UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10 - QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended February 28, 1999
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE
EXCHANGE ACT
For the transition period from __________ to __________
Commission File Number 0-22969
PALADYNE CORP.
(Exact Name of Small Business Issuer as specified in its charter)
Delaware 87-0375342
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
615 Crescent Executive Court, Suite 128, Lake Mary, FL 32746
(Address of Principal Executive Offices)
(407)333-2488
(Issuer's telephone number)
Synaptx Worldwide, Inc., a Utah corporation
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15 (d) of the Securities Exchange Act of 1934 during the past 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
Yes X No
---- ----
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date.
Class Outstanding as of April 14, 1999
Common Stock, $ .001 par value 6,584,342
Transitional Small Business Disclosure Format (check one):Yes No X .
---- ----
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TABLE OF CONTENTS
Page
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PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements 3
Condensed Consolidated Balance Sheets - February 28,
1999 and August 31, 1998 4
Condensed Consolidated Statements of Operations -
three months ended February 28, 1999 and 1998 5
Condensed Consolidated Statements of Operations -
six months ended February 28, 1999 and 1998 6
Condensed Consolidated Statements of Cash Flows -
six months ended February 28, 1999 and 1998 7
Notes to Condensed Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis
and Results of Operations 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities and Use of Proceeds 15
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 16
2
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PART I
ITEM 1. FINANCIAL STATEMENTS
The following unaudited Condensed Consolidated Financial Statements for the
three and six month periods ended February 28, 1999 and 1998 have been prepared
by Paladyne Corp., a Delaware corporation. Effective March 5, 1999, Synaptx
Worldwide, Inc., a Utah corporation, merged with and into Paladyne Corp. in a
migratory merger, and Paladyne Corp. is the successor registrant pursuant to
Rule 12g-3 under the Securities Exchange Act of 1934. The financial statements
in this Report are of Synaptx Worldwide, Inc.
3
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF FEBRUARY 28, 1999 AND AUGUST 31, 1998
February 28, August 31,
1999 1998
(Unaudited) (Audited)
----------- ---------
ASSETS
Current assets:
Cash $ 248,624 $ 126,532
Accounts receivable (net of allowance for
doubtful accounts of $37,736 and $37,736) 815,848 918,785
Prepaid expenses and deposits 135,355 44,861
---------- ----------
Total current assets 1,199,827 1,090,178
Property and equipment 452,327 462,725
Less accumulated depreciation (209,647) (162,045)
---------- ----------
Net property and equipment 242,680 300,680
Costs in excess of net assets acquired
(net of accumulated amortization of $1,924,508
and $1,878,834) 823,207 868,881
Other assets 50,756 96,839
---------- ----------
Total assets $2,316,470 $2,356,578
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable 575,728 $ 490,726
Accrued expenses and taxes 236,663 438,737
Notes payable 150,000 303,417
Current portion of long-term debt 213,888 175,521
Deferred revenue 274,639 150,427
---------- ---------
Total current liabilities 1,450,918 1,558,828
Long-term debt, net of current portion 201,497 331,502
Commitments
Stockholders' equity
Cumulative, convertible preferred stock; $.001 par
value; 10,000,000 shares authorized, 137,143 issued
and outstanding 137 137
Common stock; $.001 par value; 25,000,000 shares
authorized, 6,584,342 and 6,378,503 issued and
outstanding 6,585 6,379
Additional paid in capital 4,546,482 4,284,534
Deficit (3,889,149) (3,824,802)
---------- ----------
Total stockholders' equity 664,055 466,248
---------- ----------
Total liabilities and stockholders' equity $2,316,470 $2,356,578
========== ==========
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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED FEBRUARY 28, 1999 AND 1998
1999 1998
(Unaudited) (Unaudited)
----------- ---------
Net sales and revenues:
Marketing services and production $ 216,803 $ 599,327
Database services 618,400 409,220
Commission income 785,976 447,033
Executive placement fees 52,000 22,000
---------- ----------
Total revenues 1,673,179 1,477,580
Cost of sales and revenues 1,235,196 1,245,653
---------- ----------
Gross profit 437,983 231,927
Selling, general and administrative expenses 424,843 530,376
Depreciation and amortization 58,107 81,099
---------- ----------
(Loss) income from operations (44,967) (379,548)
Other (income) expense:
Interest expense 14,065 12,741
Gain on sale of subsidiary (63,501) -
---------- ----------
(49,436) 12,741
---------- ----------
Net income (loss) 4,469 (392,289)
Cumulative convertible preferred stock
dividend requirements 10,200 6,800
---------- ----------
Net loss applicable to common shareholders $ (5,731) $ (399,089)
========== ==========
Weighted average shares outstanding 6,608,080 5,377,518
========== ==========
Basic and diluted net loss per share $ 0.00 $ (0.07)
========== ==========
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SYNAPTX WORLDWIDE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED FEBRUARY 28, 1999 AND 1998
1999 1998
(Unaudited) (Unaudited)
----------- -----------
Net sales and revenues:
Marketing services and production $ 595,647 $1,672,161
Database services 1,437,271 558,819
Commission income 1,638,686 712,123
Executive placement fees 52,000 37,330
---------- ----------
Total revenues 3,723,604 2,980,433
Cost of sales and revenues 2,767,071 2,273,858
---------- ----------
Gross profit 956,533 706,575
Selling, general and administrative expenses 953,552 937,916
Depreciation and amortization 104,679 143,690
---------- ----------
(Loss) income from operations (101,698) (375,031)
Other (income) expense:
Interest expense 26,150 22,796
Gain on sale of subsidiary (63,501) -
---------- ----------
(37,351) 22,796
---------- ----------
Net loss (64,347) (397,827)
Cumulative convertible preferred stock
dividend requirements 20,400 6,800
---------- ----------
Net loss applicable to common shareholders $ (84,747) $ (404,627)
========== ==========
Weighted average shares outstanding 6,516,990 5,300,864
========== ==========
Basic and diluted net loss per share $ (0.01) $ (0.08)
========== ==========
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SYNAPTX WORLDWIDE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED FEBRUARY 28, 1999 AND 1998
1999 1998
(Unaudited) (Unaudited)
----------- -----------
Net cash (used in) provided by operating activities (74,728) 8,987
Cash flows from investing activities
Additions to property, plant and equipment (25,755) (52,297)
Businesses acquired - 33,452
Reductions in (additions to) other assets 46,083 (211,520)
---------- ----------
Net cash provided by (used in) investing
activities 20,328 (230,364)
Cash flows from financing activities
Reductions in bank lines of credit (135,499) (1,309)
(Reductions in) additions to long-term debt (116,005) 140,300
Additions to (reductions in) in short-term debt 44,842 (1,837)
Issuance of common stock-net 383,154 148,023
---------- ----------
Cash provided by financing activities 176,492 285,176
---------- ----------
Net increase in cash 122,092 63,799
Cash at beginning of period $ 126,532 $ 58,265
---------- ----------
Cash at end of period $ 248,624 $ 122,064
========== ==========
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
NOTE 1. BASIS OF PRESENTATION
The financial information included herein is unaudited; however, such
information reflects all adjustments (consisting solely of normal recurring
adjustments) which, in the opinion of management, are necessary for a fair
statement of results for the interim periods. The accompanying financial
statements include estimated amounts and disclosures based on management's
assumptions about future events. Actual results may differ from those estimates.
The results of operations for the interim periods are not necessarily indicative
of the results to be expected for the full year. Basic and diluted earnings per
share are the same due to the anti-dilutive nature of the options.
The condensed consolidated financial statements have been prepared by the
Company, without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the disclosures are adequate to
make information presented not misleading.
These financial statements should be read in conjunction with the financial
statements included in the Company's Form 10-KSB for the fiscal year ended
August 31, 1998, as filed with the Securities and Exchange Commission and
available under the EDGAR reporting system or from the Company.
The Company's financial statements are presented on a going concern basis, which
contemplates the realization of assets and satisfaction of liabilities in the
normal course of business. The Company's ability to continue as a going concern
is contingent upon its ability to secure additional financing, raise additional
equity investment, and attain profitable operations. Although the Company is
pursuing additional private equity investment as well as the refinancing and
expansion of outstanding debt, there can be no assurance that the Company will
be able to secure financing when needed or obtain such terms satisfactory to the
Company. In addition, the Company's ability to continue as a going concern must
be considered in light of the problems, expenses and complications frequently
encountered by entrance into established markets and the competitive environment
in which the Company operates. The financial statements do not include any
adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
may result from the possible inability of the Company to continue as a going
concern.
During fiscal year 1998, the Company changed its strategy from one of acquiring
and growing mainly distribution companies to one of building upon internal
strengths and acquiring customer organizations focused on the customer
management segment. Customer management in the context of what the Company does,
is broadly defined as processes that enable network and network equipment
providers to identify, acquire, and maintain desirable customers. This shift is
a result of what Management feels is greater opportunity and a greater chance of
achieving profitable operations on a long-term basis.
NOTE 2. PRINCIPLES OF CONSOLIDATION
The condensed consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. The subsidiaries consist of Synaptx
Access, Inc. ("Access"), acquired in June, 1996, Synaptx Impulse, Inc.
("Impulse"), acquired in October, 1996, WG Controls, Inc. ("WG"), acquired in
January, 1998, and Primus Marketing Associates, Inc. ("Primus"), acquired in
June, 1998. The statements also include the results of ORAYCOM, Inc.
("ORAYCOM"), acquired in June, 1997 for all periods presented through the
Company's disposition of this subsidiary as of December 1, 1998.
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NOTE 3. PRIVATE PLACEMENTS
During the six months ended February 28, 1999, the Company raised $383,154, net
of private placement costs, as a result of selling 216,008 shares of its Common
Stock in private placements. Additionally, each share subscribed included a five
year warrant to purchase one share of Common Stock at $3.00 per share.
Therefore, 216,008 warrants were issued in conjunction with the shares of Common
Stock. Additionally in the period, 53,573 shares of Common Stock and
corresponding warrants were issued to private placement subscribers who had
originally purchased shares at $2.00 per share, which was the original price of
that placement. Due to market conditions, the placement was re-priced at $1.75
and the Company retroactively made this price available to previous subscribers.
The Company also issued 657 shares of its Common Stock as compensation to an
unrelated individual who assisted in the placement, and issued 551 shares of
Common Stock as a result of stock options exercised.
NOTE 4: BUSINESS DISCONTINUATION
As a result of repeated and recurring losses the Company terminated its
operations under the Advantage Technologies name in San Jose, CA effective
November 30, 1998. The Company did not incur material costs related to this
closure.
Subsequent to the close of business on November 30, 1998, the Company sold all
the capital stock in ORAYCOM, Inc. ("ORAYCOM") to O. Ray Strickland and O. Ray
Strickland IRA, (collectively, the "Strickland Group"). Mr. Strickland was an
employee of the Company and the General Manager of ORAYCOM, Inc., and was the
sole shareholder of ORAYCOM when the Company acquired it from him in June, 1997.
The agreement called for Strickland Group to convey to the Company, 80,000
shares of the Company's Common Stock in exchange for all of the issued and
outstanding shares of ORAYCOM and waiver of the non-compete agreement in place
with Mr. Strickland. As a result, the Company took a charge in the fourth
quarter of fiscal 1998 of $428,054 to write off the remaining balance of the
goodwill related to the purchase of ORAYCOM. ORAYCOM was not considered a
material subsidiary to the Company's consolidated business. Upon closing, the
Company recognized a gain on the transaction of $63,501 in 2Q99.
NOTE 5. SUPPLEMENTAL CASH FLOW DISCLOSURES
Cash paid for interest was approximately $ 38,000 and $ 20,000 for the six month
periods ended February 28, 1999 and 1998, respectively.
On January 5, 1998, the Company purchased all of the capital stock of WG
Controls, Inc. for approximately $1,100,000 utilizing common stock, preferred
stock, and future cash payouts. In conjunction with this acquisition,
liabilities assumed were as follows:
February 28, 1999 February 28, 1998
----------------- -----------------
Fair value of assets acquired $ - $ 1,126,776
Cash acquired - 33,452
Value of stock issued - $ (869,621)
------------------ ----------------
Liabilities assumed $ - $ 290,607
================== ================
Subsequent to the close of business on November 30, 1998, the Company sold all
of the capital stock in ORAYCOM back to its original owner (see Note 4 to the
financial statements). On the date of the sale, ORAYCOM had assets of $95,892,
liabilities of $39,393, and stockholders' equity of $55,499, for which the
Company received back 80,000 shares of its Common Stock valued at $120,000,
recognizing a gain of $63,501.
NOTE 6. SUBSEQUENT EVENTS
On March 3, 1999, the Company held its annual meeting of shareholders at which
shareholders approved an Agreement and Plan of Merger between the Company and
the Company's newly formed, wholly-owned subsidiary, Paladyne Corp., a Delaware
9
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corporation. The merger was to change the corporate name and state of
incorporation. The merger became effective on March 5, 1999.
Additionally, shareholders elected the management slate of directors which
included two new directors to replace two departing directors, as well as
approving an increase in the number of shares of Common Stock available under
the Company's stock option plan to 2,500,000 shares from 1,450,000 shares.
On April 9, 1999, the Company entered into a credit agreement to replace its
prior credit facility. The new facility is considered adequate to fund the
Company's working capital needs in the near term. The agreement calls for a line
of credit up to $250,000 at prime rate plus 1 1/4% and is renewable six months
from the date of the original agreement.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Paladyne Corp. (the "Company") through its operating subsidiaries, provides
customer management expertise through the use of sophisticated database
analysis, consulting, marketing and sales services and executive search
("Search") assistance primarily within the telecommunications industry. The
Company intends to build its business through internal growth as well as seek
acquisitions of existing companies exhibiting the potential for growth as
telecommunications customer management and software providers needing developed
marketing channels. Except for the acquisitions consummated, the Company has no
agreements or understandings regarding possible future acquisitions. The
Company's fiscal year ends August 31.
OVERVIEW
- --------
The Company's products and services consist primarily of supporting the customer
management functions of clients in the telecommunications, data communications
and cable TV industries. The Company's mission of Synaptx is to help its clients
know their customers better and manage them in a manner to more profitably grow
their businesses. This involves using information technology to more precisely
target their prospective customers, to develop and implement customized sales
and marketing programs, and to develop and implement unique programs to nurture
relationships with existing customers to avoid expensive customer turnover.
The other service being offered is sales representation offered through the
following subsidiaries: Access, WG, and Primus. Another sales representative
subsidiary, ORAYCOM, had been included with these operations through November
30, 1998. ORAYCOM was not considered a significant part of the business. These
sales representative operations provide field sales and business development
support for cable TV, and telecommunications (both voice and data networking)
original equipment manufacturers (commonly referred to as OEMs). Commissions are
earned for sales generated for the designated products within the assigned
territories at rates ranging from approximately 3.5% to 10%, depending on the
sophistication of the client's products and services represented.
The Company's financial statements are presented on a going concern basis, which
contemplates the realization of assets and satisfaction of liabilities in the
normal course of business. The Company's ability to continue as a going concern
is contingent upon its ability to secure additional financing, raise additional
equity investment, and attain profitable operations. Although the Company is
pursuing additional private equity investment as well as the refinancing and
expansion of outstanding debt, there can be no assurance that the Company will
be able to secure financing when needed or obtain such terms satisfactory to the
Company. In addition, the Company's ability to continue as a going concern must
be considered in light of the problems, expenses and complications frequently
encountered by entrance into established markets and the competitive environment
in which the Company operates. The financial statements do not include any
adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
may result from the possible inability of the Company to continue as a going
concern.
During fiscal year 1998, the Company changed its strategy from one of
acquiring and growing mainly distribution companies to one of building upon
internal strengths and acquiring organizations focused on the customer
management segment. Customer management in the context of what the Company does,
is broadly defined as processes that enable network and network equipment
providers to identify, acquire, and maintain desirable customers. This shift is
a result of what Management feels is greater opportunity and a greater chance of
achieving profitable operations on a long-term basis.
RESULTS OF OPERATIONS
- ---------------------
The following table sets forth the percentage relationship to total revenues of
principal items contained in the Company's Condensed Consolidated Statements of
Operations for the six months ended February 28, 1999 and 1998, respectively.
The percentages discussed throughout this analysis are stated on an approximate
basis.
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Three Months Ended Six Months Ended
February 28, February 28,
1999 1998 1999 1998
---- ---- ---- ----
(Unaudited)
Net sales and revenues 100% 100% 100% 100%
Cost of sales 72% 84% 74% 76%
---- ---- ---- ----
Gross Profit 28% 16% 26% 24%
Selling, general and administrative 29% 41% 28% 36%
expenses ----- ----- ----- ----
Operating (loss) income (1%) (25%) (2%) (12%)
Interest expense 1% 1% 1% 1%
Other income (2%) - (1%) -
----- ----- ----- ----
Net (loss) income 0% (26%) (2%) (13%)
===== ===== ===== ====
NET SALES AND REVENUES
- ----------------------
The Company's net sales and revenues increased by $195,599 or 13%, from
$1,477,580 for the three months ended February 28, 1998 ("2Q/98") to $1,673,179
for the three months ended February 28, 1999 ("2Q/99"), which increase was
attributable to increases of $209,180 from Database Services, $338,943 from
Commission Income, $30,000 from Executive Placement Fees, offset by a decrease
of $382,524 from Marketing Services and Production. The Company's net sales and
revenues increased by $743,171 or 25%, from $2,980,433 for the six months ended
February 28, 1998 to $3,723,604 for the six months ended February 28, 1999
("2Q/99"), which increase was attributable to increases of $878,452 from
Database Services, $926,563 from Commission Income, $14,670 from Executive
Placement Fees, offset by a decrease of $1,076,514 from Marketing Services and
Production.
The increase in Commission Income is primarily attributable to 2Q/99 figures
having a full three months of activity of for WG and Primus, while 2Q/98
revenues included three months' activity for ORAYCOM, two months' activity for
WG, and no activity from Primus. The increase in Database Services and the
decrease in Marketing Services and Production is consistent with the Company's
refocusing on the software and services area and moving away from the pure
marketing collateral materials as its primary focus in the Impulse unit.
Additionally the Company has moved away from the media buying service it
previously provided to its clients because it is low margin and highly
administrative in nature. As discussed in Note 4 to the Condensed Consolidated
Financial Statements, the ORAYCOM subsidiary was disposed of following the close
of business on November 30, 1998.
COST OF SALES
- -------------
Cost of sales and revenues decreased by $10,457 in 2Q/99, or 1%, from $1,245,653
in 2Q/98 to $1,235,196 in 2Q/99. The nominal decrease was attributable to the
fact that both Advantage Technologies and ORAYCOM were included in prior year
results but had no results in the current year period as they had been disposed
of at the beginning of the period. Both units historically operated at low or
negative gross margins.
Cost of sales and revenues increased by $493,213 or 22% from $2,273,858 in the
six months ended February 28, 1999 to $2,767,071 in the six months ended
February 28, 1998. The increase was directly related to the growth in the
Database Services area where the Company has historically outsourced the
overwhelming majority of the work. Offsetting the increase from Database
services, is a decrease attributable to the fact that both Advantage
Technologies and ORAYCOM were included in prior year results but had minimal
results in the current year period as they had been disposed of at the beginning
of the period. Both units historically operated at low or negative gross
margins.
GROSS PROFIT
- ------------
The Company's gross profit margin, was 26% and 16% for 2Q/99 and 2Q/98,
respectively. The increase in gross profit margin of 10 percentage points in
2Q/99 is primarily attributable to the elimination of Advantage Technologies and
ORAYCOM that historically operated at poor margins.
The Company's gross profit margin, was 26% and 24% in the six months ended
February 28, 1999 and 1998, respectively. The increase in gross profit margin of
2 percentage points in the current period is primarily attributable to the
elimination of Advantage Technologies and ORAYCOM that historically operated at
poor margins.
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SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
- --------------------------------------------
Selling, general and administrative expenses, including depreciation and
amortization, decreased by $128,525 in 2Q/99 or 21%, from $611,475 in 2Q/98 to
$482,950 in 2Q/99. The decrease was primarily due to 2Q/99 results having a full
three months of activity of Impulse, Access, WG and Primus, while 2Q/98 figures
included only two months' activity for WG and no activity for Primus. Offsetting
this was the fact that Advantage Technologies and ORAYCOM had three months
activity in the prior year and no activity in the current year. Goodwill and
depreciation decreased by $22,992 primarily as a result of decreased
amortization of approximately $19,820 as a result of fully amortizing all
goodwill related to ORAYCOM and Impulse in the fourth quarter of fiscal 1998.
Additionally, the Company has eliminated approximately $200,000 per quarter in
general overhead spending as a result of staff and space reductions, which
phased in at various times during the first six months of fiscal 1999.
Selling, general and administrative expenses, including depreciation and
amortization, decreased by $23,375 or 2% from $1,081,606 in the six months ended
February 28, 1998 to $1,058,231 in the six months ended February 28, 1999. The
decrease was primarily due to current period results having a full six months of
activity of Impulse, Access, WG and Primus, while prior period figures included
only two months' activity for WG and no activity for Primus. Additionally,
Advantage Technologies and ORAYCOM had six months activity in the prior period
and three months' activity in the current period. Goodwill and depreciation
decreased by $39,011 primarily as a result of decreased amortization of
approximately $50,599 as a result of fully amortizing all goodwill related to
ORAYCOM and Impulse in the fourth quarter of fiscal 1998, offset by increased
depreciation as a result of the addition of the WG and Primus subsidiaries.
INTEREST EXPENSE
- ----------------
Interest expense increased $1,324 from 2Q/98 to 2Q/99, consistent with a similar
level of borrowing period to period.
Interest expense increased by $3,354 or 15%, from $22,796 in the six months
ended February 28, 1998 to $26,150 in the six months ended February 28, 1999.
This increase is attributable to reduced borrowings on bank lines of credit
offset by additional interest on notes payable to related parties.
Subsequent to the close of business on November 30, 1998, the Company sold all
of the capital stock in ORAYCOM back to its original owner (see Note 4 to the
financial statements). On the date of the sale, ORAYCOM had assets of $95,892,
liabilities of $39,393, and stockholders' equity of $55,499, for which the
Company received back 80,000 shares of its Common Stock valued at $120,000,
recognizing a gain of $63,501.
NET OPERATING LOSS
- ------------------
The Company has accumulated approximately $2,000,000 of net operating loss
carryforwards as of February 28, 1999 which may be offset against taxable income
and income taxes in future years. The use of these losses to reduce future
income taxes will depend on the generation of sufficient taxable income prior to
the expiration of the net operating loss carry forwards. The carry forwards
expire in the year 2013. In the event of certain changes in control of the
Company, there will be an annual limitation on the amount of net operating loss
carry forwards which can be used. No tax benefit has been reported in the
financial statements for the three months or the six months ended February 28,
1999 because there is a 50% or greater chance that the carry forward will not be
utilized. Accordingly, the potential tax benefit of the loss carry forward is
offset by a valuation allowance of the same amount.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company's principal cash requirements are for operating expenses, including
employee costs, outside consultants such as independent contractors who provide
design, database, copywriting and professional marketing and sales consulting
services, funding of accounts receivable, capital expenditures and funding of
acquisitions. The Company's primary sources of cash have been from private
placements of the Company's Common Stock and cash derived from operations. The
Company is investigating various sources for additional financing, principally
additional equity placements. There is no assurance that the Company will
consummate any additional financing or that any additional financing will not be
dilutive to shareholders.
In April 1999, the Company entered into an expanded credit facility providing a
line of credit up to $250,000 at prime rate plus 1 1/4 % and renewable six
months from the date of the original agreement. Management believes that
internal cash flow, the expanded credit facility and anticipated private equity
infusions should be adequate to meet the Company's capital needs for the next 12
months.
Cash increased $122,092 from $126,532 at the beginning of the period to $248,624
at the end of the period. Net cash used in operations was $74,728 attributable
to the net loss of $64,347, the gain on the sale of the ORAYCOM subsidiary of
$63,501, an increase in other non-current assets of $90,494, and a decrease in
accrued expenses of $202,995. Offsetting these were non-cash expense items
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(depreciation and amortization) of $104,679, a decrease in accounts receivable
of $32,937, an increase in accounts payable of $85,002, and an increase in
deferred revenue of $124,212.
Net cash provided by investing activities was $20,328 attributable to reductions
in other non-current assets of $46,083, offset by additions to fixed assets of
$25,755.
Net cash provided by financing activities was $176,492 attributable to proceeds
from issuance of common stock of $383,154 and additions to short term debt of
$44,842 offset by reductions in bank lines of credit of $135,499 and other long
term debt of $116,005.
YEAR 2000 ISSUE
- ---------------
The "Year 2000 Issue" is whether the Company's computer systems will properly
recognize date sensitive information when the year changes to 2000, or "00."
Systems that do not properly recognize such information could generate erroneous
data or cause a system to fail. The Company has conducted preliminary reviews of
its computer systems and its purchased software programs (including accounting
software) and does not believe the Year 2000 Issue will pose any significant
operational problems for its systems or software or any significant costs to the
Company. In addition, the Company intends to make similar reviews of the systems
of potential acquisition candidates for any financial or operational impact the
Year 2000 Issue may pose.
INFLATION
- ---------
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
revenues, and other risks detailed in the Company's periodic report filings with
the Securities and Exchange Commission.
11
<PAGE>
PART II
ITEM 1. LEGAL PROCEEDINGS
There are no material pending legal proceedings in which the Company is
involved. The Company was granted a judgement against a customer for non-payment
for services performed. The Company continues to pursue collection of the
judgement. As the outcome is unknown at this time, the Company has fully
reserved the entire amount as uncollectible at February 28, 1999.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(c) During the fiscal quarter ended February 28, 1999 the Company engaged in
private placements of its securities described in Note 3 to the Condensed
Consolidated Financial Statements elsewhere in this filing. These placements
were claimed exempt from the registration requirements of the Securities Act of
1933 by reason of Section 4(2) thereof.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
None
15
<PAGE>
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: April 14, 1999 By /s/ Ronald L. Weindruch
--------------------------
RONALD L. WEINDRUCH,
President and Chief Executive Officer
Date: April 14, 1999 By /s/ William E. Morris
------------------------
WILLIAM E. MORRIS,
Controller
<PAGE>
EXHIBIT INDEX
Exhibit Description
------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
PALADYNE CORP. FORM 10-QSB FOR THE PERIOD ENDED FEBRUARY 28, 1999
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> AUG-31-1998
<PERIOD-END> FEB-28-1999
<CASH> 249
<SECURITIES> 0
<RECEIVABLES> 816
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,200
<PP&E> 452
<DEPRECIATION> (210)
<TOTAL-ASSETS> 2,316
<CURRENT-LIABILITIES> 1,451
<BONDS> 0
0
0
<COMMON> 7
<OTHER-SE> 657
<TOTAL-LIABILITY-AND-EQUITY> 2,316
<SALES> 3,724
<TOTAL-REVENUES> 3,724
<CGS> 2,767
<TOTAL-COSTS> 2,767
<OTHER-EXPENSES> 995
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 26
<INCOME-PRETAX> (85)
<INCOME-TAX> 0
<INCOME-CONTINUING> (85)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (85)
<EPS-PRIMARY> (0.01)
<EPS-DILUTED> (0.01)
</TABLE>
