|CEO: NTG insolvent last year||
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NTG Press Coverage Summary
Network Technologies Group Inc. Interim CEO John M. Collard says the company was technically insolvent at the end of 2001 -- a disclosure that could have sent warning signals to the firm's investors long before its collapse this month.
Baltimore's Abell Venture Fund and Smith Whiley & Co. of Hartford, Conn., invested a total of $2 million in the company this March, Collard said.
Collard told the Business Journal this week that after a detailed review of the telecommunication firm's financial records, he found that the company overstated revenues by $2 million and understated accounts payable by $2 million during 2001 -- a $4 million swing in the company's bottom line.
The company, which installed fiber-optic cable, reported 2001 revenue of about $30 million and said it was at about break-even in documents submitted to prospective investors. Instead, Collard said, losses actually could reach as much as $4 million. He said the company's operating losses would have been about $3.5 million, which excludes depreciation and interest on debt payments.
Because of this discrepancy and previous losses in 1999, Collard said the company actually had negative shareholder equity -- or negative net worth -- at the end of 2001. And that kind of information could have scared investors away, he said.
"I just find this absolutely unbelievable," Collard told the Business Journal. "This one is just a mess."
NTG is one of the first companies in Maryland to be accused of having accounting problems. The national news has been filled with accounting-related stories such as the collapse of Enron Corp. and the massive bankruptcy of WorldCom Inc.
Once one of Baltimore's brightest technology companies, NTG hired Ferris, Baker Watts Inc. last year to help it raise $4 million to help it grow. At its apex, the company employed 250 people and had a client list that included Comcast Corp., BGE, AT&T, Corvis Corp. and WorldCom. It even employed former state Sen. Thomas Bromwell -- one of Maryland's most influential and powerful politicians -- before he took the top job at the Injured Workers' Insurance Fund in April.
All that came to a decisive end on July 12 when NTG laid off all 125 workers and shut its doors after Collard said he discovered alleged accounting irregularities. Collard, a turnaround specialist from Annapolis, was named interim CEO just 11 days earlier after founder and former CEO Michele Tobin resigned. Tobin could not be reached for comment.
Collard said that the company is now the focus of investigations by both state and federal law enforcement agencies, although he would not specify which agencies.Investors in the dark?
The Abell Venture Fund also invested $1.5 million in NTG in 1999, and Spring Capital Partners LP, a Baltimore venture firm, invested $3.5 million in 2000.
All the investors, including Smith Whiley, were given seats on NTG's board of directors. After repeated attempts to reach them, officials from Smith Whiley, the Abell Venture Fund and Spring Capital could not be reached for comment.
Until the build-out of fiber-optic networks began slowing down in 2000, the telecommunications industry was red-hot and appeared to be a no-brainer investment for many venture capitalists.
But with the crash of the technology sector, there has been a slowing of demand for telecommunications equipment. The recent collapse of WorldCom, one of the country's largest telecommunications companies and an NTG customer, has only increased the pain.
Chris M. Royston, managing director of Baltimore-based Bengur Bryan & Co. Inc., an investment banking firm, said his firm assisted Spring Capital with their investments in Network Technologies Group.
"I know that those are smart investors," he said. "So if something was done inside it had to be something sophisticated for them not to know about it."
Collard has said that only Mercantile-Safe Deposit & Trust Co. -- the company's main secured creditor -- would likely get any money out of NTG. NTG owes Mercantile as much as $1 million, and Collard is in the process now of liquidating the company's office equipment and accounts receivable to pay Mercantile back as much of that debt as possible. The rest of the investors probably won't get their money back, Collard said.
"They won't see anything," Collard said. "The proceeds go directly to the bank."
Ferris, Baker brokered the financing from Smith Whiley, said Steven Shea, director of corporate finance for Ferris, Baker. The Baltimore investment banking firm had signed on with NTG in April 2001 to help the company find $4 million in financing.
Ferris, Baker's contract with NTG specifically said that NTG was "solely responsible for the legal sufficiency, accuracy and completeness" of any financial information it provided.
On July 10, just two days before NTG shut its doors, Ferris, Baker sued NTG in Baltimore City Circuit Court for $75,000 in overdue investment banking fees from NTG. Shea said the bank will no longer pursue that case in light of NTG's demise and its inability to pay.Other revelations
Edwin R. Brake, managing director of Ellin & Tucker Chartered, NTG's former accounting firm, said auditors were unable to complete the 2001 audit of NTG because they were never given enough information by the company.
"When you look at the work we did, nothing was finalized," Brake said.
Brake added that there have been no allegations of wrongdoing at NTG from 1999 to 2000 when Ellin & Tucker did complete audits of the company.
The Business Journal also found that NTG has been the subject of several civil lawsuits over the past eight months.
In January, David H. Lowe, a former account representative for NTG, sued NTG in Baltimore City Circuit Court for unpaid commissions totaling more than $150,000.
In his lawsuit, Lowe sad that "NTG continually assured him that his commission payments would be made soon, but there were cash flow problems."
A Florida-based firm that buys debt from growing companies filed a lawsuit against NTG and two other telecommunications firms in U.S. District Court in Baltimore in December 2001 to recover $150,000.
According to that lawsuit, AmeriFund Capital Inc. bought $150,000 in debt from Barnett Services Inc., a company that NTG owed money for work the company did on telecommunications networks in Maryland.
Details of the work were not included in court documents, and the lawsuit was settled out of court for an undisclosed amount.
NTG, according to court documents, hired Salt Lake City-based Barnett Services, a network engineering firm, to provide network engineering work on certain projects. The bills were never paid, so the accounts receivable were sold to AmeriFund Capital for cash.Struggling industry
Industry analysts said that several technology firms -- especially those related to the telecommunications and fiber-optics sectors -- sold off debt when the economy began to slow down in 2000.
The telecommunications sector, which has suffered on Wall Street and Main Street, was hit hard. Since NTG did work for such firms as WorldCom, which made history with the largest federal bankruptcy filing in history, the company's client base basically disappeared.
In 2000, when NTG secured its largest venture capital investment, analysts were predicting the industry would be worth $46 billion by now.
That figure has been reduced considerably, but no analysts are willing to place projections on the market at this point.
"It's rough for telecommunications right now, real rough," said Jane Kirkwood, an analyst with Frost & Sullivan Co. in New York. "Networks are not being built, so they don't need companies that help build the networks."
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