UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10 - QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended May 31, 1999
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE
615 Crescent Executive Court, Suite 128, Lake Mary, FL 32746
(Address of Principal Executive Offices)
(407)333-2488
(Issuer's telephone number)
(Issuer's telephone number)
N/A
(Former name, former address and former
fiscal year, if changed since last report)
Check 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.
Outstanding as of
Class July 14, 1999
Common Stock, $ .001 par value 6,477,199
Transitional Small Business Disclosure Format (check one): Yes No X .
--- ---
1
TABLE OF CONTENTS
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements 3
Condensed Consolidated Balance Sheets - May 31,
1999 and August 31, 1998 4
Condensed Consolidated Statements of Operations -
three months ended May 31, 1999 and 1998 5
Condensed Consolidated Statements of Operations -
nine months ended May 31, 1999 and 1998 6
Condensed Consolidated Statements of Cash Flows -
nine months ended May 31, 1999 and 1998 7
Notes to Condensed Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis
and Results of Operations 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities and Use of Proceeds 15
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 16
2
PART I
ITEM 1. FINANCIAL STATEMENTS
The following unaudited Condensed Consolidated Financial Statements for
the three and nine month periods ended May 31, 1999 and 1998 have been prepared
by Paladyne Corp., a Delaware corporation. Effective March 5, 1999, Synaptx
Worldwide, Inc., a Utah Corporation, merged with and into Paladyne Corp., in a
migratory merger, and Paladyne Corp. is the successor registrant pursuant to
Rule 12g-3 under the Securities Exchange Act of 1934. The financial statements
in this report are of Synaptx Worldwide, Inc. for all periods through the date
of the migratory merger, and of Paladyne Corp. since that date.
3
PALADYNE CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF MAY 31, 1999 AND AUGUST 31, 1998
MAY 31, 1999 AUGUST 31, 1998
(UNAUDITED) (AUDITED)
------------ ---------------
ASSETS
Current assets:
Cash $ 0 $ 126,532
Accounts receivable (net of allowance for doubtful
accounts of $37,736 and $37,736) 907,524 918,785
Prepaid expenses and deposits 268,908 44,861
----------- -----------
Total current assets 1,176,432 1,090,178
Property and equipment 383,974 462,725
Less accumulated depreciation (205,595) (162,045)
----------- -----------
Net property and equipment 178,379 300,680
Costs in excess of net assets acquired
(net of accumulated amortization of $2,747,715 and
$1,878,834) 0 868,881
Other assets 45,170 96,839
----------- -----------
Total assets $ 1,399,981 $ 2,356,578
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 736,505 $ 490,726
Accrued expenses and taxes 117,964 438,737
Notes payable 243,600 303,417
Current portion of long-term debt 47,444 175,521
Deferred revenue 638,839 150,427
----------- -----------
Total current liabilities 1,784,352 1,558,828
Long-term debt, net of current portion 175,000 331,502
Commitments
Stockholders' (deficit) equity
Cumulative, convertible preferred stock; $.001 par value;
10,000,000 shares authorized, 137,143 issued and outstanding 137 137
Common stock; $.001 par value; 25,000,000 shares
authorized, 6,477,199 and 6,378,503 issued and outstanding 6,478 6,379
Additional paid in capital 4,506,410 4,284,534
Deficit (5,072,396) (3,824,802)
----------- -----------
Total stockholders' (deficit) equity (559,371) 466,248
----------- -----------
Total liabilities and stockholders' equity $ 1,399,981 $ 2,356,578
=========== ===========
4
PALADYNE CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MAY 31, 1999 AND 1998
1999 1998
(UNAUDITED) (UNAUDITED)
------------ -------------
Net sales and revenues:
Marketing services and production $ 41,425 498,137
Database services 734,038 358,750
Executive placement fees -- 40,100
----------- -----------
Total revenues 775,463 896,987
Cost of sales and revenues 792,171 731,215
----------- -----------
Gross profit (16,708) 165,772
Selling, general and administrative expenses 352,030 363,964
Depreciation and amortization 23,160 47,304
----------- -----------
Loss from operations (391,898) (245,496)
Other (income) expense:
Interest expense 25,412 11,849
----------- -----------
Net loss from continuing operations (417,310) (257,345)
Discontinued operations (Note 4):
Loss from operations of sales representative
subsidiaries (27,241) (104,926)
(Loss) on disposal (738,695) --
----------- -----------
Loss from discontinued operations (765,936) (104,926)
----------- -----------
Net loss (1,183,246) (362,271)
Cumulative convertible preferred stock
dividend requirements 10,200 10,200
----------- -----------
Net loss applicable to common shareholders $(1,193,446) $ (372,471)
=========== ===========
Weighted average shares outstanding 6,557,556 5,604,947
=========== ===========
Basic and diluted net loss per share $ (0.18) $ (0.07)
=========== ===========
5
PALADYNE CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED MAY 31, 1999 AND 1998
1999 1998
(UNAUDITED) (UNAUDITED)
----------- ------------
Net sales and revenues:
Marketing services and production $ 637,072 $ 2,157,968
Database services 2,171,309 917,569
Executive placement fees 52,000 77,430
----------- -----------
Total revenues 2,860,381 3,152,967
Cost of sales and revenues 2,403,955 2,379,176
----------- -----------
Gross profit 456,426 773,791
Selling, general and administrative expenses 968,391 1,144,364
Depreciation and amortization 67,320 156,618
----------- -----------
Loss income from operations (579,285) (527,191)
Interest expense 49,196 30,724
----------- -----------
Net loss from continuing operations (628,481) (557,915)
Discontinued operations (Note 4):
Income (loss) from operations of sales representative
subsidiaries 56,081 (202,183)
Loss on disposal (675,194) --
----------- -----------
Loss from discontinued operations (619,113) (202,183)
----------- -----------
Net loss (1,247,594) (760,098)
Cumulative convertible preferred stock
dividend requirements 30,600 17,000
----------- -----------
Net loss applicable to common shareholders $(1,278,194) $ (777,098)
=========== ===========
Weighted average shares outstanding 6,526,481 4,029,062
=========== ===========
Basic and diluted net loss per share $ (0.20) $ (0.11)
=========== ===========
6
PALADYNE CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED MAY 31, 1999 AND 1998
1999 1998
(UNAUDITED) (UNAUDITED)
------------ -----------
Cash flows from operating activities
Net loss $(1,247,594) (760,098)
Adjustments to reconcile net loss to net cash
used in operating activities;
Depreciation 67,320 65,984
Amortization 42,997 150,531
Loss on disposal of discontinued operations 675,194 --
Changes in assets and liabilities net of
assets acquired or disposed:
(Increase) decrease in accounts receivable (404,828) 342,967
Increase in other current assets (62,172) (34,568)
Increase in accounts payable 245,779 225,956
Decrease in accrued expenses (322,188) (25,851)
Increase (decrease)in deferred revenues 488,412 (266,273)
----------- -----------
Net cash (used in) provided by operating activities (517,080) (301,352)
Cash flows from investing activities
Additions to property, plant and equipment (77,635) (95,690)
Cash acquired in business acquisitions and disposals (net) 99,078 33,452
Reductions in (additions to) other assets 76,669 (184,051)
----------- -----------
Net cash provided by (used in) investing activities 98,112 (246,289)
Cash flows from financing activities
Reductions in bank lines of credit (41,899) (1,802)
(Reductions in) additions to long-term debt (115,257) 141,874
Additions to short-term debt 66,438 72,880
Issuance of common stock-net 383,154 398,902
----------- -----------
Cash provided by financing activities 292,436 611,854
----------- -----------
Net (decrease) increase in cash (126,532) 64,213
Cash at beginning of period $ 126,532 $ 58,265
----------- -----------
Cash at end of period $ -- $ 122,478
=========== ===========
7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
NOTE 1. BASIS OF PRESENTATION
The financial information included herein is unaudited; however, such
information reflects all adjustments (consisting solely of normal recurring
adjustments) which, in the opinion of management, are necessary for a fair
statement of results for the interim periods. The accompanying financial
statements include estmated amounts and disclosures based on management's
assumptions about futer events. Actual results may differ from those estimates.
The results of operations for the interim periods are not necessarily indicative
of the results to be expected for the full year. Basic and diluted earnings per
share are the same due to the anti-dilutive nature of the options.
The condensed consolidated financial statements have been prepared by the
Company, without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the disclosures are adequate to
make information presented not misleading.
These financial statements should be read in conjunction with the financial
statements included in the Company's Form 10-KSB for the fiscal year ended
August 31, 1998, as filed with the Securities and Exchange Commission and
available under the EDGAR reporting system or from the Company.
The Company's 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. The Company's ability to continue as a going concern
is contingent upon its ability to secure additional financing, raise additional
equity investment, and attain profitable operations. Although the Company is
pursuing additional private equity investment, there can be no assurance that
the Company will be able to secure financing when needed or obtain such terms
satisfactory to the Company. In addition, the Company's ability to continue as a
going concern must be considered in light of the problems, expenses and
complications frequently encountered by entrance into established markets and
the competitive environment in which the Company operates. The financial
statements do not include any adjustments to reflect the 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 recognizes revenue as it is earned, not necessarily when it is
billed or collected. The contractual relationship with its clients dictates the
recognition of revenue by the Company. The Company classifies any revenue billed
but not yet earned as deferred revenue on its balance sheet. As of May 31, 1999,
the Company has a significant balance as a result of significant pre-billings to
a client for amounts to be earned over an extended period of time.
During fiscal year 1998, the Company changed its strategy from one of acquiring
and growing mainly distribution companies to one of building upon internal
strengths and acquiring organizations focused on developing technology that
enables the rapid development of high data integrity databases within the
customer relationship management segment. Customer relationship management in
the context of what the Company does, is broadly defined as processes that
enable companies to identify, acquire, and maintain desirable customers. This
shift is a result of what Management feels is greater opportunity and a greater
8
opportunity to achieve profitable operations on a long-term basis.
In pursuit of this shift in strategy, the Company has discontinued its focus on
manufacturer's representative firms. In the nine months ended May 31, 1999, the
Company has either closed or sold four of the five firms of this type and
accrued for any anticipated losses from the disposal of the remaining operation.
The results of these discontinued operations have been reflected as such on the
accompanying financial statements.
NOTE 2. PRINCIPLES OF CONSOLIDATION
The condensed consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. The subsidiaries consist of Synaptx
Access, Inc. ("Access"), acquired in June, 1996, and Synaptx Impulse, Inc.
("Impulse"), acquired in October, 1996. The results of previously owned
subsidiaries - WG Controls, Inc. ("WG"), acquired in January, 1998, Primus
Marketing Associates, Inc. ("Primus"), acquired in June, 1998, and ORAYCOM, Inc.
("ORAYCOM"), acquired in June, 1997 - are presented for all periods owned
through their disposition dates as discontinued operations on the accompanying
financial statements.
NOTE 3. PRIVATE PLACEMENTS
During the nine months ended May 31, 1999, the Company raised $383,154, net of
private placement costs, as a result of selling 216,008 shares of its Common
Stock in private placements. Additionally, each share subscribed included a five
year warrant to purchase one share of Common Stock at $3.00 per share.
Therefore, 216,008 warrants were issued in conjunction with the shares of Common
Stock. Additionally in the period, 53,573 shares of Common Stock and
corresponding warrants were issued to private placement subscribers who had
originally purchased shares at $2.00 per share, which was the original price of
that placement. Due to market conditions, the placement was re-priced at $1.75
and the Company retroactively made this price available to previous subscribers.
The Company also issued 657 shares of its Common Stock as compensation to an
unrelated individual who assisted in the placement, and issued 551 shares as a
result of stock options exercised.
NOTE 4: DISCONTINUED OPERATIONS
After evaluating the Company's sales representative subsidiaries and their
relation to the overall strategic direction of the Company, given the change to
a customer relationship management, database driven strategy, the Board of
Directors made the decision to discontinue the sales representative line of
business in the third quarter of fiscal 1999. Prior to this decision in the
third quarter of fiscal 1999, the Company had already disposed of two divisions
that were under performing. Each of the divisions and the details of its
disposal are detailed below.
As a result of repeated and recurring losses the Company terminated its
operations under the Advantage Technologies name in San Jose, CA effective
November 30, 1998. The Company did not incur material costs related to this
closure.
Subsequent to the close of business on November 30, 1998, the Company sold all
the capital stock in ORAYCOM, Inc. ("ORAYCOM") to O. Ray Strickland and O. Ray
Strickland IRA, (collectively, the "Strickland Group"). Mr. Strickland was an
employee of the Company and the General Manager of ORAYCOM. He was the sole
shareholder of ORAYCOM when the Company acquired it from him in June, 1997. The
agreement called for Strickland Group to convey to the Company, 80,000 shares of
the Company's Common Stock in exchange for all of the issued and outstanding
shares of ORAYCOM and waiver of the non-compete agreement in place with Mr.
Strickland. As a result, the Company took a charge in the fourth quarter of
9
fiscal 1998 of $428,054 to write off the remaining balance of the goodwill
related to the purchase of ORAYCOM. ORAYCOM was not considered a material
subsidiary to the Company's consolidated business. Upon closing, the Company
recognized a gain on the transaction of $63,501 in 2Q99.
On May 31, 1999, the Company closed an agreement to sell the assets of WG
Controls, Inc. to the management of WG. The terms of the transaction were
$250,000 in cash, $25,000 in a long-term note receivable, and the assumption of
approximately $196,000 in debt. The total sale price was approximately $471,000.
The Company recognized a loss on the transaction of approximately $427,000 which
included the write-off of approximately $624,000 of goodwill related to the
acquisition of WG in January, 1998.
On June 28, 1999 the Company closed an agreement to sell the assets of Primus to
the management of Primus. The effective date of the transaction is May 31, 1999.
The terms of the transaction were $12,500 in cash, the return of 107,143 shares
of the Company's stock, and a 1% override on commission receipts for a period of
twenty four months following the transaction. The total sale price was
approximately $45,982. The Company recognized a loss on the transaction of
approximately $311,000 which included the write-off of approximately $176,000 of
goodwill related to the acquisition of Primus in June, 1998.
The net assets of the sales representative subsidiaries on the Company's books
as of May 31, 1999 are approximately $14,000.
NOTE 5. DEFERRED REVENUE
The Company recognizes revenue as it is earned. The earning of revenue may trail
the billing based on contractual relationships with clients. As of May 31, 1999
the Company has approximately $639,000 in deferred revenue primarily due to two
projects that have provided for significant pre-billings for work to be done in
the future. The work to be completed is all short term in nature.
NOTE 6. SUPPLEMENTAL CASH FLOW DISCLOSURES
Cash paid for interest was approximately $ 52,500 and $ 31,700 for the nine
month periods ended May 31, 1999 and 1998, respectively, consistent with an
increased level of debt.
For the nine months ended May 31, 1998, the Company recognized the following
Depreciation Amortization
------------ ------------
Continuing operations 55,606 101,012
Discontinued operations 10,378 49,519
------ ------
Total 65,984 150,531
On January 5, 1998, the Company purchased all of the capital stock of WG
Controls, Inc. for approximately $1,100,000 utilizing Common Stock, Preferred
Stock, and future cash payouts. In conjunction with this acquisition,
liabilities assumed were as follows:
Nine Months Ended
May 31, 1999 May 31, 1998
----------- ------------
Fair value of assets acquired $ - $ 1,126,776
Cash acquired - 33,452
Value of stock issued - (869,621)
-------------- ------------
10
Liabilities assumed $ - $ 290,607
=============== ==========
Subsequent to the close of business on November 30, 1998, the Company sold all
of the capital stock in ORAYCOM back to its original owner (see Note 4 to the
financial statements). On the date of the sale, ORAYCOM had assets of $95,892,
liabilities of $39,393, and stockholders' equity of $55,499, for which the
Company received back 80,000 shares of its Common Stock valued at $120,000,
recognizing a gain of $63,501.
On May 31, 1999, the Company closed an agreement to sell the assets of WG
Controls, Inc. to the management of WG. On the date of the sale, WG had net
assets $249,120. There also was debt payable to the original owners of WG for
approximately $196,000. As part of this transaction, the Company received cash
for $250,000, a note receivable for $25,000, and had the debt assumed by the
buyer. The total sale price was approximately $471,000. The Company recognized a
loss on the transaction of approximately $401,000 which included the write-off
of approximately $624,000 of goodwill related to the January 1998 acquisition of
WG.
On June 28, 1999 the Company closed an agreement to sell the assets of Primus to
the management of Primus. On the date of the sale, Primus had net assets of
$187,192, for which the Company received back 107,143 of the Company's common
stock valued at $40,200 and $12,500 in cash. The total sale price was
approximately $52,700. The Company recognized a loss on the transaction of
approximately $311,000 which included the write-off of approximately $176,000 of
goodwill related to the June 1998 acquisition of Primus.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Paladyne Corporation (the "Company") through its operating subsidiaries,
provides software products and ancillary services that enable companies to
quickly build databases with high data integrity, thus cutting long
implementation times and eliminating the risk of building the database with poor
quality data. Paladyne data quality solutions and services support desktop
marketers and developers of data warehouses and data marts. Paladyne software is
based on an open, multi-tiered, cross-platform architecture. The Company intends
to build its business through internal growth as well as seek acquisitions of
existing companies. Except for the acquisitions consummated, the Company has no
agreements or understandings regarding possible future acquisitions. The
Company's fiscal year ends August 31.
OVERVIEW
- --------
The Company provides software products and ancillary services that enable
companies to quickly build databases with high data integrity. Paladyne data
quality solutions and services support desktop marketers and developers of data
warehouses and data marts. Paladyne software is based on an open, multi-tiered,
cross-platform architecture. The Company primarily targets the
telecommunications, data communications, direct response and cable TV
industries. The Company's mission is to help its clients know their customers
better.
The Company's 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. The Company's ability to continue as a going concern
is contingent upon its ability to secure additional financing, raise additional
equity investment, and attain profitable operations. Although the Company is
pursuing additional private equity investment as well as the refinancing and
expansion of outstanding debt, there can be no assurance that the Company will
be able to secure financing when needed or obtain such terms satisfactory to the
Company. In addition, the Company's ability to continue as a going concern must
be considered in light of the problems, expenses and complications frequently
encountered by entrance into established markets and the competitive environment
in which the Company operates. The financial statements do not include any
adjustments to reflect the 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.
During fiscal year 1998, the Company changed its strategy from one of acquiring
and growing mainly distribution companies to one of building upon internal
strengths and acquiring organizations focused on developing technology that
enables the rapid development of high data integrity databases within the
customer management segment. Customer management in the context of what the
Company does, is broadly defined as processes that enable companies to identify,
acquire, and maintain desirable customers. This shift is a result of what
Management feels is greater opportunity and a greater opportunity to achieve
profitable operations on a long-term basis.
In pursuit of this shift in strategy, the Company has discontinued its focus on
manufacturer's representative firms. In the nine months ended May 31, 1999, the
Company has either closed or sold four of the five firms of this type and
accrued for any anticipated losses from the disposal of the remaining operation.
The results of these discontinued operations have been reflected as such on the
accompanying financial statements.
RESULTS OF OPERATIONS
- ---------------------
12
The following table sets forth the percentage relationship to total revenues of
principal items contained in the Company's Condensed Consolidated Statements of
Operations for the nine months ended May 31, 1999 and 1998, respectively. The
percentages discussed throughout this analysis are stated on an approximate
basis.
Three Months Ended
May 31,
1999 1998
------------------
(Unaudited)
Net sales and revenues.............................. 100% 100%
Cost of sales....................................... 102% 82%
------ ------
Gross Profit (loss)................................. (2)% 18%
Selling, general and administrative expenses........ 49% 46%
------ ------
Operating loss income............................... (51%) (28%)
Interest expense.................................... 3% 1%
------ ------
Net Loss incoming from continuing operations........ (54%) (29%)
Loss from discontinued operations................... 99% 12%
------ ------
Net loss............................................ (153%) (41%)
====== ======
Nine Months Ended
May 31,
1999 1998
------------------
(Unaudited)
Net sales and revenues.............................. 100% 100%
Cost of sales....................................... 84% 75%
------ ------
Gross Profit (loss)................................. 16% 25%
Selling, general and administrative expenses........ 36% 42%
------ ------
Operating loss income............................... (20%) (17%)
Interest expense.................................... 2% 1%
------ ------
Net Loss incoming from continuing operations........ (22%) (18%)
Loss from discontinued operations................... 22% 6%
------ ------
Net loss............................................ (44%) (24%)
====== ======
The discussion in the following sections relative to various fluctuations in
income statement items is applicable to continuing operations only. See the
separately titled section for discussion of discontiued operations.
NET SALES AND REVENUES
- ----------------------
The Company's net sales and revenues decreased by $121,524 or 14%, from $896,987
for the three months ended May 31, 1998 ("3Q/98") to $775,463 for the three
months ended May 31, 1999 ("3Q/99"). This decrease was indicative of the
Company's shift in focus from a marketing services organization to a technology
and software developer of customer management solutions. Additionally, the
executive search division is no longer a core focus of the Company. Furthermore,
the Company has experienced a significant increase in deferred revenues which
represent billings for work to be completed in the near term future. This
increase over the year earlier period is approximately $490,000 which will be
recognized as revenue in the next two fiscal quarters. The combination of
marketing services and executive search revenue declined by approximately
$497,000 while the database services division increased by approximately
$375,000. The database services area is still in its early stages. The Company
expects the database services division to be the primary growth area.
The Company's net sales and revenues decreased by $292,586 or 9%, from
$3,152,967 for the nine months ended May 31, 1998 to $2,860,381 for the nine
months ended May 31, 1999. This decrease was also consistent with the Company's
shift in focus. The combination of marketing services and executive search
revenue declined by approximately $1,546,000 while the database services
division was able to make up only approximately $1,254,000 of the difference.
COST OF SALES
- -------------
Cost of sales and revenues increased by $60,956 in 3Q/99, or 8%, from $731,215
in 3Q/98 to $792,171 in 3Q/99. The increase is primarily attributable to hiring
necessary to staff the Company's new focus in the development and delivery of
database-driven software and services, as well as paying a substantial amount to
outside contractors who have historically provided the bulk of the activities in
the database area.
Cost of sales and revenues increased by $24,779 or 1% from $2,379,176 in the
nine months ended May 31, 1998 to $2,403,955 in the nine months ended May 31,
1999. The nominal increase is due to staffing requirements and outsource
13
arrangements in the Database Services area, offset in part by reductions in
staff for business areas that have been de-emphasized, primarily Marketing
Services.
GROSS PROFIT
- ------------
The Company's gross profit (loss) margin, was (2%) and 18% for 3Q/99 and 3Q/98,
respectively. The decrease in gross profit margin of 20 percentage points in
3Q/99 is primarily attributable to the higher cost of sales encountered in the
building of internal database capabilities and lower revenues as the company
shifts its focus from Marketing Services to Software and Database Services. The
Company's gross profit margin, was 16% and 25% in the nine months ended May 31,
1999 and 1998, respectively. The decrease in gross profit margin of 9 percentage
points in the current period is consistent with the Company shifting its focus
and encountering lower revenues and higher cost of sales as that shift is made.
Further reducing margins is the fact that the Company has experienced a
significant increase in deferred revenues which represent billings for work that
is being done currently that will lead to revenue recognition in subsequent
quarters.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
- --------------------------------------------
Selling, general and administrative expenses, including depreciation and
amortization, decreased by $36,078 in 3Q/99 or 9%, from $411,268 in 3Q/98 to
$375,190 in 3Q/99. The decrease is attributable to the current period having
lower depreciation and amortization from continuing operations of approximately
$21,000 and the elimination of approximately $55,000 per quarter in general
overhead spending (from continuing operations) as a result of staff and space
reductions, which phased in at various times during the first nine months of
fiscal 1999. Offsetting these reductions are minor increases related to opening
a development office outside of Washington, DC to accommodate a staff of
developers in the Database Services division of approximately $40,000 per
quarter.
Selling, general and administrative expenses, including depreciation and
amortization, decreased by $265,271or 20% from $1,300,982 in the six months
ended May 31, 1998 to $1,035,711 in the six months ended May 31, 1999.
Approximately $100,000 of the decrease is attributable to a reduction in
goodwill amortization related to the acquisition of Impulse. The prior period
had a full nine months of amortization while the current period had none as the
entire balance was written off at August 31, 1998. The remainder of the decrease
is due to reductions in general overhead spending of approximately $165,000 for
nine months offset by additions related to the expenses attributable to the new
location in Washington, DC.
INTEREST EXPENSE
- ----------------
Interest expense increased $13,563 from 3Q/98 to 3Q/99, consistent with an
increased level of borrowing period to period.
Interest expense increased by $18,472 from the nine months ended May 31, 1998 to
the nine months ended May 31, 1999. This increase is attributable to increased
borrowings on bank lines of credit, debt related to the WG acquisition, and
notes payable to an officer of the Company.
DISCONTINUED OPERATIONS
- -----------------------
In the third quarter of fiscal 1999, the Company made the decision to
discontinue the manufacturers' representative line of business. The operations
during each of the periods presented are separately disclosed as such.
14
For the three months ended May 31, 1999, the Company lost $27,241 from the
operations of the sales rep firms vs. a loss of $104,926 in the prior year
period. The improvement in the current period is primarily due to ORAYCOM and
the San Jose office of Advantage Technologies combined for nearly a $70,000 loss
in the prior period vs. no activity in the current period. Additionally, the
current period includes three months of Primus activity, which was profitable
vs. no activity in the prior period.
For the nine months ended May 31, 1999, the Company earned $56,081 from the
operations of the sales rep firms vs. a loss of $202,183 in the prior year
period. The improvement in the current period is primarily due to ORAYCOM and
the San Jose office of Advantage Technologies combined for nearly a $110,000
loss in the prior period vs. no activity in the current period. Additionally,
the current period includes nine months of Primus activity, which had profits of
approximately $121,000 vs. no activity in the prior period. Furthermore, the
current period includes nine months of activity and earnings of $73,000 for WG,
vs. five months activity and a loss of $35,000 in the prior period.
The loss on disposition of the sales rep firms is $675, 194 in the current nine
month period vs. $0 in the prior period. The loss is calculated as the net
assets sold in exchange for the consideration received including any
amortization of goodwill related to the dispositions.
NET OPERATING LOSS
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The Company has accumulated approximately $2,300,000 of net operating loss
carry forwards as of May 31, 1999 which may be offset against taxable income and
income taxes in future years. The use of these losses to reduce future income
taxes will depend on the generation of sufficient taxable income prior to the
expiration of the net operating loss carry forwards. The carry forwards expire
in the year 2013. In the event of certain changes in control of the Company,
there will be an annual limitation on the amount of net operating loss carry
forwards which can be used. No tax benefit has been reported in the financial
statements for the three months or the six months ended February 28, 1999
because there is a 50% or greater chance that the carry forward will not be
utilized. Accordingly, the potential tax benefit of the loss carry forward is
offset by a valuation allowance of the same amount.
LIQUIDITY AND CAPITAL RESOURCES
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The Company's principal cash requirements are for operating expenses, including
employee costs, outside consultants such as independent contractors who provide
database and professional marketing and sales consulting services, funding of
accounts receivable, capital expenditures and funding of the start-up operations
of the Company's new facility in Washington, DC. The Company's primary sources
of cash have been from private placements of the Company's common stock, a bank
line of credit, and cash derived from operations. The Company is investigating
various sources for additional financing, principally additional equity
placements. There is no assurance that the Company will consummate any
additional financing or that any additional financing will not be dilutive to
shareholders.
In April 1999, the Company entered into an expanded credit facility providing a
line of credit up to $250,000 at prime rate plus 1 1/4% and renewable six months
from the date of the original agreement. Management believes that internal cash
flow, the expanded credit facility and anticipated private equity infusions
should be adequate to meet the Company's capital needs for the next twelve
months.
Nine Months ended May 31, 1999.
Cash decreased $126,532 from $126,532 at the beginning of the period
to $0 at the end of the period. Net cash used in operations was $517,080
attributable to the net loss of $1,247,594, an increase in accounts receivable
15
of approximately $400,000, an increase in other non-current assets of
approximately $62,000, and a decrease in accrued expenses of approximately
$322,000. Offsetting these were non-cash depreciation expense of $67,320, non
cash amortization expense of $42,997, the net loss on disposal of discontinued
operations of approximately $675,000, an increase in accounts payable of
approximately $246,000 and an increase in deferred revenues of approximately
$488,000.
Net cash provided by investing activities was $98,112 attributable to
the cash acquired in the disposition of the sales representative companies of
$99,078, a reduction in other long-term assets of $76,669, offset by additions
to fixed assets of approximatley $99,000 due primarily to the equipment
requirements for the Washington DC operation.
Net cash provided by financing activities was $292,436 attributable
to proceeds from issuance of common stock of $383,154 and additions to short
term debt of $66,438 offset by reductions in bank lines of credit of $41,899 and
other long term debt of $115,257.
YEAR 2000 ISSUE
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The "Year 2000 Issue" is whether the Company's computer systems will properly
recognize date sensitive information when the year changes to 2000, or "00."
Systems that do not properly recognize such information could generate erroneous
data or cause a system to fail. The Company has conducted preliminary reviews of
its computer systems and its purchased software programs (including accounting
software) and does not believe the Year 2000 Issue will pose any significant
operational problems for its systems or software or any significant costs to the
Company. In addition, the Company intends to make similar reviews of the systems
of potential acquisition candidates for any financial or operational impact the
Year 2000 Issue may pose.
INFLATION
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In the opinion of management, inflation has not had a material
effect on the operations of the Company.
RISK FACTORS AND CAUTIONARY STATEMENTS
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Forward-looking statements in this report are made pursuant to the "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995. The Company
wishes to advise readers that actual results may differ substantially from such
forward-looking statements. Forward-looking statements involve risks and
uncertainties that could cause actual results to differ materially from those
expressed in or implied by the statements, including, but not limited to, the
following: the ability of the Company to provide for its debt obligations and to
provide for working capital needs from operating revenues, and other risks
detailed in the Company's periodic report filings with the Securities and
Exchange Commission.
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PART II
ITEM 1. LEGAL PROCEEDINGS
There are no material pending legal proceedings in which the Company is
involved. The Company was granted a judgement against a customer for non-payment
for services performed. The Company continues to pursue collection of the
judgement. Although the Company has been granted a judgment for the amount due,
the ultimate collectibility of this amount is unknown at this time, therefore
the Company has fully reserved the entire amount as uncollectible at May 31,
1999.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(c) During the nine months ended May 31, 1999, the Company engaged in private
placements of its securities described in Note 3 to the Condensed Consolidated
Financial Statements elsewhere in this filing. These placements were claimed
exempt from the registration requirements of the Securities Act of 1933 by
reason of Section 4(2) thereof.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
Acquisition or Disposition of Assets related to the sale of the assets of
WG Controls, Inc. to WG Technologies, filed on June 15, 1999
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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 CORPORATION
Date: July 14, 1999 By /s/Ronald L. Weindruch
----------------------
RONALD L. WEINDRUCH,
President, Chief Executive Officer
Date: July 14, 1999 By /s/William E. Morris
--------------------
William E. Morris,
Controller
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EXHIBIT INDEX
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Exhibit Description
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27 Financial Data Schedule