-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, B8ZAEzdLYCXAbUf6Glg3JfG1QeaqZ4VsfUQr79raJla4mFWCwLZv0EN76ihQLF6F D290pVQwmY0OSKWSG9yJlg== 0000950120-02-000049.txt : 20020413 0000950120-02-000049.hdr.sgml : 20020413 ACCESSION NUMBER: 0000950120-02-000049 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20011130 FILED AS OF DATE: 20020122 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PALADYNE CORP CENTRAL INDEX KEY: 0001043933 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 593562953 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-22969 FILM NUMBER: 02514260 BUSINESS ADDRESS: STREET 1: 1650A GUM BRANCH RD CITY: JACKSONVILLE STATE: NC ZIP: 32830 BUSINESS PHONE: 4079091723 MAIL ADDRESS: STREET 1: 1650A GUM BRANCH ROAD CITY: JACKSONVILLE STATE: NC ZIP: 32746 FORMER COMPANY: FORMER CONFORMED NAME: SYNAPTX WORLDWIDE INC DATE OF NAME CHANGE: 19970807 10QSB 1 paform10qsb.txt QUARTERLY REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-QSB [x] QUARTERLY REPORT UNDER SECTION 13 0R 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarter Ended November 30, 2001 OR [ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANCE ACT OF 1934 For the transition period from _____________ to ________________ Commission File Number 0-22969 Paladyne Corp. (Name of Small Business Issuer in its charter) Delaware 59-3562953 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1650A Gum Branch Road, Jacksonville, NC 28540 (Address of Principal Executive Offices) 910-478-0097 (Issuer's Telephone Number) N/A (Former name, former address and former fiscal year, if changed since last report) Checked whether the issuer (1) filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No ____ APPLICABLE ONLY TO CORPORATE ISSUERS State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date. Class Outstanding as of December 31, 2001 Common Stock, $.001 PAR VALUE 16,709,351 Transitional Small Business Disclosure Format (check one): Yes ___ No [X] 1 TABLE OF CONTENTS Page ---- PART I. CONSOLIDATED FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements 3 Condensed Consolidated Balance Sheets - November 30, 2001 and August 31, 2001 4 Condensed Consolidated Statements of Operations - three months ended November 30, 2001 and November 30, 2000 5 Condensed Consolidated Statements of Cash Flows - three months ended November 30, 2001 and November 30, 2000 7 Notes to Condensed Consolidated Financial Statements 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12 PART II. OTHER INFORMATION Item 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 months ended November 30, 2001 and November 30, 2000 have been prepared by Paladyne Corp., a Delaware corporation. 3 PALADYNE CORP. CONDENSED CONSOLIDATED BALANCE SHEETS
November 30, 2001 AUGUST 31, 2001 (UNAUDITED) ASSETS Current Assets: Cash and cash equivalents $ 288,071 $ 158,225 Accounts receivable, net of allowance for doubtful accounts of $114,000 and $607,999, respectively 1,813,976 1,414,473 Prepaid expenses and other current assets 36,739 113,960 ----------- ----------- Total Current Assets 2,138,786 1,686,658 Furniture and fixtures 360,000 360,000 Computers and software 1,944,332 1,643,218 Leasehold improvements 1,212,119 1,209,967 Accumulated depreciation (1,035,895) (783,449) ----------- ----------- Property and equipment, net 2,480,556 2,429,736 Other assets 18,311 28,685 ----------- ----------- $ 4,637,653 $ 4,145,079 =========== =========== LIABILITIES AND DEFICIENCY IN STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable and accrued expenses $ 3,099,935 $ 2,500,585 Notes payable 2,630,301 2,663,752 Accrued preferred stock dividends 159,800 149,600 Current portion of capital lease obligations 646,439 816,649 ----------- ----------- Total current liabilities 6,536,475 6,130,586 Notes payable 2,719,699 2,986,248 Capital lease obligations 574,507 634,230 ----------- ----------- Total liabilities 9,830,681 9,751,064 COMMITMENTS AND CONTINGENCIES DEFICIENCY IN STOCKHOLDERS' EQUITY Preferred stock: Series A 137 137 Series C 632 -- Common stock 16,709 16,709 Additional paid-in capital 13,834,930 12,869,647 Accumulated deficit (19,045,436) (18,492,478) ----------- ----------- Total deficiency in stockholders' equity (5,193,028) (5,605,985) ----------- ----------- $ 4,637,653 $ 4,145,079 =========== ===========
See accompanying notes to condensed consolidated unaudited financial statements 4 PALADYNE CORP. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED NOVEMBER, 30 NOVEMBER, 30 2001 2000 (UNAUDITED) (UNAUDITED) ------------- ------------ Total Revenues $ 2,440,276 Cost of Revenues 1,316,794 ------------ Gross Profit 1,123,482 Selling, general and administrative expenses 1,250,829 Depreciation and amortization 252,446 ------------ Loss from operations (379,793) Other income (expense): Interest income Interest expense (173,166) ------------ Loss from continuing operations, before income taxes and discontinued operations (552,959) Income tax benefits -- ------------ Loss from continuing operations, before discontinued operations (552,959) Loss from discontinued operations -- (409,765) ------------ ------------ Loss (552,959) ------------ (409,765) Cumulative Convertible Preferred Stock Dividend Requirement (10,200) (10,200) ------------ ------------ Loss attributable to common stockholders $ (563,159) $ (419,965) ------------ ------------ Weighted average common shares outstanding: Basic 16,709,351 8,459,351 Diluted 16,709,351 8,459,351 Earnings (loss) per share: Basic $ (.03) $ (.05) Diluted $ (.03) $ (.05) See accompanying notes to condensed consolidated unaudited financial statements 5 PALADYNE CORP. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED NOVEMBER, 30 NOVEMBER, 30 2001 2000 (UNAUDITED) (UNAUDITED) ----------- ------------ Cash flows used in operating activities $(103,245) $(277,767) Cash flows provided by (used in) investing activities (273,091) 80,713 Cash flows provided by financing activities 446,182 2,500 ----------- ------------ Net increase (decrease) in cash and cash equivalents 69,846 (194,554) Cash and cash equivalents at beginning of period 158,225 635,612 ----------- ------------ Cash and cash equivalents at end of period $ 228,071 $ 441,057 =========== ============ Supplemental Cash Flow Information: Cash paid for interest $ 173,166 $ -- Non cash investing and financing activities: Accrual of preferred stock dividend 10,200 10,200 Preferred shares issued in exchange for debt 300,000
See accompanying notes to condensed consolidated unaudited financial statements 6 PALADYNE CORP. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS UNAUDITED NOTE 1. BASIS OF PRESENTATION The consolidated financial information included herein contains the information for Paladyne Corp. and its wholly owned subsidiary. All significant inter-company transactions and balances have been eliminated. The consolidated financial information included herein is unaudited; however, such information reflects all adjustments (consisting solely of normal recurring adjustments) that, in the opinion of management, are necessary for a fair statement of results for this interim period. The accompanying financial statements include estimated amounts and disclosures based on management's assumptions about future events. Actual results may differ from those estimates. The results of operations and cash flows for the interim periods are not necessarily indicative of the results to be expected for the full year. The condensed consolidated financial statements have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make information presented not misleading. These consolidated financial statements should be read in conjunction with the financial statements included in the Company's Form 10-KSB for the fiscal year ended August 31, 2001 as filed with the Securities and Exchange Commission. The Company's consolidated financial statements are presented on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. As with any new venture, concerns must be considered in light of the normal problems, expenses and complications encountered by entrance into established markets and the competitive environment in which the Company operates. The consolidated financial statements do not include, nor does management feel it necessary, any adjustments to reflect any possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the possible inability of the Company to continue as a going concern NOTE 2. BUSINESS COMBINATION On February 1, 2001, Paladyne Corp. ("Paladyne") through a wholly-owned subsidiary ECOM Acquisition Corp. ("Acquisition Sub"), merged (the "Merger") with e-commerce support centers, inc., a North Carolina corporation ("ECOM"), pursuant to an Agreement and Plan of Merger, dated as of December 21, 2000, as amended (collectively, the "Merger Agreement") in a transaction accounted for using the purchase method of accounting. Upon the Merger, ECOM became a wholly owned subsidiary of Paladyne. ECOM is a provider of Customer Relationship Management (CRM) solutions and customer contact center services as an outsourcing option to companies from its contact center in Jacksonville, NC. The merger consideration (the "Merger Consideration") to the ECOM shareholders consisted of shares of newly created Series B Convertible Preferred Stock, $.001 par value (the "Series B Preferred Stock"), Anti-Dilution Warrants and Performance Warrants (as discussed below) and the right to receive additional shares of Paladyne Common Stock in conjunction with future placements by Paladyne. Terrence J. Leifheit, the principal shareholder of ECOM, and another ECOM shareholder, delivered into escrow securities representing approximately 25% of the aggregate Merger Consideration as security for indemnification claims Paladyne may have under the Merger Agreement. 7 NOTE 2-BUSINESS COMBINATION (continued) Upon the Merger, Paladyne issued 4,100,000 shares of Series B Preferred Stock. Each share of Series B Preferred Stock voted on a two-for-one basis with the Common Stock on all matters, but with a separate vote on matters directly affecting such Series, mandatorily converts into two shares of Paladyne Common Stock immediately following stockholder approval of an increase in the number of authorized shares of Common Stock, will receive any dividends declared on an as-converted basis with the Common Stock and will have a liquidation preference of $5.00 per share. The stockholder approval was obtained at a July 10, 2001 stockholders meeting, accordingly, the shares are deemed converted as of that date. To protect against dilution to the former ECOM shareholders upon exercise of outstanding pre-Merger Paladyne options and warrants (the "Present Options/Warrants"), Paladyne granted to them Anti-Dilution Warrants to purchase 4,000,000 shares of Paladyne Common Stock at an exercise price of $1.146 per share (subject to adjustment), vesting as to 0.6 of a share of Common Stock for each share of Common Stock issued upon the exercise of Present Options/Warrants, and expiring 30 days after the later of (i) termination or exercise of all Present Options/Warrants or (ii) notice from Paladyne as to the aggregate number of Present Options/Warrants that were exercised. Approximately 258,000 of these Anti-Dilution Warrants have now expired unexercised as a result of the expiration of approximately 430,000 of the Present Options/Warrants. To give the former ECOM shareholders the opportunity to participate more directly in the future performance of Paladyne resulting from the acquired ECOM business, Paladyne granted to them Performance Warrants to purchase 500,000 shares of Paladyne Common Stock at an exercise price of $1.146 per share (subject to adjustment), exercisable for five years and vesting in 100,000 share tranches for each $20 million of net revenue increases, above $50 million annually, achieved in either year or both of the two (2) year periods ending January 31, 2002 and 2003. For the purpose of these awards, the measurement will be on a trailing 12-month basis, and with an acceptable gross margin (20% or greater) for each tranche to qualify. In addition, ending upon the earlier to occur of December 20, 2002 or Paladyne's completion of $6,500,000 in cash from sales of Common Stock or Common Stock equivalents (the "New Securities"), ECOM shareholders will receive one share of Common Stock for each $1.00 in gross proceeds received upon the sale of New Securities or issuable upon conversion, exercise or exchange of New Securities. ECOM shareholders waived their rights under this provision for the current $3,000,000 private placement. The Merger Agreement provided that Paladyne would grant options, at market value, to ECOM employees for the purchase of an aggregate of 500,000 shares of Paladyne Common Stock under its 1999 Stock Option Plan. The Compensation Committee of the Board of Directors was authorized to grant such options upon receipt from former ECOM management of a proposal of the ECOM employees to whom the options should be granted. None of these options have been granted. Immediately prior to the Merger, ECOM purchased from Gibralter Publishing, Inc., a North Carolina corporation, all of the tangible and intangible assets used in ECOM 's call center operations, subject to related liabilities, pursuant to an Option Agreement. Prior to the Merger, Gibralter had been operating the call center on behalf of ECOM. The purchase price for these assets was $5 million which is payable by ECOM pursuant to two amended promissory notes issued to Gibralter and guaranteed by Paladyne, one note for $1,500,000, repayable in two installments of $750,000, the first being due after completion of a $3,000,000 equity or convertible debt offering and the remaining payment due no sooner than six months after the first payment and after three consecutive months of positive cash flow from operations. The second note for $3,500,000 is repayable in equal quarterly principal and interest payments of $377,000 beginning in April 2002 and continuing through January 2005. Both notes bear interest at 10% per annum and are secured by the purchased assets. A portion of these assets used by ECOM in its contact center operations consists of equipment that is leased by Gibraltar pursuant to various equipment leases. Pending the receipt by Gibralter of lessor consents to the assignments of these leases to ECOM, and in accordance with an Equipment Use Agreement entered into by Gibralter and ECOM, Gibralter has granted to ECOM the right to possess and use the equipment and ECOM has agreed to assume and pay to the lessors the payments to be made by Gibralter pursuant to the leases. 8 The total purchase price and carrying value of the net assets acquired and liabilities assumed of ECOM were as follows: Debts assumed $ 5,000,000 Other liabilities assumed 2,375,579 Costs of acquisition 467,000 Preferred stock issued 5,765,000 Less: assets acquired (4,234,636) ----------- Excess of purchase price over fair value of assets acquired $ 9,372,943 =========== The 4,100,000 shares of Series B Preferred Stock issued in the Merger was valued based upon the underlying 8,200,000 shares of Common Stock at a price of $.7031 (the average the Company's common stock price five days prior to February 1, 2001) for a total consideration of $5,765,000. The Company has recorded the carryover basis of the net assets acquired, which did not differ materially from their fair value. The results of operations subsequent to the date of acquisition are included in the Company's consolidated statement of operations. Impairment Charge During the year ended August 31, 2001, the Company recorded a charge of $ 9,008,713 for goodwill impairment related to its ECOM subsidiary. Subsequent to its acquisition in February 2001, the ECOM subsidiary experienced significant changes in market conditions. This change caused the subsidiary not to reach the sales levels the Company originally anticipated at the time of the acquisition. In addition, the Company's acquisition and related business plan contemplated the private placement of the Company's equity in order to develop the subsidiary. Due to adverse capital market conditions, the Company was unable to raise a significant amount of equity financing. Separately, during the year ended August 31, 2001, the Company ceased the development of the Company's data integration and data quality software and recorded a charge of $338,037 for impairment of capitalized software related to this discontinued operations. Due to the significance of the changes discussed above, management performed an evaluation of the recoverability of all of the assets of ECOM, as described in Statement of Financial Accounting Standards No. 121, "Accounting for Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of". Management concluded from the results of this evaluation that a significant impairment charge was required because estimated fair value was less than the carrying value of the assets. Considerable management judgment is necessary to estimate fair value. Accordingly, actual results could vary significantly from managements' estimates. Based upon the evaluation, the Company recognized an asset impairment loss of $ 9,346,750 or $ .71 per share during the year ended August 31, 2001. The following unaudited pro forma information presents the condensed consolidated statement of operations of the Company as if the acquisition had taken place on September 1, 2000. ECOM had a December 31 year end and therefore, ECOM's results for the three months ended December 31, 2000 have been consolidated with Paladyne's results for the three months ended November 30, 2000. For the three months ended November 30, November 30, 2001 2000 ------------ ----------- Actual Pro Forma Revenues $2,440,276 $ 1,783,765 Net loss attributable to common stockholders $ (563,159) $(1,129,455) Weighted average common shares outstanding: Basic and diluted 16,709,351 8,459,351 Earnings (loss) per share: Basic and diluted $(.03) $(.13) 9 These unaudited pro forma results have been prepared for comparative purposes only and include certain adjustments, such as additional amortization expense as a result of the goodwill and increased interest expense on acquisition related debt. They do not purport to be indicative of the results of operations that actually would have resulted on the date indicated, or which may result in the future. NOTE 3. SERIES A DIVIDEND The holders of the Company's Series A cumulative convertible preferred stock are entitled to receive, out of the net profits of the Company, annual dividends at the rate of $.2975 per share. If the net profits of the Company are not sufficient to pay the preferred dividend, then any unpaid portion of the dividend will be included in accrued expenses. The Company had accrued cumulative preferred stock dividends of $159,800 as of November 30, 2001. NOTE 4. STOCKHOLDERS' DEFICIT The Series A Preferred Stock issued in the 1998 acquisition of WG Controls, a former subsidiary, provides for annual dividends of $0.2975 per share or $40,800 per year. If the Company's profits are insufficient to pay such dividends, they will be cumulative and accrued for payment when Company profits are adequate to fund payment. The conversion provision of the Series A Preferred Stock calls for each of the 137,143 preferred shares to be converted into .67361 shares of the Company's Common Stock, or an aggregate of 92,381 shares of Common Stock when the Company's Common Stock achieves an average closing price of $5.25 per share for a consecutive 60-day trading period. The Series A Preferred Stock has the same voting rights as the Common Stock and have preference to the Common Stock in the event of any liquidation, dissolution or winding up of the Company, whether voluntary of involuntary. On February 1, 2001, the Board of Directors authorized the issuance of 4,100,000 shares of newly created Series B Convertible Preferred Stock in connection with the Merger of ECOM. These shares were converted to 8,200,000 shares of the Company's Common Stock on July 10, 2001. On September 24, 2001, the Board of Directors authorized a private placement of up to 600,000 units priced at $5.00 per unit, with a unit consisting of three shares of the Company's Series C 8% Convertible Preferred Stock. Each share of Series C Preferred Stock is convertible into 10 shares of the Company's Common Stock commencing April 29, 2002, and is subject to mandatory conversion if the closing market price of the Common Stock is at least $1.25 per share for any 15 consecutive trading days. Net proceeds from this private placement as of November 30, 2001 $976,115, which is net of offering expenses of $77,135 and includes the exchange of $300,000 in debt for this Series C preferred stock. This resulted in the issuance of 210,650 shares of Series C Preferred Stock. NOTE 5. INCOME TAXES The Company has adopted Financial Accounting Standard Number 109(SFAS 109) which requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statement or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Temporary differences between taxable income reported for financial reporting purposes and income tax purposes are insignificant. For income tax reporting purposes, the Company's aggregate unused net operating losses approximate $13,520,000, which expire through 2020. The deferred tax asset related to the carryforward is approximately $4,400,000. The Company has provided a valuation reserve against the full amount of the net operating loss benefit, since in the opinion of management based upon the earnings history of the Company, it is more likely than not that the benefits will be realized. Significant changes in ownership may limit the Company's future use of its existing net operating losses. 10 NOTE 6. NOTES PAYABLE AND CAPITAL LEASE OBLIGATIONS Notes Payable at November 30, 2001 are as follows:
2001 ---- Note payable in quarterly installments of $377,000, including interest at 10% per annum, secured by property and equipment. $ 3,500,000 Note payable in two installments of $750,000, plus interest at 10% per annum, secured by property and equipment. The first installment is due after completion of a $3,000,000 equity or convertible debt offering by the Company and the remaining installment payment due the later of six months after the first installment payment is made and after three consecutive months of positive cash flow from operations (as defined). 1,500,000 Note payable to Bank in monthly installments of interest only at the Bank's prime lending rate plus 1%, secured by accounts receivable. 350,000 Capital leases, principal and interest payable in installments through 2004, interest rates range from 8% to 13% collateralized by specific computer and telephone equipment and software 1,220,946 ----------- 6,570,946 Less: current portion (3,276,740) ----------- $ 3,294,206 ===========
NOTE 7. CONTINGENCY A former Company employee filed a complaint against the Company alleging that the Company owes the plaintiff additional compensation. The Company believes that it has meritorious defenses to the plaintiff's claims and intends to vigorously defend itself against the Plaintiff's claims. The Company is also subject to other legal proceedings and claims that arise in the ordinary course of its business. Although occasional adverse decisions or settlements may occur, the Company believes that the final disposition of such matters will not have a material adverse effect on its financial position, results of operations or liquidity. 11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview Since the February merger with e-commerce support centers, inc. ("ECOM"), Paladyne Corp. (the "Company") has provided CRM-based customer and tech support, and outbound telemarketing for business-to-business and business-to-consumer needs, see Note 2 to the notes to the financial statements. The Company's consolidated financial statements are presented on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. As with any new venture, concerns must be considered in light of the normal problems, expenses and complications encountered by entrance into established markets and the competitive environment in which the Company operates. The consolidated financial statements do not include, nor does management feel it necessary, any adjustments to reflect any possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the possible inability of the Company to continue as a going concern. The Company's independent accountant's report contained a going concern qualification for the year ended August 31, 2001. The Company maintains substantial business relations with Gibralter Publishing, Inc. ("Gibralter"), from which it has acquired or leased a substantial portion of the ECOM assets in exchange for the installment notes, see note 2 to the condensed consolidated financial statements. Gibralter continues to be the Company's principal customer, accounting for approximately 50% of the revenues for the quarter ended November 30, 2001. During the three months ended November 30, 2001, the Company has continued to reduce or eliminate non-critical expenses and operations. Certain personnel continue to defer all or a portion of their compensation. RESULTS OF OPERATIONS The following table sets forth the percentage relationship to the total revenues of principal items contained in the Company's Condensed Consolidated Statements of Operations for the three months ended November 30, 2001 and November 30, 2000, respectively. The percentages discussed throughout this analysis are stated on an approximate basis. Three months Ended November 30, 2001 2000 ------------------------- (UNAUDITED) Total revenues 100% - Cost of revenues 53.9% - ----- ---- Gross profit 46.1% - Operating expenses 61.6% - ----- ---- Operating loss (15.5%) - Interest expense 7.1% - Loss from discontinued operations - 100% ----- ---- Net income (loss) (22.6%) 100% ===== ==== 12 COMPARISON OF THE THREE MONTHS ENDED NOVEMBER 30, 2001 TO THE THREE MONTHS ENDED NOVEMBER 30, 2000 Revenues for the three months ended November 30, 2001 were $2,440,276, cost of sales and gross margin were $1,316,704 and $1,123,482, respectively for this period. All of these were derived entirely from the Company's CRM-based customer and tech support, and outbound telemarketing for business-to-business and business-to-consumer operations. These operations began with the purchase of ECOM on February 1, 2001 as discussed in Note 2 to the condensed financial statements. Sales for the three months ended November 30, 2000 were attributable entirely to the discontinued operations relating to the contract software and service center operations and have accordingly been combined into the loss from discontinued operations. Expenses including depreciation and amortization and interest expense were $1,676,441, these costs all related to the Company's CRM-based customer and tech support, and outbound telemarketing for business-to-business to business-to-consumer operations. LIQUIDITY AND CAPITAL RESOURCES The Company's principal cash requirements are for operating expenses, including employee costs, funding of accounts receivable, capital expenditures and funding of the operations. The Company's primary sources of cash had been from private placements of the Company's preferred or common stock and a bank line of credit. The Company has continued to aggressively seek additional financing or additional equity infusion to fund the acquisition and growth of ECOM. A private placement of the Company's Series C Preferred Stock is currently being offered. This private placement provides for a maximum of $3,000,000, at November 30, 2001 $1,053,250 has been raised (this includes the $300,000 issued in exchange for debt). The Company has completed most of its cost cutting moves including closing the Florida and Virginia offices and certain employee reductions. Conventional bank financing has not been expanded but with successful completion of the private placement we intend to aggressively pursue increases in our bank financing. The Company must obtain additional capital, primarily to enable payment of the merger related costs from the February 2001 merger with ECOM and to enable the execution of the ECOM business plan. These merger costs, additional borrowing related to the merger, and the loss of the Company's traditional revenue sources (discontinued operations) have strained liquidity significantly Cash used in operating activities was $103,245 for the three months ended November 30, 2001. This cash decrease is primarily the result of increased operating losses, caused by the loss of the Company's traditional revenue source and revenue levels that are at less than a breakeven volume. Increasing revenues or further cost cutting will be required in the future. The Company invested $303,266 in computers and leasehold improvements during this period. The Company met its cash requirements during the three months ended November 30, 2001 through the receipt of $753,250 (net of exchange for debt) from the sale of the Series C preferred stock in a private placement. While the Company has raised capital to meet its working capital requirements in the past, additional financing is required, in order to meet current and projected cash flow deficits from operations. The Company is seeking financing in the form of equity and debt. There are no assurances the Company will be successful in raising the funds required and any equity raises would be substantially dilutive to existing shareholders. In prior periods, significant shareholders have loaned money to or guaranteed indebtedness of the Company to satisfy certain obligations. No assurance can be given that such shareholders would guarantee any further indebtedness or seek to withdraw their existing guarantees. As the Company continues to expand, the Company will incur additional costs for personnel. In order for the Company to attract and retain quality personnel, management anticipates it will continue to offer competitive salaries, issue common stock to consultants and employees, and grant Company stock options to current and future employees. 13 The Company's independent certified public accountants have stated in their report included in the Company's August 31, 2001 Form 10-KSB, that the Company is experiencing difficulty in generating sufficient cash flow to meet it obligations and sustain its operations. These factors among others may raise substantial doubt about the Company's ability to continue as a going concern. INFLATION In the opinion of management, inflation has not had a material effect on the operations of the Company. RISK FACTORS AND CAUTIONARY STATEMENTS Forward-looking statements in this report are made pursuant to the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. The Company wishes to advise readers that actual results may differ substantially from such forward-looking statements. Forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those expressed in or implied by the statements, including, but not limited to, the following: the ability of the Company to provide for its debt obligations and to provide for working capital needs from operating revenue, and other risks detailed in the Company's periodic report filings with the Securities and Exchange Commission. 14 PART II ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS (a) None (b) None (c) Sale of Securities During the fiscal quarter ended November 30, 2001, the Company sold 210,650 shares of its Series C Preferred Stock in a placement claimed to be exempt from the registration provisions of the Securities Act by reason of Section 4(2) therof. The purchasers entered into Subscription Agreements containing customary representations and warranties regarding their knowledge of the Company and their understanding of the exemption from registration. The purchasers either paid cash or exchanged existing outstanding indebtedness for their shares. The Company received $1,053,250, net of commissions of $77,135 to Attkinson Carter & Co., the placement agent. The Series C Preferred Stock is convertible into shares of Common Stock, see Note 4 to the financial statements in this report. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Exhibit 3.1 Certificate of Designations to the Certificate of Incorporation of Paladyne Corp., as filed with the Delaware Secretary of State on November 1, 2001. (b) Reports on Form 8-K 1. Form 8-K for an event of September 4, 2001, reporting on Item 4, the retaining of a new independent accountant. 15 SIGNATURES In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. PALADYNE CORP. Date: January 22, 2002 By /s/ Terrence Leifheit --------------------------- Terrence Leifheit President Date: January 22, 2002 By /s/ Clifford Clark --------------------------- Clifford Clark Chief Financial Officer 16 EX-99 3 palex31_0122.txt EX. 3.1 EXHIBIT 3.1 CERTIFICATE OF DESIGNATIONS OF SERIES C PREFERRED STOCK AND SERIES D PREFERRED STOCK OF PALADYNE CORP. (Pursuant to Section 151(g) of the Delaware General Corporate Law) -------- 1. The name of the corporation is Paladyne Corp., a corporation organized and existing under the laws of the State of Delaware (the "Corporation"). ----------- 2. The Certificate of Incorporation, as amended, of the Corporation authorizes the issuance of Ten Million (10,000,000) shares of preferred stock, $.001 par value per share (the "Preferred Stock"), and expressly vests in the --------------- Board of Directors of the Corporation the authority to establish and designate one or more series of Preferred Stock, to fix the number of shares constituting each series, and to fix the designations, powers, preferences and relative, participating, optional or other special rights, and qualifications, limitations or restrictions thereof, and the variations and the relative rights, preferences and limitations as between each series. 3. The Board of Directors of the Corporation, pursuant to the authority expressly vested in it as aforesaid, by unanimous written consent, dated as of September 24, 2001, has adopted the following resolutions creating a Series C issue of Preferred Stock and a Series D issue of Preferred Stock: "RESOLVED, that pursuant to the authority expressly granted to and vested in the Board of Directors of the Corporation by Article 4 of the Corporation's Certificate of Incorporation, (i) One Million Eight Hundred Thousand (1,800,000) authorized shares of Preferred Stock shall be designated as 8% Cumulative Convertible Series C Preferred Stock (the "Series C Preferred ------------------ Stock") and (ii) One Million Fifty Thousand (1,050,000) authorized shares of - ----- Preferred Stock shall be designated as 8% Cumulative Convertible Series D Preferred Stock (the "Series D Preferred Stock"), and shall possess the rights ------------------------ and privileges set forth below: A. General. All shares of Series C Preferred Stock and of Series D ------- Preferred Stock shall be identical to each other in all respects except for certain voting rights as specified in Part C below and certain liquidation preferences as specified in Part E below. All shares of Series C Preferred Stock and of Series D Preferred Stock shall be of such rank as to any other outstanding series of Preferred Stock, if any, of the Corporation as to dividends and as to distributions upon liquidation, dissolution or winding up (except as described below), as shall be provided herein and in the resolutions of the Board of Directors of the Corporation creating such other series of Preferred Stock. B. Conversion. Each of the holders of Series C Preferred Stock and ---------- Series D Preferred Stock shall have the following conversion rights: (i) Right to Convert and Automatic Conversion. Each share of Series C Preferred Stock and Series D Preferred Stock then outstanding shall be convertible, at the option of the holder thereof, without the payment of any additional consideration, into ten (10) shares fully-paid and non-assessable of the Corporation's Common Stock, $.001 par value per share (the "Common Stock"), ------------ subject to adjustment as provided below (the "Conversion Ratio"), at any time, ---------------- and from time to time commencing one hundred and fifty (150) days after the initial issuance of any shares of the Series C Preferred Stock. Conversion shall become mandatory when the average closing market price for the Common Stock for any fifteen (15) consecutive trading days is at least $1.25 per share (the "Conversion Event"). --------------- (ii) Mechanics of Optional Conversion. Each holder of -------------------------------- Series C Preferred Stock and Series D Preferred Stock who desires to convert the same into shares of Common Stock shall provide notice to the Corporation by the execution and delivery to it of a notice of conversion, together with the certificates for the shares of Series C Preferred Stock or Series D Preferred Stock, as the case may be, which are to be converted. The Corporation shall use its reasonable best efforts to issue and deliver, within five (5) days business days after it receives the certificate or certificates for the shares of Series C Preferred Stock or Series D Preferred Stock, as the case may be, to be converted, with proper endorsement if necessary, from the holder electing conversion, a certificate or certificates for the number of shares of Common Stock to which the holder shall be entitled upon the conversion, together with a certificate for any Series C Preferred Stock or Series D Preferred Stock, as the case may be, which are represented by the certificate or certificates surrendered by the holder but which the holder had not elected to convert. (iii) Mechanics of Mandatory Conversion. After a Conversion Event, the --------------------------------- Corporation shall send to each holder of Series C Preferred Stock and each holder of Series D Preferred Stock a written notice specifying (x) the date on which the Conversion Event has occurred, (y) the date as of which the shares of Series C Preferred Stock and shares of Series D Preferred Stock shall be converted to Common Stock, and (z) the number of shares of Common Stock issuable by reason of the Conversion Event. Upon the Conversion Event, the Series C Preferred Stock and the Series D Preferred Stock shall be automatically converted into the number of shares of Common Stock that the holder would have the right to convert at the Conversion Ratio in effect on the day immediately prior to the last trading day in the measuring period for the Conversion Event. The Corporation shall use its reasonable best efforts to issue and deliver, within five (5) business days after it receives the certificate or certificates for the shares of Series C Preferred Stock or the shares of Series D Preferred Stock, as the case may be, to be converted, with proper endorsement if necessary, from the holders, a certificate or certificates for the number of shares of Common Stock to which the holder shall be entitled to upon the conversion. Closing market price for purposes of determining whether a Conversion Event has occurred shall mean (x) if the Common Stock is then listed on the Nasdaq Small-Cap or National System or on a national securities exchange, the average of the last reported sales prices for each trading day during the measurement period or (y) if the Common Stock is then traded on the OTC Bulletin Board or other trading system, the average of the closing bid prices for each trading day during the measurement period. 2 (iv) Adjustment. In the event of a stock split, stock dividend, ---------- reorganization, recapitalization or other event affecting the Common Stock or the Series C Preferred Stock or the Series D Preferred Stock, as the case may be, the Board of Directors of the Corporation shall make an equitable adjustment in the Conversion Ratio, if necessary, to reflect such event in order to preserve substantially the initial Conversion Ratio. In the case of any capital reorganization of the Corporation, or any consolidation or merger of the Corporation with or into another corporation, or any sale or conveyance to another corporation of all or substantially all of the property of the Corporation, the holder of each share of Series C Preferred Stock and Series D Preferred Stock then outstanding shall have the right thereafter to convert such share into the kind and amount of shares of stock and other securities and property receivable upon such reorganization, consolidation, merger, sale or conveyance by a holder of shares of Common Stock of the Corporation into which such share of Series C Preferred Stock or the Series D Preferred Stock, might have been converted immediately prior to such reorganization, consolidation, merger, sale or conveyance, and shall have no further conversion rights under these provisions; and any such resulting or surviving corporation shall expressly assume the obligation to deliver, upon the exercise of the conversion privilege, such shares, securities or property as the holders of the Series C Preferred Stock and Series D Preferred Stock shall be entitled to receive pursuant to the provisions hereof. In the case securities or property other than Common Stock shall be issuable or deliverable upon conversion as aforesaid, then all references in this Paragraph (iv) to Common Stock shall be deemed to apply, so far as appropriate and as nearly as may be, to such other securities or property. The provisions of this Paragraph shall apply to successive stock splits, stock dividends, reorganizations, recapitalizations or other events affecting the Common Stock or the Series C Preferred Stock or the Series D Preferred Stock, as the case may be. Whenever the Conversion Ratio and/or the securities issuable upon conversion is adjusted as herein provided, the Corporation shall give written notice to the holders of the Series C Preferred Stock and the Series D Preferred Stock of such adjustment setting forth the new Conversion Ratio and the number of shares of Common Stock (or other securities) issuable upon conversion and a brief statement of the facts requiring such adjustment and the computation by which such adjustment was made. (v) Fractional Shares. No fractional shares of Common Stock shall be ----------------- issued upon the conversion of any shares of Series C Preferred Stock or shares of Series D Preferred Stock. All shares of Common Stock (including fractions thereof) issuable upon conversion of shares of Series C Preferred Stock or Series D Preferred Stock, as the case may be, by a holder thereof shall be aggregated for purposes of determining whether the conversion would result in the issuance of any fractional share. If, after the aforementioned aggregation, the conversion would result in the issuance of a fraction of a share of Common Stock, the Corporation shall, in lieu of issuing any fractional share, round up or down any fractional share to the nearest whole share of Common Stock. (vi) Reservation of Common Stock Issuable Upon Conversion. The ---------------------------------------------------- Corporation shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock, solely for the purpose of effecting the conversion of the shares of the Series C Preferred Stock and Series D Preferred Stock, such number of its shares of Common Stock as shall from time to time be sufficient to effect the conversion of all then 3 outstanding shares of the Series C Preferred Stock and Series D Preferred Stock. If at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of all then outstanding shares of the Series C Preferred Stock and Series D Preferred Stock, the Corporation will use its best efforts to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purpose. (vii) Status of Converted Stock. Upon the Corporation receiving a ------------------------- notice of conversion for any shares of Series C Preferred Stock or Series D Preferred Stock, as the case may be, pursuant to this Part B, or upon the Corporation giving a notice of mandatory conversion pursuant to this Part B, the shares of Series C Preferred Stock or Series D Preferred covered by such notice of conversion shall no longer be deemed outstanding and all rights with respect to such shares shall cease and be cancelled (except for the right of the holders thereof to receive shares of Common Stock upon conversion thereof), and such shares of Series C Preferred Stock or Series D Preferred Stock, as the case may be, shall return to the status of authorized but unissued Preferred Stock of no designated class or series, and shall not be issuable by the Corporation as Series C Preferred Stock or Series D Preferred Stock. C. Voting Rights. ------------- (i) Generally. Except as set forth in Paragraph (ii) below and as --------- required by applicable law, (x) the holder of each issued and outstanding share of Series C Preferred Stock or Series D Preferred Stock, as the case may be, shall have the right to cast that number of votes equal to number of shares of Common Stock issuable upon conversion of such shares of Series C Preferred Stock and Series D Preferred Stock at the then Conversion Ratio on every matter duly brought before the holders of Common Stock at all meetings of stockholders of the Corporation to be held prior to the conversion of the Series C Preferred Stock or Series D Preferred Stock, and (y) the holders of Series C Preferred Stock and Series D Preferred Stock and the holders of Common Stock shall vote together as one class on all matters submitted to a vote of the stockholders of the Corporation. (ii) Separate Vote. The approval of the holders of a majority of the ------------- outstanding shares of Series C Preferred Stock or Series D Preferred Stock, each voting as a separate class and having one vote per share, shall be required for: (a) the amendment of any of the terms and conditions of the Series C Preferred Stock or Series D Preferred Stock, as the case may be, (b) the issuance of any securities with rights, preferences and privileges (the "Preferences") equal to or superior than the Preferences of the Series C Preferred Stock or the Series D Preferred Stock, as the case may be, and (c) as otherwise required by the General Corporation Law of the State of Delaware. D. Dividends. --------- (i) Declaration and Payment. The holders of the Series C Preferred ----------------------- Stock and the Series D Preferred Stock shall be entitled to receive, when and as declared by the Board of the Directors of the Corporation, a cumulative dividend at the rate of $.13 1/3 per share per annum, based upon a twelve (12) month year, subject to pro rata reduction for a dividend 4 measurement period of less than twelve (12) months, payable either in cash or in shares of Common Stock at the election of the Board of Directors of the Corporation, on the last business day of October in each year, commencing October 31, 2002, to each holder of record on a date which is ten (10) days prior to the applicable payment date. So long as any shares of Series C Preferred Stock or Series D Preferred Stock are outstanding, no dividend shall be declared or paid or other distribution made on the Common Stock or any other class or series of the Corporation's capital stock ranking as to dividends on a parity with or junior to the Series C Preferred Stock and Series D Preferred Stock, unless the preferential dividends on the Series C Preferred Stock and Series D Preferred Stock through the dividend declaration date shall have been paid in full or declared and set aside for payment. No dividends shall be paid on the Series C Preferred Stock or the Series D Preferred Stock at such time as such payment would violate the laws of the State of Delaware or any agreement to which the Corporation is a party or may be bound. Should the Corporation elect to pay any dividend in shares of Common Stock, the number of shares to be issued shall be the result of dividing (x) the average market value for the Common Stock for the ten (10) consecutive trading days immediately preceding the record date for the dividend by (y) the amount of the dividend payable per share of Series C Preferred Stock or Series D Preferred Stock, as the case may be. The market value shall be determined by the procedure in the last sentence of Paragraph (iii) of Part B above. Further, upon conversion of any shares of Series C Preferred Stock or Series D Preferred Stock pursuant to Part B above, any accumulated but unpaid dividends on the shares being converted shall be deemed waived. (ii) Adjustment. In the event of a stock dividend, stock split-up, ---------- share combination, recapitalization or other capital transaction effecting the Series C Preferred Stock or Series D Preferred Stock, as the case may be, the Board of Directors of the Corporation shall determine whether such transaction would cause an adjustment to the amount of the preferential annual dividend on the Series C Preferred Stock and the Series D Preferred Stock, the Board of Directors shall give written notice to each holder of the Series C Preferred Stock or the Series D Preferred Stock, as the case may be, specifying the applicable transaction, the adjusted preferential dividend amount and a calculation of the adjustment. E. Liquidation Preference. In the event of any liquidation, dissolution ---------------------- or other winding-up of the Corporation, either voluntary or involuntary (a "Liquidation"), each holder of the shares of the Series C Preferred Stock or ----------- Series D Preferred Stock, as the case may be, shall be entitled to be paid out of the assets of the Corporation available for distribution to its stockholders, from any source, and be senior to all other equity securities of the Corporation and shall be entitled to receive, prior to and in preference to any payments to any of the holders of any other equity securities, for the following: (i) Series C Preferred Stock. For each share of Series C Preferred ------------------------ Stock then held by a holder, cash in an amount equal to $1.66 per share, plus declared, unpaid and accrued dividends (the "Preferential C Amount"). Such --------------------- payment shall be made pari passu to the holders of the Series D Preferred Stock and of any other series of Preferred Stock ranking on a parity (the "Parity Stock") with the Series C Preferred Stock with respect to payment on Liquidation of the Corporation. All payments to holders of Series C Preferred Stock upon Liquidation shall be in cash. 5 (ii) Series D Preferred Stock. For each share of Series D Preferred ------------------------ Stock then held by a holder, cash or assets of the Corporation in an amount equal to $1.66 per share, plus declared, unpaid and accrued dividends (the "Preferential D Amount"). Such payment shall be made pari passu to the holders --------------------- of the Series C Preferred Stock and of any other series of Parity Stock, subject to the right of the holders of the Series D Preferred Stock set forth in this Paragraph. Upon Liquidation, in payment of all or part of their Preferential D Amount the holders of the Series D Preferred Stock shall have the right to take assets of the Corporation designated by each such holder in lieu of cash payment. The assets designated by the holders of Series D Preferred Stock shall be valued at the value of such assets as shown on the most recent publicly available balance sheet of the Corporation. (iii) Priorities. If the assets (including securities) thus ---------- distributed or distributable among the holders of the Series C Preferred Stock or Series D Preferred Stock, as the case may be, and holders, if any, of Parity Stock, shall be insufficient to permit the payment to such holders of the full Preferential C Amount and the full Preferential D Amount and preferential dividend to the holders of any Parity Stock, then the entire assets (including securities) available for distribution shall be distributed pro-rata among the holders of the Series C Preferred Stock or Series D Preferred Stock, and such holders of Parity Stock ratably in proportion to the preferential amount of each such holder is otherwise entitled to receive. After payment shall have been made to the holders of shares of Series C Preferred Stock or Series D Preferred Stock of the full Preferential C Amount and the full Preferential D Amount, the holders of shares of the Series C Preferred Stock or Series D Preferred Stock shall be entitled to no further distributions thereon, and the holders of the shares of the Common Stock and of shares of any other series of stock of the Corporation ranking junior to the Series C Preferred Stock or Series D Preferred Stock in respect of distribution of assets, shall be entitled to share, according to their respective rights and preferences, in all remaining assets of the Corporation available for distribution to its stockholders. (iv) Merger not Liquidation. A merger or consolidation of the ---------------------- Corporation with or into any other corporation, or a sale, lease, exchange or transfer of all or any part of the assets of the Corporation which shall not result in the liquidation (in whole or in part) of the Corporation and the distribution of its assets to its stockholders shall not be deemed to be a Liquidation within the meaning of this Part E. F. Redemption Rights. Neither the Corporation nor any holder of shares of ----------------- Series C Preferred Stock or Series D Preferred Stock shall have the right to cause or permit the redemption by the Corporation of any outstanding shares of Series C Preferred Stock or Series D Preferred Stock. G. Preemptive Rights. The holders of the Series C Preferred Stock and of ----------------- the Series D Preferred Stock shall not be entitled to any preemptive or subscription rights in respect of any securities of the Corporation by reason of their ownership of the Series C Preferred Stock or Series D Preferred Stock, as the case may be. FURTHER RESOLVED, that the statements contained in the foregoing resolutions creating and designating the Series C Preferred Stock and the Series D Preferred Stock and fixing the number, powers, preferences and relative, optional, participating and other special 6 rights and the qualifications, limitations, restrictions and other distinguishing characteristics thereof, shall, upon the effective date of these Series, be deemed to be included in and be a part of the Certificate of Incorporation of the Corporation pursuant to the provisions of Sections 104 and 151 of the General Corporation Law of the State of Delaware. IN WITNESS WHEREOF, the Corporation has caused this Certificate of Designation to be executed by a duly authorized officer on the 22nd day of October, 2001. PALADYNE CORP. By: ___________________________________ Terrence J. Leifheit Chairman and CEO 7 -----END PRIVACY-ENHANCED MESSAGE-----