--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 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 MAY 15, 2001:
2,174,065 SHARES OF COMMON STOCK, PAR VALUE $0.04 PER SHARE.
--------------------------------------------------------------------------------
5B TECHNOLOGIES CORPORATION
INDEX TO FORM 10-Q FOR THE QUARTER ENDED
MARCH 31, 2001
PAGE NO.
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Balance Sheets
March 31, 2001 (Unaudited) and December 31, 2000
(Restated).....................................................1
Consolidated Statements of
Operations Three Months Ended
March 31, 2001 (Unaudited) and 2000 (Unaudited)................2
Consolidated Statements of Cash
Flows Three Months Ended March 31,
2001 (Unaudited) and 2000 (Unaudited)..........................3
Notes to Condensed Consolidated
Financial Statements.........................................4-9
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operation.........................10-15
Item 3 - Quantitative and Qualitative Disclosures About Market
Risk..........................................................15
PART II - Other Information.................................................16
SIGNATURES..................................................................17
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
5B TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
2001 2000
-----------------------------------------------------------------------------------------
ASSETS (Unaudited) (Restated)
------
Current assets:
Cash and cash equivalents $ 695,327 $ 1,156,436
Investments available for sale (includes $256,000 and
$298,000 respectively, restricted as collateral) 503,835 499,778
Accounts receivable, net of allowance for doubtful
accounts of $146,000 947,720 1,501,523
Note receivable for services provided 427,590 427,590
Other current assets 117,625 64,385
-----------------------------------------------------------------------------------------
Total current assets 2,692,097 3,649,712
-----------------------------------------------------------------------------------------
Goodwill & other intangibles, net 897,290 939,900
Net assets of discontinued operations 661,619 1,247,094
Other assets 524,101 509,610
-----------------------------------------------------------------------------------------
TOTAL ASSETS $ 4,775,107 $ 6,346,316
=========================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 923,310 $ 850,159
Accounts payable 711,924 1,129,308
Accrued expenses 158,807 332,273
Unearned sales revenue 120,401 174,527
-----------------------------------------------------------------------------------------
Total current liabilities 1,914,442 2,486,267
-----------------------------------------------------------------------------------------
Notes payable 10,427 11,928
-----------------------------------------------------------------------------------------
TOTAL LIABILITIES 1,924,869 2,498,195
-----------------------------------------------------------------------------------------
REDEEMABLE PREFERRED STOCK 1,250,000 1,250,000
-----------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; 5,000,000 shares
authorized, 1,000 shares issued and outstanding -- --
Common stock, $.04 par value, 17,500,000 shares
authorized, 2,198,565 and 2,165,036 shares issued and
outstanding, respectively 87,943 86,601
Additional paid-in capital 14,574,233 14,525,450
Stock subscription receivable (812,500) (812,500)
Accumulated deficit (12,198,833) (11,150,825)
Treasury stock at cost, 24,500 shares (50,605) (50,605)
-----------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 1,600,238 2,598,121
-----------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 4,775,107 $ 6,346,316
=========================================================================================
See accompanying notes to consolidated financial statements.
-1-
5B TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31,
UNAUDITED
March 31, March 31,
2001 2000
---------------------------------------------------------------------------------------
(Unaudited) (Unaudited)
Net sales $ 1,603,872 $ 1,916,310
Cost of sales 1,220,279 1,255,983
---------------------------------------------------------------------------------------
Gross profit 383,593 660,327
---------------------------------------------------------------------------------------
Expenses:
Selling 365,005 193,619
General and administrative expenses 807,270 730,023
---------------------------------------------------------------------------------------
Total expenses 1,172,275 923,642
---------------------------------------------------------------------------------------
Loss from operations (788,682) (263,315)
Other income (expense):
Interest expense (24,267) (35,146)
Interest income 11,733 9,233
---------------------------------------------------------------------------------------
Loss before provision for (benefit from) income taxes (801,216) (289,228)
and discontinued operations
State and local taxes 19,806 944
---------------------------------------------------------------------------------------
Loss from continuing operations (821,022) (290,172)
Discontinued operations:
Income (loss) from discontinued operations, net of
income taxes of $0 and $80,892 respectively (681,193) (181,685)
Gain on disposal of discontinued operations 472,957 (856,198)
---------------------------------------------------------------------------------------
Net loss $(1,029,258) $(1,328,055)
Preferred dividends (18,750) --
---------------------------------------------------------------------------------------
Net loss attributable to common shareholders $(1,048,008) $(1,328,055)
---------------------------------------------------------------------------------------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic and diluted 2,160,016 2,135,500
BASIC AND DILUTED LOSS PER COMMON SHARE:
Continuing operations $ (0.39) $ (0.13)
---------------------------------------------------------------------------------------
Discontinued operations $ (0.10) $ (0.49)
---------------------------------------------------------------------------------------
Net loss per share $ (0.49) $ (0.62)
---------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
-2-
5B TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31,
UNAUDITED
March 31, March 31,
2001 2000
--------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES: (Unaudited) (Unaudited)
Net loss $(1,029,254) $(1,328,054)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Loss from discontinued operations 681,193 181,685
(Gain) loss from disposal of discontinued operations (472,957) 856,198
Depreciation and amortization 60,157 69,697
Issuance of options and warrants for services -- 16,300
Changes in operating assets and liabilities:
Accounts receivable 553,803 117,084
Other assets (76,086) (67,757)
Accounts payable (85,788) (61,412)
Accrued expenses (246,345) (198,149)
--------------------------------------------------------------------------------------------------
NET CASH USED IN OPERATING ACTIVITIES FROM CONTINUING OPERATIONS (615,277) (414,408)
--------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES FROM DISCONTINUED
OPERATIONS 277,352 1,221,087
--------------------------------------------------------------------------------------------------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (337,925) 806,679
--------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of investments (4,057) (5,522)
Purchase of equipment (9,192) --
--------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES FROM CONTINUING OPERATIONS (13,249) (5,522)
--------------------------------------------------------------------------------------------------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES OF
DISCONTINUED OPERATIONS (494,081) 2,616,581
--------------------------------------------------------------------------------------------------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (507,330) 2,611,059
--------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock 50,124 --
Proceeds from notes payable 161,481 142,621
Repayment of notes payable (421,428) (412,162)
--------------------------------------------------------------------------------------------------
NET CASH USED IN FINANCING ACTIVITIES FROM CONTINUING OPERATIONS (209,823) (269,541)
--------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES FROM
DISCONTINUED OPERATIONS 593,969 (3,834,345)
--------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 384,146 (4,103,886)
--------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,156,436 1,003,752
--------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 695,327 $ 317,604
==================================================================================================
--------------------------------------------------------------------------------------------------
Cash paid for income taxes $ 3,399 $ 1,694
Cash paid for income taxes for discontinued operations $ 16,207 $ 70,969
Cash paid for interest $ 24,267 $ 35,147
Cash paid for interest for discontinued operations $ 49,574 $ 271,136
--------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
-3-
5B TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. 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 March 31, 2001
and its results of operations and cash flows for the three months ended March
31, 2001 and 2000, respectively, have been included (See Note 2).
The financial statements for the three months ended March 31, 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.
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, which was maintained
through a wholly owned subsidiary, Deltaforce Personnel Services, Inc.
("DeltaGroup"), for approximately $1,500,000, plus 50% of DeltaGroup revenue
in excess of $7.25 million and $7.5 million in the first and second years,
respectively, after closing. Accordingly, DeltaGroup has been presented
as a discontinued operation for the three months ended March 31, 2001,
and the balance sheet as of December 31, 2000 and the statements of
operations and cash flows for the three months ended March 31, 2000 have
been restated to conform to this 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 $1,823,000 and $1,967,000 for the three
months ended March 31, 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. ("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
March 31, 2001 and December 31, 2000 and for the three months ended March 31,
2001 and 2000, respectively. The loss on disposal of Paramount
4
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 $156,000 and $1,588,000 for the three
months ended March 31, 2001 and 2000, respectively.
The components of net assets of discontinued operation included in the
Company's Consolidated Balance Sheets at March 31, 2001 and December 31,
2000, are as follows:
2001 2000
---- ----
DELTAFORCE PERSONNEL SERVICES, INC.
Accounts receivable 869,927 932,219
Other assets 124,765 122,706
Goodwill and intangibles 1,017,454 1,056,772
Accounts payable (61,002) (77,758)
Accrued expenses (220,876) (89,574)
Notes payable (750,000) (750,000)
------------ -----------
980,268 1,194,365
------------ -----------
PARAMOUNT OPERATIONS INC.
Accounts receivable 51,299 103,528
Net investment in direct finance and sales-type 3,692,785 3,198,704
leases
Assets held under operating leases, net of 228,216 261,737
accumulated depreciation
Other assets - 162,000
Accrued expenses (404,057) (380,317)
Notes payable (57,744) (76,384)
Obligations for financed equipment - non-recourse (3,829,148) (3,216,539)
------------ -----------
(318,649) 52,729
------------ -----------
$ 661,619 $ 1,247,094
============ ===========
3. LINES OF CREDIT
At March 31, 2001, the Company had two credit lines available:
TERM LOAN: In April 1998, Paramount entered into a $500,000 term loan with
a bank collateralized by $600,000 in cash maintained in an investment account.
Principal payments of approximately $41,600 and interest are due on a quarterly
basis through April 20, 2001. On July 20, 1999 the Company borrowed an
additional $215,000 as a demand note. Interest payments are being made on this
additional borrowing and the Company is undergoing negotiations with the bank to
establish repayment terms. As of March 31, 2001, approximately $256,000 remained
outstanding under these loans collateralized by up to $600,000 in cash
maintained in an investment account. Under the agreement, the Company was not in
compliance with the debt covenant-requiring minimum net worth of at least $5.5
million. The Company has obtained a
5
waiver from the bank for non-compliance with the aforementioned covenant for the
three months ended March 31, 2001.
5B GROUP EQUIPMENT ACQUISITION CREDIT FACILITY: 5B Group has a $2,000,000
revolving line of credit agreement with a finance company secured by accounts
receivable and inventory. Interest on outstanding borrowings accrues at the
prime rate plus 1 1/2 %. Borrowings are limited to 85% of eligible accounts
receivable, as defined. This facility allows the Company to purchase computer
hardware from its vendors with net 30-day terms interest free. At the expiration
of the net 30-day period, the Company has the option of paying the amount due
or, provided the Company has sufficient eligible collateral, borrowing under the
credit facility. As of March 31, 2001, 5B Group had $487,000 outstanding under
this line, of which approximately $386,000 is classified as debt and
approximately $101,000 is included in accounts payable. Under the agreement, the
Company's 5B Group subsidiary was not in compliance with the net profit after
tax to revenue ratio of greater than 1%. Pursuant to this default the Company
has received a forbearance agreement from the finance company which states that
the credit facility has been reduced to $500,000 and is payable in full by July
15, 2001. The Company is currently negotiating with the finance company to
initiate a secured credit facility and it is also negotiating with its vendors
to establish terms and plans to utilize, when closed, the Connecticut Bank of
Commerce financing (see below) to replace this credit facility.
Each of the Company's two credit lines contains cross-default provisions,
so that any uncured or unwaived default under any of these credit lines would
cause there to be a default under the other credit lines.
As described above, the Company has received waivers from the lenders
under the Term Loan as a result of the Company's non-compliance at March 31,
2001 with certain covenants under such facility. The Company believes that it
will not satisfy these covenants in the future. The Company has regularly
obtained waivers of compliance from the respective lenders under this facility,
and believes that it will be able to obtain waivers in the future. However, if
any waiver cannot be obtained in the future, that lender would be able to
declare a default under its credit line, which would have the effect of also
causing a default under the Company's other credit lines. Among other things, if
such defaults were to occur, any or all of the lenders could declare all
amounts, which aggregated approximately $743,000 as of March 31, 2001, under its
respective credit lines immediately due and payable.
On April 11, 2001 the Company received a banking commitment from the
Connecticut Bank of Commerce ("CBC") and is currently finalizing the documents
and expects to have the credit facilities in place shortly. The commitment
extends two types of credit facilities:
5B GROUP REVOLVING CREDIT FACILITY: 5B Group will receive upon the closing
of the financing a revolving credit facility secured by eligible accounts
receivable, as defined. 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.
MEZZANINE FACILITY: 5B Technologies Corporation will receive upon the
closing of the financing, a maximum mezzanine facility of $1,500,000, to
be used for future
6
acquisitions and other agreed to purposes. The maximum amount of the
mezzanine facility will be limited to 110% of the total cash, cash
equivalents, marketable securities and accounts receivable of the Company
less the outstanding amount of the revolving credit facility.
Additionally, the mezzanine facility may not be utilized until either (a)
the amount of the mezzanine facility to be used is secured by cash
collateral acceptable to CBC, or (b) (i) the sale of certain material
assets, (ii) 5B has demonstrated a return to profitability, and (iii) a
settlement of the redeemable preferred stock. 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.
4. 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
("La Vista"), 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 fair value), subject to
certain anti-dilution adjustments for stock splits, subdivisions, other similar
events and certain below-market price issuances of Common Stock. 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 Conversion Price (as defined below) in effect at the
time of conversion. The Conversion Price at which shares of Common Stock shall
be deliverable upon conversion of Series A Preferred Stock, without the payment
of additional consideration by the holder thereof, shall be 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 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
7
The Company may be obligated to redeem the Series B Preferred Stock in two
types of situations: (1) if the number of shares issued upon conversion of the
Series B Preferred Stock were to exceed 19.9% of our outstanding common stock,
and (2) if we fail to conclude certain required actions or if certain enumerated
events were to occur.
IF THE UNDERLYING SHARES EXCEED 19.9%. If the number of shares of common
stock issued upon conversion of the Series B Preferred Stock and in lieu of cash
dividends (see below for a description of this concept) 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, as defined (ii) call a special meeting of
the Company's stockholders to approve of the issuance of the common stock (and
any other matters requiring stockholder approval under the applicable rules of
the NASDAQ Stock Market) and use the Company's best efforts to obtain such
approval.
The Company cannot predict which of the foregoing two alternatives it will
elect.
In any event, the Company's ability to elect the first alternative (i.e.,
make a redemption at 120% of the Liquidation Value of the Series B Preferred
Stock) will depend on numerous factors in the future, including whether it has
sufficient funds to make such redemption. At December 31, 2000, the Series B
Preferred Stock could be converted into 1,618,899 shares of Common Stock, which
exceeds 19.9% (see above).
FAILURE TO CONCLUDE ACTIONS/OCCURRENCE OF EVENTS. 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 if any of the following events
(among others) were to happen (unless the selling stockholder at the time agreed
with the Company otherwise): (i) if the registration statement is not effective
by September 27, 2000, (ii) if 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) if the Company becomes bankrupt by court order or if we
voluntarily institute bankruptcy proceedings or if other similar events occur
(iv) if 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, (v) if there is a Change of Control, as defined.
On September 28, 2000 the Company received notification from La Vista
demanding redemption of 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 effective by September 27, 2000. Accordingly, the Company
has increased the value of the redeemable preferred stock to $1,250,000. The
Company filed a registration statement relating to the Series B Preferred Stock
and it was declared effective on February 16, 2001.
5. 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).
8
The following represents selected financial information for the Company's
segments for the three months ended March 31, 2001 and 2000:
5B 5B Group Total
-----------------------------------------------------------
Three months ended
March 31, 2001
-----------------------------------------------------------
Revenues $ -- $1,603,872 $1,603,872
Cost of sales -- 1,220,279 1,220,279
Selling 49,536 315,469 365,005
General and
Administrative 144,010 663,256 807,266
Interest expense 8,642 15,625 24,267
Pre-tax loss (190,455) (610,757) (801,212)
Assets $2,251,005 $2,524,102 $4,775,107
Three months ended
March 31, 2000
-----------------------------------------------------------
Revenues $ -- $1,916,310 $1,916,310
Cost of sales -- 1,255,983 1,255,983
Selling 14,275 179,344 193,619
General and
Administrative 270,148 459,872 730,020
Interest expense 12,012 23,134 35,146
Pre-tax loss (287,205) (2,023) (289,228)
Assets $3,344,441 $3,001,875 $6,346,316
===========================================================
9
ITEM 2. 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
On May 14, 2001, the Company sold the majority of its assets related to
its legal staffing subsidiary, Deltaforce Personnel Services, Inc.
("DeltaGroup"), for approximately $1,500,000, plus 50% of DeltaGroup revenue
in excess of $7.25 million and $7.5 million in the first and second years,
respectively, after closing. Accordingly, DeltaGroup has been presented as a
discontinued operation for the three months ended March 31, 2001, and the
balance sheet as of December 31, 2000 and the statements of operations and
cash flows for the three months ended March 31, 2000 have been restated to
conform to this 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 $1,823,000 and
$1,967,000 for the three months ended March 31, 2001 and 2000, respectively.
The sale of DeltaGroup was prompted by the Companies commitment to its
technology subsidiary (5B Technologies Group, Inc., "5B Group") and the
DeltaGroup's continued losses. 5B Technologies Corporation ("5B") originally
purchased Deltaforce Personnel Services, Inc. in January 1998 and in July 1998
purchased RBW Staffing Inc. and merged its operations into Deltaforce Personnel
Services, Inc. and renamed the entity DeltaGroup. At that time the Company
planned to be a business solutions provider and offer staffing services in
various areas. As 5B Group continued to expand the management of 5B felt that
the focus of the Company was technology and that the DeltaGroup, being a legal
staffing entity, did not fit the Companies mission and long-term objectives,
which had changed since 1998. 5B also felt, that the DeltaGroup, being in a very
specific niche market, was susceptible to downtrends in the economy, slow downs
by law firms and an increase in unemployment. Based on these factors and a shift
in 5B's mission and long-term objectives 5B decided to sell the DeltaGroup
subsidiary. The sale will bring a new focus to the technology subsidiary,
increased cash reserves and availability and improved financial results in the
future.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2001 COMPARED TO THREE MONTHS ENDED MARCH 31,
2000
For the three months ended March 31, 2001, the Company recorded sales
revenue of $1.6 million; a $300,000 decrease from the $1.9 million recorded
during the three months ended March 31, 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.
10
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 March 31,
2001, the Company recorded cost of sales of $1.2 million; a decrease of $100,000
compared to the $1.3 million recorded for the three months ended March 31, 2000.
The reason for this decrease is the decrease in related sales and the product
mix of the sales. There were fewer services and more equipment sales for the
three months ended March 31, 2001 compared to the three months ended March 31,
2000 resulting in a lower gross profit.
Selling expense consists of all sales force salaries, commissions and
associated costs. Selling expense for the three months ended March 31, 2001 was
$365,000, an 88% increase over the $194,000 recorded in the comparable prior
period. 5B Group reported selling expenses of $315,000, or 20%, of revenue for
the three months ended March 31, 2001 compared to $179,000, or 9%, of revenue
for the three months ended March 31, 2000. The increase in selling expenses for
5B Group is predominantly due to the addition of more salespeople.
General and administrative expenses totaled $733,000 or 46%, of revenue
for the three months ended March 31, 2001, representing an increase of $3,000
compared to the $730,000, or 38%, of revenue recorded during the three months
ended March 31, 2000. 5B Group reported general and administrative expenses of
$663,000 or 41%, of revenue for the three months ended March 31, 2001 compared
to $460,000, or 24%, of revenue for the three months ended March 31, 2000. The
increase is attributable to the Company's expansion and new facilities.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2001, the Company had $1.2 million 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 or in United States Government, other AA
rated obligations and mutual funds. Primarily as a result of the continued
investment in 5B Group and the acquisitions it made in prior years the Company
experienced a decrease in net cash and investments available for sale during the
three months ended March 31, 2001 of $457,052.
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, the Company is
limited to its current cash balances for funding such internal growth and add-on
acquisitions, unless the Company is able in the future to raise significant
additional financing. There can be no assurance that the Company will be able to
raise any such financing. 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 capital outlay.
At March 31, 2001, the Company had two credit lines available:
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TERM LOAN: In April 1998, Paramount entered into a $500,000 term loan with
a bank collateralized by $600,000 in cash maintained in an investment account.
Principal payments of approximately $41,600 and interest are due on a quarterly
basis through April 20, 2001. On July 20, 1999 the Company borrowed an
additional $215,000 as a demand note. Interest payments are being made on this
additional borrowing and the Company is undergoing negotiations with the bank to
establish repayment terms. As of March 31, 2001, approximately $256,000 remained
outstanding under these loans collateralized by up to $600,000 in cash
maintained in an investment account. Under the agreement, the Company was not in
compliance with the debt covenant-requiring minimum net worth of at least $5.5
million. The Company has obtained a waiver from the bank for non-compliance with
the aforementioned covenant for the three months ended March 31, 2001.
5B GROUP EQUIPMENT ACQUISITION CREDIT FACILITY: 5B Group has a $2,000,000
revolving line of credit agreement with a finance company secured by accounts
receivable and inventory. Interest on outstanding borrowings accrues at the
prime rate plus 1 1/2 %. Borrowings are limited to 85% of eligible accounts
receivable, as defined. This facility allows the Company to purchase computer
hardware from its vendors with net 30-day terms interest free. At the expiration
of the net 30-day period, the Company has the option of paying the amount due
or, provided the Company has sufficient eligible collateral, borrowing under the
credit facility. As of March 31, 2001, 5B Group had $487,000 outstanding under
this line, of which approximately $386,000 is classified as debt and
approximately $101,000 is included in accounts payable. Under the agreement, the
Company's 5B Group subsidiary was not in compliance with the net profit after
tax to revenue ratio of greater than 1%. Pursuant to this default the Company
has received a forbearance agreement from the finance company which states that
the credit facility has been reduced to $500,000 and is payable in full by July
15, 2001. The company is currently negotiating with the finance company to
initiate a secured credit facility and it is also negotiating with its vendors
to establish terms and plans to utilize, when closed, the Connecticut Bank of
Commerce financing (see below) to replace this credit facility.
Each of the Company's two credit lines contains cross-default provisions,
so that any uncured or unwaived default under any of these credit lines would
cause there to be a default under the other credit lines.
As described above, the Company has received waivers from the lenders
under the Term Loan as a result of the Company's non-compliance at March 31,
2001 with certain covenants under such facility. The Company believes that it
will not satisfy these covenants in the future. The Company has regularly
obtained waivers of compliance from the respective lenders under this facility,
and believes that it will be able to obtain waivers in the future. However, if
any waiver cannot be obtained in the future, that lender would be able to
declare a default under its credit line, which would have the effect of also
causing a default under the Company's other credit lines. Among other things, if
such defaults were to occur, any or all of the lenders could declare all
amounts, which aggregated approximately $743,000 as of March 31, 2001, under its
respective credit lines immediately due and payable.
On April 11, 2001 the Company received a banking commitment from the
Connecticut Bank of Commerce ("CBC") and is currently finalizing the documents
and expects to have the credit facilities in place shortly. The commitment
extends two types of credit facilities:
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5B GROUP REVOLVING CREDIT FACILITY: 5B Group will receive upon the closing
of the financing a revolving credit facility secured by eligible accounts
receivable, as defined. 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.
MEZZANINE FACILITY: 5B Technologies Corporation will receive upon the
closing of the financing, 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 110% of the total
cash, cash equivalents, marketable securities and accounts receivable of
the Company less the outstanding amount of the revolving credit facility.
Additionally, the mezzanine facility may not be utilized until either (a)
the amount of the mezzanine facility to be used is secured by cash
collateral acceptable to CBC, or (b) (i) the sale of certain material
assets, (ii) 5B has demonstrated a return to profitability, and (iii) a
settlement of the redeemable preferred stock. 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.
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
("La Vista"), 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 fair value), subject to
certain anti-dilution adjustments for stock splits, subdivisions, other similar
events and certain below-market price issuances of Common Stock. 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 Conversion Price (as defined below) in effect at the
time of conversion. The Conversion Price at which shares of Common Stock shall
be deliverable upon conversion of Series A Preferred Stock, without the payment
of additional consideration by the holder thereof, shall be 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.
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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 in two
types of situations: (1) if the number of shares issued upon conversion of the
Series B Preferred Stock were to exceed 19.9% of our outstanding common stock,
and (2) if we fail to conclude certain required actions or if certain enumerated
events were to occur.
IF THE UNDERLYING SHARES EXCEED 19.9%. If the number of shares of common
stock issued upon conversion of the Series B Preferred Stock and in lieu of cash
dividends (see below for a description of this concept) 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, as defined (ii) call a special meeting of
the Company's stockholders to approve of the issuance of the common stock (and
any other matters requiring stockholder approval under the applicable rules of
the NASDAQ Stock Market) and use the Company's best efforts to obtain such
approval.
The Company cannot predict which of the foregoing two alternatives it will
elect.
In any event, the Company's ability to elect the first alternative (i.e.,
make a redemption at 120% of the Liquidation Value of the Series B Preferred
Stock) will depend on numerous factors in the future, including whether it has
sufficient funds to make such redemption. At December 31, 2000, the Series B
Preferred Stock could be converted into 1,618,899 shares of Common Stock, which
exceeds 19.9% (see above).
FAILURE TO CONCLUDE ACTIONS/OCCURRENCE OF EVENTS. 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 if any of the following events
(among others) were to happen (unless the selling stockholder at the time agreed
with the Company otherwise): (i) if the registration statement is not effective
by September 27, 2000, (ii) if 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) if the Company becomes bankrupt by court order or if we
voluntarily institute bankruptcy proceedings or if other similar events occur
(iv) if 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, (v) if there is a Change of Control, as defined.
On September 28, 2000 the Company received notification from La Vista
demanding redemption of 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 effective by September 27, 2000. Accordingly, the Company
has increased the value of the redeemable preferred stock to $1,250,000. The
Company filed a registration statement relating to the Series B Preferred Stock
and it was declared effective on February 16, 2001.
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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 statement for the year ended December 31,
2000 in our Form 10-K, an explanatory paragraph about our ability to continue
as a going concern.
INFLATION
Management does not believe inflation had a material adverse effect on the
financial statements for the periods presented.
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 months ended March 31, 2001.
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PART II: OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
None.
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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: May 21, 2001 By: /s/ Glenn Nortman
-----------------------------------------
Glenn Nortman, Chief Executive Officer
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