UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
[x] QUARTERLY REPORT UNDER SECTION 13 0R 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended February 28, 2001
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANCE ACT OF 1934
For the transition period from _____________ to ________________
Commission File Number 0-22969
Paladyne Corp.
(Name of Small Business Issuer in its charter)
Delaware 59-3562953
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1650A Gum Branch Road, Jacksonville, NC 28540
(Address of Principal Executive Offices)
(888)773-3501
(Issuer's Telephone Number)
610 Crescent Executive Court, Suite 124, Lake Mary, FL 32746
(Former name, former address and former fiscal year,
if changed since last report)
Checked whether the issuer (1) filed all reports required to be filed by
Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
Yes X No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date.
Class Outstanding as of
April 10, 2001
Common Stock, $.001 PAR VALUE 8,459,351
Transitional Small Business Disclosure Format (check one): Yes No X
--- ---
1
TABLE OF CONTENTS
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements 3
Condensed Consolidated Balance Sheets - February 28, 2001
and August 31, 2000 4
Condensed Consolidated Statements of Operations -
three months ended February 28, 2001 and
February 29, 2000 5
Condensed Consolidated Statements of Operations -
six months ended February 28, 2001 and
February 29, 2000 6
Condensed Consolidated Statements of Cash Flows -
six months ended February 28, 2001 and
February 29, 2000 7
Notes to Condensed Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 16
2
PART I.
ITEM 1. FINANCIAL STATEMENTS
The following unaudited Condensed Consolidated Financial Statements for the
three months and six months ended February 28, 2001 and February 29, 2000 have
been prepared by Paladyne Corp., a Delaware corporation.
3
PALADYNE CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
FEBRUARY 28, 2001 AUGUST 31, 2000
(UNAUDITED) ---------------
-----------
ASSETS
Current Assets:
Cash and cash equivalents $ 398,459 $ 635,612
Short term investments 242,666 484,508
Accounts receivable, net
of allowances of $107,999 and $12,555 1,531,289 1,037,544
Prepaid expenses and other current assets 120,939 867
------------ ------------
Total Current Assets 2,293,353 2,158,531
Property and equipment, net 3,188,137 124,725
Goodwill, net 9,520,256 211,012
Capitalized software development costs, net 417,936 338,037
Other assets 52,272 51,461
------------ ------------
Total Assets $ 15,471,954 $ 2,883,766
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Notes payable $ 1,850,000
Accounts payable 1,229,008 $ 680,214
Due to affiliate 128,911
Accrued expenses 601,355 131,375
Accrued preferred stock dividends 129,200 108,800
Current portion of capital lease obligations 797,247
Current portion of long term debt 431,466
------------ ------------
Total Current Liabilities 5,167,187 920,389
Capital lease obligations 881,753
Long term debt 3,068,534
------------ ------------
Total Liabilities 9,117,474 920,389
------------ ------------
Stockholders' Equity
Cumulative, convertible preferred stock;
$.001 par value; 5,000,000 shares
authorized, 137,143 issued and outstanding 137 137
Convertible preferred stock- Series B, $.001
par value, 5,000,000 shares authorized,
4,100,000 and -0- issued and outstanding 4,100
Common stock; $.001 par value; 25,000,000
shares authorized, 8,459,351 and
8,456,599 issued and outstanding 8,460 8,457
Additional paid-in capital 12,879,848 7,136,430
Accumulated deficit (6,538,065) (5,181,647)
------------ ------------
Total Stockholders' Equity 6,354,480 1,963,377
------------ ------------
Total Liabilities and Stockholders' Equity $ 15,471,954 $ 2,883,766
============ ============
See accompanying notes to condensed consolidated financial statements
4
PALADYNE CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED
FEBRUARY 28, FEBRUARY 29,
2001 2000
(UNAUDITED) (UNAUDITED)
----------- -----------
Total Revenues $ 1,234,462 $ 1,268,755
Cost of Revenues 450,204 460,838
------------ ------------
Gross Profit 784,258 807,917
Selling, general and administrative expenses 1,485,317 638,680
Depreciation and amortization 193,279 28,565
------------ ------------
Income (loss) from operations (894,338) 140,672
Other income (expense):
Interest income 5,406 -
Interest expense (57,721) (13,249)
------------ ------------
Net income (loss) (946,653) 127,423
Cumulative Convertible Preferred Stock
Dividend Requirement ( 10,200) ( 10,200)
------------ ------------
Net income (loss) attributable to
common stockholders $ (956,853) $ 117,223
============ ============
Weighted average common shares outstanding:
Basic 8,459,351 7,403,658
Diluted 8,459,351 10,059,106
Earnings (loss) per share:
Basic $ (.11) $ .02
Diluted $ (.11) $ .01
See accompanying notes to condensed consolidated financial statements
5
PALADYNE CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED
FEBRUARY 28, FEBRUARY 29,
2001 2000
(UNAUDITED) (UNAUDITED)
----------- -----------
Total Revenues $ 2,269,194 $ 2,246,961
Cost of Revenues 1,287,434 1,218,798
------------ ------------
Gross Profit 981,760 1,028,163
Selling, general and administrative expenses 2,075,946 885,281
Depreciation and amortization 232,545 38,825
------------ ------------
Income (loss) from operations (1,326,731) 104,057
Other income (expense):
Interest income 21,048 -
Interest expense (57,721) (19,468)
Other income 6,986 -
------------ ------------
Net income (loss) (1,356,418) 84,589
Cumulative Convertible Preferred
Stock Dividend Requirement ( 20,400) ( 20,400)
------------ ------------
Net income (loss) attributable to
common stockholders ($1,376,818) $ 64,189
============ ============
Weighted average common shares outstanding:
Basic 8,458,956 7,428,587
Diluted 8,458,956 9,615,589
Earnings (loss) per share:
Basic $ (.16) $ .01
Diluted $ (.16) $ .01
See accompanying notes to condensed consolidated financial statements
6
PALADYNE CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED
FEBRUARY 28, FEBRUARY 29,
2001 2000
(UNAUDITED) (UNAUDITED)
----------- -----------
Cash flows used in operating activities $ (165,641) $ ( 21,095)
Cash flows used in investing activities (380,833) (527,285)
Cash flows provided by financing activities 309,321 1,396,119
------------ ------------
Net increase (decrease) in cash and
cash equivalents (237,153) 847,739
Cash and cash equivalents at beginning of period 635,612 -----
------------ ------------
Cash and cash equivalents at end of period $ 398,459 $ 847,739
============ ============
Supplemental Cash Flow Information:
Cash paid for interest $ - $ 19,468
Non cash investing and financing activities:
Issuance of common shares as payment
of debt 99,400
Accrual of preferred stock dividend 20,400 88,400
Assets acquired in merger 4,234,636 -
Debt assumed in merger 5,000,000 -
Liabilities assumed in merger 2,375,579 -
Issuance of preferred stock in merger 5,765,420 -
See accompanying notes to condensed consolidated financial statements
7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
NOTE 1. BASIS OF PRESENTATION
The consolidated financial information included herein includes the information
for Paladyne Corp. and its wholly owned subsidiary. All significant
inter-company transactions and balances have been eliminated.
The consolidated financial information included herein is unaudited; however,
such information reflects all adjustments (consisting solely of normal recurring
adjustments) that, in the opinion of management, are necessary for a fair
statement of results for this interim period. The accompanying financial
statements include estimated amounts and disclosures based on management's
assumptions about future events. Actual results may differ from those estimates.
The results of operations and cash flows for the interim periods are not
necessarily indicative of the results to be expected for the full year.
The condensed consolidated financial statements have been prepared by the
Company, without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the disclosures are adequate to
make information presented not misleading.
These consolidated financial statements should be read in conjunction with the
financial statements included in the Company's Form 10-KSB for the fiscal year
ended August 31, 2000 as filed with the Securities and Exchange Commission.
The Company's consolidated financial statements are presented on a going concern
basis, which contemplates the realization of assets and satisfaction of
liabilities in the normal course of business. As with any new venture, concerns
must be considered in light of the normal problems, expenses and complications
encountered by entrance into established markets and the competitive environment
in which the Company operates. The consolidated financial statements do not
include, nor does management feel it necessary, any adjustments to reflect any
possible future effects on the recoverability and classification of assets or
the amounts and classification of liabilities that may result from the possible
inability of the Company to continue as a going concern
NOTE 2. MERGER
On February 1, 2001, Paladyne Corp. ("Paladyne") through a wholly-owned
subsidiary E-com Acquisition Corp. ("Acquisition Sub"), merged (the "Merger")
with e-commerce support centers, inc., a North Carolina corporation ("e-com"),
pursuant to an Agreement and Plan of Merger, dated as of December 21, 2000, as
amended (collectively, the "Merger Agreement"). Upon the Merger, e-com became a
wholly-owned subsidiary of Paladyne. e-com is a provider of electronic Customer
Relationship Management (CRM) solutions as an outsourcing option to e-commerce
companies from its call center in Jacksonville, NC. The merger consideration
(the "Merger Consideration") to the e-com shareholders consisted of shares of
newly-created Series B Convertible Preferred Stock, $.001 par value (the "Series
B Preferred Stock"), Anti-Dilution Warrants and Performance Warrants (as
discussed below) and the right to receive additional shares of Paladyne Common
Stock in conjunction with future placements by Paladyne. Terrence J. Leifheit,
the principal shareholder of e-com, and another e-com shareholder, delivered
into escrow securities representing approximately 25% of the aggregate Merger
Consideration as security for indemnification claims Paladyne may have under the
Merger Agreement.
Upon the Merger, Paladyne issued 4,100,000 shares of Series B Preferred Stock.
Each share of Series B Preferred Stock votes on a two-for-one basis with the
Common Stock on all matters, but with a separate vote on matters directly
affecting such Series, mandatorily converts into two shares of Paladyne Common
Stock immediately following stockholder approval (the "Stockholder Approval") of
an increase in the number of authorized shares of Common Stock, will receive any
8
dividends declared on an as-converted basis with the Common Stock and will have
a liquidation preference of $5.00 per share. In the event the Stockholder
Approval is not obtained by July 2, 2001 (which date may be extended by reason
of delays in obtaining certain historical financial information of e-com), then
the holders of the Series B Preferred Stock would have rights to designate
directors who would comprise a majority of the Board of Directors and would have
a 100% increase in their liquidation preference, until the Stockholder Approval
is obtained. To protect against dilution to the former e-com shareholders upon
exercise of outstanding pre-Merger Paladyne options and warrants (the "Present
Options/Warrants"), Paladyne granted to them Anti-Dilution Warrants to purchase
4,000,000 shares of Paladyne Common Stock at an exercise price of $1.146 per
share (subject to adjustment), vesting as to 0.6 of a share of Common Stock for
each share of Common Stock issued upon the exercise of Present Options/Warrants,
and expiring 30 days after the later of (i) termination or exercise of all
Present Options/Warrants or (ii) notice from Paladyne as to the aggregate number
of Present Options/Warrants that were exercised.
To give the former e-com shareholders the opportunity to participate more
directly in the future performance of Paladyne resulting from the acquired e-com
business, Paladyne granted to them Performance Warrants to purchase 500,000
shares of Paladyne Common Stock at an exercise price of $1.146 per share
(subject to adjustment), exercisable for five years and vesting in 100,000 share
tranches for each $20 million of net revenue increases, above $50 million
annually, achieved in either year or both of the two (2) year periods ending
January 31, 2002 and 2003. For the purpose of these awards, the measurement will
be on a trailing 12-month basis, and with an acceptable gross margin (20% or
greater) for each tranche to qualify.
In addition, ending upon the earlier to occur of December 20, 2002 or Paladyne's
completion of $6,500,000 in cash from sales of Common Stock or Common Stock
equivalents (the "New Securities"), e-com shareholders will receive, one share
(the "Deferred Shares") of Common Stock for each $1.00 in gross proceeds
received upon the sale of New Securities or issuable upon conversion, exercise
or exchange of New Securities.
The Merger Agreement provided that Paladyne would grant options, at market
value, to e-com employees for the purchase of an aggregate of 500,000 shares of
Paladyne Common Stock under its 1999 Stock Option Plan. The Compensation
Committee of the Board of Directors was authorized to grant such options upon
receipt from former e-com management of a proposal of the-ecom employees to whom
the options should be granted.
Immediately prior to the Merger, e-com purchased from Gibralter Publishing,
Inc., a North Carolina corporation, all of the tangible and intangible assets
used in e-com's call center operations, subject to related liabilities, pursuant
to an Option Agreement. Prior to the Merger, Gibralter had been operating the
call center on behalf of ecom. The purchase price for these assets was $5
million which is payable by e-com pursuant to two amended promissory notes
issued to Gibralter and guaranteed by Paladyne, one note for $1,500,000,
repayable in two installments of $750,000, the first being due after completion
of a $3,000,000 equity or convertible debt offering and the remaining payment
due no sooner than six months after the first payment and after three
consecutive months of positive cash flow from operations. The second note for
$3,500,000, is repayable in equal quarterly principal and interest payments of
$377,000 beginning in October 2001 and continuing through July 2004. Both notes
bear interest at 10% per annum and are secured by the purchased assets.
A portion of these assets used by e-com in its call center operations consists
of equipment that is leased by Gibraltar pursuant to various equipment leases.
Pending the receipt by Gibralter of lessor consents to the assignments of these
leases to e-com, and in accordance with an Equipment Use Agreement entered into
by Gibralter and e-com, Gibralter has granted to e-com the right to possess and
use the equipment and e-com has agreed to assume and pay to the lessors the
payments to be made by Gibralter pursuant to the leases.
The acquisition was accounted for using the purchase method of accounting
effective February 1, 2001, and accordingly, the assets and liabilities as of
this date are included in the accompanying consolidated financial statements as
of February 28, 2001. As of April 12, 2001 the Company has performed a purchase
price allocation based upon information available as of this date. The purchase
price has been allocated to the net assets acquired and net liabilities assumed
based upon their estimated fair values. Included in this preliminary allocation
were acquired assets of approximately $4,235,000, assumed debt of $5,000,000 and
other liabilities of approximately $2,376,000. The 4,100,000 shares of Series B
Preferred Stock issued in the merger was valued based upon the underlying
8,200,000 shares of common stock at a price of $.7031 (average fair value a few
9
days before and after the date of the merger agreement) for a total
consideration of $5,765,000. Total consideration of $5,765,000 and acquisition
costs of approximately $467,000 results in an excess of purchase price over the
fair value of the net assets acquired of $9,373,000 that has been assigned to
goodwill that will be amortized on a straight-line basis over 15 years. The
results of the acquired business have been included in the consolidated
financial statements since the date of acquisition.
The following unaudited pro forma information presents the condensed
consolidated statement of operations of the Company as if the acquisition had
taken place on September 1, 1999. e-com had a December 31 year end and
therefore, e-com's results for the three and six months ended December 31, 2000
have been consolidated with Paladyne's results for the three and six months
ended February 28, 2001. e-com's results for the three and six months ended
March 31, 2000 have been consolidated with Paladyne's results for the three and
six months ended February 29, 2000.
For the three months ended For the six months ended
February 28, February 29, February 28, February 29,
2001 2000 2001 2000
---- ---- ---- ----
Revenues $ 2,121,055 $ 1,887,753 $ 4,733,619 $ 3,085,363
Net loss attributable
to common stockholders $(1,392,276) $ (820,235) $(2,799,814) $(2,218,719)
Weighted average common
shares outstanding:
Basic and diluted 8,459,351 7,403,658 8,458,956 7,428,587
Earnings (loss) per share:
Basic and diluted $ (.16) $ (.11) $ (.33) $ (.30)
These unaudited pro forma results have been prepared for comparative purposes
only and include certain adjustments, such as additional amortization expense as
a result of the goodwill and increased interest expense on acquisition related
debt. They do not purport to be indicative of the results of operations that
actually would have resulted on the date indicated, or which may result in the
future.
NOTE 3. CAPITAL STOCK
The holders of the Company's cumulative convertible preferred stock are entitled
to receive, out of the net profits of the Company, annual dividends at the rate
of $.2975 per share. If the net profits of the Company are not sufficient to pay
the preferred dividend, then any unpaid portion of the dividend will be included
in accrued expenses. The Company had accrued cumulative preferred stock
dividends of $129,200 as of February 28, 2001.
NOTE 4. CAPITALIZED SOFTWARE DEVELOPMENT COSTS
Costs incurred to establish the technological feasibility of computer software
products are charged to expense as incurred. Costs of producing product masters
subsequent to establishing technological feasibility, including coding and
testing, are capitalized. Capitalization of computer software costs ceases when
the product is available for general release to customers. Capitalized costs as
of February 28, 2001 for the development of the Datagration product, release 1.0
and release 2.0, was $486,729. Datagration 1.0 was released in March 2000 and
Datagration 2.0 was released in November 2000. Accumulated amortization of
software development costs as of February 28, 2001 was $68,793. These
capitalized software development costs are amortized using either the
straight-line method over the estimated economic life of the product (which is
estimated to be three years) or the ratio of current revenues to current and
anticipated revenues for the product whichever results in the greater amount of
amortization. Unamortized capitalized costs of a computer software product in
excess of its estimated net realizable value are expensed.
10
NOTE 5. INCOME TAXES
The Company accounts for income taxes using the liability method. Under this
method, deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities. The Company
recorded a valuation allowance to state deferred tax assets at estimated
realizable value. The Company does not consider the realization of such amounts
to be more likely than not, due to uncertainty related to realization of those
assets through future taxable income.
NOTE 6. DEBT AND CAPITAL LEASE OBLIGATIONS:
In conjunction with the e-com acquisition on February 1, 2001, the Company
assumed debt related to the purchase of fixed assets and capital lease
obligations totaling approximately $6,743,000. Notes payable to Gibralter
Publishing, Inc., a related party, represents $5,000,000 of this total. The
remaining balance relates to capitalized leases for equipment and software.
Total debt and capital lease obligations obligations as of February 28, 2001 are
summarized as follows:
Notes payable to Gibralter Publishing, Inc., 10% interest, $5,000,000
Line of credit with a bank, interest at prime plus 1% 350,000
Capital leases, principal and interest payable in installments
through 2004, interest rates range from 8% to 13%
collateralized by specific computer and telephone
equipment and software 1,679,000
----------
Total 7,029,000
Less current portion 3,078,713
----------
Total long term portion $3,950,287
==========
NOTE 7. CONTINGENCY
The Company has been named in a lawsuit filed by a former employee claiming
additional compensation is due. The Company's position is that the lawsuit has
no merit and intends to vigorously defend its position. No amounts have been
accrued relating to this lawsuit as of February 28, 2001.
NOTE 8. SUBSEQUENT EVENTS
In April 2001, the Company's Board of Directors authorized the issuance of up
to $500,000 of 8% convertible subordinated debentures. These debentures provide
that they are convertible into common shares of the Company, at the option of
the Company, upon completion of a private placement of the Company's common
stock or an instrument convertible into common stock of at least $500,000. The
conversion rate of these debentures shall be equivalent to that in the private
placement that triggers the Company's conversion rights. The debentures will
mature on March 31, 2002 with interest and principal due at that time if not
converted into common stock. The debentures are subordinate to all indebtedness
of the Company and its subsidiaries. On April 11, 2001, an officer and board
member of the Company was issued $50,000 of these debentures for cash.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
- --------
Paladyne Corp. (the "Company") provides software products and ancillary services
that enable companies to quickly build databases with high data integrity, thus
cutting long implementation times and eliminating the risk of building the
database with poor quality data. As discussed in the following paragraphs, an
acquisition has expanded the Company's services to include traditional call
center services and Customer Relationship Management (CRM) solutions. Paladyne
data quality solutions and services support desktop marketers and developers of
data warehouses and data marts. Paladyne software is based on an open,
multi-tiered, cross-platform architecture within the customer relationship
management segment.
On February 1, 2001, the Company, through a wholly-owned subsidiary E-com
Acquisition Corp. ("Acquisition Sub"), merged (the "Merger") with e-commerce
support centers, inc., a North Carolina corporation ("e-com"), pursuant to an
Agreement and Plan of Merger, dated as of December 21, 2000, as amended
(collectively, the "Merger Agreement"). Upon the Merger, e-com became a
wholly-owned subsidiary of Paladyne. e-com is a provider of electronic Customer
Relationship Management (CRM) solutions as an outsourcing option to traditional
and e-commerce companies from its call center in Jacksonville, NC. The merger
consideration (the "Merger Consideration") to the e-com shareholders consisted
of shares of newly-created Series B Convertible Preferred Stock, $.001 par value
(the "Series B Preferred Stock"), Anti-Dilution Warrants and Performance
Warrants (as discussed below) and the right to receive additional shares of
Paladyne Common Stock in conjunction with future placements by Paladyne.
Terrence J. Leifheit, the principal shareholder of e-com, and another e-com
shareholder, delivered into escrow securities representing approximately 25% of
the aggregate Merger Consideration as security for indemnification claims
Paladyne may have under the Merger Agreement.
Upon the Merger, Paladyne issued 4,100,000 shares of Series B Preferred Stock.
Each share of Series B Preferred Stock votes on a two-for-one basis with the
Common Stock on all matters, but with a separate vote on matters directly
affecting such Series, mandatorily converts into two shares of Paladyne Common
Stock immediately following stockholder approval (the "Stockholder Approval") of
an increase in the number of authorized shares of Common Stock, will receive any
dividends declared on an as-converted basis with the Common Stock and will have
a liquidation preference of $5.00 per share. In the event the Stockholder
Approval is not obtained by July 2, 2001 (which date may be extended by reason
of delays in obtaining certain historical financial information of e-com), then
the holders of the Series B Preferred Stock would have rights to designate
directors who would comprise a majority of the Board of Directors and would have
a 100% increase in their liquidation preference, until the Stockholder Approval
is obtained. To protect against dilution to the former e-com shareholders upon
exercise of outstanding pre-Merger Paladyne options and warrants (the "Present
Options/Warrants"), Paladyne granted to them Anti-Dilution Warrants to purchase
4,000,000 shares of Paladyne Common Stock at an exercise price of $1.146 per
share (subject to adjustment), vesting as to 0.6 of a share of Common Stock for
each share of Common Stock issued upon the exercise of Present Options/Warrants,
and expiring 30 days after the later of (i) termination or exercise of all
Present Options/Warrants or (ii) notice from Paladyne as to the aggregate number
of Present Options/Warrants that were exercised.
To give the former e-com shareholders the opportunity to participate more
directly in the future performance of Paladyne resulting from the acquired e-com
business, Paladyne granted to them Performance Warrants to purchase 500,000
shares of Paladyne Common Stock at an exercise price of $1.146 per share
(subject to adjustment), exercisable for five years and vesting in 100,000 share
tranches for each $20 million of net revenue increases, above $50 million
annually, achieved in either year or both of the two (2) year periods ending
January 31, 2002 and 2003. For the purpose of these awards, the measurement will
be on a trailing 12-month basis, and with an acceptable gross margin (20% or
greater) for each tranche to qualify.
In addition, ending upon the earlier to occur of December 20, 2002 or Paladyne's
completion of $6,500,000 in cash from sales of Common Stock or Common Stock
equivalents (the "New Securities"), e-com shareholders will receive, one share
12
(the "Deferred Shares") of Common Stock for each $1.00 in gross proceeds
received upon the sale of New Securities or issuable upon conversion, exercise
or exchange of New Securities.
The Merger Agreement provided that Paladyne would grant options, at market
value, to e-com employees for the purchase of an aggregate of 500,000 shares of
Paladyne Common Stock under its 1999 Stock Option Plan. The Compensation
Committee of the Board of Directors was authorized to grant such options upon
receipt from former e-com management of a proposal of the-ecom employees to whom
the options should be granted.
Immediately prior to the Merger, e-com purchased from Gibralter Publishing,
Inc., a North Carolina corporation of which Mr. Leifheit is a principal
shareholder ("Gibralter"), all of the tangible and intangible assets used in
e-com's call center operations, subject to related liabilities, pursuant to an
Option Agreement. Prior to the Merger, Gibralter had been operating the call
center on behalf of ecom. The purchase price for these assets was $5 million
which is payable by e-com pursuant to two amended promissory notes issued to
Gibralter and guaranteed by Paladyne, one note for $1,500,000, repayable in two
installments of $750,000, the first being due after completion of a $3,000,000
equity or convertible debt offering and the remaining payment due no sooner than
six months after the first payment and after three consecutive months of
positive cash flow from operations. The second note for $3,500,000, is repayable
in equal quarterly principal and interest payments of $377,000 beginning in
October 2001 and continuing through July 2004. Both notes bear interest at 10%
per annum and are secured by the purchased assets.
RESULTS OF OPERATIONS
- ---------------------
The following table sets forth the percentage relationship to the total revenues
of principal items contained in the Company's Condensed Consolidated Statements
of Operations for the three and six months ended February 28, 2001 and February
29, 2000, respectively. The percentages discussed throughout this analysis are
stated on an approximate basis.
Three months Ended Six months Ended
February 28, February 29, February 28, February 29,
2001 2000 2001 2000
------------------ ------------------
(UNAUDITED) (UNAUDITED)
Total revenues 100% 100% 100% 100%
Cost of revenues 36% 36% 57% 54%
---- ---- ---- ----
Gross profit 64% 64% 43% 46%
Operating expenses 136% 53% 102% 41%
---- ---- ---- ----
Operating income (loss) (72%) 11% (59%) 5%
Interest expense (5%) (1%) (2%) (1%)
Interest income - - 1% -
---- ---- ---- ----
Net income (loss) (77%) 10% (60%) 4%
---- ---- ---- ----
---- ---- ---- ----
13
COMPARISON OF THE SIX MONTHS ENDED FEBRUARY 28, 2001 TO SIX MONTHS ENDED
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FEBRUARY 29, 2000
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Revenues for the six months ended February 28, 2001 increased $22,233 (1%) to
$2,269,194 from the corresponding six-month period in the prior year. This
increase is due to the acquisition that was effective February 1, 2001 that
resulted in $897,082 of revenue during the month of February. The Company's
traditional revenue sources declined $874,849 during this six months. This
decrease is due to the termination of the US West MDU project which concluded in
June 2000 and the significant reduction of the Qwest database project in
December 2000. The US West project was providing approximately $110,000 of
monthly revenue while the Qwest database project was generating about $250,000
of monthly revenue.
Gross profit decreased by only $46,403 (5%) for the six-month period ended
February 28, 2001 from $1,028,163 for the corresponding six-month period in the
prior year to $981,760. As a percentage of sales, gross profit decreased
slightly to 43% during the six-month period ended February 28, 2001 from 46% for
the same period in the prior year. This decrease is attributable to slightly
higher costs associated with providing database services.
Operating expenses, including depreciation and amortization, have increased as
percentage of revenue from 41% for the six months ended February 29, 2000 to
102% for the six months ended February 28, 2001. This increase is due in part to
a sharp decline in the Company's traditional revenue stream that did not affect
normal operating costs. Trade show costs were also higher in this period due to
increased marketing activity related to the Company's Datagration product. The
inclusion of the February operations for e-com that was acquired on February 1,
2001 also accounted for a large portion of this increase. Depreciation and
amortization increased from $38,825 to $232,545 for the six months ended
February 29, 2000 compared to February 28, 2001. This is due primarily to the
amortization of goodwill related to the acquisition of e-com and the
depreciation of the acquired assets.
Interest expense, as percentage of revenue, increased to 2% from 1% during the
six months ended February 28, 2001 as compared to the six months ended February
29, 2000. This increase from $19,468 to $57,721 is attributable to the debt
assumed relating to the acquisition of e-com on February 1, 2001.
COMPARISON OF THE THREE MONTHS ENDED FEBRUARY 28, 2001 TO THREE MONTHS ENDED
FEBRUARY 29, 2000
Revenues for the three months ended February 28, 2001 decreased $34,293 (3%) to
$1,234,462 from the corresponding three month period in the prior year. This
increase is due to the acquisition that was effective February 1, 2001 that
resulted in $897,082 of revenue during the month of February. The Company's
traditional revenue sources declined $931,375 during this three months. This
decrease is due to the termination of the US West MDU project which concluded in
June 2000 and the significant reduction of the Qwest database project in
December 2000. The US West project was providing approximately $110,000 of
monthly revenue while the Qwest database project was generating about $250,000
of monthly revenue.
Gross profit decreased by only $23,659 (3%) for the three-month period ended
February 28, 2001 from $807,917 for the corresponding three-month period in the
prior year to $784,258. As a percentage of sales, gross profit increased only 1%
to 64% during the three-month period ended February 28, 2001 from 63% for the
same period in the prior year.
Operating expenses, including depreciation and amortization, have increased as
percentage of revenue from 53% for the three months ended February 29, 2000 to
136% for the six months ended February 28, 2001. This increase is due in part to
a sharp decline in the Company's traditional revenue stream that did not affect
normal operating costs. Trade show costs were also higher in this period due to
increased marketing activity related to the Company's Datagration product. The
inclusion of the February operations for e-com that was acquired on February 1,
2001 also accounted for a large portion of this increase. Depreciation and
amortization increased from $28,565 to $193,279 for the three months ended
February 29, 2000 compared to February 28, 2001. This is due primarily to the
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amortization of goodwill related to the acquisition of e-com and the
depreciation of the acquired assets.
Interest expense, as percentage of revenue, increased to 5% from 1% during the
three months ended February 28, 2001 as compared to the three months ended
February 29, 2000. This increase from $13,249 to $57,721 is attributable to the
debt assumed relating to the acquisition of e-com on February 1, 2001.
LIQUIDITY AND CAPITAL RESOURCES
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The Company's principal cash requirements are for operating expenses, including
employee costs, outside consultants such as independent contractors who provide
database and professional marketing and sales consulting services, funding of
accounts receivable, capital expenditures and funding of the operations. The
Company's primary sources of cash have been from private placements of the
Company's common stock, a bank line of credit, and cash derived from operations.
The Company is aggressively seeking additional financing or additional equity
infusion to fund the acquisition and growth of e-com. A private placement of
between $3,000,000 - $6,000,000 would be optimum to implement the most
aggressive growth plans of the Company and it is likely that this will be
dilutive to stockholders. The Company is engaged in cost cutting moves including
closing the Florida office and certain employee reductions. If a private
placement of smaller amount is necessary, then certain growth plans of the
Company would have to be modified and reduced.
Cash used in operating activities increased from $21,095 to $165,641 for the six
months ended February 29, 2000 to the corresponding six months in 2001. This
cash decrease is primarily the result of start up activities related to the
introduction of the Datagration product into the marketplace. The Company
continues to maintain adequate cash and investments to fund its operations but
the merger with ecom will require a substantial amount of these funds.
The Company negotiated a new line of credit with The Huntington National Bank in
May 2000. The line of credit is for $500,000 secured by the receivables of the
Company and expires June 15, 2001. The interest rate is prime plus 1%. As of
February 28, 2001 the Company has used $350,000 proceeds from the line of
credit, which was the maximum available under the $500,000 line of credit.
INFLATION
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In the opinion of management, inflation has not had a material effect on the
operations of the Company.
RISK FACTORS AND CAUTIONARY STATEMENTS
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Forward-looking statements in this report are made pursuant to the "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995. The Company
wishes to advise readers that actual results may differ substantially from such
forward-looking statements. Forward-looking statements involve risks and
uncertainties that could cause actual results to differ materially from those
expressed in or implied by the statements, including, but not limited to, the
following: the ability of the Company to provide for its debt obligations and to
provide for working capital needs from operating revenue, and other risks
detailed in the Company's periodic report filings with the Securities and
Exchange Commission.
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PART II
ITEM 1. LEGAL PROCEEDINGS
In November 1999, the Company terminated the employment with its Vice President
of Sales. Subsequent to this termination, the former employee filed a lawsuit
claiming additional compensation was warranted in the Superior Court of Fulton
County, in the State of Georgia and is seeking payment of $178,750. The Court
issued a summary judgment order on default in June 2000 to the plaintiff in the
amount of $137,500. The Company appealed the decision and in July 2000 submitted
to the Court a Motion to Open Default. A hearing was held on August 4, 2000 and
the Court ordered the summary judgment to be reopened and the Company may
present its defense in this matter. A mediation conference is scheduled for
April 27, 2001. The Company is defending itself vigorously against this claim.
As such, no provision has been accrued in these financial statements as the
Company believes there is no merit to the claim.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - none
(b) Reports on Form 8-K dated 12/27/00 filed on 1/30/01, reporting in
item 5 the entry into the Merger Agreement with e-com support
centers, inc. (e-com)
8-K dated 2/1/01 filed on 2/8/01, reporting in item 2 the
closing of the e-com merger agreement
8-K/A dated 2/1/01 filed on 4/17/01, reporting in item 2
post closing amendments to some of the agreements
entered into upon the e-com merger and in item 7 financial
statements of e-com and pro-forma financial information of
e-com and the Company
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
PALADYNE CORP.
Date: April 19, 2001 By /s/ Terrance Leifheit
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Terrance Leifheit
President
Date: April 19, 2001 By /s/ Clifford Clark
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Clifford Clark
Chief Financial Officer
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