SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 2000
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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
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(Exact name of registrant as specified in its charter)
DELAWARE 52-2040275
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
20251 CENTURY BLVD. GERMANTOWN, MD 20874
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (301) 353-9500
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Former name, former address and former fiscal year, if changed since last
report.
Indicate by check 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 [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares
outstanding of each of the issuer's classes of common stock, as of November 1,
2000; 12,984,913 shares of common stock, $.001 par value per share.
WIDEPOINT CORPORATION
INDEX
PAGE NO.
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of September 30, 2000
(unaudited) and December 31, 1999 (audited) 1
Consolidated Statements of Operations for the three and nine
months ended September 30, 2000 and 1999 (unaudited) 2
Consolidated Statements of Cash Flows for the three and nine
months ended September 30, 2000 and 1999 (unaudited) 3
Notes to Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 16
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WIDEPOINT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
2000 1999
------------- -------------
(Unaudited) (audited)
ASSETS
Current assets:
Cash and cash equivalents $ 1,520,913 $ 4,226,434
Accounts receivable,
net of allowance of $352,913 and $110,000, respectively 2,382,341 5,548,123
Prepaid expenses and other assets 283,926 394,554
------------- --------------
Total current assets 4,187,180 10,169,111
Property and equipment, net 565,060 705,445
Intangible assets, net 6,230,736 10,114,400
Other assets 121,585 -
------------- --------------
Total assets $ 11,104,561 $ 20,988,956
============= ==============
LIABILITIES & SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 1,974,228 $ 3,230,698
Current portion of capital lease obligation 29,152 27,149
Current portion of long-term debt 0 1,000,000
------------- --------------
Total current liabilities 2,003,380 4,257,847
Capital lease obligation, net of current portion 32,138 54,260
Long-term debt 0 1,833,436
------------- --------------
Total liabilities 2,035,518 6,145,543
Commitments and contingencies (Note 6)
Shareholders' equity
Preferred stock, $0.001 par value, 10,000,000 shares authorized,
None issued and outstanding - -
Common stock, $0.001 par value, 50,000,000 shares authorized,
12,984,913 and 12,949,913 shares issued and outstanding
as of September 30, 2000 and December 31, 1999, respectively 12,985 12,950
Stock warrants 280,000 280,000
Deferred compensation (68,086) (120,587)
Additional paid-in capital 41,931,483 41,763,268
Accumulated deficit (33,087,339) (27,092,218)
------------- --------------
Total shareholders' equity 9,069,043 14,843,413
------------- --------------
Total liabilities & shareholders' equity $ 11,104,561 $ 20,988,956
============== ==============
The accompanying notes are an integral part of these balance sheets.
1
WIDEPOINT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Nine Months
Ended September 30 Ended September 30
--------------------------- --------------------------
2000 1999 2000 1999
------------ ------------ ------------ -----------
(unaudited) (unaudited)
Revenues: $ 3,055,321 $ 8,052,063 $ 10,616,342 $ 20,237,439
Operating expenses:
Cost of sales 1,682,578 3,610,179 5,811,819 8,817,420
Sales and marketing 426,018 635,852 1,592,832 1,853,178
General and administrative 2,279,565 2,326,816 7,413,550 6,575,406
Facilities closing expense 273,000 - 273,000 -
Disposition of subsidiary 694,220 - 694,220 -
Depreciation and amortization 238,624 430,097 716,733 1,251,299
-------------- ------------- -------------- --------------
Income (loss) from operations (2,538,684) 1,049,119 (5,885,812) 1,740,136
-------------- ------------- -------------- --------------
Other income (expenses):
Interest income 25,592 40,922 88,493 93,031
Interest expense (62,341) (471) (197,802) (7,794)
Other - (14,541) - 1,764
-------------- ------------- -------------- --------------
Income (loss) before provision for income taxes (2,575,433) 1,075,029 (5,995,121) 1,827,137
-------------- ------------- -------------- --------------
Provision for income taxes - 71,546 - 71,546
Net income (loss) $ (2,575,433) $ 1,003,483 $ (5,995,121) $ 1,755,591
============= ============= ============== ==============
Basic net income (loss) per share $ (0.20) $ 0.08 $ ( 0.46) $ 0.14
============= ============= ============== ==============
Basic weighted average shares outstanding 12,984,913 12,949,913 12,984,913 12,949,913
============= ============= ============== ==============
Diluted net income (loss) per share $ (0.20) $ 0.08 $ (0.46) $ 0.14
============= ============= ============== ==============
Diluted weighted average shares outstanding 12,984,913 12,989,865 12,984,913 13,001,077
============= ============= ============== ==============
The accompanying notes are an integral part of these statements.
2
WIDEPOINT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Nine Months
Ended September 30 Ended September 30
--------------------------- --------------------------
2000 1999 2000 1999
---- ---- ---- ----
(unaudited) (unaudited)
Cash flows from operating activities:
Net income (loss) $ (2,575,433) $ 1,003,483 $ (5,995,121) $ 1,755,591
Adjustments to reconcile loss to net cash:
Depreciation and amortization expense 238,624 430,097 716,733 1,251,299
Disposition of subsidiary 694,220 - 694,220 -
Changes in assets and liabilities:
Accounts receivable 621,772 (1,243,434) 3,165,782 (3,303,281)
Prepaid expenses and other assets 28,694 113,223 (10,957) (127,560)
Accounts payable, accrued expenses, and other 229,091 183,346 (1,184,645) 695,082
------------- ------------- ------------- -------------
Net cash provided by (used in) operating activities (763,042) 486,715 (2,613,988) 271,131
------------- ------------- ------------- -------------
Net cash used in investing activities:
Purchases of property and equipment (32,428) (201,868) (71,414) (282,120)
------------- ------------- ------------- -------------
Net cash used in investing activities (32,428) (201,868) (71,414) (282,120)
------------- ------------- ------------- -------------
Net cash used in financing activities:
Net payments on long-term obligations (9,119) (52,718) (20,119) (35,519)
------------- ------------- ------------- -------------
Net cash used in financing activities (9,119) (52,718) (20,119) (35,519)
------------- ------------- ------------- -------------
Net increase (decrease) in cash (804,590) 232,129 (2,705,521) (46,508)
------------- ------------- ------------- -------------
Cash, beginning of period 2,325,503 4,242,489 4,226,434 4,521,126
------------- ------------- ------------- -------------
Cash, end of period $ 1,520,913 $ 4,474,618 $ 1,520,913 $ 4,474,618
============= ============= ============= =============
The accompanying notes are an integral part of these statements.
3
WIDEPOINT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION, ORGANIZATION, AND NATURE OF OPERATIONS:
BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with Rule 10-01 of Regulation S-X. Accordingly, they do not include
all of the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments, consisting of normal recurring adjustments, considered
necessary for a fair presentation have been included. These financial
statements should be read in conjunction with the financial statements of
WidePoint Corporation (formerly known as ZMAX Corporation; the "Company"), as
of December 31, 1999, and the notes thereto included in the Annual Report on
Form 10-K filed by the Company. The results of operations for the three months
and the nine months ended September 30, 2000, respectively, are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2000.
On November 6, 1996, the Company acquired all of the outstanding shares
of Century Services, Inc. ("CSI"), a Maryland corporation. On December 14,
1998, the Company acquired all the outstanding shares of Eclipse Information
Systems, Inc. ("Eclipse"), an Illinois corporation. On October 1, 1999, the
Company acquired all of the outstanding shares of Parker Management
Consultants, Inc. ("PMC"), a Delaware corporation. In December 1999, the
Company established a new subsidiary, WidePoint Corporation
("WidePoint-Subsidiary") which effective in January 2000 began to
substantially provide all of the Company's services. On May 25, 2000, the
shareholders of the Company approved the amendment of the Company's
Certificate of Incorporation to change the name of the Company from ZMAX
Corporation to WidePoint Corporation. Effective June 26, 2000, the trading
symbol for the Company's Common Stock on the NASDAQ SmallCap Market was
changed from "ZMAX" to "WDPT" as a result of the change in the Company's
corporate name from ZMAX Corporation to WidePoint Corporation. On June 30,
2000, the Company merged CSI, Eclipse, and WidePoint-Subsidiary into the
Company, with the Company being the surviving entity in such mergers. In
September 2000, the Company implemented a refinement of its business strategy.
As part of this restructuring, the Company closed and relocated its Company
headquarters to Chicago, Illinois. On September 29, 2000, the Company sold all
of the outstanding shares of PMC to a third-party purchaser. The Company
recorded expense of $273,000 associated with the office closings and a loss of
$694,220 associated with the disposition of the PMC subsidiary. (See Note 3)
As of September 30, 2000, the Company had operations in Maryland, Illinois,
and Ohio. The accompanying consolidated financial statements include the
accounts of these acquired entities since their respective dates of
acquisition. All significant inter-company amounts have been eliminated.
NATURE OF OPERATIONS
During 1998 and 1997, the Company's revenues were derived primarily from
millennium services, being the primary business of CSI at the time of its
acquisition by the Company. In December 1998, the Company expanded its
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operations through the acquisition of Eclipse. Eclipse performed management
and information systems consulting services. In October 1999, the Company
further expanded its operations through the acquisition of PMC. PMC also
performed management and information systems consulting services.
During 1999, the Company began to implement an intentional shift in its
business mix away from millennium services and into management and information
systems consulting, with a specific focus on the Internet. In conjunction with
this shift to e-business, the Company further consolidated its operations by
merging many of its subsidiaries into itself and changing its corporate name
to further highlight these changes within the Company. On September 29, 2000,
the Company sold all of the outstanding shares of PMC as part of the Company's
further refinement of its business strategy. As a result of the sale, all of
the goodwill and other intangible assets remaining of PMC were written off.
The Company currently specializes in providing strategic and technical
expertise in the realm of e-business and during the period three months or
nine months ended September 30, 2000, had no revenues related to millennium
services.
The Company's operations are subject to certain risks and uncertainties,
including among others, rapidly changing technology; current and potential
competitors with greater financial, technological, production and marketing
resources; reliance on certain significant customers; the need to develop
additional products and services; the integration of acquired businesses;
dependence upon strategic alliances; the need for additional technical
personnel; dependence on key management personnel; management of growth;
uncertainty of future profitability; and possible fluctuations in financial
results. The Company has devoted substantial resources to shifting its
business mix to comprehensive e-business services and implementing a refined
strategy. As a result, the Company experienced operating losses in 1999 and
operating losses and negative cash flows from operations during the first nine
months of 2000. These losses and negative operating cash flows are expected to
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 equity or 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:
CASH AND CASH EQUIVALENTS
Investments with original maturities of three months or less are
considered cash equivalents for purposes of these consolidated financial
statements. The Company maintains cash and cash equivalents with various major
financial institutions. At September 30, 2000 and December 31, 1999, cash and
cash equivalents included $1,081,807 and $2,867,950, respectively, of
investments in overnight sweep accounts. 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.
5
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. 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
September 30, 2000 and December 31, 1999, unbilled accounts receivable totaled
$82,331 and $198,773, respectively.
SIGNIFICANT CUSTOMERS
For the three months ended September 30, 2000, one customer individually
represented 13% of revenues. For the three months ended September 30, 1999,
two customers individually represented 23% and 10%, respectively, of revenues.
Due to the nature of the Company's business and the relative size of certain
contracts, the loss of any single significant customer could have a material
adverse effect on the Company's results of operations.
CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Company to credit
risk consist of cash and cash equivalents and accounts receivable. Accounts
receivable includes amounts due from relatively large companies in a variety
of industries and governments. As of September 30, 2000, no one customer
individually represented more that 10% of accounts receivable. As of September
30, 1999, two customers individually represented 32% and 12%, respectively, 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.
EARNINGS PER SHARE
SFAS No. 128 "Earnings per share" 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. Outstanding shares in the three month and nine month periods
6
ending September 30, 1999 that were subject to cancellation agreements have
been included in either the basic or diluted calculation. The calculation of
the basic and diluted weighted average shares is shown below:
Three Months Nine Months
Ended September 30 Ended September 30
--------------------------- --------------------------
2000 1999 2000 1999
------------ ------------ ------------ -----------
(unaudited) (unaudited)
WEIGHTED AVERAGE SHARE CALCULATIONS
Weighted average shares of common stock
outstanding 12,984,913 12,949,913 12,984,913 13,014,974
Less: Average number of cancelable shares
common stock outstanding - - - (65,061)
------------ ----------- ----------- -----------
Basic weighted average shares outstanding 12,984,913 12,949,913 12,984,913 12,949,913
Treasury stock effect of options and warrants - 39,952 - 51,164
Diluted weighted average shares outstanding 12,984,913 12,989,865 12,984,913 13,001,077
============ =========== =========== ===========
NEW ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin ("SAB") 101, "Revenue Recognition in Financial
Statements," which provides guidance related to revenue recognition based on
interpretations and practices followed by the SEC. SAB 101 requires companies
to report any changes in revenue recognition as a cumulative change in
accounting principles in accordance with Accounting Principles Board Opinion
20, "Accounting Changes." The SEC subsequently issued SAB 101A, "Amendment:
Revenue Recognition in Financial Statements," which delayed implementation of
SAB 101 until the Company's second fiscal quarter of 2000 and SAB 101B, which
delays the implementation date of SAB 101 until no later than the Company's
fourth fiscal quarter of 2000. The Company is currently in the process of
evaluating the impact, if any, that SAB 101 will have on its financial
position or results of operations.
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
7
an enterprise. Under this definition, the Company operated as a single segment
for all periods presented.
3. DEBT:
PROMISSORY NOTE PAYABLE
On September 29, 2000, the Company sold 100% of the issued and
outstanding capital stock of PMC to eHoldings, Inc., a Maryland corporation
(the "Buyer"), in consideration for the transfer from the Buyer to the
Company, and the subsequent extinguishment thereof by the Company, of the
promissory note in the original principal amount of $3 million which was
previously issued by the Company to the former sole shareholder of PMC as part
of the consideration previously paid by the Company when it originally
acquired PMC. The buyer had previously acquired such promissory note from the
former shareholder of PMC.
This $3.0 million note payable previously 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. Interest payments related to
this note 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 amortized on the effective interest method over the term of the
note until its extinguishments.
4. 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 Company 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. The remaining 167,301
shares were returned to the Company and canceled in April 1999.
5. STOCK WARRANTS:
On September 20, 1999, the Company entered into a two-year agreement to
engage an international investment banking firm to provide investment banking,
merger and acquisition and strategic planning services. In conjunction with
the hiring of that firm, the Company issued that firm a warrant to purchase
200,000 shares of Company common stock at $2.75 per share, an amount that
exceeded the stock's closing sale price on that date. The Company used the
Black-Scholes option pricing model to value this warrant and it was determined
to have a fair value of approximately $140,000, which is being recognized
ratably over the term of the agreement. This deferred compensation has been
reflected as a separate component of stockholders' equity and as of September
30, 2000, approximately $82,502 of expense had been recognized related to the
issuance of this warrant.
On October 1, 1999, the Company issued a warrant to purchase 200,000
shares of Company common stock at $5.00 per share, an amount that exceeded the
stock's closing sale price on that date, as part of the PMC acquisition. The
Company used the Black-Scholes option pricing model to value this warrant at
8
approximately $140,000. This value has been reflected as part of the stock
warrants component 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.
6. COMMITMENTS AND CONTINGENCIES:
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.
9
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of the financial condition and
results of operations of the Company should be read in conjunction with the
financial statements and the notes thereto which appear elsewhere in this
quarterly report and the Company's Annual Report on Form 10-K for the year
ended December 31, 1999.
The information set forth below includes forward-looking statements.
Certain factors that could cause results to differ materially from those
projected in the forward-looking statements are set forth below. Readers are
cautioned not to put undue reliance on forward-looking statements. The Company
disclaims any intent or obligation to update publicly these forward-looking
statements, whether as a result of new information, future events or
otherwise.
OVERVIEW
WidePoint Corporation (formerly known as ZMAX Corporation; the
"Company") focuses on acquiring, building and operating companies in the
information technology ("IT") industry. In 1996, the Company acquired all of
the outstanding shares of Century Services, Inc. ("CSI"), a corporation that
provided re-engineering and information processing services to users of
large-scale computer systems. In December 1998, the Company acquired all of
the outstanding shares of Eclipse Information Systems, Inc. ("Eclipse"), a
corporation that provides IT consulting services through several practice
areas focused in distributed client server technologies. In October 1999, the
Company acquired all of the outstanding shares of Parker Management
Consulting, Ltd. ("PMC"), a corporation that provides IT consulting services
focused in Enterprise Resource Planning ("ERP"). During 1999, the Company
established a new subsidiary named WidePoint Corporation
("WidePoint-Subsidiary"). During the first half of 2000, the Company
substantially consolidated all of the Company's IT services into its
WidePoint-Subsidiary. Further, in June 2000, the Company merged CSI, Eclipse
and WidePoint-Subsidiary into the Company, with the Company being the
surviving entity in such mergers. In conjunction with such mergers, the
Company changed its corporate name from ZMAX Corporation to WidePoint
Corporation and changed the trading symbol for its common stock on the NASDAQ
SmallCap Market from "ZMAX" to "WDPT." On September 29, 2000, the Company sold
all of the outstanding shares of its PMC subsidiary to a third-party
purchaser.
As a result of the sale by the Company on September 29, 2000, of all the
outstanding capital of stock of PMC, the results of operation of PMC are
included in the financial statements of the Company through such date of
disposition. Prior to the date of disposition, the results of operations of
PMC are included in the Company's financial statements from such date of
acquisition. Prior to that acquisition, PMC was a privately held company with
its headquarters located in Laurel, Maryland. A description of the Company's
prior acquisistion of PMC is set forth in the Company's Form 8-K/A as filed on
December 15, 1999, with the Securities and Exchange Commission ("SEC"). A
further description of the Company's sale of PMC is set forth in the Company's
Form 8-K filed on October 13, 2000.
10
As a result of the acquisition by the Company on December 14, 1998, of
all the outstanding capital stock of Eclipse, the results of operations of
Eclipse are included in the financial statements of the Company from that date
of acquisition. Prior to that acquisition, Eclipse was a privately held
company with its headquarters located in Oakbrook, Illinois. A further
description of this transaction is set forth in the Company's Form 8-K/A filed
on March 1, 1999, with the SEC.
As a result of the acquisition by the Company on November 6, 1996, of
all the outstanding stock of CSI, the results of operations of CSI were
included in the financial statements of the Company from that date of
acquisition. Through 1999, CSI marketed millennium services to a variety of
commercial and governmental organizations.
During the first nine months of 2000, the Company has integrated all of
the services of its subsidiaries into the Company. During the next 12 months,
the Company intends to make investments in the expansion and further
development of additional IT services and markets, as well as pursue other
potentially synergistic acquisitions. In view of these changes, the Company
believes the historical period-to-period comparisons of its financial results
are not necessarily indicative of future performance. Specifically, as the
Company increases its investments in other IT services, it will incur
training, salary and other costs prior to the recognition of related revenues.
In addition, a significant portion of the Company's revenues are expected to
be derived from a relatively small number of large-scale, comprehensive
projects. Consequently, the Company's revenues and operating results may be
subject to substantial fluctuations in any given year and from quarter to
quarter.
For the three-month period ended September 30, 2000, the Company's
revenues decreased by $5.0 million to $3.1 million as compared to $8.1 million
for the three-month period ended September 30, 1999. For the nine month period
ended September 30, 2000, the Company's revenues decreased by $9.6 million to
$10.6 million as compared to $20.2 million for the nine month period ended
September 30, 1999. For each of the three-month period and the nine month
period ended September 30, 2000, no revenues were generated by CSI's
millennium services. The overall decrease in revenues during each of the
three-month period and the nine month period ended September 30, 2000 was
partially offset by increased non-millennium services. As a result of this
significant and planned shift in the Company's revenues away from millennium
services and into other IT services, the Company believes the period-to-period
comparisons of its financial results are not indicative of future performance.
The Company's current cost structure consists 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 in future quarters.
The Company's profitability depends upon both the volume of service and
the Company's ability to manage costs. Because a significant portion of the
Company's cost structure is related to salaries and benefits, the Company must
effectively manage these costs to achieve profitability. In addition, certain
of the Company's projects may be priced on a fixed fee basis. The
profitability on an individual fixed fee project depends upon completing the
project within the estimated number of staff hours and within the agreed upon
11
time frame. To date, the Company has typically been able to maintain its
operating margins through efficiencies achieved completing fixed fee projects
within budget, by offsetting increases in consultant salaries with increases
in consultant fees, and by effectively managing general overhead costs.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2000
AS COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 1999
REVENUES. Revenues for the three month period ended September 30, 2000,
were $3.1 million, a decrease of approximately $5.0 million, as compared to
revenues of $8.1 million for the three month period ended September 30, 1999.
The decrease in revenues was primarily attributable to decreased sales from
millennium services and staff augmentation services that were not offset by
revenues from the Company's intentional shift to project-based E-value chain
services.
GROSS PROFIT. Gross profit for the three month period ended September
30, 2000, was $1.4 million, or 45% of revenues, a decrease of $3.1 million
over gross profit of $4.4 million, or 55% of revenues, for the three month
period ended September 30, 1999. The decline of gross profit was attributable
to the traditionally lower margins associated with IT consulting services as
compared to the higher margins associated with millennium services and
software.
SALES AND MARKETING. Sales and marketing expenses for the three month
period ended September 30, 2000, were $0.4 million, or 14% of revenues, a
decrease of $0.2 million, as compared to $0.6 million, or 8% of revenues, for
the three month period ended September 30, 1999. The decrease in sales and
marketing expenses for the three months ended September 30, 2000 was primarily
attributable to the release of sales personal associated with the Company's
CSI subsidiary which primarily performed most of the Company's prior
millennium services.
GENERAL AND ADMINISTRATIVE. General and administrative expenses for the
three month period ended September 30, 2000, were $2.3 million, or 75% of
revenues, a decrease of less than $0.1 million, as compared to $2.3 million,
or 28% of revenues, incurred by the Company for the three month period ended
September 30, 1999. The nominal decrease in general and administrative
expenses for the three month period ended September 30, 2000 was primarily
attributable to a refinement in business strategy associated with the
intentional shift of the Company's services from millennium services and into
management and information systems consulting.
FACILITIES CLOSING EXPENSE. Facilities closing expense for the three
month period ended September 30, 2000, were $0.3 million, or 9% of revenues.
The facilities closing expense is related to costs associated with the
elimination of the Company's Germantown and satellite locations.
DISPOSITION OF SUBSIDIARY. The disposition of subsidiary expense for the
three month period ended September 30, 2000, was $0.7 million, or 23% of
revenues. The disposition of subsidiary expense is related to costs associated
with the Company's sale of its PMC subsidiary on September 29, 2000.
12
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses
for the three month period ended September 30, 2000, was $0.2 million, or 8%
of revenues, a decrease of $0.2 million, as compared to $0.4 million of such
expenses, or 5% of revenues, incurred by the Company for the three month
period ended September 30, 1999. The decrease in depreciation and amortization
expenses for the three month period ended September 30, 2000 was primarily
attributable to the write-off of certain intangible assets associated with the
Company's discontinued millennium services during the fourth quarter of 1999.
OTHER INCOME (EXPENSE). Interest income for the three month period ended
September 30, 2000, was $25,592, or less than 1% of revenues, a decrease of
$15,330 as compared to $40,922, or less than 1% of revenues, for the three
month period ended September 30, 1999. The decrease in interest income for the
three month period ended September 30, 2000 was primarily attributable to
lesser amounts of cash available for investment in overnight sweep accounts.
Interest expense for the three month period ended September 30, 2000 was
$62,341, or 2% of revenues, an increase of $61,870 as compared to $471 or less
than 1% of revenues, for the three month period ended September 30, 1999. The
increase in interest expense for the three months ended September 30, 2000 was
primarily attributable to the prior issuance of a $3.0 million promissory note
with an imputed interest rate of 8.5% per annum which was included as part of
the purchase price paid by the Company in conjunction with its original
acquisition of PMC in October 1999.
NET INCOME (LOSS). As a result of the above, the net loss for the three
month period ended September 30, 2000, was $2.6 million as compared to the net
income of approximately $1.0 million for the three months ended September 30,
1999, which represents a difference of approximately $3.6 million.
NINE MONTHS ENDED SEPTEMBER 30, 2000
AS COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 1999.
REVENUES. Revenues for the nine month period ended September 30, 2000,
were $10.6 million, a decrease of approximately $9.6 million, as compared to
revenues of $20.2 million for the nine month period ended September 30, 1999.
The decrease in revenues was primarily attributable to decreased sales from
millennium services and staff augmentation services that were not offset by
revenues from the Company's intentional shift to project-based E-value chain
services.
GROSS PROFIT. Gross profit for the nine month period ended September 30,
2000, was $4.8 million, or 45% of revenues, a decrease of $6.6 million over
gross profit of $11.4 million, or 56% of revenues, for the nine month period
ended September 30, 1999. The decline of gross profit was attributable to
lower margins associated with the introduction of new web enabled services,
lower margins traditionally associated with IT consulting services as compared
to the higher margins associated with millennium services and software, and a
cost overrun associated with a fixed price project that was accounted for in
accordance with Company policy.
13
SALES AND MARKETING. Sales and marketing expenses for the nine month
period ended September 30, 2000, were $1.6 million, or 15% of revenues, a
decrease of $0.3 million, as compared to $1.9 million, or 9% of revenues, for
the nine month period ended September 30, 1999. The decrease in sales and
marketing expenses for the nine month period ended September 30, 2000 was
primarily attributable to the release of sales personal associated with the
Company's CSI subsidiary which primarily performed most of the Company's prior
millennium services.
GENERAL AND ADMINISTRATIVE. General and administrative expenses for the
nine month period ended September 30, 2000, were $7.4 million, or 70% of
revenues, an increase of $0.8 million, as compared to $6.6 million, or 32% of
revenues, incurred by the Company for the nine month period ended September
30, 1999. The increase in general and administrative expenses for the nine
month period ended September 30, 2000 was primarily attributable to increases
in non-billable staff and training cost associated with the intentional shift
of the Company's services from millennium services and into management and
information systems consulting.
FACILITIES CLOSING EXPENSE. Facilities closing expense for the nine
month period ended September 30, 2000, was $0.3 million, or 3% of revenues.
The facilities closing expense is related to costs associated with the
termination of the Company's Germantown and satellite locations.
DISPOSITION OF SUBSIDIARY. The disposition of subsidiary expense for the
nine month period ended September 30, 2000, was $0.7 million, or 7% of
revenues. The disposition of subsidiary expense is related to costs associated
with the Company's sale of its PMC subsidiary on September 29, 2000.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses
for the nine month period ended September 30, 2000, were $0.7 million, or 7%
of revenues, a decrease of $0.5 million, as compared to $1.3 million of such
expenses, or 6% of revenues, incurred by the Company for the nine month period
ended September 30, 1999. The decrease in depreciation and amortization
expenses for the nine months ended September 30, 2000 was primarily
attributable to the write-off of certain intangible assets associated with the
Company's discontinued millennium services during the fourth quarter of 1999.
OTHER INCOME (EXPENSE). Interest income for the nine month period ended
September 30, 2000, was $88,493, or less than 1% of revenues, a decrease
increase of $4,538 as compared to $93,031, or less than 1% of revenues for the
nine month period ended September 30, 1999. The decrease in interest income
for the nine months ended September 30, 2000 was primarily attributable to
lesser amounts of cash available for investment in overnight sweep accounts.
Interest expense for the nine months ended September 30, 2000 was $197,802.
The increase in interest expense for the nine months ended September 30, 2000
was primarily attributable to the issuance of a $3.0 million promissory note
with an imputed interest rate of 8.5% per annum which was included as part of
the purchase price paid by the Company in conjunction with its prior
acquisition of PMC in October 1999.
NET INCOME (LOSS). As a result of the above, the net loss for the nine
months ended September 30, 2000, was $5.9 million as compared to the net
income of approximately $1.8 million for the nine months ended September 30,
1999, which represents a difference of approximately $7.8 million.
14
LIQUIDITY AND CAPITAL RESOURCES
The Company has, since inception, financed its operations and capital
expenditures through the sale of stock, seller notes, convertible notes,
convertible exchangeable debentures and the proceeds from the exchange offer
and exercise of the warrants related to the convertible exchangeable
debentures. Cash used in operating activities for the quarter ended September
30, 2000, was approximately $0.8 million as compared to cash provided by
operating activities of $0.5 million for the quarter ended September 30, 1999.
The increase in cash used in operations during the third quarter of 2000 was
primarily a result of the net loss from the Company's operations and closing
expenses of the Company's Germantown, Maryland office. Capital expenditures on
property and equipment were less than $0.1 million for the quarters ended
September 30, 2000, and 1999.
As of September 30, 2000, the Company had net working capital of
approximately $2.2 million. The Company's primary source of liquidity consists
of approximately $1.5 million in cash and cash equivalents and approximately
$2.4 million of accounts receivable. The Company's current liabilities include
$2.0 million in accounts payable and accrued expenses.
The market for the Company's services is expanding and the Company's
business environment is characterized by rapid technological changes. In 1999,
the Company began to shift away from millennium services and has consolidated
its current subsidiaries into one operating company. 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 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 growth and
technological change of the market make it difficult for the Company to
predict future liquidity requirements with certainty. Over the longer term,
the Company must successfully execute its plans to generate significant
positive cash flows if it is to sustain adequate liquidity without impairing
growth or requiring the infusion of additional funds from external sources.
Additionally, a major expansion, such as would occur with the acquisition of a
major new subsidiary, might also require external financing that could include
additional debt or capital. There can be no assurance that additional
financing, if required, will be available on acceptable terms, if at all.
OTHER
Inflation has not had a significant effect on the Company's operations,
as increased costs to the Company have generally been offset by increased
prices of 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
15
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, 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 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
NOT APPLICABLE
16
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
The following exhibit is filed herewith:
27 - Financial Data Schedule
(b) REPORTS ON FORM 8-K
On October 13, 2000, the Company filed a Form 8-K with the Securities
and Exchange Commission reporting the sale on September 29, 2000, of
Parker Management Consultants, Ltd., a Delaware corporation.
17
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: November 20, 2000 /s/MICHAEL C. HIGGINS
---------------------
Michael C. Higgins
President
/s/JAMES T. MCCUBBIN
--------------------
James T. McCubbin
Vice President - Principal Financial
and Accounting Officer