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: September 30, 2000
Commission File Number: 0-23100
LOGISOFT CORP.
(Exact name of small business issuer as specified in its charter)
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DELAWARE 22-2649848
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(State of Incorporation) (IRS Employer ID No)
375 Woodcliff Drive, Fairport, NY 14450
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(Address of principal executive office)
(716) 249-8600
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(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the past
12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Check whether the registrant filed all documents and reports
required to be filed by Section 12, 13 or 15(d) of the Exchange
Act after the distribution of securities under a plan confirmed
by a court. Yes X No
The number of shares outstanding of registrant's common stock,
par value $.0001 per share, as of November 6, 2000 was
30,954,553.
Transitional Small Business Disclosure Format (Check one): Yes No X
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LOGISOFT CORP.
INDEX
Page
No.
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Part I. Financial Information
Item 1. Financial Statements (unaudited) 4
Balance Sheets -
September 30, 2000 (unaudited) and December 31, 1999 4
Statements of Operations -
Three and nine months ended September 30, 2000 and 1999 (unaudited) 5
Statement of changes in Stockholders' Equity -
Nine months ended September 30, 2000 (unaudited) 6
Statements of cash flows -
Nine months ended September 30, 2000 and 1999 (unaudited) 7
Notes to Combined and Consolidated Financial Statements (unaudited) 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 20
Item 3. Qualitative and Quantitative Disclosures about Market Risk 31
Part II. Other Information 32
Item 5. Other Information 32
Item 6. Exhibits and reports on Form 8-K 32
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<TABLE>
<CAPTION>
LOGISOFT CORP.
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COMBINED AND CONSOLIDATED BALANCE SHEETS
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December 31, September30
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1999 2000
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(unaudited)
<S> <C> <C>
ASSETS
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CURRENT ASSETS:
Cash and equivalents $ 59,550 $1,260,281
Short-term investment - 2,496,824
Accounts receivable, net of allowance of
$10,000 at September 30,2000 1,003,495 1,107,065
Note receivable - 360,000
Note Receivable - officer 6,909 -
Loan receivable - officer - 226,153
Unbilled revenue 12,000 9,100
Inventory 6,542 36,143
Prepaid expenses and other current assets 4,884 221,020
Deferred tax asset 2,651 28,226
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Total current assets 1,096,031 5,744,812
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PROPERTY AND EQUIPMENT, net 367,041 994,844
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OTHER ASSETS:
Intangible assets, net 11,424 1,947,937
Deposits - 35,784
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11,424 1,983,721
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$ 1,474,496 $8,723,377
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</TABLE>
<TABLE>
<CAPTION>
December 31, March 31,
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1999 2000
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(unaudited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
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CURRENT LIABILITIES:
Line-of-credit $ 350,000 $ -
Current portion of long-term debt 9,428 91,413
Note payable - officer 12,000 -
Accounts payable 628,000 937,599
Accrued expenses and other current liabilities 370,784 623,878
Advanced billings 14,800 92,005
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Total current liabilities 1,385,012 1,744,895
LONG-TERM DEBT, net of current portion 199,736 388,431
DEFERRED TAX LIABILITY 3,110 27,351
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Total liabilities 1,587,858 2,160,677
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MINORITY INTEREST 1,002 -
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STOCKHOLDERS' EQUITY:
Preferred stock, $2.75 par value, 2,000,000
shares authorized, no shares issued - -
Common stock, $.0001 par value, 60,000,000
shares authorized, 12,000,000
and 30,954,553 shares issued
and outstanding, respectively 1,200 3,096
Additional paid-in capital 264,550 8,765,232
Notes reveivable (warrant exercise) - (350,000)
Retained earnings (accumulated deficit) (379,112) (1,855,628)
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(113,362) 6,562,700
Less: Minority interest (1,002) -
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Total stockholders' equity (114,364) 6,562,700
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$ 1,474,496 $8,723,377
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</TABLE>
The accompanying notes are an integral part of these financial statements.
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<TABLE>
<CAPTION>
LOGISOFT CORP.
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COMBINED AND CONSOLIDATED STATEMENTS OF INCOME AND OPERATIONS
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(UNAUDITED)
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QUARTER ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
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1999 2000 1999 2000
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<S> <C> <C> <C> <C>
REVENUE:
E-commerce/retail $ 1,046,446 $ 1,213,516 $ 2,663,299 $ 3,456,798
Strategic Internet services 193,040 566,637 412,011 1,121,825
------------- ------------- ------------ -------------
Total revenue 1,239,486 1,780,153 3,075,310 4,578,623
------------- ------------- ------------ -------------
COST OF REVENUE:
E-commerce/retail 912,310 1,076,452 2,305,046 2,988,310
Strategic Internet services 90,373 328,484 237,056 610,491
------------- ------------- ------------ -------------
Total cost of revenue 1,002,683 1,404,936 2,542,102 3,598,801
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Gross profit 236,803 375,217 533,208 979,822
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OPERATING EXPENSES:
Sales and marketing 74,249 517,763 204,068 928,527
General and administrative 69,197 571,501 193,540 1,169,061
Research /product development - 38,514 - 38,514
Bad debt provision - (16,250) - 98,750
Stock based compensation - 15,197 150,000 23,228
Depreciation 5,462 33,156 17,272 65,472
Amortization 289 109,827 568 231,576
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Total operating expenses 149,197 1,269,708 565,448 2,555,128
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Income (loss) from operations 87,606 (894,491) (32,240) (1,575,306)
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OTHER INCOME (EXPENSE):
Interest expense (10,349) (5,175) (22,396) (24,152)
Interest income - 58,132 - 137,695
Other (182) (1,235) 507 (5,735)
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(10,531) 51,722 (21,889) 107,808
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Income (loss) before income taxes
and minority interest 77,075 (842,769) (54,129) (1,467,498)
INCOME TAXES (1,897) (3,459) (4,823) (9,018)
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Income (loss) before minority interest 75,178 (846,228) (58,952) (1,476,516)
MINORITY INTEREST 3,414 - 91,432 1,002
------------- ------------- ------------ -------------
NET INCOME (LOSS) $ 78,592 $ (846,228) $ 32,480 $(1,475,514)
============= ============= ============ =============
NET INCOME (LOSS)
PER COMMON SHARE:
BASIC AND DILUTED $ 0.01 $ (0.03) $ 0.00 $ (0.06)
============= ============= ============ =============
The accompanying notes are an integral part of these statements.
</TABLE>
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<TABLE>
<CAPTION>
LOGISOFT CORP.
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CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
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(UNAUDITED)
Notes Retained
Receivable- Earnings
Common Stock Paid-In Warrent (Accumulated Minority
Shares Amount Capital Exercise Deficit) Interest Total
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<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 - - 23,228 - - - 23,228
Net income (loss) - - - - (1,476,516) 1,002 (1,475,514)
---------- ------- ----------- ------------ ------------ ----------- -----------
BALANCE, September 30, 2000 30,954,553 $ 3,096 $8,765,232 $ (350,000) $(1,855,628) $ - $6,562,700
========== ======= =========== ============ ============ =========== ===========
The accompanying notes are an integral part of these statements.
</TABLE>
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<TABLE>
<CAPTION>
LOGISOFT CORP.
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COMBINED AND CONSOLIDATED STATEMENTS OF CASH FLOWS
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(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30,
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1999 2000
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<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net income (loss) $ 32,480 $ (1,475,514)
Adjustments to reconcile net income (loss) to
Net cash flow from operating activities:
Minority interest (91,432) (1,002)
Depreciation and amortization 18,095 297,048
Bad debt provision - 98,750
Deferred taxes (8,643) (1,334)
Stock based compensation 150,000 23,228
Other non-cash charges - 11,911
Changes in:
Accounts receivable (593,084) (202,320)
Inventory (2,979) (29,601)
Prepaid expenses and other current assets (322) (216,136)
Unbilled revenues, net of advanced billings (21,700) (119,895)
Accounts payable 282,564 309,599
Accrued expenses 21,071 163,653
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Net cash flow used in operating activities (213,950) (1,141,613)
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CASH FLOW FROM INVESTING ACTIVITIES:
Note receivable - 6,909
Loan receivable - officer, net - (226,153)
Deposits - (35,784)
Purchases of short-term investments - (2,496,824)
Purchases of property and equipment (51,404) (400,975)
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Net cash flow from investing activities (51,404) (3,152,827)
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CASH FLOW FROM FINANCING ACTIVITIES:
Borrowings (repayments) on line-of-credit, net 255,000 (350,000)
Repayment of long-term debt (10,366) (21,620)
Proceeds from note receivable - 360,000
Repayment of note payable - officer - (12,000)
Proceeds from sale of stock and exercise of warrants 15,000 5,670,000
Payment of stock transaction costs - (151,209)
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Net cash flow from financing activities 259,634 5,495,171
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CHANGE IN CASH AND EQUIVALENTS (5,720) 1,200,731
CASH AND EQUIVALENTS - beginning of year 105,808 59,550
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CASH AND EQUIVALENTS - end of year $ 100,088 $ 1,260,281
============= =============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash interest paid $ 16,001 $ 23,483
============= =============
Cash taxes paid $ 7,319 $ 37,708
============= =============
</TABLE>
The accompanying notes are an integral part of these statements.
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LOGISOFT CORP.
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NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
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(Unaudited)
(1) Description of Business
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The combined and consolidated financial statements include Logisoft Corp,
Logisoft 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 operates its business through its two wholly-owned subsidiaries.
LCP, which encompasses the Logisoft Computer Products division, and
eStorefronts, which contains the Company's strategic Internet services
business ("Logisoft Interactive" or "LGI") and its e-commerce partnership
activities. E-commerce activities are operated under the name eStorefronts.
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. LCP has
grown consistently for the past 10 years and is being migrated to an
Internet-based platform.
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 Wet Planet Beverages (Jolt
Cola) and Dunlop. Additionally, eStorefronts operates Safesmith.com which
markets a wide range of safety and office products to businesses and
consumers through a best-in-class web site.
LGI provides comprehensive, sophisticated Internet capabilities primarily
to traditional brick and mortar companies whose objectives include
developing a robust web presence that includes e-commerce. LGI provides
up-front planning strategic consulting services, custom front-end
architecture and web site development as well as comprehensive back-end
support upon web site completion. LGI's competitive advantage is the unique
ability to integrate these services on a global scale which includes a
proprietary e-commerce solution, Global Gateway, that enables e-commerce in
50 countries. This platform is being further developed as a comprehensive
and stand-alone software solution for broader distribution.
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 sales cycle for the Company's globalization
services is generally three to six months because of the strategic nature
of customer decisions to engage in global e-commerce. Sales cycles are
shorter for more traditional Internet consulting and web development work.
LGI currently has sales operations in Chicago, Boca Raton, Boston, and
Charlotte as well as its headquarters in Rochester, NY. The Company's
intent is to expand its sales offices as business is established in other
areas of the U.S.
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.
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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 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 sale and was Logisoft's only operating business at that
time. This sale 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 nine month
periods ended September 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 nine months ended September 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 nine months ended September
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 combined and
consolidated financial statements pursuant to the rules and regulations of
the Securities and Exchange Commission regarding interim financial
reporting. Accordingly, they do not contain all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. These interim financial statements should be read in
conjunction with the audited combined financial statements and notes
thereto for the year ended December 31, 1999 included in the Company's Form
8-K/A filed on May 22, 2000. In the opinion of management, the accompanying
unaudited combined and 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 September 30, 2000, the results of its operations and cash flows for the
three and nine month periods ended September 30, 2000 and 1999. Operating
results for the three and nine month periods ended September 30, 2000 are
not necessarily indicative of the operating results that may be expected
for the year ending December 31, 2000.
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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 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.
Research/Product Development Costs -
Research and development costs are expensed as incurred in accordance with
Statement of Financial Accounting Standards No. 86, "Accounting for the
Costs of Computer Software to be Sold, Leased, or Otherwise Marketed". This
statement requires capitalization of certain software development costs
subsequent to the establishment of technological feasibility and prior to
general release of the software. Based on the Company's development
process, technological feasibility is established upon completion of a
working model. The Company has not capitalized any such costs during 2000.
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.
Short-Term Investments -
Short-term investments are classified as available for sale which are
recorded at fair market value. The cost of securities available for sale
are adjusted for amortization of premiums and discounts to maturity.
Interest and amortization of premiums and discounts for all securities are
included in interest income. Realized gains and losses from sales of
available for sale securities were not material for any period presented.
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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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 term of lease, if shorter
Office equipment 3 - 5 years
Software 1 - 5 years
Furniture and fixtures 7 - 10 years
Office equipment includes the Company's computer network, computers and
general office equipment. Software includes the capitalized cost of the
Company's web site and the accounting and project management software that
was purchased during 2000.
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 web site. Web site
development costs may be internal or external costs. In addition,
accounting for the costs of web site 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 capitalizes development costs
related to its own web site in accordance with EITF 00-2.
The Company reviews quarterly its property and equipment 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 $3,386 and $44,400 for the nine-month periods ended
September 30, 1999 and September 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.
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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.
Weighted average common shares outstanding are as follows:
Quarters Ended None Months Ended
September 30, September 30,
---------------------- ----------------------
1999 2000 1999 2000
---------- ---------- ---------- ----------
Weighted average shares
Basic and diluted 10,020,000 30,954,553 10,020,000 25,516,874
========== ========== ========== ==========
Potentially dilutive shares totaling 30,870 and 15,931 for the quarter and
nine month periods ended September 30, 2000 have been excluded from
weighted average shares used to compute loss per share in accordance with
SFAS 128.
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 December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin ("SAB") 101, "Revenue Recognition in Financial
Statements," which provides guidance related to revenue recognition based
on interpretations and practices followed by the SEC. SAB 101 was effective
the first fiscal quarter of fiscal years beginning after December 15, 1999
and requires companies to report any changes in revenue recognition as a
cumulative change in accounting principle at the time of implementation in
accordance with Accounting Principles Board Opinion 20, "Accounting
Changes". In June 2000, the SEC issued SAB 101B, "Amendment: Revenue
Recognition in Financial Statements," which delayed implementation of SAB
101 until the fourth fiscal quarter of 2000. The Company does not expect
the implementation of SAB 101 to have a material effect on its financial
position or results of operations.
--------------------------------------------------------------------------------
Page 12
<PAGE>
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation - an interpretation of APB Opinion No. 25" ("FIN 44"). FIN 44
clarifies the application of APB Opinion No. 25 and among other issues
clarifies the following: the definition of an employee for purposes of
applying APB Opinion No. 25; the criteria for determining whether a plan
qualifies as a noncompensatory plan; the accounting consequence of various
modifications to the terms of previously fixed stock options or awards; and
the accounting for an exchange of stock compensation awards in a business
combination. FIN 44 is effective July 1, 2000, but certain conclusions in
FIN 44 cover specific events that occurred after either December 15, 1998
or January 12, 2000. The application of FIN 44 did not have a material
effect on the Company's financial position or results of operations.
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 and consolidated financial statements are based upon
management's evaluation of the relevant facts and circumstances as of the
date of the financial statements. Actual results could differ from those
estimates.
(3) Acquisition of e-tailing Assets and Rights
-----------------------------------------------
On 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 and is operated as Safesmith.com. Under the contract
with Sentry Group, Logisoft must provide $200,000 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.
(4) Loan Receivable - Officer
----------------------------
In July 2000, the Company entered into a bridge loan with an officer of the
Company related to the purchase of the officer's principal residence. The
amount loaned, $228,000, is secured by the residence and 533,000 shares of
Company stock. During the term of the loan, monthly payments of $1,647 are
due. A balloon payment for all remaining principal and accrued interest
is due on January 17, 2001. Regular payments have been received through
September 30, 2001.
(5) Property and Equipment
------------------------
Property and equipment consists of the following:
December 31, September 30,
1999 2000
-------------- -----------
Land, building and improvements $ 290,531 $ 292,945
Leasehold improvements - 27,897
Office equipment 163,946 573,459
Software - 84,672
Furniture and fixtures 16,584 185,363
-------------- -----------
471,061 1,164,336
Less: Accumulated depreciation
And amortization (104,020) (169,492)
-------------- -----------
$ 367,041 $ 994,844
============== ===========
--------------------------------------------------------------------------------
Page 13
<PAGE>
During the third quarter, the Company completed the development of its own
web site. Certain costs, totaling $12,000, have been capitalized in
accordance with EITF 00-2 and are included as software in these financial
statements. These costs will be amortized over the estimated useful life of
one year.
(6) Intangible Assets
------------------
Intangible assets consist of the following:
December 31, September 30,
1999 2000
-------------- -----------
Goodwill $ - $2,180,000
Deferred financing costs 7,147 7,147
Prepaid licensing fees 6,000 6,000
-------------- -----------
13,147 2,193,147
Less: Goodwill adjustment - (11,911)
Less: Accumulated amortization (1,723) (233,299)
-------------- -----------
$ 11,424 $1,947,937
============== ===========
Goodwill of $1,980,000 relating to the purchase of the 44% minority
interest in eStorefronts is being amortized over five years.
The $200,000 cost of purchasing certain e-tailing assets and rights from
Sentry Group was capitalized as goodwill and will be amortized over the
estimated useful life of five years. Sentry Group agreed to supply
Safesmith.com's initial inventory at manufactured cost plus 10% up to
$200,000 of manufactured cost. Goodwill is also reduced for the difference
between the initial inventory purchases at cost plus 10% and the normal
negotiated pricing to Safesmith.com applicable after the initial inventory
orders. This goodwill adjustment was $11,911 for the quarter and nine
months ended September 30, 2000.
(7) Deposits
--------
Consists of deposits on office space.
(8) Financing Arrangements
-----------------------
<TABLE>
<CAPTION>
Long-Term Debt -
Long-term debt consists of the following:
December 31, September 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 $ 191,127
Capital lease obligation payable in monthly
installments of $5,236, including interest at
prime plus 1.0% through October 2003. - 161,095
Capital lease obligation payable in monthly
installments of $4,199, including interest at
prime plus .5% through June 2003. - 120,700
Capital lease obligation payable in monthly
installments of $367, including interest at
7.00% through June 2002. 11,010 6,922
-------------- ---------------
209,164 479,844
Less: Current portion (9,428) (91,413)
-------------- ---------------
$ 199,736 $ 388,431
============== ===============
</TABLE>
--------------------------------------------------------------------------------
Page 14
<PAGE>
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 September
30, 2000 on this lease was 10.0%.
Also, in September 2000, the Company entered into a three year lease on
furniture and computer equipment for $161,095. 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
September 30, 2000 on this lease was 10.5%.
Line-of-Credit -
The Company may borrow $500,000 under the terms of an annually renewable
working capital line-of-credit agreement. Amounts borrowed bear interest at
the prime rate plus 1% (10.5% at September 30, 2000) and are collateralized
by all assets of the Company.
Debt Covenants -
Certain of the financing arrangements require the Company to maintain
certain financial covenants. The Company is in compliance with all of these
covenants as of September 30, 2000.
(9) Stockholder's Equity
---------------------
Equity Transactions -
All equity transactions have been retroactively restated to reflect the
exchange ratios from the March 10, 2000 merger transactions.
Nine months ended September 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.
Nine months ended September 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. Stock issuance costs of $240,650
related to the merger transactions and funding, have been recorded as a
reduction of 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, as discussed below.
--------------------------------------------------------------------------------
Page 15
<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 was 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 reduction of equity at September 30,
2000.
At September 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 Option 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 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 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 annual 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.
--------------------------------------------------------------------------------
Page 16
<PAGE>
A summary of stock option activity during the nine months ended September
30, 2000 is as follows:
Weighted average
Options Exercise price
----------------- -------------------
Granted 1,565,700 $ 2.00
Exercised - -
Forfeited (138,750) 2.29
-----------------
Outstanding at September 30, 2000 1,426,950 $ 1.98
=================
Stock compensation expense has been recorded for 35,000 options issued to
two employees 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. The
Company recognized $23,228 of stock compensation expense for the nine
months ended September 30, 2000 relating to these options.
(10) Income Taxes
-------------
Income taxes for the nine month periods and the quarters ended September
30, 1999 and 2000 have been provided at the effective income tax rate
expected for the calendar year, adjusted for valuation allowances.
(11) Lease
-----
In March 2000, the Company entered into an agreement to lease office space
under a non-cancelable lease arrangement. The future minimum lease payments
required under this lease are as follows:
2000. . . . . . . .$ 44,274
2001. . . . . . . . 187,701
2002. . . . . . . . 207,092
2003. . . . . . . . 215,532
2004. . . . . . . . 215,532
Thereafter. . . . . 287,376
----------
$1,157,507
==========
Rent expense is being recognized on a straight-line basis over the term of
this operating lease.
(12) 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:
--------------------------------------------------------------------------------
Page 17
<PAGE>
<TABLE>
<CAPTION>
Strategic
e-Commerce/ Internet
Retail Services Corporate
------------- ------------ -----------
<S> <C> <C> <C>
Nine months ended September 30, 2000:
Revenue $ 3,456,798 $ 1,121,825 $ -
Income (loss) from operations (61,706) (1,082,445) (431,155)
Depreciation and amortization 34,306 255,312 7,430
Identifiable assets 1,892,394 2,910,725 3,920,258
Capital expenditures 24,569 596,214 72,492
Nine months ended September 30, 1999:
Revenue $ 2,663,299 $ 412,011 $ -
Income (loss) from operations 100,006 17,754 (150,000)
Depreciation and amortization 9,299 8,541 -
Identifiable assets 1,158,909 106,931 100,087
Capital expenditures 34,617 16,787 -
Quarter ended September 30, 2000:
Revenue $ 1,213,516 $ 566,637 $ -
Income (loss) from operations (70,383) (614,637) (209,471)
Depreciation and amortization 18,895 120,644 3,444
Capital expenditures 4,013 201,089 10,809
Quarter ended September 30, 1999:
Revenue $ 1,046,446 $ 193,040 $ -
Income (loss) from operations 46,569 41,037 -
Depreciation and amortization 2,073 3,678 -
Capital expenditures 15,302 12,188 -
</TABLE>
The Corporate expenses in the first nine months of 1999 relate to stock
compensation costs.
The operating results for strategic Internet services in the nine months
and quarter ended September 30, 2000 include $220,000 and $99,000,
respectively, of goodwill amortization related to the purchase of the
minority interest in eStorefronts.
The large increase in identifiable assets in the corporate and strategic
Internet services segment as of September 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 a loan
receivable from an officer. The Company's owned building and land located
in Fairport, NY and related equipment is associated 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.
(13) Concentrations
--------------
Revenue from one customer accounted for 15% and 21%, respectively, for the
nine month period and quarter ended September 30, 1999. These were two
different customers of the Company's computer products business. The
Company did not recognize revenue from any single customer that represented
greater than 10% of the total revenue in the nine months and quarter ended
September 30, 2000.
(14) Notes Receivable
-----------------
At September 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 September 30, 2000, the Company has received
six installments on this note, totaling $360,000.
--------------------------------------------------------------------------------
Page 18
<PAGE>
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 September 2000. These notes are due by December 9, 2000 and have been
recorded as a reduction in stockholders' equity.
(15) Non-Cash Transactions
----------------------
During the nine months ended September 30, 2000, the Company entered into
the following non-cash transactions:
(a) fixed assets, including furniture and computer equipment, were
purchased for $292,300 and financed by two three year capital leases
in the amounts of $131,205 and $161,095;
(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 totaling $350,000 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;
(e) stock issuance costs of $240,650 were accrued in connection with the
merger transactions and related funding; and
(f) during the third quarter, in conjunction with the purchase of
e-tailing assets and rights from Sentry Group, the Company has agreed
to provide $200,000 of services based on standard hourly rates to
Sentry Group. This obligation has been recorded in current liabilities
in the accompanying financial statements. Through September 30, 2000,
$150,000 had been recognized as revenue based on services provided.
(16) Pro-Forma Information (unaudited)
-----------------------------------
The following information presents the pro forma results of operations for
the Company for the quarters and nine month periods ended September 30,
1999 and 2000 as if the merger transactions had occurred on January 1,
1999:
<TABLE>
<CAPTION>
Quarter Quarter Nine months Nine months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
1999 2000 1999 2000
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Revenues $ 1,239,486 $ 1,780,153 $ 3,075,310 $ 4,578,623
Income (loss) from operations $ (11,394) $ (894,491) $ (329,240) $ (1,652,306)
Net income (loss) $ (23,822) $ (846,228) $ (355,952) $ (1,553,516)
Per share information:
Net income (loss) per share:
Basic and diluted $ - $ (.03) $ (.01) $ (.05)
=============== =============== =============== ===============
Weighted average common
shares outstanding:
Basic and diluted 30,434,553 30,954,553 30,247,506 30,657,765
=============== =============== =============== ===============
</TABLE>
Potentially dilutive shares totaling 30,870 and 15,931 for the quarter and
nine month periods ended September 30, 2000 have been excluded from
weighted average shares used to compute loss per share in accordance with
SFAS 128.
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).
--------------------------------------------------------------------------------
Page 19
<PAGE>
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%).
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.
----------
(1) Alan Kleinmaier resigned from the Logisoft Board on April 27, 2000 and the
seat on the Board remains vacant.
--------------------------------------------------------------------------------
Page 20
<PAGE>
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
based upon the prior audited financial results of KLI, together with the
evaluation of expected future results.
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.
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 partnership activities. E-commerce activities are operated under the
name eStorefronts.net.
LCP was founded in 1989 as a software and hardware provider to corporate
customers and educational entities such as universities and school districts.
LCP has grown consistently for the past 10 years and is being migrated to an
Internet-based platform.
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 Wet Planet Beverages (Jolt Cola) and Dunlop.
Additionally, eStorefronts operates Safesmith.com, which markets a wide range of
safety and office products to businesses and consumers through a best-in-class
web site.
--------------------------------------------------------------------------------
Page 21
<PAGE>
LGI provides comprehensive, sophisticated Internet capabilities primarily to
traditional brick and mortar companies whose objectives include developing a
robust web presence that includes e-commerce. LGI provides up-front planning
strategic consulting services, custom front-end architecture and web site
development as well as comprehensive back-end support upon web site completion.
LGI's competitive advantage is the unique ability to integrate these services on
a global scale which includes a proprietary e-commerce solution, Global Gateway,
that enables e-commerce in 50 countries. This platform is being further
developed as a comprehensive and stand-alone software solution for broader
distribution.
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 sales cycle for the Company's globalization services is generally three to
six months because of the strategic nature of customer decisions to engage in
global e-commerce. Sales cycles are shorter for more traditional Internet
consulting and web development work. LGI currently has sales operations in
Chicago, Boca Raton, Boston, and Charlotte as well as its headquarters in
Rochester, NY. The Company's intent is to expand its sales offices as business
is established in other areas of the U.S.
The equity funding raised by the Company in connection with the Transactions
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. This growth strategy is also being fueled by active strategic
alliance formation that is expected to yield co-marketing, product integration
and referral relationships.
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
- Any delays incurred in connection with a project
- Adequacy of provision for losses
- Use of estimates of resources required to complete on-going projects.
The Company expects this trend to continue.
In the second and third quarters 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. Operating
losses are expected to continue through the first half of fiscal 2001.
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.
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The combined balance sheet as of December 31, 1999 and the unaudited combined
statements of operations and cash flows for the nine months and quarter ended
September 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 nine months ended
September 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 nine months and quarter ended September 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.
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 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.
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RESULTS OF OPERATIONS
Quarter ended Nine months ended
September 30, September 30,
-------------- --------------
1999 2000 1999 2000
------ ------ ------ ------
REVENUE:
E-commerce/retail 84.4% 68.2% 86.6% 75.5%
Strategic Internet services 15.6% 31.8% 13.4% 24.5%
------ ------ ------ ------
Total revenue 100.0% 100.0% 100.0% 100.0%
------ ------ ------ ------
COST OF REVENUE:
E-commerce/retail 73.6% 60.5% 75.0% 65.3%
Strategic Internet services 7.3% 18.5% 7.7% 13.3%
------ ------ ------ ------
Total cost of revenue 80.9% 78.9% 82.7% 78.6%
------ ------ ------ ------
Gross profit 19.1% 21.1% 17.3% 21.4%
------ ------ ------ ------
OPERATING EXPENSES:
Sales and marketing 6.0% 29.1% 6.6% 20.3%
General and administrative 5.6% 32.1% 6.3% 25.5%
Research/product development 0.0% 2.2% 0.0% 0.8%
Bad debt provision 0.0% -0.9% 0.0% 2.2%
Stock based compensation 0.0% 0.9% 4.9% 0.5%
Depreciation 0.4% 1.9% 0.6% 1.4%
Amortization 0.0% 6.2% 0.0% 5.1%
------ ------ ------ ------
Total operating expenses 12.0% 71.3% 18.4% 55.8%
------ ------ ------ ------
Income (loss) from operations 7.1% -50.3% -1.0% -34.4%
------ ------ ------ ------
OTHER INCOME (EXPENSE):
Interest expense -0.8% -0.3% -0.7% -0.5%
Interest income 0.0% 3.3% 0.0% 3.0%
Other 0.0% 0.0% 0.0% 0.0%
------ ------ ------ ------
-0.8% 3.0% -0.7% 2.5%
------ ------ ------ ------
Income (loss) before income taxes
and minority interest 6.2% -47.3% -1.7% -31.9%
INCOME TAXES -0.2% -0.2% -0.2% -0.2%
------ ------ ------ ------
Income (loss) before minority interest 6.1% -47.5% -1.9% -32.1%
MINORITY INTEREST 0.3% 0.0% 3.0% 0.0%
------ ------ ------ ------
NET INCOME (LOSS) 6.3% -47.5% 1.1% -32.1%
====== ====== ====== ======
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COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
EMPLOYEES. Since March 2000, the Company's staff increased from 21 to 72
employees. The overall growth in staff was similar when comparing September
2000 to September 1999. The total number of employees in the
e-commerce/retail, strategic Internet services and corporate administration
segments increased from 7, 12 and 4 to 15, 44 and 13, respectively from
September 30, 1999 to September 30, 2000.
In the e-commerce/retail segment, the increase in staff was due to an
increase in sales and customer service personnel in the computer products
business and the addition of partner site managers with the launch of Jolt,
Dunlop and Safesmith.com partner sites.
In the strategic Internet services business, billable personnel increased
from eight to 26, sales, business development and marketing staff increased
from three to 11, a dedicated product development function was launched
during the quarter with four staff and management personnel increased from
one to three staff.
The increase in Corporate administration staffing relates primarily to the
finance and IT functions.
The increase of the Company's staff is concentrated in the strategic
Internet services business and the Corporate administrative staff necessary
to support the growth of the business and the Company's status as a fully
reporting public company. These investments in our staff are expected to
drive significant revenue growth in future periods, as demonstrated by the
near 200% increase in strategic Internet services revenue from the quarter
ended September 1999 to the quarter ended September 2000.
REVENUES. Revenues increased $540,667 or 44% to $1,780,153 for the quarter
ended September 30, 2000 from $1,239,486 for the quarter ended September
30, 1999. The increase was attributable to increases in both
e-commerce/retail sales and strategic Internet services.
Sales from the e-commerce/retail segment increased $167,070 or 16% to
$1,213,516 for the quarter ended September 30, 2000 from $1,046,446 for the
quarter ended September 30, 1999. This overall increase was the result of
an increase in sales from partner sites offset by a slight decrease in
sales of computer products. Partner sites accounted for approximately
$201,000 of revenue in the third quarter, the vast majority of which was
generated by Safesmith.com. The net decrease in computer products sales of
approximately $33,000 from the prior year was the result of the reduction
of revenue from two significant customers offset by the Company's
aggressive campaign to replace those sales with new accounts. In the third
quarter of 1999, sales to a significant customer related to its licensing
compliance program, which was substantially completed in the second quarter
of 2000, amounted to $63,000 and sales of $145,000 to a school system that
concentrated its capital spending in the first quarter of its fiscal year.
Revenues from strategic Internet services increased $373,597 or 194% to
$566,637 for the quarter ended September 30, 2000 from $193,040 for the
quarter ended September 30, 1999. This revenue growth was due to an
increase in our client base and an increase in billable headcount. In the
quarter ended September 30, 2000, the number of active engagements for
strategic Internet services more than doubled versus the prior year period.
During the quarter, the Company recognized nearly $300,000 in revenue from
its two largest contracts, demonstrating the increasing size of strategic
Internet services engagements. During the third quarter of 2000, the
Company's roster of top-tier clients continued to develop, with revenue
being generated from clients including Kodak Earth Imaging, Sentry Group,
Nexpress, Fellowes, Element K (Ziff Davis) and Saatchi & Saatchi among
others. On a sequential basis, LGI revenues nearly doubled, increasing by
96% versus the second quarter of 2000. For the quarter ended September 30,
2000, strategic Internet services revenue represented 32% of total revenue,
up from 16% in the quarter ended September 30, 1999 and 14% for the year
ended December 31, 1999.
COST OF REVENUES. Cost of revenues increased $402,253 or 40% to $1,404,936
for the quarter ended September 30, 2000 from $1,002,683 for the quarter
ended September 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 81% in the
quarter ended September 30, 1999 to 79% in the quarter ended September 30,
2000 due to the continued growth of strategic Internet services as a
portion of total revenue. During the quarter ended September 30, 2000, the
gross margin in the strategic Internet services business was 42% versus 53%
for the quarter ended September 30, 1999. Gross margins for strategic
Internet services decreased from the third quarter of 1999 as a result of
lower utilization and increased training of new staff. On sequential basis,
gross margins from strategic Internet services increased from 39% in the
second quarter of 2000 to 42% in the current quarter.
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Gross margins in the e-commerce/retail segment decreased to 11.3% from
12.8% in the same period in 1999. Margins on computer products sales were
lower as a result of the aggressive campaign to increase the customer base.
However, the lower LCP margins were partially offset by higher margins
generated by the growth of the Company's e-commerce partnerships, primarily
Safesmith.com, which generated margins approximating 16% in the third
quarter of 2000. Gross margins for the e-commerce segment are expected to
be stable in the fourth quarter of 2000 as the aggressive sales efforts are
continued in LCP and Safesmith.com. However, the gross margin from these
activities is expected to increase in 2001 as LCP develops and expands its
new client relationships and Safesmith.com is moved to a lower cost
fulfillment solution.
SALES AND MARKETING. Sales and marketing costs increased $443,514 to
$517,763 for the quarter ended September 30, 2000 from $74,249 for the
quarter ended September 30,1999. The dollar increase was primarily
attributable to higher numbers of sales, business development and marketing
personnel and increased marketing, brand building and advertising
activities.
On a sequential basis, sales and marketing expenses increased by $215,410,
or 71% versus the second quarter 2000. An increase of six staff during the
third quarter and a full quarter's cost incurred for the staff added during
the second quarter of 2000 resulted in additional costs of approximately
$83,000 in the third quarter compared to the second. The staff increases
were a result of opening a business development office in Chicago and
hiring a brand development director and partner site managers to support
Safesmith.com. Increased business development activity including the
Company's sponsorship and participation in four trade shows/executive
Forums focused on global e-business increased costs by approximately
$52,000. Additionally, the development and testing of the Company's
marketing strategy materials and message, which is being performed in
conjunction with Saatchi and Saatchi, and other brand building activities,
including lead generation activities and internal web site maintenance
increased costs by $56,000. Advertising costs increased by approximately
$16,000 from the second to the third quarter of 2000. As a percentage of
revenues, sales and marketing expenses increased to 29% in the third
quarter of 2000 from 19% in the second quarter of 2000.
GENERAL AND ADMINISTRATIVE. General and administrative costs increased
$502,304 to $571,501 for the quarter ended September 30, 2000 from $69,197
for the quarter ended September 30, 1999. The dollar increase was
attributable to increased headcount and increased infrastructure to support
the growth of the strategic Internet services business and the Company's
status as a fully reporting public company. Higher infrastructure spending
relates to rent of the Company's new office space to house its Internet
business in Fairport, NY and Chicago, IL, costs to upgrade the Company's
internal computer networks, public relations, investor relations and
accounting and legal costs.
On a sequential basis, general and administrative costs increased $89,128
or 19% to $571,501 versus the second quarter of 2000. This increase relates
primarily to employee costs, which rose by $53,000 due to the addition of
information technology resources, a director of web operations, the
Company's controller and a full quarter's cost for personnel that joined
during the second quarter. In addition, facilities costs increased by
$36,000 for rent for the Chicago, IL office, a full quarter's costs for the
Company's Rochester headquarters and infrastructure spending, including
telephone and other essential services.
RESEARCH/PRODUCT DEVELOPMENT. During the third quarter, the Company
launched a product development group to further develop the Company's
e-commerce platform into a comprehensive, stand-alone software solution
that is expected to improve profitability in the Company's own web
development business and will provide for broader distribution
opportunities. At September 30, 2000, the Company's product development
group was comprised of high-end programmers and market research and
strategic alliance experts.
BAD DEBTS. During the quarter, the Company recovered bad debts of $16,250
related to a final settlement reached with a strategic Internet services
client with whom the Company had ended its supplier relationship and
recorded a reserve against the outstanding receivable during the second
quarter.
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DEPRECIATION. Depreciation expense increased $27,694 in the quarter ended
September 30, 2000 to $33,156 as a result of increased spending for
furniture, leasehold improvements, computer, network and other equipment to
support the growth of the strategic Internet services business and
facilities.
AMORTIZATION. Amortization expenses increased $109,538 in the quarter ended
September 30, 2000 versus the prior year period primarily due to $99,000
amortization of the goodwill of $1,980,000 recorded for the acquisition of
the 44% minority interest in eStorefronts on March 10, 2000. Additionally,
in the third quarter, the Company recorded goodwill in the amount of
$200,000 relating to the purchase of certain assets and rights from Sentry
Group as described above. This is being amortized over its estimated useful
life of five years. During the quarter ended September 30, 2000, the
Company recognized amortization of $9,404 relating to this goodwill.
OTHER INCOME AND EXPENSE. Interest expense decreased to $5,175 for the
quarter ended September 30, 2000. During the quarter ended September 30,
2000, the Company recorded $58,132 in interest income. Investment balances
at September 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 $1,235 were recorded.
PROVISION FOR INCOME TAXES. For the quarter ended September 30, 2000, a net
tax provision of $3,459 was recorded for minimum income taxes due in New
York State and Delaware, offset by a deferred tax benefit resulting from
accrued expenses and the net operating loss. The majority of the benefit
from the net operating loss has been offset by a valuation allowance at
September 30, 2000 due to the inability to determine if the benefit will be
realized. In the three months ended September 30, 1999 a net tax provision
of $1,897 was recorded. 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 loss of eStorefronts for the quarter ended September 30, 1999 of
$3,414. The loss in 1999 is attributable to the launch of eStorefronts and
the costs of development of its initial web sites.
NET INCOME (LOSS). The Company recorded a net loss of $846,228 for the
quarter ended September 30, 2000 versus net income of $78,592 for the
quarter ended September 30, 1999. The increased net loss reflects the
Company's investments in staff, business development activities, marketing
strategy and materials and infrastructure to drive the growth of the
business.
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COMPARISON OF THE NINE MONTHS PERIODS ENDED SEPTEMBER 30, 2000 AND 1999
REVENUES. Revenues increased $1,503,313 or 49% to $4,578,623 for the nine
months ended September 30, 2000 from $3,075,310 for the nine months ended
September 30, 1999. The increase was attributable to increases in both
e-commerce/retail sales and strategic Internet services.
Sales from the e-commerce/retail segment increased $793,499 or 30% to
$3,456,798 for the nine months ended September 30, 2000 from $2,663,299 for
the nine months ended September 30, 1999. This increase is attributable to
higher sales to a customer as part of that customer's program to achieve
license compliance with certain software makers, a focus on new client
development in the computer products division and sales generated from
partner sites, led by Safesmith.com. The license compliance program
referred to above was substantially complete in the second quarter of 2000.
Revenues from strategic Internet services increased $709,814 or 172% to
$1,121,825 for the nine months ended September 30, 2000 from $412,011 for
the nine months ended September 30, 1999. This revenue growth was due to an
increase in our client base and an increase in billable headcount. For the
nine months ended September 30, 2000, strategic Internet services revenues
represented 25% of total revenues, up from 13% in the nine months ended
September 30, 1999 and 14% for the year ended December 31, 1999.
COST OF REVENUES. Cost of revenues increased $1,056,699 or 42% to
$3,598,801 for the nine months ended September 30, 2000 from $2,542,102 for
the nine months ended September 30, 1999. The dollar increase was
attributable to the higher revenues for both e-commerce/retail and
strategic Internet services.
As a percentage of revenue, cost of revenue decreased from 83% in the nine
months ended September 30, 1999 to 79% in the nine months ended September
30, 2000. The improvement in the gross profit is primarily due to the
growth of strategic Internet services as a larger portion of total revenue.
Gross margin for the strategic Internet services business increased to 46%
from 43% in the same period in 1999.
SALES AND MARKETING. Sales and marketing costs increased $724,459 to
$928,527 for the nine months ended September 30, 2000 from $204,068 for the
nine months ended September 30, 1999. The higher cost is attributed to an
increase in the number of sales and marketing, sponsorship and
participation in trade-shows and executive forums, development of the
Company's marketing strategy and materials, and increased advertising and
business development activity. As a percentage of revenues, sales and
marketing expenses increased to 20% in the nine months ended September 30,
2000 from 7% in the year earlier period.
GENERAL AND ADMINISTRATIVE. General and administrative costs increased
$975,521 to $1,169,061 for the nine months ended September 30, 2000 from
$193,540 for the nine months ended September 30, 1999. During the nine
months ended September 30, 2000, the Company increased personnel and
infrastructure primarily to support the growth of the strategic Internet
services business, the Company's recent public reporting status and other
general costs to support the growth of the business.
Higher infrastructure spending relates to rent of the Company's office
space to house its Internet business in Fairport, NY and Chicago, IL,
upgrade of its computer network, public relations, investor relations, and
accounting and legal costs. As a percentage of revenues, general and
administrative expenses increased to 26% in the nine months ended September
30, 2000 from 6% in the year earlier period.
RESEARCH/PRODUCT DEVELOPMENT. During the third quarter, the Company
launched a product development group to further develop the Company's
e-commerce platform into a comprehensive, stand-alone software solution
that is expected to improve profitability in the Company's own web
development business and will provide for broader distribution
opportunities. At September 30, 2000, the Company's product development
group was comprised of high-end programmers and market research and
strategic alliance experts.
BAD DEBTS. During the second 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. During the third
quarter, the Company negotiated a settlement with one of these accounts
resulting in a recovery of bad debts in the amount of $16,250. The
remaining account balance was written off against the reserve during the
third quarter.
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DEPRECIATION. Depreciation expense increased $48,200 in the nine months
ended September 30, 2000 to $65,472 as a result of increased spending for
furniture, leasehold improvements, computer, network and other equipment to
support the growth of the strategic Internet services business and
facilities. The Company invested approximately $693,000 in capital
equipment and improvements during the nine months ended September 30, 2000,
including equipment acquired under capital leases, versus approximately
$51,000 in the nine months ended September 30, 1999.
AMORTIZATION. Amortization expense increased $231,008 in the nine months
ended September 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 of $220,000 in
2000. Approximately $9,400 of additional amortization was recognized in the
third quarter due to the goodwill recorded for the acquisition of e-tailing
assets and rights.
OTHER INCOME AND EXPENSE. Interest expense increased $1,756 to $24,152 for
the nine months ended September 30, 2000 due to higher average borrowings
and higher interest rates. During the nine months ended September 30, 2000,
the Company recorded $137,695 in interest income from the invested funds
the Company received in March 2000 relating to the Transactions. During the
nine months, other expenses of $5,735 were recorded, primarily related to a
provision for loss on marketable securities. The Company purchased these
securities in 1999.
PROVISION FOR INCOME TAXES. For the nine months ended September 30, 2000, a
net tax provision of $9,018 was recorded versus $4,823 in the prior year.
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 nine months ended September 30,
2000 and 1999 of $1,002 and $91,432, 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 $1,475,514 for the
nine months ended September 30, 2000 versus net income of $32,480 for the
nine months ended September 30, 1999. The net loss reflects the Company's
investment in staff, business development activities, marketing strategy
and materials, and infrastructure to drive the growth of the business.
These investments are expected to drive significant future revenue growth.
LIQUIDITY AND CAPITAL RESOURCES
During the nine months ended September 30, 2000, the Company's cash and
equivalents and short-term investments increased by a net $3.7 million.
This increase was driven by funding received of $6.0 million less debt
repayment of $372,000, cash used in operations of $1,047,000, decrease in
working capital of $95,000, payment of stock transaction costs of $151,000,
capital investments of $401,000 and amounts loaned to an officer of
$226,000.
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. Through September 30, 2000, $360,000
has been collected on the outstanding note.
The Company may borrow up to $500,000 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.
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 $191,127 at September 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 for furniture and computer equipment. This lease bears
interest at prime plus .5% and requires monthly payments totaling $50,388
annually. Also, in September 2000, the Company entered into a three-year
capital lease for $161,095 for furniture, computer and network equipment
and software. This lease bears interest at prime rate plus 1.0% and
requires monthly payments totaling $62,832 annually.
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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
September 30, 2000, the Company had $1.3 million in cash and equivalents
including $498,000 that was invested in commercial paper with 60-day terms
yielding approximately 4%. The remainder of the Company's cash and cash
equivalents was held in available funds, including money market accounts
earning between 5% and 6%. Additionally, the Company has invested
approximately $2.5M in short term investments which are classified as
available for sale at September 30, 2000.
Historically, accounts receivable balances are high at quarter ends due to
customer ordering patterns for computer products. Customer payment terms
range from net 30 days to net 180 days, for certain of the Company's large
municipal and health care customers of the computer products business. For
strategic Internet services projects, a customer deposit is generally
required prior to commencing work and subsequent billings are made as
pre-established junctures during the project. Billings for strategic
Internet services projects are generally due upon presentation of invoices.
During the nine months ended September 30, 2000, investments in fixed
assets totaled $693,000, including $292,300 of which was financed through
capital leases. These investments relate to the Company's new office
facility in Fairport, NY, computer and other general use equipment required
by the increased staff levels, which have tripled during the period.
Additionally, the Company invested significant funds to upgrade its
computer network to support the increased volume and sophistication of the
Company's business and $72,000 in an internal financial system, which will
allow for better management reporting and control of the business,
including project/engagement management.
During the nine months ended September 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 due from the investors on December 9, 2000 pursuant
to promissory notes from investors issued in connection with the warrant
exercise. The Company may extend the payment terms of these notes.
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.
At September 30, 2000, the Company had outstanding capital expenditure
commitments totaling approximately $100,000 relating primarily to
additional equipment for the Company's growing workforce and its
information systems.
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.
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.
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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. To date, Logisoft has not
experienced any material adverse effects in its systems. Furthermore,
management believes that the Year 2000 risk will not pose significant
future operational problems for Logisoft's computer systems.
However, there is no guarantee that Logisoft's Year 2000 program, including
consulting with third parties, will avoid any future material adverse
effects on Logisoft's operations, customer relations or financial
condition. Logisoft's total cost of its year 2000 readiness program was not
significant. There is no guarantee that additional costs will not be
incurred.
RISK FACTORS
Logisoft stockholders may be exposed to risks inherent in our business. The
value of such an investment may increase or decline and could result in a
loss. Prospective investors should carefully consider the information
contained in our Form 8-K/A filed on May 22, 2000 before deciding to invest
in Logisoft Common Stock.
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
Logisoft is exposed to a variety of risks including changes in interest
rates affecting the return on its investments. This risk results primarily
from our short-term investments. To minimize this risk, the Company invests
in highly liquid instruments that are of investment grade. At September 30,
2000, the Company owned commercial paper and corporate bonds for $3.0
million earning between 5% and 6%.
The Company also maintains its cash in bank demand deposit accounts, which
at times may exceed federally insured limits. The Company has not
experienced any losses in such accounts and believes it is not exposed to
any significant credit risk on cash and equivalents.
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PART II - OTHER INFORMATION
ITEM 5. OTHER INFORMATION
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
On September 29, 2000, Mr. Wilkerson and Mr. Van Heel filed Form 3, Initial
Statements of Beneficial Ownership of Securities, related to their positions as
CEO and CFO, respectively, of Logisoft. These statements were filed past the
related due dates based on the dates that Mr. Wilkerson and Mr. Van Heel started
in their positions as officers of Logisoft. Mr. Wilkerson and Mr. Van Heel did
not engage in any buying or selling of Logisoft stock from the date of their
employment to the date of the filing of these Forms 3. The details of Mr.
Wilkerson's stock ownership and Mr. Van Heel's employment terms, including stock
options, were disclosed in the Company's filing on Form 8-KA on May 22, 2000.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS -
27. FINANCIAL DATA SCHEDULE
(B) REPORTS ON FORM 8-K
On November 10, 2000 the Company filed a report on form 8-K with the Commission
disclosing the appointment of Rob Lamy as the Company's Chief Executive Officer.
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: November 14, 2000 By: /s/ John Van Heel
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John Van Heel, Chief Financial Officer
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