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, 2003
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from _________ to _________
Commission file number: 1-7636
THE CATTLESALE COMPANY
(f/k/a DYNACORE HOLDINGS CORPORATION)
(Exact name of registrant as specified in its charter)
Delaware 74-1605174
- ------------------------------- -------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
9901 IH 10 West, Suite 800; San Antonio, Texas 78230-2292
(Address of principal executive office and zip code)
(Registrant's telephone number, including area code): (210) 558-2898
--------------
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock, $.01 par value National Association of Securities Dealers'
Over-the Counter Bulletin Board
Securities registered pursuant to Section 15(d) of the Act:
None
Title of Class
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. Yes X No .
[Cover page 1 of 2 pages]
Applicable only to registrants involved in bankruptcy proceedings during
the preceding five years: Indicate by check mark whether the registrant has
filed all documents and reports required to be filed by Section 12, 13 or 15 (d)
of the Securities Exchange Act of 1934 subsequent to the distribution of
securities under a plan confirmed by a court. Yes X No .
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes ___ No __X__
As of March 31, 2003, 20,392,574 shares of Common Stock of The CattleSale
Company were outstanding and the aggregate market value (based upon the last
reported sale price of the Common Stock) of the shares of Common Stock held by
non-affiliates was approximately $1.4 million. (For purposes of calculating the
preceding amount only, all directors and executive officers of the registrant
are assumed to be affiliates.)
[Cover page 2 of 2 pages]
Table of Contents
Page
Glossary.................................................................................................. (iv)
PART I
Item 1. Business......................................................................................... 1
Business Development............................................................................ 1
Business Development Subsequent to Year End..................................................... 1
Background...................................................................................... 2
Activities Prior to Reorganization.............................................................. 2
Reorganization; the Trust....................................................................... 3
Patent Litigation............................................................................... 4
Liquidity....................................................................................... 4
The CattleSale Acquisition...................................................................... 6
Dividend to Shareholders........................................................................ 6
Escrow of Dividend Shares....................................................................... 6
Preferred Stock................................................................................. 7
Patents and Trademarks.......................................................................... 7
Employees....................................................................................... 8
Environmental Matters........................................................................... 8
Item 2. Properties....................................................................................... 8
Real Property................................................................................... 8
Tax Loss Carryovers............................................................................. 9
Item 3. Legal Proceedings................................................................................ 9
Item 4. Submission of Matters to a Vote of Security Holders.............................................. 10
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters............................ 11
Market Information.............................................................................. 11
Holders......................................................................................... 11
Dividends....................................................................................... 11
Item 6. Selected Financial Data.......................................................................... 11
i
Item 7. Management's Discussion and Analysis of Financial Condition and 14
Results of Operation............................................................................
Background...................................................................................... 14
Liquidity....................................................................................... 14
Financial Condition............................................................................. 15
Restructuring Costs............................................................................. 16
Results of Operations........................................................................... 17
Market Risk Sensitive Instruments............................................................... 18
Cautionary Statement Regarding Risks and Uncertainties that May Affect Future Results........... 19
Item 7A. Quantitative and Qualitative Disclosures About Market Risk...................................... 19
Item 8. Financial Statements and Supplementary Data...................................................... 19
Report of Marks Paneth & Shron LLP.............................................................. 21
Consolidated Statements of Operations........................................................... 23
Consolidated Balance Sheets..................................................................... 25
Consolidated Statements of Cash Flows........................................................... 26
Consolidated Statements of Stockholders' Equity (Deficiency).................................... 28
Notes to Consolidated Financial Statements ..................................................... 29
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............. 55
PART III
Item 10. Directors and Executive Officers of the Registrant.............................................. 56
Directors and Executive Officers................................................................ 56
Audit, Compensation and Executive Committees.................................................... 60
Meetings of the Board of Directors and Committees............................................... 60
Director Compensation........................................................................... 60
Compliance with Section 16(a) of the Securities Exchange Act of 1934............................ 61
ii
Item 11. Executive Compensation.......................................................................... 62
Compensation Committee Report................................................................... 62
Compensation Committee Interlocks and Insider Participation..................................... 64
Employment Agreements........................................................................... 64
Supplemental Executive Retirement Plan.......................................................... 65
Summary Compensation Table...................................................................... 66
Stock Option Grants in Last Fiscal Year......................................................... 67
Performance Graph............................................................................... 67
Item 12. Security Ownership of Certain Beneficial Owners and Management.................................. 68
Security Ownership of Certain Beneficial Owners................................................. 68
Security Ownership of Management................................................................ 68
Item 13. Certain Relationships and Related Transactions.................................................. 71
Item 14. Controls and Procedures......................................................................... 72
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K ................................ 73
iii
GLOSSARY
Acquisition Agreement: The agreement, dated as of February 25, 2003, between the
Company and AEI pursuant to which the Company acquired the Interests in the
Subsidiaries.
AEI: AEI Environmental, Inc., from whom the Company purchased the Interests in
the Subsidiaries.
Beneficial Interests: The units of beneficial interest in the Trust.
Common Stock: The Company's common stock, par value $.01 per share.
Company: The CattleSale Company, formerly known as Dynacore Holdings
Corporation, together with the Subsidiaries.
Court: The United States Bankruptcy Court for the District of Delaware.
Deemed Acquired Shares: The securities of which a person has a right to acquire
beneficial ownership (such as by exercise of options or conversion of preferred
stock) within 60 days after the applicable reporting date.
Dividend Shares: An aggregate of 250,000 shares of Series A Preferred Stock and
1,127,000 shares of Series B Preferred Stock issued to the Escrow Agent as agent
for the Record Holders.
DNL: The purchaser of the Company's European Operations.
Escrow Agent: Asher B. Edelman, Former Vice Chairman of the Company's Board of
Directors.
European Operations: The business conducted by the Company in Europe prior to
December 18, 2000.
Interests: The units of limited liability company interest in the Subsidiaries.
Patents: United States Patent Numbers 5,008,879 and 5,077,732
Patent Litigation: Patent infringement cases brought by the Company and assigned
to the Trust.
Plan: The Company's Amended Plan of Reorganization approved by the Court on
December 5, 2000.
Predecessor Company: The term used in Item 7 - Management's Discussion and
Analysis of Financial Condition and Results of Operation and in the Company's
Consolidated Financial Statements and discussions thereof to describe the
Company prior to the adoption of the Plan.
iv
Preferred Stock: The Company's Series A Preferred Stock and the Series B
Preferred Stock.
Reorganization: The reorganization of the Company pursuant to the Plan.
Record Holders: The record holders of Common Stock on February 24, 2003.
Series A Preferred Stock: The Company's Series A Convertible Redeemable
Preferred Stock, par value $.01 per share.
Series B Preferred Stock: The Company's Series B Convertible Redeemable
Preferred Stock, par value $.01 per share.
Subsidiaries: Collectively, CS Livestock Commissions Co. LLC and CS Auction
Production Co., LLC, limited liability companies organized under the laws of
Oregon.
Successor Company: The term used in Item 7 - Management's Discussion and
Analysis of Financial Condition and Results of Operation and the Company's
Consolidated Financial Statements and discussions thereof to describe the
Company subsequent to the adoption of the Plan.
Trust: The Dynacore Patent Litigation Trust, a Delaware grantor trust formed
pursuant to the Plan to prosecute the Patent Litigation.
Trust Loan: Up to $1,000,000 required pursuant to the Plan to be loaned by the
Company to the Trust bearing interest of 12% per year.
v
PART I
ITEM 1. Business.
Business Development
On February 25, 2003, the Company acquired all of the beneficial interests
(the "Interests") in two limited liability companies owned by AEI Environmental,
Inc. ("AEI"), CS Livestock Commissions Co. LLC and CS Auction Production Co. LLC
(collectively, the "Subsidiaries"), pursuant to an Acquisition Agreement of even
date therewith (the "Acquisition Agreement"). After the acquisition was
consummated, the Company changed its name from "Dynacore Holdings Corporation"
to "The CattleSale Company."
The Company, through the Subsidiaries, is in the business of providing
auction trading services to producers of beef and dairy cattle which is
accessible by the internet at the website www.cattlesale.com. The cattlesale.com
website was one of the first sites offering a neutral cattle trading exchange
and providing information and cost efficiencies to the cattle industry for each
stage of the production cycle. Management believes that the CattleSale products
and services reduce transaction costs and improve information flow and market
efficiencies in cattle production.
The terms and conditions of the acquisition of the Interests in the
Subsidiaries are described both in this Item 1 - Business under the heading "The
Acquisition."
Business Development Subsequent to Year End
On March 7, 2004, the Company entered into a letter of intent to acquire
the assets of CowTek, Inc. CowTek, Inc., headquartered in Brule, Nebraska,
www.cowtek.com, is the industry leader in ISO Memory tag technology with a
cutting edge proprietary distributive database management system for the
identification and traceability of individual cattle records. This high tech
production system has been designed to modernize and improve the livestock
industry with affordable production tools, which allow each animal to carry its
own data in an ISO Memory Tag creating a unique distributed database. The
production tools, consisting of production management software, utilizes
industry ISO read/write hardware technology to communicate data to and from each
animal wearing the ISO Memory Tag (data chip) forming the distributed database,
which is less controversial and easier to use than what is currently available
in the market place. With the appropriate pass code, the data chip can be
accessed and managed allowing the producers to keep control of this valuable
data and build value into the sale of the animal(s) to each segment of the
livestock industry. This new platform also allows the livestock industry to meet
new consumer and export guidelines along with government mandates. The fact that
the animal's information remains on the data chip and can be updated by each
owner is significantly different from other industry ID systems on the market
that rely on read only ID tags with a centralized database system separate from
the animal. The application of this unique traceability system can extend beyond
the live production chain of the cattle industry all the way to the end
consumer.
1
The acquisition is structured around the issuance of 300,000 shares of
CattleSale Company $10 Convertible Preferred Stock B and 4,000,000 stock options
for CattleSale common stock exercisable between $.25 and $.75 for a combined
exercise price of $2,120,000. The transaction has an expected closing date
during the second quarter of 2004 and is contingent on final due diligence, a
definitive purchase agreement and approval of both companies' board of
directors.
Background
From June 2000 through February 25, 2003 the Company did not have any
significant revenue or cash producing activities. Prior to acquiring the
Interests in the Subsidiaries, the Company had been continuing to concentrate
its efforts and resources on searching for a suitable merger or acquisition
partner and on maximizing its liquidity. These efforts began when the approval
by the United States Bankruptcy Court for the District of Delaware (the
"Court"), on December 5, 2000, of the Company's Amended Plan of Reorganization
under Chapter 11 of the Bankruptcy Code (the "Plan"). A final decree in the
reorganization proceeding was ordered by the Court on December 20, 2001. The
reorganization is discussed below under the heading "Reorganization; the Trust."
Pursuant to the Plan, the Dynacore Patent Litigation Trust (the "Trust")
was formed on December 18, 2000 to prosecute the patent infringement cases that
had previously been brought by the Company (the "Patent Litigation"). The Trust
is discussed below under the heading "Reorganization; the Trust" and the Patent
Litigation is discussed below under the heading "Patent Litigation."
Activities Prior to Reorganization
In 1968, the Company was incorporated in Texas as Computer Terminal
Corporation. In 1976, it was reincorporated in Delaware as Datapoint
Corporation.
Datapoint Corporation derived its revenue from hardware and software
products and services, including hardware and software maintenance,
installation, and basic consulting services. It was the owner of certain
patents, copyrights, trademarks and trade secrets in network technologies, which
it considered valuable proprietary assets, including United States Patent
Numbers 5,008,879 and 5,077,732 (the "Patents"). A discussion of the Company's
Patents and the litigation the Company brought to enforce them appears below
under the heading "Patent Litigation."
In addition to its business within the United States, the Company had
operations in Europe which were headquartered in Paris, France (the "European
Operations"). On April 19, 2000, the Company entered into an agreement with
Datapoint Newco 1 Limited, a United Kingdom company ("DNL"), for the sale of the
European Operations. The agreement contemplated, among other things, that the
Company would file for reorganization pursuant to Chapter 11 of the United
States Bankruptcy Code and that the sale would be subject to the approval of the
Court.
2
The Company filed for reorganization on May 3, 2000. On June 15, 2000, the
Court approved the sale to DNL which was consummated on June 30, 2000. The
adjusted purchase price was $45.125 million. In addition to selling the European
Operations, the Company sold all of its interest in the name "Datapoint" and, in
June 2000, the Company changed its name to Dynacore Holdings Corporation.
Reorganization; the Trust
On December 5, 2000, the Court approved the Plan and, on December 18, 2000,
the Trust was formed, the rights to the Patent Litigation were transferred to it
and all of the then existing debt and equity in the Company was cancelled.
The sum of $34.8 million, a portion of the proceeds from the sale of the
European Operations, was distributed to debenture holders and the Company's
other unsecured creditors.
Ten million shares of new common stock, par value $.01 per share, in the
reorganized corporation (the "Common Stock"), as well as ten million beneficial
interests in the Trust (the "Beneficial Interests"), were issued, as follows:
(i) Debenture holders and the Company's other unsecured creditors received
25% of the shares of Common Stock and 40% of the Beneficial Interests;
(ii) Holders of the Company's then outstanding preferred stock, par value
$1.00 per share, received 23.5% of the shares of the Common Stock and 3.5% of
the Beneficial Interests;
(iii) Holders of the Company's then outstanding common stock, par value
$.25 per share, received 41.5% of the shares of Common Stock;
(iv) Members of the Company's management received 10% of the shares of
Common Stock; and
(v) The Company received the remaining 56.5% of the Beneficial Interests.
In August, 2002, the Company transferred approximately 12% of the
outstanding Beneficial Interests to certain of its officers and non-employee
directors in lieu of cash compensation for their services for the period from
June 30, 2002 through December 18, 2002.
On December 18, 2002, the Company declared a dividend payable to its
stockholders of record on December 20, 2002. The dividend was payable in the
remainder of the Company's Beneficial Interests on the basis of .44569 of a
Beneficial Interest per share of Common Stock (with all fractional interests
eliminated). As a result of the accumulation of the fractional Beneficial
Interests, the Company retained ownership of 1,469 of the 9,977,690 Beneficial
Interests outstanding as of March 13, 2003.
3
In January 2003, the Beneficial Interests began trading over-the-counter in
the National Daily Quotation System "pink sheets" published by the National
Quotation Bureau, Inc. under the symbol DYHCS.PK.
Patent Litigation
The Company believed that the Patents covered most products introduced by
various suppliers to the networking industry and certain types of dual-speed
technology introduced by various industry leaders. The Company had asserted one
or both of the Patents in four suits brought in the United States District Court
for the Eastern District of New York (the "Brooklyn Suits") and two suits
brought in the United States District Court for the Southern District of New
York (the "Manhattan Suits").
Pursuant to the Plan, these actions were transferred to the Trust for
prosecution on behalf of the owners of the Beneficial Interests. Also pursuant
to the Plan, the Company was obligated to lend the Trust up to $1 million to
pursue the Patent Litigation (the "Trust Loan"). As of December 31, 2003, the
outstanding principal amount owed to the Company was approximately $908,621 and
accrued interest was approximately $167,105.
The Brooklyn Suits were dismissed on appeal on February 15, 2002. On August
19, 2002 and February 3, 2003, the Trust settled the Manhattan Suits against,
respectively, Motorola, Inc. and Eastman Kodak Company. The remaining defendants
in the Manhattan Suits received summary judgment in their favor on February 11,
2003. The Trust appealed this ruling and on March 31, 2004, the United States
Court of Appeals for the Federal Circuit ("Appeals Court") rejected the appeal.
As a result of the Appeals Court's decision, the Company and the Trust cannot
enforce claims of infringement on the Patent against the defendants. The
District Court must rule on defendants' motions for taxable costs and attorneys'
fees. The Company and the Trust believe that they acted in good faith in
bringing and prosecuting the Action and that they have valid defenses to and
arguments against defendants' motions. Although the Company and the Trust
believe the motions for attorneys' fees to be without merit, there can be no
assurance that the District Court will rule in favor of the Company and the
Trust. The Trust cannot predict (i) when the District Court will rule on
defendants' motions for attorneys' fees, (ii) how the District Court will rule
on the motion, and (iii) the amount of any attorneys' fees if awarded by the
District Court. However, a ruling against the Company and/or Trust may have a
material adverse effect on the Company and/or Trust.
Liquidity
Before acquiring the Interests in the Subsidiaries in February 2003,
substantially all of the Company's assets consisted of a portion of the cash
proceeds from the sale of the European Operations which were held in a money
market fund pending use in an operating business. As of December 31, 2003, the
Company had cash and cash equivalents of approximately $29,817.
4
From June 2000 through December 31, 2002, the Company had no significant
revenue or cash producing activities. In order to maximize its liquidity so it
could satisfy its obligation to fund the Trust Loan and retain sufficient
working capital cash to attract a potential merger or acquisition partner, the
Company implemented measures to conserve cash.
In August 2002, the then three senior officers of the Company, Asher B.
Edelman, Gerald N. Agranoff and Phillip P. Krumb, agreed to receive Beneficial
Interests in lieu of cash as compensation for their services during the period
from June 30, 2002 through December 18, 2002. This resulted in cash savings to
the Company of $209,981. Likewise, the Company's then four non-employee
directors agreed to receive Beneficial Interests in lieu of their quarterly
director fees through the end of the calendar year, resulting in cash savings to
the Company of $30,000.
In addition, the Company exercised an early cancellation option in the
lease for its former European headquarters in Paris, France and downsized its
San Antonio, Texas headquarters. On April 9, 2004, the Company, along with
co-tenants Canal Capital Corporation and Plaza Securities Company LP, entered
into a settlement agreement with the landlord of its New York office lease. The
settlement agreement provides for, among other things, termination of the lease
in its entirety and full release of all of the parties. The release is
contingent upon the forfeiture of the Company's and co-tenants' security
deposits and the payment of two months rent, full payment of which must be
received by the landlord not later than April 30, 2004. While the Company
intends to make such payment, if the payment is not received, the landlord
maintains full rights to sue the Company for damages with respect to the Lease.
The terms of the original lease provided for lease termination in October, 2009
and the Company's annual lease obligation was approximately $400,000.
While the Company has a loan receivable in respect of the Trust Loan of
approximately $908,521 plus accrued interest of approximately $167,105,
virtually the only source of recovery would have been from net proceeds of the
Patent Litigation. As a result of the adverse ruling of the appeal of the
summary judgment, these amounts will not be recovered.
The Company will not have sufficient cash resources to satisfy its cash
requirements for 2004, including the payment of its December 31, 2003
obligations, without an infusion of additional cash. In November and December of
2003, the Company received short term financing of $125,000 to partially fund
its operations. These notes matured in January and February of 2004, and the
Company is currently in default on these notes. In addition, subsequent to
year end, an additional $125,000 was received as a private placement investment,
also to partially fund its operations. While the Company is seeking additional
"bridge" investments to fund its operations until more longer term capital
investments are received, if at all, there can be no assurance that additional
short term and/or longer term financing will be received and that the Company
will be able to fulfill its obligations.
5
The CattleSale Acquisition
The amount of consideration paid by the Company for the Interests in the
Subsidiaries was determined by negotiation, based on a mutual assessment by the
Company and AEI of the value of the Subsidiaries' business and the real value of
the Company's Common Stock. Further, the acquisition was structured to avoid
causing a negative impact on the Company's net operating loss carry-forward
described below under the heading "Properties."
The Company did not expend any cash in acquiring the Interests. Rather, the
consideration for the Interests consisted of:
o 1,323,000 shares of Series B Convertible Redeemable Preferred Stock (the
"Series B Preferred Stock") having the principal terms described below under the
heading "Preferred Stock;" and
o 9,593,168 shares of Common Stock, which equaled forty-nine percent (49%)
of the outstanding shares of Common Stock, on a fully-diluted basis, immediately
subsequent to the closing.
The Company intends to file a registration statement with the Securities
and Exchange Commission registering the shares issued to AEI as soon as
practicable.
Dividend to Shareholders
Upon the purchase of the Interests in the Subsidiaries, the Company
declared a dividend payable to its Common Stock holders of record on February
24, 2003 (the "Record Holders"). The dividend was payable in .02503 of a share
of Series A Convertible Redeemable Preferred Stock (the "Series A Preferred
Stock") and .11287 of a share of Series B Preferred Stock per share of Common
Stock. An aggregate of 250,000 shares of Series A Preferred Stock and 1,127,000
shares of Series B Preferred Stock were so issued (collectively, the "Dividend
Shares"). The Series A Preferred Stock has the principal terms described below
under the heading "Preferred Stock." The Dividend Shares were issued in escrow,
as described below under the heading "Escrow of Dividend Shares."
Escrow of Dividend Shares
The Dividend Shares are being held in escrow by Asher B. Edelman, former
Vice Chairman of the Company, in the capacity of escrow agent for the benefit of
the Record Holders, until such time as the Dividend Shares have been registered
for sale under the Securities Act of 1933, as amended. The Company intends to
file a registration statement with the Securities and Exchange Commission
registering the Dividend Shares, and the shares issued to AEI at the closing, as
soon as practicable; however, the Company cannot anticipate when such a
registration will become effective and the Dividend Shares released from escrow.
During the period the Dividend Shares are held in escrow, the escrow agent has
the power to vote the Dividend Shares on any matter submitted to the vote of the
Company's shareholders, including those matters acted upon pursuant to the
Written Consent, as such term is defined below in Item 4 - Submission of Matters
to a Vote of Security Holders.
6
Preferred Stock
The rights and preference of the Series A Preferred Stock and the Series B
Preferred Stock (collectively, the "Preferred Stock"), which each have a par
value of $.01 per share, are as follows:
Dividends. Dividends accrue and are cumulative from the date of issuance in
an annual amount equal to 2.5% per year per share, payable semi-annually, when,
as and if declared by the Board of Directors. Dividends are payable in cash,
shares of Preferred Stock (valued at $10 per share) or shares of Common Stock
(valued, (x) if there is a market for the Common Stock, at the average price of
a share of Common Stock during the last thirty (30) days of trading, or (y) if
there is not a market for the Common Stock, at $1.38 per share), or any
combination thereof.
Conversion. Each share of Preferred Stock is convertible at any time at the
option of the holder into 7.25 shares of Common Stock.
Redemption. At any time after the earlier of:
o a merger or consolidation effecting the sale in one or a series of
related transactions of all or substantially all of the Company's assets or a
sale of more than fifty percent (50%) of the Company's outstanding voting
securities, or
o the realization by the Company of aggregate net proceeds in excess of
$10,000,000 in connection with the sale of Common Stock pursuant to a public
offering registered under the Securities Act of 1933, as amended (a "Qualified
Public Offering"),
the Preferred Stock will be redeemed by the Company for cash in an amount
equal to the liquidation preference of $10 per share, plus accrued and unpaid
dividends as of the redemption date; provided, however, that (i) the redemption
of the Series B Preferred Stock will be subject to the rights and preferences of
the Series A Preferred Stock, and (ii) not more than forty percent (40%) of the
net offering proceeds of the Qualified Public Offering will be applied to the
redemption of the Preferred Stock.
Patents and Trademarks
The Company owns no registered patents or trademarks.
All of the Company's right, title and interest to its patents was
transferred to the Trust upon its formation and all of its right, title and
interest in the name "Datapoint" was transferred to DNL upon the sale of the
European Operations.
7
The Company owns or has the right to use all intellectual property used by
the Subsidiaries in the operation of their business as presently conducted,
including trademarks, logos, trade names (including "cattlesale.com"), corporate
names, computer software, internet domain names and IP addresses, and other
proprietary rights.
Employees
At December 31, 2003, the Company had eight employees, two of whom were
senior officers and one was a part-time temporary employee.
The Company considers its relations with its employees to be satisfactory.
Environmental Matters
Compliance with current federal, state, and local regulations relating to
the protection of the environment has not had, and is not expected to have, a
material effect upon the capital expenditures, earnings, or competitive position
of the Company.
ITEM 2. Properties.
Real Property
The Company's principal executive office is located in San Antonio, Texas.
It has additional facilities in New York and in Hinsdale, Illinois.
Approximate
Square
Location Use Footage Terms
San Antonio, Texas Office 435 Leased; month to month
San Antonio, Texas Warehouse 300 Leased; month to month
New York, New York Office 4,250 Leased; expires October 16, 2009
Hinsdale, Illinois Office 600 Leased; month to month
On April 9, 2004, the Company, along with co-tenants Canal Capital
Corporation and Plaza Securities Company LP, entered into a settlement agreement
with the landlord of its New York office lease. The settlement agreement
provides for, among other things, termination of the lease in its entirety and
full release of all of the parties. The release is contingent upon the
forfeiture of the Company's and co-tenants' security deposits and the payment of
two months rent, full payment of which must be received by the landlord not
later than April 30, 2004. While the Company intends to make such payment, if
the payment is not received, the landlord maintains full rights to sue the
company for damages with respect to the Lease. The terms of the original lease
provided for lease termination in October, 2009 and the Company's annual lease
obligation was approximately $400,000.
8
The Hinsdale office (approximately 600 square feet) is being leased on a
month-to-month basis for $1,500 per month. While on March 31, 2003 the Company
gave the landlord six months notice to vacate the premises, the Company still
occupies the premises.
The Company's aggregate annual rent under its leases, excluding sub-lease
agreements, was approximately $233,000. The Company believes that its facilities
are generally well maintained, in good operating condition and are adequately
equipped for their present use.
Tax Loss Carryovers
The Company believes that it had approximately $172 million of tax loss
carryovers for U.S. federal tax purposes upon emerging from bankruptcy in
December 2000, of which approximately $117 million remained on December 31,
2003. Of this amount, $29 million expires in years 2004 and 2005 and $88 million
expires in various amounts through year 2024. Long-term capital loss
carryforwards of $29 million expire in various amounts beginning in 2004.
At December 31, 2002, the Company had unused alternative minimum tax
credits for income tax purposes of approximately $170 million which also may be
used to offset the Company's future tax liabilities.
Utilization of the ordinary and capital tax loss carryforwards and the
alternative minimum tax credits are subject to limitation in the event of a more
than fifty percent (50%) change in ownership of the Company. Realization of the
Company's deferred tax assets is dependent on generating sufficient taxable
income in certain taxing jurisdictions prior to the expiration of loss and
credit carryforwards.
Management contemplates that future capital infusions probably will trigger
the 50% change of ownership and thus limit future utilization of the tax loss
carryforward.
In the event that the Company's ability to utilize its net operating losses
to reduce its federal tax liability with respect to current and future income
becomes subject to limitation, the Company may be required to pay, sooner than
it otherwise might have to, any amounts owing with respect to such federal tax
liability. This which would reduce the amount of cash otherwise available to the
Company (see Note 7 to the Consolidated Financial Statements).
ITEM 3. Legal Proceedings.
From time to time, the Company is a defendant in lawsuits generally
incidental to its business. The Company is not currently aware of any such suit,
which if decided adversely to it, would result in a material liability.
9
ITEM 4. Submission of Matters to a Vote of Security Holders.
There were no matters submitted during 2003 to a vote of security holders
of the Company through the solicitation of proxies. There was no annual meeting
of stockholders held during 2003.
However, immediately subsequent to the acquisition of the Interests on
February 25, 2003, a majority in interest of the Company's shareholders took
certain actions by written consent (the "Written Consent"), including the
election of directors and the adoption of the Company's Second Restated
Certificate of Incorporation, a description of which follows. The directors'
biographies appear below in Item 10 - Directors and Executive Officers of the
Registrant under the heading "Directors and Executive Officers." The votes cast
by Written Consent, 13,832,716 shares, represented 62.09% of the outstanding
shares entitled to vote. None of the shareholders voting abstained or voted
against any of the proposed actions.
The Second Restated Certificate of Incorporation, which was approved by the
Board of Directors on February 19, 2003, effectively (i) changed the name of the
Corporation to The CattleSale Company, (ii) increased the number of authorized
shares of Common Stock by twenty million (20,000,000) shares from thirty million
(30,000,000) shares to fifty million (50,000,000) shares, and (iii) increased
the number of members of the Board of Directors from seven (7) to eight (8).
Inasmuch as the Company (x) is no longer subject to the Court's December 5, 2000
Confirmation Order, and (y) distributed the Beneficial Interests owned by it as
a dividend to the holders of Common Stock of record on December 20, 2002,
certain other provisions of the Corporation's Restated Certificate of
Incorporation pertaining thereto were also amended.
10
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters.
Market Information
On March 18, 2003, the Company' Common Stock began trading under the symbol
CTLE on the National Association of Securities Dealers' Over-the Counter
Bulletin Board where it had traded since June 18, 2001 under the symbol DYHC.
From December 18, 2000 until June 18, 2001, the Common Stock was tradable
over-the-counter through the National Daily Quotation System "pink sheets"
published by the National Quotation Bureau, Inc.
As of March 31, 2004, the closing price of a share of Common Stock was
$.11. The prices below represent the high and low prices for composite
transactions for Common Stock traded during the applicable periods.
High Low
March 31, 2003 .40 .05
June 30, 2003 .28 .13
September 30, 2003 .26 .10
December 31, 2003 .22 .11
High Low
March 31, 2002 .25 .20
June 30, 2002 .22 .16
September 30, 2002 .17 .06
December 31, 2002 .12 .05
Holders
As of March 31, 2004 there were approximately 2,507 holders of record and
20,392,574 outstanding shares of Common Stock.
Dividends
The Company has not paid cash dividends to date on its Common Stock and has
no present intention to do so in the near future. However, in February 2003, the
Company declared dividends in shares of Common Stock and Series A Preferred
Stock. A discussion of both dividends appears above in Item 1 - Business under
the respective heading "Dividend to Shareholders."
ITEM 6. Selected Financial Data.
The operations of the Company for the years ended December 31, 2003, 2002
and 2001 and for the period of December 19, 2000 through December 31, 2000
(presented as the "Successor Company"), were significantly affected by the sale
of the Company's European Operations on June 30, 2000 and the cessation of
virtually all of the Company's revenue producing operations. As a result, the
Company's financial results for each of these periods prior to December 18, 2000
did not reflect the earnings capacity of the Company. In addition, the financial
data for the period ended December 31, 2000 reflects the adoption of Fresh Start
Accounting and includes the period from December 19, 2000 to December 31, 2000.
11
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 American Institute of
Certified Public Accountants. Under this accounting treatment, all assets and
liabilities were restated to reflect the reorganization value of the reorganized
entity, which approximates its fair value at the date of reorganization. In
addition, the accumulated deficit of the Company was eliminated and its capital
structure was recast in conformity with the Plan. As such, the accompanying
financial data as of December 31, 2000 represents that of a successor company,
which, in effect, is a new entity with assets, liabilities and a capital
structure having carrying values not comparable with prior periods and with no
beginning retained earnings or deficit. As such, the financial data is
considered that of a successor company and is not comparable to prior periods.
12
Selected Financial Data
Five-Year Comparison
(Dollars in thousands, except per share data)
Successor Company Predecessor Company
------------------------------------------------------------------------
12/19/00 - 01/01/00 - 08/01/99 -
2003 2002 2001 12/31/00 12/18/00 12/31/99
- --------------------------------------------------------------------------------------------------------------------------
Operating Results for the Fiscal Year
Total Revenue(net of $5,481 gross billings in 2003) $113 $- $9 $ - $62,956 $51,860
Operating income (loss) (2,017) (2,283) (3,321) (195) (3,004) (1,772)
Income (loss) before extraordinary credits
And effect of change in accounting principle (1,830) (2,526) (3,793) (311) 50,820 (4,513)
Net income (loss) (1,830) (2,290) (3,793) (311) 81,079 (4,513)
Basic earnings (loss) per common share:
Income (loss) before extraordinary credits ($0.13) ($0.25) ($0.38) ($0.03) $12.10 ($1.13)
Gain on the exchange and retirement
of preferred stock - - - - - -
Extraordinary credits and changes in accounting - 0.02 - - 10.94 -
Principle
Net income (loss) per share ($0.13) ($0.23) ($0.38) ($0.03) $23.04 ($1.13)
Diluted earnings (loss) per common share:
Income (loss) before extraordinary credits ($0.13) ($0.25) ($0.38) ($0.03) $10.25 ($1.13)
Gain on the exchange and retirement
of preferred stock - - - - - -
Extraordinary credits and changes in accounting - 0.02 - - 5.91 -
Principle -
Net income (loss) per share ($0.13) ($0.23) ($0.38) ($0.03) $16.16 ($1.13)
Financial Position at End of Fiscal Year
Current assets $154 $1,702 $3,659 $8,289 $9,318 $36,093
Fixed assets, net 108 14 28 102 108 5,872
Total assets 1,107 1,826 7,077 12,694 13,740 44,054
Current liabilities 675 295 502 1,913 2,801 60,444
Long-term debt - - - - - 50,000
Stockholders' equity (deficit) 32 1,095 3,385 7,189 7,500 (76,556)
Other Information
Average common shares outstanding 18,240,926 9,984,726 9,984,726 10,000,000 4,145,770 4,131,074
Number of common stockholders of record 2,504 2,767 2,780 2,641 2,732 2,810
Preferred shares outstanding 2,631,406 - - - - 661,967
Dividends paid or accumulated on preferred stock 556 - - - - 165
Number of employees 8 5 7 19 19 617
See notes to Consolidated Financial Statements and Management Discussion and Analysis of Financial Condition and Results of
Operations.
No cash dividends on Common Sock have been declared during any of the above periods.
Net income for the period ending 12/18/00 includes a gain of $52.5 million resulting from a divestiture.
Net income for the period ending 12/18/00 includes an extraordinary debt extinguishment gain of $26.5 million and Fresh Start
adjustments of $3.8 million.
Per share amounts have been adjusted to reflect its issuance at the rate of .225177 shares of Successor Company Common Stock for
each share of Predecessor Company Common Stock.
13
ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Background
The Company, then known as Datapoint Corporation, filed for reorganization
under Chapter 11 of the United States Bankruptcy Code on May 3, 2000 (the
"Reorganization"). Prior thereto, it had conducted a hardware and software
product and services business in the United States and Europe (the "European
Operations"). The Company was the owner of United States Patents 5,008,879 and
5,077,732 (the "Patents") and had commenced patent infringement litigation in
the United States District Courts for the Eastern and Southern Districts of New
York (the "Patent Litigation").
On December 5, 2000, the United States Bankruptcy Court for the District of
Delaware (the "Court") approved the Company's Amended Plan of Reorganization
(the "Plan"). Pursuant to the Plan, on June 30, 2000, the Company's European
Operations were sold to Datapoint Newco 1 Limited, a United Kingdom company
("DNL") and, on June 18, 2000, the Dynacore Patent Litigation Trust (the
"Trust") was formed to prosecute the Patent Litigation on behalf of the holders
of units of beneficial interest in the Trust (the "Beneficial Interests").
Pursuant to the Plan, the Company is obligated to loan the Trust up to
$1,000,000 with interest at 12% per year (the "Trust Loan").
From January 2001 through December 31, 2002, the Company had no significant
revenue or cash producing activities and was actively seeking a merger or
acquisition partner.
On February 25, 2003, the Company acquired all of the limited liability
company interests (the "Interests") in CS Livestock Commissions Co. LLC and CS
Auction Production Co. LLC (collectively, the "Subsidiaries"). The Company,
through the Subsidiaries, is now conducting a cattle auction and trading
services business on the internet.
Liquidity
Before acquiring the Interests in the Subsidiaries in February 2003,
substantially all of the Company's assets consisted of a portion of the cash
proceeds from the sale of the European Operations in June, 2000, which was held
in a money market fund pending use in an operating business. As of December 31,
2002, the Company had cash and cash equivalents of approximately $1.3 million.
In addition, the Company had approximately $6 thousand invested in PGM
Associates, L.P. (the "Partnership"), as more fully described in Note 4 to the
Consolidated Financial Statements.
As noted above, from June 2000 through December 31, 2002, the Company had
no significant revenue or cash producing activities. In order to maximize its
liquidity so it could satisfy its obligation to lend the Trust up to $1 million
and retain sufficient working capital cash to attract a potential merger or
acquisition partner, the Company implemented measures to conserve cash.
14
In August 2002, the then three senior officers of the Company agreed to
receive Beneficial Interests in lieu of cash as compensation for their services
during the period from June 30, 2002 through December 18, 2002. This resulted in
cash savings to the Company of $209,981. Likewise, the Company's then four
non-employee directors agreed to receive Beneficial Interests in lieu of their
quarterly director fees through the end of the calendar year, resulting in cash
savings to the Company of $30,000.
In addition, the Company exercised an early cancellation option in the
lease for its former European headquarters in Paris, France and downsized its
San Antonio, Texas headquarters. On April 9, 2004, the Company, along with
co-tenants Canal Capital Corporation and Plaza Securities Company LP, entered
into a settlement agreement with the landlord of its New York office lease. The
settlement agreement provides for, among other things, termination of the lease
in its entirety and full release of all of the parties. The release is
contingent upon the forfeiture of the Company's and co-tenants' security
deposits and the payment of two months rent, full payment of which must be
received by the landlord not later than April 30, 2004. While the Company
intends to make such payment, if the payment is not received, the landlord
maintains full rights to sue the Company for damages with respect to the Lease.
The terms of the original lease provided for lease termination in October, 2009
and the Company's annual lease obligation was approximately $400,000.
The Company will not have sufficient cash resources to satisfy its cash
requirements for 2004, including the payment of its December 31, 2003
obligation, without an infusion of additional cash. In November and December of
2003, the company received short term financing of $125,000 to partially fund
its operations. These notes matured in January and February of 2004, and the
Company is currently in default on these notes. In addition, subsequent to
yearend, an additional $125,000 was received as a private placement investment,
also to partially fund its operations. While the Company is seeking additional
"bridge" investments to fund its operations until more longer term capital
investments are received, if at all, there can be no assurance that additional
short term and/or longer term financing will be received and that the Company
will be able to fulfill its obligations.
As of December 31, 2003, the Company had available federal tax net
operating losses aggregating approximately $117 million which expire in various
amounts beginning in 2004. In the event that the Company's ability to utilize
its net operating losses to reduce its federal tax liability with respect to
current and future income becomes subject to limitation, the Company may be
required to pay, sooner than it otherwise might have to, any amounts owing with
respect to such federal tax liability, which would reduce the amount of cash
otherwise available to the Company (see Note 7 to the Consolidated Financial
Statements).
Financial Condition
(In thousands)
During the year ended December 31, 2003, the Company's unrestricted cash
and cash equivalents decreased approximately $1,314. This approximated the
amount used by the Company for operating purposes. The $168, raised by
borrowings, stock sales and asset liquidation, approximated the amounts
disbursed by the Company in the acquisition of the Subsidiaries and for
additional fixed assets.
15
Restructuring Costs
(In thousands)
During the periods listed below, the Company incurred restructuring costs,
as shown, in connection with employee terminations and facility closings related
to its downsizing efforts after its Reorganization. Through the end of 2002
restructuring charges relating to payroll costs were not recorded until specific
employees are determined (and notified of termination) by management in
accordance with the Company's overall restructuring plan. Other restructuring
costs were not recorded until management has committed to an exit plan and all
significant actions to be taken have been identified and significant changes to
the plan are not likely.
Subsequent to December 31, 2002, the Company began to apply the provisions
of Statement of Financial Accounting Standards No. 146 - Accounting for Costs
Associated with Exit of Disposal Activities ("SFAS 146"), to the recognition of
restructuring charges. Under SFAS 146, restructuring charges relating to payroll
costs are not recorded until management commits to a plan of termination, the
plan identifies the number, job classifications or functions, and locations of
employees to be terminated, the terms of the termination benefits have been
determined and it is unlikely that there will significant changes to the plan.
Even then, the fair value of the liability is only recorded if the employees are
not required to render service for their benefits beyond a "minimum retention
period", otherwise the liability is recorded ratably over the future service
period. Under SFAS 146, costs to terminate a contract, such as a lease, are
recorded at the termination date or, for costs that will continue to be incurred
without economic benefit to the Company, when the Company ceases using the
rights conveyed by the contract. A liability for other restructuring costs is
recorded when incurred, generally when goods and services are received by the
Company. The adoption of SFAS 146 in 2003 had no material impact on the
Company's financial statements.
2003 2002 2001
--------- -------- --------
Restructuring costs $9 $15 $233
For the year ended December 31, 2003, the Company's restructuring costs
were incurred in connection with the settlement of a facility lease.
For the year ended December 31, 2002, the Company's restructuring costs
were incurred in connection with insolvency and liquidation procedures for its
German subsidiary. At December 31, 2002, accrued but unpaid restructuring costs
were $13.
For the year ended December 31, 2001, the Company's restructuring costs of
$233 arose in connection with employee terminations and closing the Paris
office. Of this amount, $183 related to severance obligations. At December 31,
2001, accrued but unpaid restructuring costs were $50, relating to the closing
of the Paris office, which were paid during the first and second quarters of
2002.
16
A rollforward of the restructuring accrual from December 31, 2000 is as
follows:
Total
Restructuring accrual as of December 31, 2000 $ 51
Additions 233
Payments (234)
----
Restructuring accrual as of December 31, 2001 $ 50
Additions 15
Payments (52)
----
Restructuring accrual as of December 31, 2002 $ 13
Additions 20
Payments (22)
Changes in estimate (11)
----
Restructuring accrual as of December 31, 2003 $ 0
Results of Operations
(In thousands)
The following is a summary of the Company's sources of revenue for each of
the listed periods:
2003 2002 2001
---------------- ---------------- ------------------
Sales
U.S. $-- $-- $9
Foreign -- -- --
-- -- $9
Service and Other
U.S. 113 -- --
Foreign -- -- --
113 -- --
Total Revenue $113 $-- $9
==== === ===
Year ended December 31, 2003
For the year ended December 31, 2003, the Company had revenue of
approximately $113 which consisted of $5,481 of gross billings to buyers less
payments to sellers of $5,368. The Company incurred an operating loss of
approximately $2,017 and a net loss of $1,830. Of the approximate, $2,007 of
Selling, General and Administrative expenses, approximately $880 related to the
revenue producing operations and the remainder as corporate overhead. The
Company incurred non-operating income of $187, which primarily included
approximately $160 of unclaimed bankruptcy checks.
17
Year ended December 31, 2002
For the year ended December 31, 2002, the Company had an operating loss of
approximately $2,283. Of this loss, $532 related to the Trust's activities and
$276 related to additional bad debt expense provisions. The remainder related to
the Company's other corporate expenses, including expenses related to its search
for a merger or acquisition partner.
Non-operating expense for the year ended December 31, 2002 was
approximately $243 and consisted of interest income of $25, imputed interest of
$49, and a foreign currency transaction loss of $275 primarily related to the
liability for the pension benefits and other post-employment obligations for
certain employees of the Company's German subsidiary. Also included was a loss
of $42, representing the equity in loss of the Partnership.
Year ended December 31, 2001
During the year ended December 31, 2001, the revenue of $9 was derived from
the operations of Corebyte, Inc., a subsidiary, whose operations were
significantly curtailed in the first quarter of 2001 and discontinued in the
third quarter.
Of the $3,097 of selling, general and administrative expenses, $337 related
to depreciation and other "non-cash" amortization, $262 related to the Trust's
activities and $212 was incurred in operations and functions which were
terminated during the year. The remainder related to the Company's search for a
merger or acquisition transaction and other corporate expenses.
As described above, the Company incurred $233 of costs in connection with
the Reorganization for the year ended December 31, 2001.
Non-operating expense for the year ended December 31 2001 was approximately
$472 and consisted of interest income of $248, imputed interest of $54, and a
foreign currency transaction gain of $136 primarily related to the German
subsidiary. Also included was a loss of $907, representing the equity in loss of
the Partnership.
Market Risk Sensitive Instruments
The Company's market risk was primarily limited to a pension liability and
other post-employment liabilities which remain with the German subsidiary. Thus,
the Company's operating results could have been affected by fluctuations in the
value of the U.S. dollar as compared to the German currency. As of December 31,
2002, the German subsidiary was in bankruptcy and no longer a part of the
consolidated Company.
18
Cautionary Statement Regarding Risks and Uncertainties that May Affect
Future Results
This Annual Report on Form 10-K contains forward-looking statements about
the business, financial condition and prospects of the Company. The actual
results of the Company could differ materially from those indicated by the
forward-looking statements because of various risks and uncertainties, including
without limitation, the risks associated with entering into a new line of
business, changes in product demand, the reliability of the internet, changes in
competition, economic conditions, new product development, changes in tax and
other governmental rules and regulations applicable to the Company, and other
risks indicated in the Company's filings with the Securities and Exchange
Commission. These risks and uncertainties are beyond the ability of the Company
to control, and in many cases, the Company cannot predict the risks and
uncertainties that could cause its actual results to differ materially from
those indicated by the forward-looking statements. When used in this Annual
Report on Form 10-K, the words "believes," "estimates," "plans," "expects," and
"anticipates" and similar expressions as they relate to the Company or its
management are intended to identify forward-looking statements.
ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk
None.
ITEM 8. Financial Statements and Supplementary Data.
19
INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page
Report of Marks Paneth & Shron LLP
Independent Auditors 21
Consolidated Financial Statements
Consolidated Statements of Operations
for the years ended December 31, 2003, 2002 and 2001 23
Consolidated Balance Sheets as of December 31, 2003 and 2002 25
Consolidated Statements of Cash Flows
for the years ended December 31, 2003 and 2002; 26
Consolidated Statements of Stockholders' Equity (Deficiency)
for the years ended December 31, 2003 and 2002 28
Notes to Consolidated Financial Statements 29
20
REPORT OF MARKS PANETH & SHRON LLP
INDEPENDENT AUDITORS
The Board of Directors
The CattleSale Company
We have audited the accompanying consolidated balance sheets of The CattleSale
Company (formerly known as Dynacore Holdings Corporation) and subsidiaries as of
December 31, 2003 and 2002, and the related consolidated statements of
operations, stockholders' equity (deficiency), and cash flows for each of the
three years in the period ended December 31, 2003. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audit.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatements. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of The
CattleSale Company and subsidiaries as of December 31, 2003 and 2002 and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended December 31, 2003, in conformity with accounting
principles generally accepted in the United States of America.
As discussed in Note 1 to the financial statements, effective January 1, 2002,
the Company adopted Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets."
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company incurred a net loss of
$1,830,000 during the year ended December 31, 2003. Also, the Company has
current assets of $154,000 while current liabilities are $675,000. In addition,
as described in Note 1 to the financial statements, the Company has incurred
additional losses since December 31, 2003 and will need cash to fund its
operations. Those conditions raise substantial doubt about the Company's ability
to continue as a going concern. The Company's plans and intentions are more
fully described in Note 1 to the financial statements. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
21
Our audits referred to above included the financial statement schedule listed in
the index at Item 15(a)(2) as of December 31, 2003 and 2002, and for each of the
three years in the period ended December 31, 2003. 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
April 6, 2004, except for
notes 10 and 16 as to which
the date is April 9, 2004.
22
CONSOLIDATED STATEMENTS OF OPERATIONS
The CattleSale Company and Subsidiaries
For the years ended December 31, 2003, 2002 and 2001 and the periods
(In thousands, except share and per share data)
2003 2002 2001
- ----------------------------------------------------------------------------------------
Revenue:
Sales $-- $-- $9
Service (net of $5,481 gross billings in 2003) 113 -- --
- ----------------------------------------------------------------------------------------
Total revenue 113 -- 9
Operating costs and expenses:
Selling, general and administrative 2,007 1,387 2,837
Patent Litigation Trust expenses 114 532 260
Impairment of Datapoint assets -- 349 --
Restructuring costs 9 15 233
- ----------------------------------------------------------------------------------------
Total operating costs and expenses 2,130 2,283 3,330
- ----------------------------------------------------------------------------------------
Operating income (loss) (2,017) (2,283) (3,321)
Non-operating income (expense):
Interest income 28 25 --
Interest expense (24) -- --
Equity in loss of limited partnership (2) (42) (907)
Other, net 185 (226) 435
- ----------------------------------------------------------------------------------------
Income (loss) before income taxes and
extraordinary credits and cumulative effect
of change in accounting principle (1,830) (2,526) (3,793)
Income taxes (benefit) -- -- --
- ----------------------------------------------------------------------------------------
Income (loss) before extraordinary credits
and cumulative effect of change in
accounting principle (1,830) (2,526) (3,793)
Extraordinary credits:
Deconsolidation of company subsidiary -- 3,165
Impairment of reorganization value in excess
of amounts allocable to identifiable assets -- (1,941) --
Cumulative effect of change in accounting
principle -- (988) --
- ----------------------------------------------------------------------------------------
Net income (loss) $(1,830) $(2,290) $(3,793)
=========================================================================================
23
CONSOLIDATED STATEMENTS OF OPERATIONS
The CattleSale Company and Subsidiaries
continued
2003 2002 2001
- ----------------------------------------------------------------------------------------------------------
Preferred stock dividends paid or accumulated $(556) $-- $--
---- --- ---
Net income (loss) applicable to common $(2,386) $(2,290) $(3,793)
======= ======== ========
Basic income (loss) per common share:
Income (loss) before extraordinary credit $(.13) $(.25) $(.38)
Cumulative effect of change in accounting
principle -- (.10) --
Deconsolidation of company subsidiary -- .32 --
Impairment of reorganization value in excess
of amounts allocable to identifiable assets -- (.20) --
-- ----- --
Net income (loss) per common share $(.13) $(.23) $(.38)
====== ====== ======
Diluted income (loss) per common share:
Income (loss) before extraordinary credit $(.13) $(.25) $(.38)
Cumulative effect of change in accounting
principle -- (.10) --
Deconsolidation of company subsidiary -- .32 --
Write off of Reorganization excess -- (.20) --
-- ----- --
Net income (loss) per common share $(.13) $(.23) $(.38)
====== ====== ======
Average common shares outstanding:
Basic 18,240,926 9,984,726 9,984,726
Diluted 18,240,926 9,984,726 9,984,726
See accompanying Notes to Consolidated Financial Statements.
24
CONSOLIDATED BALANCE SHEETS
The CattleSale Company and Subsidiaries
December 31, 2003 and 2002
(In thousands, except share data)
2003 2002
---------------------------
Assets
Current assets:
Cash and cash equivalents $30 $1,344
Investment in limited partnership -- 6
Accounts receivable, net 64 213
Prepaid expenses and other current assets 60 139
-- ---
Total current assets 154 1,702
Fixed assets, net 108 14
Other assets, net 137 110
Goodwill 708 --
--- --
$1,107 $1,826
====== ======
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $334 $88
Accrued expenses 232 207
Notes payable 109 --
--- --
Total current liabilities 675 295
Deferred rent -- 36
Deferred federal income tax 400 400
Commitments and contingencies
Stockholders' equity:
Series A Preferred stock, $0.01 par value. Shares authorized,
500,000; 250,000 shares issued and outstanding in 2003, none 2002
(liquidation preference $2,500,000) 2 --
Series B Preferred stock, $0.01 par value. Shares authorized,
4,000,000; 2,381,406 shares issued and outstanding in 2003, none 2002
(liquidation preference $23,814,060) 24 --
Common stock, $0.01 par value. Shares authorized 50,000,000;
shares issued and outstanding 20,353,700 in 2003 and 9,984,726 in 2002. 204 100
Paid in capital 8,026 7,389
Accumulated deficit (8,224) (6,394)
------- -------
Total stockholders' equity 32 1,095
-- -----
Total Liabilities and Stockholders' Equity $1,107 $1,826
====== ======
See accompanying Notes to Consolidated Financial Statements.
25
CONSOLIDATED STATEMENTS OF CASH FLOWS
The CattleSale Company and Subsidiaries
For the years ended December 31, 2003, 2002 and 2001
(In thousands)
2003 2002 2001
--------------------------------------
Cash flows from operating activities:
Net income (loss) $(1,830) $(2,290) $(3,793)
Adjustments to reconcile net income (loss) to net cash
provided from (used in) operating activities:
Depreciation and amortization 54 34 127
Amortization of debt discount 24 -- --
Expenses paid by issuance of stock warrants 65 -- --
Reorganized value in excess of amounts allocable to identifiable assets
Amortization -- -- 210
Favorable settlement/unclaimed bankruptcy checks -- -- 276
Impairment -- 1,944 --
Loss in equity of investee 2 42 907
Provision for losses on accounts receivable -- 276 72
Cumulative change in accounting principle -- 988 --
Deconsolidation of German subsidiary -- (3,165) --
Foreign currency (gains) losses related to German Pension Plan -- 312 --
Changes in assets and liabilities:
(Increase) Decrease in prepaids 40 77 --
(Increase) Decrease in receivables 189 50 51
Increase (Decrease) in accounts payable and accrued expenses 103 (65) (1,094)
Decrease in other liabilities and deferred credits -- -- --
Other, net 39 (27) 30
-- ---- --
Net cash provided from (used in) operating activities (1,314) (1,824) (3,214)
------- ------- -------
Cash flows from investing activities:
Payments for fixed assets (18) -- --
Proceeds from sale of fixed assets -- 9 24
Acquisition costs (150) -- --
Proceeds from life insurance policies 39 -- --
Investment in limited partnership 4 545 (1,500)
- --- -------
Net cash provided from (used in) investing activities (125) 554 (1,476)
----- --- -------
26
CONSOLIDATED STATEMENTS OF CASH FLOWS
The CattleSale Company and Subsidiaries
continued
2003 2002 2001
--------------------------------------
Cash flows from financing activities:
Proceeds from borrowings 85 -- --
Sale of common stock 40 -- --
Net cash provided from (used in) financing activities 125 -- --
Net increase (decrease) in cash and cash equivalents (1,314) (1,270) (4,690)
Cash and cash equivalents at beginning of period 1,344 2,614 7,304
----- ----- -----
Cash and cash equivalents at end of period $30 $1,344 $2,614
=== ====== ======
Cash payments for:
Interest $-- $-- $--
Income taxes -- -- --
See accompanying Notes to Consolidated Financial Statements.
The changes in operating assets and liabilities resulting from the
acquisition transaction are not considered in determining net cash provided from
operating activities.
27
CONSOLIDATED STATEMENTS OF STOCKHOLDERS'EQUITY (DEFICIENCY)
The CattleSale Company and Subsidiaries
For the years ended December 31, 2003, 2002 and 2001
(In thousands)
Common Stock Preferred Stock Paid in Retained Total
# shares Par Value # Shares Par Value Capital Deficit
Balance at December 31, 2000 10,000,000 $100 0 $ - $7,400 $(311) $7,189
Net loss - - - - - (3,793) (3,793)
Treasury stock (15,274) - - - - - -
Common stock unclaimed - - - - (11) - (11)
- ------------------------------ --------------- -------------- ------------ ----------- ------------ ------------- -----------
Balance at December 31, 2001 9,984,726 $100 0 $ - $7,389 $ (4,104) $3,385
Net loss - - - - - (2,290) (2,290)
- ------------------------------ --------------- -------------- ------------ ----------- ------------ ------------- -----------
Balance at December 31, 2002 9,984,726 $100 0 $ - $7,389 $ (6,394) $1,095
Acquisition 9,593,168 96 2,700,000 27 539 - 662
Preferred Stock Conversion 497,306 5 (68,594) (1) (4) - -
Warrants issued - - - - 65 - 65
Stock issued 278,500 3 - - 37 - 40
Net loss - - - - - (1,830) (1,830)
- ------------------------------ --------------- -------------- ------------ ----------- ------------ ------------- -----------
Balance at December 31, 2003 20,353,700 $204 2,631,406 $26 $8,026 $(8,224) $ 32
See accompanying Notes to Consolidated Financial Statements
28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The CattleSale Company and
Subsidiaries For the years ended December 31, 2003 and 2002 and the periods
(Dollars in thousands, except share data)
Since February 25, 2003, the Company, through the Subsidiaries, has been in
the business of providing auction trading services to producers of beef and
dairy cattle which is accessible by the internet at the website
www.cattlesale.com. During the period of February 25, 2003 through December 31,
2003, the Company's cattle trading activity was conducted primarily in the
Pacific Northwest and Northern Great Plains' states. Also during this period,
three buyers accounted for approximately 24%, 21% and 12%, respectively, of the
Company's gross billings.
1. Summary of Significant Accounting Policies
Liquidity and Going Concern
The Company, then known as Datapoint Corporation, filed for reorganization
under Chapter 11 of the United States Bankruptcy Code on May 3, 2000 (the
"Reorganization"). Prior thereto, it had conducted a hardware and software
product and services business in the United States and Europe (the "European
Operations"). The Company was the owner of United States Patents 5,008,879 and
5,077,732 (the "Patents") and had commenced patent infringement litigation in
the United States District Courts for the Eastern and Southern Districts of New
York (the "Patent Litigation").
On December 5, 2000, the United States Bankruptcy Court for the District of
Delaware (the "Court") approved the Company's Amended Plan of Reorganization
(the "Plan"). Pursuant to the Plan, on June 30, 2000, the Company's European
Operations were sold to Datapoint Newco 1 Limited, a United Kingdom company
("DNL") and, on June 18, 2000, the Dynacore Patent Litigation Trust (the
"Trust") was formed to prosecute the Patent Litigation on behalf of the holders
of units of beneficial interest in the Trust (the "Beneficial Interests").
Pursuant to the Plan, the Company is obligated to loan the Trust up to $1
million with interest at 12% per year (the "Trust Loan"). As of December 31,
2003, $909 had been advanced leaving an additional commitment of $91.
On February 25, 2003, the Company acquired all of the limited liability
company interests (the "Interests") in CS Livestock Commissions Co. LLC and CS
Auction Production Co. LLC (collectively, the "Subsidiaries"). The Company,
through the Subsidiaries, is now conducting a cattle auction and trading
services business on the internet.
Prior to its acquisition of the Subsidiaries in February 2003, a portion of
the cash proceeds from the sale of the European Operations constituted
substantially all of the Company's assets. These proceeds were held in a money
market mutual fund pending use in an operating business. As of December 31,
2003, the Company had cash and cash equivalents of approximately $30 thousand.
29
From June 2000 through December 31, 2002, the Company had no significant
revenue or cash producing activities and was actively seeking a merger or
acquisition partner. In order to maximize its liquidity so it could satisfy its
obligation to the Trust of $1 million and retain sufficient working capital cash
to attract a potential merger or acquisition partner, the Company implemented
measures to conserve cash.
In August 2002, the then three senior officers of the Company agreed to
receive Beneficial Interests in lieu of cash as compensation for their services
during the period from June 30, 2002 through December 18, 2002. This resulted in
cash savings to the Company of $209,981. Likewise, the Company's then four
non-employee directors agreed to receive Beneficial Interests in lieu of their
quarterly director fees through the end of the calendar year, resulting in cash
savings to the Company of $30,000.
In addition, the Company exercised an early cancellation option in the
lease for its former European headquarters in Paris, France and downsized its
San Antonio, Texas headquarters. On April 9, 2004, the Company, along with
co-tenants Canal Capital Corporation and Plaza Securities Company LP, entered
into a settlement agreement with the landlord of its New York office lease. The
settlement agreement provides for, among other things, termination of the lease
in its entirety and full release of all of the parties. The release is
contingent upon the forfeiture of the Company's and co-tenants' security
deposits and the payment of two months rent, full payment of which must be
received by the landlord not later than April 30, 2004. While the Company
intends to make such payment, if the payment is not received, the landlord
maintains full rights to sue the Company for damages with respect to the Lease.
The terms of the original lease provided for lease termination in October, 2009
and the Company's annual lease obligation was approximately $400,000.
The Company will not have sufficient cash resources to satisfy its cash
requirements for 2004, including the payment of its December 31, 2003
obligations, without an infusion of additional cash. In November and December of
2003, the Company received short term financing of $125,000 to partially fund
its operations. These notes matured in January and February of 2004, and the
Company is currently in default on these notes. In addition, subsequent to year
end, an additional $125,000 was received as a private placement investment, also
to partially fund its operations. The Company has been primarily operating
through one agent located in the Northwestern region of the United States, who
was primarily responsible for generating most of the cattle transactions in
2003. The selling season for that region is generally in the summer and fall
with deliveries occurring in the fall and winter. Consequently, subsequent to
year end, the source of cash inflows to the Company has primarily been from the
private investment, which is not sufficient to meet the Company's operations
cash requirements. The Company has been seeking to expand its agent network to
include more coverage throughout the United States. In addition, the Company is
exploring several opportunities to provide more permanent capital cash
infusions. While the Company is simultaneously seeking additional "bridge"
investments to fund its operations until more longer term capital investments
are received, if at all, there can be no assurance that additional short term
and/or longer term financing will be received and that the Company will be able
to fulfill its obligations or continue operations.
30
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its majority-owned subsidiaries, all of which were wholly-owned except
Corebyte, Inc., which was 80% owned and the Trust, which was 56.5% owned as of
December 31, 2000 and 2001. In August, 2002, the Company distributed
approximately 12% of outstanding beneficial interests to three senior officers
and four non-employee directors of the Company in lieu of cash compensation for
their services for the period June 30, 2002 through December 18, 2002. The
remainder of the Company's Beneficial Interests was distributed as a dividend to
its stockholders of record on December 20, 2002 on the basis of .44569 of a
Beneficial Interest for each share of Common Stock (with all fractional
interests eliminated). As a result of the accumulation of the fractional
Beneficial Interests, the Company retained ownership of 1,469 of the 9,977,690
Beneficial Interests outstanding as of March 13, 2003. Intercompany accounts and
transactions have been eliminated upon consolidation.
On October 31, 2002, the Company's German subsidiary filed for bankruptcy
in the German courts. While the ultimate outcome of this action is unknown, the
Company does not believe that it will have a material impact upon the Company's
cash resources. As of that date, the Company ceased to consolidate the German
subsidiary into its consolidated financial statements. Accordingly, cash of $14
and a pension liability of $3,179 were removed from the financial statements as
of that date. The resulting $3,165 gain was classified as extraordinary.
Cash and Cash Equivalents
Cash equivalents include short-term, highly-liquid money market accounts or
debt investments with overnight maturities and, as a result, the carrying value
approximates fair value because of the short maturity of those instruments.
Fixed Assets
Fixed assets are carried at cost and depreciated for financial purposes
using straight-line and accelerated methods at rates based on the economic lives
of the assets or the related lease terms for leasehold improvements:
Leasehold improvements 3-5 years
Machinery, equipment, furniture and fixtures 3-10 years
Major improvements that add to the productive capacity or extend the life
of an asset are capitalized while repairs and maintenance are charged to expense
as incurred.
Risk Concentration
Financial instruments that potentially subject the Company to
concentrations of credit risk consist of cash and cash equivalents.
31
At December 31, 2002, approximately $1,301 of the Company's cash
equivalents was invested in a money market mutual fund. The remainder of the
Company's cash was in operational checking accounts.
Revenue Recognition
Between December 18, 2000 and February 25, 2003, the Company was involved
in pursuing its patent rights through the Trust and in seeking a merger or
acquisition partner, while its Corebyte subsidiary derived its revenue from the
sale of internet based application software.
Effective February 25, 2003, the Company provides auction trading services
through the internet to producers of beef and dairy cattle. The Company
typically receives a consignment fee from the producer at the time the producer
enters into a listing agreement with the Company. If the listing results in a
sale, this fee is refunded to the seller as a credit to the commission. If no
sale occurs, the Company retains the consignment fee. Commissions are based on a
percentage of the selling price of the cattle, subject to a minimum per head
charge. Commission revenue is recognized upon delivery of the cattle to the
buyer.
Commissions, paid by the Company to its regional representatives, typically
60% to 80% of the Company's commission revenue, are recorded as selling costs
when the Company records the related revenue.
The Company generally pays the seller prior to its collection from the
buyer and thereby has credit risk for amounts greatly in excess of commission
revenue. Although not contractually bound, the Company also may, in certain
circumstances, absorb losses from buyer rejection.
The previous management of the Subsidiaries before their acquisition by the
Company had taken the position that the billings to the sellers should be
reported as the Subsidiaries' revenue, the amounts paid to the sellers reported
as the cost of sales and the net retained by the Subsidiaries reported as gross
profit.
The Company continued previous management's policy in preparing its interim
financial statements for the periods ended March 31, June 30 and September 30,
2003. After review of the Subsidiaries' current method of operations and the
structuring of its transactions, management has concluded that reporting the
Company's net commission as revenue is more appropriate.
Income Taxes
The Company accounts for income taxes under the liability method in
accordance with FASB Statement No. 109.
32
Net Income (Loss) per Common Share
The following tables depict the computation of basic and diluted net income
(loss) per common share. As a result of the Common Stock which was issued on
December 18, 2000, all share data has been adjusted to reflect its issuance at
the rate of .225177 shares of Common Stock for each share of old common stock.
2003 2002 2001
---- ---- ----
Per Per Per
Loss Shares Share Loss Shares Share Loss Shares Share
Loss before extraordinary
credits and change in accounting
principle $(1,830) $(2,526) $(3,793)
Preferred stock dividend
Accumulated (556) -- --
Cumulative effect of change in
accounting principle -- (988) --
Extraordinary credits:
Deconsolidation of company
subsidiary -- 3,165 --
Write off of Reorganization
excess -- (1,941) --
-- ------- --
Basic and Diluted $(2,386) 18,241 $(0.13) $(2,290) 9,985 $(0.23) $(3,793) 9,985 $(0.38)
The per share computations for the years ended December 31, 2003, 2002 and
2001 exclude the following shares subject to stock options because their effect
would have been antidilutive:
2003 2002 2001
---- ---- ----
Stock options 1200 750 750
Warrants 450 -- --
Goodwill and Other Intangible Assets
Statement of Financial Accounting Standards No. 142 - Goodwill and Other
Intangible Assets ("SFAS 142") was applicable to the Company beginning in 2002.
SFAS 142 prescribes a new methodology for assessing the impairment of goodwill
which, for purposes of SFAS 142, includes the reorganization value in excess of
amounts allocable to identifiable assets ("RVE"). Management believed that there
was no economic impairment of RVE and consequently did not reduce RVE under the
accounting standards applicable to 2001. SFAS 142, however, requires the value
of goodwill be assessed using market conditions. This principally requires
reference to the Company's stock price. The Company has no subsidiaries or
33
divisions that meet the definition of a "reporting unit" as set forth in SFAS
142. Therefore, the impairment test must be applied on a Company-wide basis. The
stockholders' equity at the beginning of 2002 exceeded the market capitalization
of the Company by $988, necessitating a noncash impairment charge of that
amount. This charge has been reflected as a cumulative effect of a change in
accounting principle in the Consolidated Statement of Operations for the year
ended December 31, 2002.
Had SFAS 142 been in effect for the year ended December 31, 2001, the
Company's net loss for that year would have been $4,571, $778 more than the
reported $3,793.
At December 31, 2002, stockholders' equity, not including RVE, exceeded the
Company's market capitalization. This necessitated an impairment charge for the
remaining RVE of $1,941. Had the pension liability of the Company's German
subsidiary not been eliminated by the deconsolidation resulting from the
subsidiary's bankruptcy, the impairment charge would not have been necessary.
The RVE arose because of the existence of the pension liability, for which there
was, at the time, a significant expectation that the Company would eventually
not be liable. Because of the linkage of the RVE and the German pension
liability, both at its inception and its impairment, the impairment of the RVE
was classified as an extraordinary charge to correspond to the extraordinary
credit recorded for the deconsolidation of the German subsidiary.
At December 31, 2003, the Company's market capitalization greatly exceeded,
not only stockholders' equity but also total assets. Management consequently
concluded that goodwill was not impaired as of December 31, 2003. As discussed
in Liquidity and Going Concern" above, there is substantial doubt about the
ability of the Company to obtain sufficient funding to continue its operations.
Even if it does continue its operations, there is a significant chance that the
operations will not become profitable. Consequently, there is a significant
chance that a goodwill impairment could occur in 2004 or afterward.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
2. Sale of European Operations
On April 19, 2000, the Company entered into an agreement with DNL for the
sale of the European Operations. The agreement contemplated, among other things,
that the Company would file for reorganization pursuant to Chapter 11 and that
the sale would be subject to the approval of the Court.
The Company filed for reorganization on May 3, 2000. On June 15, 2000, the
Court approved the sale which was consummated on June 30, 2000. The adjusted
purchase price was $45.125 million.
As a result of the sale, the Company recorded a gain of approximately $52.5
million during the period ended December 18, 2000. Included in this amount were
transaction costs and professional fees relating to both the sale and the
bankruptcy proceeding described in Note 3 of approximately $1.4 million, as well
as $1.2 million representing the settlement of Officers Administrative Claims
pursuant to the Plan.
34
3. Reorganization Plan
Reorganization Under Chapter 11
On May 3, 2000, the Company filed a petition for relief under Chapter 11 as
a result of defaults on certain semi-annual interest payments, recurring
operating losses and cash flow problems. Under Chapter 11, substantially all
pre-petition liabilities of debtors are subject to settlement under a plan of
reorganization. The consummation of a plan of reorganization is dependent upon
the satisfaction of numerous conditions, including, among other things, the
acceptance by several classes of interests and confirmation by the United States
Bankruptcy Court.
On December 5, 2000, the Court approved the Company's Plan and, on December
18, 2000, the Trust was formed, the rights to the Patent Litigation were
transferred to it and all of the then existing debt and equity in the Company
was cancelled.
The sum of $34.8 million, a portion of the proceeds from the sale of the
European Operations, was distributed to Debenture holders and the Company's
other unsecured creditors.
Ten million shares of common stock, par value $.01 per share, in the
reorganized corporation (the "Common Stock"), as well as ten million beneficial
interests in the Trust (the "Beneficial Interests"), were issued, as follows:
(i) Debenture holders and the Company's other unsecured creditors received
25% of the shares of Common Stock and 40% of the Beneficial Interests;
(ii) Holders of the Predecessor's Company's preferred stock, par value
$1.00 per share, received 23.5% of the shares of the Common Stock and 3.5% of
the Beneficial Interests;
(iii) Holders of the Predecessor's Company's common stock, par value $.25
per share, received 41.5% of the shares of Common Stock;
(iv) Members of the Company's management received 10% of the shares of
Common Stock; and
(v) The Company received the remaining 56.5% of the Beneficial Interests.
35
For the year ended December 31, 2001, the Trust was accounted for as a
consolidated subsidiary of the Company. As such, the amount of the Trust Loan
was eliminated in consolidation for the year ended December 31, 2001 and Trust
expenses of $262 were included in the Company's Consolidated Statements of
Operations. None of the Trust expenses were allocated to the 43.5% minority
interest because the minority interest had no obligation to fund cumulative
losses of the Trust. Future income of the Trust, if any, will be paid entirely
to the Company until the Trust Loan and accrued interest has been fully
recovered.
In August 2002, the Company transferred approximately 12% of the
outstanding Beneficial Interests to certain of its officers and directors in
lieu of cash compensation for their services for the period from June 30, 2002
through December 18, 2002.
On December 18, 2002, the Company declared a dividend payable to its
stockholders of record on December 20, 2002. The dividend was payable in the
remainder of the Company's Beneficial Interests on the basis of .44569 of a
Beneficial Interest for each share of Common Stock (with all fractional
interests eliminated). As a result of the accumulation of the fractional
Beneficial Interests, the Company retained ownership 1,469 of the 9,977,690
Beneficial Interests outstanding as of March 13, 2003.
As of December 31, 2003, the $909 Trust Loan was classified as a
receivable. The probability of collection was dependent upon the success or
favorable settlements of the Patent Litigation. On February 11, 2003, the
defendants motion for summary judgment was granted. In view of the summary
judgment, an allowance for the full amount of the Trust Loan was recorded; the
Trust Loan and accrued interest are fully reserved and carried on the balance
sheet at $0. granted The Trust appealed this decision and lost the appeal on
March 31, 2004. As a result of the loss of the appeal, the amounts will be
written-off in 2004.
As a consequence of these ownership changes, the Company continued to
account for the Trust as a consolidated subsidiary until the transfer of
Beneficial Interests to the officers and directors in August 2002. At that
point, the Company began accounting for the Trust as an equity method investee.
Following the December 18, 2002 dividend of the Beneficial Interests, the
Company accounted for its advances to the Trust as loans to another entity. As
amounts were loaned or required to be loaned for costs incurred, an immediate
bad debt loss was recorded for Trust expenses. The practical result was that for
all times during 2003 and 2004 the Company recorded Trust expenses as its own.
The total amount of $532 is shown as one line item labeled Patent Litigation
Trust expenses.
Fresh Start Reporting
Under the provision of Statement of Position (SOP) 90-7, "Financial
Reporting by Entities in Reorganization under the Bankruptcy Code," issued in
November 1990 by the American Institute of Certified Public Accountants, the
Company prepared its consolidated pro forma balance sheet as of December 18,
2000 on the basis of "fresh start" reporting since the reorganization value, as
defined, was less than the total of all post-petition liabilities and
pre-petition claims, and holders of voting shares immediately before
confirmation of the Plan received less than fifty percent (50%) of the voting
36
shares of the emerging entity. Under this reporting basis, all assets and
liabilities were restated to reflect the reorganization value of the reorganized
entity, which approximates its fair value at the date of reorganization. In
addition, the accumulated deficit of the Company was eliminated and its capital
structure was recast in conformity with the Plan. As such, the consolidated pro
forma balance sheet as of December 18, 2000 represented that of a successor
company, which, in effect, is a new entity with assets, liabilities and a
capital structure having carrying values not comparable with prior periods and
with no beginning retained earnings or deficit.
The Company estimated the fair value of the reorganized entity based upon
the issuance of ten million shares of Common Stock at a value of $.01 per share
pursuant to the approved Plan. While the estimated reorganization value of the
Company was primarily allocated to specific asset categories pursuant to Fresh
Start Reporting, the effects were subject to further refinement or adjustment.
Current assets were recorded at their book value, which the Company believes
approximated fair value. Equipment and other fixed assets were recorded at their
fair value as estimated by management after considering replacement cost or
potential sales value. Intellectual property was revalued as estimated by
management after considering its remaining life.
For Fresh Start reporting purposes, the Corebyte software was valued at
zero. After the revaluation of the reorganized Company was completed, an
intangible asset of $3.8 million reflecting the reorganization value in excess
of identifiable assets was established, which was being amortized on a
straight-line basis over 15 years. Subsequently, during the first quarter ended
March 31, 2001, a favorable settlement of certain contested bankruptcy claims
existing at the Fresh Start date resulted in a gain of $140 which was applied
directly to the intangible asset. In addition, the Company obtained
clarification of certain issues relating to its German subsidiary's obligations
for the payment of disability benefits and related insurance coverage for former
employees. As a result, management reversed a reserve of $350 that had been
established at the December 18, 2000 fresh start date. The reduction of this
estimated liability was applied directly to the intangible asset in the fourth
quarter of 2001. Also during the fourth quarter of 2001, $135 representing
unclaimed bankruptcy checks and Common Sock was likewise applied directly to the
intangible asset. At December 31, 2001, the intangible asset was $3,150 less
accumulated amortization of $218 resulting in a net balance of $2,932. The
estimated $7,500 reorganization value of the Company exceeded the identifiable
net assets primarily because of the pension and other post-employment
obligations of the German subsidiary, which are not obligations of the parent
Company, except in substance, to the extent of a percentage of certain future
revenues, if any, earned in certain European countries.
4. Investment in Limited Partnership
On May 1, 2001, the Company invested $1,500 in a limited partnership (the
"Partnership") whose general partner was an affiliate of certain members of the
Company's management. All management and incentive fees associated with the
Company's investment in the Partnership were expressly waived. The Partnership's
primary purpose was to invest in a company in the natural resource industry. The
Partnership's holdings in that company were liquidated in May 2002. At that
time, the Company owned approximately 55% of the Partnership and its share of
the Partnership's capital was approximately $551, of which $545 was returned in
June 2002. The Company's investment in the Partnership was liquidated in the
37
third quarter of 2003 and a $4 distribution was received. The Partnership
accounted for its investments at fair value and changes in fair value were
reflected in the its net income for the period. The Company carried its
investment in the Partnership on the equity method. Under the equity method, the
Company's allocable share of the Partnership's earnings and losses was included
in the determination of the Company's net income. The Company's approximate
share of the Partnership's loss for the years ended December 31, 2003, 2002 and
2001 was $2, $42 and $907, respectively, and is included in non-operating
income/(expense) on the statement of operations.
5. Restructuring Costs
During the periods listed below, the Company incurred restructuring costs,
as shown, in connection with its Reorganization. Through the end of 2002
restructuring charges relating to payroll costs were not recorded until specific
employees are determined (and notified of termination) by management in
accordance with the Company's overall restructuring plan. Other restructuring
costs were not recorded until management has committed to an exit plan and all
significant actions to be taken have been identified and significant changes to
the plan are not likely.
Subsequent to December 31, 2002, the Company began to apply the provisions
of Statement of Financial Accounting Standards No. 146 - Accounting for Costs
Associated with Exit of Disposal Activities ("SFAS 146"), to the recognition of
restructuring charges. Under SFAS 146, restructuring charges relating to payroll
costs are not recorded until management commits to a plan of termination, the
plan identifies the number, job classifications or functions, and locations of
employees to be terminated, the terms of the termination benefits have been
determined and it is unlikely that there will significant changes to the plan.
Even then, the fair value of the liability is only recorded if the employees are
not required to render service for their benefits beyond a "minimum retention
period", otherwise the liability is recorded ratably over the future service
period. Under SFAS 146, costs to terminate a contract, such as a lease, are
recorded at the termination date or, for costs that will continue to be incurred
without economic benefit to the Company, when the Company ceases using the
rights conveyed by the contract. A liability for other restructuring costs is
recorded when incurred, generally when goods and services are received by the
Company. The adoption of SFAS 146 in 2003 had no material impact on the
Company's financial statements.
2003 2002 2001
--------- --------- --------
Restructuring costs $9 $15 $233
For the year ended December 31, 2003, the Company's restructuring costs
were incurred in connection with the settlement of a facility lease.
For the year ended December 31, 2002, the Company's restructuring costs
related to insolvency and liquidation procedures for its German subsidiary. At
December 31, 2002, accrued but unpaid restructuring costs were $13.
38
For the year ended December 31, 2001, the Company's restructuring costs of
$233 arose in connection with severance obligations ($183) and closing the Paris
office. At December 31, 2001, accrued but unpaid office closing restructuring
costs were $50, which were paid during the first and second quarters of 2002.
Restructuring accrual as of December 31, 2000 $51
Additions 233
Payments (234)
Restructuring accrual as of December 31, 2001 $50
Additions 15
Payments (52)
Restructuring accrual as of December 31, 2002 $13
Additions 20
Payments (22)
Change in estimate (11)
----
Restructuring accrual as of December 31, 2003 $0
6. Non-operating Income (Expense)
2003 2002 2001
Interest earned $3 $25 $248
Imputed interest 25 49 54
Interest expense (24) -- --
Foreign currency gains (losses) -- (275) 136
Equity in loss of limited partnership (2) (42) (907)
Unclaimed bankruptcy checks 160 -- --
Other 25 -- (3)
-- -- ---
$187 $(243) $(472)
==== ====== ======
7. Income Taxes
The provision for taxes consisted of the following:
2003 2002 2001
Income (loss) before income taxes and $(1,830) $(2,526) $(3,793)
extraordinary credit
Current $-- $-- $--
Deferred -- -- --
-- -- --
Total provision $-- $-- $--
=== === ===
39
2003 2002 2001
Income taxes at statutory rate $(640) $(884) $(1,327)
Increase in taxes resulting from:
Benefit of U.S. tax loss not 638 883 1,320
recognized
Other, net 2 1 7
- - -
Provision for income taxes $-- $-- $--
=== === ===
The primary components of deferred income tax assets and liabilities are as
follows:
2003 2002
---- ----
Deferred income tax assets:
Loss and credit carryforwards $51,185 $50,672
Other 345 304
--- ---
51,530 50,976
Less Valuation allowance 51,530 50,976
------ ------
-- --
Deferred income tax liabilities:
Accrued retirement costs (400) (400)
----- -----
Net deferred income tax asset(liability) $(400) $(400)
====== ======
The valuation allowance increased by $554 in 2003 and decreased by $11,443
in 2002.
Despite the current estimate, it is possible that some of the deferred tax
assets will be realized in the future. Should this happen, the valuation
allowance will be reduced.
At December 31, 2003, the net deferred income tax liability of $400 was
presented in the balance sheet, based on tax jurisdiction, as other liabilities
of $400. Realization of the Company's deferred tax assets is dependent on
generating sufficient taxable income in certain taxing jurisdictions prior to
the expiration of loss and credit carryforwards. The Company intends to utilize
qualified tax planning strategies, if necessary, to utilize deferred tax assets
where valuation allowances have not been provided. Management believes that,
more likely than not, deferred tax assets will not be fully realized in the
future and have therefore provided a valuation allowance to reserve for those
deferred tax assets not considered realizable.
At December 31, 2003, the Company had tax operating loss carryforwards for
U.S. federal tax purposes approximating $117,000. Of this amount, $14,000
expires in 2004, $15,000 expires in 2005 and $88,000 expires in various amounts
through year 2024. U.S. federal long-term capital loss carryforwards of $29,000
expire in various amounts beginning in 2004. Utilization of the ordinary and
capital tax loss carryforwards is subject to limitation in the event of a more
than 50% change in ownership of the Company. While management believes that no
such change has occurred, management does contemplate that future capital
infusions probably will trigger the 50% change of ownership and thus limit
future utilization of the tax loss carryforward.
40
The Company had unused alternative minimum tax credits for income tax
purposes at December 31, 2002 of approximately $170 which may be used to offset
the Company's future tax liabilities. Utilization of these credits is subject to
limitation in the event of a more than 50% change in ownership of the Company.
8. Accounts Receivable
The Company has a receivable from Vugate, Inc. ("Vugate"), the buyer of its
videoconferencing business. This receivable consists of a note with a remaining
face amount of $190 that is payable out of certain Vugate cash flows. This note
is carried on the balance sheet at $158, $54 of which is classified as a current
asset, which represents the present value of the estimated payments at a
discount rate of 12.5% per annum. The Company imputed interest income at 12.5%
per annum on the adjusted balance on a prospective basis beginning in the first
quarter of 2002. While the Company currently believes that the receivable is
fully collectible, it is reasonably possible that the note will be collected at
a slower or faster rate than estimated or that a portion of the note will turn
out to be uncollectible. An additional $10 is receivable from other parties.
As of December 31, 2003, the Company had a $909 receivable from the Trust
plus $167 of accrued interest. The collection of the receivable is solely
dependent upon the success or favorable settlement of the Patent Litigation. In
view of the summary judgment granted to the defendants in the Patent Litigation
on February 11, 2003, an allowance for the full amount of the receivable was
recorded as of December 31, 2002. As a result of the loss of the appeal, the
amounts will be written off in 2004. The Company has not recorded the accrued
interest as income.
On September 23, 2002, DNL, with whom the Company has a royalty licensing
arrangement, convened a meeting of its creditors to pass a resolution for its
voluntary winding-up. At that time, the Company had a royalty receivable from
DNL of approximately $16, which was net of an allowance of $71 for a billing
dispute. Upon notification of the pending liquidation of DNL, the Company wrote
off the receivable.
In addition, included in the Company's long term assets was approximately
$333 representing the present value of the expected royalty payments from DNL
through the termination of the licensing arrangement. During the quarter ended
September 30, 2002, an impairment adjustment for the full $333 was recorded as a
result of the pending liquidation.
Because of the lack of specific payment terms and comparable instruments,
it is not practicable to estimate the fair value of the note receivable from
Vugate except that the comparatively low market interest rates as of December
31, 2003 and 2002 make it likely that the fair value exceeds the carrying
amount.
41
It is also not practicable to estimate the fair value of the loan
receivable from the Trust. Because there is a remote possibility of recovery of
some or all of the principal as of each balance sheet date, the fair value does
exceed the zero carrying value.
9. Fixed Assets
Accumulated
Cost Depreciation Net
December 31, 2003
Property, plant and equipment: $148 $ 40 $108
Leasehold improvements -- -- --
Machinery, equipment, furniture and fixtures 28 28 --
-- -- --
$176 $68 $108
==== === ====
Accumulated
Cost Depreciation Net
December 31, 2002
Property, plant and equipment:
Leasehold improvements $ 4 $ 4 $--
Machinery, equipment, furniture and fixtures 24 10 14
-- -- --
$28 $14 $14
=== === ===
10. Lease Commitments
The Company leased certain facilities and equipment under various leases.
Substantially all of the leases were classified as operating leases. Rental
expense for operating leases is was follows:
2003 $233
2002 $279
2001 $256
Most of the leases contained renewal options for various periods and
required the Company to maintain the property. Certain leases contained
provisions for periodic rate adjustments to reflect Consumer Price Index
changes. At December 31, 2003, future minimum lease payments for all
noncancelable leases, assuming the completion of the settlement described in the
next paragraph, totaled $0.
On April 9, 2004, the Company, along with co-tenants Canal Capital
Corporation and Plaza Securities Company LP, entered into a settlement agreement
with the landlord of its New York office lease. The settlement agreement
provides for, among other things, termination of the lease in its entirety and
full release of all of the parties. The release is contingent upon the
forfeiture of the Company's and co-tenants' security deposits and the payment of
two months rent, full payment of which must be received by the landlord not
42
later than April 30, 2004. While the Company intends to make such payment, if
the payment is not received, the landlord maintains full rights to sue the
company for damages with respect to the Lease. The terms of the original lease
provided for lease termination in October, 2009 and the Company's annual lease
obligation was approximately $400,000. If the settlement is not effected by the
final payment, the Company may have to record the present value of part or all
of the obligation as a liability.
11. Payables to Bank
At December 31, 2003, no lines of credit or other credit facilities were in
place with any banks or financial institutions.
12. Accrued Expenses
2003 2002
---- ----
Salaries, commissions, bonuses and other benefits $81 $50
Accrued professional fees 133 136
Other 18 21
-- --
$232 $207
==== ====
13. Stock Option Plans
All of the Company's then outstanding stock options and stock option plans
were cancelled as of December 18, 2000 upon the adoption of the Plan.
As part of the Plan, the new non-employee members of the Company's Board of
Directors were each granted options to purchase 50,000 shares of Common Stock
and Messrs. Edelman, Agranoff and Krumb were granted options to purchase
300,000, 175,000 and 75,000 shares of Common Stock, respectively. The options,
which were not issued pursuant to a stock option plan, vested immediately, have
an exercise price of $.75 and a ten year term.
Options to purchase 734,505 shares of common stock outstanding under the
Company's 1997 Employee Stock Option Plan were cancelled under the Plan, as were
options under the Company's 1996 Director Stock Option Plan.
Employee Stock Option Plans Director Stock Option Plans
-------------------------------------------- ----------------------------------------
Price Range Number of Shares Price Range Number of Shares
--------------------------- -------------------------
of Shares Under Available of Shares Under Option Available for
Under Option Option for Option Under Plan Option
---------------- ------------ -------------- -------------- ------------- ------------
Outstanding at December 31, 2000 $.75 550,000 950,000 $.75 200,000 --
==
Granted -- -- -- -- -- --
Canceled -- -- -- -- -- --
-- -- -- -- -- --
Outstanding at December 31, 2001 $.75 550,000 950,000 $.75 200,000 --
==
Granted -- -- -- -- -- --
Canceled -- -- -- -- -- --
-- -- -- -- -- --
Outstanding at December 31, 2002* $.75 550,000 950,000 $.75 200,000 --
==
Granted .20 450,000 (450,000) -- -- --
Canceled -- -- -- -- -- --
-- -- -- -- -- --
Outstanding at December 31, 2003* .20 -.75 1,000,000 500,000 $.75 200,000 --
====== ========= ======= ==== ======= ==
*Balance reflects the officers contractual obligations as described above.
43
The FASB issued Statement No. 123, "Accounting for Stock-Based
Compensation", ("SFAS No. 123") which requires either recognition or disclosure
of a charge for the value of stock options granted. The Company adopted this
statement in 1997 and has elected to continue to apply the provisions of
Accounting Principles Board Opinion No. 25 and make the footnote disclosures
required by SFAS No. 123. Accordingly, no compensation cost was recognized for
the stock option plans.
(In thousands, except per share amounts)
2003 2002 2001
---- ---- ----
Net income (loss) - As reported $(1,830) $(2,290) $(3,793)
-(1) (21) (--) (131)
- Pro forma (1,851) (2,290) (3,924)
Basic earnings (loss) per share - As reported $(.13) $(.23) $(.38)
- Pro forma (.13) (.23) (.39)
(1) Stock based compensation if the fair value method had been used.
The fair value of each option grant was estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted average
assumptions. No options were granted during the years ended December 31, 2002
and 2001 or the period January 1, 2000 through December 18, 2000.
2003
Risk-free interest rate
Employee options 1.98%
Expected dividend yield
Employee options 0
Expected volatility
Employee options 3.789
Expected lives
Employee options 4
Weighted average remaining contractual life
Employee options 10
The following is summarized information about stock options outstanding as
of December 31, 2003:
Range of Exercise Prices $0.20 - 0.75
Number of shares outstanding 1,200,000
Weighted average exercise price of shares outstanding $0.54
Weighted average remaining contractual life 7.9
Number of shares exercisable 900,000
Weighted average exercise price of shares exercisable $0.66
44
14. Retirement Income Plans
Retirement expenses incurred by the Company were as follows:
2003 2002 2001
--------------------------------------------
U.S.:
Matching contributions $2 $2 $4
Outside the U.S.:
Defined benefit plans -- 142 158
Other plans 0 142 158
-- ---- ----
$2 $144 $162
== ===== ====
U.S. Plans
The Company had a 401(k) retirement and savings plan (the "401(k) plan")
which covered all full-time employees who had been employed for at least twelve
months. The Company's retirement and savings plan contribution had been a 25%
matching contribution for employee contributions up to 5% of each employee's
compensation. At the Board's discretion, the Company may have also contributed a
profit sharing amount to the plan that is contingent upon the performance level
of the Company. The 401(k) plan was terminated on January 31, 2004.
Plans Outside the U.S.
Prior to the sale of its European Operations, most of the Company's foreign
subsidiaries provided retirement income plans which conformed to the practice of
the country in which they did business, some of which were government sponsored
plans. The types of company-sponsored plans in use were defined benefit and
defined contribution.
As part of the sale to DNL, the Company's German subsidiary assumed the
liability for the pension, including disability benefits for all German
employees who did not transfer to DNL. Presently, the German subsidiary has no
revenue or cash inflow stream and is not expected to derive any significant
amounts of revenue or cash inflows in the foreseeable future. While the pension
liability was reflected in the Company's consolidated financial statements, this
obligation remained with the German subsidiary.
Subsequent to the sale to DNL, the monthly pension payments were funded
from amounts received pursuant to a royalty licensing arrangement with DNL.
Given the pending liquidation of DNL, as more fully described in Note 8
"Accounts Receivable," the Company was unable to make the September 2002 pension
45
payment and is unlikely to be able to continue to make future pension payments.
Subsequent to September 30, 2002, the Company engaged German counsel for advice
in this matter, including initiating insolvency and/or liquidation procedures
for the German subsidiary.
On October 31, 2002, the German subsidiary filed for bankruptcy in the
German courts. While the ultimate outcome of such action is unknown at this
time, the Company does not believe that such action will have a material impact
upon the Company's cash resources. As of that date, the Company ceased to
consolidate the German subsidiary into the Company's consolidated financial
statements. Accordingly, the pension liability of $3,179 was removed from the
financial statements as of that date and was included in the determination of
the related extraordinary gain.
Expenses of the defined benefit plans were as follows:
2002 2001
Service Cost $-- $--
Interest Cost 142 158
Expected return on plan assets -- --
Amortization of transition obligation -- --
Amortization of net actuarial loss -- --
-- --
Total $142 $158
---- ----
Obligation and asset data for the defined benefit plans at December 31,
2003 and 2002 were as follows:
Change in benefit obligations 2002 2001
- ----------------------------- ----- ----
Benefit obligation at beginning of period $2,763 $2,837
Service cost -- --
Interest cost 142 158
Benefits paid by employer (48) (65)
Foreign exchange (gain) loss 311 (161)
Actuarial (gain) loss 48 (6)
Deconsolidation of subsidiary (3,216) --
------- --
Benefit obligation at end of period $-- $2,763
Funded Status $-- $(2,763)
Unrecognized net actuarial (gain) loss -- (11)
Unrecognized prior service cost -- --
Unrecognized transition obligation -- --
Net amount recognized $-- $(2,774)
--- --------
Amounts recognized in the balance sheet consist of:
Accrued retirement, non-current $-- $(2,774)
Prepaid benefit cost -- --
Deferred tax asset -- --
Accumulated other comprehensive loss -- --
-- -----
Total $-- $(2,774)
=== ========
46
The defined benefit obligation for the German pension plan was determined
at the October 31, 2002 deconsolidation date using an assumed discount rate of
5.0%, as of December 31, 2001 using 6%, and an assumed average cost of living
benefit increase of 2% in 2001. An assumed weighted average expected rate of
return on plan assets was not applicable in 2002 and 2001.
15. Certain Relationships and Related Transactions
Gerald N. Agranoff, the Company's Vice President and Secretary as well as
its general counsel and a director, is of counsel at the law firm Pryor Cashman
Sherman & Flynn LLP. During the years ended December 31, 2003, 2002 and 2001,
the Company paid legal fees of $0, $106 (of which $55 was accrued at December
31, 2002), and $233 (of which $70 was accrued at December 31, 2000),
respectively, to Pryor Cashman Sherman & Flynn LLP, for legal services provided
by attorneys other than Mr. Agranoff.
During the years ended December 31, 2003, 2002 and 2001, the Company paid
secretarial expenses of $66 (of which $13 was accrued as of December 31, 2003),
$64 and $50, respectively, to Canal Capital Corporation ("Canal Capital"). Asher
B. Edelman, former Vice Chairman of the Company's Board of Directors, serves as
chairman of the board of directors of Canal Capital and Mr. Agranoff is also a
member of the board.
The Company, along with co-tenants Canal Capital and Plaza Securities
Company LP, of which Mr. Edelman, a former director of the company, is the
controlling general partner and Mr. Agranoff is a general partner, entered into
an amendment of its New York office lease in February, 1999. While the Company
is currently paying 50% of the monthly lease payment, each co-tenant of is
jointly liable for the full lease obligation. On April 9, 2004, the Company,
along with co-tenants Canal Capital Corporation and Plaza Securities Company LP,
entered into a settlement agreement with the landlord of its New York office
lease. The settlement agreement provides for, among other things, termination of
the lease in its entirety and full release of all of the parties. The release is
contingent upon the forfeiture of the Company's and co-tenants' security
deposits and the payment of two months rent, full payment of which must be
received by the landlord not later than April 30, 2004. While the Company
intends to make such payment, if the payment is not received, the landlord
maintains full rights to sue the Company for damages with respect to the Lease.
The terms of the original lease provided for lease termination in October, 2009
and the Company's annual lease obligation was approximately $400.
Joshua J. Angel, a former member of the Company's Board of Directors, is
the senior managing shareholder of Angel & Frankel, P.C. During the years ended
December 31, 2003, 2002 and 2001, the Company paid legal fees of $0, $0 and $93,
respectively, to Angel & Frankel, P. C. for legal services.
On February 25, 2003, the Company began leasing approximately 600 square
feet from MPI Investment Management, Inc. ("MPI"). Messrs. David W. Pequet and
Mark A. Margason, both Company directors, are also principals of MPI. During the
year ended December 31, 2003, the Company paid MPI $12.
47
16. 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
in relation to the financial position and results of operations.
As a result of the March 31, 2004 ruling rejecting the appeal of the Patent
Litigation described in the Patent litigation section of Item 1, the District
Court must rule on the defendants' motions for taxable costs and attorneys'
fees. The Company and the Trust believe that they acted in good faith in
bringing and prosecuting the Action and that they have valid defenses to and
arguments against defendants' motions. Although the Company and the Trust
believe the motions for attorneys' fees to be without merit, there can be no
assurance that the District Court will rule in favor of the Company and the
Trust. The Company and the Trust cannot predict (i) when the District Court will
rule on defendants' motions for attorneys' fees, (ii) how the District Court
will rule on the motion, and (iii) the amount of any attorneys' fees if awarded
by the District Court. However, a ruling against the Company and/or Trust may
have a material adverse effect on the Company and/or Trust.
In addition, pursuant to the Plan, the company is obligated to loan the
Trust up to $1 million. At December 31, 2003, $909 had been advanced. As a
result of the rejected appeal, Trust financial obligations up to the remaining
commitment of $91 may be claimed against the Company.
On April 9, 2004, the Company, along with co-tenants Canal Capital
Corporation and Plaza Securities Company LP, entered into a settlement agreement
with the landlord of its New York office lease. The settlement agreement
provides for, among other things, termination of the lease in its entirety and
full release of all of the parties. The release is contingent upon the
forfeiture of the Company's and co-tenants' security deposits and the payment of
two months rent, full payment of which must be received by the landlord not
later than April 30, 2004. While the Company intends to make such payment, if
the payment is not received, the landlord maintains full rights to sue the
Company for damages with respect to the Lease. The terms of the original lease
provided for lease termination in October, 2009 and the Company's annual lease
obligation was approximately $400,000.
17. Acquisitions
On July 27, 1999, the Company, through its subsidiary Corebyte Inc.,
acquired communication and networking software products providing internet and
e-commerce applications. During the third quarter of 2001, the Company concluded
that the Corebyte operation was no longer viable or profitable and discontinued
its operations.
48
On February 25, 2003, the Company acquired all of the limited liability
interests (collectively, the "Interests") in both CS Livestock Commissions Co.
LLC and CS Auction Production Co. LLC (collectively, the "Subsidiaries") from
AEI Environmental, Inc. ("AEI"). The results of the operations of the
Subsidiaries are included in the Company's consolidated statement of operations
from February 25, 2003 forward.
The Subsidiaries are headquartered in Hinsdale, Illinois and conduct a
cattle auction accessible via the internet at the website www.cattlesale.com.
Management believes that the Subsidiaries' products and services reduce
transaction costs and improve information flow and market efficiencies in cattle
production. Purchase Price
The purchase price paid for the Interests consisted of:
1,323,000 shares of Series B Convertible Redeemable Preferred Stock (the
"Series B Preferred Stock") having the principal terms described below under the
heading "Preferred Stock;" and
9,593,168 shares of Common Stock, which equaled forty-nine percent (49%) of
the outstanding shares of Common Stock, on a fully-diluted basis, immediately
prior to the closing.
The amount of consideration for the Interests was determined by
negotiation, based on a mutual assessment by the Company and AEI of the value of
the Subsidiaries' business and the real value of the Company's Common Stock.
Further, the Acquisition was structured to avoid causing a negative impact on
the Company's net operating loss carry-forward.
The Company determined that the monetary value assigned to the purchase
price for financial reporting purposes was $814. This consisted of a value of
$662 ascribed to the shares issued as described above, $50 cash paid to the
sellers and $102 of transaction costs. The value ascribed to the shares was
based on 49/51 of the Company's quoted market capitalization at the December,
2002 announcement of the acquisition intent, with an adjustment, based on quoted
market prices, for the Patent Litigation Trust interests distributed to the
pre-acquisition shareholders.
In the acquisition, the Company also incurred a contingent obligation to
pay the sellers $50 in the case of a significant future issuance of debt or
equity by the Company for cash.
Following is a balance sheet of the Subsidiaries acquired as of the
acquisition date of February 25, 2003.
Current assets $110
Fixed assets 130
Goodwill 708
---
948
Current liabilities 134
Equity 814
---
948
49
The tangible assets and liabilities of the Subsidiaries are not
significant. The purchase price is allocated principally to the Subsidiaries'
proprietary software and to goodwill. Management believes that the Subsidiaries'
value substantially exceeds the value of their individual assets and liabilities
because of the results of the Subsidiaries' efforts up to this point in refining
its business model, establishing its workforce and network of field agents and
creating awareness among potential customers. The goodwill and most of the
software value is not expected to be amortizable for income tax purposes.
Dividend to Shareholders
Upon acquiring the Interests, the Company declared a dividend payable to
the holders of record of its Common Stock on February 24, 2003 (the "Record
Holders"). The dividend was payable in .02503 of a share of Series A Convertible
Redeemable Preferred Stock (the "Series A Preferred Stock") and .11287 of a
share of Series B Preferred Stock per share of Common Stock. An aggregate of
250,000 shares of Series A Preferred Stock and 1,127,000 shares of Series B
Preferred Stock were so issued (collectively, the "Dividend Shares"). The Series
A Preferred Stock has the principal terms described below under the heading
"Preferred Stock." The Dividend Shares were issued in escrow, as described below
under the heading "Escrow of Dividend Shares."
Escrow of Dividend Shares
The Dividend Shares are being held in escrow by Asher B. Edelman, in the
capacity of escrow agent for the benefit of the Record Holders, until such time
as the Dividend Shares have been registered for sale under the Securities Act of
1933, as amended. The Company intends to file a registration statement with the
Securities and Exchange Commission respecting the Dividend Shares, and the
shares issued to AEI at the closing, as soon as practicable; however, the
Company cannot anticipate when such a registration will become effective and the
Dividend Shares released from escrow. During the period the Dividend Shares are
held in escrow, the escrow agent shall have the power to vote the Dividend
Shares on any matter submitted to the vote of the Company's shareholders.
Preferred Stock
The rights and preferences of the Series A Preferred Stock and the Series B
Preferred Stock (collectively, the "Preferred Stock"), which each have a par
value of $.01 per share, are as follows:
Dividends
Dividends accrue and are cumulative from the date of issuance in an amount
per annum equal to 2.5% per year per share and will be payable semi-annually,
when, as and if declared by the Board of Directors. Dividends will be payable in
50
cash, shares of Preferred Stock (valued at $10 per share) or shares of Common
Stock (valued, (x) if there is a market for the Common Stock, at the average
price of a share of Common Stock during the last thirty (30) days of trading, or
(y) if there is not a market for the Common Stock, at $1.38 per share), or any
combination thereof. As of December 31, 2003 dividends of $ .21 per share were
in arrears for a total arrearage of $556.
Conversion Each share of Preferred Stock is convertible at any time at the
option of the holder into 7.25 shares of Common Stock.
Redemption At any time after the earlier of:
o a merger or consolidation effecting the sale in one or a series of
related transactions of all or substantially all of the Company's assets or a
sale of more than fifty percent (50%) of the Company's outstanding voting
securities, or
o the realization by the Company of aggregate net proceeds in excess of
$10,000,000 in connection with the sale of Common Stock pursuant to a public
offering registered under the Securities Act of 1933, as amended (a "Qualified
Public Offering"),
the Preferred Stock will be redeemed by the Company for cash in an amount
equal to the liquidation preference of $10 per share, plus accrued and unpaid
dividends as of the redemption date; provided, however, that (i) the redemption
of the Series B Preferred Stock will be subject to the rights and preferences of
the Series A Preferred Stock, and (ii) not more than forty percent (40%) of the
net offering proceeds of the Qualified Public Offering will be applied to the
redemption of the Preferred Stock.
Pro Forma Financial Information
The estimated pro forma effect on the Company's results of operations for
1) the year ending December 31, 2003 and 2) the year ending December 31, 2002
had the acquisition occurred on January 1, 2002 are as follows:
2003 2002
Historical Pro-Forma Historical Pro-Forma
Service Revenue
(net of $5,481 gross billings
in historical 2003) $113 $123 $ - $100
Income before extraordinary credits
and cumulative effect of a change
in accounting principle (1,830) (1,956) (2,526) (3,091)
Net loss (1,830) (1,956) (2,290) (2,855)
Loss per share (.13) (.13) (.13) (.14)
51
18. Notes Payable
As of December 31, 2003, there were three notes payable outstanding with a
total face amount of $132. All three bear interest rates of 8%, with maturities
ranging from January 15, 2004 through February 15, 2004. In addition, a total of
275,000 shares of the Company's common stock were issued in conjunction with
these notes. The debt discount on these notes of $47, including $40
representing proceeds allocated to the stock issued, is being amortized over the
maturity life of the notes and at December 31, 2003, unamortized discount on all
notes totaled $23. The resulting effective annual interest rate for financial
reporting purposes was thereby 261%. The notes are being carried on the balance
sheet as $109.
Because the borrowings had been made recently, as of December 31, 2003 the
estimated fair value of the notes approximates carry value.
Subsequent to year end, the Company is in payment default on all of these
notes. Two notes were amended to included default interest of 12% for all unpaid
amounts after the maturity date as well as the issuance of an additional 135,000
shares of the Company's common stock.
19. Subsequent Event
On March 7, 2004, the Company entered into a letter of intent to acquire
the cattle identification, traceability and data management division of CowTek,
Inc. CowTek, Inc., headquartered in Brule, Nebraska is the developer of ISO
Memory tag technology with a proprietary distributive database management system
for the identification and traceability of individual cattle records. The
acquisition is structured around the issuance of 300,000 shares of CattleSale
Company $10 Convertible Preferred Stock B and 4,000,000 stock options on
CattleSale common stock exercisable between $.25 and $.75 for a combined
exercise price of $2,120,000. The transaction has an expected close date during
the second quarter of 2004 and is contingent on final due diligence, a
definitive purchase agreement and approval of both companies' board of
directors.
20. Additional Pro Forma Financial Information (Unaudited)
The accompanying unaudited pro forma condensed statement of operations of
the Subsidiaries for the year ended December 31, 2003 and December 31, 2002
gives effect to the acquisition of the Interests (see Note 17) as if it had
occurred on January 1, 2002. The pro forma condensed statement of operations
also gives effect to the deconsolidation of the Company's German subsidiary as
if it had occurred on December 31, 2001.
The pro forma financial information is not necessarily indicative of the
operating results that would have occurred had the acquisition of the Interests
been consummated as of January 1, 2002, nor is the information necessarily
indicative of future operating results.
52
The CattleSale Company and Subsidiaries
Pro Forma Statement of Operations
For the year ended December 31, 2003
($s in 000's)
As Reported Adjustments Pro Forma
Service revenue
(net of $6,021 gross pro
forma billings in 2003)(5) $ 113 $ 10 (1) $ 123
Selling, general and 2,130 131 (1) 2,266
administrative expenses 5 (2)
-------- - -
Operating loss $ (2,017) $ (126) $(2,143)
Non-operating income (expense):
Interest income 28 -- 28
Other, net 159 -- 159
--- -- ---
Net loss $ (1,830) $ (126) $(1,956)
======= ======= =======
Cumulative dividend on preferred stock (556) (556) (4)
Net loss available to common shareholders $(2,386) $ (2,512)
======== =========
Net loss per common share $ (.13) $ (.14) (3)
========= ========
Average common shares outstanding:
Basic and Fully Diluted 18,240,926
Notes to the Pro Forma Statement of Operations
(1) Reflects the actual results of the Interests for the period January 1, 2003 through February 24, 2003.
(2) Reflects amortization expense on the fair value of the Interests' fixed assets acquired for the period January 1, 2003
through February 24, 2003.
(3) Assumes weighted average shares of 18,240,926 shares of common stock for the entire period of January 1, 2003 through
December 31, 2003.
(4) Assumes 2,631,406 shares of preferred stock were outstanding for the entire period of January 1, 2003 through
December 31, 2003.
(5) Gross billings of $5,481 are included in the "as reported" column and gross billings of $540 are included in the
"adjustment" column for a total of $6,021 in the "pro forma" column.
53
The CattleSale Company and Subsidiaries
Pro Forma Statement of Operations
For the year ended December 31, 2002
($s in 000's)
Total Pro
As Reported CattleSale (7) Adjustments (5) Forma
Service revenue (9) $-- $100 $-- $100
Selling, general and administrative expenses 1,387 674 -- 2,061
Trust expense 532 -- -- 532
Impairment of assets 349 -- -- 349
Restructuring costs 15 -- -- 15
-- -- -- --
Total operating cost and expenses 2,283 674 -- 2,957
----- --- -- -----
Operating loss $(2,283) $(574) $-- $(2,857)
Non-operating income (expense):
Interest income 25 2 -- 27
Interest expense (42) (5) -- (5)
Equity in loss of limited partnership (42)
Other, net (226) 12 -- (214)
----- -- -- -----
Income (loss) before income taxes and
Extraordinary credits and cumulative effect of
Change in accounting principle (2,526) (565) -- (3,091)
Income taxes (benefit) -- -- -- --
-
Income (loss) before extraordinary credits and
Cumulative effect of change in accounting principle (2,526) (565) (3,091)
Extraordinary credits:
Deconsolidation of company subsidiary 3,165 (3,165) --
Impairment of reorganization value in excess off amounts
allocable to identifiable assets (1,941) 1,941 --
Cumulative effect of change in accounting principle (988) 988 --
Net income (loss) $(2,290) $ (565) $(236) $(3,091)
======== ======= ====== ========
Net income (loss) per common share $(.12) $(.03) $(.01) $(.16)
====== ====== ====== ======
Average common shares outstanding:
Basic and Fully Diluted (6) 19,577,894
(6) Assumes extraordinary items and change in accounting principle occurred on December 31, 2001.
(7) On February 25, 2003, the date of the acquisition of the Interests, 9,593,168 additional shares of Common Stock were issued
to the seller representing 49% of the outstanding shares.
(8) The Subsidiaries suspended their operations during the period of February through June 2002 in order to implement necessary
operational changes and efficiencies.
(9) Gross billings of $5,847 are included in the "CattleSale" and "pro forma" column
54
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
55
PART III
ITEM 10. Directors and Executive Officers of the Registrant
Directors and Executive Officers
The names, positions and offices with the Company of the current directors
and executive officers of the Company are set forth below.
Name Position Year first elected
- ----------------- ----------------------------------- --------------------
Edward L. McMillan Chairman of the Board 2003
Gerald N. Agranoff Vice President, Secretary, General
Counsel and Director 1994
David S. Geiman President and Chief Executive Officer 2003
Phillip P. Krumb Vice President, Chief Financial Officer
and Director 1994
David W. Pequet Director 2003
Mark A. Margason Director 2003
William K. Richardson Treasurer 2003
The Acquisition Agreement between the Company and AEI, pursuant to which
the Company acquired the Interests, provided that, upon the closing of the
acquisition, the Company's Board of Directors would be increased from seven
members to eight, the then members of the Board would resign effective
immediately, and by action taken pursuant to the Written Consent, four of the
Company's former directors and four persons designated by AEI would be elected
to serve as directors until their successors are elected and qualified. Messrs.
Edelman, Agranoff, Angel and Krumb were re-elected to the Board. Messrs.
McMillan, Lane, Margason and Pequet are newly elected. Messrs. Edelman, Angel
and Lane resigned during 2003.
Further, the Acquisition Agreement provided that the persons named above
were to be elected to the offices set forth opposite their names and they were
duly elected by the new Board of Directors to do so.
The principal occupations and business experience of each of the current
directors and executive officers of the Company are described below.
Edward L. McMillan, 57, a new member of the Board, will serve as Chairman
of the Board and is a member of the Audit Committee. Mr. McMillan is a member of
56
the AEI Board of Directors and is the retired President, Chief Executive Officer
and Director of Purina Mills, Inc., the largest manufacturer and distributor of
animal nutrition products in the United States. Mr. McMillan joined Purina Mills
in 1969 and held various positions in marketing, product research, business
development and diversified business management before being named President and
CEO in 1987. Mr. McMillan is a prominent leader in the animal nutrition industry
serving as Chairman of the Board of Directors for the American Feed Industry
Association and the Prescription Feed Task Force. Mr. McMillan has received
distinguished industry honors as the Agri-Marketer of the Year for the National
Agri-Marketing Association; the Distinguished Service Award from the American
Agricultural Editor's Association; the Distinguished Service Award from the
American Feed Association. Mr. McMillan owns and manages McMillan L.L.C., a
transaction consulting business and serves on other corporate boards including
Premium Food Group Inc.; Balchem Inc.; Durvet, Inc.; and Distribution Dynamics
Inc. Mr. McMillan received a Bachelor of Science degree in Agricultural Science
from the University of Illinois and is a graduate of the Credit Research
Foundation Graduate School of Credit and Financial Management. Mr. McMillan is
Chairman of the U of I Research Park LLC and is Chairman Elect of the U of I
Alumni Association. Mr. McMillan's principal business address is Mark Twain
Plaza One, Suite 325, 101 West Vandalia Street, Edwardsville, Illinois 62025.
Gerald N. Agranoff, 57, is a continuing member of the Board and is a Vice
President and Secretary of the Company, as well as its general counsel. Prior to
the Acquisition, Mr. Agranoff was the Company's Chief Operating Officer, Acting
President and Vice Chairman of the Board. Mr. Agranoff is a general partner of
SES Family Investment & Trading Partnership, L.P., an investment partnership
formed in 1995 by the members of one family to consolidate their activities. Mr.
Agranoff is not a member of the family. Mr. Agranoff has been a general partner
of Asco Partners since 1984, having become its general counsel in 1982 and,
since 1998, has been a member of Asher B. Edelman & Associates, LLC. Since 1987,
Mr. Agranoff has been a general partner of Plaza Securities Company, L.P., a
securities company located in New York City. Since 1984, he has been a director
of Canal Capital Corporation and, since 1990, has been a director of Bull Run
Corporation, a sports and affinity marketing company located in Atlanta,
Georgia. He is also counsel to the New York City law firm Pryor, Cashman,
Sherman & Flynn. Mr. Agranoff's principal business address is 9901 IH-10 West,
Suite 800, San Antonio, Texas 78230.
David S. Geiman, 59, was elected President and Chief Executive Officer on
June 5, 2003 and was elected a director on December 11, 2003. Mr. Geiman is the
founder and owner of New Dominion Management, an agricultural consulting company
that provides business analysis, construction management and risk and hedging
program development services for large agri-business entities in the United
States and Canada. In addition, he owns significant interests in contract feeder
pig production facilities and a task management software company. From 1980
until 1995 Mr. Geiman worked for Continental Grain Company, one of the top grain
merchant companies in the United States. He held positions in grain
merchandising, strategic planning and operations management and from 1985 until
1995, David was Senior Vice President and General Manager of Continental's
57
Cattle Feeder Division. Mr. Geiman received his undergraduate degree from George
Washington University in Washington, D. C. and an MBA from the University of
Virginia. He spent three years in agricultural and rural development in the
Peace Corps in West Africa.
Phillip P. Krumb, 61, a continuing member of the Board, is continuing as
Vice President and Chief Financial Officer and as a member of the Executive
Committee. He is also, as of April 10, 2003, the Company's interim Chief
Executive Officer. Mr. Krumb joined the Company in September 1994 and was Vice
President and Chief Financial Officer from September 1994 to June 1997. From
June 1997 until March 31, 1999, Mr. Krumb served as Special Assistant to the
Chairman. From April 1, 1999 to December 17, 2000, Mr. Krumb was acting Chief
Financial Officer. On December 18, 2000, he reassumed his position as Vice
President and Chief Financial Officer. Prior to joining the Company, he was
employed by IOMEGA Corporation for seven years as Senior Vice President Finance
and Chief Financial Officer. Mr. Krumb's principal business address is 9901
IH-10 West, Suite 800, San Antonio, Texas 78230.
David W. Pequet, 52, a new Member of the Board, is a co-founder of AEI and
is a member of its Board of Directors. He earned an engineering degree from
Michigan State University 1974 and served as an officer in the U.S. Naval Flight
program. Mr. Pequet began his career in the securities industry in 1976 and
started the advisory firm, MPI Investment Management, in 1986. MPI manages over
$100 million dollars of individual portfolios. During the last twelve years MPI
has been nationally ranked several times for its fixed income investment
performance. Prior to starting MPI, he was a fixed income broker at several
major Wall Street firms including Prudential-Bache and Gruntal Securities. Mr.
Pequet has served as a board member for several early stage companies. Mr.
Pequet's principal business address is 710 North York Road, Hinsdale, Illinois
60521.
Mark A. Margason, 48, a new member of the Board and Chairman of the Audit
Committee and its "financial expert," as such term is defined in the
Sarbanes-Oxley Act of 2002, has had a twenty-four-year banking and investment
career in Chicago and New York. Mr. Margason is a member of AEI's Board of
Directors. Mr. Margason has been involved as a Director, CFO and Chairman and
CEO of venture companies, both private and public, in the energy and Internet
sectors. Mr. Margason is a Partner in MPI Investment Management and a Managing
Partner of MPI Venture Management, LLC. He received a B.S.B.A. and an M.B.A in
Finance from the University of Denver and is actively involved in the Children's
Home and Aid Society and Heartland Alliance charities. Mr. Margason's principal
business address is 710 North York Road, Hinsdale, Illinois 60521.
William K. Richardson, 52 is the Company's Treasurer. Mr. Richardson joined
the Company in 1977. Prior to the Acquisition, Mr. Richardson was the Company's
Corporate Controller, a position he held since 1995. From 1992 to 1995, Mr.
Richardson was the European Regional Controller based in Paris at the Company's
then European Headquarters. From 1977 to 1992, Mr. Richardson held numerous
positions of increasing responsibility within the Company's finance
organization. Mr. Richardson's principal business address is 9901 IH-10 West,
Suite 800, San Antonio, Texas 78230.
58
Directors holding office for part of 2003, post CattleSale acquisition
Asher B. Edelman, 64, was a continuing member of the Board and served as
its Vice Chairman, as well as Chairman of the Executive Committee. Mr. Edelman
joined the Company's Board of Directors as its Chairman in March 1985. In
February 1993 he became the Company's Chief Executive Officer. Mr. Edelman
served in both capacities until the closing of the Acquisition. In addition,
since 1984, Mr. Edelman has been a general partner of Asco Partners, the general
partner of Edelman Securities Company L.P. (formerly Arbitrage Securities
Company), a United States registered broker-dealer located in New York City.
Since 1991, Mr. Edelman has been the Chairman of the Board of Directors of Canal
Capital Corporation, a real estate company located in New York City and, since
2001, has been a member of the Board of Directors of Perini Corp., a
construction company located in Framingham, Massachusetts. He is also a general
partner and/or manager of various investment partnerships and funds, including
Asher B. Edelman & Associates, LLC, a manager for a value oriented investment
fund. Mr. Edelman's principal business address is Ch. Pecholettaz 9, 1066
Epalinges, Switzerland. Mr. Edelman resigned from these positions on December
10, 2003.
Joshua J. Angel, 68, was a member of the Board and a member of the Audit
Committee. Mr. Angel is Founder and Senior Managing Shareholder of Angel &
Frankel, P.C., a New York law firm. He holds a law degree from Columbia
University School of Law (1959) and a BS degree from New York University, NY
(1956). He is also a director of Lancer Industries, Inc., Cellular Technical
Services Company, Inc. and Fairfield Manufacturing Company, Inc. Mr. Angel's
principal business address is 460 Park Avenue, New York, New York, 10022. Mr.
Angel resigned from these positions with the Company on December 9, 2003.
John D. Lane, 57, a new member of the Board, entered the securities
industry in 1969 with a bank-trading firm in New Jersey. He formed Lane Capital
Markets, llc, an investment banking boutique focused on mergers and
acquisitions, deal structuring, managing and co-managing IPO's, follow-ons and
private placements, in 2001. Mr. Lane recently became dually registered with
V-Finance Investments Inc. where he holds the position of Syndicate Manager. His
main duties at V-Finance include working with companies in the money raising
process and managing retail and institutional clients' accounts. Prior to
forming Lane Capital Markets, he held the position of Managing Director and
Senior Vice President of Capital Markets at a New York based online firm.
Between 1984 and 2000, Mr. Lane held high-level positions at investment banking
firms based in Fairfield County, Connecticut. He has been associated with
several major firms: Boettcher & Co., Advest & Co., Dain Bosworth, and Moseley
Hallgarten and has served in several capacities: officer, director, owner,
trader, retail manager and syndicate manager. Mr. Lane has also served as a
director and advisor to several boards of directors. Mr. Lane has been an active
member of several Security Industry Association (SIA) committees, including the
Small Firms Committee, of which he was Chairman in 1994, and the Membership
59
Committee, of which he was Chairman for several years. He also served three
terms on the Syndicate Committee. He is currently serving as District Chairman
of the SIA's New England district. He also served as a director of the Regional
Investment Bankers Association between 1991-1995. He is also active in the
National Association of Securities Dealers. He is currently a NASD mediator and
is serving three-year terms on its District Business Conduct Committee based in
Boston, MA and its Corporate Finance Committee, as well as serving on its Small
Firm Advisory Board and its Nominating Committee which chooses members to serve
on all standing NASD committees nationwide. Mr. Lane obtained his undergraduate
and graduate degrees from Monmouth University. Mr. Lane's principal business
address is 263 Queens Grant Road, Fairfield, Connecticut 06824. Mr. Lane
resigned from the Board in the third quarter of 2003.
There are no family relationships between any of the executive officers of
the Company.
Audit, Compensation and Executive Committees
The Company has an Audit and Executive Committees of the Board of
Directors. The current members of the Audit Committee are Messrs. Margason
(Chairman) and McMillan. The current members of the Executive Committee are
Messrs. Geiman (Chairman), Pequet and Krumb.
The Audit Committee annually recommends to the Board of Directors the
independent auditors for the Company and its subsidiaries. The Audit Committee
meets with the independent auditors concerning the audit; evaluates non-audit
services and the financial statements and accounting developments that may
affect the Company; meets with management concerning matters similar to those
discussed with the outside auditors; and makes reports and recommendations to
the Board of Directors and the Company's management and independent auditors
from time to time as it deems appropriate.
Prior to 2003, the Compensation Committee made senior management salary
recommendations to the Board and administered the Company's various bonus and
option plans. During calendar year 2003, these functions were performed by the
Audit Committee in addition to its other responsibilities.
The newly formed Executive Committee will exercise the power and authority
of the Board of Directors between its meetings.
Meetings of the Board of Directors and Committees
The Board of Directors met 8 times during the year ended December 31, 2003.
Each director was in attendance. During the year ended December 31, 2003, the
Audit Committee met 4 times.
Director Compensation
Directors who are employees of the Company receive no additional
compensation for serving on the Board of Directors or its committees.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
60
The Company believes that, during the year ended December 31, 2003, its
officers and directors complied with all filing requirements under Section 16(a)
of the Securities Exchange Act of 1934.
ITEM 11. Executive Compensation
Compensation Committee Report
The Company's executive compensation program is based on three fundamental
principles.
The Company must offer compensation opportunities sufficient to attract,
retain and reward talented executives who are sufficiently capable of addressing
the challenges of a business in a difficult industry.
Compensation should include a substantial component of pay-for-performance
sufficiently related to the financial results of the Company and/or the
executive's performance to financially motivate the executive's efforts to
increase stockholder value. This may cause individual compensation amounts to
change significantly from year to year.
Compensation should provide a direct link between the long-term interests
of executives and stockholders. Through the use of stock-based incentives, the
Compensation Committee focuses the attention of executives on managing the
Company from the perspective of an owner with an equity stake.
For executive officers, compensation now consists primarily of base salary,
and a short-term performance incentive opportunity in the form of a variable
cash bonus. The remainder of this Report reviews the annual and long-term
components of the Company's executive compensation program, along with the
decisions made by the committee regarding the current compensation for both the
Chief Executive Officer and the other named executive officers.
Total Annual Compensation
Annual cash compensation consists of two components; a fixed base salary
and a variable annual bonus opportunity. As an executive's level of
responsibility increases, a larger portion of total annual pay is based on bonus
and less on salary. The Committee sets the base salary of executive officers
based upon a subjective analysis of competitive salaries of equally qualified
executives, occasionally confirmed by reference to general salary surveys; prior
compensation of the individual or of previous holders of the position is also
considered. Contractual minimum base salaries are customarily negotiated with
the executives.
The short-term performance incentive bonus opportunity is established
either as a percentage, unique for each individual, of a numerical corporate
performance indicia, or as a target percentage of pay which is the amount that
61
can be earned based upon assigned objectives being met. Performance is measured
as a percent of attainment against these objectives. When performance exceeds
objectives, an executive's incentive pay can exceed the target rate, and when it
falls below, individual incentive pay is reduced accordingly.
Messrs. Agranoff's and Krumb's bonuses were based on a contractually
specified percentage by which "EBITDA" exceeds 12-1/2% of Net Equity for the
applicable period. "EBITDA" means, with respect to the applicable period,
earnings before interest, taxes, depreciation and amortization as determined by
the Company's accountants in accordance with generally accepted accounting
principles; provided however, "EBITDA" does not include amounts received from
the Dynacore Patent Litigation Trust. Net Equity means net assets less net
liabilities determined as of the last day of the applicable period.
Long Term Incentives
The committee believes that stock options appropriately link executive
interests to the enhancement of stockholder value and utilizes them as its
long-term incentive program; no additional long-term incentive programs are
utilized. Stock options generally are granted at fair market value as of the
date of grant, become exercisable over eighteen months, and have a term of ten
years. The stock options provide value to the recipients only when the price of
the Company's stock increases above the option grant price.
Pursuant to their employment agreements, Messrs. Agranoff and Krumb were,
in 2000, granted options to purchase 175,000 and 75,000 shares of Common Stock,
respectively. In determining the size of the option grants for Messrs. Edelman,
Agranoff' and Krumb, the committee assessed the following factors: their
potential by position and ability (i) to contribute to the creation of long-term
stockholder value; and (ii) to contribute to the successful execution of the
Company's strategy; and (iii) their relative levels of responsibility.
This report has been provided by the Audit Committee.
Compensation Committee Interlocks and Insider Participation
During the year ended December 31, 2003, no Member of the Compensation
Committee was, or was formerly, an officer or employee of the Company or any of
its subsidiaries.
Employment Agreements
Effective December 18, 2000, the Company entered into employment agreements
with each of Gerald N. Agranoff and Phillip P. Krumb which had initial terms of
eighteen months but which remained in effect through February 25, 2003. Pursuant
to the employment agreements, Mr. Agranoff served as Chief Operating Officer and
Acting President and Mr. Krumb served as Vice President and Chief Financial
Officer. Their respective annual base salaries were $157,500 and $82,5000 and
they were entitled to bonuses in respect of each fiscal quarter in which the
62
Company's earnings before interest, taxes, depreciation and amortization for the
period exceeded certain benchmarks. Upon executing their agreements, they were
granted options to purchase, respectively, 175,000, and 75,000 shares of Common
Stock at an exercise price of $.75 per share. The options are all fully
exercisable, having vested in equal installments on June 18, 2001, December 18,
2001 and June 18, 2002. The options will expire on December 18, 2010. As a
result of the Company's need for liquidity, in August 2002, they agreed to
receive Beneficial Interests in lieu of cash as compensation for their services
during the period from June 30, 2002 through December 18, 2002. Mr. Agranoff
received 369,520 Beneficial Interests and Mr. Krumb received 193,559.
Pursuant to the terms of the Acquisition Agreement, on February 25, 2003
each of and Messrs. Agranoff and Krumb entered into employment agreements with
the Company having three year terms. These agreements provide for customary
employee benefits, as well as reimbursement for certain office and secretarial
services. Mr. Krumb, the Company's Vice President and Chief Financial Officer,
is entitled to a base salary, commencing on January 1, 2004, of $60,000 per
year.
Messrs. Agranoff's and Krumb's agreements each provide that if his services
are terminated without cause or with Good Reason (as defined in the agreements),
he shall receive his base salary for the remaining duration of the employment
term and for an additional period of six months from the end of the term, as
well as continuation of certain benefits during that period. The agreements also
provide that, in the event of death or disability during the employment term, he
or his estate or legal representative shall be entitled to receive his base
salary through the end of the month in which the death, or disability occurs and
certain executive benefits.
Each of Messrs. Agranoff's and Krumb's agreements also provides for the
vesting of any unvested options upon his death or disability during the
employment term or if his services are terminated without cause or with Good
Reason.
On June 15, 2003, the Company entered into an employment agreement with Mr.
David S. Geiman. Pursuant to the terms of the agreement, Mr. Geiman assumed the
role of President and Chief Executive Officer at an annual salary of $180,000.
In addition, Mr. Geiman received 450,000 options to purchase the Company's
common stock at .20, 150,000 of which vested on December 15, 2003, 150,000 of
which vest on June 15, 2004 and 150,000 of which vest on June 15, 2005.
Supplemental Executive Retirement Plan
The Company maintains a Supplemental Executive Retirement Plan for certain
executive employees selected by the Board of Directors. The plan provides for
employee contributions of up to 10% of applicable compensation. In addition, at
the Board's discretion, the Company may also make contributions on an annual,
individual basis, allocated on a pro-rata basis according to participant's
applicable compensation up to a maximum contribution of 15% of applicable
compensation per employee. The Company has not made any contributions to the
plan since August 2, 1997. Under the terms of the plan, benefits accrued to the
various executive officers vest upon satisfaction of the plan's vesting criteria
which is based upon length of employment with the Company. Summary Compensation
Table
63
The following table sets forth certain information regarding all cash
compensation paid or accrued for services rendered by David S. Geiman, Gerald N.
Agranoff and Phillip P. Krumb the persons who served, during fiscal year 2003,
as the Company's executive officers.
Long-Term
Name and Compensation
Principal
Position
(as of 12/31/03) Other All
Annual Stock Options Other
Year Salary Compensation Granted (#) Compensation
David S Geiman 2003 $79,615 $ - 450,000(2) $ -
Chairman of the Board 2002 - - - -
Chief Executive Officer (1) 2001 - - - -
Gerald N. Agranoff 2003 $ - $ - - $ -
Acting President and 2002 84,808 - - -
Secretary 2001 157,500 - - -
Phillip P. Krumb 2003 $ - $ - - $ -
Vice President and Chief Financial 2002 $44,423 - - -
Officer 2001 82,500 - - -
(1) Mr. Geiman's employment agreement was effective on June 15, 2003 at an annual salary of $180,000. As such, the compensation
amounts reflected in the table above is for the period of June 15, 2003 - December 31, 2003. Prior to Mr. Geiman's
employment, he provided consulting services to the company between May 5, 2003 and June 5, 2003 and was paid $40,000 for
these services.
(2) Stock options granted per employment agreement
(3) Asher B. Edelman, formerly Chairman of the Board and Chief Executive Officer resigned these positions on December 10, 2003.
Had he not resigned, Mr. Edelman and his remuneration would have been included in this compensation table.
Stock Option Grants in Last Fiscal Year
On June 15, 2003, the Company granted 450,000 options to purchase the
Company's common stock at .20 per share to Mr. Geiman pursuant to his employment
agreement.
64
Aggregated Option Exercises for the period ended December 31, 2003 Option Values
Number of
Shares Value of Unexercised
Acquired on Value Number of Unexercised Options In the money options
Name Exercise Realized at 12/31/03 At 12/31/03
Exercisable Unexercisable Exercisable Unexercisable
- -------------------------- -------------- ----------- -------------- ---------------- ---------------- ---------------
David S. Geiman 0 0 150,000 300,000 $0 $0
- -------------------------- -------------- ----------- -------------- ---------------- ---------------- ---------------
Gerald N. Agranoff 0 0 175,000 0 $0 $0
- -------------------------- -------------- ----------- -------------- ---------------- ---------------- ---------------
Phillip P. Krumb 0 0 75,000 0 $0 $0
- -------------------------- -------------- ----------- -------------- ---------------- ---------------- ---------------
Performance Graph
Set forth below is a table comparing the yearly percentage changes in the
five-year cumulative total return for the Company's Common Stock with the Dow
Jones 65-Composite Average, a broad equity market index, and the S&P 500 index.
Dow Jones 65-
Company's Common Stock S&P 500 Composite Average
1999 100.00 100.00 100.00
2000 00.00 89.86 103.21
2001 15.69 78.14 89.98
2002 3.27 59.88 73.89
2003 7.19 75.68 93.95
The table assumes $100 invested on January 1, 1999, in the Company's then
common stock and each of the indexes and that all dividends were reinvested.
During the five-year period the Company did not pay any cash dividends on its
Common Stock.
65
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
Security Ownership of Certain Beneficial Owners
As of March 31, 2004, Asher B. Edelman and AEI Environmental, Inc. were the
only person(s) known to the Company to be a beneficial owner of more than five
percent (5%) of the Company's securities as defined in Rule 13(d)(3) under the
Exchange Act.
Name # shares % ownership
- -------------------------- ------------------- -------------------
Asher B. Edelman
717 5th Avenue
N.Y., NY 10022 12,087,208 (1) 29.42%
- ------------------------ --------------------- ------------------
AEI Environmental, Inc.
710 North York Road
Hinsdale, IL 60521 5,825,420 (2) 14.18%
(1) Asher B. Edelman, in his capacity as Escrow Agent (in such capacity, the
"Escrow Agent") for the Benefit of the Holders of Record of Dynacore Holdings
Corporation on February 24, 2003, owns no shares of Common Stock; however, each
share of the 250,000 Deemed Acquired Shares of Series A Convertible Preferred
Stock and each share of the 1,127,000 Deemed Acquired Shares of Series B
Convertible Preferred Stock held in escrow (collectively, the "Preferred Stock")
is convertible at any time into 7.25 shares of Common Stock and is entitled to
one vote per share of Preferred Stock on any matter presented to the holders of
the Common Stock. Accordingly, 9,983,250 shares are included in the table above.
Although the Escrow Agent does not have any pecuniary interest in the shares of
Preferred Stock held in escrow (the "Escrowed Stock") and is not authorized to
sell, convert or otherwise dispose of any shares of Escrowed Stock, the Escrow
Agent does have the power to vote the Escrowed Shares. For so long as the shares
of Escrowed Stock are held in escrow, the other persons named in the tables
above will not separately report beneficial ownership of their respective
portions of the Escrowed Stock or the shares of Common Stock into which they are
convertible.
(2) 58,838 Deemed Acquired Shares of Series B Preferred Stock (convertible into
426,576 shares of Common Stock) are owned by AEI and are included in this
tabulation because the named party is a director of AEI and, in that capacity,
shares investment control with respect to these shares. However, the named party
disclaims beneficial ownership of these shares except to the extent of his
ownership of debt and equity securities of AEI.
Security Ownership of Management
The information below relating to beneficial ownership is based upon
ownership information furnished by each person using "beneficial ownership"
definitions set forth in Section 13 of the Securities Exchange Act of 1934, as
amended. Under those rules, a person is deemed to be a "beneficial owner" of a
security if that person has or shares "voting power," which includes the power
to vote or to direct the voting of such security, or "investment power," which
includes the power to dispose or to direct the disposition of such security.
66
A person is also deemed to be a beneficial owner of any security of which
he or she has a right to acquire beneficial ownership (such as by exercise of
options or conversion of preferred stock) within 60 days after the applicable
reporting date (the "Deemed Acquired Shares").
Under these rules, more than one person may be deemed to be a beneficial
owner of the same securities, and a person may be deemed to be a beneficial
owner of securities as to which he or she may disclaim any beneficial interest.
When calculating the percentage of a class of securities owned by a
beneficial owner, the number of shares of his or her Deemed Acquired Shares is
included in the number of shares owned by him or her and in the number of shares
outstanding. A beneficial owner's Deemed Acquired Shares are not included in the
outstanding shares for purposes of calculating any other beneficial owner's
percentage of ownership.
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock by each director, by each of the executive
officers named in the table and by the directors and executive officers as a
group, as of March 31, 2004. Some of the named individuals own Deemed Acquired
Shares by virtue of their ownership of currently exercisable options and/or
currently convertible Preferred Stock. The table describes ownership of
outstanding Common Stock (20,392,574 shares) and the Deemed Acquired Shares
(20,688,819 Deemed Acquired Shares).
Except as otherwise indicated in other table footnotes, the indicated
directors and executive officers possess sole voting and investment power with
respect to all shares of Common Stock and Preferred Stock attributed. The
footnotes to the tables follow the last table.
Ownership of Outstanding Common Shares
and
All Deemed Acquired Shares
Name # of Shares % Ownership
Gerald N. Agranoff (1) 181,618 *
David S. Geiman 150,000 *
Phillip P. Krumb 129,454 *
Mark A. Margason (2)(3) 7,420,233 18.06%
Edward L. McMillan (2) 5,825,420 11.75%
David W. Pequet (2)(3) 7,420,233 18.06%
William K. Richardson 306 *
Directors and Executive
Officers as a Group(1)(2) 7,881,305 19.2%
* Indicates less than 1% ownership as a percent of the outstanding class.
67
(1) This amount includes 6,618 shares of Common Stock directly owned by Mr.
Agranoff and 175,000 Deemed Acquired Shares subject to currently exercisable
options. Mr. Agranoff is a general partner of Plaza Securities Company which
owns 99,381 shares of Common Stock. He disclaims beneficial ownership of these
shares which are excluded in the party's listing in the beneficial ownership
table above due to the sole voting and dispositive powers attributed to Mr.
Edelman in his Schedule 13D. Mr. Agranoff is also a director of Canal Capital
Corporation which owns 82,278 shares. Mr. Agranoff disclaims beneficial
ownership of these shares and they are excluded from his beneficial ownership
listing due to the sole voting and dispositive powers attributed to Mr. Edelman.
(2) 5,398,844 shares of Common Stock and 58,838 Deemed Acquired Shares of Series
B Preferred Stock (convertible into 426,576 shares of Common Stock) are owned by
AEI and are included in this tabulation because the named party is director of
AEI and, in that capacity, shares investment control with respect to these
shares. However, the named party disclaims beneficial ownership of these shares
except to the extent of his ownership of debt and equity securities of AEI.
(3) MPI Venture Management, LLC owns 394,365 shares of Common Stock and 165,579
shares of Series B Preferred (convertible into 1,200,448 shares of Common
Stock). Messrs. David W. Pequet and Mark A. Margason each own 50% of MPI Venture
Management, LLC, and both are directors of the Company and the Reporting Person.
Messrs.. Pequet and Margason have shared power to vote or to direct the vote and
shared power to dispose or to direct the disposition of the shares reported as
beneficially owned.
ITEM 13. Certain Relationships and Related Transactions
(Dollars in thousands)
Gerald N. Agranoff, the Company's Vice President and Secretary as well as
its general counsel and a director, is of counsel at the law firm Pryor Cashman
Sherman & Flynn LLP. During the years ended December 31, 2003, 2002 and 2001,
the Company paid legal fees of $0, $106 (of which $55 was accrued at December
31, 2002), and $233 (of which $70 was accrued at December 31, 2000), to Pryor
Cashman Sherman & Flynn LLP, for legal services provided by attorneys other than
Mr. Agranoff.
During the years ended December 31, 2003, 2002 and 2001, the Company paid
secretarial expenses of $66 (of which $13 was accrued as of December 31, 2003),
$64 and $50, respectively, to Canal Capital Corporation ("Canal Capital"). Asher
B. Edelman, former Vice Chairman of the Company's Board of Directors, serves as
chairman of the board of directors of Canal Capital and Mr. Agranoff is also a
member of the board.
68
The Company, along with co-tenants Canal Capital and Plaza Securities
Company LP, of which Mr. Edelman, a former director of the company, is the
controlling general partner and Mr. Agranoff is a general partner, entered into
an amendment of its New York office lease in February, 1999. While the Company
is currently paying 50% of the monthly lease payment, each co-tenant of is
jointly liable for the full lease obligation. On April 9, 2004, the Company,
along with co-tenants Canal Capital Corporation and Plaza Securities Company LP,
entered into a settlement agreement with the landlord of its New York office
lease. The settlement agreement provides for, among other things, termination of
the lease in its entirety and full release of all of the parties. The release is
contingent upon the forfeiture of the Company's and co-tenants' security
deposits and the payment of two months rent, full payment of which must be
received by the landlord not later than April 30, 2004. While the Company
intends to make such payment, if the payment is not received, the landlord
maintains full rights to sue the Company for damagew with respect to the Lease.
The terms of the original lease provided for lease termination in October, 2009
and the Company's annual lease obligation was approximately $400.
Joshua J. Angel, a former member of the Company's Board of Directors, is
the senior managing shareholder of Angel & Frankel, P.C. During the years ended
December 31, 2003, 2002 and 2001, the Company paid legal fees of $0, $0 and $93,
respectively, to Angel & Frankel, P. C. for legal services.
On February 25, 2003, the Company began leasing approximately 600 square
feet from MPI Investment Management, Inc. ("MPI"). Messrs. David W. Pequet and
Mark A. Margason, both Company directors, are also principals of MPI. During the
year ended December 31, 2003, the Company paid MPI $12.
See Note 4 to the Consolidated Financial Statements for a discussion of the
Company's investment in the Partnership.
ITEM 14. Controls and Procedures
In conjunction with this Annual Report on Form 10-K and their certification
of the disclosures herein, the Company's Principal Executive Officer, David S.
Geiman, and Principal Financial Officer, Phillip P. Krumb, evaluated the
effectiveness of the Company's disclosure controls and proceedings. This review,
which occurred within ninety (90) days prior to the filing of this Annual
Report, found the disclosure controls and proceedings to be effective.
There have been no significant changes in the Company's internal controls
or in other factors which would significantly affect these controls subsequent
to the evaluation by Mr. Geiman and Mr. Krumb.
Available Information
The Company intends to provide a hyperlink from its internet website (www.
cattlesale.com) to the Securities and Exchange Commission ("SEC") website where
the public may obtain copies of the Company's Annual Report on Form 10-K,
quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to
these reports, as soon as reasonably practicable after they are electronically
69
filed with the SEC. Interested parties may also directly access the SEC's
website which contains reports and other information that the Trust files
electronically with the SEC. The address of the SEC's website is
http://www.sec.gov. The Company will provide paper copies of its filings free of
charge upon request to William K. Richardson, Treasurer.
70
PART IV
ITEM 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) Documents Filed as Part of this Report
(1) Financial Statements
The consolidated financial statements listed in the accompanying index to
the financial statements are filed as part of this report.
(2) Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts and Reserves
All other schedules are omitted since they are either not applicable or the
required information is shown in the Company's Consolidated Financial Statements
or Notes thereto. Individual financial statements of the Company are omitted
because the Company is primarily an operating company and all subsidiaries
included in the Consolidated Financial Statements being filed, in the aggregate,
do not have minority equity interest and/or indebtedness to any person other
than the Company or its consolidated subsidiaries in amounts which together
exceed 5% of the total consolidated assets as shown by the most recent year-end
Consolidated Balance Sheet.
(3) The exhibits listed in the "Exhibit Index" on page 74 of this Annual
Report.
(b) Reports on Form 8-K
The Company filed a Form 8-K on December 15 announcing David S. Geiman's
election to the Company's Board of Directors and the receipt of bridge
financing. A Form 8-K was filed December 18 announcing the resignation of Asher
B. Edelman and Joshua Angel from the Company's Board of Directors.
(c) Exhibits
The exhibits listed on the Exhibit Index on page 74 are filed as part of
this Annual Report.
(d) Additional Financial Statement Schedules
See Item 15(a)(2) above.
71
INDEX TO EXHIBITS
(3)(b) Bylaws of Datapoint Corporation, as amended (filed as Exhibit (3)(b) to the Company's
Annual Report on Form 10-K for the year ended August 1, 1992 and incorporated herein by
reference).
(3)(d) Second Restated Certificate of Corporation (filed as Exhibit 3(d) to the Company's
Current Report on Form 8-K dated February 25, 2003 and incorporated herein by reference).
(10)(jj) Stock Purchase Agreement between Reboot Systems, Inc. and Datapoint Corporation dated
July 31, 1999 and as amended on November 1, 1999.
(10)(kk) Asset Purchase Agreement between Datapoint Corporation, SF Digital, LLC and John
Engstrom, and John Engstrom d/b/a SF Digital and Corebyte(TM) dated July 27, 1999.
(10)(tt) Operating Agreement of CS Livestock Commissions Co., LLC (the "Livestock Operating
Agreement") (filed as Exhibit 10(tt) to the Company's Current Report on Form 8-K dated
February 25, 2003 and incorporated herein by reference).
(10)(uu) Amendment to the Livestock Operating Agreement(filed as Exhibit 3(uu) to the Company's
Current Report on Form 8-K dated February 25, 2003 and incorporated herein by reference).
(10)(vv) Operating Agreement of CS Auction Production Co. LLC (the "Auction Operating Agreement")
(filed as Exhibit 10(vv) to the Company's Current Report on Form 8-K dated February 25,
2003 and incorporated herein by reference).
(10)(ww) Amendment to the Auction Operating Agreement (filed as Exhibit 10(ww) to the Company's
Current Report on Form 8-K dated February 25, 2003 and incorporated herein by reference).
(10)(xx) Purchase Agreement, dated as of February 25, 2003, by and between the Company and AEI
Environmental, Inc. (filed as Exhibit 10(xx) to the Company's Current Report on Form 8-K
dated February 25, 2003 and incorporated herein by reference).
(10)(yy) Escrow Agreement dated as of February 25, 2003, by and between the Company and Asher B.
Edelman, as Escrow Agent for the Benefit of the Holders of Record of the Company's Common
Stock on February 24, 2003 (filed as Exhibit 10(yy) to the Company's Current Report on
Form 8-K dated February 25, 2003 and incorporated herein by reference).
(10)(zz) Employment Agreement dated as of February 25, 2003, by and between the Company and
Michael B. Andelman (filed as Exhibit 10(zz) to the Company's Current Report on Form 8-K
dated February 25, 2003 and incorporated herein by reference).
72
(10)(aaa) Employment Agreement dated as of February 25, 2003, by and between the Company and Gerald
N. Agranoff (filed as Exhibit 10(aaa) to the Company's Current Report on Form 8-K dated
February 25, 2003 and incorporated herein by reference).
(10)(bbb) Services Agreement dated as of February 25, 2003, by and between the Company and Asher B.
Edelman (filed as Exhibit 10(bbb) to the Company's Current Report on Form 8-K dated
February 25, 2003 and incorporated herein by reference).
(10)(ccc) Employment Agreement dated as of February 25, 2003, by and between the Company and
Phillip P. Krumb (filed as Exhibit 10(ccc) to the Company's Current Report on Form 8-K
dated February 25, 2003 and incorporated herein by reference).
(10)(ddd) Letter of Intent dated March 7, 2004 between the CattleSale Company and CowTek, Inc. (filed
as Exhibit 10(ddd) to the Company's Current Report on Form 8-K dated March 11, 2004 and
incorporated herein by reference).
(21) Subsidiaries of Registrant
73
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
The CattleSale Company
(f/k/a Dynacore Holdings Corporation)
(Registrant)
By: /s/ Phillip P. Krumb
Phillip P. Krumb
Vice President, Chief Financial
Officer and Director
DATED: April 14, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ Edward L. McMillan
Edward L. McMillan Chairman of the Board April 14, 2004
/s/ David S. Geiman
David S. Geiman Chief Executive Officer April 14, 2004
/s/ Gerald N. Agranoff
Gerald N. Agranoff Vice President,
Secretary and Director April 14, 2004
/s/ David W. Pequet
David W. Pequet Director April 14, 2004
/s/ Mark A. Margason
Mark A. Margason Director April 14, 2004
74
Exhibit 31.1
CERTIFICATION
I, David S. Geiman, President and Chief Executive Officer of The CattleSale
Company, certify that:
1. I have reviewed this Annual Report on Form 10-K for the fiscal year
ended at December 31, 2003 of The CattleSale Company;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by the report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15 (e) and 15d-15 (e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial reporting;
and
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation of internal controls over financial reporting, to
the registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonable
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control over
financial reporting.
Date: April 14, 2004
/s/ David S. Geiman
David S. Geiman
President and Chief Executive Officer
75
Exhibit 31.2
CERTIFICATION
I, Phillip P. Krumb, Chief Financial Officer of The CattleSale Company,
certify that:
1. I have reviewed this Annual Report on Form 10-K for the fiscal year
ended at December 31, 2003 of The CattleSale Company;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by the report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15 (e) and 15d-15 (e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial reporting;
and
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation of internal controls over financial reporting, to
the registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonable
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control over
financial reporting.
Date: April 14, 2004
/s/Phillip P. Krumb
Phillip P. Krumb
Chief Financial Officer
76
EXHIBIT 32.1
CERTIFICATION OF PRESIDENT AND CHIEF EXECUTIVE OFFICER
PURSUAN TO THE 18 U.S.C. SECTION 1350
(SECTION 906 OF THE SARBANES OXLEY ACT OF 2002)
The undersigned, David S. Geiman, President and Chief Executive Officer of
The CattleSale Company (the "Registrant"), does hereby certify, pursuant to 18
U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002, that based upon a review of the Annual Report From 10-K for the year
ended December 31, 2003 of the Registrant, as filed with the Securities and
Exchange Commission on the date hereof (the "Report").
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of the Registrant.
Date: April 14, 2004 /s/ David S. Geiman
-------------------
David S. Geiman
President and Chief Executive Officer
77
EXHIBIT 32.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUAN TO THE 18 U.S.C. SECTION 1350
(SECTION 906 OF THE SARBANES OXLEY ACT OF 2002)
The undersigned, Phillip P. Krumb, Chief Financial Officer of The
CattleSale Company (the "Registrant"), does hereby certify, pursuant to 18
U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002, that based upon a review of the Annual Report From 10-K for the year
ended December 31, 2003 of the Registrant, as filed with the Securities and
Exchange Commission on the date hereof (the "Report").
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of the Registrant.
Date: April 14, 2004 /s/ Phillip P. Krumb
--------------------
Phillip P. Krumb
Chief Financial Officer
78
Schedule II
THE CATTLESALE COMPANY AND SUBSIDIARIES
Valuation and Qualifying Accounts and Reserves
(In thousands)
(a) (b)
Balance Charged Charged
at to (to) from Other Balance
Beginning Costs and Other Additions at End
Classification of Year Expenses Accounts (Deductions) of Year
Allowance for doubtful accounts:
Year ended December 31, 2003 $916 $114 $-- $(121) $909
Year ended December 31, 2002 $226 $(56) $-- $746 $916
Year ended December 31, 2001 $77 $149 $-- $-- $226
Period ended December 31, 2000 $-- $-- $-- $-- $--
(a) Transfers to and from other balance sheet reserve accounts.
(b) Accounts written-off net of recoveries, other expense accounts and translation adjustments.
79
Exhibit 21
Subsidiaries
As of December 31, 2003
(Inactive and 100% owned)
Dynacore International, Inc.
Delaware corporation
Dynacore International Holdings, Inc.
Delaware corporation
Inforex International, Inc.
Delaware corporation
Dynacore International Investments, Inc.
Delaware corporation
Datapoint International Headquarters S.A.R.L.
a French corporation
Dynacore Deutschland
a German corporation
(Active and 100% owned)
CattleSale Livestock Commissions Co. LLC
an Oregon limited liability company
CattleSale Auction Production Co. LLC
an Oregon limited liability company
80