<PAGE>
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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 QUARTER ENDED SEPTEMBER 30, 2000
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)
ONE JERICHO PLAZA, JERICHO, NEW YORK 11753
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(516) 938-3400
(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 14, 2000:
2,140,532 SHARES OF COMMON STOCK, PAR VALUE $0.04 PER SHARE.
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<PAGE>
5B TECHNOLOGIES CORPORATION
INDEX TO FORM 10-Q FOR THE QUARTER ENDED
SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Balance Sheets
September 30, 2000 (unaudited) and December 31, 1999.........................................1
Consolidated Statements of Operations for the Three Months Ended and
Nine Months Ended September 30, 2000 and 1999 (unaudited)....................................2
Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 2000 and 1999 (unaudited)......................................................3
Notes to Unaudited Consolidated Financial Statements.......................................4-9
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations.............................................................................10-15
Item 3 - Quantitative and Qualitative Disclosure About Market Risk....................................16
PART II - Other Information...................................................................................17
SIGNATURES....................................................................................................18
</TABLE>
<PAGE>
PART I: FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
5B TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS SEPTEMBER 30, DECEMBER 31,
------ 2000 1999
------------ -------------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 1,569,974 $ 1,003,752
Investments available for sale............................ 945,818 925,616
Accounts receivable, net of allowance for doubtful accounts of
$90,000 and $70,000, respectively 3,317,452 2,718,646
Other current assets...................................... 48,731 61,164
--------- ---------
Total current assets.................................. 5,881,975 4,709,178
--------- ---------
Investments available for sale............................... 159,793 157,060
Goodwill, net of accumulated amortization of $259,714 and
$155,645, respectively....................................... 1,394,223 1,498,292
Net assets of discontinued operation......................... 88,930 1,812,232
Other assets ................................................ 1,322,281 1,098,260
--------- ---------
Total assets.......................................... $ 8,847,202 $ 9,275,022
============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 716,216 $ 745,839
Accrued liabilities....................................... 849,211 558,840
Notes payable............................................. 1,994,803 2,227,775
--------- ---------
Total current liabilities............................. 3,560,230 3,532,454
Notes payable................................................ 14,349 158,600
--------- ---------
Total liabilities..................................... 3,562,579 3,691,054
--------- ---------
Stockholders' equity:
Preferred stock, $.01 par value; 5,000,000 shares
authorized, 1,000 shares issued and outstanding ........ 10 -
Common stock, $.04 par value; 17,500,000 shares
authorized, and 2,165,032 shares issued and outstanding. 86,601 86,400
Additional paid-in capital................................ 15,399,905 14,504,629
Stock subscription receivable............................. (812,500) (812,500)
Accumulated deficit....................................... (9,350,788) (8,143,956)
Treasury stock, 24,500 shares at cost..................... (50,605) (50,605)
------ ------- -------
Total stockholders' equity................................... 5,27,623 5,583,968
-------- ---------
Total liabilities and stockholders' equity................... $ 8,847,202 $ 9,275,022
============= ===========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
5B TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- ---------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sales............................................. $ 4,889,114 $ 3,948,155 $ 18,289,440 $ 12,081,655
Cost of sales..................................... 3,281,006 2,805,439 13,656,763 8,832,966
----------- ----------- ------------ ------------
Gross profit............................... 1,608,108 1,142,716 4,632,677 3,248,689
----------- ----------- ------------ ------------
Expenses:
Selling........................................... 424,901 484,130 1,222,333 1,174,687
General and administrative........................ 1,103,909 953,609 3,664,638 3,286,156
----------- ----------- ------------ ------------
Total expenses............................. 1,528,810 1,437,739 4,886,971 4,460,843
----------- ----------- ------------ ------------
Income (loss) from operations..................... 79,298 (295,023) (254,294) (1,212,154)
Interest income................................... 44,043 9,643 72,544 31,097
----------- ----------- ------------ ------------
Income (loss) before provision (benefit) for income
taxes and discontinued operations.............. 123,341 (285,380) (181,750) (1,181,057)
Provision (benefit) for income taxes.............. 14,364 (129,402) 20,705 (439,160)
----------- ----------- ------------ ------------
Income (loss) from continuing operations... 108,977 (155,978) (202,455) (741,897)
----------- ----------- ------------ ------------
Discontinued operation:
Income (loss) from discontinued operation.. -- 207,079 (121,175) 694,022
Loss on disposal of discontinued operation. -- -- (856,198) --
----------- ----------- ------------ ------------
Net income (loss)................................. $ 108,977 $ 51,101 $(1,179,828) $(47,875)
----------- ----------- ------------ ------------
Basic earnings (loss) per share:
Continuing operations...................... $ 0.04 $ (0.07) $ (0.09) $ (0.34)
======== ======== ========= ========
Discontinued operation..................... $ -- $ 0.09 $ (0.46) $ 0.32
======== ======== ========= ========
Net income (loss) per share................ $ 0.04 $ 0.02 $ (0.55) $ (0.02)
======== ======== ========= ========
Diluted earnings (loss) per share:
Continuing operations...................... $ 0.04 $ (0.07) $ (0.09) $ (0.34)
======== ======== ========= ========
Discontinued operation..................... $ -- $ 0.09 $ (0.46) $ 0.32
======== ======== ========= ========
Net income (loss) per share................ $ 0.04 $ 0.02 $ (0.55) $ (0.02)
======== ======== ========= ========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
5B TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
UNAUDITED
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,179,828) $ (47,875)
Adjustments to reconcile net loss to net cash provided by operating activities:
Loss from discontinued operations 40,282 --
Loss from sale of discontinued operation 856,198 --
Bad debt reserve 20,000 --
Issuance of stock options 16,300 --
Depreciation and amortization 368,116 342,224
Depreciation and amortization on discontinued operation 815,977 3,082,027
Changes in operating assets and liabilities:
Accounts receivable (618,806) (133,414)
Other assets (61,227) 78,412
Accounts payable (29,623) (106,920)
Accrued expenses 263,371 28,798
--------- ----------
Net cash provided by continuing operations 490,760 3,243,252
Net cash used in discontinued operation (257,344) (325,320)
--------- ----------
Net cash provided by operating activities 233,416 2,917,932
CASH FLOWS FROM INVESTING ACTIVITIES:
Payment for acquisitions, net of cash acquired (100,000) (64,832)
Purchase of equipment (44,479) --
Purchases of investments (22,935) (23,077)
--------- ----------
Net cash used by continuing operations (167,414) (87,909)
Net cash provided by discontinued operation 13,629,977 10,263,096
---------- ----------
Net cash provided by investing activities 13,462,563 10,175,187
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable 855,567 1,266,666
Repayment of notes payable (1,502,722) (1,833,689)
Issuance of common stock 4,722 --
Issuance of preferred stock 874,465 --
----------- ----------
Net cash provided by (used in) continuing operations 232,032 (567,023)
Net cash used by discontinued operation (13,361,789) (13,059,390)
----------- ----------
Net cash used in financing activities (13,129,757) (13,626,413)
----------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 566,222 (533,294)
----------- ----------
CASH AND CASH EQUIVALENTS, beginning of period 1,003,752 1,495,082
----------- ----------
CASH AND CASH EQUIVALENTS, end of period $ 1,569,974 $ 961,78
=========== ==========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for income taxes $ 4,929 $ 5,953
=========== ==========
Cash paid for income taxes for discontinued operation $ 86,017 $ 3,783
=========== ==========
Cash paid for interest $ 152,485 $ 111,928
=========== ==========
Cash paid for interest for discontinued operation $ 559,135 $1,541,212
=========== ==========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
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 September
30, 2000 and its results of operations and cash flows for the three and
nine months ended September 30, 2000 and 1999, respectively, have been
included (See Note 3).
The financial statements for the three and nine months ended September 30,
2000 and 1999, respectively, are consolidated to include the results of the
Company's two wholly owned subsidiaries, 5B Technologies Group, Inc. ("5B
Group") (formerly Paratech Resources Inc.) and Deltaforce Personnel
Services, Inc. ("DeltaGroup"). 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, 1999.
2. ACQUISITION
On September 28, 2000, 5B Technologies Group acquired certain assets of
Infinity Consulting Inc., a privately held North Carolina company that
provides high end engineering skills in the areas of database management,
applications development, and implementation and performance tuning for a
total purchase price of $50,000 in cash. The acquisition, which was not
considered material, was accounted for as a purchase. In connection with
this acquisition the Company entered into non-compete agreements with two
key executives for an aggregate consideration of $300,000, $50,000 of which
was paid at closing with $250,000 due within one year.
3. DISCONTINUED OPERATION
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 for the three and nine months ended September 30, 2000, and the
balance sheet as of December 31, 1999 and the statements of operations and
cash flows for the three and nine months ended September 30, 2000, and
1999, respectively, have been restated to conform with this presentation.
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
4
<PAGE>
related assets. Net sales for Paramount were approximately $179,000 and
$5,807,000 for the three and nine months ended September 30, 2000,
respectively.
The components of net assets of discontinued operation included in the
Company's Consolidated Balance Sheets at September 30, 2000 and December
31, 1999, are as follows:
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Accounts receivable $ 193,012 $ 274,613
Net investment in direct finance and sales-type leases 4,516,732 16,232,749
Assets held under operating leases, net of accumulated depreciation 260,276 2,990,213
Other assets - 537,990
Accrued expenses (104,467) (84,922)
Notes payable (146,234) (1,382,902)
Obligations for financed equipment -- non-recourse (4,630,389) (16,755,509)
-------------- ---------------
$ 88,930 $ 1,812,232
============== ===============
</TABLE>
3. LINES OF CREDIT
At September 30, 2000, the Company had three types of credit lines
available:
TERM LOAN: In April 1998, the Company entered into a $500,000 term
loan with a bank collateralized by $600,000 in cash maintained in an
investment account (the "Term Loan"). 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 has no scheduled repayment terms. As of September 30, 2000,
approximately $340,000 remained outstanding under these loans
collateralized by $500,000 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 at September
30, 2000. However, the Company has obtained a waiver from the bank for
non-compliance with the aforementioned covenant for the nine months ended
September 30, 2000.
DELTAGROUP REVOLVING CREDIT FACILITY: DeltaGroup has a $750,000
revolving line of credit agreement with a bank secured by accounts
receivable, which will expire on September 30, 2001. Interest on
outstanding borrowings accrues at the bank's prime rate plus 1%. Borrowings
are limited to 80% of eligible accounts receivable. As of September 30,
2000, DeltaGroup had $750,000 outstanding under this line.
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 (the "5B Group Facility").
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 September 30, 2000, 5B Group had $731,000
outstanding under this line.
5
<PAGE>
Each of the Company's three 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 two credit
lines.
As described above, the Company has received waivers from the lenders
under the Term Loan and the 5B Group Facility as a result of the Company's
non-compliance at September 30, 2000 with certain covenants under such
facilities. 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 these facilities, 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 two credit lines. Among other things, if such
defaults were to occur, any or all of the lenders could declare all
amounts, which aggregated approximately $1,821,000 as of September 30,
2000, under its respective credit lines immediately due and payable.
4. EARNINGS PER SHARE
A reconciliation of income (loss) and shares used in calculating basic and
diluted earnings per share follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------ -----------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
------------- ------------- ------------- --------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Income (loss) from continuing operations 108,977 (155,978) (202,455) (741,897)
Less: Preferred dividends 15,000
------- ------- -------- --------
BASIC EPS
Income (loss) available to common stock
holders 93,977 (155,978) (202,455) (741,897)
EFFECT OF DILUTIVE SECURITIES
Convertible preferred stock 15,000
------- ------- -------- --------
DILUTED EPS
Income (loss) available to common
stockholders plus assumed conversions 108,977 (155,978) (202,455) (741,897)
======= ======== ======== ========
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------ -----------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
------------- ------------- ------------- -------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income (loss) 108,977 51,101 (1,179,828) (47,875)
Less: Preferred dividends 15,000
------- ------ --------- -------
BASIC EPS
Income (loss) available to common stock
holders 93,977 51,101 (1,179,828) (47,875)
EFFECT OF DILUTIVE SECURITIES
Convertible preferred stock 15,000
------- ------ --------- -------
DILUTED EPS
Income (loss) available to common
stockholders plus assumed conversions 108,977 51,101 (1,179,828) (47,875)
======= ====== ========== =======
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------ -----------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
------------- ------------- ------------- -------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Shares used in computing net income (loss)
from continuing operations per share:
Basic 2,138,634 2,160,004 2,136,533 2,160,004
Effect of assumed conversion of employee
stock options and warrants 197,750
Effect of assumed conversion of convertible
preferred stock 615,390
--------- --------- --------- ---------
Diluted 2,951,774 2,160,004 2,136,533 2,160,004
========== ========= ========= =========
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------ -----------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
------------- ------------- ------------- -------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Shares used in computing net income (loss)
from discontinued operation per share:
Basic 2,138,634 2,160,004 2,136,533 2,160,004
Effect of assumed conversion of employee
stock options and warrants 197,750 185,150
Effect of assumed conversion of convertible
preferred stock 615,390
--------- --------- --------- ---------
Diluted 2,951,774 2,345,154 2,136,533 2,160,004
========= ========= ========= =========
</TABLE>
Options and warrants to purchase 96,250 and 181,250 and 518,550 and
324,583 shares of common stock at a range of $2.63 to $13.25 and $0.44
to $13.25 were outstanding during the three and nine months ended
September 30, 2000, respectively, but were not included in the
computation of diluted earnings per share because they were
anti-dilutive. The options expire in March 2010.
5. STOCKHOLDERS' EQUITY
On April 17, 2000, the Company received an equity investment of
$1,000,000 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, 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. The Company
and the holders of the Company's Series A Preferred Stock have 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.
8
<PAGE>
6. SEGMENT INFORMATION
The Company's results of operations are reviewed and managed through
three segments (i) corporate overhead ("5B"), (ii) Internet, e-commerce and
systems integration ("5B Group" formerly Paratech) and (iii) legal support
staff ("DeltaGroup"). The following represents selected financial
information for the Company's segments for the three and nine months ended
September 30, 2000 and 1999, respectively:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30, 2000 5B 5B GROUP DELTAGROUP TOTAL
------------------ -- -------- ---------- -----
<S> <C> <C> <C> <C>
Revenues $ - $ 3,057,947 $ 1,831,167 $ 4,889,114
Cost of sales - 1,961,762 1,319,244 3,281,006
Pre tax net (loss) income 30,799 272,106 (179,564) 123,341
Assets 2,078,223 4,697,659 2,071,320 8,847,202
THREE MONTHS ENDED
SEPTEMBER 30, 1999
------------------
Revenues $ - $ 1,980,429 $ 1,967,726 $ 3,948,155
Cost of sales - 1,435,410 1,370,029 2,805,439
Pre tax net (loss) income (177,437) 2,264 (110,207) (285,380)
Assets 3,853,403 2,859,973 2,333,065 9,046,441
NINE MONTHS ENDED
SEPTEMBER 30, 2000
------------------
Revenues $ - $ 12,476,578 $ 5,812,862 $ 18,289,440
Cost of sales - 9,520,048 4,136,715 13,656,763
Pre tax net (loss) income (488,840) 614,019 (306,929) (181,750)
Assets 2,078,223 4,697,659 2,071,320 8,847,202
NINE MONTHS ENDED
SEPTEMBER 30, 1999
------------------
Revenues $ - $ 6,729,311 $ 5,352,344 $ 12,081,655
Cost of sales - 5,113,406 3,719,560 8,832,966
Pre tax net (loss) income (452,206) (342,619) (386,232) (1,181,057)
Assets 3,853,403 2,859,973 2,333,065 9,046,441
</TABLE>
7. EFFECT OF RECENTLY ISSUED ACCOUNTING STANDARD
In December 1999, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin 101, "Revenue Recognition in Financial
Statements." In June of 2000, the SEC delayed the required
implementation date to the fourth quarter of fiscal years beginning
after December 15, 1999. The Company does not expect the implementation
of SAB 101 to have a material effect on its results of operations and
financial position.
9
<PAGE>
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 September 28, 2000, 5B Technologies Group acquired certain assets of
Infinity Consulting Inc. ("Infinity"), a privately held North Carolina company
that provides high end engineering skills in the areas of database management,
applications development, and implementation and performance tuning for a total
purchase price of $50,000 in cash. The acquisition, which was not considered
material, was accounted for as a purchase. In connection with this acquisition
the Company entered into non-compete agreements with two key executives for an
aggregate consideration of $300,000, $50,000 of which was paid at closing with
$250,000 due within one year.
This acquisition brings to 5B Group high end engineering skills in the
areas of database management, application development, implementation and
performance tuning. 5B Group can now support the LINUX and UNIX operating
systems, including IBM-AIX, SUN Solaris, HP-UX and SCO. By using these open
systems technology 5B Group can make rapid changes in operating systems to
thread (integrate) best-of-breed applications, including Oracle, Informix and
DB2. 5B Group has also embraced the Open Source Community, which is a client
first concept stating that the client is best served when professionals share
their expertise and solutions. 5B will strive to make all of its tools available
to the community along with the source code. 5B will continue building its tool
sets and establishing open source projects geared toward helping system and
database administrators to optimize the management of their systems.
5B Group plans to cultivate and expand the relationships that Infinity
had established with several large systems solution providers, software
companies and customers in both traditional and emerging technologies. 5B Group
also expands its presence geographically by now maintaining three offices, (Long
Island, New York City, and Charlotte, North Carolina) and has plans to open an
office in Memphis, Tennessee in the future. Our geographic expansion allows us
to better meet our customers' requirements, as well as open new markets.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1999
For the three months ended September 30, 2000, the Company recorded
sales revenue of $4.9 million; a $0.9 million increase over the $4.0 million
recorded during the three months ended September 30, 1999. 5B Group's revenue
for the three months ended September 30, 2000 increased by 55% to $3.1 million
as compared to $2.0 million recorded in 1999. The increase in sales at 5B Group
is a result of the Company's increase in providing professional services to
clients, which include Internet, integration and application services.
DeltaGroup recorded $1.8
10
<PAGE>
million in revenue during the three months ended September 30, 2000 representing
a decrease of $0.2 million, or 10%, over the $2.0 million recorded for the three
months ended September 30, 1999.
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, 2000, the Company recorded cost of sales of $3.3 million, an
increase of $0.5 million, or 18%, compared to the $2.8 million recorded for the
three months ended September 30, 1999. The increase is predominantly due to the
increase in cost of sales of the Company's 5B Group subsidiary. 5B Group
reported cost of sales of $2.0 million, an increase of $0.6 million, or 43%,
compared to the $1.4 million recorded for the three months ended September 30,
1999. The reason for this increase is the growth of 5B Group's revenue for the
three months ended September 30, 2000. The DeltaGroup posted cost of sales of
$1.3 million, a $0.1 million, or 7%, decrease compared to the $1.4 million
recorded in the three months ended September 30, 1999. The reason for the
decrease is predominantly due to the decrease in revenue, which generated
corresponding decreases in temporary salaries and associated payroll taxes.
For the three months ended September 30, 2000, the Company recorded
gross profit of $1.6 million or 33%; a $0.5 million or 4% increase over the $1.1
million or 29%, recorded during the three months ended September 30, 1999. 5B
Group's gross margin for the three months ended September 30, 2000 increased by
8% to 36% as compared to 28% recorded in 1999. The increase is predominantly due
to management's focus on professional services (which retain a higher gross
margin than hardware/software sales) and the ability to complete projects on a
timely and efficient basis. DeltaGroup recorded 28% in gross margin during the
three months ended September 30, 2000 representing a decrease of 2%, over the
30% recorded for the three months ended September 30, 1999.
Selling expense consists of all sales force salaries, commissions and
associated costs. Selling expense for the three months ended September 30, 2000
was $425,000, or 9%, of revenue, a 12% decrease over the $484,000, or 12%, of
revenue recorded in the comparable prior period. 5B Group reported selling
expenses of $192,000, or 6%, of revenue for the three months ended September 30,
2000 compared to $260,000, or 13%, of revenue for the period ended September 30,
1999. The decrease in selling expenses for 5B Group is predominantly due to
management's efforts to control costs. DeltaGroup reported selling expenses of
$219,000, or 12%, of revenue for the three months ended September 30, 2000
compared to $225,000, or 11%, of revenue for the period ended September 30,
1999. The increase in selling expenses is predominantly due to a restructuring
of salespeople's commissions.
General and administrative expenses totaled $1.1 million, or 23%, of
revenue for the three months ended September 30, 2000, representing an increase
of 10% compared to the $1.0 million, or 24%, of revenue recorded during the
three months ended September 30, 1999. 5B Group reported G&A of $537,000, or
18%, of revenue for the three months ended September 30, 2000 compared to
$361,000, or 18%, of revenue for the period ended September 30, 1999. DeltaGroup
reported general and administrative expenses of $431,000, or 24%, of revenue for
the three months ended September 30, 2000 compared to $483,000, or 25%, of
revenue for the period ended September 30, 1999.
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NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1999
For the nine months ended September 30, 2000, the Company recorded
sales revenue of $18.3 million representing a $6.2 million increase over the
$12.1 million recorded during the nine months ended September 30, 1999. 5B
Group's revenue for the nine months ended September 30, 2000 increased by 87% to
$12.5 million as compared to $6.7 million recorded in 1999. The increase in
sales at 5B Group is due to a $5.0 million one-time sale of hardware/software
components associated with an internet infrastructure database build out and an
increase in providing professional services to clients (which include internet,
integration and application). DeltaGroup recorded $5.8 million in revenue during
the nine months ended September 30, 2000; an increase of $0.4 million, or 7%,
over the $5.4 million recorded for the nine months ended September 30, 1999. The
increase was due to DeltaGroup's ability to consistently provide its customers
with well-trained temporary personnel on a timely basis, the expansion of its
customer base and an increase in its permanent placement revenue.
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 nine months ended
September 30, 2000, the Company recorded cost of sales of $13.7 million, an
increase of $4.9 million, or 56%, compared to the $8.8 million recorded for the
nine months ended September 30, 1999. The increase is predominantly due to the
increase in cost of sales of the Company's 5B Group subsidiary. 5B Group
reported cost of sales of $9.5 million, an increase of $4.4 million, or 86%,
compared to the $5.1 million recorded for the nine months ended September 30,
1999. The reason for this increase is the growth of 5B Group's revenue for the
nine months ended September 30, 2000. The DeltaGroup posted cost of sales of
$4.1 million, a $0.4 million, or 11%, increase compared to the $3.7 million
recorded in the nine months ended September 30, 1999. The reason for the
increase is predominantly due to the increase in revenue, which generated
corresponding increases in temporary salaries and associated payroll taxes.
For the nine months ended September 30, 2000, the Company recorded
gross profit of $4.6 million or 25%; a $1.4 million increase in gross profit,
but a 2% decrease in gross margin over the $3.2 million or 27%, recorded during
the nine months ended September 30, 1999. 5B Group's recorded a gross margin of
24% for the nine months ended September 30, 2000 and 1999. DeltaGroup recorded
29% in gross margin during the nine months ended September 30, 2000 representing
a decrease of 2%, over the 31% recorded for the three months ended September 30,
1999.
Selling expense consists of all sales force salaries, commissions and
associated costs. Selling expense for the nine months ended September 30, 2000
and 1999 was $1.2 million, or 7% and 10% of revenue, respectively. 5B Group
reported selling expenses of $567,000, or 5%, of revenue for the nine months
ended September 30, 2000 compared to $657,000, or 10%, of revenue for the period
ended September 30, 1999. The decrease in selling expenses for 5B Group is
predominantly due to the types of projects that were completed during the
period. During the second quarter of 2000 5B Group completed various projects
that did not require any payment of commissions to salespeople. DeltaGroup
reported selling expenses of $594,000, or 10%, of revenue for the nine months
ended September 30, 2000 compared to $517,000, or 10%, of revenue for the period
ended September 30, 1999.
General and administrative expenses totaled $3.7 million, or 20%, of
revenue for the nine months ended September 30, 2000, representing an increase
of 12% compared to the $3.3 million, or 27%, of revenue recorded during the nine
months ended September 30, 1999.
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Approximately $275,000 of this increase is related to legal and professional
fees, which were incurred due to various contracts and public filings. 5B Group
reported G&A of $1.7 million, or 14%, of revenue for the nine months ended
September 30, 2000 compared to $1.4 million, or 20%, of revenue for the period
ended September 30, 1999. DeltaGroup reported general and administrative
expenses of $1.3 million, or 22%, of revenue for the nine months ended September
30, 2000 compared to $1.5 million, or 28%, of revenue for the nine months ended
September 30, 1999. The decrease is predominantly due to a decrease in
administrative salaries.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2000, the Company had $2.5 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. Investments available for sale also include
250,000 shares and a warrant to purchase 50,000 shares of a privately held
company, which had a fair value of approximately $438,000.
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 September 30, 2000, the Company had three types of credit lines
available:
TERM LOAN: In April 1998, the Company entered into a $500,000 term loan
with a bank collateralized by $600,000 in cash maintained in an investment
account (the "Term Loan"). 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 there are no scheduled repayment
terms. As of September 30, 2000, approximately $340,000 remained outstanding
under these loans collateralized by $500,000 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 at September 30,
2000. However, the Company has obtained a waiver from the bank for
non-compliance with the aforementioned covenant for the nine months ended
September 30, 2000.
DELTAGROUP REVOLVING CREDIT FACILITY: DeltaGroup has a $750,000
revolving line of credit agreement with a bank secured by accounts receivable,
which will expire on September 30, 2001. Interest on outstanding borrowings
accrues at the bank's prime rate plus 1%. Borrowings are limited to 80% of
eligible accounts receivable. As of September 30, 2000, DeltaGroup had $750,000
outstanding under this line.
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 (the "5B Group Facility"). 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
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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
September 30, 2000, 5B Group had $731,000 outstanding under this line.
Each of the Company's three 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 two credit lines.
As described above, the Company has received waivers from the lenders
under the Term Loan and the 5B Group Facility as a result of the Company's
non-compliance at September 30, 2000 with certain covenants under such
facilities. 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 these facilities, 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
two credit lines. Among other things, if such defaults were to occur, any or all
of the lenders could declare all amounts, which aggregated approximately
$1,821,000 as of September 30, 2000, under its respective credit lines
immediately due and payable.
On April 17, 2000, the Company received an equity investment of $1,000,000
from La Vista Investors, LLC, a fund managed by WEC Asset Management LLC ("La
Vista"), 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, 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 six 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. The Company and the holders of the Company's Series A
Preferred Stock have 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.
The Company believes that cash generated from operations, amounts
available under its credit facilities, the proceeds received from the sale of
its leasing assets and from the sale of securities to La Vista, and/or other
third party financing will be sufficient to fund necessary capital expenditures
and to provide adequate working capital for at least the next 12 months. There
can be no assurance, however, that the Company will not require additional
financing prior to such date to fund its operations, or that if required, such
financing will be available on commercially reasonable terms. In addition, the
Company will require additional financing after such date to fund its
operations.
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INFLATION
Management does not believe inflation had a material adverse effect on
the financial statements for the periods presented.
EFFECT OF RECENTLY ISSUED ACCOUNTING STANDARD
In December 1999, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin 101, "Revenue Recognition in Financial Statements." In
June of 2000, the SEC delayed the required implementation date to the fourth
quarter of fiscal years beginning after December 15, 1999. The Company does not
expect the implementation of SAB 101 to have a material effect on its results of
operations and financial position.
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 Information Technology (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.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
"Quantitative and Qualitative Disclosure About Market Risk", on page 22
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 nine months ended September 30, 2000.
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PART II: OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On August 11, 2000, the Company and the holders of the Company's Series
A 6% convertible Preferred Stock ("Series A Preferred Stock") agreed to
exchange the Series A Preferred Stock for the Series B 6% Convertible
Preferred Stock ("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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its 1999 Annual Meeting of Stockholders on August 18,
2000.
At the Annual Meeting, Glenn Nortman, Jeffrey Nortman, James E. Hillman
and William H. Kelly were elected directors of the Company. The number
of shares of the Company's common stock voted in favor of the election
of Messrs. Glenn Nortman, Jeffrey Nortman, James E. Hillman and William
H. Kelly were 1,792,716, 1,790,231, 1,805,131 and 1,805,131,
respectively. The number of shares withheld were 123,980, 126,465,
111,565 and 111,565, respectively.
At the Annual Meeting, the Company's stockholders also voted in favor
of the approval of the Company's 2000 Stock Incentive Plan. The vote of
approval for the Company's Stock Incentive Plan was 994,776 FOR, 92,135
AGAINST, 8,859 ABSTAINING and 1,039,730 WITHHELD.
At the Annual Meeting, the Company's stockholders also ratified the
appointment of BDO Seidman, LLP as independent auditors of the Company
for fiscal 2000. The vote of approval for such appointment was
1,874,372 FOR, 37,390 AGAINST, 4,934 ABSTAINING and 236,804 WITHHELD.
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: November 14, 2000 By: /S/ GLENN NORTMAN
------------------------------------
Glenn Nortman, Chief Executive Officer
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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 14, 2000 By:
-------------------------------------
Glenn Nortman, Chief Executive Officer
19
