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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[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.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the transition period from to .
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Commission File Number 000-23967
WIDEPOINT CORPORATION
(Exact name of registrant as specified in its charter.)
Delaware 52-2040275
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Mid America Plaza, Oakbrook Terrace, IL 60181
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(Address of principal executive offices) (Zip Code)
Registrant's phone number, including area code: (630) 645-0003
---------------------------------
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to section 12(g) of the Act:
Common Stock, par value $.001 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
--------------- -----------
The aggregate market value of the registrant's Common Stock, par value $.001
per share, held as of March 26, 2001 by non-affiliates of the registrant was
approximately $3,043,014 based on the average bid and asked prices of the Common
Stock on such date.
As of March 26, 2001, the registrant had 12,984,913 shares of its Common
Stock issued and outstanding.
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 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.[ ]
DOCUMENTS INCORPORATED BY REFERENCE
The information called for by Part III of the Form 10-K is incorporated
by reference from the registrant's definitive proxy statement or amendment
hereto which will be filed not later than 120 days after the end of the fiscal
year covered by this report.
ITEM 1. BUSINESS
Introduction
WidePoint Corporation (formerly known as ZMAX Corporation; the "Company" or
"WidePoint") focuses on implementing middle market companies' Information
Technology ("IT") e-strategies. The Company helps its clients analyze, design,
implement, and support e-business solutions that improve the value of their
e-business initiatives.
Since 1996, WidePoint has focused on leveraging leading edge technologies,
methodologies and consultants to help clients improve their business
performance. Today, this focus continues to tie together the Company's service
offerings and future direction. WidePoint's clients are increasingly looking to
harness the power of the Internet and other leading IT technologies by
integrating these technologies with their existing systems as they transition to
a business-to-business (B2B) e-commerce environment.
In 1996, the Company acquired all of the outstanding shares of Century Services,
Inc. ("CSI"), a corporation that provided re-engineering and information
processing services to users of large-scale computer systems. In December 1998,
the Company acquired all of the outstanding shares of Eclipse Information
Systems, Inc. ("Eclipse"), a corporation that provides IT consulting services
through several practice areas focused in distributed client server
technologies. In October 1999, the Company acquired all of the outstanding
shares of Parker Management Consulting, Ltd. ("PMC"), a corporation that
provides IT consulting services focused in Enterprise Resource Planning ("ERP").
During 1999, the Company established a new subsidiary named WidePoint
Corporation ("WidePoint-Subsidiary"). During the first half of 2000, the Company
substantially consolidated all of the Company's IT services into its
WidePoint-Subsidiary. Further, in June 2000, the Company merged CSI, Eclipse and
WidePoint-Subsidiary into the Company, with the Company being the surviving
entity in such mergers. In conjunction with such mergers, the Company changed
its corporate name from ZMAX Corporation to WidePoint Corporation and changed
the trading symbol for its common stock from "ZMAX" to "WDPT." On September 29,
2000, the Company sold all of the outstanding shares of its PMC subsidiary to a
third-party purchaser.
Business Strategy and Services
In order to capitalize on the Internet revolution, the Company evolved from a
Year 2000 strategic solutions provider to an IT based e-business solutions
provider. This action occurred with a refinement of strategy that the Company
undertook during 2000 that restructured the business infrastructure and focus.
The Company believes the current market for IT services is rapidly changing and
expanding due primarily to the Internet's opportunities and challenges. The
influence of the Internet offers significant opportunities for growth in the IT
services marketplace.
The Company presently focuses on planning, implementing and supporting
component-based, custom application development and integration services. These
services include:
Strategy Consulting
o Up-front Internet consulting services designed to increase revenue,
develop digital brand strategy, generate additional market share,
reduce costs and/or establish competitive advantage.
Solutions Consulting
o Services that enable the development of e-Commerce, operational
excellence, supply chain management and customer facing solutions.
Web Site Design
o The creation of a dynamic, intuitive web presence through sound user
interface design, information architecture and graphic design
techniques.
Web Application Development
o Full life cycle development of web-based applications. Software
applications that integrate databases, legacy and ERP systems and
provide important functionality.
Web Enablement Services
o Leverages existing investments in systems and applications while
realizing the benefits of the Internet.
To support the Company's targeted growth plans, the Company's business strategy
incorporates seeding internal growth with focused sales and marketing and
selecting potential acquisitions that may supplement and expand the Company's
skills base and exposure. The Company believes that a strong focused sales and
marketing effort enables the Company to service larger national accounts that
may generate greater revenues.
The Company's ability to expand successfully by internal development and
strategic acquisitions depends on many factors, including the identification and
acquisition of proper businesses and successful strategic sales and marketing
efforts. Any difficulties encountered in the expansion of the Company through
internal development and/or acquisition could have an adverse impact on the
Company's revenues and operating results.
Clients
The Company's client list includes an expanding number of companies that are
ready to take advantage of the Internet and e-business strategies to change the
way they conduct business. The client base of the Company is located
predominately throughout North America. The Company has experience and expertise
in the successful completion of projects in the following industries:
manufacturing, consumer product goods, direct marketing, healthcare and state
government.
Historically the Company derived, and may in the future derive, a significant
percentage of its total revenues from a relatively small number of clients.
During 2000, no customers individually represented more than 10 percent of
revenues for the year. During 1999, two customers individually represented 12
and 11 percent of revenues for that year. Due to the nature of the Company's
business and the relative size of certain contracts, the loss of any single
significant customer could have a material adverse effect on the Company's
results of operations.
Marketing and Sales
The Company focuses its sales and marketing efforts on mid-market corporations
with significant IT budgets and requirements. While the Company performs work
for companies in many various industries, the majority of the Company's revenues
for 2000 were derived from contracts and projects with state governments,
manufacturing clients, consumer product goods clients and healthcare
corporations.
The Company markets its solutions through its direct sales force and alliances
with a number of strategic partnerships. The direct sales force is responsible
for providing highly responsive quality service and ensuring client satisfaction
with the Company's services. The Company's strategic partnerships provide the
Company with additional access to potential clients that would have otherwise
been more difficult for the Company's direct sales force to penetrate without
such strategic partnerships.
Competition
The market for the services that the Company provides is highly competitive,
includes a large number of competitors and is subject to rapid change. The
primary competitors of the Company include participants from a variety of market
segments, including publicly and privately held firms, "Big Five" accounting and
consulting firms, systems consulting and implementation firms, application
software firms, service groups of computer equipment companies, and other
general management consulting firms. Increasingly, companies from foreign
countries are also targeting this market.
Intellectual Property
The Company's intellectual property primarily consists of methodologies
developed for use in e-Technologies solutions. The Company does not have any
patents and relies upon a combination of trade secrets, copyright and trademark
laws, and contractual restrictions to establish and protect its ownership of its
proprietary methodologies. The Company generally enters into nondisclosure and
confidentiality agreements with its employees, partners, independent sales
agents and clients. As the number of competitors providing services similar to
the services of the Company increases, the likelihood of similar methodologies
being used by competitors increases. Although the Company's methodologies have
never been subject to an infringement claim, there can be no assurance that
third parties will not assert infringement claims against the Company in
the future, that the assertion of such claims will not result in litigation, or
that the Company would prevail in such litigation or be able to obtain the
license for the use of any allegedly infringed intellectual property from a
third party on commercially reasonable terms. Further litigation, regardless of
its outcome, could result in substantial cost to the Company and divert
management's attention from the Company's operations. Although the Company is
not aware of any basis upon which a third party could assert an infringement
claim against the Company, any infringement claim or litigation against the
Company could materially adversely affect the Company's business, operating
results and financial condition.
Personnel
As of December 31, 2000 the Company had 91 full time employees including 13
persons in sales and recruiting, 47 persons in consulting, 7 persons in
management and administration, and 24 employees contracted to PMC by the Company
through December 31, 2000 as part of the PMC sale agreement. All of the
contracted employees became PMC employees effective January 1st 2001. The
Company also employs consultants and temporary employees.
The Company believes that its future success will depend in part on its
continued ability to attract and retain highly skilled managerial, technical,
sales and support personnel. There can be no assurance that the Company will be
able to continue to attract and retain personnel necessary for the development
of its business. The Company generally does not have employment contracts with
its key employees. However, the Company does have confidentiality and
non-disclosure agreements with many of its key employees. None of the Company's
employees is subject to a collective bargaining agreement. The Company believes
that its relations with its employees are good.
ITEM 2. PROPERTIES.
The principal executive office of the Company is located at One Mid America
Plaza, Suite 403, Oakbrook Terrace, Illinois, in approximately 5,880 square feet
through a sublease that expires December 31, 2001. The Company's annual rent for
the property in 2000 was approximately $120,000. The Company also pays its pro
rata share of increases in real estate taxes and operating expenses for this
office.
The Company also leases a branch office located at 4401 Rockside Road, Suite
405, Independence, Ohio, in approximately 1,131 square feet through a prime
lease that expires June 30, 2003. The Company's annual rent for the property in
2000 was approximately $22,000. The Company also pays its pro rata share of
increases in real estate taxes and operating expenses for this office.
As a result of the refinement of strategy the Company undertook during 2000,
several offices were closed and their leases either sublet, assigned, or
expired. The Minnesota office lease located at 11800 Singletree Lane, Suite 314,
Eden Prairie, Minnesota was not renewed and will expire on March 31, 2001. The
Company's annual rent for the property in 2000 was approximately $23,000. The
Michigan office lease located at 32000 Northwestern Highway, Suite 165,
Farmington Hills, Michigan was sublet to Galaxy Builders in June of 2000 for the
same terms as those of the Company's prime lease. The Company's annual rent for
the property in 2000 was approximately $31,000 and the lease expires on February
4, 2004. The former corporate headquarters office located at 20251 Century
Boulevard, Germantown, Maryland was assigned on December 1, 2000 to GHG
Holdings, Inc. The Company's annual rent for the property in 2000 was
approximately $150,000 and the assigned lease expires on September 30, 2005. The
Company is secondarily liable if GHG Holdings, Inc were to default on the
assigned lease.
For additional information regarding the Company's lease obligations, see Note 9
of "Notes to Consolidated Financial Statements. "
The Company anticipates entering into leases for new facilities and potentially
expanding its current facilities to accommodate the expected continued growth of
the Company. The Company believes that it can obtain the additional facilities
required to accommodate its projected needs without difficulty and at
commercially reasonable prices, although no assurance can be given that it will
be able to do so.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not currently involved in any material legal proceedings.
The Company is periodically a party to disputes arising from normal business
activities. In the opinion of management, resolution of these matters will not
have a material adverse effect upon the financial position or future operating
results of the Company, and adequate provision for any potential losses has been
made in the accompanying consolidated financial statements.
In December 1999, a third-party complaint was filed against Parker Management
Consultants, Ltd. ("PMC") by a former client. The complaint alleged, among other
things, breach of contract pertaining to an enterprise resource planning
implementation. In the complaint, the former client is seeking approximately
$10.0 million in total damages. The complaint relates to work completed prior to
the Company's acquisition of PMC and, under the terms of the purchase agreement,
the shareholder of PMC, has indemnified the Company against damages related to
the complaint. In addition, the Company completed a sale of the PMC subsidiary
during 2000 (see Note 3). The shareholder of PMC has engaged counsel and intends
to vigorously defend against this complaint. In the opinion of management, the
Company will not incur a loss related to this legal matter.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of the registrant's shareholders during the
fourth quarter of 2000.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
The Company's Common Stock is quoted on the NASD OTC Bulletin Board under the
symbol "WDPT" and the Frankfurt and Berlin exchanges under the symbol "ZMX".
From July 5, 2000 to March 1, 2001 the Company's Common Stock was traded on the
NASDAQ SmallCap Market under the symbol "WDPT". From May 19, 1998 to July 4,
2000 the Company's Common Stock was traded on the NASDAQ SmallCap Market under
the symbol "ZMAX". From August 20, 1996 to May 18, 1998 the Company's Common
Stock was quoted on the NASD OTC Bulletin Board under the symbol "ZMAX". Prior
to August 20, 1996 the Company's Common Stock was traded on the NASD OTC
Bulletin Board under the trading symbols of "MEDO" and "ORYX.
The stock prices listed below represent the high and low closing bid prices of
the Common Stock for each of the periods indicated:
2000 High Low
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First Quarter $ 7.56 $ 2.28
Second Quarter 3.38 1.38
Third Quarter 1.31 .50
Fourth Quarter .56 .13
1999 High Low
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First Quarter $ 3.38 $ 1.94
Second Quarter 3.63 2.03
Third Quarter 4.19 2.25
Fourth Quarter 5.94 3.25
As of March 26, 2001 there were 162 holders of record of the Common
Stock.
Dividend Policy
The Company has never paid cash dividends on its Common Stock and intends to
continue this policy for the foreseeable future. WidePoint plans to retain
earnings for use in its business. Any future determination to pay cash dividends
will be at the discretion of the Board of Directors of the Company and will be
dependent on WidePoint's results of operations, financial condition, contractual
and legal restrictions and any other factors deemed to be relevant.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL INFORMATION.
The tables below present selected historical financial data of WidePoint. The
WidePoint historical data for the years ended December 31, 2000, 1999, and 1998
are derived from the historical financial statements of WidePoint Corporation as
audited by Arthur Andersen LLP, included elsewhere in this Form 10-K.
On September 29, 2000, WidePoint sold Parker Management Consulting, Ltd.
("PMC"), a Delaware corporation. The accompanying financial data include the
accounts of PMC through the date of sale. A further description of this
transaction is set forth in the Company's Form 8-K/A filed on December 13, 2000
with the Securities and Exchange Commission.
On September 30, 1999, WidePoint acquired Parker Management Consulting, Ltd.
("PMC"), a Delaware corporation. The accompanying financial data include the
accounts of PMC since the date of acquisition. A further description of this
transaction is set forth in the Company's Form 8-K/A filed on December 15, 1999
with the Securities and Exchange Commission.
On December 14, 1998, WidePoint acquired Eclipse Information Systems, Inc.
("EIS"), an Illinois corporation. The accompanying financial data include the
accounts of EIS since the date of acquisition. A further description of this
transaction is set forth in the Company's Form 8-K/A filed on March 1, 1999 with
the Securities and Exchange Commission.
The information set forth below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the historical financial statements and notes thereto included elsewhere herein.
Selected Consolidated Financial Information
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2000 1999 1998 1997 1996
--------------- --------------- ---------------- --------------- ----------------
Statement of Operations Data:
Revenues $ 12,834,474 $ 27,196,125 $ 9,916,276 $ 1,425,360 $ -
Cost of revenues 7,014,045 12,140,007 3,478,982 667,098 -
Research and development expense - 325,651 473,362 - -
Sales and marketing expense 1,856,694 2,617,117 1,190,548 1,110,655 228,803
General and administrative expense 8,535,062 9,701,672 3,515,391 4,148,421 1,069,681
Facilities closing expense 376,289 - - - -
Disposition of subsidiary 699,203 - - - -
Employee stock compensation expense - - 534,384 - -
Impairment of long-term assets - 1,703,825 - - -
Depreciation and amortization 851,562 1,817,329 1,268,338 1,008,864 193,533
--------------- --------------- ---------------- --------------- ----------------
Loss from operations (6,498,381) (1,109,476) (544,729) (5,509,678) (1,492,017)
--------------- --------------- ---------------- --------------- ----------------
Other income (expense):
Interest income 103,351 161,123 270,337 137,814 14,248
Interest expense (198,971) (76,296) (9,140) (1,366,479) (7,125,386)
Other - (33,756) 821 (7,468,356) (2,903,600)
--------------- --------------- ---------------- --------------- ----------------
Net loss before income taxes (6,594,001) (1,058,405) (282,711) (14,206,699) (11,506,755)
Income taxes - 37,648 - - -
--------------- --------------- ---------------- --------------- ----------------
Net loss $(6,594,001) $ (1,096,053) $ (282,711) $(14,206,699) $(11,506,755)
=============== =============== ================ =============== ================
Basic and diluted loss per share $ (0.51) $ (0.08) $ (0.03) $ (2.58) $ (13.45)
=============== =============== ================ =============== ================
Basic and diluted weighted average
shares outstanding 12,979,055 12,949,913 10,638,680 5,502,668 855,712
=============== =============== ================ =============== ================
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Forward Looking Statements
The information set forth below includes forward-looking statements. Certain
factors that could cause results to differ materially from those projected in
the forward-looking statements are set forth below. Readers are cautioned not to
put undue reliance on forward-looking statements. The Company disclaims any
intent or obligation to update publicly these forward-looking statements,
whether as a result of new information, future events or otherwise.
Overview
WidePoint Corporation (formerly known as ZMAX Corporation; the "Company")
focuses on implementing middle market companies' Information Technology ("IT")
e-strategies. The Company helps its clients analyze, design, implement, and
support e-business solutions that improve the value of their e-business
initiatives.
In 1996, the Company acquired all of the outstanding shares of Century Services,
Inc. ("CSI"), a corporation that provided re-engineering and information
processing services to users of large-scale computer systems. In December 1998,
the Company acquired all of the outstanding shares of Eclipse Information
Systems, Inc. ("Eclipse"), a corporation that provided IT consulting services
through several practice areas focused in distributed client server
technologies. In October 1999, the Company acquired all of the outstanding
shares of Parker Management Consulting, Ltd. ("PMC"), a corporation that
provides IT consulting services focused in Enterprise Resource Planning ("ERP").
During 1999, the Company established a new subsidiary named WidePoint
Corporation ("WidePoint-Subsidiary"). During the first half of 2000, the Company
substantially consolidated all of the Company's IT services into its
WidePoint-Subsidiary. Further, in June 2000, the Company merged CSI, Eclipse and
WidePoint-Subsidiary into the Company, with the Company being the surviving
entity in such mergers. In conjunction with such mergers, the Company changed
its corporate name from ZMAX Corporation to WidePoint Corporation and changed
the trading symbol for its common stock from "ZMAX" to "WDPT." On September 29,
2000, the Company sold all of the outstanding shares of its PMC subsidiary to a
third-party purchaser.
For the year ended December 31, 2000, the Company's revenues decreased by 53%
from approximately $27.2 million in 1999 to approximately $12.8 million in 2000.
This decrease was materially due to the loss of revenues generated from
millennium based IT services in 1999. Approximately 45% of the Company's
revenues, or $12.5 million, was generated from those services in 1999 as
compared to no contribution to revenues in 2000. As a result of the loss of the
revenues from millennium based IT services the Company believes the
period-to-period comparisons of its financial results are not necessarily
meaningful and should not be relied upon as an indication of future performance.
Most of the Company's current costs consist primarily of the salaries and
benefits paid to the Company's technical, marketing and administrative
personnel. Amortization and depreciation expenses relate to property, equipment
and intangible assets. As a result of its plan to expand its operations through
internal growth and acquisitions, the Company expects these costs to increase.
The Company's profitability depends upon both the volume of service and the
Company's ability to manage costs. Because a significant portion of the
Company's cost structure is labor related, the Company must effectively manage
these costs to achieve profitability. The profitability on an individual project
depends upon completing the project within the estimated number of staff hours
and within the agreed upon time frame. To date, the Company has been able to
maintain its operating margins through efficiencies achieved by the use of the
Company's proprietary methodologies, by offsetting increases in consultant
salaries with increases in consultant fees, and by effectively managing general
overhead costs.
Recent Developments
PMC Disposition:
On September 29, 2000, WidePoint Corporation sold 100% of the issued and
outstanding capital stock of Parker Management Consultants, Ltd. ("PMC"), a
Delaware corporation, to eHoldings, Inc., a Maryland corporation, in
consideration for the transfer from eHoldings to the Company of the promissory
note in the original principal amount of $3,000,000 which was previously issued
by the Company to the former sole shareholder of PMC as part of the
consideration previously paid by the Company when it originally acquired PMC.
eHoldings had previously acquired such promissory note from the former
shareholder of PMC. The sale of all the issued and outstanding shares of capital
stock of PMC by the Company was accomplished pursuant to the terms of a Stock
Purchase Agreement, dated September 20, 2000, by and among the Company and
eHoldings. In conjunction with the sale, the Company recorded a loss of
approximately $700,000 related to the write-off of intangible assets with a
remaining net book value of approximately $3,400,000. A further description of
this transaction is set forth in the Company's Form 8-K filed on October 13,
2000 and 8-K/A filed on December 15, 2000 with the Securities and Exchange
Commission.
Results of Operations
Year Ended December 31, 2000 Compared to the Year ended December 31, 1999
Revenues. Revenues for the year ended December 31, 2000, were approximately
$12.8 million, a decrease of $14.4 million, as compared to revenues of
approximately $27.2 million for the year ended December 31, 1999. The 53%
decrease in revenues in 2000 was primarily attributable to the elimination of
sales of millennium services during 2000.
Gross profit. Gross profit for the year ended December 31, 2000, was $5.8
million, or 45% of revenues, a decrease of $9.3 million as compared to gross
profit of $15.1 million, or 56% of revenues, for the year ended December 31,
1999. The decrease was attributable to a reduction in revenues generated during
2000 as compared to 1999.
Research and development. The Company had no research and development expenses
for the year ended December 31, 2000, as compared to $0.3 million, or 1% of
revenues, for the year ended December 31, 1999. The Company eliminated its
research and development expenses in 2000 as it shifted its focus from
millennium services towards IT consulting services.
Sales and marketing. Sales and marketing expenses for the year ended December
31, 2000 were $1.9 million, or 15% of revenues, as compared to $2.6 million, or
10% of revenues, for the year ended December 31, 1999. The $0.7 million decrease
in sales and marketing expenses for the year ended December 31, 2000, was
primarily attributable to the refinement of corporate strategy that matched the
size of the sales force with the operational requirements of the business. The
increase as a percentage of revenues was primarily attributable to fewer
economies of scale realized by the consolidation of the Company's seven offices
to two offices during 2000 and a decrease in revenue.
General and administrative. General and administrative expenses for the year
ended December 31, 2000 were $8.5 million, or 66% of revenues, as compared to
$9.7 million, or 36% of revenues, for the year ended December 31, 1999. The $1.2
million decrease in general and administrative expenses in 2000 was primarily
attributable to the refinement of corporate strategy that consolidated seven
offices into two during 2000. The increase as a percentage of revenues was
primarily attributable to increased costs of administering the closure of the
various offices during 2000 and a decrease in revenue.
Interest income (expense). Interest income for the year ended December 31, 2000
was $0.1 million, a decrease of $0.1 million or 50%, as compared to $0.2 million
for the year ended December 31, 1999. The decrease in interest income in 2000
was primarily attributable to lesser amounts of invested cash. Interest expense
for the year ended December 31, 2000 was $0.2 million, an increase of $0.1
million or 100%, as compared to $0.1 million interest expense for the ended
December 31, 1999. The increase in interest expense in 2000 was primarily
attributable to the issuance of a $3.0 million promissory note as part of the
purchase price paid in conjunction with the acquisition of PMC in October 1999.
Facilities closing expense. The loss from operations for the year ended December
31, 2000 included a one-time charge of $0.4 million for facilities closing
expense. This one-time charge was the result of the refinement in business
strategy the Company undertook during 2000 that consolidated and closed several
offices.
Disposition of Subsidiary. The loss from operations for the year ended December
31, 2000 included a one-time charge of $0.7 million related to the write-off of
intangible assets associated with the sale of PMC. The loss included the
write-off of intangible assets with a remaining net book value of approximately
$3,400,000 and direct costs associated with the sale of approximately $200,000.
Net income (loss). As a result of the above, the net loss for the year ended
December 31, 2000 was $6.6 million, an increase of $5.5 million, as compared to
the net loss of $1.1 million for the year ended December 31, 1999. Net loss
excluding the one time charges for the year ended December 31, 2000 was $5.5
million.
Year Ended December 31, 1999 Compared to the Year ended December 31, 1998
Revenues. Revenues for the year ended December 31, 1999, were approximately
$27.2 million, an increase of $17.3 million, over revenues of approximately $9.9
million for the year ended December 31, 1998. The 174% increase in revenues in
1999 was primarily attributable to increased sales of millennium services by
CSI, the inclusion of EIS results for the entire year, the introduction of web
enabled services by EIS, and the revenue generated by PMC from the date of
acquisition.
Gross profit. Gross profit for the year ended December 31, 1999, was $15.1
million, or 56% of revenues, an increase of $8.7 million over gross profit of
$6.4 million, or 65% of revenues, for the year ended December 31, 1998. The
overall dollar value increase was attributable to increased revenues during 1999
as compared to 1998. The decline of gross profit as a percentage of revenues was
attributable to lower margins associated with the introduction of new web
enabled services and the increased revenues of EIS and PMC that traditionally
have had lower margins as compared to the millennium services of CSI.
Research and development. Research and development expenses for the year ended
December 31, 1999, were $0.3 million, or less than 1% of revenues as compared to
$0.5 million, or 5% of revenues, for the year ended December 31, 1998. The
Company has reduced its research and development expenses in 1999 as it has
shifted its focus from its millennium services towards IT consulting services.
Sales and marketing. Sales and marketing expenses for the year ended December
31, 1999 were $2.6 million, or 10% of revenues, as compared to $1.2 million, or
12% of revenues, for the year ended December 31, 1998. The $1.4 million increase
in sales and marketing expenses for the year ended December 31, 1999, was
primarily attributable to increased commission expenses incurred as a result of
increased revenues, an increased sales force associated with the acquisitions,
and further investments in marketing efforts during the year. The decrease as a
percentage of revenues was primarily attributable to greater economies of scale
realized by the consolidation of the Company's operating units during 1999.
General and administrative. General and administrative expenses for the year
ended December 31, 1999 were $9.7 million, or 36% of revenues, as compared to
$3.5 million, or 35% of revenues, for the year ended December 31, 1998. The $6.2
million increase in general and administrative expenses in 1999 were primarily
attributable to increases in management and infrastructure costs and
professional and consulting expenses associated with the consolidation of the
Company's separate business units into a new operating company in 1999.
Interest income (expense). Interest income for the year ended December 31, 1999
was $0.2 million, a decrease of $0.1 million or 50%, as compared to interest
income of $0.3 million for the year ended December 31, 1998. The decrease in
interest income in 1999 was primarily attributable to lesser amounts of invested
cash. Interest expense for the year ended December 31, 1999 was $0.1 million, an
increase of $0.1 million or 100%, as compared to no material interest expense
for the year ended December 31, 1998. The increase in interest expense in 1999
was primarily attributable to the issuance of a $3.0 million promissory note as
part of the purchase price paid in conjunction with the acquisition of PMC in
October 1999.
Impairment of long-term assets. The loss from operations for the year ended
December 31, 1999 included a one-time charge of $1.7 million incurred in
connection with the Company's write-off of certain intangible assets associated
with its millennium services which were being discontinued in the future. This
write-off was the result of the shift in the Company's business model away from
millennium services toward IT services which rendered certain of the Company's
intangible assets related to millennium services completely impaired and with no
further useful life under the provisions of Statements of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-lived Assets and for
the Long-Lived Assets to be Disposed of."
Employee stock compensation charge. The loss from operations for the year ended
December 31, 1998 included a one-time charge of $0.5 million that resulted from
the contribution of shares of Company common stock to the Company of certain
stockholders, and the re-issuance of that stock to an employee as consideration
for services.
Net income (loss). As a result of the above, the net loss for the year ended
December 31, 1999 was $1.1 million, an increase of $0.8 million, as compared to
the net loss of $0.3 million for the year ended December 31, 1998. Net income,
excluding the one-time charge for the year ended December 31, 1999 was $0.6
million. Net income, excluding the one-time charge for the year ended December
31, 1998, was $0.3 million.
Liquidity and Capital Resources
The Company has, since inception, financed its operations and capital
expenditures through the sale of common stock, convertible notes, convertible
exchangeable debentures, the proceeds from an exchange offer of debt for equity
and the exercise of warrants related to convertible exchangeable debentures.
Cash used in operating activities for the year ended December 31, 2000 was $3.2
million, a decrease of $4.3 million over the cash provided by operating
activities of $1.0 million for the year ended December 31, 1999. Total cash used
for the year ended December 31, 2000 was $3.1 million, as compared to cash used
of $0.3 million for the year ended December 31, 1999. The cash used during the
year ended December 31, 2000 was primarily a result of the $6.6 million in net
losses during 2000. Capital expenditures on property and equipment were $0.1
million for the year ended December 31, 2000, as compared to $0.4
million during the year ended December 31, 1999. The decrease in capital
expenditures during 2000 was related primarily to the refinement of corporate
strategy that resulted in the consolidation of offices, employees, and assets of
the Company.
As of December 31, 2000, the Company had working capital of $1.9 million. The
Company's primary source of liquidity consists of $1.1 million in cash and cash
equivalents and $1.9 million of accounts receivable. The Company's current
liabilities include $1.2 million in accounts payable and accrued expenses.
The Company's business environment is characterized by rapid technological
changes. In 2000, the Company undertook a refinement in corporate strategy that
consolidated operations and shifted the Company's focus to providing IT related
e-Technology services to middle market companies. The Company requires
substantial working capital to fund the future growth of its business,
particularly to finance accounts receivable, sales and marketing efforts, and
capital expenditures. The Company currently has no material commitments for
capital expenditures. The Company's future capital requirements will depend on
many factors, including the rate of revenue growth, if any, the timing and
extent of spending for new product and service development, technological
changes and market acceptance of the Company's services. The Company believes
that its current cash position is sufficient to meet its capital expenditure and
working capital requirements for the near term; however, the Company's revenue
growth and technological change make it difficult for the Company to predict
future liquidity requirements with certainty. Over the longer term, the Company
must successfully execute its plans to generate significant positive cash flows
if it is to sustain adequate liquidity without impairing growth or requiring the
infusion of additional funds from external sources. Additionally, a major
expansion, such as would occur with the acquisition of a significant new
subsidiary, might also require external financing that could include additional
debt or equity capital. There can be no assurance that additional financing, if
required, will be available on acceptable terms, if at all.
Other
Inflation has not had a significant effect on the Company's operations, as
increased costs to the Company have generally been offset by increased prices of
products and services sold.
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 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.
This report contains forward-looking statements setting forth the Company's
beliefs or expectations relating to future revenues and profitability. Actual
results may differ materially from projected or expected results due to changes
in the demand for the Company's products and services, uncertainties relating to
the results of operations, dependence on its major customers, risks associated
with rapid technological change and the emerging services market, potential
fluctuations in quarterly results, and its dependence on key employees and other
risks and
uncertainties affecting the technology industry generally. The Company disclaims
any intent or obligation to up-date publicly these forward-looking statements,
whether as a result of new information, future events or otherwise.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
The Company is not subject to the requirement to file selected
quarterly financial data under item 302 of Regular S-K.
The consolidated financial statements and schedules required hereunder
and contained herein are listed under Item 14(a) below.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
Part III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Pursuant to General Instructions G(3) of Form 10-K, the information called for
by this Item regarding director's is hereby incorporated by reference from the
Company's definitive proxy statement or amendment hereto to be filed pursuant to
Regulation 14A not later than 120 days after the end of the fiscal year covered
by this report. Information regarding the Company's executive officers is set
forth under Item 4A of this Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION.
Pursuant to General Instruction G(3) of form 10-K, the information called for by
this item hereby incorporated by reference from the Company's definitive proxy
statement or amendment hereto to be filed pursuant to Regulation 14A not later
than 120 days after the end of the fiscal year covered by this report.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENFICIAL OWNERS AND MANAGEMENT.
Pursuant to General Instruction G(3) of form 10-K, the information called for by
this item hereby incorporated by reference from the Company's definitive proxy
statement or amendment hereto to be filed pursuant to Regulation 14A not later
than 120 days after the end of the fiscal year covered by this report.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Pursuant to General Instruction G(3) of form 10-K, the information called for by
this item hereby incorporated by reference from the Company's definitive proxy
statement or amendment hereto to be filed pursuant to Regulation 14A not later
than 120 days after the end of the fiscal year covered by this report.
Part IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K.
(a) Financial Statements and Financial Statement Schedule
(1) Financial Statements:
Report of Arthur Andersen LLP, Independent Public Accountants
Consolidated Balance Sheets as of December 31, 2000 and 1999
Consolidated Statements of Operations for the Years Ended December
31, 2000, 1999, and 1998
Consolidated Statements of Changes in Stockholders' Equity for the
Years Ended December 2000, 1999, and 1998
Consolidated Statements of Cash Flow for the Years Ended December
31, 2000, 1999, and 1998
Notes to Consolidated Financial Statements
(1) Financial Statements Schedule:
Report of Independent Accountants
Schedule II - Valuation and qualifying accounts
All other schedules are omitted either because they are not applicable or
required, or because the required information is included in the financial
statements or notes thereto:
(b) Reports on Form 8-K
On October 13, 2000, the Company filed a Form 8-K with the
Securities and Exchange Commission reporting its sale on September
29, 2000, of Parker Management Consultants, Ltd. On December 15,
2000, the Company filed an amendment to that Form 8-K setting forth
historical and pro forma financial information relating to that
acquisition.
(c) Exhibits: The following exhibits are filed herewith or
incorporated herein by reference:
EXHIBIT
NO. DESCRIPTION
2.1 Stock Purchase Agreement among ZMAX Corporation, Michael C. Higgins and
Michael S. Cannon, dated November 6, 1996, for the acquisition of Century
Services, Inc. (Incorporated herein by reference to Exhibit 2.1 to the
Registrant's Registration Statement on Form S-4 (File No. 333-29833).)
2.2 Agreement and Plan of Merger between ZMAX Corporation and New ZMAX
Corporation, dated June 10, 1999. (Incorporated herein by reference to
Exhibit 2.2 to the Registrant's Registration Statement on Form S-4 (File
No. 333-29833).)
3.1 Amended and Restated Certificate of Incorporation of ZMAX Corporation.
(Incorporated herein by reference to Exhibit 3.5 to the Registrant's
Registration Statement on Form S-4 (File No. 333-29833).)
3.2 Bylaws of ZMAX Corporation. (Incorporated herein by reference to Exhibit
3.6 to the Registrant's Registration Statement on Form S-4 (File No.
333-29833).)
4.1 Form of Warrant to Purchase Common Stock of ZMAX Corporation.
(Incorporated herein by reference to Exhibit 4.2 to the Registrant's
Registration Statement on Form S-4 (File No. 333-29833).)
10.1 ZMAX Corporation 1999 Stock Incentive Plan. (Incorporated herein by
reference to Exhibit 10.1 to the Registrant's Registration Statement on
Form S-4 (File No. 333-29833).)*
10.2 Form of ZMAX Corporation 1999 Non-qualified Stock Option Award (form of
grant and vesting schedule). (Incorporated herein by reference to Exhibit
10.2 to the Registrant's Registration Statement on Form S-4 (File No.
333-29833).)*
10.3 ZMAX Corporation 1999 Directors Formula Stock Option Plan. (Incorporated
herein by reference to Exhibit 10.3 to the Registrant's Registration
Statement on Form S-4 (File No. 333-29833).)*
10.4 Form of ZMAX Corporation Directors Formula Stock Option Award (form of
grant and vesting schedule). (Incorporated herein by reference to Exhibit
10.4 to the Registrant's Registration Statement on Form S-4 (File No.
333-29833).)*
10.5 Employment Agreement between Century Services, Inc. and Michael C.
Higgins, dated November 6, 1996. (Incorporated herein by reference to
Exhibit 10.5 to the Registrant's Registration Statement on Form S-4 (File
No. 333-29833).)*
--------------------
* - Management contract or compensatory plan
10.6 First Amendment to the Employment Agreement between Century Services,
Inc. and Michael C. Higgins, dated May 21, 1999. (Incorporated herein by
reference to Exhibit 10.6 to the Registrant's Registration Statement on
Form S-4 (File No. 333-29833).)*
10.7 Employment Agreement between Century Services, Inc. and Joseph Yeh, dated
June 18, 1999. (Incorporated herein by reference to Exhibit 10.7 to the
Registrant's Registration Statement on Form S-4 (File No. 333-29833).)*
10.8 Separation Agreement between Century Services, Inc. and Michael S.
Cannon, dated April 22, 1999. (Incorporated herein by reference to
Exhibit 10.8 to the Registrant's Registration Statement on Form S-4 (File
No. 333-29833).)*
10.9 Consulting Agreement among ZMAX Corporation, MBY, Inc. and Michel Berty,
dated April 1, 1999. (Incorporated herein by reference to Exhibit 10.9 to
the Registrant's Registration Statement on Form S-4 (File No.
333-29833).)*
10.10 Consulting Agreement among ZMAX Corporation, Wareham Management Ltd. and
G.W. Norman Wareham, dated May 30, 1999. (Incorporated herein by
reference to Exhibit 10.10 to the Registrant's Registration Statement on
Form S-4 (File No. 333-29833).)*
10.11 Consulting Agreement between ZMAX Corporation and Shafiq Nazerali, dated
May 30, 1999. (Incorporated herein by reference to Exhibit 10.11 to the
Registrant's Registration Statement on Form S-4 (File No. 333-29833).)*
10.12 Earn Out Stock Escrow Agreement among ZMAX Corporation, Michael C.
Higgins, Michael S. Cannon and Powell, Goldstein, Frazer & Murphy, dated
November 6, 1996. (Incorporated herein by reference to Exhibit 10.12 to
the Registrant's Registration Statement on Form S-4 (File No.
333-29833).)
10.13 ZMAX Corporation Stockholders Agreement among Michael C. Higgins, Michael
S. Cannon and ZMAX Corporation, dated November 6, 1996. (Incorporated
herein by reference to Exhibit 10.13 to the Registrant's Registration
Statement on Form S-4 (File No. 333-29833).)
- ----------------------
* - Management contract or compensatory plan
10.14 Stock Pledge and Security Agreement from Michael C. Higgins in favor of
ZMAX Corporation, dated November 6, 1996. (Incorporated herein by
reference to Exhibit 10.14 to the Registrant's Registration Statement on
Form S-4 (File No. 333-29833).)
10.15 Letter Agreement among ZMAX Corporation, IMS International, Inc., Wan
Hsien Information International Corporation, Ltd., Multi-Dimension
International, and Institute for Information Industry Regarding the
Purchase by ZMAX Corporation of the "COCACT" Software Program, dated
April 30, 1999. (Incorporated herein by reference to Exhibit 10.15 to the
Registrant's Registration Statement on Form S-4 (File No. 333-29833).)
10.16 Letter Agreement between ZMAX Corporation and Institute for Information
Industry Regarding the Purchase by ZMAX Corporation of the "COCACT"
Software Program, dated April 30, 1999. (Incorporated herein by reference
to Exhibit 10.16 to the Registrant's Registration Statement on Form S-4
(File No. 333-29833).)
10.17 Letter Agreement between ZMAX Corporation and Wan Hsien Information
International Corporation Ltd. Regarding the Purchase by ZMAX Corporation
of the "COCACT" Software Program, dated April 30, 1999, as amended.
(Incorporated herein by reference to Exhibit 10.17 to the Registrant's
Registration Statement on Form S-4 (File No. 333-29833).)
10.18 Conversion Agreement between Fiserv Federal Systems, Inc. and ZMAX
Corporation, dated April 28, 1999. (Incorporated herein by reference to
Exhibit 10.18 to the Registrant's Registration Statement on Form S-4
(File No. 333-29833).)
10.19 Agreement between ZMAX Corporation and Investor Communications Company,
LLC, dated as of May 20, 1999. (Incorporated herein by reference to
Exhibit 2.2 to the Registrant's Registration Statement on Form S-4 (File
No. 333-29833).)
10.20 Investor Relations Consulting Agreement between ZMAX Corporation and
Investor Communications Company, LLC, dated as of May 20, 1999.
(Incorporated herein by reference to Exhibit 10.20 to the Registrant's
Registration Statement on Form S-4 (File No. 333-29833).)
10.21 Agreement and Plan of Merger, dated as of December 14, 1998, by and among
ZMAX Corporation, Eclipse Acquisition Corporation, Eclipse Information
Systems, Inc., and Frank Schultz, Mark Mirabile, John Schultz, Scott
Shedd, Brad Adams, Ron Hilicki, Fred Anderson, Harold Zimmerman, Chris
Gildone, Dave Vittitow, Kristina Palmer, Tom Carroll and Gary Singer.
(Incorporated herein by reference to Exhibit 2 to the Registrant's
Current Report of Form 8-K, as filed on December 29, 1998 (File No.
333-55993).)
10.22 Agreement and Plan of Merger, dated as of October 1, 1999, by and among
ZMAX Corporation, Parker Acquisition Corporation, Parker Management
Consultants, Ltd.,
Westmont Non-Grantor Trust, and Kenneth W. Parker and Jennifer L Parker.
(Incorporated herein by reference to Exhibit 2 to the Registrant's
Current Report on Form 8-K, as filed on October 18, 1999 (File No.
000-23967).)
10.23 Employment Agreement between ZMAX Corporation and Michael C. Higgins,
dated September 1, 1999. (Incorporated herein by reference to
Exhibit 10.23 to the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1999.)*
10.24 Employment Agreement between ZMAX Corporation and James T. McCubbin,
dated September 1, 1999. (Incorporated herein by reference to
Exhibit 10.24 to the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1999.)*
10.25 Stock Purchase Agreement, dated as of September 20, 2000, by and between
WidePoint Corporation, eHoldings, Inc., and Parker Management
Consultants, Ltd. (Incorporated herein by reference to Exhibit 2 to the
Registrant's Current Report on Form 8-K, as filed on October 18, 2000
(File Number 000-23967).)
21 Subsidiaries of WidePoint Corporation
23 Consent of Arthur Andersen LLP
24 Schedule II Valuation and Qualifying Accounts
- -------------------------
* - Management contract or compensatory plan
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ZMAX Corporation
Date: March 29, 2001 /s/ MICHAEL C. HIGGINS
----------------------
Michael C. Higgins
President and Chief
Executive Officer
Date: March 29, 2001 /s/ JAMES T. MCCUBBIN
---------------------
James T. McCubbin
Vice President -
Principal Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons, on behalf of the
Registrant and in the capacities and on the dates indicated.
Dated: March 29, 2001 /s/MELVIN A. MCCUBBIN
---------------------
Melvin A. McCubbin
Director and Chairman of
the Board
Dated: March 29, 2001 /s/MICHAEL C. HIGGINS
---------------------
Michael C. Higgins
Director, President and
Chief Executive Officer
Dated: March 29, 2001 /s/JAMES T. MCCUBBIN
--------------------
James T. McCubbin
Director, Vice President
and Chief Financial Officer,
Secretary and Treasurer
Dated: March 29, 2001 /s/G.W. NORMAN WAREHAM
----------------------
G.W. Norman Wareham
Director
Dated: March 29, 2001 /s/STEVE L. KOMAR
-----------------
Steve L. Komar
Director
Dated: March 29, 2001 /s/JAMES M. RITTER
------------------
James M. Ritter
Director
INDEX TO FINANCIAL STATEMENTS
Page
Report of Independent Public Accountants F-1
Consolidated Balance Sheets as of December 31, 2000 and 1999 F-2
Consolidated Statements of Operations for the Years ended
December 31, 2000, 1999, and 1998 F-3
Consolidated Statements of Stockholders' Equity for the Years ended
December 31, 2000, 1999, and 1998 F-4
Consolidated Statements of Cashflows for the Years ended
December 31, 2000, 1999, and 1998 F-5
Notes to Consolidated Financial Statements F-6
Report of Independent Public Accountants F-14
Exihibit 21 - Subsidiaries of ZMAX Corporation F-15
Exihibit 24 - Schedule II - Valuation and Qualifying Accounts F-16
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To WidePoint Corporation:
We have audited the accompanying balance sheets of WidePoint Corporation (a
Delaware 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 three 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. 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 financial statements referred to above present fairly, in
all material respects, the financial position of WidePoint Corporation and its
subsidiaries, as of December 31, 2000 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2000, in conformity with accounting principles generally accepted
in the United States.
ARTHUR ANDERSEN LLP
Vienna, Virginia
March 23, 2001
WIDEPOINT CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets December 31,
- --------------------------- ---------------------------
2000 1999
----------- ------------
Assets
Current assets:
Cash and cash equivalents ....................................... $ 1,085,696 $ 4,226,434
Accounts receivable, net of allowance of $208,832 and
$110,000, respectively ......................................... 1,880,165 5,548,123
Prepaid expenses and other assets ............................... 173,698 394,554
------------ ------------
Total current assets ............................... 3,139,559 10,169,111
------------ ------------
Property and equipment, net ..................................... 335,935 705,445
Intangible assets, net .......................................... 6,155,850 10,114,400
Other assets .................................................... 59,045 --
------------ ------------
Total assets ....................................... $ 9,690,389 $ 20,988,956
============ ============
Liabilities and stockholders' equity Current liabilities:
Accounts payable and accrued expenses ........................... $ 1,237,879 $ 3,230,698
Current portion of note payable ................................. -- 1,000,000
Current portion of capital lease obligation ..................... 29,830 27,149
------------ ------------
Total current liabilities .......................... 1,267,709 4,257,847
------------ ------------
Note payable, net of current portion ................................. -- 1,833,436
Capital lease obligation, net of current portion ..................... 24,430 54,260
------------ ------------
Total liabilities .................................. 1,292,139 6,145,543
------------ ------------
Commitments and contingencies (Note 9)
Stockholders' equity:
Preferred stock, $0.001 par value; 10,000,000
shares authorized; none issued
and outstanding ............................................... -- --
Common stock, $0.001 par value; 50,000,000 shares
authorized; 12,984,913 and 12,949,913 shares
issued and outstanding as of December 31,
2000 and 1999, respectively ................................... 12,985 12,950
Stock warrants .................................................. 140,000 280,000
Deferred compensation ........................................... -- (120,587)
Additional paid-in capital ...................................... 41,931,484 41,763,268
Accumulated deficit ............................................. (33,686,219) (27,092,218)
------------ ------------
Total stockholders' equity ......................... 8,398,250 14,843,413
------------ ------------
Total liabilities and stockholders' equity ......... $ 9,690,389 $ 20,988,956
============ ============
The accompanying notes are an intergral part of these consolidated statements
F-2
WIDEPOINT CORPORATION AND SUBSIDIARIES
Consolidated statements of operations
For the Years Ended December 31,
2000 1999 1998
Revenues........................................................ $12,834,474 $27,196,125 $ 9,916,276
Operating expenses:
Cost of revenues........................................... 7,014,045 12,140,007 3,478,982
Research and development................................... - 325,651 473,362
Sales and marketing........................................ 1,856,694 2,617,117 1,190,548
General and administrative................................. 8,535,062 9,701,672 3,515,391
Facilities closing expense................................. 376,289 -- --
Disposition of subsidiary.................................. 699,203 -- --
Employee stock compensation expense........................ -- -- 534,384
Impairment of long-term assets............................. -- 1,703,825 --
Depreciation and amortization.............................. 851,562 1,817,329 1,268,338
-------------- ------------- ------------
Loss from operations............................................ (6,498,381) (1,109,476) (544,729)
Other income (expenses):
Interest income............................................ 103,351 161,123 270,337
Interest expense........................................... (198,971) (76,296) (9,140)
Other...................................................... -- (33,756) 821
-------------- ------------- ------------
Net loss before income taxes.................................... (6,594,001) (1,058,405) (282,711)
-------------- ------------- ------------
Income tax provision............................................ -- 37,648 --
-------------- ------------- ------------
Net loss........................................................ $(6,594,001) $(1,096,053) $ (282,711)
============== ============= ============
Basic and diluted net loss per share............................ $ (0.51) $ (0.08) $ (0.03)
Basic and diluted weighted-average shares outstanding...........
12,979,055 12,949,913 10,638,680
============== ============= ============
The accompanying notes are an intergral part of these consolidated statements
F-3
WIDEPOINT CORPORATION AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Preferred Stock Common Stock Stock Deferred
Shares Amount Shares Amount Warrants Compensation
Balance, December 31, 1997.... -- $ -- 11,729,714 11,729 704,000 --
Cancellation of shares....... -- -- (312,500) (312) -- --
Employee stock compensation.. -- -- -- -- -- --
Common stock issued in
Eclipse acquisition........ -- -- 1,700,000 1,700 -- --
Net loss..................... -- -- -- -- -- --
------- ------ ---------- ------- -------- --------
Balance, December 31, 1998.... -- -- 13,117,214 13,117 704,000 --
Cancellation of shares....... -- -- (167,301) (167) -- --
Expiration of warrants....... -- -- -- -- (704,000) --
Issuance of warrants in
Parker acquisition......... -- -- -- -- 140,000 --
Deferred compensation........ -- -- -- -- 140,000 (140,000)
Amortization of deferred
compensation............... -- -- -- -- -- 19,413
Net loss..................... -- -- -- -- -- --
------- ------ ---------- ------- -------- --------
Balance, December 31, 1999.... -- -- 12,949,913 12,950 280,000 (120,587)
======= ====== ========== ======= ======== ========
Adjustment of warrant
valuation.................. -- -- -- -- (140,000) 120,587
Exercise of stock options.... -- -- 35,000 35 -- --
Net loss..................... -- -- -- -- -- --
------- ------ ---------- ------- -------- --------
Balance, December 31, 2000.... -- $ -- 12,984,913 $12,985 $140,000 $ --
======= ====== ========== ======= ======== ========
Additional
Paid-In Accumulated
Capital Deficit Total
Balance, December 31, 1997.... 34,576,105 (25,713,454) 9,578,380
Cancellation of shares....... 312 -- --
Employee stock compensation.. 534,384 -- 534,384
Common stock issued in
Eclipse acquisition........ 5,948,300 -- 5,950,000
Net loss..................... -- (282,711) (282,711)
---------- ----------- ----------
Balance, December 31, 1998.... 41,059,101 (25,996,165) 15,780,053
Cancellation of shares....... 167 -- --
Expiration of warrants....... 704,000 -- --
Issuance of warrants in
Parker acquisition......... -- -- 140,000
Deferred compensation........ -- -- --
Amortization of deferred
compensation............... -- -- 19,413
Net loss..................... -- (1,096,053) (1,096,053)
---------- ----------- ----------
Balance, December 31, 1999.... 41,763,268 (27,092,218) 14,843,413
========== =========== ==========
Adjustment of warrant
valuation.................. -- -- (19,413)
Exercise of stock options.... 168,216 -- 168,251
Net loss..................... -- (6,594,001) (6,594,001)
---------- ----------- ----------
Balance, December 31, 2000.... $41,931,484 $(33,686,219) $8,398,250
========== =========== ==========
The accompanying notes are an intergral part of these consolidated statements
F-4
WIDEPOINT CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Years Ended December 31,
2000 1999 1998
Cash flows from operating activities:
Net loss.......................................................... $(6,594,001) $(1,096,053) $ (282,711)
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities-
Depreciation and amortization expense......................... 851,562 1,817,329 1,315,154
Impairment of long-term assets................................ -- 1,703,825 --
Loss on sale of property and equipment........................ 149,807 -- --
Disposition of subsidiary..................................... 699,203 -- --
Amortization of discount on notes payable..................... -- 113 --
Deferred compensation......................................... (19,413) 19,413 --
Stock compensation expense.................................... -- -- 534,384
Changes in assets and liabilities-
Accounts receivable........................................... 3,667,958 (2,473,058) (73,715)
Prepaid expenses and other assets............................. 161,811 59,264 (15,604)
Accounts payable and accrued expenses......................... (2,146,728) 992,103 (138,405)
Customer deposits............................................. -- -- (926,036)
---------- ---------- ----------
Net cash (used in) provided by operating activities.. (3,229,801) 1,022,936 413,067
---------- ---------- ----------
Net cash used in investing activities:
Purchase of subsidiaries, net of cash acquired.................... -- (847,849) (1,647,644)
Purchases of property and equipment............................... (82,038) (426,887) (109,840)
Proceeds from sale of property and equipment...................... 30,000 -- --
---------- ---------- ----------
Net cash used in investing activities................ (52,038) (1,274,736) (1,757,484)
---------- ---------- ----------
Net cash (used in) provided by financing activities:
Proceeds from exercise of stock options........................... 168,251 -- --
Net payments on long-term obligations............................. (27,150) (42,892) (539,541)
---------- ---------- ----------
Net cash (used in) provided by by financing
activities......................................... 141,101 (42,892) (539,541)
---------- ---------- ----------
Net (decrease) increase in cash........................................ (3,140,738) (294,692) (1,883,958)
Cash, beginning of period.............................................. 4,226,434 4,521,126 6,405,084
---------- ---------- ----------
Cash, ending of period................................................. $ 1,085,696 $ 4,226,434 $ 4,521,126
========== ========== ==========
Supplementary cash flow information:
Cash paid for-
Interest.............................................. $ 177,817 $ 9,005 $ 27,125
========== ========== ==========
Income taxes.......................................... $ -- $ 137,648 $ --
========== ========== ==========
The accompanying notes are an intergral part of these consolidated statements
F-5
Notes to Consolidated Financial Statements
1. Basis of Presentation, Organization and Nature of Operations:
WidePoint Corporation (formerly known as ZMAX Corporation; the "Company")
focuses on implementing middle market companies' Information Technology ("IT")
e-strategies. The Company helps its clients analyze, design, implement, and
support e-business solutions.
In 1996, the Company acquired all of the outstanding shares of Century Services,
Inc. ("CSI"), a corporation that provided re-engineering and information
processing services to users of large-scale computer systems. In December 1998,
the Company acquired all of the outstanding shares of Eclipse Information
Systems, Inc. ("Eclipse"), a corporation that provided IT consulting services
through several practice areas focused in distributed client server
technologies. In October 1999, the Company acquired all of the outstanding
shares of Parker Management Consulting, Ltd. ("PMC"), a corporation that
provides IT consulting services focused in Enterprise Resource Planning. On
September 29, 2000, the Company sold all of the outstanding shares of its PMC
subsidiary to a third-party purchaser (See Note 3).
The Company's operations are subject to certain risks and uncertainties,
including among others, rapidly changing technology; current and potential
competitors with greater financial, technological, production and marketing
resources; reliance on certain significant customers; the need to develop
additional products and services; the integration of acquired businesses;
dependence upon strategic alliances; the need for additional technical
personnel; dependence on key management personnel; management of growth;
uncertainty of future profitability; and possible fluctuations in financial
results. The Company has devoted substantial resources to shifting its business
mix to comprehensive e-business services and implementing a refined strategy. As
a result, the Company experienced operating losses in 1999 and operating losses
and negative cash flows from operations during 2000. These losses and negative
operating cash flows may continue for additional periods in the future. There
can be no assurance that the Company's operations will become profitable or will
produce positive cash flows. The Company intends to fund its operational and
capital requirements using cash on hand and with debt financing that it may be
able to arrange in the future. There can be no assurance that such new financing
will be available on terms management finds acceptable or at all.
2. Significant Accounting Policies:
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the
acquired entities since their respective dates of acquisition. All significant
intercompany amounts have been eliminated.
F-6
Use of Estimates
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and 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.
Cash and Cash Equivalents
Investments with original maturities of three months or less are considered cash
equivalents for purposes of these consolidated financial statements. The Company
maintains cash and cash equivalents with various major financial institutions.
At December 31, 2000 and 1999, cash and cash equivalents included $607,645 and
$2,867,950, respectively, of investments in overnight sweep accounts,
respectively. At times, cash balances held at financial institutions were in
excess of federally insured limits. The Company places its temporary cash
investments with high-credit, quality financial institutions, and as a result,
the Company believes that no significant concentration of credit risk exists
with respect to these cash investments.
Revenue Recognition
Revenue on time-and-materials contracts is recognized based upon hours incurred
at contract rates plus direct costs. Revenue on fixed-price contracts is
recognized on the percentage-of-completion method based on costs incurred in
relation to total estimated costs. Anticipated losses are recognized as soon as
they become known. Provisions for estimated losses on uncompleted contracts are
made in the period in which such losses are determined. Revenue from the resale
of hardware products is recognized upon shipment.
Unbilled accounts receivable on time-and-materials contracts represent costs
incurred and gross profit recognized near the period-end but not billed until
the following period. Unbilled accounts receivable on fixed-price contracts
consist of amounts incurred that are not yet billable under contract terms. At
December 31, 2000 and 1999, unbilled accounts receivable totaled $4,315 and
$198,773, respectively.
Significant Customers
During 2000, no customers individually represented more than ten percent of
revenue. During 1999, two customers individually represented 12 and 11 percent
of revenue. Due to the nature of the Company's business and the relative size of
certain contracts, the loss of any single significant customer could have a
material adverse effect on the Company's results of operations.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to credit risk
consist of cash and cash equivalents and accounts receivable. As of December 31,
2000, no customer represented more
F-7
than ten percent of accounts receivable. As of December 31, 1999, one customer
individually represented seventeen percent of accounts receivable.
Income Taxes
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes." Under SFAS
No.109, deferred tax assets and liabilities are computed based on the difference
between the financial statement and income tax bases of assets and liabilities
using the enacted marginal tax rate. SFAS No. 109 requires that the net deferred
tax asset be reduced by a valuation allowance if, based on the weight of
available evidence, it is more likely than not that some portion or all of the
net deferred tax asset will not be realized.
Property and Equipment
Property and equipment are stated at cost, net of accumulated depreciation and
amortization. Property and equipment consisted of the following:
December 31,
2000 1999
Furniture and fixtures............................. $ 78,209 $281,229
Computer equipment and software.................... 704,400 887,651
Leasehold improvements............................. - 80,539
Less- Accumulated depreciation and amortization.... (446,674) (543,974)
--------- --------
$335,935 $705,445
========= ========
Depreciation expense is computed using the straight-line method over the
estimated useful lives of three years. Leasehold improvements are amortized over
the lesser of the estimated useful life of the asset or the remaining lease
term.
In accordance with American Institute of Certified Public Accountants Statement
of Position 98-1 "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use," the Company capitalizes costs related to software
and implementation in connection with its internal use software systems. Such
costs are amortized principally over three years.
Long-Lived Assets
The Company reviews its long-lived assets, including property and equipment,
identifiable intangibles, and goodwill whenever events or changes in
circumstances indicate that the carrying amount of the assets may not be fully
recoverable. To determine recoverability of its long-lived assets, the Company
evaluates the probability that future undiscounted net cash flows will be less
than the carrying amount of the assets.
F-8
During the fourth quarter of 1999, the Company determined that certain of its
long-lived assets related to millennium services were impaired and should be
written off in accordance with the guidance of SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
This analysis was based in part on the Company's new strategic direction and
changes to its business plan. The assets impaired included the remaining
intangible assets related to its proprietary analysis and conversion software
tool and the goodwill related to the original CSI acquisition transaction. The
Company recorded an impairment charge of $1,703,825 to write-off the net book
value of these two long-lived assets in the 1999 consolidated statement of
operations.
In connection with the disposition of PMC, the intangible assets associated with
the PMC acquisition were written-off (See Note 3).
Prepaid Expenses and Other Assets
Included in prepaid expenses and other assets as of December 31, 1999 was a
customer note receivable acquired as part of the PMC acquisition. The former
client of PMC defaulted on the note receivable. The Company recorded an expense
of approximately $165,000 to write-off the remaining balance. The Company
intends to pursue further action against the customer to realize amounts due
under the note arrangement.
Basic and Diluted Net Loss Per Share
In March 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No.
128, "Earnings per Share." SFAS No. 128 requires dual presentation of basic and
diluted earnings per share. Basic income or loss per share includes no dilution
and is computed by dividing net income or loss by the weighted-average number of
common shares outstanding for the period. Diluted income or loss per share
includes the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock.
The treasury stock effect of options and warrants to purchase 1,701,500,
2,898,500, and 1,714,300 shares of common stock outstanding at December 31,
2000, 1999, and 1998, respectively, has not been included in the calculation of
the net loss per share as such effect would have been antidilutive. Outstanding
shares subject to cancellation agreements have not been included in either the
basic or diluted calculation for 1998. As a result of these items, the basic and
diluted loss per share for all periods presented are identical.
Reclassifications
Certain amounts in prior years' financial statements have been reclassified to
conform with the current year presentation.
Stock-based Compensation
The Company accounts for stock-based employee compensation arrangements using
the intrinsic value method in accordance with the provisions of Accounting
Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to
Employees," and complies with the disclosure
F-9
provisions of SFAS No. 123 "Accounting for Stock-Based Compensation." Under APB
Opinion No. 25, compensation cost is generally recognized based on the
difference, if any, on the date of grant between the fair value of the Company's
common stock and the amount an employee must pay to acquire the stock.
Fair Value of Financial Instruments
The WidePoint financial instruments consist of cash, accounts receivable and
accounts payable. The fair value of these financial instruments approximates
their carrying value as of December 31, 2000 and 1999, due to their short-term
nature.
New Accounting Pronouncements
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin ("SAB") 101, "Revenue Recognition in Financial Statements,"
which provides guidance related to revenue recognition based on interpretations
and practices followed by the SEC. SAB 101 requires companies to report any
changes in revenue recognition as a cumulative change in accounting principles
in accordance with Accounting Principles Board Opinion 20, "Accounting Changes."
The SEC subsequently issued SAB 101A, "Amendment: Revenue Recognition in
Financial Statements," which delayed implementation of SAB 101 until the
Company's second fiscal quarter of 2000 and SAB 101B, which delayed the
implementation date of SAB 101 until no later than the Company's fourth fiscal
quarter of 2000. The Company has evaluated the implications of SAB 101 and has
not identified any changes in the Company's historical practices with regards to
revenue recognition.
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). This statement establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
In June 1999, the FASB issued Statement of Financial Accounting Standards No.
137, which deferred the effective date of SFAS 133 to all fiscal quarters of all
fiscal years beginning after June 15, 2000. The Company will be required to
adopt SFAS 133, as amended, for the fiscal quarter ending March 31, 2001. The
Company does not expect the adoption of SFAS 133 to have a material impact on
its financial position or results of operations.
3. Eclipse and PMC Acquisitions:
On December 14, 1998, the Company acquired all the outstanding stock of Eclipse
in a transaction accounted for as a purchase business combination. The Company
acquired the stock of Eclipse for $1,450,000 in cash and 1,700,000 shares of the
Company's common stock. The Company also incurred approximately $325,000 in
direct acquisition costs.
On October 1, 1999, the Company acquired all the issued and outstanding stock of
PMC for $1.5 million in cash, subject to post-closing adjustments, the issuance
of a $3.0 million, three-year promissory note and a warrant to purchase 200,000
shares of the Company's common stock for $5.00 per share. The Company also
incurred approximately $233,000 in direct acquisition expenses. The Company also
entered into noncompete and employment agreements with certain members of the
PMC management team. The PMC acquisition was accounted for as a purchase
business combination.
F-10
The purchase prices for these acquisitions were allocated as follows:
Eclipse PMC
Cash..................................................... $ -- $ 523,763
Accounts receivable...................................... 1,404,686 529,406
Property and equipment................................... 226,091 --
Note receivable.......................................... -- 256,875
Other assets............................................. 62,724 35,452
Intangible assets........................................ 6,991,593 3,754,144
Deferred tax liability................................... (109,333) --
Liabilities assumed and direct acquisition costs......... (1,178,117) (696,085)
---------- ---------
$7,397,644 $4,403,555
========== =========
The unaudited pro forma information presented below reflects the acquisitions of
Eclipse and PMC as if each had occurred on January 1, 1998. The results
presented below are not necessarily indicative of future operating results or of
what would have occurred had the acquisition actually been consummated on that
date.
December 31,
1999 1998
(unaudited)
Revenues.............................. $30,964,739 $22,412,617
Net loss.............................. (831,814) (3,104)
Basic and diluted loss per share...... (0.06) (0.00)
In September 2000, the Company sold all of the outstanding shares of the PMC
subsidiary to a third party purchaser for approximately $2,800,000 and the
assumption of approximately $100,000 in liabilities. The primary shareholder of
the third party purchaser had previously acquired from the former shareholder of
PMC the promissory note that was outstanding from the original purchase of PMC
by the Company. As such, the note previously owed by the Company to the former
shareholder of PMC was extinguished as consideration for this transaction. In
conjunction with the sale, the Company recorded a loss of approximately $700,000
related to the write-off of intangible assets with a remaining net book value of
approximately $3,400,000 and direct costs associated with the sale of
approximately $200,000.
4. Intangible Assets:
Intangible assets consist of identifiable intangible assets and goodwill related
to the Company's 1998 acquisition of Eclipse and are being amortized over a
weighted-average life of 25 years.
F-11
Accumulated amortization related to the intangible assets associated with the
Eclipse transaction was approximately $890,000 and $282,000 respectively as of
December 31, 2000 and 1999.
Prior to the disposition of the PMC subsidiary (see Note 3), intangible assets
associated with the PMC acquisition were being amortized over a weighted average
life of 10 years. Accumulated amortization related to the PMC intangibles was
approximately $94,000 as of December 31, 1999 and the Company recognized
amortization expense of approximately $282,000 during 2000 prior to the
disposition.
As described in Note 2, the Company recognized an impairment charge in 1999
related to the purchased software rights and goodwill that resulted from the
Company's 1996 acquisition of CSI. Prior to the impairment charge, the
accumulated amortization related to these assets was approximately $1,200,000.
5. Income Taxes:
The components of the provision for income taxes consisted of the following:
For the Years Ended
December 31,
2000 1999 1998
Income tax (provision) benefit, net of
valuation allowance:
Current-
State................................. $ -- $37,648 $ --
Federal............................... -- -- --
Deferred-.................................
State................................. -- -- --
Federal............................... -- -- --
------- -------- --------
$ -- $37,648 $ --
======= ======== ========
The provision (benefit) for income taxes results in effective rates which
differ from the federal statutory rate as follows:
For the Years Ended
December 31,
2000 1999 1998
Statutory federal income tax rate............... (34.0)% (34.0)% (34.0)%
State income tax, net of benefit................ -- 3.4 --
Non-deductible expenses......................... 21.0 34.0 29.0
Other........................................... 13.0 -- 5.0
----- ----- ------
--% 3.4% --%
===== ===== ======
F-12
The deferred tax assets (liabilities) consisted of the following as of
December 31, 2000 and 1999 (in thousands):
December 31,
2000 1999
Deferred tax assets:
Net operating loss carryforwards.............. $5,144,000 $4,021,000
AMT credit.................................... 14,000 14,000
Other assets.................................. 228,000 197,000
--------- ---------
Total deferred tax assets........ 5,386,000 4,232,000
Deferred tax liabilities:
Depreciation and amortization................. -- (1,287,000)
Other......................................... -- --
--------- ---------
Total deferred tax liabilities... -- (1,287,000)
Net deferred tax asset............................. 5,386,000 2,945,000
Less- Valuation allowance.......................... (5,386,000) (2,945,000)
--------- ---------
$ -- $ --
========= =========
The Company has determined that its net deferred tax asset did not satisfy the
recognition criteria set forth in SFAS No. 109 and, accordingly, established a
valuation allowance for 100 percent of the net deferred tax asset.
As of December 31, 2000, the Company had net operating loss carry forwards of
approximately $12,125,000 to offset future taxable income. These carry forwards
expire between 2010 and 2020. Under the provision of the Tax Reform Act of 1986,
when there has been a change in an entity's ownership of 50 percent or greater,
utilization of net operating loss carry forwards may be limited. As a result of
WidePoint's equity transactions, the Company's net operating losses will be
subject to such limitations and may not be available to offset future income for
tax purposes.
6. Debt and Deferred Financing Costs:
Promissory Note Payable
In conjunction with the PMC acquisition the Company issued a $3.0 million note
payable to the sole shareholder of PMC. This $3.0 million note payable accrued
interest at a rate of 6 percent per annum. The principal payments were due in
$1.0 million installments on October 1, 2000, 2001 and 2002 and interest
payments were due on a quarterly basis commencing on December 31, 1999. The
Company imputed interest on this note at 8.5 percent and as a result, recorded a
discount on the promissory note payable of approximately $167,000. This discount
was being amortized using the effective interest method over the term of the
note. In connection with the sale of the PMC subsidiary, the note payable was
extinguished as consideration in the transaction (See Note 3).
F-13
Convertible Exchangeable Subordinated Debentures
In December 1996, the Company issued $5.5 million in convertible exchangeable
subordinated debentures (the "Debentures"). In November 1997, the Company
offered to exchange all the Debentures for 1,210,000 shares of common stock and
stock warrants to purchase a total of 1,210,000 shares of common stock. Because
the securities issued pursuant to the terms of the exchange included securities
in excess of the securities issuable pursuant to the original conversion terms
of the Debentures, the Company recognized $7,370,000 as expense at the time of
the exchange. Concurrent with the exchange, warrants to purchase 1,069,000
shares of common stock were exercised for $7,484,000 in proceeds to the Company.
The remaining warrants to purchase 140,800 shares of common stock expired
unexercised in 1999. Upon expiration, the value associated with these
unexercised warrants was reclassified in the accompanying consolidated financial
statements from stock warrants to additional paid-in capital.
7. Common Stock:
Stock Subject to Cancellation
In September 1995, the Company entered into stock cancellation agreements with
certain stockholders that provided for the cancellation of 775,808 shares of
common stock. In March 1997, 296,007 of these shares were returned to the
Company and canceled. An additional 312,500 shares were returned to the Company
and canceled in December 1998. In April 1999, the 167,301 remaining shares were
returned to the Company and canceled.
8. Stock Options and Stock-Based Compensation:
Employee Stock Compensation
In October 1998, two of the Company's principal stockholders entered into an
agreement with an employee to transfer 180,000 shares of restricted common stock
held by the stockholders to the employee as consideration for services. The
stockholders transferred the 180,000 shares of common stock to the Company, and
the Company, in turn, reissued the shares to the employee. The shares issued to
the employee were subject to forfeiture and to certain restrictions on
transferability for a period of one year. The Company recognized $534,384 of
employee stock compensation expense related to this transaction, based upon the
fair value of the shares issued to the employee as of the date of the agreement.
The restrictions on these shares lapsed in October 1999.
1997 Stock Incentive Plan
In May 1997, the Company adopted the 1997 Stock Incentive Plan (the "Incentive
Plan"). The purpose of the Incentive Plan is to provide additional compensation
to employees, officers, directors and consultants of the Company or its
affiliates. Under the terms of the Incentive Plan,
F-14
as amended, 3,000,000 shares of common stock have been reserved for issuance as
incentive awards under the Incentive Plan. The number of shares of Company
common stock associated with any forfeited stock incentive will be added back to
the number of shares that can be issued under the Incentive Plan. Awards under
the Incentive Plan and their terms are determined by a committee (the
"Committee") that has been selected by the Board of Directors. The Incentive
Plan permits the Committee to make awards of a variety of equity-based
incentives (collectively, "Stock Incentives").
The Incentive Plan allows for the grant of incentive stock options and
nonqualified stock options. The exercise price of the options will be
established by the Committee. The term of an option will be specified in the
applicable agreement provided, however, that no option can be exercised ten
years after the date of grant. In addition to stock options, the Incentive Plan
also allows for the grant of other Stock Incentives, including stock
appreciation rights, stock awards, phantom shares, performance unit appreciation
rights and dividend equivalent rights. These Stock Incentives will be subject to
the terms prescribed by the Committee in accordance with the provisions of the
Incentive Plan.
In February 1998, the Company amended the Incentive Plan to permit the
adjustment of the terms and conditions of outstanding options. In March 1998,
the Company and four individuals holding options to purchase 1,300,000 shares of
common stock at prices ranging from $12.44 to $14.31 per share under the
Incentive Plan entered into amendments to such stock options whereby the option
exercise price was reduced to $5.75 per share, the fair market value of the
Company's common stock on the amendment date, and the number of shares of common
stock underlying each such option was reduced by 25 percent. Further, two
optionees who previously had the right to exercise a portion of the shares
underlying their options agreed that such portions of their options would not be
exercisable until January 1, 1999.
1997 Directors Formula Stock Option Plan
In May 1997, the Company adopted the 1997 Directors Formula Stock Option Plan
(the "Director Plan"). The Company has reserved 120,000 shares of common stock
to underlie stock options granted under the Director Plan. Any shares associated
with forfeited options are added back to the number of shares that underlie
stock options to be granted under the Director Plan.
The awards of stock options under the Director Plan are determined by the
express terms of the Director Plan. Generally, only non-employee directors of
the Company who do not perform services for the Company are eligible to
participate in the Director Plan. The Director Plan provides for option grants
to purchase 12,000 shares of common stock upon a non employee director's initial
appointment to the Board of Directors. The options will vest immediately to
8,000 shares of common stock underlying such options, will vest to an additional
2,000 shares after the director's completion of the first year of continued
service to the Company, and will vest to the remaining 2,000 shares after the
completion of the second year of continued service to the Company. Each option
granted pursuant to the Director Plan will be evidenced by an agreement and will
be subject to additional terms as set forth in the agreement. Options become
F-15
exercisable when vested and expire ten years after the date of grant, subject to
any shorter period that may be provided in the agreement.
The following is a summary of the WidePoint options activity:
Number of Option Price Weighted-Average
Shares Range Exercise Price
Outstanding, December 31, 1997 1,348,000 $12.00-$14.31 $14.14
---------- ----------- -----
Granted....................................... 1,932,000 2.69-6.125 5.19
Canceled or expired........................... (1,706,500) 5.75-14.31 12.27
Outstanding, December 31, 1998 1,573,500 2.69-14.06 5.18
Granted....................................... 987,000 2.06-2.45 2.35
Canceled or expired........................... (62,000) 2.45-5.75 2.97
---------- ---------- -----
Outstanding, December 31, 1999 2,498,500 2.06-14.06 4.12
Granted....................................... 260,000 .52-2.56 1.82
Canceled or expired........................... (1,457,000) .52-2.45 3.78
---------- ---------- -----
Outstanding, December 31, 2000 1,301,500 $.52-$14.06 $3.90
========= ========== ====
As of December 31, 2000 and 1999, options to purchase 519,800 and 705,000
shares, respectively of common stock were exercisable with a weighted average
exercise price of $4.97 and $5.58, respectively. The weighted-average remaining
contractual life of the options outstanding at December 31, 2000 and December
31, 1999, was 8.43 and 8.44 years, respectively. The weighted-average fair value
of options granted in 2000 and 1999 was 1.49 and $1.79, respectively.
Had compensation expense been determined based on the fair value of the options
at the grant dates consistent with the method of accounting under SFAS No. 123,
the Company's net loss and net loss per share would have been increased to the
pro forma amounts indicated below:
For the Years Ended December 31,
2000 1999 1998
Net loss:
As reported...................................... $ (6,594,001) $(1,096,053) $(282,711)
Pro forma........................................ $ (7,396,840) (2,354,295) (957,021)
Pro forma basic and diluted net loss per share:
As reported...................................... $ (0.51) $ (0.08) $ (0.03)
Pro forma........................................ $ (0.57) $ (0.18) $ (0.09)
The fair value of each option is estimated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions: no dividend
yield, expected volatility of 110 percent, risk-free interest rates from 4.10 to
6.73 percent and an expected term of five years.
F-16
Stock Warrants
On September 20, 1999, the Company entered in a two-year agreement with an
international investment banking firm to provide investment banking, mergers and
acquisitions and strategic planning services. In conjunction with this
agreement, the Company issued a stock warrant to purchase 200,000 shares of
common stock at $2.75 per share, an amount that exceeded the stock's trading
price on that date. The Company used a fair-value option pricing model to value
this stock warrant, and it was determined to have a fair value of approximately
$140,000 at the date of grant. The deferred compensation associated with the
warrant was reflected as a separate component of stockholders' equity. During
the year ended December 31, 1999, approximately $19,000 of expense had been
recognized related to the warrant. Because the warrant was issued to a third
party in exchange for services, the Company utilizes variable plan accounting to
measure the fair value of the warrant. As of December 31, 2000, because the
exercise price of the warrant significantly exceeded the fair value of the
Company's common stock, the fair value of the warrant as measured under a
fair-value option pricing model is zero. As such, the Company reversed the
expense recognized in 1999 and reduced the amounts allocated to deferred
compensation and to the warrant.
On October 1, 1999, the Company issued a stock warrant to purchase 200,000
shares of common stock at $5.00 per share, an amount that exceeded the stock's
trading price on that date, as part of the PMC acquisition. The warrant has a
term of 3 years. The Company used a fair-value option pricing model to value
this stock warrant at approximately $140,000. This value has been reflected as
part of stock warrants in the stockholders' equity section of the consolidated
balance sheet and has been included as part of the Company's purchase accounting
for the PMC acquisition. This warrant remains outstanding subsequent to the sale
of the PMC subsidiary.
F-17
9. Commitments and Contingencies:
The Company leases office space and equipment under operating leases that expire
on various dates through 2004. The Company also leases various pieces of
computer and office equipment under capital leases that expire on various dates
through 2003.
In connection with the change in the Company's strategic plan, certain offices
in Maryland, Minnesota and Detroit were closed. The remaining contractual
expense under the lease agreements related to these locations was accrued at the
time that the Company committed to the plan to exit these locations. Operations
had ceased at these locations as of December 31, 2000.
As of December 31, 2000, the Company's office space and equipment leases,
including those for closed locations, extend through 2005. The Company also
leases various computer equipment and office equipment under capital leases that
expire on various dated through 2003. The future minimum lease obligations under
operating and capital leases as of December 31, 2000 are as follows:
Year Ended Operating Capital
December 31, Leases Leases
2001............................................ $200,425 $32,477
2002............................................ 57,342 18,763
2003............................................ 47,881 6,130
2004............................................ 6,193 --
-------- -------
Total.............................. $311,941 57,370
========
Amount representing interest.................... 3,110
-------
54,260
Less- Current portion 29,830
-------
$24,430
=======
Employment Agreements
The Company has employment agreements with certain executives that prescribe
compensation levels and provide for severance payments in certain instances.
Litigation
The Company is periodically a party to disputes arising from normal business
activities. In the opinion of management, resolution of these matters will not
have a material adverse effect upon the financial position or future operating
results of the Company, and adequate provision for any potential losses has been
made in the accompanying consolidated financial statements.
In December 1999, a third-party complaint was filed against Parker Management
Consultants, Ltd. ("PMC") by a former client. The complaint alleged, among other
things, breach of contract pertaining to an enterprise resource planning
implementation. In the complaint, the former client is seeking approximately
$10.0 million in total damages. The complaint relates to work completed prior to
the Company's acquisition of PMC and, under the terms of the purchase agreement,
the shareholder of PMC, has indemnified the Company against damages related to
the complaint. In addition, the Company completed a sale of the PMC subsidiary
during 2000 (see Note 3). The shareholder of PMC has engaged counsel and intends
to vigorously defend against this complaint. In the opinion of management, the
Company will not incur a loss related to this legal matter.
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10. Segment reporting.
During 1998, the Company adopted SFAS No. 131 " Disclosures about Segments of an
Enterprise and Related Information". SFAS No. 131 requires a business
enterprise, based upon a management approach, to disclose financial and
descriptive information about its operating segments. Operating segments are
components of an enterprise about which separate financial information is
available and regularly evaluated by the chief operating decision maker(s) of an
enterprise. Under this definition, the Company operated as a single segment for
all periods presented.
F-19
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To WidePoint Corporation:
We have audited, in accordance with auditing standards generally accepted in the
United States, the financial statements of WidePoint Corporation (a Delaware
corporation) and subsidiaries and have issued our report thereon dated March 23,
2001. Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in Item 14, Valuation
and Qualifying Accounts, is the responsibility of the Company's management and
is presented for the purpose of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in the audits of
the basic financial statements and, in our opinion, fairly states, in all
material respects, the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Vienna, Virginia
March 23, 2001
F-20