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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001
COMMISSION FILE NUMBER 0-27190
5B TECHNOLOGIES CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 11-3529387
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
100 SUNNYSIDE BOULEVARD, WOODBURY, NEW YORK 11797
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(516) 677-6100
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT: (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 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 / /
NUMBER OF SHARES OUTSTANDING AT NOVEMBER 7, 2001:
2,813,350 SHARES OF COMMON STOCK, PAR VALUE $0.04 PER SHARE.
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5B TECHNOLOGIES CORPORATION
INDEX TO FORM 10-Q FOR THE QUARTER ENDED
SEPTEMBER 30, 2001
PAGE NO.
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Balance Sheets
September 30, 2001 (unaudited) and December 31, 2000.........................................1
Consolidated Statements of Operations Three Months Ended and
Nine Months Ended September 30, 2001 (unaudited) and 2000
(unaudited)..................................................................................2
Consolidated Statements of Cash Flows Three Months Ended and
Nine Months Ended September 30, 2001 (unaudited) and 2000
(unaudited)..................................................................................3
Notes to Condensed Consolidated Financial Statements......................................4-14
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................................................15-23
Item 3 - Quantitative and Qualitative Disclosures About Market Risk...................................23
PART II - Other Information................................................................................24-25
SIGNATURES....................................................................................................26
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
5B TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
2001 2000
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ASSETS (UNAUDITED) (RESTATED)
Current assets:
Cash and cash equivalents $ 197,798 $ 1,156,436
Investments available for sale (includes $0 and $298,000 respectively,
restricted as collateral) -- 499,778
Accounts receivable, net of allowance for doubtful accounts of $146,000 1,767,704 1,501,523
Note receivable for services provided 287,778 427,590
Other current assets 504,337 64,385
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Total current assets 2,757,617 3,649,712
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Goodwill, net 1,251,809 504,275
Intangibles, net 913,390 435,625
Software 1,407,336 --
Property, plant and equipment (net) 680,780 166,624
Net assets of discontinued operations 1,084 1,247,094
Other assets 313,872 342,986
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TOTAL ASSETS $ 7,325,888 $ 6,346,316
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 1,774,619 $ 850,159
Accounts payable 1,067,677 1,129,308
Accrued expenses 573,295 332,273
Unearned sales revenue 95,547 174,527
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Total current liabilities 3,511,138 2,486,267
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Notes payable 345,222 11,928
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TOTAL LIABILITIES 3,856,360 2,498,195
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REDEEMABLE PREFERRED STOCK 1,250,000 1,250,000
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COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, Series C, D, E, F and G, $.01 par value; 5,000,000 shares
authorized, 420,000 and 0 shares issued and outstanding, respectively 4,190 --
Common stock, $.04 par value, 17,500,000 shares authorized, 2,837,850 and
2,165,036 shares issued and outstanding, respectively 113,514 86,601
Additional paid-in capital 17,284,965 14,525,450
Stock subscription receivable -- (812,500)
Accumulated deficit (15,132,536) (11,150,825)
Treasury stock at cost, 24,500 shares (50,605) (50,605)
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TOTAL STOCKHOLDERS' EQUITY 2,219,528 2,598,121
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 7,325,888 $ 6,346,316
========================================================================================================================
See accompanying notes to consolidated financial statements.
1
5B TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
2001 2000 2001 2000
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(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
Net sales $ 1,546,008 $ 3,057,947 $ 4,308,400 $ 12,476,578
Cost of sales 1,393,398 1,961,762 3,508,307 9,520,048
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Gross profit 152,610 1,096,185 800,093 2,956,530
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Expenses:
Selling 181,426 205,622 823,931 628,726
General and administrative expenses 1,047,941 645,520 2,484,520 2,327,426
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Total expenses 1,229,367 851,142 3,308,451 2,956,152
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(Loss) income from continuing operations (1,076,757) 245,043 (2,508,358) 378
Other income (expense):
Settlement of lawsuit (note 3) -- -- (1,234,956) --
Other, net -- 17,228 73,284 17,228
Interest expense (10,729) (26,536) (53,090) (94,392)
Interest income 444 26,815 26,436 55,316
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(Loss) income before provision for income taxes and
discontinued operations (1,087,042) 262,550 (3,696,684) (21,470)
State and local taxes -- 14,364 20,538 20,705
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(Loss) income from continuing operations (1,087,042) 248,186 (3,717,222) (42,175)
Discontinued operations:
Income (loss) from discontinued operations,
net of income taxes of $0 and $80,892 respectively -- (139,209) (681,193) (281,455)
Gain (loss) on disposal of discontinued operations -- -- 472,957 (856,198)
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Net (loss) income $ (1,087,042) $ 108,977 $ (3,925,458) $ (1,179,828)
Preferred dividends (18,750) (18,750) (56,250) (18,750)
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Net (loss) income attributable to common shareholders $ (1,105,792) $ 90,227 $ (3,981,708) $ (1,198,578)
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WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic 2,328,890 2,138,634 2,328,890 2,136,533
Diluted 2,328,890 2,951,774 2,328,890 2,136,533
BASIC LOSS PER COMMON SHARE:
Continuing operations $ (0.47) $ 0.12 $ (1.60) $ (0.02)
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Discontinued operations $ (0.00) $ (0.07) $ (0.09) $ (0.53)
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Net loss per share $ (0.47) $ 0.04 $ (1.69) $ (0.55)
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DILUTED LOSS PER COMMON SHARE:
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Continuing operations $ (0.47) $ 0.08 $ (1.60) $ (0.02)
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Discontinued operations $ (0.00) $ (0.05) $ (0.09) $ (0.53)
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Net loss per share $ (0.47) $ 0.03 $ (1.69) $ (0.55)
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See accompanying notes to consolidated financial statements.
2
5B TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
UNAUDITED
2001 2000
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(UNAUDITED) (UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (3,925,458) $ (1,179,828)
Adjustments to reconcile net loss to net cash provided by operating activities:
Loss from discontinued operations 681,193 856,198
(Gain) loss from disposal of discontinued operations (472,957) 61,353
Bad debt -- 20,000
Depreciation and amortization 243,290 203,506
Warrants issued in connection with lawsuit settlement 250,000 --
Notes payable issued in connection with lawsuit settlement (net of payments) 516,000 --
Issuance of options and warrants for services -- 16,300
Changes in operating assets and liabilities:
Accounts receivable 36,072 (872,914)
Other assets (317,533) (48,988)
Accounts payable (61,631) (13,363)
Accrued expenses (185,004) 231,761
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NET CASH USED IN OPERATING ACTIVITIES FROM CONTINUING OPERATIONS (3,236,028) (725,975)
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NET CASH PROVIDED BY OPERATING ACTIVITIES FROM DISCONTINUED OPERATIONS 1,831,047 959,398
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NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (1,404,981) 233,423
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments -- (22,935)
Proceeds from sale of investments 499,778 --
Payments for acquisitions -- (100,000)
Purchase of equipment (18,229) (44,479)
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NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES FROM CONTINUING OPERATIONS 481,549 (167,414)
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NET CASH PROVIDED BY INVESTING ACTIVITIES OF DISCONTINUED OPERATIONS 108,857 13,629,977
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NET CASH PROVIDED BY INVESTING ACTIVITIES 590,406 13,462,563
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock -- 4,722
Proceeds from issuance of preferred stock 100,000 874,465
Proceeds from exercise of stock options by employees and warrants 50,124 --
Proceeds/repayment from notes payable (net) 784,032 (397,155)
Payment of bank fees (176,087) --
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NET CASH PROVIDED BY FINANCING ACTIVITIES FROM CONTINUING OPERATIONS 758,069 482,032
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NET CASH USED IN FINANCING ACTIVITIES FROM DISCONTINUED OPERATIONS (902,132) (13,611,789)
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NET CASH USED IN FINANCING ACTIVITIES (144,063) (13,129,757)
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NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (958,638) 566,229
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CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,156,436 1,003,752
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CASH AND CASH EQUIVALENTS, END OF PERIOD $ 197,798 $ 1,569,981
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Supplemental non cash financing information:
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Rescission of Stock Subscription receivable in connection with lawsuit settlement $ 812,500 --
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Common stock issued to redeem notes payable $ 62,500 --
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Cash paid for income taxes $ -- $ 4,929
Cash paid for income taxes for discontinued operations $ 16,939 $ 86,017
Cash paid for interest $ 42,361 $ 94,391
Cash paid for interest for discontinued operations $ 228,817 $ 617,229
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See accompanying notes to consolidated financial statements.
3
5B TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions for Form 10-Q and Regulation S-X
related to interim period financial statements and, therefore, do not include
all information and footnotes required by generally accepted accounting
principles. However, in the opinion of management, all adjustments (consisting
of normal recurring adjustments and accruals) considered necessary for a fair
presentation of the financial position of 5B Technologies Corporation and
subsidiaries (the "Company") at September 30, 2001 and its results of operations
and cash flows for the three and nine months ended September 30, 2001 and 2000,
respectively, have been included (See Note 2).
The financial statements for the three and nine months ended September 30,
2001 include the results of the Company and its wholly owned subsidiaries. All
material intercompany balances and transactions have been eliminated.
The results of operations for the interim periods are not necessarily
indicative of the results that may be expected for the entire year. In addition,
our auditors included in their report on our financial statements for the year
ended December 31, 2000 in our Form 10-K, an explanatory paragraph about our
ability to continue as a going concern.
Reference should be made to the annual financial statements, including
footnotes thereto, included in the Company's Form 10-K for the fiscal year ended
December 31, 2000.
2. DISCONTINUED OPERATION
On May 14, 2001, the Company sold its legal staffing business, which was
maintained through a wholly owned subsidiary, Deltaforce Personnel Services,
Inc. ("DeltaGroup"), for approximately $1,500,000, plus 50% of revenue in excess
of $7.25 million and $7.5 million in the first and second years after closing.
Accordingly, DeltaGroup has been presented as a discontinued operation for the
nine months ended September 30, 2001. The balance sheet as of December 31, 2000
and the statements of operations and cash flows for the three and nine months
ended September 30, 2001 and 2000, respectively, have been restated to conform
to such presentation. The loss on disposal of DeltaGroup includes provisions for
estimated losses of approximately $681,000 and a gain on sale, exclusive of
contingent consideration, of approximately $473,000, for a total loss of
approximately $208,000. The provision for estimated losses of approximately
$681,000 is based on management's estimate of future expenses relating to
contractual obligations and other expenses related to the staffing business. Net
sales for DeltaGroup were approximately $2,636,000 and $5,813,000 for the nine
months ended September 30, 2001 and 2000, respectively.
On May 2, 2000, the Company sold the majority of its lease portfolio (the
"Assets"), which was maintained through a wholly owned subsidiary, Paramount
Operations Inc.
4
("Paramount"), for approximately $700,000 and the assumption of approximately
$6,117,000 of indebtedness related to the Assets. Accordingly, Paramount has
been presented as a discontinued operation as of September 30, 2001 and December
31, 2000 and for the three and nine months ended September 30, 2001 and 2000,
respectively. The loss on disposal of Paramount includes provisions for
estimated losses of approximately $602,000 and a loss on sale of approximately
$254,000, for a total loss of approximately $856,000. The provision for
estimated losses of approximately $602,000 is based on management's estimate of
future income and expenses relating to the remaining lease portfolio and
write-downs of certain related assets. Net sales for Paramount were
approximately $406,000 and $5,807,000 for the nine months ended September 30,
2001 and 2000, respectively.
The components of net assets of discontinued operation included in the
Company's Consolidated Balance Sheets at September 30, 2001 and December 31,
2000, are as follows:
2001 2000
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DELTAFORCE PERSONNEL SERVICES, INC
Accounts receivable $ 21,846 $ 932,219
Note receivable 300,000 --
Other assets 134,303 122,706
Goodwill and intangibles -- 1,056,772
Accounts payable (253,998) (77,758)
Accrued expenses (28,626) (89,574)
Notes payable -- (750,000)
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173,525 1,194,365
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PARAMOUNT OPERATIONS INC
Accounts receivable 23,734 103,528
Net investment in direct finance and sales-type leases 3,089,847 3,198,704
Assets held under operating leases, net of accumulated depreciation 161,174 261,737
Other assets -- 162,000
Accrued expenses (306,405) (380,317)
Notes payable (24,417) (76,384)
Obligations for financed equipment - non-recourse (3,116,374) (3,216,539)
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(172,441) 52,729
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$ 1,084 $ 1,247,094
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3. ACQUISITIONS
(a) On August 16, 2001, the Company acquired the operating assets of
Knowledge Strategies Group, Inc. ("KSG"), a privately held New York
City based e-commerce web site development and hosting company, in
exchange for 150,000 shares of the Company's common stock and the
assumption by the Company of certain indebtedness of KSG, including
KSG's indebtedness to the Connecticut Bank of Commerce ("CBC"). The
Company issued to CBC 140,193 shares of common stock and 4,000,
5,000 and 10,000 shares of the Company's Series C, Series D and
Series E 6% Convertible Preferred Stock (the "CBC Preferred Stock"),
respectively, in satisfaction of the Company's obligations with
respect to such CBC indebtedness. The CBC Preferred Stock is
convertible into an aggregate of 648,486 shares of the Company's
5
common stock at exercise prices, which on that date were greater
than the fair market value of the underlying common stock of $2.00,
$2.75 and $3.25, respectively; provided, however, that to the extent
such CBC Preferred Stock will be converted into shares of common
stock that exceeds 19.9% of the Company's outstanding common stock
(calculated as of the date of issuance of the CBC Preferred Stock),
the Company must first obtain the approval of the Company's
stockholders prior to such issuance. The Company has undertaken to
obtain such stockholder approval at the annual meeting of
stockholders scheduled for 2002. Additionally, the Company has
granted certain registration rights with respect to the shares of
common stock issuable upon conversion of the CBC Preferred Stock and
has undertaken to register the 140,193 shares of common stock issued
to CBC within 120 business days of the date of issuance. The terms
of the CBC Preferred Stock also contains certain anti-dilution
protections, including with respect to issuances of securities by
the Company below the market price per share. In connection with the
KSG transaction, CBC has amended its credit arrangement with the
Company making such arrangement with respect to the mezzanine
facility less restrictive (See Note 5).
(b) On August 31, 2001, the Company acquired certain assets, consisting
primarily of the customer list, of Anadig Network Solutions, a
privately-held consultative network, security, and infrastructure
solutions provider. The Company acquired Anadig's client base and
key staff in the marketing, engineering, project management and
support areas. The Company will pay a percentage of revenues
received from the Anadig client based at various rates, depending on
the nature of the product and the identity of the client. The
payments made to Anadig will terminate on December 31, 2002, except
for payments attributable to one client which will extinguish upon
termination existing contracts. Anadig's revenues for the 7 months
ended June 31, 2001 were approximately $3,000,000.
(c) On September 14, 2001, the Company acquired certain assets of Galt
Corporation ("Galt"), a privately held New York based company
engaged in the business of application development, web site hosting
and the integration of information technology solutions, for 300,000
shares of 5B common stock, 300,000 shares of Series F 6% Convertible
Preferred Stock, convertible at $3.33 per share, which on that date
was greater than the fair value of the underlying common stock,
warrants to acquire 300,000 shares of 5B Common Stock at $1.00 per
share and the assumption of certain liabilities. The Series F
Preferred Stock will be convertible into an aggregate of 300,000
shares of the Company's common stock (subject to a prohibition on
the issuance of shares in excess of 19.9% of the outstanding common
stock of the Company (calculated as of the date of issuance of the
Series F Preferred Stock) without first obtaining stockholder
approval, which the Company will undertake to obtain at the 2002
annual meeting of stockholders). The warrants have an expiration
term of five years. In connection with this acquisition the Company
entered into employment agreements, through December 31, 2002, with
three key executives for an aggregate consideration of $380,000
annually.
6
The following unaudited pro forma consolidated results of operations for
the three and nine months ended September 30, 2001 and 2000 assume that
the acquisitions occurred as of January 1, 2000:
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Three months ended
September 30, 2001 2000
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Net revenues $ 2,189,235 $ 6,652,152
Net loss from continuing operations 1,426,474 366,329
Loss per common share: basic and diluted $ (0.61) $ (0.13)
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Nine months ended
September 30, 2001 2000
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Net revenues $ 8,861,273 $ 22,992,351
Net loss from continuing operations 5,733,618 1,157,082
Loss per common share: basic and diluted $ (2.46) $ (0.42)
4. SALE OF SECURITIES
The Company, in September 2001, issued 100,000 shares of Series G
Convertible Preferred Stock to Galt Asset Management for $100,000. The Series G
Preferred Stock may be converted into Common Stock of the Company at any time
after 270 calendar days from the filing date of the Certificate of Designations.
Each share of Series G Preferred shall be convertible into a number of fully
paid and nonassessable shares of Common Stock at the price per share of Common
Stock equal to 100% of the ten (10) calendar day average closing price (the
"Average Closing Price") as reported on the NASDAQ Small Cap. Market or if the
Common Stock is not trading on such market, on such other market as the Common
Stock most actively trades (subject to a prohibition on the issuance of shares
in excess of 19.9% of the outstanding common stock of the Company (calculated as
of the date of issuance of the Series G Convertible Preferred Stock) without
first obtaining stockholder approval, which the Company will undertake to obtain
at the 2002 annual meeting of stockholders). The Series G Convertible Preferred
Stock will not pay dividends.
5. LEGAL PROCEEDINGS
In August 2000, Robert Klein commenced a lawsuit against the Company and
Deltaforce Personnel Services Inc. in the Supreme Court of New York. The
Complaint alleged that the Company breached an agreement to timely register Mr.
Klein's stock. In July 2001, a settlement was reached and the Company agreed to
pay Mr. Klein $875,000 in cash to be paid over a 3-year period (which has a
present value of $820,000), and to issue to Mr. Klein a warrant to purchase
400,000 shares of the Company's common stock, which warrant expires in July
2005, and has an exercise price of $0.75 per share (which warrant is valued at
$250,000 based on the Black-Scholes valuation model). Of the cash settlement
amount, $500,000 is payable as follows: $150,000 upon execution of the
settlement in July 2001, $100,000 on August 1, 2001, $50,000 on September 1,
2001, $100,000 on January 2, 2002 and $100,000 on January 2, 2003; and $375,000
is payable at the rate of $12,500 per month over a period of 30 months
commencing on
7
October 1, 2001. In addition, the stock subscription receivable of $812,500 was
rescinded in connection with the settlement. Legal fees relating to the lawsuit
approximated $165,000 for the nine months ended September 30, 2001.
On January 4, 2001, La Vista Investors, LLC ("La Vista") commenced an
action against the Company. The action seeks compensatory and other damages and
equitable relief. Among the remedies La Vista has demanded are the redemption of
the preferred stock at a redemption price of $1,250,000, and liquidated damages
of $100,000 relating to delays in effectuating the registration statement. On
February 6, 2001, the Company responded to the Complaint denying liability for
the relief sought and pleading certain affirmative defenses. On February 28,
2001, La Vista made a motion to strike the Company's defenses and for summary
judgment. In March 2001, the Company made a motion to amend its Answer to, among
other things, plead additional affirmative defenses. The Company also opposed La
Vista's motion for summary judgment. On October 1, 2001, the Court issued a
decision (i) partially granting the Company's motion to mend its Answer, (ii)
partially denying La Vista's motion to strike affirmative defenses and (iii)
denying La Vista's motion for summary judgment. The Company believes that it has
strong legal defenses and other legal rights and intends to continue to
vigorously defend this Action.
Larry Kagan, a former employee of Delta, was terminated for cause on
October 14, 1999. In June 2000, Mr. Kagan commenced an arbitration alleging that
Delta breached his employment agreement by terminating his employment and that
the Company breached a related stock purchase agreement. The arbitration panel
reached a decision in September 2001 awarding Mr. Kagan $111,000.00 plus
interest and a portion of the costs. The Company intends to bring a proceeding
to vacate the arbitration award, however $111,000 has been accrued as of
September 30, 2001 relating to the arbiters decision.
6. LINES OF CREDIT
At September 30, 2001, the Company had two credit lines available with
Connecticut Bank of Commerce ("CBC"):
5B GROUP REVOLVING CREDIT FACILITY: On May 24, 2001, the Company entered
into a revolving credit facility secured by eligible accounts receivable
(as defined in the credit facility). The term of the credit facility is
two years from the date of closing. Borrowings are limited to 75% of
eligible accounts receivable. The rate of interest charged on the facility
will be 1 1/2% above the Wall Street prime commercial lending rate, which
approximated 6.5% as of September 30, 2001. As of September 30, 2001, 5B
Group had $602,000 outstanding under this line. As of September 30, 2001,
the Company was not in compliance with its minimum tangible net worth
requirements, but has obtained a waiver from CBC for the aforementioned
covenant.
MEZZANINE FACILITY: On May 24, 2001, the Company obtained a maximum
mezzanine facility of $1,500,000, to be used for future acquisitions and
other agreed to purposes. The maximum amount of the mezzanine facility
will be limited to the lesser of $1,500,000 and 110% of the total cash,
cash equivalents, marketable securities and accounts receivable of the
Company less the outstanding amount of the revolving credit facility. The
mezzanine facility will mature within two years, or be rolled into the 5B
8
Group revolving credit facility. The rate of interest charged on the
facility will be 2% above the Wall Street prime commercial lending rate,
which approximated 6.5% as of September 30, 2001. As of September 30,
2001, 5B Group had approximately $873,000 outstanding under this line,
however, in connection with the KSG asset acquisition (See Note 3(a)), CBC
has relaxed certain of the above requirements and the Company believes
that, subject to CBC's approval, it will be able to use this mezzanine
facility for future acquisitions.
The two credit lines also have a requirement to maintain a minimum of
$1,000,000 with CBC at all times. If this requirement is not met there is a fee
of 2%, which is based on the shortfall. 5B did not meet this cash requirement
and has been charged the aforementioned fee.
7. REDEEMABLE PREFERRED STOCK
On April 17, 2000, the Company received an equity investment of $874,465
($1,000,000 less transaction costs of $125,535) from La Vista Investors, LLC, a
fund managed by WEC Asset Management LLC, a New York-based investment company.
In connection with its investment, La Vista received (i) 1,000 shares of
the Company's Series A 6% Convertible Preferred Stock, par value $0.01 per share
(the "Series A Preferred Stock"), and (ii) a warrant convertible into 100,000
shares of the Company's Common Stock at an exercise price of $10.00 per share of
Common Stock (which was deemed to have an immaterial value), subject to certain
anti-dilution adjustments. Each share of Series A Preferred Stock is convertible
into such number of shares of Common Stock as is determined by dividing $1,000,
plus the amount of any accrued and unpaid dividends, by the lower of (i) nine
dollars ($9.00) or (ii) 80% of the average of the three lowest Closing Bid
Prices (as defined in the Certificate of Designations of the Series A Preferred
Stock) of the Company's Common Stock during the thirty (30) trading days
immediately preceding the date of notice from a holder of the Series A Preferred
Stock of any such conversion. On the commitment date, the conversion price
exceeded the market price of the Company's common stock. In August 2000, the
Company and the holders of the Company's Series A Preferred Stock agreed to
exchange the Series A Preferred Stock for the Series B Preferred Stock on a
one-for-one basis. The terms of the Series A Preferred Stock were identical to
those of the Series B Preferred except that the holders of the Series A
Preferred Stock had the right to vote together with the holders of Common Stock
as a single class.
In addition to the right of the selling stockholder to voluntarily convert
its Series B Preferred Stock into shares of the Company's common stock, all
unconverted shares of the Series B Preferred Stock will automatically convert
into shares of common stock, at the then-applicable conversion formula, on April
17, 2003.
Redemption Rights of Redeemable Preferred Stock
The Company may be obligated to redeem the Series B Preferred Stock if:
(1) the number of shares issued upon conversion of the Series B Preferred Stock
were to exceed 19.9% of our outstanding common stock, or (2) we fail to conclude
certain required actions or if certain enumerated events (as described below)
were to occur.
9
The Company will be required to redeem the outstanding Series B Preferred
Stock at a price equal to 125% of the Liquidation Preference (as defined in the
Certificate of Designations) if any of the following events (among others) were
to happen: (i) the registration statement registering the shares of common stock
into which the Series B Preferred Stock is convertible is not effective by
September 27, 2000, (ii) the Company breaches the terms of the Series B
Preferred Stock and does not cure such breach within 10 days of notice to us of
such breach, (iii) the Company becomes bankrupt by court order or if we
voluntarily institute bankruptcy proceedings or if other similar events occur
(iv) the Company defaults under any of our material contracts in our businesses
or lose a final judgment, where the default or judgment is in excess of
$250,000, or (v) there is a Change of Control (as defined in the Certificate of
Designations).
Additionally, if the number of shares of common stock issued upon
conversion of the Series B Preferred Stock exceeds 19.9% of our outstanding
common stock, the Company must take, at its option, one of two actions: (i)
redeem all of the remaining shares of Series B Preferred Stock at a price equal
to 120% of the Liquidation Preference or (ii) call a special meeting of the
Company's stockholders to approve of the issuance of the common stock and use
the Company's best efforts to obtain such approval.
The Company's ability to elect the first alternative (i.e., redeem at 120%
of the Liquidation Preference) will depend on numerous factors in the future,
including whether it has sufficient funds to make such redemption. At September
30, 2001, the Series B Preferred Stock was convertible into 1,262,626 shares of
Common Stock, which exceeded the 19.9% limitation.
On September 28, 2000, the Company received notification from La Vista
demanding redemption of the outstanding Series B Preferred Stock in accordance
with the terms of the Series B Preferred Stock due to the Company's failure to
have a registration statement declared effective by September 27, 2000. Although
the Company filed a registration statement relating to the Series B Preferred
Stock, which was declared effective on February 16, 2001, La Vista instituted a
lawsuit against the Company on January 4, 2001. The action seeks compensatory
and other damages and equitable relief. Among the remedies La Vista has demanded
are the redemption of the preferred stock at a redemption price of $1,250,000,
and liquidated damages of $100,000 relating to delays in effectuating the
registration statement. On February 6, 2001, the Company responded to the
Complaint denying liability for the relief sought and pleading certain
affirmative defenses. On February 28, 2001, La Vista made a motion to strike the
Company's defenses and for summary judgment. In March 2001, the Company made a
motion to amend its Answer to, among other things, plead additional affirmative
defenses. The Company also opposed La Vista's motion for summary judgment. On
October 1, 2001, the Court issued a decision (i) partially granting the
Company's motion to amend its Answer, (ii) partially denying La Vista's motion
to strike affirmative defenses and (iii) denying La Vista's motion for summary
judgment. The Company believes that it has strong legal defenses and other legal
rights and intends to continue to vigorously defend this Action.
8. NASDAQ REGISTRATION REQUIREMENTS
On July 6, 2001, the Company received a correspondence from the NASDAQ
Stock Market in connection with a determination by NASDAQ that the Company did
not meet the net
10
tangible assets and proposed shareholders equity maintenance criteria for
continued listing as set forth in Marketplace Rule 4310(c)(2)(B) and the
proposed amendment to Marketplace Rule 4310(c)(2)(B)(i), respectively. Although
NASDAQ had determined to delist the Company's securities on July 16, 2001, the
Company requested a hearing before the NASDAQ Listing Qualifications Panel to
appeal the delisting determination, which will stay such delisting pending the
outcome of the hearing. The Company appeared at the hearing on August 23, 2001.
The panel found that the Company failed to meet the NASDAQ requirement as of
June 30, 2001; however the panel granted the Company a temporary exception
subject to the Company meeting certain conditions as follows: (1) On or before
November 9, 2001 the Company submitted to NASDAQ executed final documentation in
connection with the recently completed acquisitions of Knowledge Strategies
Group, Inc., Anadig Corp. and Galt Corporation and (2) on or before November 15,
2001, the Company must file the Form 10-Q for the quarter ending September 30,
2001 evidencing shareholders' equity of at least $2,500,000. In the event that
the Company is deemed to have met the terms of the exception, it shall continue
to be listed on The NASDAQ Small Cap Market. The Company can not make any
assurances it will meet these requirements.
9. NET LOSS PER COMMON SHARE
Basic loss per share is computed by dividing net loss by the weighted
average number of common shares outstanding. Diluted loss per share reflects, in
periods in which they have a dilutive effect, the effect of common shares
issuable upon exercise of stock options and warrants. Income attributable to
common stockholders is computed by increasing net loss by dividends on preferred
stock and other adjustments.
Options to purchase approximately 771,583 shares of common stock at
exercise prices ranging from $0.85 to $12.00 per share and warrants to purchase
approximately 460,000 shares of common stock at exercise prices ranging from
$0.85 to $2.34 per share were outstanding during the nine months ended September
30, 2001. Options to purchase approximately 524,550 shares of common stock at
exercise prices ranging from $0.44 to $13.25 per share and warrants to purchase
approximately 110,000 shares of common stock at prices ranging from $0.85 to
$2.34 per share were outstanding during a portion of 2000. These options and
warrants expire through 2011 and 2004, respectively.
10. SEGMENT INFORMATION
The Company's results of operations are reviewed and managed through two
segments (i) corporate overhead ("5B") and (ii) Internet, e-commerce and systems
integration ("5B Group"). The accounting policies of the segments are the same
as those described in the Summary of Significant Accounting Policies, which can
be found on pages F-7 through F-11 of the Company's Annual Report on Form 10-K
for the year ended December 31, 2000. The following represents selected
financial information for the Company's segments for the three and nine months
ended September 30, 2001 and 2000:
11
5B 5B Group Total
------------------------------------------------------------------------------------------
Three months ended
September 30, 2001
------------------------------------------------------------------------------------------
Revenues $ -- $ 1,546,008 $ 1,546,008
Cost of sales -- 1,393,398 1,393,398
Selling 17,417 164,009 181,426
General and Administrative 120,718 927,223 1,047,941
Interest expense 1,115 9,614 10,729
Pre-tax loss (43,297) (1,043,745) (1,087,042)
Assets $ 454,975 $ 6,870,913 $ 7,325,888
Three months ended
September 30, 2000
------------------------------------------------------------------------------------------
Revenues $ -- $ 3,057,947 $ 3,057,947
Cost of sales -- 1,961,762 1,961,762
Selling 13,220 192,402 205,622
General and Administrative 13,531 631,989 645,520
Interest expense 6,148 20,388 26,536
Pre-tax (loss) income (9,556) 272,106 262,550
Assets $ 4,149,543 $ 4,697,659 $ 8,847,202
==========================================================================================
------------------------------------------------------------------------------------------
Nine months ended
September 30, 2001
------------------------------------------------------------------------------------------
Revenues $ -- $ 4,308,400 $ 4,308,400
Cost of sales -- 3,508,307 3,508,307
Selling 84,580 739,351 823,931
General and Administrative 301,856 2,226,222 2,484,520
Interest expense 10,729 37,866 53,090
Pre-tax loss (1,554,688) (2,141,996) (3,696,684)
Assets $ 454,975 $ 6,870,913 $ 7,325,888
Nine months ended
September 30, 2000
------------------------------------------------------------------------------------------
Revenues $ -- $ 12,476,578 $ 12,476,578
Cost of sales -- 9,520,048 9,520,048
Selling 61,437 567,289 628,726
General and Administrative 598,659 1,728,767 2,327,426
Interest expense 27,237 67,155 94,392
Pre-tax (loss) income (656,759) 635,489 (21,470)
Assets $ 4,149,543 $ 4,697,659 $ 8,847,202
==========================================================================================
12
11. RECENT ACCOUNTING PRONOUNCEMENTS
In September 2001, the Financial Accounting Standards Board finalized FASB
Statements No. 141, BUSINESS COMBINATIONS (SFAS 141), and No. 142, GOODWILL AND
OTHER INTANGIBLE ASSETS (SFAS 142). SFAS 141 requires the use of the purchase
method of accounting and prohibits the use of the pooling-of-interests method of
accounting for business combinations initiated after June 30, 2001. SFAS 141
also requires that the Company recognize acquired intangible assets apart from
goodwill if the acquired intangible assets meet certain criteria. SFAS 141
applies to all business combinations initiated after June 30, 2001 and for
purchase business combinations completed on or after July 1, 2001. It also
requires, upon adoption of SFAS 142, that the Company reclassify, if necessary,
the carrying amounts of intangible assets and goodwill based on the criteria in
SFAS 141.
SFAS 142 requires, among other things, that companies no longer amortize
goodwill, but instead test goodwill for impairment at least annually. In
addition, SFAS 142 requires that the Company identify reporting units for the
purposes of assessing potential future impairments of goodwill, reassess the
useful lives of other existing recognized intangible assets, and cease
amortization of intangible assets with an indefinite useful life. An intangible
asset with an indefinite useful life should be tested for impairment in
accordance with the guidance in SFAS 142. SFAS 142 is required to be applied in
fiscal years beginning after December 15, 2001 to all goodwill and other
intangible assets recognized at that date, regardless of when those assets were
initially recognized. SFAS 142 requires the Company to complete a transitional
goodwill impairment test nine months from the date of adoption. The Company is
also required to reassess the useful lives of other intangible assets within the
first interim quarter after adoption of SFAS 142.
The Company's previous business combinations were accounted for using the
purchase method. As of June 30, 2001, the net carrying amount of goodwill is
approximately $1,574,000, approximately $486,000 was recorded prior to June 30,
2001, and other intangible assets and software are $2,191,000. Amortization
expense during the nine-month period ended September 30, 2001 was $190,000. At
present, the Company is currently assessing but has not yet determined the
impact the adoption of SFAS 141 and SFAS 142 will have on its financial position
and results of operations.
13
In August 2001, the FASB issued FASB Statement No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets ("FAS144"). This statement
supercedes FASB Statement No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of ("FAS121") and Accounting
Principles Board Opinion No. 30, Reporting Results of Operations - Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions. FAS144 retains the fundamental
provisions of FAS 121 for recognition and measurement of impairment, but amends
the accounting and reporting standards for segments of a business to be disposed
of. FAS144 is effective for fiscal years beginning after December 15, 2001, and
interim periods within those fiscal years, with early application encouraged.
The provisions of FAS144 generally are to be applied prospectively. The Company
believes that the adoption of FAS144 will not have a material impact on the
Company's financial position or results of operations.
12. SUBSEQUENT EVENTS
The financial statements and discussions contained in this Form 10-Q do
not reflect the following transaction. Effective August 31, 2001, 5B
Technologies Corporation, through a subsidiary, acquired certain assets of
Anadig Corporation. On that date, Anadig Corporation received a letter of
authorization from a customer (which letter was assigned by Anadig to 5B), to
place an order for Cisco Systems infrastructure equipment totaling approximately
$1,090,779 plus engineering services, for a total transaction value of
$1,175,489. 5B's cost of the transaction was $889,973, producing a gross profit
of $285,516. Signed purchase orders from such customer were received by 5B on
September 21, 2001. Upon receipt of those purchase orders, 5B ordered the Cisco
Systems equipment. 5B subsequently received letters from the customer (i)
requesting that the Cisco equipment be delivered in October and (ii) confirming
that title to and responsibility for the Cisco equipment transferred to the
customer on September 30, 2001. If such transaction had been included in this
form 10-Q, the shareholders equity would have been $2,505,044.
14
ITEM2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with,
and is qualified in its entirety by, the unaudited financial statements,
including the notes thereto, appearing elsewhere in this 10-Q.
RECENT DEVELOPMENTS
The third quarter of 2001 has represented a difficult time for the
technology industry. Many technology companies have closed their doors while the
remaining companies are competing for clients at all levels. 5B Technologies
Corporation has not escaped this industry downturn, but is aggressively trying
to maintain its clients and market share as well as grow its core business.
On July 6, 2001, the Company received a correspondence from the NASDAQ
Stock Market in connection with a determination by NASDAQ that the Company did
not meet the net tangible assets and proposed shareholders equity maintenance
criteria for continued listing as set forth in Marketplace Rule 4310(c)(2)(B)
and the proposed amendment to Marketplace Rule 4310(c)(2)(B)(i), respectively.
Although NASDAQ had determined to delist the Company's securities on July 16,
2001, the Company requested a hearing before the NASDAQ Listing Qualifications
Panel to appeal the delisting determination, which will stay such delisting
pending the outcome of the hearing. The Company appeared at the hearing on
August 23, 2001. The panel found that the Company failed to meet the NASDAQ
requirement as of June 30, 2001; however the panel granted the Company a
temporary exception subject to the Company meeting certain conditions as
follows: (1) On or before November 9, 2001 the Company must submit to NASDAQ
executed final documentation in connection with the recently completed
acquisitions of Knowledge Strategies Group, Inc., Anadig Corp. and Galt
Corporation and (2) on or before November 15, 2001, the Company must file the
Form 10-Q for the quarter ending September 30, 2001 evidencing shareholders'
equity of at least $2,500,000. In the event that the Company is deemed to have
met the terms of the exception, it shall continue to be listed on The NASDAQ
Small Cap Market. The Company can not make any assurances it will meet these
requirements.
While the Klein lawsuit and the potential NASDAQ delisting are negative
matters, the Company is moving forward to expand its operations in a tight
market. On August 16, 2001, the Company acquired the operating assets of
Knowledge Strategies Group ("KSG"), a privately held New York City based
e-commerce web site development and hosting company. Founded in 1995, Knowledge
Strategies Group focuses on delivering innovative business solutions that
leverage KSG's proprietary technology and design expertise. With a strong retail
focus (which is a market that the Company is currently not competing in), KSG
builds e-commerce enabled websites, business-to-business networks and intranets
for the most respected names in the retail marketplace. KSG has developed a
formidable roster of clients that transform and guide the digital marketplace,
including Bloomingdale's, Ermenegildo Zegna, Ghurka, Arrow Shirts, Telebeam and
Gold Toe Socks.
In March 2000, KSG acquired Eosk.com, the leader in e-commerce enabled
kiosks, furthering the development of complete Omnitailing solutions. By
utilizing multiple channels
15
including stores, Web sites, kiosks, handheld computers and wireless devices,
Omnitailing allows businesses to connect to consumers in more ways than have
ever before been possible.
On August 16, 2001, the Company acquired the operating assets of Knowledge
Strategies Group, Inc. ("KSG"), a privately held New York City based e-commerce
web site development and hosting company, in exchange for 150,000 shares of the
Company's common stock and the assumption by the Company of certain indebtedness
of KSG, including KSG's indebtedness Connecticut Bank of Commerce ("CBC"). The
Company issued to CBC 140,193 shares of common stock and 4,000, 5,000 and 10,000
shares of the Company's Series C, Series D and Series E 6% Convertible Preferred
Stock (the "CBC Preferred Stock"), respectively, in satisfaction of the
Company's obligations with respect to such CBC indebtedness. The CBC Preferred
Stock is convertible into an aggregate of 648,486 shares of the Company's common
stock at exercise prices, which on that date were greater than the fair market
value of the underlying common stock of $2.00, $2.75 and $3.25, respectively;
provided, however, that to the extent such CBC Preferred Stock will be converted
into shares of common stock that exceeds 19.9% of the Company's outstanding
common stock (calculated as of the date of issuance of the CBC Preferred Stock),
the Company must first obtain the approval of the Company's stockholders prior
to such issuance. The Company has undertaken to obtain such stockholder approval
at the annual meeting of stockholders scheduled for 2002. Additionally, the
Company has granted certain registration rights with respect to the shares of
common stock issuable upon conversion of the CBC Preferred Stock and has
undertaken to register the 140,193 shares of common stock issued to CBC within
120 business days of the date of issuance. The terms of the CBC Preferred Stock
also contains certain anti-dilution protections, including with respect to
issuances of securities by the Company below the market price per share. In
connection with the KSG transaction, CBC has amended its credit arrangement with
the Company making such arrangement with respect to the mezzanine facility less
restrictive (See Note 5).
On August 31, 2001, the Company acquired certain assets, consisting
primarily of the customer list, of Anadig Network Solutions, a privately-held
consultative network, security, and infrastructure solutions provider. The
Company acquired Anadig's client base and key staff in the marketing,
engineering, project management and support areas. The Company will pay a
percentage of revenues received from the Anadig client based at various rates,
depending on the nature of the product and the identity of the client. The
payments made to Anadig will terminate on December 31, 2002, except for payments
attributable to one client which will extinguish upon termination existing
contracts. Anadig's revenues for the 7 months ended June 31, 2001 were
approximately $3,000,000.
On September 14, 2001, the Company acquired certain assets of Galt
Corporation ("Galt"), a privately held New York based company engaged in the
business of application development, web site hosting and the integration of
information technology solutions, for 300,000 shares of 5B common stock, 300,000
shares of Series F 6% Convertible Preferred Stock, convertible at $3.33 per
share, which on that date was greater than the fair value of the underlying
common stock, warrants to acquire 300,000 shares of 5B Common Stock at $1.00 per
share and the assumption of certain liabilities. The Series F Preferred Stock
will be convertible into an aggregate of 300,000 shares of the Company's common
stock (subject to a prohibition on the issuance of shares in excess of 19.9% of
the outstanding common stock of the Company (calculated as of the date of
issuance of the Series F Preferred Stock) without first obtaining
16
stockholder approval, which the Company will undertake to obtain at the 2002
annual meeting of stockholders). The warrants have an expiration term of five
years. In connection with this acquisition the Company entered into employment
agreements, through December 31, 2002, with three key executives for an
aggregate consideration of $380,000 annually.
The Company, in September 2001, issued 100,000 shares of Series G
Convertible Preferred Stock to Galt Asset Management for $100,000. The Series G
Preferred Stock may be converted into Common Stock of the Company at any time
after 270 calendar days from the filing date of the Certificate of Designation.
Each share of Series G Preferred shall be convertible into a number of fully
paid and nonassessable shares of Common Stock at the price per share of Common
Stock equal to 100% of the ten (10) calendar day average closing price (the
"Average Closing Price") as reported on the NASDAQ Small Cap. Market or if the
Common Stock is not trading on such market, on such other market as the Common
Stock most actively trades (subject to a prohibition on the issuance of shares
in excess of 19.9% of the outstanding common stock of the Company (calculated as
of the date of issuance of the Series G Convertible Preferred Stock) without
first obtaining stockholder approval, which the Company will undertake to obtain
at the 2002 annual meeting of stockholders). The Series G Convertible Preferred
Stock will not pay dividends.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2000
For the three months ended September 30, 2001, the Company recorded sales
revenue of $1.6 million; a $1.5 million decrease from the $3.1 million recorded
during the three months ended September 30, 2000. The decrease in sales at 5B
Group is a result of the timing of new projects being authorized, which the
Company believes is due to the economy, both nationally and regionally.
Cost of sales consists of all direct labor costs and other costs, such as
payroll taxes, employee benefits, outside contractors and equipment purchases,
related to each project or individual sale. For the three months ended September
30, 2001, the Company recorded cost of sales of $1.4 million; an increase of
$568,000 compared to the $2.0 million recorded for the three months ended
September 30, 2000. The reason for the increase is due to unassigned engineers
and an increasingly competitive market. The Company has had various lay-offs to
reduce the amount of unassigned time and consolidate its workforce.
Selling expense consists of all sales force salaries, commissions and
associated costs. Selling expense for the three months ended September 30, 2001
was $181,000, a 11% decrease over the $206,000 recorded in the comparable prior
period. 5B Group reported selling expenses of $164,000, or 10% of revenue, for
the three months ended September 30, 2001 compared to $192,000, or 6% of revenue
for the three months ended September 30, 2000. The decrease in selling expenses
for 5B Group is predominantly due to a restructuring of the sales force and
lower commissions being paid, due to a reduction in sales.
17
General and administrative expenses totaled $1.0 million, or 63% of
revenue, for the three months ended September 30, 2001, representing an increase
of $402,000 compared to the $645,000, or 21% of revenue, recorded during the
three months ended September 30, 2000. 5B Group reported general and
administrative expenses of $927,000, or 58% of revenue, for the three months
ended September 30, 2001 compared to $632,000, or 21% of revenue, for the three
months ended September 30, 2000. The increase is attributable to the various
acquisitions which has led to additional operating expenses.
Net loss from continuing operations was $1.1 million for the three months
ended September 30, 2001 compared to the $248,000 net income recorded in the
comparable prior period.
NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2000
For the nine months ended September 30, 2001, the Company recorded sales
revenue of $4.3 million; a $8.2 million decrease from the $12.5 million recorded
during the nine months ended September 30, 2000. $5.0 million, of the $7.1
million decrease related to a one-time sale of hardware/software sales
associated with an internet infrastructure database build out in the fiscal 2000
period which was not replaced in the fiscal 2001 period. The remaining decrease
in sales at 5B Group is a result of the timing of new projects being authorized,
which the Company believes is due to the economy, both nationally and
regionally.
For the nine months ended September 30, 2001, the Company recorded cost of
sales of $3.5 million; a decrease of $5.2 million compared to the $6 million
recorded for the nine months ended September 30, 2000, primarily as a result of
a decrease in sales and implementation of cost reduction plans.
Selling expense for the nine months ended September 30, 2001 was $824,000,
a 31% increase over the $629,000 recorded in the comparable prior period. 5B
Group reported selling expenses of $739,000, or 17% of revenue, for the nine
months ended September 30, 2001 compared to $567,000, or 5% of revenue, for the
nine months ended September 30, 2000. The increase in selling expenses for 5B
Group is due primarily to the addition of more salespeople.
General and administrative expenses totaled $2.5 million, or 58% of
revenue, for the nine months ended September 30, 2001, representing an increase
of $201,000 compared to the $2.3 million, or 19% of revenue, recorded during the
nine months ended September 30, 2000. 5B Group reported general and
administrative expenses of $2.1 million, or 49% of revenue, for the nine months
ended September 30, 2001 compared to $1.7 million, or 14% of revenue, for the
nine months ended September 30, 2000. The increase is attributable to the
various acquisitions which has led to additional operating expenses.
Net loss from continuing operations was $3.7 million for the nine months
ended September 30, 2001, which included $1,234,956 in settlement of the Klein
lawsuit discussed above, which is included in other income (expense). The net
loss for the nine months ended September 30, 2000 amounted to $42,175.
18
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2001, the Company had $197,798 in cash and cash
equivalents and investments available for sale. Substantially this entire amount
was invested in interest-bearing savings accounts; money market accounts
established by major commercial banks. Primarily as a result of the continued
investment in 5B Group, the acquisitions it made in prior years and new
financings, the Company experienced a decrease in net cash and investments
available for sale during the nine months ended September 30, 2001 of $1,458,416
and a decrease of $714,940 for the three months ended September 30, 2001.
The Company continues to use its cash balances to fund its operations. In
order to expand its operations, which the Company is aggressively seeking to
accomplish, the Company will need to utilize its cash balances to promote
internal growth and fund potential future acquisitions. However, unless the
Company is able in the future to raise significant additional financing, the
Company will be limited to its current cash balances for funding such internal
growth and add-on acquisitions. There can be no assurance that the Company will
be able to raise any such financing or on terms that are acceptable to the
Company. Further, the Company's cash funds for acquisitions might be limited to
the extent that the Company's current operations or the operations of any future
acquisitions require the funding of losses or the incurrence of significant
capital expenditure.
At September 30, 2001, the Company had two credit lines available with
Connecticut Bank of Commerce ("CBC"):
5B GROUP REVOLVING CREDIT FACILITY: On May 24, 2001, the Company entered
into a revolving credit facility secured by eligible accounts receivable
(as defined in the credit facility). The term of the credit facility is
two years from the date of closing. Borrowings are limited to 75% of
eligible accounts receivable. The rate of interest charged on the facility
will be 1 1/2% above the Wall Street prime commercial lending rate, which
approximated 6.5% as of September 30, 2001. As of September 30, 2001, 5B
Group had $602,000 outstanding under this line. As of September 30, 2001,
the Company was not in compliance with its minimum tangible net worth
requirements, but has obtained a waiver from CBC for the aforementioned
covenant.
MEZZANINE FACILITY: On May 24, 2001, the Company obtained a maximum
mezzanine facility of $1,500,000, to be used for future acquisitions and
other agreed to purposes. The maximum amount of the mezzanine facility
will be limited to the lesser of $1,500,000 and 110% of the total cash,
cash equivalents, marketable securities and accounts receivable of the
Company less the outstanding amount of the revolving credit facility. The
mezzanine facility will mature within two years, or be rolled into the 5B
Group revolving credit facility. The rate of interest charged on the
facility will be 2% above the Wall Street prime commercial lending rate,
which approximated 6.5% as of September 30, 2001. As of September 30,
2001, 5B Group had approximately $873,000 outstanding under this line,
however, in connection with the KSG asset acquisition (See Note 3(a)), CBC
has relaxed certain of the above requirements and the Company believes
that, subject to CBC's approval, it will be able to use this mezzanine
facility for future acquisitions.
19
The two credit lines also have a requirement to maintain a minimum of
$1,000,000 with CBC at all times. If this requirement is not met there is a fee
of 2%, which is based on the shortfall. 5B did not meet this cash requirement
and has been charged the aforementioned fee.
On April 17, 2000, the Company received an equity investment of $874,465
($1,000,000 less transaction costs of $125,535) from La Vista Investors, LLC, a
fund managed by WEC Asset Management LLC, a New York-based investment company.
In connection with its investment, La Vista received (i) 1,000 shares of
the Company's Series A 6% Convertible Preferred Stock, par value $0.01 per share
(the "Series A Preferred Stock"), and (ii) a warrant convertible into 100,000
shares of the Company's Common Stock at an exercise price of $10.00 per share of
Common Stock (which was deemed to have an immaterial value), subject to certain
anti-dilution adjustments. Each share of Series A Preferred Stock is convertible
into such number of shares of Common Stock as is determined by dividing $1,000,
plus the amount of any accrued and unpaid dividends, by the lower of (i) nine
dollars ($9.00) or (ii) 80% of the average of the three lowest Closing Bid
Prices (as defined in the Certificate of Designations of the Series A Preferred
Stock) of the Company's Common Stock during the thirty (30) trading days
immediately preceding the date of notice from a holder of the Series A Preferred
Stock of any such conversion. In August 2000, the Company and the holders of the
Company's Series A Preferred Stock agreed to exchange the Series A Preferred
Stock for the Series B Preferred Stock on a one-for-one basis. The terms of the
Series A Preferred Stock were identical to those of the Series B Preferred
except that the holders of the Series A Preferred Stock had the right to vote
together with the holders of Common Stock as a single class.
In addition to the right of the selling stockholder to voluntarily convert
its Series B Preferred Stock into shares of our common stock, all unconverted
shares of the Series B Preferred Stock will automatically convert into shares of
common stock, at the then-applicable conversion formula, on April 17, 2003.
Redemption Rights of Redeemable Preferred Stock
The Company may be obligated to redeem the Series B Preferred Stock if:
(1) the number of shares issued upon conversion of the Series B Preferred Stock
were to exceed 19.9% of our outstanding common stock, or (2) we fail to conclude
certain required actions or if certain enumerated events (as described below)
were to occur.
The Company will be required to redeem the outstanding Series B Preferred
Stock at a price equal to 125% of the Liquidation Preference (as defined in the
Certificate of Designations) if any of the following events (among others) were
to happen: (i) the registration statement registering the shares of common stock
into which the Series B Preferred Stock is convertible is not effective by
September 27, 2000, (ii) the Company breaches the terms of the Series B
Preferred Stock and does not cure such breach within 10 days of notice to us of
such breach, (iii) the Company becomes bankrupt by court order or if we
voluntarily institute bankruptcy proceedings or if other similar events occur
(iv) the Company defaults under any of our material
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contracts in our businesses or lose a final judgment, where the default or
judgment is in excess of $250,000, or (v) there is a Change of Control (as
defined in the Certificate of Designations).
Additionally, if the number of shares of common stock issued upon
conversion of the Series B Preferred Stock exceeds 19.9% of our outstanding
common stock, we must take, at our option, one of two actions: (i) redeem all of
the remaining shares of Series B Preferred Stock at a price equal to 120% of the
Liquidation Preference or (ii) call a special meeting of the Company's
stockholders to approve of the issuance of the common stock and use the
Company's best efforts to obtain such approval.
The Company's ability to elect the first alternative (i.e., redeem at 120%
of the Liquidation Preference) will depend on numerous factors in the future,
including whether it has sufficient funds to make such redemption. At September
30, 2001, the Series B Preferred Stock was convertible into 1,262,626 shares of
Common Stock, which exceeded the 19.9% limitation.
On September 28, 2000, the Company received notification from La Vista
demanding redemption of the outstanding Series B Preferred Stock in accordance
with the terms of the Series B Preferred Stock due to the Company's failure to
have a registration statement declared effective by September 27, 2000. Although
the Company filed a registration statement relating to the Series B Preferred
Stock, which was declared effective on February 16, 2001, La Vista instituted a
lawsuit against the Company on January 4, 2001. The action seeks compensatory
and other damages and equitable relief. Among the remedies La Vista has demanded
are the redemption of the preferred stock at a redemption price of $1,250,000,
and liquidated damages of $100,000 relating to delays in effectuating the
registration statement. On February 6, 2001, the Company responded to the
Complaint denying liability for the relief sought and pleading certain
affirmative defenses. On February 28, 2001, La Vista made a motion to strike the
Company's defenses and for summary judgment. In March 2001, the Company made a
motion to amend its Answer to, among other things, plead additional affirmative
defenses. The Company also opposed La Vista's motion for summary judgment. On
October 1, 2001, the Court issued a decision (i) partially granting the
Company's motion to amend its Answer, (ii) partially denying La Vista's motion
to strike affirmative defenses and (iii) denying La Vista's motion for summary
judgment. The Company believes that it has strong legal defenses and other legal
rights and intends to continue to vigorously defend this Action.
Because of our present stock price, it is highly unlikely that we will be
able to raise funds through the sale of our equity securities, and our financial
condition prevents us from issuing debt securities. In the event that we are
unsuccessful in our litigation with the holder of our redeemable preferred
stock, we cannot assure you that we will be able to generate funds to enable the
Company to pay its financial obligations. In addition, our auditors included in
their report on our financial statements for the year ended December 31, 2000 an
explanatory paragraph about our ability to continue as a going concern
RECENT ACCOUNTING PRONOUNCEMENTS
In September 2001, the Financial Accounting Standards Board finalized FASB
Statements No. 141, BUSINESS COMBINATIONS (SFAS 141), and No. 142, GOODWILL AND
OTHER
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INTANGIBLE ASSETS (SFAS 142). SFAS 141 requires the use of the purchase method
of accounting and prohibits the use of the pooling-of-interests method of
accounting for business combinations initiated after September 30, 2001. SFAS
141 also requires that the Company recognize acquired intangible assets apart
from goodwill if the acquired intangible assets meet certain criteria. SFAS 141
applies to all business combinations initiated after September 30, 2001 and for
purchase business combinations completed on or after July 1, 2001. It also
requires, upon adoption of SFAS 142, that the Company reclassify, if necessary,
the carrying amounts of intangible assets and goodwill based on the criteria in
SFAS 141.
SFAS 142 requires, among other things, that companies no longer amortize
goodwill, but instead test goodwill for impairment at least annually. In
addition, SFAS 142 requires that the Company identify reporting units for the
purposes of assessing potential future impairments of goodwill, reassess the
useful lives of other existing recognized intangible assets, and cease
amortization of intangible assets with an indefinite useful life. An intangible
asset with an indefinite useful life should be tested for impairment in
accordance with the guidance in SFAS 142. SFAS 142 is required to be applied in
fiscal years beginning after December 15, 2001 to all goodwill and other
intangible assets recognized at that date, regardless of when those assets were
initially recognized. SFAS 142 requires the Company to complete a transitional
goodwill impairment test nine months from the date of adoption. The Company is
also required to reassess the useful lives of other intangible assets within the
first interim quarter after adoption of SFAS 142.
The Company's previous business combinations were accounted for using the
purchase method. As of September 30, 2001, the net carrying amount of goodwill
is approximately $1,574,000 and other intangible assets are $2,191,000.
Amortization expense during the nine-month period ended September 30, 2001 was
$190,000. At present, the Company is currently assessing but has not yet
determined the impact the adoption of SFAS 141 and SFAS 142 will have on its
financial position and results of operations.
In August 2001, the FASB issued FASB Statement No. 144, ACCOUNTING FOR THE
IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS ("FAS144"). This statement
supercedes FASB Statement No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED
ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF ("FAS121") and Accounting
Principles Board Opinion No. 30, REPORTING RESULTS OF OPERATIONS - REPORTING THE
EFFECTS OF DISPOSAL OF A SEGMENT OF A BUSINESS, AND EXTRAORDINARY, UNUSUAL AND
INFREQUENTLY OCCURRING EVENTS AND TRANSACTIONS. FAS144 retains the fundamental
provisions of FAS 121 for recognition and measurement of impairment, but amends
the accounting and reporting standards for segments of a business to be disposed
of. FAS144 is effective for fiscal years beginning after December 15, 2001, and
interim periods within those fiscal years, with early application encouraged.
The provisions of FAS144 generally are to be applied prospectively. The Company
believes that the adoption of FAS144 will not have a material impact on the
Company's financial position or results of operations.
INFLATION
Management does not believe inflation had a material adverse effect on the
financial statements for the periods presented.
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FORWARD LOOKING STATEMENTS AND ASSOCIATED RISK
Statements contained in this Form 10-Q, which are not historical facts,
are forwarding-looking statements. The forward-looking statements in this Form
10-Q are made pursuant to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. Forward-looking statements made herein contain a
number of risks and uncertainties that could cause actual results to differ
materially. These risks and uncertainties include, but are not limited to,
specific factors impacting the Company's business, including increased
competition; the ability of the Company to expand its operations and attract and
retain qualified sales representatives and technically trained consultants
experienced in the Internet and IT sectors; the ability of the Company to
attract and retain Internet solutions and IT professionals skilled in specific
applications; the ability of the Company to attract and retain qualified
personnel in the legal staffing sector; the availability of computer equipment;
competition in the Internet solutions and IT consulting sector and general
economic conditions and the Company's need for additional capital to finance the
growth of its operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
"Quantitative and Qualitative Disclosure About Market Risk", on page 24 of
the Company's Annual Report on Form 10-K, is incorporated herein by reference.
No material changes have occurred from the disclosure in Form 10-K, through the
three and nine months ended September 30, 2001.
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PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In August 2000, Robert Klein commenced a lawsuit against the Company and
Deltaforce Personnel Services Inc. in the Supreme Court of New York. The
Complaint alleged that the Company breached an agreement to timely register Mr.
Klein's stock. In July 2001, a settlement was reached and the Company agreed to
pay Mr. Klein $875,000 in cash to be paid over a 3-year period (which has a
present value of $820,000), and to issue to Mr. Klein a warrant to purchase
400,000 shares of the Company's common stock, which warrant expires in July
2005, and has an exercise price of $0.75 per share (which warrant is valued at
$250,000 based on the Black-Scholes valuation model). Of the cash settlement
amount, $500,000 is payable as follows: $150,000 upon execution of the
settlement in July 2001, $100,000 on August 1, 2001, $50,000 on September 1,
2001, $100,000 on January 2, 2002 and $100,000 on January 2, 2003; and $375,000
is payable at the rate of $12,500 per month over a period of 30 months
commencing on October 1, 2001. In addition, the stock subscription receivable of
$812,500 was rescinded in connection with the settlement. Legal fees relating to
the lawsuit approximated $165,000 for the nine months ended September 30, 2001.
On September 28, 2000, the Company received notification from La Vista
demanding redemption of the outstanding Series B Preferred Stock in accordance
with the terms of the Series B Preferred Stock due to the Company's failure to
have a registration statement declared effective by September 27, 2000. Although
the Company filed a registration statement relating to the Series B Preferred
Stock, which was declared effective on February 16, 2001, La Vista instituted a
lawsuit against the Company on January 4, 2001. The action seeks compensatory
and other damages and equitable relief. Among the remedies La Vista has demanded
are the redemption of the preferred stock at a redemption price of $1,250,000,
and liquidated damages of $100,000 relating to delays in effectuating the
registration statement. On February 6, 2001, the Company responded to the
Complaint denying liability for the relief sought and pleading certain
affirmative defenses. On February 28, 2001, La Vista made a motion to strike the
Company's defenses and for summary judgment. In March 2001, the Company made a
motion to amend its Answer to, among other things, plead additional affirmative
defenses. The Company also opposed La Vista's motion for summary judgment. On
October 1, 2001, the Court issued a decision (i) partially granting the
Company's motion to amend its Answer, (ii) partially denying La Vista's motion
to strike affirmative defenses and (iii) denying La Vista's motion for summary
judgment. The Company believes that it has strong legal defenses and other legal
rights and intends to continue to vigorously defend this Action.
Larry Kagan, a former employee of Delta, was terminated for cause on
October 14, 1999. In June 2000, Mr. Kagan commenced an arbitration alleging that
Delta breached his employment agreement by terminating his employment and that
the Company breached a related stock purchase agreement. The arbitration panel
reached a decision in October 2001 awarding Mr. Kagan $111,000.00 plus interest
and a portion of the costs. The Company intends to bring a proceeding to vacate
the arbitration award, however $111,000 has been accrued as of September 30,
2001 relating to the arbiters decision.
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ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
The information contained in Footnotes 3- Acquisitions and Footnote 4 -
Sale of Securities, set forth in Notes to Unaudited Consolidated Financial
Statements herein, is hereby incorporated by reference into this Item 2. The
securities described in each of Footnotes 3 and 4 were sold in reliance upon
Section 4(2) of the Securities Act of 1933, as amended, which provides an
exemption for sales of securities by an issuer not involving a public offering.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS:
None.
(b) REPORTS ON FORM 8-K:
The Company filed the following Current Reports on Form 8-K during the
three month period ended September 30, 2001:
Current Report on Form 8-K dated July 6, 2001 reporting under Item 5. a
hearing before the NASDAQ Listing Qualifications Panel to appeal a determination
by NASDAQ to delist the Company.
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SIGNATURES
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.
5B TECHNOLOGIES CORPORATION
Date: November 16, 2001 By: /s/ Glenn Nortman
--------------------------------------
Glenn Nortman, Chief Executive Officer
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