SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
Filed by the Registrant [ ]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement [X] Definitive Proxy Statement
[ ] Definitive Additional Materials [ ] Soliciting Materials Pursuant to
[ ] Confidential, for use of the Commission Section 240.14a-11(c) or
Only (as permitted by Rule 14a-6(e)(2)) Section 240.14a-12
PALADYNE CORP.
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(Name of Registrant as Specified in its Charter)
-------------------------------------------------
(Name of Person(s) Filing Proxy Statement
if other than Registrant)
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a(6)(i)(4) and 0-11.
1) Title of each class of securities to which transaction applies:_________
2) Aggregate number of securities to which transaction applies:____________
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth amount on which the
filing fee is calculated and state how it was determined):____________
4) Proposed maximum aggregate value of transaction:________________________
5) Total fee paid:__________________________
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement
number, or the Form or Schedule and date of its filing.
1) Amount Previously Paid:_______________________
2) Form, Schedule or Registration Statement No.:________________________
3) Filing Party:____________________
4) Date Filed:_____________________
PALADYNE CORP.
NOTICE OF A SPECIAL MEETING OF STOCKHOLDERS
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TO BE HELD JULY 10, 2001
------------------------
TO THE STOCKHOLDERS:
NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders (the "Meeting") of
PALADYNE CORP., a Delaware corporation ("Paladyne" or the "Company"), will be
held at the Company's offices at 1650A Gum Branch Road, Jacksonville, North
Carolina on July 10, 2001 at 10:00 A.M., local time, for the following purposes:
1. To elect six Directors from all Classes for terms to coincide with the
end of each Class's term.
2. To approve an amendment to the Company's Certificate of Incorporation
increasing the number of authorized shares of Common Stock, $.001 par
value, from 25,000,000 shares to 75,000,000 shares.
3. To approve an amendment to the Company's 1999 Stock Option Plan
increasing the number of available shares of Common Stock thereunder
from 2,500,000 shares to 5,000,000 shares.
4. To transact such other business as may properly come before the
Meeting or at any adjournment thereof.
A Proxy Statement describing the matters to be considered at this Meeting
is attached to this Notice. Only stockholders of record of the Common Stock, the
Series A Convertible Preferred Stock and the Series B Convertible Preferred
Stock at the close of business on June 7, 2001, which has been fixed as the
record date for the Meeting, shall be entitled to notice of, and to vote at, the
Meeting and any adjournments thereof.
ALL STOCKHOLDERS ARE CORDIALLY INVITED TO ATTEND THE MEETING. WHETHER OR
NOT YOU EXPECT TO ATTEND, YOU ARE RESPECTFULLY REQUESTED BY THE BOARD OF
DIRECTORS TO SIGN, DATE AND RETURN THE ENCLOSED PROXY PROMPTLY IN THE
ACCOMPANYING ENVELOPE. STOCKHOLDERS WHO EXECUTE PROXIES RETAIN THE RIGHT TO
REVOKE THEM AT ANY TIME PRIOR TO THE VOTING THEREOF.
By Order of the Board of Directors,
Terrence J. Leifheit, President and CEO
Jacksonville, North Carolina
June 14, 2001
IF YOU DO NOT EXPECT TO BE PRESENT AT THE MEETING AND WISH YOUR SHARES OF
COMMON STOCK OR PREFERRED STOCK TO BE VOTED, YOU ARE REQUIRED TO SIGN AND MAIL
PROMPTLY THE ENCLOSED PROXY WHICH IS BEING SOLICITED ON BEHALF OF THE BOARD OF
DIRECTORS. A RETURN ENVELOPE WHICH REQUIRES NO POSTAGE IF MAILED IN THE UNITED
STATES IS ENCLOSED FOR THAT PURPOSE.
PALADYNE CORP.
PROXY STATEMENT
SPECIAL MEETING OF STOCKHOLDERS
JULY 10, 2001
This Proxy Statement and the accompanying proxy card are furnished in
connection with the solicitation of proxies by the Board of Directors of
PALADYNE CORP., a Delaware corporation (the "Company"), to be voted at a Special
Meeting of Stockholders of the Company (the "Meeting") to be held at 1650A Gum
Branch Road, Jacksonville, North Carolina, at 10 a.m., local time on July 10,
2001, or at such other time or place to which the Meeting may be adjourned, for
the purposes set forth in the accompanying Notice of Special Meeting of
Stockholders to this Proxy Statement.
The approximate date on which this Proxy Statement, Notice and accompanying
Proxy will first be sent or given to the Company's stockholders is June 14,
2001.
A copy of the Company's Annual Report for the fiscal year ended August 31,
2000 accompanies this Proxy Statement.
VOTING SECURITIES AND VOTE REQUIRED
-----------------------------------
Only stockholders of record at the close of business on June 7, 2001 (the
"Record Date") of the common stock, $.001 par value (the "Common Stock"), the
Series A Convertible Preferred Stock, $.001 par value (the "Series A Preferred
Stock"), and the Series B Convertible Preferred Stock, $.001 par value (the
"Series B Preferred Stock") of the Company will be entitled to notice of, and to
vote the shares held by them on such date at the Meeting and at any adjournments
thereof. On the Record Date there were issued and outstanding 8,509,351 shares
of Common Stock, 137,143 shares of Series A Preferred Stock, and 4,100,000
shares of Series B Preferred Stock. There was no other class of voting
securities outstanding at that date.
Each share of Common Stock and Series A Preferred Stock held by a
stockholder entitles such holder to one vote upon each matter that is voted upon
at the Meeting, and each share of Series B Preferred Stock entitles the holder
to two votes upon each matter that is voted upon at the Meeting. The Common
Stock, the Series A Preferred Stock, and the Series B Preferred Stock (sometimes
collectively, the "Voting Securities") vote together as a single class on the
three matters coming before the Meeting specified in this Proxy Statement.
The presence, in person or by proxy, of the holders of a majority of the
outstanding shares of the Voting Securities, voting as one class, is necessary
to constitute a quorum at the Meeting. Broker "non-votes" and the shares as to
which a stockholder abstains from voting are included for purposed of
determining whether a quorum of shares is present at the Meeting. A broker
"non-vote" occurs when a nominee holding shares for a beneficial owner does not
have discretionary voting power with respect to that item and has not received
voting instructions from the beneficial owner. A broker "non-vote" will have the
effect of a no vote on the outcome of the proposed amendment to the Certificate
of Incorporation, but will have no effect as to the outcome on the election of
directors or the amendment to the 1999 Stock Option Plan (the "Option Plan").
A plurality of the votes cast at the Meeting is required to elect
directors. The affirmative vote of a majority of outstanding shares of the
Voting Securities is required for approval of the amendment to the Certificate
of Incorporation. The affirmative vote of a majority of the Voting Securities
present or voting by proxy is required for approval of the amendment to the
Option Plan.
Proxies are solicited to give all stockholders who are entitled to vote on
the matters that come before the Meeting the opportunity to do so whether or not
they choose to attend the Meeting in person.
If the enclosed proxy is properly executed and returned to the Company and
not revoked, it will be voted in accordance with the instructions therein.
Unless contrary instructions are given, the persons designated as proxy holders
in the accompanying Proxy will vote FOR the six (6) nominees for director, FOR
the amendment to the Certificate of Incorporation increasing the number of
authorized shares, FOR the amendment to the Option Plan, and as recommended by
the Board of Directors with regard to any other matter or if no such
recommendation is given, in their own discretion. Each Proxy granted by a
stockholder may be revoked by such stockholder at any time thereafter by writing
to the Secretary of the Company prior to the Meeting, or by execution and
delivery of a subsequent Proxy or by attendance and voting in person at the
Meeting, except as to any matter or matters upon which, prior to such
revocation, a vote shall have been cast pursuant to the authority conferred by
such Proxy.
The cost of soliciting the Proxies, consisting of the printing, handling
and mailing of the Proxy and related materials, and the actual expense incurred
by brokerage houses, custodians, nominees and fiduciaries in forwarding proxy
material to the beneficial owners of stock, will be paid by the Company.
In order to assure that there is a quorum, it may be necessary for certain
officers, directors, regular employees and other representatives of the Company
to solicit Proxies by telephone or mail. These persons will receive no extra
compensation for their services. Your cooperation in promptly signing and
returning the enclosed proxy card will help to avoid additional expense.
2
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
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The following table sets forth information, to the best of the Company's
knowledge, as of the Record Date, with respect to (i) each person known by the
Company to own beneficially more than 5% of the outstanding voting stock, (ii)
each present director and nominee for director, and (iii) all directors and
executive officers as a group:
AMOUNT AND NATURE OF BENEFICIAL OWNERSHIP PERCENT OF
NAME AND ADDRESS SERIES B VOTING
OF BENEFICIAL OWNER PREFERRED STOCK COMMON STOCK(1) SECURITIES(2)
- ------------------- --------------- --------------- -------------
Terrence J. Leifheit* 4,100,000(3) -- 48.7%
Ronald L. Weindruch* -- 1,924,340(4) 11.2%
Webbmont Holdings LLP+ -- 1,011,567(5) 5.8%
Kenneth H. Horn* -- 225,668(6) 1.3%
Clifford A. Clark* -- 36,179(7) 0.2%
James L. McGovern* -- 239,333(8) 1.4%
William E. Willis, Jr.* -- 33,333(9) 0.2%
All directors and executive
officers as a group (6 persons
in group) 4,100,000 2,458,853(10) 60.8%
* Director or nominee for director. The address of each person is c/o
Paladyne Corp., 1650A Gum Branch Road, Jacksonville, N.C. 28540.
+ The address of Webbmont Holdings LLP is 1355 Peachtree Street, Suite 1100,
Atlanta, GA 30309.
(1) Unless otherwise indicated in the notes below, the Company has been advised
that each person above has sole voting and investment power over the shares
indicated above. Unless otherwise noted, ownership is of shares of Common
Stock. Ownership is calculated separately for each person on the basis of
the actual number of outstanding shares as of the Record Date and assumes
the exercise of stock options and warrants held by such person (but not by
anyone else) exercisable within sixty days.
(2) Based upon 16,846,494 outstanding shares of Common Stock, Series A
Preferred Stock and Series B Preferred Stock (which is entitled to two
votes per share).
3
(3) Includes (i) 3,410,845 shares of Series B Preferred Stock owned directly
and (ii) 689,155 shares of Series B Preferred Stock held in a Voting Trust
for which Mr. Leifheit is the sole voting trustee. Does not include (i)
3,743,610 shares of Common Stock underlying warrants owned directly, (ii)
311,514 shares of Common Stock underlying warrants held in trust for the
benefit of Mr. Leifheit's minor children, and which warrants are not
presently exercisable or (iii) up to 6,500,000 shares of Common Stock
issuable as Deferred Shares upon future placements.
(4) Includes (i) 100,000 shares held in the names of Mr. Weindruch's children,
(ii) 1,500,000 shares held in a trust for which Mr. Weindruch acts as
trustee, and (iii) 324,340 shares subject to presently exercisable options.
(5) Includes 496,429 shares subject to presently exercisable options.
(6) Includes (i) 92,418 shares held by a corporation controlled by Mr. Horn and
(ii) 123,250 shares subject to presently exercisable options.
(7) Includes 36,179 shares subject to presently exercisable options.
(8) Includes (i) 6,604 shares held in the names of Mr. McGovern's children and
(ii) 154,088 shares subject to presently exercisable options.
(9) Includes 33,333 shares subject to presently exercisable options.
(10) See notes (3), (4), (6), (7), (8) and (9).
PROPOSAL 1
ELECTION OF DIRECTORS
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BACKGROUND
Pursuant to the Company's Certificate of Incorporation, the Board of
Directors is divided into three classes, with each class serving for a
three-year term ending in successive years. Each year the stockholders elect the
members of one of the three classes to a three year term of office. There are
six directors, with each Class having two directors. The By-Laws provide for
additional directors (up to nine directors total), which shall be apportioned
among the classes as equally as possible.
To fulfill a closing condition to the ecom Merger, (see Proposal 2,
"Amendment to Certificate of Incorporation - The ecom Merger"), upon the
closing, the Board of Directors increased the size of the Board to nine persons
and elected Terrence F. Leifhert and William E. Willis, Jr. as directors to fill
the vacancies created by the increase in the size of the Board. William N.
Kashul, Sr. and Stewart B. Harris, who had been elected as directors at the 2000
Stockholders Meeting, submitted their resignations which became effective on
February 15, 2001. On April 30, 2001, Peter Atwal and John D. Foster, who had
been elected directors at the 2001 Stockholders Meeting, submitted their
resignations, and Clifford A. Clark was elected to one of the vacancies.
Subsequently, the size of the Board was reduced to six directors.
4
Pursuant to the ecom Merger Agreement, the ecom Stockholders have the right
to designate three persons as directors and to have a fourth designee mutually
acceptable to them and the current directors. The ecom Stockholders have
nominated Messrs. Leifheit, Clark and Willis. The designation of the seventh
person is being delayed pending the completion by the Company of a placement of
its securities as it is possible an investor group participating in the
placement would desire to have a designee as a director.
At the Meeting, the stockholders will elect six directors, two Class I
directors to serve until the 2003 Annual Meeting of Stockholders, two Class II
directors to serve until the 2004 Annual Meeting of Stockholders, and two Class
III directors to serve until the 2002 Annual Meeting. These directors will all
serve until the respective Annual Meetings listed above, and until their
successors are elected and qualified. In the event any nominee is unable to or
declines to serve at the time of the Meeting, the Proxies will be voted for an
alternative nominee who shall be designated by the present Board of Directors to
fill the vacancy. As of the date of this Proxy Statement, the Board of Directors
is not aware of any nominee who is unable or will decline to serve as a
director.
NOMINEES
The following sets forth information about each nominee for election to the
Board of
DIRECTOR
NAME CLASS POSITION AGE SINCE
- ---- ----- -------- --- -----
Terrence J. Leifheit II President, CEO, COO and Director 38 2001
Ronald L. Weindruch III Executive Vice President and Director 54 1997
Clifford A. Clark I Chief Financial Officer (Acting) and Director 48 2001
Kenneth W. Horn I Director 59 1999
James L. McGovern II Director 58 1998
William E. Willis, Jr. III Director 46 2001
TERRENCE J. LEIFHEIT became President, Chief Operating Officer and a Director of
the Company in February 2001 upon the ecom Merger, and CEO in April 2001. He
presides over all operations of ecom of which he was the founder in 1999. He
co-founded Gibralter Publishing, Inc. ("Gibralter") in 1993, and led that
company from hardbound reference publishing into an on-line publishing and
membership organization with $20 million in sales to customers in over 150
countries. In 1998, he founded Gibralter Data Services, Inc., an Internet
service provider specializing in Web page development and hosting services.
Prior to these activities, from 1991 to 1992, he served as Vice President of
Florida Safety Corporation and, from 1987 to 1991, Vice President of Dallas
Chemicals Corporation. Mr. Leifheit attended the University of Texas at El Paso
where he majored in business.
RONALD L. WEINDRUCH has been Executive Vice President - Business Development of
the Company since February 2001, having served as its President and Chief
Executive Officer from 1994 to February 2001 and February 2000, respectively. He
was the founder of the Company's predecessor in 1994. Prior to 1994, he held a
variety of senior management positions with Siemens including Senior
Vice-President of Operations at Siemens Stromberg-Carlson. Prior thereto, Mr.
5
Weindruch served as Director of Marketing for the Nortel (formerly Northern
Telecom) DMS 100 switching system, and was also Group Director of Business
Development for Nortel's digital switching group. From 1993 to 1996, Mr.
Weindruch was the Chairman of the Sanford Airport Authority in Sanford, Florida.
Mr. Weindruch holds a BS from the University of Illinois and an MBA from George
Washington University.
CLIFFORD A. CLARK became Chief Financial Officer (Acting) of the Company in
February 2001. Since 1995, he has been President of Kane Realty Corporation, a
multistate real estate owner, manager and developer. He has served as Vice
President of Finance for ecom and Gibralter since 1999. He was associated with
Price Waterhouse & Co. from 1974 to 1995. Mr. Clark has a degree in business
Administration from the University of North Carolina and is a CPA.
KENNETH W. HORN has been Managing Director of KWH Associates since 1999. In
1999, he retired as a corporate officer of Nortel Networks where he had worked
for 18 years and had served as Vice President, Independents. Prior thereto, Mr.
Horn was employed by Huyck Corporation for 10 years where he held various
positions including Vice President and General Manager of its largest division.
Mr. Horn holds a BS from Villanova University and an MBA from Iona University.
JAMES L. MCGOVERN is President of McGovern & Associates. He retired as Executive
Vice President of Norstan, Inc. in 1996 and was previously President of Norstan
Communications. Prior, he was Chief Operating Officer of Electronics Engineering
Co., which was acquired by Norstan in 1985. Mr. McGovern also held a number of
key sales and management positions with Xerox Corporation. He was Chairman of
Virtual Hold Corporation, and a Director of Paknetx, which was acquired by
Aspect Telecommunications. Mr. McGovern holds a BS from Northeastern University.
WILLIAM E. WILLIS, JR. is Professor at the Kenan-Flagler School of Business at
the University of North Carolina and an information technology consultant. From
1998 until its sale to Bain Capital in 2000, he served as a corporate officer of
Interpath Communications, Inc. where he held several executive positions, most
recently as Chief Technology Officer and Vice President of Engineering with
responsibility for establishing technical strategy and system architecture. From
1992 to 1998, he also served as Vice Provost, Information Technology at North
Carolina State University and as a member of the North Carolina Information
Resource Management Committee, which governed the use of IT for the State,
having been appointed by the Governor of the State to this latter position. In
addition, he co-founded an engineering software company where he developed and
launched a Unix/Linux-based spreadsheet product. Mr. Willis holds a BS and a PhD
from North Carolina State University.
THE BOARD UNANIMOUSLY RECOMMENDS A VOTE IN FAVOR OF THE SIX NOMINEES FOR
DIRECTOR.
BOARD MEETINGS AND COMMITTEES
The Board of Directors of the Company held a total of nine meetings during
the fiscal year ended August 31, 2000. No director attended fewer than 75% of
the aggregate number of Meetings of the Board of Directors and meetings of the
committees of the Board on which he serves, except for Peter B. Atwal, a former
6
director, who attended 67% of the aggregate number of Meetings of the Board of
Directors.
The Audit Committee of the Board of Directors presently consists of Messrs.
Horn and McGovern. The Audit Committee held two meetings during the 2000 fiscal
year. The Audit Committee recommends engagement of the Company's independent
auditors and is primarily responsible for approving the services performed by
the Company's independent accountants and for reviewing with the independent
auditors and the accounting staff the scope of the audit and the interim
financial reports and evaluating the Company's accounting principles and its
system of internal accounting controls.
The Compensation Committee of the Board of Directors presently consists of
Messrs. Horn and Willis. This Committee held four meetings during the 2000
fiscal year. The Compensation Committee makes recommendations to the Board of
Directors regarding the Company's executive compensation policy and the grant of
stock options and the administration of the Option Plan.
COMPENSATION OF DIRECTORS
Non-employee members of the Board of Directors are reimbursed for costs of
attending Board and Committee meetings. In addition, non-employee members of the
Board of Directors receive options to purchase 100,000 shares of the Company's
Common Stock pursuant to its Option Plan upon becoming a director and annual
option grants thereafter.
Directors who are also employees of the Company do not receive any
additional remuneration for their services as directors.
Non-employee directors who were granted stock options since September 1,
1999 are:
Dates of Number of Exercise
Director Grant Shares Price
-------- ----- ------ -----
Kenneth W. Horn Sept. 16, 1999 5,000 $ 0.84
Nov. 12, 1999 12,500 1.56
Jan. 4, 2000 12,500 2.50
Feb. 1, 2001 25,000 1.0248
William G. Willis, Jr. Feb. 1, 2001 100,000 1.0248
In addition, on April 30, 2001, Clifford A. Clark was granted stock options
for 100,000 shares of the Company's Common Stock at an exercise price of $0.70
per share.
The exercise price for the options were equal to the market price for the
Common Stock at the time of grant.
All directors are reimbursed for expenses while attending to Company
business. There is no per meeting fee.
7
EXECUTIVE COMPENSATION AND EMPLOYMENT AGREEMENTS
Compensation
The following table sets forth all compensation actually paid or accrued by
the Company for services rendered to the Company for the years ended August 31,
1998, 1999 and 2000 to the Company's Chairman of the Board and the executive
officers who earned a salary greater than $100,000 annually for any of the
periods depicted.
Summary Compensation Table
Name and Principal All Other Stock warrants &
Position Year Salary Bonus Compensation(a) options issued(b)
- -------- ---- ------ ----- --------------- -----------------
John D. Foster, former 2000 None None None 165,000
C.E.O. 1999(b) None None None 106,250
Ronald L. Weindruch, 2000 $137,500 $0 $8,905 50,000
President 1999 137,500 0 36,034 208,784
1998 122,292 3,000 81,700 67,500
(a) All other compensation includes consulting and commission income.
(b) Mr. Foster became Chairman and CEO in February 2000 and resigned in
April 2001.
The following table sets forth individual grants of stock options made by
the Company during the fiscal year ended August 31, 2000 to the Named Executive
Officers:
# of Shares % of Total Options Exercise Expiration
Name underlying Options Granted in FY 00 Price Date
- ------------------- ------------------ ---------------- ----- ----
John D. Foster 2,500 .4 $1.56 11/12/03
John D. Foster 150,000 25.5 $2.50 2/1/05
John D. Foster 12,500 2.1 $3.38 3/1/05
Ronald L. Weindruch 50,000 18.8 $2.50 1/4/04
The following table sets forth information regarding each exercise of stock
options rights during the last fiscal year by each Named Executive Officer and
the fiscal year-end value of unexercised options and stock appreciation rights
provided on an aggregate basis:
Value of unexercised
# of unexercised in-the-money options
# of shares options at end of at end of FY 00
acquired on Value FY 00 exercisable/ exercisable/
Name exercise realized unexercisable unexercisable
- ---- -------- -------- ------------- -------------
John D. Foster 0 $0 0 $0
Ronald L. Weindruch 0 $0 0 $0
8
The Company has an employment agreement with Mr. Weindruch for a term
ending February 1, 2002, at an annual compensation of $137,500, plus a bonus. If
the Company terminates the employment without cause, the Company would be
obligated to pay as termination an amount equal to twice the then base
compensation. Mr. Weindruch and the Company have reached an agreement to
compensate him at a salary of $100,000 until adequate funding is arranged, with
the difference in his salary to be paid on September 1, 2001, provided that the
Company has raised an additional $750,000 in debt (excluding receivable
financing) or equity placements.
Upon the closing of the ecom Merger, the Company entered into an employment
agreement with Mr. Leifheit as President and Chief Operating Officer, for a term
through December 31, 2003, subject to two six-month extensions. His annual
salary base through December 31, 2001 is $300,000, but is deferred until the
Company raises $1 million in financing, when he will begin to take a salary. Mr.
Leifheit will receive the balance of any money owed to him when the Company
raises $3 million in financing. For the second and third years of the term, he
will receive base salaries of $350,000 and $400,000 respectively. In addition,
Mr. Leifheit shall receive stock options during each year of service, of which
options for 100,000 shares were granted upon entry into the employment
agreement, and additional options shall be based on the financial performance of
the Company during each fiscal year. Further, Mr. Leifheit will receive a bonus
based on the Company's performance. In the first year, the bonus would range
from $100,000 for $2.5 million in billed revenue for the month of December 2001,
escalating up to $250,000 for $3.5 million in billed revenue during the same
time period, regardless of collection. In later years the bonus would be .05
times the subsequent December 2002 and 2003 total billed amounts. The Company
plans to retain a "key man" life insurance policy on Mr. Leifheit's life. Upon
termination of employment by the Company for cause or by Mr. Leifheit without
cause, he would be subject to a one-year non-competition restriction.
In February 2001, the Company renewed its one-year employment agreement,
with an option to renew for another year, with Joseph H. Landis, as Vice
President, Finance and Administration and Controller. Mr. Landis is receiving a
base salary of $75,000 increasing to $90,000 after the Company raises $3,000,000
in financing, as well as a $10,000 performance-based bonus, and was granted
options for the purchase of 10,000 shares of Common Stock.
SECTION 16(A) COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's executive officers and directors, and persons who own more than
10% of the Company's Common Stock, to file reports of ownership and changes in
ownership with the Securities and Exchange Commission ("SEC") and any national
securities exchange or quotation system on which such class of equity securities
is listed. Officers, directors and greater than 10% shareholders are required by
SEC regulation to furnish the Company with copies of all Section 16(a) forms
filed. Based solely on a review of Forms 3, 4, and 5 furnished to the Company
for the fiscal year ended August 31, 2000, the Company believes that all Section
16 filing requirements applicable to the Company's reporting persons were
completed in a timely manner.
9
CERTAIN RELATED TRANSACTIONS
As of August 31, 1999, the Company had a balance due of $150,000, due to a
trust controlled by Mr. Weindruch, then President of the Company, which bore
interest at 12% per annum. All outstanding obligations have been satisfied as of
August 31, 2000. Mr. Weindruch, in conjunction with Mr. Leifheit, President and
CEO, and Mr. Foster, former CEO, have personally guaranteed a $500,000 line of
credit with The Huntington National Bank, of which $350,000 is outstanding.
Immediately prior to the ecom Merger (see Proposal 2, "Amendment to
Certificate of Incorporation-The ecom Merger"), ecom purchased from Gibralter, a
corporation of which Terrence J. Leifheit is President and principal
stockholder, all of the tangible and intangible assets used in ecom'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 was
originally payable by ecom pursuant to two promissory notes (the "Notes") issued
to Gibralter, Promissory Note A for $1,500,000, repayable in five monthly
principal installments of $25,000 commencing on March 1, 2001, with the balance
due on August 31, 2001, and Promissory Note B for $3,500,000, repayable in equal
quarterly principal payments through January 1, 2004. Both notes bore interest
at 10% per annum, were secured by the purchased assets under a Security
Agreement and were guaranteed by Paladyne under an Unconditional Guaranty
Agreement.
A portion of the assets used by ecom in its call center operations consists
of equipment which is leased by Gibralter pursuant to various equipment leases.
Pending the receipt by Gibralter of lessor consents to the assignments of these
leases to ecom, and in accordance with an Equipment Use Agreement entered into
by Gibralter and ecom, Gibralter has granted to ecom the right to possess and
use the equipment and ecom has agreed to assume and pay to the lessors the
payments to be made by Gibralter pursuant to the leases.
Subsequent to the Merger, Paladyne, ecom and Gibralter determined that it
was necessary to renegotiate and to amend some of the agreements which became
effective upon the Merger. The amendments change the calculation for the
issuance of the Deferred Shares and delay the repayment dates of the two Notes,
pursuant to a Second Amendment to Agreement and Plan of Merger ("Second
Amendment") and an Amending Agreement, both as of April 9, 2001, entered into by
the Companies and Mr. Leifheit, on behalf of himself and as representative for
the other former stockholders of ecom (the "ecom Stockholders").
The Merger Agreement originally provided for the ecom Stockholders to
receive post-closing an amount of Paladyne Common Stock equivalent to 95% of
each whole share of Common Stock or other security convertible into Common Stock
issued by Paladyne until Paladyne received $6,500,000 in cash from sales of
Common Stock. As amended, beginning as of the date of the Second Amendment and
ending the earlier of December 20, 2002 or when Paladyne raises $6,500,000 in
cash from sales of Common Stock or Common Stock equivalents (the "New
Securities"), Paladyne will issue one share of Common Stock to the ecom
Stockholders for each $1.00 in gross proceeds received upon the sale of New
Securities or issuable upon conversion, exercise or exchange of New Securities.
10
The Amending Agreement amended the original Notes and terminated the
Default and Assignment Agreement, the Secondary Operating Agreement, and the
Escrow Agreement. The Amended Promissory Note A issued by ecom to Gibralter in
the principal amount of $1,500,000 became repayable in two equal principal
installments of $750,000, with the first installment due when Paladyne raises a
minimum of $3,000,000 in equity or convertible debt and the second installment
due no earlier than six months after the payment of the first installment, and
in no event until Paladyne has had a positive cash flow for any three
consecutive calendar months. Amended Promissory Note B is repayable in 12 equal
quarterly principal payments commencing October 1, 2001, or up to six months
thereafter if mutually agreed. Both Notes still bear interest at 10% per annum.
The Security Agreement pursuant to which ecom granted to Gibralter a first lien
on the purchased assets to secure the repayment of the Notes and the
Unconditional Guaranty Agreement whereby Paladyne guaranteed these Notes remain
in full force and effect.
PROPOSAL 2
AMENDMENT TO CERTIFICATE OF INCORPORATION
-----------------------------------------
GENERAL
Prior to closing of the ecom Merger, the Company had authorized 25,000,000
shares of Common Stock, of which 8,459,551 shares were outstanding, and
6,302,686 shares were reserved for issuance upon conversion of the Series A
Preferred Stock and exercise of options and warrants, leaving 10,237,763 shares
available. When the Company issued its 4,100,000 shares of Series B Preferred
Stock at the time of the Merger, it agreed to amend its Articles of
Incorporation such that it would have sufficient shares for exercise of warrants
issued to the ecom Stockholders, proposed placements and for conversion of the
Series B Preferred Stock, which is automatically convertible when the amendment
to the Certificate of Incorporation is approved. As explained below, upon the
ecom Merger, the Company issued warrants to the former ecom Stockholders an
aggregate of 4,500,000 shares of Common Stock contingent upon future events and
agreed to grant options for up to 500,000 shares to ecom employees. Therefore,
the number of shares of Common Stock required to be reserved for the purpose of
enabling the Series B Preferred Stock conversion, as well as for possible future
corporate events, currently surpasses the number of remaining available
authorized shares of Common Stock.
As part of the ecom Merger, the Company covenanted to obtain stockholder
approval of an increase in the number of authorized shares of Common Stock to
have sufficient reserve for issuance upon conversion or exercise of the
securities issued on the ecom Merger, and other corporate events As explained
herein, the Company would be subject to certain penalties if such stockholder
approval is not timely obtained. Accordingly, the Company is seeking approval of
an amendment to its Certificate of Incorporation to increase the number of
authorized shares to 75,000,000 shares.
THE ECOM MERGER
On February 1, 2001, E-com Acquisition Corp. a newly-formed wholly-owned
subsidiary of the Company, merged with and into ecommerce support centers inc.
("ecom"), pursuant to an Agreement and Plan of Merger, dated as of December 21,
2000, and as amended (collectively, the "Merger Agreement"). ecom is a provider
11
of electronic Customer Relationship Management (CRM) solutions as an outsourcing
option to e-commerce companies from its call center in Jacksonville N.C. The
Company's Board of Directors, after considering the Company's resources and
future direction and strategy decided that the ecom Merger would enable the use
of the Company's Datagration software, the proprietary data cleansing and
integration software capability, to the combined enterprise in a rapidly growing
marketplace for CRM call centers.
The ecom Merger was structured to be a tax free reorganization to the
former ecom Stockholders. For accounting purposes, the Company is treating the
transaction as a purchase
Immediately prior to the ecom Merger, ecom 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 ecom'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 ecom pursuant to two Notes issued to Gibralter, one
note for $1,500,000, repayable in two equal principal installments of $750,000,
with the first installment due when Paladyne raises a minimum of $3,000,000 in
equity or convertible debt and the second installment due no earlier than six
months after the payment of the first installment, and in no event until
Paladyne had a positive cash flow for any three consecutive calendar months, and
the second Note for $3,500,000, repayable in equal quarterly principal payments
commencing October 1, 2001, or up to six months thereafter if mutually agreed.
Both Notes bear interest at 10% per annum, are secured by the purchased assets
and are guaranteed by Paladyne. See Proposal 1 "Election of Directors - Certain
Related Transactions."
A portion of these assets used by ecom in its call center operations
consists of equipment which is leased by Gibraltar pursuant to various equipment
leases. Pending the receipt by Gibralter of lessor consents to the assignments
of these leases to ecom, and in accordance with an Equipment Use Agreement
entered into by Gibralter and ecom, Gibralter has granted to ecom the right to
possess and use the equipment and ecom has agreed to assume and pay to the
lessors the payments to be made by Gibralter pursuant to the leases.
This Proxy Statement provides summaries about the ecom Merger and the
related agreements. Attached to this Proxy Statement are certain historical
financial information for ecom and proforma financial information of ecom and
the Company as Schedule I and II, respectively, and enclosed with this Proxy
Statement are the Company's Annual Report for fiscal year 2000 and its Form
10-QSB for the fiscal quarter ended February 28, 2001. For more complete
information regarding the Merger, reference is made to the Company's Form 8-K
and related Form 8-K/A for an event of February 1, 2001 and the exhibits
thereto, which is available from the Securities and Exchange commission web site
http://www.sec.gov or from the Secretary of the Company.
The Merger Consideration
The merger consideration (the "Merger Consideration") to the ecom
Stockholders consisted of 4,100,000 shares of newly-created Series B Preferred
Stock, Anti-Dilution Warrants and Performance Warrants discussed below, and the
12
right to receive Deferred Shares in conjunction with securities placements by
the Company.
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 Common Stock
immediately following stockholder approval of this Proposal, 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 of this Proposal is not obtained at this Meeting, 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 stockholder approval is obtained.
To protect against dilution to the former ecom Stockholders upon exercise
of the Company's outstanding pre-Merger options and warrants (the "Present
Options/Warrants"), the Company granted to them Anti-Dilution Warrants to
purchase 4,000,000 shares of 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 the Company as to the aggregate
number of Present Options/Warrants that were exercised.
To give the former ecom Stockholders the opportunity to participate more
directly in the Company's future performance resulting from the acquired ecom
business, the Company granted to them Performance Warrants to purchase 500,000
shares of 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 annual achieved
in either year or both of the two 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, commencing April 9, 2001 and ending the earlier of December
20, 2002 or when Company raises $6,500,000 in cash from sale of Common Stock or
Common Stock equivalents (the "New Securities"), the Company will issue one
share of Common Stock (the "Deferred Shares") to the ecom stockholders for each
$1.00 in gross proceeds received upon the sale of New Securities or issuable
upon conversion, exercise or exchange of New Securities.
Related Agreements
As part of the ecom transaction, the Company entered into other agreements
with the ecom Stockholders. Pursuant to a Registration Rights Agreement, the
Company granted the ecom Stockholders one demand right together with piggyback
rights to register under the Securities Act of 1933 the Common Stock underlying
the securities comprising the Merger Consideration. The Company would bear the
related registration expenses and be subject to certain penalties should the
demand registration not become effective within a prescribed time period.
13
Mr. Leifheit and other Company directors and executive officers agreed not
to sell publicly any of their Paladyne securities for a period of two years from
the February 1, 2001 ecom Merger closing date, excluding the sale by each person
of up to 10% of his fully diluted holdings on an annual basis, pursuant to a
Lock-Up Agreement.
DESCRIPTION OF COMMON STOCK
The holders of Common Stock are entitled to one vote for each share held of
record on all matters to be voted on by stockholders. There is no cumulative
voting with respect to the election of directors, with the result that the
holders of more than 50% of the shares voting for the election of directors can
elect all of the directors then up for election. In the event of liquidation,
dissolution or winding up of the Company, the holders of Common Stock are
entitled to share ratably in all assets remaining which are available for
distribution to them after payment of liabilities and after provision has been
made for each class of stock, if any, having preference over the Common Stock.
Holders of Common Stock, as such, have no conversion, preemptive or other
subscription rights, and there are no redemption provisions applicable to the
Common Stock.
DESCRIPTION OF PREFERRED STOCK
Of the 10,000,000 shares of Preferred Stock authorized, 137,143 shares have
been designated as Series A Convertible Preferred Stock, all of which are
outstanding, and 5,000,000 shares have been designated as Series B Preferred
Stock, of which 4,100,000 shares are outstanding.
The Series A Preferred Stock, which was issued upon the 1998 acquisition of
WG Controls, provides for annual dividends of $0.2975 per share, or $40,800 per
year. If the Company's profits are insufficient to pay such dividends, the
dividend is cumulative and accrued for payment when Company profits are adequate
to fund payment. At February 28, 2001, an amount of $129,200 was accrued for
dividends. Each share of Series A Preferred Stock is convertible into .67361
shares of the Company's Common Stock, or an aggregate of 92,381 shares of Common
Stock. When the Common Stock achieves an average closing price of $5.25 per
share for a consecutive 60 day trading period, the Company may call the Series A
Preferred Stock. The Series A Preferred Stock has the same voting rights as the
Common Stock and has a preference to the Common Stock in the event of any
liquidation, dissolution or winding up of the Company, whether voluntary of
involuntary.
The Series B Preferred Stock was issued as part of the Merger Consideration
upon the closing of the ecom acquisition. 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 at this Meeting,
then the holders of the Series B Preferred Stock would have rights to designate
14
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.
The shares of Preferred Stock not previously designated may be issued
having such preferences and rights as the Board of Directors of the Company may
designate at the time of issuance, including having anti-takeover provisions.
The Board of Directors has no present intention to issue any shares of Preferred
Stock.
DIVIDENDS
Holders of shares of the Common Stock are entitled to receive dividends
when, as and if declared by the Board of Directors from funds legally available
therefore, subject to any preferred or contemporaneous dividend on the
outstanding series of Preferred Stock. Under the Delaware General Corporation
Law, cash dividends may only be paid (i) out of "surplus", which consists of the
excess of the net assets of the Company over its capital; or (ii) if there is no
surplus, out of the net profits for the fiscal year in which the dividend is
declared, net profits for the immediately preceding fiscal year, or net profits
for both of such years. Any dividend on the Common Stock is subject to
declaration of dividends on the Series B Preferred Stock, and the prior payment
of accrued dividends on the Series A Preferred Stock. Management does not intend
to declare cash dividends on the Common Stock in the foreseeable future.
RECOMMENDATION
If the proposed amendment is approved by the stockholders, generally no
further stockholder approval would be required for the issuance of the
authorized shares of Common Stock, unless required by law or the rules of any
national securities exchange or automated quotation system on which the Common
Stock may then be listed. The Common Stock is not presently listed on any
national securities exchange or automated quotation system. Management has no
plans to issue any shares of its Common Stock except to the extent previously
disclosed herein.
Management believes that the additional authorized but unissued shares of
Common Stock not only would permit the Company to fulfill its commitment to the
former ecom Stockholders, but also would provide the Company with greater
flexibility by allowing additional shares of Common Stock to be issued without
the expense and delay of a stockholders meeting, unless stockholder approval is
otherwise required.
Mr. Leifheit, who has the voting power as to 48.8% of the Voting
Securities, has indicated that he plans to vote all such Voting Securities in
favor of this Proposal.
THE BOARD OF DIRECTORS BELIEVES THAT A VOTE TO APPROVE THE CHARTER
AMENDMENT FOR THE INCREASE IN THE NUMBER OF AUTHORIZED SHARES OF COMMON STOCK IS
IN THE BEST INTEREST OF THE COMPANY AND OF STOCKHOLDERS, AND UNANIMOUSLY
RECOMMENDS A VOTE "FOR" SUCH PROPOSAL.
15
PROPOSAL 3
AMENDMENT TO 1999 STOCK OPTION PLAN
-----------------------------------
GENERAL
The Board of Directors of the Company has unanimously approved for
submission to a vote of the stockholders a proposal to amend the 1999 Stock
Option Plan (the "Option Plan") to increase from 2,500,000 shares of Common
Stock to 5,000,000 shares of Common Stock the number of shares reserved for
issuance pursuant to the exercise of options granted thereunder.
As of June 7, 2001, stock options to purchase 2,308,401 shares of Common
Stock under the Option Plan have been granted and 1,992,582 were outstanding,
including options to purchase 1,212,992 shares to executive officers and
Directors of the Company, and 315,819 options have been exercised. The total
number of options granted also includes options for 500,000 shares that were
granted, pursuant to the Merger Agreement, to the ecom employees who continued
with ecom after the Merger. By reason of the ecom Merger, the number of Company
employees has increased from 30 persons to more than 400 persons. Management
believes that future grants of options should be beneficial in attracting and
retaining employees as a component of their compensation packages.
PURPOSES OF THE OPTION PLAN
The purposes of the Option Plan are to (i) provide incentives to certain
directors, officers, employees and other persons who perform services on or
behalf of the Company and any subsidiaries of the Company by providing them with
opportunities to purchase Common Stock in the Company pursuant to options
granted thereunder which qualify as "incentive stock options" under Section
422(b) of the Internal Revenue Code of 1986, as amended (the "Code") ("ISO") or
which do not qualify as ISOs ("Non-Qualified Option" or "NQSO") and (ii) to
individuals who are directors but not also employees of the Company and its
subsidiaries ("Non-Employee Directors"), and to individuals, independent
contractors, or consultants to the Company or its subsidiaries, by providing
them with opportunities to purchase Common Stock pursuant to NQSOs.
ADMINISTRATION
The Option Plan is administered by the Compensation Committee (the
"Committee"), each member of which is a Non-Employee Director within the meaning
of Rule 16b-3 or any successor provision under the Exchange Act, or the whole
Board of Directors. The Committee has authority (i) to select the individuals
who are to be granted options from among those eligible to participate in the
Option Plan, (ii) to establish the number of shares which may be issued under
each option, (iii) to determine at what time options may be granted, (iv) to
determine the exercise price of shares subject to each option, (v) to determine
the time at which each option shall be come exercisable and the duration of the
exercise period, (vi) to determine whether restrictions are to be imposed on
shares subject to options and the nature of such jurisdictions, if any, and
(vii) to interpret the Option Plan and prescribe and rescind rules and
regulations relating to it.
16
ELIGIBILITY
Options may be granted only to (i) individuals who are employees of the
Company and its subsidiaries, including officers and directors who are also
employees at the time the Option is granted, (ii) Non-Employee Directors, and
(iii) any other persons who perform services for or on behalf of the Company and
its subsidiaries, affiliates or any entity in which the Company has an interest,
or who are deemed by the Board of Directors to be in a position to perform such
services in the future. Options that constitute ISOs may only be granted to
employees described in clause (i) above, and Non-Employee Directors and the
other persons shall only be granted NQSOs. No option shall be granted pursuant
to the Plan after January 18, 2009.
OPTION PRICE AND TERMS
Options granted under the Option Plan may be either ISOs or NQSOs The
option price of each share of Common Stock subject to an option will be fixed by
the Committee but shall not be less than the fair market value of the Common
Stock on the date of grant of the option, defined as the closing bid price (or
average bid prices) last quoted on the OTC Electronic Bulletin Board, if the
Common Stock is not reported on the Nasdaq System or a national securities
exchange. An option designated as an ISO is intended to qualify as such under
Section 422 of the Code. Thus, the aggregate fair market value, determined at
the time of grant, of the shares with respect to which ISO's are exercisable for
the first time by an individual during any calendar year may not exceed
$100,000. NQSOs are not subject to this requirement. Certain adjustments in the
option price may be made for extraordinary dividend distributions and
recapitalizations. The Committee determines the option period, provided it is
not longer than five years, in the case of ISOs granted to employees who hold
10% of the outstanding stock of the Company, 10 years in the case of ISOs
generally, or 10 years, in the case of NQSOs, subject to earlier termination,
the vesting period and the payment terms. In the event of termination of
employment, the Optionee may exercise his options at any time within one year of
the termination, but in no event later than the expiration date of the option;
however, if the employee is terminated "for cause," the option expires
immediately. All options vest immediately upon a "change of control" of the
Company. Upon exercise of an option, payment for shares may be made in cash, or,
if the option agreement so provides, in shares of Common Stock calculated based
upon their fair market value as of the date of their delivery or, a combination
of stock and cash.
TRANSFERABILITY
Options granted under the Option Plan are not assignable or transferable by
the Optionee otherwise than (i) by will or the laws of descent and distribution,
(ii) pursuant to a qualified domestic relations order or Title I of the Employee
Retirement Income Security Act or (iii) with respect to NQSOs, to a spouse or
lineal descendant or lineal descendant of the optionee. Options are exercisable
during the lifetime of the Optionee only by the Optionee or by the Optionee's
guardian or legal representative.
17
TERMINATION, SUSPENSION OR MODIFICATION OF THE 1999 STOCK OPTION PLAN
The Board of Directors may terminate, suspend or modify the Option Plan at
any time but may not, without authorization of the Company's stockholders,
effect any change which under Section 16(b) of the Securities Exchange Act of
1934, as amended, applicable Delaware law or tax law, or the rules of any
national securities exchange or national quotation system on which the Common
Stock is then listed or traded requires the prior approval of stockholders.
FEDERAL INCOME TAX CONSEQUENCES
A participant under the Option Plan does not realize income for federal
income tax purposes as a result of (i) the grant of an ISO under the Option Plan
or (ii) the exercise of an ISO under the Option Plan. The Company is not
entitled to a federal income tax deduction upon the grant or exercise of an ISO.
Long-term capital gains tax rates will apply to the gain (excess of the amount
received for the shares over the amount paid for the shares) at the time that
the participant disposes of the shares provided that certain holding
requirements discussed below are met. The spread between the exercise price and
the fair market value of the transferred shares at the time of the exercise of
an ISO is included in alternative minimum taxable income subject to the
alternative minimum tax for the taxable year in which such transfer occurs. If
the shares are disposed of in the same taxable year and the amount realized is
less than that fair market value at the time of exercise, the amount included in
the alternative minimum taxable income will not exceed the amount realized over
the adjusted basis of the shares.
The availability of the income tax treatment discussed in the foregoing
paragraph is subject to two conditions. First, the participant must continue to
be an employee of the Company or a parent or subsidiary of the Company at all
times during the period beginning on the date that the ISO was granted and
ending (with exceptions for disability and death) on the date three months
before the option is exercised. Second, such income tax treatment is available
only if the participant does not dispose of the shares acquired pursuant to the
exercise of the ISO (i) within two years from the date of granting of the option
nor (ii) within one year after the shares were issued pursuant to the exercise
of the option. If the participant disposes of the shares prior to the expiration
of the required holding period, the participant realizes ordinary income in the
year of disposition and the same amount is then deductible by the Company.
A participant realizes no income as a result of the grant of a NQSO under
the Option Plan. However, a participant realizes ordinary income upon the
exercise of the NQSO (or at the later date described below) equal to the excess
of the fair market value of the shares at the time of exercise (or at such later
date) over the option exercise price. The Company is not entitled to a federal
income tax deduction upon the grant of the NQSO, but upon transfer of the shares
to such participant upon its exercise (or at the later date described below) an
amount corresponding to the participant's taxable income becomes deductible by
the Company. The amount of income recognized at the time of exercise is added to
the option price to determine the participant's basis in the shares, and any
further appreciation upon ultimate sale of the shares is taxable as short- or
long-term capital gains (with the holding period measured from the date of
exercise).
THE FOREGOING SUMMARY OF THE EFFECT OF UNITED STATES FEDERAL INCOME
TAXATION LAWS UPON THE OPTIONEE OR PURCHASER AND THE COMPANY IN CONNECTION WITH
18
THE OPTION PLAN DOES NOT PURPORT TO BE COMPLETE, AND REFERENCE SHOULD BE MADE TO
THE APPLICABLE PROVISIONS OF THE CODE. IN ADDITION, THIS SUMMARY DOES NOT
DISCUSS THE PROVISIONS OF THE INCOME TAX LAWS OF ANY MUNICIPALITY, STATE OR
FOREIGN COUNTRY IN WHICH THE PARTICIPANT MAY RESIDE.
OTHER OPTIONS
In addition to the options granted under the Option Plan, the Company has
also issued nonqualified options outside the Option Plan. As of June 7, 2001,
non-Plan options for the purchase of an aggregate of 67,500 shares of Common
Stock were outstanding, exercisable at prices ranging from $2.35 to $3.36 per
share and expiring from May 18, 2002 to May 14, 2003. None of these options is
held by any executive officer and director of the Company.
RECOMMENDATION
THE BOARD UNANIMOUSLY RECOMMENDS A VOTE "FOR" OF THE AMENDMENT TO THE 1999 STOCK
OPTION PLAN.
INDEPENDENT PUBLIC ACCOUNTANTS
Representatives of BDO Seidman, LLP, the Company's independent public
accountants for the fiscal year ended August 31, 2000, are expected to attend
the Meeting and will be available to respond to appropriate questions. Such
representatives will also be given an opportunity to make a statement if they so
desire.
STOCKHOLDER PROPOSALS FOR THE NEXT ANNUAL MEETING
Stockholders who desire to submit proposals for inclusion in the Company's
proxy statement for the next Annual Meeting of Stockholders of the Company must
submit such proposals to the Secretary of the Company at the Company's principal
executive offices by February 14, 2002. Nothing in this paragraph shall be
deemed to require the Company to hold the next Annual Meeting upon the
anniversary date of the current Stockholders Meeting or to include in its proxy
statement and proxy relating to any such Meeting any stockholder proposal that
does not meet the SEC requirements for including in effect at such time.
OTHER MATTERS
THE COMPANY WILL PROVIDE WITHOUT CHARGE TO EACH BENEFICIAL HOLDER OF ITS
COMMON STOCK AND PREFERRED STOCK ON THE RECORD DATE WHO DID NOT RECEIVE A COPY
OF THE COMPANY'S ANNUAL REPORT, ON THE WRITTEN REQUEST OF SUCH PERSON, A COPY OF
THE COMPANY'S ANNUAL REPORT ON FORM 10-KSB FOR THE FISCAL YEAR ENDED AUGUST 31,
2000 AS FILED WITH THE SEC. ANY SUCH REQUEST SHOULD BE MADE IN WRITING TO THE
SECRETARY OF THE COMPANY, 1650A GUM BRANCH ROAD, JACKSONVILLE, N.C. 28540.
19
As of the date of this Proxy Statement, the Board of Directors of the
Company does not know of any other matters to be brought before the Meeting
other than as set forth in this Proxy Statement. However, if any other matters
not mentioned in the Proxy Statement are properly brought before the Meeting or
any adjournments thereof, the persons names in the enclosed Proxy or their
substitutes will have discretionary authority to vote proxies given in said
form, or otherwise act, in respect of such matters in accordance with their best
judgment.
By Order of the Board of Directors,
Terrence J. Leifheit, President and CEO
June 14, 2001
20
SCHEDULE I
E-COMMERCE SUPPORT CENTERS, INC.
----------------------------------------
FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND
THREE MONTHS ENDED DECEMBER 31, 1999
E-COMMERCE SUPPORT CENTERS, INC.
Contents
- --------------------------------------------------------------------------------
Report of Independent Certified Public Accountants 3
Financial Statements
Balance sheets 4
Statements of operations 5
Statements of capital deficit 6
Statements of cash flows 7
Notes to financial statements 8-15
2
E-COMMERCE SUPPORT CENTERS, INC.
BALANCE SHEETS
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
e-commerce support centers, Inc.
Jacksonville, North Carolina
We have audited the accompanying balance sheets of e-commerce support centers,
Inc. as of September 30, 2000 and December 31, 1999 and the related statements
of operations, capital deficit and cash flows for the nine months ended
September 30, 2000 and the three months ended December 31, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Company as of September 30,
2000 and December 31, 1999 and the results of its operations and its cash flows
for the nine months ended September 30, 2000 and the three months ended December
31, 1999, in conformity with generally accepted accounting principles in the
United States of America.
As described in Note 5 to the Financial Statements, effective February 1, 2001,
the Company was merged into another entity.
High Point, North Carolina /s/ BDO Seidman, LLP
December 22, 2000, except for
Footnote 5, dated February 1, 2001
3
E-COMMERCE SUPPORT CENTERS, INC.
BALANCE SHEETS
- --------------------------------------------------------------------------------
September 30, December 31,
2000 1999
- ----------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ - $ -
Accounts receivable, net of allowance for doubtful accounts
of $108,000 in 2000 1,086,394 131,811
- ----------------------------------------------------------------------------------------------
Total current assets 1,086,394 131,811
PROPERTY AND EQUIPMENT, NET OF ACCUMULATED
Depreciation and amortization (Notes 2 and 3) 3,980,428 3,237,907
- ----------------------------------------------------------------------------------------------
$ 5,066,822 $ 3,369,718
- ----------------------------------------------------------------------------------------------
LIABILITIES AND CAPITAL DEFICIT
CURRENT LIABILITIES:
Accounts payable $ 386,136 $ 32,653
Accrued expenses 362,692 118,635
Due to affiliate (Note 1) 5,852,085 3,395,239
Current portion of capital lease obligations (Note 3) 712,919 379,138
- ----------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 7,313,832 3,925,665
LONG-TERM CAPITAL LEASE OBLIGATIONS, LESS
current portion (Note 3) 1,044,079 682,632
- ----------------------------------------------------------------------------------------------
Total liabilities 8,357,911 4,608,297
- ----------------------------------------------------------------------------------------------
COMMITMENTS (Note 3)
CAPITAL DEFICIT
Stock subscription receivable (2,000) -
Common stock - no par value; authorized 100,000 shares; issued and
outstanding 82,000 shares in 2000 - -
Additional paid-in capital 2,000 -
Accumulated deficit (3,291,089) (1,238,579)
- ----------------------------------------------------------------------------------------------
TOTAL CAPITAL DEFICIT (3,291,089) (1,238,579)
- ----------------------------------------------------------------------------------------------
$ 5,066,822 $ 3,369,718
- ----------------------------------------------------------------------------------------------
See accompanying notes to financial statements.
4
E-COMMERCE SUPPORT CENTERS, INC.
STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
Nine Months Three Months
Ended Ended
September 30, December 31,
2000 1999
- --------------------------------------------------------------------------------
REVENUES $ 3,306,968 $ 219,404
- --------------------------------------------------------------------------------
OPERATING EXPENSES:
Call center expenses 2,115,479 441,844
Selling, general and administrative expenses 1,988,066 423,146
Depreciation and amortization 1,155,774 570,356
- --------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 5,259,319 1,435,346
- --------------------------------------------------------------------------------
LOSS FROM OPERATIONS (1,952,351) (1,215,942)
OTHER INCOME (EXPENSE) - interest (100,159) (22,637)
- --------------------------------------------------------------------------------
Loss before taxes on income (2,052,510) (1,238,579)
TAXES ON INCOME (Note 4) - -
- --------------------------------------------------------------------------------
NET LOSS $ (2,052,510) $ (1,238,579)
- --------------------------------------------------------------------------------
NET LOSS PER SHARE - BASIC AND DILUTED $ (25.03) $ (15.10)
- --------------------------------------------------------------------------------
See accompanying notes to financial statements.
5
E-COMMERCE SUPPORT CENTERS, INC.
STATEMENTS OF CAPITAL DEFICIT
- --------------------------------------------------------------------------------
Stock Common Stock Additional
Subscription ------------------- Paid-in Accumulated Total Capital
Receivable Shares Amount Capital Deficit Deficit
- ------------------------------------------------------------------------------------------------------
AMOUNT, October 1, 1999 $ - - $ - $ - $ - $ -
Net loss - - - - (1,238,579) (1,238,579)
- ------------------------------------------------------------------------------------------------------
AMOUNT, December 31, 1999 - - - - (1,238,579) (1,238,579)
Issuance of company common stock (2,000) 82,000 - 2,000 - -
Net loss - - - - (2,052,510) (2,052,510)
- ------------------------------------------------------------------------------------------------------
AMOUNT, September 30, 2000 $ (2,000) 82,000 $ - $ 2,000 $(3,291,089) $(3,291,089)
- ------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements.
6
E-COMMERCE SUPPORT CENTERS, INC.
STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
Nine months Three Months
Ended Ended
September 30, December 31,
2000 1999
- ----------------------------------------------------------------------------------------------
CASH FLOW FROM OPERATING ACTIVITIES:
Net loss $ (2,052,510) $ (1,238,579)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 1,155,774 570,356
Allowance for doubtful accounts 108,000 -
Changes in assets and liabilities:
Accounts receivable (1,062,583) (131,811)
Accounts payable 353,483 32,653
Accrued expenses 244,057 118,635
Due to affiliate 2,456,846 3,395,239
- ----------------------------------------------------------------------------------------------
Net cash provided by operating activities 1,203,067 2,746,493
- ----------------------------------------------------------------------------------------------
CASH FLOW USED IN INVESTING ACTIVITIES -
Purchase of property and equipment (890,271) (2,682,090)
- ----------------------------------------------------------------------------------------------
CASH FLOW USED IN FINANCING ACTIVITIES -
Principal payments on capital lease obligations (312,796) (64,403)
- ----------------------------------------------------------------------------------------------
Net increase(decrease) in cash - -
CASH AND CASH EQUIVALENTS, beginning of period - -
- ----------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, end of period $ - $ -
- ----------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF NONCASH FINANCING ACTIVITIES:
Equipment financed through capital leases $ 1,008,024 $ 1,126,173
- ----------------------------------------------------------------------------------------------
See accompanying notes to financial statements.
7
E-COMMERCE SUPPORT CENTERS, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. SUMMARY OF Basis of Presentation and Description of Business
SIGNIFICANT
ACCOUNTING e-commerce support centers, Inc. ("e-com") began operations
POLICIES in October 1999 as a division of Gibralter Publishing, Inc.
("Gibralter"). In May of 2000, e-com was incorporated and
Gibralter transferred existing call center contracts to
e-com. e-com provides outsourced eCRM solutions for both
business to business and business to consumer Internet
sites. e-com's full spectrum of personalized customer
solutions include inbound customer support and Help Desk
support using live, one-to-one text chat; live phone support
comprised of callback technology and voice/video over IP;
multiple, simultaneous email response; customized reporting;
proactive site monitoring; and collaborative agent
interaction. e-com also provides traditional call center
services. These services are provided for companies
throughout the United States.
The accompanying financial statements include the
operations, assets and liabilities of e-com. In December
2000, e-com announced its plan to merge with Paladyne Corp.,
see Note 5. Immediately prior to the merger, an affiliated
Company through common ownership, Gibralter, transferred
certain assets and liabilities to e-com. Those assets and
liabilities will be reflected in e-com's financial
statements at Gibralter's historical cost. The net effect of
the transfer of assets and liabilities was recorded as a due
to the affiliate. In conjunction with the merger, e-com has
entered into a contractual arrangement with Gibralter to
provide traditional call center services previously
performed by Gibralter.
Revenues and expenses specifically identified have been
directly attributed to e-com in the financial statements.
e-com's costs and expenses in the accompanying financial
statements include allocations from Gibralter for
centralized legal, accounting, real estate, information
technology, and other Gibralter corporate services and
infrastructure costs because specific identification of the
expenses is not practicable. The expense allocations have
been determined on the bases that Gibralter and e-com
considered to be reasonable reflections of the utilization
8
E-COMMERCE SUPPORT CENTERS, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
of services provided or the benefit received by e-com using
a ratio of hours worked by customer service representatives.
However, the financial information included herein may not
necessarily reflect the financial position and results of
operations of e-com in the future or what these amounts
would have been had it been a separate, stand-alone entity
during the periods presented. However, management believe
that if e-com had been a stand-alone entity during the
periods presented, the expenses would not have been
materially different from the allocations presented.
REVENUE RECOGNITION AND CREDIT RISK
The Company's call center support business records service
revenue in the period in which the services are rendered,
based on contractual hourly or call rates.
Management performs credit evaluations of its customers and
generally does not require collateral.
CASH AND CASH EQUIVALENTS
For the purposes of the statements of cash flows, cash and
cash equivalents include amounts in banks and on hand, and
highly liquid instruments with an original maturity of three
months or less. Due to their relationship with Gibralter
previously mentioned, all of ecom's cash receipts are
netted against due to affiliate.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost and depreciated
using the straight-line method over estimated useful lives
of the respective assets, as follows:
------------------------------------------------------------
Computer and telephone hardware 3-5 years
Computer software 3 years
Leasehold improvements Term of lease
Furniture and fixtures 7 years
Equipment 5 years
------------------------------------------------------------
9
E-COMMERCE SUPPORT CENTERS, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of financial instruments is the amount
at which the instrument could be exchanged in a current
transaction between willing parties. Management estimates
that the carrying amounts of the Company's financial
instruments included in the accompanying balance sheets are
not materially different from their fair values.
LONG-LIVED ASSETS
Long-lived assets, such as property and equipment, are
evaluated for impairment when events or changes in
circumstances indicate that the carrying amount of the
assets may not be recoverable through the estimated
undiscounted future cash flows from the use of these assets.
When any such impairment exists, the related assets will be
written down to fair value. This policy is in accordance
with Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of."
INCOME TAXES
e-com accounts for income taxes under the asset and
liability method in accordance with generally accepted
accounting principles. Accordingly, deferred income taxes
are recognized for the tax consequences of temporary
differences by applying enacted statutory rates applicable
to future years to differences between the financial
statement carrying amounts and the tax bases of existing
assets and liabilities. Valuation allowances are recorded
when realization of deferred tax assets can not be
considered more likely than not.
10
E-COMMERCE SUPPORT CENTERS, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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 reported
amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results
could differ from those estimates.
ADVERTISING
Cost incurred for advertising are expensed when incurred.
The charges to expense were not significant for the nine
month period ended September 30, 2000 and for the three
months ended December 31, 1999.
PER SHARE DATA
e-com computes earnings per share based upon the weighted
average shares outstanding during the period. Earnings per
share were, calculated on a proforma bases for the three
month period end December 31, 1999.
RECENT ACCOUNTING PRONOUNCEMENTS
SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," as amended, is effective for all fiscal
quarters of fiscal years beginning after June 15, 2000. SFAS
No. 133 establishes accounting and reporting standards for
derivative instruments, including certain derivative
instruments embedded in other contracts (collectively
referred to as derivatives), and for hedging activities.
Historically, e-com has not entered into derivatives
contracts either to hedge existing risks or for speculative
purposes. Accordingly, e-com does not expect adoption of the
new standard on January 1, 2001, to affect its financial
statements.
11
E-COMMERCE SUPPORT CENTERS, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
On December 3, 1999, the SEC issued Staff Accounting
Bulletin 101 (SAB 101"), Revenue Recognition in Financial
Statements. SAB 101 summarizes some of the SEC's
interpretations of the application of generally accepted
accounting principles to revenue recognition. Revenue
recognition under SAB 101 was initially effective for the
Company's first fiscal quarter of fiscal year beginning
after December 15, 1999. However, SAB 101B, which was
released June 26, 2000, delayed adoption of SAB 101 until no
later than the fourth fiscal quarter of fiscal years
beginning after December 15, 1999. The Company believes that
its revenue recognition practices are in substantial
compliance with SAB 101 and that adoption of its provisions
would not be material to its prospective annual or quarterly
results of operations.
2. PROPERTY AND Property and equipment is summarized as follows:
EQUIPMENT
September 30, December 31,
2000 1999
-----------------------------------------------------------
Computer and telephone hardware $ 2,026,668 $ 1,468,085
Computer software 3,402,142 2,186,394
Leasehold improvements 698,841 698,841
Furniture and fixtures 276,974 194,974
Equipment 159,106 117,142
-----------------------------------------------------------
6,563,731 4,665,436
Accumulated depreciation and
amortization (2,583,303) (1,427,529)
-----------------------------------------------------------
Property and equipment, net $ 3,980,428 $ 3,237,907
-----------------------------------------------------------
12
E-COMMERCE SUPPORT CENTERS, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Assets recorded under capital leases and included in
property and equipment are as follows:
September 30 December 31
2000 1999
-----------------------------------------------------------
Computer and telephone
hardware $ 872,629 $ 491,405
Computer software 1,256,249 863,768
-----------------------------------------------------------
2,128,878 1,355,173
Accumulated depreciation
and amortization (938,459) (578,027)
-----------------------------------------------------------
Net assets under lease
obligations $ 1,190,419 $ 777,146
-----------------------------------------------------------
3. CAPITAL LEASE Future minimum lease payments on capital leases for the
OBLIGATIONS 12-month period ended September 30 are summarized as
follows:
-----------------------------------------------------------
2001 $ 855,371
2002 615,659
2003 508,984
2004 15,153
-----------------------------------------------------------
Total payments 1,995,167
Less amount representing interest 238,169
-----------------------------------------------------------
Present value of minimum lease payments 1,756,998
Less current portion 712,919
-----------------------------------------------------------
Long term portion of capital lease obligations $ 1,044,079
-----------------------------------------------------------
13
E-COMMERCE SUPPORT CENTERS, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
4. INCOME TAXES Provisions for federal and state income taxes consist of
the following:
Nine Months Three Months
Ended Ended
September 30, December 31,
2000 1999
-----------------------------------------------------------
Deferred:
Federal $ (737,000) $ (421,000)
State (100,000) (57,000)
Valuation allowance 837,000 478,000
-----------------------------------------------------------
Total deferred - -
-----------------------------------------------------------
Provision for income taxes $ - $ -
-----------------------------------------------------------
The Company's effective tax rate differs from the statutory
federal tax rate in 2000 and 1999 as shown in the following
table:
Nine Months Three Months
Ended Ended
September 30, December 31,
2000 1999
-----------------------------------------------------------
U.S. federal income taxes at the
statutory rate $ (737,000) $ (421,000)
State taxes, net (100,000) (57,000)
Changes in valuation allowance 837,000 478,000
-----------------------------------------------------------
Provision for income taxes $ - $ -
-----------------------------------------------------------
14
E-COMMERCE SUPPORT CENTERS, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The tax effects of temporary differences that give rise to a
significant portion of the deferred tax assets and
liabilities as of September 30, 2000 and December 31, 1999
are presented below:
September 30, December 31,
2000 1999
-----------------------------------------------------------
Allowance for doubtful accounts $ 42,000 $ -
Net operating loss carryforwards 795,000 478,000
Valuation allowances (837,000) (478,000)
-----------------------------------------------------------
Net deferred taxes $ - $ -
-----------------------------------------------------------
The Company has recorded a valuation allowance against
deferred tax assets due to uncertainties regarding the
Company's ability to generate a sufficient level of taxable
income in future periods. In the event that realization of
the deferred tax assets is considered more likely than not
in future periods, the Company may reduce the valuation
allowance.
Due to the change in ownership, future utilization of net
operating loss carryforwards will be limited.
5. SUBSEQUENT Effective February 1, 2001, ecom merged into Paladyne Corp.,
EVENTS in exchange for Paladyne redeemable Preferred Stock.
15
SCHEDULE II
Pro Forma Financial Data
Introduction
The following pro forma financial data is based upon the historical
financial statements of Paladyne Corp. ("Paladyne") and have been prepared to
illustrate the effects on such historical financial data of the acquisition of
e-commerce support centers, inc. ("ecom"). The unaudited pro forma statements of
operations combine the historical consolidated statements of operations of
Paladyne for the six months ended February 28, 2001 and the year ended August
31, 2000 with the historical statements of operations for ecom for the six
months ended December 31, 2000 and the year ended September 30, 2000,
respectively. The ecom acquisition is assumed to have been consummated on
September 1, 1999. The unaudited pro forma balance sheet of Paladyne as of
February 28, 2001 includes the acquisition of ecom, which was consummated on
February 1, 2001 and reflects the results of operations of ecom for the one
month ended February 28, 2001.
The pro forma financial data is provided for comparative purposes only and
does not purport to represent the actual financial position or results of
operations of Paladyne that actually would have been obtained if the ecom
acquisition had been consummated on the date specified, nor is it necessarily
indicative of the results of operations that may be achieved in the future.
The pro forma financial data is based on certain assumptions and
adjustments described in the notes thereto and should be read in conjunction
with the historical financial statements of Paladyne and ecom.
II-1
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED FEBRUARY 28, 2001
HISTORICAL PRO FORMA
-------------------------- --------------------------------
ECOM ACQUISITION
PALADYNE (A), (F) ADJUSTMENTS COMBINED
------------ ------------ ------------ ------------
(UNAUDITED) (UNAUDITED)
REVENUES $ 2,353,389 $ 3,277,312 $ (897,082) (B) $ 4,733,619
COST OF REVENUES 1,287,434 1,994,898 (153,330) (B) 3,129,002
------------ ------------ ------------ ------------
Gross Profit 1,065,955 1,282,414 (743,752) 1,604,617
EXPENSES:
Selling & G&A 2,160,141 1,554,941 (805,183) (B) 2,909,899
Depreciation & Amortization 232,545 770,516 (130,357) (B) 1,185,145
312,441 (C)
------------ ------------ ------------ ------------
Income (Loss) from Operations (1,326,731) (1,043,043) (120,653) (2,490,427)
OTHER INCOME (EXPENSE):
Interest Income 21,048 - - 21,048
Interest Expense (57,721) (66,773) 57,473 (B) (317,021)
(250,000) (D)
Other Income 6,986 - - 6,986
------------ ------------ ------------ ------------
Net Income (Loss) (1,356,418) (1,109,816) (313,180) (2,779,414)
Cumulative Convertible Preferred Stock Dividend 20,400 - - 20,400
------------ ------------ ------------ ------------
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS $ (1,376,818) $ (1,109,816) $ (313,180) $ (2,799,814)
============ ============ ============ ============
Net loss per common share - basic and diluted $ (0.16) - - $ (0.33)
Weighted average common shares outstanding - 8,458,956 - - (E) 8,458,956
basic and diluted
Footnotes
(A) The unaudited historical financial statements of ecom were based on a
December year end and have been adjusted to to reflect the results of
operations for the six months ended December 31, 2000.
(B) Adjustment to remove the results of operations of ecom for the one month
ended February 28, 2001 as these amounts are already included in Paladyne's
historical financial statements.
(C) Adjustment to record the amortization of goodwill resulting from the ecom
acquisition.
(D) Adjustment to reflect the interest expense related to the notes payable
signed by ecom in connection with the purchase of property and equipment
immediately prior to the acquisition.
(E) The convertible preferred stock issued in connection with the acquisition
was anti-dilutive as of February 28, 2001 and has no effect on net loss per
common share.
(F) The results of operations of ecom for the six months ended December 31,
2000 included the results of operations for three months ended September
30, 2000 which are also included in the results of operations for the year
ended September 30, 2000. There were no unusual transactions during the
three months ended September 30, 2000.
II-2
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
FEBRUARY 28, 2001
PALADYNE
(A)
------------
(UNAUDITED)
ASSETS:
Current Assets
Cash and cash equivalents $ 398,459
Short term investments 242,666
Accounts receivable, net 1,531,289
Prepaid expenses and other current assets 120,939
------------
Total Current Assets 2,293,353
Property and equipment, net 3,188,137
Goodwill, net 9,520,256 (B)
Capitalized software development costs, net 417,936
Other assets 52,272
------------
TOTAL ASSETS $ 15,471,954
============
LIABILITIES & STOCKHOLDERS' EQUITY:
Current Liabilities
Notes payable $ 1,850,000 (C)
Accounts payable 1,229,008
Accrued expenses 601,355
Due to Affiliate 128,911
Accrued preferred stock dividends 129,200
Current portion of capital lease obligations 797,247
Current portion of long-term debt 431,466 (C)
------------
Total Current Liabilities 5,167,187
Long-term capital lease obligations 881,753
Long-term debt 3,068,534 (C)
------------
Total Liabilities 9,117,474
------------
Stockholders' Equity
Preferred Stock - Series A 137
Preferred Stock - Series B 4,100 (D)
Common Stock 8,460
Additional paid-in capital 12,879,848 (D)
Accumulated deficit (6,538,065)
------------
Total Stockholders' Equity 6,354,480
------------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 15,471,954
============
Footnotes
(A) The unaudited historical balance sheet of Paladyne includes the acquisition
of ecom on February 1, 2001 and reflects the results of ecom's operations
for the one month ended February 28, 2001.
(B) The excess of the purchase price over the net assets acquired of
approximately $9,373,000 was recorded as goodwill and will be amortized
over a 15 year period. Amortization expense of approximately $52,000 was
recorded in February 2001 relating to this goodwill. The purchase price was
based on the fair value of Paladyne's common stock and the number of shares
obtainable upon conversion of the convertible preferred stock issued as
acquisition consideration. The purchase price was allocated based on the
estimated fair value of the net assets acquired. The purchase allocation is
preliminary and is subject to change based upon final appraisals of the
assets acquired.
(C) Debt of $5,000,000 was assumed in the acquisition, including a short-term
$1,500,000 note payable and a long- term $3,500,000 note payable. Interest
expense of approximately $42,000 was recorded in February 2001 relating to
this debt.
(D) Stock valued at approximately $5,765,000 was issued, representing the
purchase price, in the acquisition consisting of 4,100,000 shares of
convertible preferred stock with a par value of $.001.
II-3
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED AUGUST 31, 2000
HISTORICAL PRO FORMA
-------------------------- --------------------------------
ECOM ACQUISITION
PALADYNE (A), (E) ADJUSTMENTS COMBINED
------------ ------------ ------------ ------------
(UNAUDITED)
REVENUES $ 5,521,865 $ 3,526,372 $ - $ 9,048,237
COST OF REVENUES 3,366,400 2,557,323 - 5,923,723
------------ ------------ ------------ ------------
Gross Profit 2,155,465 969,049 - 3,124,514
EXPENSES:
Selling & G&A 2,047,982 2,411,212 4,459,194
Depreciation & Amortization 62,656 1,726,130 624,882 (B) 2,413,668
-
------------ ------------ ------------ ------------
Income (Loss) from Operations 44,827 (3,168,293) (624,882) (3,748,348)
OTHER INCOME (EXPENSE):
Interest Income 7,594 - - 7,594
Interest Expense (24,418) (122,796) (500,000) (C) (647,214)
Loss on disposal of assets (31,814) - - (31,814)
Other Income 16,460 - - 16,460
------------ ------------ ------------ ------------
Net Income (Loss) 12,649 (3,291,089) (1,124,882) (4,403,322)
Cumulative Convertible Preferred Stock Dividend 40,800 40,800
------------ ------------ ------------ ------------
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS $ (28,151) $ (3,291,089) $ (1,124,882) $ (4,444,122)
============ ============ ============ ============
Net loss per common share - basic and diluted $ (0.00) - - $ (0.56)
Weighted average common shares outstanding - 7,958,843 - - (D) 7,958,843
basic and diluted
Footnotes
(A) The unaudited historical financial statements of ecom were based on a
December year end and have been adjusted to to reflect the results of
operations for the year ended September 30, 2000.
(B) Adjustments to record the amortization of goodwill resulting from the ecom
acquisition.
(C) Adjustment to reflect the interest expense related to the notes payable
signed by ecom in connection with the purchase of the property and
equipment immediately prior to the acquisition.
(D) The convertible preferred stock issued in connection with the acquisition
was anti-dilutive as of August 31, 2001 and has no effect on net loss per
common share.
(E) The results of operations of ecom for the year ended September 30, 2000
included the results of operations for three months ended September 30,
2000 which is also included in the results of operations for the six months
ended December 31, 2000. There were no unusual transactions during the
three months ended September 30, 2000.
II-4
PALADYNE CORP. SPECIAL MEETING
TO BE HELD ON JULY 10, 2001
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned stockholder of PALADYNE CORP., a Delaware corporation (the
"Company"), acknowledges receipt of the Notice of Special Meeting of
Stockholders and Proxy Statement, dated June 14, 2001, and hereby constitutes
and appoints Terrence J. Leifheit and Clifford A. Clark, or either of them
acting singly in the absence of the other, with the power of substitution in
either of them, the proxies of the undersigned to vote with the same force and
effect as the undersigned all shares of Common Stock, Series A Preferred Stock,
and/or Series B Preferred Stock of the Company held by the undersigned at the
Special Meeting of Stockholders of the Company to be held on July 10, 2001, and
at any adjournment or adjournments thereof, hereby revoking any proxy or proxies
heretofore given and ratifying and confirming all that said proxies may do or
cause to be done by virtue thereof with respect to the following matters:
The undersigned hereby instructs said proxies or their substitutes:
1. The election of six persons nominated by the Board of Directors to serve
as Class I, II and III Directors as indicated below:
FOR all nominees listed below: [ ] (except as indicated) WITHHOLD AUTHORITY
to vote for all nominees listed below: [ ]
NOMINEES: Clifford A. Clark and Kenneth W. Horn (Class I),
Terrence J. Leifheit and James L. McGovern (Class II) and
Ronald L. Weindruch and William E. Willis, Jr. (Class III).
(INSTRUCTION: To withhold authority to vote for any individual nominee or
nominees, write such nominee's or nominees' name(s) in the space
provided below.)
2. Amendment to the Company's Certificate of Incorporation to increase
the number of authorized shares of Common Stock.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
3. Amendment to Company's 1999 Stock Option Plan to increase the number
of underlying shares of Common Stock.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
4. Upon such other matters as may properly come before the Meeting or any
adjournment or adjournments thereof.
1
This Proxy when properly executed will be voted as directed. If no
direction is indicated, this Proxy will be voted FOR the election of the six
named individuals as directors, FOR the amendment to the Certificate of
Incorporation, and FOR the amendment to the 1999 Stock Option Plan.
PLEASE SIGN, DATE AND MAIL THIS PROXY
IMMEDIATELY IN THE ENCLOSED ENVELOPE.
Name
-----------------------------------
Name (if joint)
-----------------------------------
Date........................., 2001
Please sign your name exactly as it appears
hereon. When signing as attorney, executor,
administrator, trustee or guardian, please give
your full title as it appears hereon. When signing
as joint tenants, all parties in the joint tenancy
must sign. When a proxy is given by a corporation,
it should be signed by an authorized officer and
the corporate seal affixed. No postage is required
if returned in the enclosed envelope.
2