SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[ X ] Quarterly Report Pursuant To Section 13 Or 15(d) Of The Securities
Exchange Act Of 1934
For the quarterly period ended September 30, 2002
------------------
OR
[ ] Transition Report Pursuant To Section 13 or 15(d) Of The Securities
Exchange Act Of 1934
For the transition period from ____________ to _______________
Commission file number 1-7636
DYNACORE HOLDINGS CORPORATION
(formerly Datapoint Corporation)
(Exact name of registrant as specified in its charter)
Delaware 74-1605174
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
9901 IH10 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)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X . No___.
Applicable only to registrants involved in bankruptcy proceedings during the
preceding five years: Indicate by check mark whether the registrant has filed
all documents and reports required to be filed by Section 12, 13 or 15 (d) of
the Securities Exchange Act of 1934 subsequent to the distribution of securities
under a plan confirmed by a court. Yes X No ___.
As of September 30, 2002, 9,984,726 shares of Dynacore Holdings Corporation
Common Stock were outstanding.
DYNACORE HOLDINGS CORPORATION AND SUBSIDIARIES
INDEX
Page
Number
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets -
September 30, 2002 and December 31, 2001 3
Consolidated Statements of Operations -
Quarter and Nine Months Ended September 30, 2002 and 2001 4
Consolidated Statements of Cash Flows -
Quarter and Nine Months Ended September 30, 2002 and 2001 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 14
Item 4. Controls and Procedures 14
Part II. Other Information
Item 1. Legal Proceedings 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
Signature 16
Certifications 17
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED BALANCE SHEETS
Dynacore Holdings Corporation and Subsidiaries
(In thousands, except share data)
------------------------------------------------------------------------------------------------------------
(unaudited)
Sept. 30, 2002 Dec. 31, 2001
-------------- -------------
Assets
Current assets:
Cash and cash equivalents $1,754 $2,614
Investment in limited partnership 6 593
Accounts receivable, net 169 236
Prepaid expenses and other current assets 84 216
-------------------------------------------------------------------------------------------------------
Total current assets 2,013 3,659
Fixed assets, net 18 28
Investment in and advances to the Patent Litigation Trust 6 --
Other assets, net 109 458
Reorganization value in excess of amounts allocable to identifiable assets 1,944 2,932
----------------------------------------------------------------------------------------------------------
$4,090 $7,077
==========================================================================================================
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $11 $126
Accrued expenses 306 376
----------------------------------------------------------------------------------------------------------
Total current liabilities 317 502
Accrued pension and post employment liabilities 3,147 2,790
Deferred federal income tax 400 400
Other long term liabilities 31 --
Stockholders' equity (deficit):
Common stock of $0.01 par value. Shares authorized 30,000,000;
shares issued and outstanding 9,984,726 in 2002 and 2001. 100 100
Paid in capital 7,389 7,389
Accumulated deficit (7,294) (4,104)
-----------------------------------------------------------------------------------------------------------
Total stockholders' equity 195 3,385
----------------------------------------------------------------------------------------------------------
$4,090 $7,077
==========================================================================================================
See accompanying Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF OPERATIONS
Dynacore Holdings Corporation and Subsidiaries
(Unaudited)
--------------------------------------------------------------------------------------------------------------------------
(In thousands, except share data)
--------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------
Quarter Ended Nine Months Ended
--------------------------------------------------------------------------------------------------------------------------
Sept. 30, 2002 Sept. 30, 2001 Sept. 30, 2002 Sept. 30, 2001
-------------- -------------- -------------- --------------
Revenue:
Sales $-- $-- $-- $9
Service and other -- -- -- --
-------------------------------------------------------------------------------------------------------------------------
Total revenue -- -- -- 9
Operating costs and expenses:
Cost of sales -- -- -- --
Selling, general and administrative 270 547 1,110 2,098
Impairment of Datapoint assets 349 -- 349 --
Patent Litigation Trust expenses -- 49 349 131
Restructuring costs -- -- -- 210
--------------------------------------------------------------------------------------------------------------------------
Total operating costs and expenses 619 596 1,808 2,439
--------------------------------------------------------------------------------------------------------------------------
Operating loss (619) (596) (1,808) (2,430)
Non-operating income (expense):
Equity in loss of limited partnership -- (602) (42) (802)
Equity in loss of Patent Litigation Trust (164) -- (164) --
Other, net 67 (156) (188) 361
---------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------
Loss before income taxes (716) (1,354) (2,202) (2,871)
Income tax -- -- -- --
--------------------------------------------------------------------------------------------------------------------------
Loss before income taxes and cumulative effect of change
in accounting principle $(716) $(1,354) $(2,202) $(2,871)
==========================================================================================================================
Cumulative effect of change in accounting principle, net of tax -- -- (988) --
Net loss $(716) $(1,354) (3,190) $(2,871)
============================================================================================================================
Basic and Diluted Loss Per Common Share:
Before cumulative effect of change in accounting principle $(.07) $(.14) $(.22) $(.29)
Cumulative effect of change in accounting principle -- -- (.10) --
---------------------------------------------------------------------------------------------------------------------------
Net loss per common share $(.07) $(.14) $(.32) $(.29)
===========================================================================================================================
Average Common Shares Outstanding:
Basic and Diluted 9,984,726 10,000,000 9,984,726 10,000,000
See accompanying Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Dynacore Holdings Corporation and Subsidiaries
(Unaudited)
(In Thousands)
------------------------------------------------------------------------------------------------------------
Nine Months Ended
----------------------------
Sept. 30, 2002 Sept. 30, 2001
-------------- ---------------
Cash flows from operating activities:
Net loss $(3,190) $(2,871)
Adjustments to reconcile net loss to net
cash used in operating activities:
Cumulative effect of change in accounting principle 988 --
Depreciation and amortization 10 114
Reorganized value in excess of amounts allocable to
identifiable assets:
Amortization -- 182
Favorable settlement/unclaimed bankruptcy checks -- 140
Equity in loss of Patent Litigation Trust, net of $18 interest earned 146 --
Equity in loss of a limited partnership 42 802
Foreign currency (gains) losses related to German Pension Plan 372 --
Bad debt expense 349 --
Changes in assets and liabilities:
Decrease in prepaids 126 --
(Increase) decrease in receivables 67 (58)
Decrease in accounts payable and accrued expenses (360) (1,420)
Other, net 16 102
-----------------------------------------------------------------------------------------------------
Net cash used in operating activities (1,434) (3,009)
Cash flows from investing activities:
Proceeds from sale of fixed assets -- 24
Distributions from PLT 50 --
Advances to Patent Litigation Trust (21) --
Proceeds from limited partnership 545 --
Investment in limited partnership -- (1,500)
-----------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 574 (1,476)
Net decrease in cash and cash equivalents (860) (4,485)
Cash and cash equivalents at beginning of period 2,614 7,304
----------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $1,754 $2,819
====== ======
Cash payments for:
Interest $-- $--
Income taxes, net $-- $--
Noncash investment and financing activity
During the nine months ended September 30, 2002, the Patent Litigation Trust
incurred accounts payable and accrued expenses of $175 that the Company is
obligated to fund. This amount has been included in the Company's accounts
payable and accrued expenses.
See accompanying Notes to Consolidated Financial Statements.
DYNACORE HOLDINGS CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In thousands, except per share data)
(Unaudited)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
by Dynacore Holdings Corporation (the "Company") (formerly Datapoint
Corporation) in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, the information furnished
reflects all adjustments which are necessary for a fair statement of the results
of the interim periods presented. All adjustments made in the interim statements
are of a normal recurring nature.
It is recommended that these statements be read in conjunction with the
financial statements and notes thereto included in the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 2001.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from these estimates.
The results for the quarter and nine months ended September 30, 2002, are not
necessarily indicative of the results to be expected for the full year.
2. Reorganization Plan
Reorganization Under Chapter 11
On May 3, 2000 (the "Petition Date"), the Company filed a petition for relief
under Chapter 11 of the United States Bankruptcy Code with the United States
Bankruptcy Court. The Chapter 11 filing was the result of a default related to
the semi-annual interest payment on the Company's then outstanding 8 7/8%
Convertible Subordinated Debentures (the "Debentures"), recurring operating
losses and cash flow problems.
On December 5, 2000, the Company's Amended Plan of Reorganization (the "Plan")
was approved by the Bankruptcy Court and became effective December 18, 2000 (the
"Effective Date"). The accompanying consolidated financial statements were
prepared in conformity with principles of accounting applicable to a going
concern and reflect all adjustments relating to settlement of the claims of any
class of creditors that were provided for in the Company's Plan of
Reorganization.
On the Effective Date, 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 (the "PLT"), formed to pursue Dynacore's patent litigations, were issued.
Due to the cancellation of unclaimed beneficial interests, as of September 30,
2002, 9,977,690 beneficial interests were outstanding.
As part of the Plan, Dynacore has committed to lend the PLT up to $1 million to
pursue Dynacore's patent litigations as more fully described in Footnote 4.
Fresh Start Reporting
Under the provision of Statement of Position (SOP) 90-7, "Financial Reporting by
Entities in Reorganization under the Bankruptcy Code," issued in November 1990
by the American Institute of Certified Public Accountants, the Company prepared
a consolidated pro forma balance sheet as of the Effective Date, on the basis of
"fresh start" reporting since the reorganization value, as defined, was less
than the total of all post-petition liabilities and pre-petition claims, and
holders of voting shares immediately before confirmation of the Plan received
less than fifty percent of the voting shares of the emerging entity. Under this
concept, all assets and liabilities were restated to reflect the reorganization
value of the reorganized entity, which approximates its fair value at the date
of reorganization. The accumulated deficit of the Company was eliminated and its
capital structure was recast in conformity with the Plan. As such, the
accompanying consolidated balance sheet at September 30, 2002, represents that
of a successor company.
The Company estimated the fair value of the reorganized entity based upon the
issuance of 10 million shares of new common stock at a value of $0.75 per share
pursuant to the approved Plan. 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 in 2000, which was 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 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 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 in the fourth quarter of 2001. Also during the fourth quarter
of 2001, $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.
Statement of Financial Accounting Standards No. 142 - Goodwill and Other
Intangible Assets ("SFAS142") was 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. SFAS 142 requires the value of
goodwill be assessed using market conditions, which principally requires
reference to the Company's stock price. The Company has no subsidiaries or
divisions that meet the definition of a "reporting unit" as set forth in SFAS
142, therefore, the impairment test must be applied on a Company-wide basis. The
stockholders' equity at the beginning of 2002 exceeded the market capitalization
of the Company by $988, necessitating a noncash impairment charge of that
amount. This charge has been reflected as a cumulative effect of a change in
accounting principle in the Consolidated Statement of Operations for the quarter
ended March 31, 2002 and the nine months ended September 30, 2002.
3. Liquidity
As of September 30, 2002, the Company had cash and cash equivalents of
approximately $1.8 million. The Company believes that based upon its forecasted
cash requirements for the next twelve months of approximately $1.2 million to
$1.3 million, its cash will be sufficient for this period. This forecast assumes
the continuation of the selling, general and administrative expenses of the type
referenced in the income statement and reflects the expense savings described in
"Footnote 10 - Officers and Directors Remuneration."
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 PLT in excess of Dynacore's $1 million
loan commitment for court trial expenses, if any.
4. Patent Litigation Trust Advances
As part of the Plan, (see Footnote 2) Dynacore has committed to advance the PLT
up to $1 million to pursue Dynacore's patent litigations. As shown in the table
below, as of September 30, 2002, the amount of such advances are $637. As of
that date interest of $46 has accrued on these advances for a total receivable
from the PLT, net of a $50 settlement received by the PLT and distributed to
Dynacore, of $633. Excluded from this receivable is $175 of incurred, yet unpaid
expenses, the payment of which will have to be funded in the fourth quarter of
2002 by Dynacore through additional advances under the loan. Prior to the third
quarter of 2002, the PLT was accounted for as a consolidated subsidiary of the
Company. As such, the loan amount was eliminated in consolidation. However,
beginning in the third quarter of 2002, when the Company's beneficial interest
fell below 50%, the PLT has been accounted for as an equity method investee. The
loan amount is recorded as part of the combined line item "investment in and
advances to the PLT" which also includes Dynacore's approximately 44.5% interest
in the PLT's beneficial interests which has a recorded amount of zero. From
inception at December 19, 2000 through September 30, 2002, the PLT has had a
cumulative net loss of $802. As none of the PLT expenses have been allocated to
the other holders of beneficial interests in the trust because those interests
have no obligation to fund cumulative losses of the PLT, this loss has been
allocated entirely to Dynacore. In addition, this cumulative net loss of $802
has been, as shown in the table below, reflected in Dynacore's financial
statements, such that $28 of interest income was eliminated in consolidation by
Dynacore, $599 has been recorded as a reduction of the carrying amount of the
loan to $6 and the remaining $175 has been recorded as a liability by Dynacore
and included in accounts payable as Dynacore has incurred an obligation to make
additional advances of this amount. Future income of the PLT, if any, will be
allocated entirely to the Company until the loan and interest has been fully
recovered.
As of September 30, 2002
Total advances to PLT $637
Cumulative accrued interest 46
Settlement received by PLT and distributed to Dynacore (50)
----
Amount receivable from PLT 633
Expenses incurred by PLT to be paid by additional
Dynacore advances 175
---
Cumulative investment in and advances to PLT $808
Cumulative losses of PLT, all allocated to Dynacore:
Intercompany interest eliminated in consolidation by
Dynacore 28
Losses recorded by Dynacore against the amounts
receivable from PLT 599
Additional Dynacore obligation to fund loss of PLT 175
---
Cumulative losses of PLT 802
---
Net investment in and advances to PLT $ 6
=====
Please refer to "Footnote 10 - Officers and Directors Remuneration" for
additional information regarding the PLT ownership percentages.
5. Investment in Limited Partnership
On May 1, 2001, the Company, with the approval of its Board of Directors, agreed
to become a Limited Partner of a partnership (the "Partnership"), of which Asher
B. Edelman & Associates, LLC ("Edelman & Associates") is the General Partner for
an initial investment of $1.5 million. Edelman & Associates is an entity
controlled by Asher B. Edelman, who is Dynacore's Chairman of the Board and
Chief Executive Officer and of which Gerald N. Agranoff, Dynacore's Vice
Chairman of the Board, Chief Operating Officer and Acting President, is a
member. The primary purpose of the Partnership is to acquire by open market
purchase, privately negotiated purchase or otherwise, securities of a specific
publicly traded company in the natural resource industry. Edelman & Associates
has expressly waived all management and incentive fees associated with the
Company's investment which would ordinarily be payable by an investor in this
Partnership. In May, 2002, the Partnership liquidated all of its security
positions in this company. At the time of liquidation, the Company's ownership
interest in the Partnership approximated 55% and the Company's share of the
Partnership's capital was approximately $551 of which $545 was returned to the
Company in June 2002. 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 quarter and nine months ended September 30, 2002 and 2001, was $0
and $42, and $602 and $802, respectively, and is included in non-operating
income/(expense) on the statement of operations. The remaining investment of $6
is reflected as a short term investment as of September 30, 2002.
6. Commitments and Contingencies
From time to time, the Company is a defendant in lawsuits generally incidental
to its business. The Company is not currently aware of any such suit which, if
decided adversely to the Company, would result in a material liability.
7. Non-operating Income (Expense)
Quarter Ended Nine Months
-------------- ----------------
Ended
(In thousands) 09/30/02 09/30/01 09/30/02 09/30/01
-------- -------- -------- --------
Interest earned $24 $45 $38 $279
Imputed interest 15 -- 43 --
Equity in loss of limited partnership -- (602) (42) (802)
Equity in loss of Patent Litigation Trust (164) -- (164) --
Foreign currency gains (losses) 28 (201) (269) 82
-- ===== ----- --
$(97) $(758) $(394) $(441)
===== ====== ====== ======
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 $300 that is payable out of certain Vugate cash flows.
This note is carried on the balance sheet at $165, 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 calculates imputed interest income at 12.5% per
annum on the adjusted balance on a prospective basis. 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.
On September 23, 2002, Datapoint Newco 1 Limited ("DNL"), with whom the Company
has a royalty licensing arrangement, convened a meeting of its creditors to pass
a resolution for the voluntary winding-up of DNL. At the time of such meeting,
the Company had a royalty receivable from DNL of approximately $16, which was
net of an allowance of $71 for a billing dispute. Upon notification of the
pending liquidation of DNL, the Company, which expects to realize little, if
any, recovery from the liquidation proceedings, established an allowance for the
entire amount of the receivable.
In addition, included in the Company's long term assets was approximately $333
representing the present value of the expected royalty payments through the
termination of the licensing arrangement. During the quarter ended September 30,
2002, an impairment adjustment for the full $333 was recorded as a result of the
pending liquidation.
An additional $4 is receivable from other parties.
9. Accrued Expenses
Sept. 30, 2002 Dec. 31, 2001
--------------------------------------------------------------------------------
Salaries, commissions, and other benefits $46 $74
Accrued professional fees 73 174
Accrued Patent Litigation Trust expenses
to be funded by Dynacore 175 --
Other 12 128
---------------------------------------------------------------------------
$306 $376
===========================================================================
10. Officers and Directors Remuneration
In an effort to conserve cash, in August 2002, the three senior officers of the
Company, Asher B. Edelman, Gerald N. Agranoff and Philip P. Krumb agreed to
receive certificates of beneficial interest in the Dynacore Patent Litigation
Trust (the "PLT") owned by the Company in lieu of salary compensation for their
services through December 18, 2002. As a result, the Company transferred
1,049,905 PLT certificates to the three senior officers. The cash savings will
total $210. In addition, the Company's four (4) non-employee directors agreed to
receive 150,000 PLT certificates in lieu of their quarterly director fees
through the end of the current calendar year. The cash savings will total $30.
The value of the PLT certificates was established at $0.20 (20 cents) per
certificate by the Compensation Committee of the Company's Board of Directors by
considering recent sales and through negotiation with the senior officers.
However, as there is presently a very limited trading market for these
beneficial interests, the market value is not readily available. Therefore, the
Company has not recorded any entries in its financial statements to reflect this
transaction.
After distribution of the certificates to the officers and directors as
described above, the Company's ownership in the Patent Litigation Trust is
approximately 44.5%. As a result of this reduction in the Company's ownership
interest, the Company's interest is recorded on the equity method of accounting,
rather than being consolidated as it had been the case previously.
11. German Pension Plan
As part of the sale of the Company's European Operations (the "Sale") to
Datapoint Newco 1 Limited ("DNL") in June, 2000, 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 $3.1 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.
While the pension obligation remains with the German subsidiary, subsequent to
the Sale, the monthly pension payments have been funded from amounts received
pursuant to a royalty licensing arrangement with DNL. Given the pending
liquidation of DNL, as more fully described in Footnote 8 "Accounts Receivable",
the Company was unable to make the September, 2002 pension payment and is
unlikely to be able to continue to make future pension payments. Subsequent to
September 30, 2002, the Company has engaged German Counsel for advice in this
matter, which may include initiating insolvency and/or liquidation procedures
for the German subsidiary. While the ultimate outcome of such actions is unknown
at this time, the Company does not believe that any such actions will have a
material impact upon the Company's cash resources.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (For the Quarter and Nine Months Ended September 30, 2002
and 2001)
Overview
The operations of Dynacore were significantly affected by the sale of the
Company's European Operations on June 30, 2000 and the cessation of virtually
all of the production operations of the Company. In addition, the financial data
for the periods presented reflect the adoption of Fresh Start Accounting on
December 18, 2000, the Effective Date of the approved Plan.
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. 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 continuing to
pursue additional opportunities for an acquisition or merger transaction.
However the Company can give no assurance that any such endeavor will be
successful or profitable.
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 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
As the owner of United States Patent Nos. 5,008,879 and 5,077,732 (the "'732
Patent") related to network technology, Dynacore 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. The actions described below represent
the Trust property which Dynacore transferred and assigned to the Trust pursuant
to the Trust Agreement.
On June 6, 2001 and November 30, 2001, respectively, Dynacore and the Trust
filed the following suits in the Southern District of New York for infringement
of the '732 Patent.
1. Dynacore Patent Litigation Trust v. 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).
2. Dynacore Patent Litigation Trust v. 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)
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 these actions were initially stayed, the stay has been
vacated and the action is proceeding.
On August 19, 2002, the Dynacore Patent Litigation Trust, of which Dynacore
Holdings Corporation owns approximately 44.5 %, settled its patent infringement
lawsuit against Motorola, Inc. The financial aspects of the settlement remain
confidential pursuant to the terms of the settlement agreement.
The remaining suits are in their discovery phase.
Dynacore also had asserted one or both of its 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. CV-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, 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.
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 were submitted to the Patent Office for re-examination. After
re-examination, the patents were approved and a certificate for both patents was
issued. After this re-examination the action proceeded and the appeal was
ultimately denied on February 15, 2002. Accordingly, these actions listed (1)
through (4) above are now over.
The above actions (those listed (1) through (4) above and the actions described
in the first paragraph) represent the trust property which Dynacore transferred
and assigned to the Trust pursuant to that certain Trust Agreement, by and among
Dynacore and the trustees.
Subsequent to the quarter ended September 30, 2002, on October 1, 2002, the
Dynacore Patent Litigation Trust (the "PLT"), of which the Company owns
approximately 44.5%, filed a General Form For Registration of Securities (Form
10) with the Securities and Exchange Commission to register the 10 million
beneficial interests of the PLT. The Company expects the Registration will be
effective on December 1, 2002.
Results of Operations
The following is a summary of the Company's sources of revenue:
Quarter Ended Nine Months Ended
(In thousands) 09/30/02 09/30/01 09/30/02 09/30/01
-------- -------- -------- --------
Sales:
U.S. $-- $-- $-- $9
Foreign -- -- -- --
-- --
-- -- -- 9
-
Other: -- -- -- --
-- --
Total revenue $-- $-- $-- $9
=== === === ==
For the quarter and nine month period ended September 30, 2002, the Company
reported a net loss of $716 and $3,190, respectively. For the same periods, the
Company reported an operating loss of $619 and $1,808, respectively.
Non-operating income (expense) for the quarter and nine month period ended
September 30, 2002, was approximately $(97) and $(394), respectively, and
consisted of interest income of $24 and $38, respectively, imputed interest of
$15 and $43, respectively, and foreign currency transaction gains/(losses) of
$28 and $(269), respectively, primarily related to the liability for the pension
benefits and other post employment obligations for all employees of the
Company's German subsidiary who did not transfer to the buyer of the Company's
European operations in June 2000 at the time of the Sale. Also included was a
loss of $0 and $42, respectively, for the quarter and nine month period ended
September 30, 2002, representing the equity in loss of a limited partnership.
Additionally, a loss of $164 for both the quarter and nine months ended
September 30, 2002, respectively, was included representing the equity in loss
of a patent litigation trust.
Statement of Financial Accounting Standards No. 142 - Goodwill and Other
Intangible Assets ("SFAS142") was 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. SFAS 142 requires the value of
goodwill be assessed using market conditions, which principally requires
reference to the Company's stock price. The Company has no subsidiaries or
divisions that meet the definition of a "reporting unit" as set forth in SFAS
142, therefore, the impairment test must be applied on a Company-wide basis. The
stockholders' equity at the beginning of 2002 exceeded the market capitalization
of the Company by $988, necessitating a noncash impairment charge of that
amount. This charge has been reflected as a cumulative effect of a change in
accounting principle in the Consolidated Statement of Operations for the quarter
ended March 31, 2002 and the nine months ended September 30, 2002. Management
does not believe, however, that this charge reflects actual economic impairment.
Although not permitted under SFAS 142, management views the reorganization value
in excess of amounts allocable to identifiable assets as principally relating to
the Company's German subsidiary, which at December 31, 2001 had accrued pension
and post employment liabilities of $2,790. These pension and post employment
liabilities are obligations of the Company's German subsidiary and are not
obligations of the Parent Company, except possibly to the extent of certain
earmarked assets amounting to $316 and of a percentage of certain future
revenues, if any, earned in certain European countries.
For the quarter and nine month period ended September 30, 2001, the Company
reported a net loss of $1,354 and $2,871, respectively. For the same periods,
the Company reported an operating loss of $596 and $2,430, respectively, which
included approximately $0, and $210, respectively of severance expenses related
to the termination of seven employees of the Company's Corebyte subsidiary and
one employee of the Company during the quarter ended March 31, 2001 and four
employees of the Company during the quarter ended June 30, 2001.
Non operating expense for the quarter and nine month period ended September 30,
2001, was approximately $758 and $441, respectively, and consisted of interest
income of $45 and $279, respectively, and a foreign currency transaction
gain/(loss) of $(201) and $82, respectively, primarily related to the liability
for the pension benefits and other post employment obligations for all employees
of the Company's German subsidiary who did not transfer to DNL at the time of
the Sale. Also included was a loss of $602 and $802 for the quarter and nine
months ended Septemer 30, 2001, respectively, representing the equity in loss of
a limited partnership.
Financial Condition
During the first nine months of 2002, the Company's cash and cash equivalents
decreased approximately $860. The decrease was the result of the payment of the
Company's current operating expenses for the first nine months of 2002,
including approximately $441 which was paid on behalf of the PLT. Also, included
in this amount were certain one-time or annual payments of Company obligations;
therefore, this amount is not necessarily indicative of the Company's quarterly
"run rate" for 2002.
As of September 30, 2002, the Company had cash and cash equivalents of
approximately $1.8 million. The Company believes that based upon its forecasted
cash requirements for the next twelve months of approximately $1.2 million to
$1.3 million, its cash will be sufficient for this period. This forecast assumes
the continuation of the selling, general and administrative expenses of the type
referenced in the income statement and reflects the expense savings described in
"Footnote 10 - Officers and Directors Remuneration".
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 PLT in excess of Dynacore's $1 million
loan commitment for court trial expenses, if any.
On May 1, 2001, the Company, with the approval of its Board of Directors, agreed
to become a Limited Partner of a partnership (the "Partnership"), of which Asher
B. Edelman & Associates, LLC ("Edelman & Associates") is the General Partner for
an initial investment of $1.5 million. Edelman & Associates is an entity
controlled by Asher B. Edelman, who is Dynacore's Chairman of the Board and
Chief Executive Officer and of which Gerald N. Agranoff, Dynacore's Vice
Chairman of the Board, Chief Operating Officer and Acting President, is a
member. The primary purpose of the Partnership is to acquire by open market
purchase, privately negotiated purchase or otherwise, securities of a specific
publicly traded company in the natural resource industry. Edelman & Associates
has expressly waived all management and incentive fees associated with the
Company's investment which would ordinarily be payable by an investor in this
Partnership. In May, 2002, the Partnership liquidated all of its security
positions in this company. At the time of liquidation, the Company's ownership
interest in the Partnership approximated 55% and the Company's share of the
Partnership's capital was approximately $551 of which $545 was returned to the
Company in June 2002. 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 quarter and nine months ended September 30, 2002 and 2001, was $0
and $42, and $602 and $802, respectively, and is included in non-operating
income/(expense) on the statement of operations. The remaining investment of $6
is reflected as a short term investment as of September 30, 2002.
Restructuring Costs
(In thousands)
During the quarter and nine months ended September 30, 2002, the Company did not
incur any restructuring costs. During the quarter and nine months ended
September 30, 2001, the Company incurred restructuring costs for employee
termination costs of $0 and $210, respectively. These costs related primarily to
the termination of seven employees of the Company's Corebyte subsidiary and one
employee of the Company during the quarter ended March 31, 2001 and four
employees of the Company during the quarter ended June 30, 2001. At September
30, 2001, accrued but unpaid restructuring costs were approximately $28.
Restructuring charges are not recorded until specific employees are determined
(and notified of termination) by management in accordance with its overall
restructuring plan.
Cautionary Statement Regarding Risks and Uncertainties That May Affect
Future Results
This Quarterly Report on Form 10-Q contains forward-looking statements about the
business, financial condition and prospects of the Company. The actual results
of the Company could differ materially from those indicated by the
forward-looking statements because of various risks and uncertainties,
including, without limitation, availability of products, changes in competition,
economic conditions, new product development, changes in tax and other
governmental rules and regulations applicable to the Company, and other risks
indicated in the Company's filings with the Securities and Exchange Commission.
These risks and uncertainties are beyond the ability of the Company to control,
and in many cases, the Company cannot predict the risks and uncertainties that
could cause its actual results to differ materially from those indicated by the
forward-looking statements. When used in this Quarterly Report on Form 10-Q, the
words "believes," "estimates," "plans," "expects," and "anticipates" and similar
expressions as they relate to the Company or its management are intended to
identify forward-looking statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Information concerning market risk is contained on page 29 of the Registrant's
Annual Report on Form 10-K for the year ended December 31, 2001 and is
incorporated by reference to such annual report.
Item 4. Controls and Procedures
(a) Within the 90 days prior to the date of this report, the Company
carried out an evaluation, under the supervision and with the participation of
the Company's management, including the Company's chief executive officer and
chief financial officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures pursuant to Exchange Act Rule
13a-14. Based upon that evaluation, the Company's chief executive officer and
chief financial officer concluded that the Company's disclosure controls and
procedures are effective in timely alerting them to material information
relating to the Company (including its consolidated subsidiaries) required to be
included in the Company's periodic filings with the Securities and Exchange
Commission.
(b) There have been no significant changes in the Company's internal
controls or in other factors that could significantly affect the Company's
internal controls subsequent to the date the Company carried out this
evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
See Item 3 of Registrant's Report on Form 10-K for the fiscal year ended
December 31, 2001, for a description of certain legal proceedings heretofore
reported.
The Company is a Plaintiff in a number of actions related to its patents and
trademarks, which are more fully described in the Management's Discussion and
Analysis overview section of this Form 10Q.
Item 5. Other Information
Asher B. Edelman and Phillip P. Krumb, the Chief Executive Officer and Chief
Financial Officer of the Company, respectively, have furnished to the Securities
and Exchange Commission the certification with respect to this Report that is
required by Section 906 of the Sarbanes-Oxley Act of 2002.
Item 6. Exhibits and Reports on Form 8-K
The Company filed two reports on Form 8-K during the quarter ended September 30,
2002. One Form 8-K was filed on August 12, 2002 regarding the officers and
directors remuneration (see Footnote 10). The other Form 8-K was filed on
September 11, 2002 regarding the settlement of a patent infringement lawsuit
against Motorola, Inc.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DYNACORE HOLDINGS CORPORATION
(Registrant)
DATE: November 13, 2002 /s/ Phillip P. Krumb
-------------------------------
Phillip P. Krumb
Chief Financial Officer
(Chief Accounting Officer)
CERTIFICATIONS
I, Asher B. Edelman, Chief Executive Officer of Dynacore Holdings
Corporation, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Dynacore Holdings
Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability
to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 13, 2002 /s/ Asher B. Edelman
-------------------------
Asher B. Edelman
Chief Executive Officer
I, Phillip P. Krumb, Chief Financial Officer of Dynacore Holdings
Corporation, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Dynacore Holdings
Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability
to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 13, 2002 /s/ Phillip P. Krumb
--------------------
Phillip P. Krumb
Chief Financial Officer