U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For Quarter Ended: March 31, 2000
Commission File Number: 0-23100
LOGISOFT CORP.
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(Exact name of small business issuer as specified in its charter)
DELAWARE 22-2649848
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(State of Incorporation) (IRS Employer ID No)
375 Woodcliff Drive, Fairport, NY 14450
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(Address of principal executive office)
(716) 249-8600
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(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act 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
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes X No
The number of shares outstanding of registrant's common stock, par value $.0001
per share, as of May 12, 2000 was 30,452,553.
Transitional Small Business Disclosure Format (Check one): Yes No X
LOGISOFT CORP.
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INDEX
Page
No.
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Part I. Financial Information
Item 1. Financial Statements (unaudited) 3
Balance Sheet -
March 31, 2000 (unaudited) and December 31, 1999 3
Statement of Income and Operations -
Three months ended March 31, 2000 and 1999 (unaudited) 5
Statements of changes in Stockholders' Equity March 31, 2000
(unaudited) 6
Statement of cash flows -
Three months ended March 31, 2000 and 1999 (unaudited) 7
Notes to Financial Statements -
Three months ended March 31, 2000 and 1999 (unaudited) 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 18
Item 3. Qualitative and Quantitative Disclosures about Market Risk 27
Part II. Other Information 28
Item 2. Changes in Securities and use of Proceeds 28
Item 6. Exhibits and reports on Form 8-K 28
- 2 -
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
LOGISOFT CORP.
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COMBINED AND CONSOLIDATED BALANCE SHEETS
----------------------------------------
December 31, March 31,
------------- ----------
1999 2000
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(unaudited)
ASSETS
- --------------------------------------------
CURRENT ASSETS:
Cash and equivalents $ 59,550 $5,040,519
Accounts receivable 1,003,495 988,958
Note receivable - 720,000
Due from officer 6,909 -
Unbilled revenues 12,000 20,000
Inventory 6,542 9,858
Prepaid expenses and other current assets 4,884 13,474
Deferred tax asset 37,640 37,640
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Total current assets 1,131,020 6,830,449
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PROPERTY AND EQUIPMENT, net 367,041 376,641
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OTHER ASSETS:
Intangible assets, net 11,424 1,969,035
Other assets - 28,684
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11,424 1,997,719
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$ 1,509,485 $9,204,809
============= ==========
- 3 -
LOGISOFT CORP.
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COMBINED AND CONSOLIDATED BALANCE SHEETS
----------------------------------------
(CONTINUED)
-----------
December 31, March 31,
-------------- -----------
1999 2000
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(unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
- ---------------------------------------------------
CURRENT LIABILITIES:
Line-of-credit $ 350,000 $ 400,000
Current portion of long-term debt 9,428 8,400
Note payable - officer 12,000 -
Accounts payable 628,000 399,558
Accrued expenses and other current liabilities 389,529 159,915
Advanced billings 14,800 23,900
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Total current liabilities 1,403,757 991,773
LONG-TERM DEBT, net of current portion 199,736 197,167
DEFERRED TAX LIABILITY 19,354 27,831
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Total liabilities 1,622,847 1,216,771
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MINORITY INTEREST 1,002 -
-------------- -----------
STOCKHOLDERS' EQUITY:
Preferred stock, $2.75 par value, 2,000,000
shares authorized, no shares issued - -
Common stock, $.0001 par value, 60,000,000
shares authorized, 12,000,000
and 30,434,553 shares issued
and outstanding, respectively 1,200 3,044
Additional paid-in capital 264,550 8,342,706
Retained earnings (379,112) (357,712)
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(113,362) 7,988,038
Less: Minority interest (1,002) -
-------------- -----------
Total stockholders' equity (114,364) 7,988,038
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$ 1,509,485 $9,204,809
============== ===========
The accompanying notes are an integral part of these statements.
-4-
LOGISOFT CORP.
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COMBINED AND CONSOLIDATED STATEMENTS OF INCOME AND OPERATIONS
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(UNAUDITED)
-----------
Quarter ended March 31,
-----------------------
1999 2000
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REVENUE:
E-commerce/retail $550,719 $ 924,520
Strategic internet services 80,320 266,721
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Total revenue 631,039 1,191,241
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COST OF REVENUE:
E-commerce/retail 467,879 800,259
Strategic internet services 69,126 107,228
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Total cost of revenue 537,005 907,487
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Gross profit 94,034 283,754
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OPERATING EXPENSES:
Sales and marketing 65,542 108,411
General and administrative 56,768 115,187
Stock based compensation - -
Depreciation 6,759 11,931
Amortization 87 22,389
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Total operating expenses 129,156 257,918
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Income (loss) from operations (35,122) 25,836
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OTHER INCOME (EXPENSE):
Interest expense (6,069) (13,495)
Interest income - 21,188
Other 325 83
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(5,744) 7,776
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Income (loss) before income taxes
and minority interest (40,866) 33,612
INCOME TAXES (637) (12,212)
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Income (loss) before minority interest (41,503) 21,400
MINORITY INTEREST 18,241 1,002
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NET INCOME (LOSS) $(23,262) $ 22,402
========= ===========
NET INCOME (LOSS)
PER COMMON SHARE:
BASIC AND DILUTED $ - $ -
========= ===========
The accompanying notes are an integral part of these statements.
-5-
LOGISOFT CORP.
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CONSOLIDTED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
---------------------------------------------------------
(Unaudited)
Common Stock Paid-in Retained Minority
Shares Amount Capital Earnings Interest Total
------------ ------- ----------- ---------- ---------- -----------
BALANCE, December 31, 1999 12,000,000 1,200 264,550 (379,112) (1,002) (114,364)
Issuance of shares in merger 18,434,553 1,844 6,218,156 - - 6,220,000
Stock issuance costs - - (120,000) - - (120,000)
Acquisition of eStorefronts
minority interest - - 1,980,000 - - 1,980,000
Net income (loss) - - - 21,400 1,002 22,402
------------ ------- ----------- ---------- ---------- -----------
BALANCE, March 31, 2000 30,434,553 $ 3,044 $8,342,706 $(357,712) $ - $7,988,038
============ ======== =========== ========== ========== ===========
The accompanying notes are an integral part of these statements.
-6-
LOGISOFT CORP.
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COMBINED AND CONSOLIDATED STATEMENT OF CASH FLOWS
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(Unaudited)
Quarter ended March 31,
-----------------------
1999 2000
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CASH FLOW FROM OPERATING ACTIVITIES:
Net income (loss) $(23,262) $ 22,402
Adjustments to reconcile net income (loss) to
net cash flow from operating activities:
Minority interest (18,241) (1,002)
Depreciation and amortization 6,846 34,320
Deferred taxes - 8,477
Stock based compensation - -
Changes in:
Accounts receivable (96,661) 14,537
Inventory 215 (3,316)
Prepaid expenses and other current assets (11,609) (8,590)
Unbilled revenues, net of advanced billings 23,700 1,100
Accounts payable 82,000 (228,442)
Accrued expenses (744) (324,614)
--------- -----------
Net cash flow from (used in) operating activities (37,756) (485,128)
CASH FLOW FROM INVESTING ACTIVITIES:
Increase in other assets - (28,684)
Purchases of property and equipment (3,589) (21,531)
Repayments - due from officer - 6,909
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Net cash flow from investing activities (3,589) (43,306)
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CASH FLOW FROM FINANCING ACTIVITIES:
Borrowings on line-of-credit, net 50,000 50,000
Repayment of long-term debt (3,453) (3,597)
Repayments of note payable - officer - (12,000)
Proceeds from sale of stock 15,000 -
Cash acquired in merger transactions - 5,500,000
Stock issuance costs - (25,000)
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Net cash flow from (used in) financing activities 61,547 5,509,403
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CHANGE IN CASH AND EQUIVALENTS 20,202 4,980,969
CASH AND EQUIVALENTS - beginning of year 105,808 59,550
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CASH AND EQUIVALENTS - end of year $126,010 $5,040,519
========= ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash interest paid $ 4,639 $ 14,034
========= ===========
Cash taxes paid $ 979 $ 1,212
========= ===========
The accompanying notes are an integral part of these statements.
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LOGISOFT CORP.
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NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------
(Unaudited)
(1) Description of Business
The combined and consolidated financial statements include LogiSoft
Computer Products Corp. (LCP), formerly known as LogiSoft Corp., and
eStorefronts.net Corp. (eStorefronts), which are under common control,
together the Companies. The shareholders of LCP owned 56% of the shares of
eStorefronts through March 10, 2000, when LCP and eStorefronts shares were
exchanged in transactions with LogiSoft Corp., formerly known as
Reconversion Technologies, Inc. (LogiSoft or the Company), as discussed
below. After these transactions, LCP and eStorefronts were wholly-owned
subsidiaries of LogiSoft.
Business -
Together, LCP and eStorefronts are a full-spectrum Internet business
development enterprise. The Companies offer comprehensive strategic
Internet services with core competencies being sophisticated interactive
web development and domestic/international e-commerce solutions.
Additionally, the Companies develop and operate a variety of
e-commerce/retail businesses through subsidiaries and strategic
partnerships that leverage their knowledge of technology, e-commerce and
Internet marketing.
The Companies provide comprehensive, sophisticated Internet capabilities to
both traditional middle market and pure e-business companies. LCP provides
up front planning with our strategic consulting services, custom front-end
architecture and web development as well as comprehensive back end support
upon web site completion. LCP's competitive advantage is the unique ability
to deliver these services on a global scale which includes a proprietary
e-commerce solution that allows for transactions in multiple languages and
currencies, settlement in multiple countries and multiple transactions
methods - all automated and updated in real time.
LCP was founded in 1989 as a software and hardware provider to corporate
customers and educational entities such as universities and school
districts. In 1996, LCP launched its Internet division, "LogiSoft
Interactive" or "LGI", and found immediate success, winning both local and
national awards in 1997. In 1999, LogiSoft Interactive completed its
development of a proprietary e-commerce platform that enables it to roll
out turn-key domestic and international websites that allow companies
to penetrate international markets on a cost effective basis. The software
and hardware solutions business is being migrated to an internet based
platform. eStorefronts partners with both traditional and pure web-based
businesses to take businesses to the Internet. It participates in the
development and execution of the business plan in exchange for
revenue-sharing and/or equity-based arrangements.
Merger Transactions -
On March 10, 2000, LCP was acquired by Reconversion Technologies, Inc. (now
known as LogiSoft), a public shell company registered in Delaware in a
reverse triangular merger, in which the shareholders of LCP received
7,500,000 shares of LogiSoft for all of the outstanding common stock of
LCP. For accounting purposes, this transaction has been recorded as an
issuance of stock by LCP in exchange for the assets of LogiSoft. At the
time of acquisition, LogiSoft had no operations and its assets consisted of
$5,500,000 in cash and a note receivable for $720,000. Effective May 1,
2000, Reconversion Technologies, Inc. changed its name to LogiSoft Corp.
and its ticker symbol to 'LGST' to better reflect its business.
- 8 -
Merger Transactions - (Continued)
Consistent with the accounting for this transaction as an issuance of
shares by LCP for the assets of LogiSoft, the historical financial
statements of LCP replace those of the legal issuer, LogiSoft, and the
assets and activity of LogiSoft are included in the consolidated financial
statements of the Company from March 10, 2000. The Company will maintain
LCP's December 31 fiscal year end. LogiSoft's fiscal year end was June 30.
The $5,500,000 cash in LogiSoft on the date of acquisition represents the
proceeds received from the sale of 2,750,000 shares of its stock and the
exercise of 2,750,000 existing warrants to purchase registered shares of
its common stock at $1 per share by nine unrelated investors on March 9,
2000.
Also on March 10, 2000 and in conjunction with the LCP transaction,
LogiSoft acquired all of the outstanding common stock of eStorefronts for
4,500,000 shares of LogiSoft in a share exchange. LCP shareholders owned
56% of eStorefronts common stock at the time of this transaction. The share
exchange between the shareholders of eStorefronts and LogiSoft has been
accounted for at historical cost for the 56% of eStorefronts controlled by
the LCP shareholders. The acquisition of the minority interest of 44% by
LogiSoft has been accounted for using purchase accounting.
The purchase price of the 44% minority interest in eStorefronts in excess
of fair value of net assets acquired has been reflected as goodwill.
Certain eStorefronts shareholders have assumed key executive management
roles in LogiSoft. This goodwill of approximately $1,980,000 is being
amortized over its estimated useful life of five years.
In connection with the merger transactions, shareholders owning 50.4% of
the Company including the LCP shareholders, certain eStorefronts
shareholders and other investors entered into voting agreements. The
agreements are effective for two years from the date of the reverse merger
transaction and require the parties to vote to maintain the number of
directors of the Company at four and to vote for the two candidates for
board of directors seats nominated by (1) the former LCP shareholders and
(2) certain investors in the 5,500,000 shares issued on March 9, 2000. The
pre-transaction shareholders of LCP and eStorefronts occupy the key
executive management positions of the Company.
On March 7, 2000, LogiSoft entered into an agreement for the sale of
Keystone Laboratories, Inc. (Keystone), a drug screening and confirmatory
testing laboratory business, to its former president for a $720,000
promissory note. Keystone's business was operated in the normal course up
to the time of its disposal and was LogiSoft's only operating business at
that time. This disposal was a condition precedent to completing the
transactions with LCP and eStorefronts.
- 9 -
(2) Basis and Presentation of Financial Statements
----------------------------------------------
The combined balance sheet as of December 31, 1999 and the unaudited
statements of operations and cash flows for the quarter ended March 31,
1999 include the historical combined financial statements of LCP and
eStorefronts giving effect to the 44% minority interest in eStorefronts.
The unaudited consolidated financial statements for the quarter ended March
31, 2000 include the historical combined accounts of LCP and eStorefronts
for the period from January 1, 2000 through March 9, 2000 and reflect the
issuance of stock for the assets of LogiSoft and the acquisition of the
minority interest in eStorefronts on March 10, 2000. Accordingly, net
income for the quarter ended March 31, 2000 includes 56% of the
eStorefronts operations through March 9, 2000 and 100% thereafter. The
$5,500,000 in cash and the $720,000 note receivable are recorded as
proceeds from the issuance of 18,434,553 shares of LCP on March 10, 2000.
The Company has prepared the accompanying unaudited consolidated financial
statements pursuant to the rules and regulations of the Securities and
Exchange Commission regarding interim financial reporting. Accordingly,
they do not contain all of the information and footnotes required by
generally accepted accounting principles for complete financial statements.
These interim financial statements should be read in conjunction with the
audited combined financial statements and notes thereto for the year ended
December 31, 1999 included in the Company's Form 8-K filed on May 22, 2000.
In the opinion of management, the accompanying unaudited consolidated
financial statements reflect all adjustments (consisting of only normal
recurring adjustments) considered necessary for a fair presentation of the
Company's financial condition as of March 31, 2000, the results of its
operations and cash flows for the three month periods ended March 31, 2000
and 1999. Operating results for the three month period ended March 31, 2000
are not necessarily indicative of the operating results that may be
expected for the year ending December 31, 2000.
All significant intercompany accounts and transactions have been
eliminated.
Revenue Recognition and Related Expenses -
Revenue from uncollateralized e-commerce/retail sales is recognized upon
passage of title of the related goods to the customer.
Strategic internet services revenue is recognized on a percentage of
completion basis for fixed fee contracts, based on the ratio of costs
incurred to total estimated costs for individual projects. Revenue is
recognized as services are performed for time and material contracts.
Cost of revenue for the e-commerce/retail business is comprised primarily
of the purchased cost of products sold.
Cost of revenue for strategic internet services consists primarily of
project personnel costs such as salaries, employee benefits and incentive
compensation of billable employees and the cost of any third-party hardware
or software included in an Internet solution.
Sales and marketing expenses include product and service research,
advertising, brand name promotions, lead-generation activities and
shipping/logistics as well as salaries, employee benefits and incentive
compensation of personnel in these functions.
- 10 -
General and administrative expenses are comprised of the salaries, employee
benefits and incentive compensation of personnel responsible for
administrative, accounting, legal, human resources functions, the costs of
the Company's facilities and other general and administrative expense.
Cash and Equivalents -
The Company considers all highly liquid investments with an original
maturity of 90 days or less to be cash and equivalents. The Company
maintains its cash in bank demand deposit accounts, which at times may
exceed federally insured limits. The Company has not experienced any losses
in such accounts and believes it is not exposed to any significant credit
risk on cash and equivalents.
Inventory -
Inventory consists of computer hardware and software supplies and is stated
at the lower of cost, determined on a first-in, first-out (FIFO) basis, or
market.
Property and Equipment -
Property and equipment is recorded at cost. Expenditures for renewals and
improvements that significantly add to the productive capacity or extend
the useful life of an asset are capitalized. Expenditures for maintenance
and repairs are charged to operations as incurred. Depreciation is provided
using the straight-line method over the estimated useful lives of the
assets as follows:
Buildings and improvements 40 years
Computers and office equipment 3 - 5 years
Furniture and fixtures 10 years
The Company reviews quarterly its properties in accordance with the
Statement of Financial Accounting Standards No. 121 "Accounting for the
Impairment of Long Lived Assets" to determine if its carrying costs will be
recovered from future operating cash flows. In cases where the Company does
not expect to recover its carrying costs, the Company recognizes an
impairment loss.
Intangible Assets -
Intangible assets consist of goodwill, deferred financing costs and prepaid
licensing fees. Goodwill is being amortized over its estimated useful life
of five (5) years. Deferred financing fees are amortized on a straight-line
basis over the term of the related mortgage. Prepaid licensing fees are
amortized over the estimated useful life of the licensing agreement of five
(5) years.
The carrying value of goodwill and other intangible assets are reviewed if
facts and circumstances suggest that they may be impaired. If this review
indicates goodwill or other intangibles will not be recoverable, as
determined based on future expected cash flows or other fair market value
determinations, the Company's carrying value of the goodwill or other
intangibles are reduced to fair value.
Advertising Costs -
The Company expenses advertising costs as incurred. The Company recorded
advertising expense $700 and $3,300 for the quarters ended March 31, 1999
and March 31, 2000, respectively.
- 11 -
Income Taxes -
The Company applies the asset and liability approach for financial
accounting and reporting purposes for income taxes. The Company accounts
for certain items of income and expense in different time periods for
financial reporting and income tax purposes. Provisions for deferred income
taxes are made in recognition of such temporary differences, where
applicable. A valuation allowance is established against deferred tax
assets unless the Company believes it is more likely than not that the
benefit will be realized.
Net Income (Loss) per Common Share -
The Company computes net income (loss) per share in accordance with
Statement of Financial Accounting Standards No. 128, "Earnings per Share"
(SFAS No. 128). Under the provisions of SFAS No. 128 basic net income
(loss) per share (Basic EPS) is computed by dividing net income (loss) by
the weighted average number of common shares outstanding. Diluted net
income (loss) per common share (Diluted EPS) is computed by dividing net
income (loss) by the weighted average number of common shares and dilutive
common shares equivalents then outstanding.
Weighted average common shares outstanding are as follows:
Quarters Ended
March 31,
----------------------
1999 2000
---------- ----------
Weighted average shares 10,018,875 14,628,509
Dilutive potential shares - 958,765
---------- ----------
Adjusted weighted
average shares 10,018,875 15,587,274
========== ==========
Fair Value of Financial Instruments -
The carrying amounts of financial instruments including cash and
equivalents, accounts receivable, notes receivable, accounts payable and
accrued expenses approximate fair value. The carrying amount of long-term
debt approximates fair value based on current rates of interest available
to the Company for loans of similar maturities.
New Accounting Pronouncements -
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities,"
which is required to be adopted in years beginning after June 15, 1999. In
July, 1999, the FASB issued SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
statement No. 133, " which amends SFAS No. 133 to be effective for all
fiscal quarters of all fiscal years beginning after June 15, 2000. The
Company will be required to adopt SFAS 133 for the quarter ending March 31,
2001. The Company anticipates that the adoption of SFAS No. 133 will not
have a significant effect on the financial condition or results of
operations of the Company.
- 12 -
Estimates -
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements
and accompanying notes. The estimates and assumptions used in the
accompanying combined financial statements are based upon management's
evaluation of the relevant facts and circumstances as of the date of the
financial statements. Actual results could differ from those estimates.
(3) Property and Equipment
----------------------
Property and equipment consists of the following:
December 31, March 31,
-------------- -----------
1999 2000
-------------- -----------
Land, building and improvements $ 290,531 $ 292,945
Computers and office equipment 163,946 182,221
Furniture and fixtures 16,584 17,426
-------------- -----------
471,061 492,592
Less: Accumulated depreciation (104,020) (115,951)
-------------- -----------
$ 367,041 $ 376,641
============== ===========
(4) Intangible Assets
------------------
Intangible assets consist of the following:
December 31, March 31,
-------------- -----------
1999 2000
-------------- -----------
Goodwill $ - $1,980,000
Deferred financing costs 7,147 7,147
Prepaid licensing fees 6,000 6,000
-------------- -----------
13,147 1,993,147
Less: Accumulated amortization (1,723) (24,112)
-------------- -----------
$ 11,424 $1,969,035
============== ===========
(5) Other Assets
------------
Other assets consists of a deposit paid in March, 2000 relating to a lease
agreement for additional office space.
- 13 -
(6) Financing Arrangements
----------------------
Long-Term Debt -
Long-term debt consists of the following:
December 31, March 31,
1999 2000
------------ ---------
Mortgage payable to a bank in
monthly installments of $1,751,
including interest at 7.96% through
October, 2015. $ 198,154 $195,658
Capital lease obligation payable in
monthly installments of $367,
including interest at 7.00% through
June, 2002. 11,010 9,909
------------ ---------
209,164 205,567
Less: Current portion (9,428) (8,400)
------------ ---------
199,736 $197,167
============ =========
Line-of-Credit -
The Company may borrow $400,000 under the terms of an annually renewable
working capital line-of-credit agreement. Amounts borrowed bear interest at
the prime rate plus 1% (9.75% at March 31, 2000), are collateralized by all
assets of the Company and are guaranteed by certain shareholders.
(7) Stockholder's Equity
--------------------
Equity Transactions -
All equity transactions have been retroactively restated to reflect the
exchange ratios from the March 10, 2000 merger transactions.
Quarter ended March 31, 2000 -
As described in Note 1, LCP and eStorefronts entered into transactions with
LogiSoft on March 10, 2000. For accounting purposes, these transactions
have been reflected as an issuance of 18,434,553 common shares by LCP in
exchange for the assets of LogiSoft and the purchase of the 44% minority
interest in eStorefronts. Transactions costs of $120,000 were incurred
related to the merger transactions which have been recorded as a reduction
in paid-in capital.
Warrants -
On November 13, 1997, LogiSoft's Disclosure Statement and Plan of
Reorganization (the Plan) was confirmed. In connection with the Plan,
LogiSoft issued the following warrants to purchase LogiSoft's common stock:
- 14 -
- Class A warrants to purchase 1,624,172 shares of common stock at $1
per share exercisable through June 7, 2000.
- Class B warrants to purchase 1,475,973 shares of common stock at $1
per share exercisable through June 7, 2000.
- Upon the exercise of a Class B warrant, a Class C warrant will be
issued allowing the purchase of the number of shares of common stock
equal to the number of shares purchased upon exercise of the Class B
warrants. Class C warrants are exercisable at $1.75 per share through
December 7, 2000.
In the quarter ended March 31, 2000 and prior to the merger transactions,
227,500 Class A warrants were exercised and an additional 1,300,000 Class B
warrants were issued under the Plan. These Class B warrants and 1,450,000
of the previously issued Class B warrants were exercised as a part of the
sale of 2,750,000 shares of LogiSoft on March 9, 2000 in conjunction with
the merger transactions.
The exercise of the 2,750,000 Class B warrants resulted in the issuance of
the same number of Class C warrants, which are exercisable at $1.75 per
share on or before December 7, 2000.
At March 31, 2000, Class A and B warrants to purchase 1,422,145 shares and
Class C warrants to purchase 2,767,500 shares were outstanding.
Preferred Stock -
The Company has authorized the issuance of 2,000,000 shares of Series A
non-voting, cumulative preferred stock with a par value of $2.75.
A 6% cumulative dividend is payable quarterly to stockholders of record in
the last day of the month prior to the dividend date. The Series A stock
has a liquidation preference over the Company's common stock as well as any
other classes of stock established by the Company.
Stock Option Plan -
In April, 2000, the Company adopted its 2000 Stock Option Plan (the Plan).
The Plan is subject to approval by the shareholders. Under the Plan, the
Board of Directors is authorized to grant options to purchase up to
3,000,000 shares of the Company's common stock. The Board of Directors is
authorized to establish the exercise price and vesting terms of individual
grants under the Plan.
(8) Income Taxes
------------
Income taxes for the quarters ended March 31, 1999 and 2000 have been
provided at the effective income tax rate expected for the calendar year.
- 15 -
(9) Commitments and Contingencies
-----------------------------
Lease -
In March, 2000, the Company entered into an agreement to lease office space
under a non-cancelable lease arrangement. The future minimum lease payments
required under this lease are as follows:
2000 $ 90,376
2001 147,740
2002 166,012
2003 172,104
2004 172,104
Thereafter 143,420
--------
$891,756
========
Consulting -
During April, 2000, the Company entered into a 12 month non-cancelable
consulting agreement requiring monthly payments of $10,000.
(10) Business Segments
-----------------
The Company operates in two business segments: e-commerce/retail and
strategic internet services. The Company's reportable segments are
strategic business units that offer different products and services. They
are managed separately because each segment requires different technology,
strategic competencies and marketing strategies.
A summary of the Company's two business segments are as follows:
Quarter ended March 31, 1999:
Strategic
e-Commerce/ Internet
Retail Services Corporate
------------ ---------- -----------
Revenue $ 550,719 $ 80,320 $ -
Income (loss) from operations 4,026 (37,000) (2,148)
Depreciation and amortization 2,167 2,531 2,148
Identifiable assets 347,314 91,700 410,953
Capital expenditures - 1,245 2,344
Quarter ended March 31, 2000:
Strategic
e-Commerce/ Internet
Retail Services Corporate
------------- --------- -----------
Revenue $ 924,520 $ 266,721 $ -
Income (loss) from operations (32,088) 61,910 (3,986)
Depreciation and amortization 27,627 2,707 3,986
Identifiable assets 2,890,817 222,500 6,091,492
Capital expenditures 8,042 13,489 -
The loss in e-Commerce/Retail in the quarter ended March, 2000 includes
$22,000 of goodwill amortization and is also impacted by seasonably low
sales in the first quarter and the cost of additional sales staff hired
during the quarter, who were being trained.
- 16 -
(10) Business Segments (Continued)
-----------------------------
The large increase in identifiable assets in the e-commerce segment as of
March 31, 2000 is due to the recording of goodwill of $1,980,000 from the
purchase of the 44% minority interest in eStorefronts.
The corporate assets consist primarily of cash and cash equivalents, the
note receivable arising from the March, 2000 merger transactions, deferred
tax assets, the Company's building and land located in Fairport, NY and
certain equipment that is not allocated to the business segments.
(11) Concentrations
--------------
Revenue from one customer accounted for 15% and revenue from two customers
individually accounted for 12% of total revenue in the quarters ended March
31, 2000 and 1999, respectively.
(12) Note Receivable
---------------
At March 31, 2000, the Company has a non-interest bearing $720,000 note
receivable from the sale of a laboratory business by LogiSoft on March 7,
2000, prior to the merger transactions. This note is payable in twelve
equal monthly installments of $60,000 and is collateralized by the assets
of the business sold.
(13) Pro-forma information (unaudited)
---------------------------------
The following information presents the pro forma results of operations for
the Company for the quarters ended March 31, 2000 and 1999 as if the merger
transactions had occurred on January 1, 1999:
Three Months Three Months
Ended March 31, Ended March 31,
2000 1999
--------------- ---------------
Revenues $ 1,191,241 $ 631,039
Income (loss) from operations $ (51,164) $ (134,122)
Net income (loss) $ (55,600) $ (140,503)
Per share information:
Net income (loss) per share:
Basic and diluted $ - $ -
=============== ===============
Weighted average common shares outstanding:
Basic and diluted 30,434,553 30,095,928
The pro forma information above reflects the amortization of goodwill of
$1,980,000 resulting from the acquisition of the 44% minority interest in
eStorefronts over five (5) years, the elimination of the minority interest
in eStorefronts' loss from operations and the weighted average shares
amount reflects the number of shares issued in the merger transactions
(18,434,553).
- 17 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
THE INFORMATION IN THIS DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS WITHIN
THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE
SECURITIES ACT OF 1934, AS AMENDED. SUCH STATEMENTS ARE BASED UPON CURRENT
EXPECTATIONS THAT INVOLVE RISKS AND UNCERTAINTIES. ANY STATEMENTS CONTAINED
HEREIN THAT ARE NOT STATEMENTS OF HISTORICAL FACT MAY BE DEEMED TO BE
FORWARD-LOOKING STATEMENTS. FOR EXAMPLE, THE WORDS "BELIEVES", "ANTICIPATES",
"PLANS", "EXPECTS", "INTENDS" AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY
FORWARD-LOOKING STATEMENTS. LOGISOFT'S ACTUAL RESULTS AND THE TIMING OF CERTAIN
EVENTS MAY DIFFER SIGNIFICANTLY FROM THE RESULTS DISCUSSED IN THE
FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH A DISCREPANCY
INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN "LIQUIDITY AND CAPITAL
RESOURCES" BELOW, AS WELL AS "RISK FACTORS" INCLUDED IN LOGISOFT'S FORM 8-K/A
DATED MAY 22, 2000, AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. ALL
FORWARD-LOOKING STATEMENTS IN THIS DOCUMENT ARE BASED ON INFORMATION AVAILABLE
TO LOGISOFT AS OF THE DATE HEREOF AND LOGISOFT ASSUMES NO OBLIGATION TO UPDATE
ANY SUCH FORWARD-LOOKING STATEMENTS.
Changes in Control of LogiSoft. Pursuant to the merger of LogiSoft Corp.,
--------------------------------
formerly known as Reconversion Technologies, Inc., a Delaware corporation
("LogiSoft" or the "Company") and LogiSoft Computer Products Corp., a New York
corporation formerly known as LogiSoft Corp. ("LCP") and the share exchange
between LogiSoft and eStorefronts.net Corp., a New York corporation
("eStorefronts"), both of which were effective on March 10, 2000 (together, the
"Transactions"), control of LogiSoft was acquired by the principals of LCP and
eStorefronts. In anticipation of the Transactions, all but one member of
LogiSoft's Board of Directors-W. Leo Morris, Clark Bundren, John Sams and Robert
Garner-resigned from the Board, effective March 9, 2000. The sole remaining
member of the Board, Joel Holt, appointed Robert Lamy, Scott Fox, Alan
Kleinmaier(1) and Gene Divine to the Board of Directors of LogiSoft. Joel Holt
resigned from the Board effective March 10, 2000. In connection with the
Transactions, certain of LCP and eStorefront's shareholders assumed the key
officer and executive management positions in LogiSoft. Robert Lamy became
President of LogiSoft, Scott Fox became Vice President of Marketing, Robert
Ballard became President of LogiSoft's Computer Products division and William
Lamy became Director of Technology. Robert Lamy acquired 4,191,750 shares of
LogiSoft common stock (13.8%), William Lamy received 2,826,750 shares of
LogiSoft common stock (9.3%), Michael Pruitt acquired 2,100,000 shares of
LogiSoft common stock (6.9%) and Robert Ballard acquired 907,407 shares of
LogiSoft common stock (3.0%).
Further, Robert Lamy, William Lamy and Robert Ballard ("Purchasers")
executed a Voting Agreement with Michael Pruitt, Bruce Goldfarb, Darien Road,
Ltd., Michael Cimino, Corsica Marketing, Inc., Avenel Financial Group (together,
the "Shareholders") and LogiSoft on March 10, 2000, pursuant to which for a
period of up to two (2) years from the date of the Transactions (i) they agreed
that LogiSoft would have four (4) directors or such greater number as the
Purchasers and the Shareholders would unanimously agree; (ii) the Purchasers
agreed to vote in favor of the election as directors of LogiSoft, two persons
nominated by the Shareholders; and (iii) the Shareholders agreed to vote in
favor of the election as directors of LogiSoft, two persons nominated by the
Purchasers. In addition, the Purchasers and David Wilkerson, Scott Fox, David
White, Walter Robb, Carl Mozak and Van Ernst Jakobs Securities have executed a
Second Voting Agreement that allows Robert Lamy, William Lamy and Robert Ballard
to vote shares of those shareholders for purposes of the determination of the
number of directors and election of the individuals nominated, pursuant to the
Voting Agreement. As a result, 50.4% of the outstanding common stock of the
LogiSoft are controlled under by the Purchasers and Shareholders these voting
agreements.
- -----------------
(1) Alan Kleinmaier resigned from the LogiSoft Board on April 27, 2000 and the
seat on the Board remains vacant.
- 18 -
ACQUISITION OR DISPOSITION OF ASSETS
Keystone Sale. The majority shareholders of LCP and eStorefronts
--------------
required as a pre-condition of the Transactions that LogiSoft sell its
wholly-owned subsidiary, Keystone Laboratories, Inc. ("KLI"). KLI is a forensic
urine drug screening and confirmatory testing laboratory located in Asheville,
North Carolina. Urine laboratory tests are used primarily by employers to
detect the use of illegal substances by employees and/or prospective employees.
On March 7, 2000, LogiSoft executed a Purchase and Sale Agreement to sell all of
its issued and outstanding shares of the capital stock of KLI. Joel Holt, a
former president of LogiSoft and a director of LogiSoft until the closing of the
Transactions, purchased KLI from LogiSoft for a purchase price of $720,000. At
the closing of the KLI sale on March 9, 2000, Mr. Holt issued a promissory note
(the "Note") in the principal amount of the purchase price, payable in twelve
(12) equal monthly installments of $60,000 each, commencing April 1, 2000. The
purchase price for KLI was determined as a result of arms-length negotiations
between Mr. Holt and the LogiSoft Board of Directors. (2)
New Capital. The majority shareholders of LCP and eStorefronts also
------------
required as part of the Transactions that LogiSoft have at least $5,000,000 in
cash equity at the closing of the Transactions. To meet this pre-condition,
LogiSoft issued 5,500,000 shares of LogiSoft common stock at a purchase price of
$1.00 per share to nine (9) unrelated investors on March 9, 2000. Thus, at the
time of the closing of the Transactions, LogiSoft's assets consisted of
$5,500,000 in cash equity plus the Note, and LogiSoft maintained no operations.
LCP Merger. On March 10, 2000, LogiSoft consummated a merger with LCP.
-----------
Pursuant to the Agreement and Plan of Reorganization, a wholly-owned New York
subsidiary of LogiSoft was merged with and into LCP in a reverse triangular
merger, the surviving corporation of the merger, becoming a wholly-owned
subsidiary of LogiSoft (the "LCP Merger"). Prior to the LCP Merger, Robert
Lamy, William Lamy, Robert Ballard and Michael Pruitt were the sole shareholders
of LCP. Upon consummation of the LCP Merger, all of the outstanding common stock
of LCP was converted into 7,500,000 shares of LogiSoft common stock. The
conversion ratio of LCP stock into LogiSoft stock was determined as a result of
arms-length negotiations between unrelated parties and was based upon a review
of financial statements, business plans and the recent valuations placed on
e-commerce companies.
eStorefronts Exchange. On March 10, 2000, LogiSoft also consummated the
---------------------
acquisition of eStorefronts, an affiliate of LCP. Pursuant to the Agreement and
Plan of Reorganization, LogiSoft exchanged 4,500,000 shares of LogiSoft common
stock for all of the issued and outstanding shares of eStorefronts' common stock
(the "eStorefronts Exchange"). Prior to the eStorefronts Exchange, the
shareholders of eStorefronts were Robert Lamy, William Lamy, Robert Ballard,
Walter Robb, James Tusty, David White, Scott Fox, David Wilkerson, Jeff Sorenson
and Matthew Bailey. Upon consummation of the eStorefronts Exchange,
eStorefronts became a wholly-owned subsidiary of LogiSoft. The conversion ratio
of eStorefronts stock into LogiSoft stock was determined as a result of
arms-length negotiations between unrelated parties and was based upon a review
of financial statements, business plans and the recent valuations placed on
e-commerce companies.
Effective May 1, 2000, LogiSoft changed its name from Reconversion
Technologies, Inc. to LogiSoft Corp. to better reflect its business.
- -------------
(2) The prior audited financial results of KLI, together with the evaluation
of expected future results, were the primary factors utilized in
determining the purchase price.
- 19 -
Overview
On March 10, 2000 and following the Transactions, LCP and eStorefronts, two
emerging Internet, e-commerce and technology solutions/service companies, became
wholly-owned subsidiaries of LogiSoft, a public shell company. At the time of
the Transactions, LCP shareholders owned 56% of eStorefronts common stock.
The LCP Merger has been accounted for as an issuance of stock by LCP for
the assets of LogiSoft. The share exchange between the shareholders of
eStorefronts and LogiSoft has been accounted for at historical cost for the 56%
of eStorefronts controlled by the LCP shareholders. Accordingly, the historical
combined financial statements of LCP and eStorefronts replace those of LogiSoft.
The acquisition of the 44% minority interest in eStorefronts has been recorded
at the fair value of the shares issued to the eStorefronts minority
shareholders, resulting in goodwill of $1,980,000, which is being amortized over
its estimated useful life of five years.
The Company is a full-spectrum Internet business development enterprise
that offers comprehensive strategic Internet services with its core competencies
being sophisticated Interactive web development and domestic/international
e-commerce solutions. Additionally, LogiSoft develops and operates a variety of
e-commerce/retail businesses through subsidiaries and strategic partnerships
that leverage its knowledge of technology, e-commerce and Internet marketing.
LogiSoft operates its business through its two wholly-owned subsidiaries.
LCP, which encompasses the Computer Products division and the Strategic Internet
Services ("LogiSoft Interactive" or "LGI") and eStorefronts, which contains the
company's e-commerce activities.
Our global e-business solutions provide comprehensive, sophisticated
Internet capabilities to both traditional middle market and pure e-business
companies. LogiSoft Interactive provides up front planning with our strategic
consulting services, custom front-end architecture and web site development as
well as comprehensive back end support upon web site completion. LGI's
competitive advantage is the unique ability to deliver these services on a
global scale which includes a proprietary e-commerce solution that allows for
transactions in multiple languages and currencies, settlement in multiple
countries and in multiple transaction methods - all automated and updated in
real time.
LCP was founded in 1989 as a software and hardware provider to corporate
customers and educational entities such as universities and school districts.
This business is operated as LogiSoft Computer Products ("Computer Products").
Computer Products has grown consistently for the past 10 years and is being
migrated to an Internet-based platform.
In 1996, LCP launched its Internet division, LGI, and found immediate
success, winning both local and national awards in 1997. In 1999, the LGI
completed its development of a proprietary e-commerce platform that enables it
to roll out turn-key domestic and international web sites that allow companies
to penetrate international markets on a cost-effective basis.
- 20 -
eStorefronts partners with traditional and pure web-based businesses to
take businesses to the Internet. It participates in the development and
implementation of the business plan in exchange for revenue-sharing and/or
equity-based arrangements.
LogiSoft's goal is to become a best in class provider of true vertically
integrated global web solutions for middle market companies (sub Fortune 500).
The equity funding raised by the Company in connection with the
transactions discussed above will allow the Company to aggressively pursue its
Internet and e-commerce growth strategy through expansion of our client base and
headcount and increased investment in our engagement methodology,
product/solution development and brand awareness. The impact of the
transactions on the Company's operations for the quarter ended March 31, 2000
was not significant because they were consummated during March 2000.
In the first quarter of fiscal 2000, operating margins and profitability
improved, despite the amortization charge of $22,000. However, investments in
infrastructure to support the implementation of our business plan will make
short-term profitability a challenge during this year of transition.
BASIS AND PRESENTATION OF FINANCIAL STATEMENTS
The Company will maintain LCP's December 31 fiscal year end. LogiSoft's
fiscal year end was June 30.
The combined balance sheet as of December 31, 1999 and the unaudited
combined statements of operations and cash flows for the quarter ended March 31,
1999 include the historical combined financial statements of LCP and
eStorefronts, giving effect to the 44% minority interest in eStorefronts. The
unaudited consolidated financial statements for the quarter ended March 31, 2000
include the historical combined accounts of LCP and eStorefronts for the period
from January 1, 2000 through March 9, 2000 and reflect the issuance of stock for
the assets of LogiSoft and the acquisition of the minority interest in
eStorefronts on March 10, 2000. Accordingly, net income for the quarter ended
March 31, 2000 includes 56% of the eStorefronts operations through March 9, 2000
and 100% thereafter. The $5,500,000 in cash and the $720,000 note receivable
are recorded as proceeds from the issuance of 18,434,553 shares of LCP on March
10, 2000.
Presentation of information in the financial statements
Revenues from uncollateralized e-commerce/retail sales are recognized upon
passage of title of the related goods to the customer.
Strategic Internet services revenues are recognized on a percentage of
completion basis for fixed fee contracts based on the ratio of costs incurred to
total estimated costs for individual projects. Revenues are recognized as
services are performed for time and material contracts.
Costs of revenues for our e-commerce/retail business are comprised
primarily of the purchased cost of products sold.
Cost of revenues for strategic Internet services consist primarily of
project personnel costs such as salaries, employee benefits and incentive
compensation of billable employees and the cost of any third-party hardware or
software included in an Internet solution.
- 21 -
Sales and marketing expenses include product and service research,
advertising, brand name promotions and lead-generation activities,
shipping/logistics as well as salaries, employee benefits and incentive
compensation of personnel in these functions.
General and administrative expenses are comprised of the salaries, employee
benefits and incentive compensation of personnel responsible for administrative,
accounting, legal, human resources functions, the costs of the company's
facilities and other general and administrative expense.
- 22 -
RESULTS OF OPERATIONS
Comparison of the Three Months Ended March 31, 2000 and March 31, 1999
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH MARCH MARCH MARCH
1999 2000 1999 2000
---------- ---------- ---------- ----------
REVENUES:
e-commerce/retail revenues 550,719 924,520 87.3% 77.6%
Strategic Internet services 80,320 266,721 12.7% 22.4%
---------- ---------- ---------- ----------
TOTAL REVENUE 631,039 1,191,241 100.0% 100.0%
COST OF REVENUES:
e-commerce/retail costs 467,879 800,259 74.1% 67.2%
Project personnel costs 69,126 107,228 11.0% 9.0%
---------- ---------- ---------- ----------
TOTAL COST OF REVENUES 537,005 907,487 85.1% 76.2%
GROSS PROFIT 94,034 283,754 14.9% 23.8%
OPERATING EXPENSES:
Sales and marketing 65,542 108,411 10.4% 9.1%
General and administrative 56,768 115,187 9.0% 9.7%
Stock based compensation - - 0.0% 0.0%
Depreciation 6,759 11,931 1.1% 1.0%
Amortization 87 22,389 0.0% 1.9%
---------- ---------- ---------- ----------
Total operating costs 129,156 257,918 20.5% 21.7%
OPERATING INCOME (35,122) 25,836 -5.6% 2.2%
Interest expense (6,069) (13,495) -1.0% -1.1%
Interest income - 21,188 0.0% 1.8%
Other income / (expense) 325 83 0.1% 0.0%
---------- ---------- ---------- ----------
Income before taxes (40,866) 33,612 -6.5% 2.8%
Income taxes provision (benefit) 637 12,212 0.1% 1.0%
---------- ---------- ---------- ----------
Income before minority interest (41,503) 21,400 -6.6% 1.8%
Minority interest in (income) / loss 18,241 1,002 2.9% 0.1%
---------- ---------- ---------- ----------
NET INCOME (23,262) 22,402 -3.7% 1.9%
========== ========== ========== ==========
REVENUES. Revenues increased $560,202 or 89% to $1,191,241 for the quarter
ended March 31, 2000 from $631,039 for the quarter ended March 31, 1999. The
increase was attributable to substantial increases in both e-commerce/retail
sales and strategic Internet services.
Sales of computer products to industrial, health care and educational markets,
increased $373,801 or 68% to $924,520 for the quarter ended March 31, 2000 from
$550,719 for the quarter ended March 31, 1999. This increase was due to greater
penetration of key accounts, including increased purchases of client licenses by
a significant customer as a part of that customer's program to achieve licensing
compliance with certain software makers. During the quarter ended March 31,
2000, sales to this customer accounted for approximately 15% of total revenues
for the period. The customer's licensing compliance program also resulted in
increased sales during the last half of 1999 and is expected be completed in
fiscal 2000. Historically, computer products sales in the first quarter have
been low compared with other quarters.
- 23 -
Revenues from strategic Internet services revenues increased $186,401 or 232% to
$266,721 for the quarter ended March 31, 2000 from $80,320 for the quarter ended
March 31, 1999. This revenue growth was due to a significant increase in our
client base and an increase in headcount. In the quarter ended March 31, 2000,
the number of active engagements for sophisticated web site development more
than tripled from the prior year period and the average size of these
engagements increased. For the quarter ended March 31, 2000, strategic Internet
services revenues represented 22% of total revenues, up from 13% in the quarter
ended March 31, 1999 and 14% for the year ended December 31, 1999.
Two e-commerce/retail customers each accounted for 12% of total Company revenues
in the quarter ended March 31, 1999.
COST OF REVENUES. Cost of revenues increased $370,482 or 69% to $907,487 for the
quarter ended March 31, 2000 from $537,005 for the quarter ended March 31, 1999.
The dollar increase was attributable to the higher revenues for both
e-commerce/retail and strategic Internet services. As a percentage of revenues,
cost of revenues decreased from 85% in the quarter ended March 31, 1999 to 76%
in the quarter ended March 31, 2000. The decrease in the cost of revenues as a
percentage of revenues is attributable to the strategic Internet services
business, where higher billing rates, increased utilization and improvements in
efficiency and engagement processes positively impacted margins. During the
quarter ended March 31, 2000, the gross margin in the strategic Internet
services business was 59% versus 14% for the quarter ended March 31, 1999.
Margins for the prior year quarter were depressed as a result of the significant
investment in developing the Company's proprietary international e-commerce
platform, which resulted in reduced average billing rates realized in the
strategic Internet services business.
SALES AND MARKETING. Sales and marketing costs increased $42,869 or 65% to
$108,411 for the quarter ended March 31, 2000 from $65,542 for the quarter ended
March 31, 1999. The dollar increase was attributable to higher numbers of sales
and marketing personnel and increased marketing activities to support the growth
of our Computer Products and strategic Internet services businesses. As a
percentage of revenues, sales and marketing expenses decreased to 9% in the
quarter ended March 31, 2000 from 10% in the year earlier period.
GENERAL AND ADMINISTRATIVE. General and administrative costs increased $58,419
or 103% to $115,187 for the quarter ended March 31, 2000 from $56,768 for the
quarter ended March 31, 1999. The dollar increase was attributable to increased
headcount, higher compensation and spending on infrastructure to support the
growth of the business. As a percentage of revenues, general and administrative
expenses increased slightly from 9% in the quarter ended March 31, 1999 to 10%
in the quarter ended March 31, 2000.
DEPRECIATION. Depreciation expense increased $5,172 in the quarter ended March
31, 2000 to $11,931 as a result of increased purchases of computer and other
equipment to support the growth of the strategic Internet services business and
facilities. The company invested $21,531 in capital equipment during the
quarter ended March 31, 2000 and $3,589 in the quarter ended March 31, 1999.
AMORTIZATION. Amortization expenses increased $22,302 in the quarter ended
March 31, 2000 versus the prior year period as a result of the amortization of
the goodwill of $1,980,000 recorded for the acquisition of the 44% minority
interest in eStorefronts on March 10, 2000.
- 24 -
INTEREST INCOME AND INTEREST EXPENSE. Interest expense increased from $6,069
for the quarter ended March 31, 1999 to $13,495 for the quarter ended March 31,
2000. This increase was due to higher average outstanding balances on our
line-of-credit during the March 2000 quarter as a result of increased
investments and the growth of the business. During the quarter ended March 31,
2000, the Company recorded $21,188 in interest income. Investment balances at
March 31, 2000 relate to the proceeds of $5,500,000 received as a result of the
Transactions.
PROVISION FOR INCOME TAXES. For the quarters ended March 31, 2000 and 1999, net
tax provisions were recorded of $12,212 and $637, respectively. The tax charges
in Income tax expense represents combined federal and state income taxes. In
1999, we recorded a net tax provision despite the financial statement loss due
to non-deductible permanent differences and valuation allowances recorded on
deferred tax assets. Our effective tax rate for the quarter ended March 31,
2000 was 36%. Our effective tax rate may vary from period to period based on
the Company's future expansion into areas with varying income tax rates and
deductibility of certain costs and expenses by jurisdiction.
MINORITY INTEREST. As noted previously, the LCP shareholders owned 56% of
eStorefronts common stock prior to the mergers. Accordingly, the combined
financial statements reflect the minority interest's portion of the operating
losses of eStorefronts for the quarters ended March 31, 1999 and 1998, $1,002
and $18,241, respectively. The loss in 1999 is attributable to the launch of
eStorefronts and the costs of development of its initial web-sites.
NET INCOME (Loss). The Company recorded net income of $22,402 for the quarter
ended March 31, 2000 versus a net loss of $23,262 for the quarter ended March
31, 1999. The improved results reflect the strong performance of the strategic
Internet services business, for which gross margins grew from 14% to 59% and
lower net financing costs, offset by lower profitability in the Computer
Products division and amortization expenses of $22,000 (non-cash) related to the
eStorefronts goodwill. Lower net income in 1999 reflects the investments the
Company had undertaken in developing its proprietary international e-commerce
platform and in growing its strategic Internet services business.
LIQUIDITY AND CAPITAL RESOURCES
On March 10, 2000, LCP completed a reverse triangular merger with LogiSoft,
which for accounting purposes was treated as an issuance of shares by LCP to
shareholders of LogiSoft for $5.5 million in cash and a promissory note of
$720,000.
The Company may borrow up to $400,000 under the terms of an annually renewable
working capital line-of-credit agreement. Amounts borrowed bear interest at the
prime rate plus 1%, (9.75% at March 31, 2000) are collateralized by all of the
assets of the Company and are guaranteed by certain of the Company's
shareholders. At March 31, 2000, borrowings under the line-of-credit agreement
totaled $400,000, up from $350,000 at December 1999. The line of credit was
repaid in April 2000.
The Company also has a mortgage payable to a bank on its office facility in
Rochester, NY that houses its Computer Products division and certain
administrative functions. The amount outstanding on this mortgage was $195,658
at March 31, 2000. This mortgage requires annual payments of $21,000 through
October 2015.
The Company invests predominantly in instruments that are highly liquid,
investment grade, and have maturities of less than one year, with the intent to
make such funds readily available for operating purposes. At March 31, 2000,
the Company had $5,040,519 million in cash and cash equivalents including
$3,500,000 that was invested in certificates of deposit with a 90 day term, at a
6% rate. The remainder of the Company's cash and cash equivalents was held in
available funds as discussed above.
- 25 -
In the quarter ended March 31, 2000, the Company used $485,128 in cash in its
operations, primarily due to the payment of accounts payable and accrued
expenses, offset by positive operating results. The reduction of trade
creditors and accrued expenses was financed principally by the proceeds from the
Transactions. As noted above, the Company repaid its line of credit of $400,000
in April 2000.
Historically, accounts receivable balances are high at quarter ends due to
customer ordering patterns for computer products. Customer payment terms range
from net 30 days to net 180 days, for certain of the Company's large municipal
and health care computer products customers. For strategic Internet services
projects, a 25% to 50% customer deposit is generally required prior to
commencing work and subsequent billings are made as pre-established milestones
are completed. Billings for strategic Internet services projects are generally
due upon presentation of invoices.
At March 31, 2000, the Company had outstanding capital expenditure commitments
totaling approximately $115,000. These capital expenditure commitments relate
primarily to the expansion of our Rochester facilities and additional equipment
required for planned additions to the Company's staff.
In March 2000, the Company signed a lease for 8,500 square feet of additional
office space in Rochester, NY related to the expansion of our headquarters and
strategic Internet services staffs. The lease commences in May 2000 and runs
for 66 months. The Company paid a $28,684 deposit for this lease. This amount
is recorded in Other Assets. Monthly payments under this lease increase from
$12,000 initially to $14,000 after two years.
The Company believes its available cash resources and credit facilities will be
sufficient to meet its anticipated working capital and capital expenditure
requirements for at least the next twelve months. However, the Company may need
to raise additional funding sooner in order to support its growth, develop new
or enhance existing products and services, respond to competitive pressures,
acquire complementary businesses or take advantage of unanticipated
opportunities. Certain investors who purchased shares of LogiSoft, prior to the
merger transaction through the exercise of 2.75 million existing Class B
warrants, received Class C warrants to purchase an additional 2.75 million
shares of the Company's stock exercisable through December 7, 2000 at $1.75 per
share. If all of these warrants and other existing warrants were exercised,
the Company would receive proceeds of approximately $6.2 million.
Year 2000 risk
Prior to December 31, 1999, many installed computer systems and software
products were coded to accept only two-digit entries to identify a year in the
date code field. Consequently, as of January 1, 2000, many of these systems
could fail or malfunction because they may not be able to distinguish between
20th century dates and 21st century dates. Accordingly, many companies,
including LogiSoft and LogiSoft's customers, potential customers, vendors and
strategic partners, have upgraded their systems to comply with applicable "Year
2000" requirements.
- 26 -
Because LogiSoft and its clients are dependent, to a very substantial degree,
upon the proper functioning of its and their computer systems, a failure of its
or their systems to correctly recognize dates beyond December 31, 1999 could
materially disrupt operations, which could materially and adversely affect
LogiSoft's business, results of operations and financial condition.
Additionally, LogiSoft's failure to provide Year 2000 compliant products and
services to our clients could result in financial loss, reputation harm and
legal liability.
In 1998 and 1999, LogiSoft completed a review of its information technology
systems, hardware and software, and its non-information technology systems, and
took action to remediate systems, where necessary. LogiSoft believes it has
identified its mission critical systems. LogiSoft has obtained confirmations
from the providers of these systems that they are Year 2000 compliant and has
conducted internal tests of such systems as part of its Year 2000 efforts.
LogiSoft has confirmed Year 2000 compliance of all material existing LogiSoft
systems supplied by third party providers and continues to test new products.
LogiSoft has obtained written certification regarding the critical hardware and
software systems used to assemble client solutions or to support LogiSoft's
internal electronic infrastructure. LogiSoft has also obtained written
certification regarding facilities items and other non-standard applications and
systems.
LogiSoft has not examined third party readiness. LogiSoft has not researched and
is not researching its clients' readiness, except to the extent clients request
LogiSoft to examine solutions delivered by LogiSoft.
Prior to December 31, 1999, LogiSoft completed contingency plans for critical
individual information technology systems and non-information technology systems
for implementation. LogiSoft has not to date experienced any material adverse
effects of its systems. Furthermore, management believes that the Year 2000 risk
will not pose significant future operational problems for LogiSoft's computer
systems.
However, there is no guarantee that LogiSoft's Year 2000 program, including
consulting with third parties, will avoid any future material adverse effects on
LogiSoft's operations, customer relations or financial condition. LogiSoft's
total cost of its year 2000 readiness program was not significant.
There is no guarantee that additional costs will not be incurred.
RISK FACTORS
LogiSoft stockholders may be exposed to risks inherent in our business. The
value of such an investment may increase or decline and could result in a loss.
Prospective investors should carefully consider the information contained in our
Form 8-K/A filed on May 22, 2000 before deciding to invest in LogiSoft Common
Stock.
Item 3. Qualitative and Quantitative Disclosures about Market Risk
LogiSoft is exposed to a variety of risks including changes in interest
rates affecting the return on its investments. This risk results primarily from
our short-term investments. To minimize this risk, the Company invests in
highly liquid instruments that are of investment grade. At March 31, 2000, the
Company owned a certificate of deposit for $3.5 million earning a 6% return for
a term of 90 days.
The Company also maintains its cash in bank demand deposit accounts, which
at times may exceed federally insured limits. The Company has not experienced
any losses in such accounts and believes it is not exposed to any significant
credit risk on cash and equivalents.
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PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On March 9, 2000, LogiSoft issued 5,500,000 shares of LogiSoft common stock to
nine (9) unrelated investors for an aggregate purchase price of $5,500,000. On
March 10, 2000, all of the issued and outstanding shares of LCP were converted
into 7,500,000 shares of LogiSoft common stock pursuant to an Agreement and Plan
of Reorganization. As a result of the transaction, LCP became a wholly-owned
subsidiary of Logisoft. Also on March 10, 2000, LogiSoft exchanged 4,500,000
shares of Logisoft common stock for all of the issued and outstanding shares of
eStorefronts.
A more detailed description of each of these transactions is included in the
Company's 8-K/A filing dated May 22, 2000.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
1 See the Report on Form 8-K filed on May 22, 2000 for the merger and
voting agreements related to the Transactions.
2 Renewal Promissory Note dated May 15, 1998 by and between Keybank
National Association and Logisoft Corp.
3 Standard Office Space Lease for 375 Woodcliff Drive, Fairport, New York
by and between 375 Woodcliff Drive Company, LLC and Logisoft Corp.
27 Financial Data Schedule
(b) Reports on Form 8-K
On March 27, 2000 the Company filed Form 8-K to disclose the transactions
involving LCP and eStorefronts which resulted in LCP and eStorefronts becoming
wholly-owned subsidiaries of the Company.
In May of 2000 we engaged Bonadio & Co.,LLP as our independent public
accountants to audit our financial statements for the years ended December 31,
1999 and 1998. Our prior management had most recently used a public accounting
firm located in Tulsa, OK to perform the audit. Subsequent to the Transactions,
management desired to have accounting services provided by a firm that has a
local presence in Rochester, N.Y., the location of our headquarters and our
primary operations. Therefore, we engaged Bonadio & Co., LLP. On May 15, 2000
LogiSoft filed its notice of change of accountants on a Report on Form 8-K.
On May 22, 2000, the Company filed its Amended Report on Form 8-K to file
the financial statements and pro forma information for LogiSoft reflecting the
mergers of LogiSoft and LCP and the share exchange between LogiSoft and
eStorefronts, both of which were effective on March 10, 2000. The Amended Form
8-K amended Items 1, 2, 7(a) and 7(b) of the Company's report on Form 8-K, filed
with the Commission on March 27, 2000.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
LOGISOFT CORP.
Date: May 22, 2000 By: /s/ John Van Heel
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John Van Heel, Chief Financial Officer
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