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, 2001.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from to .
----------- ---------------
Commission File Number 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 12, 2002 by non-affiliates of the registrant
was approximately $1,038,793 based on the average bid and asked prices of the
Common Stock on such date.
As of March 12, 2002, 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.[ ]
ITEM 1. BUSINESS
Introduction
WidePoint Corporation is a consulting services firm specializing in planning,
managing and implementing Information Technology ("IT") solutions. Its staff
consists of business and technical specialists that help clients improve their
profitability and maintain a competitive edge in today's rapidly changing
business technology environment.
The WidePoint approach is to apply a structured delivery methodology based on
industry standard best practices, enhanced with a set of deliverable templates
that increase productivity and effectiveness. WidePoint focuses on providing
results with significant, tangible business benefits. Our consultants possess
recognized industry-standard certifications and years of successful project
experience.
Since 1996, WidePoint has focused on leveraging leading edge technologies,
methodologies and consultant skills to help clients improve their business
performance. 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 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 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 Consultants, Ltd. ("PMC"), a corporation that
provided IT consulting services focused in enterprise resource planning ("ERP").
During 1999, the Company established a new subsidiary named WidePoint
Corporation ("WidePoint-Subsidiary") and initiated operations in 2000 through
this subsidiary in an effort to fully transition the Company from a Year 2000
strategic solutions provider to an Internet services company. In 2000, 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". During this transition in 2000, the Company experienced several economic
reversals that included an unexpectedly rapid deterioration in Year 2000
services, and a severe contraction in Internet related services. These negative
events prompted the Company to initiate a refinement in its strategy during 2000
and on September 29, 2000, the Company sold all of the outstanding shares of its
PMC subsidiary to a third-party purchaser that resulted in the elimination of
substantially all of the Company's long-term debt.
During 2001, the Company continued to further refine its strategy and
consolidated its operations in an attempt to minimize losses, conserve working
capital, and provide a flexible, scaleable, and efficient business model that
was more responsive to the evolving needs of the Company's markets and
customers. Although these actions served to decrease losses, they did not result
in a resumption of revenue growth for the Company. In the latter part of 2001,
the Board of Directors
2
of the Company decided that an updated assessment of strategic alternatives was
in order, and soon thereafter decided that a newly focused strategic direction,
plan, and leadership were required. These mandated changes were initiated prior
to the end of 2001, and put into effect during the first calendar quarter of
2002. Consistent with such changes initiated by the Board, and the materially
deteriorated values of assets acquired in earlier acquisitions, the Company
recorded an impairment of the remaining intangible assets associated with the
acquisition of Eclipse that were acquired in December 1998.
Business Strategy and Services
WidePoint's strategy has been to apply a structured delivery methodology based
on industry standard best practices, enhanced with a set of deliverable
templates that boost productivity and effectiveness through its consultants.
WidePoint focuses on providing end results with significant, tangible business
benefits through its consultants that possess recognized industry-standard
certifications and years of successful project experience.
The Company presently focuses on planning, implementing and supporting IT-based
initiatives with the following services:
Architecture and Planning Services
o IT Strategic Planning
o Software Selection
o Program Management
o Project Management
IT Outsource Solutions
o Infrastructure Management
o Applications Management
o Architecture and Design
The Company's ability to successfully expand requires significant revenue growth
from increased services performed for existing and new clients, as well the
potential for strategic acquisitions and/or mergers. The realization of these
events depends on many factors, including successful strategic sales and
marketing efforts and the identification and acquisition of appropriate
businesses. Any difficulties encountered in the expansion of the Company through
successful sales and marketing efforts and/or acquisitions could have an adverse
impact on the Company's revenues and operating results.
3
Clients
The client base of the Company is located predominantly within 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 2001, two customers individually represented 15% and 11% of revenues,
respectively, 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 2001 were derived from contracts and projects with manufacturing clients,
consumer products clients and healthcare clients.
The Company markets its solutions through its direct sales force, and alliances
with several strategic partnerships in certain industries. 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.
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, large 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 application development 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,
4
consultants, 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, 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, 2001, the Company had 27 full time employees and 3 part-time
employees (including 3 persons in sales and recruiting), 24 persons in
consulting, and 3 persons in management and administration. The Company also
periodically employs additional 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.
5
ITEM 2. PROPERTIES.
The principal executive office of the Company consists of approximately 5,880
square feet of office space located at One Mid America Plaza, Suite 403,
Oakbrook Terrace, Illinois, which is currently being leased by the Company on a
month-to-month basis for approximately $13,400 per month. The Company's annual
rent in 2001 for this office 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 intends to terminate its month-to-month lease at this
location effective as of April 30, 2002, and relocate its principal executive
office to a new location at One Lincoln Centre, Oakbrook Terrace, Illinois as
described below.
The Company has executed a sublease, effective May 1, 2002, for its new
principal executive office to be located at One Lincoln Centre, Oakbrook
Terrace, Illinois, for approximately 3,500 square feet. The term of this
sublease expires in January 2004. The monthly rent under this sublease is
approximately $5,500 per month.
The Company also leases a branch office located at 4401 Rockside Road, Suite
405, Independence, Ohio, in approximately 1,131 square feet under a lease that
expires on June 30, 2003. The Company's annual rent in 2001 for such branch
office was approximately $24,000. The Company also pays its pro rata share of
increases in real estate taxes and operating expenses for this office. The
Company is currently attempting to sublease this office space.
During 2000, several offices of the Company were closed and their leases were
either sublet, assigned, or have expired. The Minnesota office lease located at
11800 Singletree Lane, Suite 314, Eden Prairie, Minnesota expired on March 31,
2001. The Company's annual rent in 2001 for that property was approximately
$6,000. The Michigan office lease located at 32000 Northwestern Highway, Suite
165, Farmington Hills, Michigan was sublet to Galaxy Builders in June 2000 for
the same terms as those of the Company's lease for that location. The Company's
annual rent in 2001 for that property was approximately $34,000 and the lease
expires on February 4, 2004. The lease for the former corporate headquarters
office of the Company located at 20251 Century Boulevard, Germantown, Maryland
was assigned on December 1, 2000 to GHG Holdings, Inc., which assigned lease
expires on September 30, 2005. The Company is secondarily liable if GHG
Holdings, Inc were to default on that assigned lease.
For additional information regarding the Company's lease obligations, see Note 9
of "Notes to Consolidated Financial Statements. "
The Company believes that it can obtain 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.
6
ITEM 3. LEGAL PROCEEDINGS.
The Company is not involved in any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company's Annual Meeting of Stockholders was held on December 17,
2001.
The following two persons were elected by the following votes to serve as
Class I directors of the Board of Directors for three years or until their
resignation and/or their successors are elected and qualified:
Name Votes For Votes Withheld
- --------------------------------------------------------------------------
Michael C. Higgins 7,362,253 617,276
G.W. Norman Wareham 7,371,046 608,483
Stockholders ratified the selection of Grant Thornton LLP as the
independent accountants for the Company for the current fiscal year. Such
proposal was approved by a vote of 7,928,599 shares for and 36,680 shares
against, with 14,250 shares abstaining.
7
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".
The stock prices listed below represent the high and low closing bid prices of
the Common Stock for each of the periods indicated:
2001 High Low
-----------------------------------------------------------------
First Quarter $ 0.31 $ 0.09
Second Quarter 0.25 0.11
Third Quarter 0.19 0.07
Fourth Quarter 0.13 0.05
2000 High Low
-----------------------------------------------------------------
First Quarter $ 7.56 $ 2.28
Second Quarter 3.38 1.38
Third Quarter 1.31 0.50
Fourth Quarter 0.56 0.13
As of March 12, 2002 there were 170 holders of record of the Company's
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, 2001, 2000, and 1999
are derived from the historical financial statements of WidePoint Corporation as
audited by Grant Thornton, LLP in 2001 and Arthur Andersen LLP in years 2000 and
1999, included elsewhere in this Form 10-K.
On September 30, 1999, WidePoint acquired Parker Management Consulting, Ltd.
("PMC"), a Delaware corporation. The accompanying financial data include the
accounts of PMC since that
8
date of acquisition. A further description of that acquisition transaction is
set forth in the Company's Form 8-K/A filed on December 15, 1999 with the
Securities and Exchange Commission. On September 29, 2000, WidePoint sold PMC.
The accompanying financial data includes the accounts of PMC through that date
of sale. A further description of that sale transaction is set forth in the
Company's Form 8-K/A filed on December 13, 2000 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
-------------- -------------- -------------- -------------- --------------
2001 2000 1999 1998 1997
-------------- -------------- -------------- -------------- --------------
Statement of Operations Data:
Revenues $ 5,902,728 $ 12,834,474 $ 27,196,125 $ 9,916,276 $ 1,425,360
Cost of revenues 3,122,061 7,014,045 12,140,007 3,478,982 667,098
Research and development expense -- -- 325,651 473,362 --
Sales and marketing expense 614,786 1,856,694 2,617,117 1,190,548 1,110,655
General and administrative expense 2,549,661 8,535,062 9,701,672 3,515,391 4,148,421
Facilities closing expense 43,500 376,289 -- -- --
Disposition of subsidiary -- 699,203 -- -- --
Employee stock compensation expense -- -- -- 534,384 --
Impairment of long-term assets 5,853,693 -- 1,703,825 -- --
Depreciation and amortization 545,290 851,562 1,817,329 1,268,338 1,008,864
------------ ------------ ------------ ------------ ------------
Loss from operations (6,826,263) (6,498,381) (1,109,476)) (544,729) (5,509,678)
------------ ------------ ------------ ------------ ------------
Other income (expense):
Interest income 44,655 103,351 161,123 270,337 137,814
Interest expense (5,231) (198,971) (76,296) (9,140) (1,366,479)
Other -- -- (33,756) 821 (7,468,356)
------------ ------------ ------------ ------------ ------------
Net loss before income taxes (6,786,839) (6,594,001) (1,058,405) (282,711) (14,206,699)
Income taxes -- -- 37,648 -- --
------------ ------------ ------------ ------------ ------------
Net loss $ (6,786,839) $ (6,594,001) $ (1,096,053) $ (282,711) $(14,206,699)
============ ============ ============ ============ ============
Basic and diluted loss per share $ (0.52) $ (0.51) $ (0.08) $ (0.03) $ (2.58)
============ ============ ============ ============ ============
Basic and diluted weighted average
shares outstanding 12,984,913 12,979,055 12,949,913 10,638,680 5,502,668
============ ============ ============ ============ ============
9
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 is a consulting services firm specializing in planning,
managing and implementing Information Technology (IT) solutions. Its staff
consists of business and technical specialists that help clients improve their
profitability and maintain a competitive edge in today's rapidly changing
business environment.
The WidePoint approach is to apply a structured delivery methodology based on
industry standard best practices, enhanced with a set of deliverable templates
that increase productivity and effectiveness. WidePoint focuses on providing end
results with significant, tangible business benefits. Our consultants possess
recognized industry-standard certifications and years of successful project
experience.
Since 1996, WidePoint has focused on leveraging leading edge technologies,
methodologies and consultants to help clients improve their business
performance. 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 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 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 Consultants, Ltd. ("PMC"), a corporation that
provided IT consulting services focused in enterprise resource planning ("ERP").
During 1999, the Company established a new subsidiary named WidePoint
Corporation ("WidePoint-Subsidiary") and initiated operations in 2000 through
this subsidiary in an effort to fully transition the Company from a Year 2000
strategic solutions provider to an Internet services company. In 2000, the
Company changed its corporate name from ZMAX Corporation to WidePoint
Corporation and changed the trading symbol for its common stock from
10
"ZMAX" to "WDPT". During this transition in 2000, the Company experienced
several economic reversals that included an unexpectedly rapid deterioration in
Year 2000 services, and a severe contraction in Internet related services. These
negative events prompted the Company to initiate a refinement in its strategy
during 2000 and on September 29, 2000, the Company sold all of the outstanding
shares of its PMC subsidiary to a third-party purchaser that resulted in the
elimination of substantially all of the Company's long-term debt.
During 2001, the Company continued to further refine its strategy and
consolidated its operations in an attempt to minimize losses, conserve working
capital, and provide a flexible, scaleable, and efficient business model that
was more responsive to the evolving needs of the Company's markets and
customers. Although these actions served to decrease losses, they did not result
in a resumption of revenue growth for the Company. In the latter part of 2001,
the Board of Directors of the Company decided that an updated assessment of
strategic alternatives was in order, and soon thereafter decided that a newly
focused strategic direction, plan, and leadership were required. These mandated
changes were initiated prior to the end of 2001, and put into effect during the
first calendar quarter of 2002. Consistent with such changes initiated by the
Board, and the materially deteriorated values of assets acquired in earlier
acquisitions, the Company recorded an impairment of the remaining intangible
assets associated with the acquisition of Eclipse that were acquired in December
1998.
For the year ended December 31, 2001, the Company's revenues decreased by 54%
from approximately $12.8 million in 2000 to approximately $5.9 million in 2001.
This decrease was materially due to the significant decrease in Internet based
initiatives among the Company's clients and an economic recession in the United
States.
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 services performed
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 received from clients, and by
effectively managing general overhead costs.
Recent Developments
Early in the fourth quarter of 2001, the Board of Directors' determined that the
interests of the shareholders of Widepoint would best be served by a
comprehensive review of the direction of the
11
Company, and the strategic alternatives available to the Board. During this
process, Melvin A. (Mac) McCubbin, Chairman of the Board of the Company,
suddenly died from a rapidly moving form of cancer. The Board elected Steve
Komar, an existing board member, to replace Mr. Melvin McCubbin as Chairman of
the Board. During December 2001, Widepoint's President and Chief Executive
Officer, Michael C. Higgins, advised the Board of his decision to resign his
responsibilities as an officer and employee of the Company and as a member of
the Company's Board of Directors in order to pursue other business interests.
Steve Komar thereafter agreed to assume the position of Chief Executive Officer
of the Company, and a formal transition plan was adopted by the Board to ensure
a smooth transfer of management control from Mr. Higgins to Mr. Komar. In the
latter part of 2001, the Board of Directors of the Company decided that an
updated assessment of strategic alternatives was in order, and soon thereafter
decided that a newly focused strategic direction, plan, and leadership were
required. These mandated changes were initiated prior to the end of 2001, and
put into effect during the first calendar quarter of 2002. Consistent with such
changes initiated by the Board, and the materially deteriorated values of assets
acquired in earlier acquisitions, the Company recorded an impairment of the
remaining intangible assets associated with the acquisition of Eclipse that were
acquired in December 1998.
Results of Operations
Year Ended December 31, 2001 Compared to the Year ended December 31, 2000
Revenues. Revenues for the year ended December 31, 2001, were approximately $5.9
million, a decrease of $6.9 million, as compared to revenues of approximately
$12.8 million for the year ended December 31, 2000. The 54% decrease in revenues
in 2001 was primarily attributable to the severe contraction of Internet based
initiatives among the Company's clients and an economic recession in the United
States.
Gross profit. Gross profit for the year ended December 31, 2001, was $2.8
million, or 47% of revenues, a decrease of $3.0 million as compared to gross
profit of $5.8 million, or 45% of revenues, for the year ended December 31,
2000. The decrease in the amount of gross profit was attributable to a reduction
in revenues generated during 2001 as compared to 2000.
Research and development. The Company had no research and development expenses
for the years ended December 31, 2001 and 2000, respectively. 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, 2001 were $0.6 million, or 10% of revenues, as compared to $1.9 million, or
15% of revenues, for the year ended December 31, 2000. The $1.3 million decrease
in sales and marketing expenses for the year ended December 31, 2001, was
primarily attributable to the refinement of corporate strategy that matched the
size of the Company's sales force with the operational requirements of the
Company's business.
12
General and administrative. General and administrative expenses for the year
ended December 31, 2001 were $2.5 million, or 43% of revenues, as compared to
$8.5 million, or 66% of revenues, for the year ended December 31, 2000. The $6.0
million decrease in general and administrative expenses in 2001 was primarily
attributable to the reduction in employees and consultants of the Company and
the closure of offices that resulted from the continued cost containment
strategy of the Company.
Interest income (expense). Interest income for the year ended December 31, 2001
was $44,654, a decrease of $58,697 or 57%, as compared to $103,351 for the year
ended December 31, 2000. The decrease in interest income in 2001 was primarily
attributable to lesser amounts of invested cash and lower interest rates.
Interest expense for the year ended December 31, 2001 was $5,231, a decrease of
$193,740 or 97%, as compared to $198,971 in interest expense for the year ended
December 31, 2000. The decrease in interest expense in 2001 was primarily
attributable to the elimination of the Company's debt through the sale of PMC.
Facilities closing expense. The loss from operations for the year ended December
31, 2001 included a one-time charge of $43,500 for facilities closing expense
related to the closure of the Company's Ohio office. For the year ended December
31, 2000, the facilities closing expense was $0.4 million, which was the result
of the consolidation and closure of the Company's offices in Minnesota,
Michigan, Maryland, and Massachusetts.
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.
Asset Impairment. The impairment of assets for the year ended December 31, 2001
included a charge of approximately $5.9 million related to the write-down of
intangible assets associated with the purchase of Eclipse in December 1998.
Net income (loss). As a result of the above, the net loss for the year ended
December 31, 2001 was $6.8 million, an increase of $0.2 million, as compared to
the net loss of $6.6 million for the year ended December 31, 2000.
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 material
reduction of sales associated with Year 2000 services.
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
13
Year 2000 revenues and an increase in cost associated with performing e-business
services as compared Year 2000 services 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.
14
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.
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 provided by operating activities for the year ended December 31, 2001 was
approximately $0.5 million, an increase of $3.7 million over the cash used in
operating activities of $3.2 million for the year ended December 31, 2000. Total
cash provided for the year ended December 31, 2001 was approximately $0.5
million, as compared to cash used of $3.1 million for the year ended December
31, 2000. The cash provided during the year ended December 31, 2001 was
primarily a result of the increased collections of accounts receivable. There
were no capital expenditures on property and equipment for the year ended
December 31, 2001, as compared to $0.1 million in capital expenditures during
the year ended December 31, 2000. The decrease in capital expenditures during
2001 was related primarily to the refinement of corporate strategy that resulted
in the consolidation of offices, reduction in employees, and conservation of
working capital.
As of December 31, 2001, the Company had working capital of $1.5 million. The
Company's primary source of liquidity consists of $1.6 million in cash and cash
equivalents and $0.5 million of accounts receivable. The Company's current
liabilities include $0.6 million in accounts payable and accrued expenses.
The Company's business environment is characterized by rapid technological
changes. In 2001, the Company continued a refinement in corporate strategy that
consolidated operations and shifted the Company's focus to providing IT-related
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 from increased revenues 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.
15
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 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.
The Company filed a Form 8-K on May 10, 2001 reporting a change in the
Company's auditors.
16
Part III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The following sets forth information regarding the directors, executive
officers and certain significant employees of the Company:
POSITION WITH BECAME
NAME THE COMPANY AGE DIRECTOR
Steve L. Komar Chairman of the Board of 60 1997
Directors and Chief
Executive Officer
James T. McCubbin Director, Secretary and 38 1998
Treasurer, and Chief
Financial Officer
James M. Ritter Director 58 1999
G.W. Norman Wareham Director 49 1997
Mark Mirabile Vice President of Sales 39 --
and Marketing
Ron Hilicki Vice President of 39 --
Consulting Services
Steve L. Komar has served as a director of the Company since December
1997 and following the death of Melvin A. "Mac" McCubbin in October 2001, Mr.
Komar became Chairman of the Board of Directors. Since the resignation of
Michael Higgins in December 2001, Mr. Komar has also served as the Chief
Executive Officer of the Company. From June 2000 until December 2001, Mr. Komar
served as a founding partner in C-III Holdings, a development stage financial
services company. From 1991 to June 2000, Mr. Komar served as Group Executive
Vice President of Fiserv, Inc., a company which provides advanced data
processing services and related products to the financial industry. Mr. Komar is
a graduate of the City University of New York with a Bachelor of Science Degree
in Accounting and holds a Masters Degree in Finance from Pace University.
James T. McCubbin has served as a director and Secretary and Treasurer of
the Company since November 1998. Since August 1998, Mr. McCubbin has also served
as the Company's Vice President and Chief Financial Officer. Prior to that time,
from December 1997 to August 1998, Mr. McCubbin served as the Vice President,
Controller, Assistant Secretary and Treasurer of the Company. Prior to his
employment with the Company in November 1997, Mr.
17
McCubbin held various financial management positions with a wide range of
companies. Mr. McCubbin is a graduate of the University of Maryland with a
Bachelor of Science Degree in Finance and a Masters Degree in International
Management.
James M. Ritter has served as a director of the Company since December
1999. Mr. Ritter is the retired Corporate Headquarters Chief Information Officer
of Lockheed Martin Corporation. Prior to his retirement in February 2001, Mr.
Ritter was employed at Lockheed Martin Corporation for over 32 years in various
positions involving high level IT strategic planning and implementation,
e-commerce development, integrated financial systems, and large-scale
distributed systems.
G.W. Norman Wareham has served as a director of the Company since
December 1997. Mr. Wareham served as the Company's Vice President, Secretary and
Chief Financial Officer from September 1996 until August 1998. Mr. Wareham is
President of Wareham Management Ltd. and provides management consulting and
accounting services to public companies in Canada and the United States. Mr.
Wareham is a certified general accountant and has been engaged in the public
practice of accounting for over 20 years.
Mark Mirabile has served as the Vice President of Sales and Marketing for
the Company since May 2000. Prior to that time, from November 1992 to May 2000,
Mr. Mirabile served as the Vice President of Eclipse Information Systems, Inc.
("Eclipse"), a wholly-owned subsidiary of the Company. Mr. Mirabile was a
co-founder of Eclipse prior to its acquisition by the Company in December 1998.
Mr. Mirabile has over 20 years experience in information technology at both the
executive and technical levels. He has an Associates Degree in Applied
Science-Accounting from Daley Community College in Chicago.
Ron Hilicki has served as the Vice President of Consulting Services for
the Company since May 2000. Prior to that time, from September 1997 to May 2000,
Mr. Hilicki served as a consultant with Eclipse. Mr. Hilicki has over 16 years
of business and information systems experience, with a specialization in the
development of distributed, e-business and decision support applications. In May
2000, Mr. Hilicki became responsible for directing the Company's software
application development efforts. Prior to joining Eclipse in September 1997, Mr.
Hilicki held a number of business and IT management positions at ITT, W.W.
Grainger and UOP/Allied Signal. Mr. Hilicki has a Bachelor of Arts Degree in
Economics from Northwestern University and a Masters of Business Management
Degree from the Kellogg Graduate School of Management at Northwestern
University.
18
ITEM 11. EXECUTIVE COMPENSATION.
The following Summary Compensation Table sets forth the annual salary (column c)
and bonus (column d) paid and options granted (column g) during each of the past
three years to the Company's Chief Executive Officer and the other executive
officers of the Company at December 31, 2001 whose annual salary and bonus in
2001 exceeded $100,000.
====================================================================================================================
Summary Compensation Table
- --------------------------------------------------------------------------------------------------------------------
Long-Term Compensation
-------------------------------------------
Annual Compensation Awards Payouts
- --------------------------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e) (f) (g) (h)
Other Annual Restricted Stock LTIP
Name and Principal Year Salary Bonus Compensation 1 Award(s) Options Payouts
Position ($) ($) ($) $ (#)2 ($)
- --------------------------------------------------------------------------------------------------------------------
Michael C. Higgins 5 2001 $216,025 $ -0- $-0- $-0- 100,000 $ -0-
Former President and 2000 $220,106 $171,000 $-0- $-0- -0- $ -0-
Chief Executive 1999 $214,327 $118,750 $-0- $-0- 200,000 $ -0-
Officer
====================================================================================================================
James McCubbin 2001 $134,302 $ -0- $-0- $-0- 500,000 $ -0-
Vice President & 2000 $136,855 $ 92,400 $-0- $-0- -0- $ -0-
Chief Financial 1999 $126,596 $ 58,000 $-0- $-0- 150,000 $ -0-
Officer
====================================================================================================================
Mark Mirabile 2001 $133,681 $ -0- $-0- $-0- 500,000 $ -0-
Vice President 2000 $131,250 $ 9,750 $-0- $-0- 45,000 $ -0-
Sales & Marketing 3 1999 $126,389 $ 27,909 $-0- $-0- 20,000 $ -0-
====================================================================================================================
Ron Hilicki 2001 $133,681 $ -0- $-0- $-0- 500,000 $ -0-
Vice President 2000 $132,443 $ 13,219 $-0- $-0- 30,000 $ -0-
Consulting Services 4 1999 $106,944 $ 13,684 $-0- $-0- -0- $ -0-
====================================================================================================================
- -----------------------
1 Does not report the approximate cost to the Company of an automobile allowance furnished to
the above persons, which amounts do not exceed the lesser of either $50,000 or 10% of the
total of the person's annual salary and bonuses for 2001.
2 Reports the number of shares underlying options granted during each of the respective years.
3 Mr. Mirabile was appointed Vice President of Sales and Marketing of the Company in May 2000.
4 Mr. Hilicki was appointed Vice President of Consulting Services in May 2000.
5 Mr. Higgins resigned from the Company in December 2001
The following Option Grants Table sets forth, for each of the named
executive officers, information regarding individual grants of options granted
in 2001 and their potential realizable value. Information regarding individual
option grants includes the number of options granted, the percentage of total
grants to employees represented by each grant, the per-share exercise price and
the expiration date. The potential realizable value of the options are based on
assumed annual 0%, 5% and 10% rates of stock price appreciation over the term of
the option.
19
===================================================================================================================================
Option Grants Table
- ----------------------------------------------------------------------------------------------- -----------------------------------
Potential Realizable Value at
Assumed
Individual Grants Annual Rates of Stock Price
Appreciation for Option Term 4
- --------------------- --------------- -------------------------- ---------------- ------------- --------- ------------ ------------
% of Total Options
Options Granted to Employees in
Granted Fiscal Exercise Expiration
Name (#) 1 Year 2 Price($/SH) 3 Date 0% 5% 10%
- --------------------- --------------- -------------------------- ---------------- ------------- --------- ------------ ------------
Michael Higgins 100,000 6% $0.17 12/31/2002 $0 $11,320 $ 28,687
James McCubbin 500,000 32% $0.17 1/3/2011 $0 $53,456 $ 135,468
Mark Mirabile 500,000 32% $0.17 1/3/2011 $0 $53,456 $ 135,468
Ron Hilicki 500,000 32% $0.17 1/3/2011 $0 $53,456 $ 135,468
===================== =============== ========================== ================ ============= ========= ============ ============
- --------------------
1 The reported options were granted by the Company to the named executive officers under the
Company's 1997 Stock Option Plan and become exercisable and may be accelerated upon the achievement
by the executive officer of certain annual performance criteria set each year by the Compensation
Committee of the Company's Board of Directors.
2 Based on options for a total of 1,742,000 shares granted to all employees in 2001.
3 The exercise price is equal to the fair market value on the date of grant of the option with the
exception of Mr. Higgins who's option price was set above market price.
4 The potential realizable values shown in the columns are net of the option exercise price. These
amounts assume annual compounded rates of stock price appreciation of 0%, 5%, and 10% from the date
of grant to the option expiration date, a term of ten years. These rates have been set by the U.S.
Securities and Exchange Commission and are not intended to forecast future appreciation, if any, of
the Company's Common Stock. Actual gains, if any, on stock option exercises are dependent on several
factors including the future performance of the Company's Common Stock, overall stock market
conditions, and the optionee's continued employment through the vesting period. The amounts
reflected in this table may not actually be realized.
The following Option Exercises and Year-End Value Table is set forth
herein because it sets forth, for each of the named executive officers,
information regarding the number and value of unexercised options at December
31, 2001. No options were exercised by such persons during 2001.
20
=======================================================================================================================
Aggregate Option Exercises and Fiscal Year-End Option Value Table
- -----------------------------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e)
Number of Unexercised Options Value of Unexercised
at FY-End (#) 1 In-The-Money Options at
Number of FY-End ($)
Shares Acquired on
Name Exercise Value Realized ($) Exercisable/Unexercisable Exercisable/Unexercisable 2
- -----------------------------------------------------------------------------------------------------------------------
Michael C. Higgins -0- -0- 306,000/132,500 3 $0 / $0
=======================================================================================================================
James McCubbin -0- -0- 201,000/300,000 4 $0 / $0
=======================================================================================================================
Mark Mirabile -0- -0- 101,000/400,000 5 $0 / $0
=======================================================================================================================
Ron Hilicki -0- -0- 101,000/400,000 6 $0 / $0
=======================================================================================================================
1 The reported options were granted by the Company to the named executive officer.
2 Market value of underlying shares at December 31, 2001, minus the exercise price.
3 Mr. Higgins resigned from the Company in December 2001. The above-reported options entitle Mr.
Higgins to purchase from the Company (i) 337,500 common shares at a price of $5.75 per share through
March 31, 2002 under an option granted on April 17, 1997, of which 205,000 shares are currently
exercisable, (ii) 200,000 common shares at a price of $2.45 per share through March 30, 2002 under
an option granted on June 15, 1999, of which no shares are currently exercisable, (iii) 1,000 common
shares at a price of $1.35 per share through March 31, 2002 under an option granted July 3, 2000 of
which 1,000 shares are currently exercisable, and (iv) 100,000 common shares at a price of $0.17 per
share through December 31, 2002 under an option granted December 31, 2001 of which 100,000 shares
are currently exercisable.
4 The above-reported options entitle Mr. McCubbin to purchase from the Company (i) 1,000 common
shares at a price of $1.35 per share through July 3, 2010 under an option granted on July 3, 2000,
of which 1,000 shares are currently exercisable, (ii) 200,000 common shares at a price of $0.17 per
share through January 2, 2011, pursuant to a stock option granted to him on January 2, 2001 under
the Incentive Plan, and (iii) 300,000 shares at a price of $0.17 per share through January 2, 2011,
under an option granted on January 2, 2001, with such shares vesting 100,000 shares annually through
January 2, 2004 or by the earlier vesting by the compensation committee.
5 The above-reported options entitle Mr. Mirabile to purchase from the Company (i) 1,000 common
shares at a price of $1.35 per share through July 3, 2010 under an option granted on July 3, 2000,
of which 1,000 shares are currently exercisable, (ii) 100,000 common shares at a price of $0.17 per
share through January 2, 2011, pursuant to a stock option granted to him on January 2, 2001 under
the Incentive Plan, and (iii) 400,000 shares at a price of $0.17 per share through January 2, 2011,
under an option granted on January 2, 2001, with such shares vesting 100,000
21
shares annually through January 2, 2005 or by the earlier vesting by the compensation committee.
6 The above-reported options entitle Mr. Hilicki to purchase from the Company (i) 1,000 common
shares at a price of $1.35 per share through July 3, 2010 under an option granted on July 3, 2000,
of which 1,000 shares are currently exercisable, (ii) 100,000 common shares at a price of $0.17 per
share through January 2, 2011, pursuant to a stock option granted to him on January 2, 2001 under
the Incentive Plan, and (iii) 400,000 shares at a price of $0.17 per share through January 2, 2011,
under an option granted on January 2, 2001, with such shares vesting 100,000 shares annually through
January 2, 2005 or by the earlier vesting by the compensation committee.
No Long-Term Incentive Plan Awards Table is set forth herein because no
long-term incentive plan awards were made to the above-named executive officers
during 2001.
Employment Agreements and Arrangements
On September 1, 1999, the Company entered into employment agreements with
each of Michael C. Higgins and James T. McCubbin for Mr. Higgins to continue to
serve as President and Chief Executive Officer of the Company and for Mr.
McCubbin to continue to serve as the Vice President, Chief Financial Officer,
Secretary and Treasurer of the Company. These agreements provide that Mr.
Higgins' base salary was to be $225,000 for 1999 and Mr. McCubbin's base salary
was to be $140,000 for 1999, with each executive's salary to be thereafter
determined by the Company's Compensation Committee. During the year 2000, the
Compensation Committee did not grant an increase in the base salary of Mr.
Higgins or Mr. McCubbin. The agreements each provide for a bonus to be paid to
the executive of up to 100% of his base salary upon the achievement of
performance criteria including gross revenue and earnings targets, which
criteria will be adjusted each year by the Compensation Committee. If the
performance goals are not met or if the executive is no longer employed by the
Company (unless for cause), the bonus may be paid at the discretion of the
Compensation Committee. Each agreement is for a term of four years ending on
September 1, 2003, and is terminable by the executive upon 60 days notice to the
Company and by the Company on notice to the executive. Each agreement contains
non-competition, non-solicitation and non-disclosure provisions restricting the
executive from employment with any competing business, soliciting or diverting
Company employees and customers to a competing business or disclosing the
Company's proprietary information to third parties during the term of the
agreement. Each agreement also contains a provision under which the executive
has agreed to refrain from competing with the Company or soliciting its
employees for a period of 12 months after the termination of his employment with
the Company in consideration for the payment by the Company to the executive of
an amount in cash equal to his base salary and cash bonus received for the
one-year period immediately preceding the date of his termination, with such
cash amount to be paid to the executive in 12 equal monthly installment payments
as of the first day of each month during the 12-month period immediately
following the date of termination of his employment. Mr. Higgins resigned his
position with the Company on December 31, 2001. Mr. Higgins entered into a
separation agreement that amended and superseded his prior contract with the
Company upon his resignation. The separation agreement contained
non-competition, non-solicitation and non-
22
disclosure provisions restricting Mr. Higgins from employment with any competing
business, soliciting or diverting Company employees and customers to a competing
business, soliciting or diverting Company employees and customers to a competing
business or disclosing the Company's proprietary information to third parties
during the term of the agreement. The separation agreement provided for a single
payment of $95,625 by the Company to Mr. Higgins, representing six (6) months
salary at his then current pay rate of $191,250 per annum and the Company paid
benefits for six (6) months from his date of resignation. In October 2001, Mr.
McCubbin volunteered to reduce his current pay rate from $140,000 per annum to
$119,000 per annum with an office expense allowance of $500 per month.
On December 14 1998, the Company entered into an employment agreement
with Mark Mirabile, Vice President of Sales and Marketing for the Company. The
employment agreement was for a three year term and expired on December 14, 2001.
The agreement provided for a base salary of at least $130,000 plus a bonus of up
to 30% of his annual gross salary bonus and an automobile expense in the amount
of $500 per month. Mr. Mirabile voluntarily reduced his pay rate to $119,000 per
annum and an automobile expense allowance in the amount of $500 per month.
Compensation Committee Report on Executive Compensation
The Compensation Committee consists entirely of non-employee directors
and determines the compensation paid to the Chief Executive Officer and the
other executive officers and consultants of the Company. The Compensation
Committee believes that for the Company to be successful long-term and for it to
increase stockholder value it must be able to hire, retain, adequately
compensate and financially motivate talented and ambitious executives. The
Compensation Committee attempts to reward executives for both individual
achievement and overall Company success.
Executive compensation is made up of three components:
Base Salary. An executive's base salary is initially determined by
considering the executive's level of responsibility, prior experience and
compensation history. Published salaries of executives in similar positions at
other companies of comparable size (sales and/or number of employees) is also
considered in establishing base salary.
Stock Options. In 1997, the Company adopted the 1997 Incentive Stock Plan
to provide stock option awards to certain executives of the Company and its
subsidiaries. The Compensation Committee believes that the granting of stock
options is directly linked to increased executive commitment and motivation and
to the long-term success of the Company. The Compensation Committee awards stock
options to certain executives of the Company and its subsidiaries. The
Compensation Committee uses both subjective appraisals of the executive's
performance and the Company's performance and financial success during the
previous year to determine option grants.
23
Bonus. The Company has also implemented an executive bonus program for
certain of its executives. Such bonuses are based, in part, on the Company's
financial performance during the previous fiscal year including achievement of
gross revenue and net income targets. In addition, objective individual measures
of performance compared to the individual's business unit profit performance may
be considered. A subjective rating of the executive's personal performance may
also be considered. Bonuses may be paid in cash or Company Common Stock or a
combination of cash and Company Common Stock. Bonuses are typically linked to a
percentage of base salary.
The Compensation Committee recommended to the Board of Directors and the
Board of Directors approved a compensation package for the Company's President
and Chief Executive Officer, Michael Higgins, and the Company's Vice President
and Chief Financial Officer, James McCubbin, that included a base salary of
approximately $225,000 in 2001 for Mr. Higgins and approximately $140,000 in
2001 for Mr. McCubbin plus a possible bonus of up to 100% of the base salary,
which represented no increase in the base pay for either such person since 1999
due to the declining revenues of the Company . Mr. Higgins voluntarily reduced
his base pay in October 2001 to approximately $191,250 per annum and Mr.
McCubbin voluntarily reduced his base pay in October 2001 to approximately
$119,000 per annum. Mr. Higgins subsequently resigned from the Company in
December 2001. Receipt of the bonus is subject to the Company's achievement of
certain performance criteria, including gross revenue and net income targets. If
the performance criteria are not achieved or the executive is no longer employed
by the Company (other than for cause termination), a bonus may be awarded in the
discretion of the Compensation Committee. No bonuses were awarded in 2001.
In determining the 2001 compensation packages for these executive
officers, the Compensation Committee considered that the Company was conserving
its cash and reducing its costs and expenses in response to declining revenues.
Exceptions to the general principles stated above can be made when the
Compensation Committee deems them appropriate and in the best interests of
stockholders. The Compensation Committee regularly considers other forms of
compensation and modifications of its present policies, and will make changes as
it deems appropriate. The competitive opportunities to which the Company's
executives are exposed frequently come from private companies or divisions of
large companies, for which published compensation data is often unavailable and,
therefore, the Compensation Committee's information about such opportunities is
often anecdotal.
Section 162(m) of the Internal Revenue Code of 1986, as amended,
establishes a limit on the deductibility of annual compensation for certain
executive officers that exceeds $1,000,000 per year unless certain requirements
are met. The Company does not anticipate that any employee will exceed such
$1,000,000 cap in the near future but will consider whether any necessary
adjustments are appropriate if it becomes likely that any executive officer's
compensation may exceed the $1,000,000 limit.
24
Compensation Committee
Steve L. Komar
G.W. Norman Wareham
James Ritter
The foregoing Compensation Committee report shall not be deemed to be
filed with the Securities and Exchange Commission for purposes of the Securities
Exchange Act of 1934 (the "1934 Act"), nor shall such report be deemed to be
incorporated by reference in any past or subsequent filing by the Company under
the 1934 Act or the Securities Act of 1933, as amended (the "1933 Act").
Stock Options
1997 Stock Incentive Plan. In May 1997, the Board of Directors adopted,
and in December 1997 the stockholders of the Company approved, the Company's
1997 Stock Incentive Plan (the "Incentive Plan"), which provides for the award
of a variety of equity-based incentives, including stock awards, stock options,
stock appreciation rights, phantom shares, performance unit appreciation rights
and dividend equivalents (collectively, "Stock Incentives"). The Incentive Plan
is administered by a committee, which is presently comprised of Steve L. Komar,
G.W. Norman Wareham and James Ritter, and provides for the grant of Stock
Incentives officers, key employees and consultants of the Company to purchase up
to an aggregate of 3,000,000 shares of Common Stock at not less than 100% of
fair market value on the date granted. The vesting and exercisability of any
Stock Incentives granted under the Incentive Plan is subject to the
determination of and criteria set by the committee. As of March 12, 2002,
options to purchase a total of 2,358,500 shares of Common Stock under the
Incentive Plan, at prices ranging from $0.12 to $5.75 per share, were
outstanding, of which options to purchase 1,073,840 shares were presently
exercisable.
1997 Directors Formula Stock Option Plan. In May 1997, the Board of
Directors adopted, and in December 1997 the stockholders of the Company
approved, the Company's 1997 Directors Formula Stock Option Plan (the "Director
Plan"). Other than Messrs. Komar, Wareham, and Ritter, directors of the Company
who are not employed by the Company and who do not perform services for the
Company are eligible to receive options under the Director Plan. The Director
Plan is administered by a committee which presently consists of Messrs. Komar
and McCubbin. Options become exercisable when vested and expire ten years after
the date of grant, subject to such shorter period as may be provided in the
agreement. A total of 140,000 shares of Common Stock are reserved for possible
issuance upon the exercise of options under the Director Plan. As of March 12,
2002, options to purchase a total of 80,000 shares of Common Stock had been
granted under the Director Plan, at prices ranging from $2.06 to $14.06 per
share, of which options to purchase 80,000 shares were vested and presently
exercisable.
Directors' Fees
Directors who are not officers or employees of the Company receive an
annual fee of $12,000.
25
STOCK PERFORMANCE CHART
The following chart compares the cumulative total stockholder return for
the Common Stock of the Company (and its predecessors) with the NASDAQ Stock
market (U.S.) Index and the NASDAQ Computer & Data Processing Industry Index
since December 31, 1996.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
AMONG WIDEPOINT CORPORATION,
THE NASDAQ STOCK MARKET (U.S.) INDEX
AND THE NASDAQ COMPUTER & DATA PROCESSING INDEX
[GRAPHIC OMITTED]
============================================================================================
1996 1997 1998 1999 2000 2001
- --------------------------------------------------------------------------------------------
WidePoint Corporation $100.00 $ 41.60 $ 22.14 $ 13.36 $ .95 $ .76
- --------------------------------------------------------------------------------------------
NASDAQ (U.S.) Index 100.00 122.48 172.68 320.89 193.01 153.15
- --------------------------------------------------------------------------------------------
NASDAQ C&DP Index 100.00 122.87 219.20 481.81 221.85 178.69
============================================================================================
The foregoing Stock Performance Chart shall not be deemed to be filed
with the Securities and Exchange Commission for purposes of the 1934 Act, nor
shall such material be deemed to be incorporated by reference in any past or
subsequent filing by the Company under the 1934 Act or the 1933 Act.
26
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENFICIAL OWNERS AND MANAGEMENT.
PRINCIPAL STOCKHOLDERS
The following table sets forth the number of shares of Common Stock
beneficially owned as of December 31, 2001 by: (i) each person known by the
Company to be the beneficial owner of 5% or more of such class of securities,
(ii) each director of the Company and (iii) all directors and officers of the
Company as a group.
Number of Percent of
Directors, Nominees Shares of Outstanding
and 5% Stockholders Common Stock(1) Common Stock(1)
- ------------------- --------------- ---------------
Michael C. Higgins (2) 1,806,000 13.9%
Michael S. Cannon (3) 1,046,730 8.1%
Steve L. Komar (4) 28,000 0.2%
G.W. Norman Wareham (5) 28,000 0.2%
James T. McCubbin (6) 201,000 1.5%
James M. Ritter (7) 13,500 0.1%
Mark Mirabile (8) 281,000 2.2%
Ron Hilicki (9) 121,517 1.0%
All directors and
officers as a group
(7 persons) (10)..... 2,479,017 19.1%
(1) Assumes in the case of each stockholder listed in the above list that all
presently exercisable warrants or options held by such stockholder were fully
exercised by such stockholder, without the exercise of any warrants or options
held by any other stockholders.
(2) Includes (i) a stock option granted on March 13, 1998, to Mr. Higgins under
the Incentive Plan to purchase 205,000 shares of stock at $5.75 until March 31,
2002 and excludes 132,500 still remaining under the original grant of 337,500
shares of Common Stock at $5.75 per share, which option is not presently
exercisable, (ii) excludes a stock option granted on June 15, 1999, to Mr.
Higgins under the Incentive Plan to purchase 200,000 shares of Common Stock at
$2.45 per share, which option is not presently exercisable, (iii) a stock option
granted on July 3, 2000 under the Incentive Plan to purchase 1,000 shares of
stock at $1.35, which option is presently exercisable until March 31, 2002, and
(iv) a stock option granted on December 31, 2001, to Mr. Higgins under the
Incentive Plan to purchase 100,000 shares of stock at $0.17 until December 31,
2002.
(3) Mr. Cannon died in November 2001. The address of Mr. Cannon prior to his
death was PMB 422, 12179 South Apopka Vineland Road, Orlando, Florida.
27
(4) Includes (i) 12,000 shares of Common Stock that may be purchased by Mr.
Komar from the Company at a price of $14.06 per share until May 20, 2007,
pursuant to a stock option granted to him on May 20, 1997 under the Director
Plan, (ii) 6,000 shares of Common Stock that may be purchased by Mr. Komar from
the Company at a price of $7.66 per share until March 24, 2008, pursuant to a
stock option granted to him on March 24, 1998 under the Director Plan, and (iii)
10,000 shares of Common Stock that may be purchased by Mr. Komar from the
Company at a price of $3.97 per share until December 10, 2008, pursuant to a
stock option granted to him on December 10, 1998 under the Director Plan.
(5) Includes (i) 12,000 shares of Common Stock that may be purchased by Mr.
Wareham from the Company at a price of $14.06 per share until May 20, 2007,
pursuant to a stock option granted to him on May 20, 1997 under the Director
Plan, (ii) 6,000 shares of Common Stock that may be purchased by Mr. Wareham
from the Company at a price of $7.66 per share until March 24, 2008, pursuant to
a stock option granted to him on March 24, 1998 under the Director Plan, and
(iii) 10,000 shares of Common Stock that may be purchased by Mr. Wareham from
the Company at a price of $3.97 per share until December 10, 2008, pursuant to a
stock option granted to him on December 10, 1998 under the Director Plan
(6) Includes (i) 200,000 shares of Common Stock that may be purchased by Mr.
McCubbin from the Company at a price of $0.17 per share until January 2, 2011,
pursuant to a stock option granted to him on January 2, 2001, and (ii) includes
1,000 shares of Common Stock that may be purchased by Mr. McCubbin from the
Company at a price of $1.35 per share until July 3, 2010, pursuant to a stock
option granted to him on July 3, 2000. Does not include (i) 300,000 shares of
Common Stock that may be purchased by Mr. McCubbin from the Company at a price
of $0.17 per share pursuant to a stock option granted to him on January 2, 2001,
with such shares vesting annually through January 2, 2004 or by the earlier
vesting by the Compensation Committee.
(7) Includes (i) 1,500 shares of Common Stock owned directly by Mr. Ritter and
(ii) 12,000 shares of Common Stock that may be purchased by Mr. Ritter from the
Company at a price of $2.06 per share until December 1, 2009, pursuant to a
stock option granted to him on December 1, 1999 under the Director Plan. 1,
1999, with such shares vesting on December 1, 2001.
(8) Includes (i) 270,000 shares of Common Stock issued to Mr. Mirabile in
connection with the Company's prior acquisition of Eclipse, of which 180,000
shares have no restrictions and the remaining 90,000 shares are restricted
pursuant to the terms of such acquisition, (ii) includes 100,000 shares of
Common Stock that may be purchased by Mr. Mirabile from the Company at a price
of $0.17 per share until January 2, 2011, pursuant to a stock option granted to
him on January 2, 2001, and (iii) includes 1,000 shares of Common Stock that may
be purchased by Mr. Mirabile from the Company at a price of $1.35 per share
until July 3, 2010, pursuant to a stock option granted to him on July 3, 2000.
Does not include (i) 400,000 shares of Common Stock that may be purchased by Mr.
Hilicki from the Company at a price of $0.17 per share pursuant to a stock
option granted to him on January 2, 2001, with such shares vesting annually
through January 2, 2005 or by the earlier vesting by the Compensation Committee.
(9) Includes (i) 20,517 shares of Common Stock issued to Mr. Hilicki in
connection with the Company's prior acquisition of Eclipse, of which 11,724
shares have no restrictions and the remaining 8,793 shares are restricted
pursuant to the terms of such acquisition , (ii) includes 100,000 shares of
Common Stock that may be purchased by Mr. Hilicki from the Company at a
28
price of $0.17 per share until January 2, 2011, pursuant to a stock option
granted to him on January 2, 2001, and (iii) includes 1,000 shares of Common
Stock that may be purchased by Mr. Hilicki from the Company at a price of $1.35
per share until July 3, 2010, pursuant to a stock option granted to him on July
3, 2000. Does not include (i) 400,000 shares of Common Stock that may be
purchased by Mr. Hilicki from the Company at a price of $0.17 per share pursuant
to a stock option granted to him on January 2, 2001, with such shares vesting
annually through January 2, 2005 or by the earlier vesting by the Compensation
Committee.
(10) Includes the shares referred to as included in notes (2), (4), (5), (6),
(7), (8), and (9) above. Does not include the shares referred to as not included
in notes (2), (6), (8), and (9) above.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
There have been no transactions, or series of similar transactions, since the
beginning of the Company's last fiscal year, or any currently proposed
transactions, or series of similar transactions, greater than $60,000, to which
the Company or any of its subsidiaries were a party involving any of the
directors, executive officers, control persons, more than 5% security holder
known to the registrant, or member of the immediate family of any of the
foregoing persons.
29
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 Grant Thornton LLP , Independent Public Accountants
Report of Arthur Andersen LLP, Independent Public Accountants
Consolidated Balance Sheets as of December 31, 2001 and 2000
Consolidated Statements of Operations for the Years Ended December 31,
2001, 2000, and 1999
Consolidated Statements of Changes in Stockholders' Equity for the
Years Ended December 2001, 2000, and 1999
Consolidated Statements of Cash Flow for the Years Ended December 31,
2001, 2000, and 1999
Notes to Consolidated Financial Statements
(1) Financial Statements Schedule:
Reports 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
None
(c) Exhibits: The following exhibits are filed herewith or incorporated
herein by reference:
30
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
31
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
32
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. 333-555993).)
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.
33
(Incorporated herein by reference to Exhibit 2 to the Registrant's
Current Report of Form 8-K, as filed on October 18, 1999 (File No.
333-55993).)
10.23 Employment Agreement between ZMAX Corporation and Michael C. Higgins,
dated September 1, 1999. (Incorporated herein by reference to Exhibit
10.23 to Registrant's Report of Form 10-K, as filed on March 30, 2000
(File No. 000-23967).)*
10.24 Employment Agreement between ZMAX Corporation and James T. McCubbin,
dated September 1, 1999. (Incorporated herein by reference to Exhibit
10.24 to Registrant's Report of Form 10-K, as filed on March 30, 2000
(File No. 000-23967).)*
10.25 Separation Agreement between WidePoint Corporation and Michael C.
Higgins, dated December 31, 2001.*
21 Subsidiaries of WidePoint Corporation
23.1 Consent of Grant Thornton LLP
23.2 Consent of Arthur Andersen LLP
- -------------------------
* - Management contract or compensatory plan
34
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.
WidePoint Corporation
Date: March 29, 2002 /s/ STEVE L. KOMAR
------------------
Steve L. Komar
Chief Executive Officer
Date: March 29, 2002 /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, 2002 /s/STEVE L. KOMAR
-----------------
Steve L. Komar
Director and Chief
Executive Officer
Dated: March 29, 2002 /s/JAMES T. MCCUBBIN
--------------------
James T. McCubbin
Director, Vice President and
Chief Financial Officer,
Secretary and Treasurer
Dated: March 29, 2002 /s/G.W. NORMAN WAREHAM
----------------------
G.W. Norman Wareham
Director
Dated: March 29, 2002 /s/JAMES M. RITTER
------------------
James M. Ritter
Director
35
INDEX TO FINANCIAL STATEMENTS
Page
Reports of Independent Public Accountants F-1
Consolidated Balance Sheets as of December 31, 2001 and 2000 F-3
Consolidated Statements of Operations for the Years ended
December 31, 2001, 2000, and 1999 F-4
Consolidated Statements of Stockholders' Equity for the Years ended
December 31, 2001, 2000, and 1999 F-5
Consolidated Statements of Cashflows for the Years ended
December 31, 2001, 2000, and 1999 F-6
Notes to Consolidated Financial Statements F-7
Report of Independent Public Accountants F-21
Exihibit 21 - Subsidiaries of WidePoint Corporation F-23
Exihibit 24 - Schedule II - Valuation and Qualifying Accounts F-24
36
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
WidePoint Corporation
We have audited the accompanying consolidated balance sheet of WidePoint
Corporation (a Delaware corporation) and subsidiaries, as of December 31, 2001,
and the related consolidated statements of operations, stockholders' equity, and
cash flows for the year ended December 31, 2001. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of WidePoint
Corporation and subsidiaries at December 31, 2001, and the consolidated results
of their operations and their cash flows for the year ended December 31, 2001,
in conformity with accounting standards generally accepted in the United States
of America.
We have also audited Schedule II of WidePoint Corporation and subsidiaries for
the year ended December 31, 2001. In our opinion, this schedule presents fairly,
in all material respects, the information required to be set forth herein.
GRANT THORNTON LLP
Chicago, Illinois
March 8, 2002
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To WidePoint Corporation:
We have audited the accompanying consolidated 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 two years in the period ended December 31,
2000. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. 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 two 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
F-2
WIDEPOINT CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets December 31,
-------------------------------
2001 2000
------------ ------------
Assets
Current assets:
Cash and cash equivalents....................................... $ 1,563,544 $ 1,085,696
Accounts receivable, net of allowance of
$30,000 and $208,832, respectively............................ 459,983 1,880,165
Prepaid expenses and other assets............................... 47,941 173,698
----------- -----------
Total current assets...................................... 2,071,468 3,139,559
----------- -----------
Property and equipment, net..................................... 63,758 335,935
Intangible assets, net.......................................... 0 6,155,850
Other assets.................................................... 58,113 59,045
----------- -----------
Total assets............................................... 2,193,339 $9,690,389
=========== ===========
Liabilities and stockholders' equity Current liabilities:
Accounts payable................................................ $ 110,339 $ 384,226
Accrued expenses................................................ 447,159 853,653
Current portion of capital lease obligation..................... 18,009 29,830
----------- -----------
Total current liabilities.................................. 575,507 1,267,709
----------- -----------
Capital lease obligation, net of current portion..................... 6,421 24,430
----------- -----------
Total liabilities.......................................... 581,928 1,292,139
----------- -----------
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 shares
issued and outstanding as of December 31,
2001 and 2000................................................. 12,985 12,985
Stock warrants.................................................. 140,000 140,000
Additional paid-in capital...................................... 41,931,484 41,931,484
Accumulated deficit............................................. (40,473,058) (33,686,219)
----------- -----------
Total stockholders' equity................................. 1,611,411 8,398,250
----------- -----------
Total liabilities and stockholders' equity................. 2,193,339 $9,690,389
=========== ===========
The accompanying notes are an integral part of these consolidated statements
F-3
WIDEPOINT CORPORATION AND SUBSIDIARIES
Consolidated statements of operations
For the Years Ended December 31,
-------------------------------------------------
2001 2000 1999
----------- ----------- -----------
Revenues........................................................ $ 5,902,728 $12,834,474 $27,196,125
Operating expenses:
Cost of revenues........................................... 3,122,061 7,014,045 12,140,007
Research and development................................... -- -- 325,651
Sales and marketing........................................ 614,786 1,856,694 2,617,117
General and administrative................................. 2,549,661 8,535,062 9,701,672
Facilities closing expense................................. 43,500 376,289 --
Disposition of subsidiary.................................. -- 699,203 --
Impairment of long-term assets............................. 5,853,693 -- 1,703,825
Depreciation and amortization.............................. 545,290 851,562 1,817,329
----------- ----------- -----------
Loss from operations............................................ (6,826,263) (6,498,381) (1,109,476)
Other income (expenses):
Interest income............................................ 44,655 103,351 161,123
Interest expense........................................... (5,231) (198,971) (76,296)
Other...................................................... -- -- (33,756)
----------- ----------- -----------
Net loss before provision for income taxes...................... (6,786,839) (6,594,001) (1,058,405)
----------- ----------- -----------
Income tax provision............................................ -- -- 37,648
----------- ----------- -----------
Net loss........................................................ $(6,786,839) $(6,594,001) $(1,096,053)
=========== =========== ===========
Basic and diluted net loss per share............................ $ (0.52) $ (0.51) $ (0.08)
=========== =========== ===========
Basic and diluted weighted-average shares outstanding........... 12,984,913 12,979,055 12,949,913
=========== =========== ===========
The accompanying notes are an integral part of these consolidated statements
F-4
WIDEPOINT CORPORATION AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Additional
Preferred Stock Common Stock Stock Deferred Paid-In Accumulated
Shares Amount Shares Amount Warrants Compensation Capital Deficit Total
------ ------ ------ ------ -------- ------------ ------- ------- -----
Balance, December 31,
1998.................. -- -- 13,117,214 13,117 704,000 -- 41,059,101 (25,996,165) 15,780,053
Cancellation of
shares................ -- -- (167,301) (167) -- -- 167 -- --
Expiration of
warrants.............. -- -- -- -- (704,000) -- 704,000 -- --
Issuance of warrants
in Parker
acquisition........... -- -- -- -- 140,000 -- -- -- 140,000
Deferred compensation... -- -- -- -- 140,000 (140,000) -- -- --
Amortization of
deferred
compensation.......... -- -- -- -- -- 19,413 -- -- 19,413
Net loss................ -- -- -- -- -- -- -- (1,096,053) (1,096,053)
Balance, December 31,
1999.................. -- -- 12,949,913 12,950 280,000 (120,587) 41,763,268 (27,092,218) 14,843,413
Adjustment of warrant
valuation............. -- -- -- -- (140,000) 120,587 -- -- (19,413)
Exercise of stock
options............... -- -- 35,000 35 -- -- 168,216 -- 168,251
Net loss................ -- -- -- -- -- -- -- (6,594,001) (6,594,001)
Balance, December 31,
2000.................. -- -- 12,984,913 12,985 140,000 -- 41,931,484 (33,686,219) 8,398,250
Net loss................ -- -- -- -- -- -- -- (6,786,839) (6,786,839)
Balance, December 31,
2001.................. -- $ -- 12,984,913 $12,985 $140,000 $ -- $41,931,484 $(40,473,058) $1,611,411
The accompanying notes are an integral part of these consolidated statements
F-5
WIDEPOINT CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Years Ended December 31,
-----------------------------------------------
2001 2000 1999
------------ ------------ ------------
Cash flows from operating activities:
Net loss.......................................................... $(6,786,839) $(6,594,001) $(1,096,053)
Adjustments to reconcile net loss to net
cash (used in) provided
by operating activities
Depreciation and amortization expense......................... 545,290 851,562 1,817,329
Impairment of long-term assets................................ 5,853,693 -- 1,703,825
Loss on sale of property and equipment........................ 43,527 149,807 --
Disposition of subsidiary..................................... -- 699,203 --
Amortization of discount on notes payable..................... -- -- 113
Deferred compensation......................................... -- (19,413) 19,413
Changes in assets and liabilities-
Accounts receivable........................................... 1,420,182 3,667,958 (2,473,058)
Prepaid expenses and other assets............................. 126,689 161,811 59,264
Accounts payable and accrued expenses......................... (680,381) (2,146,728) 992,103
-------------- -------------- ---------------
Net cash provided by (used in)
operating activities.............................. 522,161 (3,229,801) 1,022,936
-------------- -------------- ---------------
Net cash used in investing activities:
Purchase of subsidiaries, net of cash acquired.................... -- -- (847,849)
Purchases of property and equipment............................... (17,733) (82,038) (426,887)
Proceeds from sale of property and equipment...................... 3,250 30,000 --
-------------- -------------- ---------------
Net cash used in investing activities................ (14,483) (52,038) (1,274,736)
-------------- -------------- ---------------
Net cash (used in) provided by financing activities:
Proceeds from exercise of stock options........................... -- 168,251 --
Net payments on long-term obligations............................. (29,830) (27,150) (42,892)
-------------- -------------- ---------------
Net cash (used in) provided by
financing activities............................... (29,830) 141,101 (42,892)
-------------- -------------- ---------------
Net increase (decrease) in cash........................................ 477,848 (3,140,738) (294,692)
Cash, beginning of period.............................................. 1,085,696 4,226,434 4,521,126
-------------- -------------- ---------------
Cash, ending of period................................................. 1,563,544 $ 1,085,696 $ 4,226,434
============== ============== ===============
Supplementary cash flow information:
Cash paid for-
Interest...................................................... $ -- $ 177,817 $ 9,005
============== ============== ===============
Income taxes.................................................. $ -- $ -- $ 137,648
============== ============== ===============
The accompanying notes are an integral part of these consolidated statements
F-6
Notes to Consolidated Financial Statements
1. Basis of Presentation, Organization and Nature of Operations:
WidePoint Corporation is a consulting services firm specializing in planning,
managing and implementing Information Technology solutions. It staff consists of
business and technical specialists that help clients improve their bottom line
and maintain a competitive edge in today's rapidly changing business
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 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
provided IT consulting services focused in Enterprise Resource Planning ("ERP").
During 1999, the Company established a new subsidiary named WidePoint
Corporation ("WidePoint-Subsidiary") and initiated operations in 2000 through
this subsidiary in an effort to fully transition the Company from a Year 2000
strategic solutions provider to an Internet Services company. In 2000, 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". During this transition in 2000, the Company experienced several economic
reversals that included an unexpected rapid deterioration in Year 2000 services,
and a severe contraction in Internet related services. These negative events
prompted the Company to initiate a refinement in Strategy during 2000 and on
September 29, 2000, the Company sold all of the outstanding shares of its PMC
subsidiary to a third-party purchaser that resulted in the elimination of
materially all of the Company's long-term debt.
During 2001, the Company continued to further refine its strategy and
consolidated its operations in an attempt to minimize losses, conserve working
capital, and provide a flexible, scaleable, and efficient business model that
was more responsive to the evolving needs of the Company's markets and
customers. Although these actions served to somewhat limit losses, they did not
result in a resumption of revenue growth for the Company. Late in 2001, the
Board of Directors of the Company decided that an updated assessment of
strategic alternatives was in order, and soon thereafter decided that a newly
focused strategic direction, plan, and leadership were required. These mandated
changes were initiated prior to the end of 2001, and put into effect during the
first calendar quarter of 2002. Consistent with the re-focus mandated by the
Board, and the materially deteriorated values of assets acquired in earlier
acquisitions, the Company recorded an impairment of the remaining intangible
assets associated with the acquisition of Eclipse that were acquired in
December, 1998.
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;
F-7
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 and negative cash flows in
2000 and during 2001. 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.
Use of Estimates
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
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 purchased 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, 2001 and 2000, cash and cash equivalents
included $1,618,818 and $ 607,645 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
F-8
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, 2001 and 2000, unbilled accounts receivable totaled $1,901 and
$4,315, respectively.
Significant Customers
During 2001, two customers individually represented 15 and 11 percent of
revenue. During 2000, no customers individually represented more than ten
percent of revenue.
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,
2001, three customers individually represented 23, 22, and 11 percent of
accounts receivable. As of December 31, 2000, no customer represented more than
ten 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,
-----------------------
2001 2000
---------- ----------
Furniture and fixtures............................... $ - $ 78,209
Computer equipment and software...................... 265,592 704,400
Less- Accumulated depreciation and amortization...... (201,834) (446,674)
$ 63,758 $335,935
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.
F-9
In accordance with the 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.
During the fourth quarter of 2001, the Company determined that certain of its
long-lived assets related to its acquisition of Eclipse 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 continued refinement of
its strategic direction and changes to its business plan that eliminated the
Eclipse business unit. The assets impaired included the remaining intangible
assets related to the goodwill associated with the original Eclipse acquisition
transaction. The Company recorded an impairment charge of $5,853,693 to
write-off the net book value of these long-lived assets in the 2001 consolidated
statement of operations.
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. 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 (Note 3).
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 2,845,500,
1,701,500, and 2,898,500 shares of common stock outstanding at December 31,
2001, 2000, and 1999, respectively, has not
F-10
been included in the calculation of the net loss per share as such effect would
have been anti-dilutive. 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 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
WidePoint financial instruments consist of cash, accounts receivable, accounts
payable and accrued expenses. The fair value of these financial instruments
approximates their carrying value as of December 31, 2001, due to their
short-term nature.
New accounting pronouncements
On July 20, 2001, the FASBissued Statement of Financial Accounting Standards
No.141 ("SFAS No. 141"), "Business Combinations", and Statement of Financial
Accounting Standards No. 142 ("SFAS No. 142"), "Goodwill and Intangible Assets".
SFAS No. 141 is effective for all business combinations completed after June 30,
2001. SFAS No. 142 is effective for fiscal years beginning after December 15,
2001; however, certain provisions of such Statement apply to goodwill and other
intangible assets acquired between July 1, 2001, and the effective date of SFAS
No. 142. Major provisions of these Statements and their effective dates for the
Company are as follows:
1. All business combinations initiated after June 30, 2001 must use the purchase
method of accounting. The pooling of interest method of accounting is prohibited
except for transactions initiated before July 1, 2001.
2. Intangible assets acquired in a business combination must be recorded
separately from goodwill if they arise from contractual or other legal rights or
are separable from the acquired entity and can be sold, transferred, licensed,
rented, or exchanged, either individually or as part of a related contract,
asset, or liability.
3. Goodwill, as well as intangible assets with indefinite lives, acquired after
June 30, 2001, will not be amortized. Effective January 1, 2002, all previously
recognized goodwill and intangible assets with indefinite lives will no longer
be subject to amortization.
F-11
4. Effective January 1, 2002, goodwill and intangible assets with indefinite
lives will be tested for impairment annually and whenever there is an impairment
indicator.
5. All acquired goodwill must be assigned to reporting units for purposes of
impairment testing and segment reporting.
As of December 31, 2001, the Company does not have any intangible assets
recorded on the books, and therefore will not be currently affected by SFAS No.
141 or SFAS No. 142.
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.
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-12
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:
As described in Note 2, the Company recognized an impairment charge in 2001
related to the acquisition of Eclipse. Prior to this write-off, intangible
assets associated with the Eclipse acquisition were being amortized over a
weighted-average life of 25 years. Accumulated amortization related to the
Eclipse intangibles was approximately $1,167,000 as of December 31, 2001 and the
Company recognized amortization expense of approximately $302,000 during 2001
prior to the disposition. During 2000, the accumulated amortization related to
the intangible assets associated with the Eclipse transaction was approximately
$890,000.
F-13
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,
-------------------------------------------
2001 2000 1999
------------- --------------- -------------
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,
---------------------------------
2001 2000 1999
--------- --------- ---------
Statutory federal income tax rate ............ (34.0)% (34.0)% (34.0)%
State income tax, net of benefit ............. -- -- 3.4
Amortization and write-off of intangibles .... (30.8) -- --
Increase in valuation allowance .............. (3.6) -- --
Non-deductible expenses ...................... -- 21.0% 34.0
Other ........................................ 0.4% 13.0% --
--------- --------- ---------
-- -- 3.4%
========= ========= =========
F-14
The deferred tax assets (liabilities) consisted of the following as of
December 31, 2001 and 2000 (in thousands):
December 31,
--------------------------
2001 2000
----------- ------------
Deferred tax assets:
Net operating loss carryforwards ............ $ 6,497,356 $ 5,144,000
AMT credit .................................. 13,853 14,000
Capital losses in excess capital gains ...... 696,215 228,000
----------- -----------
Other assets ................................ 242,655 --
Total deferred tax assets ...... 7,450,079 5,386,000
Deferred tax liabilities:
Depreciation and amortization ............... -- --
Other ....................................... -- --
----------- -----------
Total deferred tax liabilities.. -- --
Net deferred tax asset ........................... 7,450,079 5,386,000
Less- Valuation allowance ........................ (7,450,079) (5,386,000)
----------- -----------
$ -- $ --
=========== ===========
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, 2001 the Company had net operating loss carry forwards of
approximately $16,243,365 to offset future taxable income. These carry forwards
expire between 2010 and 2021. 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. The capital
losses in excess of capital gains expire in the year 2005. 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.
F-15
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 (Note 3).
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:
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, 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
F-16
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
exercisable when vested and expire ten years after the date of grant, subject to
any shorter period that may be provided in the agreement.
F-17
The following is a summary of the WidePoint options activity:
Number of Option Price Weighted-Average
Shares Range Exercise Price
------ ----- --------------
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
------------ ------------ --------
Granted.............................................. 1,742,000 .12-.19 0.17
Canceled or expired.................................. (605,000) .17-14.06 3.55
------------ ------------ --------
Outstanding, December 31, 2001 2,438,500 .12-14.06 1.37
============ ============ ========
As of December 31, 2001 and 2000, options to purchase 1,153,840 and 519,800
shares, respectively of common stock were exercisable with a weighted average
exercise price of $1.65 and $4.97, respectively. The weighted-average remaining
contractual life of the options outstanding at December 31, 2001 and December
31, 2000, was 7.69 and 8.43 years, respectively. The weighted-average fair value
of options granted in 2001 and 2000 was $0.15 and $1.49, 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,
--------------------------------------------------------
2001 2000 1999
------------------- --------------- -------------
Net loss:
As reported........................................... $ (6,786,840) $ (6,594,001) $ (1,096,053)
Pro forma............................................. $ (6,870,740) $ (7,396,840) $ (2,354,295)
Pro forma basic and diluted net loss per share:
As reported........................................... $ (0.52) $ (0.51) $ (0.08)
Pro forma............................................. $ (0.53) $ (0.57) $ (0.18)
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 140 percent, risk-free interest rates from 4.10 to
6.73 percent and an expected term of five years.
F-18
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.
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, Cleveland, 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, 2001.
As of December 31, 2001, the Company's office space and equipment leases,
including those for closed locations, extend through 2004. The Company also
leases various computer equipment and office equipment under capital leases that
expire on various dates through 2003. The future
F-19
minimum lease obligations under operating and capital leases as of December 31,
2001 are as follows:
Year Ended Operating Capital
December 31, Leases Leases
------------ ------ ------
2002............................................ 122,730 19,263
2003............................................ 78,096 6,568
2004............................................ 5,499 --
--------- --------
Total 206,325 25,831
--------
Amount representing interest.................... 1,401
--------
24,430
Less- Current portion 18,009
--------
$ 6,421
========
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.
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.
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11. Selected Quarterly Financial Data (Unaudited)
A summary of selected quarterly information for 2001 and 2000 is as follows:
2001 Quarter Ended
(in thousands of U.S. dollars except per share amounts)
March 31 June 30 Sep. 30 Dec. 31
-------- ------- ------- -------
Net Sales $ 2,200 $ 1,646 $ 1,253 $ 804
Gross Profit 1,041 768 620 351
Net Earnings (116) (270) (116) (6,284)
Earnings per Share $ (0.01) $ (0.02) $ (0.01) $ (0.48)
2000 Quarter Ended
(in thousands of U.S. dollars except per share amounts)
March 31 June 30 Sep. 30 Dec. 31
-------- ------- ------- -------
Net Sales $ 3,985 $ 3,576 $ 3,055 $ 2,218
Gross Profit 1,778 1,654 1,373 1,016
Net Earnings (1,927) (1,493) (2,575) (599)
Earnings per Share $ (0.15) $ (0.11) $ (0.20) $ (0.05)
F-21
Schedule II - valuation and qualifying accounts
Additions
Balance at Charged to Balance at
Beginning of Costs and End of
Description Period Expenses Deductions Period
----------- ------ -------- ---------- ------
For the year ended December 31, 1999,
Allowance for doubtful accounts................ $ 17,160 $ 95,840 $ 3,000 $110,000
For the year ended December 31, 2000,
Allowance for doubtful accounts................ $ 110,000 $ 541,607 $ 442,775 $208,832
For the year ended December 31, 2001,
Allowance for doubtful accounts................ $ 208,832 $ 10,000 $ 188,832 $ 30,000
F-22