U. S. Securities and Exchange Commission
Washington, D. C. 20549
AMENDMENT NO. 1 TO FORM 10-SB
GENERAL FORM FOR REGISTRATION OF SECURITIES OF
SMALL BUSINESS ISSUERS
Under Section 12(b) or (g) of the Securities Exchange Act of 1934
CONSORTIUM SERVICE MANAGEMENT GROUP, INC.
(Name of Small Business Issuer in its charter)
Texas 74-2653437
------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
500 North Shoreline Drive, Suite 701 North,
Corpus Christi, TX 78471
(Address of principal executive offices)
512-887-7546
(Issuer's Telephone Number)
Securities to be registered under Section 12(b) of the Act:
Title of each class Name of each exchange on which
to be so registered each class is to be registered
None
Securities to be registered under Section 12(g) of the Act:
Common Stock, $0.001 par value
Preferred Stock, $0.001 par value
---------------------------------
(Title of Class)
<PAGE>
TABLE OF CONTENTS
Page
Preliminary Statement ................................................. 1
Description of Business................................................ 1
Business Development .......................................... 1
Business of the Company ....................................... 4
Live Tissue Bonding Equipment .......................... 4
Anaerobic Farm-waste Disposal Equipment ................ 5
Carbon Dioxide Separator ............................... 7
Raw Materials, Supplies and Manufacturing .............. 8
Distribution Methods ................................... 8
Competition ............................................ 8
Live tissue bonding equipment ................... 8
Anaerobic farm-waste disposal plants ............ 8
CO2 Separator ................................... 9
Patents, Trademarks and Licenses ....................... 9
Government Approval and Regulations .................... 9
Year 2000 Computer Problems ............................ 9
Research and Development ............................... 10
Cost of Compliance with Environmental Laws ............. 10
Seasonality ............................................ 10
Employees .............................................. 10
Management's Discussion and Analysis of Financial
Condition and Results of Operations ........................... 11
Results of Operations ......................................... 11
Sales .................................................. 11
Interim results ................................. 11
Selling, General and Administrative Expenses ........... 12
Interim results ................................. 12
Net Loss ............................................... 12
Interim results ................................. 12
Balance Sheet Items .................................... 12
Assets .......................................... 12
Stockholders' Equity ............................ 12
Interim balance sheet items ..................... 13
Liquidity and Outlook .................................. 13
Costs of Filing Periodic Reports ....................... 14
Properties ............................................................ 14
Security Ownership of Certain Beneficial Owners and
Management .................................................... 14
Changes in Control ..................................... 15
Directors, Executive Officers and Control Persons ..................... 15
Executive Compensation ................................................ 17
Certain Relationships and Related Transactions ........................ 18
Description of Securities ............................................. 18
ii
<PAGE>
Common Stock .................................................. 18
Voting Rights .......................................... 18
Dividend Rights ........................................ 18
Liquidation Rights ..................................... 18
Preemptive Rights ...................................... 18
Registrar and Transfer Agents .......................... 18
Dissenters' Rights ..................................... 18
Preferred Stock ............................................... 19
Series A Preferred Stock ............................... 19
Market for Common Stock and Related Stockholder Matters ............... 19
Holders ....................................................... 20
Dividends ..................................................... 20
Legal Proceedings ..................................................... 21
Change in Accountants ................................................. 21
Recent Sales of Unregistered Securities ............................... 21
Indemnification of Directors and Officers ............................. 22
Financial Statements .................................................. 24
iii
<PAGE>
PRELIMINARY STATEMENT
Consortium Service Management Group, Inc. is filing this registration
statement on a voluntary basis under Section 12(g) of the Securities Exchange
Act of 1934. Our common stock trades in the over-the-counter market and is
quoted by NASD market makers on the OTC Bulletin Board. A recent rule change
requires that all companies whose securities are approved for quotation on the
OTC Bulletin Board must file periodic financial reports with governmental
authorities such as the Securities and Exchange Commission. The effectiveness of
this registration statement subjects the company to the periodic reporting
requirements imposed by Section 13(a) of the Securities Exchange Act.
DESCRIPTION OF BUSINESS
Business Development
- --------------------
We were incorporated on November 17, 1992 in the State of Texas. We
conduct our business from our headquarters in Corpus Christi, Texas; from
offices in Oklahoma City, Oklahoma; and from offices in Kiev, Ukraine. We first
had revenues from operations in 1995.
We believe we are unique in our business mission. We facilitate the
transfer to the U.S. and other developed countries of technologies developed by
the scientists and engineers of Ukraine.
We have a formal relationship with several prestigious organizations in
Ukraine. They have, as their stockholders or members, many of Ukraine's leading
scientists, engineers and technicians. We formalized our relationship with them
in February 1994 when we registered with the Ukraine Government a Ukraine
company owned 50 percent by us and 50 percent by the Ukraine organizations.
The Ukraine company's name is United Engineering Company. It is called a
"joint stock company with a foreign investor." The foreign investor is us.
United Engineering Company is authorized by Ukraine law, among other things, to
perform classified and secret construction works related to the national
security of Ukraine.
The 50 percent of the stock of United Engineering Company owned by
Ukraine organizations is owned by the following companies or organizations:
o The State Property Fund of Ukraine. It owns all state enterprises
----------------------------------
and property of the state, and it is represented by:
o Yuzhnoye (Southern) Machine Building Plant. This is a giant
---------------------------------------------
manufacturing complex located in Dniepropetrovsk. It built many of
the missiles and nuclear missiles for
1
<PAGE>
the former Soviet Union. Today, it manufactures commercial
satellites, farming tractors for export, trolley cars, and other
heavy products.
o Design Bureau "Yuzhnoye". This organization was established in
------------------------
1954. It developed and turned over to the Ukraine Army several
generations of missiles (specifically, SS-18 "Satan" satellite and
the launch rockets "Cyclone" and "Zinet"), space carrier rockets,
and artificial satellites. Design Bureau employs several thousand
researchers and production engineers and is the leading enterprise
in Ukraine for the development of rocket and other jet systems. It
also is the leading enterprise for the elimination of launching
sites in Ukraine. The Bureau also works on conversion projects,
trolley busses, pumps for the oil industry, small-sized vehicles
for cleaning city streets, and devices for manufacturing
margarine, oils, etc. It is under the direction of Academician
Stanislav Nikolayevich Konyukhov, who also is president of United
Engineering Company.
o Trust No. 5 for Special Construction Works. This organization
--------------------------------------------
believes itself to be the highest technical and most qualified
engineering firm in the former Soviet Union. It was involved in
building all of the former Soviet Unions's nuclear and non-nuclear
missile launching pads and silos, the Soviet space station,
several chemical and oil industry plants and pipelines, and other
installations requiring the highest technologies of the former
Soviet Union.
o E.O. Paton Institute of Electric Welding. This organization was
----------------------------------------
founded in 1934 by the Academy of Sciences of the Ukraine S.S.R.
It is headed today by Professor Boris Paton, the president of the
Ukraine Academy of Sciences. It developed the collapsible,
titanium-welded, building-structure technology that was used in
the construction of the Soviet space station "MIRE." We believe
the Paton Institute is one of the world's most prominent
scientific institutions involved in metal casting and bonding
ceramics, microwave bonding of metals and plastics, explosive
welding and cutting, welding in space and underwater, electro
metallurgy, protective coatings, and bridge building and coating.
It employed at one time more than 5,000 scientists and engineers
and employs today more than 200 engineers and executives. It has
joint ventures with several multinational companies and
governmental agencies including the U.S. Department of Energy and
NASA.
o Spivdruznist Business Association. This was formed by major
-----------------------------------
defense enterprises to develop and implement methods of
dismantling munitions and converting the
2
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metals and explosive by-products to commercially marketable
products. It is composed of 6 large manufacturing facilities that
developed and manufactured explosives, weapons and military
equipment during the Cold War.
o Pivdenexo, Ltd. This is a research, development and production-
--------------
design "think tank."
The above organizations, working with us as their equal partners in
United Engineering Company, as well as other organizations in Ukraine look to us
to fill two roles:
o Inside Ukraine. When they negotiate with western nation
enterprises expecting to do business in Ukraine, we bring to the
negotiating table our experience in negotiating agreements with
market-oriented enterprises.
o Outside Ukraine. After we first identify technologies developed
in Ukraine that appear to have promising commercial application,
we introduce companies in the U.S. and in other developed
countries to these technologies and attempt to negotiate
technology transfer agreements between them and the Ukraine
organizations.
There are no specific funding arrangements for the stockholders of
United Engineering Company. Projects are funded on a case-by-case basis. By
agreement, we advanced more than half of the costs associated with setting up
the company and in bringing to Ukraine representatives of U.S. and other western
companies that were interested in certain Ukraine-developed technologies or
business opportunities. We are entitled to recover such costs to the extent they
exceed our fifty percent share. While we have recovered some of these costs, we
have largely written off the balance. In fact, we have reinvested in the company
approximately ninety percent of our profits.
We do experience certain difficulties in dealing with foreign entities
in Ukraine. We overcome the language difficulties with our bi-lingual staff in
Ukraine. A recurring problem is a rapid change of laws in Ukraine - particularly
tax laws. But the major problem we encounter is related to a fluctuating
exchange rate between Ukraine and U.S. currencies. We lack the resources to take
defensive action against a fluctuating exchange rate.
There are no restrictions related to our investment in United
Engineering Company including restrictions on its ability to declare and record
dividends.
Inside Ukraine, we have assisted United Engineering Company in its
negotiation of contracts for the dismantling of the Ukraine nuclear and
non-nuclear missiles, silos, and related
3
<PAGE>
equipment. This dismantling is required by the treaty known as START and will be
paid for by the U.S. and other western countries. The Ukraine members of UEC
designed, built and commanded these missiles and silos, are logical
organizations to dismantle them, and are expected to receive a substantial
portion of the contracts to dismantle them.
Since 1995 United Engineering Company has completed contracts with U.S.
contractors for more than $6.0 million with respect to ICBM dismantlement in
Ukraine and for more than DM4.7 million in contracts with the German Government
and German contractors for new methods of dismantling ICBM silos.
Outside Ukraine, we have identified several promising Ukraine-developed
technologies. We have been both successful and unsuccessful in negotiating
technology transfer agreements between United Engineering Company or one of its
constituent Ukraine organizations and companies in the U.S. We have successfully
negotiated technology transfer agreements for the projects set forth below.
Business of the Company
- -----------------------
Live Tissue Bonding Equipment. The E.O. Paton Electric Welding Institute
-----------------------------
of Kiev, Ukraine developed equipment that bonds blood vessels and soft tissues
in substantially less time than other technologies take and apparently leaves no
or minimal trace scar tissues after a lapse of six to seven months.
The equipment bonds the soft biological tissue with a special miniature
surgical tool. No glues, sutures, staples or other foreign matter are used. The
process is best described as a welding process. The scar tissue is either
minimal or non-existent. Tests conducted in Louisville, Kentucky by U.S.
surgeons on rabbits' stomachs resulted in scar tissue only forty microns wide
six months after surgery. It appears that the Ukraine scientists have developed
a superior, all-purpose, seamless method of bonding soft biological tissues,
which method is characterized by simple manipulation applicable to different
surgical operations and the fast restoration of tissues without the formation of
coarse scars. Apparently there is no need for prolonged special training of
surgeons and surgical personnel.
The Ukraine prototype for the equipment was successfully demonstrated to
physicians and surgeons in the U.S. in June 1996 on the blood vessels, nerves
and stomachs of rats and rabbits. Additional, subsequent demonstrations on
animals were performed in Ukraine by Ukraine surgeons with U.S. surgeons in
attendance. In 1998 the U.S. surgeons performed successful tests on animals in
Louisville, Kentucky. Testing on humans in Ukraine began in mid-year 1998. The
success of these tests has not been verified by the Federal Drug administration
or any independent laboratory.
U.S. and international patent applications on the process were filed in
February 1999, but no patents have been issued.
4
<PAGE>
The exclusive world rights have been assigned one-half to us and one-half to the
E.O. Paton Electric Welding Institute of Kiev, Ukraine.
We estimate that in excess of $1.5 million have been expended in
developing the project and that $1.5 million of additional funds must be
expended to bring this product to market. We estimate that the first surgical
equipment will be manufactured in the U.S. by the end of 2000.
This project is still in the development stage, even though the
Ukrainians have created a finished product in their special miniature surgical
tool. Improvements in the tool are possible, and testing on live tissue of
humans to U.S. testing standards is required. Approval of the process and
equipment by the Federal Drug Administration is required. The Louisville,
Kentucky surgeons report that their recent studies are very favorable, that they
need additional experimentation for which they will apply for a short study
grant from the FDA, and that with the grant they will proceed to early human
studies.
Anaerobic Farm-Waste Disposal Equipment. We are marketing a closed
-----------------------------------------
system, no lagoon, anaerobic plant that:
o processes farm-animal waste into a high grade organic fertilizer,
o captures the methane gas for commercial use,
o eliminates 90 to 95 percent of the odor, and
o prevents all runoff and contamination of the environment.
This processing plant was developed in Ukraine before the breakup of the
Soviet Union. The developer is a 103-year-old Ukraine joint stock company that
is the Ukraine's largest enterprise that manufactures equipment for the
petroleum and chemical industries. The company's name is Sumy Frunze
MachineBuilding Science-and-Production Association, called herein "Frunze." We
have obtained the exclusive, worldwide rights to market Frunze's anaerobic
farm-waste disposal plant.
Frunze developed the processing plant to solve the above-mentioned
problems that were associated with a 3,000-head swine farm located in the center
of a city of 400,000 people. The plant has operated successfully for more than
twelve years.
This technology was patented in 1991 in U.S.S.R. Patent applications
have not been filed in the U.S. Frunze has assigned to us the worldwide rights
to market, distribute, license and service products covered by the U.S.S.R.
patents and any upgrades of the patents. This assignment extends until June 4,
2019 but will expire earlier if we fail to place orders annually for at least $1
million in plant and equipment to be manufactured in
5
<PAGE>
Ukraine. We are required to pay royalties equal to five percent of the costs of
all equipment manufactured in Ukraine.
Under our license agreement with United Engineering Company and the
Ukraine inventor, Ivan Semenenko, the Ukrainians are
o to design each anaerobic farm-waste disposal facility after
visiting the site where it is to be placed,
o to construct all of the facility in Ukraine except for the
electric motors, generators, tanks and computer controls,
o to oversee the installation and startup of the facility at each
project site, and
o to provide equipment warranties acceptable to us.
Our obligations are
o to obtain contracts for the installation of the acilities,
o to pay the expenses of the Ukrainians' visits to the U.S. or other
countries in the performance of their obligations under the
license,
o to pay for and arrange for the delivery to the facility sites of
all equipment not manufactured in Ukraine, and
o to act as a liaison between the Ukrainians and persons in the
countries where facilities are to be installed.
United Engineering Company coordinates our relations with Frunze, the
manufacturer, in Ukraine. We are initially marketing these plants in a six-state
region in the U.S. through Western Waste Management, Inc. The plants will be
custom designed for each U.S. user. The major portion of each plant will be
manufactured initially, at least, by Frunze in Ukraine. The electric motors,
generators, tanks and computer controls will be obtained in the U.S.
Approximately 70% of the cost of a plant will be for Ukraine-manufactured parts
at a cost far less than could be obtained in the U.S.
We have a contract to lease a plant to a large dairy herd farm located
near Twin Falls, Idaho. Ukraine engineers and the inventor visited the location
in October 1999, evaluated the project and designed the plant. Construction of
the plant awaits funding by us. We are working with several sources of funds in
this regard.
A considerable market exists for the plant. At the end of 1997 there
were 1,520 U.S. swine farms with 5,000 head or more and more than 4,000 swine
farms with 2,000 to 5,000 head of stock. It is estimated that 5,000-head swine
farm with a lagoon
6
<PAGE>
spends $90,000 to $100,000 a year on lagoon management only. And this is without
controlling the odor, soil permeation or runoff problems.
We estimate that the $1 million cost of a Farm Waste Anaerobic Plant for
a 3,000-head swine farm will be recovered by the farmer in seven to eight years
from:
o organic fertilizer sales,
o methane gas converted to electricity used on the farm and sold
commercially,
o elimination of waste lagoon expense, and
o reduction of other operating costs.
Of major public relations importance is the near total elimination of
foul odors. The only exposure of the animal waste to the atmosphere is the
one-day-or-less period that elapses before it is hosed or scraped to the pump
site for transportation to the closed storage tanks or directly to the
processing plant. Little decomposition and emission of gases occur during this
initial period.
Of major health importance are:
o the elimination of the volatile organic acids, which are consumed
by the gas-producing bacteria,
o the elimination of surface and ground water contamination, and
o the dramatic reduction of pathogen populations in the heated
digesters.
Carbon Dioxide Separator. We own the exclusive and perpetual world
--------------------------
rights to service, license and market certain unpatented equipment manufactured
in Ukraine that separates carbon dioxide and other impurities from the gas
produced in landfills and converts the remaining gas to a cleaner, 98-percent
pure methane gas for use in internal combustion engines or for sale to natural
gas companies. This equipment was developed for us by the Institute of Gas,
Ukraine National Academy of Sciences and will be manufactured for us by the
International Welding Association of Kiev, Ukraine. We are now marketing this
equipment.
The manufacturing and operating costs of our CO2 separator plants are
substantially lower than the costs of competitive units. We have negotiated a
contract with a large landfill operator, Resource Technology Corporation of
Chicago, Illinois, which contract awaits final execution, to provide one of
these plants to be placed on one its landfills in Alabama. The plant will be
manufactured in Ukraine. The landfill operator will
7
<PAGE>
provide all other equipment needed as well as the operations. Our agreement with
Resource Technology Corporation requires us to provide the plant and bring it to
the U.S. We will require approximately $500,000 to fulfill our obligations under
the agreement, and Resource Technology Corporation will contribute cash, all
piping, tanks and other auxiliary equipment, the cost of which is estimated to
be approximately $1,100,000. Revenue from the plant will be shared 65 percent
for Resource Technology Corporation and 35 percent for us until payout of costs,
at which time revenue will be shared equally. We are attempting to sell a
40-percent interest in our share of this matter for the $500,000 we need to meet
our obligations. We expect to receive our first revenues from this project
before the end of 2000.
Raw Materials, Supplies and Manufacturing
-----------------------------------------
No manufacturer has been selected for the tissue bonding equipment.
The anaerobic plants will be manufactured in Ukraine at a cost far less
than what it would cost in the U.S.
The carbon dioxide separator plants will be manufactured in the Ukraine,
again at a cost far less than what it would cost in the U.S.
Distribution Methods
--------------------
We propose to negotiate with a medical equipment manufacturing company
to market and distribute the live tissue bonding equipment once Federal Drug
Administration approval is obtained. We have no specific manufacturing company
to do this at this time.
We have organized a majority-owned subsidiary, Anaerobic Farm Waste,
Inc., to own and lease the anaerobic farm waste disposal equipment. The officers
of our company are also the principal officers of the subsidiary company.
We are marketing our CO2 separator equipment directly through the
efforts of our officers.
Competition
-----------
Live tissue bonding equipment. We have the only equipment in the
-----------------------------
world that bonds live tissues with little or no scarring. We are in competition
only with older surgical methods of closing tissue openings.
Anaerobic farm waste disposal plants. There are ten companies
---------------------------------------
that offer various types of anaerobic systems in the U.S. None of these systems
processes the manure and water to the extent of the Ukraine-made plant. Further,
the costs of design, development, fabrication and construction are higher by
multiples in the U.S. than in Ukraine, where high-caliber scientists and
8
<PAGE>
engineers are readily available. The plant now in operation in Ukraine is the
product of years of experience in designing and building various types of
anaerobic plants. The design now in operation has been the most effective and
economical for anaerobically processing animal wastes.
CO2 Separator. Numerous companies make CO2 separators in the U.S.
-------------
but none can compete with the quality of our separators or with our price. Their
prices are multiples of ours. Their separators produce no better than 75 to 90
percent pure methane; ours produce 98-percent pure methane.
Patents, Trademarks and Licenses
--------------------------------
The live tissue bonding equipment is the subject of patents and patent
applications filed by the Ukraine inventor in the Ukraine, the U.S., and other
countries. The patents and the patent applications for the U.S., the European
Patent Convention, Australia, Canada and Japan are held by us.
The anaerobic farm-waste disposal equipment was patented in U.S.S.R. in
1991 but is not the subject of any patent application filed in the U.S. The CO2
separator equipment is not the subject of any existing patent; the technology
has been known for more than 30 years.
We have been assigned the exclusive world rights to license,
manufacture, market, and distribute both the anaerobic farm waste disposal
equipment and the CO2 separator equipment.
Government Approval and Regulations
-----------------------------------
The live tissue bonding equipment must obtain the approval of the
Federal Drug Administration before it can be sold to be used on humans. We are
advised by the Louisville, Kentucky surgeons that their recent studies are very
favorable, that they need additional experimentation for which they will apply
for a short study grant from the FDA, and that with the grant they will proceed
to early human studies.
The anaerobic farm waste disposal plants and the CO2 separator plants
require no governmental approval before being placed into use, but the results
of their usage are subject to the oversight authority of the Environmental
Protection Agency. Because we expect the results of their usage will enable
cattle, swine and chicken farmers and landfill operators to comply with EPA
regulations, we believe the plants will be readily accepted in the U.S.
Year 2000 Computer Problems
---------------------------
We believe we do not face material costs, problems or uncertainties
about the year 2000 computer problem. This problem affects many companies and
organizations and stems from the fact that many existing computer programs use
only two digits to
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<PAGE>
identify a year in the date field and do not consider the impact of the year
2000. We are newly organized and use off-the-shelf and easily replaceable
software programs for our office work. We have yet to devise any software
programs for our live tissue bonding, anaerobic farm-waste disposal or CO2
separator projects.
The animal-waste anaerobic plants will not be installed until 2000, and
the computer controls for the facilities will not be designed, ordered or
installed until 2000. The CO2 separator plants also will not be delivered or
installed until 2000.
The worst case scenario involving Year 2000 issues would be that Frunze
- - the manufacturer of the anaerobic farm-waste disposal facilities, the company
to be selected to manufacture the live tissue bonding tools, or International
Welding Association of Kiev, Ukraine - the manufacturer of the CO2 separator
plants should experience significant Year 2000 problems that would delay the
delivery of the equipment they are to manufacture. We have no contingency plan
for dealing with such a matter; we will simply have to delay our operations
until any such Year 2000 problems are solved at the manufacturers' level.
We have been orally advised by the Ukraine manufacturers of our
anaerobic farm waste plants and our CO2 separator plants that they are Year 2000
compliant. Should either of them not be Year 2000 compliant and should
difficulties arise, we will have to delay our operations until they work out
their problems.
Research and Development
------------------------
We expend no funds on research and development.
Cost of Compliance with Environmental Laws
------------------------------------------
We have no direct costs in complying with environmental laws. Our
anaerobic farm waste disposal plants are designed to dispose of farm waste in a
manner that meets all environmental regulations. The same is true with regard to
our CO2 separator plants. The users of this equipment have an environmental
waste disposal problem caused by their other operations. Their cost of complying
with environmental regulations is our share of the revenue produced from the
installation and use of our equipment.
Seasonality
-----------
There is no seasonal aspect of our business.
Employees
---------
We employ three persons full time in the U.S. and two persons full time
in Kiev, Ukraine.
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the financial statements and the accompanying notes thereto and is qualified
entirely by the foregoing and by other more detailed financial information
appearing elsewhere.
See "Financial Statements."
Results of Operations
- ---------------------
The following table presents, as a percentage of sales, certain selected
financial data for the two fiscal years ended December 31, 1998 and for the
six-month periods ended June 30, 1998 and June 30, 1999:
<TABLE>
<CAPTION>
Year Ended 12-31 6-Mos. Ended 6-30
1998 1997 1999 1998
---------------- -----------------
<S> <C> <C> <C> <C>
Sales (services) 100.0% 100.0% 100.0% 100.0%
Cost of services and
general and adminis-
trative expenses 279.9 197.3 440.3 146.7
Other income and
(losses) on foreign
currency exchange (28.7) - - -
----- ----- ----- -----
(Loss) from direct
operations (226.6) (97.3) (340.3) (46.7)
50% interest in
income of United
Engineering Company 82.8 86.7 - -
----- ----- ----- -----
Net (loss) (143.8) (10.6) (340.3) (46.7)
</TABLE>
Sales
-----
We have received no revenue from our anaerobic farm waste disposal
equipment project or our carbon dioxide separator project. All revenues, except
for revenue from incidental services, is attributable to services we perform for
the Louisville, Kentucky surgeons with regard to our live tissue bonding
equipment project. Such revenues decreased from $299,454 in the fiscal year
ended December 31, 1997 to $278,929 in the fiscal year ended December 31, 1998,
a decrease of 6.9%. The decrease in sales was attributable to foreign exchange
loss of $91,957.
Interim results. Sales decreased from $130,013 in the first half
---------------
of 1998 to $29,616 in the first half of 1999, a decrease of $100,398 or 77.2
percent. The decrease was due entirely to less revenue from the tissue bonding
project. Our income is still derived from services we perform, primarily in
Ukraine, for Louisville, Kentucky surgeons in their study of the live tissue
bonding technology and procedures. Considerably less time is now being spent in
Ukraine in this regard. A $5,000 a month office and travel allowance was
discontinued in February 1999. Dividends from United Engineering Company
increased from
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<PAGE>
$2,666 in the first half of 1998 to $8,390 in the first half of 1999.
Selling, General and Administrative Expenses
--------------------------------------------
Selling (reported as "cost of goods sold" in fiscal year 1998), general
and administrative expenses increased from $590,888 in fiscal year 1997 to
$831,033 in fiscal year 1998 - an increase of $240,145 or 40.6 percent. The
increase is attributed to $174,689 in common stock that was issued to various
persons for services rendered and to $65,456 attributed to accrued interest on
notes payable.
Interim results. Selling (reported as "cost of services" in the
---------------
interim Statement of Operations), general and administrative expenses decreased
from $190,710 in the first half of 1998 to $130,403 in the first half of 1999 -
a decrease of $60,307 or 31.6 percent. The decrease is attributable to a
reduction in salaries paid to officers, and reduced foreign and domestic travel
expenses.
Net Loss
--------
We had a net loss from operations in fiscal year 1997 of $291,434, or
$0.145 a share of our common stock before considering income of $259,761
attributable to our 50 percent interest in United Engineering Company. In fiscal
year 1998 we had a net loss from operations of $552,104, or $0.262 a share of
common stock before considering income of $230,932 attributable to our 50
percent interest in United Engineering Company. In 1998 we also suffered a
$91,957 loss attributable to a foreign exchange loss - the U.S. dollar
strengthening against the Ukraine currency.
Interim results. Our net loss of $60,697 in the first half of
----------------
1998 on sales of $130,013 increased to a net loss of $100,787 in the first half
of 1999 on sales of $29,616, an increase of 66.0 percent. The increase was due
to $100,398 less income associated with the tissue bonding project and a
decrease of $60,307 in selling, general and administrative expenses.
Balance Sheet Items
-------------------
Assets. Our total assets increased in fiscal 1998 by $194,531 - a
------
34.2 percent increase. Some $136,309, or 70 percent of the increase, is
attributable to our increased investment in United Engineering Company.
Stockholders' Equity. Stockholders' equity decreased from
----------------------
$195,016 at the end of fiscal 1997 to $25,314 on December 31, 1998. The loss
from operations of $401,135 was covered primarily by an increase in
stockholders' loans to the company of $288,750 and the issuance of $231,260
worth of stock for $30,000 cash and $201,260 in services.
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<PAGE>
Interim balance sheet items.
---------------------------
Notes Payable to Stockholders. We decreased our notes
-----------------------------
payable to stockholders by $285,205 from $685,430 at December 31, 1998 to
$400,225 on June 30, 1999 - a 41.6 percent decrease.
Stockholders' Equity. We increased stockholders' equity
--------------------
from only $25,314 on December 31, 1998 to $449,921 on June 30, 1999. The
increase was due to a $285,205 reduction in notes payable to stockholders, which
reduction reflected the conversion of the notes to common stock and the sale of
$42,500 of common stock, which amounts were reduced by our $100,787 loss from
operations during the first half of 1999.
Liquidity and Outlook
---------------------
We have never operated at a profit. We have been able to stay in
operation only from the proceeds realized from loans made to us by our
shareholders and from the sale of capital stock. While our shareholders have
been forthcoming in the past to meet our cash needs, and while we believe they
will continue to provide debt capital as needed during the next twelve months,
their willingness to do this has been and is dependent upon the company's
prospects for financial success. Management believes our prospects for financial
liquidity have never been better and depend upon the following:
o obtaining contracts for the leasing of our anaerobic farm waste
equipment;
o obtaining contracts for the joint venturing of our CO2 separator;
o the sale of capital stock in either our company or our subsidiary,
Anaerobic Farm Waste, Inc.; and
o loans to finance the purchase of anaerobic farm waste units and
CO2 separators.
At this time, we have not identified the sources for additional equity capital,
but we are negotiating with a lender of funds that we believe will provide $5
million in capital for us to purchase anaerobic farm waste plants for executed
contracts that require such equipment. In addition to our commitment to repay
the $5 million loan, this lender would receive 50 percent of the equity in our
subsidiary corporation through which we conduct our anaerobic farm waste plant
project. This lender indicates that it would provide additional loans as needed
for additional sales of plants. We expect to conclude our negotiations by
mid-year 2000.
13
<PAGE>
Costs of Filing Periodic Reports
--------------------------------
The filing of this Form 10-SB registration statement subjects our
company to certain requirements of the Exchange Act of 1934. These requirements
include the filing of an annual report on the company's business, which must
include audited financial statements; quarterly reports, which must include
unaudited interim financial statements; and periodic reports of certain material
events of which investors should be made aware. Legal and accounting expertise
are required to prepare these reports. The services of the company's securities
law attorney and the annual auditor's services must be paid for in cash. Should
cash not be available to pay for these legal and auditor's services, we will
have to borrow these needed funds from sources not yet identified.
PROPERTIES
We lease office space in the following cities as follows:
<TABLE>
<CAPTION>
Approximate Monthly Term of
Square Feet Rental Lease
----------- ------- -------
<S> <C> <C> <C>
Corpus Christi, TX 1,000 $ 500 08-31-2001
Oklahoma City, OK 500 $ 500 Month-to-Month
Kiev, Ukraine 800 $1,200 Month-to-Month
</TABLE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The table below sets forth, as of June 30, 1999, the number of shares of
Common Stock of the company beneficially owned by each officer and director of
the company, individually and as a group, and by each person known to the
company to be the beneficial owner of more than five percent of the Common
Stock.
<TABLE>
<CAPTION>
Number of
Shares of
Name and Address Common Stock Percent
---------------- ------------ -------
<S> <C> <C> <C>
Esmeralda G. Robbins(1)(2) 250,000 8.6
701 CCNB North Tower
500 North Shoreline
Corpus Christi, TX 78471
Donald S. Robbins(2)(3)(4) 250,000 8.6
701 CCNB North Tower
500 North Shoreline
Corpus Christi, TX 78471
Gordon W. Allison(4)(5) 382,800 13.1
P. O. Box 770304
Oklahoma City, Oklahoma 73177
</TABLE>
14
<PAGE>
<TABLE>
<S> <C> <C>
James Workman 60,000 2.1
1826 War Eagle Street
North Little Rock, AR 72116
Officers and Directors 942,800 32.3
as a group (4 persons)(4)
-------------------------
</TABLE>
(1) These shares are held of record by the Esmeralda G. Robbins Family
Limited Partnership.
(2) Esmeralda G. Robbins and Donald S. Robbins are wife and husband.
(3) These shares are held of record by the Donald S. Robbins Family Limited
Partnership.
(4) This does not include 75,669 shares of Series A Preferred Stock of the
company, which shares are owned by Mr. Robbins (43,869 shares) and Mr.
Allison (31,800 shares), each share of which Preferred Stock is entitled
to receive an $0.80 annual dividend, payable quarterly, cumulative if
not paid, has a face value of $10, is redeemable by the company out of
profits, and is preferred over the company's Common Stock in the event
of the liquidation and dissolution of the company.
(5) This stock is held of record by Electronic Data Service, Inc., an
Oklahoma corporation, of which Mr. Allison is an officer, director and
100 percent beneficial shareholder.
Changes in Control
- ------------------
There are no arrangements which may result in a change in control of the
company.
DIRECTORS, EXECUTIVE OFFICERS AND CONTROL PERSONS
The company's directors, officers and significant employees occupying
executive officer positions, their ages as of June 30, 1999, the directors'
terms of office and the period each director has served are set forth in the
following table:
Director's
Director Term
Person Positions and Offices Since Expires
- -------------------- --------------------- -------- ----------
Esmeralda G. Robbins, 54 Chairman of the Board 1992 2000
of Directors
Donald S. Robbins, 55 President, Chief 1992 2000
Executive Officer and
Director
Gordon W. Allison, 72 Executive Vice Presi- 1992 2000
dent, Chief Financial
Officer, Secretary and
Director
15
<PAGE>
James Workman, 71 Director 1998 2000
Esmeralda G. Robbins. From 1979 to 1993 Mrs. Robbins worked as Product
--------------------
Consultant and Salon Coordinator for Corpus Christi Beauty Supply, a family
owned business that covered a 500-mile radius. Mrs. Robbins consulted boutiques,
beauty, and barber salons providing the equipment and products necessary for
them to start a new salon. Working with furniture manufacturers and product
technicians she also coordinated large-scale seminars to introduce shop owners
and their employees to new products and ideas to improve and update their
services. Mrs. Robbins would also oversee the day-to-day operations of the
business along with other family members. In 1993 the business was closed due to
the declining health of elder family members. Mrs. Robbins is an original
founder of Consortium Service Management Group and has been its Chairman of the
Board since 1992. She has worked full time for the company since 1993.
Donald S. Robbins. Mr. Robbins commenced his business career by working
-----------------
from 1969 until 1979 with several life insurance companies in the area of estate
and retirement planning. From 1979 until 1983 he was associated with the
financial planning division of E.F. Hutton, Hutton Financial Services. From 1983
until 1988 he was associated with Prudential Bache Securities as a vice
president for investments and financial planning. From 1988 until 1995 he was
affiliated with the broker-dealer firm Royal Alliance Associates, Inc. From 1983
until 1985 he has been a guest speaker at numerous investor meetings, continuing
medical education meetings, medical society meetings and broker seminars. Mr.
Robbins was one of the founders of Consortium Service Management Group in 1992
and has been employed full time by the company since 1992. He is the person who
has negotiated for the company with respect to the marketing and licensing
agreements of the company and the person who negotiated with the various
organizations in Ukraine that, together with the company, founded United
Engineering Joint Stock Company. Mr. Robbins oversees the company's operations
offices in Ukraine and devotes full time to the affairs of the company.
Gordon W. Allison. Mr. Allison has 35 years experience in the insurance
-----------------
industry and 28 years experience as a corporate officer and a chief executive of
several companies. From 1972 through 1987 he was the chief executive officer of
American Trustee Life Corporation and affiliated insurance companies in
Minnesota, Arizona, and Nebraska. From 1982 through 1991 he was the partnership
manager of Cross Timbers Ranch Ltd., a real estate development and ranching
operation specializing in tax-sheltered cattle maintenance. In 1988 he retired
from the insurance industry as an officer and director of companies but remained
in sales and financial planning. From 1988 until 1991 he served as a director of
Advantage Marketing System, a public company. In 1982 he was the elected
president of the Association of Oklahoma Life Insurance Companies. He has been a
bank director and a community and church leader in Oklahoma City for more than
30 years. He is one of the founders of Consortium Service Management Group in
1992 and has
16
<PAGE>
been employed full time by the company since 1992. He is responsible for its
operations in the U.S., particularly during periods when Mr. Robbins is in
Ukraine.
James Workman. An agriculture entrepreneur and expert, James Workman has
-------------
spent his entire working life in agriculture projects. For 35 years he has
operated and owned several thousand acres of farming. He retired in 1993 and
sold his 26,000-acre farming operation in Mississippi specializing in soy beans,
rice, cotton, corn and wheat. Prior to moving to Mississippi, James Workman had
operated a 10,000-acre farm operation in Arkansas for a German company farming
rice, cotton, corn and soy beans. He specialized in land clearing, land
precision leveling, drainage and irrigation for the German company. Mr. Workman
has worked part time with Consortium Service Management Group since January
1993.
EXECUTIVE COMPENSATION
Set forth below is the aggregate compensation during fiscal years 1996,
1997 and 1998 of the chief executive officer of the company. During the period,
no executive officer of the company received compensation that exceeded
$100,000.
<TABLE>
<CAPTION>
Fiscal Annual Other
Name Year Salary Compensation
----------------- ------ ------ ------------
<S> <C> <C> <C>
Donald S. Robbins, 1998 $48,000 None
President
1997 $32,900 None
1996 $33,100 None
</TABLE>
Set forth below is information concerning individual grants of stock
options made during fiscal year 1998 to the officers of the company:
<TABLE>
<CAPTION>
No. of Shares of No. of Total
Common Stock Options Granted
Underlying to All Employees Exercise Expiration
Name of Officer Options Granted in Fiscal Year Price Date
- ------------------ --------------- -------------- ------- ------
<S> <C> <C> <C> <C>
Donald S. Robbins 425,000 850,000 $0.16(1) 2004
Gordon W. Allison 425,000 850,000 $0.16(1) 2004
- --------------------
</TABLE>
(1) The exercise price is the same as the closing bid price for the common
stock on the day the options were granted.
Directors of the company receive no compensation for their services as
directors.
17
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There have been no transactions during the past two years, or proposed
transactions, to which our company was or is to be a party, in which any
director, executive officer, nominee for election as a director, a holder of
more than five percent of our voting stock or any member of their immediate
family had or is to have a direct or indirect material interest.
Our company's "parents" may be deemed to be Esmeralda G. Robbins, Donald
S. Robbins and Gordon W. Allison by reason of their positions as officers and
directors of the company and their stock ownership as reflected in the tables
above.
DESCRIPTION OF SECURITIES
The company is authorized to issue 40 million shares of Common Stock,
$0.001 par value and 10 million shares of Preferred Stock, $0.001 par value. The
presently outstanding shares of Common Stock and Preferred Stock are fully paid
and nonassessable.
Common Stock
- ------------
Voting Rights. Holders of shares of Common Stock are entitled to one
--------------
vote per share on all matters submitted to a vote of the shareholders. Shares of
Common Stock do not have cumulative voting rights, which means that the holders
of a majority of the shareholder votes eligible to vote and voting for the
election of the Board of Directors can elect all members of the Board of
Directors.
Dividend Rights. Holders of record of shares of Common Stock are
----------------
entitled to receive dividends when and if declared by the Board of Directors out
of funds of the company legally available therefor.
Liquidation Rights. Upon any liquidation, dissolution or winding up of
------------------
the company, holders of shares of Common Stock are entitled to receive pro rata
all of the assets of the company available for distribution to shareholders
after distributions are made to the holders of the company's Preferred Stock.
Preemptive Rights. Holders of Common Stock do not have any preemptive
-----------------
rights to subscribe for or to purchase any stock, obligations or other
securities of the company.
Registrar and Transfer Agent. The company's registrar and transfer agent
----------------------------
is Securities Transfer Corporation of Dallas, Texas.
Dissenters' Rights. Under current Texas law, a shareholder is afforded
-------------------
dissenters' rights which, if properly exercised, may require the company to
purchase his shares. Dissenters' rights commonly arise in extraordinary
transactions such as mergers, consolidations, reorganizations, substantial asset
sales,
18
<PAGE>
liquidating distributions, and certain amendments to the company's certificate
of incorporation.
Preferred Stock
- ---------------
The company is also authorized to issue 10 million shares of Preferred
Stock, $0.001 par value.
The Preferred Stock or any series thereof shall have such designations,
preferences and relative, participating, optional or special rights and
qualifications, limitations or restrictions thereof as shall be expressed in the
resolution or resolutions providing for the issue of such stock adopted by the
board of directors and may be made dependent upon facts ascertainable outside
such resolution or resolutions of the board of directors, provided that the
manner in which such facts shall operate upon such designations, preferences,
rights and qualifications, limitations or restrictions of such class or series
of stock is clearly and expressly set forth in the resolution or resolutions
providing for the issuance of such stock by the board of directors.
Series A Preferred Stock. The board of directors, by resolution,
--------------------------
designated a Series A Preferred Stock, consisting of 75,669 shares, each with a
face value of $10, each entitled to receive an $0.80 annual dividend, payable
quarterly from earnings, cumulative if earned but not paid, and preferred over
the Common Stock in the event of the liquidation and dissolution of the company.
All 75,669 shares of the company's authorized Series A Preferred Stock
have been issued, 43,869 to Donald S. Robbins, president, chief executive
officer and director of the company, and 31,800 shares to Gordon W. Allison,
executive vice president, chief financial officer, secretary and a director of
the company.
MARKET FOR COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The company's Common Stock was but is no longer quoted on the OTC
Bulletin Board. Its symbol was "CTUM" until October 1999 at which time the
symbol was changed to "CTUME.OB." The symbol change reflected the fact that the
OTC Bulletin Board would remove the company's stock from its system on November
4, 1999 unless, prior to such date, the company should have entered the
financial statements reporting system of the Securities and Exchange Commission.
On November 4, 1999 our stock was removed from the Bulletin Board.
We filed a registration statement with the Commission that became
effective November 15, 1999. At such time as the Commission's staff has reviewed
the statement and we have amended the statement to satisfy any comments of the
Commission's staff, we will become eligible again to have our common stock
quoted on the OTC Bulletin Board. Until such date when we have amended our
registration statement to satisfy any comments of the
19
<PAGE>
Commission's staff, we anticipate that our common stock will be quoted in the
Pink Sheets of the National Quotation Bureau.
It first traded on April 21, 1998. The range of high and low bid
information for our Common Stock is set forth below. The source of this
information is the OTC Bulletin Board. The quotations reflect inter-dealer
prices without markup, markdown or commissions and may not represent actual
transactions.
<TABLE>
<CAPTION>
High Low
---- ---
1998
----
<S> <C> <C> <C>
2nd Qtr. 2 1.125
3rd Qtr. 1.3125 0.5
4th Qtr. 0.2813 0.1500
1999
----
1st Qtr. 1.6875 0.1500
2nd Qtr. 1.1875 0.5000
3rd Qtr. 1.1250 0.5
</TABLE>
On June 30, 1999, there were 2,918,095 shares of Common Stock
outstanding. There are 850,000 shares subject to outstanding options to
purchase, or securities convertible into, such shares of stock.
Holders
- -------
As of June 30, 1999 there were approximately 84 holders of record of our
Common Stock. Some 850,682 shares of Common Stock are held by numerous other
shareholders in brokerage accounts under the record name of "Cede & Co."
Dividends
- ---------
We have paid no dividends to our common stockholders and do not plan to
pay dividends on our Common Stock in the foreseeable future. We currently intend
to retain any earnings to finance future growth.
20
<PAGE>
LEGAL PROCEEDINGS
Neither the company nor our property is a party to any pending legal
proceeding or any known proceeding that a governmental authority is
contemplating.
CHANGE IN ACCOUNTANTS
We changed our independent accountant after the 1997 fiscal year in an
effort to achieve economies in the overhead of the company. The decision to
change accountants was recommended by our board of directors. The change
occurred in July 1999. The former independent accountant's report on the 1996
and 1997 fiscal years contained no adverse opinion or disclaimer of opinion and
was not modified as to uncertainty, audit scope or accounting principles. There
were no unresolved disagreements on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure which,
if not resolved to the former accountant's satisfaction, would have caused it to
make reference to the subject matter of the disagreement in connection with its
report.
RECENT SALES OF UNREGISTERED SECURITIES
During the past three years our company sold the following securities
without registering the securities under the Securities Act of 1933:
<TABLE>
<CAPTION>
No. of
Common
Shares Offering
Date Sold Price
------ --------- --------
<S> <C> <C> <C>
1997 212,600 $186,950
1998 174,515(1) 39,451
4-6-99 586,862 582,612
--------
$809,013
- ------------------------
</TABLE>
(1) Of these shares, 12,965 shares were issued in June 1998 to Diversified
Marketing Co. in exchange for financial public relations services valued
at $3,000.
The shares were sold pursuant to the exemption from registration
provided by Regulation D, Rule 504. The securities were sold through the efforts
of our officers and also through the NASD broker-dealer firm of Atlantic Pacific
Financial, Inc. A commission of ten percent of the proceeds of sales was paid to
Atlantic Pacific Financial, Inc. for sales made by it. No commissions were paid
with respect to sales made by the officers of the company.
With regard to the above Rule 504 public offering sales, we furnished
each prospective investor with an offering memorandum that described our company
and generally met the disclosure
21
<PAGE>
requirements of Form 1-A of the Securities and Exchange Commission.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under Texas corporation law, a corporation is authorized to indemnify
officers, directors, employees and agents who are made or threatened to be made
parties to any civil, criminal, administrative or investigative suit or
proceeding by reason of the fact that they are or were a director, officer,
employee or agent of the corporation or are or were acting in the same capacity
for another entity at the request of the corporation. Such indemnification
includes expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by such persons if they acted in
good faith and in a manner reasonably believed to be in or not opposed to the
best interests of the corporation or, with respect to any criminal action or
proceeding, if they had no reasonable cause to believe their conduct was
unlawful.
In the case of any action or suit by or in the right of the corporation
against such persons, the corporation is authorized to provide similar
indemnification, provided that, should any such persons be adjudged to be liable
for negligence or misconduct in the performance of duties to the corporation,
the court conducting the proceeding must determine that such persons are
nevertheless fairly and reasonably entitled to indemnification. To the extent
any such persons are successful on the merits in defense of any such action,
suit or proceeding, Texas law provides that they shall be indemnified against
reasonable expenses, including attorney fees.
A corporation is authorized to advance anticipated expenses for such
suits or proceedings upon an undertaking by the person to whom such advance is
made to repay such advances if it is ultimately determined that such person is
not entitled to be indemnified by the corporation.
Indemnification and payment of expenses provided by Texas law are not
deemed exclusive of any other rights by which an officer, director, employee or
agent may seek indemnification or payment of expenses or may be entitled to
under any by-law, agreement, or vote of shareholders or disinterested directors.
In such regard, a Texas corporation is empowered to, and may, purchase and
maintain liability insurance on behalf of any person who is or was a director,
officer, employee or agent of the corporation. As a result of such corporation
law, the company may, at some future time, be legally obligated to pay judgments
(including amounts paid in settlement) and expenses in regard to civil or
criminal suits or proceedings brought against one or more of its officers,
directors, employees or agents.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the company pursuant to the foregoing
22
<PAGE>
provisions or otherwise, the company has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Securities Act of 1933 and is, therefore, unenforceable.
23
<PAGE>
FINANCIAL STATEMENTS
There appears below the following financial statements of the company:
Independent accountant's report
of July 27, 1998 ............................................... F-1
Balance Sheet at December 31, 1997 ................................... F-2
Statements of Operations for the Years Ended
December 31, 1997 and December 31, 1996 ...................... F-4
Statements of Change in Stockholders' Equity
for the Two Years Ended December 31, 1997 ...................... F-5
Statements of Cash Flows for the Years Ended
December 31, 1997 and December 31, 1996......................... F-7
Notes to Financial Statements, December 31, 1997 ....................... F-8
Independent Auditors Report of August 17, 1999 ......................... F-13
Balance Sheet at December 31, 1998 ................................... F-14
Statement of Operations for the Year Ended
December 31, 1998 .............................................. F-16
Statement of Cash Flows for the Year Ended
December 31, 1998 .............................................. F-17
Statement of Changes in Stockholders' Equity
for the Two Years Ended December 31, 1998 ...................... F-18
Notes to Financial Statements, December 31, 1998 ....................... F-20
Balance Sheet (unaudited) at June 30, 1999 ............................. F-26
Statement of Operations for the Six Months Ended
June 30, 1999 and June 30, 1998 ................................ F-28
Statement of Cash Flows for the Six Months Ended
June 30, 1999 and June 30, 1998 ................................ F-29
Notes to Interim Financial Statements,
June 30, 1999 .................................................. F-30
24
<PAGE>
EXHIBITS
Index to Exhibits
Exhibit No. Description
3 - Amended and Restated Articles of Corporation of Consortium
Service Management Group, Inc.*
3.1 - Bylaws of Consortium Service Management Group, Inc.*
10 - Founders' Agreement of United Engineering Company*
10.1 - Statutes (Bylaws) of United Engineering Company*
10.2 - Agreement of April 24, 1996 between Consortium Service
Management Group, Inc. and The L Group, Inc. concerning
tissue bonding technology* (rescinded in January 2000)
10.3 - Agreement of July 9, 1996 between Consortium Service
Management Group, Inc. and International Welding concerning
tissue bonding technology*
10.4 - Agreement among Consortium Service Management Group, Inc.,
United Engineering Company and Ivan V. Semenenko, the
inventor of the anaerobic farm waste technology*
10.5 - Agreement of June 9, 1998 among Consortium Service
Management Group, Inc., The Sumy Frunze Machine Building
Science and Production Association, and United Engineering
Company concerning the anaerobic farm waste technology*
10.6 - Agreement between Consortium Service Management Group, Inc.
and Western Waste Management, Inc. concerning the anaerobic
farm waste technology*
10.7 - Agreement between Consortium Service Management Group, Inc.
and Aardema Dairy concerning the anaerobic farm waste
technology*
25
<PAGE>
10.8 - Agreement between Consortium Service Management Group, Inc.
and John and Ruth Beukers concerning the anaerobic farm
waste technology*
10.9 - Agreement of December 1998 between International Welding
Association of Kiev, Ukraine and Consortium Service
Management Group, Inc. concerning the carbon dioxide
separator technology*
16 - Letter dated January 29, 2000 from Jaak (Jack) Olesk to
Consortium Service Management Group, Inc. Re: Termination
as Auditor
*Previously filed with Form 10-SB; incorporated herein.
26
<PAGE>
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934,
the registrant caused this registration statement to be signed on its behalf by
the undersigned, thereunto duly authorized.
CONSORTIUM SERVICE MANAGEMENT GROUP,
INC.
Date: February 17, 2000 By /s/ Donald S. Robbins
---------------------------------
Donald S. Robbins, President and
Chief Executive Officer
27
<PAGE>
JAAK (JACK) OLESK
Certified Public Accountant
270 North Canon Drive, Suite 203
Beverly Hills, California 90210
(310) 288-0693
INDEPENDENT AUDITOR'S REPORT
To the Shareholders and Board of Directors
Consortium Service Management Group, Inc.
I have audited the accompanying balance sheet of Consortium Service Management
Group, Inc. as of December 31, 1997, and the related statements of operations,
changes in stockholders' equity and cash flows for each of the two years in the
period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. My responsibility is to express an
opinion on these financial statements based on my audits.
I conducted my audits in accordance with generally accepted auditing standards.
Those standards require that I 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.
I believe that my audits provide a reasonable basis for my opinion.
In my opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Consortium Service Management
Group, Inc. as of December 31, 1997 and the results of its operations and its
cash flows for each of the two years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has suffered recurring losses from operations
that raises substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 2. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ Jaak Olesk, CPA
Beverly Hills, California
July 27, 1998
F-1
<PAGE>
Consortium Service Management Group, Inc.
BALANCE SHEET
December 31, 1997
<TABLE>
ASSETS
Current Assets
<S> <C>
Cash $ 9,497
Trade Accounts Receivable 17,800
---------
Total Current Assets 27,297
Fixed Assets
Furniture, Fixtures and Equipment 33,868
Less Accumulated Depreciation (12,621)
---------
Total Fixed Assets 21,247
Other Assets
Accounts Receivable from United
Engineering Company 383,613
Less Valuation Allowance (323,613)
Investment - United Engineering
Company 385,705
Founders Fund 73,843
---------
Total Other Assets 519,548
---------
$ 568,092
=========
</TABLE>
See accompanying notes to financial statements.
F-2
<PAGE>
Consortium Service Management Group, Inc.
BALANCE SHEET(continued)
December 31, 1997
<TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
<S> <C>
Accounts Payable $ 33,174
Accrued Expenses 15,000
Taxes Payable 13,997
Notes Payable to Stockholders 310,905
----------
Total Current Liabilities 373,076
Stockholders' Equity
Preferred stock, $0.001 par value
10,000,000 shares authorized;
75,669 shares issued and
outstanding at December 31, 1997 76
Common stock, $0.001 par value
40,000,000 shares
authorized; 2,096,718 shares issued and
outstanding at December 31, 1997 2,097
Additional paid-in capital 1,042,301
Retained earnings (deficit) (849,458)
---------
Total Stockholders' Equity 195,016
----------
$ 568,092
==========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
Consortium Service Management Group, Inc.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
For the Year
Ended Dec. 31,
1997 1996
---------- ----------
<S> <C> <C>
Revenues $ 299,454 $ 246,197
General costs
and expenses:
General and adminis-
trative expenses 590,888 698,413
---------- ----------
Loss before income
taxes and interest
in income of
unconsolidated
company (291,434) (452,216)
Income taxes - -
---------- ----------
Loss before interest
in income of
unconsolidated company (291,434) (452,216)
Interest in income of
unconsolidated company 259,761 321,403
---------- ----------
NET LOSS $ (31,673) $ (130,813)
========== ==========
Net loss per share
of common stock $ (.02) $ (.07)
========== ==========
Weighted average
common shares
outstanding 2,008,125 1,884,118
========== ==========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
Consortium Service Management Group, Inc.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
For the two year period ended December 31, 1997
<TABLE>
<CAPTION>
Additional Retained
Preferred Stock Common Stock Paid-In earnings
------------------- --------------------
Shares Amount Shares Amount Capital (Deficit) Total
--------- -------- ---------- ------ ---------- --------- --------
Balance, Dec.
<S> <C> <C> <C> <C> <C> <C> <C>
31, 1995 - $ - 1, 884,118 $1,884 $ 832,608 $(686,972) $147,520
Preferred shares
issued for
services on
April 11, 1996 73,958 74 - - 14,958 - 15,032
Preferred
shares
issued for
assets on April
11, 1996 1,711 2 - - 7,998 - 8,000
Net loss for
year ended Dec.
31, 1996 - - - - - (130,813) (130,813)
------ ------ --------- ------ ---------- --------- ---------
Balance, Dec.
31, 1996 75,669 $ 76 1,884,118 $1,884 $ 855,564 $ (817,785) $ 39,739
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
Consortium Service Management Group, Inc.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (continued)
For the two year period ended December 31, 1997
<TABLE>
<CAPTION>
Additional Retained
Preferred Stock Common Stock
----------------- --------------------- Paid-In earnings
Shares Amount Shares Amount Capital (Deficit) Total
--------- ------ --------- ------ ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance, Dec.
31, 1996 75,669 $ 76 1,884,118 $1,884 $ 855,564 $(817,785) $ 39,739
Common shares
issued for cash
during 1997 - - 205,250 205 180,295 - 180,500
Common shares
issued for
services
during 1997 - - 7,350 8 6,442 - 6,450
Net loss for
year ended Dec.
31, 1997 - - - - - (31,673) (31,673)
------ ------ --------- ------ ---------- ------- -------
Balance, Dec.
31, 1997 75,669 $ 76 2,096,718 $2,097 $1,042,301 $(849,458) $ 195,016
====== ====== ========= ====== ========== ========= =========
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
Consortium Service Management Group, Inc.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Year
Ended Dec. 31,
1997 1996
---------- ----------
Cash flows from/(for)
operating activities:
Continuing operations
<S> <C> <C>
(loss) from operations $ (31,673) $(130,813)
Depreciation and amortization 5,927 1,761
Issuance of stock for services 6,450 15,032
Valuation allowance-receivable (129,107) (452,720)
Changes in assets
and liabilities:
Accounts receivable 51,307 (306,110)
Accounts payable (11,660) 44,834
Accrued salaries (180,000) 180,000
Investment-United
Engineering Company (185,918) (199,787)
Other 324,693 154,500
--------- ---------
Net Cash provided (Used) by
operating Activities: (149,981) 212,137
Cash flows from/(for)
investing activities:
Acquisition of fixed assets (23,890) -
Other - (213,134)
Net Cash provided (used) by
investing activities: (23,890) (213,134)
Cash flows from/(for)
financing activities:
Issuance of shares 180,500 -
--------- ---------
Net cash provided by
financing activities: 180,500 -
Net increase (decrease)
in cash 6,629 (997)
Cash at beginning of period 2,868 3,865
--------- ---------
Cash at end of period $ 9,497 $ 2,868
========= =========
Supplemental disclosures:
Cash paid during the
period for:
Interest $ - $ -
========= =========
Income taxes $ - $ -
========= =========
Noncash financing transactions:
Stock for services $ 6,450 $ 15,032
========= =========
Stock for assets $ - $ 8,000
========= =========
</TABLE>
See accompanying notes to financial statements.
F-7
<PAGE>
Consortium Service Management Group, Inc.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
Note 1 - Significant Accounting Policies
Nature of Operations
Consortium Service Management Group, Inc. (the "Company"), a Texas
corporation, was incorporated on November 17, 1992. The planned operations of
the Company are to develop business and investment opportunities in Eastern
Europe, especially Ukraine. The Company is also engaged in the commercialization
of advanced technologies, whereby the Company receives world licensing,
marketing and distribution rights in exchange for technology, commercial
development, marketing and distribution. The Company has successfully placed the
live biological tissue bonding technology with a U.S. manufacturing company and
has contracted for two new medical technologies.
Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company considers all
highly liquid investments with maturities of less than three months to be cash
equivalents.
Revenue Recognition
Income is earned as recognized by contractual agreements. Revenue from
sales of services is recognized when the services are performed and billable.
Furniture, Fixtures and Equipment
Furniture, fixtures and equipment is stated at cost and is depreciated
using the straight - line method over the estimated useful lives of the assets,
primarily five years. Equipment with no continuing value is written off.
Investments in Unconsolidated Companies
Investments in companies in which Consortium Service Management Group,
Inc. has an equity interest of at least 20% but not more than 50% are accounted
for under the equity method. Under this method, the Company records its share of
income or losses as interest in income or losses of unconsolidated companies and
increases or decreases the investment by the equivalent amount.
Foreign Operations
Foreign currency transactions and financial statements are translated
into U.S. dollars in accordance with Statement of Financial Accounting Standards
No. 52 "Foreign Currency Translation". All balance sheet accounts have been
translated using the current exchange rate at the balance sheet date. Income
Statement accounts have been translated using the average exchange rates during
each reporting period. For the periods presented, the Company had no significant
foreign currency transaction gains or losses.
F-8
<PAGE>
Consortium Service Management Group, Inc.
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 1997
Note 1 - Significant Accounting Policies (continued)
Loss Per Share
The computation of loss per share of common stock is based on the
weighted average number of shares outstanding during the periods presented. As
the effect would be antidilutive, warrants outstanding are not included in the
computation. The Company had a net loss in 1997 of $31,673, and, accordingly,
basic and diluted earnings per share are the same, because any dilutive or
potentially dilutive securities would be antidilutive.
Issuance of Shares for Services
Valuation of shares for services is based on the fair market value of
services.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Accounting Pronouncements to be Adopted in 1998
During 1997, the Financial Accounting Standards Board issued the
following Statements of Financial Accounting Standards ("SFAS") that are
effective for periods beginning after December 15, 1997 and will be adopted by
the Company during 1998. The Company does not expect that adoption of these
Standards will have a material effect on its financial position, results of
operations or on disclosures within the financial statements.
(1) SFAS No. 130-"Reporting Comprehensive Income", which establishes standards
for the reporting and display of comprehensive income and its components.
(2) SFAS No. 131-"Disclosures about Segments of an Enterprise and Related
Information", which establishes new standards for reporting information about
operating segments in interim and annual financial statements.
Income Taxes
The Company records its income tax provision in accordance
with Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes". (See Note 3).
Reclassifications
Certain prior year amounts have been reclassified to conform with 1997
classifications.
F-9
<PAGE>
Consortium Service Management Group, Inc.
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 1997
Note 2 - Basis of Presentation and Considerations Related to
Continued Existence (Going Concern)
The Company's financial statements have been presented on the basis that it
is a going concern, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. The Company
incurred net losses of $31,673 and $130,813 for the years ended December 31,
1997 and 1996, respectively. These factors, among others, raise substantial
doubt as to the Company's ability to obtain debt and/or equity financing and
achieve profitable operations.
The Company's management intends to raise additional operating funds
through equity and/or debt offerings and the sale of technologies. However,
there can be no assurance management will be successful in its endeavors. If the
Company is unable to obtain additional funds through equity offerings, debt
offerings or sales of technologies, there is substantial doubt about the
Company's ability to continue as a going concern.
Note 3 - Income Taxes
The Company records its income tax provision in accordance with
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" which requires the use of the liability method of accounting for deferred
income taxes.
Since the Company has not generated taxable income since inception, no
provision for income taxes has been provided. At December 31, 1997, the Company
did not have any significant tax net operating loss carryforwards (tax benefits
resulting from losses for tax purposes have been fully reserved due to the
uncertainty of a going concern). At December 31, 1997, the Company did not have
any significant deferred tax liabilities or deferred tax assets. At December 31,
1995 the net operating loss carryforward was $686,922 and at December 31, 1996
the net operating loss carryforward was $817,785.
Note 4 - Warrants Outstanding
In 1997, pursuant to an offering made in reliance upon an exemption from
registration provided by Regulation D, Rule 504 of the Securities and Exchange
Commission, the Company sold shares of common stock and stock purchase warrants.
Approximately $180,500 was raised.
Each warrant entitles the holder to purchase one share of the Company's
common stock for $2.00. The warrants expire September 15, 1998. The Company can
call in the warrants on fifteen days notice, if not exercised by the holder
prior to the expiration of
F-10
<PAGE>
Consortium Service Management Group, Inc.
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 1997
the fifteen day notice period, should the Company's common stock trade at or
above a $2.50 reported closing bid or trade price for ten consecutive trading
days. At December 31, 1997 the Company had 361,000 warrants outstanding.
Note 5 - Preferred Stock/Common Stock Split/Stock Options
On April 11, 1996 the Company amended its Articles of Incorporation. The
effects of the amendments were as follows:
The authorized capital was increased to 40 million shares of common
stock, par value $0.001, and 10 million shares of Preferred Stock were
authorized, of which Preferred Stock, a Series A Preferred Stock was designated
which consists of 75,669 shares, each with a $10 face amount entitled to an
annual, cumulative dividend from the net profits of the Company equal to 8% of
the face amount, redeemable out of otherwise undistributed net profits of the
Company, and preferred over the common stock in the event of the liquidation and
dissolution of the Company to the extent of its unredeemed face amount and
accumulated unpaid dividends (the face amount of $10 is solely for dividend
calculation, and liquidation and dissolution calculation; for accounting
purposes the par value is $0.001). On April 11, 1996 the Company issued the
Series A Preferred Stock shares to the following persons:
Person No. of Shares
- ------------------------------------ -------------
Donald S. Robbins
(President/CEO and Director) 43,869
Gordon W. Allison
(Executive Vice President, Secretary
and Director) 31,800
75,669
========
Consideration for the preferred stock issuance consisted of
preincorporation costs, office furniture, vehicle and services rendered to the
Company. The preferred stock dividends payable at the 8 percent rate are not
accruable if the Company doesn't realize any net profits.
Incidental to the Company's amendment to its Articles of Incorporation
filed April 11, 1996, each previously issued share of Common Stock of the
Company was exchanged for 25 new shares of Common Stock of the Company in a
stock split. Common stock amounts shown for previous years have been restated to
reflect this split.
F-11
<PAGE>
Consortium Service Management Group, Inc.
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 1997
150,000 shares of the Company's common stock is issuable to each of
Messrs. Robbins and Allison (300,000 shares total) pursuant to stock options.
Each option expires March 31, 2001, and is exercisable at $1 a share.
Note 6 - Investment - United Engineering Company
At December 31, 1997 the Company was a 50% owner of United Engineering
Company ("UEC"), a Ukraine - U.S. joint stock company registered under the laws
of Ukraine. The other 50% of UEC's equity was owned by eight Ukraine
organizations representing fourteen Ukraine organizations, three of which
represent the State Property Fund of Ukraine. All UEC decisions require a 75%
shareholder vote. UEC is a Ukraine joint stock company with foreign investment,
the Company being the foreign investor, and holds a Ukraine license to perform
classified and secret construction works relating to projects that are in the
Ukraine national security sector. For the year ended December 31, 1997 UEC had
revenues of approximately $2,000,000 and a net income of approximately $520,000.
At December 31, 1997 UEC had approximately $890,000 in assets and approximately
$45,000 in liabilities. For the year ended December 31, 1997 the Company had an
interest of $259,761 in the income of UEC.
A portion of Investment- United Engineering Company is shown as Founders
Fund. This represents a liquidation priority.
Note 7 - Change in Accounting Estimate
During 1997, the President/CEO and the Executive Vice President (both of
whom are also significant stockholders) elected not to try and collect back
salaries from the Company (thus estimating they were due zero). At December 31,
1996 it had been estimated that these two officers together were owed
approximately $180,000 in salaries for approximately the three years ended
December 31, 1996.
The above change was recorded by the Company as a change in accounting
estimate. A change in an accounting estimate is not accounted for by restating
prior years' financial statements or by including the cumulative effect of the
change in income. This change in accounting estimate does not affect future
periods.
Note 8 - Notes Payable to Stockholders
These notes consist of short-term (generally one year) unsecured notes
with maturities at varying dates. Primarily, the interest rate is 11%. There was
no significant interest payable at December 31, 1997.
F-12
<PAGE>
INDEPENDENT AUDITORS REPORT
To the Shareholders and Board of Directors
Consortium Service Management Group, Inc.
I have audited the accompanying balance sheet of Consortium Service Management
Group, Inc. as of December 31, 1998, and the related statements of operations,
changes in stockholders' equity and cash flows for the year then ended. These
financial statements are the responsibility of the company's management. My
responsibility is to express an opinion on these financial statements based on
my audit.
I conducted my audit in accordance with generally accepted auditing standards.
Those standards require that I 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.
I believe that my audit provides a reasonable basis for my opinion.
In my opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Consortium Service Management
Group, Inc. as of December 31, 1998, and the results of its operations and cash
flows for the year then ended, in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has suffered recurring losses from operations
that raises substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 2. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
Oklahoma City, Oklahoma By: /s/ Gary Skibicki
January 7, 2000 Gary Skibicki
Certified Public Accountant
F-13
<PAGE>
CONSORTIUM SERVICE MANAGEMENT GROUP, INC.
BALANCE SHEET
as of December 31, 1998
ASSETS
<TABLE>
CURRENT ASSETS
<S> <C>
Cash $50,179
Trade Accounts Receivable 17,800
Note Receivable 600
-------
Total Current Assets $68,579
FIXED ASSETS
Furniture, Fixtures & Equipment 58,518
Less: Accum. Depr. (20,331)
-------
Total Fixed Assets 38,187
OTHER ASSETS
Accounts Receivable from
United Engineering Company 383,613
Less: Allowance Doubtful
Accounts (323,613)
Investment - United
Engineering Company 522,014
Founders Fund 73,843
-------
Total Other Assets 655,857
-------
Total Assets $762,623
========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
F-14
<PAGE>
CONSORTIUM SERVICE MANAGEMENT GROUP, INC.
BALANCE SHEET (Continued)
December 31, 1998
LIABILITIES
<TABLE>
CURRENT LIABILITIES
<S> <C>
Accounts Payable $15,620
Taxes Payable 13,355
Notes Payable to Stockholders 685,430
Interest Payable 22,904
---------
Total Current Liabilities $737,309
---------
STOCKHOLDERS EQUITY
Preferred Stock, $.001 Par 76
Value, 10000000 Shares
Authorized; 75,669 Shares
Issued and Outstanding
at December 31, 1998
Common Stock $.001 Par Value, 2,271
40,000,000 Shares Authorized;
2,271,233 Shares Issued and Outstanding
at December 31, 1998
Additional Paid in Capital 1,453,561
Retained Earnings 1/1/98 $(1,029,459)
Current Year Income (309,178)
Foreign Exchange Loss (91,957)
Retained Earnings 12/31/98 (1,430,594)
---------
Total Stockholders Equity 25,314
---------
Total Liabilities and Stockholders Equity $762,623
=========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
F-15
<PAGE>
CONSORTIUM SERVICE MANAGEMENT GROUP, INC.
STATEMENT OF OPERATIONS
JANUARY 1, 1998 - DECEMBER 31, 1998
Revenues 278,929
Cost of Goods Sold 246,242
Gross Profit 32,687
General and Administrative Expenses 584,791
Operating Income (552,104)
Interest in Income of Unconsolidated Company 230,932
Gain on Asset Exchange 11,994
Foreign Currency Loss (91,957)
Income from Continuing Operations (401,135)
Income Taxes -0-
Net Loss (401,135)
Net Loss Per Share of Common Stock $( .19)
Weighted Average Common Shares Outstanding 2,111,261 Shares
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
F-16
<PAGE>
CONSORTIUM SERVICES MANAGEMENT GROUP, INC.
STATEMENT OF CASH FLOWS
JANUARY 1, 1998 - DECEMBER 31, 1998
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss (401,135)
Dividends From Investee 2,666
Depreciation 7,710
Decrease Accounts Payable (10,292)
and Accrued Expenses
Foreign Exchange Loss 91,957
Equity Income From Investee (230,932)
Interest 95,225
Compensation for Common Stock 191,983
-------
Net Cash Used in Operating
Activities (252,818)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase Equipment (24,650)
Increase Note Receivable (600)
-------
Cash Used From Investing Activities (25,250)
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase Shareholder Loans 288,750
Increase in Stock Issue 30,000
-------
Increase Cash From 318,750
Financing Activities
Net Increase in Cash 40,682
Cash at Beginning of Period 9,497
Cash at End of Period 50,179
Non Cash Financing Activities
Shareholder Note Payable
Added to Paid in Capital 9,450
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
F-17
<PAGE>
Consortium Service Management Group, Inc.
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
NOTE 1
SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Consortium Service Management Group, Inc. (the "Company"), a Texas corporation,
was incorporated on November 17, 1992. The planned operations of the Company are
to develop business and investment opportunities in Eastern Europe, especially
Ukraine. The Company is also engaged in the commercialization of advanced
technologies, whereby the Company receives world licensing, marketing and
distribution rights in exchange for technology, commercial development,
marketing and distribution. The Company has successfully placed the live
biological tissue bonding technology with a U.S. manufacturing company which has
not received FDA approval and has contracted for two new medical technologies.
The live tissue bonding agreement exists with the L Group in Louisville, KY.,
where they provide funding to test, patent, market, manufacture, distribute and
license tissue bonding technology. An additional agreement exists with
International Association Welding in Kiev, Ukraine, which specifies funding that
CSMG, Inc. provides to them. Specifically, the L Group pays CSMG, Inc. $5,000
per month to support an office in Ukraine and pay travel costs. The L Group also
pays CSMG, Inc. $16,217 of which $15,187 is paid to International Association of
Welding. The agreement with the L Group is dated April 24, 1996 and
automatically renews annually unless terminated by the L Group.
CSMG entered into a three year agreement on October 21, 1997 with Paton, a
Ukrainian Academy of Science Research Institute in Kiev, Ukraine, and
International Association Welding also in Ukraine, to fund development of
Medical procedures to remove kidney stones and dilate blood vessels for
cardiovascular stints. The terms of this agreement are that CSMG will locate and
arrange grants for Paton to develop and test these new technologies. In return
Paton and International Association Welding agreed to assign CSMG exclusive
rights for the USA and West European countries to patent, license, market,
manufacture and distribute this technology sharing with CSMG on a 50/50 basis
revenues these rights earn.
The Company does not internally separate financial information including results
of operations by segments such as geographic areas, products, major customers or
operating segments. With the major component of income being from United
Engineering Company's earnings management considers it impractical to further
segment financial information.
F-20
<PAGE>
Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company considers all highly
liquid investments with maturities of less than three months to be cash
equivalents.
Revenue Recognition
Income is recognized as earned by the foreign investee using the equity method
of accounting. Other revenue and specifically revenue from the L Group is earned
by contractual agreement and recognized when deposited. The terms of the
contract are the L Group pays CSMG $5,000 per month to maintain an office in the
Ukraine and pay travel costs. The L Group also pays CSMG $16,217 per month for
research costs and each of these revenues are recognized when deposited into
corporate bank accounts.
Furniture, Fixtures and Equipment
Furniture, fixtures and equipment is stated at cost and is depreciated using the
straight - line method over the estimated useful lives of the assets, primarily
five years. Equipment with no continuing value is written off.
Investments in Unconsolidated Companies
Investments in companies in which Consortium Service Management Group, Inc. has
an equity interest of at least 20% but not more than 50% are accounted for under
the equity method. Under this method, the Company records its share of income or
losses as interest in income or losses of unconsolidated companies and increases
or decreases the investment by the equivalent amount.
Foreign Operations
Foreign currency transactions and financial statements are translated into U.S.
dollars in accordance with Statement of Financial Accounting Standard No. 52
"Foreign Currency Translation". All balance sheet accounts have been translated
using the current exchange rate at the balance sheet date. Income Statement
accounts have been translated using the average exchange rates during the year.
The Company owns a 50% interest in United Engineering Company which was
organized in and operates in the Ukraine. The average exchange rate used to
record income was .41542 functional currency to U.S. dollars and the year end
exchange rate used was .250 to value the United Engineering investment.
Loss Per Share
The computation of loss per share of common stock is based on the weighted
average number of shares outstanding during the period presented. As the effect
would be antidilutive, warrants outstanding are not included in the computation.
F-21
<PAGE>
Issuance of Shares for Services
Valuation of shares for services is based on the fair market value of services.
During 1998 the Company issued 174,515 shares of common stock in exchange for
management, marketing and research services. The cost of the services has been
charged to operations, and additional paid in capital has been increased by
$191,809, representing the excess of the cost of the services over the par value
of the common stock issued.
Preferred Stock
On December 28, 1995 the Company authorized the issuance of 75,669 shares of
Series A preferred stock, 10.00 face amount, .001 Par which pays a cumulative
dividend of net corporate profit equal to 8% of the face amount of the
outstanding stock. Such preferred Series A stock is preferred over all common
stock in the event of corporate liquidation and dissolution to the extent of its
unredeemed face amount.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
Accounting Pronouncements Adopted in 1998
During 1997, the Financial Accounting Standards Board issued the following
Statements of Financial Accounting Standards ("SFAS") effective for periods
beginning after December 15, 1997 and adopted by the Company during 1998.
Adoption of these Standards did not have a material effect on its financial
position, results of operations or on disclosures within the financial
statements.
(1) SFAS No. 130 - "Reporting Comprehensive Income", established standards for
the reporting and display of comprehensive income and its components.
(2) SFAS No. 131 - "Disclosures about Segments of an Enterprise and Related
Information", established new standards for reporting information about
operating segments in interim and annual financial statements.
Income Taxes
The Company records its income tax provision in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes".
(See Note 3).
F-22
<PAGE>
Consortium Service Management Group, Inc.
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 1998
NOTE 2
BASIS OF PRESENTATION AND CONSIDERATIONS RELATED
TO CONTINUED EXISTENCE (GOING CONCERN)
The Company's financial statements have been presented on the basis that it is a
going concern, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business. The Company incurred a net loss
of $401,135 for the year ended December 31, 1998 and this factor combined with
prior year net losses, raises substantial doubt as to the Company's ability to
continue as a going concern.
The Company's management intends to raise additional operating funds through
equity and/or debt offerings and the sale of technologies. However, there can be
no assurance management will be successful in its endeavors. The possible
consequences of not obtaining additional funds either through equity offerings,
debt offerings or sale of technologies is that there will not be sufficient
money to fund the capital projects required to earn long term planned revenues
of the company. A major component of planned future operations involves the
construction of animal waste and disposal facilities for either sale and or
lease and these undertakings are only possible from outside financing.
NOTE 3
INCOME TAXES
The Company records its income tax provision in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" which
requires the use of the liability method of accounting for deferred income
taxes.
Since the Company has not generated taxable income since inception, no provision
for income taxes has been provided. At December 31, 1997 the net operating loss
carryforward was $1,012,798 and at the end of 1998 the net operating loss
carryforward was $1,265,642.
NOTE 4
WARRANTS OUTSTANDING
In 1998, pursuant to an offering made in reliance upon an exemption from
registration provided by Regulation D, Rule 504 of the Securities and Exchange
Commission, the Company offered for sale 400,000 shares of common stock units
(warrant shares) at $2.00 a share. Each unit consisted of one share of common
stock and four warrants that were originally scheduled to expire June 30, 1998.
These warrants were extended to April 6, 1999 at which time 42,500 were
converted to 42,500 shares of common stock at $1.00 per share with the remaining
warrants expiring. Additionally and also on April 6, 1999, the Company issued
177,400 common stock shares at $1.00 par for notes receivable with the stock
certificates held by the Company as collateral.
F-23
<PAGE>
Consortium Service Management Group, Inc.
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 1998
NOTE 5
INVESTMENT - UNITED ENGINEERING COMPANY
At December 31, 1998 the Company was a 50% owner of United Engineering Company
("UEC"), a Ukraine - U.S. joint stock company registered under the laws of
Ukraine. The other 50% of UEC's equity was owned by eight Ukraine organizations
representing fourteen Ukraine organizations, three of which represent the State
Property Fund of Ukraine. All UEC decisions require a 75% shareholder vote. UEC
is a Ukraine joint stock company with foreign investment, the Company being the
foreign investor, and holds a Ukraine license to perform classified and secret
construction works relating to projects that are in the Ukraine national
security sector. For the year ended December 31, 1998 UEC had revenues of
$1,688,599 and a net income of $461,864. At December 31, 1998 UEC had $610,175
in assets and $64,750 in liabilities. For the year ended December 31, 1998 the
Company had an interest of $230,931 in the income of UEC.
A portion of Investment - United Engineering Company is shown as Founders Fund.
This represents a liquidation priority. In 1994 the company made its original
investment in United Engineering Company which included contributing $73,843 in
autos, equipment and furniture. The agreement between the company and UEC was
that in the event of UEC liquidating, $73,843 would be repaid in preference to
all creditors. As an incentive to encourage foreign investment the Ukraine
government has guaranteed repayment if upon liquidation UEC has insufficient
funds to make the repayment.
NOTE 6
NOTES PAYABLE TO STOCKHOLDERS
These notes consist of short-term (generally one year) unsecured notes with
maturities at varying dates. Primarily, the interest rate is 11%. At year end
interest payable was $22,904. During the first four months of 1999 $296,374 of
notes were exchanged for common stock.
NOTE 7
RETAINED EARNINGS
Retained earnings at the beginning of 1998 has been decreased by $180,000 for
unpaid officer compensation for 1994, 1995 and 1996. Paid-in capital has been
increased by $180,000. The gross effect on net losses through 1996 is that
cumulative losses are increased by $180,000 and (loss) per share for each of the
three years is increased as follows:
F-24
<PAGE>
<TABLE>
Weighted Average Increased Loss Per
Common Shares Outstanding Loss Share
------------------------- --------- --------
<S> <C> <C> <C>
1994 1,592,362 60,000 (.04)
1995 1,853,390 60,000 (.03)
1996 1,884,118 60,000 (.03)
</TABLE>
F-25
<PAGE>
CONSORTIUM SERVICE MANAGEMENT GROUP, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE TWO YEAR PERIOD ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
DEFICIT ACCUMULATED
NO. PREFERRED PAR NO. COMMON PAR ADDITIONAL DURING DEVELOPMENT
DESCRIPTION SHARES VALUE SHARES(ea) VALUE PAID IN CAPITAL STAGE TOTAL
- ----------------------------------------------------------------------------------------------------------------------------
Common Shares Issued for
<S> <C> <C> <C> <C> <C> <C> <C>
Services at Inception 1260000 $1260 $49140 $50400
Nov. 19, 1992
Net Loss Year Ended 12/31/92 $( 23882) (23882)
--------- ---------- ---------- ---------- ---------- ---------- --------
Balance December 31, 1992 1260000 $1260 $49140 ( 23882) $26518
Common Shares Issued for
Cash During 1993 102063 102 134898 135000
Net Loss Year Ended 12/31/93 (119408) (119408)
--------- ---------- --------- ---------- ---------- ---------- --------
Balance December 31, 1993 1362063 1362 184038 (143290) 42110
Common Shares Issued for
Cash During 1994 320848 320 543182 543502
Common Shares Issued for
Services During 1994 139750 140 5450 5590
Net Loss Year Ended 12/31/94 (288402) (288402)
--------- ----------- --------- ---------- ---------- ---------- --------
Balance December 31, 1994 1822661 1822 732670 (431692) 302800
Common Shares Issued for
Cash During 1995 61457 62 99938 100000
Net Loss Year Ended 12/31/95 (255280) (255280)
--------- ----------- --------- ---------- ---------- ---------- --------
Balance December 31, 1995 1884118 1884 832608 (686972) 147520
Preferred Shares Issued for
Services on April 11, 1996 73958 $74 14958 15032
Preferred Shares Issued
For Asset on April 11, 1996 1711 2 7998 8000
Net Loss Year Ended 12/31/96 (130813) (130813)
--------- ---------- --------- ---------- ---------- --------- --------
Balance December 31, 1996 75669 76 1884118 1884 855564 (817785) 39739
Common Shares Issued for
Cash During 1997 205250 205 180295 180500
Common Shares Issued for
Services During 1997 7350 8 6442 6450
Net Loss Year Ended 12/31/97 (31673) (31673)
--------- ---------- ---------- ---------- ---------- --------- --------
Balance December 31, 1997 75669 $76 2096718 $2097 $1042301 $(849458) $195016
</TABLE>
F-18
<PAGE>
CONSORTIUM SERVICE MANAGEMENT GROUP, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE TWO YEAR PERIOD ENDED DECEMBER 31, 1998
(Continued)
<TABLE>
<CAPTION>
DEFICIT ACCUMULATED
NO. PREFERRED PAR NO. COMMON PAR ADDITIONAL DURING DEVELOPMENT
DESCRIPTION SHARES VALUE SHARES(ea) VALUE PAID IN CAPITAL STAGE TOTAL
- ------------------------------------------------------------------------------------------------------------------------------
Additional Paid-In
<S> <C> <C> <C> <C> <C> <C> <C>
Capital $39,451 $ 39,451
Common Shares Issued for
Services During 1998 174515 174 191,809 191,983
Net Loss Year Ended
12/31/98 $ (401,136) (401,136)
----------- ---------- --------- --------- ---------- ------------ ----------
Balance December 31, 1998 76669 $76 2271233 $2271 $1,453,561 $(1,430,594) $ 25,314
</TABLE>
F-19
<PAGE>
CONSORTIUM SERVICE MANAGEMENT GROUP, INC.
Interim Balance Sheet
June 30, 1999
<TABLE>
<CAPTION>
06-30-99 12-31-98
Unaudited Audited
--------- --------
CURRENT ASSETS
<S> <C> <C>
Cash $ (981) $ 50,179
Trade Account Receivable 17,800 17,800
Notes Receivable - Current 178,000 600
-------- --------
Total Current Assets $196,504 $ 68,579
FIXED ASSETS
Furniture, Fixtures and Equipment $ 58,518 $ 58,518
Accumulated Depreciation (20,331) (20,331)
-------- --------
Total Property and Equipment $ 38,187 $ 38,187
OTHER ASSETS
UEC Founders Fund $ 73,843 $ 73,843
Account Receivable - UEC 383,613 383,613
Account Receivable - Other 2,474 -
Allowance for Doubtful Accounts (323,613) (323,613)
Investment - UEC 522,014 522,014
Employee Advances 26,065 -
-------- --------
Total Other Assets $684,396 $655,857
-------- --------
Total Assets $917,402 $762,623
</TABLE>
======== ========
F-26
<PAGE>
CONSORTIUM SERVICE MANAGEMENT GROUP, INC.
Balance Sheet (Continued)
June 30, 1999
<TABLE>
<CAPTION>
06-30-99 12-31-98
Unaudited Audited
--------- --------
CURRENT LIABILITIES
<S> <C> <C>
Accounts Payable $ 6,500 $ 15,620
Taxes Payable 12,852 13,355
Notes Payable to Stockholders 400,225 685,430
Interest Payable 22,904 22,904
Other Current Liabilities 25,000 -
---------- ---------
Total Current Liabilities $ 467,481 $ 737,309
STOCKHOLDERS EQUITY
Preferred Stock $0.001 Par Value $ 76 $ 76
10,000,000 Shares Authorized
75,669 issued and outstanding
Common Stock $0.001 Par Value 2,918 2,271
40,000,000 Shares Authorized
2,918,095 issued and outstanding
Additional Paid-In Capital 1,978,308 1,453,561
Retained Earnings (1,430,594) (1,430,594)
Current Year Earnings (100,787)
---------- ---------
Total Stockholders Equity $ 449,921 25,314
---------- ---------
Total Liabilities and
Stockholders Equity $ 917,402 $ 762,623
========== =========
</TABLE>
F-27
<PAGE>
CONSORTIUM SERVICE MANAGEMENT GROUP, INC.
Statement of Operations
For the Six Months Ending June 30, 1999 and June 30, 1998
<TABLE>
<CAPTION>
06-30-99 06-30-98
-------- --------
<S> <C> <C>
Revenues $ 29,616 $130,013
Cost of Goods Sold 33,902 92,332
--------- --------
Gross Profit (4,287) 37,681
General and Administrative Expenses 96,501 98,378
--------- --------
Operating Income (100,787) (60,697)
--------- --------
Income Taxes 0 0
--------- --------
Net Gain or (Loss) $(100,787)
$(60,697)
Net Loss per Share of Common Stock (.035) (.021)
2,918,095 shares outstanding
</TABLE>
F-28
<PAGE>
CONSORTIUM SERVICE MANAGEMENT GROUP, INC.
Statement of Cash Flows
For the Six Months Ending June 30, 1999 and June 30, 1998
<TABLE>
<CAPTION>
06-30-99 06-30-98
-------- --------
Cash Flows from Operating Activities
<S> <C> <C>
Net Income $(100,787) $ (60,697)
Accounts Receivable - (60,762)
Employee Advances (26,065) (24,200)
Accounts Payable (9,120) (28,060)
Accrued Interest 0 (15,000)
Payroll Taxes Payable (502) (5,761)
Notes Receivable-Current (177,400) (600)
Other Current Liabilities 24,210 (33,335)
--------- ---------
Net Cash Used in Operations $(289,664) $(172,295)
--------- ---------
Cash Flows from Investing Activities
Investment in UEC $ 0 $ 73,843
Equipment 0 (18,000)
---------- ---------
Net Cash Used in Investing $ 0 $ 55,843
---------- ---------
Cash Flows from Financing Activities
Common Stock $ 647 $ 0
Preferred Stock 0 76
Increase in Paid-in Capital 524,747 7,118
Decrease in Notes Payable (285,205) 0
---------- ---------
Net Cash Used in Financing $ 240,189 $ 105,944
---------- ---------
Net Increase (Decrease) in Cash $ (49,475) $ (10,508)
========= =========
Cash Balance at End of Period $ 703 $ (65)
Cash Balance at Beginning of Period (50,179) 10,444
--------- ---------
Net Increase (Decrease) in Cash $ (49,475) $ (10,508)
========= =========
</TABLE>
F-29
<PAGE>
Consortium Service Management Group, Inc.
NOTES TO INTERIM FINANCIAL STATEMENTS
June 30, 1999
NOTE 1
SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Consortium Service Management Group, Inc. (the "Company"), a Texas corporation,
was incorporated on November 17, 1992. The planned operations of the Company are
to develop business and investment opportunities in Eastern Europe, especially
Ukraine. The Company is also engaged in the commercialization of advanced
technologies, whereby the Company receives world licensing, marketing and
distribution rights in exchange for technology, commercial development,
marketing and distribution. The Company has successfully placed the live
biological tissue bonding technology with a U.S. manufacturing company which has
not received FDA approval and has contracted for two new medical technologies.
The live tissue bonding agreement exists with the L Group in Louisville, KY.,
where they provide funding to test, patent, market, manufacture, distribute and
license tissue bonding technology. An additional agreement exists with
International Association Welding in Kiev, Ukraine, which specifies funding that
CSMG, Inc. provides to them. Specifically, the L Group pays CSMG, Inc. $5,000
per month to support an office in Ukraine and pay travel costs. The L Group also
pays CSMG, Inc. $16,217 of which $15,187 is paid to International Association of
Welding. The agreement with the L Group is dated April 24, 1996 and
automatically renews annually unless terminated by the L Group.
CSMG entered into a three year agreement on October 21, 1997 with Paton, a
Ukrainian Academy of Science Research Institute in Kiev, Ukraine, and
International Association Welding also in Ukraine, to fund development of
Medical procedures to remove kidney stones and dilate blood vessels for
cardiovascular stints. The terms of this agreement are that CSMG will locate and
arrange grants for Paton to develop and test these new technologies. In return
Paton and International Association Welding agreed to assign CSMG exclusive
rights for the USA and West European countries to patent, license, market,
manufacture and distribute this technology sharing with CSMG on a 50/50 basis
revenues these rights earn.
The Company does not internally separate financial information including results
of operations by segments such as geographic areas, products, major customers or
operating segments. With the major component of income being from United
Engineering Company's earnings management considers it impractical to further
segment financial information.
F-30
<PAGE>
Consortium Service Management Group, Inc.
NOTES TO INTERIM FINANCIAL STATEMENTS (continued)
June 30, 1999
Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company considers all highly
liquid investments with maturities of less than three months to be cash
equivalents.
Revenue Recognition
Income is recognized as earned by the foreign investee using the equity method
of accounting. Other revenue and specifically revenue from the L Group is earned
by contractual agreement and recognized when deposited. The terms of the
contract are the L Group pays CSMG $5,000 per month to maintain an office in the
Ukraine and pay travel costs. The L Group also pays CSMG $16,217 per month for
research costs and each of these revenues are recognized when deposited into
corporate bank accounts.
Furniture, Fixtures and Equipment
Furniture, fixtures and equipment is stated at cost and is depreciated using the
straight - line method over the estimated useful lives of the assets, primarily
five years. Equipment with no continuing value is written off.
Investments in Unconsolidated Companies
Investments in companies in which Consortium Service Management Group, Inc. has
an equity interest of at least 20% but not more than 50% are accounted for under
the equity method. Under this method, the Company records its share of income or
losses as interest in income or losses of unconsolidated companies and increases
or decreases the investment by the equivalent amount.
Foreign Operations
Foreign currency transactions and financial statements are translated into U.S.
dollars in accordance with Statement of Financial Accounting Standards No. 52
"Foreign Currency Translation". All balance sheet accounts have been translated
using the current exchange rate at the balance sheet date. Income Statement
accounts have been translated using the average exchange rates during the year.
The Company owns a 50% interest in United Engineering Company which was
organized in and operates in the Ukraine.
F-31
<PAGE>
Consortium Service Management Group, Inc.
NOTES TO INTERIM FINANCIAL STATEMENTS (continued)
June 30, 1999
Loss Per Share
The computation of loss per share of common stock is based on the weighted
average number of shares outstanding during the period presented. As the effect
would be antidilutive, warrants outstanding are not included in the computation.
The Company had a net loss for the first six months of 1999 of $100,787;
accordingly, basic and diluted earnings per share are the same because any
dilutive or potentially dilutive securities would be antidilutive.
Preferred Stock
On December 28, 1995 the Company authorized the issuance of 75,669 shares of
Series A preferred stock, 10.00 face amount, .001 Par which pays a cumulative
dividend of net corporate profit equal to 8% of the face amount of the
outstanding stock. Such preferred Series A stock is preferred over all common
stock in the event of corporate liquidation and dissolution to the extent of its
unredeemed face amount.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
Accounting Pronouncements Adopted in 1998
During 1997, the Financial Accounting Standards Board issued the following
Statements of Financial Accounting Standards ("SFAS") effective for periods
beginning after December 15, 1997 and adopted by the Company during 1998.
Adoption of these Standards did not have a material effect on its financial
position, results of operations or on disclosures within the financial
statements.
(1) SFAS No. 130 - "Reporting Comprehensive Income", established standards for
the reporting and display of comprehensive income and its components.
(2) SFAS No. 131 - "Disclosures about Segments of an Enterprise and Related
Information", established new standards for reporting information about
operating segments in interim and annual financial statements.
F-32
<PAGE>
Consortium Service Management Group, Inc.
NOTES TO INTERIM FINANCIAL STATEMENTS (continued)
June 30, 1999
Income Taxes
The Company records its income tax provision in accordance with
Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes". (See Note 3).
NOTE 2
BASIS OF PRESENTATION AND CONSIDERATIONS RELATED
TO CONTINUED EXISTENCE (GOING CONCERN)
The Company's financial statements have been presented on the basis that it is a
going concern, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business. The Company incurred a net loss
of $100,787 for the six months ended June 30, 1999 and this factor, combined
with prior year net losses, raises substantial doubt as to the Company's ability
to obtain debt or equity financing and achieve profitable operations.
The Company's management intends to raise additional operating funds through
equity and/or debt offerings and the sale of technologies. However, there can be
no assurance management will be successful in its endeavors. The possible
consequences of not obtaining additional funds either through equity offerings,
debt offerings or sale of technologies is that there will not be sufficient
money to fund the capital projects required to earn long term planned revenues
of the company. A major component of planned future operations involves the
construction of animal waste and disposal facilities for either sale and or
lease and these undertakings are only possible from outside financing. The
possible consequences of not obtaining additional financing are the cessation of
current and planned operations, resulting in a liquidation of the Company.
NOTE 3
INCOME TAXES
The Company records its income tax provision in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" which
requires the use of the liability method of
accounting for deferred income taxes.
Since the Company has not generated taxable income since inception, no provision
for income taxes has been provided. At June 30, 1999 the net operating loss
carryforward was $1,531,381.
F-33
<PAGE>
Consortium Service Management Group, Inc.
NOTES TO INTERIM FINANCIAL STATEMENTS (continued)
June 30, 1999
NOTE 4
WARRANTS OUTSTANDING
In 1998, pursuant to an offering made in reliance upon an exemption from
registration provided by Regulation D, Rule 504 of the Securities and Exchange
Commission, the Company offered for sale 400,000 shares of common stock units
(warrant shares) at $2.00 a share. Each unit consisted of one share of common
stock and four warrants that were originally scheduled to expire June 30, 1998.
These warrants were extended to April 6, 1999 at which time 42,500 were
converted to 42,500 shares of common stock at $1.00 per share with the remaining
warrants expiring. Additionally and also on April 6, 1999, the Company issued
177,400 common stock shares at $1.00 par for notes receivable with the stock
certificates held by the Company as collateral.
NOTE 5
INVESTMENT - UNITED ENGINEERING COMPANY
The Company is a 50% owner of United Engineering Company ("UEC"), a Ukraine -
U.S. joint stock company registered under the laws of Ukraine. The other 50% of
UEC's equity is owned by eight Ukraine organizations representing fourteen
Ukraine organizations, three of which represent the State Property Fund of
Ukraine. All UEC decisions require a 75% shareholder vote. UEC is a Ukraine
"joint stock company with foreign investment," the Company being the foreign
investor, and holds a Ukraine license to perform classified and secret
construction works relating to projects that are in the Ukraine national
security sector.
A portion of Investment - United Engineering Company is shown as Founders Fund.
This represents a liquidation priority. In 1994 the company made its original
investment in United Engineering Company, which included contributing $73,843 in
autos, equipment and furniture. The agreement between the company and UEC was
that in the event of UEC's liquidating, $73,843 would be repaid in preference to
all creditors. As an incentive to encourage foreign investment the Ukraine
government has guaranteed repayment if upon liquidation UEC has insufficient
funds to make the repayment.
NOTE 6
NOTES PAYABLE TO STOCKHOLDERS
These notes consist of short-term (generally one year) unsecured notes with
maturities at varying dates. Primarily, the interest rate is 11%. At year end
interest payable was $22,904. During the first four months of 1999 $296,374 of
notes were exchanged for common stock.
F-34
