<PAGE>
================================================================================
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 JUNE 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 AUGUST 14, 2000:
2,135,500 SHARES OF COMMON STOCK, PAR VALUE $0.01 PER SHARE.
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<PAGE>
5B TECHNOLOGIES CORPORATION
INDEX TO FORM 10-Q FOR THE QUARTER ENDED
JUNE 30, 2000
Page No.
--------
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Balance Sheets
June 30, 2000 (unaudited) and December 31, 1999..............1
Consolidated Statements of Operations for the Three
Months Ended and Six Months Ended June 30, 2000 and
1999 (unaudited).............................................2
Consolidated Statements of Cash Flows for the Six
Months Ended June 30, 2000 and 1999 (unaudited)..............3
Notes to Unaudited Consolidated Financial Statements.......4-5
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations........................6-11
Item 3 - Quantitative and Qualitative Disclosure About Market
Risk.........................................................12
PART II - Other Information...................................................13
SIGNATURES....................................................................14
2
<PAGE>
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
5B TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS JUNE 30, DECEMBER 31,
2000 1999
------------ ------------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,366,420 $ 1,003,752
Investments available for sale 1,096,425 925,616
Accounts receivable, net of allowance for doubtful accounts of
$80,000 and $70,000, respectively 7,532,664 2,718,646
Other current assets 176,897 61,164
------------ ------------
Total current assets 10,172,406 4,709,178
------------ ------------
Investments available for sale -- 157,060
Goodwill, net of accumulated amortization of $225,913 and
$155,645, respectively 1,428,024 1,498,292
Net assets of discontinued operation 240,692 1,812,232
Other assets 1,032,319 1,098,260
------------ ------------
Total assets $ 12,873,441 $ 9,275,022
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 5,482,592 $ 745,839
Accrued liabilities 264,395 558,840
Notes payable 1,926,651 2,227,775
------------ ------------
Total current liabilities 7,673,638 3,532,454
Notes payable 13,875 158,600
------------ ------------
Total liabilities 7,687,513 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 2,160,000 shares issued and outstanding 86,400 86,400
Additional paid-in capital 15,395,384 14,504,629
Stock subscription receivable (812,500) (812,500)
Accumulated deficit (9,432,761) (8,143,956)
Treasury stock, 24,500 shares at cost (50,605) (50,605)
------------ ------------
Total stockholders' equity 5,185,928 5,583,968
------------ ------------
Total liabilities and stockholders' equity $ 12,873,441 $ 9,275,022
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
5B TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2000 1999 2000 1999
---------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Sales $9,517,310 $ 4,128,960 $ 13,400,326 $ 8,133,500
Cost of sales 7,722,370 3,096,803 10,375,757 6,027,527
---------- ----------- ------------ -----------
Gross profit 1,794,940 1,032,157 3,024,569 2,105,973
---------- ----------- ------------ -----------
Expenses:
Selling 407,185 335,913 797,432 690,557
General and administrative 1,362,376 1,060,791 2,560,729 2,332,547
---------- ----------- ------------ -----------
Total expenses 1,769,561 1,396,704 3,358,161 3,023,104
---------- ----------- ------------ -----------
Income (loss) from operations 25,379 (364,547) (333,592) (917,131)
Interest income 19,268 6,838 28,501 21,454
---------- ----------- ------------ -----------
Income (loss) before provision (benefit) for income
taxes and discontinued operations 44,647 (357,709) (305,091) (895,677)
Provision (benefit) for income taxes 5,397 (310,583) 6,341 (309,758)
---------- ----------- ------------ -----------
Income (loss) from continuing operations 39,250 (47,126) (311,432) (585,919)
Discontinued operation:
Income (loss) from discontinued operation . -- 61,927 (121,175) 486,943
Loss on disposal of discontinued operation -- -- (856,198) --
---------- ----------- ------------ -----------
Net income (loss) $ 39,250 $ 14,801 $ (1,288,805) $ (98,976)
---------- ----------- ------------ -----------
Basic earnings (loss) per share:
Continuing operations $ 0.02 $ (0.02) $ (0.15) $ (0.28)
========== =========== ============ ===========
Discontinued operation $ -- $ 0.03 $ (0.45) $ 0.23
========== =========== ============ ===========
Net income (loss) per share $ 0.02 $ 0.01 $ (0.60) $ (0.05)
========== =========== ============ ===========
Diluted earnings (loss) per share:
Continuing operations $ 0.01 $ (0.02) $ (0.15) $ (0.28)
========== =========== ============ ===========
Discontinued operation $ -- $ 0.03 $ (0.45) $ 0.23
========== =========== ============ ===========
Net income (loss) per share $ 0.01 $ 0.01 $ (0.60) $ (0.05)
========== =========== ============ ===========
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
5B TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30,
UNAUDITED
<TABLE>
<CAPTION>
2000 1999
------------ -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,288,805) $ (98,976)
Adjustments to reconcile net income (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 10,000 --
Issuance of stock options 16,300 --
Depreciation and amortization 239,353 235,484
Depreciation and amortization on discontinued operation 644,523 2,071,284
Changes in operating assets and liabilities:
Accounts receivable (4,824,018) (715,559)
Other assets (198,948) 257,427
Accounts payable 4,736,753 138,971
Accrued expenses (294,444) 105,706
------------ -----------
Net cash provided by (used in) continuing operations (62,806) 1,994,337
Net cash provided by (used in) discontinued operation (245,927) 91,981
------------ -----------
Net cash provided by operating activities (308,733) 2,086,318
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payment for acquisitions, net of cash acquired (64,832)
Purchases of investments (13,749) (17,796)
------------ -----------
Net cash used by continuing operations (13,749) (82,628)
Net cash provided by discontinued operation 12,203,495 6,906,444
------------ -----------
Net cash provided by investing activities 12,189,746 6,823,816
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable 645,768 797,482
Repayment of notes payable (1,111,546) (946,736)
Issuance of preferred stock 874,465 --
------------ -----------
Net cash provided by (used in) continuing operations 408,687 (149,254)
Net cash used by discontinued operation (11,927,032) (9,283,837)
------------ -----------
Net cash used in financing activities (11,518,345) (9,433,091)
------------ -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 362,668 (522,957)
------------ -----------
CASH AND CASH EQUIVALENTS, beginning of period 1,003,752 1,495,082
------------ -----------
CASH AND CASH EQUIVALENTS, end of period $ 1,366,420 $ 972,125
============ ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for income taxes $ 1,894 $ 7,867
============ ===========
Cash paid for income taxes for discontinued operation $ 74,638 $ --
============ ===========
Cash paid for interest $ 105,825 $ 74,438
============ ===========
Cash paid for interest for discontinued operation $ 78,053 $ 1,094,675
============ ===========
</TABLE>
See accompanying notes to financial statements.
5
<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 June 30,
2000 and its results of operations and cash flows for the three and six
months ended June 30, 2000 and 1999, respectively, have been included (See
Note 2).
The financial statements for the three and six months ended June 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. 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 six months ended June 30, 2000, and the balance
sheet as of December 31, 1999 and the statements of operations and cash
flows for the three and six months ended June 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 related assets. Net sales for Paramount were approximately
$2,051,000 and $5,628,000 for the three and six months ended June 30, 1999,
respectively.
The components of net assets of discontinued operation included in the
Company's Consolidated Balance Sheets at June 30, 2000 and December 31,
1999, are as follows:
6
<PAGE>
<TABLE>
<CAPTION>
2000 1999
----------- ------------
<S> <C> <C>
Accounts receivable $ 181,860 $ 274,613
Net investment in direct finance and sales-type leases 5,880,671 16,232,749
Assets held under operating leases, net of accumulated depreciation 494,273 2,990,213
Other assets -- 537,990
Accrued expenses (104,732) (84,922)
Notes payable (149,464) (1,382,902)
Obligations for financed equipment - non-recourse (6,061,916) (16,755,509)
----------- ------------
$ 240,692 $ 1,812,232
=========== ============
</TABLE>
3. LINES OF CREDIT
At June 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 is undergoing negotiations with the bank to establish repayment
terms. As of June 30, 2000, approximately $382,000 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 June 30, 2000. However, the Company has obtained a waiver from the bank
for non-compliance with the aforementioned covenant for the six months
ended June 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 June 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 June 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 June 30, 2000, 5B Group had $745,000 outstanding
under this line. Under the agreement, at June 30, 2000 5B Group was not in
compliance with the debt covenant requiring a liability to net worth ratio
of less than 8 to 1 and net income greater than $0. However, 5B Group has
obtained a waiver from the finance company for non-compliance with the
aforementioned covenant for the six months ended June 30, 2000.
7
<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 June 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 $1,876,000 as of June 30, 2000,
under its respective credit lines immediately due and payable.
4. EARNINGS PER SHARE
A reconciliation of shares used in calculating basic and diluted earnings
per share follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------ ----------------
JUNE 30, 2000 JUNE 30, 1999 JUNE 30, 2000 JUNE 30, 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Shares used in computing net income (loss)
from continuing operations per share:
Basic 2,135,500 2,067,397 2,135,500 2,067,397
Effect of assumed conversion of employee
stock options and warrants 407,279 -- -- --
Effect of assumed conversion of convertible
preferred stock 316,415 -- -- --
--------- --------- --------- ---------
Diluted 2,859,194 2,067,397 2,135,500 2,067,397
========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------ ----------------
JUNE 30, 2000 JUNE 30, 1999 JUNE 30, 2000 JUNE 30, 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Shares used in computing net income (loss)
from continuing operations per share:
Basic 2,135,500 2,067,397 2,135,500 2,067,397
Effect of assumed conversion of employee
stock options and warrants 407,279 -- -- --
Effect of assumed conversion of convertible
preferred stock 316,415 -- -- --
--------- --------- --------- ---------
Diluted 2,859,194 2,067,397 2,135,500 2,067,397
========= ========= ========= =========
</TABLE>
8
<PAGE>
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.
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 six months ended
June 30, 2000 and 1999, respectively:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30, 2000 5B 5B GROUP DELTAGROUP TOTAL
------------- -- -------- ---------- -----
<S> <C> <C> <C> <C>
Revenues $ -- $ 7,502,321 $ 2,014,989 $ 9,517,310
Cost of sales -- 6,302,303 1,420,067 7,722,370
Pre tax net (loss) income (451,410) 508,752 (12,695) 44,647
Assets 2,108,748 8,483,291 2,281,402 12,873,441
THREE MONTHS ENDED
JUNE 30, 1999
------------
Revenues $ -- $ 2,338,613 $ 1,790,347 $ 4,128,960
Cost of sales -- 1,771,263 1,325,540 3,096,803
Pre tax net (loss) income (239,680) (38,290) (78,912) (356,882)
Assets 3,892,937 3,382,612 2,460,358 9,735,907
9
<PAGE>
SIX MONTHS ENDED
JUNE 30, 2000
------------
Revenues $ -- $ 9,418,631 $ 3,981,695 $ 13,400,326
Cost of sales -- 7,558,286 2,817,471 10,375,757
Pre tax net (loss) income (519,639) 341,913 (127,365) (305,091)
Assets 2,108,748 8,483,291 2,281,402 12,873,441
SIX MONTHS ENDED
JUNE 30, 1999
------------
Revenues $ -- $ 4,748,882 $ 3,384,618 $ 8,133,500
Cost of sales -- 3,677,996 2,349,531 6,027,527
Pre tax net (loss) income (274,769) (344,883) (276,025) (895,677)
Assets 3,892,937 3,382,612 2,460,358 9,735,907
</TABLE>
10
<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.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THREE MONTHS ENDED JUNE 30, 1999
For the three months ended June 30, 2000, the Company recorded sales
revenue of $9.5 million, a $5.4 million increase over the $4.1 million recorded
during the three months ended June 30, 1999. 5B Group's revenue for the three
months ended June 30, 2000 increased by 226% to $7.5 million ($5.0 million
relates to a one-time sale of hardware/software sales associated with an
internet infrastructure database build out) as compared to $2.3 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) and hardware/software sales associated with
Internet infrastructure projects. DeltaGroup recorded $2.0 million in revenue
during the three months ended June 30, 2000, an increase of $0.2 million, or
11%, over the $1.8 million recorded for the three months ended June 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 three months
ended June 30, 2000, the Company recorded cost of sales of $7.7 million, an
increase of $4.6 million, or 148%, compared to the $3.1 million recorded for the
three months ended June 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 $6.3 million, an increase of $4.5 million, or 250%,
compared to the $1.8 million recorded for the three months ended June 30, 1999.
The reason for this increase is the growth of 5B Group's revenue for the three
months ended June 30, 2000. The DeltaGroup posted cost of sales of $1.4 million,
a $0.1 million, or 8%, increase compared to the $1.3 million recorded in the
three months ended June 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.
Selling expense consists of all sales force salaries, commissions and
associated costs. Selling expense for the three months ended June 30, 2000 was
$407,000, a 21% increase over the $336,000 recorded in the comparable prior
period. 5B Group reported selling expenses of $182,000, or 2%, of revenue for
the three months ended June 30, 2000 compared to $268,000, or 11%, of revenue
for the period ended June 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 $177,000, or 9%, of revenue for the
three months ended June 30, 2000 compared to $68,000, or 4%, of revenue for the
period ended June 30, 1999. The increase in selling expenses is predominantly
due to a restructuring of salespeople's commissions.
11
<PAGE>
General and administrative expenses totaled $1.4 million for the three
months ended June 30, 2000, representing an increase of 27% compared to the $1.1
million recorded during the three months ended June 30, 1999. Approximately
$204,000 of this increase is due to legal and professional fees associated with
various contracts and filings. 5B Group reported G&A of $614,000, or 8%, of
revenue for the three months ended June 30, 2000 compared to $413,000, or 18%,
of revenue for the period ended June 30, 1999. DeltaGroup reported general and
administrative expenses of $302,000, or 15%, of revenue for the three months
ended June 30, 2000 compared to $446,000, or 25%, of revenue for the period
ended June 30, 1999. The decrease is predominantly due to a decrease in
administrative salaries.
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999
For the six months ended June 30, 2000, the Company recorded sales
revenue of $13.4 million, a $5.3 million increase over the $8.1 million recorded
during the six months ended June 30, 1999. 5B Group's revenue for the six months
ended June 30, 2000 increased by 96% to $9.4 million ($5.0 million relates to a
one-time sale of hardware/software sales associated with an internet
infrastructure database build out) as compared to $4.8 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) and hardware/software sales associated with Internet
infrastructure projects. DeltaGroup recorded $4.0 million in revenue during the
six months ended June 30, 2000, an increase of $0.6 million, or 18%, over the
$3.4 million recorded for the six months ended June 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 six months ended
June 30, 2000, the Company recorded cost of sales of $10.4 million, an increase
of $4.4 million, or 73%, compared to the $6.0 million recorded for the six
months ended June 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 $7.6 million, an increase of $3.9 million, or 105%, compared to the
$3.7 million recorded for the six months ended June 30, 1999. The reason for
this increase is the growth of 5B Group's revenue for the six months ended June
30, 2000. The DeltaGroup posted cost of sales of $2.8 million, a $0.4 million,
or 17%, increase compared to the $2.4 million recorded in the six months ended
June 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.
Selling expense consists of all sales force salaries, commissions and
associated costs. Selling expense for the six months ended June 30, 2000 was
$797,000, a 15% increase over the $691,000 recorded in the comparable prior
period. 5B Group reported selling expenses of $375,000, or 4%, of revenue for
the six months ended June 30, 2000 compared to $398,000, or 8%, of revenue for
the period ended June 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 $374,000, or 9%, of revenue for the six months
ended June 30, 2000 compared to $293,000, or 6%, of revenue for the
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period ended June 30, 1999. The increase in selling expenses is predominantly
due to a restructuring of salespeople's commissions.
General and administrative expenses totaled $2.6 million for the six
months ended June 30, 2000, representing an increase of 13% compared to the $2.3
million recorded during the six months ended June 30, 1999. 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
$1,202,000, or 16%, of revenue for the six months ended June 30, 2000 compared
to $997,000, or 21%, of revenue for the period ended June 30, 1999. DeltaGroup
reported general and administrative expenses of $820,000, or 21%, of revenue for
the six months ended June 30, 2000 compared to $1,018,000, or 30%, of revenue
for the six months ended June 30, 1999. The decrease is predominantly due to a
decrease in administrative salaries.
LIQUIDITY AND CAPITAL RESOURCES
As of June 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 June 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 is undergoing
negotiations with the bank to establish repayment terms. As of June 30, 2000,
approximately $382,000 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 June 30, 2000. However, the Company has obtained a
waiver from the bank for non-compliance with the aforementioned covenant for the
six months ended June 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 June 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 June 30, 2000, DeltaGroup had $750,000 outstanding
under this line.
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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 June 30, 2000, 5B Group
had $745,000 outstanding under this line. Under the agreement, at June 30, 2000
5B Group was not in compliance with the debt covenant requiring a liability to
net worth ratio of less than 8 to 1 and net income greater than $0. However, 5B
Group has obtained a waiver from the finance company for non-compliance with the
aforementioned covenant for the six months ended June 30, 2000.
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 June 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 $1,876,000 as of June
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.
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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.
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 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.
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 six months ended June 30, 2000.
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PART II: OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
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 Series A Preferred Stock and the warrant were
issued to La Vista, an accredited investor pursuant to Section 4(2) of the
Securities Act of 1933. 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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS.
27. Financial Data Schedule.
(b) REPORTS ON FORM 8-K.
(i) The Company filed a Current Report on Form 8-K with the
Securities and Exchange Commission on May 26, 2000. The
following items were reported in such Form 8-K:
1. Item 5. Other Events.
2. Item 7. Financial Statements and Exhibits.
(a) Restated Financial Data Schedule for the year
ended December 31, 1997.
(b) Restated Financial Data Schedule for the year
ended December 31, 1998.
(c) Restated Financial Data Schedule for the year
ended December 31, 1999.
(d) Restated Financial Data Schedule for the quarter
ended March 31, 1998.
(e) Restated Financial Data Schedule for the quarter
ended June 30, 1998.
(f) Restated Financial Data Schedule for the quarter
ended September 30, 1998.
(g) Restated Financial Data Schedule for the quarter
ended March 31, 1999.
(h) Restated Financial Data Schedule for the quarter
ended June 30, 1999.
(i) Restated Financial Information.
(ii) The Company filed a Current Report on Form 8-K with the
Securities and Exchange Commission on May 17, 2000. The
following items were reported in such Form 8-K:
1. Item 2. Acquisition or Disposition of Assets.
2. Item 7. Financial Statements and Exhibits.
(a) Press Release, dated May 4, 2000.
(b) Unaudited Pro Forma Consolidated Statements of
Operations of 5B for the Years Ending December 31,
1999, December 31, 1998 and December 31, 1997.
(iii) The Company filed a Current Report on Form 8-K with the
Securities and Exchange Commission on April 28, 2000. The
following items were reported in such Form 8-K:
1. Item 5. Other Events.
2. Item 7. Financial Statements and Exhibits.
(a) Certificate of Designations of Series A 6%
Convertible Preferred Stock of 5B Technologies
Corporation, filed with the Secretary of State of
the State of Delaware on April 14, 2000.
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(b) Common Stock Purchase Warrant, dated April 17,
2000, issued to La Vista Investors LLC by 5B
Technologies Corporation and La Vista Investors
LLC.
(c) Securities Purchase Agreement, dated April 17,
2000, by and between 5B Technologies Corporation
and La Vista Investors LLC.
(d) Registration Rights Agreement, dated April 17,
2000, by and between 5B Technologies Corporation
and La Vista Investors LLC.
(e) Press Release, dated April 18, 2000.
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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: August 14, 2000 By: /s/ GLENN NORTMAN
--------------------------------------
Glenn Nortman, Chief Executive Officer
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