1
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 [No Fee Required]
For the year ended December 31, 2000
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [No Fee Required]
COMMISSION FILE NUMBER 0-10558
NQL INC.
(Exact name of registrant as specified in its charter)
(Formerly incorporated as Alpha Microsystems)
DELAWARE 33-0887356
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
4 HUTTON CENTRE DRIVE, SUITE 500, SANTA ANA, CA 92707
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (714) 338-1600
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant based on the closing sale price of its common stock on March 19, 2001
on the Nasdaq National Market, a date within 60 days prior to the date of
filing, was $27,411,143.
As of March 19, 2001, there were 14,391,103 shares of the registrant's common
stock outstanding.
2
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Registrant's definitive Proxy Statement for the Annual Meeting
of Stockholders to be filed no later than 120 days after the close of the
registrant's year ended December 31, 2000, are incorporated by reference in Part
III of this Annual Report on Form 10-K.
PART I
INTRODUCTORY NOTE
This Annual Report on Form 10-K contains certain forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934 and we intend that such forward-looking
statements be subject to the safe harbors created thereby. These forward-looking
statements include, but are not limited to, statements relating to: (i) the
market acceptance of our products, including, but not limited to, our Network
Query Language-based infrastructure software products and, and our information
technology (IT) services, (ii) the ability of the Company to raise funds through
additional issuances of debt or equity, (iii) the continued development of our
technical, manufacturing, sales, marketing and management capabilities, (iv)
anticipated competition, (v) completion of complementary acquisitions and
alliances, and (vi) any future performance, achievements, or industry results
expressed or implied by such forward-looking statements.
The forward-looking statements included in this report are based on current
expectations that involve a number of risks and uncertainties. Forward-looking
statements included in this report regarding our results, performance and
achievements are dependent on a number of factors. Our ability to execute
Internet/intranet technology and marketing agreements with key companies and our
ability to derive revenues from the sale of product, licensing of technology, or
revenue sharing relationships depends on: (i) our ability to develop, produce
and market products and services that incorporate new technology, are priced
competitively and achieve significant market acceptance, (ii) whether our
products and information technology services will be commercially successful or
sufficiently technically advanced to keep pace with rapid improvements in
computer technology and resulting product obsolescence, (iii) our ability to
deliver commercial quantities of new products in a timely manner, (iv) our
ability to manage risks associated with our Internet operating strategies, (v)
changes in our operating strategy and capital expenditure plans, and (vi) the
economic and competitive environment of the Internet/intranet industry in
general. Our ability to expand our information technology professional services
division through new service contracts, expansion of time and materials
servicing, and alliances with third-party information technology service
providers, to realize revenues from existing service contract alliances and to
develop opportunities to service products manufactured by third parties depends
on: (i) our ability to develop, produce and market services that are priced
competitively, (ii) whether our information technology services will be
commercially successful or sufficiently technically advanced to keep pace with
rapid improvements in computer technology and resulting product obsolescence,
(iii) changes in the cost of information technology services, (iv) our ability
to manage risks associated with our information technology services operating
strategies, (v) changes in our operating and capital expenditure plans, and (vi)
our ability to manage our expenses in relation to our revenues. Our ability to
potentially pursue companies that provide strategic platforms on which to
leverage future growth depends on: (i) the economic and competitive environment
of the computer maintenance and information technology support services industry
in general, and in our specific market areas, (ii) our ability to identify
acquisition candidates, (iii) the availability of, and terms of, financing to
fund the anticipated growth of our business, and (iv) our ability to
successfully integrate acquired operations with our existing operations.
Assumptions relating to the foregoing involve judgments with respect to, among
other things, future economic, competitive and market conditions, all of which
are difficult or impossible to predict accurately and many of which are beyond
our control. In addition, our business and operations are subject to substantial
risks, which increase the uncertainty inherent in forward-looking statements. In
light of the significant uncertainties inherent in the forward-looking
information included in this report, the inclusion of such information should
not be regarded as a representation by us or any other person that our
objectives or plans will be achieved. We disclaim any obligations to update any
such factors or to publicly announce the results of any revisions to any of the
forward-looking statements contained in this report to reflect future events or
developments.
We previously operated under a fiscal year end ending the last Sunday in
February. In 1998, we adopted a calendar year end effective for the fiscal
ten-month period ending December 31, 1998. To the extent comparisons of the year
ending December 31, 1999 are made to the twelve-month period ending December 31,
1998, the amounts for such prior periods have been derived from previously
reported results for the ten-month period ended December 31, 1998 plus
two-thirds of the quarter ended February 22, 1998, and are unaudited.
2
3
ITEM 1. BUSINESS
RECENT ASSET SALE
In January 2000, we sold our historic principal business lines which were: (1)
the sale of computer and networking hardware and services, and (2) the service
of our products, the service of third-party hardware and software products, and
installation, training, and consulting services with respect to these products.
Following the completion of this transaction, we are now focusing exclusively on
our remaining operations, which are segmented into two operating units - our
software division, which focuses on Network Query Language-based infrastructure
software products and services, and our information technology (IT) professional
services subsidiary, Delta CompuTec, Inc. ("DCi").
The sale involved the transfer of substantially all of the assets associated
with the managed services division and the computer hardware manufacturing
division to R.E. Mahmarian Enterprises, LLC, which changed its name to Alpha
Microsystems, LLC in November 2000, for consideration of approximately $3.2
million, consisting primarily of liabilities that were assumed by the purchaser.
We also received a ten percent contingent interest in gross cash and non-cash
proceeds that may be received by Alpha Microsystems, LLC upon the occurrence of
certain liquidity events involving the purchaser, which is owned by Richard E.
Mahmarian, a former member of our Board of Directors. This transaction was
approved by a special committee of the Board of Directors and we received an
opinion from our investment bankers that the consideration received in the
transaction was fair from a financial point of view.
The assets sold included certain accounts receivable, prepaid expenses, other
current and non-current assets, inventories, fixed assets, information
technology service contracts and capitalized software development costs. We also
agreed to (1) grant Alpha Microsystems, LLC the right to use the name "Alpha
Microsystems" and associated logos, marks and trade dress, (2) transfer the
rights to the trade names, logos and trademarks associated with divisions that
were sold, and (3) enter into a five-year license agreement providing the right
to internally use our Network Query Language-based technology. Additionally, we
agreed to sublease a portion of our Santa Ana, California facility at a rental
rate equal to our cost.
OVERVIEW
We are a provider of content integration and networking solutions. Our two
operating divisions are (1) our NQL software division that develops and markets
Network Query Language-based software products and services which are designed
to access, excavate, gather, organize and convert into desired formats the
massive amounts of data that are located on the web and legacy-based systems,
and (2) our DCi information technology (IT) professional services division that
provides network installation, support and consulting services.
SOFTWARE DIVISION
The software division provides bot and intelligent agent technologies
to the global Internet/Intranet business-to-business market. Bots are software
robots designed to excavate, gather and organize the massive amounts of data
proliferating on the web, and automate many of these computing processes.
Intelligent agents are personalized bots that can make their own decisions and
thus use their own "artificial intelligence" to improve their abilities to
search, retrieve and organize data. Intelligent agents access and search
multiple types of information systems in various locations, including the
Internet, and perform computing tasks that are difficult, inefficient or
impossible to conduct manually. Bots and intelligent agents can also be used to
monitor and report on the status of data and systems.
The software division serves the growing needs of a broad range of
businesses for improved bot and intelligent agent technologies. This division
created and developed Network Query Language technology, a proprietary scripting
programming language that streamlines the development of intelligent agents,
bots and web applications. Network Query Language technology can also be used to
convert data on the web into desired formats for other databases and documents.
Currently, we believe Network Query Language technology is the one of the only
programming language designed exclusively for the development of bots and
intelligent agents. Network Query Language technology provides an efficient
development environment for bots, intelligent agents and web applications in
much the same way as Structured Query Language (SQL) provided a common
development environment for database applications. As a result, the Network
Query Language technology delivers added value to information management.
3
4
We license the Network Query Language technology to businesses so they
can create and use their own bots and intelligent agents in real time. The
current target market for Network Query Language technology-based bot and
intelligent agent technology includes Internet integrators, information
technology departments of Fortune 1000 and other large companies, Internet
communities and marketplaces (portals and vortals) and independent software
vendors. These businesses use Network Query Language-based products and services
to create their own intelligent agents to search a variety of resources for
specific information and then gather and organize that information for internal
or external use. Using Network Query Language-based products and services,
companies and individuals can create and deploy customized bot and intelligent
agent applications in a matter of hours or days rather than the weeks or months
common with other development environments. Network Query Language technology
contains more than 500 common English language verbs and is designed to be
non-cryptic. We also develop and market custom software applications for
gathering and organizing information from a variety of resources.
INFORMATION TECHNOLOGY PROFESSIONAL SERVICES DIVISION
Our information technology professional services division provides
Internet and intranet consulting, design implementation, circuit procurement,
installation, maintenance, help desk services, premise wiring services, network
installation and administration and on-site technical management and consulting
services. DCi also cross-markets Network Query Language-based products and
services. Additionally, this division provides a wide array of computer systems,
data communications and LAN/WAN information technology services and products to
a customer base encompassing many industries. Specifically, this division serves
large financial institutions, major accounting firms, pharmaceutical companies,
hospitals and universities. Most customers are located in the Northeast, but our
customer base also reaches as far as Florida and the West Coast.
While we maintain our corporate headquarters in Santa Ana, California,
our main center for information technology professional services is located in
Teterboro, New Jersey. The Northeast and Mid-Atlantic regions are also serviced
from a satellite office in Delaware, while other areas of the country are
supported through the corporate home office and carefully selected, monitored
and managed sub-contractors.
NQL PRODUCTS
NQL's offerings include a core technology, enterprise-level platform and
customized software applications designed to turn a company's data burden into
its competitive advantage. Our complete range of products and services help
enterprises capitalize on a universe of information. With the exception of
customized software applications, all of our products are available for
purchase.
NETWORK QUERY LANGUAGE
NQL's patent-pending Network Query Language technology allows for rapid
development of intelligent agents, bots, spiders, middleware and scalable
business-to-business content aggregation applications. According to Hurwitz
Group, as one of the first languages designed for the content engineering era,
Network Query Language can significantly reduce development time, while allowing
interoperability with all programming and scripting languages, making a software
or web developer's work much easier. Network Query Language also contains the
building blocks needed for connected applications and its capabilities include:
communications, data conversion, automation, and intelligent behavior. According
to IDC, Network Query Language has the potential to do for heterogeneous web
content what Structured Query Language (SQL) did for relational data a
generation ago, unifying conflicting network standards and software. That gives
Network Query Language technology an importance to information management, one
of the needs of almost any enterprise.
NQL CONTENTANYWHERE
The NQL ContentAnywhere platform was in beta as of December 31, 2000
and was commercially released in February 2001. The platform is an
enterprise-wide content management solution that changes the way information is
managed and used within an organization. Based on Network Query Language
technology, the NQL ContentAnywhere system is a content aggregation and delivery
solution that addresses and focuses on the efficient deployment of content.
As NQL's flagship offering, the NQL ContentAnywhere system provides a
framework for content integration, aggregating data from virtually any source
and delivering it to any destination while augmenting existing information
infrastructures to help businesses maintain the value of their IT investments.
4
5
The NQL ContentAnywhere system scales to allow enterprises to customize
content collection, content naming, content aggregation, content refreshing and
multiple mechanisms of content delivery. The system is designed to allow diverse
data sources including legacy systems, databases, and web sites to be unified as
a single information source. Data from that source can then be automatically
delivered to destinations and applications including documents, contact
managers, spreadsheets, presentation programs, mobile devices and others. NQL
ContentAnywhere system integration is available for almost any environment an
organization might need, whether it's a drop-down menu in sales automation
software, customer resource management software, or a Lotus or Microsoft
application.
STOCKVUE 2001
StockVue 2001 is designed for investors and businesses that monitor
companies and is an example of what can be built with Network Query Language
1.0. It is a desktop PC application that can easily be programmed to access the
Internet and retrieve narrowly focused, specific information on stocks and
mutual funds such as quotes, market research, business development, investment
tips and discussion board postings. This product is jointly marketed by Terra
Lycos and NQL.
CUSTOM SOFTWARE APPLICATIONS AND SERVICES
Customized software applications complete the NQL's software division's
offerings with solutions tailored to meet an organization's unique information
management needs with hands-on solutions from NQL technology experts. Through
NQL's custom software application services, we provide an external means of
expert implementation to businesses that want to take advantage of NQL's
technology but do not have the internal resources to implement it. NQL's custom
software applications offerings are distinct from its subsidiary, DCi, which
implements information technology solutions, provides management and consulting
services, and network design, installation and maintenance.
THE MARKET FOR OUR NETWORK QUERY LANGUAGE-BASED PRODUCTS AND CUSTOM
SOFTWARE APPLICATION SERVICES IS NEW AND EMERGING AND IF IT DOES NOT GROW AS
RAPIDLY AS WE ANTICIPATE OR IF IT DECLINES IN SIZE, OUR PLANNED GROWTH AND
FINANCIAL OBJECTIVES WILL NOT BE MET.
Our success depends on the emergence and growth of the market for bots,
intelligent agents and services for searching, gathering, filtering and
organizing information from the World Wide Web, intranets and from legacy
systems. We have concentrated the majority of our sales, marketing, product
development and service efforts toward our software division, which is focused
on expanding the sales and marketing of Network Query Language-based products
and services. If the markets for products and services for searching, gathering,
filtering and organizing information from the web, intranets and legacy systems
or for custom software application services do not grow as rapidly as we expect,
our planned growth and financial objectives will not be met.
ENGINEERING, RESEARCH AND DEVELOPMENT
For over five years, we have been developing information management
technologies. We have received a notice of allowance from the United States
Patent and Trademark Office on a utility patent application and have three
additional utility patent applications pending before the United States Patent
and Trademark Office and one international application. Our research and
development expenditures for the years ended December 31, 2000 and 1999 and the
ten months ended December 31, 1998 were $732,000, $1,290,000 and $1,173,000
respectively. We intend to continue to invest in engineering, research and
development for our NQL technologies and NQL based products. Management
annually, or more frequently, sets the amount of such investment after
considering profitability levels and technology standing within our industry.
We are continuously exploring potential new applications for our NQL
technologies. We intend to explore and take commercial advantage of
opportunities to develop new NQL based general-purpose applications as we
discover such opportunities. Last year NQL released 1.0 of Network Query
Language for Windows and Network Query Language for Java, Linux, Solaris, and
for wireless devices. On February 7, 2001 the company released NQL
ContentAnywhere(TM) system - the company's enterprise-level content integration
and management platform.
COMPETITION
The market for our products is intensely competitive, subject to rapid
technological change and significantly affected by new product introductions and
other market activities of industry participants. We expect competition to
persist and intensify in the future.
5
6
We have three primary categories of competition: in-house development efforts by
potential clients; other vendors of software that directly address content
management and document management solutions; and developers of point solution
software that address only certain technology components of content management
or document management.
CUSTOMERS
Our software division's customers as of December 31, 2000 include, but
are not limited to, Terra Lycos, Microsoft, Jubii, Sitelynx, AGFA Monotype, Drug
Enforcement Agency, Getronics, Grass is Greener.com, Industry Click, Morgan
Stanley, Talisman, University of Pennsylvania and World Bank. Revenue from Terra
Lycos represented 43.8 percent of total software division revenue for the year
ended December 31, 2000.
We are still in the early stages of bringing to market our Network
Query Language-based products and services to the indirect sales channel, which
we hope will drive interest in our technology. This is a critical element of our
sales strategy as we intend to develop a diverse indirect sales channel that
will carry our products and services to their target markets and specific
clients. No assurance can be given that this will occur.
INFORMATION TECHNOLOGY PROFESSIONAL SERVICES DIVISION
SERVICES PROVIDED
Our total annual sales and revenues are only a fraction of the dollars
spent nationally for services and products related to information technology
services. We have established certain long-standing relationships with large
financial institutions, major accounting firms, banks, pharmaceutical companies,
large healthcare providers and universities. In addition, we work closely with
major original equipment manufacturers (OEM) and system integrators to
participate as a subcontractor to their outsource needs.
Information technology services are based on providing direct technical
and maintenance solutions to customers' computer systems, data communications
and LAN/WAN needs. These services include:
o Network systems design.
o Network analysis and performance testing.
o Network management.
o Project management.
o Premise wiring.
o Telephone company circuit provisioning.
o Installation services.
o Technical consulting services.
o Maintenance services.
o Help desk support.
o Complete or partial outsource programs.
Some additional information technology services and products offered include:
o Total Cost of Ownership, which is a program that allows
customers to lease products and services and form a
"Technology Refresh" strategy.
6
7
o Video conferencing services, including procurement, design,
installation and support.
o Special application development using the proprietary Network
Query Language-based infrastructure software products and
services that provide powerful web based solutions for
challenges facing customers' information systems support
groups.
We believe these additional services and products will be attractive to
end users because they offer the advantages of dynamic web based performance
reporting, benchmarking and enhanced search capabilities with other customer
benefits. Furthermore, these additional services and products combine with
existing services and products to give us the capability to provide customers
with complete technology solutions.
COMPETITION
We compete both with third-party service providers which are either
nationally based or have a strong regional presence and with manufacturers and
large distributors which have their own technical service organizations. We
compete with third-party providers on the basis of the technical competence,
customer satisfaction, responsiveness and effectiveness of services, as well as
the price at which such services are provided. We compete with manufacturers and
large distributors on the basis of breadth of product availability, product
price and ability to service multiple product lines.
CUSTOMERS
The information technology professional services division's twenty
largest customers, measured in terms of revenue generated by that division,
include Morgan Stanley Dean Witter, the Pershing division of D.L.J., St.
Barnabas Health Systems, Community Medical Center, Malcolm Pirnie Co., Inc.,
PricewaterhouseCoopers LLP, Deloitte & Touche LLP, Compaq Computer Corp., DLJ
Direct-Inautix Technologies, Kimball Medical Center, Monmouth Medical Center and
Gruntal & Co., L.L.C. In 2000, Morgan Stanley and the Pershing division of
D.L.J. provided approximately 20% and 16%, respectively, of the revenue for our
information technology professional services division.
PATENTS, TRADEMARKS AND LICENSES
In addition to claiming standard copyright protection, we have received a notice
of allowance from the United States Patent and Trademark Office on a utility
patent application and have three additional utility patent applications pending
before the United States Patent and Trademark Office and one international
application. There can be no assurance that any patent will be issued with
respect to any aspect of our technology. We may decide to abandon prosecution
prior to issuance of a patent. If any patent issues, there can be no assurance
that the issued claims will be sufficiently broad to protect our technology, to
deter competitors or to prevent third parties from developing equivalent
technology that does not infringe such patents, or that the patent will not
otherwise be circumvented. In addition, there can be no assurance that any
patents that may be issued will not be challenged, re-issued, re-examined,
invalidated or held unenforceable, or that any rights granted thereunder would
provide us with proprietary protection or otherwise protect the investment in
our technology. We could incur substantial costs in litigation in which we
assert a patent infringement claim against another party. Failure of any patents
to provide protection of our technology may make it easier for our competitors
to offer technology equivalent to or superior to our technology.
We have federally registered trademarks for the following marks "NQL,"
"StockVue" "AlphaCONNECT," "AlphaCONNECT BusinessVue," "AlphaCONNECT Messenger,"
"AlphaCONNECT Pro," "AlphaCONNECT StockVue," and "AlphaSERV." In addition, we
have pending federal applications to register the following marks: "Network
Query Language," "Object Recognition Engine," "ORE," "NQL IQ ContentAnywhere
Platform," "NQL IQ ContentAnywhere Server," "NQL ContentAnywhere, " "NQL
ContentAnyware, " "IQ," "NQL IQ" "AC Convert & Apply." "AC Enterprise," "AC
Export," "AC Spotlight," "AC Tools," "AlphaCONNECT EdgarVue," "AlphaServ.com,"
"EdgarVue," and "The Corporate Portal".
To protect our intellectual property, we also rely in part on agreements with
strategic employees and consultants which typically include provisions
concerning confidentiality and ownership of work product. Despite these
precautions, there can be no assurance that such agreements will provide us with
meaningful remedies in the event of an improper use or disclosure of proprietary
information. There can be no assurance that our products or activities will not
infringe the patents or proprietary rights of others, even if we also have
received patent protection or other proprietary rights for our technology. We
may be required to obtain licenses to patents or other proprietary rights. There
can be no assurance that any such licenses would be made available on terms
acceptable to
7
8
us, if at all. If we do not obtain such licenses, we could encounter delays in
product introductions while we attempt to design around such patents. If we
cannot obtain such licenses, the development, manufacture or sale of products
requiring such licenses could be precluded and we may have to pay substantial
damages for past infringement. We could encounter substantial costs in
litigation brought against us on such patents or proprietary rights.
EMPLOYEES
On March 15, 2001, we employed approximately 198 persons. The ability to attract
and retain qualified personnel is a significant factor in our future success. We
employ approximately six persons who are represented by a labor organization. We
also contract for union members to work on specific projects where necessary. We
have never experienced a work stoppage.
ITEM 2. PROPERTIES
During the year ended December 31, 2000, we occupied approximately 17,025 square
feet of a 66,200 square foot facility located in Santa Ana, California and
subleased approximately 49,175 square feet of this facility to two subtenants.
The lease had an average annual rent of $285,000. The lease had an original
expiration date of December 31, 2000 and was amended in October 2000 to extend
its term through January 31, 2001. We vacated the facility in January 2001.
In November 2000, we entered into an agreement to lease approximately 21,505
square feet of a facility located in Santa Ana, California. The lease, which
commenced on February 1, 2001 and expires on January 31, 2006, has an average
annual rent of $568,000. The lease contains an option to extend the term of the
lease through January 31, 2011.
We currently lease approximately 38,000 square feet of a facility located in
Teterboro, New Jersey. The lease, which expires on July 30, 2001, has an annual
rent of $300,000. We currently sublease of approximately 18,500 square feet of
that facility for an average annual rent of approximately $120,000 through July
30, 2001.
ITEM 3. LEGAL PROCEEDINGS
The Company is not currently subject to any material litigation nor, to its
knowledge, is any material litigation being threatened against it.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Inapplicable.
8
9
EXECUTIVE OFFICERS OF THE REGISTRANT
Certain information regarding the executive officers of the Company is set forth
in the following:
DOUGLAS J. TULLIO, 58, has served as President, Chief Executive Officer and a
Director of the Company since 1991 and as Chairman of the Board since July 1998.
Mr. Tullio also served as Chief Operating Officer from May 1991 to March 1994.
Mr. Tullio joined the Company in January 1990. From 1984 to 1989, he worked for
General Automation, Inc. in the positions of President and member of the Board
of Directors.
ROBERT O. RIISKA, 39, was appointed Chief Financial Officer and Vice President
of Finance of the Company in November 1999. Mr. Riiska was appointed Secretary
of the Company in August 2000. Prior to joining the Company, Mr. Riiska worked
for Morris-Anderson & Associates, Ltd. from March 1991 to November 1999, where
he held the position of Regional Partner since January 1998. Previously, he held
the positions of Consulting Manager and Senior Consultant. From 1983 to 1987 and
from 1989 to 1991, Mr. Riiska served in management consulting and audit
capacities with Ernst & Young LLP and its predecessor Ernst & Whinney.
JOHN T. DEVITO, 44, has served as President of Professional Services since the
acquisition of Delta CompuTec, Inc. in September 1998. Mr. DeVito previously
served as President and Chief Operating Officer of Delta CompuTec Inc. from
April 1995 to August 1998. Previously, he held the position of Vice President
and General Manager of Delta CompuTec, Inc.
DENNIS E. MICHAEL, 42, was named Vice President of Marketing of the Company in
May 1996 and previously held the position of Director of Marketing of the
Company. He served in various marketing management capacities at the Company
between 1983 and 1990 and with AST Research, Inc. from 1990 to 1995.
DAVID PALLMANN, 40, was appointed Chief Technology Officer of the Company in
November 2000. Mr. Pallmann also served as chief technologist from 1995 to
November 2000. Mr. Pallmann joined the Company in 1993. Prior to joining the
Company, he founded and ran his own company, UltraSoft Corp. Prior to that time
he held a variety of management and software development positions at other
firms.
9
10
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is included on the National Association of Securities
Dealers Automated Quotation ("NASDAQ") National Market under the symbol "NQLI".
The following table sets forth the high and low sales prices for the Company's
common stock (NQLI) for the fiscal periods indicated, as quoted on the NASDAQ
National Market. Prices reflect inter-dealer prices without retail mark-up,
mark-down or commissions, and may not necessarily reflect actual transactions.
High Low
---- ---
YEAR ENDED DECEMBER 31, 2000
First Quarter $11 3/8 $ 4 3/8
Second Quarter 8 1/4 3 1/8
Third Quarter 5 7/8 2 11/16
Fourth Quarter 3 5/16 5/16
YEAR ENDED DECEMBER 31, 1999
First Quarter $ 7 7/8 $ 2
Second Quarter 7 1/8 2 1/2
Third Quarter 8 3/16 4 1/2
Fourth Quarter 6 7/8 3 7/8
On March 19, 2001, the high was $2.094 and the low was $1.781 and the
approximate number of holders of record of the Company's common stock was 500.
This number does not reflect the number of beneficial holders of the Company's
common stock.
The Company has not paid dividends on its common stock, and it anticipates that
for the foreseeable future it will not pay dividends. Should the Company desire
to pay dividends, any such dividends would be subject to any preferential rights
to receive dividend payments contained in any securities issued by the Company,
including those payable to holders of outstanding redeemable exchangeable
preferred stock (see Note 6 of Notes to Consolidated Financial Statements).
On March 30, 2000, we completed a private placement of 2,342,000 shares of
common stock that were sold at $6.25 per share, generating gross proceeds to us
of $14,637,500 with net proceeds of approximately $13,500,000. Hampshire Equity
Partners II, L.P., our preferred stockholder, purchased 995,400 of our shares of
common stock issued in the private placement. The net proceeds from this
offering have been used for marketing and further product enhancement of the
Network Query Language technology and for general corporate purposes.
In connection with the private placement of common stock in March 2000, we
granted our underwriter and a financial consultant warrants to purchase, 70,260
and 5,000 shares, respectively, of common stock, which were exercisable for five
years at $7.50 per share.
During 2000, we accrued $250,000 of dividends on our redeemable preferred stock
and paid $113,000 in cash and $137,000 in additional shares of exchangeable
redeemable preferred stock.
During 2000, we accrued $1,804,500 of dividends on our exchangeable redeemable
preferred stock and paid $806,000 in cash and $999,000 in additional shares of
exchangeable redeemable preferred stock.
10
11
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial data of the Company and its
subsidiaries for the years ended December 31, 2000 and 1999; the ten months
ended December 31, 1998; and the years ended February 22, 1998; and February 23,
1997.
Year Ended
Year Ended Year Ended 10 Months Ended ---------------------------
December 31, December 31, December 31, February 22, February 23,
2000 1999 1998 1998 1997
------------ ------------ --------------- ------------ ------------
(In thousands, except per share data)
STATEMENT OF
OPERATIONS DATA:
IT Services revenues $ 13,465 $ 30,399 $ 20,072 $ 13,223 $ 14,627
Product sales 732 4,491 4,068 6,104 8,885
-------- -------- -------- -------- --------
Net sales 14,197 34,890 24,140 19,327 23,512
Cost of sales 11,269 27,032 20,994 13,966 15,498
-------- -------- -------- -------- --------
Gross margin $ 2,928 $ 7,858 $ 3,146 $ 5,361 $ 8,014
======== ======== ======== ======== ========
Loss before taxes $ (7,534) $(12,158) $ (9,527) $ (3,318) $ (2,742)
Net loss $ (7,555) $(12,204) $ (9,542) $ (3,297) $ (2,770)
Net loss attributable to
common stockholders $(10,585) $(14,093) $ (9,978) $ (3,297) $ (2,770)
Basic and diluted net loss per
Share $ (0.78) $ (1.21) $ (0.90) $ (0.30) $ (0.28)
Number of shares used in the
computation of per share
amounts 13,574 11,610 11,029 10,864 9,727
BALANCE SHEET DATA:
Current assets $ 8,117 $ 5,272 $ 13,016 $ 9,754 $ 12,378
Current liabilities 5,062 4,949 10,088 5,421 3,648
-------- -------- -------- -------- --------
Working capital $ 3,055 $ 323 $ 2,928 $ 4,333 $ 8,730
======== ======== ======== ======== ========
Total assets $ 19,644 $ 16,309 $ 26,431 $ 15,788 $ 17,195
Long-term obligations 601 3,000 846 60 34
Redeemable preferred stock 2,322 2,190 12,824 -- --
Other stockholders' equity $ 11,659 $ 6,170 $ 2,673 $ 10,307 $ 13,513
In January 2000, we sold our historic principal business lines which were: (1)
the sale of computer and networking hardware and software products, and (2) the
service of our products, the service of third-party hardware and software
products, and installation, training, and consulting services with respect to
these products. See Note 2 of Notes to Consolidated Financial Statements for
information concerning revenues, costs and expenses of the Businesses sold.
On December 17, 1998, our Board of Directors approved a change in the fiscal
year to a calendar year-end. Accordingly, the Company's 1999 annual fiscal
period is the calendar year ended December 31, 1999 and the Company had a
ten-month transition period ended December 31, 1998 to adopt the new year end.
11
12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
SUMMARY
The following table sets forth operational data as a percentage of net sales for
the periods indicated:
Relationship to Net Sales
-----------------------------------------------------------
Year Ended Year Ended Ten Months Ended
December 31, 2000 December 31, 1999 December 31, 1998
----------------- ----------------- -----------------
Net sales:
IT Services 94.8% 87.1% 83.1%
Product 5.2 12.9 16.9
----- ----- -----
Total net sales 100.0 100.0 100.0
Cost of sales 79.4 77.5 87.0
----- ----- -----
Gross margin 20.6 22.5 13.0
Selling, general and administrative expense 84.4 34.0 35.9
Engineering, research and development expense 5.2 3.7 4.9
Impairment of long-lived assets 0.0 0.6 10.1
Interest expense (income), net (2.6) 0.3 0.1
Other expense (income), net (13.2) 18.8 1.5
----- ----- -----
Loss before taxes (53.1) (34.9) (39.5)
Net loss (53.2) (35.0) (39.5)
Net loss attributable to common stockholders (74.6)% (40.4)% (41.3)%
We had negative earnings before interest, taxes, depreciation and amortization
("EBITDA") of $6,450,000 during the year ended December 31, 2000, compared to a
negative EBITDA of $10,381,000 during the year ended December 31, 1999.
On December 17, 1998, our Board of Directors approved a change in the fiscal
year to a calendar year-end. Accordingly, the Company's 1999 annual fiscal
period is the calendar year ended December 31, 1999 and the Company had a
ten-month transition period ended December 31, 1998 to adopt the new year end.
This discussion and analysis of our financial condition and results of operation
is qualified by the Introductory Note set forth in the beginning of this Annual
Report on Form 10-K.
RECENT ACTIVITIES REFOCUSING THE COMPANY'S FUTURE BUSINESS ACTIVITIES
Our historic principal business lines were (i) the sale of computer and
networking hardware and software products, and (ii) the service of those
products, the service of third-party hardware and software products, and
installation, training and consulting services with respect to these products.
On January 31, 2000, we completed a sale of these business lines to Alpha
Microsystems, LLC (formerly R.E. Mahmarian Enterprises, LLC). The results of
operations include a gain on sale of business of $1,865,000 and a loss on sale
of business of $6,506,000 for the years ended December 31, 2000 and 1999,
respectively. Also included in results of operations are other related asset
impairment charges of $196,000 for the year ended December 31, 1999. These
charges are a result of the sale of business to Alpha Microsystems, LLC.
We now focus exclusively on our two remaining operating divisions - our software
division, which focuses on Network Query Language-based infrastructure software
products, custom software applications and services, and our information
technology (IT) professional services division, which was acquired on September
1, 1998 and provides management and consulting services, as well as network
design, installation and maintenance.
As a result of the sale of our historic principal businesses in January 2000,
the Company's future revenues are expected to be significantly lower than the
Company has recognized historically. See Note 2 of Notes to Consolidated
Financial Statements for information concerning revenues, costs and expenses of
such business sold.
12
13
YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999
The following table presents the results for the years ended December 31, 2000
and 1999.
Year Ended December 31, 2000 Year Ended December 31, 1999
----------------------------- -----------------------------
Relationship to Relationship to
Operations Net Sales Operations Net Sales
---------- --------------- ---------- ---------------
(in thousands) (in thousands)
Net sales:
IT Services $ 13,465 94.8% $ 30,399 87.1%
Product 732 5.2 4,491 12.9
---------- ----- ---------- -----
Total net sales 14,197 100.0 34,890 100.0
---------- ----------
Cost of sales:
IT Services 10,842 76.4 23,608 67.7
Product 427 3.0 3,424 9.8
---------- ----------
Total cost of sales 11,269 79.4 27,032 77.5
---------- ----------
Gross margin
Service 2,623 18.5 6,791 19.5
Product 305 2.1 1,067 3.0
---------- ----------
Total gross margin 2,928 20.6 7,858 22.5
Selling, general and administrative expense 11,976 84.4 11,858 34.0
Engineering, research and development expense 732 5.2 1,290 3.7
Impairment of long-lived assets -- -- 196 0.6
Interest expense (income), net (375) (2.6) 114 0.3
Other expense (income), net (1,871) (13.2) 6,558 18.8
---------- ----- ---------- -----
Loss before taxes (7,534) (53.1) (12,158) (34.9)
Net loss $ (7,555) (53.2)% $ (12,204) (35.0)%
========== ===== ========== =====
Net loss attributable to common stockholders $ (10,585) (74.6)% $ (14,093) (40.4)%
========== ===== ========== =====
Basic and diluted net loss per share $ (0.78) $ (1.21)
========== ==========
Number of shares used in the computation of per
share amounts 13,574 11,610
========== ==========
RESULTS OF OPERATIONS
We had a net loss attributable to common stockholders of $10,585,000, or $0.78
per share, in 2000 compared to a net loss attributable to common stockholders of
$14,093,000 or $1.21 per share, in 1999.
Net Sales
Our total net sales decreased $20,693,000, or 59.3 percent, to $14,197,000 for
the year ended December 31, 2000 from $34,890,000 for the year ended December
31, 1999. The decrease in total net sales is primarily due to the January 31,
2000 sale of our managed service and computer hardware manufacturing division
and delays in technology services and projects at our information technology
services division, of which the majority were related back to customer concerns
over year 2000 problems. We cannot be certain that net sales will increase in
future periods.
13
14
Information Technology Service Revenue
Our information technology service revenue decreased $16,934,000, or 55.7
percent, to $13,465,000 for the year ended December 31, 2000 from $30,399,000
for the year ended December 31, 1999. The decrease in revenue is primarily due
to the January 31, 2000 sale of our managed service and computer hardware
manufacturing division and delays in technology services and projects at our
information technology services division, of which the majority were related
back to customer concerns over year 2000 problems.
Product Sales
Our product revenue decreased $3,759,000 or 83.7 percent to $732,000 for the
year ended December 31, 2000 from $4,491,000 for the year ended December 31,
1999. The decrease in revenue is primarily due to the January 31, 2000 sale of
our managed service and computer hardware manufacturing division offset by
increased sales at our software division.
Gross Margin
Our total gross margin for the year ended December 31, 2000 decreased to 20.6
percent compared to 22.5 percent during the year ended December 31, 1999. The
decrease is due primarily to our lower IT margins being offset by higher product
margins.
Information Technology Services Gross Margin
Our information technology services gross margin decreased to 19.5 percent for
the year ended December 31, 2000, compared to 22.3 percent during the year ended
December 31, 1999. The decrease in gross margin is due to lower professional
on-site services revenues at DCi due to delays in technology services and
projects the majority of which we believe were related to customer concerns over
year 2000 problems.
Product Gross Margin
Our product gross margin during the year ended December 31, 2000 increased to
41.7 percent compared to 23.8 percent for the year ended December 31, 1999. The
increase in gross margin is due to the January 31, 2000 sale of our
comparatively lower gross margin computer hardware manufacturing division, and
increased sales from the operations of our software division.
Selling, General and Administrative Expenses
Our selling, general and administrative expenses increased $118,000 to
$11,976,000 for the year ended December 31, 2000, compared to $11,858,000 for
the year ended December 31, 1999. The increase in selling, general and
administrative expenses is due to increased expenses in connection with the
launch of our software products, the beginning of our advertising campaign,
corporate name change and incorporation in Delaware.
Research and Development Expenses
Our research and development expenses (which include, but are not limited to,
engineering support and services) incurred for the year ended December 31, 2000,
decreased by $558,000 to $732,000 compared to $1,290,000 during the year ended
December 31, 1999. Research and development expenses as a percentage of product
sales increased to 76.2 percent for the year ended December 31, 2000 compared to
28.7 percent during the year ended December 31, 1999 due to the January 31, 2000
sale of our computer hardware manufacturing division.
14
15
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
The following table presents the results for the year ended December 31, 1999
and the comparable unaudited pro forma results for the year ended December 31,
1998 for purposes of the discussion following. For comparative purposes, the
1998 results of operations for the year ended December 31, 1998 have been
derived from the previously reported results for the ten-month period ended
December 31, 1998 plus two-thirds of the operating results for the quarter ended
February 22, 1998, and are unaudited.
(Unaudited)
-----------------------------
Year Ended December 31, 1999 Year Ended December 31, 1998
------------------------------ -----------------------------
Relationship to Relationship to
Operations Net Sales Operations Net Sales
---------- --------------- ---------- ---------------
(in thousands) (in thousands)
Net sales:
IT Services $ 30,399 87.1% $ 22,381 81.3%
Product 4,491 12.9 5,132 18.7
---------- ----- ---------- -----
Total net sales 34,890 100.0 27,513 100.0
---------- ----------
Cost of sales:
IT Services 23,608 67.7 19,044 69.2
Product 3,424 9.8 4,529 16.5
---------- ----------
Total cost of sales 27,032 77.5 23,573 85.7
---------- ----------
Gross margin
Service 6,791 19.5 3,337 12.1
Product 1,067 3.0 603 2.2
---------- ----------
Total gross margin 7,858 22.5 3,940 14.3
Selling, general and administrative expense 11,858 34.0 9,756 35.5
Engineering, research and development expense 1,290 3.7 1,380 5.0
Impairment of long-lived assets 196 0.6 2,438 8.9
Interest expense (income), net 114 0.3 (27) (0.1)
Other expense (income), net 6,558 18.8 390 1.4
---------- ----- ---------- -----
Loss before taxes (12,158) (34.9) (9,997) (36.4)
Net loss $ (12,204) (35.0)% $ (9,991) (36.4)%
========== ===== ========== =====
Net loss attributable to common stockholders $ (14,093) (40.4)% $ (10,427) (37.9)%
========== ===== ========== =====
Basic and diluted net loss per share $ (1.21) $ (0.95)
========== ==========
Number of shares used in the computation of per
share amounts 11,610 11,009
========== ==========
SIGNIFICANT 1998 CHARGES TO OPERATIONS
Significant to the comparative results of operations are charges totaling
$4,679,000 in the ten months ended December 31, 1998. These charges are
comprised of the following: (i) $2,230,000 to write-down impaired tangible and
intangible assets from non-core businesses acquired prior to 1998 to their
estimated fair values based on estimated cash flows, and write-down of accounts
receivable related to non-core operations, (ii) $910,000 to write-down impaired
fixed assets and inventory related to end-of-life proprietary product lines to
their estimated fair values, (iii) $813,000 related to software products
obsolesced by the introduction of new products, (iv) $379,000 resulting from the
write-off of notes receivable from previously sold assets and subsidiaries, (v)
$256,000 of indirect financing costs related to the sale of redeemable preferred
stock and warrants and the expensing of previously capitalized costs associated
with abandoned acquisitions, and (vi) $91,000 in write-offs of costs related to
year 2000 issues and adjustments of warranty and other liabilities. The table
below summarizes where these charges have been recognized on the statement of
operations for the ten months ended December 31, 1998 (in thousands):
15
16
Cost of Operating Impairment
Sales Expenses Charge Other Total
------- --------- ---------- ----- ------
Impairment of tangible and intangible assets $147 $495 $1,588 $ -- $2,230
Write-down of fixed assets and inventory 60 -- 850 -- 910
Software obsolescence 730 83 -- -- 813
Loss on sale of assets and subsidiaries -- -- -- 379 379
Indirect financing costs -- 256 -- -- 256
Year 2000 issues and operating expenses 25 66 -- -- 91
---- ---- ------ ---- ------
Total $962 $900 $2,438 $379 $4,679
==== ==== ====== ==== ======
RESULTS OF OPERATIONS
We had a net loss attributable to common stockholders of $14,093,000, or $1.21
per share, in 1999 compared to a net loss attributable to common stockholders of
$10,427,000, or $0.95 per share, in 1998.
Net Sales
Our total net sales increased $7,377,000, or 26.8 percent, to $34,890,000 for
the year ended December 31, 1999 from $27,513,000 for the year ended December
31, 1998. The increase in total net sales is due to increases in information
technology service revenues (largely attributable to the acquisition of DCi),
offset by declines in product sales.
Information Technology Service Revenue
Our information technology service revenue increased $8,018,000, or 35.8
percent, to $30,399,000 during the year over the respective prior year period.
The revenue increase includes $8,833,000 from the acquired DCi operations offset
by a decrease of $2,308,000 attributable to non-core businesses that were sold
during the year ended December 31, 1999. The balance of the revenue increase
during the year of $1,493,000 is attributable to organic growth.
Product Sales
Our total product revenues during the year declined $641,000, or 12.5 percent,
to approximately $4,491,000 from approximately $5,132,000. While both domestic
and European product sales declined, $208,000 of the decline was due to the loss
of sales to a large European customer, which in the past represented a
significant portion of our product revenues.
Gross Margin
Our total gross margin for the year ended December 31, 1999 increased to 22.5
percent compared to 14.3 percent during the year ended December 31, 1998.
Information Technology Services Gross Margin
Our information technology services gross margin increased to 22.3 percent for
the year ended December 31, 1999, compared to 14.9 percent during the year ended
December 31, 1998. The year ended December 31, 1999 is positively affected by
the increase in professional on-site services revenues, which are primarily
attributable to the business acquired from DCi, that have a significantly higher
gross margin than our historic service revenues. The year ended December 31,
1999 was also positively affected by the sale of the telephone installation
business, which had a negative gross margin. Offsetting these gross margin
improvements were continuing increased direct operating costs related to new
information technology services contracts with major distributors, for which the
related services revenue remain below expected levels. Additionally, the shift
from proprietary to third-party information technology services negatively
impacted gross margins. As indicated above, the Businesses experiencing these
lower gross margins were sold in January 2000.
16
17
Product Gross Margin
Our product gross margin during the year ended December 31, 1999 increased to
23.8 percent compared to 11.7 percent for the year ended December 31, 1998. The
year ended December 31, 1998 includes a software obsolescence charge of
$730,000.
Selling, General and Administrative Expenses
Our selling, general and administrative expenses increased $2,102,000 to
$11,858,000 for the year ended December 31, 1999, compared to $9,756,000 for the
year ended December 31, 1998. The increase in costs for the year ended December
31, 1999 is primarily due to additional general and administrative costs and
goodwill amortization associated with the DCi acquisition.
Research and Development Expenses
Our research and development expenses (which include, but are not limited to,
engineering support and services) incurred for the year ended December 31, 1999,
decreased by $90,000 to $1,290,000 compared to $1,380,000 during the year ended
December 31, 1998. Research and development expenses as a percentage of product
sales increased to 28.7 percent for the year ended December 31, 1999 compared to
26.9 percent during the year ended December 31, 1998.
17
18
QUARTERLY RESULTS
The following table sets forth certain unaudited consolidated statements of
operations data both in absolute dollars and as a percentage of total revenue
for each of our last eight quarters. This data has been derived from unaudited
condensed consolidated financial statements that have been prepared on the same
basis as the annual audited consolidated financial statements and, in our
opinion, include all normal recurring adjustments necessary for a fair
presentation of such information. These unaudited quarterly results should be
read in conjunction with the consolidated financial statements and notes thereto
appearing elsewhere in this Annual Report on Form 10-K. The consolidated results
of operations for any quarter are not necessarily indicative of the results for
any future period.
Consolidated Statements of Operations
For the Three Months Ended: March 31 June 30 Sept 30 Dec 31 March 31 June 30 Sept 30 Dec 31
(in thousands, except percentages) 1999 1999 1999 1999 2000 2000 2000 2000
------- ------- ------- ------- ------- ------- ------- -------
Net sales:
IT Services $ 8,391 $ 7,767 $ 7,892 $ 6,349 $ 4,357 $ 2,834 $ 3,106 $ 3,168
Product 1,214 1,291 1,073 913 262 123 227 120
------- ------- ------- ------- ------- ------- ------- -------
Total net sales 9,605 9,058 8,965 7,262 4,619 2,957 3,333 3,288
Cost of sales:
IT Services 6,355 5,789 5,791 5,672 3,361 2,373 2,450 2,658
Product 889 896 848 792 256 41 87 43
------- ------- ------- ------- ------- ------- ------- -------
Total cost of sales 7,244 6,685 6,639 6,464 3,617 2,414 2,537 2,701
------- ------- ------- ------- ------- ------- ------- -------
Gross Margin 2,361 2,373 2,326 798 1,002 543 796 587
Operating expenses:
Selling, general and administrative 2,861 3,068 2,485 3,444 1,939 2,111 3,282 4,644
Engineering, research and development 321 303 325 341 171 203 199 159
Impairment of long-lived assets -- -- -- 196 -- -- -- --
------- ------- ------- ------- ------- ------- ------- -------
Total operating expenses 3,182 3,371 2,810 3,981 2,110 2,314 3,481 4,803
------- ------- ------- ------- ------- ------- ------- -------
Loss from operations (821) (998) (484) (3,183) (1,108) (1,771) (2,685) (4,216)
Other (income) expense:
Interest income (40) (10) (10) (12) (7) (162) (141) (90)
Interest expense 27 24 82 53 20 1 3 1
(Gain)/loss on disposition of business -- -- (3) 6,509 (884) (443) (343) (195)
Other (income) expense, net 11 (225) 21 245 (12) (6) (8) 20
------- ------- ------- ------- ------- ------- ------- -------
Total other (income) expense (2) (211) 90 6,795 (883) (610) (489) (264)
------- ------- ------- ------- ------- ------- ------- -------
Loss before taxes (819) (787) (574) (9,978) (225) (1,161) (2,196) (3,952)
(Benefit) provision for income taxes -- -- 50 (4) 13 2 7 (1)
------- ------- ------- ------- ------- ------- ------- -------
Net (loss) (819) (787) (624) (9,974) (238) (1,163) (2,203) (3,951)
Accretion on redeemable preferred stock (44) (10) (10) (268) (116) (117) (114) (117)
Dividends on redeemable preferred stock (338) (338) (338) (543) (637) (637) (637) (655)
------- ------- ------- ------- ------- ------- ------- -------
Net loss attributable to common shares $(1,201) $(1,135) $ (972) $10,785) $ (991) $(1,917) $(2,954) $(4,723)
======= ======= ======= ======= ======= ======= ======= =======
Basic and diluted net loss per share $ (0.10) $ (0.10) $ (0.08) $ (0.93) $ (0.08) $ (0.14) $ (0.21) $ (0.33)
======= ======= ======= ======= ======= ======= ======= =======
Number of shares used in the
computation of per share amounts 11,549 11,602 11,630 11,656 11,787 14,142 14,163 14,192
======= ======= ======= ======= ======= ======= ======= =======
18
19
Consolidated Statements of Operations
For the Three Months Ended: March 31 June 30 Sept 30 Dec 31 March 31 June 30 Sept 30 Dec 31
(as a percentage of total revenue): 1999 1999 1999 1999 2000 2000 2000 2000
------- ------- ------- ------- ------- ------- ------- -------
Net sales:
IT Services 87.4% 85.7% 88.0% 87.4% 94.3% 95.8% 93.2% 96.4%
Product 12.6% 14.3% 12.0% 12.6% 5.7% 4.2% 6.8% 3.6%
------- ------- ------- ------- ------- ------- ------- -------
Total net sales 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
------- ------- ------- ------- ------- ------- ------- -------
Cost of sales:
IT Services 66.2% 63.9% 64.6% 78.1% 72.8% 80.3% 73.5% 80.8%
Product 9.3% 9.9% 9.5% 10.9% 5.5% 1.4% 2.6% 1.3%
------- ------- ------- ------- ------- ------- ------- -------
Total cost of sales 75.5% 73.8% 74.1% 89.0% 78.3% 81.7% 76.1% 82.1%
------- ------- ------- ------- ------- ------- ------- -------
Gross Margin 24.6% 26.2% 25.9% 11.0% 21.7% 18.4% 23.9% 17.9%
Operating expenses:
Selling, general and administrative 29.8% 33.9% 27.7% 47.4% 42.0% 71.4% 98.5% 141.2%
Engineering, research and development 3.3% 3.3% 3.6% 4.7% 3.7% 6.9% 6.0% 4.8%
Impairment of long-lived assets 0.0% 0.0% 0.0% 2.7% 0.0% 0.0% 0.0% 0.0%
------- ------- ------- ------- ------- ------- ------- -------
Total operating expenses 33.1% 37.2% 31.3% 54.8% 45.7% 78.3% 104.5% 146.0%
------- ------- ------- ------- ------- ------- ------- -------
Loss from operations (8.5)% (11.0)% (5.4)% (43.8)% (24.0)% (59.9)% (80.5)% (128.2)%
Other (income) expense:
Interest income (0.4)% (0.1)% (0.1)% (0.2)% (0.2)% (5.5)% (4.2)% (2.7)%
Interest expense 0.3% 0.3% 0.9% 0.7% 0.4% 0.0% 0.1% 0.0%
(Gain)/loss on disposition of business 0.0% 0.0% (0.0)% 89.6% (19.1)% (15.0)% (10.3)% (5.9)%
Other (income) expense, net 0.1% (2.5)% 0.2% 3.4% (0.3)% (0.2)% (0.2)% 0.6%
------- ------- ------- ------- ------- ------- ------- -------
Total other (income) expense (0.0)% (2.3)% 1.0% 93.5% (19.2)% (20.7)% (14.6)% (8.0)%
------- ------- ------- ------- ------- ------- ------- -------
Loss before taxes (8.5)% (8.7)% (6.4)% (137.4)% (4.9)% (39.3)% (65.9)% (120.2)%
(Benefit) provision for income taxes 0.0% 0.0% 0.6% (0.1)% 0.3% 0.1% 0.2% (0.0)%
------- ------- ------- ------- ------- ------- ------- -------
Net (loss) (8.5)% (8.7)% (7.0)% (137.3)% (5.2)% (39.4)% (66.1)% (120.2)%
Accretion on redeemable preferred stock (0.5)% (0.1)% (0.1)% (3.7)% (2.5)% (4.0)% (3.4)% (3.5)%
Dividends on redeemable preferred stock (3.5)% (3.7)% (3.8)% (7.5)% (13.8)% (21.5)% (19.1)% (20.0)%
------- ------- ------- ------- ------- ------- ------- -------
Net loss attributable to common shares (12.5)% (12.5)% (10.9)% (148.5)% (21.5)% (64.8)% (88.6)% (143.7)%
======= ======= ======= ======= ======= ======= ======= =======
LIQUIDITY AND CAPITAL RESOURCES
We have incurred significant recurring operating losses and operating cash flow
deficits and are in active discussions to raise additional equity financing to
fund operations. Because we have not as yet raised the additional equity
financing, there is substantial doubt about our ability to continue as a going
concern.
We believe that we will be successful in raising additional equity financing and
that our current cash and cash equivalents balance combined with the net
proceeds of the contemplated additional equity financing, cash expected to be
generated by our information technology professional services division, and
continued revenue growth in our software division will provide sufficient
resources to allow us to maintain our operations at least through December 31,
2001. After that date, we may need to obtain additional capital, and we cannot
be certain that we will be able to obtain additional financing on favorable
terms, if at all. If we cannot raise additional capital on acceptable terms, we
may not be able to develop or enhance our products and services, take advantage
of future opportunities or respond favorably to competitive pressures or
unanticipated events. We commercially released a new software product in
February 2001 which is expected to contribute to revenue growth in our software
division. In addition, should we not
19
20
obtain growth in revenue, expenditures will be scaled back in the areas of
marketing, advertising, product development, salaries, bonuses and commissions.
During the year ended December 31, 2000, our working capital increased
$2,732,000 to $3,055,000 from $323,000 at December 31, 1999. This increase was
primarily the result of the completion of a private placement of 2,342,000
shares of common stock sold at $6.25 per share generating net proceeds of
$13,620,000 offset by $7,350,000 net cash used in operating activities,
purchases of equipment of $1,622,000, payment of preferred stock dividends of
$920,000 and repayments of indebtedness of $743,000.
The March 30, 2000 private placement of common stock generated gross proceeds to
us of $14,637,500 with net proceeds of approximately $13,500,000. Hampshire
Equity Partners II, L.P., our preferred stockholder, purchased 995,400 of the
shares of our common stock issued in the private placement.
As of December 31, 1999, we had a loan facility with a bank under which a $4
million accounts receivable line of revolving credit was designated for working
capital and $1 million was designated to finance acquisitions. The loan facility
was secured by substantially all of our assets. The loan bore interest at the
bank prime rate plus 2.5% (11% at December 31, 1999). On March 28, 2000, we
terminated the revolving line of credit and on March 31, 2000, we repaid in full
the loan designated for acquisitions.
Our Network Query Language-based products and services are all in early stages
of commercialization and, as a result, it is difficult to predict the level of
market acceptance that our Network Query Language-based products and services
will attain. We expect to continue to incur significant costs developing and
introducing enhancements to our Network Query Language-based products and
technologies, and expanding our sales and marketing activities. We expect this
strategy to result in losses for our software division and the Company on a
consolidated basis at least through the next four to five quarters.
We had no material commitments for capital expenditures as of December 31, 2000,
however we incur expenditures for information technology service parts on a
routine ongoing basis in order to perform services associated with maintaining
customers' computer networks.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market rate risk for changes in interest rates relates primarily
to the interest income generated by excess cash invested in short term money
market accounts and certificates of deposit. We have not used derivative
financial instruments in our investment portfolio. Interest earning instruments
carry a degree of interest rate risk. We have not been exposed nor do we
anticipate being exposed to material risks due to changes in interest rates.
However, our future interest income may fall short of expectations due to
changes in interest rates.
An investment in our Common Stock involves a high degree of risk. Before making
an investment decision, you should carefully consider all the risks described in
this report in addition to the other information contained in this report
(including the Exhibits referenced in this report). Our business, operating
results and financial condition all could be materially and adversely affected
by any of the following risks. Additional risks and uncertainties not presently
known to us or that we currently deem immaterial may also impair our business,
operating results and financial condition. The market price of our Common Stock
could decline due to the occurrence of any of such risks and you could lose all
or part of your investment. This report also contains certain forward-looking
statements that involve risks and uncertainties. Certain factors, including the
risks described below and elsewhere in this report, could cause our actual
results to differ materially from anticipated results reflected in the
forward-looking statements.
WE RECENTLY CHANGED THE FOCUS OF OUR BUSINESS TO CONCENTRATE ON SOFTWARE
PRODUCTS AND SERVICES, AND INFORMATION TECHNOLOGY PROFESSIONAL SERVICES;
THEREFORE, OUR PAST BUSINESS AND FINANCIAL RESULTS MAY NOT PROVIDE A RELIABLE
BASIS FOR ASSESSING THE PROSPECTS FOR THE NEW FOCUS OF OUR BUSINESS, WHICH
LARGELY DEPENDS ON NEW TECHNOLOGIES AND EMERGING MARKETS.
Our historic principal business lines were (1) the sale of computer and
networking hardware and software products, and (2) the service of our products,
the service of third-party hardware and software products, and installation,
training and consulting services with respect to these products. On January 31,
2000, we completed a sale of these business lines to R.E. Mahmarian Enterprises,
LLC, which changed its name to Alpha Microsystems, LLC in November 2000 and
which is owned by Richard E. Mahmarian, a former member of our Board of
Directors. We now focus exclusively on our remaining operations, which are
segmented into two operating units - our software division, which focuses on
Network Query Language-based infrastructure software products, customized
software applications and services, and our information technology (IT)
professional services subsidiary, Delta CompuTec, Inc. ("DCi").
20
21
Accordingly, our business and financial results prior to February 1, 2000 do not
reflect the new focus of our business. Analyzing those past results will not
provide an accurate picture of our current risks or anticipated returns. The
future for our business will depend almost exclusively on elements that made up
a relatively smaller portion of our prior business and financial activities.
Also, the future of our software division will depend mostly on new technologies
and emerging markets, both of which are in the early stages of commercial
development.
OUR SOFTWARE DIVISION HAS A HISTORY OF LOSSES AND EXPECTS LOSSES IN THE NEAR
FUTURE. IF THE DIVISION DOES NOT ACHIEVE OR SUSTAIN PROFITABILITY, OUR VIABILITY
COULD BE IN DOUBT AND THE MARKET PRICE OF OUR COMMON STOCK COULD DECLINE
SIGNIFICANTLY.
To date, our software division has not had a profitable quarter and there is no
assurance that this division will attain or sustain profitability in the future.
To date, we have funded the operations of our software division primarily from
revenue generated by outside investors. We expect to continue to incur
significant costs developing and introducing enhancements to our Network Query
Language-based products and technologies, improving and expanding our IT
services and expanding our sales and marketing activities. We expect this
strategy to result in losses for our software division at least through the next
four to five quarters. These losses could impede the our ability to compete
effectively by creating doubt among our current and potential customers as to
our long-term viability, and could cause the market price of our Common Stock to
decline significantly and may also impair our ability to raise funds if our path
to profitability is not clear.
OUR QUARTERLY OPERATING RESULTS FOR OUR SOFTWARE DIVISION ARE VOLATILE AND
DIFFICULT TO PREDICT AND IF WE DO NOT MEET THE EXPECTATIONS OF ANALYSTS OR
INVESTORS, THE MARKET PRICE OF OUR COMMON STOCK COULD DECLINE SIGNIFICANTLY.
Our quarterly operating results for our software division have varied in the
past and may vary significantly in the future. Because our business is evolving
rapidly and our Network Query Language technology is in the early stages of
commercial development, we have little experience in forecasting revenues for
this division. Since our operating results for our software division are
volatile and difficult to predict, we believe that period-to-period comparisons
of the operating results from this division are not a reliable indication of
this unit's likely future performance. Investors should not rely on the results
of one quarter as an indication of future performance. Our future quarterly
operating results may be below the expectations of public market analysts and
investors. In this event, the market price of our Common Stock may decline
significantly. Our future quarterly operating results may vary for several
reasons, including, but not limited to, the numerous risk factors discussed in
this report.
As we work to further develop our products and services and expand our business,
we may be unable to adjust spending in a timely manner to compensation for any
unexpected revenue shortfall. Such inability to adjust spending could accentuate
any negative effects on our quarterly results.
OUR REVENUE PRIMARILY DEPENDS ON OUR INFORMATION TECHNOLOGY PROFESSIONAL
SERVICES SUBSIDIARY.
The majority of our revenue currently comes from providing information
technology services. In 2000, our IT services division generated over 95% of our
consolidated revenue excluding revenues generated by businesses sold. We
anticipate that our IT professional services division will generate the majority
of our revenue for at least the next four to eight quarters. If our IT
professional services subsidiary fails to grow its profits as expected, that
could negatively impact our ability to develop and expand our Software business
division and significantly adversely affect our business, financial results and
the market price of our Common Stock.
21
22
WE DO NOT HAVE A LONG HISTORY OF OPERATING OUR IT PROFESSIONAL SERVICES
SUBSIDIARY.
We acquired our IT professional services subsidiary in September of 1998.
Although the key management personnel of this subsidiary continued with us after
our acquisition, we have owned and operated this subsidiary for only nine
quarters. Therefore, we may not yet be fully aware of the risks and prospects
for this division or our industry in general. The short length of our experience
with our IT professional services subsidiary could negatively impact our ability
to evaluate and effectively oversee our operation, and this could significantly
adversely affect our business, financial results and the market price of our
Common Stock.
WE FACE INCREASING COMPETITION IN THE MARKET FOR OUR NETWORK QUERY
LANGUAGE-BASED PRODUCTS AND SERVICES AND FOR OUR IT SERVICES.
The markets for Network Query Language-based products and services and for IT
services are intensely competitive and the competition is increasing. There are
no substantial barriers to entry for Internet services and products or for IT
services, so we expect competition in these markets to increase and remain both
strong and persistent. Competitors include on-line service and content
providers, web site operators, other Internet services and products that
incorporate data retrieval, conversion and delivery or "push" technology, and
numerous information technology service providers. Unknown to us, another
company could now be developing one or more products or services superior to our
products or services. Such a company could, to our detriment, rapidly acquire
market share for competitive Internet products and services or information
technology services. In short, competitive forces could rapidly, severely and
adversely affect our business, financial results and the market price of our
Common Stock.
Many of our competitors have longer operating histories, significantly greater
financial, technical, marketing and other resources, significantly greater name
recognition and a larger installed base of customers than we have. Many of our
competitors have well-established relationships with our current and potential
customers, have extensive knowledge of our industries and may be capable of
offering alternative solutions. As a result, our competitors may be able to
respond more quickly to new or emerging technologies and changes in customer
requirements, or to devote greater resources to the development, promotion and
sale of their products and services than we can. In addition, many of our
current and potential competitors have established or may establish cooperative
relationships among themselves or with third parties that may improve their
ability to address the needs of customers. Accordingly, it is possible that new
competitors or alliances among competitors may emerge and rapidly acquire
significant market share. Increased competition is likely to result in price
reductions, reduced gross margins and loss of market share, any of which could
negatively impact our ability to sell our products or services at the price
levels required to support our continuing operations.
FUTURE REGULATIONS COULD BE ENACTED THAT EITHER DIRECTLY RESTRICT OUR BUSINESS
OR INDIRECTLY MATERIALLY ADVERSELY IMPACT OUR BUSINESS BY LIMITING THE GROWTH OF
INTERNET COMMERCE.
As Internet commerce evolves, we expect federal, state, local and foreign
governments and agencies to adopt regulations covering many issues, including
user privacy, pricing, content and quality of products and services. If enacted,
these laws, rules or regulations could limit the market for our Network Query
Language-based products and services, which could significantly adversely affect
our operating results, business prospects and the market price of our Common
Stock. Although many of these regulations may not apply to our business
directly, we expect that laws regulating the solicitation, collection or
processing of personal and consumer information could indirectly affect our
business. The Telecommunications Act of 1996 prohibits some types of information
and content from being transmitted over the Internet. The prohibition's scope
and the liability associated with a Telecommunications Act violation are
currently unsettled. In addition, although substantial portions of the
Communications Decency Act were held to be unconstitutional, we are unsure
whether similar legislation will be enacted and upheld in the future. It is
possible that legislation could expose companies involved in Internet commerce
to liability, which could limit the growth of Internet commerce generally.
Legislation like the Telecommunications Act and the Communications Decency Act
could dampen the growth of Internet usage and decrease our acceptance as a
commercial medium. Moreover, the applicability to the Internet of existing laws
in various jurisdictions governing issues such as property ownership, sales tax,
libel and personal privacy is uncertain and may take years to resolve. Our costs
could increase and our business could be harmed by any new legislation or
regulation, the application of laws and regulations from jurisdictions whose
laws do not currently apply to our business, the application of existing laws
and regulations to the Internet and on-line businesses, and litigation seeking
to restrict placing, accessing or using information on the Internet.
22
23
VARIABLE SALES CYCLES MAKE IT DIFFICULT TO PREDICT THE TIMING OF SALES, MAKING
QUARTERLY OPERATING RESULTS LESS PREDICTABLE.
Because customers have differing views on the strategic importance of acquiring
products for gathering and organizing information on the web, intranets and
legacy systems and using custom software applications for improving their
information technology networks, the time required to educate customers and sell
our products and services can vary widely. As a result, the evaluation, testing,
implementation and acceptance procedures undertaken by customers can vary,
resulting in a variable sales cycle, which typically can range from six to nine
months. While our customers are evaluating our products and services before
placing an order, we may incur substantial sales and marketing expenses and
expend significant management efforts after which customers still may not place
an order with us. Sales cycles for our products and services sold to larger
companies have been longer than sales cycles for our products that are sold to
comparatively smaller companies. We expect that our sales to larger companies
may increase as a percentage of our total sales over time, and, accordingly, we
may experience longer average sales cycles for our products and services. In
addition, purchases of our products and services will frequently be subject to
unplanned processing and other delays, particularly with respect to larger
customers for whom our products and services represent a very small percentage
of their overall purchase activity. Large customers typically require approvals
at a number of management levels within their organizations, and, therefore,
frequently have longer sales cycles.
IF WE FAIL TO ADEQUATELY RESPOND TO RAPID TECHNOLOGICAL CHANGES, OUR PRODUCTS
AND SERVICES COULD BECOME OBSOLETE OR UNMARKETABLE.
New technologies or new industry standards for gathering, exchanging,
integrating, personalizing and organizing information over the Internet or on
internal sources, or legacy based content sources, could render our products and
services obsolete and unmarketable. We believe that to succeed we will have to
frequently enhance our Network Query Language-based products and services,
develop new products and services on a timely basis to keep pace with
technological developments and satisfy the increasingly sophisticated
requirements of our customers. Therefore, we cannot be certain that we will
successfully respond to technological change, evolving industry standards or
customer requirements. If we are unable to adequately respond to these changes,
our revenues and market share could rapidly decline. In connection with the
introduction of new products and enhancements, we expect to experience
development delays and related cost overruns, which are not unusual in the
software industry. We could encounter these problems or more serious delays in
the future. Any delays in developing and releasing new products or services or
enhancements to our existing products or services could result in:
o customer dissatisfaction;
o cancellation of orders and licensing agreements;
o negative publicity;
o loss of revenues;
o slower market acceptance;
o slower, or even negative, business growth rates; and
o legal action against us by customers.
Our Network Query Language-based products and services are designed to work on a
variety of hardware and software platforms used by our customers. However, these
products may not operate well with future versions of hardware and software
platforms, programming languages, database environments, accounting and other
systems used by our customers. We must frequently modify and improve our
technology to keep pace with changes made to these platforms and to operational
applications and other Internet-related applications. This may result in
uncertainty relating to the timing and nature of new product or service
announcements, introductions or modifications, which may harm our business. If
we fail to modify or improve our products or services in response to evolving
industry standards, they could rapidly become obsolete or unmarketable, which
would significantly adversely affect our business, financial results and the
market price of our Common Stock.
23
24
IF A SIGNIFICANT NUMBER OF WEB SITES BLOCK BOTS AND INTELLIGENT AGENTS FROM
SEARCHING, GATHERING AND ORGANIZING INFORMATION FROM THEIR SITES THAT WOULD
REDUCE THE MARKETABILITY OF OUR NETWORK QUERY LANGUAGE-BASED PRODUCTS.
Our Network Query Language-based products are designed to enable others to
create and use bots and intelligent agents for automatically searching,
gathering, filtering, organizing, converting and monitoring information on web
sites. If a significant number of web sites block bots and intelligent agents
from taking one or more of these actions or any other actions for which Network
Query Language-based bots and intelligent agents may be deployed, that would
substantially reduce the marketability of our Network Query Language-based
products.
WE MAY BE UNABLE TO DEVOTE ENOUGH FUNDS AND RESOURCES TO SUFFICIENTLY DEVELOP
OUR PRODUCTS AND SERVICES IN ORDER TO SUSTAIN AND GROW OUR BUSINESS.
Developing and improving our products and services requires large amounts of
funds and resources. There are no assurances that we will be able to provide
enough funds and resources to sufficiently develop our products and services in
order to sustain and grow our business. If we lack funds and resources for
product and service development, our business, financial results and the market
price of our Common Stock could be significantly adversely affected.
WE COULD BE ADVERSELY AFFECTED IF WE ARE UNABLE TO SECURE AND MAINTAIN
TECHNOLOGY AND MARKETING AGREEMENTS WITH OTHER KEY COMPANIES OR IMPLEMENT
STRATEGIES TO KEEP PACE WITH THE MARKET.
We have agreements regarding our Network Query Language technology with several
key companies. One or more of these agreements could terminate or expire. Such
an event could significantly adversely affect our business, financial results
and the market price of our Common Stock.
We expect to execute technology and marketing agreements with key companies, as
well as develop additional strategies to keep pace with the fast changing
market. These anticipated agreements are expected to range from customized
technology projects to marketing alliances. While we expect these agreements to
provide us significant benefits, they may or may not provide us any actual
benefits. Some of our strategies are anticipated to expand the integration of
the Network Query Language technology with third-party products and services
currently being developed or marketed. No assurance can be given that any of
these strategies will be successfully implemented. If we do not successfully
implement any or all of such strategies, our business, financial results and the
market price of our Common Stock could be significantly adversely affected.
WE COULD BE ADVERSELY AFFECTED IF WE ARE UNABLE TO SECURE LICENSE AGREEMENTS
WITH BETA USERS OF OUR NQL CONTENTANYWHERE PLATFORM.
We recently concluded a beta program for our NQL ContentAnywhere platform
involving several U.S. and European companies. The initial beta group included a
cross section of industries representing the Company's target markets. The
Company released the full version of the platform in the first quarter of 2001
however, the beta program may or may not result in actual licensees of the
platform.
IF OTHER PARTIES WRONGFULLY USE OUR NETWORK QUERY LANGUAGE-BASED PRODUCTS
WITHOUT BEING LICENSED, OUR REVENUE FROM THOSE PRODUCTS WOULD BE NEGATIVELY
IMPACTED.
We anticipate primarily depending on licensing agreements to earn revenue from
our Network Query Language-based products. We have safeguards in place to
monitor and reduce the risk of unauthorized use of our Network Query
Language-based products. There is, however, no assurance that other parties will
not manage to circumvent those safeguards and use those products without being
licensed. If that occurs, we could lose a significant portion of our potential
revenue.
WE FACE INTENSE COMPETITION FOR KEY PERSONNEL. IF WE ARE UNABLE TO ATTRACT,
TRAIN AND RETAIN KEY PERSONNEL, WE COULD BE ADVERSELY AFFECTED.
Competition for key personnel is intense, particularly in Orange County,
California, where our headquarters are located, and in New Jersey, where our IT
professional services subsidiary is based. We have experienced difficulties
common to the industry in attracting, hiring, training and retaining personnel.
Our key personnel, including members of our management team, may terminate their
employment with us or decide to work for one of our competitors at any time for
any reason. The loss of the services of any of our
24
25
key personnel would materially impede the operation and growth of our business.
We do not maintain key person life insurance on any of our personnel.
WE COULD BE ADVERSELY AFFECTED IF WE ARE UNABLE TO EFFECTIVELY MANAGE RAPID
GROWTH AND EXPANSION.
Our ability to offer our products and services in a quickly evolving market
requires an effective planning and management process. Rapid growth can place
significant demands on our managerial and operational resources and our internal
training capabilities. In addition, we also plan to expand the geographic scope
of our operations, both domestically and internationally. We intend for this
geographic expansion to occur primarily in the Software business unit. Expansion
may substantially burden our management team. To manage growth effectively, we
must:
o implement and improve our operational, financial, information
and other systems, procedures and controls on a timely basis;
o expand, train and manage our workforce, particularly our
sales, marketing and support organizations; and
o identify and move into suitable office space to expand our
facilities.
There is no assurance that our systems, procedures or controls will be adequate
to support our current or future operations or that our management team will be
able to manage expansion and still achieve the rapid execution necessary to meet
our growth expectations. Failure to manage our growth effectively could diminish
our growth prospects and could result in lost opportunities as well as operating
expenses exceeding budgeted amounts.
WE COULD BE ADVERSELY AFFECTED IF OUR PRODUCTS CONTAIN UNDETECTED DEFECTS.
Our Network Query Language-based products are complex and may contain undetected
errors or result in system failures, especially when first introduced or when
new versions or enhancements are released. Despite extensive testing, we have
discovered software defects in our new products after their introduction and
utilization. Testing of our Network Query Language-based products is
particularly challenging because it is difficult to simulate the wide variety of
computer environments into which they may be deployed. The implementation of our
Network Query Language-based products typically involves working with
sophisticated software, computing and communications systems. If our software
contains undetected errors or we fail to meet our customers' expectations in a
timely manner we could experience:
o loss or delay in receipt of revenues and loss of market share;
o loss of customers;
o failure to achieve market acceptance;
o diversion of development resources;
o diversion of customer support resources;
o negative publicity;
o increased service and warranty costs;
o legal actions by customers against us; and
o increased insurance costs.
Because our customers use our products and services for mission-critical
applications, errors or defects in or other performance problems associated with
our products and services could result in financial or other damages to our
customers. Our customers may then seek substantial damages from us for their
losses. We have not experienced any such claims to date. However, such claims
brought against us, even if not successful, would likely be time-consuming,
costly and harmful to our reputation.
25
26
Our license and service agreements with customers generally contain provisions
designed to limit our exposure to potential liability claims. These provisions
typically include disclaimers of warranties and limitations on liability for
special, consequential and incidental damages. In addition, our license and
service agreements generally limit the amounts recoverable for damages to the
amounts paid by our customers for the products or services giving rise to the
damages. We cannot be certain that the limitations of liability we include in
our contracts will be enforceable since existing or future laws or unfavorable
judicial decisions could negate these liability limiting provisions. The
successful assertion of one or more large claims that exceed contractual
limitations on our liability could have significant negative impact on our
business, financial results and the market price of our Common Stock.
THE PRICE OF OUR COMMON STOCK HAS BEEN AND MAY CONTINUE TO BE VOLATILE;
INVESTORS SHOULD BE AWARE THAT THEY COULD POTENTIALLY LOSE ALL OR PART OF THEIR
INVESTMENT.
The price of our Common Stock has been and may continue to be volatile. The
price of our Common Stock may fluctuate significantly in response to a number of
events and factors relating to us, our competitors, the market for our products
or the securities markets in general, such as:
o quarterly variations in our operating results;
o announcements by us or our competitors of new technological
innovations, new products, new services, significant
contracts;
o acquisitions, strategic partnerships, joint ventures or
capital commitments;
o changes in financial estimates and recommendations by
securities analysts;
o changes in market valuations of Internet-related and
networking companies;
o loss of a major customer;
o additions or departures of key personnel;
o changes in prevailing interest rates;
o fluctuations in overall stock market prices and volumes; and
o news relating to trends in our markets.
In addition, the stock market in general, and the market prices for
Internet-related companies in particular, have experienced extreme volatility
that often has been unrelated to the operating performance of these companies.
These broad market and industry fluctuations may adversely affect the market
price of our Common Stock, regardless of our operating performance.
Recently, when the market price of a stock has been volatile, holders of that
stock have often instituted securities class action litigation against the
Company that issued the stock. If any of our stockholders brought such a lawsuit
against us, we could incur substantial costs defending the lawsuit. Such a
lawsuit could also divert the time and attention of our management.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements and Supplementary Data of the Company are listed and
included under Item 14 of this Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
26
27
PART III
The information required to be set forth herein, Item 10, "Directors and
Executive Officers of the Registrant," Item 11, "Executive Compensation," Item
12, "Security Ownership of Certain Beneficial Owners and Management," and Item
13, "Certain Relationships and Related Transactions," except for a list of
Executive Officers which is set forth in Part I of this report, is included in
the Company's definitive Proxy Statement pursuant to Regulation 14A, which is
incorporated herein by reference, filed with the Securities and Exchange
Commission no later than 120 days after the close of the year ended December 31,
2000.
27
28
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. The following financial statements are referenced in Part II
Item 8 and submitted herewith:
PAGE NUMBER
-----------
Report of Independent Auditors 34
Consolidated Balance Sheets at December 31, 2000 and December 31, 1999 35
Consolidated Statements of Operations for the Years Ended
December 31, 2000 and 1999, and the Ten Months Ended
December 31, 1998 36
Consolidated Statements of Redeemable Preferred Stock and
Other Stockholders' Equity for the Years Ended December 31,
2000 and 1999, and the Ten Months Ended December 31, 1998 37
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2000 and 1999, and the Ten Months Ended
December 31, 1998 38
Notes to Consolidated Financial Statements 39
2. The following financial statement schedule for the years ended
December 31, 2000 and 1999, and the Ten Months Ended
December 31, 1998 is submitted herewith:
Schedule II - Valuation and Qualifying Accounts
All other schedules are omitted because they are not
applicable or the required information is presented in the
financial statements or notes thereto.
3. The list of exhibits contained in the Index to Exhibits is
submitted herewith.
(b) [No reports on Form 8-K were filed by the Company during the last
quarter of the year ended December 31, 2000.]
(c) 1. The Index of Exhibits is as follows:
2. Exhibits:
*2.1 Agreement and Plan of Merger of NQL Inc., a Delaware
corporation and Alpha Microsystems, a California corporation
dated August 18, 2000 (incorporated herein by reference to
Exhibit 2.1 to the Form 8-K filed by the Registrant on
September 1, 2000)
*2.2 Merger Agreement by and between Alpha Microsystems, Alpha
Micro Merger Corp., Delta CompuTec Inc. and Joseph Lobozzo II
and Joanne Lobozzo dated July 2, 1998 (incorporated by
reference to Exhibit 2 to the Form 8-K filed by Alpha
Microsystems on September 16, 1998)
28
29
*3.1 Restated Certificate of Incorporation of NQL Inc., a Delaware
corporation (incorporated herein by reference to Exhibit 3.1
to the Form 8-K filed by the Registrant on September 1, 2000)
*3.2 Amended and Restated Bylaws of NQL Inc., a Delaware
corporation (incorporated herein by reference to Exhibit 3.3
to the Form 8-K filed by the Registrant on September 1, 2000)
*4.1 Certificate of Designations of Rights and Preferences of Class
A1 Cumulative, Redeemable and Exchangeable Preferred Stock,
Class A2 Cumulative, Redeemable and Exchangeable Preferred
Stock, Class B1 Cumulative Redeemable and Exchangeable
Preferred Stock, Class C1 Cumulative Redeemable and
Exchangeable Preferred Stock, Class D Cumulative Redeemable
and Exchangeable Preferred Stock, Class E Cumulative
Redeemable and Exchangeable Preferred Stock and Voting
Preferred Stock of NQL Inc., a Delaware corporation
(incorporated herein by reference to Exhibit 3.2 to the Form
8-K filed by the Registrant on September 1, 2000)
*4.2 Warrant to Purchase Common Stock issued to Princeton
Securities dated October 20, 1998 (incorporated herein by
reference to Exhibit 4.7 to the Quarterly Report on Form 10-Q
of Alpha Microsystems for the quarter ended November 22, 1998)
*4.3 Form of Warrant Certificate to Purchase Common Stock issued to
ING Equity Partners II, L.P. dated September 1, 1998
(incorporated herein by reference to Exhibit 10.2 to the Form
8-K filed by Alpha Microsystems on August 10, 1998)
*10.1 Alpha Microsystems Profit Sharing Trust Agreement between
Registrant and Bank of America NT & S.A. as Trustee dated May
24, 1985 (incorporated herein by reference to Exhibit 10.32 to
the Annual Report on Form 10-K of Alpha Microsystems for the
year ended February 23, 1986)
*10.2 Alpha Microsystems Profit Sharing Plan (as amended and
restated) dated May 15, 1986 (incorporated herein by reference
to Exhibit 10.33 to the Annual Report on Form 10-K of Alpha
Microsystems for the year ended February 23, 1986)
*10.3 Acceptance of Trust by Trustee dated September 30, 1986
pursuant to Registrant's Profit Sharing Plan (incorporated
herein by reference to Exhibit 10.29 to the Annual Report on
Form 10-K of Alpha Microsystems for the year ended February
22, 1987)
*10.4 First Amendment dated March 1, 1987 to Registrant's Profit
Sharing Plan (incorporated herein by reference to Exhibit
10.30 to the Annual Report on Form 10-K of Alpha Microsystems
for the year ended February 22, 1987)
*10.5 Indemnification Agreement dated October 23, 1987 by and
between the Registrant and Rockell N. Hankin (incorporated
herein by reference to Exhibit 10.36 to the Quarterly Report
on Form 10-Q of Alpha Microsystems for the quarter ended
November 22, 1987)
*10.6 Second Amendment to Alpha Microsystems Profit Sharing Plan
dated January 22, 1988 (incorporated herein by reference to
Exhibit 10.31 to the Annual Report on Form 10-K of Alpha
Microsystems for the year ended February 28, 1988)
29
30
*10.7 Alpha Microsystems Profit Sharing Plan Amendments Under IRS
Notice 88-131 dated May 24, 1989 (incorporated herein by
reference to Exhibit 10.38 to the Quarterly Report on Form
10-Q of Alpha Microsystems for the quarter ended May 28, 1989)
*10.8 Alpha Microsystems Profit Sharing Plan Amendment dated
December 15, 1989 (incorporated herein by reference to Exhibit
10.45 to the Quarterly Report on Form 10-Q of Alpha
Microsystems for the quarter ended November 26, 1989)
*10.9 Indemnification Agreement by and between the Registrant and
Douglas J. Tullio dated January 8, 1990 (incorporated herein
by reference to Exhibit 10.50 to the Quarterly Report on Form
10-Q of Alpha Microsystems for the quarter ended November 26,
1989)
*10.10 Indemnification Agreement by and between Registrant and Clarke
E. Reynolds dated June 16, 1989 (incorporated herein by
reference to Exhibit 10.67 to the Annual Report on Form 10-K
of Alpha Microsystems for the year ended February 23, 1992)
*10.11 Alpha Microsystems 1993 Employee Stock Option Plan
(incorporated herein by reference to Exhibit 10.109 to the
Quarterly Report on Form 10-Q filed by Alpha Microsystems for
the quarter ended May 29, 1994)
*10.12 Industrial Lease between Fairview Investors Ltd. and
Registrant dated October 28, 1994 (incorporated herein by
reference to Exhibit 10.113 to the Quarterly Report on Form
10-Q of Alpha Microsystems for the quarter ended November 27,
1994)
*10.13 Second Amendment and Restatement of the Alpha Microsystems
Profit Sharing Plan dated July 1, 1992 (incorporated herein by
reference to Exhibit 10.72 to the Quarterly Report on Form
10-Q of Alpha Microsystems for the quarter ended May 31, 1992)
*10.14 Memorandum to Lease by and between Registrant and Fairview
Investors, Ltd. dated January 24, 1995 (incorporated herein by
reference to Exhibit 10.136 to the Annual Report on Form 10-K
of Alpha Microsystems for the year ended February 26, 1995)
*10.15 First Amendment to Alpha Microsystems 1993 Employee Stock
Option Plan (incorporated herein by reference to Exhibit 4.6
to the Form S-8 filed by Alpha Microsystems on January 31,
1997)
*10.16 Second Amendment to Alpha Microsystems 1993 Employee Stock
Option Plan (incorporated herein by reference to Exhibit 4.7
to the Form S-8 filed by Alpha Microsystems on January 31,
1997)
*10.17 Alpha Microsystems Employee Stock Purchase Plan (incorporated
herein by reference to Exhibit 4.10 to the Form S-8 filed by
Alpha Microsystems on January 31, 1997)
*10.18 Indemnification Agreement by and between Registrant and Dennis
E. Michael dated January 17, 1997 (incorporated herein by
reference to Exhibit 10.57 to the Annual Report on Form 10-K
of Alpha Microsystems for the year ended February 23, 1997)
*10.19 Securities Purchase Agreement by and between Registrant and
ING Equity Partners II, L.P. dated August 7, 1998
(incorporated herein by reference to Exhibit 10.1 to the Form
8-K filed by Alpha Microsystems on August 10, 1998)
30
31
*10.20 Employment Agreement by and between Registrant and John T.
DeVito dated September 1, 1998 (incorporated herein by
reference to Exhibit 10.1 to the Form 8-K/A filed by Alpha
Microsystems on October 5, 1998)
*10.21 Amended and Restated Employment Agreement by and between
Registrant and Douglas J. Tullio dated September 1, 1998
(incorporated herein by reference to Exhibit 10.2 to the Form
8-K/A filed by Alpha Microsystems on October 5, 1998)
*10.22 Alpha Microsystems 1998 Stock Option and Award Plan
(incorporated herein by reference to Exhibit 10.69 to the
Quarterly Report on Form 10-Q of Alpha Microsystems for the
quarter ended November 22, 1998)
*10.23 Form of Incentive Stock Option Agreement for use in connection
with 1998 Stock Option and Award Plan (incorporated herein by
reference to Exhibit 10.70 to the Quarterly Report on Form
10-Q of Alpha Microsystems for the quarter ended November 22,
1998)
*10.24 Form of Non-employee Director Non-Qualified Stock Option
Agreement to be used in connection with 1998 Stock Option and
Award Plan (incorporated herein by reference to Exhibit 10.71
to the Quarterly Report on Form 10-Q of Alpha Microsystems for
the quarter ended November 22, 1998)
*10.25 Form of Non-employee Director Non-Qualified Stock Option
Agreement in Lieu of Cash Compensation for Prior Services for
use in connection with 1998 Stock Option and Award Plan
(incorporated herein by reference to Exhibit 10.72 to the
Quarterly Report on Form 10-Q of Alpha Microsystems for the
quarter ended November 22, 1998)
*10.26 Form of Non-Qualified Stock Option Agreement for use in
connection with the 1998 Stock Option and Award Plan
(incorporated herein by reference to Exhibit 10.73 to the
Quarterly Report on Form 10-Q of Alpha Microsystems for the
quarter ended November 22, 1998)
*10.27 Form of Non-Qualified Stock Option Agreement issued in
connection with the acquisition of Delta CompuTec Inc.
(incorporated herein by reference to Exhibit 10.74 to the
Quarterly Report on Form 10-Q of Alpha Microsystems for the
quarter ended November 22, 1998)
*10.28 Indemnification Agreement by and between Registrant and John
T. DeVito dated December 17, 1998 (incorporated herein by
reference to Exhibit 10.76 to the Quarterly Report on Form
10-Q of Alpha Microsystems for the quarter ended November 22,
1998)
*10.29 Indemnification Agreement by and between Registrant and
Benjamin P. Giess dated December 17, 1998 (incorporated herein
by reference to Exhibit 10.77 to the Quarterly Report on Form
10-Q of Alpha Microsystems for the quarter ended November 22,
1998)
*10.30 Indemnification Agreement by and between Registrant and Sam
Yau dated December 17, 1998 (incorporated herein by reference
to Exhibit 10.78 to the Quarterly Report on Form 10-Q of Alpha
Microsystems for the quarter ended November 22, 1998)
*10.31 Management Deferred Compensation Plan dated November 1, 1998
(incorporated herein by reference to Exhibit 4.9 to the
Transition Report on Form 10-K of Alpha Microsystems for the
transition period ended December 31, 1998)
31
32
*10.32 Amendment No. 1 to Securities Purchase Agreement by and
between Registrant and ING Equity Partners II, L.P. dated
February 1999 (incorporated herein by reference to Exhibit
10.49 to the Quarterly Report on Form 10-Q of Alpha
Microsystems for the quarter ended June 30, 1999)
*10.33 Amendment No. 2 to Securities Purchase Agreement by and
between Registrant and Hampshire Equity Partners II, L.P.
dated June 28, 1999 (incorporated herein by reference to
Exhibit 10.50 to the Quarterly Report on Form 10-Q of Alpha
Microsystems for the quarter ended June 30, 1999)
*10.34 Amendment No. 3 to Securities Purchase Agreement by and
between Registrant and Hampshire Equity Partners II, L.P.
dated November 18, 1999 (incorporated herein by reference to
Exhibit 10.52 to the Quarterly Report on Form 10-Q of Alpha
Microsystems for the quarter ended September 30, 1999)
*10.35 Employment Agreement by and between Registrant and Robert O.
Riiska dated November 26, 1999 (incorporated herein by
reference to Exhibit 10.53 to the Annual Report on Form 10-K
of Alpha Microsystems for the year ended December 31, 1999)
*10.36 Indemnification Agreement by and between Registrant and Robert
O. Riiska dated November 26, 1999 (incorporated herein by
reference to Exhibit 10.54 to the Annual Report on Form 10-K
of Alpha Microsystems for the year ended December 31, 1999)
*10.37 Asset Purchase Agreement by and between Registrant and Alpha
Microsystems, LLC, dated as of December 31, 1999 (incorporated
herein by reference to Exhibit 10.1 to Form 8-K Current Report
of Alpha Microsystems dated January 14, 2000)
*10.38 Amendment No. 1 to Asset Purchase Agreement by and between
Registrant and Alpha Microsystems, LLC, dated January 31, 2000
(incorporated herein by reference to Exhibit 10.2 of Form 8-K
Current Report of Alpha Microsystems dated January 31, 2000)
*10.39 Amendment No. 2 to Asset Purchase Agreement by and between
Registrant and Alpha Microsystems, LLC, dated March 15, 2000
(incorporated herein by reference to Exhibit 10.57 to the
Annual Report on Form 10-K of Alpha Microsystems for the year
ended December 31, 1999)
*10.40 Amendment No. 3 to Asset Purchase Agreement by and between
Registrant and Alpha Microsystems, LLC, dated August 1, 2000
(incorporated herein by reference to Exhibit 10.58 to the
Quarterly Report on Form 10-Q of Alpha Microsystems for the
quarter ended June 30, 2000)
*10.41 Alpha Microsystems 1998 Stock Option and Award Plan, as
amended, dated August 14, 2000 (incorporated herein by
reference to Exhibit 10 to Form S-8 of Alpha Microsystems
filed August 31, 2000)
10.42 Indemnification Agreement by and between Registrant and Tracey
L. Rudd dated September 1, 2000
10.43 Amendment No. 1 to Industrial Lease between Fairview, LLC
and Registrant dated October 24, 2000
10.44 Office Lease Agreement between Starwood O.C. Portfolio I,
L.L.C. and NQL Inc. dated November 13, 2000
- --------------------------------------------------
* FILED BY INCORPORATION.
32
33
21 Subsidiaries
23 Consent of Independent Auditors
24 Power of Attorney (included on signature pages of this Annual
Report on Form 10-K)
33
34
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
NQL Inc.
We have audited the accompanying consolidated balance sheets of NQL Inc. as of
December 31, 2000 and 1999, and the related statements of operations, redeemable
preferred stock and other stockholders' equity, and cash flows for the years
ended December 31, 2000 and 1999 and for the ten months ended December 31, 1998.
Our audits also included the financial statement schedule listed in the Index at
Item 14(a). These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedule 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 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 consolidated financial position of NQL at
December 31, 2000 and 1999 and the consolidated results of its operations and
its cash flows for the years ended December 31, 2000 and 1999 and for the ten
months ended December 31, 1998, in conformity with accounting principles
generally accepted in the United States. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
The accompanying financial statements have been prepared assuming that NQL Inc.
will continue as a going concern. As more fully described in Note 1, the Company
has incurred recurring operating losses and operating cash flow deficits. This
condition raises substantial doubt about the Company's ability to continue as a
going concern. Management's plans in regards to this matter are also described
in Note 1. The financial statements do not include any adjustments to reflect
the possible future effects on the recoverability and classification of assets
or the amounts and classification of liabilities that may result from the
outcome of this uncertainty.
/s/ Ernst & Young LLP
Orange County, California
February 23, 2001
34
35
NQL INC.
(FORMERLY ALPHA MICROSYSTEMS)
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
December 31, 2000 December 31, 1999
----------------- -----------------
ASSETS
Current assets:
Cash and cash equivalents $ 4,097 $ 1,160
Accounts receivable, net of allowance for doubtful accounts
of $46 and $40 at December 31, 2000 and 1999, respectively 3,021 3,391
Prepaid expenses and other current assets 769 221
Accounts receivable from Alpha Microsystems, LLC (Net assets
held for sale at December 31, 1999) sale (Note 2) 230 500
-------- --------
Total current assets 8,117 5,272
Property and equipment, net 2,760 2,025
Intangibles, net 8,506 8,543
Other assets 261 469
-------- --------
Total assets $ 19,644 $ 16,309
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank borrowings $ -- $ 688
Accounts payable 2,035 1,615
Accrued compensation 578 444
Other accrued liabilities 1,121 1,189
Deferred revenue 1,328 1,013
-------- --------
Total current liabilities 5,062 4,949
Other long-term liabilities -- 274
Deferred gain on sale of Businesses to Alpha Microsystems, LLC 601 2,726
Commitments and contingencies
Redeemable preferred stock, no par value; 2,501 issued and
outstanding at December 31, 2000 and 1999; liquidation
value $2,500 at December 31, 2000 2,322 2,190
Other stockholders' equity:
Exchangeable redeemable preferred stock, no par
value; 5,000,000 shares authorized; 19,027 and 17,891
issued and outstanding at December 31, 2000 and 1999,
respectively; liquidation value $19,027 at December 31, 2000 17,526 15,395
Common stock, no par value; 40,000,000 shares
authorized; 14,233,407 and 11,678,025 shares issued
and outstanding at December 31, 2000 and 1999,
respectively 46,860 32,914
Warrants 2,655 2,655
Accumulated deficit (55,416) (44,832)
Accumulated other comprehensive income 34 38
-------- --------
Total other stockholders' equity 11,659 6,170
-------- --------
Total liabilities and stockholders' equity $ 19,644 $ 16,309
======== ========
See accompanying notes.
35
36
NQL INC.
(FORMERLY ALPHA MICROSYSTEMS)
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Year Ended Year Ended Ten Months Ended
December 31, December 31, December 31,
2000 1999 1998
------------ ------------ ----------------
Net sales:
IT Services $ 13,465 $ 30,399 $ 20,072
Product 732 4,491 4,068
-------- -------- --------
Total net sales 14,197 34,890 24,140
-------- -------- --------
Cost of sales:
IT Services 10,842 23,608 17,222
Product 427 3,424 3,772
-------- -------- --------
Total cost of sales 11,269 27,032 20,994
-------- -------- --------
Gross margin 2,928 7,858 3,146
Operating expenses:
Selling, general and administrative 11,976 11,858 8,674
Engineering, research and development 732 1,290 1,173
Impairment of long-lived assets -- 196 2,438
-------- -------- --------
Total operating expenses 12,708 13,344 12,285
-------- -------- --------
Loss from operations (9,780) (5,486) (9,139)
Other expense (income):
Interest income (400) (72) (88)
Interest expense 25 186 106
(Gain) loss on dispositions of businesses (1,865) 6,506 379
Other (income) expense, net (6) 52 (9)
-------- -------- --------
Total other (income) expense (2,246) 6,672 388
-------- -------- --------
Loss before taxes (7,534) (12,158) (9,527)
Income tax expense 21 46 15
-------- -------- --------
Net loss (7,555) (12,204) (9,542)
Accretion on redeemable preferred stock (463) (333) (72)
Dividends on redeemable preferred stock (2,567) (1,556) (364)
-------- -------- --------
Net loss attributable to common stockholders $(10,585) $(14,093) $ (9,978)
======== ======== ========
Basic and diluted net loss per share $ (0.78) $ (1.21) $ (0.90)
======== ======== ========
Number of shares used in computing
basic and diluted per share amounts 13,574 11,610 11,029
======== ======== ========
See accompanying notes.
36
37
NQL INC.
(FORMERLY ALPHA MICROSYSTEMS)
CONSOLIDATED STATEMENTS OF REDEEMABLE PREFERRED STOCK
AND OTHER STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2000 AND DECEMBER
31, 1999, AND TEN MONTHS ENDED DECEMBER 31, 1998
(In thousands)
Exchangeable
Redeemable Redeemable
Preferred Stock Preferred Stock Common Stock
-------------------- ---------------- -----------------
Shares Amount Shares Amount Shares Amount
------ -------- ------ ------- ------ -------
Balance at February 23, 1998 -- $ -- -- $ -- 10,914 $31,011
Net loss -- -- -- -- -- --
Translation adjustment -- -- -- -- -- --
Total comprehensive
loss
Issuance of stock,
net of expenses 15 12,752 -- -- 274 612
Accretion on
preferred stock -- 72 -- -- -- --
Dividends on
preferred stock -- -- -- -- -- --
Issuance of
redeemable
warrants, net -- -- -- -- -- --
Exercise of stock
options -- -- -- -- 6 9
------ -------- -- ------- ------ -------
Balance at December 31, 1998 15 12,824 -- -- 11,194 31,632
Net loss -- -- -- -- -- --
Translation adjustment -- -- -- -- -- --
Total comprehensive
loss -- -- -- -- -- --
Issuance of stock,
net of expenses -- -- 5 4,037 357 1,014
Exchange of preferred
stock (13) (10,719) 13 10,719 -- --
Accretion on
preferred stock -- 85 -- 248 -- --
Dividends on
preferred stock -- -- -- 391 -- --
Issuance of
redeemable
warrants, net -- -- -- -- -- --
Exercise of stock
options -- -- -- -- 127 268
------ -------- -- ------- ------ -------
Balance at December 31, 1999 2 $ 2,190 18 $15,395 11,678 $32,914
Net loss
-- -- -- -- -- --
Translation adjustment -- -- -- -- -- --
Total comprehensive
loss -- -- -- -- -- --
Issuance of stock,
net of expenses -- -- -- -- 2,407 13,620
Accretion on
preferred stock -- 52 -- 411 -- --
Dividends on
preferred stock -- 80 1 1,720 -- --
Compensation expense
on acceleration
of stock option
vesting -- -- -- -- -- 30
Exercise of warrants -- -- -- -- 22 --
Exercise of stock
options -- -- -- -- 126 296
------ -------- -- ------- ------ -------
Balance at December 31, 2000 2 $ 2,322 19 $17,526 14,233 $46,860
====== ======== == ======= ====== =======
Unamortized Accumulated
Restricted Other
Accumulated Stock Plan Comprehensive
Warrants Deficit Expense Income Total
-------- ----------- ---------- ------------- --------
Balance at February 23, 1998 $ -- $(20,761) $ -- $ 57 $ 10,307
Net loss -- (9,542) -- -- (9,542)
Translation adjustment -- -- -- (41) (41)
--------
Total comprehensive
loss (9,583)
Issuance of stock,
net of expenses -- -- -- -- 612
Accretion on
preferred stock -- (72) -- -- (72)
Dividends on
preferred stock -- (364) -- -- (364)
Issuance of
redeemable
warrants, net 1,764 -- -- -- 1,764
Exercise of stock
options -- -- -- -- 9
------- -------- ---- ------- --------
Balance at December 31, 1998 1,764 (30,739) -- 16 2,673
Net loss -- (12,204) -- -- (12,204)
Translation adjustment -- -- -- 22 22
--------
Total comprehensive
loss -- -- -- -- (12,182)
Issuance of stock,
net of expenses -- -- -- -- 5,051
Exchange of preferred
stock -- -- -- -- 10,719
Accretion on
preferred stock -- (333) -- -- (85)
Dividends on
preferred stock -- (1,556) -- -- (1,165)
Issuance of
redeemable
warrants, net 891 -- -- -- 891
Exercise of stock
options -- -- -- -- 268
------- -------- ---- ------- --------
Balance at December 31, 1999 $ 2,655 $(44,832) $ -- $ 38 $ 6,170
Net loss -- (7,555) -- -- (7,555)
Translation adjustment -- -- -- (4) (4)
--------
Total comprehensive
loss -- -- -- -- (7,559)
Issuance of stock,
net of expenses -- -- -- -- 13,620
Accretion on
preferred stock -- (463) -- -- (52)
Dividends on
preferred stock -- (2,566) -- -- (846)
Compensation expense
on acceleration
of stock option
vesting -- -- -- -- 30
Exercise of warrants -- -- -- -- --
Exercise of stock
options -- -- -- -- 296
------- -------- ---- ------- --------
Balance at December 31, 2000 $ 2,655 $(55,416) $ -- $ 34 $ 11,659
======= ======== ==== ======= ========
See accompanying notes.
37
38
NQL INC.
(FORMERLY ALPHA MICROSYSTEMS)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended Year Ended Ten Months Ended
December 31, December 31, December 31,
2000 1999 1998
------------ ------------ ----------------
Cash flows from operating activities:
Net loss $ (7,555) $(12,204) $ (9,542)
Adjustments to reconcile net loss to net cash
used in operating activities:
(Gain)/loss on sales of businesses, net (1,865) 6,506 379
Impairment of long-lived assets -- 196 2,438
IT service parts obsolescence -- 142 --
Software obsolescence -- -- 813
Depreciation and amortization 1,459 1,663 1,970
Provision for losses on accounts receivable 30 312 548
Other 30 (58) 78
Other changes in operating assets and liabilities,
net of effects of acquisitions and dispositions:
Restricted cash -- 296 (384)
Accounts receivable 227 (1,222) (1,092)
Prepaid expenses and other current assets (591) 92 (143)
Accounts payable and accrued liabilities 603 (1,423) 792
Deferred revenue 315 909 (188)
Other, net (3) 172 (24)
-------- -------- --------
Net cash used in operating activities (7,350) (4,619) (4,355)
-------- -------- --------
Cash flows from investing activities:
Purchases of equipment (1,622) (2,881) (1,847)
Capitalization of software development costs (549) (290) (269)
Acquisition of DCi, net of cash acquired -- -- (3,285)
Acquisition of other IT service assets -- (366) (478)
Other, net 250 (134) --
-------- -------- --------
Net cash used in investing activities (1,921) (3,671) (5,879)
-------- -------- --------
Cash flows from financing activities:
Issuance of preferred stock, net -- 4,037 12,812
Issuance of common stock, net 13,620 1,282 271
Issuance of warrants to purchase common stock, net -- 891 1,704
Line of credit, net -- -- (1,000)
Issuance of debt -- -- 1,050
Principal repayments on debt (743) (308) (102)
Repayments on debt assumed in acquisition of Dci -- -- (4,612)
Payment of preferred stock dividends (919) (1,318) (58)
Other, net 250 (68) 105
-------- -------- --------
Net cash provided by financing activities 12,208 4,516 10,170
-------- -------- --------
Effect of exchange rate changes on cash and cash equivalents -- 4 (9)
-------- -------- --------
Increase (decrease) in cash and cash equivalents 2,937 (3,770) (73)
Cash and cash equivalents at beginning of period 1,160 4,930 5,003
-------- -------- --------
Cash and cash equivalents at end of period $ 4,097 $ 1,160 $ 4,930
======== ======== ========
Supplemental information:
Cash paid for:
Interest $ 2 $ 189 $ 98
======== ======== ========
Income tax payments, net $ 14 $ 22 $ 15
======== ======== ========
See accompanying notes.
38
39
NQL INC.
(FORMERLY ALPHA MICROSYSTEMS)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REINCORPORATION AND NAME CHANGE
On September 1, 2000, Alpha Microsystems, a California corporation, which had
been doing business as AlphaServ.com, merged with and into its wholly-owned
subsidiary, NQL Inc., a Delaware corporation for the purposes of reincorporating
in Delaware and changing its name to NQL Inc. The reincorporation merger was
accomplished pursuant to the Agreement and Plan of Merger dated August 18, 2000.
NQL Inc. did not assume the name "Alpha Microsystems", but instead continued to
use "NQL Inc." The reincorporation merger is more fully described in the
Company's report on Form 8-K filed on September 1, 2000.
THE BUSINESS
The Company is a global business-to-business infrastructure company that through
its patent-pending Network Query Language technology develops and deploys the
next generation of enabling software solutions. Network Query Language enables
organizations of all sizes to locate, capture and deploy information from any
source into intelligent solutions. The Company markets its products to systems
integrators, Fortune 1000 corporations, Internet communities and marketplaces,
software vendors, OEMs (original equipment manufacturers) and Internet-based
service providers. The Company's wholly-owned subsidiary, Delta CompuTec, Inc.
("DCi"), provides professional services including Internet and intranet
consulting, network design, and onsite support for customers located primarily
in the northeastern U.S. DCi provides information technology services and
products to vertical markets such as financial institutions, "Big 5" accounting
firms, major healthcare providers, pharmaceutical companies and educational
institutions. On January 31, 2000, the Company completed the sale of its
historic principal business lines which were: (i) the sale of computer and
networking hardware and software products, and (ii) the service of the Company's
products, the service of third-party hardware and software products, and
installation, training, and consulting services with respect to these products.
BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of NQL
and its wholly-owned subsidiaries (the "Company"). Significant intercompany
accounts and transactions have been eliminated in consolidation. Certain
reclassifications have been made to the prior periods' consolidated financial
statements to conform with the current year presentation. The 1999 financial
statements also include adjustments to reflect the sale of substantially all of
the assets associated with the Company's Alpha Micro Services Division ("AMSO")
and the Company's Alpha Micro Operating System ("AMOS") computer hardware
manufacturing division (collectively the "Businesses") to Alpha Microsystems,
LLC (formerly R.E. Mahmarian Enterprises, LLC) effective as of December 31, 1999
(Note 2).
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates. The
industries in which the Company operates are characterized by rapid
technological change and short product life cycles. As a result, estimates are
required to provide for doubtful accounts receivable, product obsolescence,
impairment in asset carrying values and certain other accrued liabilities and to
determine the fair value of stock options and warrants issued by the Company.
Historically, actual amounts recorded have
not varied significantly from estimated amounts.
The Company has incurred significant recurring operating losses and operating
cash flow deficits and is in active discussions to raise additional equity
financing to fund operations. Because the Company has not as yet raised the
additional equity financing, there is substantial doubt about its ability to
continue as a going concern. The Company believes that its current cash and cash
equivalents balance combined with the net proceeds of the contemplated
additional equity financing, cash expected to be generated by its information
technology professional services division, and continued revenue growth in its
software division will provide sufficient resources to allow the Company to
39
40
maintain its operations for the foreseeable future. Further, upon successful
completion of the contemplated equity financing, the Company intends to
reevaluate its cash flow projections to alleviate its concerns about its ability
to continue as a going concern. The Company will then amend its Annual Report on
Form 10-K for the year ended December 31, 2000 and reissue its financial
statements accordingly. There can be no assurance that the Company will be
successful with its ability to complete the contemplated equity financing. The
Company commercially released a new software product in February 2001 which is
expected to contribute to revenue growth in its software division. In addition,
should the Company not obtain growth in revenue, expenditures will be scaled
back in the areas of marketing, advertising, product development, salaries,
bonuses and commissions.
FISCAL YEAR
On December 17, 1998, the Company's Board of Directors approved a change in the
Company's fiscal year to a calendar year-end. Accordingly, the Company's 2000
and 1999 annual fiscal periods are the calendar years ended December 31, 2000
and December 31, 1999, respectively, and the Company had a ten-month transition
period ended December 31, 1998 to adopt the new year end.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with a maturity of
three months or less to be cash equivalents.
For purposes of the statement of cash flows, the non-cash transaction recorded
during 2000 was the issuance of 1,136 shares of exchangeable redeemable
preferred stock in lieu of cash payment of $1,136,000 of accrued dividends on
preferred stock. The non-cash transaction recorded during 1999 was the issuance
of 391 shares of exchangeable redeemable preferred stock in lieu of cash payment
of $391,000 of accrued dividends on preferred stock. During the ten months ended
December 31, 1998, the Company recorded the following non-cash transactions:
$350,000 of debt converted to 108,317 shares of common stock related to the
exercise of a warrant issued in connection with the acquisition of Delta
CompuTec, Inc. ("DCi") (Note 2), and issuance of 200,000 warrants to a financial
advisor in exchange for $60,000 of services.
RESTRICTED CASH
As part of the acquisition of DCi, the Company deposited funds into an escrow
account from which the Company is entitled to reimbursement for amounts
specifically relating to indemnification under the terms of the Agreement and
Plan of Merger ("Merger Agreement"). In November 1999, the Company received
$296,000 from the escrow account. The remaining balance was remitted to the
seller and reflected as an increase in goodwill in the accompanying consolidated
financial statements.
CONCENTRATION OF CREDIT RISK
In the normal course of business, the Company extends credit to a wide variety
of customers including individuals, value-added resellers, distributors and
large corporations and partnerships. The Company performs ongoing credit
evaluations of its customers and maintains allowances for potential credit
losses that have been within management's expectations. As of December 31, 2000,
the Company had no significant concentrations of credit risk.
PROPERTY AND EQUIPMENT
The straight-line method of depreciation is used for the following classes of
assets for financial statement purposes and is based on the following estimated
useful lives:
Years
-------
Machinery and equipment 3 to 10
Information technology service parts 3
Leasehold improvements 1 to 6
The Company capitalizes certain costs incurred in connection with developing or
obtaining internal use software. The amount capitalized includes amounts related
to external direct costs of material and services, payroll and payroll-related
costs. During the year ended December 31, 2000, the year ended December 31, 1999
and the ten months ended December 31, 1998, the Company
40
41
capitalized in machinery and equipment $104,000, $1,092,000 and $696,000,
respectively, associated with obtaining and implementing computer software for
internal use.
INTANGIBLE ASSETS
Intangible assets include goodwill, acquired information technology service
contracts and capitalized software development costs. The book value of goodwill
and information technology service contracts is associated with the acquisition
of companies or assets. Capitalized software development costs are the
accumulation of software development costs or the assigned value of software
associated with an acquisition. The straight-line amortization periods for the
major classes of intangible assets are as follows:
Years
-------
Goodwill 20
Information technology service contracts 5 to 10
Capitalized software development costs 3 to 5
The Company capitalizes certain engineering costs related to software
development after technological feasibility has been established and amortizes
these costs as the respective products are sold. However, in no event is the
amortization less than that which would be achieved by amortizing such costs on
a straight-line basis over the product's estimated life beginning on the date of
general product release.
RECOVERABILITY OF LONG-LIVED ASSETS
The Company routinely evaluates the carrying value of long-lived assets to
determine if impairment exists based upon estimated undiscounted future cash
flows of the respective operating divisions. The impairment, if any, is measured
by the difference between carrying value and estimated discounted future cash
flows and is charged to expense in the period identified. It is at least
reasonably possible that the Company's estimate of future undiscounted cash
flows may change in future periods. In addition, if the Company's estimate of
future undiscounted cash flows should change or if the operating plan is not
achieved, future analyses may indicate insufficient future undiscounted net cash
flows to recover the carrying value of certain of the Company's long-lived
assets, in which case, such assets would be written down to estimated fair
value.
DEFERRED REVENUE
Deferred revenue represents amounts billed and collected in advance for post
contract customer support on software licenses, customer training and
information technology service contracts and is recognized ratably over the
contract period or as the services are performed.
DEFERRED GAIN ON SALE OF BUSINESSES TO ALPHA MICROSYSTEMS, LLC (FORMERLY R.E.
MAHMARIAN ENTERPRISES, LLC)
In connection with the sale of the Businesses to Alpha Microsystems, LLC
(formerly R.E. Mahmarian Enterprises, LLC) (Note 2), Alpha Microsystems, LLC
assumed certain of the Company's contractual service obligations associated with
the Businesses sold. Because the Company remained contingently obligated to
honor the contractual service obligation in the event Alpha Microsystems, LLC
failed to perform, the Company retained its deferred revenue balance and
reclassified it to deferred gain on sale of the Businesses to Alpha
Microsystems, LLC, which was to be recognized on a monthly basis over future
periods as the contingent contractual obligations lapsed. As of December 31,
2000, the deferred gain had been reduced to $601,000 due to the operations of
Alpha Microsystems, LLC and a corresponding reduction in the Company's
contingent guarantee.
REVENUE RECOGNITION
The Company recognizes revenue on its information technology service sales and
post contract customer support on a straight-line basis over the contract
period, recognizes revenue on its product sales on shipment and recognizes
software license revenue in accordance with Statement of Position 97-2, Software
Revenue Recognition ("SOP 97-2"), as amended by SOP 98-4 and 98-9. Under the
terms of SOP 97-2, as amended, where an arrangement to deliver software does not
require significant production, modification or
41
42
customization, the Company recognizes license revenue when all of the following
criteria are met: persuasive evidence of an arrangement exists; delivery has
occurred; the fee is fixed or determinable; and collection is probable. The
Company's product revenues for the year ended December 31, 2000 relate to its
Internet software business except for revenues derived during the month of
January 2000 from the computer hardware manufacturing division that was sold to
Alpha Microsystems, LLC ("Alpha Microsystems, LLC") on January 31, 2000.
In December 1999, the Securities and Exchange Commission staff released Staff
Accounting Bulletin No. 101, Revenue Recognition in Financial Statements ("SAB
101"), which provides guidance on the recognition, presentation and disclosure
of revenue in financial statements. The application of SAB 101, as amended, was
implemented in the fourth quarter of 2000 and did not have a material impact on
the Company's financial position, results of operations or cash flows.
ADVERTISING EXPENSES
The Company expenses the production costs of advertising the first time the
advertising takes place in accordance with Statement of Position 93-7, Reporting
on Advertising Costs. The Company recognizes expenses related to advertising
costs in the period in which these costs are incurred. Total advertising
expenses for the year ended December 31, 2000, the year ended December 31, 1999,
and the ten months ended December 31, 1998 were $2,140,000, $49,000 and
$101,000, respectively.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development costs are expensed as incurred. Substantially all
research and development expenses are related to developing new products and
designing significant improvements to existing products.
STOCK-BASED COMPENSATION
The Company applies the intrinsic value method prescribed by Accounting
Principles Board Opinion No. 25 and related Interpretations in accounting for
its employee stock option and purchase plans. Note 7 to the consolidated
financial statements contains a summary of the pro forma effects on reported net
loss and net loss per share for the year ended December 31, 2000 and 1999, and
for the ten months ended December 31, 1998 as if the Company had elected to
recognize compensation cost based on the fair value method prescribed by
Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation.
In March 2000, the FASB issued Interpretation No. 44, Accounting for Certain
Transactions Involving Stock Compensation ("Interpretation 44"), which was
effective July 1, 2000. Interpretation 44 clarifies guidance for certain issues
that arose in the application of APB Opinion No. 25, Accounting for Stock Issued
to Employees ("APB 25"). The Company's implementation of the requirements of
Interpretation 44 did not have a material impact on the Company's financial
position, results of operations or cash flows.
INCOME TAXES
The Company uses the liability method to account for deferred taxes, which
requires an asset and liability approach to recognize deferred tax assets and
liabilities. Under this method of accounting, deferred tax assets and
liabilities are determined based upon the differences between the financial
reporting basis and the income tax basis of the Company's assets and liabilities
at the enacted income tax rates expected to apply when such differences are
expected to reverse. A valuation allowance is provided for deferred tax assets
as there is no assurance that the Company will realize those assets through
future operations.
FOREIGN CURRENCIES
Prior to January 31, 2000, the Company operated foreign entities that used the
local currency as the functional currency. The Company translates all foreign
entity assets and liabilities at year-end exchange rates, all income and expense
accounts at average exchange rates, and records adjustments resulting from
translation as a separate component of other comprehensive income (loss) within
stockholders' equity.
42
43
Foreign currency exchange gains (losses) included in the determination of loss
from operations before taxes were ($19,000), ($13,000) and $31,000 for the year
ended December 31, 2000 and 1999 and the ten-month period ended December 31,
1998, respectively. The Company had no forward exchange contracts outstanding at
December 31, 2000 and 1999.
PER SHARE DATA
Basic and diluted net loss per share is based on the weighted average number of
common shares outstanding during the periods presented and excludes the
anti-dilutive effects of options and warrants. The net loss has been adjusted to
reflect dividends accrued and accretion related to preferred shares outstanding.
COMPREHENSIVE INCOME
Statement of Financial Accounting Standards No. 130, Reporting Comprehensive
Income requires foreign currency translation adjustments to be included in other
comprehensive income. For the year ended December 31, 2000 and 1999, total
comprehensive loss amounted to $7,559,000 and $12,182,000 respectively. The
Company's comprehensive income is reported in the consolidated statements of
redeemable preferred stock and other stockholders' equity.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities ("SFAS No. 133"), as amended by SFAS No. 138, Accounting
for Certain Derivative Instruments and Hedging Activities. SFAS No. 133
establishes new standards for recording derivatives in interim and annual
financial reports requiring that all derivative instruments be recorded as
assets or liabilities, measured at fair value. SFAS No. 133 is effective for
fiscal years beginning after June 15, 2000, and therefore we will adopt the new
requirements effective with the filing of our Quarterly Report on Form 10-Q for
the quarter ended March 31, 2001. We do not anticipate that the adoption of SFAS
No. 133 will have a significant impact on our results of operations, financial
position or cash flows.
2. DIVESTITURES AND ACQUISITIONS
DIVESTITURES
On January 31, 2000, NQL completed the sale of substantially all of its assets
associated with its Alpha Micro Services Division ("AMSO") and its Alpha Micro
Operating System ("AMOS") computer hardware manufacturing division to Alpha
Microsystems, LLC for consideration of approximately $3.2 million, consisting
primarily of liabilities of the Businesses that were assumed by Alpha
Microsystems, LLC. The Company also received a ten percent contingent interest
in gross cash and non-cash proceeds that may be received by Alpha Microsystems,
LLC upon the occurrence of certain liquidity events, as defined in the asset
purchase agreement, following Alpha Microsystems, LLC's acquisition of the
Businesses. Alpha Microsystems, LLC is owned by Richard E. Mahmarian, who was a
member of the Company's Board of Directors until October 2000.
Assets of the Businesses initially sold to Alpha Microsystems, LLC include
certain accounts receivable, prepaid expenses, other current and non-current
assets, inventories, fixed assets, information technology service contracts and
capitalized software development costs. The Company has (i) granted Alpha
Microsystems, LLC the right to use the name "Alpha Microsystems" and associated
logos, marks and trade dress, (ii) transferred the rights to the trade names,
logos and trademarks associated with the Businesses that were sold, and (iii)
entered into a five year license agreement providing Alpha Microsystems, LLC the
right to use the Company's software technology for Alpha Microsystems, LLC's
internal use in continuing operations of the Businesses. Additionally, the
Company has agreed to sublease to Alpha Microsystems, LLC the portion of the
Santa Ana, California facility occupied by the Businesses at amounts equal to
cost. This sublease agreement ended on January 31, 2001 with Alpha Microsystems,
LLC assuming the facility lease effective February 1, 2001.
This sale indicates the assets sold to Alpha Microsystems, LLC were impaired
and, accordingly, as of December 31, 1999, the Company recognized a loss on the
sale of $6,728,000 and reclassified $2,726,000, representing deferred revenue at
December 31, 1999 related to contractual service obligations assumed by Alpha
Microsystems, LLC for which performance continues to be
43
44
guaranteed by the Company, to deferred gain on sale of Businesses to Alpha
Microsystems, LLC. As of December 31, 2000, the deferred gain had been reduced
to $601,000 due to the operations of Alpha Microsystems, LLC and a corresponding
reduction in the Company's contingent guarantee.
On March 15, 2000, the Company entered into another agreement whereby Alpha
Microsystems, LLC, in exchange for $500,000 cash (recorded as net assets held
for sale to Alpha Microsystems, LLC as of December 31, 1999) and the assumption
of the remaining outstanding accounts payable of the Businesses, purchased the
remaining net accounts receivable of the Businesses it acquired in the sale
completed on January 31, 2000. During the year ended December 31, 2000 the
Company received payments of $270,000. On August 1, 2000, the terms of the
agreement were amended such that payment of the remaining balance of $230,000
was extended to be due in full by June 30, 2001, and that interest on the
outstanding balance will be paid monthly at an annualized rate of 10 percent.
Alpha Microsystems, LLC may prepay all or a portion of the remaining balance
prior to June 30, 2001 without penalty.
Assets and liabilities at historical book values sold to Alpha Microsystems, LLC
and a reconciliation of the loss recorded on the sale are as follows (in
thousands):
December 31, 1999
-----------------
Accounts receivable $ 2,625
Prepaid expenses and other current assets 553
Property and equipment, net 3,244
Intangibles and other assets, net 1,049
Accounts payable and accrued liabilities (1,130)
-------
Subtotal 6,341
Direct transaction costs 387
-------
Loss on sale of Businesses to Alpha Microsystems, LLC $ 6,728
=======
The unaudited pro forma financial information below reflects the operations of
the Businesses that were included in the sale (in thousands):
Year Ended Year Ended Ten Months Ended
December 31, 2000 December 31, 1999 December 31, 1998
----------------- ----------------- -----------------
Net sales:
Information technology services $ 1,368 $ 15,622 $ 12,224
Product 195 4,324 3,824
------- -------- --------
Total net sales 1,563 19,946 16,048
Cost of sales:
Information technology services 1,051 12,982 10,590
Product 165 3,402 2,899
------- -------- --------
Total cost of sales 1,216 16,384 13,489
------- -------- --------
Gross margin 347 3,562 2,559
Selling, general and administrative 598 5,447 4,103
Engineering, research and development 56 1,059 1,032
Impairment of long-lived assets -- -- 978
------- -------- --------
Loss from operations $ (307) $ (2,944) $ (3,554)
======= ======== ========
Effective April 1, 1999, the Company sold its telephone installation business
for $650,000. As a result of this sale, the results of operations during the
year ended December 31, 1999 include a gain of approximately $222,000 included
in loss on disposition of businesses. Operating results of this business, which
are included in the statement of operations, included net losses of $149,000 and
$2,298,000 and revenues of $563,000, and $2,467,000 for the year ended December
31, 1999 and for the ten-month period ended December 31, 1998, respectively.
During the ten-month period ended December 31, 1998, the net loss attributable
to this business included an impairment write-down of $1,460,000.
44
45
ACQUISITIONS
On September 1, 1998, the Company completed the acquisition of Delta CompuTec,
Inc. ("DCi"). DCi provides management and consulting services, as well as
services that include network design, installation and maintenance. The Merger
Agreement provided for the payment of $3.4 million in exchange for all of the
outstanding shares of DCi at the time of closing, and a net payment of DCi's
then outstanding debt in the amount of $4.6 million. Under the Merger Agreement,
DCi became a wholly-owned subsidiary of the Company.
The unaudited pro forma financial information below reflects the acquisition of
DCi and the related purchase price financing through the sale of redeemable
preferred stock, warrants and term loan borrowings as if the acquisition
occurred at the beginning of the periods presented (in thousands, except per
share amounts).
Ten Months Ended
December 31, 1998
-----------------
Revenue $ 31,508
========
Net loss $ (9,193)
========
Basic and diluted net loss per common share $ (0.90)
========
All acquisitions have been accounted for as purchases and the acquired
operations have been included in the consolidated statements of operations from
the dates of acquisition. Pro forma information for acquisitions other than DCi
has not been presented as it would not be materially different from the
historical information presented.
3. PROPERTY AND EQUIPMENT
Major classes of property and equipment are as follows (in thousands):
(In thousands)
December 31, 2000 December 31, 1999
----------------- -----------------
Machinery and equipment $1,565 $1,164
Information technology service parts 2,347 1,166
Leasehold improvements 80 80
------ ------
3,992 2,410
Less accumulated depreciation and amortization 1,232 385
------ ------
Property and equipment, net $2,760 $2,025
====== ======
Depreciation expense was $893,000, $1,002,000 and $1,265,000 for the years ended
December 31, 2000 and December 31, 1999 and the ten months ended December 31,
1998, respectively.
45
46
4. INTANGIBLE ASSETS
Intangible assets consist of the following (in thousands):
December 31, 2000 December 31, 1999
----------------- -----------------
Goodwill, net of accumulated amortization of $1,013 and $570 at
December 31, 2000 and 1999, respectively $7,553 $7,996
Software development costs, net of accumulated amortization
of $102 and $28 at December 31, 2000 and 1999, respectively 774 385
Other, net 179 162
------ ------
$8,506 $8,543
====== ======
Related amortization expense charged to operations is as follows (in thousands):
Year Ended Year Ended Ten Months Ended
December 31, 2000 December 31, 1999 December 31, 1998
----------------- ----------------- -----------------
Goodwill $443 $435 $135
Software development costs 113 140 234
IT service contracts -- 68 311
Other 10 18 25
---- ---- ----
$566 $661 $705
==== ==== ====
5. DEBT
As of December 31, 1999, the Company had a loan facility with a bank under which
a $4 million accounts receivable line of revolving credit was designated for
working capital and $1 million was designated to finance acquisitions. The loan
facility was secured by substantially all of the Company's assets. The loan bore
interest at the bank prime rate plus 2.5% (11% at December 31, 1999). On March
28, 2000, the Company terminated the revolving line of credit and on March 31,
2000, the Company repaid in full the loan designated for acquisitions.
6. REDEEMABLE PREFERRED STOCK
In addition to the $1.0 million of cash proceeds provided under a bank term-loan
(Note 5), the acquisition of DCi was financed with $8.0 million obtained under a
Securities Purchase Agreement (the "Purchase Agreement"). Under the Purchase
Agreement, Hampshire Equity Partners II, L.P. ("Hampshire") agreed, subject to
certain conditions, to invest up to $20 million in redeemable preferred stock of
the Company. The Purchase Agreement provides for the purchase of redeemable
preferred stock in three tranches of $8 million, $7 million, and up to $5
million. The first tranche was completed concurrent with the acquisition of DCi
and the second tranche was funded on October 20, 1998 after stockholder
approval.
In February 1999, the Company exchanged $12.5 million face value of its then
outstanding $15.0 million face value of redeemable preferred stock for $12.5
million face value of exchangeable redeemable preferred stock. As a result of
this exchange, approximately, $10.7 million was reclassified from redeemable
preferred stock to exchangeable redeemable preferred stock (Note 7), a component
of other stockholders' equity in the accompanying consolidated balance sheet.
The outstanding shares of redeemable preferred stock mature on June 30, 2005, or
earlier in the event of default, and may be redeemed at any time by the Company
in cash. In the event of a public offering of its securities, the Company is
required to apply 50% of the net proceeds toward the redemption of the then
outstanding redeemable preferred stock. The redeemable preferred stock is being
accreted over seven years to its redemption value of $2.5 million.
The redeemable preferred stock is non-voting, except for one share that entitles
Hampshire to vote on all matters an aggregate number of votes equal to the
number of unexercised warrants held by Hampshire as of the record date (Note 7).
46
47
Dividends on the redeemable preferred stock are cumulative and are payable
quarterly in arrears at an initial cumulative annual dividend rate of 9%, which
increased to 11% on July 1, 2000, and thereafter increases an additional 1%
annually until July 1, 2004, when the rate will be 14%. Effective October 1,
1999, the Company is accruing dividends on the redeemable preferred stock using
the effective interest method at a rate approximating 12.5% per year. Prior to
October 1, 1999, the Company was accruing dividends on the redeemable preferred
stock and the exchangeable redeemable preferred stock (Note 7) based on the
stated dividend rate of 9% based on the fact that management had intended to
redeem the preferred stock prior to July 1, 2000, when the dividend rate first
increased. During 2000 and 1999, dividends on the preferred stock of $250,000
and $341,000, respectively, were accrued by the Company, of which, $113,000 and
$568,000 (which included $306,000 of dividends accrued at December 31, 1998),
respectively, were paid in cash, $137,000 in 2000 and $56,000 in 1999 were paid
in additional shares of exchangeable redeemable preferred stock. At December 31,
2000 and 1999, accrued but unpaid dividends on the redeemable preferred stock
were $0 and $23,000, respectively, and are included in other accrued liabilities
in the accompanying consolidated balance sheet.
The holders of the redeemable preferred stock are entitled to a liquidation
preference equal to the original cost of the redeemable preferred stock plus any
accrued but unpaid dividends (based on the stated dividend rate) prior to any
distributions to holders of common stock. A merger, reorganization or other
transaction in which control of the Company is transferred may be treated as a
liquidation. The redeemable preferred stock is exchangeable, upon approval of
the Board of Directors, into subordinated debentures whose maturity, variable
interest rate, and liquidation preference would be equal to the redeemable
preferred stock. The subordinated debentures also have mandatory redemption
rights payable in cash on terms equal to the exchanged preferred stock.
7. OTHER STOCKHOLDERS' EQUITY
EXCHANGEABLE REDEEMABLE PREFERRED STOCK
As discussed in Note 6, in February 1999, the Company exchanged $12.5 million
face value of its then outstanding $15.0 million face value of redeemable
preferred stock for $12.5 million face value of exchangeable redeemable
preferred stock. The exchangeable redeemable preferred stock has the same
redemption, voting, dividend, liquidation and conversion terms as the originally
issued redeemable preferred stock, except that each share is automatically
converted at maturity into one share of a new class of non-redeemable preferred
stock with a 40% annual dividend rate. Effective November 18, 1999, the Company
issued $5.0 million of exchangeable redeemable preferred stock under the third
tranche of the Purchase Agreement on essentially the same terms as the then
outstanding exchangeable redeemable preferred stock. The carrying value of the
exchangeable redeemable preferred stock is being accreted over seven years to
its redemption value of $17.5 million. During 2000 and 1999, dividends on the
exchangeable redeemable preferred stock aggregating $1,805,000 and $1,215,000
were accrued by the Company of which $806,000 and $750,000 were paid in cash and
$999,000 and $335,000 were paid in additional shares of exchangeable redeemable
preferred stock. At December 31, 2000 and 1999, accrued but unpaid dividends on
the exchangeable redeemable preferred stock aggregate to $0 and $130,000 and are
included in other accrued liabilities in the accompanying consolidated balance
sheet.
COMMON STOCK
On March 30, 2000, the Company completed a private placement of 2,342,000 shares
of common stock that were sold at $6.25 per share, generating gross proceeds to
the Company of $14,637,500 with net proceeds of approximately $13,500,000.
Hampshire Equity Partners II, L.P., the Company's preferred stockholder,
purchased 995,400 of the shares of the Company's common stock issued in the
private placement. The net proceeds from this offering have been used for
marketing and further product enhancement of the Network Query Language
technology and for general corporate purposes.
WARRANTS
In connection with its initial investment in the Company's preferred stock in
September 1998, Hampshire was granted warrants to purchase a total of 5,844,826
shares of the Company's common stock for $2.50 per share exercisable immediately
and expiring in September 2008. In connection with its investment in the
Company's preferred stock in November 1999, Hampshire was granted warrants to
purchase 2,971,620 shares of common stock at $2.50 per share exercisable
immediately and expiring in November 2009. The estimated fair value assigned to
the warrants, aggregating approximately $2.6 million, and direct costs
associated with the financings, aggregating approximately $566,000, reduced the
initial carrying value of the preferred stock in the accompanying consolidated
financial statements. The difference between the initial carrying value and the
aggregate redemption amounts of the preferred stock is being accreted through
periodic charges to accumulated deficit over seven years.
47
48
In connection with a public offering in fiscal 1993, the Company granted to its
underwriter a warrant to purchase 139,315 units with an exercise price of $1.95
per unit. Those warrants were exercised during the ten-month period ended
December 31, 1998, providing net proceeds to the Company of $272,000. Pursuant
to the terms of an amendment to a loan agreement signed in October 1996, the
Company issued 25,000 warrants to a bank which were exercisable for five years
at $1.81 per share. In June 1999, the bank elected to exercise these warrants,
utilizing a cashless exercise option and received 18,010 shares of the Company's
common stock. Also in October 1996, the Company issued a warrant to purchase
300,000 shares of common stock exercisable for five years at $3.00 per share to
its financial advisor. In January 1999, those warrants were exercised, providing
net proceeds to the Company of $897,000. In June 1998, the Company issued 33,000
warrants to a bank which were exercisable for seven years at $2.50 per share. In
February 2000, the bank elected to exercise these warrants, utilizing a cashless
exercise option and received 22,354 shares of the Company's common stock. In
October 1998, the Company granted an additional 200,000 warrants to a financial
advisor, exercisable for five years at $3.23 per share. These warrants remain
outstanding at December 31, 2000.
In connection with a private placement of common stock in March 2000, the
Company granted its underwriter and a financial consultant warrants to purchase
70,260 and 5,000 shares, respectively, of common stock which were exercisable
for five years at $7.50 per share.
OPTIONS
In October 1998, the stockholders approved the 1998 Stock Option and Award Plan
which provides for the grants of (i) incentive stock options; (ii) non-qualified
stock options; (iii) deferred delivery of shares of common stock; (iv)
restricted stock; (v) performance shares of common stock; and (vi) stock
appreciation rights that are only exercisable in the event of a change in
control of the Company or upon other events. In August 2000, the stockholders
approved an amendment to the 1998 Plan to increase the number of shares of
common stock authorized under such plan by 700,000 shares to an aggregate of
3,200,000 shares.
As of December 31, 2000, the Company's 1993 Employee Stock Option Plan provides
for the Board to award up to 925,000 shares of common stock to employees of the
Company.
In connection with the DCi acquisition, 195,000 non-qualified stock options were
issued to employees outside of the above plans.
48
49
The following table contains a summary of transactions related to options for
the years ended December 31, 2000 and 1999 and the ten months ended December 31,
1998.
Weighted Average
Options Exercise Price Per Share
--------- ------------------------
Outstanding at February 22, 1998 1,004,939 $1.97
Granted 1,713,578 $2.29
Expired/canceled (272,689) $1.89
Exercised (6,250) $1.44
---------
Outstanding at December 31, 1998 2,439,578 $2.21
Granted 525,000 $5.15
Expired/canceled (243,750) $2.71
Exercised (127,250) $2.15
---------
Outstanding at December 31, 1999 2,593,578 $2.76
Granted 1,180,000 $3.90
Expired/canceled (502,143) $4.04
Exercised (125,750) $2.36
---------
Outstanding at December 31, 2000 3,145,685 $3.00
=========
Exercisable at:
December 31, 1998 823,179 $2.21
December 31, 1999 1,397,002 $2.24
December 31, 2000 1,640,435 $2.34
Available for grant:
December 31, 1998 699,172
December 31, 1999 917,922
December 31, 2000 940,065
Options outstanding at December 31, 2000 have exercise prices and weighted
average remaining lives as follows: 390,000 shares at $0.50 to $1.00 per share
with a remaining life of 8.2 years, 1,227,729 shares at $1.03 to $2.00 per share
with a remaining life of 6.9 years, 544,659 shares at $2.06 to $3.00 per share
with a remaining life of 4.9 years, 292,797 shares at $3.63 to $4.00 per share
with a remaining life of 8.7 years, 234,500 shares at $4.19 to $4.94 per share
with a remaining life of 9.5 years and 456,000 shares at $5.69 to $7.25 per
share with a remaining life of 8.9 years.
Pro forma information regarding net loss and net loss per share is required by
Statement 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of that Statement. The fair
value of these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted average assumptions: risk-free
interest rate of 6.2% for the year ended December 31, 2000, 6.5% for the year
ended December 31, 1999 and 5.8% for ten months ended December 31, 1998;
volatility factors of the expected market price of the Company's common stock of
1.3 for the year ended December 31, 2000, 1.1 for the year ended December 31,
1999 and 0.6 for the ten months ended December 31, 1998; and a weighted average
expected life of the options of seven years for the years ended December 31,
2000 and December 31, 1999 and five years for the ten months ended December 31,
1998.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value
49
50
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock
options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information follows (In thousands, except per share information):
Year Ended Year Ended Ten Months Ended
December 31, 2000 December 31, 1999 December 31, 1998
----------------- ----------------- -----------------
Pro forma net loss $ (8,901) $(13,346) $(10,403)
Pro forma net loss attributable to common shares $(11,931) $(15,235) $(10,839)
Pro forma basic and diluted loss per share $ (0.88) $ (1.31) $ (0.98)
The per share weighted average fair value of options granted during the year
ended December 31, 2000, the year ended December 31, 1999 and the ten months
ended December 31, 1998 were $3.59, $4.52, and $1.30, respectively.
As of December 31, 2000, the Company has 9,091,706 warrants outstanding and
4,085,750 options outstanding and available for grant, or a total of 13,177,456
shares of common stock reserved for issuance pursuant to option and warrant
agreements.
8. OPERATING CHARGES
The results of operations for the year ended December 31, 2000 include charges
totaling $69,000 relating to the write-down of certain long-lived assets. Of
this amount, $13,000 is included in cost of goods sold and $56,000 is included
in (gain)/loss on dispositions of businesses.
Significant to the comparative results of operations for the ten months ended
December 31, 1998 are charges totaling $4,679,000. These charges are comprised
of the following: (i) $2,230,000 to write-down impaired tangible and intangible
assets from non-core businesses acquired prior to 1998 to their estimated fair
values based on estimated cash flows, and write-down of accounts receivable
related to non-core operations, (ii) $910,000 to write-down impaired fixed
assets and inventory related to end-of-life proprietary product lines to their
estimated fair values, (iii) $813,000 related to software products obsolesced by
the introduction of new products, (iv) $379,000 resulting from the write-off of
notes receivable from previously sold assets and subsidiaries, (v) $256,000 of
indirect financing costs related to the sale of redeemable preferred stock and
warrants and the expensing of previously capitalized costs associated with
abandoned acquisitions, and (vi) $91,000 in write-offs of costs related to Year
2000 issues and adjustments of warranty and other liabilities. The table below
summarizes where these charges have been recognized on the statement of
operations for the ten months ended December 31, 1998 (in thousands):
Cost of Operating Impairment
Sales Expenses Charge Other Total
---- ---- ------ ---- ------
Impairment of tangible and intangible assets $147 $495 $1,588 $ -- $2,230
Write-down of fixed assets and inventory 60 -- 850 -- 910
Software obsolescence 730 83 -- -- 813
Loss on sale of assets and subsidiaries -- -- -- 379 379
Indirect financing costs -- 256 -- -- 256
Other operating expenses 25 66 -- -- 91
---- ---- ------ ---- ------
Total $962 $900 $2,438 $379 $4,679
==== ==== ====== ==== ======
50
51
9. INCOME TAXES
The current provision (benefit) for income taxes consists of the following (in
thousands):
Year Ended Year Ended Ten Months Ended
December 31, 2000 December 31, 1999 December 31, 1998
----------------- ----------------- -----------------
Foreign $-- $-- $--
State 21 46 15
--- --- ---
$21 $46 $15
=== === ===
Temporary differences and net operating loss and tax credit carryforwards that
give rise to deferred tax assets and liabilities recognized in the balance sheet
are as follows (in thousands):
December 31, 2000 December 31, 1999
----------------- -----------------
Deferred tax assets:
Net operating loss carryforward $ 20,846 $ 17,931
Tax credits 1,111 1,063
Accruals not currently deductible for tax purposes 382 569
Depreciation and capitalized software -- 111
Translation adjustment 20 20
-------- --------
Total deferred tax assets 22,359 19,694
Valuation allowance (21,909) (19,677)
-------- --------
Net deferred tax assets 450 17
Deferred tax liabilities
Depreciation and capitalized software (412) --
Other (38) (17)
-------- --------
Net deferred taxes $ -- $ --
======== ========
The change in the valuation allowance was a net increase of $2,232,000 and
$3,670,000 for the year ended December 31, 2000 and 1999, respectively. The
valuation allowance was increased since the realization of deferred tax assets
is uncertain.
The Company has federal net operating loss carryforwards totaling approximately
$59,000,000 at December 31, 2000, which begin to expire in 2006, if not
utilized. Due to the exercise of redeemable public warrants in the fiscal year
ended February 23, 1997, the Company experienced a change of ownership as
defined in Section 382 of the Internal Revenue Code. As a result of the
ownership change, utilization of approximately $19,000,000 of the net operating
loss carryforwards is limited to approximately $1,300,000 per year. In addition,
approximately $5,000,000 of acquired net operating loss carryforwards is limited
to approximately $400,000 per year as a result of another change in ownership.
Furthermore, a change of ownership pursuant to Section 382 may have occurred in
the year ended December 31, 2000. The precise timing of such a change, if it
occurred is not clear due to the significant impact that a range of reasonable
assumptions about stock valuation can have on the ultimate outcome. As a result,
it is not currently possible to quantify the impact such a change of ownership
may have on the future utilization of the Company's deferred tax assets.
The recognition of tax benefits associated with approximately $6 million of net
operating loss carryforwards and deductible temporary differences arising as a
result of the acquisition of DCi, will first reduce goodwill and other
noncurrent intangible assets related to the acquisition, and then income tax
expense.
51
52
A reconciliation of income tax expense (benefit) to the statutory U.S. federal
income tax rate follows:
Year Ended Year Ended Ten Months Ended
December 31, 2000 December 31, 1999 December 31 1998
----------------- ----------------- ----------------
Statutory U.S. federal income tax rate (benefit) (34.0)% (34.0)% (34.0)%
Changes in taxes resulting from:
Foreign losses and excess rates -- 0.1 0.3
Domestic losses with no tax benefit 31.3 32.7 33.4
Other items, net 2.7 1.2 0.5
---- ---- ----
Effective tax rate --% --% 0.2%
==== ==== ====
United States and foreign loss before taxes are as follows (in thousands):
(In thousands)
Year Ended Year Ended Ten Months Ended
December 31, 2000 December 31, 1999 December 31, 1998
----------------- ----------------- -----------------
Domestic $ (7,528) $(12,187) $(9,615)
Foreign (6) 29 88
-------- -------- -------
$ (7,534) $(12,158) $(9,527)
======== ======== =======
10. COMMITMENTS AND CONTINGENCIES
The Company leases its office facilities and certain equipment under operating
leases that expire on various dates through 2005. Rent expense during the year
ended December 31, 2000, the year ended December 31, 1999 and the ten months
ended December 31, 1998 was $636,000, $1,729,000, and $1,415,000, respectively.
The Company's annual minimum lease commitments under non-cancelable operating
leases, net of sublease income of $93,000 for 2001, are as follows:
(in thousands)
2001 $ 646
2002 583
2003 588
2004 601
2005 614
Thereafter 51
------
$3,083
======
The Company is involved in matters of litigation arising in the normal course of
business. The Company is not aware of any legal proceedings or claims that it
believes will have, individually or in the aggregate, a material adverse effect
on its business, consolidated financial position, results of operations or cash
flows.
11. EMPLOYEE BENEFIT PLANS
The Company has a defined contribution profit sharing plan, which has been
qualified under Section 401(k) of the Internal Revenue Code, covering
substantially all of its full-time employees. Company contributions to the plan
are at the sole discretion of the Company's Board of Directors and cannot exceed
the maximum allowable deduction for federal income tax purposes. There were no
discretionary Company contributions for the years ended December 31, 2000 and
1999 or for the ten-month period ended December 31, 1998. Voluntary employee
contributions are matched at a rate of 20% of employee contributions up to a
total of 5.0% of the employee's salary for participants with an annual income of
less than $29,999. Matching contributions were $2,000, $36,000, and
52
53
$21,000 for the years ended December 31, 2000 and 1999, and for the ten-months
ended December 31, 1998, respectively. The amount of matching contributions for
the year ended December 31, 2000 was lower than in prior years due to the sale
of the managed service division on January 31, 2000, and the resulting
significant decrease in the number of employees.
In fiscal 1997, the Company adopted a new Employee Stock Purchase Plan, covering
substantially all of its full-time employees, enabling employees to acquire
shares of the Company's stock at 85% of the lower of (i) the fair market value
of a share on the first trading day of the date of grant, or (ii) the fair
market value of a share on the date of exercise, up to an aggregate of 350,000
shares of common stock. Voluntary employee purchases under the plan for the year
ended December 31, 2000 and 1999 and for the ten months ended December 31, 1998
were $120,000, $117,000 and $26,000, representing purchases of 65,278, 21,383
and 43,387 shares, respectively.
53
54
12. INDUSTRY SEGMENT INFORMATION
The Company currently operates in two business segments: (i) software based on
the Company's Network Query Language; and (ii) IT professional services
consisting of management and consulting services, as well as network design,
installation and maintenance. A third segment reflects the results of operations
of businesses which have been sold. The accounting policies of the reportable
segments are the same as those described in the summary of significant
accounting policies in the annual consolidated financial statements included in
the Company's Annual Report on Form 10-K for the year ended December 31, 2000,
except that certain expenses, such as interest, amortization of certain
intangibles, special charges and general corporate expenses are not allocated to
the segments. In addition, certain assets including cash and cash equivalents,
deferred taxes and certain intangible assets are held at corporate. The effect
of capitalizing software costs is included in the software segment.
Prior to January 31, 2000, the Company evaluated its business according to the
following two segments: (i) the servicing of computer systems, networks and
related products; and (ii) the manufacture and sale of computer systems,
software and related products. The operations of the telephone installation
business and the managed service business, including the computer hardware
manufacturing division, which were sold on April 1, 1999 and January 31, 2000,
respectively, have been reclassified as the "businesses sold" segment. Prior
periods have been reclassified to reflect this realignment.
Selected financial information for the Company's reportable segments for the
year ended December 31, 2000, the year ended December 31, 1999 and the ten
months ended December 31, 1998 follows (In thousands):
IT
Professional Corporate Businesses
Software Services Expenses Sold Consolidated
-------- ------------ --------- ---------- ------------
YEAR ENDED DECEMBER 31, 2000
Revenues from external customers $ 537 $ 12,097 $ -- $ 1,563(1) $ 14,197
Segment loss (4,518) (1,510) (1,220) (307)(1) (7,555)
Segment assets 818 13,521 5,305 -- 19,644
Depreciation and amortization 144 1,249 66 -- 1,459
Expenditures for long-lived assets 583 1,412 176 -- 2,171
YEAR ENDED DECEMBER 31, 1999
Revenues from external customers $ 168 $ 14,213 $ -- $ 20,509(1) $ 34,890
Segment income (loss) (486) 988 (9,613)(2) (3,093)(1) (12,204)
Segment assets 384 13,097 2,828 -- 16,309
Depreciation and amortization 22 836 208 597 1,663
Expenditures for long-lived assets 354 1,809 44 964 3,171
TEN MONTHS ENDED DECEMBER 31, 1998
Revenues from external customers $ 244 $ 5,381 $ -- $ 18,515(1) $ 24,140
Significant operating charges (Note 8) -- -- 2,070 2,609 4,679
Segment income (loss) (1,291) 360 (2,759) (5,852) (9,542)
Segment assets 20 12,595 4,673 9,143 26,431
Depreciation and amortization -- 187 -- 1,783 1,970
Expenditures for long-lived assets 19 -- 25 2,072 2,116
(1) In January 2000, the Company closed the sale of a significant portion of
the Company's operations to Alpha Microsystems, LLC. Note 2 to the
consolidated financial statements summarizes, on an unaudited basis, the
results of operations of the Businesses sold.
(2) Includes $6,728 loss from sale of Businesses to Alpha Microsystems, LLC and
$222 gain from sale of telephone installation business.
During all periods presented there were no significant revenues or long-lived
assets outside of the United States.
54
55
For the year ended December 31, 2000, Morgan Stanley and the Pershing division
of D.L.J. accounted for 17% and 13%, respectively, of the Company's revenue. For
the year ended December 31, 1999 and the ten months ended December 31, 1998, no
single customer accounted for 10% or more of the Company's revenue.
55
56
NQL INC.
(FORMERLY ALPHA MICROSYSTEMS)
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Balance at Additions Balance at
Beginning Charged to End
of Period Other Expense Deductions of Period
---------- ----- ---------- ---------- ----------
Allowance for doubtful accounts:
December 31, 2000 $ 40 $ -- $ 27 $ (21)(1) $ 46
December 31, 1999 $700 $(888)(2) $518(3) $ 290(4) $ 40
December 31, 1998 $294 $ 94(5) $548(6) $ 236(7) $700
(1) Includes $23,000 for the write off of accounts receivable.
(2) Reserve related to accounts receivable sold to Alpha Microsystems, LLC in
March 2000.
(3) Includes $205,000 reserve for accounts receivable related to non-core
operations.
(4) Includes $63,000 for the write-off of accounts receivable related to
non-core operations.
(5) Balance transferred as part of the acquisition of DCi.
(6) Includes $495,000 for the write-off of accounts receivable related to
non-core operations.
(7) Includes the write-off of $108,000 of accounts receivable related to
non-core operations.
56
57
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
NQL INC
Date: March 31, 2001 By: /s/ DOUGLAS J. TULLIO
----------------------------------
Douglas J. Tullio
President, Chief Executive Officer
POWER OF ATTORNEY
Each person whose signature appears below hereby appoints Douglas J. Tullio and
Robert O. Riiska, and each and any of them, as attorneys-in-fact and agents with
full powers of substitution to sign on his behalf, individually and in the
capacity stated below, and to file any amendments to this Annual Report on Form
10-K with the Securities and Exchange Commission, granting to said
attorneys-in-fact and agents full power and authority to perform any other act
on behalf of the undersigned required to be done in the premises.
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.
Date: March 31, 2001 By: /s/ DOUGLAS J. TULLIO
----------------------
Douglas J. Tullio
Chairman of the Board, President, Chief Executive
Officer, Director
Date: March 31, 2001 By: /s/ ROBERT O. RIISKA
----------------------
Robert O. Riiska
Vice President, Chief Financial Officer and
Secretary
Date: March 31, 2001 By: /s/ BENJAMIN P. GIESS
----------------------
Benjamin P. Giess
Director
Date: March 31, 2001 By: /s/ ROCKELL N. HANKIN
----------------------
Rockell N. Hankin
Director
Date: March 31, 2001 By: /s/ CLARKE E. REYNOLDS
----------------------
Clarke E. Reynolds
Director
Date: March 31, 2001 By: /s/ TRACEY L. RUDD
----------------------
Tracey L. Rudd
Director
Date: March 31, 2001 By: /s/ SAM YAU
----------------------
Sam Yau
Director
57
58
EXHIBIT INDEX
*2.1 Agreement and Plan of Merger of NQL Inc., a Delaware
corporation and Alpha Microsystems, a California corporation
dated August 18, 2000 (incorporated herein by reference to
Exhibit 2.1 to the Form 8-K filed by the Registrant on
September 1, 2000)
*2.2 Merger Agreement by and between Alpha Microsystems, Alpha
Micro Merger Corp., Delta CompuTec Inc. and Joseph Lobozzo II
and Joanne Lobozzo dated July 2, 1998 (incorporated by
reference to Exhibit 2 to the Form 8-K filed by Alpha
Microsystems on September 16, 1998)
*3.1 Restated Certificate of Incorporation of NQL Inc., a Delaware
corporation (incorporated herein by reference to Exhibit 3.1
to the Form 8-K filed by the Registrant on September 1, 2000)
*3.2 Amended and Restated Bylaws of NQL Inc., a Delaware
corporation (incorporated herein by reference to Exhibit 3.3
to the Form 8-K filed by the Registrant on September 1, 2000)
*4.1 Certificate of Designations of Rights and Preferences of Class
A1 Cumulative, Redeemable and Exchangeable Preferred Stock,
Class A2 Cumulative, Redeemable and Exchangeable Preferred
Stock, Class B1 Cumulative Redeemable and Exchangeable
Preferred Stock, Class C1 Cumulative Redeemable and
Exchangeable Preferred Stock, Class D Cumulative Redeemable
and Exchangeable Preferred Stock, Class E Cumulative
Redeemable and Exchangeable Preferred Stock and Voting
Preferred Stock of NQL Inc., a Delaware corporation
(incorporated herein by reference to Exhibit 3.2 to the Form
8-K filed by the Registrant on September 1, 2000)
*4.2 Warrant to Purchase Common Stock issued to Princeton
Securities dated October 20, 1998 (incorporated herein by
reference to Exhibit 4.7 to the Quarterly Report on Form 10-Q
of Alpha Microsystems for the quarter ended November 22, 1998)
*4.3 Form of Warrant Certificate to Purchase Common Stock issued to
ING Equity Partners II, L.P. dated September 1, 1998
(incorporated herein by reference to Exhibit 10.2 to the Form
8-K filed by Alpha Microsystems on August 10, 1998)
*10.1 Alpha Microsystems Profit Sharing Trust Agreement between
Registrant and Bank of America NT & S.A. as Trustee dated May
24, 1985 (incorporated herein by reference to Exhibit 10.32 to
the Annual Report on Form 10-K of Alpha Microsystems for the
year ended February 23, 1986)
*10.2 Alpha Microsystems Profit Sharing Plan (as amended and
restated) dated May 15, 1986 (incorporated herein by reference
to Exhibit 10.33 to the Annual Report on Form 10-K of Alpha
Microsystems for the year ended February 23, 1986)
*10.3 Acceptance of Trust by Trustee dated September 30, 1986
pursuant to Registrant's Profit Sharing Plan (incorporated
herein by reference to Exhibit 10.29 to the Annual Report on
Form 10-K of Alpha Microsystems for the year ended February
22, 1987)
*10.4 First Amendment dated March 1, 1987 to Registrant's Profit
Sharing Plan (incorporated herein by reference to Exhibit
10.30 to the Annual Report on Form 10-K of Alpha Microsystems
for the year ended February 22, 1987)
*10.5 Indemnification Agreement dated October 23, 1987 by and
between the Registrant and Rockell N. Hankin (incorporated
herein by reference to Exhibit 10.36 to the Quarterly Report
on Form 10-Q of Alpha Microsystems for the quarter ended
November 22, 1987)
*10.6 Second Amendment to Alpha Microsystems Profit Sharing Plan
dated January 22, 1988 (incorporated herein by reference to
Exhibit 10.31 to the Annual Report on Form 10-K of Alpha
Microsystems for the year ended February 28, 1988)
59
*10.7 Alpha Microsystems Profit Sharing Plan Amendments Under IRS
Notice 88-131 dated May 24, 1989 (incorporated herein by
reference to Exhibit 10.38 to the Quarterly Report on Form
10-Q of Alpha Microsystems for the quarter ended May 28, 1989)
*10.8 Alpha Microsystems Profit Sharing Plan Amendment dated
December 15, 1989 (incorporated herein by reference to Exhibit
10.45 to the Quarterly Report on Form 10-Q of Alpha
Microsystems for the quarter ended November 26, 1989)
*10.9 Indemnification Agreement by and between the Registrant and
Douglas J. Tullio dated January 8, 1990 (incorporated herein
by reference to Exhibit 10.50 to the Quarterly Report on Form
10-Q of Alpha Microsystems for the quarter ended November 26,
1989)
*10.10 Indemnification Agreement by and between Registrant and Clarke
E. Reynolds dated June 16, 1989 (incorporated herein by
reference to Exhibit 10.67 to the Annual Report on Form 10-K
of Alpha Microsystems for the year ended February 23, 1992)
*10.11 Alpha Microsystems 1993 Employee Stock Option Plan
(incorporated herein by reference to Exhibit 10.109 to the
Quarterly Report on Form 10-Q filed by Alpha Microsystems for
the quarter ended May 29, 1994)
*10.12 Industrial Lease between Fairview Investors Ltd. and
Registrant dated October 28, 1994 (incorporated herein by
reference to Exhibit 10.113 to the Quarterly Report on Form
10-Q of Alpha Microsystems for the quarter ended November 27,
1994)
*10.13 Second Amendment and Restatement of the Alpha Microsystems
Profit Sharing Plan dated July 1, 1992 (incorporated herein by
reference to Exhibit 10.72 to the Quarterly Report on Form
10-Q of Alpha Microsystems for the quarter ended May 31, 1992)
*10.14 Memorandum to Lease by and between Registrant and Fairview
Investors, Ltd. dated January 24, 1995 (incorporated herein by
reference to Exhibit 10.136 to the Annual Report on Form 10-K
of Alpha Microsystems for the year ended February 26, 1995)
*10.15 First Amendment to Alpha Microsystems 1993 Employee Stock
Option Plan (incorporated herein by reference to Exhibit 4.6
to the Form S-8 filed by Alpha Microsystems on January 31,
1997)
*10.16 Second Amendment to Alpha Microsystems 1993 Employee Stock
Option Plan (incorporated herein by reference to Exhibit 4.7
to the Form S-8 filed by Alpha Microsystems on January 31,
1997)
*10.17 Alpha Microsystems Employee Stock Purchase Plan (incorporated
herein by reference to Exhibit 4.10 to the Form S-8 filed by
Alpha Microsystems on January 31, 1997)
*10.18 Indemnification Agreement by and between Registrant and Dennis
E. Michael dated January 17, 1997 (incorporated herein by
reference to Exhibit 10.57 to the Annual Report on Form 10-K
of Alpha Microsystems for the year ended February 23, 1997)
*10.19 Securities Purchase Agreement by and between Registrant and
ING Equity Partners II, L.P. dated August 7, 1998
(incorporated herein by reference to Exhibit 10.1 to the Form
8-K filed by Alpha Microsystems on August 10, 1998)
60
*10.20 Employment Agreement by and between Registrant and John T.
DeVito dated September 1, 1998 (incorporated herein by
reference to Exhibit 10.1 to the Form 8-K/A filed by Alpha
Microsystems on October 5, 1998)
*10.21 Amended and Restated Employment Agreement by and between
Registrant and Douglas J. Tullio dated September 1, 1998
(incorporated herein by reference to Exhibit 10.2 to the Form
8-K/A filed by Alpha Microsystems on October 5, 1998)
*10.22 Alpha Microsystems 1998 Stock Option and Award Plan
(incorporated herein by reference to Exhibit 10.69 to the
Quarterly Report on Form 10-Q of Alpha Microsystems for the
quarter ended November 22, 1998)
*10.23 Form of Incentive Stock Option Agreement for use in connection
with 1998 Stock Option and Award Plan (incorporated herein by
reference to Exhibit 10.70 to the Quarterly Report on Form
10-Q of Alpha Microsystems for the quarter ended November 22,
1998)
*10.24 Form of Non-employee Director Non-Qualified Stock Option
Agreement to be used in connection with 1998 Stock Option and
Award Plan (incorporated herein by reference to Exhibit 10.71
to the Quarterly Report on Form 10-Q of Alpha Microsystems for
the quarter ended November 22, 1998)
*10.25 Form of Non-employee Director Non-Qualified Stock Option
Agreement in Lieu of Cash Compensation for Prior Services for
use in connection with 1998 Stock Option and Award Plan
(incorporated herein by reference to Exhibit 10.72 to the
Quarterly Report on Form 10-Q of Alpha Microsystems for the
quarter ended November 22, 1998)
*10.26 Form of Non-Qualified Stock Option Agreement for use in
connection with the 1998 Stock Option and Award Plan
(incorporated herein by reference to Exhibit 10.73 to the
Quarterly Report on Form 10-Q of Alpha Microsystems for the
quarter ended November 22, 1998)
*10.27 Form of Non-Qualified Stock Option Agreement issued in
connection with the acquisition of Delta CompuTec Inc.
(incorporated herein by reference to Exhibit 10.74 to the
Quarterly Report on Form 10-Q of Alpha Microsystems for the
quarter ended November 22, 1998)
*10.28 Indemnification Agreement by and between Registrant and John
T. DeVito dated December 17, 1998 (incorporated herein by
reference to Exhibit 10.76 to the Quarterly Report on Form
10-Q of Alpha Microsystems for the quarter ended November 22,
1998)
*10.29 Indemnification Agreement by and between Registrant and
Benjamin P. Giess dated December 17, 1998 (incorporated herein
by reference to Exhibit 10.77 to the Quarterly Report on Form
10-Q of Alpha Microsystems for the quarter ended November 22,
1998)
*10.30 Indemnification Agreement by and between Registrant and Sam
Yau dated December 17, 1998 (incorporated herein by reference
to Exhibit 10.78 to the Quarterly Report on Form 10-Q of Alpha
Microsystems for the quarter ended November 22, 1998)
*10.31 Management Deferred Compensation Plan dated November 1, 1998
(incorporated herein by reference to Exhibit 4.9 to the
Transition Report on Form 10-K of Alpha Microsystems for the
transition period ended December 31, 1998)
61
*10.32 Amendment No. 1 to Securities Purchase Agreement by and
between Registrant and ING Equity Partners II, L.P. dated
February 1999 (incorporated herein by reference to Exhibit
10.49 to the Quarterly Report on Form 10-Q of Alpha
Microsystems for the quarter ended June 30, 1999)
*10.33 Amendment No. 2 to Securities Purchase Agreement by and
between Registrant and Hampshire Equity Partners II, L.P.
dated June 28, 1999 (incorporated herein by reference to
Exhibit 10.50 to the Quarterly Report on Form 10-Q of Alpha
Microsystems for the quarter ended June 30, 1999)
*10.34 Amendment No. 3 to Securities Purchase Agreement by and
between Registrant and Hampshire Equity Partners II, L.P.
dated November 18, 1999 (incorporated herein by reference to
Exhibit 10.52 to the Quarterly Report on Form 10-Q of Alpha
Microsystems for the quarter ended September 30, 1999)
*10.35 Employment Agreement by and between Registrant and Robert O.
Riiska dated November 26, 1999 (incorporated herein by
reference to Exhibit 10.53 to the Annual Report on Form 10-K
of Alpha Microsystems for the year ended December 31, 1999)
*10.36 Indemnification Agreement by and between Registrant and Robert
O. Riiska dated November 26, 1999 (incorporated herein by
reference to Exhibit 10.54 to the Annual Report on Form 10-K
of Alpha Microsystems for the year ended December 31, 1999)
*10.37 Asset Purchase Agreement by and between Registrant and Alpha
Microsystems, LLC, dated as of December 31, 1999 (incorporated
herein by reference to Exhibit 10.1 to Form 8-K Current Report
of Alpha Microsystems dated January 14, 2000)
*10.38 Amendment No. 1 to Asset Purchase Agreement by and between
Registrant and Alpha Microsystems, LLC, dated January 31, 2000
(incorporated herein by reference to Exhibit 10.2 of Form 8-K
Current Report of Alpha Microsystems dated January 31, 2000)
*10.39 Amendment No. 2 to Asset Purchase Agreement by and between
Registrant and Alpha Microsystems, LLC, dated March 15, 2000
(incorporated herein by reference to Exhibit 10.57 to the
Annual Report on Form 10-K of Alpha Microsystems for the year
ended December 31, 1999)
*10.40 Amendment No. 3 to Asset Purchase Agreement by and between
Registrant and Alpha Microsystems, LLC, dated August 1, 2000
(incorporated herein by reference to Exhibit 10.58 to the
Quarterly Report on Form 10-Q of Alpha Microsystems for the
quarter ended June 30, 2000)
*10.41 Alpha Microsystems 1998 Stock Option and Award Plan, as
amended, dated August 14, 2000 (incorporated herein by
reference to Exhibit 10 to Form S-8 of Alpha Microsystems
filed August 31, 2000)
10.42 Indemnification Agreement by and between Registrant and Tracey
L. Rudd dated September 1, 2000
10.43 Amendment No. 1 to Industrial Lease between Fairview, LLC
and Registrant dated October 24, 2000
10.44 Office Lease Agreement between Starwood O.C. Portfolio I,
L.L.C. and NQL Inc. dated November 13, 2000
21 Subsidiaries
23 Consent of Independent Auditors
24 Power of Attorney (included on signature pages of this Annual
Report on Form 10-K)
- --------------------------------------------------
* FILED BY INCORPORATION.