UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-KSB
(Mark one)
X Annual Report Pursuant to Section 13 or 15(d) of the Securities
----- Exchange Act of 1934
FOR THE FISCAL YEAR ENDED AUGUST 31,2000
Transition Report Pursuant to Section 13 or 15(d) of the
----- Securities Exchange Act of 1934
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.)
610 Crescent Executive Court, Suite 124, Lake Mary, FL 32746
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (407) 333-2488
Securities to be registered under Section 12(b) of the Exchange Act: None
Securities to be registered under Section 12(g) of the Exchange Act:
Common Stock, par value $.001 per share
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed under
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports, and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
--- ---
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation SB contained in this form, and no disclosure will be
contained, to the best of the Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this form 10-KSB. Yes No X
--- ---
State the issuer's revenue for its most recent fiscal year: $5,521,865
State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and ask prices of such stock as of November 1, 2000: $8,459,351
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date.
--------------------------------------------------------------------------
Outstanding as of
Class November 1, 2000
--------------------------------------------------------------------------
Common Stock, par value $.001 per share 8,459,351
--------------------------------------------------------------------------
Documents Incorporated by Reference: None
Transitional Small business Disclosure Format. Yes No X
--- ---
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PALADYNE CORP.
FORM 10-KSB
TABLE OF CONTENTS
PAGE
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PART I
ITEM 1. Description of Business................................. 3
ITEM 2. Description of Property................................. 10
ITEM 3. Legal Proceedings....................................... 10
ITEM 4. Submission of Matters to a Vote of Security
Holders................................................. 11
PART II
ITEM 5. Market for Common Equity and Other Shareholder
Matters................................................. 11
ITEM 6. Management's Discussion and Analysis of Financial
Condition and Results of Operations..................... 13
ITEM 7. Financial Statements. .................................. 19
ITEM 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure..................... 40
PART III
ITEM 9. Directors, Executive Officers, Promoters
and Control Persons; Compliance with Section
16(a) of the Exchange Act............................... 41
ITEM 10. Executive Compensation.................................. 43
ITEM 11. Security Ownership of Certain Beneficial
Owners and Management................................... 45
ITEM 12. Certain Relationships and Related Transactions.......... 48
ITEM 13. Exhibits and Reports on Form 8-K........................ 49
Signatures ...................................................... 51
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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 include statements
concerning underlying assumptions and other statements which are other than
statements of historical facts. Forward-looking statements involve risks and
uncertainties that could cause actual results to differ materially from those
expressed or implied by the statements, including, but not limited to, the
following: the ability of the Company to provide for its obligations, to provide
working capital needs from operating revenues, to obtain additional financing
needed for any future acquisitions, and other risks detailed in the Company's
periodic report filings with the Securities and Exchange Commission.
ITEM 1.
The following information relates to Paladyne Corp., a Delaware corporation.
Effective March 5, 1999, Synaptx Worldwide, Inc., (the "predecessor Company") a
Utah Corporation, merged with and into Paladyne Corp., in a migratory merger,
and Paladyne Corp. is the successor registrant pursuant to Rule 12g-3 under the
Securities Exchange Act of 1934. The financial statements in this report are of
Synaptx Worldwide, Inc. for all periods through the date of the migratory
merger, and of Paladyne Corp. since that date. There were no adjustments to the
historical financial statements of Paladyne Corp. as a result of the merger.
DESCRIPTION OF BUSINESS
Paladyne Corp. (the "Company") provides seamless data integration and data
quality software and services that enable its customers to carryout customer
mailing, marketing and e-commerce initiatives. The Company also provides the
database-related services of customer identification, customer and prospect
database development and management, data integration and marketing campaign
management.
Currently, the Company provides these services by engaging subcontractors to
perform the bulk of the activity, but management has undertaken initiatives to
build these capabilities internally via the acquisition of "Bradas", a company
formed to develop database software tools. In February, 1999, the Company
purchased the intellectual property of Bradas, including the initial framework
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of what has become the Datagration e-Business Suite, a collection of software
tools that enable clients to effectively and efficiently build high data quality
databases, for 60,000 shares of common stock, at a value of approximately
$65,000, and 400,000 warrants (100,000 of which have been issued through August
31, 2000) that will be issued based on the delivery of intellectual property and
attainment of certain predefined milestones. Additionally, the Company assumed
approximately $32,000 of debt incurred by Bradas's founder. The debt was
satisfied through the issuance of 8,475 shares of common stock and 37,881 common
stock warrants. The Company agreed to fund the completion of the product
including providing necessary funding for both equipment and personnel to finish
the product and maintain and upgrade it.
The Company intends to build its business through internal growth as well as
seek acquisitions and mergers, should opportunities become available, of
existing companies. On October 3, 2000 the Company announced it had signed a
Letter of Intent with e-commerce support centers, inc., calling for a merger
with ecom to become a wholly owned subsidiary of Paladyne. The merger
consideration will be Company securities, including stock options and warrants.
The merger is subject to execution of a definitive merger agreement and
customary closing conditions. The parties are currently engaged in the due
diligence process and in negotiating the merger agreement. If and when such
conditions are fulfilled, it is anticipated that the merger will close in the
Company's second quarter of fiscal 2001.
HISTORY
The predecessor Company was incorporated on June 25, 1981 under the laws of the
State of Utah as Calico Gold Properties, Inc. and initially engaged in the
acquisition and development of mineral resource prospects. The predecessor
Company engaged in limited mining operations and subsequently ceased its
operations and became inactive for several years. In 1995, the predecessor
Company began to actively investigate and seek mergers with or acquisitions of
operating businesses. In 1996, the predecessor Company changed its name to
In-Touch Interactive Multimedia, Inc. in connection with a previously planned
merger that was never consummated.
On February 10, 1997, the predecessor Company entered into a merger agreement
(the "Merger") with Worldwide Applied Telecom Technology, Inc., a Delaware
corporation, ("WWATT"). Pursuant to the terms of the Merger, the predecessor
Company effected a reverse stock split of its outstanding shares of common Stock
on a one (1) share for one and three-fourths (1.75)shares basis, and exchanged
3,600,000 shares of authorized but previously unissued shares of the predecessor
Company's Common Stock for all the previously issued and outstanding shares of
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WWATT. An additional 790,000 shares of the predecessor Company's Common Stock
were issued for services related to the Merger. As a result of the Merger, WWATT
was merged with and into the predecessor Company with the predecessor Company
being the surviving corporation, and the predecessor Company changed its
corporate name to Synaptx Worldwide, Inc. Prior to the Merger, there was no
affiliation between the Predecessor Company and WWATT, nor between the officers,
directors or principal shareholders of the two respective entities. For
accounting purposes, the transaction has been treated as a recapitalization of
WWATT, or a reverse merger, with WWATT being treated as the acquirer. All share
information herein gives effect to the 1-for-1.75 reverse stock split, unless
otherwise provided.
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
surviving Company.
The prior strategy was to initially build a nationwide sales force that would be
in place to support the products manufactured by the companies the Company hoped
to someday acquire. In support of that strategy, the Company had acquired three
manufacturers' representative companies, and had opened and staffed an
additional two offices, all between June 1997 and June 1998. Due to the
underperformance of these companies as a whole, and the shift in business focus
and strategy, all of the Company's manufacturers' representative companies were
classified as discontinued operations and subsequently sold in fiscal 1999. A
summary of these transactions, from a chronological standpoint is below.
Wholly-Owned Acquired/ Disposed/
Subsidiaries Opened Closed
------------ --------- ---------
ORAYCOM June, 1997 November, 1998
WG Controls January, 1998 May, 1999
Primus Marketing June, 1998 May, 1999
Offices Opened
--------------
dba Advantage
Technologies October, 1997 November, 1998
dba Patterson
Communications January, 1998 July, 1999
Throughout financial presentations and discussions in this document, the results
of these businesses are reflected as discontinued operations. The results of
these discontinued operations and the related loss on disposal are reflected in
fiscal year 1999 financial statements.
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The Company's principal executive offices are at 610 Crescent Executive Court,
Suite 124, Lake Mary, FL 32746 and its telephone number is (407) 333-2488.
PRODUCTS AND SERVICES:
The Company's products and services fulfill the data integration and data
quality needs of clients in the Telecommunications, Direct Marketing, Internet,
Cable TV and Utility industries. The Company currently offers these services via
subcontractor arrangements with third party vendors. As described above, the
Company is developing these capabilities internally, and began offering the
internally generated product in fiscal 2000.
The Company's software product under development, the Datagration e-Business
Suite, is a component-based data integration and data quality solution built
upon an open, multi-tiered, cross platform architecture. Other significant
services being offered are outsourced marketing and prospecting database
development and management, and customer identification and householding. These
services enable clients to more effectively find new and retain existing
customers.
BUSINESS DEVELOPMENT AND STRATEGY:
Through the development of its internal capabilities to service its clients'
database needs, Paladyne's vision is to help businesses fully realize the
financial rewards of e-commerce by providing enterprise class web-enabled
e-business solutions. Management believes the Company will achieve this vision
by becoming a leading provider of e-business software and services that enable
the enterprise to achieve true customer-centric data integration and data
quality over the Internet.
The Company will fulfill its mission by solving data integration and data
quality business problems initially within the Telecommunications and Direct
Marketing industries. While the Company currently does provide this, it is
provided via outsource arrangements with third party vendors.
The telecommunications ("Telco") industry has grown from a regulated,
monopolistic environment to a government-mandated, competitive environment. As a
result of its regulated history, the Telco Industry is by nature a
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network-centric industry since the regulatory environment previously rewarded
high quality universal service. The network providers are, out of necessity,
beginning the movement from a network to a customer focus.
Management believes the market for both network and customer management software
and services will grow tremendously over the next several years as a result of
this shift to a customer-centric industry. In that same period, Management
expects the market for the software and services subset to grow
disproportionately faster. The intended focus will be on developing software and
services that enable the client to correctly identify its customers across the
enterprise and enhance the value of the services the client offers, identify,
target, and acquire prospective customers for the client's services, and
ultimately retain desirable customers of that service.
The Direct Marketing Industry, and more specifically the potential of one-to-one
relationship selling, has grown extraordinarily fast with the general market
acceptance of the Internet as a means to obtain products and services. Direct
marketers must integrate data from disparate sources to complete transactions,
produce contact and mailing lists and build customer and prospect databases. In
addition to managing traditional internal and external data sources, direct
marketers must now obtain and exchange data via the Internet.
The Datagration e-Business Suite solves three business problems for direct
marketers:
1) Management, control and linkage of data formats, business rules and data
behavior. This lack of integration causes jobs to be rerun, unnecessary
errors to be introduced and affects the overall time to run and quality of
a database or process.
Datagration returns control over data to the user through the software's
proprietary Data Discovery Manager and innovative Metadata Distributed
eNterprise Architecture (DNA) Manager and enhances the results of data
integration and quality initiatives.
2) Shared Knowledge. Computer programmers must rewrite code every time a new
job comes in.
A Datagration process can be shared by others in the organization so additional
computer programming time is not required to run the same type of process. This
frees valuable human resources for more productive activities.
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3) E-business applications rely on the Internet as their communications
backbone.
Datagration's next generation architecture is built for today's demanding
Internet e-business applications and designed to easily integrate internal or
third party products.
The above are the stated future goals of the Company. The existing subsidiaries
and strategic relationships are in place to pursue those goals. However, there
can be no assurance that the Company will ever achieve its expressed goals.
STRATEGIC ALLIANCE
Strategic Alliance: Direct Services, Inc.
The Company has formed a strategic alliance with Direct Services, Inc. of
Miramar, Florida ("DSI"). DSI is currently the key provider of database analysis
services provided by the Company. The companies worked together throughout
fiscal years 1999 and 2000 to provide these services. This vendor represented
approximately 61% and 74% of cost of revenues for fiscal years 1999 and 2000,
respectively. The Company hopes to become less dependent on this supplier as it
develops its own internal capabilities and the potential merger with e-com.
Should this relationship terminate, Management believes that such services can
be readily obtained from other sources as well as provided internally with
minimal interruption in service at a similar cost.
POTENTIAL NEW ACQUISITIONS AND PRODUCT LINES
The Company intends to investigate, should opportunities arise, strategic
acquisitions or mergers that fit its long-term objectives as financing and
business conditions warrant, although there can be no assurance that the Company
will be able to finalize any future acquisitions. The Company anticipates making
future acquisitions or mergers by primarily using its capital stock, employing
tax-free exchanges for the stock of the to-be-acquired companies. If necessary,
the Company plans to finance or seek outside financing for potential
requirements of cash. Although the Company occasionally explores additional
acquisition and merger opportunities, there can be no assurances that financing
for any future acquisitions will be available on terms acceptable to the Company
or at all, or that any future acquisitions or mergers will be consummated.
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The proposed transaction with e-com is the first potential acquisition sought
under this current strategy (see Item 7 - Note 14).
SALES AND MARKETING
The Company markets and sells its products and services through its professional
employees. All the Company's contractual services and sales relationships are
sold by its professional staff of three sales professionals, based on past and
ongoing relationships with purchasing decision-makers who normally work in the
marketing and sales and information technologies organizations of clients. These
long-term relationships within the Telecommunications and Direct Marketing
industries are the basis for past and future business. From time to time, the
Company utilizes sales consultants to assist in sales. These non-exclusive
independent contractors receive a fee and generally a commission based on
consummating an agreement. These independent contractors are selected for their
specific expertise in an industry.
COMPETITION
The industries to which the Company currently offers and intends to offer its
products and services are highly competitive and characterized by rapidly
changing technologies, evolving industry standards, frequent new product
introductions, and rapid changes in customer requirements. The Company's
competitors vary from market to market. Principal competitive factors affecting
the market for products and services include product reputation, quality,
performance, price, professional service, and customer support. Features such as
adaptability, scalability, ability to integrate with other products,
functionality, and ease of use are key product differentiators.
EMPLOYEES
As of August 31, 2000, the Company employed 19 individuals, consisting of 4
executives, 14 professionals and sales representatives, and 1 office staff
person. In addition to its full-time employees, the Company uses the services of
certain outsourced professionals on an as-needed basis. Management presently
anticipates hiring additional employees as business conditions warrant and as
operating funds become available.
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INDUSTRY SEGMENTS
The Company operates in one business segment which is providing software and
services enabling customers to integrate data in a more efficient manner as well
as ensure that the data is cleansed, accurate and current.
ITEM 2. DESCRIPTION OF PROPERTY
The Company's principal executive offices are located 610 Crescent Executive
Court, Suite 128, Lake Mary, FL 32746. The current lease, the term of which
extends for three years, covers approximately 3,500 square feet at an
approximate annual rental rate of $75,000.
The Company maintains its software and services development center in suburban
Washington D.C., located at 14100 Parke Long Court, Suite H, Chantilly, VA
20151. The lease covers approximately 3,100 square feet of space. The lease
extends for 39 months, from March 1999 to May 2002. Monthly rents start at
$3,645 and have a fixed escalation of approximately three and one-half percent
(3.5%) per year on each anniversary date of the lease. On a straight-line basis,
the monthly cost of the lease is approximately $3,900.
The Company closed its office in suburban Chicago at 168 E. Highland Ave, Suite
300, Elgin, IL 60120 in January, 2000. There was minimal cost to vacate this
space, primarily due to the write-off of unamortized leasehold improvements.
The Company believes its current premises are adequate for current purposes and
if necessary would be able to obtain alternative or additional space.
ITEM 3. LEGAL PROCEEDINGS
In November 1999, the Company terminated the employment of its Vice President of
Sales. Subsequent to this termination, the former employee filed a lawsuit
claiming additional compensation was warranted in the Superior Court of Fulton
County, in the State of Georgia and is seeking payment of $178,750. The Court
issued a summary judgment order on default in June 2000 to the plaintiff in the
amount of $137,500. The Company appealed the decision, and in July 2000
submitted to the Court a Motion to Open Default. A hearing was held on August 4,
2000 and the Court ordered the summary judgment to be reopened and the Company
may present its defense in this matter. A court date has not been set for this
hearing as of November 6, 2000. The Company does not agree with the assertion
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and fully intends to defend itself vigorously against this claim. As such, no
provision has been accrued in these financial statements as the Company believes
there is no merit to the claim.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders in the fourth
quarter of Fiscal 2000.
PART II
ITEM 5. MARKET PRICE FOR COMMON EQUITY AND OTHER RELATED
SHAREHOLDER MATTERS
The Company's Common Stock has been traded on a limited basis in the
over-the-counter market and quotations are published on the OTC Bulletin Board
under the symbol "PLDY", and in the National Quotation Bureau, Inc. "pink
sheets" under Paladyne Corp.
The following table sets forth the range of high and low bid prices of the
Common Stock for each fiscal quarterly period. Prices reported represent prices
between dealers, do not include retail markups, markdowns or commissions and do
not represent actual transactions.
Fiscal Year
2000 1999
---- ----
High Low High Low
---- --- ---- ---
First Quarter $1.06 $0.50 $2.75 $0.88
Second Quarter $3.75 $1.25 $2.00 $0.88
Third Quarter $3.25 $1.25 $1.13 $0.31
Fourth Quarter $1.88 $1.06 $1.00 $0.25
(The price information above was obtained from an independent quotation
service).
The ability of individual shareholders to trade their shares in a particular
state may be subject to various rules and regulations of that state. A number of
states require that an issuer's securities be registered in their state or
appropriately exempted from registration before the securities are permitted to
trade in that state. Presently, the Company has no plans to register its
securities in any particular state. Further, most likely the Company's shares
will be subject to the provisions of Section 15(g) and Rule 15g-9 of the
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Securities Exchange Act of 1934, as amended (the "Exchange Act"), commonly
referred to as the "penny stock" rule. Section 15(g) sets forth certain
requirements for transactions in penny stocks and Rule 15g-9(d)(1) incorporates
the definition of penny stock as that used in Rule 3a51-1 of the Exchange Act.
The Commission generally defines penny stock to be any equity security that has
a market price less than $5.00 per share, subject to certain exceptions. Rule
3a51-1 provides that any equity security is considered to be a penny stock
unless that security is: registered and traded on a national securities exchange
meeting specified criteria set by the Commission; authorized for quotation on
The NASDAQ Stock Market; issued by a registered investment company; excluded
from the definition on the basis of price (at least $5.00 per share) or the
issuer's net tangible assets; or exempted from the definition by the Commission.
If the Company's shares are deemed to be a penny stock, trading in the shares
will be subject to additional sales practice requirements on broker-dealers who
sell penny stocks to persons other than established customers and accredited
investors, generally persons with assets in excess of $1,000,000 or annual
income exceeding $200,000, or $300,000 together with their spouse.
For transactions covered by these rules, broker-dealers must make a special
suitability determination for the purchase of such securities and must have
received the purchaser's written consent to the transaction prior to the
purchase. Additionally, for any transaction involving a penny stock, unless
exempt, the rules require the delivery, prior to the first transaction, of a
risk disclosure document relating to the penny stock market. A broker-dealer
also must disclose the commissions payable to both the broker-dealer and the
registered representative, and current quotations for the securities. Finally,
monthly statements must be sent disclosing recent price information for the
penny stocks held in the account and information on the limited market in penny
stocks. Consequently, these rules may restrict the ability of broker-dealers to
trade and/or maintain a market in the Company's Common stock and may affect the
ability of shareholders to sell their shares.
As of August 31, 2000, there were 170 holders of record of the Company's Common
Stock. This amount does not take into account those shareholders whose
certificates are held in the name of broker-dealers or otherwise in street or
nominee name.
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DIVIDEND POLICY
The Company has not declared or paid cash dividends on its common stock or made
distributions in the past, and the Company does not anticipate that it will pay
cash dividends or make distributions in the foreseeable future, other than
preferred dividends described below. The Company currently intends to retain and
invest future earnings to finance its operations.
As part of the acquisition of WG Controls in January, 1998, the Company issued
Series A Preferred Stock which 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. Accordingly, the Company must meet this obligation
before any dividends can be declared for the benefit of Common Stock
shareholders. As of August 31, 2000, the Company has accrued $108,800 of
preferred stock dividends.
TRANSFER AGENT
The Company has designated American Stock Transfer and Trust, 59 Maiden Lane,
New York, NY, 10007 as its transfer agent for the common stock.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following information should be read in conjunction with the consolidated
financial statements and notes thereto appearing elsewhere in this Form 10-KSB.
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RESULTS OF OPERATIONS
The following selected financial information has been derived from the Company's
consolidated financial statements. The information set forth below is not
necessarily indicative of results of future operations and cash flows and should
be read in conjunction with the consolidated financial statements and notes
thereto appearing elsewhere in this Form 10-KSB.
The following table sets forth the percentage relationships to revenues of
principal items contained in the Company's Consolidated Statements of Operations
for the fiscal years ended August 31, 2000 and 1999. The percentages discussed
throughout this analysis are stated on an approximate basis. Results for both
periods presented have been stated to reflect discontinued operations.
Fiscal Years
Ended
August 31,
2000 1999
---- ----
Revenues 100.0% 100.0%
Cost of revenues 61.0% 79.5%
------ ------
Gross profit 39.0% 20.5%
Operating expenses 38.2% 36.6%
------ ------
Operating(loss)income 0.8% (16.1%)
Other expenses, net 0.6% 1.4%
------ ------
Net income(loss)from
continuing operations 0.2% (17.5%)
Loss from discontinued operations (0.0%) (13.9%)
------ ------
Net income(loss) 0.2% (31.4%)
====== ======
Year Ended August 31, 2000 Compared to Year Ended August 31, 1999
The Company's revenues increased by $1,156,013 or 26.5%, from $4,365,852 for the
fiscal year ended August 31, 1999 ("1999") to $5,521,865 for the fiscal year
ended August 31, 2000 ("2000"). This increase is reflective of the Company's
expanding software capabilities and its emphasis on obtaining new sales for its
Datagration product. This product generated approximately $3,684,000 of revenue
in 2000.
One multi - divisional customer in the telecommunications industry accounted for
approximately 81% and 87% of revenues in the years ended August 31, 2000 and
1999, respectively. Receivables from this customer represented approximately 76%
and 94% of net accounts receivable at August 31, 2000 and 1999, respectively.
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Cost of revenues decreased by $106,186 in 2000, or 3.1%, from $3,472,586 in 1999
to $3,366,400 in 2000. This decrease is consistent with the Company's business
which began using in-house efforts to satisfy the requirements of contracts
rather than using more expensive outside services.
The Company is highly reliant on one vendor who performs the bulk of the work
related to database processing activities the Company performs for its clients.
While the Company does intend to develop the capabilities internally to offset
some of the dependence on this vendor, there will be significant need for the
services of this vendor. The vendor represented approximately 74% and 61% of the
cost of revenues for fiscal years 2000 and 1999, respectively.
The Company's gross profit margin, was 39.0% and 20.5% for 2000 and 1999,
respectively. This increase in gross profit margin is consistent with the
re-focus of the Company's strategic direction related to software development.
The revenues generated by the sale of the software have higher margins than the
previous marketing representative sales.
Selling, general and administrative expenses ("SG&A"), including depreciation
and amortization, increased by $514,169 in 2000 or 24.3%, from $1,596,469 in
1999 to $2,110,638 in 2000. This increase in SG&A was expected and the Company
had planned for these levels. As the Company moved from the sales rep business,
in fiscal 1999, to software development and sales, additional expenses were
needed for personnel for software development and additional sales expenses such
as travel and trade shows. In addition, SG&A also includes stock compensation
charges of $82,000 in 2000 and $130,312 in 1999 for warrant and option grants
issued to non-employees.
Interest expense decreased by $37,036 or 60.3% from $61,454 in 1999, or 1.4% of
revenues to $24,418, or 0.4% for 2000. The decrease is consistent with
significantly lower average borrowings throughout the current year. The bank
line of credit and the note payable to a stockholder were paid off in fiscal
2000.
There was no tax provision or benefit recognized in fiscal 2000 and 1999. The
Company generated net income of $12,649 in 2000 compared to a net loss of
$1,369,494 in 1999. At August 31, 2000 and 1999, the Company recorded a
valuation allowance against deferred tax assets due to uncertainties regarding
the Company's ability to generate a sufficient level of taxable income in future
periods to realize such assets. In the event that realization of the deferred
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tax assets is considered more likely than not in future periods, the Company may
reduce the valuation allowance.
In fiscal year 1999, the Company discontinued the operations of its
manufacturers' representative companies. The following table sets forth the
results of operations and loss on disposal from these businesses in fiscal 1999.
There is no effect on fiscal 2000, as these operations were disposed of and
reported in fiscal 1999.
Fiscal 1999
-----------
Revenues $2,346,053
Cost of revenues 1,723,867
----------
Gross profit 622,186
General & administrative expenses 551,829
----------
Income from operations 70,357
Loss on disposal (675,194)
-----------
Loss from discontinued operations $ (604,837)
===========
NET OPERATING LOSS
The Company has accumulated approximately $2,200,000 of net operating loss
carryforwards as of August 31, 2000, which may be offset against taxable income
and income taxes in future years. The use of these losses to reduce future
income tax liabilities will depend on the generation of sufficient taxable
income prior to the expiration of the net operating loss carryforwards. The
carryforwards expire in the year 2019. In the event of certain changes in
control of the Company, there will be an annual limitation on the amount of net
operating loss carryforwards which can be used.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal cash requirements are for software development, selling,
general and administrative expenses, outside consultants (such as independent
contractors) who provide database services, employee costs, 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 which raised $1,983,149 of net proceeds in the fiscal year 2000 and
$476,555 in fiscal year 1999. The Company is investigating various sources for
additional financing, including both equity sales and debt facility
arrangements, though no representation is made as to the Company's ability to
secure either.
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For the year ended August 31, 2000, cash and cash equivalents increased from
none at the beginning of the year to $635,612 at the end of the year.
Net cash used in operating activities in the year ended August 31, 1999 was
$529,856 due to the net loss of approximately $1,369,000 and a net decrease in
working capital items of approximately $173,000, offset by non-cash depreciation
and amortization expenses of approximately $209,000, and the non-cash loss on
discontinued operations of approximately $675,000.
Net cash used in operating activities in the year ended August 31, 2000 was
$233,482 due primarily to an increase in accounts receivable offset by an
increase in operating accounts payable and non-cash depreciation and
amortization expenses of approximately $63,000.
Net cash provided by investing activities in fiscal 1999 was $53,332
attributable to net cash acquired in business acquisition and asset disposals of
approximately $99,000, and reductions in other assets of approximately $76,000,
offset by fixed asset additions of approximately $122,000.
Net cash used in investing activities in fiscal 2000 was $910,092 attributable
to the capitalization of software development costs of approximately $349,000,
additions to property and equipment of approximately $71,000 and the purchase of
short-term investments of approximately $485,000.
Cash provided by financing activities in fiscal 1999 was $349,992 due primarily
to net proceeds from stock issuance of approximately $477,000 and additions to
short term debt of approximately $19,000, offset by reductions in bank lines of
credit of approximately $42,000 and reductions to long term debt of
approximately $109,000.
Cash provided by financing activities in fiscal 2000 was $1,779,186 due
primarily to net proceeds from stock issuance of approximately $1,983,000 and
proceeds of $189,637 on option/warrant exercises offset by the repayment of the
bank line of credit of $243,600 and the repayment of long term debt of $150,000.
In the year ended August 31, 1999, the Company sold 520,538 shares of its Common
Stock via private placements, resulting in net proceeds of $476,555. The
exercise of outstanding options and warrants during fiscal year 1999 resulted in
net proceeds to the Company of $5,500.
In the year ended August 31, 2000, the Company sold 1,325,129 shares of its
Common Stock via private placements, resulting in proceeds of $1,983,149. The
17
<PAGE>
exercise of outstanding options and warrants during fiscal year 2000 resulted in
net proceeds to the Company of $189,637.
In fiscal year 2000 the Company had a revolving line-of-credit with a bank for
$250,000, which was originally due to expire December 31, 1999. The expiration
date was extended to February 29, 2000 by mutual agreement. The Company paid the
entire $250,000 principal on February 28, 2000. The Company negotiated a new
line of credit with the bank in May, 2000. The line of credit is for $500,000
secured by the receivables of the Company. The rate is prime plus 1.5%. The line
of credit expires on March 15, 2001. As of August 31, 2000, the Company has no
outstanding balance on the line of credit.
The Company also had a note payable to a trust controlled by the President of
the Company (see Note 11 to the financial statements in Part II, Item 7). The
balance due on the note was $150,000 plus interest at 12% per annum. The note
was repaid in its entirety on May 15, 2000. There are no outstanding obligations
to any officer, directors or employees for any loans.
EFFECTS OF RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities". SFAS No.
133 requires companies to recognize all derivative contracts as either assets or
liabilities in the balance sheet and to measure them at fair value. If certain
conditions are met, a derivative may be specifically designated as a hedge, the
objective of which is to match the timing of gain or loss recognition on the
hedging derivative with the recognition of (i) the changes in the fair value of
the hedged asset or liability that are attributable to the hedged risk or (ii)
the earnings effect of the hedged forecasted transaction. For a derivative not
designated as a hedging instrument, the gain or loss is recognized in income in
the period of change. SFAS NO. 133, as amended by SFAS NO. 137, is effective for
all fiscal quarters of fiscal years beginning after June 15, 2000.
Historically, the Company has not entered into derivatives contracts either to
hedge existing risks or for speculative purposes. Accordingly, the Company's
adoption of the new standard on September 1, 2000 did not affect its financial
statements.
In March 2000, the FASB issued Interpretation No. 44 ("FIN 44"), "Accounting for
Certain Transactions Involving Stock Compensation, an Interpretation of APB
Opinion No. 25". FIN 44 clarifies the application of APB Opinion No. 25 for (a)
18
<PAGE>
the definition of employee for purposes of applying APB Opinion No. 25, (b) the
criteria for determining whether a plan qualifies as a noncompensatory plan, (c)
the accounting consequences of various modifications to the terms of a
previously fixed stock option or award, and (d) the accounting for an exchange
of stock compensation awards in a business combination. FIN 44 is effective July
1, 2000, but certain conclusions cover specific events that occurred after
either December 15, 1998 or January 12, 2000. The adoption of FIN 44, as of July
1, 2000, did not have a material effect on the Company's historical financial
position or results of operations, but may impact the accounting for grants or
awards in future periods.
On December 3, 1999, the SEC issued Staff Accounting Bulletin 101 ("SAB 101"),
Revenue Recognition in Financial Statements. SAB 101 summarizes some of the
SEC's interpretations of the application of generally accepted accounting
principles to revenue recognition. Revenue recognition under SAB 101 was
initially effective for the Company's first fiscal quarter of fiscal year
beginning after December 15, 1999. However, SAB 101B, which was released June
26, 2000, delayed adoption of SAB 101 until no later than the fourth fiscal
quarter of fiscal years beginning after December 15, 1999. The Company believes
that its revenue recognition practices are in substantial compliance with SAB
101 and that adoption of its provisions would not be material to its prospective
annual or quarterly results of operations.
INFLATION
In the opinion of management, inflation has not had a material effect on the
operations of the Company.
ITEM 7. FINANCIAL STATEMENTS
The consolidated financial statements for Paladyne Corp. as of and for the
fiscal years ended August 31, 2000 and 1999 are included herein in response to
Item 7 of this Form 10-KSB.
19
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
Paladyne Corp.
Lake Mary, Florida
We have audited the accompanying consolidated balance sheets of Paladyne
Corp. and subsidiaries as of August 31, 2000 and 1999, and the related
consolidated statements of operations, stockholders' equity (deficit) and cash
flows for the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Paladyne Corp. and subsidiaries at August 31, 2000 and 1999, and the results of
their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.
BDO SEIDMAN, LLP
New York, New York
November 3, 2000
20
<PAGE>
PALADYNE CORP.
CONSOLIDATED BALANCE SHEETS
AUGUST 31, 2000 AND 1999
2000 1999
---- ----
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 635,612 $ -
Short-term investments 484,508 -
Accounts receivable (net of allowance
for doubtful accounts of $12,555 and
$9,263) 1,037,544 392,933
Prepaid expenses and deposits 867 32,641
----------- -----------
Total current assets 2,158,531 425,574
-
PROPERTY AND EQUIPMENT, NET 124,725 128,385
GOODWILL, NET OF AMORTIZATION
OF $13,388 AND $4,333 211,012 77,367
CAPITALIZED SOFTWARE DEVELOPMENT COSTS, NET
OF AMORTIZATION OF $11,034 338,037 -
OTHER ASSETS 51,461 45,669
----------- -----------
TOTAL ASSETS $ 2,883,766 $ 676,995
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable $ 680,214 $ 330,516
Accrued expenses 131,375 278,137
Accrued preferred stock dividend 108,800 -
Notes payable - line of credit - 243,600
Deferred revenue - 95,700
----------- -----------
Total current liabilities 920,389 947,953
NOTE PAYABLE TO STOCKHOLDER - 150,000
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT)
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,
8,456,599 and 6,782,229
issued and outstanding 8,457 6,783
Additional paid in capital 7,136,430 4,766,418
Accumulated deficit (5,181,647) (5,194,296)
----------- -----------
Total stockholders' equity (deficit) 1,963,377 (420,958)
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT) $ 2,883,766 $ 676,995
=========== ===========
See accompanying notes to consolidated financial statements
===========================================================
21
<PAGE>
PALADYNE CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED AUGUST 31, 2000 AND 1999
2000 1999
---- ----
Revenues $ 5,521,865 $ 4,365,852
Cost of revenues 3,366,400 3,472,586
----------- -----------
Gross profit 2,155,465 893,266
Selling, general and administrative expenses 2,047,982 1,429,376
Depreciation and amortization 62,656 167,093
----------- -----------
Income(loss) from operations 44,827 (703,203)
Other income (expense):
Interest income 7,594 -
Interest expense (24,418) (61,454)
Loss on disposal of assets (31,814) -
Other income 16,460 -
----------- -----------
Income(loss) from continuing operations 12,649 (764,657)
Discontinued operations:
Income from operations of discontinued
subsidiaries - 70,357
Loss on disposal - (675,194)
----------- -----------
Loss from discontinued operations - (604,837)
----------- -----------
Net income (loss) 12,649 (1,369,494)
Cumulative convertible preferred stock
dividend requirements 40,800 40,800
----------- -----------
Net loss attributable to common
stockholders $ (28,151) $(1,410,294)
=========== ============
Weighted average shares outstanding
Basic and diluted 7,958,843 6,555,056
=========== ============
Basic and diluted net loss per share
continuing operations $ - $ (0.13)
=========== ============
Basic and diluted net loss per share
discontinued operations $ - $ (0.09)
=========== ============
Basic and diluted net loss per share $ - $ (0.22)
=========== ============
See accompanying notes to consolidated financial statements
===========================================================
22
<PAGE>
PALADYNE CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED AUGUST 31, 2000 AND 1999
<TABLE>
<CAPTION>
Total
Common Stock Preferred Stock Additional Stockholders'
Par Par Paid-in Accumulated Equity
Shares Value Shares Value Capital Deficit (Deficit)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCES, SEPTEMBER 1, 1998 6,378,503 $6,379 137,143 $137 $ 4,284,534 ($3,824,802) $466,248
Shares retired in business
dispositions (187,143) (187) (159,992) (160,179)
Options exercised 55,581 56 5,444 5,500
Note holder settlement for stock 15,050 15 30,085 30,100
Warrants issued as compensation 130,312 130,312
Private placement sales, net 520,238 520 476,035 476,555
Net loss for the year (1,369,494) (1,369,494)
------------------------------------------------------------------------------
BALANCES, AUGUST 31, 1999 6,782,229 6,783 137,143 137 4,766,418 (5,194,296) (420,958)
Options exercised 261,838 262 172,649 172,911
Warrants exercised 18,408 18 16,708 16,726
Payable settlement for common stock 520 1 1,299 1,300
Common shares and warrants issued
for acquisition 68,475 68 224,332 224,400
Private placement sales, net 1,325,129 1,325 1,981,824 1,983,149
Warrants issued for non-employee
services rendered 82,000 82,000
Preferred dividend accrual (108,800) (108,800)
Net income for the year 12,649 12,649
------------------------------------------------------------------------------
BALANCES, AUGUST 31, 2000 8,456,599 $8,457 137,143 $137 $ 7,136,430 ($5,181,647) $1,963,377
==============================================================================
</TABLE>
See accompanying notes to consolidated financial statements
===========================================================
23
<PAGE>
PALADYNE CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED AUGUST 31, 2000 AND 1999
2000 1999
---- ----
Cash flows from operating activities
Net income (loss) $ 12,649 $(1,369,494)
Adjustments to reconcile net income(loss)
to cash used in operating activities:
Depreciation 42,567 161,535
Amortization 20,089 47,390
Loss on disposal of discontinued
operations - 675,194
Non-cash warrants issued 82,000 130,312
Common stock issued for services 1,300 -
Loss on disposal of assets 31,814 -
Changes in operating assets and liabilities
(net of assets and liabilities acquired and
disposed of):
Accounts receivables (644,611) 109,764
Other current assets 31,774 174,095
Accounts payable 349,698 (160,210)
Accrued expenses (65,062) (243,715)
Deferred revenue (95,700) ( 54,727)
----------- -----------
Net cash used in operating activities (233,482) (529,856)
----------- -----------
Cash flows from investing activities
Additions to property & equipment ( 70,721) ( 121,916)
Purchase of short-term investments (484,508) -
Capitalized software development costs (349,071) -
Cash acquired in business acquisition
and disposal, net - 99,078
Other assets ( 5,792) 76,170
----------- -----------
Net cash provided by (used in)
investing activities (910,092) 53,332
----------- -----------
Cash flows from financing activities
Repayment of notes payable (243,600) ( 41,899)
Repayment of note payable
to stockholder (150,000) (109,158)
Additions/(reductions) in short-term
debt - 18,994
Proceeds from issuing of
common stock, net 1,983,149 476,555
Proceeds from exercise of
options and warrants 189,637 5,500
----------- -----------
Net cash provided by financing
activities 1,779,186 349,992
----------- -----------
Net increase (decrease) in cash
and cash equivalents 635,612 (126,532)
Cash and cash equivalents
at beginning of year - 126,532
----------- -----------
Cash and cash equivalents
at end of year $ 635,612 $ -
=========== ===========
See accompanying notes to consolidated financial statements
===========================================================
24
<PAGE>
PALADYNE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF ACCOUNTING POLICIES
OPERATIONS
Paladyne Corp. (the "Company") provides seamless data integration and data
quality software and services that enable its customers to carryout
customer mailing, marketing and e-commerce initiatives. The Company also
provides the database-related services of customer identification, customer
and prospect database development and management, data integration and
marketing campaign management. The Company's primary offices are in Lake
Mary, Florida. The Company also has operations in Chantilly, Virginia. Its
customers are located throughout the continental United States.
On March 5, 1999, the Company merged with and into Paladyne Corp., its
wholly owned subsidiary, in a migratory merger, and Paladyne Corp. is the
successor Company. The purpose of the merger was simply to change the name
of the Company and re-incorporate the Company in Delaware to utilize more
favorable corporate taxation regulations.
PRINCIPLES OF CONSOLIDATION
The Company, as of the beginning of fiscal year 2000 operates as a single
business entity. In prior fiscal years, the financial statements include
the accounts of the Company and its wholly owned subsidiaries. All
intercompany classifications and balances have been eliminated in
consolidation.
REVENUE RECOGNITION
The Company recognizes revenue at the point at which the product is
delivered to the customer, for software, and for services when these
services are performed. The contractual terms of agreements dictate the
recognition of revenue by the Company.
DEFERRED REVENUE
The Company, at times, receives prepayments for professional services to be
rendered. This revenue is deferred and as the services are provided, a
proportionate share of the deferred revenue is recognized as revenue.
25
<PAGE>
CASH EQUIVALENTS AND INVESTMENTS
The Company considers all highly liquid debt instruments and other short
term investments with an initial maturity date of three months or less from
the purchase date to be cash equivalents.
Short-term investments are comprised of investments in a single entity's
commercial paper with terms of less than one year. The commercial paper is
classified as held-to-maturity and, accordingly, is carried at historical
cost.
STOCK BASED COMPENSATION
The Company accounts for its stock option awards to employees under the
intrinsic value based method of accounting prescribed by Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees". Under the intrinsic value based method, compensation cost is
the excess, if any, of the fair market value of the stock at the grant date
over the amount an employee must pay to exercise the option. The Company
provides pro forma disclosures of net loss attributable to common
stockholders and loss per share as if the fair value based method of
accounting had been applied as required by Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock Based
Compensation".
From time to time, the Company grants options or warrants to non employees
in return for services rendered. The Company recognizes a charge for the
fair value ascribed to such options and warrants over the service or
vesting period.
PROPERTY AND EQUIPMENT; DEPRECIATION
Property and equipment are stated at cost and depreciated over their
estimated useful lives of three to five years using the straight-line
method.
LONG - LIVED ASSETS
Long-lived assets, such as goodwill and property and equipment, are
evaluated for impairment when events or changes in circumstances indicate
that the carrying amount of the assets may not be recoverable through the
estimated undiscounted future cash flows from the use of these assets. When
such impairment exists, the related assets will be written down to fair
value.
GOODWILL
Goodwill related to the Bradas Inc. "(Bradas") acquisition (see Note 2) is
amortized using the straight line method over an estimated useful life of
10 years.
26
<PAGE>
CAPITALIZED SOFTWARE DEVELOPMENT COSTS
Costs incurred to establish the technological feasibility of computer
software products are charged to expense as incurred. Costs of producing
masters subsequent to establishing technological feasibility, including
coding and testing, are capitalized. Capitalization of computer software
costs ceases when the product is available for general release to
customers. Capitalized costs for the year ended August 31, 2000 for the
development of the Datagration product was $349,071. The amortized
development cost for the year ended August 31, 2000 was $11,034. These
capitalized software development costs will be amortized using either the
straight-line method over the estimated economic life of the product (which
is estimated to be three years) or the ratio of current revenues to current
and anticipated revenues for the product, whichever results in the greater
amount of amortization. Unamortized capitalized costs of a computer
software product in excess of its estimated net realizable value are
expensed.
INCOME TAXES
The Company accounts for income taxes under an asset and liability
approach. Accordingly, deferred income taxes are recognized for the tax
consequences of temporary differences by applying enacted statutory rates
applicable to future years to differences between the financial statement
carrying amounts and the tax bases of existing assets and liabilities.
Valuation allowances are recorded when realization of deferred tax assets
can not be considered more likely than not.
ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires the Company to make estimates and
assumptions that affect the reported amounts of assets, liabilities,
revenue and expenses during the reporting period. This included the
allowance for doubtful accounts and the valuation of capitalized software
development costs.
EFFECTS OF RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities".
SFAS No. 133 requires companies to recognize all derivative contracts as
either assets or liabilities in the balance sheet and to measure them at
fair value. If certain conditions are met, a derivative may be specifically
designated as a hedge, the objective of which is to match the timing of
gain or loss recognition on the hedging derivative with the recognition of
27
<PAGE>
(i) the changes in the fair value of the hedged asset or liability that are
attributable to the hedged risk or (ii) the earnings effect of the hedged
forecasted transaction. For a derivative not designated as a hedging
instrument, the gain or loss is recognized in income in the period of
change.
SFAS NO. 133, as amended by SFAS NO. 137, is effective for all fiscal
quarters of fiscal years beginning after June 15, 2000.
Historically, the Company has not entered into derivative contracts either
to hedge existing risks or for speculative purposes. Accordingly, the
Company does not expect adoption of the new standard on September 1, 2000
to affect its financial statements.
In March 2000, the FASB issued Interpretation No. 44 ("FIN 44"),
"Accounting for Certain Transactions Involving Stock Compensation, an
Interpretation of APB Opinion No. 25". FIN 44 clarifies the application of
APB Opinion No. 25 for (a) the definition of employee for purposes of
applying APB Opinion No. 25, (b) the criteria for determining whether a
plan qualifies as a noncompensatory plan, (c) the accounting consequences
of various modifications to the terms of a previously fixed stock option or
award, and (d) the accounting for an exchange of stock compensation awards
in a business combination. FIN 44 is effective July 1, 2000, but certain
conclusions cover specific events that occurred after either December 15,
1998 or January 12, 2000. The adoption of FIN 44, as of July 1, 2000, did
not have a material effect on the Company's historical financial position
or results of operations but may impact the accounting for grants or awards
in future periods.
On December 3, 1999, the SEC issued Staff Accounting Bulletin 101 ("SAB
101"), Revenue Recognition in Financial Statements. SAB 101 summarizes some
of the SEC's interpretations of the application of generally accepted
accounting principles to revenue recognition. Revenue recognition under SAB
101 was initially effective for the Company's first fiscal quarter of
fiscal years beginning after December 15, 1999. However, SAB 101B, which
was released June 26, 2000, delayed adoption of SAB 101 until no later than
the fourth fiscal quarter of fiscal years beginning after December 15,
1999. The Company believes that its revenue recognition practices are in
substantial compliance with SAB 101 and that adoption of its provisions
would not be material to its prospective annual or quarterly results of
operations.
FINANCIAL INSTRUMENTS
Financial instruments which potentially subject the Company to
concentrations of risk consist principally of temporary cash, equivalents,
28
<PAGE>
investments and accounts receivable (see Note 12). The Company invests its
temporary cash balances in financial instruments of large financial
institutions with maturities of six months or less.
The carrying values reflected in the balance sheets reasonably approximate
the fair values for cash, accounts receivable, payables and debt.
NET LOSS PER SHARE
Basic net loss per share is computed by dividing net income or loss by the
weighted average number of common shares outstanding, after giving effect
to the stock dividend. Diluted loss per share includes the assumed exercise
of stock options and warrants using the treasury stock method and the
effects of convertible preferred stock. In fiscal 2000 and 1999, there were
no differences between basic and diluted loss per common share because the
assumed exercise was anti-dilutive. The assumed exercise of stock options
and warrants and conversion of preferred stock could potentially dilute
basic earnings per share amounts in the future.
NOTE 2. BUSINESS COMBINATION AND DISPOSITIONS
Business Combination
--------------------
In February 1999, the Company agreed to purchase intellectual property,
including the initial framework of what has become the Datagration
e-Business Suite, from Bradas for 60,000 shares of common stock, all of
which has been issued and valued at approximately $65,000, and 400,000
stock warrants that will be issued based on the delivery of intellectual
property and attainment of certain predefined milestones. The Company's
August 31, 1999 balance sheet reflects an accrued liability for the
contemplated issuance of these shares. Such shares were issued in fiscal
2000. Through August 31, 2000, 100,000 of these stock warrants had been
issued. The fair values ascribed to these warrants ($125,000), using the
Black - Scholes option pricing model, have been included in the cost of the
acquisition. The issuance of the remaining warrants (and related accounting
treatment) is contingent upon future events, facts and circumstances.
Additionally, the Company agreed to assume approximately $32,000 of debt
incurred by Bradas' founder. The Company agreed to fund the completion of
the product including providing necessary funding for both equipment and
personnel to complete the product and maintain and upgrade it. As of August
31, 2000 the Company has goodwill of $224,400 for the Bradas purchase of
which approximately $13,400 has been amortized. The ascribed life is 10
years.
29
<PAGE>
Dispositions
------------
Subsequent to the close of business on November 30, 1998, the Company sold
all the capital stock in ORAYCOM, Inc. ("ORAYCOM") to O. Ray Strickland and
O. Ray Strickland IRA, (collectively, the "Strickland Group"). Mr.
Strickland was an employee of the Company and the General Manager of
ORAYCOM. He was the sole shareholder of ORAYCOM when the Company acquired
it from him in June 1997. The agreement called for Strickland Group to
convey to the Company, 80,000 shares of the Company's Common Stock in
exchange for all of the issued and outstanding shares of ORAYCOM and waiver
of the non-compete agreement in place with Mr. Strickland. As a result, the
Company took a charge in the fourth quarter of 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 fiscal 1999.
On May 31, 1999, the Company closed an agreement to sell the assets of WG
Controls, Inc. to the management of WG. The terms of the transaction were
$250,000 in cash, $25,000 in a long-term note receivable, and the
assumption of approximately $196,000 in debt. The total sale price was
approximately $471,000.
Effective May 31, 1999, the Company sold the assets of Primus to the
management of Primus. The terms of the transaction were $12,500 in cash,
the return of 107,143 shares of the Company's stock, valued at $40,179, and
a 1% override on commission receipts for a period of twenty four months
following the transaction. The total sale price was approximately $53,000.
Due to the distinct nature of their operations, management has treated the
Oraycom, Primus and WG Controls businesses as discontinued operations and,
accordingly, previous financial statements have been restated to reflect
the results of these sold businesses. Fiscal 1999 results include the
results of these businesses prior to their disposal dates. Capsule
financial data of these discontinued operations for fiscal 1999 are as
follows:
30
<PAGE>
1999
----------
Revenues $2,346,053
Cost of revenues 1,723,867
----------
Gross profit 622,186
General and administrative expenses 551,829
----------
Income from operations 70,357
Loss on disposal (675,194)
----------
Loss from discontinued operations $ (604,837)
==========
The following summarizes the losses on the dispositions of these
businesses:
ORAYCOM WG Primus Total
------- -- ------ -----
Stock redeemed $ 120,000 - $ 40,179 $ 160,179
Cash(paid) received (922) $100,000 - 99,078
Note receivable - 175,000 12,500 187,500
Debt assumed - 195,764 - 195,764
Net assets disposed (55,577) (249,120) (187,192) (491,889)
Goodwill written off - (623,556) (176,436) (799,992)
--------------------------------------------
Gain(loss) on
Disposal $63,501 $(401,912) $(310,949) (649,360)
--------------------------------------------
Additional amortization
of covenants
not to compete ( 25,834)
---------
Net loss on disposal $(675,194)
=========
NOTE 3. PROPERTY AND EQUIPMENT
Major classes of property and equipment consist of the following:
2000 1999
---- ----
Leasehold improvements $ 1,387 $ 51,182
Furniture and fixtures 55,073 98,994
Computer equipment 159,349 279,244
---------- ----------
215,809 429,420
Less accumulated depreciation 91,084 301,035
---------- ----------
Net property and equipment $ 124,725 $ 128,385
========== ==========
31
<PAGE>
NOTE 4. NOTES PAYABLE
Notes payable consisted of the following:
Description % Rate Payment Terms(a) 2000 1999
----------- ------ ---------------- ---- ----
$250,000 Line Prime Due on demand $ - $ 243,600
of Credit plus or Dec 31,1999
1.25%
Stockholder 12% Due Jan 1, 2001 - 150,000
Loan
$500,000 Line Prime Due March 15, 2001 - -
of Credit plus 1.5% ---- ---------
Total - 393,600
Less current maturities - 243,600
---- ---------
Long-term portion $ - $ 150,000
==== =========
a) On February 28, 2000, the Company repaid and terminated the $250,000
line of credit. The Company also repaid the $150,000 owed to a trust
controlled by the President of the Company on May 15, 2000. As of August
31, 2000, the Company has no short term or long term notes payable. The
$500,000 line of credit is secured by accounts receivable.
The Company previously guaranteed the personal and commercial debt of a
certain former Director and shareholder (who are husband and wife) of the
Company with this bank. The Company was released from all guarantees in
fiscal 1999.
NOTE 5. INCOME TAXES
Provisions (benefits) for Federal and state income taxes consist of the
following:
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<PAGE>
2000 1999
---- ----
Current:
Federal $ - $ -
State - -
--------------- ---------------
Total current - -
Deferred:
Federal 18,000 (246,000)
State 2,000 (28,000)
Valuation allowance (20,000) 274,000
--------------- ---------------
Total deferred - -
--------------- ---------------
Provision (benefit) for
income taxes $ - $ -
=============== ===============
The Company's effective tax rate differs from the statutory federal tax
rate in 2000 and 1999 as shown in the following table:
2000 1999
---- ----
U.S. federal income taxes at the
statutory rate $ 4,000 $(260,000)
State taxes, net 2,000 (28,000)
Nondeductible expenses 14,000 14,000
Changes in valuation allowance (20,000) 274,000
--------------- ---------------
$ - $ -
=============== ===============
The tax effects of temporary differences that give rise to a significant
portion of the deferred tax assets and liabilities as of August 31, 2000
and 1999 are presented below:
2000 1999
---- ----
Allowance for doubtful accounts $ 5,000 $ 3,000
Net operating loss carryforwards 858,000 912,000
Stock option compensation 80,000 49,000
Other 2,000 1,000
Valuation allowances (945,000) (965,000)
--------------- ---------------
$ - $ -
=============== ===============
The Company has recorded a valuation allowance against deferred tax assets
due to uncertainties regarding the Company's ability to generate a
sufficient level of taxable income in future periods. In the event that
realization of the deferred tax assets is considered more likely than not
in future periods, the Company may reduce the valuation allowance. The
Company has approximately $2,200,000 of net operating loss carryforwards as
of August 31, 2000 which expire through 2019.
33
<PAGE>
NOTE 6. EMPLOYEE BENEFIT PLAN
The Company sponsors a qualified employee savings plan for all eligible
employees, commonly referred to as a 401-K plan. Participants may make
contributions from their gross pay (limited to 15% of the employee's
compensation, as defined), with the Company matching such contributions
(subject to certain limitations) at the rate of 25% of the first 6% of each
participant's contribution.
Employer matching contributions to the plan were approximately $12,000 and
$8,000 for the years ended August 31, 2000 and 1999, respectively.
NOTE 7. COMMITMENTS AND CONTINGENCIES
Lease Obligations
-----------------
The Company leases office space and equipment under operating leases which
expire at various dates. As of August 31, 2000, the Company's future
minimum lease payments under operating leases are as follows:
Year ending August 31, Amount
------
2001 $ 128,634
2002 116,253
2003 27,375
-------
Total minimum rent commitments $ 272,262
=======
Total rental expense for the Company's facilities and equipment was
approximately $110,000 and $231,000 for the years ended August 31, 2000 and
1999, respectively.
Legal Proceedings
-----------------
The Company has been named a party in a lawsuit filed by a former employee
claiming additional compensation is due. The Company's position is that the
lawsuit has no merit and intends to vigorously defend its position. No
amounts have been accrued relating to this lawsuit as of August 31, 2000.
NOTE 8. STOCKHOLDERS' EQUITY
On August 19, 1999 the Board of Directors authorized a private placement of
up to $400,000 priced at $0.50 per unit, with a unit consisting of one
share of the Company's Common Stock and a callable stock warrant to
purchase the Company's Common Stock at $1.00 per share but callable at
$0.05 per share if the closing trading price of the Company's Common Stock
34
<PAGE>
closes at or above $2.00 per share for sixty consecutive trading days when
25,000 shares trade. The period of this offering extended through September
30, 1999. This offering resulted in proceeds of $125,000, for which 250,000
units were issued, through August 31, 1999, and an additional $287,000 and
574,000 units in fiscal 2000, for a total of $412,000 and 824,000 shares
being issued in total. Of the $412,000 raised, $187,000 was invested by
Management and Directors of the Company.
On January 21, 2000, the Board of Directors authorized a private placement
of up to 500,000 units prices at $2.375 per unit, with a unit consisting of
one share of the Company's Common Stock and a callable warrant to purchase
the Company's Common Stock at $3.00 per share but callable at $0.05 per
share if the closing trading price of the Company's Common Stock closes at
or above $6.00 per share for 20 consecutive trading days. Net proceeds from
this private placement as of August 31, 2000 were $1,696,149, (which is net
of offering expenses of $85,130). This resulted in the issuance of 751,129
shares of Common Stock and the same number of warrants.
The Series A Preferred Stock issued in the 1998 acquisition of WG Controls
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 on the preferred stock calls for the
137,143 preferred shares to be converted into .67361 shares of the
Company's Common Stock or 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 preferred shares have the same
voting rights as common shares and have preference to the common shares in
the event of any liquidation, dissolution or winding up of the Company,
whether voluntary of involuntary.
NOTE 9. STOCK OPTION PLAN AND WARRANTS
The Company has a stock option plan (the "Plan") adopted by the
shareholders on March 3, 1999 which replaced the Company's previous 1996
Stock Option Plan. The Plan authorizes the issuance of up to 2,500,000
shares of common stock.
The Plan provides for the issuance of both qualified and nonqualified
incentive stock options at an exercise price approximating the fair market
value of the Company's stock at the date of grant (or 110% of such fair
market value in the case of substantial stockholders). Options generally
vest over two years, with one-third being vested immediately, one-third
vesting on the one year anniversary of the issuance, and the final
one-third vesting on the two year anniversary date of the issuance. The
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<PAGE>
maximum life of the options is five years in the case of qualified
incentive stock options and ten years in the case of non-qualified
incentive stock options.
A total of 2,500,000 shares of the Company's Common Stock have been
reserved pursuant to the Plan. As of August 31, 2000, 1,537,311 options are
outstanding: 1,458,805 shares issued inside the Plan and 78,506 shares
issued outside the Plan.
Information regarding the options outstanding and exercisable at August 31,
2000 are as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------- ---------------------------
Weighted
Average
Remaining Weighted Weighted
Contractual Average Average
Number Life Exercise Number Exercise
Outstanding (Years) Price Exercisable Price
------------ ----------- ----------- ------------ -------------
Exercise prices:
<S> <C> <C> <C> <C> <C>
$0.38 - $1.00 1,058,561 2.9 $0.62 720,980 $0.63
$1.17 - $1.85 100,000 3.3 1.48 55,001 1.46
$2.18 - $2.99 318,750 2.6 2.58 217,757 2.61
$3.36 - $3.70 60,000 2.2 3.53 60,000 3.53
------------ ----------
1,537,311 2.9 $1.20 1,053,738 $1.25
============ ==========
</TABLE>
Transactions under the stock option plans and individual non-qualified
options not under the plans are summarized as follows:
<TABLE>
<CAPTION>
Years Ended
--------------------------------------------------
August 31, 2000 August 31, 1999
----------------------- ------------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------------ --------- ------------ ---------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 2,194,357 $1.21 1,677,788 $2.49
Granted 325,000 1.81 1,604,750 .73
Exercised (261,838) .66 (55,581) .10
Canceled (720,208) 1.71 (1,032,600) 2.60
------------ ------------
Outstanding at end of year 1,537,311 $1.20 2,194,357 $1.21
============ ============
Options available for grant 1,041,195 384,149
============ ============
</TABLE>
The weighted-average fair value of stock options and warrants granted to
employees and directors during the year and the weighted-average
significant assumptions used to determine those fair values, using a
Black-Scholes option pricing model are as follows:
2000 1999
---- ----
Grant-date fair value per share $ 1.05 $ .93
Significant assumptions (weighted-average):
Risk-free interest rate at
grant date 6.24% 5.01%
Expected stock price
volatility 140.00% 80.00%
Expected dividend payout - -
Expected option life-years(a) 4.3 2.9
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<PAGE>
(a) The expected option life is based on contractual expiration dates.
In addition to the options described above, the Company has issued warrants
to its Chief Executive Officer and in conjunction with private placements,
private placement support, and acquisitions.
Information regarding the warrants outstanding and exercisable at August
31, 2000 are as follows:
<TABLE>
<CAPTION>
Warrants Outstanding Warrants Exercisable
---------------------------------- ------------------------
Weighted
Average
Remaining Weighted Weighted
Contractual Average Average
Number Life Exercise Number Exercise
Outstanding (Years) Price Exercisable Price
------------ ----------- --------- ------------ ----------
Exercise prices:
<S> <C> <C> <C> <C> <C>
$0.45 - $1.00 1,764,364 2.3 $0.97 1,764,364 $0.97
$1.18 - $2.00 293,887 2.9 1.54 293,887 1.54
$2.38 - $3.00 2,045,710 2.8 2.90 2,045,710 2.90
$3.38 - $4.00 112,500 2.0 3.93 112,500 3.93
------------ ------------
4,216,461 2.6 $2.03 4,216,461 $2.03
============ ============
</TABLE>
Transactions involving warrants are summarized as follows:
<TABLE>
<CAPTION>
Years Ended
-----------------------------------------------
August 31, 2000 August 31, 1999
------------------------ ----------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------------ ---------- ----------- ----------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 1,932,359 $2.18 1,068,994 $2.62
Granted 2,302,510 1.89 863,365 1.51
Exercised (18,408) .91 - -
------------ -----------
Outstanding at end of year 4,216,461 $2.03 1,932,359 $2.18
============ ===========
</TABLE>
Under the accounting provisions of SFAS No. 123, the Company's pro forma
net income (loss) and earnings (loss) per share would have been:
Years Ended
-------------------------------------
August 31, 2000 August 31, 1999
---------------- ----------------
Net loss $(898,761) $(2,074,119)
Net loss per share:
Basic and diluted $ (0.11) $ (0.32)
In October 1998 the Board of Directors modified the terms of 78,506 options
held by the former CFO of the Company to be fully vested and be options
outside the plan as part of a severance arrangement. These options were
priced from $0.91 - $3.36 per share. These options remain outstanding.
The Company recognized expenses related to the granting of certain stock
options and warrants to non-employees and non-directors. These options and
warrants were granted in lieu of cash compensation for services performed.
These options and warrants were valued using a Black-Scholes pricing model.
37
<PAGE>
The amount of the expense was $82,000 and $130,312 during 2000 and 1999
respectively.
NOTE 10. EMPLOYMENT AGREEMENTS
The Company has an employment agreement with its President. The aggregate
commitment for future salaries, excluding bonuses, under this employment
agreement is approximately $137,500. This agreement shall be automatically
renewed for successive one-year terms unless canceled by either party at
least 30 days prior to the current term's expiration. The agreement also
contains a severance provision ranging up to one year of salary in case of
early termination without cause.
NOTE 11. RELATED PARTY TRANSACTIONS
As of August 31, 1999, the Company had a $150,000 note payable to a trust
controlled by the President of the Company which bore interest at 12% per
annum, and was due June 30, 2001. On May 15, 2000, the Company repaid this
entire obligation. Interest expense on this note was approximately $13,000
and $17,000 in 2000 and 1999, respectively.
NOTE 12. SIGNIFICANT CUSTOMERS AND VENDORS
One multi - divisional customer in the telecommunications industry
accounted for approximately 81% and 87% of revenues in the years ended
August 31, 2000 and 1999, respectively. Receivables from this customer
represented approximately 76% and 94% of net accounts receivable at August
31, 2000 and 1999, respectively.
One product generated approximately $3,684,000 of net revenues for fiscal
2000.
The Company is highly reliant on one vendor who performs the bulk of the
work related to database processing activities the Company performs for its
clients. While the Company does intend to develop the capabilities
internally to offset some of the dependence on this vendor, there will be
significant need for the services of this vendor. The vendor represented
approximately 74% and 61% of the cost of revenue for fiscal years 2000 and
1999 respectively.
NOTE 13. SUPPLEMENTAL CASH FLOW DISCLOSURES
Cash paid during the year for interest was approximately $24,400 and
$72,400 for the years ended August 31, 2000 and 1999, respectively.
38
<PAGE>
In fiscal 1999, the Company received and retired 187,143 shares of common
stock in connection with the sale of discontinued operations. Liabilities
with carrying values of $30,100 and $1,300 were settled through the
issuance of common stock in fiscal 2000 and 1999, respectively. In fiscal
1999, the Company assumed liabilities of $99,400 in connection with the
Bradas acquisition (see Note 2); in fiscal 2000 the Company issued 68,475
shares of common stock to settle these liabilities and issued stock
warrants valued at $125,000. During fiscal 2000, the Company accrued
preferred stock dividends payable of $108,800.
NOTE 14. SUBSEQUENT EVENTS
On October 3, 2000 the Company announced it had signed a Letter of Intent
with e-commerce support centers, inc. ("ecom"), calling for a merger with
ecom to become a wholly-owned subsidiary of the Company. The merger
consideration will be Company securities, including stock options and
warrants. The merger is subject to execution of a definitive merger
agreement and customary closing conditions. If and when such conditions are
fulfilled, it is anticipated that the merger will close in the second
quarter of the Company's year ending August 31, 2001.
39
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There have been no changes in or disagreements with the Company's
accountants on accounting or financial disclosure during the past two
fiscal years.
40
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Executive Officers and Directors
As of August 31, 2000, the executive officers and directors of the Company
were as follows:
NAME AGE POSITION
---- --- --------
John D. Foster.......... 56 Director,CEO, ##
Ronald L. Weindruch..... 52 President, Director
Peter B. Atwal.......... 43 Director
Stewart B. Harris....... 58 Director, ** ##
Kenneth Horn............ 59 Director, ** ##
William N. Kashul, Sr... 66 Director
James L. McGovern....... 57 Director, **
Joseph H. Landis........ 48 CFO, Corporate Secretary
NOTE: ATWAL AND KASHUL TERM EXPIRES IN 2001.
WEINDRUCH, HARRIS, AND MCGOVERN TERM EXPIRES IN 2002.
FOSTER AND HORN TERM EXPIRES IN 2003.
** member of Audit Committee
## member of Compensation Committee
All directors hold office until the year that their term expires. The Board
is a staggered Board with respect to their terms of office. There are no
agreements with respect to the election of directors. The Company has not
compensated its directors in cash for service on the Board of Directors or
any committee thereof, but directors are reimbursed for expenses incurred
for attendance at meetings of the Board of Directors and any committee of
the Board of Directors. Certain directors have been compensated with
options in recognition of their service on the Board, as described further
below. Officers are appointed annually by the Board of Directors and each
executive officer serves at the discretion of the Board of Directors. The
Board of Directors has two standing committees: an audit committee and a
compensation committee.
None of the officers and/or directors of the Company are officers or
directors of any other publicly traded corporation, except for John Foster
who is a Director of Aerial Communications, nor have any of the directors
and/or officers, nor have any of the affiliates or promoters of the Company
filed any bankruptcy petition, been convicted in or been the subject of any
pending criminal proceedings, or the subject or any order, judgment, or
41
<PAGE>
decree involving the violation of any state or federal securities laws
within the past five years.
The business experience of each of the persons listed above during the past
five years is as follows:
RONALD L. WEINDRUCH is the President, and former Chairman and Chief
Executive Officer of Paladyne as well as the founder of Access, in 1994.
Mr. Weindruch was the Chairman of the Sanford Airport Authority in Sanford,
Florida from 1993 to 1996. Prior thereto, he held a variety of senior
management positions with Siemens, including senior vice-president of
operations at Siemens Stromberg-Carlson. Prior to beginning with Siemens in
1984, Mr. Weindruch served as director of marketing for the Nortel
(formerly Northern Telecom) DMS 100 switching system and was also group
director of business development for Nortel's digital switching group. Mr.
Weindruch holds an M.B.A. degree from George Washington University and a
B.S. degree from the University of Illinois.
JOHN D. FOSTER has been Chairman and Chief Executive Officer of the Company
since January 2000. He is also President of Vedra International Associates,
Inc., which he founded in 1996. In 1996, Mr. Foster retired from AT&T where
he was a Corporate Officer. He had served as Vice President-Marketing and
Sales, Southeast Region, President and CEO of AT&T American Transtech, and
as President and Managing Director of AT&T Communications Services
Group-Europe. Mr. Foster is also a board member of Aerial Communications.
He holds a B.S. degree from Purdue University and a Masters from the
University of Illinois.
WILLIAM N. KASHUL, SR. is President of Kashul Consulting, Inc., a
Chicago-based telecommunications consulting firm. From 1994 to 1997, he was
an independent consultant for a variety of companies in the
telecommunications industry. From 1972 to 1994, Mr. Kashul was a Regional
Vice President of Strategic Account Development, North America, for
Northern Telecom, Inc. Mr. Kashul began his telecommunications career in
the U.S. Army in 1953. He joined BTE Automated Electric as an engineer in
1956 and went to ITT Kellogg as a project engineer in 1959. He joined
Stromberg-Carlson as a senior sales engineer in 1967 before going to
Northern Telecom in 1972. Mr. Kashul is a member of the International
Engineering Consortium's Executive Advisory Council and holds an M.B.A.
from the University of Chicago.
PETER B. ATWAL has been a Vice President of Business Development for
Milcomm Communications since August 1999. From 1992 to July 1999, Mr. Atwal
was Chief Technology Officer for ISR Global Telecom, a network management
provider. From 1985 to 1991, Mr. Atwal previously worked as a research and
development manager for Siemens, and from 1977 to 1985, and as a consultant
42
<PAGE>
for Logica, Inc. Mr. Atwal holds a BSC degree in computer science from
London University.
JAMES L. MCGOVERN has been President of McGovern & Associates since 1996.
In 1996, he retired from Norstan where he was President of Norstan
Communications from 1985 to 1996. Prior, he was Chief Operating Officer of
Electronic Engineering Co. which was acquired by Norstan in 1985. McGovern
also held a number of key sales and management positions with Xerox
Corporation. He was Chairman of Virtual Hold Corporation, and a Director
for Paknetx which was acquired by Aspect Telecommunications. Mr. McGovern
holds a B.S. from Northeastern University.
STEWART B. HARRIS is currently President and Chief Executive Officer of SGH
Services, Inc., a management consulting firm. He was an Executive Vice
President of Carlson Marketing Group from January 1998 through December
1999. Mr. Harris was President and Chief Executive Officer of S&H Citadel,
an incentive marketing company, and its predecessors from 1982 until 1998
when it was acquired by Carlson Marketing. Prior thereto, Mr. Harris also
held various sales, marketing, and executive positions with IBM
Corporation, HERS Apparel Industries, and MDB Holding.
KENNETH W. HORN has been Managing Director of KNH Associates since April
1999. In 1999, he retired as a Corporate Officer of Nortel Networks where
he worked for 18 years and had served as Vice President. Prior thereto, Mr.
Horn was employed by Huyck Corporation for 10 years where he held various
positions including Vice President and General Manager of its largest
division. Mr. Horn holds a B.S. degree from Villanova University and a
M.B.A. from Iona University.
JOSEPH H. LANDIS is Paladyne's Corporate Vice President and Chief Financial
Officer, as well as its Corporate Secretary. Mr. Landis has been employed
with Paladyne since November 1999. Prior to Paladyne, Mr. Landis was the
Controller for Sparks Exhibits and Environments from January 1999 to his
employment at Paladyne. From August 1996 to December 1998, he was CFO and
President for Stratcomm Media, Ltd. Mr. Landis was employed by The Boeing
Company from January 1981 to March 1996 where he served as its Controller
for the Helicopter Division.
ITEM 10. EXECUTIVE COMPENSATION
Compensation
The following table sets forth all compensation actually paid or accrued by
the Company for services rendered to the Company for the years ended August
31, 1998, 1999 and 2000 to the Company's Chief Executive Officer and
President. No other executive officer of the Company has earned a salary
greater than $100,000 annually for any of the periods depicted.
43
<PAGE>
Summary Compensation Table ALL
OTHER STOCK WARRANTS
NAME AND PRINCIPAL COMPEN- AND OPTIONS
POSITION YEAR SALARY BONUS SATION ISSUED
---- ------ ----- ------- -------
John Foster, CEO 1999 None None None 106,250
2000 None None None 165,000
Ronald L. Weindruch, 1998 $122,292 $3,000 $ 81,700 67,500
President 1999 $137,500 $ -0- $ 36,034 208,784
2000 $137,500 $ -0- $ 8,905 50,000
(All other compensation includes consulting and commission income)
In addition to cash compensation, Mr. Foster and Mr. Weindruch participate
in the Company's stock option plan. The following table details options
granted in fiscal year 2000:
% of
total
# of shares options
underlying granted Exer. Exp.
Name options in FY 00 Price Date
------------------- ------- -------- ----- ----
John Foster 2,500 .4% $1.56 11/12/03
John Foster 150,000 25.5% $2.50 2/1/05
John Foster 12,500 2.1% $3.38 3/1/05
Ronald L. Weindruch 50,000 8.5% $2.50 1/4/04
No stock options held by these individuals were exercised in the current
fiscal year whether the options were issued in the current year or in years
prior.
Employee Stock Option Plan
The Company's 1999 Stock Option Plan (the "Plan"), assumed the 1996 Stock
Option Plan, as amended on the migratory merger, which was adopted in 1996
and amended in October, 1997 to increase the number of issuable shares
under the Plan and to clarify the basis for determining fair market value
of shares in conjunction with setting the exercise price of options at
issuance. The purpose of the Plan is to encourage stock ownership by
management and employees of the Company, to provide an additional incentive
for those employees to contribute to the success of the Company and to
provide the Company with the opportunity to use stock options as a means of
recruiting new managerial personnel where appropriate.
The Plan authorizes the grant of options which qualify as incentive stock
options under Section 422A of the Internal Revenue Code ("qualified
options"), as well as stock options which do not qualify under that section
of the Code ("nonqualified options"). The Plan is administered by the Board
of Directors of the Company. The Board is authorized to select the
individual employees to receive options under the Plan, the number of
44
<PAGE>
shares subject to each option, the option term and other matters specified
in the Plan.
The Plan provides that the exercise price of any option may not be less
than 100% of the fair market value of the Company's stock at the date of
grant, defined as the average bid and ask price over the prior five days'
trading in which at least 1,000 shares have traded. Options must be granted
within ten years from the date the Plan was approved by the Company's
shareholders.
A maximum of 2,500,000 shares of the Company's Common Stock are authorized
for issuance pursuant to options granted under the Plan, subject to
adjustments to prevent dilution or enlargement of rights of participants in
certain circumstances. As of August 31, 2000, 1,890,378 options were
outstanding: 1,815,206 shares issued inside the Plan, and 75,172 shares
issued outside the Plan. As of August 31, 2000, 991,900 shares are
exercisable at an option price per share ranging from $0.38 to $3.36 per
share and with expiration dates from October 2000 through July 2004.
Profit Sharing Plan
The Company sponsors a qualified employee savings plan (commonly referred
to as a "401K plan") for all eligible employees, including all the officers
of the Company. Participants may make contributions from their gross pay
(limited to 15% of the employee's compensation, as defined), with Paladyne
matching such contributions (subject to certain limitations) at the rate of
25% of the first 6% of each participant's contribution. No other deferred
compensation plan is currently in place.
Employment Agreements
The Company has an employment agreement with Ronald Weindruch, its
President. The aggregate commitment for future salaries, excluding bonuses,
under this employment agreement is approximately $137,500. This agreement
shall be automatically renewed for successive one-year terms unless
canceled by either party at least 30 days prior to the current term's
expiration. The agreement also contains a severance provision ranging up to
one year in case of early termination without cause.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information, to the best of the Company's
knowledge, as of August 31, 2000, with respect to each person known by the
45
<PAGE>
Company to own beneficially more than 5% of the outstanding Common Stock,
each director and all directors and executive officers as a group.
PERCENT
NAME AND ADDRESS AMOUNT AND NATURE OF OF
OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP(1) CLASS(2)
Ronald L. Weindruch * 1,924,340(3) 22.76%
Kenneth H. Horn * 225,668(4) 2.67%
William N. Kashul, Sr. * 221,957(5) 2.62%
Peter B. Atwal * 76,667(6) 0.9%
James L. McGovern * 177,835(7) 2.10%
John D. Foster * 492,933(8) 5.83%
Stewart B. Harris * 158,751(9) 1.87%
All directors and
executive officers as a 3,278,151 38.76%
group (7 persons in group)
Webbmont Holdings 1,011,567(10) 11.96%
Note: Unless otherwise noted, all persons address is 610 Crescent
Executive Court, Lake Mary, Florida 32746.
* Director and/or executive officer
Note: Unless otherwise indicated in the footnotes below, the Company has
been advised that each person above has sole voting and investment
power over the shares indicated above.
(1) Share amounts include, where indicated, Common Stock issuable upon
the exercise of certain stock options and stock warrants held by the
Company's directors and executive officers at exercise prices ranging
from $0.38 to $3.70 per share which are exercisable within sixty days.
(2) Based upon 8,456,599 shares of Common Stock outstanding on August
31, 2000. Percentage ownership is calculated separately for each
person on the basis of the actual number of outstanding shares as of
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<PAGE>
November 19, 1998 and assumes the exercise of certain stock options
and warrants held by such person (but not by anyone else) exercisable
within sixty days.
(3) Includes 100,000 shares of stock held in the names of Mr.
Weindruch's children, and 1,500,000 held in trusts for which Mr.
Weindruch acts as trustee. Includes 324,340 shares which may be
acquired by Mr. Weindruch pursuant to the exercise of stock purchase
options and warrants exercisable within sixty days at exercise prices
from $0.42 to $3.70 per share.
(4) Includes 92,418 shares held by a corporation controlled by Mr.
Horn. Includes 123,250 shares which may be acquired by Mr. Horn
pursuant to the exercise of stock purchase options and warrants
exercisable within sixty days at exercise prices from $0.38 to $2.50
per share.
(5) Includes 77,084 shares which may be acquired by Mr. Kashul
pursuant to the exercise of stock purchase options exercisable within
sixty days at the exercise prices from $0.38 to $3.36 per share.
(6) Includes 76,667 shares which may be acquired by Mr. Atwal pursuant
to the exercise of stock purchase options exercisable within sixty
days at the exercise prices from $0.38 to $3.36 per share.
(7) Includes 6,604 shares held in the names of Mr. McGovern's
children. Also includes 154,088 shares which may be acquired by Mr.
McGovern pursuant to the exercise of stock purchase options and
warrants exercisable within sixty days at exercise prices from $0.38
to $1.00 per share.
(8) Includes 415,418 shares which may be acquired by Mr. Foster
pursuant to the exercise of stock purchase options and warrants
exercisable within sixty days at the exercise prices from $0.67 to
$3.375 per share.
(9) Includes 108,751 shares which may be acquired by Mr. Harris
pursuant to the exercise of stock purchase options and warrants
exercisable within sixty days at the exercise prices from $0.88 to
$2.50 per share.(10) Includes 496,429 shares which may be acquired by
Webbmont Holdings pursuant to the exercise of stock purchase warrants
exercisable within sixty days at exercise prices from $1.00 to $3.00
per share.
47
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
As of August 31, 1999, the Company had a $150,000 note payable to a trust
controlled by the President of the Company, and bore interest at 12% per
annum. All outstanding obligations have been satisfied as of August 31,
2000.
48
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-KSB
(a) EXHIBITS
Exhibit No. Exhibit Name
----------- ------------
2.1 Merger Agreement and Plan of Reorganization previously filed as
Exhibit 2.1 to Form 10-SB/A dated December 31, 1997
3.1 Articles of Incorporation and all amendments thereto previously filed
as Exhibit 3.1(i) to Form 10-SB/A dated December 31, 1997
3.2 By-Laws of Registrant previously filed as Exhibit 3.2(ii) to Form
10-SB/A dated December 31, 1997
4.1 Specimen of Common Stock Certificate previously filed as Exhibit 4.1
to Form 10-SB/A dated December 31, 1997
4.2 Certificate of Series A Cumulative Convertible Preferred Stock
Certificate
10.1 Lease Agreement on registrant's previous principal place of business
previously filed as Exhibit 10.1 to Form 10-SB/A dated December 31,
1997
10.2 Purchase Agreement of Synaptx Access, Inc. f.k.a. North American Telco
/ Cable Representatives, Inc. previously filed as Exhibit 10.2 to Form
10-SB/A dated December 31, 1997
10.3 Purchase Agreement for Synaptx Impulse, Inc., f.k.a. Maxwell Partners,
Inc. previously filed as Exhibit 10.3 to Form 10-SB/A dated December
31, 1997
10.4 Purchase Agreement for ORAYCOM, Inc. previously filed as Exhibit 10.4
to Form 10-SB/A dated December 31, 1997
10.5 Employment Agreement for Ronald L. Weindruch previously filed as
Exhibit 10.5 to Form 10-SB/A dated December 31, 1997
49
<PAGE>
10.6 Employment Agreement for D. Mike Maxwell previously filed as Exhibit
10.6 to Form 10-SB/A dated December 31, 1997
10.7 New Lease Agreement on Principal Place of Business
10.8 Agreement and Plan of Merger for WG Controls, Inc. between Synaptx
Worldwide, Inc. and the WG Controls, Inc. shareholders as follows:
James M. Gleason, Shirley Gleason, Michael Concialdi, and James Gammon
previously filed as Exhibit 10.1 to Form 8-K dated March 23, 1998
10.9 Employment Agreement, dated January 1, 1998, between WG Controls, Inc.
and James M. Gleason previously filed as Exhibit 10.2 to Form 8-K
dated March 23, 1998
10.10 Agreement and Plan of Stock for Stock Exchange, dated June 1, 1998
between Synaptx Worldwide, Inc. (the "Company") and John Primus and
Jannine Primus previously filed as Exhibit 10.1 to Form 8-K dated
August 14, 1998
10.11 Employment Agreement, dated June 1, 1998, between Primus Marketing
Associates, Inc. and John E. Primus previously filed as Exhibit 10.2
to Form 8-K dated August 14, 1998
10.12 Non-compete Agreement, dated June 1, 1998, between the Company and
John E. Primus previously filed as Exhibit 10.3 to Form 8-K dated
August 14, 1998
10.13 Non-compete Agreement, dated June 1, 1998, between the Company and
Jannine E. Primus previously filed as Exhibit 10.4 to Form 8-K dated
August 14, 1998
10.14 Letter Agreement to Sell 100% of ORAYCOM stock to O. Ray Strickland
and O. Ray Strickland IRA ("Strickland Group") previously filed as
Exhibit 10.14 to Form 10-KSB for fiscal year ended August 31, 1998.
27 Financial Data Schedule
(b) Reports on From 8-K
None
50
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly organized.
PALADYNE CORP.
(Registrant)
By: /S/ JOSEPH H. LANDIS
-----------------------------
Date: November 28, 2000 Joseph H. Landis
Vice President, Controller
(Chief Accounting Officer)
In accordance with the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
Name Position Date
---- -------- ----
/S/ Ronald L. Weindruch President,Director November 28, 2000
---------------------- ---------------------- ----------------------
Ronald L. Weindruch
Director
---------------------- ---------------------- ----------------------
William N. Kashul, Sr
/S/ Kenneth Horn Director November 28, 2000
---------------------- ---------------------- ----------------------
Kenneth Horn
/S/ John D. Foster Director November 28, 2000
---------------------- ---------------------- ----------------------
John D. Foster
Director
---------------------- ---------------------- ----------------------
Peter B. Atwal
/S/ James L. McGovern Director November 28, 2000
---------------------- ---------------------- ----------------------
James L. McGovern
/S/ Stewart Harris Director November 28, 2000
---------------------- ---------------------- ----------------------
Stewart Harris
51
