SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QT
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[ ] Quarterly Report Pursuant To Section 13 Or 15(d) Of The Securities
Exchange Act Of 1934 For the quarterly period ended _________________________
OR
[ X ] Transition Report Pursuant To Section 13 or 15(d) Of The Securities
Exchange Act Of 1934 For the transition period from August 1, 1999 to December
31, 1999
Commission file number 1-7636
DYNACORE HOLDINGS CORPORATION
(formerly Datapoint Corporation)
(Exact name of registrant as specified in its charter)
Delaware 74-1605174
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
8410 Datapoint Drive
San Antonio, Texas 78229-8500
(Address of principal executive office and zip code)
(210) 593-7000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X . No___.
As of December 31, 1999, 18,355,050 shares of Dynacore Holdings Corporation
Common Stock were outstanding, exclusive of 2,636,167 shares held in Treasury.
<PAGE>
DYNACORE HOLDINGS CORPORATION AND SUBSIDIARIES
INDEX
Page
Number
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets -
December 31, 1999 (unaudited) and July 31, 1999 3
Consolidated Statements of Operations -
Five Months Ended December 31, 1999 and 1998 (unaudited) 4
Consolidated Statements of Cash Flows -
Five Months Ended December 31, 1999 and 1998 (unaudited) 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Part II. Other Information
Item 1. Legal Proceedings 15
Item 3. Default Upon Senior Securities 15
Item 6. Exhibits and Reports on Form 8-K 15
Signature 16
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<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED BALANCE SHEETS
Dynacore Holdings Corporation and Subsidiaries
<TABLE>
<CAPTION>
(In thousands, except share data)
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(Unaudited)
Dec. 31, 1999 July 31, 1999
------------- -------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $2,089 $3,568
Restricted cash and cash equivalents 298 328
Accounts receivable, net of allowance for doubtful
accounts of $773 and $880, respectively 29,780 32,130
Inventories 1,563 2,632
Prepaid expenses and other current assets 2,363 2,272
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Total current assets 36,093 40,930
Fixed assets, net 5,872 5,928
Other assets, net 2,089 2,475
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$44,054 $49,333
==========================================================================================================
Liabilities and Stockholders' Deficit
Current liabilities:
Payables to banks $8,288 $6,676
Current maturities of long-term debt 4,960 4,960
Accounts payable 13,479 14,451
Accrued expenses 23,867 22,890
Deferred revenue 8,125 9,311
Income taxes payable 1,725 2,175
----------------------------------------------------------------------------------------------------------
Total current liabilities 60,444 60,463
Long-term debt, exclusive of current maturities 50,000 50,000
Other liabilities 10,166 10,998
Stockholders' deficit:
Preferred stock of $1.00 par value. Shares authorized 10,000,000; shares issued
and outstanding 661,967 for the periods ended December 31, 1999 and July 31,
1999 (aggregate liquidation preference, including dividend in arrears,
$16,715 for the period ended
December 31, 1999 and $16,549 for the period ended July 31, 1999). 662 662
Common stock of $0.25 par value. Shares authorized 40,000,000;
shares issued 20,991,217, including treasury shares of
2,636,167 for the period ended December 31, 1999 and 2,655,985
for the period ended July 31, 1999. 5,248 5,248
Paid in capital 212,733 212,733
Accumulated other comprehensive income (436) (354)
Retained deficit (292,817) (288,292)
Treasury stock, at cost (1,946) (2,125)
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Total stockholders' deficit (76,556) (72,128)
-----------------------------------------------------------------------------------------------------------
$44,054 $49,333
==========================================================================================================
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
Dynacore Holdings Corporation and Subsidiaries
(Unaudited)
<TABLE>
<CAPTION>
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(In thousands, except share data)
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Five Months Ended
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<S> <C> <C>
December 31, 1999 December 31, 1998
----------------- -----------------
Revenue:
Sales $27,932 $30,991
Service and other 23,928 25,004
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Total revenue 51,860 55,995
Operating costs and expenses:
Cost of sales 21,831 24,018
Cost of service and other 17,143 17,648
Research and development 490 907
Selling, general and administrative 13,544 13,591
Reorganization/restructuring costs 624 --
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Total operating costs and expenses 53,632 56,164
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Operating income (loss) (1,772) (169)
Non-operating income (expense):
Interest expense (2,378) (2,475)
Other, net (35) (274)
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Loss before income taxes and
extraordinary credit (4,185) (2,918)
Income tax expense 328 85
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Loss before extraordinary credit (4,513) (3,003)
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Extraordinary credit -- debt extinguishment -- 1,284
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Net loss $(4,513) $(1,719)
===================================================================================================================================
Net loss, adjusted for preferred stock dividends paid
or accumulated plus gain on exchange and retirement of
preferred stock - Net Loss applicable to common $(4,678) $(1,816)
===========================================================================================================
Basic and Diluted Earnings (Loss) Per Common Share:
Loss before extraordinary credit $(.26) $ (.18)
Gain on exchange of preferred stock -- .01
Extraordinary credit -- .07
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Net loss per common share $(.26) $ (.10)
===================================================================================================================================
Average Common Shares Outstanding:
Basic and Diluted 18,345,898 18,130,874
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Dynacore Holdings Corporation and Subsidiaries
(Unaudited)
<TABLE>
<CAPTION>
(In Thousands)
Five Months Ended
Dec. 31, 1999 Dec. 31, 1998
<S> <C> <C>
Cash flows from operating activities:
Net loss $(4,513) $(1,719)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 1,470 1,557
Provisions (recoveries) on accounts receivable (203) (151)
Gain on debt extinguishment -- (1,284)
Deferred income taxes 60 374
Realized gain on sale of property -- (273)
Changes in assets and liabilities:
(Increase) decrease in receivables 714 3,476
(Increase) decrease in inventory 1,008 (1,896)
Increase (decrease) in accounts payable and accrued expenses 1,044 (5,249)
Increase (decrease) in other liabilities and deferred credits (1,254) (2,688)
Other, net (94) 221
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Net cash provided by (used in) operating activities (1,768) (7,632)
Cash flows from investing activities:
Payments for fixed assets (1,729) (1,293)
Proceeds from dispositions of fixed assets -- 2,111
Other, net 153 107
----------------------------------------------------------------------------------------------------------
Net cash provided (used) from investing activities (1,576) 925
Cash flows from financing activities:
Proceeds from borrowings 51,692 33,654
Payments on borrowings (49,811) (33,607)
Restricted cash for letters of credit 30 (113)
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Net cash provided (used) in financing activities 1,911 (66)
Effect of foreign currency translation on cash (46) 465
----------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (1,479) (6,308)
Cash and cash equivalents at beginning of period 3,568 12,101
----------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $2,089 $5,793
====== ======
Cash payments for:
Interest $467 $3,604
Income taxes, net $324 $510
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
DYNACORE HOLDINGS CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In thousands)
(Unaudited)
1. Basis of Presentation and Sale of European Operations
On June 27, 2000, Dynacore Holdings Corporation (the "Company") (formerly
Datapoint Corporation), elected to change its fiscal year from a July year end
to a calendar year end, effective January 1, 2000. In accordance with the rules
and regulations of the Securities and Exchange Commission, the consolidated
financial statements included in this Transition Report are for the five-month
period ended December 31, 1999 (the "transition period").
It is recommended that these statements be read in conjunction with the
financial statements and notes thereto included in the Company's Annual Report
on Form 10-K for the year ended July 31, 1999.
The accompanying unaudited consolidated financial statements have been prepared
by Dynacore Holdings Corporation in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, the information furnished reflects all adjustments which are
necessary for a fair statement of the results of the interim periods presented.
All adjustments made in the interim statements are of a normal recurring nature.
The financial statements have been prepared on the basis of current ongoing
operations without regard to the sale of the Company's European Operations and
the effect of the bankruptcy proceedings, as more fully described below.
The Company has not sought to retain an independent auditor, which will require
court approval, subsequent to the filing of Petition for Reorganization under
Chapter 11 of the United States Bankruptcy Code, as discussed below, and
therefore, this Form 10-Q has been prepared without independent auditor
involvement or review.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from these estimates.
The accompanying unaudited financial statements have been prepared assuming that
the Company will continue as a going concern. At July 31, 1999 and for the year
then ended, the Company experienced a net loss of $7,549 and it had a working
capital deficiency of $19,533 and a net capital deficiency of $72,128 which
raised substantial doubt about its ability to continue as a going concern. For
the five month period ended December 31, 1999, the Company experienced a net
loss of $4,513 and it had a working capital deficiency of $24,351 and a net
capital deficiency of $76,556. The Company's ability to continue operations
depended on the availability of sufficient cash resources to meet the Company's
obligations in the near term. Without the successful consummation of the
announced sale of the European Operations, described below, and positive cash
flow, if any, from future operations, there could have been no assurances that
the Company's operations were able to continue.
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, the Company and several of its
subsidiaries entered into that certain Stock Purchase Agreement, dated as of
July 31, 1999 (the "Reboot Agreement"), with Reboot Systems, Inc. ("Reboot") an
investor group lead by Blake Thomas, the former President of the Company, to
sell the European subsidiaries of the Company which comprise substantially all
of the Company's operations (the "European 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 Datapoint Newco
I Limited ("Newco"), a United Kingdom corporation affiliated with CallCentric,
for $49,500 in cash, less certain adjustments, in the event that the aggregate
shareholder's deficit of the European Operations exceeded $10,000. 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 2, 2000 and that the sale of the European Operations to
Newco would be subject to higher and better offers, if any, and the approval of
the Bankruptcy Court. The Bankruptcy Court approved the sale on June 15, 2000.
<PAGE>
The Company intends to file a Plan of Reorganization pursuant to Chapter 11 of
the Bankruptcy Code and in that respect has commenced negotiations over the
terms of such plan with members of an Official Committee of Unsecured Creditors
appointed in the bankruptcy case.
On June 27, 2000, Dynacore announced that an agreement in principle had been
reached with the Official Unsecured Creditors' Committee appointed in the
corporation's Chapter 11 case pending in the United States Bankruptcy Court for
the District of Delaware. (Case No. 00-1853(PJW)).
The agreement in principle, which is subject to among other things, filing of a
Plan of Reorganization, approval by creditors and equity security holders and
approval by the Bankruptcy Court, provides for the distribution of approximately
$34.8 million in cash to holders of the outstanding 8 7/8% Convertible
Subordinated Debentures due 2006 (the "Debentures") and other unsecured
creditors from the proceeds of the sale to Newco. Such cash distribution is
expected to result in holders of Debentures receiving a distribution equal to
approximately 60% of the face value of the outstanding Debentures, excluding
accrued interest. At the time of confirmation of the proposed Plan of
Reorganization, Dynacore is expected to have remaining working capital of
approximately $4 million after fees, expenses and certain escrow items required
in the Sale pursuant to the Sale Agreement.
The agreement in principle currently under discussion with the Official
Unsecured Creditors' Committee contemplates that when the reorganized Dynacore
emerges from Chapter 11: (i) Debenture holders and other unsecured creditors
will receive 25% of the equity of the reorganized corporation, 3 out of 7 seats
on the Board of Directors, and 40% of a trust (the "Patent Litigation Trust"),
to be formed to pursue the patent litigations of Dynacore more fully described
below in Item 2, (ii) holders of the preferred stock, par value $1.00 per share,
will receive 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, will receive 41.5% of the equity of the reorganized corporation, (iv)
current officer management will receive 10% of the equity of the reorganized
corporation as part of a settlement of certain officer administrative claims
that include contract cancellation and other contractual entitlements and (v)
the remaining 56.5% interest in the Patent Litigation Trust shall be retained by
the reorganized Dynacore. Under the agreement in principle with the Official
Unsecured Creditors' Committee, all options to purchase shares of common stock
of the Company will be cancelled. The proposed Plan of Reorganization of the
corporation is expected to be filed during August 2000.
Pursuant to the agreement in principle, which is expected to be memorialized in
the proposed Plan of Reorganization, the beneficial interests in the Patent
Litigation Trust, are expected to be transferable and tradeable. In addition,
pursuant to the proposed Plan of Reorganization, Dynacore will distribute to its
then shareholders 75% of the first $100 million of net proceeds received on
account of its beneficial interest in the Patent Litigation Trust, if any, after
adjustment for corporate tax and payment of all patent litigation expenses.
The unaudited financial statements exclude any impact resulting from the
agreement described above.
The European Operations represented 98% and 97%, respectively, of the Company's
total revenue for the five month period ended December 31, 1999 and 1998.
Excluding the European Operations, the Company's consolidated revenue and
operating loss were $814 thousand and $3.4 million respectively, for the five
month period ended December 31, 1999 and $1.5 million and $3.1 million,
respectively, for the five month period ended December 31, 1998.
2. Inventories
Inventories consist of:
Dec. 31, 1999 July 31, 1999
Raw materials $115 $93
Work in process 138 234
Finished and purchased products 1,310 2,305
----- -----
$1,563 $2,632
====== ======
3. Commitments and Contingencies
From time to time, the Company is a defendant in lawsuits generally incidental
to its business. The Company is not currently aware of any such suit which, if
decided adversely to the Company, would result in a material liability.
<PAGE>
4. Net Income (Loss) to Common Share
Net income (loss) applicable to common share is as follows:
Five Months Ended
-----------------
12/31/99 12/31/ 98
-------- ---------
Loss before extraordinary credit $(4,513) $(3,003)
Preferred stock dividends accumulated (165) (175)
Gain on the exchange of preferred stock -- 78
Extraordinary credit -- 1,284
-----------------------------------------------------------------------------
Net loss applicable to common $(4,678) $(1,816)
======== ========
Average common shares outstanding:
Basic and Diluted 18,345,898 18,130,874
Net loss per common share $(.26) $(.10)
5. Comprehensive Income
In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement
No. 130, Reporting Comprehensive Income. Statement No. 130 established new rules
for the reporting and display of comprehensive income and its components.
Comprehensive income is net income, plus certain other items that are recorded
directly to stockholders' equity. The only such items currently applicable to
the Company are foreign currency translation and minimum pension liability
adjustments. The Company adopted this Statement in August 1998. On this basis,
these nonowner increases to stockholders' deficit, including net income or loss,
for the five months ended December 31, 1999 and December 31, 1998, totaled $4.6
million and $2.2 million, respectively.
6. Non-operating Income (Expense)
Five Months Ended
(In thousands) 12/31/99 12/31/98
-------- --------
Interest earned $6 $156
Foreign currency gains (losses) 218 (355)
Realized gain on sale of property -- 273
Other (259) (348)
----- -----
$(35) $(274)
===== ======
7. Operating Segments
In 1999, the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 131, "Disclosures about Segments of an Enterprise and Related
Information." Through the time of the consummation of the Sale, Dynacore was
principally engaged in the development, acquisition, marketing, servicing, and
system integration of computer and communication products - both hardware and
software. These products and services are for integrated computer and
telecommunication network systems. The Company's Chief Operating Decision Maker
(CODM) assesses performance and allocates resources based on a geographic
reporting structure. Through the time of the consummation of the Sale,
substantially all of the Company's operations consisted of ten European
subsidiaries and to a lesser extent, domestic operations. Reportable operating
segments under SFAS No. 131 include the Company's subsidiaries residing in
Sweden, the United Kingdom, France, and Belgium. Each of these subsidiaries
functioned as value-added resellers.
Included in "Corporate and Other" are general corporate activities and related
expenses and activities from other foreign subsidiaries. Assets are those that
are used or generated exclusively by each operating segment. The eliminations
required to determine the consolidated amounts shown below consist principally
of the elimination of intercompany receivables for loans provided by the
operating segments to the parent entity.
The following table presents certain information regarding the Company's
reportable operating segments for the five month period ended December 31, 1999
and December 31, 1998:
Five Months Ended
12/31/99 12/31/98
Revenue
Sweden $17,567 $16,450
United Kingdom 14,164 16,572
France 5,211 6,113
Belgium 3,524 5,473
Corporate and Other 11,784 11,645
Eliminations (390) (258)
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Total $51,860 $55,995
========================
<PAGE>
Five Months Ended
12/31/99 12/31/98
Segment Profit (Loss)
Sweden $1,787 $1,278
United Kingdom 1,230 1,512
France (252) (241)
Belgium (78) 569
Corporate and Other (4,459) (3,287)
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Operating Income (Loss) (1,772) (169)
Interest Expense (2,378) (2,475)
Other Non-Operating Income, net (35) (274)
-------------------------------------------------------------------
Loss Before Income Taxes and
Extraordinary Credit $(4,185) $(2,918)
=========================
Assets: December 31, 1999 July 31, 1999
-------------------------------------------------------------------------
Sweden $14,408 $12,786
United Kingdom 22,669 18,838
France 10,971 13,870
Belgium 13,028 15,677
Corporate and Other 39,723 44,614
Eliminations (56,745) (56,452)
------------------------------------------------------------------------
Total $44,054 $49,333
=============================
8. Acquisitions
On July 27, 1999, the Company, through its newly formed subsidiary, Corebyte
Inc., conditionally acquired (the "Corebyte Acquisition") the Corebyte
communication and networking software product family (the "Corebyte Products").
The acquisition was accomplished pursuant to an Asset Purchase Agreement, by and
among the Company, SF Digital, LLC and John Engstrom ("Engstrom"), dated July
27, 1999. Consideration provided for the Corebyte assets comprised the
following: (i) options to purchase up to one million shares of common stock of
the Company at an exercise price of $1.00 per share, (ii) options to purchase an
additional one million shares of common stock of the Company at an exercise
price equal to 80% of the closing price per share of common stock of the Company
on July 27, 2000, the first anniversary of the acquisition, provided that Mr.
Engstrom is still employed by the Company on such date; (iii) up to twenty-five
percent of the common stock in Corebyte, Inc.; and (iv) $75,000 in cash as
reimbursement for certain research and development expenses. All such
consideration is being held by the Company pending final resolution of Engstrom
v. Futureshare.com, LLC, a litigation. Under the agreement in principle with the
Official Unsecured Creditors' Committee, all options to purchase shares of
common stock of the Company will be cancelled.
On June 30, 2000, the United States District Court for the Southern District of
New York dismissed, without prejudice, for lack of subject matter jurisdiction
John A. Engstrom v. Futureshare.com LLC (99 Civ. 3824), the pending litigation
concerning the ownership status of the intellectual property underlying the
Corebyte Networks(TM) product family of software licensed on an exclusive basis
to the Registrant in July 1999 from Engstrom. The Court cited the general
principle under the Federal Copyright Act that works are subject to copyright by
the mere act of creation, subject to the notable work for hire exception. The
work for hire doctrine provides that if an employee who creates a work within
the scope of his or her employment, such work is automatically owned by the
employer. The Court indicated that the parties did not dispute the chronology of
events in this action. The software was created in November 1997, one and
one-half years before futureshare.com LLC (the "LLC") was formed. Therefore, the
Court concluded that Engstrom could not have been an employee of the LLC at the
time of creation of the software and there is no good faith basis for the LLC to
allege that the software is within the scope of the work for hire doctrine.
Accordingly, the Court found that absent a transfer of rights, Engstrom is the
sole owner of the software. The Court further indicated that whether a transfer
of exclusive rights in the software and/or the extent of any transfer, otherwise
within Engstrom's right, has been contractually modified turns on the
interpretation of the language of the operating agreement of the LLC. As to this
question, the Court indicated that it is purely an issue of state law and does
not implicate the Federal Copyright Act. Accordingly, the Court dismissed this
action without prejudice to the right to file a state action.
<PAGE>
Corebyte Inc. is led by John Engstrom, a pioneer of online and accomplished
enterprise groupware and e-mail service provider. Corebyte is an intelligent
browser-based enterprise-to-enterprise networking system. With a single
interface, and based upon beta testing of the system performed to date, the
end-user directly accesses every application necessary to manage their
enterprise from basic e-mail to advanced e-commerce. Users of Corebyte
seamlessly share and exchange valuable information, selectively and securely,
within their network community and across enterprises.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (For the Five Months Ended December 31, 1999 Versus the
Five Months Ended December 31, 1998)
Overview
The Company had an operating loss of $1.8 million and a net loss of $4.5 million
for the five months ended December 31, 1999 and an operating loss of $169
thousand and a net loss of $1.7 million for the five months ended December 31,
1998. Revenue during the five months ended December 31, 1999 decreased $4.1
million, or 7.4%, compared with the same period of the prior year. Approximately
$3.7 million of the decrease was due to the impact of a stronger U.S. dollar, on
average, during the five months ended December 31, 1999 as compared to the
average U.S. dollar during the same period of 1998.
Operating expenses (excluding cost of revenue and restructuring) for the five
months ended December 31, 1999 were approximately $14.0 million, compared with
$14.5 million for the same period of the prior year. On October 8, 1999, the
Company discontinued its domestic video conferencing (MINX) operations thereby
incurring restructuring costs of $624 thousand, related to severance actions in
the United States for 28 employees.
During the five months ended December 31, 1999, the Company did not repurchase
in the public market any of its 8 7/8% convertible subordinated debentures.
During the five months ended December 31, 1998, the Company repurchased
approximately $2.4 million face value of its 8 7/8% convertible subordinated
debentures. These purchases resulted in an extraordinary gain of approximately
$1.3 million for the five months ended December 31, 1998.
In October 1998, 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 term of five
years and approximately 12,000 square feet for an initial lease term of one
year. The Company recorded in non-operating income a gain of approximately $.3
million during the five month period ended December 31, 1998. The remainder of
the gain ($.9 million) was deferred and is being amortized over the lease terms.
Patents and Trademarks
Dynacore owns certain patents, copyrights, trademarks and trade secrets in
network technologies, which it considers valuable proprietary assets.
Video Conferencing Patents
Dynacore, along with John Frassanito and David A. Monroe, owns United States
Patent Nos. 4,710,917 and 4,847,829 related to video teleconferencing
technology. Dynacore had filed infringement actions against several companies.
All actions were dismissed after an adverse result at trial and on appeal.
<PAGE>
Multi-speed Networking Patents
Dynacore is also the owner of United States Patent Nos. 5,008,879 and 5,077,732
related to network technology. The Company believes these patents cover most
products introduced by various suppliers to the networking industry and
dominates certain types of dual-speed technology on networking recently
introduced by various industry leaders. Dynacore has asserted one or both of
these patents in the United States District Court for the Eastern District of
New York against a number of parties:
(1) Datapoint Corporation* v. Standard Micro-Systems, Inc. and
Intel Corporation, No. C.V.-96-1685;
------------------------------------------------------------------
(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., individually, and as representatives of the class
of all manufacturers, vendors and users of Fast Ethernet-compliant,
dual protocol local-area network products, No. CV-96-03819.
-----------------------------------------------------------
* The Company expects to make a motion with the Court to reflect the name change
to Dynacore Holdings Corporation.
These actions were consolidated for discovery, and for purposes of claim
construction. On January 20, 1998, a hearing commenced in the United States
District Court that concluded on January 23, 1998 during which claim
construction was submitted to a Special Master. The Special Master's report was
issued April of 1998 adverse to Dynacore. The Company had filed two sets of
objections to certain portions of this report. The objections were overruled.
These objections will now have to be resolved at the Appellate Court level. The
briefing is completed. Both patents have been submitted to the Patent Office for
re-examination. An adverse action was rendered on one patent, which the Company
is contesting, and a favorable action was rendered on the other. The appeal has
been stayed pending the complete outcome of the re-examination proceedings.
The above actions represent the Company's continuing efforts to license and
enforce its multi-speed networking patents through negotiations and/or
litigation. The Company believes that these patents provide broad coverage in
multi-speed networking technology and present the opportunity for further
royalty bearing licenses. While such royalty bearing licenses and enforcement of
its patents may create long-term value for its shareholders, the ultimate
outcome of the above litigation, appeals with respect to the litigation, and /or
negotiations cannot be determined at this time.
<PAGE>
Results of Operations
The Company had an operating loss of $1.8 million and a net loss of $4.5 million
for the five months ended December 31, 1999 and an operating loss of $169
thousand and a net loss of $1.7 million for the same period of the prior year.
The following is a summary of the Company's sources of revenue (approximately 99
percent of Dynacore's international revenue is derived from customers in Western
Europe):
Five Months Ended
(In thousands) 12/31/99 12/31/98
-------- --------
Sales:
U.S. $385 $1,043
Foreign 27,547 29,948
------ ------
27,932 30,991
Service and other:
U.S. 429 495
Foreign 23,499 24,509
------ ------
23,928 25,004
------ ------
Total revenue $51,860 $55,995
======= =======
Total revenue during the five months ended December 31, 1999 decreased $4.1
million, or 7.4%, compared with the same period of the prior year. Approximately
$3.7 million of the decrease was due to the impact of a stronger U.S. dollar, on
average, during the five months ended December 31, 1999, as compared to the
average U.S. dollar during the same period of 1998. For the five month period
ended December 31, 1999, approximately $658 thousand and $66 thousand,
respectively, of the decrease was due to lower sales and service volumes in the
U.S. due primarily to the discontinuance of its domestic video conferencing
(MINX) operations.
The gross profit margin for the five months ended December 31, 1999 was 24.8%
compared to 25.6%, for the same period of the prior year.
Operating expenses (excluding cost of revenue and restructuring) for the five
months ended December 31, 1999 were approximately $14.0 million, compared with
$14.5 million for the same period of the prior year. On October 8, 1999, the
Company discontinued its domestic video conferencing (MINX) operations thereby
incurring restructuring costs of $624 thousand, related to severance actions in
the United States for 28 employees.
Non-operating expenses for the five months ended December 31, 1999, consisted
primarily of interest expense of $2.4 million, foreign currency gains of $218
thousand and other expenses of $259 thousand. Non-operating income and expenses
for the same period of the prior year, consisted primarily of interest expense
of $2.5 million, foreign currency losses of $355 thousand, realized gain on sale
of property of $273 thousand and other expenses of $348 thousand.
During the five months ended December 31, 1999, the Company did not repurchase
in the public market any of its 8 7/8% convertible subordinated debentures.
During the five months ended December 31, 1998, the Company repurchased
approximately $2.4 million face value of its 8 7/8% convertible subordinated
debentures. These purchases resulted in an extraordinary gain of approximately
$1.3 million for the five months ended December 31, 1998.
<PAGE>
Financial Condition
The accompanying unaudited financial statements have been prepared assuming that
the Company will continue as a going concern. At July 31, 1999 and for the year
then ended, the Company experienced a net loss of $7,549 and it had a working
capital deficiency of $19,533 and a net capital deficiency of $72,128 which
raised substantial doubt about its ability to continue as a going concern. For
the five month period ended December 31, 1999, the Company experienced a net
loss of $4,513 and it had a working capital deficiency of $24,351 and a net
capital deficiency of $76,556. The Company's ability to continue operations
depended on the availability of sufficient cash resources to meet the Company's
obligations in the near term. Without the successful consummation of the
announced sale of the European Operations, described below, and positive cash
flow, if any, from future operations, there could have been no assurances that
the Company's operations were able to continue.
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, the Company and several of its
subsidiaries entered into that certain Stock Purchase Agreement, dated as of
July 31, 1999 (the "Reboot Agreement"), with Reboot Systems, Inc. ("Reboot") an
investor group lead by Blake Thomas, the former President of the Company, to
sell the European subsidiaries of the Company which comprise substantially all
of the Company's operations (the "European 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 Datapoint Newco
I Limited ("Newco"), a United Kingdom corporation affiliated with CallCentric,
for $49,500 in cash, less certain adjustments, in the event that the aggregate
shareholder's deficit of the European Operations exceeded $10,000. 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 2, 2000 and that the sale of the European Operations to
Newco would be subject to higher and better offers, if any, and the approval of
the Bankruptcy Court. The Bankruptcy Court approved the sale on June 15, 2000.
The Company intends to file a Plan of Reorganization pursuant to Chapter 11 of
the Bankruptcy Code and in that respect has commenced negotiations over the
terms of such plan with members of an Official Committee of Unsecured Creditors
appointed in the bankruptcy case.
On June 27, 2000, Dynacore announced that an agreement in principle had been
reached with the Official Unsecured Creditors' Committee appointed in the
corporation's Chapter 11 case pending in the United States Bankruptcy Court for
the District of Delaware. (Case No. 00-1853(PJW)).
The agreement in principle, which is subject to among other things, filing of a
Plan of Reorganization, approval by creditors and equity security holders and
approval by the Bankruptcy Court, provides for the distribution of approximately
$34.8 million in cash to holders of the outstanding 8 7/8% Convertible
Subordinated Debentures due 2006 (the "Debentures") and other unsecured
creditors from the proceeds of the sale to Newco. Such cash distribution is
expected to result in holders of Debentures receiving a distribution equal to
approximately 60% of the face value of the outstanding Debentures, excluding
accrued interest. At the time of confirmation of the proposed Plan of
Reorganization, Dynacore is expected to have remaining working capital of
approximately $4 million after fees, expenses and certain escrow items required
in the Sale pursuant to the Sale Agreement.
The agreement in principle currently under discussion with the Official
Unsecured Creditors' Committee contemplates that when the reorganized Dynacore
emerges from Chapter 11: (i) Debenture holders and other unsecured creditors
will receive 25% of the equity of the reorganized corporation, 3 out of 7 seats
on the Board of Directors, and 40% of a trust (the "Patent Litigation Trust"),
to be formed to pursue the patent litigations of Dynacore more fully described
below in Item 2, (ii) holders of the preferred stock, par value $1.00 per share,
will receive 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, will receive 41.5% of the equity of the reorganized corporation, (iv)
current officer management will receive 10% of the equity of the reorganized
corporation as part of a settlement of certain officer administrative claims
that include contract cancellation and other contractual entitlements and (v)
the remaining 56.5% interest in the Patent Litigation Trust shall be retained by
the reorganized Dynacore. Under the agreement in principle with the Official
Unsecured Creditors' Committee, all options to purchase shares of common stock
of the Company will be cancelled. The proposed Plan of Reorganization of the
corporation is expected to be filed during August 2000.
Pursuant to the agreement in principle, which is expected to be memorialized in
the proposed Plan of Reorganization, the beneficial interests in the Patent
Litigation Trust, are expected to be transferable and tradeable. In addition,
pursuant to the proposed Plan of Reorganization, Dynacore will distribute to its
then shareholders 75% of the first $100 million of net proceeds received on
account of its beneficial interest in the Patent Litigation Trust, if any, after
adjustment for corporate tax and payment of all patent litigation expenses.
The unaudited financial statements exclude any impact resulting from the
agreement described above.
<PAGE>
During the five months ended December 31, 1999, the Company's cash and cash
equivalents decreased $1.5 million due primarily to the usage of cash in
operating activities.
During the five months ended December 31, 1999, the Company's net cash used in
investing activities was approximately $1.6 million which included fixed asset
purchases (primarily test equipment, spares, and internally-used equipment).
Net cash provided by financing activities was $1.9 million during the five
months ended December 31, 1999, which included borrowings of $51.7 million
offset by payments of $49.8 million.
As of December 31, 1999, the Company had restricted cash of $298 thousand as
compared to $328 thousand for the year ended July 31, 1999. The balances were
restricted primarily to cover various lines of credits, reflected as payables to
banks.
Reorganization/Restructuring Costs
(In thousands)
During the five months ended December 31, 1999, the Company incurred
restructuring costs 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) operations. At December 31, 1999, accrued but unpaid restructuring costs
were approximately $382. Such costs are expected to be paid through the second
quarter of calendar year 2000.
The Company did not incur any restructuring for the five months ended December
31, 1998.
Restructuring charges are not recorded until specific employees are determined
(and notified of termination) by management in accordance with its overall
restructuring plan. Employee termination payments are generally paid out over a
period of time rather than as one lump sum.
Year 2000 Compliance
The Year 2000 Issue was the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs or hardware that had date-sensitive software or embedded chips
may have recognized a date using "00" as the year 1900 rather than the year
2000. This could have resulted in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions, generate invoices, or engage in similar normal business
activities. Based on the Company's assessments, the Company modified and/or
replaced significant portions of hardware and software so that those systems
would properly utilize dates beyond December 31, 1999.
The Company also assessed and modified and/or replaced its non Information
Technology ("IT") operating systems to insure compliance with Year 2000 which
included those primarily related to the office and facilities' environment
(telephone systems, security systems, etc.).
As a result of its efforts, Dynacore was prepared for the transition to the Year
2000 and did not experience any significant malfunctions or errors in its
operating or business systems when the date changed from 1999 to 2000. Dynacore
is not currently aware of any year 2000 problems that have materially affected
its customers or suppliers. Based on operations since January 1, 2000, the
Company does not anticipate any material disruption in its operations as a
result of any continuing Year 2000 issues. However it is possible that latent
problems may arise in the future. The Company believes that any such problems
are likely to be minor and correctable. Dynacore's aggregate costs for its Year
2000 actions were approximately $1.2 million.
<PAGE>
New European Currency
In January 1999, certain European countries introduced a new currency unit
called the "euro". In conjunction with the preparation for the year 2000, the
Company also modified and/or adapted systems designed to properly handle the
euro. The costs required to be able to accommodate the euro were combined with
costs of becoming year 2000 compliant, and therefore not easily identifiable.
However, they are not considered to be so significant so as to have a material
effect on the Company's business.
Cautionary Statement Regarding Risks and Uncertainties That May Affect
Future Results
This Quarterly Report on Form 10-Q contains forward-looking statements about the
business, financial condition and prospects of the Company. The actual results
of the Company could differ materially from those indicated by the
forward-looking statements because of various risks and uncertainties,
including, without limitation, the ability of the Company to consummate the sale
of its European Operations, actions which may be taken by trade creditors of the
Company or holders of the Company's Debentures, changes in product demand, the
availability of products, changes in competition, economic conditions, new
product development, 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 Quarterly Report on Form 10-Q, the words "believes,"
"estimates," "plans," "expects," and "anticipates" and similar expressions as
they relate to the Company or its management are intended to identify
forward-looking statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Information concerning market risk is contained on page 18 of the Registrant's
Annual Report on Form 10-K for the year ended July 31, 1999 and is incorporated
by reference to such annual report.
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On May 2, 2000 the Company filed a petition pursuant to Chapter 11 of the United
States Bankruptcy Code in the United States Bankruptcy Court for the District of
Delaware. The case has been assigned docket number 00-1853 (PJW).
See Item 3 of Registrant's Report on Form 10-K for the fiscal year ended July
31, 1999, for a description of certain legal proceedings heretofore reported.
The Company is a Plaintiff in a number of actions related to its patents and
trademarks which are more fully described in the Management's Discussion and
Analysis overview section of this Form 10Q-T.
On February 17, 2000, Blake Thomas, the former President of the Company,
who was terminated effective December 30, 1999, filed an action for $119
thousand of severance and vacation pay with the Texas Work Force Commission at
the Texas Workman's Compensation Court. Blake Thomas has also filed an unsecured
employee claim for $1,878,637.00 with the United States Bankruptcy Court. The
Company expects to contest these claims. Final disposition of this matter will
be determined by the United States Bankruptcy Court.
Item 3. Defaults Upon Senior Securities
Since December 1, 1999 the Company has been in default of its interest payment
obligation on its Debentures which were issued pursuant to the Indenture (See
Part I, note 1 to Financial Statements). The Company has had informal meetings
with certain of the large holders of Debentures concerning such default. As of
December 31, 1999, the default and the total arrearages in interest total
approximately $2.4 million. In addition, as of December 31, 1999, the Company
has outstanding 661,967 shares of its preferred stock, par value $1.00 per
share. The aggregate liquidation preference and dividend arrearages on such
shares is approximately $16.7 million including dividend arrearages of $3.5
million.
Item 6. Exhibits and Reports on Form 8-K
Reports on Form 8-K:
In a report filed on Form 8-K dated May 3, 2000, the Company reported that it
had filed a petition for reorganization under Chapter 11 of the United States
Bankruptcy Code in the United States Bankruptcy Court for the District of
Delaware and that it had entered into the Stock Purchase Agreement.
In a report filed on Form 8-K dated June 15, 2000, the Company reported that on
June 15, 2000, the United States Bankruptcy Court for the District of Delaware
approved the sale of its European operations and certain U.S. assets to
Datapoint NewCo 1 Limited and the approval of the Company's name change to
Dynacore Holdings Corporation.
In a report filed on Form 8-K dated June 30, 2000, the Company reported that the
sale of its European operations and certain U.S. assets to Datapoint NewCo 1
Limited had been completed.
In a report filed on Form 8-K dated June 27, 2000, the Company reported that an
agreement had been reached in principle with the Official Unsecured Creditors'
Committee appointed in the Company's Chapter 11 case pending in the United
States Bankruptcy Court for the District of Delaware and that the Company had
changed its fiscal year end to December 31.
In a report filed on Form 8-K dated June 30, 2000, the Company reported that on
June 30, 2000, the United States District Court for the Southern District of New
York dismissed, without prejudice, for lack of subject matter jurisdiction John
A. Engstrom v. Futureshare.com LLC (99 Civ. 3824).
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DYNACORE HOLDINGS CORPORATION
(Registrant)
DATE: August 11, 2000 /s/ Phillip P. Krumb
Phillip P. Krumb
Acting Chief Financial Officer
Acting Chief Accounting Officer)
