UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
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(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______ to _______
Commission File Number 0-27190
5B TECHNOLOGIES CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE
(State or Other Jurisdiction of 11-3529387
Incorporation or Organization) (I.R.S. Employer
Identification No.)
100 SUNNYSIDE BOULEVARD
WOODBURY, NEW YORK 11797
(Address of Principal Executive Offices)
(516) 677-6100
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act:
Units, each consisting of two shares of
Common Stock and two Class A Warrants
-------------------------------------
(Title of class)
Class A Warrants, each to purchase one share of Common Stock
------------------------------------------------------------
(Title of class)
COMMON STOCK, $0.04 PAR VALUE PER SHARE
(Title of class)
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 / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. /X/
The aggregate market value of the voting stock (Common Stock) held by
non-affiliates of the Registrant on April 12, 2001 was approximately $2,697,070
based on the closing sales price of such stock on such date, as reported by the
NASDAQ Small Cap Market.
The number of shares outstanding of the Registrant's Common Stock, as of
April 12, 2001 was: 2,140,532 shares of Common Stock, $0.04 par value.
PART I
ITEM 1 - BUSINESS
GENERAL
5B Technologies Corporation (formerly Paramount Financial Corporation) and
subsidiaries ("5B" or the "Company") operates through three wholly owned
subsidiaries, 5B Technologies Group, Inc. (formerly Paratech Resources, Inc.),
Deltaforce Personnel Services, Inc. ("DeltaGroup") and Paramount Operations Inc.
("Paramount").
5B Technologies Group Inc. ("5B Group") is a comprehensive business
solutions provider, offering customers a wide range of integrated services,
including the procurement of hardware/software, customized design and
development of Internet infrastructure and commerce solutions, information
technology consulting, local area network and web site security and systems
integration. As businesses deploy new solutions and technologies, the ability to
seamlessly integrate these solutions - both internally across the enterprise and
externally with business partners - is critical to a company's on-going success.
5B Group builds e-business and integrated solutions for some of the world's most
innovative companies. Our in-depth understanding of New Economy issues, market
trends, and world-class technology coupled with our collaborative way of working
with clients, creates a strong business relationship. Now, as in the past, 5B
Group is redefining the professional services, systems integration and
management consulting services industry.
DeltaGroup provides temporary and permanent staffing services to several
of New York City's top law firms and corporations. DeltaGroup provides top-notch
temporary word processors, proofreaders and legal secretaries, twenty-four hours
a day, seven days a week.
In May 2000, the Company sold the majority of its lease portfolio which
was maintained through its wholly owned subsidiary, Paramount. Accordingly,
Paramount has been presented as a discontinued operation as of and for the year
ended December 31, 2000, and the balance sheet as of December 31, 1999 and the
statements of operations and cash flows for the years ended December 31, 1999
and 1998 have been restated to conform with this presentation. (See Note 14 in
ITEM 8 Financial Statements and Supplementary Data).
We recently incurred net losses from our continuing operations, and our
losses may continue. We incurred a net loss from continuing operations of
$1,601,000, or $0.94 per share (basic and diluted), on sales of $22,088,000 for
2000 following a loss from continuing operations of $891,000, or $0.42 per share
(basic and diluted) for 1999, and our losses are continuing at least through the
first quarter of 2001 and may continue thereafter. We cannot give assurance that
we will be able to operate profitably in the future.
Our independent auditors have included an explanatory paragraph relating
to our ability to continue as a going concern in their report on our financial
statements. Because of our losses from continuing operations in 2000 and 1999,
and a potential liability in the amount of $1,250,000 in connection with a
pending lawsuit which may require the Company to obtain long-term financing to
settle this liability and fund current operations, our auditors included in
their report an explanatory paragraph about our ability to continue as a going
concern.
2
The evolution of 5B from a technology equipment leasing and trading
company to a comprehensive business solutions provider of full service Internet
and Information Technology ("IT") began in 1996. During the first quarter of
that year, in response to the Company's need to provide its customers with
more-value added services, the Company created a new wholly owned subsidiary, 5B
Group. 5B Group began offering customers full IT service solutions, including
hardware, software, system design, systems integration and other value-added
support services, including telephony integration in voice over Internet
Protocol.
In order to further enhance and expand its system integration services and
solutions business, 5B Group acquired Comptech Resources, Inc. ("Comptech") in
October 1998. Comptech was a systems consulting, software application, Year 2000
compliance and Internet design and development firm. The acquisition of Comptech
brought to the Company a specialization in client-server accounting, sales-force
automation, web development and e-commerce solutions.
To expand its Internet solutions business and to add the ability to host
clients, 5B Group acquired, in March 1999, certain assets of Web Business
Systems Inc. ("Web"), a small New York based web hosting and development
company. The acquisitions of Comptech and Web have enabled the Company to offer
a full complement of state-of-the-art Internet and IT solutions.
The Company felt that while it satisfied most middle market technology
needs, it was unable to offer Fortune 1,000 and global companies high end
solutions. To overcome this shortcoming, in September 2000, 5B Group acquired
certain assets of Infinity Consulting Inc. ("Infinity"), a privately held North
Carolina based company. 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 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 Group will strive to make all of its tools
available to the community along with the source code. 5B Group 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.
The Company's strategic diversification and expansion strategy also
resulted in two other acquisitions during 1998. In January 1998, the Company
completed the acquisition of Deltaforce Personnel Services, Inc., a privately
held New York City based staffing company specializing in legal support staffing
("Deltaforce"). This acquisition further enhanced the Company's product
offerings by including staffing services to its expanding list of integrated
services. The Deltaforce acquisition was followed in August 1998 by the
acquisition of RBW Staffing Services, Inc. (d/b/a Wordsmiths) ("Wordsmiths"), a
New York City based staffing company also specializing in legal support
staffing. Following this second acquisition, the Company merged the operations
of Wordsmiths into Deltaforce to form "The DeltaGroup." As a result of the
Deltaforce and Wordsmiths acquisitions, the Company became one of the premier
temporary and permanent placement legal support staffing agencies in New York.
SYSTEM INTEGRATION AND CONSULTING BUSINESS
INDUSTRY BACKGROUND
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Businesses have become increasingly dependent upon complex information
systems in an effort to gain competitive advantages or to maintain competitive
positions. Today's computer and network infrastructures demand multiple
operating systems, cross-platform connectivity, network protocols, and vast
computer architectures for maximum productivity. Computer technology and related
products are continuously evolving, making predecessor technologies or products
obsolete within a few years or, in some cases, within months. The constant
changes in hardware and software and the competitive pressure to upgrade
existing products create significant challenges to companies.
Over the last several years, the increase in performance of desktop
computers, the development of a variety of effective business productivity
software programs and the ability to interconnect desktop computers in high
speed networks have led to an industry shift away from mainframe computer
systems to client/server systems based on desktop computer technology. In such
systems, the client computer, in addition to its stand-alone capabilities, is
able to obtain resources from a central server or servers. Accordingly, desktop
computers may share everything from data files to printers. Recently, networked
applications such as electronic mail and work group productivity software,
coupled with widespread acceptance of Internet technologies, have led companies
to implement corporate Intranets (networks that enable end-users (e.g.,
employees) to share information). The use of a corporate Intranet allows a
company to warehouse valuable information, which may be "mined" or accessed by
employees or other authorized users through readily available Internet tools
such as Web browsers and other graphical user interfaces.
With these advances in information systems and networking, many companies
are reengineering their businesses using these technologies to enhance their
revenue and productivity. However, as the design of information systems has
become more complex to accommodate the proliferating network applications, the
configuration, selection and integration of the necessary hardware and software
products have become increasingly more difficult and complicated. While many
companies have the financial resources to make the required capital investments,
they often do not have the necessary information technology personnel to design,
install or maintain complex systems and may not be able to provide appropriate
or sufficient funding or internal management for the maintenance of their
information systems. As a result, such companies are increasingly turning to
independent third parties to procure, design, install, maintain and upgrade
their information systems. By utilizing the services of such third parties,
companies are able to acquire state-of-the-art equipment and expertise on a
cost-effective basis.
Systems integration includes designing systems and integrating hardware,
software and communications. According to Frost & Sullivan, an industry research
firm, the systems integration market will have grown to nearly $13 billion in
the year 2000 and worldwide computer equipment sales is expected to have reached
more than $320 billion. International Data Source, an industry research firm,
stated that worldwide IT spending was estimated to have grow to $908 billion in
2000 and of that $444 billion was to be created in North America, an increase of
8.7% and 8.6% respectively over 1999. This growth is being driven by several
factors, including the proliferation of distributed computing applications, the
increased reliance on network computing, and the trend for companies to
outsource network management responsibilities to companies such as 5B Group.
OPERATIONS
5B Group's mission is to assist and support companies in designing
computer networks that cater to their individual needs and to implement and
maintain these systems in a cost-effective manner. Our
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LAN/WAN capabilities include complete solutions, from network design, cabling,
operating systems and protocols to peripherals and communication interfaces. 5B
Group can rightsize an application that resides on a mid-range or mainframe
platform and convert that application to run on a desktop LAN based environment.
5B Group ensures that these systems support a company's business goals by
staying closely attuned to each client's environment in order to provide the
strategy and consulting required to achieve their goals. 5B Group offers a full
range of comprehensive technology solutions, including network design and
integration, cabling, operating systems and protocols to peripherals and
communication interfaces, software applications, system training and value added
support.
In 1999, 5B Group expanded its service offerings by adding security for
local area networks and web sites. This is accomplished using firewall and proxy
server technology. 5B Group also began its specialization in Great Plains
client-server accounting software, specifically their e-Enterprise system
solutions and Internet web site connectivity to the back office accounting
system. Additionally, 5B Group became a "lead reseller member" of the National
Service Network of Ingram Micro Inc. Ingram Micro is the world's leading
wholesale distributor of technology products and services. The National Services
Network is a national network of more than 325 service led technology resellers
working together to provide service and support for regional and national
end-user customers. 5B Group can access the National Services Network 24 hours a
day, seven days a week, to arrange service for its customers.
5B has formed key alliances with technology leaders including Akamai,
Allaire, Cisco, Citrix, Computer Associates, Great Plains Software, Ingram
Micro, Intershop, Microsoft, Oracle and RSA Security. The Group's technical
skills and alliances have enabled it to complete numerous enterprise e-commerce
solutions, Internet infrastructure and systems integration projects on behalf of
premier companies across diverse industries. Included among the unit's high
profile clients are Aer Lingus Airlines, Americana Financial Services, Bloomberg
LP, Charter House, Dover Corporation, Federal Express, Henry Schein, Kasper ASL,
The Limited, Maybelline, Morgan Stanley, Skadden Arps and Timex.
For the year ended December 31, 2000, 5B Group's system integration
division generated $12.4 million in revenue, or 86% of the total revenue
generated by 5B Group. The majority of the systems integration work that 5B
Group performs is on a time and material basis. In addition to being engaged on
a project basis, 5B Group is regularly engaged by customers on a regular,
ongoing basis to perform maintenance and updates to their networks. 5B Group's
system integration division serves small, mid-sized and large companies within
the Northeast area.
5B Group is platform independent and thus can provide customers with the
latest technology. Certified in LAN/WAN operating systems from Novell,
Microsoft, IBM, Apple, HP, NEC, LINUX and UNIX; 5B Group is qualified to support
the enterprise with multiple operating platforms, due to its broad operating
systems certifications and background. Our qualified systems engineers implement
custom networks based on industry standard methodologies. 5B Group can carry out
a number of activities including file server configuration, on-site
installation, office moves, network upgrades, and hardware and software audits.
These are all provided on a priority scheduled basis while a pre-determined time
response is guaranteed to network critical failures. 5B Group can be used to
augment customer resources on short and long-term projects. 5B Group works with
its customers to develop strategies governing when to acquire equipment, upgrade
existing equipment and order new equipment to take advantage of current
technology. The Company believes that a single source solution enables the
customers to use fewer vendors while providing a more efficient integration,
thereby reducing costs, minimizing risk, and increasing management control and
accountability.
5
COMPETITION
5B Group competes against major hardware distributors and national and
regional consulting and service organizations. The Company believes that it is
able to compete in this market due to the technical expertise of its employees,
its focus on customer service, and its relationship with technology vendors. In
addition, the Company believes its ability to act as a sole provider offering
all components of an IT solution, from hardware and infrastructure to specific
application software and Internet design and implementation. The company
therefore has the ability to link all of these different systems together
provides us with a competitive advantage. 5B Group's typical customers are
mid-size regional organizations with ongoing IT infrastructure and applications
needs.
CUSTOMER CONCENTRATION
For the year ended December 31, 2000 one customer represented 41% of 5B
Group's System Integration and Consulting business. 40% of the sales generated
by the Systems Integration and consulting business was due to a $5.0 million,
one-time sale of hardware/software, associated with an internet infrastructure
database build out for this one significant customer. 5B Group does not plan to
have any recurring business from this customer as the customer is experiencing
financial difficulties.
INTERNET SOLUTIONS BUSINESS
INDUSTRY BACKGROUND
GROWTH OF THE INTERNET
The Internet has experienced rapid growth in recent years. According to
metrics published by the Industry Standard, using data from International Data
Corporation, Forrester Research, and Jupiter Research Cahners In-Stat Group, all
leading research firms, the number of Internet users was 361 million worldwide
at the end of 2000 and will continue to grow to 742 million by the end of 2004.
The broad acceptance of the Internet has resulted in the creation of Intranets
and Extranets, which allow a company and its customers, employees and suppliers
to communicate in new and different ways. Intranets are secure web sites
accessible only within a given company and Extranets are Intranets which are
also accessible to select outsiders.
GROWTH OF E-COMMERCE
Much of the growth of the Internet has been driven by corporate
recognition that the Internet can be used to achieve competitive advantage. The
growth in the use of the Internet and the expansion of uses for the Internet
have led to the creation of numerous start-up companies that seek to take
advantage of new market opportunities including the sale and delivery of goods
and services via the Internet. International Data Corporation expects dramatic
growth in total world e-commerce transaction volume, predicting an increase to
$2.8 trillion in 2003. Forrester Research's projections call for worldwide
business-to-business e-commerce revenues to increase from approximately $406
billion in 2000 to more than $2.7 trillion in 2004.
6
MARKET FOR INTERNET SERVICES
The development and implementation of Internet solutions requires the
successful integration of creative design and systems engineering skills.
Historically, these areas have not existed within most companies. Accordingly,
many businesses have chosen to outsource a significant portion of the
development, design and maintenance of their web sites, Intranets, Extranets and
e-commerce applications to independent service providers who can capitalize on
their creative and technical expertise. Such outsourcing needs have generated
worldwide demand for Internet professional services, which International Data
Corporation estimates will grow from $8 billion in 1998 to $79 billion in 2003.
The Company believes that the rapidly growing demand for Internet solutions has
created significant opportunities for strategic Internet solutions providers
such as 5B Group.
OPERATIONS
5B Group provides comprehensive Internet-based solutions to small and
medium sized companies, primarily in the New York Metropolitan area. For the
year ended December 31, 2000, the Internet solutions business generated $2.0
million in revenue from numerous projects and its web hosting services. While
the Internet division generated only 14% of 5B Group's total revenue for 2000,
the Company believes that this percentage can increase in future years if the
Company can successfully grow this business to address the rapid growth in the
Internet discussed above and capitalize on its ability to integrate clients
Internet sites to their current Intranet and back office systems.
5B Group helps businesses identify how the Internet can be used to their
competitive advantage and uses its expertise in creative design and systems
engineering to develop and deploy advanced Internet applications and solutions.
Our service offerings include:
o E-COMMERCE PLATFORM DEVELOPMENT: 5B is a pioneer in understanding the
technical aspects of the value chain proposition in online business. Our
staff began building e-commerce systems and integrating legacy and online
systems in 1995 and have been providing leading-edge solutions (both B2C
and B2B) ever since. We incorporate leading technologies in the areas of
application servers, transactional systems, customer relationship
management (CRM) and content management as part of these solutions.
o CUSTOM OPERATIONS SUPPORT SYSTEMS: Many of our clients have identified
opportunities to run their businesses more profitably using a Web-based
support system-often with our guidance. 5B specializes in the
specification, development and deployment of these systems.
o LEGACY SYSTEM INTEGRATION: 5B can create interface infrastructure that
allows us to integrate Web-based solutions with virtually any type of
legacy infrastructure. We have worked extensively with Great Plains, SAP,
Oracle, Peoplesoft, and other leading ERP and infrastructure application
suppliers.
o E-MARKETPLACE DEVELOPMENT: 5B understands the complexities required to
deliver a scalable e-marketplace. Our understanding helps create online
environments that allow buyers and suppliers to meet, buy and sell
products and services in the most efficient manner.
o E-BUSINESS STRATEGIES: 5B believes that a comprehensive e-business
strategy is a critical component for companies extending their existing
operations online, and for new companies built specifically for the
7
online world. We analyze business needs and create scalable technology
platforms and architecture solutions.
5B Group uses its engineering capabilities to deliver complex
Internet-based business solutions. Its engineers provide application development
and systems integration services by employing proven Internet technologies such
as Java, Perl, Cold Fusion, CGI, C and C++. Additionally, the Company has
embraced open standards that ensure e-business platforms are scalable and easy
to interface to legacy systems. Our methodologies and consistent development
techniques enable us to fully leverage reusable development skills and
components. 5B has also developed strategic alliances that allow us to provide
best-of-breed point solutions, developed as single e-business platforms and
integrated with existing back-end systems; and advanced client development
capabilities that effectively leverage emerging client technologies, such as
broadband and wireless. 5B Group has established these strategic affiliations
with leading technology vendors, such as Microsoft, Intershop, Cisco, Computer
Associates and UUNET. These affiliations typically allow us early access to
training, product support and technology developed by these companies.
Typical 5B Group engagements include (1) the strategic application of
E-commerce solutions to enhance existing business processes, (2) the
identification of new business opportunities created by the Internet, (3) the
use of creative design and marketing to acquire, cross-sell and retain customers
on-line, and (4) the integration of web-based applications to our clients'
existing legacy systems. In each consulting engagement, the client can contract
for the specific services it requires, depending on the nature of the engagement
and the capabilities of the client's organization. 5B Group generally bills its
clients on a fixed price basis, however some engagements may be on a
time-and-material basis. Additionally, as part of our fee arrangement, 5B Group
may receive equity in the client company.
The Company's Internet solution process consists of five phases:
1. PLANNING 5B Group begins by assigning a dedicated project manager
to a client. This person as well as an engineer and a designer form your contact
to the team working on your application or Web site. All of our project managers
are critical members of our team and have experience in meeting rigorous goals
and timelines. The project manager can be in daily contact with you and will
arrange site visits at your convenience. Projects are broken into manageable
phases with predetermined deliverables at the conclusion of every phase.
2. APPROACH 5B Group's approach is to guide its clients through a
step-by-step design and creation of an on-line presence dependent upon the needs
of the business and what such a presence will achieve. 5B Group starts by
listening to its clients needs and expectations. 5B Group learns how its clients
promote their businesses now and what their plans are for promoting their future
Web application. With our clients long-term business goals in mind, 5B Group can
plan a solution that suits our clients requirements and reflects their visual
character and integrity.
3. DEVELOPMENT. During this phase 5B Group will build innovative
applications that can access data from mainframes, enterprise databases, and
departmental servers. 5B Group works with our clients department heads, MIS, CIO
and CEO, to make certain that 5B Group completely understand our clients
business objectives, competitive posture, and budget. After the interview and
fact finding process, 5B Group provides a detailed document which specifies the
objectives, hardware and software infrastructure, structural programming
components, timetable and the exact look and feel of the final product.
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4. TESTING Quality Assurance is important to 5B Group. We have
dedicated engineers that pore through applications and Web sites with a proven
methodology and check list. Each application is tested for compatibility on all
appropriate browsers, and is stress tested. 5B Group's multi-step testing
process includes proofreading, link testing, browser compatibility, function
testing, code inspection, system testing, performance testing, stress testing,
user testing and walkthrough. Before the solution is implemented, 5B Group will
assist the client in developing a security policy as it pertains to Internet
connectivity via the clients LAN and other internet-enabled devices in the
organization, to ensure all possible unwanted entries are shut.
5. POST PRODUCTION Our post-production process is a system of
maintaining the creative direction and functionality established during the
development phase. Graphic standards are created for the site so that upon
completion, you will approve the project knowing that the continuity of the site
and your corporate message, both visually and via content, has been defined and
will be maintained. Any successful Internet venture requires constant care to
maximize the return on investment. With this in mind, 5B Group has created a
highly focused production team to offer this special service. Utilizing the
industry's leading Internet/Intranet software, our clients Internet/Intranet
applications will encompass a fast search engine, comprehensive directory,
interactive collaboration and server-based supports. 5B Group's maintenance
support group is dedicated to making sure that, as an existing client, your Web
site provides beneficial and timely information. A successful Internet presence
must evolve as your business evolves. Once that need is realized, 5B Group is
ready to further develop and modify your site within 24 hours of our clients
approval. As a result of our clients request, the 5B Group staff will begin the
creative process of either adding new, compelling sections to your existing
site, or simply fine-tuning what already exists.
COMPETITION
Although the market for Internet solutions is relatively new, it is
already highly competitive. We believe that competition will intensify and
increase in the future. The market is rapidly evolving and is subject to
continuous technological change. 5B Group's competitors can be divided into
several groups:
o Small and large Internet solutions service providers
o Large information technology consulting service providers
o Computer hardware and service vendors
o Strategic consulting firms
o Interactive advertising agencies
5B Group competes on the basis of a number of factors, including the
attractiveness of the Internet solutions offered, creative design, engineering
expertise, pricing, and understanding clients' strategies and needs. In order to
gain a competitive advantage, 5B Group is constantly integrating new
technologies, such as digital medial technology, into its development efforts.
Additionally, because the Company is able to act as a single provider for
Internet solutions as well as other IT requirements, the Company believes that
it enjoys a competitive advantage.
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CUSTOMER CONCENTRATION
For the year ended December 31, 2000, three customers represented more
than 83% of 5B Group's Internet Solutions business. 5B Group plans to have
recurring business from one of these customers and will have recurring business
with the second, if it is successful in obtaining additional financing.
STAFFING SERVICES
INDUSTRY BACKGROUND
The temporary staffing industry, once used predominately as a short-term
solution for peak production periods and to temporarily replace absent workers,
has evolved into a permanent and significant component of the staffing plans of
many companies. Corporate restructuring, downsizing, increased government
regulations governing employee relations, advances in technology, and the desire
by many companies to shift employee cost from a fixed to a variable expense have
contributed to the strong growth of the temporary staffing industry. Temporary
staffing firms act as intermediaries in matching available temporary workers to
employer assignments. According to Investors Business Daily, a periodic business
publication, the temporary staffing industry was a $69 billion industry in 1999,
up 12% from 1998. Of this total, Commercial Services (office/clerical and light
industrial) and IT, the two segments in which the Company operates, accounted
for a total of $49.4 billion in 1999. The Commercial Services segment has grown
12% since 1993 and the IT segment has grown at 26% a year since 1993. The
Staffing Industry Report stated that the United States temporary staffing
industry grew from approximately $28.9 billion in revenue in 1993 to
approximately $62.0 billion in revenue in 1998, a compound annual growth rate of
approximately 17%
OPERATIONS
Deltaforce, which commenced operations in 1988, is a provider of temporary
legal-support staff to the legal community in the New York City metropolitan
area. Deltaforce's typical clients are large New York City based law firms with
on-going needs for temporary personnel services. The Company's acquisition of
Deltaforce was followed closely by the acquisition of Wordsmiths in August 1998.
Wordsmiths is an 11-year old staffing firm providing law firms with support
staff, proofreaders, legal professionals and paralegals. Its services are a
strong complement to the legal services of Deltaforce. Following this second
acquisition, the Company merged the operations of Wordsmiths into Deltaforce to
create The DeltaGroup. The combined company now offers temporary and permanent
legal support staff. The Company believes that The DeltaGroup is now among the
top five temporary staffing companies to the legal community in New York City.
Following the acquisition of Deltaforce, the Company made a considerable
investment in systems and process improvements to create a new and improved
infrastructure to enhance client servicing, applicant recruitment and overall
productivity. These systems, which are specific to the staffing industry,
provide The DeltaGroup with the platform to grow without incurring additional
administrative costs. With the integration of Wordsmiths into the Deltaforce
operation, the Company was able to realize economies of scale concurrent with
improving overall performance and serving the growing client base more
efficiently.
In the temporary staffing industry, quality of service is generally a
function of two things: (1) the ability to effectively match an individual
worker to a specific assignment, and (2) the promptness with which the
assignment is filled. The Company believes that the experience of its management
and internal staff and its standing in the market allows it to effectively
access a large supply of available temporary workers, select
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suitable individuals for a particular assignment and, in some cases, train
available worker in skills required for an assignment.
COMPETITION
The DeltaGroup competes against local and national temporary personnel
firms, both to recruit and retain a supply of worker and to attract customers to
use temporary employees. Many of the firms that the company competes with have
greater financial resources available for marketing and advertising as well as a
larger pool of potential candidates to fill positions. The company believes that
it can compete against these firms due to the experience of existing management,
the relationships that it has maintained over the years, and the reputation that
it holds in the market for providing high quality service. The Company recruits
temporary workers through a wide variety of means, principally personal
referrals and advertisements. In addition, The DeltaGroup has installed a new
state-of-the-art computer system specifically designed for the temporary
personnel industry, which allows it to effectively match candidates with
assignments in a timely and efficient manner.
CUSTOMER CONCENTRATION
The DeltaGroup's typical clients are large New York City based law firms
with on-going needs for temporary personnel services. The company believes that
its business is not dependent on any single customer. For the year ending
December 31, 2000, the one customer represented 11% of DeltaGroup's total sales
and DeltaGroup plans to have recurring business from this customer.
EMPLOYEES
As of December 31, 2000, the Company employed 62 full-time employees and
684 temporary part-time employees, related to the DeltaGroup. Of the 62 full
time employees 39 worked for 5B Group, 19 worked for DeltaGroup and 4 worked for
5B. The Company has experienced no work stoppages and considers its employee
relations to be satisfactory. None of the Company's employees are represented by
a labor union.
GOVERNMENT REGULATION
The Company has not been materially affected by any government regulations
applicable to its business activities.
ITEM 2 - PROPERTIES
PROPERTIES
The Company leases approximately 7,448 square feet of office space for its
principal executive offices at 100 Sunnyside Boulevard, Woodbury, New York
11797. Payment of rent for the Company's offices is approximately $12,000 per
month. This lease expires in August 2002. The Company also leases approximately
1,200 square feet of office space for 5B Group in Charlotte, North Carolina.
Payment of rent for this facility is approximately $750 per month and the lease
expires on August 2001. In addition, the Company leases 6,000
11
square feet in Manhattan for the DeltaGroup operations. Payment of rent is
approximately $13,000 per month. This lease expires in November 2002.
ITEM 3 - LEGAL PROCEEDINGS
On January 4, 2001, La Vista Investors LLC commenced a lawsuit against the
Company in the Supreme Court of the State of New York (Index No. 01600067/01).
The action claims compensatory and other damages and equitable relief arising
out of alleged breaches of the Securities Purchase Agreement between La Vista
and the Company dated April 17, 2000 and other agreements. Specifically, the
complaint alleges that the Company breached the agreement to redeem the
preferred stock purchased by La Vista if the common stock issuable upon
conversion of the preferred stock was not registered within 150 days of April
17, 2000. Among the remedies La Vista has demanded are redemption of the
preferred stock at a redemption price of $1.25 million and liquidated damages of
$100,000 relating to delays in effectuating the registration statement required
by the Securities Purchase Agreement. On February 6, the Company responded to
the complaint denying liability for the relief sought. The Company believes that
it has strong defenses and other legal rights and intends to vigorously defend
this action.
In June 2000, Lawrence Kagan, a former employee and former shareholder,
commenced an arbitration proceeding against DeltaGroup and the Company before
the American Arbitration Association in the City of New York. The Compliant
alleges that (i) DeltaGroup breached Mr. Kagan's employment agreement and (ii)
the Company breached a related stock purchase agreement. The Company and
DeltaGroup responded to the Compliant denying liability and asserting
counterclaims. The Company and DeltaGroup believe that they have strong
defenses, counterclaims and other legal rights, and intend to vigorously defend
this proceeding.
On August 29, 2000 Robert Klein commenced a lawsuit against the Company
and Deltaforce Personnel Services Inc. in the Supreme Court of New York (Index
No. 603727/00). The Complaint alleges that the Company breached an agreement to
timely register Mr. Klein's stock. Mr. Klein seeks damages in excess of $2.0
million plus reimbursement of attorneys' fees. The Company and DeltaGroup
responded to the Compliant denying liability for the relief sought. The Company
and DeltaGroup believe that they have strong defenses and other legal rights and
intend to vigorously defend this action.
The action previously brought against the Company and third parties by
Hirata Corporation and Hirata Corporation of America was dismissed with respect
to the Company for lack of personal jurisdiction.
The Company is subject to legal proceedings and claims that a rise in the
ordinary course of its business. In the opinion of the management, the amount of
the ultimate outcome of these actions will not materially affect the Company's
financial position, results of operations or cash flows.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security-holders during the fourth
quarter of the fiscal year ended December 31, 2000.
12
PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
In connection with the reorganization in February 2000, the Company
changed the trading symbols of its Common Stock and Class A Warrants to "FIVE"
and "FIVEW", respectively.
The following table sets forth the high and low closing prices for the
Company's Common Stock for the periods shown below.
COMMON STOCK
1999 HIGH LOW
---- ---- ---
First quarter.................................. 6 17/32
Second quarter................................. 2 15/16 1 1/2
Third quarter.................................. 4 5/16 1 32/93
Fourth quarter................................. 1 15/16 1 7/16
2000
----
First quarter.................................. 18 7/8 1 1/2
Second quarter................................. 13 7/8 3
Third quarter.................................. 3 5/8 1 29/32
Fourth quarter................................. 2 5/8 5/8
2001
----
January 1, 2001 through March 15, 2001......... 2 15/32 31/32
13
As of August 20, 1998, the Class A Warrants were delisted from the NASDAQ Small
Cap Market as a result of the failure to meet certain NASDAQ continued listing
requirements. Set forth below in the first table are the high and low closing
prices for the Class A Warrants as reported by the NASDAQ Small Cap Market from
January 1, 1997 through August 20, 1998. Set forth below in the second table are
the high and low sales prices for the Class A Warrants as reported by the NASDAQ
Over-The-Counter Bulletin Board since August 21, 1998.
On January 19, 2001 the Class A Warrants expired and none of the Warrants were
exercised.
CLASS A WARRANTS
NASDAQ SMALL CAP MARKET
1998
----
First quarter.................................. 1/8 3/32
Second quarter................................. 3/32 1/32
Third quarter (July 1 - August 20)............. 1/32 1/64
NASDAQ OVER-THE-COUNTER BULLETIN BOARD
1999
----
First quarter.................................. 3/100 1/500
Second quarter................................. 9/50 1/20
Third quarter.................................. 23/200 1/1,000
Fourth quarter................................. 7/200 3/200
2000
----
First quarter.................................. 3/200 151/200
Second quarter................................. 214/389 1/10
Third quarter.................................. 17/100 1/20
Fourth quarter................................. 9/100 1/100
2001
----
January 1, 2001 through January 19, 2001....... 1/100 1/200
----------
(1) After being delisted from the NASDAQ Small Cap Market, the Class A
Warrants did not begin trading on The Over-The-Counter Bulletin Board
until December 1998, and subsequently expired on January 19, 2001.
The closing sales price of the Common Stock as of March 15, 2001, as reported by
the NASDAQ Small Cap Market, was $1.25 per share.
As of March 15, 2001, there were 39 record holders of the Common Stock.
14
ITEM 6 - SELECTED FINANCIAL DATA
The following selected financial data with respect to the Company's
financial position and its results of operations for each of the five years in
the period ended December 31, 2000, set forth below has been derived from the
Company's consolidated financial statements. The selected financial data
presented below should be read in conjunction with the Consolidated Financial
Statements and related notes thereto in ITEM 8 and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in ITEM 7. The
Company's financial position and results of operations have been restated to
reflect the discontinuance of the Company's leasing segment. See Note 14 to the
Consolidated Financial Statements.
2000 1999 1998 1997 1996
Net Sales ............. $ 22,088,442 $ 16,824,712 $ 9,369,802 $ 3,774,673 $ 585,233
Loss from continuing
operations ............ (1,601,461) (890,739) (2,499,128) (1,616,522) (1,856,908)
Basic and diluted loss
per share from
continuing operations . $ (0.94) $ (0.42) $ (1.21) $ (0.81) $ (0.95)
BALANCE SHEET DATA:
Total assets .......... $ 7,263,648 $ 9,275,022 $ 9,739,458 $ 9,348,670 $ 9,865,827
Long term debt ........ $ 11,928 $ 158,600 $ 675,265 $ -- $ --
Redeemable preferred
stock ................. $ 1,250,000 $ -- $ -- $ -- $ --
15
ITEM 7 - 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 audited financial statements, including
the notes thereto, appearing elsewhere in this Form 10-K.
GENERAL
5B Technologies Corporation (formerly Paramount Financial Corporation) and
subsidiaries ("5B" or the "Company") is a comprehensive business solutions
provider, offering customers a wide range of integrated services, including
customized design and development of Internet infrastructure and commerce
solutions, information technology consulting, local area network and web site
security, systems integration and staffing services. The Company operates
through two wholly owned subsidiaries, 5B Technologies Group, Inc. ("5B Group")
(formerly Paratech Resources, Inc.) and Deltaforce Personnel Services, Inc.
("DeltaGroup").
5B Group provides a complete range of advanced technological services,
including fully integrated solutions for Internet and e-commerce businesses,
Internet marketing, applications development, systems integration, hardware and
software procurement, multi-platform integration services and personnel
outsourcing.
5B Group's systems integration and consulting business is typically
retained on a time-and-material basis. Due to the complexity and diversity of
implementing integration and application solutions, the Company prefers a time
and material basis contract over a fixed price contract. The Company perceives
the growth in the integration business to be generated from the Internet
solutions business and the ever growing need to cross connect multiple
applications and systems. As more businesses expand on to the Internet the need
for integrated accounting and back office software will become essential. 5B
Group's integration business continues to serve its core clients as well as
expanding its client base through the use of its internal sales force, referrals
and the strategic alliances with our vendors.
5B Group's Internet solutions business is typically retained on a fixed
price, project-by-project basis. Revenue is recognized on a
percentage-of-completion basis. Each project typically undergoes a five step
process: (a) planning, (b) approach, (c) development, (d) testing and (e) post
production. The Company believes that these five phases are crucial to the
success of its Internet projects and uses this model to plan and price its
projects. From time to time the Company may accept small time-and-material
projects, but it prefers to align itself with its customers, developing
long-term relationships as opposed to performing one-time changes or fixes.
Additionally, as part of our fee arrangement, 5B Group may receive equity in the
client company.
In the temporary staffing industry, quality of service is generally a
function of two things: (1) the ability to effectively match an individual
worker to a specific assignment, and (2) the promptness with which the
assignment is filled. The Company believes that the experience of its management
and internal staff and its standing in the New York City market allows it to
effectively access a large supply of available temporary workers, select
suitable individuals for a particular assignment and, in some cases, train
available workers in skills required for an assignment.
Following the acquisition of Deltaforce and Wordsmith, the Company made a
considerable investment in systems and process improvements to create a new and
improved infrastructure to enhance client servicing, applicant recruitment and
overall productivity. These systems, which are specific to the staffing
industry, provide The DeltaGroup with the platform to grow without incurring
additional administrative costs, as well as to provide a shift-based, 24 hour a
day seven day a week business.
16
On May 2, 2000, the Company sold the majority of its lease portfolio (the
"Assets"), which was maintained through a wholly owned subsidiary, Paramount
Operations Inc. ("Paramount"), for approximately $700,000 and the assumption of
approximately $6,117,000 of indebtedness related to the Assets. Accordingly,
Paramount has been presented as a discontinued operation as of and for the year
ended December 31, 2000, and the balance sheet as of December 31, 1999 and the
statements of operations and cash flows for the years ended December 31, 1999
and 1998 have been restated to conform with this presentation. At March 31,
2000, the Company accrued the loss on disposal of $856,000. The loss on disposal
of Paramount includes provisions for estimated losses of approximately $602,000
and a loss on sale of approximately $254,000. The provision for estimated losses
of approximately $602,000 was based on management's estimate of future income
and expenses relating to the remaining lease portfolio and write-downs of
certain related assets. No adjustments to these estimates were necessary as of
December 31, 2000. Net sales for Paramount were approximately $322,600,
$9,125,164 and $28,937,455 for the years ended December 31, 2000, 1999 and 1998,
respectively.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999
For the year ended December 31, 2000, the Company recorded sales revenue
of $22.1 million, a $5.3 million increase from the $16.8 million recorded during
the year ended December 31, 1999. 5B Group's revenue for the year ended December
31, 2000 increased 52%, to $14.4 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 $9.5 million recorded for the year ended
December 31, 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 contributed $7.6 million in
revenue during the year ended December 31, 2000, a 4% increase over the $7.3
million recorded in 1999. The Company believes that this increase was due to
DeltaGroup's ability to consistently provide its customers with well-trained
temporary personnel on a timely basis.
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 year ended December 31,
2000, the Company recorded cost of sales of $16.6 million, an increase of $4.9
million compared to the $11.7 million recorded for the year ended December 31,
1999. 5B Group reported cost of sales of $11.1 million, a 68% increase over the
$6.6 million reported for the year ended December 31, 1999. The reason for this
increase is the growth of 5B Group and its related increase in revenues. The
DeltaGroup posted cost of sales of $5.5 million, a 8%, increase compared to the
$5.1 million recorded for the year ended December 31, 1999. The reason for the
increase is predominantly due to the increase in revenue which generated
corresponding increases in salaries of employees and associated payroll taxes.
Selling expense consists of all sales force salaries, commissions and
associated costs. Selling expense for the year ended December 31, 2000 was $1.97
million, a 13% increase over the $1.75 million recorded in the comparable prior
period. 5B Group reported selling expenses of $1,115,035, or 8%, of revenue for
the year ended December 31, 2000 compared to $1,044,000, or 11%, of revenue for
the year ended December 31, 1999. The decrease in selling expenses for 5B Group
is predominantly due to the types of transactions that were completed during the
period, several of which did not require any payment of commissions to
salespeople. DeltaGroup reported selling expenses of $766,000, or 10%, of
revenue for the year ended December 31, 2000 compared to $696,000, or 10%, of
revenue for the year ended December 31, 1999.
17
General and administrative expenses totaled $5.0 million, or 23%, of
revenue for the year ended December 31, 2000, representing an increase of 19%
compared to the $4.2 million, or 25%, of revenue recorded during the year ended
December 31, 1999. 5B Group reported general and administrative expenses of
$2,601,000, or 18%, of revenue for the year ended December 31, 2000 compared to
$1,992,000, or 21%, of revenue for the year ended December 31, 1999. The
increase in general and administrative expenses is partially attributable to the
write down of 250,000 shares and a warrant to purchase 50,000 shares valued at
$438,000 of a privately held company received in 1999 as payment for Internet
solution services provided, which were deemed worthless during the fourth
quarter of 2000. DeltaGroup reported general and administrative expenses of
$1,800,000, or 24%, of revenue for the year ended December 31, 2000 compared to
$2,054,000, or 28%, of revenue for the year ended December 31, 1999. The
decrease in general and administrative expenses is mainly due to the completion
of certain consulting agreements and restructuring of administrative salaries.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
For the year ended December 31, 1999, the Company recorded sales revenue
of $16.8 million, a $7.4 million increase from the $9.4 million recorded during
the year ended December 31, 1998. 5B Group's revenue for the year ended December
31, 1999 increased 76%, to $9.5 million, as compared to $5.4 million recorded
for the year ended December 31, 1998. The increase in sales at 5B Group is a
result of the Company's growth in providing Internet solution services during
1999 (this service was not provided in 1998) in addition to growth in its system
integration revenue. DeltaGroup, which was purchased in January 1998,
contributed $7.3 million in revenue during the year ended December 31, 1999, an
83% increase over the $4.0 million recorded in 1998. The Company believes that
this increase was due to DeltaGroup's ability to consistently provide its
customers with well-trained temporary personnel on a timely basis and the
expansion of its customer base as a result of the acquisition of Wordsmiths in
July 1998.
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 year ended December 31,
1999, the Company recorded cost of sales of $11.7 million, an increase of $4.1
million compared to the $7.6 million recorded for the year ended December 31,
1998. 5B Group reported cost of sales of $6.6 million, a 47% increase over the
$4.5 million reported for the year ended December 31, 1998. The reason for this
increase is due primarily to providing Internet solution services during 1999
(this service was not provided during 1998). The DeltaGroup posted cost of sales
of $5.1 million, a 59%, increase compared to the $3.2 million recorded for the
year ended December 31, 1998. The reason for the increase is predominantly due
to the increase in revenue which generated corresponding increases in employees
salaries and associated payroll taxes.
Selling expense for the year ended December 31, 1999 was $1.75 million, a
151% increase over the $694,000 recorded in the comparable prior period. 5B
Group reported selling expenses of $1,044,000, or 11%, of revenue for the year
ended December 31, 1999 compared to $650,000, or 12%, of revenue for the year
ended December 31, 1998. DeltaGroup reported selling expenses of $696,000, or
10%, of revenue for the year ended December 31, 1999 compared to $35,000, or 1%,
of revenue for the year ended December 31, 1998. The increase in selling
expenses is predominantly due to a restructuring of salespeople's commissions
and the expansion of DeltaGroup's sales force.
General and administrative expenses totaled $4.2 million, or 25%, of
revenue for the year ended December 31, 1999, compared to the $4.2 million, or
45%, of revenue recorded during the year ended December 31, 1998. 5B Group
reported general and administrative expenses of $1,992,000, or 21%, of revenue
18
for the year ended December 31, 1999 compared to $2,260,000, or 42%, of revenue
for the year ended December 31, 1998. The decrease in general and administrative
expenses is mainly due to the restructuring of administrative salaries.
DeltaGroup reported general and administrative expenses of $2,054,000, or 28%,
of revenue for the year ended December 31, 1999 compared to $1,276,000, or 32%,
of revenue for the year ended December 31, 1998. The increase in general and
administrative expenses is predominantly due to restructuring and increased
overhead related to the two acquisitions made during 1998.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2000, the Company had $1.7 million in cash and cash
equivalents and investments available for sale. Substantially this entire amount
was invested in interest-bearing savings accounts, money market accounts
established by major commercial banks or in United States Government, other AA
rated obligations and mutual funds. Primarily as a result of the continued
investment in 5B Group and DeltaGroup and the acquisitions it made in prior
years the Company experienced a decrease in net cash and investments available
for sale during the year ended December 31, 2000 of $273,154.
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 December 31, 2000, the Company had three credit lines available:
TERM LOAN: In April 1998, Paramount entered into a $500,000 term loan with
a bank collateralized by $600,000 in cash maintained in an investment account.
Principal payments of approximately $41,600 and interest are due on a quarterly
basis through April 20, 2001. On July 20, 1999 the Company borrowed an
additional $215,000 as a demand note. Interest payments are being made on this
additional borrowing and the Company is undergoing negotiations with the bank to
establish repayment terms. As of December 31, 2000, approximately $298,000
remained outstanding under these loans collateralized by up to $600,000 in cash
maintained in an investment account. Under the agreement, the Company was not in
compliance with the debt covenant requiring minimum net worth of at least $5.5
million. The Company has obtained a waiver from the bank for non-compliance with
the aforementioned covenant for the year ended December 31, 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 December 31, 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. 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
19
amount due or, provided the Company has sufficient eligible collateral,
borrowing under the credit facility. As of December 31, 2000, 5B Group had
$784,000 outstanding under this line, of which approximately $221,000 is
classified as debt and approximately $563,000 is included in accounts payable.
Under the agreement, the Company's 5B Group subsidiary was not in compliance
with the working capital covenant requiring a revenue to working capital ratio
of less than 20 to 1, but not greater than 0. 5B Group is also not in compliance
with a debt covenant requiring a liability to net worth ratio of less than 8 to
1. 5B Group has obtained a waiver from the finance company for non-compliance
with the aforementioned covenant for the year ended December 31, 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 December 31, 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
$1,832,000 as of December 31, 2000, under its respective credit lines
immediately due and payable.
On April 11, 2001 the Company received a banking commitment from the
Connecticut Bank of Commerce ("CBC"). The commitment extends two types of credit
facilities:
5B GROUP REVOLVING CREDIT FACILITY: 5B Group will receive upon the closing
of the financing a revolving credit facility secured by eligible accounts
receivable, as defined. The term of the credit facility is two years from
the date of closing. Borrowings are limited to 75% of eligible accounts
receivable. The rate of interest charged on the facility will be 1 1/2%
above the Wall Street prime commercial lending rate.
MEZZANINE FACILITY: 5B Technologies Corporation will receive upon the
closing of the financing, a maximum mezzanine facility of $1,500,000, to
be used for future acquisitions and other agreed to purposes. The maximum
amount of the mezzanine facility will be limited to 110% of the total
cash, cash equivalents, marketable securities and accounts receivable of
the Company less the outstanding amount of the revolving credit facility.
Additionally, the mezzanine facility may not be utilized until either (a)
the amount of the mezzanine facility to be used is secured by cash
collateral acceptable to CBC, or (b) (i) the sale of certain material
assets, (ii) 5B has demonstrated a return to profitability, and (iii) a
settlement of the redeemable preferred stock. The mezzanine facility will
mature within two years, or be rolled into the 5B Group revolving credit
facility. The rate of interest charged on the facility will be 2% above
the Wall Street prime commercial lending rate.
REDEEMABLE PREFERRED STOCK
20
On April 17, 2000, the Company received an equity investment of $874,465
($1,000,000 less transaction costs of $125,535) from La Vista Investors, LLC
("La Vista"), a fund managed by WEC Asset Management LLC, a New York-based
investment company.
In connection with its investment, La Vista received (i) 1,000 shares of
the Company's Series A 6% Convertible Preferred Stock, par value $0.01 per share
(the "Series A Preferred Stock"), and (ii) a warrant convertible into 100,000
shares of the Company's Common Stock at an exercise price of $10.00 per share of
Common Stock (which was deemed to have an immaterial fair value), subject to
certain anti-dilution adjustments for stock splits, subdivisions, other similar
events and certain below-market price issuances of Common Stock. Each share of
Series A Preferred Stock is convertible into such number of shares of Common
Stock as is determined by dividing $1,000, plus the amount of any accrued and
unpaid dividends, by the Conversion Price (as defined below) in effect at the
time of conversion. The Conversion Price at which shares of Common Stock shall
be deliverable upon conversion of Series A Preferred Stock, without the payment
of additional consideration by the holder thereof, shall be the lower of (i)
nine dollars ($9.00) or (ii) 80% of the average of the three lowest Closing Bid
Prices (as defined in the Certificate of Designations of the Series A Preferred
Stock) of the Company's Common Stock during the thirty (30) trading days
immediately preceding the date of notice from a holder of the Series A Preferred
Stock of any such conversion. On the commitment date, the conversion price
exceeded the market price of the Company's Common Stock. In August, 2000, the
Company and the holders of the Company's Series A Preferred Stock agreed to
exchange the Series A Preferred Stock for the Series B Preferred Stock on a
one-for-one basis. The terms of the Series A Preferred Stock were identical to
those of the Series B Preferred except that the holders of the Series A
Preferred Stock had the right to vote together with the holders of Common Stock
as a single class.
In addition to the right of the selling stockholder to voluntarily convert
its Series B Preferred Stock into shares of our common stock, all unconverted
shares of the Series B Preferred Stock will automatically convert into shares of
common stock, at the then-applicable conversion formula, on April 17, 2003.
REDEMPTION RIGHTS OF REDEEMABLE PREFERRED STOCK
The Company may be obligated to redeem the Series B Preferred Stock in two
types of situations: (1) if the number of shares issued upon conversion of the
Series B Preferred Stock were to exceed 19.9% of our outstanding common stock,
and (2) if we fail to conclude certain required actions or if certain enumerated
events were to occur.
IF THE UNDERLYING SHARES EXCEED 19.9%. If the number of shares of common
stock issued upon conversion of the Series B Preferred Stock and in lieu of cash
dividends (see below for a description of this concept) exceeds 19.9% of our
outstanding common stock, we must take, at our option, one of two actions: (i)
redeem all of the remaining shares of Series B Preferred Stock at a price equal
to 120% of the Liquidation Preference, as defined (ii) call a special meeting of
the Company's stockholders to approve of the issuance of the common stock (and
any other matters requiring stockholder approval under the applicable rules of
the NASDAQ Stock Market) and use the Company's best efforts to obtain such
approval.
The Company cannot predict which of the foregoing two alternatives it will
elect.
In any event, the Company's ability to elect the first alternative (i.e.,
make a redemption at 120% of the Liquidation Value of the Series B Preferred
Stock) will depend on numerous factors in the future, including
21
whether it has sufficient funds to make such redemption. At December 31, 2000,
the Series B Preferred Stock could be converted into 1,618,899 shares of Common
Stock, which exceeds 19.9% (see above).
FAILURE TO CONCLUDE ACTIONS/OCCURRENCE OF EVENTS. The Company will be
required to redeem the outstanding Series B Preferred Stock at a price equal to
125% of the Liquidation Preference as defined if any of the following events
(among others) were to happen (unless the selling stockholder at the time agreed
with the Company otherwise): (i) if the registration statement is not effective
by September 27, 2000, (ii) if the Company breaches the terms of the Series B
Preferred Stock and does not cure such breach within 10 days of notice to us of
such breach, (iii) if the Company becomes bankrupt by court order or if we
voluntarily institute bankruptcy proceedings or if other similar events occur
(iv) if the Company defaults under any of our material contracts in our
businesses or lose a final judgment, where the default or judgment is in excess
of $250,000, (v) if there is a Change of Control, as defined.
On September 28, 2000 the Company received notification from La Vista
demanding redemption of outstanding Series B Preferred Stock in accordance with
the terms of the Series B Preferred Stock due to the Company's failure to have a
registration statement effective by September 27, 2000. Accordingly, the Company
has increased the value of the redeemable preferred stock to $1,250,000. The
Company filed a registration statement relating to the common stock underlying
the Series B Preferred Stock and it was declared effective on February 16, 2001.
(See Item 3 Legal Proceedings).
FUTURE CASH REQUIREMENTS
Our cash availability during 2001 and thereafter may be affected by a
number of factors. At December 31, 2000, the Company had cash and cash
equivalents and investments available for sale of $1,656,000 and cash available
of approximately $423,000 under our existing credit facilities, which are
limited to certain asset based criteria, as defined. To the extent that credit
is not available, we may have difficulty performing our obligations under our
contracts, which could result in the cancellation of contracts or the loss of
future business. In addition, in September 2000 the holder of the redeemable
preferred stock made a claim for redemption, seeking $1,250,000 (See Notes 6 and
12(c) in the Consolidated Financial Statements). The Company recorded the
increase in the carrying value of the redeemable preferred stock but refused
such claim, and such holder subsequently commenced a lawsuit. The Company
responded to the complaint denying liability for the relief sought. The Company
believes that it has strong defenses and other legal rights and intends to
vigorously defend this action. Additionally, the Company has failed to comply
with certain financial covenants related to its existing credit lines. Under the
default provisions of the existing credit lines, a default under any of these
credit lines can trigger a default under the other two credit lines. The Company
has obtained waivers of such defaults. If the lenders refuse to waive such
defaults in the future (which the Company believes is unlikely) and if the
Company is unable to obtain alternative financing (which the Company also
believes is unlikely), it may be unable to meet its obligations under such
credit lines and fund its current operations.
We are seeking to address our need for liquidity by negotiating with other
lenders with respect to obtaining alternative financing (see below), seeking to
negotiate an agreement with the holder of the redeemable preferred stock which
would result in a deferral of our payment obligations or a conversion of the
related debt to equity or a combination and evaluating proposals for the sale of
certain material assets.
On April 11, 2001 the Company received a banking commitment from the
Connecticut Bank of Commerce ("CBC"). The commitment extends two types of credit
facilities:
22
5B GROUP REVOLVING CREDIT FACILITY: 5B Group will receive upon the closing
of the financing a revolving credit facility secured by eligible accounts
receivable, as defined. The term of the credit facility is two years from
the date of closing. Borrowings are limited to 75% of eligible accounts
receivable. The rate of interest charged on the facility will be 1 1/2%
above the Wall Street prime commercial lending rate.
MEZZANINE FACILITY: 5B Technologies Corporation will receive upon the
closing of the financing, a maximum mezzanine facility of $1,500,000, to
be used for future acquisitions and other agreed to purposes. The maximum
amount of the mezzanine facility will be limited to 110% of the total
cash, cash equivalents, marketable securities and accounts receivable of
the Company less the outstanding amount of the revolving credit facility.
Additionally, the mezzanine facility may not be utilized until either (a)
the amount of the mezzanine facility to be used is secured by cash
collateral acceptable to CBC, or (b) (i) the sale of certain material
assets, (ii) 5B has demonstrated a return to profitability, and (iii) a
settlement of the redeemable preferred stock. The mezzanine facility will
mature within two years, or be rolled into the 5B Group revolving credit
facility. The rate of interest charged on the facility will be 2% above
the Wall Street prime commercial lending rate.
Because of our present stock price, it is highly unlikely that we will be
able to raise funds through the sale of our equity securities, and our financial
condition prevents us from issuing debt securities. In the event that we are
unsuccessful in our litigation with the holder of our redeemable preferred
stock, we cannot assure you that we will be able to generate funds to enable the
Company to pay its financial obligations. In addition, our auditors included in
their report an explanatory paragraph about our ability to continue as a going
concern.
INFLATION
Management does not believe inflation had a material adverse effect on the
financial statements for the periods presented.
ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative
Instruments and Hedging Activities", which was amended by Statement of Financial
Accounting Standards No. 138 ("SFAS 138"), "Accounting for Certain Derivative
Instruments and Certain Hedging Activities." These Statements required
derivatives to be measured at fair value and to be recorded as assets or
liabilities on the balance sheet. The accounting for gains or losses resulting
from charges in the fair value of those derivatives would be dependent upon the
use of the derivative and whether it qualifies for hedge accounting. The
adoption of SFAS 133 will have no impact on the Company's results or operations
of financial position.
In 1999, the SEC issued Staff Accounting Bulletin ("SAB") No. 101,
"Revenue Recognition Financial Statements, " which became effective in the
fourth quarter of 2000. The adoption of SAB No. 101 did not have a material
effect on the Company's financial statements.
23
In November 2000, the Emerging Issues Task Force ("EITF") issued EITF No. 00-21.
Accounting for Multiple Element Revenue Arrangements," which addresses (1) how
and when an arrangement should be divided into separate units of accounting; (2)
how consideration should be allocated, if separate accounting for a deliverable
is appropriate; and (3) the accounting for direct costs when it is concluded
that those costs are not associated with any single deliverable or are
associated with a specific deliverable that does not qualify as a separate unit.
Although the Issue has been discussed at several EITF meetings, no final
consensus positions have been reached. The Company is currently evaluating the
impact that EITF 00-21 will have on its results of operations and cash flows.
FORWARD LOOKING STATEMENTS AND ASSOCIATED RISK
The forward-looking statements in this report are made pursuant to the
safe harbor provisions of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements made herein contain a number of risks and
uncertainties that could cause actual results to differ materially. These risks
and uncertainties include, but are not limited to, specific factors impacting
the Company's business, including increased competition; the ability of the
Company to expand its operations and attract and retain qualified sales
representatives and technically trained consultants experienced in the Internet
and IT sectors; the ability of the Company to attract and retain Internet
solutions and IT professionals skilled in specific applications; the ability of
the Company to attract and retain qualified personnel in the legal staffing
sector; the availability of computer equipment; technological obsolescence of
the Company's portfolio 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 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risks, which primarily include changes in
the interest rates in the United States of America.
The Company is exposed to risk from changes in interest rates from
borrowings under certain variable bank credit lines and loan agreements. If the
outstanding balance at December 31, 2000 of approximately $1,270,000 was the
average balance for the following twelve month period and the Company
experienced a 1% increase in average interest rates, the interest expense for
that period would have increased by $12,700. Based upon current economic
conditions, the Company does not believe interest rates will increase
substantially in the near future. As a result, the Company does not believe it
is necessary to hedge its exposure against potential future interest rate
increases.
24
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
The exhibits listed in the index to Exhibits below are filed as part of
this Annual Report on Form 10-K.
(a) EXHIBITS:
****2.1 - Agreement and Plan of Merger, dated as of February
11, 2000, by and among Paramount Financial
Corporation, 5B Technologies Corporation and
Paramount Merger Corporation
*****3.1 - Certificate of Incorporation of the Registrant
*****3.2 - By-laws of the Registrant
******3.3 - 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.
+3.4 - Certificate of Designations of Series B 6%
Convertible Preferred Stock of 5B Technologies
Corporation.
*4.1 - Specimen Common Stock Certificate
*4.2 - Form of Underwriter's Unit Purchase Option, as amended
*4.3 - Form of Class A and Class B Warrant Agreement, as amended
*4.4 - Specimen Class A Warrant Certificate
*4.5 - Specimen Class B Warrant Certificate
******4.6 - Common Stock Purchase Warrant, dated April 17,
2000, issued to La Vista Investors LLC by 5B
Technologies Corporation
*10.1 - Employment Agreement between Registrant and
Jeffrey Nortman dated as of January 22, 1996
*10.2 - Employment Agreement between Registrant and Glenn
Nortman dated as of January 22, 1996
10.3 - Omitted
*10.4 - Form of Master Lease Agreement relating to Computer Equipment Leases
*10.5 - 1995 Stock Option Plan
**10.6 - Stock Purchase Agreement dated January 6, 1998 by
and among Paramount Financial Corporation and
Lawrence P. Kagan and Steven Lippel relating to
Deltaforce Personnel Services, Inc.
*10.7 - Form of Indemnification Agreement
*10.8 - Sublease Agreement, dated September 15, 1995, between the Company
and Lehman Brothers Inc.
*10.9 - Consent to Sublease, dated September 15, 1995,
among Chasco Company, Lehman Brothers Inc. and the
Company
*10.10 - 1995 Director Option Plan
***10.11 - Stock Purchase Agreement dated October 23, 1998
between the Registrant and Abbey, Garrett & Seth,
Ltd. relating to Comptech Resources, Inc.
***10.12 - Asset Purchase Agreement dated July 28, 1998
between the Registrant and RBW Staffing Services,
Inc. relating to WordSmiths
******10.13 - Securities Purchase Agreement, dated April 17,
2000, by and between 5B Technologies Corporation
and La Vista Investors LLC
25
******10.14 - Registration Rights Agreement, dated April 17,
2000, by and between 5B Technologies Corporation
and La Vista Investors LLC
*******10.15 - Purchase Agreement, dated May 2, 2000, by and
between Paramount Operations Inc. (a wholly -owned
subsidiary of 5B Technologies Corporation) and
Stamford Computer Group, Inc.
10.16 - 2000 Stock Option Plan
21 - List of Subsidiaries
23.1 - Consent of BDO Seidman, LLP
----------
* Incorporated by Reference from the Registrant's Registration
Statement on Form S-1, Registration No. 33-96382.
** Incorporated by reference from the Registrant's Form 10-K for the
year ended December 31, 1997.
*** Incorporated by reference from the Registrant's Form 10-K for the
year ended December 31, 1998.
**** Incorporated by reference from the Registrant's Form 8-K filed on
February 15, 2000.
***** Incorporated by reference from the Registrant's Form 10-K for the
year ended December 31, 1999.
****** Incorporated by reference from the Registrant's Form 8-K filed on
April 28, 2000.
******* Incorporated by reference from the Registrant's Form 8-K filed on
May 17, 2000.
+ Incorporated by Reference from the Registrant's Registration
Statement on Form S-3, Registration No. 333-51864
(b) REPORTS ON FORM 8-K
The Company did not file any reports on Form 8-K during the fourth quarter of
the fiscal year ended December 31, 2000.
(c) EXHIBITS
The Exhibits set forth in (a) above are filed as part of this Annual Report on
Form 10-K.
(d) FINANCIAL STATEMENT SCHEDULES
Information required by schedules called for under Regulations S-X is either not
applicable or is included in the financial statements or notes thereto.
26
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
5B Technologies Corporation
Dated: April 12, 2001 By: /s/ Glenn Nortman
--------------------------------------
Glenn Nortman,
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Glenn Nortman Chief Executive Officer April 12, 2001
---------------------------------------------- and Director
Glenn Nortman (Principal Executive Officer)
/s/ Jeffrey Nortman Chief Operating Officer April 12, 2001
---------------------------------------------- and Director
Jeffrey Nortman
/s/ Anthony Fernandez Vice-President of Finance April 12, 2001
---------------------------------------------- (Principal Financial Officer and
Anthony Fernandez Principal Accounting Officer)
/s/ William H. Kelly Director April 12, 2001
----------------------------------------------
William H. Kelly
/s/ James E. Hillman Director April 12, 2001
----------------------------------------------
James E. Hillman
27
5B TECHNOLOGIES CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
REPORTS OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS F-1 - F-2
CONSOLIDATED FINANCIAL STATEMENTS:
Balance Sheets as of December 31, 2000 and 1999 F-3
Statements of Operations for the years ended
December 31, 2000, 1999 and 1998 F-4
Statements of Stockholders' Equity for the
years ended December 31, 2000, 1999 and 1998 F-5
Statements of Cash Flows for the years
ended December 31, 2000, 1999 and 1998 F-6
Notes to Consolidated Financial Statements F-7 - F-24
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS F-25
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS F-26
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
5B Technologies Corporation and Subsidiaries
Woodbury, New York
We have audited the accompanying consolidated balance sheets of 5B Technologies
Corporation and Subsidiaries as of December 31, 2000 and 1999, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the two years in the period ended December 31, 2000. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of 5B Technologies
Corporation and Subsidiaries (formerly Paramount Financial Corporation and
Subsidiaries) as of December 31, 2000 and 1999, and the results of their
operations and their cash flows for each of the two years in the period ended
December 31, 2000 in conformity with accounting principles generally accepted in
the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered losses from operations in 2000
and 1999. Additionally, the Company needs to obtain new financing and has a
potential liability in the amount of $1,250,000 in connection with a pending
lawsuit. These factors raise substantial doubt about the Company's ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ BDO Seidman, LLP
Melville, New York
March 16, 2001
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To 5B Technologies Corporation and Subsidiaries:
Woodbury, New York
We have audited the consolidated statement of operations, cash flows and changes
in stockholders' equity for the year ended December 31, 1998 of 5B Technologies
Corporation and Subsidiaries. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements of 5B Technologies
Corporation and Subsidiaries (formerly Paramount Financial Corporation and
Subsidiaries) present fairly, in all material respects, the results of their
operations and their cash flows for the year ended December 31, 1998 in
conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Melville, New York
March 12, 1999
F-2
5B TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
------------------------------
2000 1999
-----------------------------------------------------------------------------------------
ASSETS
------
Current assets:
Cash and cash equivalents $ 1,156,436 $ 1,003,752
Investments available for sale (includes $298,000 and
$465,000 respectively, restricted as collateral (See
Note 4(b))) 499,778 925,616
Accounts receivable, net of allowance for doubtful
accounts of $196,000 and $70,000, respectively 2,433,742 2,718,646
Note receivable for services provided 427,590 --
Other current assets 72,322 61,164
------------------------------------------------------------------------------------------
Total current assets 4,589,868 4,709,178
------------------------------------------------------------------------------------------
Investments available for sale -- 157,060
Goodwill & other intangibles, net 1,996,672 2,055,745
Net assets of discontinued operation 52,729 1,812,232
Other assets 624,379 540,807
------------------------------------------------------------------------------------------
TOTAL ASSETS $ 7,263,648 $ 9,275,022
==========================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 1,600,159 $ 2,227,775
Accounts payable 1,207,063 745,839
Accrued expenses 421,850 385,999
Unearned sales revenue 174,527 172,841
------------------------------------------------------------------------------------------
Total current liabilities 3,403,599 3,532,454
------------------------------------------------------------------------------------------
Notes payable 11,928 158,600
------------------------------------------------------------------------------------------
TOTAL LIABILITIES 3,415,527 3,691,054
REDEEMABLE PREFERRED STOCK 1,250,000 --
COMMITMENTS AND CONTINGENCIES (NOTE 12)
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; 5,000,000 shares
authorized, 1,000 shares issued and outstanding -- --
Common stock, $.04 par value, 17,500,000 shares
authorized, 2,165,036 and $2,160,000 shares issued
and outstanding, respectively 86,601 86,400
Additional paid-in capital 14,525,450 14,504,629
Stock subscription receivable (812,500) (812,500)
Accumulated deficit (11,150,825) (8,143,956)
Treasury stock at cost, 24,500 shares (50,605) (50,605)
------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 2,598,121 5,583,968
------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 7,263,648 $ 9,275,022
==========================================================================================
SEE ACCOMPANYING SUMMARY OF ACCOUNTING POLICIES AND
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-3
5B TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31,
------------------------------------------------
2000 1999 1998
---------------------------------------------------------------------------------------------------------
Net sales $ 22,088,442 $ 16,824,712 $ 9,369,802
Cost of sales 16,644,313 11,672,084 7,620,412
---------------------------------------------------------------------------------------------------------
Gross profit 5,444,129 5,152,628 1,749,390
---------------------------------------------------------------------------------------------------------
Expenses:
Selling 1,974,968 1,745,238 694,968
General and administrative expenses 4,963,873 4,200,118 4,215,136
---------------------------------------------------------------------------------------------------------
Total expenses 6,938,841 5,945,356 4,910,104
---------------------------------------------------------------------------------------------------------
Loss from operations (1,494,712) (792,728) (3,160,714)
Other income (expense):
Interest expense (203,774) (139,508) (51,324)
Interest income 86,169 43,037 178,234
---------------------------------------------------------------------------------------------------------
Loss before provision for (benefit from) income (1,612,317) (889,199) (3,033,804)
taxes and discontinued operations
Provision for (benefit from) income taxes (10,856) 1,540 (534,676)
---------------------------------------------------------------------------------------------------------
Loss from continuing operations (1,601,461) (890,739) (2,499,128)
Discontinued operations:
Income (loss) from discontinued operations,
net of income taxes of $0, $80,892 and
$525,390, respectively (121,175) 629,667 665,324
Loss on disposal of discontinued operations (856,198) -- --
---------------------------------------------------------------------------------------------------------
Net loss (2,578,834) (261,072) (1,833,804)
Preferred dividends and increase in carrying
value of redeemable preferred stock (428,035) -- --
---------------------------------------------------------------------------------------------------------
Net loss attributable to common shareholders $ (3,006,869) $ (261,072) $ (1,833,804)
---------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic and diluted 2,162,041 2,135,500 2,067,842
BASIC AND DILUTED (LOSS) EARNINGS PER COMMON SHARE:
Continuing operations $ (0.94) $ (0.42) $ (1.21)
---------------------------------------------------------------------------------------------------------
Discontinued operations $ (0.45) $ 0.29 $ 0.32
---------------------------------------------------------------------------------------------------------
Net loss per share $ (1.39) $ (0.12) $ (0.89)
=========================================================================================================
SEE ACCOMPANYING SUMMARY OF ACCOUNTING POLICIES AND
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-4
5B TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Additional Stock
Paid-In Subscription Accumulated Treasury
Common Stock Capital Receivable Deficit Stock Total
--------------------------- ------------- -------------- ------------- -------------- --------
Shares Amount
---------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 7,990,000 $ 79,900 $ 13,644,228 $ -- $ (6,049,080) $ (29,365) $ 7,645,683
One-for-four reverse stock split (5,992,500) -- -- -- -- -- --
Issuance of common stock 162,500 6,500 812,500 (812,500) -- -- 6,500
Purchase of treasury stock -- -- -- -- -- (21,240) (21,240)
Net Loss -- -- -- -- (1,833,804) -- (1,833,804)
=================================================================================================================================
Balance, December 31, 1998 2,160,000 86,400 14,456,728 (812,500) (7,882,884) (50,605) 5,797,139
Issuance of warrants for services -- -- 47,901 -- -- -- 47,901
Net loss -- -- -- -- (261,072) -- (261,072)
=================================================================================================================================
Balance, December 31, 1999 2,160,000 86,400 14,504,629 (812,500) (8,143,956) (50,605) 5,583,968
Issuance of common stock upon
exercise of stock options by
employees 5,036 201 4,521 -- -- -- 4,722
Issuance of stock options for
services -- -- 16,300 -- -- -- 16,300
Redeemable preferred stock
dividend -- -- -- -- (52,500) -- (52,500)
Redeemable preferred stock
redemption adjustment -- -- -- -- (375,535) -- (375,535)
Net loss -- -- -- -- (2,578,834) -- (2,578,834)
=================================================================================================================================
Balance, December 31, 2000 2,165,036 $ 86,601 $ 14,525,450 $ (812,500) $(11,150,825) $ (50,605) $ 2,598,121
=================================================================================================================================
SEE ACCOMPANYING SUMMARY OF ACCOUNTING POLICIES AND
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-5
5B TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31,
--------------------------------------------
2000 1999 1998
------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (2,578,834) $ (261,072) $ (1,833,804)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Deferred income taxes -- -- 540,095
Loss from discontinued operations 121,175 -- --
Loss from disposal of discontinued operations 856,198 -- --
Depreciation and amortization 490,924 461,008 171,538
Provision for losses and allowances on accounts receivable 125,859 -- 50,000
Amortization of discounts on investments -- -- (26,953)
Issuance of options and warrants for services 16,300 25,000 --
Note receivable received for services provided (427,590) -- --
Equity received for services provided -- (438,000) --
Impairment of equity received for past services provided 438,000 -- --
Changes in operating assets and liabilities:
Accounts receivable 159,045 (429,267) (1,543,606)
Other assets (93,487) 6,981 (1,601,004)
Accounts payable 461,227 (196,592) (365,065)
Accrued expenses (14,964) 154,218 82,980
-----------------------------------------------------------------------------------------------------------------------
NET CASH USED IN OPERATING ACTIVITIES FROM CONTINUING OPERATIONS (446,147) (677,724) (4,525,819)
-----------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES FROM DISCONTINUED OPERATIONS 714,594 3,594,938 5,009,514
-----------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 268,447 2,917,214 483,695
-----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for acquisitions, net of cash acquired (100,000) (95,331) (1,010,172)
Purchase of investments (36,053) (31,488) (3,697,782)
Purchase of equipment (65,521) -- --
Proceeds from sale/maturity of investments 180,951 -- 6,636,003
-----------------------------------------------------------------------------------------------------------------------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES FROM CONTINUING
OPERATIONS (20,623) (126,819) 1,928,049
-----------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY INVESTING ACTIVITIES OF DISCONTINUED OPERATIONS 14,913,024 13,942,136 2,083,550
-----------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY INVESTING ACTIVITIES 14,892,401 13,815,317 4,011,599
-----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock -- -- 6,500
Proceeds from issuance of stock upon exercise of options by
employees 4,722 -- --
Repurchase of common stock -- -- (21,240)
Proceeds from issuance of preferred stock 874,465 --
Proceeds from notes payable 947,765 158,600 4,326,635
Repayment of notes payable (1,989,627) (367,490) (1,731,370)
-----------------------------------------------------------------------------------------------------------------------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES FROM CONTINUING (162,675) (208,890) 2,580,525
OPERATIONS
-----------------------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES FROM DISCONTINUED OPERATIONS (14,845,489) (17,014,971) (7,790,386)
-----------------------------------------------------------------------------------------------------------------------
NET CASH USED IN FINANCING ACTIVITIES (15,008,164) (17,223,861) (5,209,861)
-----------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,003,752 1,495,082 2,209,649
-----------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,156,436 $ 1,003,752 $ 1,495,082
=======================================================================================================================
SEE ACCOMPANYING SUMMARY OF ACCOUNTING POLICIES AND
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-6
5B TECHNOLOGIES CORPORATION AND SUBSIDIARIES
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
5B Technologies Corporation (formerly Paramount Financial Corporation) and
subsidiaries (the "Company") is a comprehensive business solutions provider,
offering customers a wide range of integrated services, including customized
design and development of Internet infrastructure and commerce solutions,
information technology consulting, local area network and web site security,
systems integration and staffing services.
On February 11, 2000, 5B Technologies Corporation was created as a holding
company for Paramount Financial Corporation. Paramount Financial Corporation
became a wholly owned subsidiary of 5B Technologies Corporation and was renamed
Paramount Operations Inc. Paramount Financial Corporation was incorporated in
the state of Delaware in July 1991.
On May 2, 2000, the Company sold the majority of its lease portfolio which was
formerly operated through a wholly owned subsidiary, Paramount Operations, Inc.
("Paramount"). Accordingly, Paramount has been presented as a discontinued
operation as of and for the year ended December 31, 2000, and the balance sheet
as of December 31, 1999 and the statements of operations and cash flows for the
years ended December 31, 1999 and 1998 have been restated to conform with this
presentation. (See Note 14)
The Company operates through two wholly owned subsidiaries, 5B Technologies
Group, Inc. (formerly Paratech Resources, Inc.) ("5B Group") and Deltaforce
Personnel Services, Inc. ("DeltaGroup").
5B Group provides a complete range of technological services, including fully
integrated solutions for Internet and e-commerce businesses, Internet marketing,
applications development, systems integration, hardware and software
procurement, multi-platform integration services and personnel outsourcing to
small and mid-sized companies primarily in the New York Metropolitan area.
DeltaGroup is a provider of temporary and permanent placement of administrative
staffing to the legal industry. DeltaGroup offers its clients, which consist
primarily of New York based law firms and corporate legal departments, an array
of experienced legal support staff 24 hours a day seven days a week. DeltaGroup
also provides temporary and permanent placement of professionals to various
businesses.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. All intercompany balances and transactions have
been eliminated in consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
F-7
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
REVENUE RECOGNITION
The Company records revenues when tangible products are delivered and title
transfers to the customer as the Company generally has no significant post
delivery obligations, the product price is fixed and determinable, collection of
the resulting receivables are probable and product returns are reasonably
estimable. Revenues are recognized for time and material based arrangements and
temporary staffing services when the services are provided to the customers. The
Company recognizes revenues for fixed-fee arrangements under the
percentage-of-completion method of accounting based on the ratio of costs
incurred to total estimated costs. The cumulative impact of any revision in
estimates of the cost to complete and losses on projects in process are
reflected in the period in which they become known. Revenue from freight charged
to customers are recognized when tangible products are delivered. The Company
does not incur other material freight expenses or direct handling fees.
From time to time, the Company will receive payment prior to delivery and the
transfer of title of tangible products or performance of services. The Company
records such amounts as unearned sales revenue on the balance sheet. Upon
delivery and transfer of title of tangible products or performance of services,
unearned sales revenue is reversed and recorded as revenue. Provisions for
returns and other adjustments are provided for in the period the related
revenues are recorded.
STATEMENT OF CASH FLOWS
The Company considers all highly liquid debt and equity instruments with an
original maturity of three or less months to be cash equivalents. Cash
equivalents include investments in money market funds and are stated at cost,
which approximates market value.
INVESTMENTS AVAILABLE FOR SALE
Marketable securities are stated in accordance with Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities". Securities classified as available for sale are reported at
fair value, with unrealized gains and losses excluded from earnings and reported
as a separate component of stockholders' equity. Gains and losses on the
disposition of securities are recognized on the specific identification method
in the period in which they occur.
At December 31, 2000 and 1999, investments available for sale consist of United
States government and agency bonds with original maturities of one year or less
and a mutual fund. The cost of debt securities is adjusted for accretion of
discount to maturity and recorded as interest income and interest income is
recorded on the mutual fund as earned. At December 2000 and 1999, the cost basis
of these securities approximates market value.
During 1999, the Company received payment for services provided, in lieu of
cash, of 250,000 shares and a warrant to purchase 50,000 shares of a privately
held company. The fair value of these investments at December 31, 2000 and 1999
was approximately $0 and $438,000, respectively.
F-8
INCOME TAXES
The Company accounts for income taxes using the liability method. Under the
liability method, deferred income taxes are provided on the differences between
the carrying values of assets and liabilities for financial reporting and tax
purposes at the enacted rate.
NET LOSS PER COMMON SHARE
Basic loss per share is computed by dividing net loss by the weighted average
number of common shares outstanding. Diluted loss per share reflects, in periods
in which they have a dilutive effect, the effect of common shares issuable upon
exercise of stock options and warrants. Income attributable to common
stockholders is computed by increasing net loss by dividends on preferred stock
and other adjustments.
Options to purchase approximately 538,550 shares of common stock at exercise
prices ranging from $0.44 to $13.25 per share and warrants to purchase
approximately 110,000 shares of common stock at prices ranging from $0.85 to
$2.34 per share were outstanding during a portion of 2000. These options and
warrants expire through 2010 and 2004, respectively. Options to purchase
approximately 211,650 shares of common stock at exercise prices ranging from
$0.44 to $2.38 per share and warrants to purchase approximately 110,000 shares
of common stock at prices ranging from $0.85 to $2.34 per share were outstanding
during a portion of 1999. Options to purchase approximately 186,000 shares of
common stock at exercise prices ranging from $0.44 to $2.38 per share were
outstanding during a portion of 1998.
The options and warrants were not included in the computation of diluted
earnings per share because they were anti-dilutive in their respective periods.
STOCK-BASED COMPENSATION
The Company accounts for its stock option awards to employees under the
intrinsic value based method of accounting prescribed by Accounting Principles
Board Option No. 25 "Accounting for Stock Issued to Employees". Under the
intrinsic value based method, compensation cost is the excess, if any, of the
quoted market price of the stock at grant date or other measurement date over
the amount an employee must pay to acquire the stock. The Company makes pro
forma disclosure of net income and earnings per share as if the fair value based
method of accounting had been applied as required by Statement of Financial
Accounting Standards No. 123("SFAS 123"), "Accounting for Stock-Based
Compensation".
LONG-LIVED ASSETS
Long-lived assets, such as goodwill and property and equipment, are evaluated
for impairment when events or changes in circumstances indicate that the
carrying amount of the assets may not be recoverable through the estimated
undiscounted future cash flows from the use of these assets. When any such
impairment exists, the related assets will be written down to the fair market
value. No impairment losses have been necessary through December 31, 2000.
F-9
PROPERTY AND EQUIPMENT AND DEPRECIATION AND AMORTIZATION
Property and equipment are stated at cost and primarily consists of computer
equipment and furniture and fixtures. Depreciation is computed primarily under
the straight-line method over the following estimated useful lives:
Years
-----
Computer equipment and software 3
Furniture and fixtures 5
Amortization of leasehold improvements is computed using the straight-line
method over the lesser of the useful life of the assets or the lease term.
The net book value of property and equipment was $193,982, $207,102 and $201,562
at December 31, 2000, 1999 and 1998,respectively and are included in other
assets. Depreciation and amortization expense was $131,851, $126,109 and
$129,682 for the years ended December 31, 2000, 1999 and 1998, respectively.
ACQUISITIONS
The net assets of businesses purchased are recorded at their fair value at the
acquisition date and the consolidated financial statements include their
operations from that date. Any excess of acquisition costs over the fair value
of identifiable net assets acquired is included in goodwill and is amortized on
a straight-line basis over periods not exceeding 15 years. Certain acquisitions
provide for contingent consideration, primarily cash, to be paid in the event
certain financial performance targets are satisfied over periods typically not
exceeding two years from the date of acquisition.
The Company's policy is to record a liability for such amounts when it becomes
probable that targets will be met.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the consolidated balance sheets for cash and
cash equivalents, accounts receivable, accounts payable and accrued liabilities
approximate fair value because of the immediate or short-term maturity of these
financial instruments. The carrying amount reported for long-term debt
approximates fair value because certain of the underlying instruments are at
variable rates, which are repriced frequently. The remaining portion of
long-term debt approximates fair value because the interest approximates current
market rates for financial instruments with similar maturities and terms.
RECLASSIFICATIONS
Certain amounts have been reclassified to conform to current year
classifications.
ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative
Instruments and Hedging Activities", which was amended by Statement of Financial
Accounting Standards No. 138 ("SFAS 138"), "Accounting for Certain Derivative
F-10
Instruments and Certain Hedging Activities." These Statements required
derivatives to be measured at fair value and to be recorded as assets or
liabilities on the balance sheet. The accounting for gains or losses resulting
from charges in the fair value of those derivatives would be dependent upon the
use of the derivative and whether it qualifies for hedge accounting. The
adoption of SFAS 133 will have no impact on the Company's results or operations
of financial position.
In 1999, the SEC issued Staff Accounting Bulletin ("SAB") No. 101, "Revenue
Recognition Financial Statements, " which became effective in the fourth quarter
of 2000. The adoption of SAB No. 101 did not have a material effect on the
Company's financial statements.
In November 2000, the Emerging Issues Task Force ("EITF") issued EITF No. 00-21.
Accounting for Multiple Element Revenue Arrangements," which addresses (1) how
and when an arrangement should be divided into separate units of accounting; (2)
how consideration should be allocated, if separate accounting for a deliverable
is appropriate; and (3) the accounting for direct costs when it is concluded
that those costs are not associated with any single deliverable or are
associated with a specific deliverable that does not qualify as a separate unit.
Although the Issue has been discussed at several EITF meetings, no final
consensus positions have been reached. The Company is currently evaluating the
impact that EITF 00-21 will have on its results of operations and cash flows.
F-11
5B TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1: Going Concern
The Company's cash availability during 2001 and thereafter may be affected
by a number of factors. At December 31, 2000, the Company had cash and
cash equivalents and investments available for sale of $1,656,000 and cash
available of approximately $423,000 under our existing credit facilities,
which are limited to certain asset based criteria, as defined. To the
extent that credit is not available, the Company may have difficulty
performing its obligations under its contracts, which could result in the
cancellation of contracts or the loss of future business. In addition, the
holder of the redeemable preferred stock made a claim for redemption
thereof, seeking $1,250,000 (See Notes 6 and Note 12(c)). The Company
refused the claim and such holder subsequently commenced a lawsuit. The
Company responded to the complaint denying liability for the relief
sought. The Company believes that it has strong defenses and other legal
rights and intends to vigorously defend this action. Additionally, the
Company has failed to comply with certain financial covenants related to
its existing credit lines. Under the default provisions of the existing
credit lines, a default under any of these credit lines can trigger a
default under the other two credit lines. The Company has obtained waivers
of such defaults. If the lenders refuse to waive such defaults in the
future (which the Company believes is unlikely) and if the Company is
unable to obtain alternative financing (which the Company also believes is
unlikely) it may be unable to meet its obligations under such credit lines
and fund its current operations.
The Company is seeking to address its need for liquidity by negotiating
with other lenders with respect to obtaining alterative financing (see
below), seeking to negotiate an agreement with the holder of the
redeemable preferred stock which would result in a deferral of our payment
obligations or a conversion of the related debt to equity or a combination
and evaluating proposals for the sale of certain materials. Because of the
Company's present stock price, it is highly unlikely that it will be able
to raise funds through the sale of its equity securities, and its
financial condition prevents the Company from issuing debt securities.
If necessary, the Company intends to take steps to reduce overhead
expenses. The Company will continue to seek additional business from new
and existing customers. On April 11, 2001 the Company received a banking
commitment from the Connecticut Bank of Commerce ("CBC"). The commitment
extends two types of credit facilities:
5B GROUP REVOLVING CREDIT FACILITY: 5B Group will receive upon the closing
of the financing a revolving credit facility secured by eligible accounts
receivable, as defined. The term of the credit facility is two years from
the date of closing. Borrowings are limited to 75% of eligible accounts
receivable.. The rate of interest charged on the facility will be 1 1/2%
above the Wall Street prime commercial lending rate.
MEZZANINE FACILITY: 5B Technologies Corporation will receive upon the
closing of the financing, a maximum mezzanine facility of $1,500,000, to
be used for future acquisitions and other agreed to purposes. The maximum
amount of the mezzanine facility will be limited to 110% of the total
cash, cash
F-12
equivalents, marketable securities and accounts receivable of the Company
less the outstanding amount of the revolving credit facility.
Additionally, the mezzanine facility may not be utilized until either (a)
the amount of the mezzanine facility to be used is secured by cash
collateral acceptable to CBC, or (b) (i) the sale of certain material
assets, (ii) 5B has demonstrated a return to profitability, and (iii) a
settlement of the redeemable preferred stock. The mezzanine facility will
mature within two years, or be rolled into the 5B Group revolving credit
facility. The rate of interest charged on the facility will be 2% above
the Wall Street prime commercial lending rate.
The Company cannot give any assurance, despite this additional financing,
that it will be able to generate funds to enable it to pay its financial
obligations. These financial statements have been prepared assuming that
the Company will continue as a going concern and, accordingly, do not
include any adjustments that might result from the outcome of the
uncertainties described above.
Note 2: Goodwill and Other Intangibles - Net
Goodwill and other intangibles consist of the following:
Estimated
DECEMBER 31, Lives 2000 1999
----------------------------------------------------------------------------------------------
Goodwill 10-15 years $1,653,935 $1,653,935
Noncompete agreements 1-5 years 1,140,000 840,000
----------------------------------------------------------------------------------------------
2,793,935 2,493,935
Less: accumulated amortization 797,263 438,190
----------------------------------------------------------------------------------------------
$1,996,672 $2,055,745
==============================================================================================
Note 3: Acquisitions
(a) Infinity Consulting, Inc.
On September 28, 2000, 5B 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 which represented the fair
value of certain computer equipment acquired. The acquisition, which
was not considered material, was accounted for under the purchase
method of accounting. 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 (See Note 4(c)).
(b) Web Business Systems, Inc.
On March 3, 1999, 5B Group acquired certain assets of Web Business
Systems, Inc. ("Web"), a privately held New York based web hosting and
development company for a total purchase price of $118,000. The
purchase price consisted of $50,000 in cash and a warrant, which
expires in February
F-13
2004, to purchase 10,000 shares of the Company's common stock at $2.34,
which equaled the market value of the Company's common stock on the
date of acquisition and direct transaction costs. The acquisition was
accounted for under the purchase method of accounting. The acquisition
agreement provided for additional cash consideration of $30,000 to be
paid if the acquired entity's results of operations exceed certain
targeted levels. This additional consideration was earned during 1999.
The excess of the aggregate purchase price over the net assets acquired
of approximately $118,000 is being amortized over 10 years.
(c) Abbey, Garrett and Seth, Ltd.
On October 23, 1998, 5B Group acquired 100% of the outstanding shares
of Abbey, Garrett and Seth, Ltd, (d/b/a Comptech Resources)
("Comptech'), a privately held, systems consulting, software
applications and Internal commerce development firm for approximately
$272,000. The acquisition was accounted for under the purchase method
of accounting. The excess of the aggregate purchase price over the net
assets acquired of approximately $551,000 is being amortized over 10
years. In connection with this acquisition the Company entered into
non-compete agreements with three key executives for an aggregate
consideration of $380,000, $105,000 of which was paid at closing with
$25,000 due quarterly through October 23, 2001 (See Note 4(c)).
(d) RBW Staffing Resources, Inc.
On July 28, 1998, DeltaGroup, a wholly owned subsidiary of the Company,
acquired certain assets from RBW Staffing Resources, Inc. (d/b/a
Wordsmiths) ("Wordsmiths"), a privately held New York City based
staffing company for approximately $440,000, which included $100,000 of
notes payable. The acquisition was accounted for under the purchase
method of accounting. The excess of the aggregate purchase price over
the net assets acquired of approximately $440,000 is being amortized
over 15 years. In connection with this acquisition Deltaforce entered
into non-compete agreements with two key executives of Wordsmiths for
an aggregate consideration of $460,000, $60,000 of which was paid at
closing with $150,000 due on July 28, 1999 and $250,000 due on July 28,
2000. In addition, simultaneous with the closing of the transaction,
the Company entered into a stock purchase agreement with the former
shareholder of Wordsmiths (the "Shareholder"). Under the terms of this
agreement, the Company sold 162,500 shares of newly issued $.04 par
value common stock to the Shareholder as follows: (1) 81,250 shares at
$4.00 per share and (2) 81,250 shares at $6.00 per share. The
Shareholder paid for the stock with cash equal to the par value of the
shares issued, $6,500, and by the issuance of two non-recourse secured
promissory notes and stock pledge agreements restricting the issuance
of the stock until the notes are paid in full. The notes mature on July
27, 2000 and 2001, respectively. The operations of Wordsmiths was
merged into Deltaforce to create the DeltaGroup.
(e) Deltaforce Personnel Services, Inc.
On January 9, 1998, the Company acquired 100% of the outstanding shares
of Deltaforce Personnel Services, Inc., ("Deltaforce") a privately held
New York City based staffing company, for approximately $560,000, which
included $162,500 of notes payable. The acquisition was accounted for
under the purchase method of accounting. The acquisition agreement
provided for additional consideration of $162,500 to be paid if the
acquired entity's results of operations exceeded certain targeted
levels and certain forfeiture events do not occur. During 1999, a
forfeiture event occurred
F-14
and the additional consideration earned was reduced to $81,250. The
excess of the aggregate purchase price over the net assets acquired of
approximately $545,000 is being amortized over 15 years.
Note 4: Notes Payable and Other Financing
Notes payable were comprised of:
DECEMBER 31, 2000 1999
---------------------------------------------------------------------------------
Credit facilities (a) and (e) $ 221,181 $ 665,125
Notes payable to financial institutions (b) and (e) 1,048,333 1,215,000
Notes payable (c) 325,000 506,250
Leases (d) 17,573 --
---------------------------------------------------------------------------------
1,612,087 2,386,375
Less: current portion 1,600,159 2,227,775
---------------------------------------------------------------------------------
$ 11,928 $ 158,600
=================================================================================
(a) The Company maintains a $2,000,000 revolving line of credit agreement with
a finance company for and, secured by accounts receivable of 5B Group.
Interest on outstanding borrowings accrues at the prime rate (9.50% at
December 31, 2000) plus 1-1/2%. Borrowings are limited to 85% of eligible
accounts receivable. 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 December 31, 2000, 5B Group had
$784,000 outstanding under this line, of which $221,000 was classified as
debt and $563,000 was included in accounts payable. Under the agreement, 5B
Group was not in compliance with the working capital covenant requiring a
revenue to working capital ratio of less than 20 to 1, but not greater than
0. 5B Group is also not in compliance with a debt covenant requiring a
liability to net worth ratio of less than 8 to 1. 5B Group has obtained a
waiver from the finance company for non-compliance with the aforementioned
covenant for the year ended December 31, 2000.
(b) In April 1998, the Company entered into a $500,000 term loan, for the
benefit of DeltaGroup, with a bank collateralized by up to $600,000 in
cash maintained in an investment account. Interest accrues at a rate of
8.03% and principal payments of approximately $41,600 and interest are due
on a quarterly basis through April 20, 2001. As of December 31, 2000,
approximately $83,000 remains outstanding under this agreement. Under the
agreement, the Company was not in compliance with the debt covenant
requiring minimum net worth of at least $5.5 million. The Company has
obtained a waiver from the bank for non-compliance with the aforementioned
covenant for the year ended December 31, 2000.
F-15
In addition, the Company entered into a demand note, for the benefit of
DeltaGroup, with the same bank, in July 1999, collateralized by up to the
same $600,000 in cash as the term loan for $215,000. Interest accrues at
the prime rate (9.50% at December 31, 2000) plus 1% and is paid quarterly.
As of December 31, 2000, approximately $215,000 remains outstanding.
In January 1998, the Company entered into a $750,000 revolving line of
credit agreement with a bank for and secured by accounts receivable of
DeltaGroup which expires on June 30, 2001. Interest on outstanding
borrowings accrues at the bank's prime rate (9.5% at December 31, 2000)
plus 1%, and interest is paid monthly. Borrowings are limited to 80% of
eligible accounts receivable. As of December 31, 2000, $750,000 was
outstanding under this line.
(c) In connection with the acquisitions described in Note 3, the Company
entered into promissory notes with several individuals. Interest on such
notes ranges from 0% to 8.5%. The interest components of those non-interest
bearing notes are immaterial. All of these loans mature in 2001.
(d) Capital lease
In June 2000, the Company entered into a lease for office equipment used
by 5B Group. The lease calls for monthly payments of approximately $596
and bears interest at a rate of 10%. Future annual minimum lease payments
are $7,148, $7,148 and $4,765 in 2001, 2002 and 2003, respectively.
(e) 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 December 31, 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 $1,832,000 as of December 31, 2000,
under its respective credit lines immediately due and payable.
Note 5: Income Taxes
The provision for (benefit from) income taxes is comprised of:
F-16
YEARS ENDED DECEMBER 31, 2000 1999 1998
---------------------------------------------------------------------
Current:
Federal $ -- $ 73,795 $ --
State (10,856) 8,637 43,328
----------- ----------- -----------
(10,856) 82,432 43,328
----------- ----------- -----------
Deferred:
Federal (1,177,916) (72,730) (532,055)
State (148,945) (6,241) (82,362)
----------- ----------- -----------
(1,326,861) (78,971) (614,417)
----------- ----------- -----------
Valuation allowance 1,326,861 78,971 561,803
----------- ----------- -----------
$ (10,856) $ 82,432 $ (9,286)
=========== =========== ===========
Significant components of deferred income tax assets and (liabilities) are:
DECEMBER 31, 2000 1999
--------------------------------------------------------------------------
Depreciation $ 61,269 $ 369,668
Lease transactions treated differently
for tax and financial reporting
purposes -- (45,187)
Accounts receivable valuation allowance 64,295 15,210
Amortization 132,228 65,192
Net operating loss carryforwards 1,515,933 354,361
Other accrued expenses 283,910 (28,470)
Valuation allowance (2,057,635) (730,774)
--------------------------------------------------------------------------
Net deferred income tax $ -- $ --
==========================================================================
The Company has net operating loss carryforwards for income tax reporting
purposes of approximately $3,887,000 expiring through 2020. A full valuation
allowance has been provided against the net deferred tax asset due to the
uncertainty at December 31, 2000 as to their realization.
The following reconciliation presents the principal reasons for the difference
between income taxes calculated at the United States federal statutory income
tax rate (34%) and the provision for (benefit from) income taxes:
F-17
YEARS ENDED DECEMBER 31, 2000 1999 1998
----------------------------------------------------------------------------------------------------------
Federal income tax benefit at U.S. statutory rate $ (876,804) $ (60,738) $ (626,651)
Permanent differences 61,809 47,588 --
Alternative minimum tax -- 73,795 --
Changes in valuation allowance 1,326,861 5,176 561,803
State taxes, net of federal benefit -- 5,700 43,328
Adjustment of deferred taxes relating to discontinued
operations (548,701) -- --
Other 25,979 10,911 12,234
---------------------------------------------
$ (10,856) $ 82,432 $ (9,286)
=============================================
Note 6: Redeemable Preferred Stock
On April 17, 2000, the Company received an equity investment of $874,465
($1,000,000 less transaction costs of $125,535) from La Vista Investors,
LLC ("La Vista"), a fund managed by WEC Asset Management LLC, a New
York-based investment company.
In connection with its investment, La Vista received (i) 1,000 shares of
the Company's Series A 6% Convertible Preferred Stock, par value $0.01 per
share (the "Series A Preferred Stock"), and (ii) a warrant convertible into
100,000 shares of the Company's Common Stock at an exercise price of $10.00
per share of Common Stock (which was deemed to have an immaterial fair
value), subject to certain anti-dilution adjustments for stock splits,
subdivisions, other similar events and certain below-market price issuances
of Common Stock. Each share of Series A Preferred Stock is convertible into
such number of shares of Common Stock as is determined by dividing $1,000,
plus the amount of any accrued and unpaid dividends, by the Conversion
Price (as defined below) in effect at the time of conversion. The
Conversion Price at which shares of Common Stock shall be deliverable upon
conversion of Series A Preferred Stock, without the payment of additional
consideration by the holder thereof, shall be the lower of (i) nine dollars
($9.00) or (ii) 80% of the average of the three lowest Closing Bid Prices
(as defined in the Certificate of Designations of the Series A Preferred
Stock) of the Company's Common Stock during the thirty (30) trading days
immediately preceding the date of notice from a holder of the Series A
Preferred Stock of any such conversion. On the commitment date, the
Conversion Price exceeded the market price of the Company's Common Stock.
In August, 2000, the Company and the holders of the Company's Series A
Preferred Stock agreed to exchange the Series A Preferred Stock for the
Series B Preferred Stock on a one-for-one basis. The terms of the Series A
Preferred Stock were identical to those of the Series B Preferred except
that the holders of the Series A Preferred Stock had the right to vote
together with the holders of Common Stock as a single class.
In addition to the right of the selling stockholder to voluntarily convert
its Series B Preferred Stock into shares of our common stock, all
unconverted shares of the Series B Preferred Stock will automatically
convert into shares of common stock, at the then-applicable conversion
formula, on April 17, 2003.
REDEMPTION RIGHTS OF REDEEMABLE PREFERRED STOCK
F-18
The Company may be obligated to redeem the Series B Preferred Stock in two
types of situations: (1) if the number of shares issued upon conversion of
the Series B Preferred Stock were to exceed 19.9% of our outstanding common
stock, and (2) if we fail to conclude certain required actions or if
certain enumerated events were to occur.
IF THE UNDERLYING SHARES EXCEED 19.9%. If the number of shares of common
stock issued upon conversion of the Series B Preferred Stock and in lieu of
cash dividends (see below for a description of this concept) exceeds 19.9%
of our outstanding common stock, we must take, at our option, one of two
actions: (i) redeem all of the remaining shares of Series B Preferred Stock
at a price equal to 120% of the Liquidation Preference, as defined. (ii)
Call a special meeting of the Company's stockholders to approve the
issuance of the common stock (and any other matters requiring stockholder
approval under the applicable rules of the NASDAQ Stock Market) and use the
Company's best efforts to obtain such approval.
The Company cannot predict which of the foregoing two alternatives it will
elect.
In any event, the Company's ability to elect the first alternative (i.e.,
make a redemption at 120% of the Liquidation Value of the Series B
Preferred Stock) will depend on numerous factors in the future, including
whether it has sufficient funds to make such redemption. At December 31,
2000 the Series B Preferred Stock would be converted into 1,618,899 shares
of Common Stock, which is in excess of 19.9% (see above).
FAILURE TO CONCLUDE ACTIONS/OCCURRENCE OF EVENTS. The Company will be
required to redeem the outstanding Series B Preferred Stock at a price
equal to 125% of the Liquidation Preference as defined if any of the
following events (among others) were to happen (unless the selling
stockholder at the time agreed with the Company otherwise): (i) if the
registration statement is not effective by September 27, 2000, (ii) if the
Company breaches the terms of the Series B Preferred Stock and does not
cure such breach within 10 days of notice to us of such breach, (iii) if
the Company becomes bankrupt by court order or if we voluntarily institute
bankruptcy proceedings or if other similar events occur (iv) if the
Company defaults under any of our material contracts in our businesses or
lose a final judgment, where the default or judgment is in excess of
$250,000, (v) if there is a Change of Control, as defined.
On September 28, 2000 the Company received notification from La Vista
demanding redemption of outstanding Series B Preferred Stock in accordance
with the terms of the Series B Preferred Stock due to the Company's
failure to have a registration statement effective by September 27, 2000.
Accordingly, the Company has increased the value of the redeemable
preferred stock to $1,250,000. The Company filed a registration statement
relating to the Series B Preferred Stock and it was declared effective on
February 16, 2001.(See Note 12 (c))
Note 7: Stockholders' Equity
(a) Class A and Class B Warrants
On January 22, 1996 ("Effective Date"), the Company consummated an initial
public offering of its securities. In connection with the offering, the
Company issued a total of 1,495,000 units, inclusive of the underwriter's
over-allotment option, which was exercised in full, at a price of $7.00 per
unit. Each unit sold in the offering consisted of two shares of common
stock and two redeemable Class A warrants. The
F-19
common stock and Class A warrants were detachable and trade separately. The
Class A warrants were exercisable commencing one year from the Effective
Date. Four Class A warrants entitle the holder to purchase one share of
common stock at $16.00 per share (after giving effect to a one-for-four
reverse stock split of the common stock effected May 19, 1998 and subject
to adjustment for anti-dilution) during the four year period commencing one
year from the Effective Date. The Class A warrants are redeemable by the
Company for $0.05 per warrant in the event that the closing bid price of
the Company's common stock exceeds $36.00 per share (after giving effect to
the one-for-four reverse stock split) for twenty consecutive trading days
ending within ten days of the notice of redemption. With the prior written
consent of the underwriter, upon thirty days written notice to all holders
of the Class A warrants, the Company shall have the right to reduce the
exercise price and/or extend the term of the class A warrants.
In connection with the Company's initial public offering, there was a
secondary offering of securities by certain non-affiliated lenders of the
Company (the "Selling Lenders"). The Selling Lenders registered 750,000
units (consisting of an aggregate of 1,500,000 shares of common stock and
Class A warrants to purchase an aggregate of 1,500,000 shares of common
stock), identical to the initial public offering units described above, as
well as an additional 1,500,000 shares of common stock issuable upon the
exercise of Class B warrants. The Class B warrants are identical to Class A
warrants, except that their exercise price is $16.80 per share (after
giving effect to the one-for-four reverse stock split). They are not
included for listing on any public trading market and there is no
solicitation fee payable in connection with their exercise.
Both the Class A Warrants and the Class B Warrants expired on January 19,
2001. None of these Warrants were exercised.
(b) Authorized Shares Outstanding
Effective May 19, 1998, the Board of Directors of the Company approved a
reduction of the authorized number of shares of common stock from
35,000,000 to 17,500,000 and authorized a one-for-four reverse stock split
of the Company's common stock. The par value of the common stock was
increased from $.01 to $.04 per share. The preferred stock remained
unchanged. All shareholders' equity accounts and per share date were
retroactively adjusted to reflect this split.
(c) Treasury Shares
During the year ended December 31, 1997, the Board of Directors of the
Company approved a plan that would allow for the repurchase of up to
$500,000 worth of common stock of the Company. The repurchase program took
effect immediately and was authorized to continue for a period of two
years. Subject to applicable rules, the plan allowed the Company to
repurchase shares at any time during the authorized period in any
increments it deems appropriate. As of December 31, 2000 and 1999, the
Company had repurchased 24,500 shares for a cash purchase price of $50,605.
(d) Warrants
In January 1999, the Company, in connection with a service agreement,
issued warrants, which expire in January 2002, to a third party to purchase
100,000 shares of the Company's common stock at an exercise
F-20
price of $0.85 per share for 50,000 shares and $1.25 per share for 50,000
shares. The fair value of the warrants was approximately $25,000, which has
been recorded as compensation expense.
Note 8: Stock Option Plans
(a) Employee 1995 Stock Option Plan
On August 28, 1995, the Board of Directors adopted and the Company's
shareholders approved the Employee Stock Option Plan (the "Stock Option
Plan") for all senior executive officers, key employees and consultants of
the Company pursuant to which 187,500 shares of common stock were reserved
for issuance. In June 1997, the Board of Directors approved an amendment
to increase the aggregate number of shares of common stock reserved for
issuance by 187,500 shares, for a total of 375,000. Additionally, in June
1999 the Board of Directors approved an amendment to increase the
aggregate number of shares of common stock reserved for issuance by
125,000 shares, for a total of 500,000. Options granted under the Stock
Option Plan may be either incentive stock options ("ISO"), which are
intended to meet the requirements of Section 422 of the Internal Revenue
Code of 1986 (the "Code"), as amended, or non-qualified stock options
("NSO's"). Under the Stock Option Plan, the Board of Directors may grant
(i) ISO's at an exercise price per share which is not less than the fair
market value of a share of common stock on the date on which such ISO's
are granted (and not less than 110% of the fair market value in the case
of any optionee who beneficially owns more than 10% of the total combined
voting power of the Company), and (ii) NSO's at an exercise price per
share which is determined by the Board of Directors (and which may be less
than the fair market value of a share of common stock on the date on which
such NSO's are granted). The Stock Option Plan further provides that the
maximum period in which options may be exercised will be determined by the
Board of Directors, except that ISO's may not be exercised after the
expiration of ten years from the date the ISO was initially granted (and
five years in the case of any optionee who beneficially owns more than 10%
of the total combined voting power of the Company). Any option granted
under the Stock Option Plan will be nontransferable and may be exercised
upon payment of the option price in cash, a cash equivalent, common stock
or any other form of consideration, which is acceptable to the Board of
Directors.
(b) 2000 Stock Incentive Plan
On August 18, 2000, the Board of Directors adopted and the Company's
shareholders approved the 2000 Stock Incentive Plan (the "Stock Incentive
Plan") for all employees, officers, and directors of, and other
individuals providing bona fide services to or for, the Company, or of any
Affiliate of the Company ("eligible participants") pursuant to which,
500,000 shares of common stock were reserved for issuance. The Stock
Incentive Plan allows for the issuance of stock options (both ISO's and
NSO's) and other awards, all of which are under the sole discretion of the
Board of Directors.
The following table summarizes the activity under the Stock Option Plan
and the Stock Incentive Plan for the years ended December 31, 1999 and
2000:
F-21
Weighted Average
Shares Exercise Price Exercise Price
---------------------------------------------------------------------------------------
Outstanding, December 31, 1997 41,250 $1.50 - $2.38 $ 2.00
Granted 150,000 0.44 - 2.50 1.02
Forfeited (5,250) 0.44 - 1.50 .99
Outstanding, December 31, 1998 186,000 0.44 - 2.38 $ 1.24
Granted 95,750 1.08 - 2.06 1.62
Forfeited (70,100) 0.44 - 2.38 .85
Outstanding, December 31, 1999 211,650 0.44 - 2.38 1.41
Granted 383,750 1.19 - 13.25 3.09
Forfeited (52,817) 0.44 - 1.75 1.31
Exercised (4,033) 0.44 - 1.08 .66
Outstanding, December 31, 2000 538,550 0.44 - 13.25 1.94
Shares exercisable December 31, 1998 23,800 1.50 - 2.38 2.10
Shares exercisable December 31, 1999 27,346 0.44 - 2.38 .90
Shares exercisable December 31, 2000 97,469 0.44 - 2.38 1.25
The 538,550 options outstanding at December 31, 2000 have a weighted
average remaining contractual life of 8.79 years.
The Company accounts for these plans under APB Opinion No. 25, under which
no compensation has been recorded. As of December 31, 2000 the Company has
issued 15,000 options to consultants. Had compensation cost for the plan
been determined in accordance with SFAS 123, the Company's net loss and
basic loss per common share would have been decreased in the following pro
forma amounts:
2000 1999 1998
---------------------------------------------------------------------------------------------------
Net loss As reported $(2,578,834 $(261,069) $(1,833,804)
Pro forma (2,832,662) (310,134) (1,849,110)
Basic and diluted loss per common share As reported $ (1.39) $ (0.12) $ (0.89)
Pro forma $ (1.51) $ (0.12) $ (0.89)
The pro forma effects of applying SFAS 123 are not indicative of future
amounts because stock option awards are anticipated in future years.
F-22
The fair value of each stock option grant is estimated as of the date of
grant using the Black-Scholes option pricing model with the following
weighted average assumptions:
December 31,
--------------------------------------
2000 1999 1998
-----------------------------------------------------------------
Fair value $2.29 $0.79 $0.59
Expected life (years) 2.24 2.45 3.87
Risk-free interest rate 6.1% 5.3% 4.8%
Volatility 115% 68% 73%
Dividend yield 0% 0% 0%
(c) Director Option Plan
On October 1, 1995, the Board of Directors of the Company adopted and
the Company's shareholders approved the Director Option Plan (the
"Director Plan") pursuant to which 12,500 shares of common stock of the
Company were reserved for issuance upon the exercise of options granted
to non-employee directors of the Company. Under the Director Plan, an
eligible director of the Company will, after having served as a director
for one year, automatically receive non-qualified stock options to
purchase 500 shares of common stock per annum at an exercise price equal
to the fair market value of such shares at the time of grant of such
options. Each option is immediately exercisable for a period of ten
years from the date of grant but generally may not be exercised more
than 90 days after the date an optionee ceases to serve as a director of
the Company. As of December 31, 2000, there were options to purchase
1,000 shares of common stock granted to directors under the Director
Plan of which 1,000 shares were exercised.
Note 9: Employee Savings Plan
The Company has an employee savings plan, which covers all employees who
have completed at least one year of service with the Company and permits
participants to make contributions by salary reduction pursuant to
section 401(k) of the Internal Revenue Code. Company contributions are
discretionary. During the years ended December 31, 2000, 1999 and 1998,
the Company contributed $0, $34,500 and $0, respectively.
Note 10: Segment Information
Historically, the Company's results of operations were reviewed and
managed through three segments (i) high technology equipment leasing
("Paramount"), (ii) Internet, e-commerce and systems integration ("5B
Group") and (iii) legal support staff ("DeltaGroup"). In connection with
the sale and discontinuance of Paramount (see Note 14), the Company now
reviews and manages its segments through (i) corporate overhead ("5B"),
(ii) 5B Group and (iii) DeltaGroup. The Company evaluated segment
performance based on net income (loss) for the year ended December 31,
1998. During 1999, the Company decided to change the way in which it
evaluated its segments by using pre-tax income (loss), and has restated
the information for this change. The accounting policies of the segments
are the same as those described in the Summary of Significant Accounting
Policies. The following represents
F-23
selected financial information for the Company's segments for the years
ended December 31, 2000, 1999 and 1998:
5B 5B Group DeltaGroup Total
--------------------------------------------------------------------------------------------------
2000
--------------------------------------------------------------------------------------------------
Revenues -- 14,438,759 7,649,683 22,088,442
Cost of sales -- 11,128,705 5,515,608 16,644,313
Selling 94,355 1,115,035 765,578 1,974,968
General and Administrative 562,839 2,600,885 1,800,149 4,963,873
Interest expense 35,757 89,579 78,438 203,774
Pre-tax loss 606,782 495,445 510,090 1,612,317
Assets 1,951,046 3,277,582 2,035,020 7,263,648
1999
--------------------------------------------------------------------------------------------------
Revenues -- 9,505,458 7,319,254 16,824,712
Cost of sales -- 6,595,490 5,076,594 11,672,084
Selling 5,810 1,043,524 695,904 1,745,238
General and Administrative 153,154 1,992,367 2,054,597 4,200,118
Interest expense 33,811 42,278 63,419 139,508
Pre-tax loss 149,738 168,201 571,260 889,199
Assets 3,148,226 3,778,877 2,347,919 9,275,022
1998
--------------------------------------------------------------------------------------------------
Revenues -- 5,387,107 3,982,695 9,369,802
Cost of sales -- 4,453,016 3,167,396 7,620,412
Selling 10,359 649,684 34,925 694,968
General and Administrative 678,210 2,260,050 1,276,876 4,215,136
Interest expense 24,045 -- 27,279 51,324
Pre-tax loss 570,123 1,939,900 523,781 3,033,804
Assets 4,538,085 2,652,444 2,548,929 9,739,458
==================================================================================================
Revenues for 5B Group totaled $12,421,882 for System Integration and
Consulting and $2,016,877 for Internet Solutions, for the year ended
December 31, 2000. Within the System Integration and Consulting business
5B Group generated $10,198,128 from hardware/software sales and
$2,223,754 from services for the year ended December 31, 2000. For the
years ended December 31, 1999 and 1998, it is not practicable to
determine these amounts as the revenue was not tracked separately by
division.
Note 11: Significant Vendors and Customers and Concentrations of Credit
For the years ended December 31, 2000, 1999 and 1998 the following
vendors represented in excess of 10% of total cost of goods sold for the
respective years.
F-24
5B GROUP
Vendor 2000 1999 1998
------------------------------------------------------
A 48% 18% 18%
As of December 31, 2000 and 1999 the Company had two vendors who
represented 67% and 51%, respectively of accounts payable. For the years
ended December 31, 2000, 1999 and 1998 the following customers
represented in excess of 10% of total revenues for the respective years,
it is not practicable to determine these amounts, on a segmented basis,
for the years ended December 31, 1999 and 1998.
5B GROUP
Customer 2000 1999 1998
------------------------------------------------------
A 42% -- --
INTEGRATION AND CONSULTING
A 41% -- --
INTERNET SOLUTIONS
A 48%
B 16% -- --
C 19% -- --
As of December 31, 2000 and 1999 the Company had two and three customers
who represented 30% and 36% of net accounts receivable of 5B Group.
For the years ended December 31, 2000, 1999 and 1998 the following
customers represented in excess of 10% of total revenues for the
respective years.
DELTAGROUP
Customer 2000 1999 1998
------------------------------------------------------
A 11% -- --
As of December 31, 2000 the Company had one customer who represented 12%
of the net accounts receivable of DeltaGroup. As of December 31, 1999,
there were no customers who represented 10% or more of the net accounts
receivable.
In October 2000, 5B Group converted various invoices, generated from a
customer throughout the year, into a note receivable for approximately
$417,000. In connection with the note, 5B Group obtained a security
interest in various computer equipment and other assets from the
customer. The note had a maturity date of February 11, 2001 and bore an
interest rate of 10%. The note was not repaid on the maturity date and
the Company has commenced a foreclosure proceeding against the customer
for the equipment and other assets. 5B Group believes that it will be
successful in obtaining the full amount of the loan through the
foreclosure and sale of the foregoing assets.
In May 2000, 5B Group was contracted for an Internet Solutions project
for a customer. The terms were $1.1 million and 50,000 warrants (for
which no value was recorded) and it was projected to be
F-25
completed by December 2000. The customer has had difficulties obtaining
the necessary financing to complete the project and as of December 31,
2000 has remitted to 5B Group a total of $375,000 which has been recorded
as revenue, substantially through the third quarter, due to the status of
the project. Once the customer obtains financing 5B Group will recognize
the remaining revenue upon collection of monies due under the contract.
Note 12: Commitments and Contingencies
(a) Operating Leases
The Company leases three office facilities and office equipment under
operating leases expiring through November 2002. Total rent expense
amounted to approximately $241,000, $245,000, and $184,000 in 2000,
1999 and 1998 respectively. Total minimum lease payments due under
non-cancelable operating leases are as follows:
2001 $313,000
2002 276,000
(b) Employment Agreements
In 2000, employment agreements with 2 executives were signed and will
expire through the end of 2001 and 2002 (subject to automatic renewal
provisions) with aggregate minimum payments totaling $650,000 for 2001
and $350,000 for 2002.
In connection with the acquisitions described in Note 3, the Company
has also entered into employment agreements with 4 executives expiring
through September 2003 with aggregate minimum payments totaling
$1,280,000.
(c) Legal Proceedings
La Vista Investors LLC commenced a lawsuit against the Company in the
Supreme Court of the State of New York. The action claims compensatory
and other damages and equitable relief arising out of alleged breaches
of the Securities Purchase Agreement between La Vista and the Company
dated April 17, 2000 and other agreements. Specifically, the complaint
alleges that the Company breached the agreement to redeem the preferred
stock purchased by La Vista if the common stock issuable upon
conversion of the preferred stock was not registered within 150 days of
April 17, 2000. The Company responded to the complaint denying
liability for the relief sought. The Company believes that it has
strong defenses and other legal rights and intends to vigorously defend
this action (See Note 6).
In June 2000, Lawrence Kagan, a former employee and former shareholder
of Delta, commenced an arbitration proceeding against Delta and the
Company before the American Arbitration Association in the City of New
York. The compliant alleges that (i) Delta breached Mr. Kagan's
employment agreement and (ii) the Company breached a related stock
purchase agreement. The Company and Delta responded to the compliant
denying liability and asserting counterclaims. The Company and
F-26
Delta believe that they have strong defenses, counterclaims and other
legal rights, and intend to vigorously defend this proceeding.
In August 2000 Robert Klein commenced a lawsuit against the Company and
Deltaforce Personnel Services Inc. in the Supreme Court of New York.
The Complaint alleges that the Company breached an agreement to timely
register Mr. Klein's stock. The Company and Delta responded to the
Complaint denying liability for the relief sought. The Company and
Delta believe that they have strong defenses and other legal rights and
intend to vigorously defend this action.
The action previously brought against the Company and third parties by
Hirata Corporation and Hirata Corporation of America was dismissed with
respect to the Company for lack of personal jurisdiction.
The Company is subject to legal proceedings and claims that a rise in
the ordinary course of its business. In the opinion of the management,
the amount of the ultimate outcome of these actions will not materially
affect the Company's financial position, results of operations or cash
flows.
Note 13: Supplemental Cash Flow Information
Years ended December 31,
--------------------------------------------
2000 1999 1998
-------------------------------------------------------------------------------------------------------
Cash paid for income taxes $ 4,929 $ 4,808 $ 17,305
Cash paid for income taxes for discontinued operations 59,310 28,247 69,927
Cash paid for interest 196,992 152,441 84,476
Cash paid for interest for discontinued operations $ 632,539 $ 1,913,193 $ 2,630,314
Years ended December 31,
--------------------------------------------
2000 1999 1998
-------------------------------------------------------------------------------------------------------
Fair value of assets acquired $ 50,000 $ -- $ 2,365,376
Liabilities assumed -- -- (2,570,194)
Notes issued 250,000 -- (262,500)
Warrants issued -- (22,901) --
Purchase price in excess of net assets acquired -- 118,232 1,477,490
Cash paid for acquisitions $ 100,000 $ 95,331 $ 1,010,172
Note 14: Discontinued Operations
On May 2, 2000, the Company sold the majority of its lease portfolio
(the "Assets") which was maintained through, a wholly owned subsidiary,
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 year ended December 31, 2000, and the balance sheets as of
December 31, 2000 and 1999 and the statements of operations and cash
flows for the years ended December 31, 1998, 1999 and 2000 have been
restated to conform with this presentation. At March 31, 2000, the
Company accrued a loss on disposal of $860,000. The loss on disposal of
Paramount includes provisions for estimated losses of approximately
$602,000 and a loss
F-27
on sale of approximately $254,000. 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. No adjustments to these estimates
were necessary as of December 31, 2000. Net sales for Paramount were
approximately $322,600, $9,125,164 and $28,937,455 for the years ended
December 31, 2000, 1999 and 1998, respectively.
The components of net assets of discontinued operations included in the
Company's Consolidated Balance Sheets at December 31, 2000 and 1999, are
as follows:
2000 1999
------------ ------------
Accounts receivable $ 103,528 $ 274,613
Net investment in direct finance and sales-type leases 3,198,704 16,232,749
Assets held under operating leases, net of accumulated depreciation 261,737 2,990,213
Other assets 162,000 537,990
Accrued expenses (380,317) (84,922)
Notes payable (76,384) (1,382,902)
Obligations for financed equipment - non-recourse (3,216,539) (16,755,509)
------------ ------------
$ 52,729 $ 1,812,232
============ ============
(a) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NET INVESTMENT IN DIRECT FINANCE AND SALES-TYPE LEASES
The net investment in direct finance and sales-type leased assets
consists of the present value of the future minimum lease payments plus
the present value of the residual value, if any (collectively referred to
as the "net investment"). The residual value is the estimated fair market
value of the leased assets at lease expiration.
Completed lease contracts which qualify as direct finance and sales-type
leases, as defined by Statement of Financial Accounting Standards No. 13,
("SFAS 13") "Accounting for Leases", are accounted for on the balance
sheet by recording the total minimum lease payments receivable, the
estimated residual value of the leased equipment and unearned income. The
unearned lease income represents the excess of the total minimum lease
payments and the estimated residual value expected to be realized, over
the cost of the related equipment. The unearned income is recognized as
revenue over the term of each lease by applying a constant periodic rate
of return to the declining net investment in each lease.
Lease revenue includes that portion of unearned income amortized into
income during the current period. Revenue recognized at the inception of
a sales-type lease is recorded in sales.
ASSETS HELD UNDER OPERATING LEASES
F-28
Assets held under operating leases consist of the equipment at cost, net
of accumulated depreciation. Depreciation is recognized on a
straight-line basis over the lease term up to the Company's estimate of
the equipment's residual value at lease expiration. Accumulated
depreciation was approximately $476,000 and $6,055,000 at December 31,
2000 and 1999, respectively. During the fourth quarter of 1999,
additional depreciation expense of $182,000 was recorded in order to
record the residual value associated with certain operating leases to
fair value.
Lease revenue includes the contractual lease payments and is recognized
on a straight-line basis over the lease term.
RESIDUAL VALUES
The Company's residual value estimates are based on current market
conditions and published residual value projections, as determined at
lease inception. On an ongoing basis, the Company compares its residual
value estimates against currently published independent forecasts of
equipment values at lease expiration as well as other known market
conditions. If the residual value is determined to be excessive and the
decline in residual value is judged to be other than temporary, the
Company revises its residual values accordingly with corresponding
adjustments to income and unearned income.
REVENUE RECOGNITION
The Company records revenues when products are delivered and title
transfers to the customer or services are provided to customers. When
equipment is sold to another computer leasing and trading company (a
"broker"), the transfer of title and recognition of revenue generally
occur upon the receipt of a payment from the broker.
The Company records revenue from the sale of leased equipment to an
equipment investor upon transfer of title to the equipment. Subsequent to
a sale of this variety, the Company generally is a party to a
re-marketing agreement under which it may earn additional income from the
asset's future re-lease or sale value upon lease termination or
expiration.
See Net Investment in Direct Finance and Sales-Type Leases and Assets
Held Under Operating Leases for a discussion of revenues earned under
leasing transactions.
LEASE EXPENSE
Lease expense includes depreciation on assets held under operating
leases, interest expense on obligations for financed equipment and
sublease rental expense. The cost of equipment recognized at the
inception of a sales-type lease is reflected in cost of sales.
(b) Direct Finance and Sales-Type Leases
The net investment in direct finance and sales-type leases was comprised
of the following:
F-29
DECEMBER 31, 2000 1999
-----------------------------------------------------------------------
Total minimum lease payments receivable $ 3,166,121 $16,282,746
Estimated residual value of equipment 144,838 1,071,785
-----------------------------------------------------------------------
3,310,959 17,354,531
Less: Unearned income 112,255 1,121,782
-----------------------------------------------------------------------
Net investment in direct finance and
sales-type leases $ 3,198,704 $16,232,749
-----------------------------------------------------------------------
During the fourth quarter of 1999, the Company wrote down the residual
value of certain cease contracts by approximately $289,000.
(c) Future Minimum Lease Payments
Future minimum lease rentals to be received by the Company under
non-cancelable direct finance, sales-type and operating leases are as
follows:
Direct Finance
YEARS ENDING and Sales-Type
DECEMBER 31, Leases Operating Leases
---------------------------------------------------
2001 3,166,121 166,900
(d) Obligations for Financed Equipment - Non-Recourse
Under various arrangements with banks and financial institutions, the
Company finances substantially all of its equipment leases with
non-recourse notes. In exchange for these future rentals, the Company
receives a discounted cash payment. These notes provide for an
assignment of future lease rentals to these institutions at effective
interest rates (which range between 6.8% and 7.2%). In the event of
default by a lessee, the financial institution has a first lien on the
underlying equipment, with no further recourse against the Company. The
underlying equipment securing these non-recourse notes represents the
Company's assets under direct finance, sales-type and operating leases,
which book value totaled approximately $3.6 million and $19.4 million at
December 31, 2000 and 1999.
Future maturities on non-recourse notes are:
YEAR ENDING DECEMBER 31, 2001 Lease Payments
---------------------------------------------------
$ 3,216,539
Less: Interest 99,068
---------------------------------------------------
$ 3,117,471
---------------------------------------------------
F-30
(e) Notes Payable and Other Financing
Notes payable were comprised of:
DECEMBER 31, 2000 1999
---------------------------------------------------------------
Notes payable to financial
institutions (a) $ 75,664 $1,363,933
Other 720 18,970
---------------------------------------------------------------
$ 76,384 $1,382,903
---------------------------------------------------------------
During 1998, the Company entered into a total of nine notes payable
agreements totaling approximately $2,925,000 with a financial
institution to finance the residual value of certain equipment on
lease, at an interest rate of prime (9.50% at December 31, 2000) plus
0.25%. Interest is payable quarterly and the principal amount is due 60
days after lease expiration. These notes mature through 2001. The
equipment on lease and the related lease serve as collateral for the
notes payable.
No such transactions were entered into during 2000.
(f) Significant Customers and Concentrations of Credit
For the years ended December 31, 2000, 1999 and 1998 the following
customers represented in excess of 10% of total revenues for the
respective years:
Customer 2000 1999 1998
------------------------------------------------------
A 23% 12% 54%
B -- -- 12%
F-31
Note 15: Quarterly Information (Unaudited)
The following presents certain unaudited quarterly financial data:
QUARTERS ENDED
-----------------------------------------------------------------------
March 31, June 30, September 30, December 31,
2000 2000 2000 2000
=======================================================================
Net Sales $ 3,883,016 $ 9,517,310 $ 4,889,114 $ 3,799,002
Gross Profit 1,229,629 1,794,940 1,608,108 811,452
Income (loss) from continuing operations (350,682) 39,250 108,977 (1,399,006)
Loss from discontinued operations, net (977,373) -- -- --
Net income (loss) $ (1,328,055) $ 39,250 $ 108,977 $(1,399,006)
------------- ------------- ------------- -----------
Basic (loss) earnings per share:
Continuing operations
$ (0.16) $ 0.01 $ (0.13) $ (0.66)
Discontinued operations $ (0.46) $ -- $ -- $ --
Net loss per share $ (0.62) $ 0.01 $ (0.13) $ (0.66)
------------- ------------- ------------- -----------
Diluted (loss) earnings per share:
Continuing operations $ (0.16) $ 0.01 $ (0.13) $ (0.66)
Discontinued operations $ (0.46) $ -- $ -- $ --
Net loss per share $ (0.62) $ 0.01 $ (0.13) $ (0.66)
====================================================================
F-32
QUARTERS ENDED
-----------------------------------------------------------------------
March 31, June 30, September 30, December 31,
1999 1999 1999 1999
=======================================================================
Net Sales $ 4,004,540 $ 4,128,960 $ 3,948,155 $ 4,743,057
Gross Profit 1,073,816 1,032,157 1,142,716 1,903,939
Loss from continuing operations (538,795) (47,126) (155,978) (148,840)
Income (loss) from discontinued
operations, net 425,016 61,927 207,079 (64,355)
Net income (loss) $ (113,779) $ 14,801 $ 51,101 $ (213,195)
------------- ------------- ------------- -------------
Basic (loss) earnings per share:
Continuing operations $ (0.26) $ (0.02) $ (0.07) $ (0.07)
Discontinued operations $ 0.20 $ 0.03 $ 0.09 $ (0.03)
Net loss per share $ (0.06) $ 0.01 $ 0.02 $ (0.10)
------------- ------------- ------------- -------------
Diluted (loss) earnings per share:
Continuing operations $ (0.26) $ (0.02) $ (0.07) $ (0.07)
Discontinued operations $ 0.20 $ 0.03 $ 0.09 $ (0.03)
Net loss per share $ (0.06) $ 0.01 $ 0.02 $ (0.10)
------------- ------------- ------------- -------------
The Company's business is not subject to seasonal and other quarterly
influences. Quarterly results may be materially affected by a variety of
factors, including the completion of Integration, Consulting and Internet
solution projects and customers budgeting constraints.
In the fourth quarter of 2000, 5B Group wrote off $438,000 relating to
250,000 shares and a warrant to purchase 50,000 shares of a privately
held company received in 1999 for services which were deemed worthless.
In the fourth quarter of 1999, Paramount recorded additional depreciation
expense of $182,000 to record the residual value associated with certain
operating leases to fair value and wrote down the residual value of
certain lease contracts by approximately $289,000. These amounts are
included in the income from discontinued operations.
Basic earnings per share calculations for the second, third and fourth
quarters include the effect of dividends payable on the redeemable
preferred stock and in the third quarter the effect of the redemption
notice on the redeemable preferred stock which resulted in an increase in
the carrying value of $375,555. Diluted earnings per share calculations
for the quarters include the effect of stock options, when dilutive to
the quarter's average number of shares outstanding for each period, and
therefore the sum of the quarters may not necessarily be equal to the
full year earnings per share amount.
F-33
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
5B Technologies Corporation and Subsidiaries
Woodbury, NY
The audits referred to in our report dated March 16, 2001 relating to the
consolidated financial statements of 5B Technologies Corporation and
Subsidiaries included the audits of the financial statement Schedule II -
Valuation and Qualifying Accounts for each of the two years in the period ended
December 31, 2000. This financial statement schedule is the responsibility of
management. Our responsibility is to express an opinion on this schedule based
on our audits.
In our opinion, such financial statement Schedule - Valuation and
Qualifying Accounts, presents fairly, in all material respects, the information
set forth therein.
/s/ BDO Seidman, LLP
-----------------------------
BDO Seidman, LLP
Melville, New York
March 16, 2001
F-34
Schedule II - Valuation and Qualifying Accounts
ADDITIONS
Balance at Charged to Charged to Balance
Beginning of Costs and Other at End of
Description Period Expenses Accounts Deductions Period
YEAR ENDED DECEMBER 31, 2000
Allowance for doubtful accounts 70,000 125,859 - - 195,859
YEAR ENDED DECEMBER 31, 1999
Allowance for doubtful accounts 70,000 - - - 70,000
YEAR ENDED DECEMBER 31, 1998
Allowance for doubtful accounts 20,000 50,000 - - 70,000
F-35
EXHIBIT INDEX
****2.1 - Agreement and Plan of Merger, dated as of February 11,
2000, by and among Paramount Financial Corporation, 5B
Technologies Corporation and Paramount Merger
Corporation
*****3.1 - Certificate of Incorporation of the Registrant
*****3.2 - By-laws of the Registrant
******3.3 - 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.
+3.4 - Certificate of Designations of Series B 6% Convertible
Preferred Stock of 5B Technologies Corporation.
*4.1 - Specimen Common Stock Certificate
*4.2 - Form of Underwriter's Unit Purchase Option, as amended
*4.3 - Form of Class A and Class B Warrant Agreement, as amended
*4.4 - Specimen Class A Warrant Certificate
*4.5 - Specimen Class B Warrant Certificate
******4.6 - Common Stock Purchase Warrant, dated April 17, 2000,
issued to La Vista Investors LLC by 5B Technologies
Corporation
*10.1 - Employment Agreement between Registrant and Jeffrey
Nortman dated as of January 22, 1996
*10.2 - Employment Agreement between Registrant and Glenn
Nortman dated as of January 22, 1996
10.3 - Omitted
*10.4 - Form of Master Lease Agreement relating to Computer Equipment Leases
*10.5 - 1995 Stock Option Plan
**10.6 - Stock Purchase Agreement dated January 6, 1998 by and
among Paramount Financial Corporation and Lawrence P.
Kagan and Steven Lippel relating to Deltaforce Personnel
Services, Inc.
*10.7 - Form of Indemnification Agreement
*10.8 - Sublease Agreement, dated September 15, 1995, between
the Company and Lehman Brothers Inc.
*10.9 - Consent to Sublease, dated September 15, 1995, among
Chasco Company, Lehman Brothers Inc. and the Company
*10.10 - 1995 Director Option Plan
***10.11 - Stock Purchase Agreement dated October 23, 1998 between
the Registrant and Abbey, Garrett & Seth, Ltd. relating
to Comptech Resources, Inc.
***10.12 - Asset Purchase Agreement dated July 28, 1998 between the
Registrant and RBW Staffing Services, Inc. relating to
WordSmiths
******10.13 - Securities Purchase Agreement, dated April 17, 2000, by
and between 5B Technologies Corporation and La Vista
Investors LLC
******10.14 - Registration Rights Agreement, dated April 17, 2000, by
and between 5B Technologies Corporation and La Vista
Investors LLC
*******10.15 - Purchase Agreement, dated May 2, 2000, by and between
Paramount Operations Inc. (a wholly-owned subsidiary of
5B Technologies Corporation) and Stamford Computer
Group, Inc.
10.16 - 2000 Stock Option Plan
21 - List of Subsidiaries
23.1 - Consent of BDO Seidman, LLP
----------
* Incorporated by Reference from the Registrant's Registration
Statement on Form S-1, Registration No. 33-96382.
** Incorporated by reference from the Registrant's Form 10-K for the
year ended December 31, 1997.
*** Incorporated by reference from the Registrant's Form 10-K for the
year ended December 31, 1998.
**** Incorporated by reference from the Registrant's Form 8-K filed on
February 15, 2000.
***** Incorporated by reference from the Registrant's Form 10-K for the
year ended December 31, 1999.
****** Incorporated by reference from the Registrant's Form 8-K filed on
April 28, 2000.
******* Incorporated by reference from the Registrant's Form 8-K filed on
May 17, 2000.
+ Incorporated by Reference from the Registrant's Registration
Statement on Form S-3, Registration No. 333-51864