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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual Report Pursuant To Section 13 or 15(d) Of The Securities
Exchange Act Of 1934
For the fiscal year ended December 31, 2001
-----------------
OR
[ ] Transition Report Pursuant To Section 13 or 15(d) Of The Securities
Exchange Act Of 1934
For the transition period from _________ to _________
Commission file number 1-7636
DYNACORE HOLDINGS CORPORATION
(f/k/a DATAPOINT CORPORATION)
(Exact name of registrant as specified in its charter)
Delaware 74-1605174
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
9901 IH 10 West, Suite 800; San Antonio, Texas 78230-2292
(Address of principal executive office and zip code)
(210) 558-2898
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of each class Name of each exchange on which registered
---------------------- -----------------------------------------------
Common Stock, $.01 par value National Association of Securities Dealers'
Over-the Counter Bulletin Board
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. Yes X No .
Applicable only to registrants involved in bankruptcy proceedings during the
preceding five years: Indicate by check mark whether the registrant has filed
all documents and reports required to be filed by Section 12, 13 or 15 (d) of
the Securities Exchange Act of 1934 subsequent to the distribution of securities
under a plan confirmed by a court. Yes X No .
As of March 7, 2002, 9,984,726 shares of Dynacore Holdings Corporation
Common Stock were outstanding and the aggregate market value (based upon the
last reported sale price of the Common Stock) of the shares of Common Stock held
by non-affiliates was approximately $1.5 million. (For purposes of calculating
the preceding amount only, all directors and executive officers of the
registrant are assumed to be affiliates.)
PART I
ITEM 1. Business.
2001 in Summary
Since its successful emergence from Chapter 11 bankruptcy in December 2000,
Dynacore Holdings Corporation, formerly known as Datapoint Corporation
(hereinafter "Dynacore" or the "Company"), has been concentrating its efforts
and resources in four primary areas:
1. Continuation of its Patent Management Activities,
2. Continuation of its Search for a Merger or Acquisition Transaction,
3. Continuation of its Evaluation of Current Operations and Cost Control, and
4. Liquidity.
Continuation of its Patent Management Activities
During the second quarter of 2001, the Company and the Dynacore Patent
Litigation Trust, established pursuant to the Patent Litigation Trust Agreement,
by and among the Company and the Patent Litigation Trust Trustees (as defined
therein), dated December 18, 2000, filed suit in the Southern District of New
York against U.S. Philips Corporation, STMicroelectronics, Inc., Compaq Computer
Corporation, Hewlett-Packard Corporation, Epson America, Inc., Fujitsu America,
Inc., Matsushita Electric Corporation of America, Texas Instruments
Incorporated, Eastman Kodak Company, Dell Computer Corporation, Dell Marketing
Corporation, Gateway, Inc., Motorola, Inc., Apple Computer, Inc., and NEC
Computers, Inc. for patent infringement regarding United States Patent No.
5,077,732. This patent incorporates into a single network multiple different
operational capabilities and a method of communicating information between at
least three devices. The suit alleges that The Institute of Electrical and
Electronic Engineers standard for the computer and electronics industry known as
1394 utilizes technology that falls within the scope of the subject matter of
the `732 Patent. Although this action was initially stayed, the stay has been
vacated and the action is proceeding (see "Patents and Trademarks" below for
more extensive discussion of the patents and patent litigations).
Continuation of its Search for a Merger or Acquisition Transaction
Since the sale of its European operations in June 2000 and the termination
of the Company's Corebyte operations during the third quarter of 2001, the
Company has been actively seeking a merger or acquisition partner with revenue
producing operations or cash infusion opportunities to support pre-revenue
research and development activities. Although the Company has not entered into
any proposals, arrangements or understandings with the owners of any business or
company regarding the possibility of an acquisition by or merger transaction
with the Company, the Company has received expressions of interest regarding
such a possibility from several businesses. In addition, the Company has
conducted preliminary due diligence in this regard and formal presentations were
made to the Company's Board of Directors in connection with some of these
businesses. However, to date, the Company's Board of Directors and/or executive
management have concluded that the opportunities presented were not in the best
interests of the Company and its shareholders, and therefore terminated any
further discussions with these businesses. Currently, the Company is evaluating
the possibility of entering into serious negotiations and due diligence with an
additional company. Concurrently, the Company is continuing to pursue additional
opportunities for an acquisition or merger transaction.
Continuation of its Evaluation of Current Operations and Cost Control
In January 2001, the Company began a thorough evaluation of the Corebyte
operations, prospects, and strategic options given the lack of a significant
revenue stream resulting from longer than anticipated software development and
marketing efforts and the availability of similar Internet applications in the
marketplace. During its subsequent evaluation, which included the exploration
and discussions with various parties for alternative uses and markets for the
Corebyte developed source code and underlying technologies, the Company
significantly restructured and curtailed Corebyte's day-to-day operations, to
include the elimination of its Web hosting services to third parties. During the
third quarter of 2001, the Company concluded that the Corebyte operation was no
longer a viable and profitable opportunity for the Company and therefore
completely discontinued operations.
The Company maintains a leased office facility in Paris, France, which
served as the Company's European headquarters for the Company's former European
Operations. Since the Company sold its European Operations in June 2000, the
Company intends to dissolve the European Headquarters entity and exercise its
early cancellation option on the leased facility in June 2002.
For the year ended December 31, 2001, the Company incurred restructuring
costs for employee terminations and the Paris facility closing costs of $233
thousand. Of this amount, $183 thousand related to the termination of seven
employees of the Company's Corebyte subsidiary, one employee of the Company
during the quarter ended March 31, 2001, and four employees of the Company
during the quarter ended June 30, 2001. Of such four former employees, three
still provide services on an as needed basis to the Company.
Liquidity
As of December 31, 2001, the Company had cash and cash equivalents of
approximately $2.6 million. In addition, the Company has approximately $593
thousand invested in a limited partnership as more fully described in Footnote 4
to the Consolidated Financial Statements. Since the Effective Date, the
Company's management team has undertaken efforts to identify and evaluate
successor business opportunities. The Company believes that given its current
and forecasted cash requirements for the next twelve months of approximately
$1.7 million to $2.0 million, its cash and its interest in the limited
partnership, which are the Company's two major sources of liquidity, will be
sufficient for the remainder of 2002. This forecast assumes the continuation of
the selling, general and administrative expenses of the type referenced in the
income statement and assumes payments under the existing executive employment
agreements (see Item 11 Executive Compensation) and continuation of such
salaries at current amounts after the expiration of such contracts on June 18,
2002. This forecast also does not include the impact of any merger or
acquisition transaction, if any, does not include any net cash proceeds that may
be received from the patent management activities, if any, and does not include
any additional legal costs required by the Patent Litigation Trust for court
trial expenses, if any.
General
On May 3, 2000 (the "Petition Date" or the "Filing Date"), Dynacore Holdings
Corporation, then known as Datapoint Corporation filed a petition for relief
under Chapter 11 of the Bankruptcy Code with the United States Bankruptcy Court
(the "Court") for the District of Delaware. On October 12, 2000, Dynacore filed
its Amended Plan of Reorganization, which was subsequently approved by the Court
on December 5, 2000. A final decree closing the Chapter 11 case was ordered by
the Court on December 20, 2001.
Prior to the Petition Date, Dynacore, including its subsidiaries, was
principally engaged in the development, acquisition, marketing, servicing, and
system integration of computer and communication products -- both hardware and
software. These products and services were used for integrated computer,
telecommunication and video conferencing network systems. Through its 80% owned
subsidiary, Corebyte Inc. ("Corebyte"), the Company was also actively engaged in
the development and marketing of internet products having e-commerce
applications.
Dynacore was reincorporated in Delaware in 1976 as the successor corporation
to a Texas corporation originally incorporated in 1968 as Computer Terminal
Corporation. The Company's name was changed from Datapoint Corporation to
Dynacore Holdings Corporation in June 2000, in accordance with an order of the
Court. Pursuant to a Stock Purchase Agreement dated April 19, 2000 (the "Stock
Purchase Agreement"), the Company sold certain of its European based
subsidiaries (the "European Operations") to Datapoint Newco 1 Limited ("DNL").
In addition, the Company sold all of its interests in the name "Datapoint" and
was also required to change its name. (See below for a more complete description
of the sale of the European Operations). Dynacore's principal executive offices
are located at 9901 IH 10 West, Suite 800; San Antonio, Texas 78230-2292
(telephone number (210) 558-2898).
As of the Petition Date, the Company's business consisted of three
operations. One operation consisted of a computer telephony integration system,
which offered integrated telecommunication products and services to meet the
requirements of large call centers, customer service organizations and
telemarketing firms. A second, the systems integration and proprietary hardware
and software operation, sold and marketed Dynacore's networking products to
end-users. The European Operations of the Company which were sold to DNL
comprised substantially all of the first and second operations described above
and accounted for more than 98% of the total assets and more than 98% of the
revenue of the Company for the last three fiscal years prior to the Sale. The
Company's third operation consisted of its Corebyte subsidiary, which was
engaged in the creation of internet networking software products.
Over the past many years preceding the Sale, the Company's business suffered
a significant decline in total revenue, recurring losses and a reduction of its
domestic work force. This was primarily due to a mass entry of competitors in
the networking marketplace compounded by a marketplace demand for "Open Systems"
and standard interfaces, both of which adversely impacted the traditional
networking and data processing components of Dynacore's business. The
marketplace was forced into a uniformity of design that led to highly
competitive pricing. At the same time, the increasing availability of low cost,
"off the shelf" software applications written in a number of industry accepted
programming languages adversely affected Dynacore.
In 1981, Dynacore issued $100 million 8 7/8% Convertible Subordinated
Debentures, due 2006 (the "Debentures"). Among other features, the Trust
Indenture governing the Debentures contained an annual sinking fund obligation.
The sinking fund obligation provided that prior to June 1 of each year,
commencing in 1991, Dynacore was required to deposit an amount of not less than
$5 million with the Indenture Trustee in connection with the redemption of the
Debentures. The Company was also permitted to deliver outstanding Debentures,
other than any previously called for redemption, in partial or full satisfaction
of this annual sinking fund obligation, and in fact, from time to time, the
Company purchased Debentures for redemption, such that at the Petition Date, the
outstanding principal face amount of the Debentures had been reduced to
approximately $55 million.
The recurring operational losses and reduced cash flow adversely affected
the Company's ability to properly fund its business operations as it continued
to make the interest and sinking fund obligations to holders of the Debentures
under the Trust Indenture. To fund these obligations, Dynacore was forced to
sell virtually all of its fixed assets during the preceding years, including
real property in San Antonio, Texas in October 1998 and in Gouda, The
Netherlands, approximately one year later. In addition, in October, 1999, the
Company discontinued its domestic video conferencing operations (MINX) as it was
not able to continue making the financial investment required, both in marketing
and product development to sustain profitability for this portion of the
business. In spite of these actions, as of the Petition Date, the Company had
defaulted on one semi-annual interest payment, totaling approximately $2.5
million, and was about to default on the sinking fund payment due June 1, 2000.
In late 1998, Dynacore hired Dain Rauscher Wessels ("Dain Rauscher") to
explore strategic alternatives. Although Dain Rauscher reviewed a series of
alternatives for Dynacore, the one that appeared most viable was the sale of its
European Operations to a strategic buyer.
Dain Rauscher was then retained to supervise a process to locate and sell
the European Operations to the highest bidder. Although numerous potential
purchasers were contacted and a private confidential memorandum was distributed
to over thirty (30) prospective purchasers, Dynacore initially received two bids
for the European Operations. Dain Rauscher and Dynacore's Board of Directors
agreed that the bid made by Reboot Systems, Inc. ("Reboot") represented the
better offer.
On May 17, 1999, the Company entered into a letter of intent to sell its
European Operations to Reboot for $49.5 million plus the assumption of certain
liabilities. Reboot was a newly formed corporation controlled by Mr. Blake
Thomas, the Company's then president. Following the letter of intent, a sale
agreement was executed with Reboot dated as of July 31, 1999 (the "Reboot
Agreement"). The Reboot Agreement contained several contingencies, the most
significant being Reboot's ability to secure financing necessary to close the
transaction. By November 1, 1999, Reboot still had not secured its financing and
Dynacore agreed to an amendment (the "Amendment") to the Reboot Agreement in
return for which Reboot posted a deposit of $750,000 which would be
non-refundable in the event that Reboot failed to close because it could not
secure financing. The Amendment obligated Reboot to loan Dynacore $2.5 million
on or prior to December 1, 1999. Although the termination date pursuant to the
Amendment was extended to March 1, 2000, this extension was contingent on
Reboot's loaning the Company the $2.5 million on or before December 1, 1999, and
in the event the loan was not made, the agreement terminated on December 1,
1999. Since the loan was not made, the agreement was then terminated.
In addition, consistent with the determination of its Board of Directors to
shift the focus of the Company towards acquiring, developing and marketing
products with internet and e-commerce applications, on July 27, 1999, the
Company, through its newly formed subsidiary, Corebyte Inc., acquired (the
"Corebyte Acquisition") the Corebyte communication and networking software
product family (the "Corebyte Products"). The acquisition was accomplished
pursuant to an Asset Purchase Agreement, by and among the Company, SF Digital,
LLC and John Engstrom ("Engstrom"), dated July 27, 1999. In January 2001, the
Company began a thorough evaluation of the Corebyte operations, prospects, and
strategic options given the lack of a significant revenue stream resulting from
longer than anticipated software development and marketing efforts and the
availability of similar Internet applications in the marketplace. During its
subsequent evaluation, which included the exploration and discussions with
various parties for alternative uses and markets for the Corebyte developed
source code and underlying technologies, the Company significantly restructured
and curtailed Corebyte's day-to-day operations, to include the elimination of
its Web hosting services to third parties. During the third quarter of 2001, the
Company concluded that the Corebyte operation was no longer a viable and
profitable opportunity for the Company and therefore completely discontinued
operations.
Subsequent to the termination of the Reboot Agreement, as a result of the
lack of performance by Reboot, the Company entered into a Letter of Intent,
dated January 26, 2000, with the European based CallCentric Ltd. ("CallCentric")
to sell the European Operations. Pursuant to an agreement dated as of April 19,
2000 (the "Sale Agreement"), on June 30, 2000, after receipt of approval from
the Bankruptcy Court, the Company sold (the "Sale") its European Operations to
DNL, a United Kingdom corporation affiliated with CallCentric, for $49.5 million
in cash, less certain adjustments in the event that the aggregate shareholder's
deficit of the European Operations exceeded $10 million (the "Purchase Price").
The Sale Agreement contemplated, among other things, that the Company would file
for reorganization pursuant to Chapter 11 of the United States Bankruptcy Code,
which was filed on May 3, 2000 and that the sale of the European Operations to
DNL would be subject to higher and better offers, if any, and the approval of
the Court. The Court approved the sale on June 15, 2000 and the sale was
consummated on June 30, 2000 (the "Closing"). Pursuant to the Sale Agreement, at
Closing DNL deposited $6 million from the Purchase Price in escrow, $4 million
pending resolution of various issues relating to the UK Pension Plan and $2
million pending preparation of the closing balance sheet. Upon final resolution
of these issues the full $4 million escrow relating to the UK Pension Plan was
released to DNL and $1.625 million of the $2 million escrow was released to the
Company and $375 thousand was released to DNL. Accordingly, the final Purchase
Price after such adjustments was $45.125 million.
On December 5, 2000, the Court approved an order confirming Dynacore's
Amended Plan of Reorganization (the "Plan"). On December 18, 2000 (the
"Effective Date", as defined in the Plan), all of the then existing debt and
equity in Dynacore was cancelled and 10 million shares of new common stock, as
well as 10 million beneficial interests, representing interests in the Dynacore
Patent Litigation Trust, (as defined below) formed to pursue Dynacore's patent
litigations, were issued.
The confirmed Plan provided for the distribution of $34.8 million in cash
from the proceeds of the sale of the European Operations to Debenture holders
and other unsecured creditors of Dynacore on the Effective Date. In addition,
pursuant to the confirmed Plan: (i) Debenture holders and other unsecured
creditors received 25% of the equity of the reorganized corporation, the ability
to designate 3 out of 7 members on the Board of Directors, and 40% of a trust
(the "Patent Litigation Trust"), formed to pursue the patent litigations of
Dynacore, (ii) holders of Dynacore's preferred stock, par value $1.00 per share,
received 23.5% of the equity of the reorganized corporation, and 3.5% of the
Patent Litigation Trust, (iii) holders of the common stock, par value $.25 per
share, received 41.5% of the equity of the reorganized corporation, (iv) current
officer management received 10% of the equity of the reorganized corporation as
part of a settlement of certain officer administrative claims that included
employment contract cancellation and other contractual entitlements and (v) the
remaining 56.5% interest in the Patent Litigation Trust was retained by the
reorganized Dynacore and the Company is currently taking steps to comply with
the National Association of Securities Dealers' requests in order to obtain
approval to cause such interests to be tradable.
The Plan contemplated that the beneficial interests in the Patent Litigation
Trust would be transferable and tradable. In addition, pursuant to the approved
Plan and as reflected in its Restated Certificate of Incorporation, Dynacore is
obligated to distribute to its then stockholders, 75% of the first $100 million
of net proceeds, if any, received on account of its beneficial interest in the
Patent Litigation Trust after adjustment for corporate tax and payment of all
patent litigation expenses. Also, as part of the Plan, Dynacore has committed to
lend the Patent Litigation Trust up to $1 million to pursue Dynacore's patent
litigations. As of December 31, 2001, the amount of such loan is approximately
$262 thousand and the status of the related patent litigations is set forth
below under the heading "Multi-Speed Networking Patents".
As of December 31, 2001, the Company had cash and cash equivalents of
approximately $2.6 million. In addition, the Company has approximately $593
thousand invested in a limited partnership as more fully described in Footnote 4
to the Consolidated Financial Statements. Since the Effective Date, the
Company's management team has undertaken efforts to identify and evaluate
successor business opportunities. The Company believes that given its current
and forecasted cash requirements for the next twelve months of approximately
$1.7 million to $2.0 million, its cash and its interest in the limited
partnership, which are the Company's two major sources of liquidity, will be
sufficient for the remainder of 2002. This forecast assumes the continuation of
the selling, general and administrative expenses of the type referenced in the
income statement and assumes payments under the existing executive employment
agreements (see Item 11 Executive Compensation) and continuation of such
salaries at current amounts after the expiration of such contracts on June 18,
2002.This forecast also does not include the impact of any merger or acquisition
transaction, if any, does not include any net cash proceeds that may be received
from the patent management activities, if any, and does not include any
additional legal costs required by the Patent Litigation Trust for court trial
expenses, if any.
Since the confirmation of the Plan, the Company has been actively pursuing
an acquisition of assets, property or business that may be beneficial to it and
its stockholders. In considering whether to complete any such acquisition, the
Board of Directors shall make the final determination, and the approval of
stockholders will not be sought unless required by applicable law, the Company's
Restated Certificate of Incorporation, Bylaws or contract. The Company can give
no assurance that any such endeavor will be successful or profitable.
The Company has not restricted its search to any particular business or
industry, and the areas in which it is seeking out acquisitions, reorganizations
or mergers includes, but is not limited to, the fields of high technology,
manufacturing, natural resources, service, research and development,
communications, transportation, insurance, brokerage, finance and all medically
related fields, among others. The Company recognizes that because of its lack of
significant resources, the number of suitable potential business ventures which
may be available to it will be extremely limited, and may be restricted to
entities who desire to avoid what these entities may deem to be the adverse
factors related to an initial public offering. The most prevalent of these
factors include substantial time requirements, legal and accounting costs, the
inability to obtain an underwriter who is willing to publicly offer and sell
shares, the lack of or the inability to obtain the required financial statements
for such an undertaking, limitations on the amount of dilution public investors
will suffer to the benefit of the stockholders of any such entities, along with
other conditions or requirements imposed by various federal and state securities
laws, rules and regulations.
Management intends to consider a number of factors prior to making any
decision as to whether to participate in any specific business endeavor, none of
which may be determinative or provide any assurance of success. These may
include, but will not be limited to an analysis of the quality of the entity's
management personnel; the anticipated acceptability of any new products or
marketing concepts; the merit of technological changes; its present financial
condition, projected growth potential and available technical, financial and
managerial resources; its working capital, history of operations and future
prospects; the nature of its present and expected competition; the quality and
experience of its management services and the depth of its management; its
potential for further research, development or exploration; risk factors
specifically related to its business operations; its potential for growth,
expansion and profit; the perceived public recognition or acceptance of its
products, services, trademarks and name identification; and numerous other
factors which are difficult, if not impossible, to properly analyze without
referring to any objective criteria.
Regardless, the results of operations of any specific entity may not
necessarily be indicative of what may occur in the future, by reason of changing
market strategies, plant or product expansion, changes in product emphasis,
future management personnel and changes in innumerable other factors. Further,
in the case of a new business venture or one that is in a research and
development mode, the risks will be substantial, and there will be no objective
criteria to examine the effectiveness or the abilities of its management or its
business objectives. Also, a firm market for its products or services may yet
need to be established, and with no past track record, the profitability of any
such entity will be unproven and cannot be predicted with any certainty.
Management personally meets with management and key personnel of the entity
sponsoring any business opportunity afforded to the Company, visits and inspects
material facilities, obtains independent analysis or verification of information
provided and gathered, checks references of management and key personnel and
conducts other reasonably prudent measures calculated to ensure a reasonably
thorough review of any particular business opportunity.
The Company is unable to predict the time as to when and if it may actually
participate in any specific business endeavor. The Company anticipates that
proposed business ventures will be made available to it through personal
contacts of directors, executive officers and principal stockholders,
professional advisors, broker dealers in securities, venture capital personnel,
members of the financial community and others who may present unsolicited
proposals. In certain cases, the Company may agree to pay a finder's fee or to
otherwise compensate the persons who submit a potential business endeavor in
which the Company eventually participates.
Although the Company has not entered into any proposals, arrangements or
understandings with the owners of any business or company regarding the
possibility of an acquisition by or merger transaction with the Company, the
Company has received expressions of interest regarding such a possibility from
several businesses. In addition, the Company has conducted preliminary due
diligence in this regard and formal presentations were made to the Company's
Board of Directors in connection with some of these businesses. However, to
date, the Company's Board of Directors and/or executive management have
concluded that the opportunities presented were not in the best interests of the
Company and its shareholders, and therefore terminated any further discussions
with these businesses. Currently, the Company is evaluating the possibility of
entering into serious negotiations and due diligence with an additional company.
Concurrently, the Company is continuing to pursue additional opportunities for
an acquisition or merger transaction.
Since the sale of its European Operations as described above, substantially
all of the principal assets of the Company are currently the cash proceeds from
the sale of the European Operations which are being held in a money market
mutual fund pending future redeployment in an operating business other than an
investment company. Pursuant to the Investment Company Act of 1940, as amended
(the "40 Act"), a company that owns investment securities having a value
exceeding 40% of the value of its total assets (exclusive of government
securities and cash items) is subject to registration and regulation as an
investment company unless it qualifies for a statutory or regulatory exclusion
or exemption from investment company status. Furthermore, a company that is or
holds itself out as being engaged primarily, or proposes to engage primarily, in
the business of investing, reinvesting, or trading in securities is subject to
registration and regulation as an investment company.
Since the sale of its European Operations and the termination of the
Corebyte operations, the Company relied on a temporary one-year exclusion from
investment company status under the 40 Act, since as indicated above the
Company's intent, as soon as reasonably possible, was to engage in a business
other than that of investing, reinvesting, owning, holding or trading in
securities. The Company believes that based on its current asset mix, and its
current activities, including the management of its patents, it will not be
treated as an investment company. However, given its current activities, the
Company believes there is a risk of becoming subject to regulation and
registration as an investment company. The Company does not believe that it is
feasible for the Company to register as an investment company because the 40 Act
rules are inconsistent with the Company's strategy of acquiring, and actively
managing an operating business. However, if the Company were required to
register as an investment company, then it would incur substantial additional
expense as a result of the 40 Act's record keeping, reporting, voting, proxy
disclosure and other requirements. In the event that the Company's activities
and asset mix do not qualify for an exclusion or exemption, the Company may be
required either to register as an investment company or take significant
business actions that are contrary to its business objectives in order to avoid
being required to register as an investment company. For example, the Company
might be compelled to acquire additional assets it might not otherwise have
acquired, be forced to forgo opportunities to acquire interests in companies or
other assets or be forced to sell or refrain from selling such interests or
assets. In addition, the Company might need to sell certain assets, which are
considered to be investment securities. In order to be certain of its status
under the 40 Act, the Company may apply to the Securities and Exchange
Commission for an order finding that it is primarily engaged in a business other
than investing in securities. The Company can give no assurance that such an
order, if applied for, will be granted.
Dynacore believes that it had approximately $172 million of tax loss
carryovers prior to the consummation of its Plan. Section 382 of the Internal
Revenue Code of 1986 (the "Code") limits the full annual utilization of NOL
carryovers of a "loss corporation" that has undergone an Ownership Change (as
defined below). Dynacore believes that had it not qualified for the 382
Bankruptcy Exception described below its use of its NOL and capital loss
carryovers would have been subject to Section 382 limitations following its
reorganization under the Plan. As of December 31, 2001, the Company has $149
million of NOL and $28 million of capital losses carryovers remaining.
Generally, a "loss corporation" undergoes an ownership change (an "Ownership
Change") as defined by Section 382 of the Code if immediately after any "owner
shift involving a 5-percent shareholder" (in general, any change in the
respective ownership of stock of a corporation affecting the percentage of stock
of such corporation owned by any person who is a "5-percent shareholder" before
or after such change) or any "equity structure shift" (in general, except for
certain reorganizations, any tax-free reorganization under Section 368 of the
Code and, to the extent provided in Treasury regulations, taxable
reorganization-type transactions, public offerings and similar transactions):
(A) the percentage of the stock of the loss corporation owned by one or more
5-percent shareholders has increased by more than 50 percentage points over (B)
the lowest percentage of stock of the loss corporation (or any predecessor
corporation) owned by such shareholders at any time during the "testing period"
(in general, the 3-year period ending on the day of any owner shift involving a
5-percent shareholder or equity structure shift).
A "loss corporation", for purposes of Section 382 of the Code, is a
corporation, like Dynacore, that either is entitled to use an NOL carryover or
has an NOL for the taxable year in which an Ownership Change occurs and, except
as provided in Treasury regulations, any corporation with a net unrealized
built-in loss. A "5-percent shareholder" means any person holding 5 percent or
more (by value) of the stock of a loss corporation at any time during the
testing period. In general, in determining whether an Ownership Change has
occurred, all stock owned by shareholders of a loss corporation who are not
5-percent shareholders is treated as stock owned by a single 5-percent
shareholder (referred to as the "public group"), regardless of whether such
stock comprises an aggregate of 5 percent of the loss corporation's stock.
Notwithstanding the foregoing, the normal Code Section 382 rules generally
do not apply to any Ownership Change if (i) the loss corporation is (immediately
before such Ownership Change) under the jurisdiction of the court in a
bankruptcy under Title 11 of the United States Code or similar case ("Title 11
Case"), and (ii) the shareholders and creditors of the loss corporation
(determined immediately before such Ownership Change) own (after such Ownership
Change and as a result of being shareholders or creditors immediately before
such change) stock of such corporation possessing at least 50 percent of the
total voting power of the stock of such loss corporation and has a value equal
to at least 50 percent of the total value of the stock of such loss corporation
(the "382 Bankruptcy Exception"). Dynacore believes that the circumstances
surrounding its reorganization in accordance with the terms of the Plan were
such that it qualified for the 382 Bankruptcy Exception. In addition, subject to
certain "built-in-loss" rules that should have no appreciable effect on Dynacore
and, under certain circumstances, certain possible limitations set forth in the
consolidated return regulations, Dynacore does not expect to be subject to any
limitations on the use of its NOL carryovers under any other provisions of the
Code other than Section 382. Moreover, the Section 382 continuity of business
enterprise requirement normally applicable to loss corporations that have
experienced an Ownership Change should not apply to Dynacore since loss
corporations that qualify and elect to rely on the 382 Bankruptcy Exception are
exempted from such requirement.
However, due to its reliance on the 382 Bankruptcy Exception, Dynacore was
required to reduce its NOL carryovers by the amount of interest paid or accrued
during the preceding three year period on its Debentures that was converted into
the equity of the reorganized corporation pursuant to the Plan. Taking both the
reduction for such disallowed interest and all other reductions in its tax loss
carryovers required by Section 108 of the Code (relating to cancellation of
indebtedness income), Dynacore believes that its tax loss carryovers were
approximately $172 million following the consummation of the Plan.
In addition, if a loss corporation has taken advantage of the 382 Bankruptcy
Exception to one Ownership Change and subsequently experiences a second
Ownership Change within 2 years following the first Ownership Change, it must
reduce its NOL carryovers to zero for all tax periods ending after the date of
the second Ownership Change. The testing period for the second Ownership Change,
however, begins on the first day following the earlier Ownership Change to which
the 382 Bankruptcy Exception applied (rather than beginning on any prior date,
as would otherwise be the case under the three-year rule), meaning, in effect,
that the percentage ownership of Dynacore by 5-percent shareholders would have
to increase within two years by more than 50 percentage points over their
ownership as determined on the date of the Ownership Change in Dynacore subject
to the 382 Bankruptcy Exception. For periods following such latter date,
Dynacore will again be subject to the general Section 382 rules applicable to
changes of more than 50 percent in stock ownership by its 5-percent shareholders
within a rolling 3-year period as described above.
As part of the Plan the Company restated its Certificate of Incorporation
and in order to maintain its NOL and capital loss carryovers the Restated
Certificate of Incorporation includes certain provisions, which impose
restrictions, designed to prevent Ownership Changes from occurring. These
provisions, as well as structuring considerations, may interfere with the
Company's ability to acquire a business since use of the Company's stock as
consideration in any acquisition transaction may be limited if the Company
desires to retain its NOL and capital loss carryovers.
Risk Factors
In any business venture, there are substantial risks specific to the
particular enterprise which cannot be ascertained until a potential acquisition,
reorganization or merger candidate has been identified; however, at a minimum,
the Company's present and proposed business operations will be highly
speculative and subject to the same types of risks inherent in any new or
unproven venture, and will include those types of risk factors outlined below.
No Source of Revenue. The Company can provide no assurance that any acquired
business will produce any material revenues for the Company or its stockholders
or that any such business will operate on a profitable basis.
Absence of Substantive Disclosure Relating to Prospective Acquisitions.
Because the Company has not yet identified any assets, property or business that
it may potentially acquire, potential investors in the Company will have
virtually no substantive information upon which to base a decision whether or
not to invest in the Company. Potential investors would have access to
significantly more information if the Company had already identified a potential
acquisition or if the acquisition target had made an offering of its securities
directly to the public. The Company can provide no assurance that any investment
in the Company will not ultimately prove to be less favorable than such a direct
investment.
Unspecified Industry and Acquired Business; Unascertainable Risks. To date,
the Company has not identified any particular industry or business in which to
concentrate its acquisition efforts. Accordingly, prospective investors
currently have no basis to evaluate the comparative risks and merits of
investing in the industry or business in which the Company may invest. To the
extent that the Company may acquire a business in a highly risky industry, the
Company will become subject to those risks. Similarly, if the Company acquires a
financially unstable business or a business that is in the early stages of
development, the Company will become subject to the numerous risks to which such
businesses are subject. Although management intends to consider the risks
inherent in any industry and business in which it may become involved, there can
be no assurance that it will correctly assess such risks.
Uncertain Structure of Acquisition. While management has had preliminary
contact and discussions with several businesses, there are, presently, no formal
plans, proposals or arrangements to acquire any specific assets, property or
business. Accordingly, it is unclear whether such an acquisition would take the
form of an exchange of capital stock, a merger or an asset acquisition. However,
because the Company has limited cash resources as of the date of this Report,
management expects that any such acquisition would take the form of cash and an
exchange of capital stock.
Patents and Trademarks
Dynacore owns certain patents, copyrights, trademarks and trade secrets in
network technologies, which it considers valuable proprietary assets. In this
regard, the Company, and the Dynacore Patent Litigation Trust (the "PLT") have
been actively involved in not only maximizing such intellectual property through
licensing and/or royalty arrangements but also, in protecting these assets from
infringement by other parties.
In this regard, the Company and the PLT have retained the services of
"intellectual property" Counsel, who meets regularly with the Company's
executive management to discuss, among other things, the status of current,
pending, and future patent litigation, certain patent infringement settlement
proposals, and proposed patent royalty and license agreements.
Multi-speed Networking Patents
During the quarter ended June 30, 2001, the Company and the Dynacore Patent
Litigation Trust, established pursuant to the Patent Litigation Trust Agreement,
by and among the Company and the PLT Trustees (as defined therein), dated
December 18, 2000, filed suit in the Southern District of New York against U.S.
Philips Corporation, STMicroelectronics, Inc., Compaq Computer Corporation,
Hewlett-Packard Corporation, Epson America, Inc., Fujitsu America, Inc.,
Matsushita Electric Corporation of America, Texas Instruments Incorporated,
Eastman Kodak Company, Dell Computer Corporation, Dell Marketing Corporation,
Gateway, Inc., Motorola, Inc., Apple Computer, Inc., and NEC Computers, Inc.,
Civil Action No. 01-CV-5012 (LTS) (GWG); and Sony Electronics Inc., Nikon Inc.,
JVC Americas Corp., Adaptec, Inc., Smartdisk Corporation, Evergreen
Technologies, Inc., Ads Technologies, Inc., Western Digital Corporation,
Quadmation Incorporated, Lucent Technologies, Inc., and 3COM Corporation, Civil
Action No. 01-CV-10978 (LTS) (GWG), for patent infringement regarding United
States Patent No. 5,077,732. The suits allege that The Institute of Electrical
and Electronic Engineers ("IEEE") standard for the computer and electronics
industry known as 1394 utilizes technology that falls within the scope of the
subject matter of the `732 Patent and that each defendant sells products that
comply with the 1394 standard. Although this action was initially stayed, the
stay has been vacated and the action is proceeding.
Any recovery by way of judgment or settlement will be received, net of
expenses, by the Dynacore Patent Litigation Trust. Dynacore Holdings Corporation
holds 56.5% of the Dynacore Patent Litigation Trust interests. The balance of
the interests were distributed to former unsecured creditors and preferred
shareholders of the Company when it emerged from bankruptcy proceedings in
December 2000.
As the owner of United States Patent Nos. 5,008,879 and 5,077,732 related to
network technology, the Company believed these patents covered most products
introduced by various suppliers to the networking industry and dominated certain
types of dual-speed technology on networking recently introduced by various
industry leaders. Dynacore had asserted one or both of these patents in the
United States District Court for the Eastern District of New York against a
number of parties:
(1) Datapoint Corporation v. Standard Micro-Systems, Inc. and
Intel Corporation, No. C.V.-96-1685;
-----------------------------------------------------------------
(2) Datapoint Corporation v. Cisco Systems, Plaintree Systems Corp.,
Accton Technologies Corp., Cabletron Systems, Inc., Bay Networks, Inc.,
Crosscom Corp. and Assante Technologies, Inc. No. CV 96 4534;
-----------------------------------------------------------------------
(3) Datapoint Corporation v. Dayna Communications, Inc., Sun Microsystems,
Inc., Adaptec, Inc. International Business
Machines Corp., Lantronix, SVEC America Computer Corporation, and Nbase
Communications, No. CV 96 6334; and
-------------------------------------------------------------------------
(4) Datapoint Corporation v. Standard Microsystems Corp. and
Intel Corp., No. CV-96-03819.
-------------------------------------------------------------------------
These actions were consolidated for discovery, and for purposes of claim
construction. On January 20, 1998, a hearing commenced in the United States
District Court that concluded on January 23, 1998 during which claim
construction was submitted to a Special Master. The Special Master's report was
issued in April of 1998 adverse to Dynacore. The Company had filed two sets of
objections to certain portions of this report. The objections were overruled.
Both patents have been submitted to the Patent Office for re-examination. After
re-examination, the patents were approved and a certificate for both patents has
been issued. After this re-examination the action proceeded and the appeal was
ultimately denied on February 15, 2002. Accordingly, these actions are now over.
The above actions represent the trust property which the Company transferred
and assigned to the Patent Litigation Trust pursuant to that certain Patent
Litigation Trust Agreement, by and among the Company and the Patent Litigation
Trust trustees. As previously mentioned, the Company has retained a 56.5%
interest in the Patent Litigation Trust.
Employees
At December 31, 2001, the Company had seven employees: four full time and
three part-time. The Company considers its relations with its employees to be
satisfactory. The aggregate annual salaries for the seven employees are
approximately $671 thousand.
Environmental Matters
Compliance with current federal, state, and local regulations relating to
the protection of the environment has not had, and is not expected to have, a
material effect upon the capital expenditures, earnings, or competitive position
of the Company.
ITEM 2. Properties.
Dynacore's principal executive office is located in San Antonio, Texas. The
Company believes that its facilities are generally well maintained, in good
operating condition and are adequately equipped for their present use.
Information regarding the principal properties, excluding leases assigned or
subleased, as of December 31, 2001, is as follows:
Approximate
Facility
Location Use Sq. Footage Owned or Leased Land Area
-------- --- ----------- -------------------------
San Antonio, Texas Office 805 Leased; expires August 31, 2002
New York, New York Office 4,250 Leased; expires October 16, 2009
San Antonio, Texas Warehouse 4,900 Leased; expires January 31, 2004
Paris, France Office 1,450 Leased; expires June 16, 2008
with early cancellation options
on June 16, 2002 (which the
Company intends to exercise)
and June 16, 2005
The aggregate annual rental for these leases, excluding sub-lease agreements
is approximately $253 thousand.
During the first quarter of fiscal 1999, the Company sold the building it
owned in Gouda, Netherlands to a private unaffiliated group for approximately
$2.1 million (net of mortgage obligations and closing costs). The sales contract
provided for the leaseback by the Company of approximately 18,000 square feet
for an initial lease term of five years and approximately 12,000 square feet for
an initial lease term of one year. This lease obligation was transferred to DNL
as a result of the sale of the European Operations on June 30, 2000.
On October 27, 1997, the Company sold the three buildings it owned in San
Antonio, Texas to a private unaffiliated group for approximately $3.2 million
(net of mortgage obligations and closing costs). The sales contract provided for
the leaseback by the Company of one of the buildings (approximately 38,000
square feet) for an initial lease term of five years. As part of the Court
approved bankruptcy proceedings, the Company renegotiated the termination of the
lease to March 31, 2001. The Company occupied space on a month-to-month basis
ranging from 17,630 square feet in April 2001 to 1,670 square feet in September
2001, at which time the Company vacated the premises.
ITEM 3. Legal Proceedings.
From time to time, the Company is a defendant in lawsuits generally
incidental to its business. The Company is not currently aware of any such suit,
which if decided adversely to the Company, would result in a material liability.
ITEM 4. Submission of Matters to a Vote of Security Holders.
There were no matters submitted during 2001 to a vote of security holders of
the Company through the solicitation of proxies. There was no annual meeting of
stockholders held during 2001.
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters.
Beginning August 24, 1998, the Company's common stock was quoted on the National
Association of Securities Dealers' Over-the Counter Bulletin Board under the
symbol "DTPT". The symbol changed to DTPTQ upon the filing for bankruptcy relief
and the symbol once again changed as the result of the Company's name change to
DYHGQ. On the Effective Date and through June 18, 2001, the symbol was DYHC and
the stock was tradable over-the-counter through the National Daily Quotation
System "pink sheets" published by the National Quotation Bureau, Inc. On June
18, 2001, the Company announced that the National Association of Securities
Dealers' Inc. ("NASD") approved the application for listing and quotation of the
stock on the Over-the-Counter Bulletin Board, also under the symbol DYHC. The
Company is currently working to cause the beneficial interests in the Patent
Litigation Trust to be tradable as the Company has undertaken to have a set of
financial statements for the year 2001 for the Patent Litigation Trust prepared
in order to comply with the request by the NASD for such financial statements.
Accordingly, the Company believes that the shares of beneficial interests in the
Patent Litigation Trust will ultimately be traded over-the-counter through the
National Daily Quotation System "pink sheets" published by the National
Quotation Bureau, Inc. As of March 7, 2002 there were approximately 2,780
holders of record and 9,984,726 outstanding shares of Common Stock. The prices
below represent the high and low prices for composite transactions for stock
traded during the applicable periods. As a result of the new common stock, which
was issued on the Effective Date, all prices have been adjusted to reflect its
issuance at the rate of .225177 shares of New Common Stock for each share of Old
Common Stock. The Company has not paid cash dividends to date on its common
stock and has no present intention to pay cash dividends on its common stock in
the near future. As of March 7, 2002, the closing price of the stock was $.20.
The stock prices for the last two years are as follows:
High Low
March 30, 2001 .50 .10
June 30, 2001 .37 .20
September 30, 2001 .28 .16
December 31, 2001 .29 .18
High Low
March 30, 2000 6.52 1.24
June 30, 2000 3.05 .55
September 30, 2000 1.80 .62
December 18, 2000* .84 .26
* The New common stock did not trade during the period December 19, 2000 through
December 31, 2000.
ITEM 6. Selected Financial Data.
The operations of Dynacore for the year ended December 31, 2001 and for the
period of December 19, 2000 through December 31, 2000 (referred to as the
"Successor Company"), and all prior periods presented (referred to as the
"Predecessor Company") in this report were significantly affected by the Sale of
the Company's European Operations on June 30, 2000 and the cessation of
virtually all of the production operations of the Company. As a result, the
financial results of the Company for each of the periods addressed by this
report prior to December 18, 2000, (the Effective Date), do not reflect the
earnings capacity of the Company. In addition the financial data for the period
ended December 31, 2000 reflects the adoption of Fresh Start Accounting and
includes the period from December 19, 2000 to December 31, 2000.
The Fresh Start basis of accounting is in accordance with the Statement of
Position (SOP) 90-7, "Financial Reporting by Entities in Reorganization Under
the Bankruptcy Code," issued in November 1990 by the Institute of Certified
Public Accountants and includes activity from December 19, 2000 to December 31,
2000. Under this accounting treatment, all assets and liabilities were restated
to reflect the reorganization value of the reorganized entity, which
approximates its fair value at the date of reorganization. In addition, the
accumulated deficit of the Company was eliminated and its capital structure was
recast in conformity with the Plan. As such, the accompanying financial data as
of December 31, 2000 represents that of a successor company, which, in effect,
is a new entity with assets, liabilities and a capital structure having carrying
values not comparable with prior periods and with no beginning retained earnings
or deficit. As such, the financial data is considered that of a Successor
Company and is not comparable to prior periods.
Selected Financial Data
Five-Year Comparison
(Dollars in thousands, except per share data)
Successor Predecessor
12/19/00- 01/01/00 - 08/01/99 -
2001 12/31/00 12/18/00 12/31/99 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------------------
Operating Results for the Fiscal Year
Total Revenue $ 9 $ - $62,956 $51,860 $138,285 $151,445 $142,121
Operating income (loss) (3,321) (195) (3,004) (1,772) (2,886) 5,074 2,033
Income (loss) before extraordinary credits
and effect of change in accounting principle (3,793) (311) 50,820 (4,513) (9,256) (1,224) 1,173
Net income (loss) (3,793) (311) 81,079 (4,513) (7,549) (669) 2,383
Basic earnings (loss) per common share:
Income (loss) before extraordinary credits ($0.38) ($0.03) $12.10 ($1.13) ($2.45) ($0.49) $0.05
Gain on the exchange and retirement
of preferred stock - - - - 0.09 - 1.05
Extraordinary credits - - 10.94 - 0.40 0.14 0.33
Net income (loss) per share ($0.38) ($0.03) $23.04 ($1.13) ($1.96) ($0.35) $1.43
Diluted earnings (loss) per common share:
Income (loss) before extraordinary credits ($0.38) ($0.03) $10.25 ($1.13) ($2.45) ($0.49) $0.05
Gain on the exchange and retirement
of preferred stock - - - - 0.09 - 1.07
Extraordinary credits - - 5.91 - 0.40 0.14 0.31
Net income (loss) per share ($0.38) ($0.03) $16.16 ($1.13) ($1.96) ($0.35) $1.43
Financial Position at End of Fiscal Year
Current assets $ 3,659 $8,289 $9,318 $36,093 $40,930 $50,807 $45,340
Fixed assets, net 28 102 108 5,872 5,928 9,468 11,764
Total assets 7,077 12,694 13,740 44,054 49,333 66,816 62,388
Current liabilities 502 1,913 2,801 60,444 60,463 64,491 53,679
Long-term debt - - - 50,000 50,000 55,000 60,875
Stockholders' equity (deficit) 3,385 7,189 7,500 (76,556) (72,128) (64,437) (64,084)
Other Information
Average common shares outstanding 9,984,726 10,000,000 4,145,770 4,131,074 4,104,029 4,045,963 3,627,550
Number of common stockholders of record 2,780 2,641 2,732 2,810 2,860 2,966 3,070
Preferred shares outstanding - - - 661,967 661,967 721,976 721,976
Dividends paid or accumulated on preferred stock - - - 165 684 722 1,009
Number of employees 7 19 19 617 639 652 641
No cash dividends on common stock have been declared during any of the above periods.
Net income for the period ending 12/18/00 includes a gain of $52.5 million resulting from a divestiture.
Net income for the period ending 12/18/00 includes an extraordinary debt extinguishment gain of $26.5 million and Fresh start
adjustments of of $3.8 million.
See notes to Consolidated Financial Statements and Management Discussion and Analysis of Financial Condition and Results
of Operations.
Per share amounts have been adjusted to reflect its issuance at the rate of .225177 shares of New Common stock for each share
of Old Common Stock.
ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
2001 in Summary
Since its successful emergence from Chapter 11 bankruptcy in December 2000,
Dynacore Holdings Corporation, formerly known as Datapoint Corporation
(hereinafter "Dynacore" or the "Company") has been concentrating its efforts and
resources in four primary areas:
1. Continuation of its Patent Management Activities,
2. Continuation of its Search for a Merger or Acquisition Transaction,
3. Continuation of its Evaluation of Current Operations and Cost Control, and
4. Liquidity.
Continuation of its Patent Management Activities
During the second quarter of 2001, the Company and the Dynacore Patent
Litigation Trust, established pursuant to the Patent Litigation Trust Agreement,
by and among the Company and the Patent Litigation Trust Trustees (as defined
therein), dated December 18, 2000, filed suit in the Southern District of New
York against U.S. Philips Corporation, STMicroelectronics, Inc., Compaq Computer
Corporation, Hewlett-Packard Corporation, Epson America, Inc., Fujitsu America,
Inc., Matsushita Electric Corporation of America, Texas Instruments
Incorporated, Eastman Kodak Company, Dell Computer Corporation, Dell Marketing
Corporation, Gateway, Inc., Motorola, Inc., Apple Computer, Inc., and NEC
Computers, Inc. for patent infringement regarding United States Patent No.
5,077,732. This patent incorporates into a single network multiple different
operational capabilities and a method of communicating information between at
least three devices. The suit alleges that The Institute of Electrical and
Electronic Engineers standard for the computer and electronics industry known as
1394 utilizes technology that falls within the scope of the subject matter of
the `732 Patent. Although this action was initially stayed, the stay has been
vacated and the action is proceeding.
Continuation of its Search for a Merger or Acquisition Transaction
Since the sale of its European operations in June 2000 and the termination of
the Company's Corebyte operations during the third quarter of 2001, the Company
has been actively seeking a merger or acquisition partner with revenue producing
operations or cash infusion opportunities to support pre-revenue research and
development activities. Although the Company has not entered into any proposals,
arrangements or understandings with the owners of any business or company
regarding the possibility of an acquisition by or merger transaction with the
Company, the Company has received expressions of interest regarding such a
possibility from several businesses. In addition, the Company has conducted
preliminary due diligence in this regard and formal presentations were made to
the Company's Board of Directors in connection with some of these businesses.
However, to date, the Company's Board of Directors and/or executive management
have concluded that the opportunities presented were not in the best interests
of the Company and its shareholders, and therefore terminated any further
discussions with these businesses. Currently, the Company is evaluating the
possibility of entering into serious negotiations and due diligence with an
additional company. Concurrently, the Company is continuing to pursue additional
opportunities for an acquisition or merger transaction.
Continuation of its Evaluation of Current Operations and Cost Control
In January 2001, the Company began a thorough evaluation of the Corebyte
operations, prospects, and strategic options given the lack of a significant
revenue stream resulting from longer than anticipated software development and
marketing efforts and the availability of similar Internet applications in the
marketplace. During its subsequent evaluation, which included the exploration
and discussions with various parties for alternative uses and markets for the
Corebyte developed source code and underlying technologies, the Company
significantly restructured and curtailed Corebyte's day-to-day operations, to
include the elimination of its Web hosting services to third parties. During the
third quarter of 2001, the Company concluded that the Corebyte operation was no
longer a viable and profitable opportunity for the Company and therefore
completely discontinued operations.
The Company maintains a leased office facility in Paris, France, which served as
the Company's European headquarters for the Company's former European
Operations. Since the Company sold its European Operations in June 2000, the
Company intends to dissolve the European Headquarters entity and exercise its
early cancellation option on the leased facility in June 2002.
For the year ended December 31, 2001, the Company incurred restructuring costs
for employee termination costs and the Paris facility closing costs of $233
thousand. Of this amount, $183 thousand related to the termination of seven
employees of the Company's Corebyte subsidiary, one employee of the Company
during the quarter ended March 31, 2001, and four employees of the Company
during the quarter ended June 30, 2001. Of such four former employees, three
still provide services on an as needed basis to the Company.
Liquidity
As of December 31, 2001, the Company had cash and cash equivalents of
approximately $2.6 million. In addition, the Company has approximately $593
thousand invested in a limited partnership as more fully described in Footnote 4
to the Consolidated Financial Statements. Since the Effective Date, the
Company's management team has undertaken efforts to identify and evaluate
successor business opportunities. The Company believes that given its current
and forecasted cash requirements for the next twelve months of approximately
$1.7 million to $2.0 million, its cash and its interest in the limited
partnership, which are the Company's two major sources of liquidity, will be
sufficient for the remainder of 2002. This forecast assumes the continuation of
the selling, general and administrative expenses of the type referenced in the
income statement and assumes payments under the existing executive employment
agreements (see Item 11 Executive Compensation) and continuation of such
salaries at current amounts after the expiration of such contracts on June 18,
2002. This forecast also does not include the impact of any merger or
acquisition transaction, if any, does not include any net cash proceeds that may
be received from the patent management activities, if any, and does not include
any additional legal costs required by the Patent Litigation Trust for court
trial expenses, if any.
Overview
The operations of Dynacore for the year ended December 31, 2001, and the period
of December 19, 2000 through December 31, 2000 (referred to as the "Successor
Company"), and all prior periods presented (referred to as the "Predecessor
Company") in this report were significantly affected by the sale of the
Company's European Operations on June 30, 2000 and the cessation of virtually
all of the production operations of the Company. As a result, the financial
results of the Company for each of the periods addressed by this report prior to
December 18, 2000, (the Effective Date) , do not reflect the earnings capacity
of the Company. In addition the financial data for the period ended December 31,
2000 reflects the adoption of Fresh Start Accounting and includes the period
from December 19, 2000 to December 31, 2000.
The Fresh Start basis of accounting is in accordance with the Statement of
Position (SOP) 90-7, "Financial Reporting by Entities in Reorganization Under
the Bankruptcy Code," issued in November 1990 by the Institute of Certified
Public Accountants and includes activity from December 19, 2000 to December 31,
2000. Under this accounting treatment, all assets and liabilities were restated
to reflect the reorganization value of the reorganized entity, which
approximates its fair value at the date of reorganization. In addition, the
accumulated deficit of the Company was eliminated and its capital structure was
recast in conformity with the Plan. As such, the accompanying financial data as
of December 31, 2000 represents that of a successor company, which, in effect,
is a new entity with assets, liabilities and a capital structure having carrying
values not comparable with prior periods and with no beginning retained earnings
or deficit. As such, the financial data is considered that of a Successor
Company and is not comparable to prior periods.
On May 17, 1999, the Company entered into a letter of intent to sell its
European Operations to Reboot for $49.5 million plus the assumption of certain
liabilities. Reboot was a newly formed corporation controlled by Mr. Blake
Thomas, the Company's then president. Following the letter of intent, a sale
agreement was executed with Reboot dated as of July 31, 1999 (the "Reboot
Agreement"). The Reboot Agreement contained several contingencies, the most
significant being Reboot's ability to secure financing necessary to close the
transaction. By November 1, 1999, Reboot still had not secured its financing and
Dynacore agreed to an amendment (the "Amendment") to the Reboot Agreement in
return for which Reboot posted a deposit of $750,000 which would be
non-refundable in the event that Reboot failed to close because it could not
secure financing. The Amendment obligated Reboot to loan Dynacore $2.5 million
on or prior to December 1, 1999. Although the termination date pursuant to the
Amendment was extended to March 1, 2000, this extension was contingent on
Reboot's loaning the Company the $2.5 million on or before December 1, 1999, and
in the event the loan was not made, the agreement terminated on December 1,
1999. Since the loan was not made, the agreement was then terminated.
Subsequent to the termination of the Reboot Agreement, as a result of the lack
of performance by Reboot, the Company entered into a Letter of Intent, dated
January 26, 2000, with the European based CallCentric Ltd. ("CallCentric") to
sell the European Operations. Pursuant to an agreement dated as of April 19,
2000 (the "Sale Agreement"), on June 30, 2000, after receipt of approval from
the Bankruptcy Court (the "Court"), the Company sold (the "Sale") its European
Operations to Datapoint Newco 1 Limited ("DNL"), a United Kingdom corporation
affiliated with CallCentric, for $49.5 million in cash, less certain adjustments
in the event that the aggregate shareholder's deficit of the European Operations
exceeded $10 million (the "Purchase Price"). The Sale Agreement contemplated,
among other things, that the Company would file for reorganization pursuant to
Chapter 11 of the United States Bankruptcy Code, which was filed on May 3, 2000
(the "Petition Date" or the "Filing Date") and that the sale of the European
Operations to DNL would be subject to higher and better offers, if any, and the
approval of the Court. The Court approved the sale on June 15, 2000 and the sale
was consummated on June 30, 2000 (the "Closing"). Pursuant to the Sale
Agreement, at Closing DNL deposited $6 million from the Purchase Price in
escrow, $4 million pending resolution of various issues relating to the UK
Pension Plan and $2 million pending preparation of the closing balance sheet.
Upon final resolution of these issues the full $4 million escrow relating to the
UK Pension Plan was released to DNL and $1.625 million of the $2 million escrow
was released to the Company and $375 thousand was released to DNL. Accordingly,
the final Purchase Price after such adjustments was $45.125 million.
As a result of the Sale, the Company recorded a gain of approximately $52.5
million during the period ended December 18, 2000. Included in this amount were
transaction costs and professional fees relating to both the Sale and Bankruptcy
of approximately $1.4 million as well as $1.2 million representing the
settlement of the Officers Administrative Claims.
On December 5, 2000, the Court approved an order confirming Dynacore's Amended
Plan of Reorganization (the "Plan"). On December 18, 2000 (the "Effective Date",
as defined in the Plan), all of the then existing debt and equity in Dynacore
was cancelled and 10 million shares of new common stock, as well as 10 million
beneficial interests, representing interests in the Dynacore Patent Litigation
Trust, (as defined below) formed to pursue Dynacore's patent litigations, were
issued.
The confirmed Plan provided for the distribution of $34.8 million in cash from
the proceeds of the sale of the European Operations to Debenture holders and
other unsecured creditors of Dynacore on the Effective Date. In addition,
pursuant to the confirmed Plan: (i) Debenture holders and other unsecured
creditors received 25% of the equity of the reorganized corporation, the ability
to designate 3 out of 7 members on the Board of Directors, and 40% of a trust
(the "Patent Litigation Trust"), formed to pursue the patent litigations of
Dynacore, (ii) holders of Dynacore's preferred stock, par value $1.00 per share,
received 23.5% of the equity of the reorganized corporation, and 3.5% of the
Patent Litigation Trust, (iii) holders of the common stock, par value $.25 per
share, received 41.5% of the equity of the reorganized corporation, (iv) current
officer management received 10% of the equity of the reorganized corporation as
part of a settlement of certain officer administrative claims that included
employment contract cancellation and other contractual entitlements and (v) the
remaining 56.5% interest in the Patent Litigation Trust was retained by the
reorganized Dynacore.
The Plan contemplated that the beneficial interests in the Patent Litigation
Trust would be transferable and tradable. In addition, pursuant to the approved
Plan and as reflected in its Restated Certificate of Incorporation, Dynacore is
obligated to distribute to its then stockholders, 75% of the first $100 million
of net proceeds, if any, received on account of its beneficial interest in the
Patent Litigation Trust after adjustment for corporate tax and payment of all
patent litigation expenses. Also, as part of the Plan, Dynacore has committed to
lend the Patent Litigation Trust up to $1 million to pursue Dynacore's patent
litigations. As of December 31, 2001, the amount of such loan is approximately
$262 thousand and the status of the related patent litigations is set forth
above under the heading "Multi-Speed Networking Patents".
As of December 31, 2001, the Company had cash and cash equivalents of
approximately $2.6 million. In addition, the Company has approximately $593
thousand invested in a limited partnership as more fully described in Footnote 4
to the Consolidated Financial Statements. Since the Effective Date, the
Company's management team has undertaken efforts to identify and evaluate
successor business opportunities. The Company believes that given its current
and forecasted cash requirements for the next twelve months of approximately
$1.7 million to $2.0 million, its cash and its interest in the limited
partnership, which are the Company's two major sources of liquidity, will be
sufficient for the remainder of 2002. This forecast assumes the continuation of
the selling, general and administrative expenses of the type referenced in the
income statement and assumes payments under the existing executive employment
agreements (see Item 11 Executive Compensation) and continuation of such
salaries at current amounts after the expiration of such contracts on June 18,
2002. This forecast also does not include the impact of any merger or
acquisition transaction, if any, does not include any net cash proceeds that may
be received from the patent management activities, if any, and does not include
any additional legal costs required by the Patent Litigation Trust for court
trial expenses, if any.
As of December 31, 2001, the Company had available federal tax net operating
losses aggregating approximately $149 million, expiring in various amounts
beginning in 2002. In the event that the Company's ability to utilize its net
operating losses to reduce its federal tax liability with respect to current and
future income becomes subject to limitation, the Company may be required to pay,
sooner than it otherwise might have to, any amounts owing with respect to such
federal tax liability, which would reduce the amount of cash otherwise available
to the Company (see note 7 to Consolidated Financial Statements).
As part of the Sale to DNL, the Company's German subsidiary assumed the
liability for the pension benefits for all German employees who did not transfer
to DNL. Presently, the German subsidiary has no revenue or cash inflow stream
and is not expected to derive any significant amounts of revenue or cash inflows
in the foreseeable future. While the pension liability of $2.8 million has been
reflected in the Company's consolidated financial statements, this obligation
remains with the German subsidiary. The Parent has however entered into an
exclusive distribution agreement with the subsidiary affording the German
subsidiary contractual distribution rights for future products of or services by
the Company, if any, in one Eastern and three Western European countries.
Financial Condition
During the year ended December 31, 2001, the Company's unrestricted cash
and cash equivalents decreased approximately $4.7 million. Primarily, this
decrease was the result of the payment of the Company's operating expenses, the
$1.5 million investment described below and payment of certain liabilities
related to the finalization of the Company's "Plan".
On May 1, 2001, the Company, with the approval of its Board of Directors, agreed
to become a Limited Partner of PGM Associates, L.P., a partnership (the
"Partnership"), of which Asher B. Edelman & Associates, LLC ("Edelman &
Associates") is the General Partner for an initial investment of $1.5 million.
Edelman & Associates is an entity controlled by Asher B. Edelman, who is
Dynacore's Chairman of the Board and Chief Executive Officer and of which Gerald
N. Agranoff, Dynacore's Vice Chairman of the Board, Chief Operating Officer and
Acting President, is a member. The primary purpose of the Partnership is to
acquire by open market purchase, privately negotiated purchase or otherwise,
securities of a specific publicly traded company in the natural resource
industry. Edelman & Associates has expressly waived all management and incentive
fees associated with the Company's investment which would ordinarily be payable
by an investor in this Partnership. As of December 31, 2001, based upon the
closing prices of the securities as of that date, the Partnership had
approximately $2.2 million of assets and approximately $1.1 million of
liabilities for a net asset value of approximately $1.1 million. The Company's
ownership interest in the Partnership approximated 56% and the Company's share
of the Partnership's capital was approximately $0.6 million. As an investment
partnership, the Partnership accounts for its investments in the publicly traded
securities at fair value. Changes in the fair value of the Partnership's
securities are reflected in the partnership's net income for the period. The
Company carries its investment in the Partnership on the equity method. Under
the equity method, the Company's allocable share of the earnings and losses of
the Partnership is included in the determination of the Company's net income.
The Company's approximate share of the Partnership's loss for the twelve months
ended December 31, 2001 of $907, is included in non-operating income/(expense)
on the statement of operations. This investment is reflected as a short-term
investment as the Company has the right to liquidate this investment, as
permitted by the Partnership agreement, prior to the end of the fourth quarter
of 2002.
As of December 31, 2001, the Company had cash and cash equivalents of
approximately $2.6 million. In addition, the Company has approximately $593
thousand invested in the Partnership as described above. Since the Effective
Date, the Company's management team has undertaken efforts to identify and
evaluate successor business opportunities. The Company believes that given its
current and forecasted cash requirements for the next twelve months of
approximately $1.7 million to $2.0 million, its cash and its interest in the
Partnership, which are the Company's two major sources of liquidity, will be
sufficient for the remainder of 2002. This forecast assumes the continuation of
the selling, general and administrative expenses of the type referenced in the
income statement and assumes payments under the existing executive employment
agreements (see Item 11 Executive Compensation) and continuation of such
salaries at current amounts after the expiration of such contracts on June 18,
2002.This forecast also does not include the impact of any merger or acquisition
transaction, if any, does not include any net cash proceeds that may be received
from the patent management activities, if any, and does not include any
additional legal costs required by the Patent Litigation Trust for court trial
expenses, if any.
Restructuring Costs
(In thousands)
The Company incurred restructuring costs primarily related to employee
termination programs implemented in these periods:
Successor Predecessor
---------- ------------
12/19/00 - 01/01/00 - 08/01/99-
2001 12/31/00 12/18/00 12/31/99 1999
- --------------------------------------------------------------------------------
Restructuring costs $233 $22 $0 $624 $813
================================================================================
For the year ended December 31, 2001, the Company incurred restructuring costs
for employee termination and the Paris facility closing costs of $233. Of this
amount, $183 related to the termination of seven employees of the Company's
Corebyte subsidiary and one employee of the Company during the quarter ended
March 31, 2001 and four employees of the Company during the quarter ended June
30, 2001. Of such four former employees, three still provide services on an as
needed basis to the Company. At December 31, 2001, accrued but unpaid
restructuring costs were $50, related to the closing of the Company's Paris
office, which will be paid during the first and second quarters of 2002.
For the period ending December 31, 2000, the Company had restructuring costs of
$22 related to its downsizing efforts after its emergence from bankruptcy.
For the period ended December 31, 1999, the Company incurred restructuring
charges of $624 for employee termination costs. These costs related to the
termination of 28 employees at the Company's San Antonio headquarters in
connection with the Company's discontinuance of its domestic video conferencing
(MINX) employees.
Restructuring costs incurred during for the fiscal year ended July 31, 1999,
included $650 for the termination of 25 employees at the Company's San Antonio
headquarters and $163 for the termination of 5 employees at the Company's French
subsidiary.
Restructuring charges relating to payroll costs are not recorded until specific
employees are determined (and notified of termination) by management in
accordance with its overall restructuring plan. Other restructuring costs are
not recorded until management has committed to an exit plan, all significant
actions to be taken have been identified and significant changes to the plan are
not likely.
A rollforward of the restructuring accrual from August 1, 1998 through December
31, 2001 is as follows:
Predecessor TOTAL
- ------------ -----
Restructuring accrual as of August 1, 1998 $182
Additions 813
Payments (862)
- -----------------------------------------------------------------------
Restructuring accrual as of July 31, 1999 $133
Additions 624
Payments (375)
- -----------------------------------------------------------------------
Restructuring accrual as of December 31, 1999 $382
Additions 0
Payments (350)
- -----------------------------------------------------------------------
Restructuring accrual as of December 18, 2000 $32
Successor
Restructuring accrual as of December 18, 2000 $32
Additions 22
Payments (3)
- -----------------------------------------------------------------------
Restructuring accrual as of December 31, 2000 $51
Additions 233
Payments (234)
- -----------------------------------------------------------------------
Restructuring accrual as of December 31, 2001 $50
===
Results of Operations
The following is a summary of the Company's sources of revenue for each of the
periods listed below:
(In thousands) Successor Predecessor
--------- -------------------------------------
01/01/00 - 08/01/99 -
2001 12/18/00 12/31/99 1999
---- -------- -------- ----
Sales:
U.S. $9 $103 $385 $3,057
Foreign -- 37,716 27,547 75,630
-- ------ ------ ------
9 37,819 27,932 78,687
Service and other:
U.S. -- 355 429 1,074
Foreign -- 24,782 23,499 58,524
------ ------ ------
-- 25,137 23,928 59,598
------ ------ ------
Total revenue $9 $62,956 $51,860 $138,285
== ======= ======= ========
(Note that the Company did not record any revenue for the period of December 19,
2000 - December 31, 2000.)
Year ended December 31, 2001
During the year ended December 31, 2001, the revenue of $9 was derived from the
Company's Corebyte's operations, which were significantly curtailed in the first
quarter of 2001 and subsequently discontinued in the third quarter of 2001.
Of the $3,097 of selling, general and administrative expenses, $337 related to
depreciation and other "non-cash" amortization, $262 related to the Patent
Litigation Trust activities, and $212 incurred by operations and functions which
were terminated during the year. The remainder related to the Company's search
for a merger or acquisition transaction and other corporate expenses.
For the year ended December 31, 2001, and as described above, the Company
incurred restructuring costs for employee terminations and the Paris facility
closing of $233.
Restructuring charges relating to payroll costs are not recorded until specific
employees are determined (and notified of termination) by management in
accordance with its overall restructuring plan. Other restructuring costs are
not recorded until management has committed to an exit plan, all significant
actions to be taken have been identified and significant changes to the plan are
not likely.
Non operating expense for the year ended December 31, 2001, was approximately
$472 and primarily consisted of interest income of $248, imputed interest of
$54, and a foreign currency transaction gain of $136 primarily related to the
liability for the pension benefits and other post employment obligations for all
employees of the Company's German subsidiary who did not transfer to DNL at the
time of the Sale. Also included was a loss of $907 for the year ended December
31, 2001, representing the equity in loss of the Partnership.
December 19, 2000 - December 31, 2000
The Company did not record any revenue for this period. Operating expenses of
$195 thousand included approximately $50 thousand of expenses related to
severance obligations and other expenses related to employees whose full time
employment has been terminated. In addition, included in this period's operating
expenses are certain non-recurring items and therefore, the operating results
indicated are not necessarily indicative of future results. Non-operating
expense includes a foreign currency transaction adjustment of $139 thousand
related to the German pension plan, offset by approximately $19 thousand of
interest income earned during the period. The Company recorded depreciation and
amortization expenses of approximately $13 thousand during this period,
reflecting the revaluation of the assets due to the adoption of Fresh Start
Reporting.
January 1, 2000 - December 18, 2000
Substantially all of the approximately $63.0 million of revenue related to the
European subsidiaries, which were sold on June 30, 2000. The gross profit margin
for this period ended December 18, 2000 was 23.1%, compared with the 24.8% for
the five-month period ended December 31, 1999. Operating expenses for this
period were approximately $17.6 million, which primarily included those expenses
incurred by the company's European subsidiaries until the time of sale on June
30, 2000.
As a result of the Sale, the Company recorded a gain of approximately $52.5
million during the period. Included in this amount are transaction costs and
professional fees relating to both the Sale and Bankruptcy of approximately $1.4
million as well as $1.2 million representing the settlement of the Officers
Administrative Claims.
Non operating expenses included interest expense of approximately $2.0 million,
offset by interest income of $1.5 million and $317 thousand related to
transaction gains as result of the strengthening U.S. Dollar, on average,
against foreign currencies.
Also included as extraordinary items are $26.5 million related to the gain on
the extinguishment of debt pursuant to the confirmation of the Company's amended
plan of reorganization and $3.8 million related to the adjustments required by
the adoption of Fresh Start Accounting.
August 1, 1999 - December 31, 1999
On June 27, 2000, the Company elected to change its fiscal year to a calendar
year basis. Therefore, the five months represented by this transitional period
are not comparable to the 12-month fiscal year ended July 31, 1999 or the 11-1/2
month period ended December 18, 2000. Of the $51.9 million revenue recorded
during this five-month period, approximately $51.2 million related to the
European Operations, which were sold on June 30, 2000. The gross profit margin
for this five-month period was 24.8%, as compared to the 25.7% for the
twelve-month period ended July 31, 1999. Operating expenses for the five months
ended December 31, 2000 were approximately $ 14 million, compared with
approximately $37.7 million for the twelve-month period ended July 31, 1999.
Non-operating expenses consisted primarily of interest expense of $2.4 million.
Fiscal Year 1999 Compared to Fiscal Year 1998
During 1999, the Company had total revenue of $138.3 million, a decrease of
$13.2 million from the previous year. The decrease was primarily the result of
weak 1999 sales in the Company's Spanish and Italian subsidiaries and a large
volume of personal computer sales to the Swedish government in fiscal year 1998
which did not repeat in fiscal year 1999. This revenue decrease reflects the
impact of approximately $1.2 million, resulting from a stronger U.S. dollar, on
average, during fiscal 1999, as compared to the same period of 1998.
Gross profit margins during 1999 were 25.7% compared with 27.0% for 1998. The
decrease was evidenced in the service business as margins decreased from 35.3%
in 1998 to 29.6% in 1999. This decrease was primarily the result of an erosion
of the maintenance base in Western Europe as customers upgrade their hardware
with non-Datapoint equipment.
During the first quarter of 1999, the Company sold the building it owned in
Gouda, Netherlands to a private unaffiliated group for approximately $2.1
million (net of mortgage obligations and closing costs). The sales contract
provided for the leaseback by the Company of approximately 18,000 square feet
for an initial lease term of five years and approximately 12,000 square feet for
an initial lease term of one year. This lease obligation was transferred to DNL
as a result of the sale of the European Operations on June 30, 2000.
During fiscal year 1998, management reassessed the characteristics of its
intercompany notes with international subsidiaries (payable by the U.S. parent)
and determined that a substantial portion was long-term in nature and not
payable in the foreseeable future. As a result, during fiscal year 1999,
transaction gains of $1.6 million relating to these loans are included as a
foreign currency adjustment to accumulated other comprehensive income included
in Stockholders' Deficit, which in prior years, would have been included in
non-operating income and expense.
Operating expenses (research and development plus selling, general &
administrative) for 1999 were $37.7 million, an increase of $1.9 million from
the $35.8 million recorded in 1998. Principally this is due to the increased
year over year expense associated with the amortization of the unrecognized
actuarial losses with regard to the Company's United Kingdom pension plan. The
Company recorded restructuring charges of $813 thousand during 1999, compared
with $96 thousand recorded in the prior year. Research and development expenses
decreased from $2.5 million in 1998 to $2.0 million in 1999.
Market Risk Sensitive Instruments
Management had determined that all of the Predecessor Company's foreign
subsidiaries operated primarily in local currencies, which represented the
functional currencies of the subsidiaries. All assets and liabilities of foreign
subsidiaries were translated into U.S. dollars using the exchange rate
prevailing at the balance sheet date, while income and expense accounts were
translated at average exchange rates during the year. As such, the Predecessor
Company's operating results were affected by fluctuations in the value of the
U.S. dollar as compared to currencies in European countries, as a result of the
sales of its products and services in these foreign markets. To illustrate, a
hypothetical, uniform 10% strengthening of the dollar relative to the currencies
in which the Predecessor Company's sales were denominated would have resulted in
a decrease to gross profit of approximately $3.0 million for the year ending
July 31, 1999. This calculation assumes that each exchange rate would have
changed in the same direction relative to the U.S. dollar. In addition to the
direct effects of changes in exchange rates, which are a changed dollar value of
the resulting sales, changes in exchange rates also affect the volume of sales
or the foreign currency sales price as competitors' products become more or less
attractive. The Predecessor Company's sensitivity analysis of the effects in
foreign currency exchange rates did not factor in a potential change in sales
levels or local currency prices.
In addition, the Predecessor Company had cash and intercompany receivables and
payables, which were denominated in various functional currencies of the
subsidiaries and parent. At July 31, 1999, the result of a uniform 10%
strengthening of the dollar relative to the currencies in which the Company's
intercompany balances were denominated would have resulted in $4.1 million of
foreign currency transaction gains that would have been reported as a
translation adjustment to stockholders' deficit.
The Successor Company's market risk is primarily limited to a pension liability
and other post employment liabilities, which remain with the Company's German
subsidiary. As such, the Successor Company's future operating results could be
affected by fluctuations in the value of the U.S. dollar as compared to the
German currency. For example, a 10% strengthening of the dollar relative to the
German currency would result in a decrease of this liability and an increase to
operating performance of an approximate $280 thousand transaction gain.
Cautionary Statement Regarding Risks and Uncertainties That May Affect
Future Results
This Annual Report on Form 10-K contains forward-looking statements about the
business, financial condition and prospects of the Company. The actual results
of the Company could differ materially from those indicated by the
forward-looking statements because of various risks and uncertainties including
without limitation changes in product demand, the availability of products,
changes in competition, economic conditions, new product development, various
inventory risks due to changes in market conditions, changes in tax and other
governmental rules and regulations applicable to the Company, and other risks
indicated in the Company's filings with the Securities and Exchange Commission.
These risks and uncertainties are beyond the ability of the Company to control,
and in many cases, the Company cannot predict the risks and uncertainties that
could cause its actual results to differ materially from those indicated by the
forward-looking statements. When used in this Annual Report on Form 10-K, the
words "believes," "estimates," "plans," "expects," and "anticipates" and similar
expressions as they relate to the Company or its management are intended to
identify forward-looking statements.
ITEM 8. Financial Statements and Supplementary Data.
INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page
Report of Marks Paneth & Shron LLP
Independent Auditors 22
Report of Ernst & Young LLP 23
Independent Auditors
Consolidated Financial Statements
Consolidated Statements of Operations for the period 2001;
December 19 - 31, 2000; January 1 - December 18, 2000;
Five months ended December 31, 1999; and fiscal year 1999 24
Consolidated Balance Sheets as of December 31, 2001 and 2000 26
Consolidated Statements of Cash Flows for the period 2001;
December 19 - 31, 2000; January 1 - December 18, 2000;
Five months ended December 31, 1999; and fiscal year 1999 27
Consolidated Statements of Stockholders' Equity (Deficiency)
for the period 2001; December 19 - 31, 2000;
January 1 - December 18, 2000; Five months ended
December 31, 1999; and fiscal year 1999 28
Notes to Consolidated Financial Statements 29
REPORT OF MARKS PANETH & SHRON LLP
INDEPENDENT AUDITORS
The Board of Directors
Dynacore Holdings Corporation
We have audited the accompanying consolidated balance sheets of Dynacore
Holdings Corporation (formerly known as Datapoint Corporation) and subsidiaries
as of December 31, 2001 and 2000, and the related consolidated statements of
operations, stockholders' equity (deficiency), and cash flows for the year
ending December 31, 2001, the period December 19, to December 31, 2000, the
period January 1, to December 18, 2000, and the five months ended December 31,
1999. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatements. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Dynacore Holdings Corporation and subsidiaries as of December 31, 2001 and 2000
and the consolidated results of its operations and its cash flows for the year
ending December 31, 2001, the period December 19, to December 31, 2000, the
period January 1, to December 18, 2000, and five months ended December 31, 1999
in conformity with accounting principles generally accepted in the United States
of America.
As discussed in the notes to the consolidated financial statements, effective
December 18, 2000, the Company emerged from bankruptcy and applied fresh start
accounting. As a result, the consolidated balance sheets as of December 31, 2001
and 2000, and the related statements of consolidated operations and cash flows
for the year ended December 31, 2001 and for the period December 19, to December
31, 2000, are presented on a different basis than that for the periods before
fresh start, and therefore, are not comparable.
Our audits referred to above included the financial statement schedule
listed in the index at Item 14(a) as of December 31, 2001 and 2000, and for the
period December 19, to December 31, 2000, the period January 1, to December 18,
2000, and five months ended December 31, 1999. In our opinion, this financial
statement schedule presents fairly, in all material respects, in relation to the
financial statements taken as a whole, the information required to be stated
therein.
Marks Paneth & Shron LLP
New York, New York
February 23, 2002
REPORT OF ERNST & YOUNG LLP
INDEPENDENT AUDITORS
The Board of Directors
Dynacore Holdings Corporation
We have audited the consolidated statements of operations, stockholders' equity
(deficiency) and cash flows of Dynacore Holdings Corporation (formerly Datapoint
Corporation) and subsidiaries (the Company) for the fiscal year ended July 31,
1999. Our audit also included the financial statement schedule listed in the
index at Item 14(a). These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated results of operations and
cash flows, of the Company, for the fiscal year ended July 31, 1999 in
conformity with accounting principles generally accepted in the United States.
Also, in our opinion the related financial statement schedule, when considered
in relation to the basic financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
The consolidated financial statements and schedule referred to above, have been
prepared assuming that the Company will continue as a going concern. As more
fully described in the Note 3 to the consolidated financial statements, the
Company incurred recurring net losses and had a working capital and net capital
deficiency at July 31, 1999. These conditions raised substantial doubt about the
Company's ability to continue as a going concern. The financial statements do
not include any adjustments that may result from the outcome of this
uncertainty.
Ernst & Young LLP
Dallas, Texas
November 1, 1999
CONSOLIDATED STATEMENTS OF OPERATIONS
Dynacore Holdings Corporation and Subsidiaries For the year ended December 31,
2001, the period December 19 - 31, 2000; January 1 - December 18, 2000; Five
Months Ended December 31, 1999; and Fiscal Year 1999
(In thousands, except share and per share data)
Successor Predecessor
---------- -----------
2000 2000 Five Months Ended
2001 12/19 - 12/31 01/01 - 12/18 12/31/99 07/31/99
- ---------------------------------------------------------------------------------------------------------------------------
Revenue:
Sales $9 $-- $37,819 $27,932 $78,687
Service and other -- -- 25,137 23,928 59,598
- ---------------------------------------------------------------------------------------------------------------------------
Total revenue 9 -- 62,956 51,860 138,285
Operating costs and expenses:
Cost of sales -- -- 28,884 21,831 60,740
Cost of service and other -- -- 19,502 17,143 41,958
Research and development -- -- 491 490 1,965
Selling, general and administrative 3,097 173 17,083 13,544 35,695
Restructuring costs 233 22 -- 624 813
- ---------------------------------------------------------------------------------------------------------------------------
Total operating costs and expenses 3,330 195 65,960 53,632 141,171
- ---------------------------------------------------------------------------------------------------------------------------
Operating income (loss) (3,321) (195) (3,004) (1,772) (2,886)
Non-operating income (expense):
Interest expense -- -- (1,993) (2,378) (5,731)
Equity in loss of limited partnership (907) -- -- -- --
Other, net 435 (116) 1,924 (35) 196
Reorganization items:
Gain on sale of European Operations -- -- 52,473 -- --
- ---------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes
and extraordinary credit (3,793) (311) 49,400 (4,185) (8,421)
Income taxes (benefit) -- -- (1,420) 328 835
- ---------------------------------------------------------------------------------------------------------------------------
Income (loss) before
extraordinary credit (3,793) (311) 50,820 (4,513) (9,256)
Extraordinary credits:
Fresh start adjustments -- -- 3,771 -- 1,707
Debt extinguishment -- -- 26,488 -- --
- ---------------------------------------------------------------------------------------------------------------------------
Net income (loss) $(3,793) $(311) $81,079 $(4,513) $(7,549)
============================================================================================================================
Net income (loss), adjusted for preferred
stock dividends paid or accumulated plus
gain on exchange and retirement of
preferred stock -
Net Income (loss) applicable to common $(3,793) $(311) $95,513 $(4,678) $(7,927)
============================================================================================================================
Basic income (loss) per common share:
Income (loss) before extraordinary credit $(.38) $(.03) $12.10 $ (1.13) $(2.42)
Gain on the exchange and retirement of
preferred stock -- -- -- -- .07
Extraordinary credit-fresh start adjustments -- -- .91 -- --
Extraordinary credit-debt extinguishment -- -- 10.03 -- .42
- ---------------------------------------------------------------------------------------------------------------------------
Net income (loss) per common share $(.38) $(.03) $23.04 $(1.13) $(1.93)
===========================================================================================================================
Diluted income (loss) per common share:
Income (loss) before extraordinary credit $(.38) $(.03) $10.25 $ (1.13) $(2.42)
Gain on the exchange and retirement of
preferred stock -- -- -- -- .07
Extraordinary credit-fresh start adjustments -- .74 -- --
Extraordinary credit-debt extinguishment -- -- 5.17 -- .42
- ---------------------------------------------------------------------------------------------------------------------------
Net income (loss) per common share $(.38) $(.03) $16.16 $(1.13) $(1.93)
===========================================================================================================================
Average common shares outstanding:
Basic 9,984,726 10,000,000 4,145,770 4,131,074 4,104,029
Diluted 9,984,726 10,000,000 5,118,172 4,131,074 4,104,029
See accompanying Notes to Consolidated Financial Statements.
CONSOLIDATED BALANCE SHEETS
Dynacore Holdings Corporation and Subsidiaries December 31, 2001 and 2000 (In
thousands, except share data)
2001 2000
- ----------------------------------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $2,614 $7,304
Restricted cash and cash equivalents -- 317
Investment in limited partnership 593 --
Accounts receivable, net 236 359
Prepaid expenses and other current assets 216 309
- ----------------------------------------------------------------------------------------------------------
Total current assets 3,659 8,289
Fixed assets, net 28 102
Other assets, net 458 535
Reorganization value in excess of amounts allocable to identifiable assets 2,932 3,768
- ----------------------------------------------------------------------------------------------------------
$7,077 $12,694
==========================================================================================================
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $126 $297
Accrued expenses 376 1,616
- ----------------------------------------------------------------------------------------------------------
Total current liabilities 502 1,913
Accrued pension and post employment liabilities 2,790 3,192
Deferred federal income tax 400 400
Commitments and contingencies
Stockholders' equity (deficit):
Successor Common stock of $0.01 par value. Shares authorized 30,000,000;
shares issued and outstanding 9,984,726 in 2001 and 10,000,000 in 2000 100 100
Paid in capital 7,389 7,400
Accumulated deficit (4,104) (311)
- -----------------------------------------------------------------------------------------------------------
Total stockholders' equity 3,385 7,189
- ----------------------------------------------------------------------------------------------------------
$7,077 $12,694
==========================================================================================================
See accompanying Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Dynacore Holdings Corporation and Subsidiaries For the year ended December 31,
2001; the period December 19 - 31, 2000; January 1 - December 18, 2000; Five
Months Ended December 31, 1999; and Fiscal Year 1999
(In thousands)
Successor Predecessor
---------- ------------
2000 2000 Five Months Ended
2001 12/19-12/31 01/01 - 12/18 12/31/99 1999
- -------------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income (loss) $(3,793) $(311) $81,079 $(4,513) $(7,549)
Adjustments to reconcile net income (loss) to net cash
provided from (used in) operating activities:
Depreciation and amortization 127 5 801 1,470 3,179
Reorganized value in excess of amounts allocable to
identifiable assets
Amortization 210 8 -- -- --
Favorable settlement/unclaimed bankruptcy checks 276 -- -- -- --
Officer stock compensation -- 750 -- -- --
Loss in equity of investee 907 -- -- -- --
Provision for losses (recoveries) on accounts receivable 72 -- 35 (203) (299)
Realized gain on sale of European Operations -- -- (52,473) -- (273)
Gain on debt extinguishment -- -- (26,488) -- (1,707)
Non-cash pension expense -- -- --