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, 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
THE CATTLESALE COMPANY
(f/k/a DYNACORE HOLDINGS 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)
(Registrant's telephone number, including area code): (210) 558-2898
--------------
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
Securities registered pursuant to Section 15(d) of the Act:
None
Title of Class
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 [ ] .
[Cover page 1 of 2 pages]
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 [ ] .
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ ] No [X].
As of June 30, 2002, 9,984,726 shares of Common Stock of The CattleSale
Company 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 $1.1 million. (For purposes of calculating the
preceding amount only, all directors and executive officers of the registrant
are assumed to be affiliates.)
As of March 13, 2003, 19,577,894 shares of Common Stock of The CattleSale
Company were outstanding and the aggregate market value (based upon the last
reported sale price of the Common Stock) of the shares of Common Stock held by
non-affiliates was approximately $2.7 million. (For purposes of calculating the
preceding amount only, all directors and executive officers of the registrant
are assumed to be affiliates.)
[Cover page 2 of 2 pages]
Table of Contents
Page
Glossary.................................................................................................. (iv)
PART I
Item 1. Business......................................................................................... 1
Recent Business Development..................................................................... 1
Background...................................................................................... 1
Activities Prior to Reorganization.............................................................. 2
Reorganization; the Trust....................................................................... 2
Patent Litigation............................................................................... 3
Liquidity....................................................................................... 4
Terms of the Acquisition........................................................................ 4
Dividend to Shareholders........................................................................ 5
Escrow of Dividend Shares....................................................................... 5
Preferred Stock................................................................................. 6
Patents and Trademarks.......................................................................... 6
Employees....................................................................................... 7
Environmental Matters........................................................................... 7
Item 2. Properties....................................................................................... 7
Real Property................................................................................... 7
Tax Loss Carryovers............................................................................. 7
Item 3. Legal Proceedings................................................................................ 8
Item 4. Submission of Matters to a Vote of Security Holders.............................................. 8
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters............................ 10
Market Information.............................................................................. 10
Holders......................................................................................... 10
Dividends....................................................................................... 10
Item 6. Selected Financial Data.......................................................................... 11
i
Item 7. Management's Discussion and Analysis of Financial Condition and 13
Results of Operation............................................................................
Background...................................................................................... 13
Liquidity....................................................................................... 13
Financial Condition............................................................................. 14
Restructuring Costs............................................................................. 14
Results of Operations........................................................................... 16
Market Risk Sensitive Instruments............................................................... 18
Cautionary Statement Regarding Risks and Uncertainties that May Affect Future Results........... 18
Item 7A. Quantitative and Qualitative Disclosures About Market Risk...................................... 18
Item 8. Financial Statements and Supplementary Data...................................................... 19
Report of Marks Paneth & Shron LLP.............................................................. 20
Consolidated Statements of Operations........................................................... 22
Consolidated Balance Sheets..................................................................... 24
Consolidated Statements of Cash Flows........................................................... 25
Consolidated Statements of Stockholders' Equity (Deficiency).................................... 27
Notes to Consolidated Financial Statements ..................................................... 28
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............. 56
PART III
Item 10. Directors and Executive Officers of the Registrant.............................................. 57
Directors and Executive Officers................................................................ 57
Audit, Compensation and Executive Committees.................................................... 61
Meetings of the Board of Directors and Committees............................................... 61
Director Compensation........................................................................... 61
Compliance with Section 16(a) of the Securities Exchange Act of 1934............................ 62
ii
Item 11. Executive Compensation.......................................................................... 62
Compensation Committee Report................................................................... 62
Compensation Committee Interlocks and Insider Participation..................................... 64
Employment Agreements........................................................................... 64
Supplemental Executive Retirement Plan.......................................................... 65
Summary Compensation Table...................................................................... 66
Stock Option Grants in Last Fiscal Year......................................................... 67
Performance Graph............................................................................... 67
Item 12. Security Ownership of Certain Beneficial Owners and Management.................................. 68
Security Ownership of Certain Beneficial Owners................................................. 68
Security Ownership of Management................................................................ 68
Item 13. Certain Relationships and Related Transactions.................................................. 71
Item 14. Controls and Procedures......................................................................... 72
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K ................................ 73
iii
GLOSSARY
Acquisition Agreement: The agreement, dated as of February 25, 2003,
between the Company and AEI pursuant to which the Company acquired the
Interests in the Subsidiaries.
AEI: AEI Environmental, Inc., from whom the Company purchased the Interests in
the Subsidiaries.
Beneficial Interests: The units of beneficial interest in the Trust.
Common Stock: The Company's common stock, par value $.01 per share.
Company: The CattleSale Company, formerly known as Dynacore Holdings
Corporation, together with the Subsidiaries.
Court: The United States Bankruptcy Court for the District of Delaware.
Deemed Acquired Shares: The securities of which a person has a right to acquire
beneficial ownership (such as by exercise of options or conversion of preferred
stock) within 60 days after the applicable reporting date.
Dividend Shares: An aggregate of 250,000 shares of Series A Preferred Stock and
1,127,000 shares of Series B Preferred Stock issued to the Escrow Agent as agent
for the Record Holders.
DNL: The purchaser of the Company's European Operations.
Escrow Agent: Asher B. Edelman, Vice Chairman of the Company's Board of
Directors.
European Operations: The business conducted by the Company in Europe prior to
December 18, 2000.
Interests: The units of limited liability company interest in the Subsidiaries.
Patents: United States Patent Numbers 5,008,879 and 5,077,732
Patent Litigation: Patent infringement cases brought by the Company and
assigned to the Trust.
Plan: The Company's Amended Plan of Reorganization approved by the Court on
December 5, 2000.
Predecessor Company: The term used in Item 7 - Management's Discussion and
Analysis of Financial Condition and Results of Operation and in the Company's
Consolidated Financial Statements and discussions thereof to describe the
Company prior to the adoption of the Plan.
iv
Preferred Stock: The Company's Series A Preferred Stock and the Series B
Preferred Stock.
Reorganization: The reorganization of the Company pursuant to the Plan.
Record Holders: The record holders of Common Stock on February 24, 2003.
Series A Preferred Stock: The Company's Series A Convertible Redeemable
Preferred Stock, par value $.01 per share.
Series B Preferred Stock: The Company's Series B Convertible Redeemable
Preferred Stock, par value $.01 per share.
Subsidiaries: Collectively, CS Livestock Commissions Co. LLC and CS Auction
Production Co., LLC, limited liability companies organized under the laws
of Oregon.
Successor Company: The term used in Item 7 - Management's Discussion and
Analysis of Financial Condition and Results of Operation and the Company's
Consolidated Financial Statements and discussions thereof to describe the
Company subsequent to the adoption of the Plan.
Trust: The Dynacore Patent Litigation Trust, a Delaware grantor trust formed
pursuant to the Plan to prosecute the Patent Litigation.
Trust Loan: Up to $1,000,000 required pursuant to the Plan to be loaned by the
Company to the Trust bearing interest of 12% per year.
v
PART I
ITEM 1. Business.
Recent Business Development
With the close of fiscal year 2002, the Company's active search for a
merger or acquisition partner with revenue producing operations or cash infusion
opportunities came to fruition.
On February 25, 2003, the Company acquired all of the beneficial
interests (the "Interests") in two limited liability companies owned by AEI
Environmental, Inc. ("AEI"), CS Livestock Commissions Co. LLC and CS Auction
Production Co. LLC (collectively, the "Subsidiaries"), pursuant to an
Acquisition Agreement of even date therewith (the "Acquisition Agreement").
After the acquisition was consummated, the Company changed its name from
"Dynacore Holdings Corporation" to "The CattleSale Company."
The Company, through the Subsidiaries, is now in the business of
providing auction trading services to producers of beef and dairy cattle which
is accessible by the internet at the website www.cattlesale.com. The
cattlesale.com website was one of the first sites offering a neutral cattle
trading exchange and providing information and cost efficiencies to the cattle
industry for each stage of the production cycle. Management believes that the
CattleSale products and services reduce transaction costs and improve
information flow and market efficiencies in cattle production.
The terms and conditions of the acquisition of the Interests in the
Subsidiaries are described both in this Item 1 - Business under the heading "The
Acquisition."
Background
The Company did not have any significant revenue or cash producing
activities after June 2000. Prior to acquiring the Interests in the
Subsidiaries, the Company had been continuing to concentrate its efforts and
resources on searching for a suitable merger or acquisition partner and on
maximizing its liquidity. These efforts began when the approval by the United
States Bankruptcy Court for the District of Delaware (the "Court"), on December
5, 2000, of the Company's Amended Plan of Reorganization under Chapter 11 of the
Bankruptcy Code (the "Plan"). A final decree in the reorganization proceeding
was ordered by the Court on December 20, 2001. The reorganization is discussed
below under the heading "Reorganization; the Trust."
Pursuant to the Plan, the Dynacore Patent Litigation Trust (the
"Trust") was formed on December 18, 2000 to prosecute the patent infringement
cases that had previously been brought by the Company (the "Patent Litigation").
The Trust is discussed below under the heading "Reorganization; the Trust" and
the Patent Litigation is discussed below under the heading "Patent Litigation."
Activities Prior to Reorganization
In 1968, the Company was incorporated in Texas as Computer Terminal
Corporation. In 1976, it was reincorporated in Delaware as Datapoint
Corporation.
Datapoint Corporation derived its revenue from hardware and software
products and services, including hardware and software maintenance,
installation, and basic consulting services. It was the owner of certain
patents, copyrights, trademarks and trade secrets in network technologies, which
it considered valuable proprietary assets, including United States Patent
Numbers 5,008,879 and 5,077,732 (the "Patents"). A discussion of the Company's
Patents and the litigation the Company brought to enforce them appears below
under the heading "Patent Litigation."
In addition to its business within the United States, the Company had
operations in Europe which were headquartered in Paris, France (the "European
Operations"). On April 19, 2000, the Company entered into an agreement with
Datapoint Newco 1 Limited, a United Kingdom company ("DNL"), for the sale of the
European Operations. The agreement contemplated, among other things, that the
Company would file for reorganization pursuant to Chapter 11 of the United
States Bankruptcy Code and that the sale would be subject to the approval of the
Court.
The Company filed for reorganization on May 3, 2000. On June 15, 2000,
the Court approved the sale to DNL which was consummated on June 30, 2000. The
adjusted purchase price was $45.125 million. In addition to selling the European
Operations, the Company sold all of its interest in the name "Datapoint" and, in
June 2000, the Company changed its name to Dynacore Holdings Corporation.
Reorganization; the Trust
On December 5, 2000, the Court approved the Plan and, on December 18,
2000, the Trust was formed, the rights to the Patent Litigation were transferred
to it and all of the then existing debt and equity in the Company was cancelled.
The sum of $34.8 million, a portion of the proceeds from the sale of
the European Operations, was distributed to debenture holders and the Company's
other unsecured creditors.
Ten million shares of new common stock, par value $.01 per share, in
the reorganized corporation (the "Common Stock"), as well as ten million
beneficial interests in the Trust (the "Beneficial Interests"), were issued, as
follows:
(i) Debenture holders and the Company's other unsecured creditors
received 25% of the shares of Common Stock and 40% of the Beneficial Interests;
(ii) Holders of the Company's then outstanding preferred stock, par
value $1.00 per share, received 23.5% of the shares of the Common Stock and 3.5%
of the Beneficial Interests;
2
(iii) Holders of the Company's then outstanding common stock, par
value $.25 per share, received 41.5% of the shares of Common Stock;
(iv) Members of the Company's management received 10% of the shares of
Common Stock; and
(v) The Company received the remaining 56.5% of the Beneficial
Interests.
In August, 2002, the Company transferred approximately 12% of the
outstanding Beneficial Interests to certain of its officers and non-employee
directors in lieu of cash compensation for their services for the period from
June 30, 2002 through December 18, 2002.
On December 18, 2002, the Company declared a dividend payable to its
stockholders of record on December 20, 2002. The dividend was payable in the
remainder of the Company's Beneficial Interests on the basis of .44569 of a
Beneficial Interest per share of Common Stock (with all fractional interests
eliminated). As a result of the accumulation of the fractional Beneficial
Interests, the Company retained ownership of 1,469 of the 9,977,690 Beneficial
Interests outstanding as of March 13, 2003.
In January 2003, the Beneficial Interests began trading
over-the-counter in the National Daily Quotation System "pink sheets" published
by the National Quotation Bureau, Inc. under the symbol DYHCS.PK.
Patent Litigation
The Company believes that the Patents covered most products introduced
by various suppliers to the networking industry and certain types of dual-speed
technology introduced by various industry leaders. The Company had asserted one
or both of the Patents in four suits brought in the United States District Court
for the Eastern District of New York (the "Brooklyn Suits") and two suits
brought in the United States District Court for the Southern District of New
York (the "Manhattan Suits").
Pursuant to the Plan, these actions were transferred to the Trust for
prosecution on behalf of the owners of the Beneficial Interests. Also pursuant
to the Plan, the Company is obligated to lend the Trust up to $1 million to
pursue the Patent Litigation (the "Trust Loan"). As of December 31, 2002, the
outstanding principal amount owed to the Company was approximately $793,000 and
accrued interest was approximately $67,000.
The Brooklyn Suits were dismissed on appeal on February 15, 2002. On
August 19, 2002 and February 3, 2003, the Trust settled the Manhattan Suits
against, respectively, Motorola, Inc. and Eastman Kodak Company. The remaining
defendants in the Manhattan Suits received summary judgment in their favor on
February 11, 2003. The Trust intends to appeal this ruling. If the judgment is
not vacated, the Trust will be precluded from further pursuing these cases.
3
Liquidity
Before acquiring the Interests in the Subsidiaries in February 2003,
substantially all of the Company's assets consisted of a portion of the cash
proceeds from the sale of the European Operations which were held in a money
market fund pending use in an operating business. As of December 31, 2002, the
Company had cash and cash equivalents of approximately $1.3 million. In
addition, the Company had approximately $6 thousand invested in an investment
partnership, as more fully described in Note 4 to the Consolidated Financial
Statements.
From June 2000 through December 31, 2002, the Company had no
significant revenue or cash producing activities. In order to maximize its
liquidity so it could satisfy its obligation to fund the Trust Loan and retain
sufficient working capital cash to attract a potential merger or acquisition
partner, the Company implemented measures to conserve cash.
In August 2002, the three senior officers of the Company, Asher B.
Edelman, Gerald N. Agranoff and Phillip P. Krumb, agreed to receive Beneficial
Interests in lieu of cash as compensation for their services during the period
from June 30, 2002 through December 18, 2002. This resulted in cash savings to
the Company of $209,981. Likewise, the Company's then four non-employee
directors agreed to receive Beneficial Interests in lieu of their quarterly
director fees through the end of the calendar year, resulting in cash savings to
the Company of $30,000.
In addition, the Company exercised an early cancellation option in the
lease for its former European headquarters in Paris, France and downsized its
San Antonio, Texas headquarters. The Company is currently attempting to
sub-lease a portion of its New York office and is reviewing several other cost
reduction options.
While the Company has a loan receivable in respect of the Trust Loan of
approximately $793,000 plus accrued interest of approximately $67,000, virtually
the only source of recovery would be from net proceeds of the Patent Litigation
which the Trust most likely will not receive.
Despite its cash saving measures, the Company does not believe that it
will have sufficient cash resources to satisfy its cash requirements for 2003
without an infusion of additional cash. While the Company is actively exploring
various opportunities, there can be no assurance that additional capital will be
available or that the Company will be able to fulfill its obligations.
The Acquisition
The amount of consideration paid by the Company for the Interests in
the Subsidiaries was determined by negotiation, based on a mutual assessment by
the Company and AEI of the value of the Subsidiaries' business and the real
value of the Company's Common Stock. Further, the acquisition was structured to
avoid causing a negative impact on the Company's net operating loss
carry-forward described below under the heading "Properties."
4
The Company did not expend any cash in acquiring the Interests. Rather,
the consideration for the Interests consisted of:
o 1,323,000 shares of Series B Convertible Redeemable Preferred Stock
(the "Series B Preferred Stock") having the principal terms described below
under the heading "Preferred Stock;" and
o 9,593,168 shares of Common Stock, which equaled forty-nine percent
(49%) of the outstanding shares of Common Stock, on a fully-diluted basis,
immediately subsequent to the closing.
The Company intends to file a registration statement with the
Securities and Exchange Commission registering the shares issued to AEI as soon
as practicable.
Dividend to Shareholders
Upon the purchase of the Interests in the Subsidiaries, the Company
declared a dividend payable to its Common Stock holders of record on February
24, 2003 (the "Record Holders"). The dividend was payable in .02503 of a share
of Series A Convertible Redeemable Preferred Stock (the "Series A Preferred
Stock") and .11287 of a share of Series B Preferred Stock per share of Common
Stock. An aggregate of 250,000 shares of Series A Preferred Stock and 1,127,000
shares of Series B Preferred Stock were so issued (collectively, the "Dividend
Shares"). The Series A Preferred Stock has the principal terms described below
under the heading "Preferred Stock." The Dividend Shares were issued in escrow,
as described below under the heading "Escrow of Dividend Shares."
Escrow of Dividend Shares
The Dividend Shares are being held in escrow by Asher B. Edelman, in
the capacity of escrow agent for the benefit of the Record Holders, until such
time as the Dividend Shares have been registered for sale under the Securities
Act of 1933, as amended. The Company intends to file a registration statement
with the Securities and Exchange Commission registering the Dividend Shares, and
the shares issued to AEI at the closing, as soon as practicable; however, the
Company cannot anticipate when such a registration will become effective and the
Dividend Shares released from escrow. During the period the Dividend Shares are
held in escrow, the escrow agent has the power to vote the Dividend Shares on
any matter submitted to the vote of the Company's shareholders, including those
matters acted upon pursuant to the Written Consent, as such term is defined
below in Item 4 - Submission of Matters to a Vote of Security Holders. Mr.
Edelman's biography appears below in Item 10 - Directors and Executive Officers
of the Registrant under the heading "Directors and Executive Officers."
5
Preferred Stock
The rights and preference of the Series A Preferred Stock and the
Series B Preferred Stock (collectively, the "Preferred Stock"), which each have
a par value of $.01 per share, are as follows:
Dividends. Dividends accrue and are cumulative from the date of
issuance in an annual amount equal to 2.5% per year per share, payable
semi-annually, when, as and if declared by the Board of Directors. Dividends are
payable in cash, shares of Preferred Stock (valued at $10 per share) or shares
of Common Stock (valued, (x) if there is a market for the Common Stock, at the
average price of a share of Common Stock during the last thirty (30) days of
trading, or (y) if there is not a market for the Common Stock, at $1.38 per
share), or any combination thereof.
Conversion. Each share of Preferred Stock is convertible at any time
at the option of the holder into 7.25 shares of Common Stock.
Redemption. At any time after the earlier of:
o a merger or consolidation effecting the sale in one or a series of
related transactions of all or substantially all of the Company's assets or a
sale of more than fifty percent (50%) of the Company's outstanding voting
securities, or
o the realization by the Company of aggregate net proceeds in excess of
$10,000,000 in connection with the sale of Common Stock pursuant to a public
offering registered under the Securities Act of 1933, as amended (a "Qualified
Public Offering"),
the Preferred Stock will be redeemed by the Company for cash in an amount equal
to the liquidation preference of $10 per share, plus accrued and unpaid
dividends as of the redemption date; provided, however, that (i) the redemption
of the Series B Preferred Stock will be subject to the rights and preferences of
the Series A Preferred Stock, and (ii) not more than forty percent (40%) of the
net offering proceeds of the Qualified Public Offering will be applied to the
redemption of the Preferred Stock.
Patents and Trademarks
The Company owns no registered patents or trademarks.
All of the Company's right, title and interest to its patents was
transferred to the Trust upon its formation and all of its right, title and
interest in the name "Datapoint" was transferred to DNL upon the sale of the
European Operations.
The Company owns or has the right to use all intellectual property used
by the Subsidiaries in the operation of their business as presently conducted,
6
including trademarks, logos, trade names (including "cattlesale.com"), corporate
names, computer software, internet domain names and IP addresses, and other
proprietary rights.
Employees
At December 31, 2002, the Company had five employees, of whom three
were senior officers and one worked part-time. As a result of its acquisition of
the Interests, on February 25, 2003 the Company gained an additional four
employees, one of whom has since left the Company.
The Company considers its relations with its employees to be
satisfactory.
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.
Real Property
The Company's principal executive office is located in San Antonio,
Texas. It has additional facilities in New York, and, as of February 25, 2003,
Hinsdale, Illinois.
Approximate
Square
Location Use Footage Terms
San Antonio, Texas Office 435 Leased; month to month
San Antonio, Texas Warehouse 4,900 Leased; expires January 31, 2004
New York, New York Office 4,250 Leased; expires October 16, 2009
The Hinsdale office (approximately 600 square feet) is being leased on
a month-to-month basis for $1,500 per month. On March 1, 2003, the Company gave
the landlord notice that it will vacate the premises in six months. The Company
expects to enter into a new lease for approximately 1,200 square feet in the
same vicinity at a comparable rent.
The Company's aggregate annual rent under its leases, excluding
sub-lease agreements, is approximately $234,000. The Company believes that its
facilities are generally well maintained, in good operating condition and are
adequately equipped for their present use.
Tax Loss Carryovers
The Company believes that it had approximately $172 million of tax loss
carryovers for U.S. federal tax purposes upon emerging from bankruptcy in
7
December 2000, of which approximately $116,000 remained on December 31, 2002. Of
this amount, $29,000 expires in years 2004 and 2005 and $87,000 expires in
various amounts through year 2023. Long-term capital loss carryforwards of
$29,000 expire in various amounts beginning in 2004.
At December 31, 2002, the Company had unused alternative minimum tax
credits for income tax purposes of approximately $170,000 which also may be used
to offset the Company's future tax liabilities.
Utilization of the ordinary and capital tax loss carryforwards and the
alternative minimum tax credits are subject to limitation in the event of a more
than fifty percent (50%) change in ownership of the Company. 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 order to maintain its loss carryovers, the Company's Second Restated
Certificate of Incorporation includes certain provisions which impose
restrictions designed to prevent certain ownership changes from occurring.
Further, the Company intends to utilize qualified tax planning strategies, if
necessary, to utilize deferred tax assets.
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. This which would reduce the amount of cash otherwise available to
the Company (see Note 7 to the Consolidated Financial Statements).
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 it, would result in a material liability.
ITEM 4. Submission of Matters to a Vote of Security Holders.
There were no matters submitted during 2002 to a vote of security
holders of the Company through the solicitation of proxies. There was no annual
meeting of stockholders held during 2002.
However, immediately subsequent to the acquisition of the Interests on
February 25, 2003, a majority in interest of the Company's shareholders took
certain actions by written consent (the "Written Consent"), including the
election of directors and the adoption of the Company's Second Restated
Certificate of Incorporation, a description of which follows. The directors'
biographies appear below in Item 10 - Directors and Executive Officers of the
Registrant under the heading "Directors and Executive Officers." The votes cast
by Written Consent, 13,832,716 shares, represented 62.09% of the outstanding
shares entitled to vote. None of the shareholders voting abstained or voted
against any of the proposed actions.
8
The Second Restated Certificate of Incorporation, which was approved by
the Board of Directors on February 19, 2003, effectively (i) changed the name of
the Corporation to The CattleSale Company, (ii) increased the number of
authorized shares of Common Stock by twenty million (20,000,000) shares from
thirty million (30,000,000) shares to fifty million (50,000,000) shares, and
(iii) increased the number of members of the Board of Directors from seven (7)
to eight (8). Inasmuch as the Company (x) is no longer subject to the Court's
December 5, 2000 Confirmation Order, and (y) distributed the Beneficial
Interests owned by it as a dividend to the holders of Common Stock of record on
December 20, 2002, certain other provisions of the Corporation's Restated
Certificate of Incorporation pertaining thereto were also amended.
9
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters.
Market Information
On March 18, 2003, the Company' Common Stock began trading under the
symbol CTLE on the National Association of Securities Dealers' Over-the Counter
Bulletin Board where it had traded since June 18, 2001 under the symbol DYHC.
From December 18, 2000 until June 18, 2001, the Common Stock was tradable
over-the-counter through the National Daily Quotation System "pink sheets"
published by the National Quotation Bureau, Inc.
As of March 20, 2003, the closing price of a share of Common Stock was
$.35. The prices below represent the high and low prices for composite
transactions for Common Stock traded during the applicable periods.
High Low
March 30, 2002 .25 .20
June 30, 2002 .22 .16
September 30, 2002 .17 .06
December 31, 2002 .12 .05
High Low
March 30, 2001 .50 .10
June 30, 2001 .37 .20
September 30, 2001 .28 .16
December 31, 2001 .29 .18
Holders
As of March 13, 2003 there were approximately 2,757 holders of record
and 19,577,894 outstanding shares of Common Stock.
Dividends
The Company has not paid cash dividends to date on its Common Stock and
has no present intention to do so in the near future. However, in December 2002
and February 2003, respectively, the Company declared dividends payable in
Beneficial Interests and in shares of Common Stock and Series A Preferred Stock.
A discussion of both dividends appears above in Item 1 - Business under the
respective headings "Reorganization; the Trust" and "Dividend to Shareholders."
10
ITEM 6. Selected Financial Data.
The operations of the Company for the years ended December 31, 2002 and
2001 and for the period of December 19, 2000 through December 31, 2000
(presented as the "Successor Company"), and all prior periods presented below
(presented as operations of the "Predecessor Company") were significantly
affected by the sale of the Company's European Operations on June 30, 2000 and
the cessation of virtually all of the Company's revenue producing operations. As
a result, the Company's financial results for each of these periods prior to
December 18, 2000 did 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. 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.
11
Selected Financial Data
Five-Year Comparison
(Dollars in thousands, except per share data)
Successor Company Predecessor Company
--------------------------------- ----------------------------------
12/19/00 - 01/01/00 - 08/01/99 -
2002 2001 12/31/00 12/18/00 12/31/99 1999
----------------------------------------------------------------------------------- ----------------------------------
Operating Results for the Fiscal Year
Total Revenue $- $9 $ - $62,956 $51,860 $138,285
Operating income (loss) (2,283) (3,321) (195) (3,004) (1,772) (2,886)
Income (loss) before extraordinary credits
And effect of change in accounting principle (2,526) (3,793) (311) 50,820 (4,513) (9,256)
Net income (loss) (2,290) (3,793) (311) 81,079 (4,513) (7,549)
Basic earnings (loss) per common share:
Income (loss) before extraordinary credits ($0.25) ($0.38) ($0.03) $12.10 ($1.13) ($2.45)
Gain on the exchange and retirement
of preferred stock - - - - - 0.09
Extraordinary credits and changes in accounting 0.02 - - 10.94 - 0.40
Principle
Net income (loss) per share ($0.23) ($0.38) ($0.03) $23.04 ($1.13) ($1.96)
Diluted earnings (loss) per common share:
Income (loss) before extraordinary credits ($0.25) ($0.38) ($0.03) $10.25 ($1.13) ($2.45)
Gain on the exchange and retirement
of preferred stock - - - - - 0.09
Extraordinary credits and changes in accounting 0.02 - - 5.91 - 0.40
Principle
Net income (loss) per share ($0.23) ($0.38) ($0.03) $16.16 ($1.13) ($1.96)
Financial Position at End of Fiscal Year
Current assets $1,702 $3,659 $8,289 $9,318 $36,093 $40,930
Fixed assets, net 14 28 102 108 5,872 5,928
Total assets 1,826 7,077 12,694 13,740 44,054 49,333
Current liabilities 295 502 1,913 2,801 60,444 60,463
Long-term debt - - - - 50,000 50,000
Stockholders' equity (deficit) 1,095 3,385 7,189 7,500 (76,556) (72,128)
Other Information
Average common shares outstanding 9,984,726 9,984,726 10,000,000 4,145,770 4,131,074 4,104,029
Number of common stockholders of record 2,767 2,780 2,641 2,732 2,810 2,860
Preferred shares outstanding - - - - 661,967 661,967
Dividends paid or accumulated on preferred stock - - - - 165 684
Number of employees 5 7 19 19 617 639
See notes to Consolidated Financial Statements and Management Discussion and
Analysis of Financial Condition and Results of Operations.
No cash dividends on Common Sock 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 $3.8 million.
Per share amounts have been adjusted to reflect its issuance at the rate of
..225177 shares of Successor Company Common Stock for each share of Predecessor
Company Common Stock.
12
ITEM 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
Background
The Company, then known as Datapoint Corporation, filed for
reorganization under Chapter 11 of the United States Bankruptcy Code on May 3,
2000 (the "Reorganization"). Prior thereto, it had conducted a hardware and
software product and services business in the United States and Europe (the
"European Operations"). The Company was the owner of United States Patents
5,008,879 and 5,077,732 (the "Patents") and had commenced patent infringement
litigation in the United States District Courts for the Eastern and Southern
Districts of New York (the "Patent Litigation").
On December 5, 2000, the United States Bankruptcy Court for the
District of Delaware (the "Court") approved the Company's Amended Plan of
Reorganization (the "Plan"). Pursuant to the Plan, on June 30, 2000, the
Company's European Operations were sold to Datapoint Newco 1 Limited, a United
Kingdom company ("DNL") and, on June 18, 2000, the Dynacore Patent Litigation
Trust (the "Trust") was formed to prosecute the Patent Litigation on behalf of
the holders of units of beneficial interest in the Trust (the "Beneficial
Interests"). Pursuant to the Plan, the Company is obligated to loan the Trust up
to $1,000,000 with interest at 12% per year (the "Trust Loan").
From June 2000 through December 31, 2002, the Company had no
significant revenue or cash producing activities and was actively seeking a
merger or acquisition partner.
On February 25, 2003, the Company acquired all of the limited liability
company interests (the "Interests") in CS Livestock Commissions Co. LLC and CS
Auction Production Co. LLC (collectively, the "Subsidiaries"). The Company,
through the Subsidiaries, is now conducting a cattle auction and trading
services business on the internet.
Liquidity
Before acquiring the Interests in the Subsidiaries in February 2003,
substantially all of the Company's assets consisted of a portion of the cash
proceeds from the sale of the European Operations which was held in a money
market fund pending use in an operating business. As of December 31, 2002, the
Company had cash and cash equivalents of approximately $1.3 million. In
addition, the Company had approximately $6 thousand invested in PGM Associates,
L.P. (the "Partnership"), as more fully described in Note 4 to the Consolidated
Financial Statements.
As noted above, from June 2000 through December 31, 2002, the Company
had no significant revenue or cash producing activities. In order to maximize
its liquidity so it could satisfy its obligation to lend the Trust up to $1
million and retain sufficient working capital cash to attract a potential merger
or acquisition partner, the Company implemented measures to conserve cash.
13
In August 2002, the three senior officers of the Company agreed to
receive Beneficial Interests in lieu of cash as compensation for their services
during the period from June 30, 2002 through December 18, 2002. This resulted in
cash savings to the Company of $209,981. Likewise, the Company's then four
non-employee directors agreed to receive Beneficial Interests in lieu of their
quarterly director fees through the end of the calendar year, resulting in cash
savings to the Company of $30,000.
In addition, the Company exercised an early cancellation option in the
lease for its former European headquarters in Paris, France and downsized its
San Antonio, Texas headquarters. The Company is currently attempting to
sub-lease a portion of its New York office and is reviewing several other cost
reduction options.
Despite its cash saving measures, the Company does not believe that it
will have sufficient cash resources to satisfy its cash requirements for 2003
without an infusion of additional cash. While the Company is actively exploring
various opportunities, there can be no assurance that additional capital will be
available or that the Company will be able to fulfill its obligations.
As of December 31, 2002, the Company had available federal tax net
operating losses aggregating approximately $116 million which expire in various
amounts beginning in 2004. 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 the Consolidated Financial
Statements).
Financial Condition
(In thousands)
During the year ended December 31, 2002, the Company's unrestricted
cash and cash equivalents decreased approximately $1,300. Of the decrease,
approximately $594 was loaned to the Trust to pay its expenses. The remainder
was used for the Company's operating expenses.
Restructuring Costs
(In thousands)
During the periods listed below, the Company incurred restructuring
costs, as shown, in connection with employee terminations and facility closings
related to its downsizing efforts after its Reorganization. Restructuring
charges relating to payroll costs are not recorded until specific employees are
determined (and notified of termination) by management in accordance with the
Company's overall restructuring plan. Other restructuring costs are not recorded
until management has committed to an exit plan and all significant actions to be
taken have been identified and significant changes to the plan are not likely.
14
Successor Company Predecessor Company
--------------------------------- -------------------
12/19/00 - 01/01/00 -
2002 2001 12/31/00 12/18/00
------ ---------- --------------- ------------------
Restructuring costs $15 $233 $22 $0
For the year ended December 31, 2002, the Company's restructuring costs
were incurred in connection with insolvency and liquidation procedures for its
German subsidiary. At December 31, 2002, accrued but unpaid restructuring costs
were $13, which will be paid during the first and second quarters of 2003.
For the year ended December 31, 2001, the Company's restructuring costs
of $233 arose in connection with employee terminations and closing the Paris
office. Of this amount, $183 related to severance obligations. At December 31,
2001, accrued but unpaid restructuring costs were $50, relating to the closing
of the Paris office, which were 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 Reorganization.
A rollforward of the restructuring accrual from December 18, 2000
through December 31, 2002 is as follows:
Total
Predecessor Company
Restructuring accrual as of December 18, 2000 $32
===
Successor Company
Restructuring accrual as of December 18, 2000 $32
Additions 22
Payments (3)
---
Restructuring accrual as of December 31, 2000 $51
Additions 233
Payments (234)
-----
Restructuring accrual as of December 31, 2001 $50
Additions 15
Payments (52)
----
Restructuring accrual as of December 31, 2002 $13
15
Results of Operations
(In thousands)
The following is a summary of the Company's sources of revenue for each
of the listed periods:
Successor Company Predecessor Company
------------------------- -----------------------
January 1 to
2002 2001 December 18, 2000
------------------------- -----------------------
Sales
U.S. $-- $9 $ 103
Foreign -- -- 37,716
-- -- ------
-- $9 37,819
Service and Other
U.S. -- -- 355
Foreign -- -- 24,782
-- -- ------
25,137
Total Revenue $-- $9 $62,956
=== == =======
(Note: The Company did not record any revenue for the period of
December 19, 2000 to December 31, 2000.)
Year ended December 31, 2002
For the year ended December 31, 2002, the Company had an operating loss
of approximately $2,283. Of this loss, $532 related to the Trust's activities
and $276 related to additional bad debt expense provisions. The remainder
related to the Company's other corporate expenses, including expenses related to
its search for a merger or acquisition partner.
Non-operating expense for the year ended December 31, 2002 was
approximately $243 and consisted of interest income of $25, imputed interest of
$49, and a foreign currency transaction loss of $275 primarily related to the
liability for the pension benefits and other post-employment obligations for
certain employees of the Company's German subsidiary. Also included was a loss
of $42, representing the equity in loss of the Partnership.
Year ended December 31, 2001
During the year ended December 31, 2001, the revenue of $9 was derived
from the operations of Corebyte, Inc., a subsidiary, whose operations were
significantly curtailed in the first quarter of 2001 and discontinued in the
third quarter.
Of the $3,097 of selling, general and administrative expenses, $337
related to depreciation and other "non-cash" amortization, $262 related to the
Trust's activities and $212 was incurred in operations and functions which were
16
terminated during the year. The remainder related to the Company's search for a
merger or acquisition transaction and other corporate expenses.
As described above, the Company incurred $233 of costs in connection
with the Reorganization for the year ended December 31, 2001.
Non-operating expense for the year ended December 31 2001 was
approximately $472 and consisted of interest income of $248, imputed interest of
$54, and a foreign currency transaction gain of $136 primarily related to the
German subsidiary. Also included was a loss of $907, 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 included approximately $50 of expenses related to severance
obligations and other expenses related to the Reorganization. In addition,
included in this period's operating expenses were certain non-recurring items.
Non-operating expense included a foreign currency transaction adjustment of $139
thousand related to the German subsidiary, offset by approximately $19 of
interest income earned during the period. The Company recorded depreciation and
amortization expenses of approximately $13, 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 sale of the European Operations. The gross profit margin for the period
ended December 18, 2000 was 23.1% compared with 24.8% for the five-month period
ended December 31, 1999. Operating expenses for the period were approximately
$17.6 million, including expenses incurred by the European Operations prior to
sale.
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 the Reorganization
proceedings of approximately $1.4 million, as well as $1.2 million representing
the settlement of Officers Administrative Claims in the Reorganization.
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 were $26.5 million related to the
gain on the extinguishment of debt pursuant to the Plan and $3.8 million related
to adjustments required by the adoption of Fresh Start Accounting.
17
Market Risk Sensitive Instruments
Management determined that all of the Predecessor Company's foreign
subsidiaries operated primarily in their respective local currencies and their
assets and liabilities 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. In addition, the
Predecessor Company had cash and intercompany receivables and payables which
were denominated in various functional currencies of the subsidiaries and
parent. 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.
The Successor Company's market risk was primarily limited to a pension
liability and other post-employment liabilities which remain with the German
subsidiary. Thus, the Successor Company's operating results could have been
affected by fluctuations in the value of the U.S. dollar as compared to the
German currency. As of December 31, 2002, the German subsidiary was in
bankruptcy and no longer a part of the consolidated Company.
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, the risks associated with entering into a new line of
business, changes in product demand, the reliability of the internet, 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 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 7A. Quantitative and Qualitative Disclosures about Market Risk
None.
18
ITEM 8. Financial Statements and Supplementary Data.
INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page
Report of Marks Paneth & Shron LLP
Independent Auditors 20
Consolidated Financial Statements
Consolidated Statements of Operations for the years
ended December 31, 2002 and 2001; and the periods
December 19 - December 31, 2000 and
January 1, 2000 - December 18, 2000 22
Consolidated Balance Sheets as of December 31, 2002
and 2001 24
Consolidated Statements of Cash Flows for the years
ended December 31, 2002 and 2001; and the periods
December 19 - December 31, 2000 and
January 1, 2000 - December 18, 2000 25
Consolidated Statements of Stockholders' Equity (Deficiency)
for the years ended December 31, 2002 and 2001; and the
periods December 19 - December 31, 2000
and January 1, 2000 - December 18, 2000 27
Notes to Consolidated Financial Statements 28
19
REPORT OF MARKS PANETH & SHRON LLP
INDEPENDENT AUDITORS
The Board of Directors
The CattleSale Company
We have audited the accompanying consolidated balance sheets of The CattleSale
Company (formerly known as Dynacore Holdings Corporation) and subsidiaries as of
December 31, 2002 and 2001, and the related consolidated statements of
operations, stockholders' equity (deficiency), and cash flows for the years then
ended and for the periods December 19 to December 31, 2000 and January 1 to
December 18, 2000. 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 The
CattleSale Company and subsidiaries as of December 31, 2002 and 2001 and the
consolidated results of its operations and its cash flows for the years then
ended and for the periods December 19 to December 31, 2000 and January 1 to
December 18, 2000, 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, 2002
and 2001, and the related statements of consolidated operations and cash flows
for the years then ended 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.
As discussed in Note 1 to the financial statements, effective January 1, 2002,
the Company adopted Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets."
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As shown in the financial statements,
the Company incurred a net loss before extraordinary credits and the cumulative
effects of change in accounting principle of $2,526,000 during the year ended
December 31, 2002. In addition, as described in Note 1 to the financial
20
statements, the Company will need cash to fund its operations and those of the
Dynacore Patent Litigation Trust. Those conditions raise substantial doubt about
the Company's ability to continue as a going concern. The Company's plans and
intentions are more fully described in Note 1 to the financial statements. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
Our audits referred to above included the financial statement schedule listed in
the index at Item 14(a) as of December 31, 2002 and 2001, and for the years then
ended and for the period December 19 to December 31, 2000, and the period
January 1 to December 18, 2000. 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.
/s/ Marks Paneth & Shron LLP
New York, New York
February 22, 2003, except as to Note 19,
as to which the date is February 25, 2003
21
CONSOLIDATED STATEMENTS OF OPERATIONS
The CattleSale Company and Subsidiaries
For the years ended December 31, 2002 and 2001 and the periods December 19 -
December 31, 2000 and January 1 - December 18, 2000 (In thousands, except share
and per share data)
Predecessor
Successor Company Company
2000 2000
2002 2001 12/19 - 12/31 01/01 -12/18
------------------------------------------------------------------------------------------- ----------------
Revenue:
Sales $-- $9 $-- $37,819
Service and other -- -- -- 25,137
------------------------------------------------------------------------------------------- --------------
Total revenue -- 9 -- 62,956
Operating costs and expenses:
Cost of sales -- -- -- 28,884
Cost of service and other -- -- -- 19,502
Research and development -- -- -- 491
Selling, general and administrative 1,387 2,837 172 17,083
Patent Litigation Trust expenses 532 260 1 --
Impairment of Datapoint assets 349 -- -- --
Restructuring costs 15 233 22 --
------------------------------------------------------------------------------------------- --------------
Total operating costs and expenses 2,283 3,330 195 65,960
------------------------------------------------------------------------------------------- --------------
Operating income (loss) (2,283) (3,321) (195) (3,004)
Non-operating income (expense):
Interest income 25 -- -- --
Interest expense -- -- -- (1,993)
Equity in loss of limited partnership (42) (907) -- --
Other, net (226) 435 (116) 1,924
Reorganization items:
Gain on sale of European Operations -- -- -- 52,473
------------------------------------------------------------------------------------------- --------------
Income (loss) before income taxes and
extraordinary credits and cumulative effect
of change in accounting principle (2,526) (3,793) (311) 49,400
Income taxes (benefit) -- -- -- (1,420)
------------------------------------------------------------------------------------------- ---------------
Income (loss) before extraordinary credits
and cumulative effect of change in
accounting principle (2,526) (3,793) (311) 50,820
Extraordinary credits:
Fresh start adjustments -- -- -- 3,771
Deconsolidation of company subsidiary 3,165
Impairment of reorganization value in excess
of amounts allocable to identifiable assets(1,941) -- -- --
Debt extinguishment -- -- -- 26,488
Cumulative effect of change in accounting
principle (988) -- -- --
------------------------------------------------------------------------------------------- --------------
Net income (loss) $(2,290) $(3,793) $(311) $81,079
=========================================================================================== ==============
22
CONSOLIDATED STATEMENTS OF OPERATIONS
The CattleSale Company and Subsidiaries
continued
Predecessor
Successor Company Company
2000 2000
2002 2001 12/19 - 12/31 01/01 -12/18
----------------------------------------------------------------------------------------------- ---------------
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 $(2,290) $(3,793) $(311) $95,513
======== ======== ====== =======
Basic income (loss) per common share:
Income (loss) before extraordinary credit $(.25) $(.38) $(.03) $ 12.10
Cumulative effect of change in accounting
principle (.10) -- -- --
Deconsolidation of company subsidiary .32 -- -- --
Impairment of reorganization value in excess
of amounts allocable to identifiable assets (.20) -- -- --
Extraordinary credit-fresh start adjustments -- -- -- .91
Extraordinary credit-debt extinguishment -- -- -- 10.03
-- -- -- -----
Net income (loss) per common share $(.23) $(.38) $(.03) $23.04
====== ====== ====== ======
Diluted income (loss) per common share:
Income (loss) before extraordinary credit $(.25) $(.38) $(.03) $ 10.25
Cumulative effect of change in accounting
principle (.10) -- -- --
Deconsolidation of company subsidiary .32 -- -- --
Write off of Reorganization excess (.20) -- -- --
Extraordinary credit-fresh start adjustments -- -- -- .74
Extraordinary credit-debt extinguishment -- -- -- 5.17
-- -- -- ----
Net income (loss) per common share $(.23) $(.38) $(.03) $16.16
====== ====== ====== ======
Average common shares outstanding:
Basic 9,984,726 9,984,726 10,000,000 4,145,770
Diluted 9,984,726 9,984,726 10,000,000 5,118,172
See accompanying Notes to Consolidated Financial Statements.
23
CONSOLIDATED BALANCE SHEETS
The CattleSale Company and Subsidiaries December 31, 2002 and 2001
(In thousands, except share data)
2002 2001
------------------------------
Assets
Current assets:
Cash and cash equivalents $1,344 $2,614
Investment in limited partnership 6 593
Accounts receivable, net 213 236
Prepaid expenses and other current assets 139 216
--- ---
Total current assets 1,702 3,659
Fixed assets, net 14 28
Other assets, net 110 458
Reorganization value in excess of amounts allocable to identifiable assets -- 2,932
-- -----
$1,826 $7,077
====== ======
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $88 $126
Accrued expenses 207 376
--- ---
Total current liabilities 295 502
Accrued pension and post employment liabilities -- 2,790
Deferred rent 36 --
Deferred federal income tax 400 400
Commitments and contingencies
Stockholders' equity:
Successor Common stock of $0.01 par value.
Shares authorized 30,000,000; shares issued
and outstanding 9,984,726 in 2002 and in 2001 100 100
Paid in capital 7,389 7,389
Accumulated deficit (6,394) (4,104)
------- -------
Total stockholders' equity 1,095 3,385
----- -----
$1,826 $7,077
====== ======
See accompanying Notes to Consolidated Financial Statements.
24
CONSOLIDATED STATEMENTS OF CASH FLOWS
The CattleSale Company and Subsidiaries
For the years ended December 31, 2002 and 2001 and the periods
December 19 - December 31, 2000 and January 1 - December 18, 2000
(In thousands)
Predecessor
Successor Company Company
2000 2000
2002 2001 12/19 - 12/31 01/01 - 12/18
---------------------------------------- ------------------------
Cash flows from operating activities:
Net income (loss) $(2,290) $(3,793) $(311) $81,079
Adjustments to reconcile net income (loss) to net cash
provided from (used in) operating activities:
Depreciation and amortization 14 127 5 801
Reorganized value in excess of amounts allocable to identifiable assets
Amortization -- 210 8 --
Favorable settlement/unclaimed bankruptcy checks -- 276 -- --
Impairment 1,944 -- -- --
Officer stock compensation -- -- 750 --
Loss in equity of investee 42 907 -- --
Provision for losses on accounts receivable 276 72 -- 35
Realized gain on sale of European Operations -- -- -- (52,473)
Cumulative change in accounting principle 988 -- -- --
Gain on debt extinguishment -- -- -- (26,488)
Deconsolidation of German subsidiary (3,165) -- -- --
Foreign currency (gains) losses related to German Pension Plan 312 -- -- --
Deferred income taxes -- -- -- 188
Fresh start accounting adjustments -- -- -- (3,771)
Changes in assets and liabilities:
(Increase) Decrease in prepaids 77 -- -- --
(Increase) Decrease in receivables 50 51 (12) (4,303)
Increase in inventory -- -- -- (53)
Increase (Decrease) in accounts payable and accrued expenses (65) (1,094) (1,637) 12,568
Decrease in other liabilities and deferred credits -- -- -- (3,487)
Other, net (27) 30 (24) (1,293)
---- -- ---- -------
Net cash provided from (used in) operating activities (1,824) (3,214) (1,221) 2,803
Cash flows from investing activities:
Payments for fixed assets -- -- -- (1,513)
Proceeds from sale of fixed assets 9 24 -- --
Proceeds from sale of European Operations -- -- -- 43,306
Investment in limited partnership 545 (1,500) -- --
Other, net -- -- -- 432
-- -- -- ---
Net cash provided from (used in) investing activities 554 (1,476) -- 42,225
25
CONSOLIDATED STATEMENTS OF CASH FLOWS
The CattleSale Company and Subsidiaries
continued
Predecessor
Successor Company Company
---------------------------------------- -----------
2000 2000
2002 2001 12/19 - 12/31 01/01 - 12/18
----------------------------------------- --------------
Cash flows from financing activities:
Payments on borrowings -- -- -- (50,467)
Proceeds from borrowings -- -- -- 46,902
Debt extinguishment -- -- -- (34,868)
Restricted cash for letters of credit -- -- -- (19)
----
Net cash provided from (used in) financing activities -- -- -- (38,452)
Effect of foreign currency translation on cash -- -- -- (140)
-----
Net increase (decrease) in cash and cash equivalents (1,270) (4,690) (1,221) 6,436
Cash and cash equivalents at beginning of period 2,614 7,304 8,525 2,089
-----
Cash and cash equivalents at end of period $1,344 $2,614 $7,304 $8,525
====== ====== ====== ======
Cash payments for:
Interest $-- $-- $-- $341
Income taxes $-- $-- $-- $267
See accompanying Notes to Consolidated Financial Statements.
26
CONSOLIDATED STATEMENTS OF STOCKHOLDERS'EQUITY (DEFICIENCY)
The CattleSale Company and Subsidiaries
For the years ended December 31, 2002 and 2001 and the periods
December 19 - December 31, 2000 and January 1 - December 18, 2000 (In thousands)
Accumulated
$1.00 Other
(Predecessor) Common Preferred Paid In Retained Treasury Comprehensive
Stock Stock Capital Deficit Stock Income (Loss) Total
------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------------
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
-----------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------
Net loss - - - (2,290) - - $(2,290)
------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2002 $ 100 $ - $ 7,389 $ (6,394) $ - $ - $1,095
------------------------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements.
27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The CattleSale Company and Subsidiaries
For the years ended December 31, 2002 and 2001 and the periods
December 19 - December 31, 2000 and January 1 - December 18, 2000 (Dollars in
thousands, except share data)
1. Summary of Significant Accounting Policies
Liquidity and Going Concern
The Company, then known as Datapoint Corporation, filed for
reorganization under Chapter 11 of the United States Bankruptcy Code on May 3,
2000 (the "Reorganization"). Prior thereto, it had conducted a hardware and
software product and services business in the United States and Europe (the
"European Operations"). The Company was the owner of United States Patents
5,008,879 and 5,077,732 (the "Patents") and had commenced patent infringement
litigation in the United States District Courts for the Eastern and Southern
Districts of New York (the "Patent Litigation").
On December 5, 2000, the United States Bankruptcy Court for the
District of Delaware (the "Court") approved the Company's Amended Plan of
Reorganization (the "Plan"). Pursuant to the Plan, on June 30, 2000, the
Company's European Operations were sold to Datapoint Newco 1 Limited, a United
Kingdom company ("DNL") and, on June 18, 2000, the Dynacore Patent Litigation
Trust (the "Trust") was formed to prosecute the Patent Litigation on behalf of
the holders of units of beneficial interest in the Trust (the "Beneficial
Interests"). Pursuant to the Plan, the Company is obligated to loan the Trust up
to $1 million with interest at 12% per year (the "Trust Loan"). As of December
31, 2002, $793 had been advanced leaving an additional commitment of $207.
From June 2000 through December 31, 2002, the Company had no
significant revenue or cash producing activities and was actively seeking a
merger or acquisition partner.
On February 25, 2003, the Company acquired all of the limited liability
company interests (the "Interests") in CS Livestock Commissions Co. LLC and CS
Auction Production Co. LLC (collectively, the "Subsidiaries"). The Company,
through the Subsidiaries, is now conducting a cattle auction and trading
services business on the internet.
Prior to its acquisition of the Subsidiaries in February 2003, a
portion of the cash proceeds from the sale of the European Operations
constituted substantially all of the Company's assets. These proceeds were held
in a money market mutual fund pending use in an operating business. As of
December 31, 2002, the Company had cash and cash equivalents of approximately
$1.3 million. In addition, the Company had approximately $6 invested in a
limited partnership, as more fully described in Note 4 below.
28
From June 2000 through December 31, 2002, the Company had no
significant revenue or cash producing activities. In order to maximize its
liquidity so it could satisfy its obligation to the Trust of $1 million and
retain sufficient working capital cash to attract a potential merger or
acquisition partner, the Company implemented measures to conserve cash.
In August 2002, the three senior officers of the Company agreed to
receive Beneficial Interests in lieu of cash as compensation for their services
during the period from June 30, 2002 through December 18, 2002. This resulted in
cash savings to the Company of $209,981. Likewise, the Company's then four
non-employee directors agreed to receive Beneficial Interests in lieu of their
quarterly director fees through the end of the calendar year, resulting in cash
savings to the Company of $30,000.
In addition, the Company exercised an early cancellation option in the
lease for its former European headquarters in Paris, France and downsized its
San Antonio, Texas headquarters. The Company is currently attempting to
sub-lease a portion of its New York office and is reviewing several other cost
reduction options.
Despite its cash saving measures, the Company does not believe that it
will have sufficient cash resources to satisfy its cash requirements for 2003
without an infusion of additional cash. While the Company is actively exploring
various opportunities, there can be no assurance that additional capital will be
available or that the Company will be able to fulfill its obligations. These
conditions raise substantial doubt about the ability of the Company to continue
as a going concern. The financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
Fiscal Year
On June 30, 2000, the Company changed its fiscal year to a calendar
year end in conjunction with the sale of its European Operations. For the period
from January 1, 2000 to December 18, 2000, the Company is referred to as the
"Predecessor Company." For all subsequent periods, the Company is referred to as
the "Successor Company."
Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its majority-owned subsidiaries, all of which were wholly-owned
except Corebyte, Inc., which was 80% owned and the Trust, which was 56.5% owned
as of December 31, 2000 and 2001. In August, 2002, the Company distributed
approximately 12% of outstanding beneficial interests to three senior officers
and four non-employee directors of the Company in lieu of cash compensation for
their services for the period June 30, 2002 through December 18, 2002. The
remainder of the Company's Beneficial Interests was distributed as a dividend to
its stockholders of record on December 20, 2002 on the basis of .44569 of a
Beneficial Interest for each share of Common Stock (with all fractional
interests eliminated). As a result of the accumulation of the fractional
Beneficial Interests, the Company retained ownership of 1,469 of the 9,977,690
29
Beneficial Interests outstanding as of March 13, 2003. Intercompany accounts and
transactions have been eliminated upon consolidation.
On October 31, 2002, the Company's German subsidiary filed for
bankruptcy in the German courts. While the ultimate outcome of this action is
unknown, the Company does not believe that it will have a material impact upon
the Company's cash resources. As of that date, the Company ceased to consolidate
the German subsidiary into its consolidated financial statements. Accordingly,
cash of $14 and a pension liability of $3,179 were removed from the financial
statements as of that date. The resulting $3,165 gain was classified as
extraordinary.
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.
At December 31, 2002 and 2001, approximately $1,301 and $2,534,
respectively, of the Company's cash equivalents was invested in a money market
mutual fund. The remainder of the Company's cash was in operational checking
accounts.
Translation of Foreign Currencies
Management 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
30
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 Predecessor Company's common stock which
has been restated to reflect the equivalent number of shares of Successor
Company Common Stock at the rate of .225177 shares of Successor Company Common
Stock for each share of Predecessor Company common stock.
Revenue Recognition
Between December 18, 2000 and February 25, 2003, the Company was
involved in pursuing its patent rights through the Trust and in seeking a merger
or acquisition partner, while its 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. 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.
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.
31
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 Common Stock which was issued
on December 18, 2000, all share data has been adjusted to reflect its issuance
at the rate of .225177 shares of Common Stock for each share of old common
stock.
Successor Company
2002 2001 12/19/00 -12/31/00
---- ---- ------------------
Per Per Per
Loss Shares Share Loss Shares Share Loss Shares Share
Loss before extraordinary
credits and change in accounting
principle $(2,526) $(3,793) $(311)
Cumulative effect of change in
accounting principle (988) -- --
Extraordinary credits:
Deconsolidation of company
subsidiary 3,165 -- --
Write off of Reorganization
excess (1,941) -- --
Basic and Diluted $(2,290) 9,985 $(0.23) $(3,793) 9,985 $(0.38) $(311) 10,000 $(0.03)
The per share computations for the years ended December 31, 2002, 2001,
and 2000 exclude the following shares subject to stock options because their
effect would have been antidilutive:
2002 2001 12/31/00
---- ---- --------
Stock options 750 750 750
Predecessor Company
01/01/00 - 12/18/00
Income Per
(Loss) Shares Share
Income (loss) before extraordinary
Credit $50,820
Preferred stock dividends
Accumulated (641)
Gain on the exchange and
retirement of preferred stock --
Extraordinary credits:
Debt extinguishment 41,563
Fresh start adjustments 3,771
-------
Basic $95,513 4,146 $23.04
------- ------ ------
32
01/01/00 - 12/18/00
Income Per
(Loss) Shares Share
Income (loss) before extraordinary
credit $50,820
Preferred stock dividends
accumulated (641)
Gain on the exchange and
retirement of preferred stock --
Extraordinary credits:
Debt extinguishment 26,488
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
For the period January 1, 2000 to 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 period ended December 18, 2000
exclude 796 shares subject to stock options because their effect would have been
antidilutive.
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 adjustments and minimum pension liability
adjustments.
Goodwill and Other Intangible Assets
Statement of Financial Accounting Standards No. 142 - Goodwill and
Other Intangible Assets ("SFAS 142") 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 ("RVE"). Management believed
that there was no economic impairment of RVE and consequently did not reduced
RVE under the accounting standards applicable to 2001. SFAS 142, however,
requires the value of goodwill be assessed using market conditions. This
principally requires reference to the Company's stock price. The Company has no
33
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 year ended December 31, 2002.
At December 31, 2002, stockholders' equity, not including RVE, exceeded
the Company's market capitalization. This necessitated an impairment charge for
the remaining RVE of $1,941. Had the pension liability of the Company's German
subsidiary not been eliminated by the deconsolidation resulting from the
subsidiary's bankruptcy, the impairment charge would not have been necessary.
The RVE arose because of the existence of the pension liability, for which there
was, at the time, a significant expectation that the Company would eventually
not be liable. Because of the linkage of the RVE and the German pension
liability, both at its inception and its impairment, the impairment of the RVE
was classified as an extraordinary charge to correspond to the extraordinary
credit recorded for the deconsolidation of the German subsidiary.
Had SFAS 142 been in effect for the year ended December 31, 2001, the
Company's net loss for that year would have been $4,571, $778 more than the
reported $3,793. The effect on the two periods in 2000 would have been
immaterial.
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 April 19, 2000, the Company entered into an agreement with DNL for
the sale of the European Operations. The agreement contemplated, among other
things, that the Company would file for reorganization pursuant to Chapter 11
and that the sale would be subject to the approval of the Court.
The Company filed for reorganization on May 3, 2000. On June 15, 2000,
the Court approved the sale which was consummated on June 30, 2000. The adjusted
purchase price 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 the
bankruptcy proceeding described in Note 3 of approximately $1.4 million, as well
as $1.2 million representing the settlement of Officers Administrative Claims
pursuant to the Plan.
34
3. Reorganization Plan
Reorganization Under Chapter 11
On May 3, 2000, the Company filed a petition for relief under Chapter
11 as a result of defaults on certain semi-annual interest payments, recurring
operating losses and cash flow problems. Under Chapter 11, substantially all
pre-petition 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 United States
Bankruptcy Court.
On December 5, 2000, the Court approved the Company's Plan and, on
December 18, 2000, the Trust was formed, the rights to the Patent Litigation
were transferred to it and all of the then existing debt and equity in the
Company was cancelled.
The sum of $34.8 million, a portion of the proceeds from the sale of
the European Operations, was distributed to Debenture holders and the Company's
other unsecured creditors.
Ten million shares of common stock, par value $.01 per share, in the
reorganized corporation (the "Common Stock"), as well as ten million beneficial
interests in the Trust (the "Beneficial Interests"), were issued, as follows:
(i) Debenture holders and the Company's other unsecured creditors
received 25% of the shares of Common Stock and 40% of the Beneficial Interests;
(ii) Holders of the Predecessor's Company's preferred stock, par value
$1.00 per share, received 23.5% of the shares of the Common Stock and 3.5% of
the Beneficial Interests;
(iii) Holders of the Predecessor's Company's common stock, par
value $.25 per share, received 41.5% of the shares of Common Stock;
(iv) Members of the Company's management received 10% of the shares of
Common Stock; and
(v) The Company received the remaining 56.5% of the Beneficial
Interests.
For the year ended December 31, 2001, the Trust was accounted for as a
consolidated subsidiary of the Company. As such, the amount of the Trust Loan
was eliminated in consolidation for the year ended December 31, 2001 and Trust
expenses of $262 were included in the Company's Consolidated Statements of
Operations. None of the Trust expenses were allocated to the 43.5% minority
interest because the minority interest had no obligation to fund cumulative
losses of the Trust. Future income of the Trust, if any, will be paid entirely
to the Company until the Trust Loan and accrued interest has been fully
recovered.
35
In August 2002, the Company transferred approximately 12% of the
outstanding Beneficial Interests to certain of its officers and directors in
lieu of cash compensation for their services for the period from June 30, 2002
through December 18, 2002.
On December 18, 2002, the Company declared a dividend payable to its
stockholders of record on December 20, 2002. The dividend was payable in the
remainder of the Company's Beneficial Interests on the basis of .44569 of a
Beneficial Interest for each share of Common Stock (with all fractional
interests eliminated). As a result of the accumulation of the fractional
Beneficial Interests, the Company retained ownership 1,469 of the 9,977,690
Beneficial Interests outstanding as of March 13, 2003.
As of December 31, 2002, the $793 Trust Loan was classified as a
receivable. The probability of collection is dependent upon the success or
favorable settlements of the Patent Litigation. On February 11, 2003, the
defendants motion for summary judgment was granted. If this decision is not
reversed, the Trust will be precluded from further pursuit of the litigation.
The Trust intends to appeal this decision. In view of the summary judgment, an
allowance for the full amount of the Trust Loan has been recorded; the Trust
Loan and accrued interest are fully reserved and carried on the balance sheet at
$0.
As a consequence of these ownership changes, the Company continued to
account for the Trust as a consolidated subsidiary until the transfer of
Beneficial Interests to the officers and directors in August 2002. At that
point, the Company began accounting for the Trust as an equity method investee.
Following the December 18, 2002 dividend of the Beneficial Interests, the
Company accounted for its advances to the Trust as loans to another entity. As
amounts were loaned or required to be loaned for costs incurred, an immediate
bad debt loss was recorded for Trust expenses. The practical result was that for
all times during the year the Company recorded Trust expenses as its own. The
total amount of $532 is shown as one line item labeled Patent Litigation Trust
expenses.
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 its consolidated pro forma balance sheet as of 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 (50%) of the voting
shares of the emerging entity. Under this reporting basis, 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 consolidated pro
forma balance sheet as of December 18, 2000 represented 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.
36
The Company estimated the fair value of the reorganized entity based
upon the issuance of ten million shares of Common Stock at a value of $.01 per
share pursuant to the approved Plan. While the estimated reorganization value of
the Company was primarily allocated to specific asset categories pursuant to
Fresh Start Reporting, the effects were subject to further refinement or
adjustment. Current assets were recorded at their book value, which the Company
believes approximated fair value. Equipment and other fixed assets were recorded
at their fair value as estimated by management after considering replacement
cost or potential sales value. Intellectual property was revalued as estimated
by management after considering its remaining life.
For Fresh Start reporting purposes, the Corebyte software was 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 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 which 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. The reduction of this
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 Sock 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 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.
37
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 invested $1,500 in a limited partnership
(the "Partnership") whose general partner is an affiliate of certain members of
the Company's management. All management and incentive fees associated with the
Company's investment in the Partnership were expressly waived. The Partnership's
primary purpose was to invest in a company in the natural resource industry. The
Partnership's holdings in that company were liquidated in May 2002. At that
time, the Company owned approximately 55% of the Partnership and its share of
the Partnership's capital was approximately $551, of which $545 was returned in
June 2002. The Partnership accounted for its investments at fair value and
38
changes in fair value were reflected in the its net income for the period. The
Company carried its investment in the Partnership on the equity method. Under
the equity method, the Company's allocable share of the Partnership's earnings
and losses was included in the determination of the Company's net income. The
Company's approximate share of the Partnership's loss for the years ended
December 31, 2002 and 2001 was $42 and $907, 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 December 31,
2002.
5. Restructuring Costs
During the periods listed below, the Company incurred restructuring costs, as
shown, in connection with its Reorganization. Restructuring charges relating to
payroll costs are not recorded until specific employees are determined (and
notified of termination) by management in accordance with the Company's overall
restructuring plan. Other restructuring costs are not recorded until management
has committed to an exit plan and all significant actions to be taken have been
identified and significant changes to the plan are not likely.
Successor Company Predecessor Company
---------------------------------- -------------------
12/19/00 - 01/01/00 -
2002 2001 12/31/00 12/18/00
--------- -------- --------------- -------------------
Restructuring costs $15 $233 $22 $0
For the year ended December 31, 2002, the Company's restructuring costs
related to insolvency and liquidation procedures for its German subsidiary. At
December 31, 2002, accrued but unpaid restructuring costs were $13, which will
be paid during the first and second quarters of 2003.
For the year ended December 31, 2001, the Company's restructuring costs
of $233 arose in connection with severance obligations ($183) and closing the
Paris office. At December 31, 2001, accrued but unpaid office closing
restructuring costs were $50, which were 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.
A rollforward of the restructuring accrual from December 18, 2000
through December 31, 2002 is as follows:
39
Predecessor Company Total
-------------------- -----
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
Additions 15
Payments (52)
Restructuring accrual as of December 31, 2002 $13
===
6. Non-operating Income (Expense)
Successor Company Predecessor Company
----------------------------------------- ---------------------------
12/19/00 - 01/01/00
2002 2001 12/31/00 12/18/00
---------- --------------- -------------- ---------------------------
Interest earned $25 $248 $19 $1,510
Imputed interest 49 54 -- --
Interest expense from PLT -- -- -- --
Foreign currency gains (losses) (275) 136 (135) 317
Equity in loss of limited partnership (42) (907) -- --
Other -- (3) -- 97
-- --- -- --
$(243) $(472) $(116) $1,924
====== ====== ====== ======
40
7. Income Taxes
The provision for taxes consisted of the following:
Successor Predecessor Company
Company
---------------------------------------------- ------------------------------
12/19/00-
2002 2001 12/31/00 01/01/00 - 12/18/00
------------- -------------- ----------------- ------------------------------
Income (loss) before income taxes and
extraordinary credit: $(2,526) $(3,793) $(311) $50,538
U.S. -- -- -- (1,138)
------------- -------------- ----------------- ------------------------------
Outside the U.S. $(2,526) $(3,793) $(311) $49,400
============= ============== ================= ==============================
U.S. federal:
Current $-- $-- $-- $--
Outside the U.S.:
Current -- -- -- (257)
Deferred -- -- -- (1,163)
------------- -------------- ----------------- ------------------------------
Total provision $-- $-- $-- $(1,420)
============= ============== ================= ==============================
Successor Company Predecessor Company
2002 2001 12/19/00 -12/31/00 01/01/00 -12/18/00
----------- ------------- --------------------- ------------------------------
Income taxes at statutory rate $(884) $(1,327) $(109) $17,290
Increase in taxes resulting from:
Benefit of U.S. tax loss not 883 1,320 106 20,279
recognized
Tax basis in excess of book basis -- -- -- (38,710)
on disposal of assets
Foreign losses and other -- -- -- 708
transactions on which a tax
benefit could not be recognized
Effect of federal tax rate less -- -- -- 150
than (greater than) foreign tax
rates
Benefit of operating loss -- -- -- (1,137)
carryforwards
Other, net 1 7 3 --
Provision for income taxes $-- $-- $-- $(1,420)
The primary components of deferred income tax assets and liabilities
are as follows:
2002 2001
---- ----
Deferred income tax assets:
Loss and credit carryforwards $50,672 $62,072
Other 304 346
--- ---
50,976 62,418
Less Valuation allowance 50,976 62,418
------ ------
-- --
Deferred income tax liabilities:
Accrued retirement costs (400) (400)
----- -----
Net deferred income tax asset (liability) $(400) $(400)
====== ======
41
The valuation allowance decreased by $11,443 in 2002 and increased by
$1,431 in 2001.
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.
At December 31, 2002, 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. 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 have therefore provided a valuation allowance to reserve for those
deferred tax assets not considered realizable.
At December 31, 2002, the Company had tax operating loss carryforwards
for U.S. federal tax purposes approximating $116,000. Of this amount, $29,000
expires in years 2004 and 2005 and $87,000 expires in various amounts through
year 2023. U.S. federal long-term capital loss carryforwards of $29,000 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. Management believes that no such change has
occurred.
The Company had unused alternative minimum tax credits for income tax
purposes at December 31, 2002 of approximately $170 which may be used to offset
the Company's future tax liabilities. 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. This receivable consists of a note with a
remaining face amount of $268 that is payable out of certain Vugate cash flows.
This note is carried on the balance sheet at $211, which represents the present
value of the estimated payments at a discount rate of 12.5% per annum. The
Company imputed 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 $2 is receivable from other parties.
As of December 31, 2002, the Company had a $793 receivable from the
Trust plus $67 of accrued interest. The collection of the receivable is solely
dependent upon the success or favorable settlement of the Patent Litigation. In
view of the summary judgment granted to the defendants in the Patent Litigation
on February 11, 2003, an allowance for the full amount of the receivable was
recorded as of December 31, 2002. The Company has not recorded the accrued
interest as income.
42
On September 23, 2002, DNL, with whom the Company has a royalty
licensing arrangement, convened a meeting of its creditors to pass a resolution
for its voluntary winding-up. At that time, 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 wrote off the receivable.
In addition, included in the Company's long term assets was
approximately $333 representing the present value of the expected royalty
payments from DNL 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.
Because of the lack of specific payment terms and comparable
instruments, it is not practicable to estimate the fair value of the note
receivable from Vugate except that the comparatively low market interest rates
as of December 31, 2002 and 2001 make it likely that the fair value exceeds the
carrying amount.
It is also, not practicable to estimate the fair value of the loan
receivable from the Trust. Because there is a remote possibility of recovery of
some or all of the principal, the fair value does exceed the zero carrying
value.
9. Fixed Assets
Accumulated
Cost Depreciation Net
December 31, 2002
Property, plant and equipment:
Leasehold improvements $ 4 $ 4 $--
Machinery, equipment, furniture and fixtures 24 10 14
-- -- --
$28 $14 $14
=== === ===
Accumulated
Depreciation
Cost Net
December 31, 2001
Property, plant and equipment:
Building and leasehold improvements $6 $ 2 $ 4
Machinery, equipment, furniture and fixtures 60 36 24
-- -- --
$66 $38 $28
=== === ===
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:
43
Successor Company
-----------------------------------------------------
2002 $279
2001 $256
12/19/00 to 12/31/00 $ 6
Predecessor Company
-----------------------------------------------------
1/1/00 to 12/18/00 $2,048
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, 2002, future minimum lease payments for all
noncancelable leases totaled $1,290 and were payable as follows:
2003 $234
2004 $210
2005 $207
2006 $221
2007 $222
2008 and after $417
11. Payables to Bank
At December 31, 2002, no lines of credit or other credit facilities
were in place with any banks or financial institutions.
12. Accrued Expenses
2002 2001
---- ----
Salaries, commissions, bonuses and other benefits $50 $74
Accrued professional fees 136 174
Other 21 128
-- ---
$207 $376
==== ====
13. Stockholders' Equity (Deficit)
Changes in other comprehensive income are as follows:
(all Predecessor Company related)
Foreign
Pension Currency
Liability Translation
Adjustment Adjustment Total
------------------- ----------------- --------
Balance at December 31, 1999 $(6,628) $6,192 $(436)
Annual adjustments 6,628 (6,192) 436
Tax effect -- -- --
-- -- --
Balance at December 18, 2000 $-- $-- $--
=== === ===
44
14. Stock Option Plans
All of the Company's then outstanding stock options and stock option
plans were cancelled as of December 18, 2000 upon the adoption of the Plan.
As part of the Plan, the new non-employee members of the Company's
Board of Directors were each granted options to purchase 50,000 shares of Common
Stock and Messrs. Edelman, Agranoff and Krumb were granted options to purchase
300,000, 175,000 and 75,000 shares of Common Stock, respectively. The options,
which were not issued pursuant to a stock option plan, vested immediately, have
an exercise price of $.75 and a ten year term.
Options to purchase 734,505 shares of common stock outstanding under the
Company's 1997 Employee Stock Option Plan were cancelled under the Plan, as were
options under the Company's 1996 Director Stock Option Plan.
Predecessor Company
Employee Stock Option Plans Director Stock Option Plans
-------------------------------------------- ----------------------------------------
Price Range Number of Shares Price Range Number of Shares
--------------------------- ------------------------
of Shares Under Available Of Shares Under OptionAvailable for
Under Option Option for Option Under Plan Option
---------------- ------------ -------------- --------------- ----------- ------------
Outstanding at December 18, 1999 $4.17-32.19 734,505 520,226 $5.28-7.23 61,923 118,217
Exercised -- -- -- -- -- --
== == ==
Canceled 4.17-32.19 (734,505) (520,226) $5.28-7.23 (61,923) (118,217)
Granted -- -- -- -- -- --
Outstanding at December 18, 2002 $-- -- -- $-- -- --
=== == == === == ==
Successor Company
Employee Stock Option Plans Director Stock Option Plans
-------------------------------------------- ----------------------------------------
Price Range Number of Shares Price Range Number of Shares
--------------------------- ------------------------
of Shares Under Available of Shares Under Option Available
Under Option Option for Option Under Plan for Option
---------------- ------------ -------------- --------------- ------------ -----------
Outstanding at December 18, 2000 $-- -- -- $-- -- --
Granted .75 550,000 950,000 .75 200,000 --
Canceled -- -- -- -- -- --
-- -- -- -- -- --
Outstanding at December 31, 2000 $.75 550,000 950,000 $.75 200,000 --
==== ======= ======= ==== ======= ==
Granted -- -- -- -- -- --
Canceled -- -- -- -- -- --
-- -- -- -- -- --
Outstanding at December 31, 2001 $.75 550,000 950,000 $.75 200,000 --
==== ======= ======= ==== ======= ==
Granted -- -- -- -- -- --
Canceled -- -- -- -- -- --
-- -- -- -- -- --
Outstanding at December 31, 2002* $.75 550,000 950,000 $.75 200,000 --
==== ======= ======= ==== ======= ==
*Balance reflects the officers contractual obligations as described above.
The FASB 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 was recognized for
the stock option plans.
45
(In thousands, except per share amounts)
Successor Company Predecessor Company
---------------------------------------- ----------------------------
12/19/00 -
2002 2001 12/31/00 01/01/00 - 12/18/00
---- ---- -------- -------------------
Net income (loss) - As reported $(2,290) $(3,793) $(311) $81,079
- Pro forma (2,290) (3,924) (387) 80,612
Basic earnings (loss) per share - As reported $(.23) $(.38) $(.03) $23.04
- Pro forma (.23) (.39) (.04) 19.45
The fair value of each option grant was estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted average
assumptions. No options were granted during the years ended December 31, 2002
and 2001 or the period January 1, 2000 through December 18, 2000.
12/19/00 - 12/31/00
Risk-free interest rate
Employee options 5.19%
Director options 5.19%
Expected dividend yield
Employee options 0
Director options 0
Expected volatility
Employee options .996
Director options .996
Expected lives
Employee options 6
Director options 3
Weighted average remaining contractual life
Employee options 10
Director options 10
The weighted average fair value of options granted for the employee and
director stock option plans granted between December 19, 2000 and December 31,
2000 was $.35.
46
The following is summarized information about stock options outstanding
as of December 31, 2002:
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 8.0 years
Number of shares exercisable 50,000
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 its
reorganization under the Plan, the Company engaged in the development,
acquisition, marketing, servicing and system integration of computer and
communication products - both hardware and software. 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 the period of January 1 to December
18, 2000. For the periods after December 18, 2000, there were no reportable
separate segments.
47
Revenue Segment Profit (Loss)
Sweden $20,204 Sweden $2,111
United Kingdom 14,075 United Kingdom 658
France 7,057 France (441)
Belgium 3,114 Belgium 55
Corporate and Other 18,625 Corporate and Other (5,387)
Eliminations (119)
Total $62,956 Operating Income (Loss) (3,004)
======= Interest Expense (1,993)
Other Non-Operating Income, net 54,397
Income Before Income Taxes
and Extraordinary Credit $49,400
=======
Capital Expenditures: Depreciation:
Sweden $110 Sweden $139
United Kingdom 432 United Kingdom 311
France 36 France 54
Belgium 95 Belgium 37
Corporate and Other 840 Corporate and Other 260
------- ---
Total $1,513 Total $801
====== ====
Assets:
Sweden $--
United Kingdom --
France --
Belgium --
Corporate and Other 13,740
Eliminations --
-------
Total $13,740
=======
Geographic Operations
The following geographic area data includes trade revenues and fixed assets for
the period January 1 to December 18, 2000:
Revenue - unaffiliated customers:
United States - domestic $458
-- export sales 496
Europe 62,002
Other International --
--
Total revenue from unaffiliated customers 62,956
Revenue - Intercompany:
United States 116
Europe 3
Eliminations (119)
-----
Total consolidated revenue $62,956
=======
48
Fixed Assets:
United States $108
Europe --
--
Total fixed assets $108
====
16. Retirement Income Plans
Retirement expenses incurred by the Company were as follows:
Successor Company Predecessor Company
12/19/00 - 01/01/00 -
2002 2001 12/31/00 12/18/00
---------------------------- -------------------
U.S.:
Matching contributions $2 $4 $-- $23
Outside the U.S.:
Defined benefit plans 142 158 14 1,461
Other plans -- -- -- 331
--- -- -- ------
142 158 14 1,792
--- --- -- -----
$144 $162 $14 $1,815
==== ==== === =======
U.S. Plans
The Company has a 401(k) retirement and savings plan which covers all
full-time employees who have been employed for at least twelve 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 make contributions on an
annual, individual basis, allocated on a pro-rata basis according to the
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.
49
Five of the Company's former subsidiaries 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 twelve months. Obligations 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.
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.
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 was reflected in the Company's consolidated financial statements, this
obligation remained with the German subsidiary.
Subsequent to the sale to DNL, the monthly pension payments were funded
from amounts received pursuant to a royalty licensing arrangement with DNL.
Given the pending liquidation of DNL, as more fully described in Note 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 engaged German counsel for advice
in this matter, including initiating insolvency and/or liquidation procedures
for the German subsidiary.
On October 31, 2002, the German subsidiary filed for bankruptcy in the
German courts. While the ultimate outcome of such action is unknown at this
time, the Company does not believe that such action will have a material impact
upon the Company's cash resources. As of that date, the Company ceased to
consolidate the German subsidiary into the Company's consolidated financial
statements. Accordingly, the pension liability of $3,179 was removed from the
financial statements as of that date and was included in the determination of
the related extraordinary gain.
Expenses of the defined benefit plans were as follows:
50
Successor Company Predecessor Company
12/19/00 - 01/01/00 -
2002 2001 12/31/00 12/18/00
--------------------------------- ---------------------
Service Cost $-- $-- $-- $ 484
Interest Cost 142 158 14 1,219
Expected return on plan assets -- -- -- (895)
Amortization of transition obligation -- -- -- 14
Amortization of net actuarial loss -- -- -- 639
-- -- -- --------
Total $142 $158 $14 $ 1,461
=================================== ========
Obligation and asset data for the defined benefit plans at December 31,
2002 and 2001 were as follows:
Change in benefit obligations 2002 2001
----------------------------- ---- ----
Benefit obligation at beginning of period $2,763 $2,837
Service cost -- --
Interest cost 142 158
Benefits paid by employer (48) (65)
Foreign exchange (gain) loss 311 (161)
Actuarial (gain) loss 48 (6)
Deconsolidation of subsidiary (3,216) --
------- --
Benefit obligation at end of period $-- $2,763
----------------------------------- --- ------
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)
-------------
Unrecognized net actuarial (gain) loss -- (11)
Unrecognized prior service cost -- --
Unrecognized transition obligation -- --
-- --
Net amount recognized $-- $(2,774)
=== ========
Amounts recognized in the balance sheet consist of:
Accrued retirement, non-current $-- $(2,774)
Prepaid benefit cost -- --
Deferred tax asset -- --
Accumulated other comprehensive loss -- --
-- --
Total $-- $(2,774)
=== ========
The defined benefit obligation for the German pension plan was
determined at the October 31, 2002 deconsolidation date using an assumed
discount rate of 5.0%, as of December 31, 2001 using 6%, and an assumed average
cost of living benefit increase of 2% in 2001. An assumed weighted average
expected rate of return on plan assets was not applicable in 2002 and 2001.
Since the German's pension plan is unfunded, the benefit obligation exceeds plan
assets at the end of December 31, 2001.
51
17. Certain Relationships and Related Transactions
Gerald N. Agranoff, the Company's Vice President and Secretary as well
as its general counsel, is of counsel at the law firm Pryor Cashman Sherman &
Flynn LLP. During the years ended December 31, 2002 and 2001 and the periods
ended December 31, 2000 and December 18, 2000, the Company paid legal fees of
$106 (of which $55 was accrued at December 31, 2002) , $233 (of which $70 was
accrued at December 31, 2000), $0, and $420, respectively, to Pryor Cashman
Sherman & Flynn LLP, for legal services provided by attorneys other than Mr.
Agranoff.
During the years ended December 31, 2002 and 2001 and the periods ended
December 31, 2000, and December 18, 2000, the Company paid secretarial expenses
of $64, $50, $0, and $45, respectively, to Canal Capital Corporation ("Canal
Capital"). Asher B. Edelman, Vice Chairman of the Company's Board of Directors,
serves as chairman of the board of directors of Canal Capital and Mr. Agranoff
is also a member of the board.
The Company, along with co-tenants Canal Capital 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 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.
Joshua J. Angel, a member of the Company's Board of Directors, is the
senior managing shareholder of Angel & Frankel, P.C. During the years ended
December 31, 2002 and 2001 and the periods ended December 31, 2000, December 18,
2000, the Company paid legal fees of $0, $93, $0, and $484, respectively, to
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. Acquisitions
On July 27, 1999, the Company, through its subsidiary Corebyte Inc.,
acquired communication and networking software products providing internet and
e-commerce applications. During the third quarter of 2001, the Company concluded
that the Corebyte operation was no longer viable or profitable and discontinued
its operations.
On February 25, 2003, the Company acquired all of the limited liability
interests (collectively, the "Interests") in both CS Livestock Commissions Co.
LLC and CS Auction Production Co. LLC (collectively, the "Subsidiaries") from
AEI Environmental, Inc. ("AEI").
52
The Subsidiaries are headquartered in Hinsdale, Illinois and conduct a
cattle auction trading service business accessible via the internet at the
website www.cattlesale.com. Management believes that the Subsidiaries' products
and services reduce transaction costs and improve information flow and market
efficiencies in cattle production.
Purchase Price
The purchase price paid for the Interests consisted of:
1,323,000 shares of Series B Convertible Redeemable Preferred Stock
(the "Series B Preferred Stock") having the principal terms described below
under the heading "Preferred Stock;" and
9,593,168 shares of Common Stock, which equaled forty-nine percent
(49%) of the outstanding shares of Common Stock, on a fully-diluted basis,
immediately prior to the closing.
The amount of consideration for the Interests was determined by
negotiation, based on a mutual assessment by the Company and AEI of the value of
the Subsidiaries' business and the real value of the Company's Common Stock.
Further, the Acquisition was structured to avoid causing a negative impact on
the Company's net operating loss carry-forward.
The Company has not yet made a final determination of the monetary
value that will be assigned to the purchase price for financial reporting
purposes but believes that it will be between $400 and $1,000.
The tangible assets and liabilities of the Subsidiaries are not
significant. The purchase price, when finally determined, is expected to be
allocated principally to the Subsidiaries' proprietary software and to goodwill.
Management believes that the Subsidiaries' value substantially exceeds the value
of their individual assets and liabilities because of the results of the
Subsidiaries' efforts up to this point in refining its business model,
establishing its workforce and network of field agents and creating awareness
among potential customers. The goodwill and most of the software value is not
expected to be amortizable for income tax purposes.
Dividend to Shareholders
Upon acquiring the Interests, the Company declared a dividend payable
to the holders of record of its Common Stock on February 24, 2003 (the "Record
Holders"). The dividend was payable in .02503 of a share of Series A Convertible
Redeemable Preferred Stock (the "Series A Preferred Stock") and .11287 of a
share of Series B Preferred Stock per share of Common Stock. An aggregate of
250,000 shares of Series A Preferred Stock and 1,127,000 shares of Series B
Preferred Stock were so issued (collectively, the "Dividend Shares"). The Series
A Preferred Stock has the principal terms described below under the heading
"Preferred Stock." The Dividend Shares were issued in escrow, as described below
under the heading "Escrow of Dividend Shares."
53
Escrow of Dividend Shares
The Dividend Shares are being held in escrow by Asher B. Edelman, in
the capacity of escrow agent for the benefit of the Record Holders, until such
time as the Dividend Shares have been registered for sale under the Securities
Act of 1933, as amended. The Company intends to file a registration statement
with the Securities and Exchange Commission respecting the Dividend Shares, and
the shares issued to AEI at the closing, as soon as practicable; however, the
Company cannot anticipate when such a registration will become effective and the
Dividend Shares released from escrow. During the period the Dividend Shares are
held in escrow, the escrow agent shall have the power to vote the Dividend
Shares on any matter submitted to the vote of the Company's shareholders.
Preferred Stock
The rights and preferences of the Series A Preferred Stock and the
Series B Preferred Stock (collectively, the "Preferred Stock"), which each have
a par value of $.01 per share, are as follows:
Dividends Dividends accrue and are cumulative from the date of
issuance in an amount per annum equal to 2.5% per year per share and will be
payable semi-annually, when, as and if declared by the Board of Directors.
Dividends will be payable in cash, shares of Preferred Stock (valued at $10 per
share) or shares of Common Stock (valued, (x) if there is a market for the
Common Stock, at the average price of a share of Common Stock during the last
thirty (30) days of trading, or (y) if there is not a market for the Common
Stock, at $1.38 per share), or any combination thereof.
Conversion Each share of Preferred Stock is convertible at
any time at the option of the holder into 7.25 shares of Common Stock.
Redemption At any time after the earlier of:
o a merger or consolidation effecting the sale in one or a series of related
transactions of all or substantially all of the Company's assets or a sale of
more than fifty percent (50%) of the Company's outstanding voting securities, or
o the realization by the Company of aggregate net proceeds in excess of
$10,000,000 in connection with the sale of Common Stock pursuant to a public
offering registered under the Securities Act of 1933, as amended (a "Qualified
Public Offering"),
the Preferred Stock will be redeemed by the Company for cash in an amount equal
to the liquidation preference of $10 per share, plus accrued and unpaid
dividends as of the redemption date; provided, however, that (i) the redemption
of the Series B Preferred Stock will be subject to the rights and preferences of
the Series A Preferred Stock, and (ii) not more than forty percent (40%) of the
54
net offering proceeds of the Qualified Public Offering will be applied to the
redemption of the Preferred Stock.
20. Pro Forma Financial Information (Unaudited)
The accompanying unaudited pro forma condensed statement of operations
of the Subsidiaries for the year ended December 31, 2002 gives effect to the
acquisition of the Interests (see Note 19) as if it had occurred on January 1,
2002. The pro forma condensed statement of operations also gives effect to the
deconsolidation of the Company's German subsidiary as if it had occurred on
December 31, 2001.
The pro forma financial information is not necessarily indicative of
the operating results that would have occurred had the acquisition of the
Interests been consummated as of January 1, 2002, nor is the information
necessarily indicative of future operating results.
55
Total Pro
Pro Forma Revenue As Reported CattleSale (3) Adjustments (1) Forma
----------------- ----------- -------------- --------------- -----
-- 5,847 -- 5,847
Operating costs and expenses
Costs of sales -- 5,747 5,747
Selling, general and administrative 1,387 580 1,967
Trust expense 532 532
Impairment of assets 349 349
Restructuring costs 15 _____ 15
-- --
Total operating cost and expenses 2,283 6,327 8,610
----- ----- -----
Operating income (loss) (2,283) (480) (2,763)
Non-operating income (expense):
Interest income 25 2 27
Interest expense (42) (5) (5)
Equity in loss of limited partnership (42)
Other, net (226) 12 (214)
Income (loss) before income taxes and
extraordinary credits and cumulative effect of
change in accounting principle (2,526) (471) (2,997)
Income taxes (benefit) -- -- --
-
Income (loss) before extraordinary credits and
cumulative effect of change in accounting principle (2,526) (471) (2,997)
Extraordinary credits:
Deconsolidation of company subsidiary 3,165 (3,165) --
Impairment of reorganization value in excess of amounts
allocable to identifiable assets (1,941) 1,941 --
Cumulative effect of change in accounting principle (988) 988 --
Net income (loss) $(2,290) $ (471) (236) (2,997)
======== ======= ===== =======
Net income (loss) per common share $(.12) $(.02) $(.01) $(.15)
====== ====== ====== ======
Average common shares outstanding:
Basic and Fully Diluted (2) 19,577,894
(1) Assumes extraordinary items and change in accounting principle occurred on
December 31, 2001.
(2) On February 25, 2003, the date of the acquisition of the Interests,
9,593,168 additional shares of Common Stock were issued to the seller
representing 49% of the outstanding shares.
(3) The Subsidiaries suspended their operations during the period of February
through June 2002 in order to implement necessary operational changes and
efficiencies.
ITEM 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.
None.
56
PART III
ITEM 10. Directors and Executive Officers of the Registrant
Directors and Executive Officers
The names, positions and offices with the Company of the current
directors and executive officers of the Company are set forth below.
Year First Elected
Name Position
------------------------------------------- ---------------------------------------------------- --------------------
Edward L. McMillan Chairman of the Board 2003
Asher B. Edelman Vice Chairman of the Board 1985
Gerald N. Agranoff Vice President, Secretary, General Counsel and
Director 1994
Joshua J. Angel Director 2000
Phillip P. Krumb Vice President, Chief Financial Officer, Interim
Chief Executive Officer and Director 1994
David W. Pequet Director 2003
John D. Lane Director 2003
Mark A. Margason Director 2003
William K. Richardson Treasurer 2003
The Acquisition Agreement between the Company and AEI, pursuant to
which the Company acquired the Interests, provided that, upon the closing of the
acquisition, the Company's Board of Directors would be increased from seven
members to eight, the then members of the Board would resign effective
immediately, and by action taken pursuant to the Written Consent, four of the
Company's former directors and four persons designated by AEI would be elected
to serve as directors until their successors are elected and qualified. Messrs.
Edelman, Agranoff, Angel and Krumb were re-elected to the Board. Messrs.
McMillan, Lane, Margason and Pequet are newly elected.
Further, the Acquisition Agreement provided that the persons named
above were to be elected to the offices set forth opposite their names and they
were duly elected by the new Board of Directors to do so.
57
The principal occupations and business experience of each of the
current directors and executive officers of the Company are described below. A
description of AEI appears in Item 12 - Security Ownership of Certain Beneficial
Owners and Management under the heading "Security Ownership of Certain
Beneficial Owners."
Edward L. McMillan, 56, a new member of the Board, will serve as
Chairman of the Board and is a member of the Audit Committee. Mr. McMillan is a
member of the AEI Board of Directors and is the retired President, Chief
Executive Officer and Director of Purina Mills, Inc., the largest manufacturer
and distributor of animal nutrition products in the United States. Mr. McMillan
joined Purina Mills in 1969 and held various positions in marketing, product
research, business development and diversified business management before being
named President and CEO in 1987. Mr. McMillan is a prominent leader in the
animal nutrition industry serving as Chairman of the Board of Directors for the
American Feed Industry Association and the Prescription Feed Task Force. Mr.
McMillan has received distinguished industry honors as the Agri-Marketer of the
Year for the National Agri-Marketing Association; the Distinguished Service
Award from the American Agricultural Editor's Association; the Distinguished
Service Award from the American Feed Association. Mr. McMillan owns and manages
McMillan L.L.C., a transaction consulting business and serves on other corporate
boards including Premium Food Group Inc.; Balchem Inc.; Durvet, Inc.; and
Distribution Dynamics Inc. Mr. McMillan received a Bachelor of Science degree in
Agricultural Science from the University of Illinois and is a graduate of the
Credit Research Foundation Graduate School of Credit and Financial Management.
Mr. McMillan is Chairman of the U of I Research Park LLC and is Chairman Elect
of the U of I Alumni Association. Mr. McMillan's principal business address is
Mark Twain Plaza One, Suite 325, 101 West Vandalia Street, Edwardsville,
Illinois 62025.
Asher B. Edelman, 63, is a continuing member of the Board and will
serve as its Vice Chairman, as well as Chairman of the Executive Committee. Mr.
Edelman joined the Company's Board of Directors as its Chairman in March 1985.
In February 1993 he became the Company's Chief Executive Officer. Mr. Edelman
served in both capacities until the closing of the Acquisition. In addition,
since 1984, Mr. Edelman has been a general partner of Asco Partners, the general
partner of Edelman Securities Company L.P. (formerly Arbitrage Securities
Company), a United States registered broker-dealer located in New York City.
Since 1991, Mr. Edelman has been the Chairman of the Board of Directors of Canal
Capital Corporation, a real estate company located in New York City and, since
2001, has been a member of the Board of Directors of Perini Corp., a
construction company located in Framingham, Massachusetts. He is also a general
partner and/or manager of various investment partnerships and funds, including
Asher B. Edelman & Associates, LLC, a manager for a value oriented investment
fund. Mr. Edelman's principal business address is Ch. Pecholettaz 9, 1066
Epalinges, Switzerland.
Gerald N. Agranoff, 56, is a continuing member of the Board and is a
Vice President and Secretary of the Company, as well as its general counsel.
Prior to the Acquisition, Mr. Agranoff was the Company's Chief Operating
Officer, Acting President and Vice Chairman of the Board. Mr. Agranoff is a
general partner of SES Family Investment & Trading Partnership, L.P., an
investment partnership formed in 1995 by the members of one family to
consolidate their activities. Mr. Agranoff is not a member of the family. Mr.
58
Agranoff has been a general partner of Asco Partners since 1984, having become
its general counsel in 1982 and, since 1998, has been a member of Asher B.
Edelman & Associates, LLC. Since 1987, Mr. Agranoff has been a general partner
of Plaza Securities Company, L.P., a securities company located in New York
City. Since 1984, he has been a director of Canal Capital Corporation and, since
1990, has been a director of Bull Run Corporation, a sports and affinity
marketing company located in Atlanta, Georgia. He is also counsel to the New
York City law firm Pryor, Cashman, Sherman & Flynn. Mr. Agranoff's principal
business address is 9901 IH-10 West, Suite 800, San Antonio, Texas 78230.
Joshua J. Angel, 67, is a continuing member of the Board and a member
of the Audit Committee. Mr. Angel 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 is also a director of Lancer Industries, Inc., Cellular Technical
Services Company, Inc. and Fairfield Manufacturing Company, Inc. Mr. Angel's
principal business address is 460 Park Avenue, New York, New York, 10022.
Phillip P. Krumb, 60, a continuing member of the Board, is continuing
as Vice President and Chief Financial Officer and as a member of the Executive
Committee. He is also, as of April 10, 2003, the Company's interim Chief
Executive Officer. 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 seven years as Senior Vice President Finance
and Chief Financial Officer. Mr. Krumb's principal business address is 9901
IH-10 West, Suite 800, San Antonio, Texas 78230.
David W. Pequet, 50, a new Member of the Board, is a co-founder of AEI
and is a member of its Board of Directors. He earned an engineering degree from
Michigan State University 1974 and served as an officer in the U.S. Naval Flight
program. Mr. Pequet began his career in the securities industry in 1976 and
started the advisory firm, MPI Investment Management, in 1986. MPI manages over
$100 million dollars of individually portfolios. During the last twelve years
MPI has been nationally ranked several times for its fixed income investment
performance. Prior to starting MPI, he was a fixed income broker at several
major Wall Street firms including Prudential-Bache and Gruntal Securities. Mr.
Pequet has served as a board member for several early stage companies. Mr.
Pequet's principal business address is 710 North York Road, Hinsdale, Illinois
60521.
John D. Lane, 56, a new member of the Board, entered the securities
industry in 1969 with a bank-trading firm in New Jersey. He formed Lane Capital
Markets, llc, an investment banking boutique focused on mergers and
acquisitions, deal structuring, managing and co-managing IPO's, follow-ons and
private placements, in 2001. Mr. Lane recently became dually registered with
V-Finance Investments Inc. where he holds the position of Syndicate Manager. His
main duties at V-Finance include working with companies in the money raising
59
process and managing retail and institutional clients' accounts. Prior to
forming Lane Capital Markets, he held the position of Managing Director and
Senior Vice President of Capital Markets at a New York based online firm.
Between 1984 and 2000, Mr. Lane held high-level positions at investment banking
firms based in Fairfield County, Connecticut. He has been associated with
several major firms: Boettcher & Co., Advest & Co., Dain Bosworth, and Moseley
Hallgarten and has served in several capacities: officer, director, owner,
trader, retail manager and syndicate manager. Mr. Lane has also served as a
director and advisor to several boards of directors. Mr. Lane has been an active
member of several Security Industry Association (SIA) committees, including the
Small Firms Committee, of which he was Chairman in 1994, and the Membership
Committee, of which he was Chairman for several years. He also served three
terms on the Syndicate Committee. He is currently serving as District Chairman
of the SIA's New England district. He also served as a director of the Regional
Investment Bankers Association between 1991-1995. He is also active in the
National Association of Securities Dealers. He is currently a NASD mediator and
is serving three-year terms on its District Business Conduct Committee based in
Boston, MA and its Corporate Finance Committee, as well as serving on its Small
Firm Advisory Board and its Nominating Committee which chooses members to serve
on all standing NASD committees nationwide. Mr. Lane obtained his undergraduate
and graduate degrees from Monmouth University. Mr. Lane's principal business
address is 263 Queens Grant Road, Fairfield, Connecticut 06824.
Mark A. Margason, 47, a new member of the Board and Chairman of the
Audit Committee and its "financial expert," as such term is defined in the
Sarbanes-Oxley Act of 2002, has had a twenty-four-year banking and investment
career in Chicago and New York. Mr. Margason is a member of AEI's Board of
Directors and has held positions as a commercial banker with American National
Trust Company of Chicago and Mellon Bank of Pittsburgh, and as an investment
banker in the Leveraged Capital Business Group of Citicorp North America. Mr.
Margason has been involved as a Director, CFO and Chairman and CEO of venture
companies, both private and public, in the energy and Internet sectors. Mr.
Margason is a Partner in MPI Investment Management and a Managing Partner of MPI
Venture Management, LLC. He received a B.S.B.A. and an M.B.A in Finance from the
University of Denver and is actively involved in the Children's Home and Aid
Society and Heartland Alliance charities. Mr. Margason's principal business
address is 710 North York Road, Hinsdale, Illinois 60521.
William K. Richardson, 51, is the Company's new Treasurer. Mr.
Richardson joined the Company in 1977. Prior to the Acquisition, Mr. Richardson
was the Company's Corporate Controller, a position he held since 1995. From 1992
to 1995, Mr. Richardson was the European Regional Controller based in Paris at
the Company's then European Headquarters. From 1977 to 1992, Mr. Richardson held
numerous positions of increasing responsibility within the Company's finance
organization. Mr. Richardson's principal business address is 9901 IH-10 West,
Suite 800, San Antonio, Texas 78230.
There are no family relationships between any of the executive officers
of the Company.
60
Audit, Compensation and Executive Committees
The Company has an Audit and Executive Committees of the Board of
Directors. The current members of the Audit Committee are Messrs. Margason
(Chairman), Angel and McMillan. The current members of the Executive Committee
are Messrs. Edelman (Chairman), Pequet and Krumb.
During the year ended December 31, 2002, the Company had an Audit Committee
and a Compensation Committee. The Audit Committee was composed of Nicholas W.
Walsh, Neil S. Subin, Joshua J. Angel and Roger B. Smith, none of whom was an
employee of the Company. The Compensation Committee was also composed of Messrs.
Walsh, Subin and Smith.
The Audit Committee annually recommends to the Board of Directors the
independent auditors for the Company and its subsidiaries. The Audit Committee
meets with the independent auditors concerning the audit; evaluates non-audit
services and the financial statements and accounting developments that may
affect the Company; meets with management concerning matters similar to those
discussed with the outside auditors; and makes reports and recommendations to
the Board of Directors and the Company's management and independent auditors
from time to time as it deems appropriate.
During past years, including calendar year 2002, the Compensation
Committee made senior management salary recommendations to the Board and
administered the Company's various bonus and option plans. During calendar year
2003, these functions will be performed by the Audit Committee in addition to
its other responsibilities.
The newly formed Executive Committee will exercise the power and
authority of the Board of Directors between its meetings.
Meetings of the Board of Directors and Committees
The Board of Directors met eight times during the year ended December
31, 2002. Each director was in attendance. During the year ended December 31,
2002, the Audit Committee met four times; the Compensation Committee did not
meet.
Director Compensation
Directors who are employees of the Company receive no additional
compensation for serving on the Board of Directors or its committees. During
calendar year 2002, each director who was not an employee of the Company
received an annual fee of $15,000, payable in quarterly installments, but
received no additional fee for serving on any of the committees of the Board. As
of January 1, 2003, non-employee directors will not receive a fee for their
service.
Because of the Company's liquidity requirements, in August 2002,
Nicholas W. Walsh, Neil S. Subin, Joshua J. Angel and Roger B. Smith, the
Company's then four non-employee directors agreed, to receive 37,500 Beneficial
61
Interests each in lieu of their quarterly director fees through the end of the
calendar year.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
The Company believes that, during the year ended December 31, 2002, 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 Committee Report
The Company's executive compensation program is based on three
fundamental principles.
The Company 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 the Company's executive compensation program, along with the
decisions made by the committee regarding the current compensation for both the
Chief Executive Officer and the other named executive officers.
62
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 were based on a
contractually specified percentage by which "EBITDA" exceeds 12-1/2% of Net
Equity for the applicable period. "EBITDA" means, 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" does not include amounts
received from the Dynacore Patent Litigation Trust. Net Equity means 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
the Company's stock increases above the option grant price.
Pursuant to their employment agreements, Messrs. Edelman, Agranoff, and
Krumb, were granted options to purchase 300,000, 175,000 and 75,000 shares of
Common Stock, respectively. In determining the size of the option grants for
Messrs. Edelman, Agranoff' and Krumb, the committee assessed the following
factors: their potential by position and ability (i) to contribute to the
creation of long-term stockholder value; and (ii) to contribute to the
successful execution of the Company's strategy; and (iii) their relative levels
of responsibility.
63
This report has been provided by the Compensation Committee.
Nicholas W. Walsh
Neil S. Subin
Roger B. Smith
Compensation Committee Interlocks and Insider Participation
During the year ended December 31, 2002, no Member of the Compensation
Committee was, or was formerly, an officer or employee of the Company or any of
its subsidiaries.
Employment Agreements
Effective December 18, 2000, the Company entered into employment
agreements with each of Asher B. Edelman, Gerald N. Agranoff and Phillip P.
Krumb which had initial terms of eighteen months but which remained in effect
through February 25, 2003. Pursuant to the employment agreements, Mr. Edelman
served as Chief Executive of the Company, Mr. Agranoff served as Chief Operating
Officer and Acting President and Mr. Krumb served as Vice President and Chief
Financial Officer. Their respective annual base salaries were $207,500, $157,500
and $82,5000 and they were entitled to bonuses in respect of each fiscal quarter
in which the Company's earnings before interest, taxes, depreciation and
amortization for the period exceeded certain benchmarks. Upon executing their
agreements, they were granted options to purchase, respectively, 300,000,
175,000, and 750,000 shares of Common Stock at an exercise price of $.75 per
share. The options are all fully exercisable, having vested in equal
installments on June 18, 2001, December 18, 2001 and June 18, 2002. The options
will expire on December 18, 2010. As a result of the Company's need for
liquidity, in August 2002, they agreed to receive Beneficial Interests in lieu
of cash as compensation for their services during the period from June 30, 2002
through December 18, 2002. Mr. Edelman received 486,827 Beneficial Interests,
Mr. Agranoff received 369,520 and Mr. Krumb received 193,559.
Pursuant to the terms of the Acquisition Agreement, on February 25,
2003 each of Michael B. Andelman and Messrs. Agranoff and Krumb entered into
employment agreements with the Company having three year terms. Additionally,
Mr. Edelman entered into a services agreement with the Company, also having a
three year term. All of these agreements provide for customary employee
benefits, as well as reimbursement for certain office and secretarial services.
Mr. Andelman, whose employment was terminated as of April 8, 2003 due to a
dispute over his duties and responsibilities, was entitled to a base salary of
$240,000 per year and Mr. Krumb, the Company's Vice President, interim Chief
Executive Officer and Chief Financial Officer, is entitled to a base salary,
commencing on January 1, 2004, of $60,000 per year. Mr. Edelman, the Vice
Chairman of the Board of Directors and Chairman of the Executive Committee, is
entitled to compensation in the amount of $100,000 per year.
Messrs. Agranoff's and Krumb's agreements each provide that if his
services are terminated without cause or with Good Reason (as defined in the
agreements), he shall receive his base salary for the remaining duration of the
employment term and for an additional period of six months from the end of the
64
term, as well as continuation of certain benefits during that period. The
agreements also provide that, in the event of death or disability during the
employment term, he or his estate or legal representative shall be entitled to
receive his base salary through the end of the month in which the death, or
disability occurs and certain executive benefits.
Mr. Edelman's agreement provides, and Mr. Andelman's agreement
provided, essentially the same severance arrangements; however, if Mr. Edelman
becomes disabled, he will be entitled to receive his base salary for an
additional six month period.
Each of Messrs. Edelman's, Agranoff's and Krumb's agreements also
provides for the vesting of any unvested options upon his death or disability
during the employment term or if his services are terminated without cause or
with Good Reason.
Mr. Andelman's employment was terminated as of April 8, 2003 due to a
dispute over his duties and responsibilities. Management believes that his
employment termination was for "Cause," as such term is defined in his
employment agreement. There can be no assurance, however, that if litigation
over this matter should arise that a court would agree with the Company.
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. The Company has not made any contributions
to the plan since August 2, 1997. Under the terms of the plan, benefits accrued
to the various executive officers vest upon satisfaction of the plan's vesting
criteria which is 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 Asher B. Edelman, Gerald
N. Agranoff and Phillip P. Krumb the persons who served, during fiscal year
2002, as the Company's executive officers.
65
--------------------------------------------------------------------------------------------------------------------
Long-Term
Compensation
Name and Annual
Principal Other All
Position Annual Stock Options Other
(as of 12/31/02) Year Salary Compensation Granted (#) Compensation
Asher B. Edelman 2002 $111,731 $ - - $ -
Chairman of the Board 2001 207,500 - - -
Chief Executive Officer (7)
01/01/00 -
12/31/0 300,534 70,648 (1) 300,000 (3) 300,000 (5)
709,500 (6)
Gerald N. Agranoff 2002 $84,808 $ - - $ -
Acting President and 2001 157,500 - - -
Secretary (7) 01/01/00 -
12/31/00 198,915 7,200 (2) 175,000 (3) 700,000 (5)
4,500 (6)
Phillip P. Krumb
Vice President and Chief Financial 2002 $44,423 $ - - $ -
Officer(7) 2001 82,500 - - -
01/01/00 -
12/31/00 257,890(4) - 75,000 (3) 200,000 (5)
36,000 (6)
--------------------------------------------------------------------------------------------------------------------
(1) Represents payments incident to foreign assignment.
(2) Represents automobile allowance.
(3) Pursuant to their employment agreements, Messrs. Edelman, Agranoff and
Krumb were granted options to purchase, respectively, 300,000, 175,000
and 75,000 shares of Common Stock at an exercise price of $.75 per
share.
(4) Includes $105,417 of deferred compensation for the period of April 1999
until February 2000.
(5) Represents cash portion of the officer's settlement under the Plan.
(6) Represents the stock portion of the
officer's settlement under the Plan at a value of $.75/share issued.
(7) Effective February 25, 2003 Mr. Edelman became Vice Chairman of the
Board of Directors and Mr. Agranoff became a Vice President and the
Secretary of the Company. Mr. Krumb continued in these positions. As of
April 10, 2003, Mr. Krumb became the Company's interim Chief Executive
Officer.
66
Stock Option Grants in Last Fiscal Year
The Company did not grant any stock options for the year ended December
31, 2002.
Aggregated Option Exercises for the period ended December 31, 2002 Option Values
-------------------------- -------------- ----------- ------------------------------- --------------------------------
Number of Value of Unexercised
Shares Number of Unexercised In the money options
Acquired on Value Options at 12/31/02 At 12/31/02
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
-------------------------- -------------- ----------- -------------- ---------------- ---------------- ---------------
Asher B Edelman 0 0 300,000 0 $0 $0
-------------------------- -------------- ----------- -------------- ---------------- ---------------- ---------------
-------------------------- -------------- ----------- -------------- ---------------- ---------------- ---------------
Gerald N. Agranoff 0 0 175,000 0 $0 $0
-------------------------- -------------- ----------- -------------- ---------------- ---------------- ---------------
-------------------------- -------------- ----------- -------------- ---------------- ---------------- ---------------
Phillip P. Krumb 0 0 75,000 0 $0 $0
-------------------------- -------------- ----------- -------------- ---------------- ---------------- ---------------
Performance Table
Set forth below is a table comparing the yearly percentage changes
in the five-year cumulative total return for the Company's Common Stock with the
Dow Jones 65-Composite Average, a broad equity market index, and the Dow Jones
computer systems index.
Company's Common Stock Dow Jones Computer Systems Dow Jones 65-
Index Composite Average
1997 100.00 100.00 100.00
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
2002 0.33 285.77 91.09
The table assumes $100 invested on January 1, 1998, in the Company's
then common stock and each of the Dow Jones indexes and that all dividends were
reinvested. During the five-year period the Company did not pay any cash
dividends on its Common Stock.
67
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
Security Ownership of Certain Beneficial Owners
As of December 31, 2002, Asher B. Edelman was the only person known to
the Company to be a beneficial owner of more than five percent (5%) of the
Company's securities as defined in Rule 13(d)(3) under the Exchange Act. Mr.
Edelman is part of a "group" as that term is used in Section 13(d)(3) of the
Exchange Act. See the discussion below under the heading "Security Ownership of
Management" for a detailed description of the amount and nature of beneficial
ownership by the members of the group.
As of February 25, 2003, AEI, whose address is 710 North York Road,
Hinsdale, Illinois 60521, became the owner of the Company's securities described
below.
Percentage
Number of
of
Class of Stock Shares Class
Common Stock 9,593,168 49.00%
Series A Preferred Stock 0 0.00%
Series B Preferred Stock 1,323,000 54.00%
----------- ---------
Total owned by AEI 10,916,168 49.00%
==========
Prior to purchasing the Subsidiaries in the fall of 2000, AEI was a
provider of environmental control products and services for the livestock
industry. It also provided operating systems for waste treatment systems,
cooling and odor control systems, and data management control systems designed
to economically manage agricultural and livestock operations. With the sale of
the Interests, AEI has ceased active business operations.
Security Ownership of Management
The information below 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. 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.
A person is also deemed to be a beneficial owner of any security of
which he or she has a right to acquire beneficial ownership (such as by exercise
of options or conversion of preferred stock) within 60 days after the applicable
reporting date (the "Deemed Acquired Shares").
Under these 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.
68
When calculating the percentage of a class of securities owned by a
beneficial owner, the number of shares of his or her Deemed Acquired Shares is
included in the number of shares owned by him or her and in the number of shares
outstanding. A beneficial owner's Deemed Acquired Shares are not included in the
outstanding shares for purposes of calculating any other beneficial owner's
percentage of ownership.
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 13, 2003. Some of the named individuals own
Deemed Acquired Shares by virtue of their ownership of currently exercisable
options and/or currently convertible Preferred Stock. The table describes
ownership of outstanding Common Stock (19,577,894 shares) and the Deemed
Acquired Shares (20,175,000 Deemed Acquired Shares).
Except as otherwise indicated in other table footnotes, the indicated
directors and executive officers possess sole voting and investment power with
respect to all shares of Common Stock and Preferred Stock attributed. The
footnotes to the tables follow the last table.
----------------------------------------------------------------------------------------------------------------------
Ownership of Outstanding Common Shares
and
All Deemed Acquired Shares
----------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------- --------------------- ---------------------
Name # of Shares % Ownership
Gerald N. Agranoff (1) 181,618 *
-------------------------------------------------------------------------- --------------------- ---------------------
-------------------------------------------------------------------------- --------------------- ---------------------
Joshua J. Angel 50,000 *
-------------------------------------------------------------------------- --------------------- ---------------------
-------------------------------------------------------------------------- --------------------- ---------------------
Asher B. Edelman (2)(3) 11,992,463 30.17%
-------------------------------------------------------------------------- --------------------- ---------------------
-------------------------------------------------------------------------- --------------------- ---------------------
Phillip P. Krumb 129,454 *
-------------------------------------------------------------------------- --------------------- ---------------------
-------------------------------------------------------------------------- --------------------- ---------------------
John D. Lane 0 0.00%
-------------------------------------------------------------------------- --------------------- ---------------------
-------------------------------------------------------------------------- --------------------- ---------------------
Mark A. Margason (4) 19,184,918 48.26%
-------------------------------------------------------------------------- --------------------- ---------------------
-------------------------------------------------------------------------- --------------------- ---------------------
Edward L. McMillan (4) 19,184,918 48.26%
-------------------------------------------------------------------------- --------------------- ---------------------
-------------------------------------------------------------------------- --------------------- ---------------------
David W. Pequet (4) 19,184,918 48.26%
-------------------------------------------------------------------------- --------------------- ---------------------
-------------------------------------------------------------------------- --------------------- ---------------------
William K. Richardson 306 *
-------------------------------------------------------------------------- --------------------- ---------------------
-------------------------------------------------------------------------- --------------------- ---------------------
Directors and Executive Officers as a Group (1)(2)(3)(4) 31,538,759 79.34%
-------------------------------------------------------------------------- --------------------- ---------------------
* Indicates less than 1% ownership as a percent of the outstanding class.
(1) This amount includes 6,618 shares of Common Stock directly owned by Mr.
Agranoff and 175,000 Deemed Acquired Shares subject to currently exercisable
options. 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 Capital
Corporation which owns 82,278 shares. Mr. Agranoff disclaims beneficial
69
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.
(2) Mr. Edelman's listed beneficial ownership of 11,992,463 shares of Common
Stock is explained in detail in this paragraph and in footnote 3 below, and is
based upon his beneficial ownership reported on Schedule 13D. Mr. Edelman owns
696,000 Common shares directly and 300,000 Deemed Acquired Shares subject to
currently exercisable options. 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
205,629 shares owned by Mr. Edelman's spouse Michelle Vrebalovich, 1,125 shares
held by Mr. Edelman in a Keogh account, 4,728 shares beneficially owned by Mr.
Edelman's children in accounts for which he is the custodian, and 211,197 shares
owned by Edelman Value Fund, Ltd., for which Mr. Edelman serves as the sole
investment manager. Also included are the 46,825 shares owned by Edelman Family
Partners, L.P. for which Mr. Edelman serves as a general partner and the 19,255
shares beneficially owned by Mr. Edelman's son in accounts for which Irving
Garfinkel is the custodian. 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, and the 411 shares
owned directly by Penelope C. Edelman. 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.
(3) Asher B. Edelman, in his capacity as Escrow Agent (in such capacity, the
"Escrow Agent") for the Benefit of the Holders of Record of Dynacore Holdings
Corporation on February 24, 2003, owns no shares of Common Stock; however, each
share of the 250,000 Deemed Acquired Shares of Series A Convertible Preferred
Stock and each share of the 1,127,000 Deemed Acquired Shares of Series B
Convertible Preferred Stock held in escrow (collectively, the "Preferred Stock")
70
is convertible at any time into 7.25 shares of Common Stock and is entitled to
one vote per share of Preferred Stock on any matter presented to the holders of
the Common Stock. Although the Escrow Agent does not have any pecuniary interest
in the shares of Preferred Stock held in escrow (the "Escrowed Stock") and is
not authorized to sell, convert or otherwise dispose of any shares of Escrowed
Stock, the Escrow Agent does have the power to vote the Escrowed Shares. For so
long as the shares of Escrowed Stock are held in escrow, the other persons named
in the tables above will not separately report beneficial ownership of their
respective portions of the Escrowed Stock or the shares of Common Stock into
which they are convertible.
(4) 9,593,168 shares of Common Stock and 1,323,000 Deemed Acquired Shares of
Series B Preferred Stock (convertible into 9,591,750 shares of Common Stock) are
owned by AEI and are included in this tabulation because the named party is
director of AEI and, in that capacity, shares investment control with respect to
these shares. However, the named party disclaims beneficial ownership of these
shares except to the extent of his ownership of debt and equity securities of
AEI.
ITEM 13. Certain Relationships and Related Transactions
Gerald N. Agranoff, the Company's Vice President and Secretary as well
as its general counsel, is of counsel at the law firm Pryor Cashman Sherman &
Flynn LLP. During the years ended December 31, 2002 and 2001 and the periods
ended December 31, 2000 and December 18, 2000, the Company paid legal fees of
$106 (of which $55 was accrued at December 31, 2002) , $233 (of which $70 was
accrued at December 31, 2000), $0, and $420, respectively, to Pryor Cashman
Sherman & Flynn LLP, for legal services provided by attorneys other than Mr.
Agranoff.
During the years ended December 31, 2002 and 2001 and the periods ended
December 31, 2000, and December 18, 2000, the Company paid secretarial expenses
of $64, $50, $0, and $45, respectively, to Canal Capital Corporation ("Canal
Capital"). Asher B. Edelman, Vice Chairman of the Company's Board of Directors,
serves as chairman of the board of directors of Canal Capital and Mr. Agranoff
is also a member of the board.
The Company, along with co-tenants Canal Capital 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 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.
Joshua J. Angel, a member of the Company's Board of Directors, is the
senior managing shareholder of Angel & Frankel, P.C. During the years ended
December 31, 2002 and 2001 and the periods ended December 31, 2000, December 18,
2000, the Company paid legal fees of $0, $93, $0, and $484, respectively, to
Angel & Frankel, P. C. for legal services.
71
See Note 4 to the Consolidated Financial Statements for a discussion of
the Company's investment in the Partnership.
ITEM 14. Controls and Procedures
In conjunction with this Annual Report on Form 10-K and their
certification of the disclosures herein, the Company's interim Principal
Executive Officer and Principal Financial Officer, Phillip P. Krumb, evaluated
the effectiveness of the Company's disclosure controls and proceedings. This
review, which occurred within ninety (90) days prior to the filing of this
Annual Report, found the disclosure controls and proceedings to be effective.
There have been no significant changes in the Company's internal
controls or in other factors which would significantly affect these controls
subsequent to the evaluation by Mr. Krumb.
Available Information
The Company's internet website (www.cattlesale.com.) will soon provide
a hyperlink to the Securities and Exchange Commission ("SEC") website where the
public may obtain copies of the Company's Annual Report on Form 10-K, quarterly
Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to these
reports, as soon as reasonably practicable after they are electronically filed
with the SEC. Interested parties may also directly access the SEC's website
which contains reports and other information that the Trust files electronically
with the SEC. The address of the SEC's website is http://www.sec.gov. The
Company will provide paper copies of its filings free of charge upon request to
William K. Richardson, Treasurer.
72
PART IV
ITEM 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) Documents Filed as Part of this Report
(1) Financial Statements
The consolidated financial statements listed in the
accompanying index to the financial statements are filed as part of this report.
(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 Consolidated 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.
(3) The exhibits listed in the "Exhibit Index" on page 74 of this
Annual Report.
(b) Reports on Form 8-K
On December 17, 2002, the Company filed a Current Report on Form 8-K
reporting that it had entered into a letter of intent with AEI for the purchase
of the Interests. No financial statements were included in the Current Report.
(c) Exhibits
The exhibits listed on the Exhibit Index on page 74 are filed as part
of this Annual Report.
(d) Additional Financial Statement Schedules
See Item 15(a)(2) above.
73
INDEX TO EXHIBITS
(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).
(3)(d) Second Restated Certificate of Corporation (filed as Exhibit
3(d) to the Company's Current Report on Form 8-K dated
February 25, 2003 and incorporated herein 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)(tt) Operating Agreement of CS Livestock Commissions Co., LLC (the "Livestock Operating
Agreement") (filed as Exhibit 10(tt) to the Company's Current Report on Form 8-K dated
February 25, 2003 and incorporated herein by reference).
(10)(uu) Amendment to the Livestock Operating Agreement(filed as
Exhibit 3(uu) to the Company's Current Report on Form 8-K
dated February 25, 2003 and incorporated herein by reference).
(10)(vv) Operating Agreement of CS Auction Production Co. LLC (the "Auction Operating Agreement")
(filed as Exhibit 10(vv) to the Company's Current Report on Form 8-K dated February 25,
2003 and incorporated herein by reference).
(10)(ww) Amendment to the Auction Operating Agreement (filed as Exhibit
10(ww) to the Company's Current Report on Form 8-K dated
February 25, 2003 and incorporated herein by reference).
(10)(xx) Purchase Agreement, dated as of February 25, 2003, by and between the Company and AEI
Environmental, Inc. (filed as Exhibit 10(xx) to the Company's Current Report on Form 8-K
dated February 25, 2003 and incorporated herein by reference).
(10)(yy) Escrow Agreement dated as of February 25, 2003, by and between
the Company and Asher B. Edelman, as Escrow Agent for the
Benefit of the Holders of Record of the Company's Common Stock
on February 24, 2003 (filed as Exhibit 10(yy) to the Company's
Current Report on Form 8-K dated February 25, 2003 and
incorporated herein by reference).
74
(10)(zz) Employment Agreement dated as of February 25, 2003, by and between the Company and
Michael B. Andelman (filed as Exhibit 10(zz) to the Company's Current Report on Form 8-K
dated February 25, 2003 and incorporated herein by reference).
(10)(aaa) Employment Agreement dated as of February 25, 2003, by and
between the Company and Gerald N. Agranoff (filed as Exhibit
10(aaa) to the Company's Current Report on Form 8-K dated
February 25, 2003 and incorporated herein by reference).
(10)(bbb) Services Agreement dated as of February 25, 2003, by and
between the Company and Asher B. Edelman (filed as Exhibit
10(bbb) to the Company's Current Report on Form 8-K dated
February 25, 2003 and incorporated herein by reference).
(10)(ccc) Employment Agreement dated as of February 25, 2003, by and
between the Company and Phillip P. Krumb (filed as Exhibit
10(ccc) to the Company's Current Report on Form 8-K dated
February 25, 2003 and incorporated herein by reference).
(21) Subsidiaries of Registrant 81
75
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.
The CattleSale Company
(f/k/a Dynacore Holdings Corporation)
(Registrant)
By: /s/ Phillip P. Krumb
-----------------------------
Phillip P. Krumb
Interim Chief Executive Officer
Vice President, Chief Financial
Officer and Director
DATED: April 14, 2003
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/ Edward L. McMillan
Edward L. McMillan Chairman of the Board April 14, 2003
/s/ Asher B. Edelman
Asher B. Edelman Vice Chairman of the Board April 14, 2003
/s/ Gerald N. Agranoff
Gerald N. Agranoff Vice President,
Secretary and Director April 14, 2003
/s/ Joshua J. Angel
Joshua J. Angel Director April 14, 2003
76
/s/ David W. Pequet
David W. Pequet Director April 14, 2003
/s/ Mark A. Margason
Mark A. Margason Director April 14, 2003
/s/ John D. Lane
John D. Lane Director April 14, 2003
77
CERTIFICATIONS
I, Phillip P. Krumb, certify that:
1. I have reviewed this annual report on Form 10-K of the CattleSale Company;
2. Based on my knowledge, this annual 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 annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual report;
4. I am the registrant's sole certifying officer and I am responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and 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 annual 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
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. I am the registrant's sole certifying officer and I have disclosed, based on
my most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
functions):
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
78
6. I am the registrant's sole certifying officer and I have indicated in this
annual report whether 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: April 14, 2003 /s/ Phillip P. Krumb
--------------------------------
Name: Phillip P. Krumb
Titles: Interim Chief Executive Officer and
Chief Financial Officer
79
Schedule II
THE CATTLESALE COMPANY 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, 2002 $226 $(56) $-- $746 $916
Year ended December 31, 2001 $77 $149 $-- $-- $226
Period ended December 31, 2000 $-- $-- $-- $-- $--
(Predecessor Company)
Period ended December 18, 2000 $773 $(65) $-- $(708) $--
(a) Transfers to and from other balance sheet reserve accounts.
(b) Accounts written-off net of recoveries, other expense accounts and
translation adjustments.
80
Exhibit 21
Subsidiaries
As of December 31, 2002
(all inactive and 100% owned unless otherwise indicated)
Corebyte, Inc.
Delaware corporation (80% owned)
Dynacore International, Inc.
Delaware corporation
Dynacore International Holdings, Inc.
Delaware corporation
Inforex International, Inc.
Delaware corporation
Dynacore International Investments, Inc.
Delaware corporation
Datapoint International Headquarters S.A.R.L.
a French corporation
Dynacore Deutschland
a German corporation
As of February 25, 2003
All of the above
CattleSale Livestock Commissions Co. LLC
an Oregon limited liability company
CattleSale Auction Production Co. LLC
an Oregon limited liability company
81