U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For Quarter Ended: June 30, 2000
Commission File Number: 0-23100
LOGISOFT CORP.
--------------------------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
DELAWARE 22-2649848
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(State of Incorporation) (IRS Employer ID No)
375 Woodcliff Drive, Fairport, NY 14450
(Address of principal executive office)
(716) 249-8600
-------------------------
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes X No
The number of shares outstanding of registrant's common stock, par value $.0001
per share, as of August 7, 2000 was 30,954,553.
Transitional Small Business Disclosure Format (Check one): Yes No X
Page 1
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LOGISOFT CORP.
INDEX
Page
No.
----
Part I. Financial Information
Item 1. Financial Statements (unaudited) 3
Balance Sheet -
June 30, 2000 (unaudited) and December 31, 1999 3
Statement of Operations -
Three and six months ended June 30, 2000 and 1999 (unaudited) 4
Statements of changes in Stockholders' Equity -
Six months ended June 30, 2000 (unaudited) 5
Statement of cash flows -
Six months ended June 30, 2000 and 1999 (unaudited) 6
Notes to Combined and Consolidated Financial Statements (unaudited) 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 16
Item 3. Qualitative and Quantitative Disclosures about Market Risk 25
Part II. Other Information 25
Item 6. Exhibits and reports on Form 8-K 25
Page 2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
<TABLE>
<CAPTION>
LOGISOFT CORP.
COMBINED AND CONSOLIDATED BALANCE SHEETS
December 31, June 30,
1999 2000
------------- ----------
(unaudited)
<S> <C> <C>
ASSETS
------
CURRENT ASSETS:
Cash and equivalents $ 59,550 $4,646,035
Accounts receivable, net of allowance of
$115,000 at June 30, 2000 1,003,495 1,140,988
Notes receivable - 540,000
Due from officer 6,909 -
Unbilled revenues 12,000 105,100
Inventory 6,542 36,867
Prepaid expenses and other current assets 4,884 48,605
Deferred tax asset 2,651 16,226
------------- ----------
Total current assets 1,096,031 6,533,821
------------- ----------
PROPERTY AND EQUIPMENT, net
367,041 809,157
------------- ----------
OTHER ASSETS:
Intangible assets, net 11,424 1,869,675
Other assets - 28,892
------------- ----------
11,424 1,898,567
------------- ----------
$ 1,474,496 $9,241,545
============= ==========
</TABLE>
<TABLE>
<CAPTION>
December 31, June 30,
1999 2000
-------------- ------------
(unaudited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Line-of-credit $ 350,000 $ -
Current portion of long-term debt 9,428 49,000
Note payable - officer 12,000 -
Accounts payable 628,000 954,299
Accrued expenses and other current liabilities 370,784 523,241
Advanced billings 14,800 15,800
-------------- ------------
Total current liabilities 1,385,012 1,542,340
LONG-TERM DEBT, net of current portion 199,736 284,123
DEFERRED TAX LIABILITY 3,110 21,351
-------------- ------------
Total liabilities 1,587,858 1,847,814
-------------- ------------
MINORITY INTEREST 1,002 -
-------------- ------------
STOCKHOLDERS' EQUITY:
Preferred stock, $2.75 par value, 2,000,000
shares authorized, no shares issued - -
Common stock, $.0001 par value, 60,000,000
shares authorized, 12,000,000
and 30,954,553 shares issued
and outstanding, respectively 1,200 3,096
Additional paid-in capital 264,550 8,750,035
Notes receivable (warrant exercise) - (350,000)
Retained earnings (deficit) (379,112) (1,009,400)
-------------- ------------
(113,362) 7,393,731
Less: Minority interest (1,002) -
-------------- ------------
Total stockholders' equity (114,364) 7,393,731
-------------- ------------
$ 1,474,496 $ 9,241,545
============== ============
</TABLE>
The accompanying notes are an integral part of these statements.
Page 3
<PAGE>
<TABLE>
<CAPTION>
LOGISOFT CORP.
--------------
COMBINED AND CONSOLIDATED STATEMENTS OF INCOME AND OPERATIONS
(Unaudited)
Quarter ended June 30, Six months ended June 30,
------------------------ ------------------------
1999 2000 1999 2000
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUE:
E-commerce/retail $1,066,133 $1,318,762 $1,616,852 $2,243,282
Strategic internet services 138,651 288,467 218,971 555,188
----------- ----------- ----------- -----------
Total revenue 1,204,784 1,607,229 1,835,823 2,798,470
----------- ----------- ----------- -----------
COST OF REVENUE:
E-commerce/retail 924,857 1,111,599 1,392,736 1,911,858
Strategic internet services 77,557 174,779 146,683 282,007
----------- ----------- ----------- -----------
Total cost of revenue 1,002,414 1,286,378 1,539,419 2,193,865
----------- ----------- ----------- -----------
Gross profit 202,370 320,851 296,404 604,605
----------- ----------- ----------- -----------
OPERATING EXPENSES:
Sales and marketing 64,277 302,353 129,819 410,764
General and administrative 67,575 482,373 124,343 597,560
Bad debt provision - 115,000 - 115,000
Stock based compensation 150,000 8,031 150,000 8,031
Depreciation 5,051 20,385 11,810 32,316
Amortization 191 99,360 278 121,749
----------- ----------- ----------- -----------
Total operating expenses 287,094 1,027,502 416,250 1,285,420
----------- ----------- ----------- -----------
Income (loss) from operations (84,724) (706,651) (119,846) (680,815)
----------- ----------- ----------- -----------
OTHER INCOME (EXPENSE):
Interest expense (5,978) (5,482) (12,047) (18,977)
Interest income - 58,375 - 79,563
Other 364 (4,583) 689 (4,500)
----------- ----------- ----------- -----------
(5,614) 48,310 (11,358) 56,086
----------- ----------- ----------- -----------
Income (loss) before income taxes
and minority interest (90,338) (658,341) (131,204) (624,729)
INCOME TAXES (2,289) 6,653 (2,926) (5,559)
----------- ----------- ----------- -----------
Income (loss) before minority interest (92,627) (651,688) (134,130) (630,288)
----------- ----------- ----------- -----------
MINORITY INTEREST 69,777 - 88,018 1,002
----------- ----------- ----------- -----------
NET INCOME (LOSS) $ (22,850) $ (651,688) $ (46,112) $ (629,286)
=========== =========== =========== ===========
NET INCOME (LOSS)
PER COMMON SHARE:
BASIC AND DILUTED $ - $ (0.02) $ - $ (0.03)
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
Page 4
<PAGE>
<TABLE>
<CAPTION>
LOGISOFT CORP.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
Notes
receivable -
Common Stock Paid-in Warrant Retained Minority
Shares Amount Capital exercise Earnings Interest Total
---------- ------ ----------- ---------- ------------ -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1999 12,000,000 $1,200 $ 264,550 $ - $ (379,112) $(1,002) $ (114,364)
Issuance of shares in merger 18,434,553 1,844 6,218,156 - - 6,220,000
Stock issuance costs - - (240,650) - - (240,650)
Acquisition of eStorefronts minority interest - - 1,980,000 - - 1,980,000
Exercise of warrants to purchase common stock 520,000 52 519,948 (350,000) - - 170,000
Stock based compensation - - 8,031 - - 8,031
Net income (loss) - - - - (630,288) 1,002 (629,286)
---------- ------ ----------- ---------- ------------ -------- -----------
BALANCE, June 30, 2000 30,954,553 $3,096 $8,750,035 $(350,000) $(1,009,400) $ - $7,393,731
========== ====== =========== ========== ============ ======== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
Page 5
<PAGE>
<TABLE>
<CAPTION>
LOGISOFT CORP.
COMBINED AND CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six months ended June 30,
-----------------------
1999 2000
---------- -----------
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net income (loss) $ (46,112) $ (629,286)
Adjustments to reconcile net income (loss) to
net cash flow from operating activities:
Minority interest (88,018) (1,002)
Depreciation and amortization 11,458 154,065
Bad debt provision - 115,000
Deferred taxes (8,643) -
Stock based compensation 150,000 8,031
Changes in:
Accounts receivable (486,203) (252,493)
Inventory 1,029 (30,325)
Prepaid expenses and other current assets (1,096) (44,290)
Unbilled revenues, net of advanced billings 700 (92,100)
Accounts payable 380,727 326,299
Accrued expenses 42,766 (104,294)
---------- -----------
Net cash flow from operating activities (43,392) (550,395)
---------- -----------
CASH FLOW FROM INVESTING ACTIVITIES:
Purchases of property and equipment (23,913) (343,224)
---------- -----------
Net cash flow from investing activities (23,913) (343,224)
---------- -----------
CASH FLOW FROM FINANCING ACTIVITIES:
Borrowings (repayments) on line-of-credit, net 230,000 (350,000)
Repayment of long-term debt (6,909) (7,246)
Proceeds from note receivable - 180,000
Repayments of note payable - officer - (12,000)
Proceeds from sale of stock and exercise of warrants 15,000 5,670,000
Other - (650)
---------- -----------
Net cash flow from financing activities 238,091 5,480,104
---------- -----------
CHANGE IN CASH AND EQUIVALENTS 170,786 4,586,485
CASH AND EQUIVALENTS - beginning of year 105,808 59,550
---------- -----------
CASH AND EQUIVALENTS - end of year $ 276,594 $4,646,035
========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash interest paid $ 5,652 $ 6,075
========== ===========
Cash taxes paid $ 4,345 $ 4,347
========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
Page 6
<PAGE>
LOGISOFT CORP.
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) DESCRIPTION OF BUSINESS
The combined and consolidated financial statements include Logisoft Corp,
Logiosft Computer Products Corp. (LCP), formerly known as Logisoft Corp.,
and eStorefronts.net Corp. (eStorefronts). The shareholders of LCP owned
56% of the shares of eStorefronts through March 10, 2000, when LCP and
eStorefronts shares were exchanged in transactions with Logisoft Corp.,
formerly known as Reconversion Technologies, Inc. (Logisoft or the
Company), as discussed below. As a result of these transactions, LCP and
eStorefronts are wholly-owned subsidiaries of Logisoft.
BUSINESS -
Logisoft is a full-spectrum Internet business development enterprise. The
Company offers comprehensive strategic Internet services with core
competencies being sophisticated interactive web development and
domestic/international e-commerce solutions. Additionally, Logisoft
develops and operates a variety of e-commerce/retail businesses through
subsidiaries and strategic partnerships that leverage its knowledge of
technology, e-commerce and Internet marketing.
Logisoft Interactive, the Company's strategic Internet services business,
provides comprehensive, sophisticated Internet strategy and development
capabilities to both traditional and pure e-business companies, with a
focus on globalization. Logisoft Interactive's competitive advantage is the
ability to deliver these services on a global scale which includes a
proprietary e-commerce solution that allows for transactions in multiple
currencies and languages, settlement in multiple countries and multiple
transactions methods - all automated and updated in real time.
eStorefronts partners with both traditional and pure web-based companies to
help its partners capitalize on the opportunities provided by the Internet
to grow their business. eStorefronts participates in the development and
execution of the business plan in exchange for revenue-sharing and/or
equity-based arrangements. eStorefronts partners include Web Planet
Beverages (Jolt Cola), Dunlop and Sentry Group.
LCP was founded in 1989 as a software and hardware provider to corporate
customers and educational entities such as universities and school
districts. LCP's business is being migrated to an Internet based platform.
MERGER TRANSACTIONS -
On March 10, 2000, LCP was acquired by Reconversion Technologies, Inc. (now
known as Logisoft), a public shell company registered in Delaware in a
reverse triangular merger, in which the shareholders of LCP received
7,500,000 shares of Logisoft for all of the outstanding common stock of
LCP. For accounting purposes, this transaction has been recorded as an
issuance of stock by LCP in exchange for the assets of Logisoft. At the
time of acquisition, Logisoft had no operations and its assets consisted of
$5,500,000 in cash and a note receivable for $720,000. Effective May 1,
2000, Reconversion Technologies, Inc. changed its name to Logisoft Corp.
and its ticker symbol to 'LGST' to better reflect its business.
Consistent with the accounting for this transaction as an issuance of
shares by LCP for the assets of Logisoft, the historical financial
statements of LCP replace those of the legal issuer, Logisoft, and the
assets and activity of Logisoft are included in the consolidated financial
statements of the Company from March 10, 2000. The Company will maintain
LCP's December 31 fiscal year end. Logisoft's fiscal year end was June 30.
The $5,500,000 cash in Logisoft on the date of acquisition represents the
proceeds received from the sale of 2,750,000 shares of its stock and the
exercise of 2,750,000 existing warrants to purchase registered shares of
Logisoft common stock at $1.00 per share by nine unrelated investors on
March 9, 2000.
Also on March 10, 2000 and in conjunction with the LCP transaction,
Logisoft acquired all of the outstanding common stock of eStorefronts for
4,500,000 shares of Logisoft in a share exchange. LCP shareholders owned
56% of eStorefronts common stock at the time of this transaction. The share
exchange between the shareholders of eStorefronts and Logisoft has been
accounted for at historical cost for the 56% of eStorefronts controlled by
the LCP shareholders. The acquisition of the minority interest of 44% by
Logisoft has been accounted for using purchase accounting.
The purchase price of the 44% minority interest in eStorefronts in excess
of fair value of net assets acquired has been reflected as goodwill.
Certain eStorefronts shareholders have assumed key executive management
roles in Logisoft. This goodwill of $1,980,000 is being amortized over its
estimated useful life of five years.
In connection with the merger transactions, shareholders owning 50.4% of
the Company including the LCP shareholders, certain eStorefronts
shareholders and other investors entered into voting agreements. The
agreements are effective for two years from the date of the reverse merger
transaction and require the parties to vote to maintain the number of
directors of the Company at four and
Page 7
<PAGE>
to vote for the two candidates for board of directors seats nominated by
(1) the former LCP shareholders and (2) certain investors in the 5,500,000
shares issued on March 9, 2000. The pre-transaction shareholders of LCP and
eStorefronts occupy the key executive management positions of the Company.
On March 7, 2000, Logisoft entered into an agreement for the sale of
Keystone Laboratories, Inc. (Keystone), a drug screening and confirmatory
testing laboratory business, to its former president for a $720,000
promissory note. Keystone's business was operated in the normal course up
to the time of its disposal and was Logisoft's only operating business at
that time. This disposal was a condition precedent to completing the
transactions with LCP and eStorefronts.
(2) BASIS AND PRESENTATION OF FINANCIAL STATEMENTS
----------------------------------------------
The combined balance sheet as of December 31, 1999 and the unaudited
statements of operations and cash flows for the quarter and six month
periods ended June 30, 1999 include the historical combined financial
statements of LCP and eStorefronts giving effect to the 44% minority
interest in eStorefronts. The unaudited consolidated financial statements
for the six months ended June 30, 2000 include the historical combined
accounts of LCP and eStorefronts for the period from January 1, 2000
through March 9, 2000 and reflect the issuance of stock for the assets of
Logisoft and the acquisition of the minority interest in eStorefronts on
March 10, 2000. Accordingly, net income for the six months ended June 30,
2000 includes 56% of the eStorefronts operations through March 9, 2000 and
100% thereafter. The $5,500,000 in cash and the $720,000 note receivable
are recorded as proceeds from the issuance of 18,434,553 shares on March
10, 2000.
The Company has prepared the accompanying unaudited consolidated financial
statements pursuant to the rules and regulations of the Securities and
Exchange Commission regarding interim financial reporting. Accordingly,
they do not contain all of the information and footnotes required by
generally accepted accounting principles for complete financial statements.
These interim financial statements should be read in conjunction with the
audited combined financial statements and notes thereto for the year ended
December 31, 1999 included in the Company's Form 8-KA filed on May 22,
2000. In the opinion of management, the accompanying unaudited consolidated
financial statements reflect all adjustments (consisting of only normal,
recurring adjustments) considered necessary for a fair presentation of the
Company's financial condition as of June 30, 2000, the results of its
operations and cash flows for the three and six month periods ended June
30, 2000 and 1999. Operating results for the three and six month periods
ended June 30, 2000 are not necessarily indicative of the operating results
that may be expected for the year ending December 31, 2000.
All significant intercompany accounts and transactions have been
eliminated.
REVENUE RECOGNITION AND RELATED EXPENSES -
Revenue from uncollateralized e-commerce/retail sales is recognized upon
passage of title of the related goods to the customer.
Strategic Internet services revenue is recognized on a percentage of
completion basis for fixed fee contracts, based on the ratio of costs
incurred to total estimated costs for individual projects. Revenue is
recognized as services are performed for time and material contracts.
Cost of revenue for the e-commerce/retail business is comprised primarily
of the purchased cost of products sold.
Cost of revenue for strategic Internet services consists primarily of
project personnel costs such as salaries, employee benefits and incentive
compensation of billable employees and the cost of any third-party hardware
or software included in an Internet solution.
Sales and marketing expenses include product and service research,
advertising, brand name promotions, lead-generation activities and
shipping/logistics as well as salaries, employee benefits and incentive
compensation of personnel in these functions.
General and administrative expenses are comprised of the salaries, employee
benefits and incentive compensation of personnel responsible for
administrative, accounting, legal, human resources functions, the costs of
the Company's facilities and other general and administrative expense.
CASH AND EQUIVALENTS -
The Company considers all highly liquid investments with an original
maturity of 90 days or less to be cash and equivalents. The Company
maintains its cash in bank demand deposit accounts, which at times may
exceed federally insured limits. The Company has not experienced any losses
in such accounts and believes it is not exposed to any significant credit
risk on cash and equivalents.
INVENTORY -
Inventory consists of computer hardware and software supplies and other
goods held for sale and is stated at the lower of cost, determined on a
first-in, first-out (FIFO) basis, or market.
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<PAGE>
PROPERTY AND EQUIPMENT -
Property and equipment is recorded at cost. Expenditures for renewals and
improvements that significantly add to the productive capacity or extend
the useful life of an asset are capitalized. Expenditures for maintenance
and repairs are charged to operations as incurred. Depreciation is provided
using the straight-line method over the estimated useful lives of the
assets as follows:
Buildings and improvements 40 years
Leasehold improvements 7 years or life of lease, if shorter
Computers, office equipment and software 3 - 5 years
Furniture and fixtures 7 - 10 years
The Company reviews quarterly its properties in accordance with the
Statement of Financial Accounting Standards No. 121 "Accounting for the
Impairment of Long Lived Assets" to determine if its carrying costs will be
recovered from future operating cash flows. In cases where the Company does
not expect to recover its carrying costs, the Company recognizes an
impairment loss.
INTANGIBLE ASSETS -
Intangible assets consist of goodwill, deferred financing costs and prepaid
licensing fees. Goodwill is being amortized over its estimated useful life
of five (5) years. Deferred financing fees are amortized on a straight-line
basis over the term of the related mortgage. Prepaid licensing fees are
amortized over the estimated useful life of the licensing agreement of five
(5) years.
The carrying value of goodwill and other intangible assets are reviewed if
facts and circumstances suggest that they may be impaired. If this review
indicates goodwill or other intangibles will not be recoverable, as
determined based on future expected cash flows or other fair market value
determinations, the Company's carrying value of the goodwill or other
intangibles are reduced to fair value.
ADVERTISING COSTS -
The Company expenses advertising costs as incurred. The Company recorded
advertising expense of $2,235 and $13,600 for the six month periods ended
June 30, 1999 and June 30, 2000, respectively.
INCOME TAXES -
The Company applies the asset and liability approach for financial
accounting and reporting purposes for income taxes. The Company accounts
for certain items of income and expense in different time periods for
financial reporting and income tax purposes. Provisions for deferred income
taxes are made in recognition of such temporary differences, where
applicable. A valuation allowance is established against deferred tax
assets unless the Company believes it is more likely than not that the
benefit will be realized.
STOCK-BASED COMPENSATION -
The Company accounts for stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and related
interpretations and elects the disclosure option of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation"
(SFAS 123). Accordingly, compensation cost for stock options is measured as
the excess, if any, of the fair value of the Company's stock at the date of
the grant over the amount an employee must pay to acquire the stock.
NET INCOME (LOSS) PER COMMON SHARE -
The Company computes net income (loss) per share in accordance with
Statement of Financial Accounting Standards No. 128, "Earnings per Share"
(SFAS No. 128). Under the provisions of SFAS No. 128 basic net income
(loss) per share (Basic EPS) is computed by dividing net income (loss) by
the weighted average number of common shares outstanding. Diluted net
income (loss) per common share (Diluted EPS) is computed by dividing net
income (loss) by the weighted average number of common shares and dilutive
common shares equivalents then outstanding.
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Weighted average common shares outstanding are as follows:
<TABLE>
<CAPTION>
Quarters Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
1999 2000 1999 2000
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Weighted average shares 10,127,555 30,575,212 10,073,515 22,761,923
Dilutive potential shares - - - -
---------- ---------- ---------- ----------
Adjusted weighted
average shares 10,127,555 30,575,212 10,073,515 22,761,923
========== ========== ========== ==========
</TABLE>
FAIR VALUE OF FINANCIAL INSTRUMENTS -
The carrying amounts of financial instruments including cash and
equivalents, accounts receivable, notes receivable, accounts payable and
accrued expenses approximate fair value. The carrying amount of long-term
debt approximates fair value based on current rates of interest available
to the Company for loans of similar maturities.
NEW ACCOUNTING PRONOUNCEMENTS -
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities,"
which is required to be adopted in years beginning after June 15, 1999. In
July, 1999, the FASB issued SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
statement No. 133," which amends SFAS No. 133 to be effective for all
fiscal quarters of all fiscal years beginning after June 15, 2000. The
Company will be required to adopt SFAS 133 for the quarter ending March 31,
2001. The Company anticipates that the adoption of SFAS No. 133 will not
have a significant effect on the financial condition or results of
operations of the Company.
In May 2000, the Emerging Issues Task Force issued EITF 00-2, "Accounting
for Web Site Development Costs", which is required to be adopted for web
site development costs incurred in fiscal quarters beginning after June 30,
2000. The issue provides guidance on how entities should account for web
site development costs, requiring that certain costs, such as planning and
operating costs, be expensed and other costs, including development and
initial graphics creation, be capitalized. EITF 00-2 is not intended to
address the accounting for the hardware infrastructure (for example,
servers) costs that are necessary to support a website. Website development
costs may be internal or external costs. In addition, accounting for the
costs of website development conducted for others under contractual
arrangements is part of reporting on contracts in general and is not
covered by EITF 00-2. The Company is studying the impact of the adoption of
Issue 00-2 on its financial statements.
ESTIMATES -
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements
and accompanying notes. The estimates and assumptions used in the
accompanying combined financial statements are based upon management's
evaluation of the relevant facts and circumstances as of the date of the
financial statements. Actual results could differ from those estimates.
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(3) PROPERTY AND EQUIPMENT
----------------------
Property and equipment consists of the following:
<TABLE>
<CAPTION>
December 31, June 30,
1999 2000
-------------- ----------
<S> <C> <C>
Land, building and improvements $ 290,531 $ 318,971
Computers, network, office equipment and software 163,946 495,026
Furniture and fixtures 16,584 131,496
-------------- ----------
471,061 945,493
Less: Accumulated depreciation (104,020) (136,336)
-------------- ----------
$ 367,041 $ 809,157
============== ==========
</TABLE>
(4) INTANGIBLE ASSETS
-----------------
Intangible assets consist of the following:
<TABLE>
<CAPTION>
December 31, June 30,
1999 2000
-------------- -----------
<S> <C> <C>
Goodwill $ - $1,980,000
Deferred financing costs 7,147 7,147
Prepaid licensing fees 6,000 6,000
-------------- -----------
13,147 1,993,147
Less: Accumulated amortization (1,723) (123,472)
-------------- -----------
$ 11,424 $1,869,675
============== ===========
</TABLE>
(5) OTHER ASSETS
------------
Other assets consist primarily of a deposit on office space in Fairport,
NY.
Page 11
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(6) FINANCING ARRANGEMENTS
----------------------
LONG-TERM DEBT -
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31, June 30,
1999 2000
------------- -----------
<S> <C> <C>
Mortgage payable to a bank in monthly installments
of $1,751, including interest at 7.96% through
October, 2015. $ 198,154 $ 193,110
Capital lease obligation payable in monthly
installments of $4,199, including interest at prime
plus 0.5% through June, 2003. -- 131,205
Capital lease obligation payable in monthly
installments of $367, including interest at 7.00%
through June, 2002. 11,010 8,808
------------- -----------
209,164 333,123
Less: Current portion (9,428) (49,000)
------------- -----------
$ 199,736 $ 284,123
============= ===========
</TABLE>
In June 2000, the Company entered into a three year lease on furniture and
computer equipment for $131,205. The lease transfers title of these assets
to the Company at the end of the lease term, accordingly it is being
accounted for as a capital lease. The interest rate applicable at June 30,
2000 on this lease was 9.5%.
LINE-OF-CREDIT -
The Company may borrow $400,000 under the terms of an annually renewable
working capital line-of-credit agreement. Amounts borrowed bear interest at
the prime rate plus 1% (10.0% at June 30, 2000), are collateralized by all
assets of the Company and are guaranteed by certain shareholders. No
amounts were outstanding on the line-of-credit as of June 30, 2000.
(7) STOCKHOLDER'S EQUITY
--------------------
EQUITY TRANSACTIONS -
All equity transactions have been retroactively restated to reflect the
exchange ratios from the March 10, 2000 merger transactions.
Six months ended June 30, 1999 -
eStorefronts sold 11,250 common shares for $15,000 in January 1999 and
issued 337,500 common shares valued at $150,000 to individuals for services
rendered.
Six months ended June 30, 2000 -
As described in Note 1, LCP and eStorefronts entered into merger
transactions with Logisoft on March 10, 2000. For accounting purposes,
these transactions have been reflected as an issuance of 18,434,553
common shares by LCP in exchange for the assets of Logisoft and the
purchase of the 44% minority interest in eStorefronts. Transaction costs
of $240,650 related to the merger transactions, have been recorded as a
reduction in paid-in capital. These costs relate primarily to investment
banking fees and accounting and legal consulting.
In addition, warrants for the purchase of 520,000 shares of the Company's
common stock were exercised during the quarter, as discussed below.
Page 12
<PAGE>
WARRANTS -
On November 13, 1997, Logisoft's Disclosure Statement and Plan of
Reorganization (the Plan) was confirmed. In connection with the Plan,
Logisoft issued the following warrants to purchase Logisoft's common stock:
- Class A warrants to purchase 1,624,172 shares of common stock at $1
per share exercisable through June 7, 2000.
- Class B warrants to purchase 1,475,973 shares of common stock at $1
per share exercisable through June 7, 2000.
- Upon the exercise of a Class B warrant, a Class C warrant will be
issued allowing the purchase of the number of shares of common stock
equal to the number of shares purchased upon exercise of the Class B
warrants. Class C warrants are exercisable at $1.75 per share through
December 7, 2000.
Prior to the merger transactions, 227,500 Class A warrants were exercised
and an additional 1,300,000 Class B warrants were issued under the Plan.
These Class B warrants and 1,450,000 of the previously issued Class B
warrants were exercised as a part of the sale of 2,750,000 shares of
Logisoft on March 9, 2000 in conjunction with the merger transactions. The
exercise of the 2,750,000 Class B warrants resulted in the issuance of the
same number of Class C warrants.
Subsequent to the merger transactions, 520,000 additional Class A warrants
were exercised. The remaining Class A and B warrants expired on June 7,
2000. Promissory notes were executed with three investors related to the
exercise of 350,000 Class A warrants. The amounts due under these
promissory notes are due on December 9, 2000. In accordance with EITF 85-1,
these notes have been recorded as a component of equity at June 30, 2000.
At June 30, 2000, Class C warrants to purchase 2,767,500 shares at $1.75
were outstanding.
PREFERRED STOCK -
The Company is authorized to issue up to 2,000,000 shares of Series A
non-voting, cumulative preferred stock with a par value of $2.75.
A 6% cumulative dividend is payable quarterly to stockholders of record in
the last day of the month prior to the dividend date. The Series A stock
has a liquidation preference over the Company's common stock as well as any
other classes of stock established by the Company.
STOCK PLANS
In April 2000, the Company adopted its 2000 Stock Option Plan (the "Plan")
and the Company's Board of Directors approved the same. The Plan is subject
to approval by the Company's shareholders at the next shareholders'
meeting. The Plan was established to advance the interests of the Company
and its stockholders by attracting, retaining and motivating key personnel
of the Company. The Board of Directors, or a committee that it appoints, is
authorized to grant options to purchase the Common Stock of the Company,
not to exceed an aggregate maximum of 3,000,000 shares. The Board of
Directors, or a committee that it appoints, is also authorized to establish
the exercise price and vesting terms of individual grants under the Plan.
Options granted under the Plan may be either "incentive stock options"
intended to qualify as such under the Internal Revenue Code, or
"non-qualified stock options". The Company expects that most options
granted pursuant to the Plan will be subject to vesting over a four year
period, such as 25% increments on each grant date anniversary, during which
the optionee must continue to be an employee of the Company. The Board or
the committee, if applicable, may choose to impose different vesting
requirements or none at all. Options outstanding under the Plan may have a
maximum term of up to ten (10) years.
The Plan also provides that all options that are not vested will become
vested upon a change in control, unless the options are either assumed or
substituted with equivalent options. In addition, unvested options become
vested, after a change in control, if an optionee is subject to involuntary
termination other than for cause during that optionee's remaining vesting
period.
A summary of stock option activity during the six months ended June 30,
2000 is as follows:
<TABLE>
<CAPTION>
Weighted average
Options Exercise price
----------- -----------------
<S> <C> <C>
Granted 1,185,200 $ 1.95
Exercised -- --
Forfeited (21,250) 2.51
-----------
Outstanding at June 30, 2000 1,163,950 $ 1.94
===========
</TABLE>
Stock compensation expense has been recorded for 25,000 options issued to
one employee with an exercise price of $0.01 per share. Compensation
expense is being recognized for the difference between the fair value of
the shares on the day the options were granted and the $0.01 exercise
price, over the related service period for these options, one year.
Page 13
<PAGE>
(8) INCOME TAXES
-------------
Income taxes for the six month periods and the quarters ended June 30, 1999
and 2000 have been provided at the effective income tax rate expected for
the calendar year, adjusted for valuation allowances.
(9) COMMITMENTS AND CONTINGENCIES
------------------------------
LEASE -
In March, 2000, the Company entered into an agreement to lease office space
under a non-cancelable lease arrangement. The future minimum lease payments
required under this lease are as follows:
2000 $ 63,125
2001 147,740
2002 166,012
2003 172,104
2004 172,104
Thereafter 143,420
--------
$864,505
========
Rent expense is being recognized on a straight-line basis over the life of
this operating lease.
(10) BUSINESS SEGMENTS
------------------
The Company operates in two business segments: e-commerce/retail and
strategic Internet services. The Company's reportable segments are
strategic business units that offer different products and services. They
are managed separately because each segment requires different technology,
strategic competencies and marketing strategies.
A summary of the Company's two business segments are as follows:
Six months ended June 30, 2000:
<TABLE>
<CAPTION>
Strategic
e-Commerce/ Internet
Retail Services Corporate
------------- ----------- ----------
<S> <C> <C> <C>
Revenue $ 2,243,282 $ 555,188 --
Income (loss) from operations 8,677 (467,808) (221,684)
Depreciation and amortization 15,411 134,668 3,986
Identifiable assets 1,565,440 2,406,408 5,269,697
Capital expenditures 20,556 392,013 61,683
Six months ended June 30, 1999:
Strategic
e-Commerce/ Internet
Retail Services Corporate
------------- ----------- ----------
Revenue $ 1,616,852 $ 218,971 --
Income (loss) from operations 53,437 (23,283) (150,000)
Depreciation and amortization 7,226 4,862 --
Identifiable assets 1,028,026 109,847 276,593
Capital expenditures 16,971 4,598 2,344
Quarter ended June 30, 2000:
Strategic
e-Commerce/ Internet
Retail Services Corporate
------------- ----------- ----------
Revenue $ 1,318,762 $ 288,467 --
Income (loss) from operations 18,765 (507,718) (217,698)
Depreciation and amortization 9,784 109,961 --
Capital expenditures 12,514 378,524 61,683
Quarter ended June 30, 1999:
Strategic
e-Commerce/ Internet
Retail Services Corporate
------------- ----------- ----------
Revenue $ 1,066,133 $ 138,651 --
Income (loss) from operations 49,411 13,716 (147,851)
Depreciation and amortization 2,911 2,331 --
Capital expenditures 11,607 3,353 --
</TABLE>
Page 14
<PAGE>
The Corporate expenses in the second quarter of 1999 relate to stock
compensation costs.
The operating results for strategic Internet services in the six months and
quarter ended June 30,2000 include $121,000 and $99,000, respectively, of
goodwill amortization related to the purchase of the minority interest in
eStorefronts (this amortization was reclassified from e-commerce/retail for
this second quarter report). The second quarter is also impacted by
seasonably high sales related to the fiscal year end of the majority of
educational customers of the Company's computer hardware and software
resale business, which is part of the e-commerce/retail segment.
The large increase in identifiable assets in the strategic Internet
services segment and corporate as of June 30, 2000 is the result of the
funding received in March 2000 and the related goodwill of $1,980,000
from the purchase of the 44% minority interest in eStorefronts.
Corporate assets consist primarily of cash and equivalents, the notes
receivable arising from the March, 2000 merger transactions and warrant
exercises and deferred tax assets. The Company's owned building and land
located in Fairport, NY and related equipment is now associated only with
the Company's e-commerce/retail segment, as it is used primarily by the
computer products resale business.
Subsequent to March 2000, the Company established a corporate services
group, which consists of finance, human resources and information
technology staff. The costs of these departments, consisting mainly of
personnel-related expenses, as well as other corporate expenses such as
accounting and legal fees, public and investor relations, are classified
under Corporate. As the formation of this group occurred subsequent to
March 2000 and involved the addition of new staff, segment data for prior
periods has not been adjusted.
(11) CONCENTRATIONS
--------------
Revenue from one customer accounted for 25% and 13%, respectively, in the
six month periods ended June 30, 1999 and 2000 and 30% and 11%,
respectively, of total revenue in the quarters then ended.
(12) NOTES RECEIVABLE
-----------------
At June 30, 2000, the Company has a non-interest bearing $720,000 note
receivable from the sale of a laboratory business by Logisoft on March 7,
2000, prior to the merger transactions. This note is payable in twelve
equal monthly installments of $60,000 and is collateralized by the assets
of the business sold. As of June 30, 2000, the Company has received three
installments on this note, totaling $180,000.
Three promissory notes, totaling $350,000, were received by the Company in
relation to the exercise of 350,000 Class A warrants during the quarter
ended June 2000. These notes are due by December 9, 2000 and have been
recorded as a component of stockholders' equity.
(13) NON-CASH TRANSACTIONS
----------------------
During the six months ended June 30, 2000, the Company entered into the
following non-cash transactions:
(a) fixed assets, including furniture and computer equipment, were
purchased for $131,205 and financed by a three year capital lease;
(b) a non-interest bearing promissory note with a face value of $720,000
was received in the merger transactions in exchange for the issuance
of the Company's stock;
(c) promissory notes were received for the exercise of 350,000 Class A
warrants to purchase the Company's common stock;
(d) goodwill of $1,980,000 was recorded as a result of the merger
transactions, with a corresponding increase in additional paid in
capital; and
(e) stock issuance costs of $240,000 were accrued in connection with the
merger transactions and related funding.
(14) SUBSEQUENT EVENTS
------------------
Page 15
<PAGE>
Effective July 1, 2000, Logisoft purchased certain e-tailing assets and
rights of Sentry Group related to the sale of safes and related products
on-line. This transaction was completed by eStorefronts, Logisoft's
e-commerce partnerships division. Under the contract, Logisoft must provide
a pre-defined amount of strategic Internet services to Sentry over the
18 months following July 1, 2000. Revenue will be recognized as these
services are delivered to Sentry. In addition, Sentry agreed to provide
Logisoft with its initial safe inventory requirements to operate the new
security site at cost plus 10% (for up to $200,000 of product at Sentry's
manufactured cost). In conjunction with this transaction, Logisoft
engaged Sentry to provide certain consulting services over a period of
five years at a maximum cost of $40,000 per year and Sentry agreed to use
Logisoft as its preferred supplier of strategic Internet services.
(15) PRO-FORMA INFORMATION (UNAUDITED)
----------------------------------
The following information presents the pro forma results of operations for
the Company for the six month periods and the quarters ended June 30, 2000
and 1999 as if the merger transactions had occurred on January 1, 1999:
<TABLE>
<CAPTION>
Three Months Three Months Six months Six months
Ended June 30, Ended June 30, Ended June 30 Ended June 30,
2000 1999 2000 1999
-------------------- -------------------- -------------------- ---------------
<S> <C> <C> <C> <C>
Revenues $ 1,607,229 $ 1,204,784 $ 2,798,470 $ 1,835,823
Income (loss) from operations $ (706,651) $ (183,724) $ (757,815) $ (317,846)
Net income (loss) $ (651,688) $ (191,956) $ (707,288) $ (332,784)
Per share information:
Net income (loss) per share:
Basic and diluted $ (0.02) $ (0.01) $ (0.02) $ (0.01)
==================== ==================== ==================== ===============
Weighted average common shares
outstanding:
Basic and diluted 30,575,212 30,208,358 30,504,883 30,150,568
==================== ==================== ==================== ===============
</TABLE>
The pro forma information above reflects the amortization of the
estorefronts' goodwill of $1,980,000 over five (5) years, the elimination
of the minority interest in eStorefronts' loss from operations and the
weighted average shares amount reflects the number of shares issued in
the merger transactions (18,434,553).
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
The Information In This Discussion Contains Forward-Looking Statements
Within The Meaning Of Section 27a Of The Securities Act Of 1933 And Section
21e Of The Securities Act Of 1934, As Amended. Such Statements Are Based
Upon Current Expectations That Involve Risks And Uncertainties. Any
Statements Contained Herein That Are Not Statements Of Historical Fact May
Be Deemed To Be Forward-Looking Statements. For Example, The Words
"Believes", "Anticipates", "Plans", "Expects", "Intends" And Similar
Expressions Are Intended To Identify Forward-Looking Statements. Logisoft's
Actual Results And The Timing Of Certain Events May Differ Significantly
From The Results Discussed In The Forward-Looking Statements. Factors That
Might Cause Such A Discrepancy Include, But Are Not Limited To, Those
Discussed In "Liquidity And Capital Resources" Below, As Well As "Risk
Factors" Included In Logisoft's Form 8-K/A Dated May 22, 2000, As Filed
With The Securities And Exchange Commission. All Forward-Looking Statements
In This Document Are Based On Information Available To Logisoft As Of The
Date Hereof And Logisoft Assumes No Obligation To Update Any Such
Forward-Looking Statements.
Changes in Control of Logisoft. Pursuant to the merger of Logisoft Corp,
-------------------------------
formerly known as Reconversion Technologies, Inc., a Delaware corporation
("Logisoft" or the "Company") and Logisoft Computer Products Corp., a New
York corporation formerly known as Logisoft Corp.("LCP") and the share
exchange between Logisoft and eStorefronts.net Corp., a New York
corporation ("eStorefronts"), both of which were effective on March 10,
2000 (together, the "Transactions"), control of Logisoft was acquired by
the principals of LCP and eStorefronts. In anticipation of the
Transactions, all but one member of Logisoft's Board of Directors-W. Leo
Morris, Clark Bundren, John Sams and Robert Garner-resigned from the Board,
effective March 9, 2000. The sole remaining member of the Board, Joel Holt,
appointed Robert Lamy, Scott Fox, Alan Kleinmaier(1) and Gene Divine to the
Board of Directors of Logisoft. Joel Holt resigned from the Board effective
March 10, 2000. In connection with the Transactions, certain of LCP and
eStorefront's shareholders assumed the key officer and executive management
positions in Logisoft. Robert Lamy became President of Logisoft, Scott Fox
became Vice President of Marketing, Robert Ballard became President of
Logisoft's Computer Products division and William Lamy became Director of
Technology. Robert Lamy received 4,191,750 shares of Logisoft common stock
(13.8%), William Lamy received 2,826,750 shares of Logisoft common stock
(9.3%), Michael Pruitt received 2,100,000 shares of Logisoft common stock
(6.9%) and Robert Ballard received 907,407 shares of Logisoft common stock
(3.0%).
Page 16
<PAGE>
Further, Robert Lamy, William Lamy and Robert Ballard ("Purchasers")
executed a Voting Agreement with Michael Pruitt, Bruce Goldfarb, Darien
Road,Ltd., Michael Cimino, Corsica Marketing, Inc., Avenel Financial Group
(together, the "Shareholders") and Logisoft on March 10, 2000, pursuant to
which for a period of up to two (2) years from the date of the Transactions
(i) they agreed that Logisoft would have four (4) directors or such greater
number as the Purchasers and the Shareholders would unanimously agree;
(ii)the Purchasers agreed to vote in favor of the election as directors of
Logisoft, two persons nominated by the Shareholders; and (iii) the
Shareholders agreed to vote in favor of the election as directors of
Logisoft, two persons nominated by the Purchasers. In addition, the
Purchasers and David Wilkerson, Scott Fox, David White, Walter Robb, Carl
Mozak and Van Ernst Jakobs Securities have executed a Second Voting
Agreement that allows Robert Lamy, William Lamy and Robert Ballard to vote
shares of those shareholders for purposes of the determination of the
number of directors and election of the individuals nominated, pursuant to
the Voting Agreement. As a result, 50.4% of the outstanding common stock of
the Logisoft are controlled under by the Purchasers and Shareholders these
voting agreements.
-----------
(1) Alan Kleinmaier resigned from the Logisoft Board on April 27, 2000 and the
seat on the Board remains vacant.
ACQUISITION OR DISPOSITION OF ASSETS
Keystone Sale. The majority shareholders of LCP and eStorefronts required
-------------
as a pre-condition of the Transactions that Logisoft sell its wholly-owned
subsidiary, Keystone Laboratories, Inc. ("KLI"). KLI is a forensic urine
drug screening and confirmatory testing laboratory located in Asheville,
North Carolina. Urine laboratory tests are used primarily by employers to
detect the use of illegal substances by employees and/or prospective
employees. On March 7, 2000, Logisoft executed a Purchase and Sale
Agreement to sell all of its issued and outstanding shares of the capital
stock of KLI. Joel Holt, a former president of Logisoft and a director of
Logisoft until the closing of the Transactions, purchased KLI from Logisoft
for a purchase price of $720,000. At the closing of the KLI sale on March
9, 2000, Mr. Holt issued a non-interest bearing promissory note (the
"Note") in the principal amount of the purchase price, payable in twelve
(12) equal monthly installments of $60,000 each, commencing April 1, 2000.
The purchase price for KLI was determined as a result of arms-length
negotiations between Mr. Holt and the Logisoft Board of Directors. (2)
New Capital. The majority shareholders of LCP and eStorefronts required as
-----------
part of the Transactions that Logisoft have at least $5,000,000 in cash
equity at the closing of the Transactions. To meet this pre-condition,
Logisoft issued 5,500,000 shares of Logisoft common stock at a purchase
price of $1.00 per share to nine (9) unrelated investors on March 9, 2000.
Thus, at the time of the closing of the Transactions, Logisoft's assets
consisted of $5,500,000 in cash equity plus the Note, and Logisoft
maintained no operations.
LCP Merger. On March 10, 2000, Logisoft consummated a merger with LCP.
-----------
Pursuant to the Agreement and Plan of Reorganization, a wholly-owned New
York subsidiary of Logisoft was merged with and into LCP in a reverse
triangular merger, the surviving corporation of the merger, becoming a
wholly-owned subsidiary of Logisoft (the "LCP Merger"). Prior to the LCP
Merger, Robert Lamy, William Lamy, Robert Ballard and Michael Pruitt were
the sole shareholders of LCP. Upon consummation of the LCP Merger, all of
the outstanding common stock of LCP was converted into 7,500,000 shares of
Logisoft common stock. The conversion ratio of LCP stock into Logisoft
stock was determined as a result of arms-length negotiations between
unrelated parties and was based upon a review of financial statements,
business plans and recent valuations placed on e-commerce companies.
eStorefronts Exchange. On March 10, 2000, Logisoft also consummated the
----------------------
acquisition of eStorefronts, an affiliate of LCP. Pursuant to the Agreement
and Plan of Reorganization, Logisoft exchanged 4,500,000 shares of Logisoft
common stock for all of the issued and outstanding shares of eStorefronts'
common stock (the "eStorefronts Exchange"). Prior to the eStorefronts
Exchange, the shareholders of eStorefronts were Robert Lamy, William Lamy,
Robert Ballard, Walter Robb, James Tusty, David White, Scott Fox, David
Wilkerson, Jeff Sorenson and Matthew Bailey. Upon consummation of the
eStorefronts Exchange, eStorefronts became a wholly-owned subsidiary of
Logisoft. The conversion ratio of eStorefronts stock into Logisoft stock
was determined as a result of arms-length negotiations between unrelated
parties and was based upon a review of financial statements, business plans
and the recent valuations placed on e-commerce companies.
Effective May 1, 2000, Logisoft changed its name from Reconversion
Technologies, Inc. to Logisoft Corp. to better reflect its business.
-----------
(2) The prior audited financial results of KLI, together with the evaluation of
expected future results, were the primary factors utilized in determining
the purchase price.
OVERVIEW
Logisoft operates its business through its two wholly-owned subsidiaries.
Logisoft Computer Products Corp. (LCP), which encompasses the Logisoft
Computer Products division, and eStorefronts.net Corp, which contains
the Company's strategic Internet services business ("Logisoft Interactive"
or "LGI") and its e-commerce activities. E-commerce activities are operated
under the name eStorefronts.net.
LGI provides comprehensive, sophisticated Internet capabilities primarily
to traditional brick and mortar companies whose objectives include
developing a robust web presence that includes commerce. Logisoft
Interactive provides up front planning with our strategic consulting
services, custom front-end
Page 17
<PAGE>
architecture and web site development as well as comprehensive back end
support upon web site completion. LGI's competitive advantage is the unique
ability to deliver these services on a global scale which includes a
proprietary e-commerce solution that allows for transactions in multiple
currencies and languages, settlement in multiple countries and in multiple
transaction methods - all automated and updated in real time.
eStorefronts partners with both traditional and pure web-based companies to
take advantage of the opportunities provided by the Internet to grow their
businesses. It participates in the development and execution of the
business plan in exchange for revenue-sharing and/or equity-based
arrangements. eStorefronts partners include Web Planet Beverages (Jolt
Cola), Dunlop and Sentry Group.
LCP was founded in 1989 as a software and hardware provider to corporate
customers and educational entities such as universities and school
districts. This business is operated as Logisoft Computer Products
("Computer Products"). Computer Products has grown consistently for the
past 10 years and is being migrated to an Internet-based platform.
The Company's strategic Internet services revenues are derived from fees
for services generated on a project-by-project basis. In general, clients
are charged for the time, materials and expenses incurred on a particular
project; however, a portion of the Company's revenue is derived from
fixed-fee contracts.
The equity funding raised by the Company in connection with the
transactions discussed above will allow the Company to aggressively pursue
its Internet and e-commerce growth strategy through expansion of its client
base and headcount and increased investment in engagement methodology,
product/solution development and brand awareness.
The Company's operating results and quarter-to-quarter margins may
fluctuate in the future as a result of many factors, some of which are
beyond the Company's control. Historically, the Company's quarterly margins
have been impacted by:
- The timing of growth of staff, including billable staff, during each
quarter
- The number of client engagements undertaken or completed - Seasonality
- The mix of fixed fee and time and materials contracts
- The number of days in the quarter
- Utilization rates of billable employees
- Marketing and business development expenses
- Economic conditions generally or in the information technology
services market
The Company expects this trend to continue.
In the second quarter of fiscal 2000, the Company invested aggressively to
develop the infrastructure, management and staff required to substantially
increase the revenue generating potential of the business, in particular
the strategic Internet services division. This effort is expected to
continue throughout 2000, resulting in a loss for the full year. However,
operating losses are expected to be significantly reduced by the fourth
quarter of 2000 as a result of an increase in revenue.
BASIS AND PRESENTATION OF FINANCIAL STATEMENTS
The LCP Merger has been accounted for as an issuance of stock by LCP for
the assets of Logisoft. The share exchange between the shareholders of
eStorefronts and Logisoft has been accounted for at historical cost for the
56% of eStorefronts controlled by the LCP shareholders. Accordingly, the
historical combined financial statements of LCP and eStorefronts replace
those of Logisoft. The Company will maintain LCP's December 31 fiscal year
end. Logisoft's fiscal year end was June 30.
The combined balance sheet as of December 31, 1999 and the unaudited
combined statements of operations and cash flows for the six months and
quarter ended June 30, 1999 include the historical combined financial
statements of LCP and eStorefronts, giving effect to the 44% minority
interest in eStorefronts. The unaudited consolidated financial statements
for the quarter ended June 30, 2000 include the historical combined
accounts of LCP and eStorefronts for the period from January 1, 2000
through March 9, 2000 and reflect the issuance of stock for the assets of
Logisoft and the acquisition of the minority interest in eStorefronts on
March 10, 2000. Accordingly, net income for the six months and quarter
ended June 30, 2000 includes 56% of the eStorefronts operations through
March 9, 2000 and 100% thereafter. The $5,500,000 in cash and the $720,000
note receivable have been recorded as proceeds from the issuance of
18,434,553 shares on March 10, 2000. The acquisition of the 44% minority
interest in eStorefronts has been recorded at the fair value of the shares
issued to the eStorefronts minority shareholders, resulting in goodwill of
$1,980,000, which is being amortized over its estimated useful life of five
years.
PRESENTATION OF INFORMATION IN THE FINANCIAL STATEMENTS
Revenue from uncollateralized e-commerce/retail sales is recognized upon
passage of title of the related goods to the customer.
Page 18
<PAGE>
Strategic Internet services revenues is recognized on a percentage of
completion basis for fixed fee contracts based on the ratio of costs
incurred to total estimated costs for individual projects. Revenue is
recognized as services are performed for time and material contracts.
Costs of revenues for our e-commerce/retail business are comprised
primarily of the purchased cost of products sold.
Cost of revenues for strategic Internet services consist primarily of
project personnel costs such as salaries, employee benefits and incentive
compensation of billable employees and the cost of any third-party hardware
or software included in an Internet solution.
Sales and marketing expenses include product and service research,
advertising, brand name promotions and lead-generation activities,
shipping/logistics as well as salaries, employee benefits and incentive
compensation of personnel in these functions.
General and administrative expenses are comprised of the salaries, employee
benefits and incentive compensation of personnel responsible for
administrative, accounting, legal, human resources functions, the costs of
the company's facilities and other general and administrative expense.
Page 19
<PAGE>
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
Quarter ended Six months
June 30, ended June 30,
-------------- --------------
1999 2000 1999 2000
------ ------ ------ ------
<S> <C> <C> <C> <C>
REVENUE:
E-commerce/retail 88.5% 82.1% 88.1% 80.2%
Strategic Internet services 11.5% 17.9% 11.9% 19.8%
------ ------ ------ ------
Total revenue 100.0% 100.0% 100.0% 100.0%
------ ------ ------ ------
COST OF REVENUE:
E-commerce/retail 76.8% 69.2% 75.9% 68.3%
Strategic Internet services 6.4% 10.9% 8.0% 10.1%
------ ------ ------ ------
Total cost of revenue 83.2% 80.0% 83.9% 78.4%
------ ------ ------ ------
Gross profit 16.8% 20.0% 16.1% 21.6%
------ ------ ------ ------
OPERATING EXPENSES:
Sales and marketing 5.3% 18.8% 7.1% 14.7%
General and administrative 5.6% 30.0% 6.8% 21.3%
Bad debt provision 0.0% 7.2% 0.0% 4.1%
Stock based compensation 12.5% 0.5% 8.2% 0.3%
Depreciation 0.4% 1.3% 0.6% 1.2%
Amortization 0.0% 6.2% 0.0% 4.4%
------ ------ ------ ------
Total operating expenses 23.8% 64.0% 22.7% 45.9%
------ ------ ------ ------
Income (loss) from operations -7.0% -44.0% -6.5% -24.3%
------ ------ ------ ------
OTHER INCOME (EXPENSE):
Interest expense -0.5% -0.3% -0.6% -0.7%
Interest income 0.0% 3.6% 0.0% 2.8%
Other 0.0% 0.0% 0.0% 0.0%
------ ------ ------ ------
-0.5% 3.3% -0.6% 2.1%
------ ------ ------ ------
Income (loss) before income taxes
and minority interest -7.5% -40.7% -7.1% -22.2%
INCOME TAXES -0.2% 0.4% -0.2% -0.2%
------ ------ ------ ------
Income (loss) before minority interest -7.7% -40.3% -7.3% -22.4%
MINORITY INTEREST 5.8% 0.0% 4.8% 0.1%
------ ------ ------ ------
NET INCOME (LOSS) -1.9% -40.3% -2.5% -22.3%
====== ====== ====== ======
</TABLE>
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Comparisons between the three and six month periods ended June 30, 2000 and
1999 are difficult to make due to the significant growth of the business
during the second quarter of 2000. During the quarter ended June 30, 2000,
the Company's staff increased from 21 to more than 50 employees. The
overall growth in staff was similar when comparing June 2000 and June 1999.
From June 1999 to June 2000, billable personnel increased from seven to 19,
sales, business development, customer service and marketing staff increased
from three to 13 and management and administrative personnel increased from
four to nine.
This growth in our staff drove the greater than 100% increase in strategic
Internet services revenue from the quarter ended June 1999 to the quarter
ended June 2000. The growth of the Company's infrastructure and business
development and sales functions, by more than three-fold from June 1999, is
expected to drive significant revenue growth in the second six months of
2000 and beyond.
COMPARISON OF THE THREE MONTHS ENDED JUNE 30, 2000 AND 1999
REVENUES. Revenues increased $402,445 or 33% to $1,607,229 for the quarter
ended June 30, 2000 from $1,204,784 for the quarter ended June 30, 1999.
The increase was attributable to increases in both e-commerce/retail sales
and strategic Internet services.
Sales of computer products to industrial, health care and educational
markets, increased $252,629 or 24% to $1,318,762 for the quarter ended June
30, 2000 from $1,066,133 for the quarter ended June 30, 1999. This increase
was due to greater penetration of key accounts, including increased
purchases of client licenses by a significant customer as a part of that
customer's program to achieve licensing compliance with certain software
makers. During the quarter ended June 30, 2000, sales to this customer
accounted for approximately 11% of total revenues for the period, 30% in
the year-earlier period. The customer's licensing compliance program also
resulted in increased sales during the last half of 1999 and is expected be
completed in fiscal 2000. Historically, computer products sales in the
second quarter have been high compared with other quarters because the
fiscal year of many of the Company's educational customers ends in June and
these customers complete the spending of annual budgets.
Revenues from strategic Internet services increased $149,816 or 108%
To $288,467 for the quarter ended June 30, 2000 from $138,651 for the
quarter ended June 30, 1999. This revenue growth was due to an increase in
our client base and an increase in headcount. In the quarter ended June 30,
2000, the number of active engagements for strategic Internet services more
than doubled versus the prior year period. However, revenue in the second
quarter was limited by the completion of certain pre-Transactions contracts
at lower effective rates per hour than current contracts, training of new
staff and work on further development of our e-commerce platform. For the
quarter ended June 30, 2000, strategic Internet services revenue
represented 18% of total revenue, up from 12% in the quarter ended June 30,
1999 and 14% for the year ended December 31, 1999.
COST OF REVENUES. Cost of revenues increased $283,964 or 28% to $1,286,378
for the quarter ended June 30, 2000 from $1,002,414 for the quarter ended
June 30, 1999. The dollar increase was attributable to the higher revenues
for both e-commerce/retail and strategic Internet services. As a percentage
of revenues, cost of revenues decreased from 83% in the quarter ended June
30, 1999 to 80% in the quarter ended June 30, 2000 due to the growth of
strategic Internet services as a portion of total revenue. Gross margin for
the strategic Internet services business decreased versus the same period
in 1999 as a result of a decrease in utilization resulting from the
training of large number of staff hired during the current quarter and
completion of pre-Transactions engagements. During the quarter ended June
30, 2000, the gross margin in the strategic Internet services business was
39% versus 44% for the quarter ended June 30, 1999.
SALES AND MARKETING. Sales and marketing costs increased $238,076 to
$302,353 for the quarter ended June 30, 2000 from $64,277 for the quarter
ended June 30,1999. The dollar increase was primarily attributable to
higher numbers of sales, business development and marketing personnel,
including our Vice President of Marketing and our five person business
development and marketing team. These professionals have been added to
drive the growth of our strategic Internet services business. As a
percentage of revenues, sales and marketing expenses increased to 19% in
the quarter ended June 30, 2000 from 5% in the year earlier period.
GENERAL AND ADMINISTRATIVE. General and administrative costs increased
$414,798 to $482,373 for the quarter ended June 30, 2000 from $67,575 for
the quarter ended June 30, 1999. The dollar increase was attributable to
increased headcount and increased infrastructure to support the growth of
the strategic Internet services business. During the quarter, the Company
added its CEO, CFO and additional human resources and information
technology resources. Higher infrastructure spending relates to rent of the
Company's new office space to house its Internet business in Fairport, NY,
costs to upgrade the Company's internal computer networks, public
relations, investor relations, accounting and legal costs related to the
Company's recent public reporting status and other general costs to support
the growth of the business. General and administrative expenses also
include $87,000 of hiring/recruiting costs, including signing bonuses and
relocation, required to support the growth of our staff and the development
of human resources procedures and policies.
During the quarter, the Company recorded a provision for bad debts of
$115,000 related to strategic Internet services clients with whom the
Company has ended its supplier relationship. The Company is planning to
pursue its claim the amounts it is owed, however, it has reserved for the
amount that believed to be uncollectable. The bad debt provision relates to
contracts that were entered into prior to the Transactions.
DEPRECIATION. Depreciation expense increased $15,334 in the quarter ended
June 30, 2000 to $20,385 as a result of increased purchases of furniture,
leaseholds, computer, network and other equipment to support the growth of
the strategic
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Internet services business and facilities. The company invested $474,429 in
capital equipment during the six months ended June 30, 2000 and $23,913 in
the six months ended June 30, 1999.
AMORTIZATION. Amortization expenses increased $99,169 in the quarter ended
June 30, 2000 versus the prior year period as a result of the amortization
of the goodwill of $1,980,000 recorded for the acquisition of the 44%
minority interest in eStorefronts on March 10, 2000.
INTEREST INCOME AND INTEREST EXPENSE. Interest expense decreased slightly
to $5,482 for the quarter ended June 30, 2000. During the quarter ended
June 30, 2000, the Company recorded $58,375 in interest income. Investment
balances at June 30, 2000 relate to the proceeds of $5,500,000 received as
a result of the Transactions and the $170,000 received with the exercise of
warrants. During the quarter, other expenses of $4,583 were recorded,
relating primarily to a provision for loss on marketable securities of
$4,500. These securities were purchased by the Company in 1999.
PROVISION FOR INCOME TAXES. For the quarter ended June 30, 2000, a net tax
benefit of $6,653 was recorded due to the operating loss incurred. In the
three months ended June 30, 1999 a net tax provision of $2,289 was
recorded. The tax charges in income tax expense represents combined federal
and state income taxes. In 1999, a net tax provision was recorded despite
the financial statement loss due to non-deductible permanent differences
and valuation allowances recorded on deferred tax assets. The effective tax
rate may vary from period to period based on the Company's future expansion
into areas with varying income tax rates and deductibility of certain costs
and expenses by jurisdiction.
MINORITY INTEREST. As noted previously the LCP shareholders owned 56% of
eStorefronts common stock prior to the mergers. Accordingly, the combined
financial statements reflect the minority interest's portion of the
operating losses of eStorefronts for the quarter ended June 30, 1999 of
$69,777. The loss in 1999 is attributable to the launch of eStorefronts,
stock compensation expenses and the costs of development of its initial
web-sites.
NET INCOME (LOSS). The Company recorded a net loss of $651,688 for the
quarter ended June 30, 2000 versus a net loss of $22,850 for the quarter
ended June 30, 1999. The increased net loss reflects the Company's
investments in building its infrastructure and ability to sell its products
and services, which is expected to lead to drive significant revenue growth
in the third and fourth quarters of 2000.
COMPARISON OF THE SIX MONTHS PERIODS ENDED JUNE 30, 2000 AND 1999
REVENUES. Revenues increased $962,647 or 52% to $2,798,470 for the six
months ended June 30, 2000 from $1,835,823 for the six months ended June
30, 1999. The increase was attributable to increases in both
e-commerce/retail sales and strategic Internet services.
Sales of computer products to industrial, health care and educational
markets, increased $626,430 or 39% to $2,243,282 for the six months ended
June 30, 2000 from $1,616,852 for the six months ended June 30, 1999. This
increase was due to greater penetration of key accounts, including
increased purchases of client licenses by a significant customer as a part
of that customer's program to achieve licensing compliance with certain
software makers. During the six months ended June 30, 2000, sales to this
customer accounted for approximately 13% of total revenues for the period,
25% in the year-earlier period.
Revenues from strategic Internet services increased $336,217 or 154%
To $555,188 for the six months ended June 30, 2000 from $218,971 for
the six months ended June 30, 1999. This revenue growth was due to an
increase in our client base and an increase in headcount. However, revenue
in the second six months was limited by the completion of certain
pre-Transactions contracts at lower effective rates per hour than current
contracts. For the six months ended June 30, 2000, strategic Internet
services revenues represented 20% of total revenues, up from 12% in the six
months ended June 30, 1999 and 14% for the year ended December 31, 1999.
COST OF REVENUES. Cost of revenues increased $654,446 or 43% to $2,193,865
for the six months ended June 30, 2000 from $1,539,419 for the six months
ended June 30, 1999. The dollar increase was attributable to the higher
revenues for both e-commerce/retail and strategic Internet services. As a
percentage of revenues, cost of revenues decreased from 84% in the six
months ended June 30, 1999 to 78% in the six months ended June 30, 2000 due
to the growth of strategic Internet services as a portion of total revenue.
Gross margin for the strategic Internet services business increased to 49%
from 33% in the same period in 1999. Strategic Internet services margins in
1999 were depressed as a result of the significant investment in developing
the Company's proprietary international e-commerce platform, which resulted
in reduced average billing rates.
SALES AND MARKETING. Sales and marketing costs increased $280,945 to
$410,764 for the six months ended June 30, 2000 from $129,819 for the six
months ended June 30,1999. The dollar increase was primarily attributable
to higher numbers of sales, business development and marketing personnel,
including our Vice President of Marketing and our five person business
development and marketing team during the second quarter of 2000. These
professionals have been added to drive the growth of our strategic Internet
services business. As a percentage of revenues, sales and marketing
expenses increased to 15% in the six months ended June 30, 2000 from 7% in
the year earlier period.
GENERAL AND ADMINISTRATIVE. General and administrative costs increased
$473,217 to $597,560 for the six months ended June 30, 2000 from $124,343
for the six months ended June 30, 1999. The dollar increase was
attributable to increased headcount and increased infrastructure to support
the growth of the strategic Internet services business. During the second
quarter of 2000, the Company
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<PAGE>
added its CEO, CFO and additional human resources and information
technology resources. Higher infrastructure spending relates to rent of the
Company's new office space to house its Internet business in Fairport, NY,
costs to upgrade the Company's internal computer networks, public
relations, investor relations, accounting and legal costs related to the
Company's recent public reporting status and other general costs to support
the growth of the business.
The Company recorded a provision for bad debts of $115,000 related to
strategic Internet services clients with whom the Company has ended its
supplier relationship. The Company is planning to pursue its claim the
amounts it is owed, however, it has reserved for the amount that believed
to be uncollectable. The bad debt provision relates to contracts that were
entered into prior to the Transactions.
DEPRECIATION. Depreciation expense increased $20,506 in the six months
ended June 30, 2000 to $32,316 as a result of increased purchases of
furniture, leaseholds, computer, network and other equipment to support the
growth of the strategic Internet services business and facilities. The
company invested $474,429 in capital equipment during the six months ended
June 30, 2000 and $23,913 in the six months ended June 30, 1999.
AMORTIZATION. Amortization expenses increased $121,471 in the six months
ended June 30, 2000 versus the prior year period as a result of the
amortization of the goodwill of $1,980,000 recorded for the acquisition of
the 44% minority interest in eStorefronts on March 10, 2000.
INTEREST INCOME AND INTEREST EXPENSE. Interest expense decreased to $18,977
for the six months ended June 30, 2000 due to higher average borrowings and
higher interest rates. During the six months ended June 30, 2000, the
Company recorded $79,563 in interest income related to the funding it
received in March 2000. During the six months, other expenses of $4,500
were recorded, relating to a provision for loss on marketable securities.
These securities were purchased by the Company in 1999.
PROVISION FOR INCOME TAXES. For the six months ended June 30, 2000, a net
tax provision of $5,559 was recorded versus $2,926 in the prior year. The
tax charges in income tax expense represents combined federal and state
income taxes. The effective tax rate may vary from period to period based
on the Company's future expansion into areas with varying income tax rates
and deductibility of certain costs and expenses by jurisdiction.
MINORITY INTEREST. As noted previously the LCP shareholders owned 56% of
eStorefronts common stock prior to the mergers. Accordingly, the combined
financial statements reflect the minority interest's portion of the
operating losses of eStorefronts for the six months ended June 30, 2000 and
1999 of $1,002 and $88,018, respectively. The loss in 1999 is attributable
to the launch of eStorefronts, stock compensation expenses and the costs of
development of its initial web-sites.
NET INCOME (LOSS). The Company recorded a net loss of $629,286 for the six
months ended June 30, 2000 versus a net loss of $46,112 for the six months
ended June 30, 1999. The increased net loss reflects the Company's
investments, made primarily in the second quarter of 2000, in building its
infrastructure and ability to sell its products and services, which are
expected to drive significant revenue growth in the second six months of
2000.
LIQUIDITY AND CAPITAL RESOURCES
During the six months ended June 30, 2000, the Company's cash and
equivalents increased by a net $4.6 million, driven by funding received of
$5.8 million less debt repayment of $350,000, cash used in operations of
$550,000 and capital investments of $340,000.
On March 10, 2000, LCP completed a reverse triangular merger with Logisoft,
which for accounting purposes was treated as an issuance of shares by LCP
to shareholders of Logisoft for $5.5 million in cash and a non-interest
bearing promissory note of $720,000.
The Company may borrow up to $400,000 under the terms of an annually
renewable working capital line-of-credit agreement. Amounts borrowed bear
interest at the prime rate plus 1%. Borrowings under this facility are
collateralized by all of the Company's assets and are guaranteed by certain
of the Company's shareholders. The line of credit was repaid in April 2000
and no balance was outstanding at June 30, 2000.
The Company also has a mortgage payable to a bank on its office facility in
Rochester, NY that houses its Computer Products division. The amount
outstanding on this mortgage was $193,110 at June 30, 2000. This mortgage
requires monthly payments totaling $21,000 annually through October 2015.
In June 2000, the Company entered into a three-year capital lease for
$131,205 of furniture and computer equipment. This lease bears interest at
prime plus 0.5% and requires monthly payments totaling $50,388 annually.
The Company invests predominantly in instruments that are highly liquid,
investment grade, and have maturities of less than one year, with the
intent to make such funds readily available for operating purposes. At June
30, 2000, the Company had $4,646,035 million in cash and equivalents
including $3,500,000 that was invested in certificates of deposit with 30
to 60 day terms, at a rates approximating 6%. The remainder of the
Company's cash and cash equivalents was held in available funds, including
money market accounts earning between 5% and 6%.
During the six months ended June 30, 2000, the Company used $550,394 in
cash in its operations, primarily due to the operating loss incurred during
the period then ended. The operating loss was financed principally by the
proceeds from the Transactions and warrant exercises. During this period,
net working capital increased by $196,000 due to seasonally higher accounts
receivable at the end of June 2000 and as a result of generally higher
sales volumes.
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Historically, accounts receivable balances are high at quarter ends due to
customer ordering patterns for computer products. This trend is
particularly significant at June due to the seasonally high sales in the
quarter and the month of June. Customer payment terms range from net 30
days to net 180 days, for certain of the Company's large municipal and
health care computer products customers. For strategic Internet services
projects, a customer deposit is generally required prior to commencing work
and subsequent billings are made as pre-established milestones are
completed. Billings for strategic Internet services projects are generally
due upon presentation of invoices.
During the six months ended June 30, 2000, investments in fixed assets
totalled $474,429, including $131,205 of which was financed through a
capital lease. These investments were directed at completing the Company's
new office facility in Fairport, NY, computer and other general use
equipment required by the increased staff levels, which more than doubled
during the period, and the upgrade of the Company's computer network to
support the increased volume and sophistication of the Company's business.
In addition, the Company invested $60,000 in an internal financial system,
which will allow for better management reporting and control of the
business, including project/engagement management.
During the six months ended June 30, 2000, 520,000 Class A warrants to
purchase the Company's common stock were exercised. Proceeds of $170,000
have been received related to the exercise of these warrants, while the
remaining $350,000 is scheduled to be received by December 9, 2000,
pursuant to promissory notes from investors executed in connection with the
warrant exercise.
In the quarter ended June 30, 2000, three payments, totalling $180,000,were
received on the KLI note receivable. Nine payments of $60,000 are scheduled
to be received from July 2000 to March 2001.
At June 30, 2000, the Company had outstanding capital expenditure
commitments totaling approximately $100,000 relating primarily to
additional equipment for the Company's growing workforce, its recently
announced Chicago office and completion of the network upgrade.
The Company believes its available cash resources and credit facilities
will be sufficient to meet its anticipated working capital and capital
expenditure requirements for at least the next twelve months. However, the
Company may need to raise additional funding sooner in order to support its
growth, develop new or enhance existing products and services, respond to
competitive pressures, acquire complementary businesses or take advantage
of unanticipated opportunities. Certain investors who purchased shares of
Logisoft prior to the merger transaction through the exercise of 2.75
million existing Class B warrants, received Class C warrants to purchase an
additional 2.75 million shares of the Company's stock exercisable through
December 7, 2000 at $1.75 per share. If all of these warrants were
exercised the Company would receive proceeds of approximately $4.8 million.
YEAR 2000 RISK
Prior to December 31, 1999, many installed computer systems and software
products were coded to accept only two-digit entries to identify a year in
the date code field. Consequently, as of January 1, 2000, many of these
systems could fail or malfunction because they may not be able to
distinguish between 20th century date and 21st century dates. Accordingly,
many companies, including Logisoft and Logisoft's customers, potential
customers, vendors and strategic partners, have upgraded their systems to
comply with applicable "Year 2000" requirements.
Because Logisoft and its clients are dependent, to a very substantial
degree, upon the proper functioning of its and their computer systems, a
failure of its or their systems to correctly recognize dates beyond
December 31, 1999 could materially disrupt operations, which could
materially and adversely affect Logisoft's business, results of operations
and financial condition. Additionally, Logisoft's failure to provide Year
2000 compliant products and services to our clients could result in
financial loss, reputation harm and legal liability.
In 1998 and 1999, Logisoft completed a review of its information technology
systems, hardware and software, and its non-information technology systems,
and took action to remediate systems, where necessary. Logisoft believes it
has identified its mission critical systems. Logisoft has obtained
confirmations from the providers of these systems that they are Year 2000
compliant and has conducted internal tests of such systems as part of its
Year 2000 efforts.
Logisoft has confirmed Year 2000 compliance of all material existing
Logisoft systems supplied by third party providers and continues to test
new products. Logisoft has obtained written certification regarding the
critical hardware and software systems used to assemble client solutions or
to support Logisoft's internal electronic infrastructure. Logisoft has also
obtained written certification regarding facilities items and other
non-standard applications and systems.
Logisoft has not examined third party readiness. Logisoft has not
researched and is not researching its clients' readiness, except to the
extent clients request Logisoft to examine solutions delivered by Logisoft.
Prior to December 31, 1999, Logisoft completed contingency plans for
critical individual information technology systems and non-information
technology systems for implementation. Logisoft has not to date experienced
any material adverse effects of its systems. Furthermore, management
believes that the Year 2000 risk will not pose significant future
operational problems for Logisoft's computer systems.
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However, there is no guarantee that Logisoft's Year 2000 program, including
consulting with third parties, will avoid any future material adverse
effects on Logisoft's operations, customer relations or financial
condition. Logisoft's total cost of its year 2000 readiness program was not
significant. There is no guarantee that additional costs will not be
incurred.
RISK FACTORS
Logisoft stockholders may be exposed to risks inherent in our business. The
value of such an investment may increase or decline and could result in a
loss. Prospective investors should carefully consider the information
contained in our Form 8-K/A filed on May 22, 2000 before deciding to invest
in Logisoft Common Stock.
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
Logisoft is exposed to a variety of risks including changes in interest
rates affecting the return on its investments. This risk results primarily
from our short-term investments. To minimize this risk, the Company invests
in highly liquid instruments that are of investment grade. At June 30,
2000, the Company owned certificates of deposit for $3.5 million earning a
6% return for terms of 30 to 60 days.
The Company also maintains its cash in bank demand deposit accounts, which
at times may exceed federally insured limits. The Company has not
experienced any losses in such accounts and believes it is not exposed to
any significant credit risk on cash and equivalents.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS - NONE
1. Form of Non-Internet bearing Promissory Note RE: Class A
warrant exercise.
27 Financial Data Schedule
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
LOGISOFT CORP.
Date: August 14, 2000 By: /s/ John Van Heel
--------------------------------------
John Van Heel, Chief Financial Officer
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