UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
[x] QUARTERLY REPORT UNDER SECTION 13 0R 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended May 31, 2002
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANCE ACT OF 1934
For the transition period from _____________ to ________________
Commission File Number 0-22969
Paladyne Corp.
(Name of Small Business Issuer in its charter)
Delaware 59-3562953
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1650A Gum Branch Road, Jacksonville, NC 28540
(Address of Principal Executive Offices)
910-478-0097
(Issuer's Telephone Number)
N/A
(Former name, former address and former fiscal year,
if changed since last report)
Checked whether the issuer (1) filed all reports required to be filed by
Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
Yes X No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date.
Class Outstanding as of
July 3, 2002
Common Stock, $.001 PAR VALUE 16,709,351
Transitional Small Business Disclosure Format (check one): Yes No X
--- ---
1
TABLE OF CONTENTS
Page
----
PART I. CONSOLIDATED FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements 3
Condensed Consolidated Balance Sheets - May 31, 2002
and August 31, 2001 4
Condensed Consolidated Statements of Operations -
three months ended May 31, 2002 and
May 31, 2001 5
Condensed Consolidated Statements of Operations -
nine months ended May 31, 2002 and
May 31, 2001 6
Condensed Consolidated Statements of Cash Flows -
nine months ended May 31, 2002 and May 31, 2001 7
Notes to Unaudited Condensed Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 14
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 17
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 17
2
PART I.
ITEM 1. FINANCIAL STATEMENTS
The following unaudited Condensed Consolidated Financial Statements for the
three months and nine months ended May 31, 2002 and May 31, 2001 have been
prepared by Paladyne Corp., a Delaware corporation.
3
PALADYNE CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
MAY 31, 2002 AUGUST 31, 2001
(UNAUDITED) ---------------
------------
ASSETS
Current Assets:
Cash and cash equivalents $ 177,499 $ 158,225
Accounts receivable, net of allowance
for doubtful accounts of $164,000
and $607,999, respectively 1,626,720 1,414,473
Prepaid expenses and other current assets 109,744 113,960
------------ ------------
Total Current Assets 1,913,963 1,686,658
Property and equipment, net of accumulated
depreciation of $1,505,599 and $783,449 2,037,846 2,429,736
Other assets 8,310 28,685
------------ ------------
$ 3,960,119 $ 4,145,079
============ ============
LIABILITIES AND DEFICIENCY IN
STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 3,061,573 $ 2,500,585
Notes payable 3,183,557 2,663,752
Accrued preferred stock dividends Series A 180,200 149,600
Current portion of capital lease obligations 671,439 816,649
------------ ------------
Total current liabilities 7,096,769 6,130,586
Notes payable 2,166,443 2,986,248
Capital lease obligations 381,191 634,230
------------ ------------
Total liabilities 9,644,403 9,751,064
COMMITMENTS AND CONTINGENCIES
DEFICIENCY IN STOCKHOLDERS' EQUITY
Preferred stock;
Series A 137 137
Series C 941 -
Common stock 16,709 16,709
Additional paid-in capital 14,257,250 12,869,647
Accumulated deficit (19,959,321) (18,492,478)
------------ ------------
Total deficiency in stockholders' equity (5,684,284) (5,605,985)
------------ ------------
$ 3,960,119 $ 4,145,079
============ ============
See accompanying notes to unaudited condensed consolidated financial statements
4
PALADYNE CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED
MAY 31,
2002 2001
(UNAUDITED) (UNAUDITED)
----------- -----------
Total Revenues $ 2,035,472 $ 2,925,499
Cost of Revenues 1,141,585 1,704,305
----------- -----------
Gross Profit 893,887 1,221,194
Selling, general and administrative expenses 1,058,207 1,173,972
Depreciation and amortization 234,852 391,074
----------- -----------
Loss from operations (399,172) (343,852)
Other income (expense):
Interest expense (172,685) (164,998)
----------- -----------
Loss from continuing operations, before
income taxes and discontinued operations (571,857) (508,850)
Income tax benefits -
----------- -----------
Loss from continuing operations, before
discontinued operations (571,857) (508,850)
Loss from discontinued operations - (963,807)
----------- -----------
Net Loss (571,857) (1,472,657)
Cumulative Convertible Preferred Stock
Dividend Requirement (10,200) (10,200)
----------- -----------
Loss attributable to common stockholders $ (582,057) $(1,482,857)
=========== ===========
Weighted average common shares outstanding:
Basic 16,709,351 8,459,351
Diluted 16,709,351 8,459,351
Earnings (loss) per share:
Basic $ (.03) $ (.18)
Diluted $ (.03) $ (.18)
See accompanying notes to unaudited condensed consolidated financial statements
5
PALADYNE CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED
MAY 31,
2002 2001
(UNAUDITED) (UNAUDITED)
----------- -----------
Total Revenues $ 6,999,471 $ 3,822,581
Cost of Revenues 3,826,481 2,177,114
----------- -----------
Gross Profit 3,172,990 1,645,467
Selling, general and administrative expenses 3,422,004 1,659,676
Depreciation and amortization 722,150 521,431
----------- -----------
Loss from operations (971,164) (535,640)
Other income (expense):
Interest expense (495,679) (222,471)
----------- -----------
Loss from continuing operations, before
income taxes and discontinued operations (1,466,843) (758,111)
Income tax benefits - -
----------- -----------
Loss from continuing operations, before
discontinued operations (1,466,843) (758,111)
Loss from discontinued operations - (2,070,964)
----------- -----------
Net Loss (1,466,843) (2,829,075)
Cumulative Convertible Preferred
Stock Dividend Requirement (30,600) (30,600)
----------- -----------
Net loss attributable to
common stockholders $(1,497,443) $(2,859,675)
=========== ===========
Weighted average common shares outstanding:
Basic 16,709,351 8,459,351
Diluted 16,709,351 8,459,351
Earnings (loss) per share:
Basic $ (.09) $ (.34)
Diluted $ (.09) $ (.34)
See accompanying notes to unaudited condensed consolidated financial statements
6
PALADYNE CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED
MAY 31,
2002 2001
(UNAUDITED) (UNAUDITED)
----------- -----------
Cash flows used in operating activities $ (351,137) $ (426,585)
Cash flows used in investing activities (319,886) (97,146)
Cash flows provided by financing activities 690,297 185,027
---------- ----------
Net increase (decrease) in cash and
cash equivalents 19,274 (338,704)
Cash and cash equivalents at beginning of period 158,225 635,612
---------- ----------
Cash and cash equivalents at end of period $ 177,499 $ 296,908
========== ==========
Supplemental Cash Flow Information:
Cash paid for interest $ 495,679 $ 222,471
Non cash investing and financing activities:
Accrual of preferred stock dividend 30,600 30,600
Issuance of common shares as payment
of debt 300,000 -
See accompanying notes to unaudited condensed consolidated financial statements
7
PALADYNE CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
NOTE 1. SUMMARY OF ACCOUNTING POLICIES
General
- -------
The accompanying unaudited consolidated financial statements have been prepared
in accordance with the instructions to Form 10-QSB, and therefore, do not
include all the information necessary for a fair presentation of financial
position, results of operations and cash flows in conformity with generally
accepted accounting principles.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Accordingly, the results from operations for the nine-month period ended May 31,
2002 are not necessarily indicative of the results that may be expected for the
year ended August 31, 2002. The unaudited consolidated financial statements
should be read in conjunction with the consolidated August 31, 2001 financial
statements and footnotes thereto included in the Company's SEC Form 10-KSB.
Business and Basis of Presentation
- ----------------------------------
Paladyne Corp. (the "Company") through a wholly-owned subsidiary, E-commerce
Support Centers, Inc., provides customer relationship management (CRM) solutions
at its customer contact center in Jacksonville, NC. Effective with the merger of
ECOM the Company discontinued operations of its data integration business. The
consolidated financial statements include the accounts of the Company, and its
wholly owned subsidiary, e-commerce support centers inc. All significant
inter-company transactions and balances have been eliminated.
Reclassification
- ----------------
Certain reclassifications have been made to conform to prior periods' data to
the current presentation. These reclassifications had no effect on reported
losses.
Recent Accounting Pronouncements
- --------------------------------
In July 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 141, "Business Combinations" (SFAS No.
141), and Statement of Financial Accounting Standards No. 142, "Goodwill and
Other Intangible Assets" (SFAS No. 142). The FASB also issued Statement of
Financial Accounting Standards No. 143, "Accounting for Obligations Associated
with the Retirement of Long-Lived Assets" (SFAS No. 143), and Statement of
Financial Accounting Standards No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" (SFAS No. 144), in August and October 2001,
respectively.
SFAS No. 141 requires the purchase method of accounting for business
combinations initiated after June 30, 2001 and eliminates the pooling-of-
interest method. The adoption of SFAS No. 141 had no material impact on the
Company's consolidated financial statements.
Effective January 1, 2002, the Company adopted SFAS No. 142. Under the new
rules, the Company will no longer amortize goodwill and other intangible assets
with indefinite lives, but such assets will be subject to periodic testing for
impairment. On an annual basis, and when there is reason to suspect that their
values have been diminished or impaired, these assets must be tested for
impairment, and write-downs to be included in results from operations may be
necessary. SFAS No. 142 also requires the Company to complete a transitional
goodwill impairment test six months from the date of adoption.
Any goodwill impairment loss recognized as a result of the transitional goodwill
impairment test will be recorded as a cumulative effect of a change in
accounting principle no later than the end of fiscal year 2002. The adoption of
8
SFAS No. 142 had no material impact on the Company's consolidated financial
statements.
SFAS No. 143 establishes accounting standards for the recognition and
measurement of an asset retirement obligation and its associated asset
retirement cost. It also provides accounting guidance for legal obligations
associated with the retirement of tangible long-lived assets. SFAS No. 143 is
effective in fiscal years beginning after June 15, 2002, with early adoption
permitted. The Company expects that the provisions of SFAS No. 143 will not have
a material impact on its consolidated results of operations and financial
position upon adoption. The Company plans to adopt SFAS No. 143 effective
January 1, 2003.
SFAS No. 144 establishes a single accounting model for the impairment or
disposal of long-lived assets, including discontinued operations. SFAS No. 144
superseded Statement of Financial Accounting Standards No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
(SFAS No. 121), and APB Opinion No. 30, "Reporting the Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions". The Company adopted
SFAS No. 144 effective January 1,2002. The adoption of SFAS No. 144 had no
material impact on Company's consolidated financial statements.
NOTE 2. BUSINESS COMBINATION
On February 1, 2001, Paladyne Corp. ("Paladyne") through a wholly-owned
subsidiary ecom Acquisition Corp. ("Acquisition Sub"), merged (the "Merger")
with e-commerce support centers, inc., a North Carolina corporation ("ecom"),
pursuant to an Agreement and Plan of Merger, dated as of December 21, 2000, as
amended (collectively, the "Merger Agreement") in a transaction accounted for
using the purchase method of accounting. Upon the Merger, ecom became a wholly
owned subsidiary of Paladyne. ecom is a provider of Customer Relationship
Management (CRM) solutions and customer contact center services as an
outsourcing option to companies from its contact center in Jacksonville, NC. The
merger consideration (the "Merger Consideration") to the ecom shareholders
consisted of shares of newly created Series B Convertible Preferred Stock, $.001
par value (the "Series B Preferred Stock"), Anti-Dilution Warrants and
Performance Warrants (as discussed below) and the right to receive additional
shares of Paladyne Common Stock in conjunction with future placements by
Paladyne. Terrence J. Leifheit, the principal shareholder of ecom, and another
ecom shareholder, delivered into escrow securities representing approximately
25% of the aggregate Merger Consideration as security for indemnification claims
Paladyne may have under the Merger Agreement.
9
NOTE 2-BUSINESS COMBINATION (continued)
- ---------------------------------------
Upon the Merger, Paladyne issued 4,100,000 shares of Series B Preferred Stock.
Each share of Series B Preferred Stock voted 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 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. The stockholder approval was obtained at a July 10, 2001
stockholders meeting, accordingly, the shares are deemed converted as of that
date.
To protect against dilution to the former ecom shareholders upon exercise of
outstanding pre-Merger Paladyne options and warrants (the "Present
Options/Warrants"), Paladyne granted to them Anti-Dilution Warrants to purchase
4,000,000 shares of Paladyne Common Stock at an exercise price of $1.146 per
share (subject to adjustment), vesting as to 0.6 of a share of Common Stock for
each share of Common Stock issued upon the exercise of Present Options/Warrants,
and expiring 30 days after the later of (i) termination or exercise of all
Present Options/Warrants or (ii) notice from Paladyne as to the aggregate number
of Present Options/Warrants that were exercised. Approximately 592,000 of these
Anti-Dilution Warrants have now expired unexercised as a result of the
expiration of approximately 987,000 of the Present Options/Warrants.
To give the former ecom shareholders the opportunity to participate more
directly in the future performance of Paladyne resulting from the acquired ecom
business, Paladyne granted to them Performance Warrants to purchase 500,000
shares of Paladyne Common Stock at an exercise price of $1.146 per share
(subject to adjustment), exercisable for five years and vesting in 100,000 share
tranches for each $20 million of net revenue increases, above $50 million
annually, achieved in either year or both of the two (2) year periods ending
January 31, 2002 and 2003. For the purpose of these awards, the measurement will
be on a trailing 12-month basis, and with an acceptable gross margin (20% or
greater) for each tranche to qualify.
In addition, ending upon the earlier to occur of December 20, 2002 or Paladyne's
completion of $6,500,000 in cash from sales of Common Stock or Common Stock
equivalents (the "New Securities"), ecom shareholders will receive, one share
(the "Deferred Shares") of Common Stock for each $1.00 in gross proceeds
received upon the sale of New Securities or issuable upon conversion, exercise
or exchange of New Securities. ecom shareholders waived their rights under this
provision for the private placement of Series C Preferred Stock.
The Merger Agreement provided that Paladyne would grant options, at market
value, to ecom employees for the purchase of an aggregate of 500,000 shares of
Paladyne Common Stock under its 1999 Stock Option Plan. The Compensation
Committee of the Board of Directors was authorized to grant such options upon
receipt from former ecom management of a proposal of the ecom employees to whom
the options should be granted.
Immediately prior to the Merger, ecom purchased from Gibralter Publishing, Inc.,
a North Carolina corporation, 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 amended promissory notes issued to
Gibralter and guaranteed by Paladyne, one note for $1,500,000, repayable in two
installments of $750,000, the first being due after completion of a $3,000,000
equity or convertible debt offering and the remaining payment due no sooner than
six months after the first payment and after three consecutive months of
positive cash flow from operations. The second note for $3,500,000 is repayable
in equal quarterly principal and interest payments of $377,000 beginning in
April 2002 and continuing through January 2005. Both notes bear interest at 10%
per annum and are secured by the purchased assets.
A portion of these assets used by ecom in its contact center operations consists
of equipment that is leased by Gibraltar pursuant to various equipment leases.
Pending the receipt by Gibralter of lessor consents to the assignments of these
leases to 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.
10
The total purchase price and carrying value of the net assets acquired and
liabilities assumed of ecom were as follows:
Debts assumed $ 5,000,000
Other liabilities assumed 2,375,579
Costs of acquisition 467,000
Preferred stock issued 5,765,000
Less: assets acquired (4,234,636)
------------
Excess of purchase price over fair value
of assets acquired $ 9,372,943
============
The 4,100,000 shares of Series B Preferred Stock issued in the Merger was valued
based upon the underlying 8,200,000 shares of Common Stock at a price of $.7031
(the average the Company's common stock price five days prior to February 1,
2001) for a total consideration of $5,765,000.
The Company has recorded the carryover basis of the net assets acquired, which
did not differ materially from their fair value. The results of operations
subsequent to the date of acquisition are included in the Company's consolidated
statement of operations.
Impairment Charge
- -----------------
During the year ended August 31, 2001, the Company recorded a charge of
$9,008,713 for goodwill impairment related to its ecom subsidiary. Subsequent to
its acquisition in February 2001, the ecom subsidiary experienced significant
changes in market conditions. This change caused the subsidiary not to reach the
sales levels the Company originally anticipated at the time of the acquisition.
In addition, the Company's acquisition and related business plan contemplated
the private placement of the Company's equity in order to develop the
subsidiary. Due to adverse capital market conditions, the Company was unable to
raise a significant amount of equity financing. Separately, during the year
ended August 31, 2001, the Company ceased the development of the Company's data
integration and data quality software and recorded a charge of $338,037 for
impairment of capitalized software related to this discontinued operations.
Due to the significance of the changes discussed above, management performed an
evaluation of the recoverability of all of the assets of ecom, as described in
Statement of Financial Accounting Standards No. 121, "Accounting for Impairment
of Long-Lived Assets and Long-Lived Assets to be Disposed Of". Management
concluded from the results of this evaluation that a significant impairment
charge was required because estimated fair value was less than the carrying
value of the assets. Considerable management judgment is necessary to estimate
fair value. Accordingly, actual results could vary significantly from
managements' estimates.
Based upon the evaluation, the Company recognized an asset impairment loss of
$9,346,750 or $.71 per share during the year ended August 31, 2001.
NOTE 3. SERIES A DIVIDEND
The holders of the Company's Series A cumulative convertible preferred stock are
entitled to receive, out of the net profits of the Company, annual dividends at
the rate of $.2975 per share. If the net profits of the Company are not
sufficient to pay the preferred dividend, then any unpaid portion of the
dividend will be included in accrued expenses. The Company had accrued
cumulative preferred stock dividends of $180,200 as of May 31, 2002.
NOTE 4. STOCKHOLDERS' DEFICIT
The Series A Preferred Stock issued in the 1998 acquisition of WG Controls, a
former subsidiary, 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, they
will be cumulative and accrued for payment when Company profits are adequate to
fund payment. The conversion provision of the Series A Preferred Stock calls for
each of the 137,143 preferred shares to be converted into .67361 shares of the
Company's Common Stock, or an aggregate of 92,381 shares of Common Stock when
the Company's Common Stock achieves an average closing price of $5.25 per share
for a consecutive 60-day trading period. The Series A Preferred Stock has the
11
same voting rights as the Common Stock and have preference to the Common Stock
in the event of any liquidation, dissolution or winding up of the Company,
whether voluntary of involuntary.
On February 1, 2001, the Board of Directors authorized the issuance of 4,100,000
shares of newly created Series B Convertible Preferred Stock in connection with
the Merger of ecom. These shares were converted to 8,200,000 shares of the
Company's Common Stock on July 10, 2001.
On September 24, 2001, the Board of Directors authorized a private placement of
up to 600,000 units priced at $5.00 per unit, with a unit consisting of three
shares of the Company's Series C 8% Cumulative Convertible Preferred Stock. Each
Series C Preferred share is convertible into 10 shares of the Company's Common
Stock at $3.00 per share. Net proceeds from this private placement as of May 31,
2002 were $1,419,146, which is net of offering expenses of $148,705 and includes
the exchange of $300,000 in debt for this Series C preferred stock. This
resulted in the issuance of 940,710 shares of Series C Preferred Stock.
NOTE 5. NOTES PAYABLE AND CAPITAL LEASE OBLIGATIONS
- ---------------------------------------------------
Notes Payable at May 31, 2002 are as follows:
2001
----
Note payable in quarterly installments of $377,000,
including interest at 10% per annum, secured by property
and equipment. $ 3,500,000
Note payable in two installments of $750,000, plus interest
at 10% per annum, secured by property and equipment. The
first installment is due after completion of a $3,000,000
equity or convertible debt offering by the Company and the
remaining installment payment due the later of six months
after the first installment payment is made and after three
consecutive months of positive cash flow from operations (as
defined). 1,500,000
Note payable to Bank at the Bank's prime lending rate plus
1%, secured by accounts receivable, note is in past due and
in default 350,000
Capital leases, principal and interest payable in
installments Through 2004, interest rates range from 8% to
13% collateralized by specific computer and telephone
equipment and software 1,052,630
-----------
6,402,630
Less: current portion (3,854,996)
-----------
$ 2,547,634
===========
NOTE 6. CONTINGENCY
A former Company employee filed a complaint against the Company alleging that
the Company owes the plaintiff additional compensation. The Company believes
that it has meritorious defenses to the plaintiff's claims and intends to
vigorously defend itself against the plaintiff's claims.
The Company is also subject to other legal proceedings and claims that arise in
the ordinary course of its business. Although occasional adverse decisions or
settlements may occur, the Company believes that the final disposition of such
matters will not have a material adverse effect on its financial position,
results of operations or liquidity.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
- --------
Since the February merger with e-commerce support centers, inc. ("ecom"),
Paladyne Corp. (the "Company") has provided CRM-based customer and tech support,
and outbound telemarketing for business-to-business and business-to-customer
needs, see Note 2 to the notes to the financial statements.
The Company's consolidated financial statements are presented on a going concern
basis, which contemplates the realization of assets and satisfaction of
liabilities in the normal course of business. As with any new venture, concerns
must be considered in light of the normal problems, expenses and complications
encountered by entrance into established markets and the competitive environment
in which the Company operates. The consolidated financial statements do not
include, nor does management feel it necessary, any adjustments to reflect any
possible future effects on the recoverability and classification of assets or
the amounts and classification of liabilities that may result from the possible
inability of the Company to continue as a going concern. The Company's
independent accountant's report contained a going concern qualification for the
year ended August 31, 2001.
The Company maintains substantial business relationships with Gibralter
Publishing, Inc. ("Gibralter"), from which it has acquired or leased a
substantial portion of the ecom assets in exchange for the installment notes,
see note 2 to the condensed consolidated financial statements. Gibralter
continues to be the Company's principal customer, accounting for approximately
50% of the revenues for the nine month period and three month period ended May
31, 2002.
During the three months ended May 31, 2002, the Company has continued to reduce
or eliminate non-critical expenses and operations. Certain personnel continue to
defer all or a portion of their compensation.
RESULTS OF OPERATIONS
- ---------------------
The following table sets forth the percentage relationship to the total revenues
of principal items contained in the Company's Condensed Consolidated Statements
of Operations for the three and nine months ended May 31, 2002 and 2001,
respectively. The percentages discussed throughout this analysis are stated on
an approximate basis.
Three months ended Nine months ended
May 31, May 31,
2002 2001 2002 2001
------------------ -----------------
(UNAUDITED) (UNAUDITED)
Total revenues 100% 100% 100% 100%
Cost of revenues 56% 58% 55% 57%
---- ---- ---- ----
Gross profit 44% 42% 45% 43%
Operating expenses 63% 54% 59% 57%
---- ---- ---- ----
Operating loss (19%) (12%) (14%) (14%)
Interest expense (9%) (6%) (7%) (6%)
Loss from discontinued operations (32%) (54%)
---- ---- ---- ----
Net loss (28%) (50%) (21%) (74%)
==== ==== ==== ====
13
COMPARISON OF THE NINE MONTHS ENDED MAY 31, 2002 TO NINE MONTHS ENDED
- ---------------------------------------------------------------------
MAY 31, 2001
- ------------
Revenues for the nine months ended May 31, 2002 and 2001 were $6,999,471 and
$3,822,581, respectively; this represents a 83% increase in sales. This is due
primarily to the May 31, 2001 period containing only four month's revenue due to
the timing of the merger with ecom on February 1, 2001. The increase in revenue
from 2001 to 2002 was partially offset by a reduction in revenue in 2002 from
two large customers of the Company of $785,000 during this nine-month period.
All of these revenues were derived entirely from the Company's CRM-based
customer and tech support, and outbound telemarketing for business-to-business
to business-to-customer operations. These operations began with the purchase of
ecom on February 1, 2001 as discussed in Note 2 to the condensed financial
statements. Other revenue for the nine months ended May 31, 2001 were
attributable entirely to the discontinued operations relating to the contract
software and service center operations and have accordingly been combined into
the loss from discontinued operations.
Cost of revenues of $3,826,481 and $2,177,114, respectively for the nine months
ended May 31, 2002 and 2001 were 55% and 57% of revenue for the periods. The
increase in cost of revenues of $1,649,367 from the nine months ended May 31,
2001 to May 31, 2002 is due to the 2001 period reflecting lower revenues due
primarily to only four months of activity as discussed above. The increase in
cost of revenue from 2001 to 2002, due to more months being reported in 2002,
was partially offset by a reduction in revenue in 2002 from two large customers
of the Company of $785,000 during this nine-month period
Gross profit was $3,172,990 and $1,645,467, respectively for the nine months
ended May 31, 2002 and 2001 were 45% and 43% of revenue for the periods. This
increase in the gross profit percentage, from 43% to 45%, is due primarily to
efficiencies in 2002 and certain cost reductions. Although revenues and the
related costs were higher in 2002, this was due to more months of activity
rather than greater monthly revenue. The decline in revenue volume from two of
the Company's customers was the primary cause of the decline in the gross
margin.
Operating expenses of $4,144,154 and $2,181,107, respectively for the nine
months ended May 31, 2002 and 2001 were 59% and 57% of revenue for the periods.
The increase as a percentage of revenue from 57% to 59% is due to the lower than
anticipated volume particularly in the last three months of the nine month
period. Cost cutting actions taken during the last nine months and the decrease
in depreciation and amortization expenses resulted in this increase, as a
percentage of revenue, being smaller than would have been otherwise. The
increase in operating expenses of $1,963,047 was attributable primarily to there
being nine months of operations reflected in 2002 and four months in 2001.
Interest expense, as percentage of revenue, increased from 6% to 7% during the
nine months ended May 31, 2001 as compared to the nine months ended May 31,
2002. This percentage increase and the actual increase from $222,471 to $495,679
is primarily attributable to the nine months of activity in 2002 as compared to
the four months shown in 2001 together with increased interest related to
capital leases.
COMPARISON OF THE THREE MONTHS ENDED MAY 31, 2002 TO THREE MONTHS ENDED
- -----------------------------------------------------------------------
MAY 31, 2001
- ------------
Revenue for the three months ended May 31, 2002 and 2001 were $2,035,472 and
$2,925,499, respectively; this represents a 30% decline in sales. All of these
revenues were derived entirely from the Company's CRM-based customer and tech
support, and outbound telemarketing for business-to-business to business-to-
customer operations. This decline is attributable to the reduction in revenue
from the Company's two largest customers. These two, Gibralter and Lowes
accounted for $785,000 of the decline during this three-month period. Other
revenue for the three months ended May 31, 2001 were attributable entirely to
the discontinued operations relating to the contract software and service center
operations and have accordingly been combined into the loss from discontinued
operations.
Cost of revenues of $1,141,585 and $1,704,305, respectively for the three months
ended May 31, 2002 and 2001 were 56% and 58% of revenue for the periods. The
decrease in cost of sales of $562,720 or 32% from 2001 to 2002 is attributable
to the 30% decline in sales discussed above and cost cutting actions taken by
the Company. Gross profit was $893,887 and $1,221,194, respectively for the
three months ended May 31, 2002 and 2001 and was 44% and 42% of revenue for the
periods. The increase in gross profit percentage is due to cost cutting actions
in the 2002 period.
14
Operating expenses, including depreciation and amortization, have increased as
percentage of revenue from 54% for the three months ended May 31, 2001 to 63%
for the three months ended May 31, 2002. The increase as a percentage of revenue
is due primarily to the decline in revenue that is discussed above. Cost cutting
actions taken during the this three month period were not adequate to result in
operating expenses to remain at the same percentage of revenue. Operating
expenses did decline $271,987 or 17% from the 2001 to 2002 period. The reduction
in depreciation and amortization expenses totaled approximately $156,000 or 8%
of revenue for the three months ended May 31, 2002.
Interest expense, as percentage of revenue, increased from 6% to 9% during the
three months ended May 31, 2001 as compared to the three months ended May 31,
2002. The increase from $164,998 to $172,685 is due to increased interest costs
related to capital leases and on the percentage comparison is primarily due to
the decline in sales from 2001 to 2002.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company's principal cash requirements are for operating expenses, including
employee costs, funding of accounts receivable, capital expenditures and funding
of the operations. The Company's primary sources of cash had been from private
placements of the Company's preferred or common stock and a bank line of credit.
The Company has continued to aggressively seek additional financing or
additional equity infusion to fund the acquisition and growth of ecom. A private
placement of the Company's Series C Preferred Stock was offered through May 31,
2002. At May 31, 2002 $1,419,146 has been raised (this includes the $300,000
issued in exchange for debt). The Company has completed most of its cost cutting
moves including closing the Florida and Virginia offices and certain employee
reductions. Conventional bank financing has not been expanded but with
successful completion of the private placement we intend to aggressively pursue
increases in our bank financing. The Company must obtain additional capital,
primarily to enable payment of the merger related costs from the February 2001
merger with ecom and to enable the execution of the ecom business plan. These
merger costs, additional borrowing related to the merger, and the loss of the
Company's traditional revenue sources (discontinued operations) have strained
liquidity significantly
Cash used in operating activities was $351,137 for the nine months ended May 31,
2002. This cash decrease is primarily the result of increased operating losses,
caused by the loss of the Company's traditional revenue source and revenue
levels that are at less than a breakeven volume. Increasing revenues or further
cost cutting will required in the future. The Company invested $319,886 in
computers and leasehold improvements during this period. The Company met its
cash requirements during the nine months ended May 31, 2002 through the receipt
of $1,419,146 (including the exchange of Series C shares for $300,000 in
liabilities) from the sale of the Series C preferred stock in a private
placement.
While the Company has raised capital to meet its working capital requirements in
the past, additional financing is required, in order to meet current and
projected cash flow deficits from operations. The Company is seeking financing
in the form of equity and debt. There are no assurances the Company will be
successful in raising the funds required and any equity raises would be
substantially dilutive to existing shareholders.
In prior periods, the Company has borrowed funds from significant shareholders
of the Company to satisfy certain obligations.
The Company's independent certified public accountants have stated in their
report included in the Company's August 31, 2001 Form 10-KSB, that the Company
has incurred operating losses in the last two years, and that the Company is
dependent upon management's ability to develop profitable operations. These
factors among others may raise substantial doubt about the Company's ability to
continue as a going concern.
INFLATION
- ---------
In the opinion of management, inflation has not had a material effect on the
operations of the Company.
15
RISK FACTORS AND CAUTIONARY STATEMENTS
- --------------------------------------
Forward-looking statements in this report are made pursuant to the "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995. The Company
wishes to advise readers that actual results may differ substantially from such
forward-looking statements. Forward-looking statements involve risks and
uncertainties that could cause actual results to differ materially from those
expressed in or implied by the statements, including, but not limited to, the
following: the ability of the Company to provide for its debt obligations and to
provide for working capital needs from operating revenue, and other risks
detailed in the Company's periodic report filings with the Securities and
Exchange Commission.
16
PART II
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) None
(b) None
(c) Sale of Securities
During the fiscal quarter ended May 31, 2002, the Company sold
11,220 shares of its Series C Preferred Stock in a placement
claimed to be exempt from the registration provisions of the
Securities Act by reason of Section 4(2) therof. The purchasers
entered into Subscription Agreements containing customary
representations and warranties regarding their knowledge of the
Company and their understanding of the exemption from
registration. The purchasers either paid cash or exchanged
existing outstanding indebtedness for their shares. The Company
received $6,915, net of commissions of $11,785 paid to Attkinson
Carter & Co., the placement agent. The Series C Preferred Stock
is convertible into shares of Common Stock, see Note 4 to the
financial statements in this report.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(b) Reports on Form 8-K
1. None
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
PALADYNE CORP.
Date: July 11, 2002 By /s/ Terrance Leifheit
----------------------
Terrance Leifheit
President
Date: July 11, 2002 By /s/ Clifford Clark
-------------------
Clifford Clark
Chief Financial Officer
17