3,330 195 65,960 53,632 141,171
---------------------------------------------------------------------------------------------------------------------------
Operating income (loss) (3,321) (195) (3,004) (1,772) (2,886)
Non-operating income (expense):
Interest expense -- -- (1,993) (2,378) (5,731)
Equity in loss of limited partnership (907) -- -- -- --
Other, net 435 (116) 1,924 (35) 196
Reorganization items:
Gain on sale of European Operations -- -- 52,473 -- --
---------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes
and extraordinary credit (3,793) (311) 49,400 (4,185) (8,421)
Income taxes (benefit) -- -- (1,420) 328 835
---------------------------------------------------------------------------------------------------------------------------
Income (loss) before
extraordinary credit (3,793) (311) 50,820 (4,513) (9,256)
Extraordinary credits:
Fresh start adjustments -- -- 3,771 -- 1,707
Debt extinguishment -- -- 26,488 -- --
---------------------------------------------------------------------------------------------------------------------------
Net income (loss) $(3,793) $(311) $81,079 $(4,513) $(7,549)
============================================================================================================================
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 $(3,793) $(311) $95,513 $(4,678) $(7,927)
============================================================================================================================
Basic income (loss) per common share:
Income (loss) before extraordinary credit $(.38) $(.03) $12.10 $ (1.13) $(2.42)
Gain on the exchange and retirement of
preferred stock -- -- -- -- .07
Extraordinary credit-fresh start adjustments -- -- .91 -- --
Extraordinary credit-debt extinguishment -- -- 10.03 -- .42
---------------------------------------------------------------------------------------------------------------------------
Net income (loss) per common share $(.38) $(.03) $23.04 $(1.13) $(1.93)
===========================================================================================================================
Diluted income (loss) per common share:
Income (loss) before extraordinary credit $(.38) $(.03) $10.25 $ (1.13) $(2.42)
Gain on the exchange and retirement of
preferred stock -- -- -- -- .07
Extraordinary credit-fresh start adjustments -- .74 -- --
Extraordinary credit-debt extinguishment -- -- 5.17 -- .42
---------------------------------------------------------------------------------------------------------------------------
Net income (loss) per common share $(.38) $(.03) $16.16 $(1.13) $(1.93)
===========================================================================================================================
Average common shares outstanding:
Basic 9,984,726 10,000,000 4,145,770 4,131,074 4,104,029
Diluted 9,984,726 10,000,000 5,118,172 4,131,074 4,104,029
See accompanying Notes to Consolidated Financial Statements.
CONSOLIDATED BALANCE SHEETS
Dynacore Holdings Corporation and Subsidiaries December 31, 2001 and 2000 (In
thousands, except share data)
2001 2000
----------------------------------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $2,614 $7,304
Restricted cash and cash equivalents -- 317
Investment in limited partnership 593 --
Accounts receivable, net 236 359
Prepaid expenses and other current assets 216 309
----------------------------------------------------------------------------------------------------------
Total current assets 3,659 8,289
Fixed assets, net 28 102
Other assets, net 458 535
Reorganization value in excess of amounts allocable to identifiable assets 2,932 3,768
----------------------------------------------------------------------------------------------------------
$7,077 $12,694
==========================================================================================================
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $126 $297
Accrued expenses 376 1,616
----------------------------------------------------------------------------------------------------------
Total current liabilities 502 1,913
Accrued pension and post employment liabilities 2,790 3,192
Deferred federal income tax 400 400
Commitments and contingencies
Stockholders' equity (deficit):
Successor Common stock of $0.01 par value. Shares authorized 30,000,000;
shares issued and outstanding 9,984,726 in 2001 and 10,000,000 in 2000 100 100
Paid in capital 7,389 7,400
Accumulated deficit (4,104) (311)
-----------------------------------------------------------------------------------------------------------
Total stockholders' equity 3,385 7,189
----------------------------------------------------------------------------------------------------------
$7,077 $12,694
==========================================================================================================
See accompanying Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Dynacore Holdings Corporation and Subsidiaries For the year ended December 31,
2001; the period December 19 - 31, 2000; January 1 - December 18, 2000; Five
Months Ended December 31, 1999; and Fiscal Year 1999
(In thousands)
Successor Predecessor
---------- ------------
2000 2000 Five Months Ended
2001 12/19-12/31 01/01 - 12/18 12/31/99 1999
-------------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income (loss) $(3,793) $(311) $81,079 $(4,513) $(7,549)
Adjustments to reconcile net income (loss) to net cash
provided from (used in) operating activities:
Depreciation and amortization 127 5 801 1,470 3,179
Reorganized value in excess of amounts allocable to
identifiable assets
Amortization 210 8 -- -- --
Favorable settlement/unclaimed bankruptcy checks 276 -- -- -- --
Officer stock compensation -- 750 -- -- --
Loss in equity of investee 907 -- -- -- --
Provision for losses (recoveries) on accounts receivable 72 -- 35 (203) (299)
Realized gain on sale of European Operations -- -- (52,473) -- (273)
Gain on debt extinguishment -- -- (26,488) -- (1,707)
Non-cash pension expense -- -- -- -- 2,761
Deferred income taxes -- -- 188 60 (616)
Fresh start accounting adjustments -- -- (3,771) -- --
Changes in assets and liabilities:
(Increase) Decrease in receivables 51 (12) (4,303) 714 (406)
(Increase) decrease in inventory -- -- (53) 1,008 354
Increase (Decrease) in accounts payable and accrued expenses(1,094) (1,637) 12,568 1,044 (1,960)
Increase (Decrease) in other liabilities and deferred credits -- -- (3,487) (1,254) (1,948)
Other, net 30 (24) (1,293) (94) 1,302
-------------------------------------------------------------------------------------------------------------------------------
Net cash provided from (used in) operating activities (3,214) (1,221) 2,803 (1,768) (7,162)
Cash flows from investing activities:
Payments for fixed assets -- -- (1,513) (1,729) (3,312)
Proceeds from sale of fixed assets 24 -- -- -- --
Proceeds from sale of European Operations -- -- 43,306 -- 2,111
Investment in limited partnership (1,500) -- -- -- --
Other, net -- -- 432 153 411
-------------------------------------------------------------------------------------------------------------------------------
Net cash provided from (used in) investing activities (1,476) -- 42,225 (1,576) (790)
Cash flows from financing activities:
Payments on borrowings -- -- (50,467) (49,811) (90,289)
Proceeds from borrowings -- -- 46,902 51,692 89,636
Debt extinguishment -- -- (34,868) -- --
Restricted cash for letters of credit -- -- (19) 30 24
-------------------------------------------------------------------------------------------------------------------------------
Net cash provided from (used in) financing activities -- -- (38,452) 1,911 (629)
Effect of foreign currency translation on cash -- -- (140) (46) 48
-------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (4,690) (1,221) 6,436 (1,479) (8,533)
Cash and cash equivalents at beginning of period 7,304 8,525 2,089 3,568 12,101
-------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $2,614 $7,304 $8,525 $2,089 $3,568
===============================================================================================================================
Cash payments for:
Interest $-- $-- $341 $467 $5,778
Income taxes -- -- 267 324 778
See accompanying Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
Dynacore Holdings Corporation and Subsidiaries for the year ended
December 31, 2001; the period December 19 - 31, 2000; January 1 -
December 18, 2000; five months ended December 31, 1999, and Fiscal Year 1999
(In thousands)
Accumulated
$1.00 Other
(Predecessor) Common Preferred Paid In Retained Treasury Comprehensive
Stock Stock Capital Deficit Stock Income (Loss) Total
-----------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------------------
Balance at August 1, 1998 $ 5,248 $ 722 $ 212,655 $ (278,655) $ (4,565) $ 158 $ (64,437)
----------------------------------------------------------------------------------------------------------------------------------
Net loss - - - (7,549) - - (7,549)
Foreign currency translation adjustment - - - - - 60 60
Pension liability adjustment - - - - - (572) (572)
--------------
Comprehensive loss (8,061)
Preferred Stock conversion - (60) - (929) 989 - -
Stock options exercised - - - (162) 184 - 22
Common issued to 401(k) plan - - - (1,167) 1,267 - 100
Other - - 78 170 - - 248
----------------------------------------------------------------------------------------------------------------------------------
Balance at July 31, 1999 $ 5,248 $ 662 $ 212,733 $ (288,292) $ (2,125) $ (354) $ (72,128)
----------------------------------------------------------------------------------------------------------------------------------
Net loss - - - (4,513) - - (4,513)
Foreign currency translation adjustment - - - - - (110) (110)
Pension liability adjustment - - - - - 28 28
--------------
Comprehensive loss (4,595)
Common issued to 401(k) plan - - - (169) 179 - 10
Other - - - 157 - - 157
----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 $ 5,248 $ 662 $ 212,733 $ (292,817) $ (1,946) $ (436) $ (76,556)
----------------------------------------------------------------------------------------------------------------------------------
Net income before extraordinary items - - - 50,820 - - 50,820
Debt extinguishment 26,488 26,488
Fresh start adjustments - gains 3,771 3,771
--------------
Net income after extraordinary items 81,079
Foreign currency translation adjustment - - - - - (6,192) (6,192)
Pension liability adjustment - - - - - 6,628 6,628
--------------
Comprehensive income 81,515
Preferred Stock conversion - (20) - (319) 339 - -
Common issued to 401(k) plan - - - (243) 261 - 18
Debt extinguishment - - 2,624 - - - 2,624
Fresh start adjustments - reclassifications (5,148) (642) (207,957) 212,401 1,346 - -
Other - - - (101) - - (101)
----------------------------------------------------------------------------------------------------------------------------------
Balance at December 18, 2000 $ 100 $ - $ 7,400 $ - $ - $ - $ 7,500
----------------------------------------------------------------------------------------------------------------------------------
(Successor)
Net loss - - - (311) - - (311)
----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2000 $ 100 $ - $ 7,400 $ (311) $ - $ - $ 7,189
----------------------------------------------------------------------------------------------------------------------------------
Net loss - - - (3,793) - - (3,793)
Common stock unclaimed - - (11) $ - - - (11)
----------------------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2001 $ 100 $ - $ 7,389 $ (4,104) $ - $ - $ 3,385
----------------------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Dynacore Holdings Corporation and Subsidiaries For the year ended December 31,
2001; the period January 1 - December 18, 2001; December 19 - 31, 2000; January
1 - December 18, 2000; Five Months Ended December 31, 1999; and July 31, 1999
(Dollars in thousands, except share data)
1. Summary of Significant Accounting Policies
Liquidity
The Company believes that given its current and forecasted cash requirements for
the next twelve months of approximately $1.7 million to $2.0 million, its cash
and its interest in the limited partnership, as more fully described in Footnote
4, which are the Company's two major sources of liquidity, will be sufficient
for the remainder of 2002. This forecast assumes the continuation of the
selling, general and administrative expenses of the type referenced in the
income statement and assumes payments under the existing executive employment
agreements (see Item 11 Executive Compensation) and continuation of such
salaries at current amounts after the expiration of such contracts on June 18,
2002.This forecast also does not include the impact of any merger or acquisition
transaction, if any, does not include any net cash proceeds that may be received
from the patent management activities, if any, and does not include any
additional legal costs required by the Patent Litigation Trust for court trial
expenses, if any.
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 are for the fiscal year ended July
31, 1999. 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 and the Patent Litigation Trust, which is 56.5% owned.
Intercompany accounts and transactions have been eliminated upon consolidation.
Cash and Cash Equivalents
Cash equivalents include short-term, highly-liquid money market accounts or debt
investments with overnight maturities and, as a result, the carrying value
approximates fair value because of the short maturity of those instruments.
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, 2001, the Company had $5 on deposit with one prominent Texas
bank. At December 31, 2001, approximately $2,534 of the Company's cash
equivalents was invested in the AIM money market mutual fund. The remainder of
the Company's cash was in operational checking accounts.
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.
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
Subsequent to December 18, 2000, the Company has been involved principally in
pursuing its patent rights through the Patent Litigation Trust and in seeking a
merger or acquisition partner. The Company's Corebyte subsidiary derived its
revenue from the sale of internet based application software. Prior to December
18, 2000, 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.
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
2001 12/19/00 - 12/31/00
---- -------------------
Per Per
Loss Shares Share Loss Shares Share
-------------------------------------------------------------------------------------------------------------
Loss before
extraordinary credit $(3,793) $(311)
Extraordinary credit -- --
-------------------------------------------------------------------------------------------------------------
Basic and Diluted $(3,793) 9,985 $(0.38) $(311) 10,000 $(0.03)
--------------------------------------------------------------------------------------------------------------
The per share computations for the period ended December 31, 2001 and 2000
exclude the following shares for stock options and convertible debentures
because their effect would have been antidilutive:
2001 12/31/00
Stock options 750 750
Convertible preferred stock -- --
Convertible debentures -- --
PREDECESSOR COMPANY
01/01/00 - 12/18/00 08/01/99 - 12/31/99 1999
------------------- ------------------- ----
Income Per Income Per Income Per
(Loss) Shares Share (Loss) Shares Share (Loss) Shares Share
---------------------------------------------------------------------------------------------------------------------------
Income (loss) before extraordinary
credit $50,820 $(4,513) $(9,256)
Preferred stock dividends
accumulated (641) (165) (684)
Gain on the exchange and
retirement of preferred stock -- -- 306
Extraordinary credits:
Debt extinguishment 41,563 -- 1,707
Fresh start adjustments 3,771 --
---------------------------------------------------------------------------------------------------------------------------
Basic $95,513 4,146 $23.04 $(4,678) 4,131 $(1.13) $(7,927) 4,104 $(1.93)
----------------------------------------------------------------------------------------------------------------------------
01/01/00 - 12/18/00 08/01/99 - 12/31/99 1999
------------------- ------------------- ----
Income Per Income Per Income Per
(Loss) Shares Share (Loss) Shares Share (Loss) Shares Share
---------------------------------------------------------------------------------------------------------------------------
Income (loss) before extraordinary
credit $50,820 $(4,513) $(9,256)
Preferred stock dividends
accumulated (641) (165) (684)
Gain on the exchange and
retirement of preferred stock -- -- 306
Extraordinary credits:
Debt extinguishment 26,488 1,707
Fresh start adjustments 3,771 -- --
Dilutives:
8 7/8% subordinated debentures 1,644 683 -- --
Convertible preferred stock 641 289 -- --
---------------------------------------------------------------------------------------------------------------------------
Diluted $82,723 5,118 $16.16 $(4,678) 4,131 $(1.13) $(7,927) 4,104 $(1.93)
---------------------------------------------------------------------------------------------------------------------------
For the period January 1, 2000 - December 18, 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 the periods ended 12/18/00 and 12/31/99 and
fiscal year 1999 exclude the following shares for stock options and convertible
debentures because their effect would have been antidilutive:
12/18/00 12/31/99 1999
-------- -------- ----
Stock options 796 796 796
Convertible preferred stock -- 298 298
Convertible debentures -- 683 683
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.
Goodwill and Other Intangible Assets
Statement of Financial Accounting Standards No. 142 - Goodwill and Other
Intangible Assets ("SFAS142") is applicable to the Company beginning in 2002.
SFAS 142 prescribes a new methodology for assessing the impairment of goodwill,
which for purposes of SFAS 142, includes the reorganization value in excess of
amounts allocable to identifiable assets ("RVE"). Management believes that there
is no economic impairment of RVE and consequently has not reduced RVE under the
accounting standards applicable to 2001. SFAS 142, however, requires the value
of goodwill be assessed using market conditions, which will principally require
reference to the Company's stock price. If current prices for the Company's
stock remain at current levels, this will likely require a significant non-cash
charge for impairment of RVE in early 2002.
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 were
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. For the year ended December 31, 2001, the amount of such loan is
$262. The Patent Litigation Trust is accounted for as a consolidated subsidiary
of the Company. As such, the loan amount is eliminated in consolidation for the
year ended December 31, 2001, and the Patent Litigation Trust expenses of $262
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 has 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 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. Subsequently, 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. In addition, the Company has obtained
clarification of certain issues relating to its German subsidiary's obligations
for the payment of disability benefits and related insurance coverage for former
employees. As a result, management has reversed a reserve of $350 that had been
established at the December 18, 2000 fresh start date. This reduction of the
estimated liability was applied directly to the intangible asset as a fourth
quarter adjustment. Also during the fourth quarter, $135 representing unclaimed
bankruptcy checks and common stock was likewise applied directly to the
intangible asset. At December 31, 2001, the intangible asset was $3,150 less
accumulated amortization of $218 resulting in a net balance of $2,932. 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, except in substance, to the extent of a percentage of certain
future revenues, if any, earned in certain European countries.
Reorganized
Balance Sheet
Prior to Debt Fresh Start as of
Reorganization Extinguishment Adjustments Dec. 18, 2000
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
===========================================================================================================================
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 PGM Associates, L.P., 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 December 31, 2001, based upon the
closing prices of the securities as of that date, the Partnership had
approximately $2.2 million of assets and approximately $1.1 million of
liabilities for a net asset value of approximately $1.1 million. The Company's
ownership interest in the Partnership approximated 56% and the Company's share
of the Partnership's capital was approximately $0.6 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 share of the Partnership's loss for the twelve months
ended December 31, 2001 of $907, is included in non-operating income/(expense)
on the statement of operations. This investment is reflected as a short term
investment as the Company has the right to liquidate this investment, as
permitted by the Partnership agreement, prior to the end of the fourth quarter
of 2002.
5. Restructuring Costs
During the periods listed below, the Company incurred restructuring costs as
follows in connection with employee termination and facility closing programs
implemented in these years:
Successor Predecessor
12/19/00 - 01/01/00 - 08/01/99 -
2001 12/31/00 12/18/00 12/31/99 1999
--------------------------------------------------------------------------------
Restructuring costs $233 $22 $0 $624 $813
================================================================================
For the year ended December 31, 2001, the Company incurred restructuring costs
for employee termination and the Paris facility closing costs of $233. Of this
amount, $183 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. Of such four former employees, three still provide services on an as
needed basis to the Company. At December 31, 2001, accrued but unpaid
restructuring costs were $50, related to the closing of the Company's Paris
office, which will be paid during the first and second quarters of 2002.
For the period ending December 31, 2000, the Company had restructuring costs of
$22 related 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.
Restructuring costs incurred for the fiscal year ended July 31, 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 relating to payroll costs are not recorded until specific
employees are determined (and notified of termination) by management in
accordance with its overall restructuring plan. Other restructuring costs are
not recorded until management has committed to an exit plan, all significant
actions to be taken have been identified and significant changes to the plan are
not likely.
A rollforward of the restructuring accrual from August 1, 1998 through December
31, 2001 is as follows:
Predecessor TOTAL
------------ -----
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 TOTAL
------------------- ------
Restructuring accrual as of December 18, 2000 $32
Additions 22
Payments (3)
------------------------------------------------------------------
Restructuring accrual as of December 31, 2000 $51
Additions 233
Payments (234)
-----------------------------------------------------------------
Restructuring accrual as of December 31, 2001 $50
===
6. Non-operating Income (Expense)
Successor Predecessor
---------- ------------
12/19/00 - 01/01/00 - 08/01/99 -
2001 12/31/00 12/18/00 12/31/99 1999
-------------------------------------------------------------------------------------------------------
Interest earned $248 $19 $1,510 $6 $313
Imputed interest 54 -- -- -- --
Foreign currency gains (losses) 136 (135) 317 218 (89)
Gain on the sale of buildings -- -- -- -- 273
Equity in loss of limited partnership (907) -- -- -- --
Other (3) -- 97 (259) (301)
---------------------------------------------------------------------------------------------------------
$(472) $(116) $1,924 $(35) $196
========================================================================================================
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,
transaction gains of $1.6 million 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.
7. Income Taxes
The provision for taxes consisted of the following:
Successor Predecessor
----------- ------------
12/19/00 - 01/01/00 - 08/01/99-
2001 12/31/00 12/18/00 12/31/99 1999
-------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes and extraordinary
credit:
U.S. $(3,793) $(311) $50,538 $(4,356) $(8,275)
Outside the U.S. -- -- (1,138) 171 (146)
--------------------------------------------------------------------------------------------------------------------
$(3,793) $(311) $49,400 $(4,185) $(8,421)
====================================================================================================================
U.S. federal:
Current $-- $-- $-- $-- --
Outside the U.S.:
Current -- -- (257) 38 1,451
Deferred -- -- (1,163) 290 (616)
--------------------------------------------------------------------------------------------------------------------
Total provision $-- $-- $(1,420) $328 $835
===================================================================================================================
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 -
2001 12/31/00 12/18/00 12/31/99 1999
-------------------------------------------------------------------------------------------------------------------
Income taxes at statutory rate $(1,327) $(109) $17,290 $(1,465) $(2,947)
Increase in taxes resulting from:
Benefit of U.S. tax loss not recognized 1,320 106 20,279 1,523 2,895
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
Effect of federal tax rate less than (greater than)
foreign tax rates -- -- 150 (372) 325
Benefit of operating loss carryforwards -- -- (1,137) (46) (192)
Other, net 7 3 -- 2 1
-------------------------------------------------------------------------------------------------------------------
Provision for income taxes $-- $-- $(1,420) $328 $835
===================================================================================================================
The primary components of deferred income tax assets and liabilities are as
follows:
2001 2000
---------------------------------------------------------------------------
Deferred income tax assets:
Loss and credit carryforwards $62,072 $61,007
Other 346 --
------------------------------------------------------------------------
62,418 61,007
Less: valuation allowance 62,418 61,007
---------------------------------------------------------------------------
-- --
Deferred income tax liabilities:
Accrued retirement costs (400) (400)
-------------------------------------------------------------------------
Net deferred income tax asset (liability) $(400) $(400)
============================================================================
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 $1,517 of December 31, 2001 deferred tax assets to be
utilized (i.e., those arising after December 18, 2000), the reduction of the
valuation allowance relating to the next $2,932 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, 2001, 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, 2001, the Company had tax operating loss carryforwards
approximating $149,000 for U.S. federal tax purposes. Of this amount, $35,000
expires in year 2002, $29,000 expires in years 2004 and 2005, and $85,000
expires in various amounts through year 2022. U.S. federal long-term capital
loss carryforwards of $28,000 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 alternative minimum tax credits for income tax purposes
at December 31, 2001 of approximately $170 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.
8. 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
remaining face value of $365 that is payable out of certain Vugate cash flows.
This note is carried on the balance sheet at $210, which represents the present
value of the estimated payments at a discount rate of 12.5% per annum. This
carrying amount is net of a $72 impairment adjustment recorded in the fourth
quarter of 2001. The Company plans to impute interest income at 12.5% per annum
on the adjusted balance on a prospective basis beginning in the first quarter of
2002. While the Company currently believes that the receivable is fully
collectible, it is reasonably possible that the note will be collected at a
slower or faster rate than estimated or that a portion of the note will turn out
to be uncollectible. An additional $26 is receivable from other parties. The $26
is net of an allowance of $71 for claims billed to another party that are
currently in dispute.
9. Fixed Assets
Accumulated
Cost Depreciation Net
December 31, 2001
Property, plant and equipment:
Leasehold improvements $6 $2 $4
Machinery, equipment, furniture and fixtures 60 36 24
-----------------------------------------------------------------------------
$66 $38 $28
=== === ===
Accumulated
Cost Depreciation Net
December 31, 2000
Property, plant and equipment:
Building and leasehold improvements $24 $1 $23
Machinery, equipment, furniture and fixtures 84 5 79
------------------------------------------------------------------------------
$108 $6 $102
==============================================================================
During the first and second quarters of 2001, the Company sold its excess office
furniture and fixtures. The net sale proceeds from this was approximately $24,
which is reflected as a decrease in "Cost".
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 is as follows:
Successor
2001 $256
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
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, 2001, future minimum lease payments for all noncancelable leases
totaled $1,749 and are payable as follows:
2002 $253
2003 $220
2004 $209
2005 $207
2006 $207
2007 and after $653
11. Payables to Bank
At December 31, 2001, no lines of credit or other credit facilities were in
place with any of the Company's banks or financial institutions.
12. Accrued Expenses
2001 2000
----------------------------------------------------------------------------
Salaries, commissions, bonuses and other benefits $74 $370
Accrued professional fees 174 1,051
Other 128 195
----------------------------------------------------------------------------
$376 $1,616
============================================================================
13. 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 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 $-- $-- $--
=== === ===
14. Stock Option Plans
Pursuant to their employment agreements, Messrs. Edelman, Agranoff, and
Krumb, were granted stock options of 300,000, 175,000 and 75,000, respectively.
To that end, on December 19, 2000, the Board of Directors adopted the Dynacore
Holdings Corporation Equity Incentive Plan (pursuant to which these options were
issued), which required that the plan be approved by the Shareholders within one
year of adoption. As the Company did not solicit and therefore did not receive
such shareholder approval, the plan expired. As the Company remains
contractually obligated to grant these options to said officers, the Company
anticipates adopting a new stock option plan, which is substantially similar to
the plan previously adopted, including limiting the aggregate amount of shares
available under the plan to 1,500,000, to re-issue these options.
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. As of July 31, 1999, options for 734,505 shares had been granted and no
appreciation rights had been granted. This plan and the options issued
thereunder 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 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 $-- -- --
=== == ==
-------------------------------------------------------------------------------------------
Employee Stock Option Plans
----------------------------------------------------------------------------------------
Price Range Number of Shares
------------------
of Shares Under Available
Under Option Option for Option
-------------------------------------------------------------------------------------------
Successor Company
-----------------
Outstanding at December 18, 2000 $-- -- --
Granted .75 550,000 950,000
Canceled -- -- --
-------------------------------------------------------------------------------------------
Outstanding at December 31, 2000 $.75 550,000 950,000
==== ======= =======
Granted -- -- --
Canceled -- -- --
-------------------------------------------------------------------------------------------
Outstanding at December 31, 2001* $.75 550,000 950,000
==== ======= =======
*Balance reflects the officers contractual obligations as described above.
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. This plan and the options issued thereunder were cancelled as of the
Effective Date.
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 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 --
Granted -- -- --
Canceled-- -- --
---------------------------------------------------------------------------
Outstanding at December 31, 2001 $.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 -
2001 12/31/00 12/18/00 12/31/99 1999
--------------------------------------------------------------------------
Net income (loss) -- As reported $(3,793) $(311) $81,079 $(4,513) $(7,549)
-- Pro forma (3,924) (387) 80,612 (4,893) (8,444)
Basic earnings (loss) per share
-- As reported $(.38) $(.03) $23.04 $(1.13) $(1.93)
-- Pro forma (.39) (.04) 19.45 (1.19) (2.06)
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 2001, the period 01/01/00 -
12/18/00, 08/01/99 - 12/31/99, nor for fiscal year 1999.
12/19/00 - 12/31/00
Risk-free interest rate
Employee stock option 5.19%
Board of director stock option 5.19%
Expected dividend yield
Employee stock option 0
Board of director stock option 0
Expected volatility
Employee stock option .996
Board of director stock option .996
Expected lives
Employee stock option 6
Board of director stock option 3
Weighted average remaining contractual life
Employee stock option 10
Board of director stock option 10
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.
Summarized information about stock options outstanding as of December 31, 2001,
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 9.0 years
Number of shares exercisable 566,667
Weighted average exercise price of shares exercisable $0.75
15. 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 year 1999, the period of 8/1/99 -
12/31/99 and 1/1/00 - 12/18/00:
For the periods 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
-----------------------------------------------------------------------------
Sweden $20,204 $17,567 41,868
United Kingdom 14,075 14,164 35,814
France 7,057 5,211 17,419
Belgium 3,114 3,524 15,749
Corporate and Other 18,625 11,784 28,184
Eliminations (119) (390) (749)
------------------------------------------------------------------------------
Total $62,956 $51,860 $138,285
==========================================
01/01/00 - 08/01/99 -
Segment Profit (Loss) 12/18/00 12/31/99 1999
-----------------------------------------------------------------------------
Sweden $2,111 $1,787 $2,834
United Kingdom 658 1,230 4,547
France (441) (252) 1,102
Belgium 55 (78) 1,339
Corporate and Other (5,387) (4,459) (12,708)
------------------------------------------------------------------------------
Operating Income (Loss) (3,004) (1,772) (2,886)
Interest Expense (1,993) (2,378) (5,731)
Other Non-Operating Income, net 54,397 (35) 196
-----------------------------------------------------------------------------
Income Before Income Taxes and
Extraordinary Credit $49,400 $(4,185) $(8,421)
===========================================
01/01/00 - 08/01/99 -
Capital Expenditures: 12/18/00 12/31/99 1999
-------------------------------------------------------------------------
Sweden $110 $20 $238
United Kingdom 432 702 1,732
France 36 24 231
Belgium 95 54 346
Corporate and Other 840 929 765
-------------------------------------------------------------------------
Total $1,513 $1,729 3,312
=========================================
01/01/00 - 08/01/99 -
Depreciation: 12/18/00 12/31/99 1999
-------------------------------------------------------------------------
Sweden $139 $93 $292
United Kingdom 311 306 1,655
France 54 52 123
Belgium 37 43 291
Corporate and Other 260 976 818
-------------------------------------------------------------------------
Total $801 $1,470 $3,179
=======================================
01/01/00 - 08/01/99 -
Assets: 12/18/00 12/31/99 1999
-------------------------------------------------------------------------
Sweden $-- $14,408 $12,786
United Kingdom -- 22,669 18,838
France -- 10,971 13,870
Belgium -- 13,028 15,677
Corporate and Other 13,740 39,723 44,614
Eliminations -- (56,745) (56,452)
--------------------------------------------------------------------------
Total $13,740 $44,054 $49,333
==========================================
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
--------------------------------------
Revenue - unaffiliated customers:
United States - domestic $458 $814 $4,131
- export sales 496 215 977
Europe 62,002 50,831 133,143
Other International -- -- 34
-------------------------------------------------------------------------------
Total revenue from unaffiliated
customers 62,956 51,860 138,285
Revenue - Intercompany:
United States 116 385 719
Europe 3 5 30
Eliminations (119) (390) (749)
--------------------------------------------------------------------------------
Total consolidated revenue $62,956 $51,860 $138,285
=======================================
01/01/00 - 08/01/99 -
Fixed Assets: 12/18/00 12/31/99 1999
-------------------------------------------------------------------------------
United States $108 $189 $133
Europe -- 5,683 5,795
-------------------------------------------------------------------------------
Total fixed assets $108 $5,872 $5,928
====================================
16. Retirement Income Plans
Retirement expenses incurred by the Company were as follows:
Successor Predecessor
12/19/00- 01/01/00- 08/01/99-
2001 12/31/00 12/18/00 12/31/99 1999
-------------------------------------------------------------------------------
U.S.:
Matching contributions $4 $-- $23 $12 $81
Outside the U.S.:
Defined benefit plans 158 14 1,461 1,223 2,761
Other plans -- -- 331 275 543
-------------------------------------------------------------------------------
158 14 1,792 1,498 3,304
-------------------------------------------------------------------------------
$162 $14 $1,815 $1,510 $3,385
===============================================================================
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.
Prior to the sale of its European Operations, most of the Company's foreign
subsidiaries provided retirement income plans which conformed to the practice of
the country in which they did business, some of which were government sponsored
plans. The types of company-sponsored plans in use were defined benefit and
defined contribution.
Five of the Company's former 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 covered all full-time
employees who had been employed for at least 12 months. Obligations under the
Company's plans were 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 were invested in the Edelman Value Fund,
Ltd., and (c) for Germany, where reserves were established for the obligations.
The Trustees of the Company's former United Kingdom operating subsidiary's
defined benefit pension plan had implemented an investment strategy which
included 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, including disability, 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 one Eastern and three
Western European countries.
The Company's former United Kingdom operating subsidiary had a defined
contribution plan. The plan covered all full-time salaried employees who had
been employed for at least 12 months and contributions were based upon a
percentage of compensation. Obligations under this plan were 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-
2001 12/31/00 12/18/00 12/31/99 1999
-----------------------------------------------------------------------------------------------------
Service Cost $-- $-- $484 $423 $217
Interest Cost 158 14 1,219 995 2,291
Expected return on plan assets -- -- (895) (770) (1,690)
Amortization of transition obligation -- -- 14 14 33
Amortization of net actuarial loss -- -- 639 561 1,910
-----------------------------------------------------------------------------------------------------
Total $158 $14 $1,461 $1,223 $2,761
========================================================
Obligation and asset data for the defined benefit plans at December 31, 2001 and
2000 were as follows:
2001 2000
-------------------------------------------------------------------------------
Change in benefit obligations
Benefit obligation at beginning of period $2,837 $2,689
Service cost -- --
Interest cost 158 14
Benefits paid by employer (65) --
Foreign exchange (gain) loss (161) 139
Actuarial (gain) loss (6) (5)
-------------------------------------------------------------------------------
Benefit obligation at end of period $2,763 $2,837
-------------------------------------------------------------------------------
Change in plan assets
Fair value of plan assets at beginning of period $-- $--
Actual return on plan assets -- --
Benefits paid from plan assets -- --
-------------------------------------------------------------------------------
Fair value of plan assets at end of period $-- $--
-------------------------------------------------------------------------------
Funded Status $(2,763) $(2,837)
Unrecognized net actuarial (gain) loss (11) (5)
Unrecognized prior service cost -- --
Unrecognized transition obligation -- --
-------------------------------------------------------------------------------
Net amount recognized $(2,774) $(2,842)
========================
Amounts recognized in the balance sheet consist of:
Accrued retirement, non-current $(2,774) $(2,842)
Prepaid benefit cost -- --
Deferred tax asset -- --
Accumulated other comprehensive loss -- --
-------------------------------------------------------------------------------
Total $(2,774) $(2,842)
========================
The defined benefit obligation for the German pension plan was determined as of
December 31, 2001 and 2000 using assumed discount rates of 6%, and an assumed
average cost of living benefit increase of 2% in 2001 and 3% in 2000. An assumed
weighted average expected rate of return on plan assets was not applicable in
2001 and 2000. Since the German's pension plan is unfunded, the benefit
obligation exceeds plan assets at the end of December 31, 2001 and 2000.
17. 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, 2001 and 2000,
December 18, 2000, December 31, 1999 and fiscal year 1999, Dynacore paid legal
fees of $233 (of which $70 was accrued at December 31, 2000), $0, $420, $250,
and $265, respectively, to the law firm of Pryor Cashman Sherman & Flynn LLP,
for legal services provided by attorneys other than Mr. Agranoff.
During the period ended December 31, 2001 and 2000, December 18, 2000, December
31, 1999, and fiscal year 1999, the Company paid secretarial expenses of $50,
$0, $45, $0, and $64, 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, 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 implemented an investment strategy which included
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, 2001 and 2000, December 18, 2000, December
31,1999 and fiscal year 1999, Dynacore paid legal fees of $93, $0, $484, $0, and
$0, respectively, to the law firm of Angel & Frankel, P. C. for legal services.
18. 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.
19. 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., 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. In January 2001, the Company began a thorough
evaluation of the Corebyte operations, prospects, and strategic options given
the lack of a significant revenue stream resulting from longer than anticipated
software development and marketing efforts and the availability of similar
Internet applications in the marketplace. During its subsequent evaluation,
which included the exploration and discussions with various parties for
alternative uses and markets for the Corebyte developed source code and
underlying technologies, the Company significantly restructured and curtailed
Corebyte's day-to-day operations, to include the elimination of its Web hosting
services to third parties. During the third quarter of 2001, the Company
concluded that the Corebyte operation was no longer a viable and profitable
opportunity for the Company and therefore completely discontinued operations.
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, 2001 Position Since
---- ------------- -------- -----
A. B. Edelman 62 Director-Chairman of the Board and Chief Executive Officer 1985
P. P. Krumb 59 Vice President, Chief Financial Officer, and Director 1994
G. N. Agranoff 55 Chief Operating Officer, Acting President, Vice Chairman
of the Board and Director 1994
N. W. Walsh 32 Director 2000
N. S. Subin 37 Director 2000
R. B. Smith 59 Director 2000
J. J. Angel 65 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 62, 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 Perini Corp. The principal business address of Mr. Edelman is Ch. Pecholettaz
9, 1066 EPALINGES, Switzerland.
PHILLIP P. KRUMB, age 59, 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 9901
IH10 West Suite 800, San Antonio, Texas 78230-2292.
GERALD N. AGRANOFF, age 55, is currently Chief Operating Officer, Acting
President, Vice Chairman of the Board 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 9901
IH 10 West Suite 800, San Antonio, Texas 78230-2292.
NICHOLAS W. WALSH, age 32, is currently a Principal at Gramercy Capital
Advisors ("Gramercy") , a company that he co-founded in December 2000. Gramercy
is a private investment management company specializing in fixed income and real
estate investments. Prior to forming Gramercy, Mr. Walsh was a Vice
President-Portfolio Manager with J. & W. Seligman & Co. Inc., an asset
management firm based in New York City. He has held various financial positions
with the firm since 1993. Mr. Walsh holds a B.A. in Economics from Tufts
University and Chartered Financial Analyst designation. The principal business
address of Mr. Walsh is 3 Sheridan Square, Suite #11E, New York, New York 10014.
NEIL S. SUBIN, age 37, 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 Nucentrix Broadband Networks,
Inc., a provider of wireless broadband network and multichannel subscription
television services, located in Plano, Texas and also a member of the Board of
Directors of First Avenue Networks, Inc., a provider of broadband fixed wireless
internet services. 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 59, 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 65, 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 Cellular Technical
Services Company, Inc. 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 or 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 met 4 times during the year ended December 31,
2001.
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 2001.
Meetings of the Board of Directors and Committees
The Board of Directors met 3 times during the year ended December 31, 2001. Each
director was in attendance.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Dynacore believes that, during the year ended December 31, 2001, 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 other non-employee
member 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 eighteen months, 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.
Pursuant to their employment agreements, Messrs. Edelman, Agranoff, and
Krumb, were granted stock options of 300,000, 175,000 and 75,000, respectively.
To that end, on December 19, 2000, the Board of Directors adopted the Dynacore
Holdings Corporation Equity Incentive Plan (pursuant to which these options were
issued), which required that the plan be approved by the Shareholders within one
year of adoption. As the Company did not solicit and therefore did not receive
such shareholder approval, the plan expired. As the Company remains
contractually obligated to grant these options to said officers, the Company
anticipates adopting a new stock option plan, which is substantially similar to
the plan previously adopted, including limiting the aggregate amount of shares
available under the plan to 1,500,000, to re-issue these options.
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 year ended December 31, 2001, 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 vest 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 executive
officers for the last three fiscal years.
----------------------------------------------------------------------------------------------------------------------------------
Annual Compensation Long-Term
------------------------------------------
Name and Other Compensation All
--------------------
Principal Annual Stock Options Other
Position Year (8) Salary Bonus Compensation Granted (#) Compensation
----------------------------------------------------------------------------------------------------------------------------------
Asher B. Edelman (1) 01/01/01-12/31/01 $207,500 - $ - - $-
Chairman of the Board and 01/01/00-12/31/00 300,534 - 70,648 300,000 (4) 300,000(7)
Chief Executive Officer (2) 709,500(9)
08/01/99-07/29/00 300,534 - 82,863 - -
08/02/98-07/31/99 - (2) 225,000 (5) -
300,534 101,628 (2)
Gerald N. Agranoff 01/01/01-12/31/01 $157,500 - $ - - $ -
Chief Operating Officer, 01/01/00-12/31/00 198,915 - 7,200 (3) 175,000 (4) 700,000(7)
Acting President 08/01/99-07/29/00 200,000 - 7,200 (3) - 4,500(9)
08/02/98-07/31/99 200,000 - 7,200 (3) 180,000 (5) -
Phillip P. Krumb 01/01/01-12/31/01 $82,500 - - - $ -
Vice President and Chief 01/01/00-12/31/00 257,890(6) - - 75,000 (4) 200,000(7)
Financial Officer 08/01/99-07/29/00 213,659(6) - - - 36,000(9)
Table Footnotes
(1) Asher B. Edelman was named Chief Executive Officer in February 1993.
(2) Represents payments incident to foreign assignment.
(3) Represents auto allowance
(4) Pursuant to their employment agreements, Messrs. Edelman, Agranoff, and
Krumb,were granted stock options of 300,000, 175,000 and 75,000,
respectively. To that end, on December 19, 2000, the Board of Directors
adopted the Dynacore Holdings Corporation Equity Incentive Plan (pursuant
to which these options were issued), which required that the plan be
approved by the Shareholders within one year of adoption. As the Company
did not solicit and therefore did not receive such shareholder approval,
the plan expired. As the Company remains contractually obligated to grant
these options to said officers, the Company anticipates adopting a new
stock option plan, which is substantially similar to the plan previously
adopted, including limiting the aggregate amount of shares available under
the plan to 1,500,000, to re-issue these options.
(5) Options granted pursuant to the 1997 Employee Stock Option Plan which were
cancelled as of the Effective Date.
(6) Included is $105,417 of deferred compensation for the period of April 1999
until February 2000.
(7) Represents cash portion of the officer settlement agreement.
(8) 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.
(9) Represents the stock portion of the officer settlement agreement at a
value of $.75/share issued.
Stock Option Grants in Last Fiscal Year
No stock option grants were made to the named executive officers for the year
ended December 31, 2001.
Aggregated Option Exercises for the period ended December 31, 2001 Option Values
------------------------------------------------- ----------------------------
Number of Value of Unexercised
-----------------------------
Shares Number of Unexercised In-the-Money Options
Acquired on Value Options at December 31, 2001 at December 31, 2000
----------------------------------------------------------
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
-----------------------------------------------------------------------------------------------------------
Asher B. Edelman 0 0 200,000 100,000 $0 $0
Gerald N. Agranoff 0 0 116,667 58,333 $0 $0
Phillip P. Krumb 0 0 50,000 25,000 $0 $0
-----------------------------------------------------------------------------------------------------------
Performance Table
Set forth below is a line 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.
Dow Jones Computer Dow Jones 65
Dynacore Common Stock Systems Index Composite Average
1996 $100.00 $100.00 $100.00
1997 407.20 154.71 159.46
1998 80.53 274.82 175.57
1999 40.80 417.84 196.58
2000 0.00 122.65 210.29
2001 4.81 203.23 142.77
The table assumes $100 invested on January 1, 1997, 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 10022
(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 7, 2002.
Common Stock
Beneficially Percent
Name of Officer/Director Owned (1) of Class(10)
------------------------- ----------------- ------------
Gerald N. Agranoff (O&D) 123,285 (2)(4)(8) *
Asher B. Edelman (O&D) 1,960,287 (2)(3)(4) 19.6%
Phillip P. Krumb (O&D) 104,454 (2) (9) *
Nicholas W. Walsh (D) 375,174 (2)(5) *
Neil S. Subin (D) 184,656 (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) 2,925,572 29.3%
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. Edelman, 200,000; Mr. Agranoff, 116,667; Mr. Krumb, 50,000; Mr.
Walsh, 50,000; Mr. Subin, 50,000; Mr. Smith, 50,000; and Mr. Angel, 50,000; all
officers and directors as a group, 566,667.
(3) Mr. Edelman's listed beneficial ownership of 1,960,287 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 82,278 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 82,278 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 129,852 shares of
Common Stock which are included. Also included are the 43,458 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 231,197 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. Also included are the 200,000
shares represented by exercisable options. 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 6,755 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 82,278 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 325,174 Common shares indirectly in addition to the
50,000 shares represented by exercisable options.
(6) Mr. Subin owns 134,656 Common shares indirectly 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 in addition to the
116,667 shares represented by exercisable options.
(9) Mr. Krumb owns 54,454 Common shares directly in addition to the 50,000
shares represented by exercisable options.
(10) The percentage of the outstanding class calculations are based upon
9,984,726 Common shares, outstanding as of March 7, 2002.
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, 2001 and 2000,
December 18, 2000, December 31, 1999 and fiscal year 1999, Dynacore paid legal
fees of $233 (of which $70 was accrued at December 31, 2000), $0, $420, $250,
and $265, respectively, to the law firm of Pryor Cashman Sherman & Flynn LLP,
for legal services provided by attorneys other than Mr. Agranoff.
During the period ended December 31, 2001 and 2000, December 18, 2000, December
31, 1999, and fiscal year 1999, the Company paid secretarial expenses of $50,
$0, $45, $0, and $64, 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 implemented an investment strategy which included
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, 2001 and 2000, December 18, 2000, December
31, 1999 and fiscal year 1999, Dynacore paid legal fees of $93, $0, $484, $0,
and $0, respectively, to the law firm of Angel & Frankel, P. C. for legal
services.
See Footnote 4 to the Consolidated Financial Statements relating to the
investment in Limited Partnership.
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.
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 59.
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).
(10)(rr) Limited Partnership Agreement between Dynacore Holdings Corporation and PGM
Associates, Inc. dated May 1, 2001 (filed as Exhibit 99.1 to the Company's Current
Form 10K and incorporated by reference).
(10)(ss) Contract between Edelman & Associates and PGM Associates dated April 27, 2001; waiving
management fees of Edelman & Associates and permitting liquidation of investment
within thirty days.
(21) Subsidiaries of Registrant
Patent Litigation Trust, organized under the law of the
State of Delaware.
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 P. Krumb
----------------------
Asher B. Edelman
Chief Executive Officer and
Chairman of The Board
By Phillip P. Krumb, Attorney In Fact
DATED: March 27, 2002
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 March 27, 2002
-------------------- (Principal Accounting Officer)
Phillip P. Krumb
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 March 27, 2002
---------------------
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)
Year ended December 31, 2001 $-- $(143) $-- $-- $(143)
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
(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(rr)
--------------------------------
AGREEMENT
OF
LIMITED PARTNERSHIP
OF
PGM ASSOCIATES, L.P.
----------------------------------
AGREEMENT
OF
LIMITED PARTNERSHIP
OF
PGM ASSOCIATES, L.P.
Table of Contents
Section Page
I General 1
II Purposes and Powers 2
III Capital Contributions and Capital Accounts 3
IV Control and Management 4
V Allocation of Income, Gains and Losses 6
VI Distributions 7
VII Dispositions of Interests of Partners; Withdrawals 8
VIII Dissolution and Termination 9
IX Death, Incompetency, Etc. of Limited Partner 10
X Accounting 11
XI Reports and Statements 11
XII Power of Attorney 12
XIII Notices 13
XIV Miscellaneous 13
AGREEMENT
OF
LIMITED PARTNERSHIP
OF
PGM ASSOCIATES, L.P.
AGREEMENT OF LIMITED PARTNERSHIP (the "Agreement"), dated as of April
27, 2001, by and among Asher B. Edelman & Associates, LLC, as general partner
(the "General Partner") and all the parties who sign copies of this Agreement to
become Limited Partners. The General Partner and the persons who sign as Limited
Partners are sometimes collectively referred to as the "Partners" and
individually as a "Partner".) The term "General Partner" when used in this
Agreement shall be deemed to mean General Partners when there is more than one.
The parties hereto, desiring to form a limited partnership under the
Delaware Revised Uniform Limited Partnership Act on the terms and conditions set
forth herein, hereby agree as follows:
SECTION I
General
1.1 Formation. The parties hereto hereby form, on the day and year
first above written, a limited partnership (the "Partnership") pursuant to the
provisions of the Delaware Revised Uniform Limited Partnership Act. The General
Partner shall cause the due filing in the office of the Secretary of State of
the State of Delaware a Certificate of Limited Partnership for the Partnership.
1.2 Name. The name of the Partnership shall be PGM Associates, L.P..
The General Partner may change the name of the Partnership as he may determine
appropriate, and shall provide notice thereof to the Limited Partners as
promptly as possible following any such determination.
1.3 Term. The Partnership shall commence on the date of the filing of
the Certificate of Limited Partnership referred to in Section 1.1 (the
"Commencement Date"). The Partnership shall continue until dissolved and
terminated as provided in Section VIII.
1.4 Business Location. The principal place of business of the
Partnership shall be 717 Fifth Avenue - 15th Floor, New York, New York 10022 or
at such other location as the General Partner, in his discretion, from time to
time may determine, provided that notice thereof is furnished to the Limited
Partners as promptly as possible following any such determination. The General
Partner may establish other places of business of the Partnership when and where
required by the Partnership's business.
1.5 Registered Office and Agent. The address of the Partnership's
registered office in the State of Delaware shall be 15 East North Street, Dover,
Delaware. The name of the Partnership's registered agent for service of process
in the State of Delaware shall be Vanguard Corporate Services, Ltd. whose
address is 15 East North Street, Dover, Delaware 19901.
1.6 General Partner. The General Partner of the Partnership shall be
Asher B. Edelman & Associates, LLC and any other person who shall become an
additional or successor general partner pursuant to the terms of this Agreement
with the consent of the General Partner. The General Partner may also be a
Limited Partner of the Partnership.
1.7 Limited Partners. The Limited Partners shall be those parties who
sign copies of this Agreement to become Limited Partners. The General Partner
shall have the right to admit additional Limited Partners to the Partnership,
each of whom shall, upon his admission, execute an appropriate supplement to or
counterpart of this Agreement pursuant to which he agrees to be bound by all the
conditions and terms set forth herein, and such other instruments and documents
as the General Partner shall determine.
SECTION II
Purposes and Powers
The purposes of the Partnership are to acquire by open market purchase,
privately negotiated purchase or otherwise, securities of every nature and
description (including options) of a specific entity, the name and business of
which each Limited Partner acknowledges he is familiar, and any affiliated
entities (the "Securities"); to hold, sell, exchange, transfer, vote and
otherwise exercise all rights, powers, privileges and other incidents of
ownership or possession with respect to the Securities and other assets owned by
the Partnership; to borrow money in furtherance of the foregoing purposes and,
subject to applicable margin regulations, secure the payment of such or other
obligations of the Partnership by hypothecation or pledge of all or part of the
assets of the Partnership; to purchase, hold, sell and otherwise deal in
currencies, futures contracts, forward contracts, and options thereon to the
extent the General Partner deems it appropriate with respect to the Securities;
and to enter into, make and perform all contracts and undertakings, engage in
all activities and transactions, and to exercise any and all strategic
initiatives, as the General Partner may deem necessary or advisable to achieve
capital appreciation in the carrying out of the foregoing purposes. The
Partnership may act directly or in conjunction with others, through joint
ventures, partnerships or otherwise, in carrying out the foregoing purposes. The
Partnership shall have all such powers as are necessary or convenient to carry
out the purposes of the Partnership.
SECTION III
Capital Contributions and Capital Accounts
3.1 Partners' Contributions. The Partners shall contribute to the
capital of the Partnership upon execution and delivery of this Agreement cash in
the amount set forth opposite their names on Schedule A hereto. Neither the
General Partner nor any Limited Partner shall have any further liability for any
additional capital contributions to the capital of the Partnership.
3.2 Accounting Periods. The first accounting period (an "Accounting
Period") hereunder shall commence on the Commencement Date and each subsequent
Accounting Period shall commence immediately after the close of the next
preceding Accounting Period. Each Accounting Period hereunder shall close at the
close of business on the first to occur of (a) the date immediately prior to the
effective date of the admission of an additional Limited or General Partner or
the acceptance of any capital contributions pursuant to Section 3.1 hereof, (b)
a Withdrawal Date (as defined in Section 7.2(b) hereof), (c) the date of a
distribution pursuant to Section VI hereof, or (d) the date on which the
Partnership shall terminate.
3.3 Capital Accounts. A capital account (a "Capital Account") shall be
established on the books of the Partnership for each Partner. The Capital
Account of each Partner shall be in an amount equal to (a) the Capital Account
of such Partner as of the end of the immediately preceding Accounting Period
(after taking into account allocations of profits and loss pursuant to Section V
hereof and adjustments to such Capital Account pursuant to Section VI hereof)
or, in the case of the first Accounting Period for such Partner, the amount of
such Partner's capital contribution to the Partnership as set forth in Schedule
A hereto, plus (b) the amount of any capital contribution or additional capital
contribution to the Partnership by such Partner as of the beginning of such
Accounting Period, less (c) the amount, if any, of any distributions made to
such Partner pursuant to Section 6.1 hereof.
3.4 Limitation on Liability. No Limited Partner shall be liable for any of
the debts of the Partnership, except to the extent of his capital contribution.
Notwithstanding the foregoing, a Limited Partner receiving a distribution in
accordance with this Agreement in part or
full return of his capital contribution shall be liable to the Partnership for
any sum, not in excess of such amount returned, plus interest, necessary to
discharge the liabilities of the Partnership to creditors who extended credit or
whose claims arose before such distribution, excluding creditors whose claims
are represented by debt for which neither the Partnership nor any Partner has
any personal liability.
3.5 Miscellaneous. A Partner shall not be entitled to withdraw any part
of his capital contribution or to receive any distribution from the Partnership,
except as specifically provided in this Agreement, and no Partner shall be
entitled to make any additional capital contribution to the Partnership other
than as provided herein. Loans by any Partner to the Partnership shall not be
considered contributions to the capital of the Partnership.
3.6 No Interest on Contributions. No interest shall be paid on the capital
contributed to the Partnership.
SECTION IV
Control and Management
4.1 Power and Duties of the General Partners.
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(a) Except as otherwise expressly provided herein, the General Partner
shall have full and exclusive power and authority on behalf of the Partnership
to manage, control, administer and operate the business and affairs of the
Partnership and to do or cause to be done any and all acts deemed by such
General Partner to be necessary or appropriate thereto, and the scope of such
power and authority shall encompass all matters in any way connected with such
business or incident thereto.
(b) In addition to and in furtherance of the foregoing, the General
Partner shall possess all of the power and authority of a general partner in a
partnership without limited partners as is provided under the laws of the State
of Delaware. No person dealing with the Partnership shall be required to inquire
into the power and authority of the General Partner to take any action or make
any decisions. The signature of the General Partner upon any and all
instruments, contracts, stock powers, proxies, loan agreements, promissory notes
and other documents shall be sufficient to bind the Partnership in respect
thereof and no third person need look to the application of funds or authority
to act or require joinder of any other party.
4.2 Limited Partners' Actions and Cooperation.
-----------------------------------------
(a) The Limited Partners shall take no part in the conduct or control
of the Partnership business and shall have no right or authority to act for or
to bind the Partnership. The exercise of any of the rights and powers of the
Limited Partners pursuant to the terms of this Agreement shall not be deemed
taking part in the day-to-day affairs of the Partnership or the exercise of
control over Partnership affairs.
(b) Each Limited Partner shall furnish the General Partner with such
information as he may from time to time reasonably request, and shall otherwise
cooperate with the General Partner, to enable the General Partner and the
Partnership to comply with applicable laws (including, without limitation,
applicable securities laws) in the conduct of its business.
(c) Each Limited Partner represents that he is acquiring his limited
partnership interest in the Partnership for his own account, for investment, and
not with a view to distribution thereof within the meaning of the Securities Act
of 1933, as amended (the "Act"). Any Limited Partner receiving a distribution in
kind of securities from the Partnership will so represent with respect to the
securities so received and will execute such documents as the General Partner
may reasonably request to insure compliance with the Act.
4.3 Services to Partnership; Affiliated Transactions.
------------------------------------------------
(a) Any Partner may engage in or possess an interest in other business
ventures of any nature or description, independently or with others. In
addition, each Partner shall have the right to be a principal in and devote
time, attention and resources to other business ventures during the term of this
Agreement. Without limiting the generality of the foregoing, the Limited
Partners acknowledge that the General Partner and other entities and persons
affiliated with the General Partner may now own and hereafter acquire and
dispose of Securities of the same issuer and class as the Securities owned by
the Partnership. Neither the Partnership nor any Partner shall have any rights
in or to any such independent ventures or the income or profits derived
therefrom.
(b) The General Partner shall not be paid a salary.
4.4 Exculpation and Indemnification.
-------------------------------
The General Partner and its members, employees, agents and affiliates (an
"Indemnified Person") shall not be liable, responsible or accountable in damages
or otherwise to any Limited Partner for any act or omission performed or omitted
by him in good faith and within the scope of this Agreement. The Partnership
(but not any Partner) shall indemnify and hold harmless an Indemnified Person
from any loss, damage, liability, cost or expense (including reasonable
attorneys' fees) arising out of any act or failure to act by him on behalf of
the Partnership if such act or failure to act is in good faith and within the
scope of this Agreement.
The Partnership shall pay the expenses incurred by an Indemnified Person in
defending a civil or criminal action or proceeding in advance of a final
disposition of such act or proceeding, upon receipt of an undertaking by the
Indemnified Person to repay such amount if the Indemnified Person shall be
adjudicated not to be entitled to indemnification under this Section 4.4, which
undertaking shall be accepted without reference to the financial ability of such
Indemnified Person to make repayment.
4.5 Expenses; Reimbursement of and Payments to the General Partners.
Except as otherwise provided in this Agreement, the Partnership shall be
responsible for paying all direct costs and expenses relating to the formation
and operation of the Partnership, including, without limitation, legal expenses,
accounting expenses, fees of agents and consultants, financing fees, debt
service payments and other costs and expenses relating to the purposes of the
Partnership. In the event that any such costs and expenses have been or
hereafter are paid by the General Partner on behalf of the Partnership, then,
except as expressly provided herein to the contrary, the General Partner shall
be entitled to be reimbursed for such payment from the Partnership.
4.6 Temporary Investments. Pending disbursements of funds of the
Partnership for purchase of Securities, or other related investments, such funds
shall be invested in money market funds, short-term government securities,
deposits in brokerage accounts, certificates of deposit or time or demand
deposits in commercial banks, bankers acceptances, commercial paper, repurchase
agreements in respect of government securities, and other money market
instruments or investments.
4.7 Management Fee. The Partnership shall pay the General Partner (or any
person or entity designated by the General Partner) a fee
computed at an annual rate of 1.50% of the net assets of the Partnership (the
"Management Fee"). Said fee shall be calculated based on the value of the net
assets of the Partnership at the end of each fiscal quarter and shall be paid
within 10 days after the end of the fiscal quarter. Such fees shall be prorated
for periods less than a full fiscal quarter. Any Management Fee payable (but not
previously paid) by the Partnership shall be reduced (but not below zero) by an
amount equal to fifty percent (50%) of the aggregate amount of fees (net of any
related expenses) received by the General Partner or its members from or related
to Securities (other than amounts described in Section 6.1), including
director's fees, advisory fees, consulting fees, brokers' and finders' fees,
transaction fees, investment banking fees and any similar type fees.
SECTION V
Allocation of Income, Gains and Losses
5.1 Allocation of Profits and Losses. The net profits and net losses of
the Partnership for each Accounting Period shall be determined as of the end of
such Accounting Period by the General Partner. For purposes of such
determination, account shall be taken of unrealized gains and unrealized losses
in the value of the assets of the Partnership in accordance with Section 10.4.
5.2 Adjustments to Capital Accounts. The net profits and net losses of
the Partnership shall be credited or charged, as the case may be, to the Capital
Accounts of the Partners as of the end of each Accounting Period, and among them
pro rata to such Capital Accounts.
5.3 Allocations for Tax Purposes. All items of income, deduction, gain,
loss or credit of the Partnership for each fiscal year (or part thereof) of the
Partnership as determined for United States Federal income tax purposes, shall
be allocated (except as provided in Section 7.2(e) hereof) among the Partners in
such manner as to reflect equitably the amounts credited or charged, or to be
credited or charged, to each Partner's Capital Account pursuant to Section 5.2
hereof and amounts distributed or to be distributed pursuant to Section VI
hereof.
SECTION VI
Distributions
6.1 Allocations of Distributions. After providing for satisfaction of
the current debts and obligations of the Partnership and such reserves for
working capital and contingencies as the General Partner deems appropriate in
his discretion, the General Partner may, in his discretion, make distributions
in cash or in kind to the partners, pro rata to their Capital Accounts;
provided, however, that if by operation of the foregoing provisions of this
Section 6.1 a Limited Partner shall be entitled to receive an amount in excess
of his capital contributions (reduced by previous distributions) plus the
Preferred Return of such Limited Partner as defined in Section 6.2 hereof, (the
"Excess"), such Limited Partner's Capital Account shall be reduced, and the
General Partner's Capital Account shall be increased, by 20% of the amount of
such Excess and distributions shall be made in accordance with Capital Accounts,
as so adjusted. The General Partner may receive a distribution in cash or in
kind as an advance of the General Partner's Capital Account, as adjusted herein
as if there were an Excess, if a partial distribution in cash or in kind had
been made to the partners of their then Capital Accounts; provided, however,
that such advance or part thereof, as the case may be, shall be returned to the
Partnership by the General Partner forthwith in the event that a Limited Partner
does not receive as a distribution upon withdrawal at least the amount (reduced
by distributions) of such partner's Capital Account, as adjusted, when such
advance was made.
6.2 Preferred Return. The Preferred Return of a Limited Partner shall be
the return the Limited Partner would have received if an amount equal to his
capital contributions had been invested at 6% per annum.
6.3 Distributions in Kind. If any assets of the Partnership shall be
distributed in kind, such assets shall be valued pursuant to Section 10.4 and
shall be distributed to the Partners in the same proportions as such Partners
would have been entitled to distributions under Section 6.1.
6.4 Property. No Partners shall be entitled to demand and receive
property other than cash in return for his capital contributions to the
Partnership, and, to the maximum extent permissible under applicable law, each
Partner hereby waives all right to partition any property of the Partnership.
6.5 No Priorities among Partners. No Partner shall have any priority over
any other Partner as to the return of his contributions to the capital of the
Partnership or as to compensation by way of income.
SECTION VII
Dispositions of Interests of Partners; Withdrawals
7.1 Restriction on Transfers. No Partner shall assign, transfer or
encumber, in whole or in part, his interest in the Partnership, except with the
prior written consent of the General Partner, which consent shall be within his
sole and absolute discretion, and no approved assignee shall have the right to
become a substituted Partner with respect to an interest so assigned without the
prior written consent of the General Partner, which consent shall be within his
sole and absolute discretion.
7.2 Withdrawal of Limited Partner.
-----------------------------
(a) A Limited Partner may not withdraw from the Partnership prior to
June 30, 2003. Thereafter, a Limited Partner may withdraw all or any part of its
Capital Account as of the last day of each calendar year. Any Limited Partner
desiring to make a withdrawal from its Capital Account shall, not less than 60
days before the date on which such withdrawal is to be made, give written notice
to the Partnership of (i) such Limited Partner's intention to make such
withdrawal and (ii) the amount of such withdrawal or the manner in which the
amount of such withdrawal is to be determined.
The General Partner, in his sole and absolute discretion, with or without
cause, may require any Limited Partner to withdraw from the Partnership at any
time upon written notice to that effect to such Limited Partner at least 10 days
prior to the effective date of such withdrawal, which notice shall specify the
date of such withdrawal. The date of withdrawal either by notice of withdrawal
by the General Partner or the Limited Partner shall be deemed the "Withdrawal
Date".
(c) In the event of the withdrawal of a Limited Partner, the interest
of such Limited Partner shall continue at the risk of the Partnership business
until the Withdrawal Date or earlier termination of the Partnership. If the
Partnership is continued after the Withdrawal Date, such Limited Partner shall
be entitled to receive within 30 days thereafter, in accordance with this
Section 7.2, the value of such Limited Partner's interest in the Partnership as
of the applicable Withdrawal Date. The interest of a Limited Partner after
notice of such withdrawal shall not be included in calculating the interest of
the Partners or Limited Partners required to take action under any provision of
this Agreement.
(d) The value of a withdrawing Limited Partner's interest in the
Partnership shall be that amount that the Limited Partner would have received
had the Partnership been dissolved as of the Withdrawal Date, its debts and
liabilities paid or provided for and its assets distributed in the order of
priority set forth in Section 8.3. Such value shall be determined in the manner
provided in Section 10.4. The value of such withdrawing Limited Partner's
interest may be paid in cash, securities valued (pursuant to Section 10.4) as of
the date of payment, or any combination thereof, in the sole discretion of the
General Partner.
(e) To the extent that a net gain is realized by the Partnership upon
the sale of securities, and the proceeds of such sale are designated in the
books and records of the Partnership as being used to effect payment of a
withdrawing Limited Partner's interest, such net gain shall be specially
allocated for Federal income tax purposes (i) first to such withdrawing Limited
Partner up to an amount equal to the difference between the value of his
interest in the Partnership and his "tax basis" for Federal income tax purposes
in his interest in the Partnership, as of the Withdrawal Date and (ii) to the
extent of any remaining net gains, to all Partners who were Partners as of the
Withdrawal Date, other than such withdrawing Limited Partner, in accordance with
Section V.
(f) The right of any withdrawing Limited Partner to have distributed
the value of his interest in the Partnership pursuant to this Section 7.2 is
subject to the provisions of Sec. 17-607 of the Delaware Revised Uniform Limited
Partnership Act, and reserves for contingencies. The unused portion of any
reserve shall be distributed, with interest at the rate actually earned thereon
pursuant to the investment thereof by the General Partner in any authorized
investment under Section 4.6 hereof, after the General Partner shall have
determined that the need therefor shall have ceased.
The withdrawal of a Limited Partner shall not dissolve the Partnership.
SECTION VIII
Dissolution and Termination
8.1 Dissolution. The Partnership shall be dissolved and its business wound
up upon the earliest to occur of:
(a) the election of the General Partner to so dissolve and wind up;
(b) subject to continuation as provided in Section 8.2, the death,
incompetency, dissolution, insolvency or bankruptcy of the General Partner; or
(3) December 31, 2011.
8.2 Continuation. The General Partner agrees to serve as General
Partner of the Partnership until the Partnership is terminated without
reconstitution as provided below. Upon the occurrence of an event of dissolution
set forth in Section 8.1(b), then the business of the Partnership shall be
continued on the terms and conditions of this Agreement if, within 90 days after
such event, all of the Limited Partners shall designate one or more persons to
be substituted as general partner(s). In the event that the Limited Partners
elect to continue the Partnership with one or more new general partners, such
new general partner(s) shall succeed to all of the powers, privileges and
obligations (but not the interests) of the General Partner hereunder.
8.3 Winding Up. Upon any dissolution requiring the winding up of the
business of the Partnership, the General Partner or such other person as is
winding up the business of the Partnership shall, out of the Partnership assets,
make distributions in the following manner and order;
(a) to creditors, including Partners who are creditors, to the extent
otherwise permitted by law, in satisfaction of liabilities of the Partnership
(whether by payment or by establishment of reserves) other than liabilities for
distributions to Partners under Section. 17-601 or 17-604 of the Delaware
Revised Uniform Limited Partnership Act; and
(b) to the Partners in accordance with Section VI hereof.
All distributions made pursuant to this Agreement shall be made in
cash, securities or other assets of the Partnership, or any combination thereof,
as the General Partner may in his discretion determine.
SECTION IX
Death, Incompetency, Etc. of a Limited Partner
The death, incompetency, bankruptcy or dissolution of a Limited Partner
shall not cause a dissolution of the Partnership. Upon the death, adjudicated
incompetency or bankruptcy of any Limited Partner who is an individual, or upon
the dissolution or bankruptcy of any Limited Partner which is a corporation or
other entity, the rights of such Limited Partner to share in the profits and
losses of the Partnership, to receive distributions of Partnership funds and to
assign his or its Partnership interests pursuant to this Agreement shall devolve
upon his or its personal representative, guardian or successor in interest, as
the case may be, (or, upon the death of one whose interest is held in joint
tenancy, to his surviving joint tenant), subject to the terms and conditions of
this Agreement. The estate of a deceased or bankrupt Limited Partner or such a
surviving joint tenant, as the case may be, shall be liable for all the
obligations of such Limited Partner. In no event shall such personal
representative, guardian, successor in interest or surviving joint tenant become
a substitute Limited Partner except in accordance with Section 7.1.
SECTION X
Accounting
10.1 Fiscal Year. The fiscal year of the Partnership shall be the calendar
year.
10.2 Records. The General Partner, at the expense of the Partnership,
shall keep, or cause to be kept, full and accurate records of all transactions
of the Partnership in accordance with generally accepted accounting principles.
All of such books of account shall, at all times, be maintained in the principal
office of the Partnership, and shall be open during reasonable business hours
for inspection and examination by the Limited Partners and their authorized
representatives, who shall have the right to make copies thereof.
10.3 Tax Filings. The General Partner, at the expense of the Partnership,
shall prepare and file, or cause the accountant of the Partnership to prepare
and file, any required tax and information returns for each tax year of the
Partnership.
10.4 Valuation. For purposes of this Agreement, (a) every asset of the
Partnership other than securities shall be valued at its fair market value in
the judgment of the General Partner, as of the date as of which such valuation
is to be made (the "Valuation Date"), unless this Agreement shall specifically
provide a different method for valuing a particular asset in specified
circumstances; and (b) securities held by the Partnership shall be valued as of
the Valuation Date at an amount per share equal to the last sales price of the
securities on the largest national securities exchange on which the securities
are listed or traded. Liabilities shall be determined in accordance with
generally accepted accounting principles.
SECTION XI
Reports and Statements
11.1 Tax Information. Within 75 days after the end of each fiscal year of
the Partnership, the General Partner, at the expense of the Partnership, shall
cause to be delivered to each Limited Partner the following:
(a) such information as shall be necessary (including a statement for
that fiscal year of each Limited Partner's share of net income, net gains, net
losses and other items of the Partnership) for the preparation of his tax
returns; and
(b) a copy of all income tax and information returns to be filed by the
Partnership for that fiscal year of the Partnership.
11.2 Financial Information.
---------------------
Within 120 days after the end of each fiscal year of the Partnership,
the General Partner shall cause to be delivered to each of the Limited Partners
financial statements of the Partnership for such fiscal year, prepared at the
expense of the Partnership, which statements (a) shall set forth, as at the end
of and for such fiscal year, (i) a profit and loss statement and a balance sheet
of the Partnership; and (ii) such other information as, in the judgment of the
General Partner, shall be reasonably necessary for the Partners to be advised of
the financial status and results of operations of the Partnership.
SECTION XII
Power of Attorney
Each Limited Partner hereby irrevocably makes, constitutes and appoints
the General Partner, and each successor general partner, as long as such person
is acting as general partner, as his true and lawful attorney, to make, sign,
execute, acknowledge, swear to and file with respect to the Partnership:
(a) such Certificate of Limited Partnership and other documents as may
be required by law or pursuant to the provisions of this Agreement, and such
Certificate of Limited Partnership and other documents as may be required to
reconstitute and continue the business of the Partnership in accordance with the
provisions of this Agreement;
(b) all papers which may be deemed necessary or desirable to effect the
winding-up and termination of the Partnership (including, but not limited to, a
certificate of cancellation of the Certificate of Limited Partnership);
(c) documents of transfer of a Limited Partner's interest and all other
instruments to effect such transfer, but only if there has been compliance with
the applicable provisions of this Agreement;
(d) all filings or other reports with respect to the Partnership required
to be made under applicable securities laws, and
(e) all amendments to this Agreement and the Certificate of Limited
Partnership adopted in accordance with Section 14.2, and all documents relating
to such amendments, but only if there has been compliance with the applicable
provisions of this Agreement.
The foregoing appointments are coupled with an interest.
The General Partner shall supply to each Limited Partner a copy of any
document filed pursuant to this Section XII.
SECTION XIII
Notices
Whenever any notice or other communication is required or permitted to
be given under any provision of this Agreement, such notice or other
communication shall be (i) if between Partners within and without the United
States, by telefax, telegram or cable, and shall be deemed to have been given
when received and shall be promptly confirmed by mail, postage prepaid; or (ii)
if between Partners within the United States, in writing, and shall be deemed to
have been given when delivered by personal delivery or five days after the date
mailed, postage prepaid, in each case addressed to the person or persons to whom
such notice or other communication is to be given at the notice address
specified for such person or persons in Schedule A hereto (or at such other
address as shall be stated in a notice similarly given).
SECTION XIV
Miscellaneous
14.1 Binding Effect. Except as herein otherwise provided to the
contrary, this Agreement shall be binding upon and shall inure to the benefit of
the parties hereto, and their legal representatives, successors and permitted
assigns.
14.2 Amendments. No amendment, modification or waiver of this
Agreement, or any part hereof, shall be valid or effective unless in writing and
duly signed by the General Partner with the consent of a Majority-in-Interest of
the Limited Partners; provided, however, that, (i) without the consent of the
Limited Partners, the General Partner may amend this Agreement to comply with
Delaware law, to change the name of the Partnership, its address or that of any
Limited Partner, to change its registered agent or to reflect the admission or
withdrawal of a Partner; and (ii) without the consent of a particular Limited
Partner, no modification or amendment to this Agreement shall increase such
Limited Partner's obligation to make capital contributions to the partnership,
modify adversely his right to withdraw provided herein, or amend this Section
14.2 with respect to him. No waiver of any breach or condition of this Agreement
shall be deemed to be a waiver of any other condition or subsequent breach,
whether of like or different nature. As used herein, a "Majority-in-Interest of
the Limited Partners" shall mean Limited Partners whose Capital Accounts
constitute more than 50% of the aggregate value of the Capital Accounts of all
Limited Partner.
14.3 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware applicable to contracts made
and to be performed entirely within such State.
14.4 Counterparts. This Agreement may be executed in counterparts, each
of which shall be deemed an original and all of which, taken together, shall
constitute but one and the same instrument which may be sufficiently evidenced
by one counterpart.
IN WITNESS WHEREOF, the parties hereto have subscribed and sworn to
this Agreement of Limited Partnership on the day and year first above written.
GENERAL PARTNER:
/s/Irving J. Garfinkel
----------------------
Irving J. Garfinkel
Asher B. Edelman & Associates, LLC
LIMITED PARTNER:
---------------
/s/Nicholas Walsh
-----------------
Nicholas Walsh
Name:
Director- Dynacore Holdings Corporation
Title of Authorized Signatory
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Social Security Number
74 1605174
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Federal I.D. Number
Date:4-30-01
SCHEDULE A
LIMITED PARTNER CAPITAL
NAME AND ADDRESS CONTRIBUTION
EXHIBIT 10(ss)
ASHER B. EDELMAN & ASSOCIATES, LLC
The Beatrice Butterfield Building
P.O. Box 260
Butterfield Square
Providenciales
Turks & Caicos Islands
British Virgin Islands
April 27, 2001
Dynacore Holdings Corporation
717 Fifth Avenue - 15t Floor
New York, New York 10022
Gentlemen:
Confirming our earlier telephone conversation, Dynacore Holdings
Corporation has agreed to become a Limited Partner of PGM Associates, L.P., by
investing $1,500,000. We have agreed to modify certain provisions of the
Partnership Agreements to accommodate your investment. They are as follows:
(a) Section 4.7 regarding payment of the management fee is waived by the
General Partner;
(b) Section 6.1 regarding payment of the incentive allocation is waived by
the General Partner; and
(c) Section 7.2 regarding withdrawal is amended to allow you the right to
withdraw on thirty (30) days notice.
If these modifications meet your approval, please sign in the space
indicated below on the copy of the letter provided for that purpose and return
it to me at 717 Fifth Avenue - 15th Floor, New York New York 10022.
Sincerely
Asher B. Edelman & Associates, LLC
General Partner
By:/s/Gerald N. Agranoff
Gerald N. Agranoff, Member
Approved on Behalf of
Dynacore Holdings Corporation
/s/Nicholas Walsh
Nicholas Walsh
Member of the Board of Directors
Chairman of the Audit Committee