SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
AMENDMENT NO. 1 TO FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report: July 7, 1999
(Date of earliest event reported)
NETWOLVES CORPORATION
(Exact name of registrant as specified in its charter)
New York 000-25831 11-3439392
(State or other (Commission (IRS Employer
jurisdiction of File Number) Identification
incorporation) Number)
200 Broadhollow Road, Suite 207, Melville, New York 11747
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code (516) 393-5016
- ------------------------------------------------------------------------------
(Former name or former address, if changed since last report.)
<PAGE>
Item 7. Financial Statements and Exhibits
(a) Financial Statements of Businesses Acquired. The financial statements
of Sales and Management Consulting, Inc. (d/b/a The Sullivan Group) are attached
hereto.
(b) Pro Forma Financial Information. The required pro forma financial
information is attached hereto.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
NETWOLVES CORPORATION
/s/ Walter M. Groteke
Walter M. Groteke, President
Dated: September 20, 1999
<PAGE>
(a) FINANCIAL STATEMENTS OF SALES AND MANAGEMENT CONSULTING, INC.
(D/B/A THE SULLIVAN GROUP)
INDEPENDENT AUDITOR'S REPORT 1
BALANCE SHEETS as of December 31, 1998 and 1997 2
STATEMENTS OF OPERATIONS for the years ended
December 31, 1998, 1997 and 1996 3
STATEMENT OF SHAREHOLDERS DEFICIENCY for the years
ended December 31, 1996, 1997 and 1998 4
STATEMENTS OF CASH FLOWS for the years ended December 31,
1998, 1997 and 1996 5
NOTES TO FINANCIAL STATEMENTS for the years ended
December 31, 1998, 1997 and 1996 6-12
CONDENSED BALANCE SHEET (unaudited) as of June 30, 1999 13
CONDENSED STATEMENTS OF OPERATIONS (unaudited) for the six months
ended June 30, 1999 and 1998 14
CONDENSED STATEMENTS OF CASH FLOWS (unaudited) for the six months
ended June 30, 1999 and 1998 15
NOTES TO CONDENSED FINANCIAL STATEMENTS (unaudited) for the six
months ended June 30, 1999 and 1998 16
(b) PRO FORMA FINANCIAL INFORMATION
INTRODUCTION TO UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL INFORMATION 17
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT
OF OPERATIONS for the year ended June 30, 1999 18
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED
STATEMENTS OF OPERATIONS for the year ended June 30, 1999 19
<PAGE>
Board+` of Directors and Shareholders
Sales and Management Consulting, Inc.
Guilford, Connecticut
INDEPENDENT AUDITOR'S REPORT
We have audited the accompanying balance sheets of Sales and Management
Consulting, Inc. (d/b/a The Sullivan Group) as of December 31, 1998 and 1997,
and the related statements of operations, shareholders' deficiency, and cash
flows for each of the three years in the period ended December 31, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Sales and Management
Consulting, Inc. as of December 31, 1998 and 1997, and the results of its
operations and cash flows for each of the three years in the period ended
December 31, 1998 in conformity with generally accepted accounting principles.
/s/ HAYS & COMPANY
August 5, 1999
New York, New York
1
<PAGE>
SALES AND MANAGEMENT CONSULTING, INC.
(d/b/a The Sullivan Group)
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-------------------------
1998 1997
---- ----
ASSETS
<S> <C> <C>
Current assets
Cash $ 38,799 $ 7,507
Accounts receivable 157,329 423,535
Due to affiliate - 15,000
--------- ---------
Total current assets 196,128 446,042
Property and equipment, net 57,258 94,604
Intangible assets, net 20,915 21,535
--------- ---------
$274,301 $562,181
--------- ---------
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
Current liabilities
Accounts payable and accrued expenses $133,138 $100,707
Deferred compensation 100,000 76,120
Current maturities of long-term debt 56,818 54,057
--------- ---------
Total current liabilities 289,956 230,884
Long-term debt, net of current maturities 331,593 388,410
Loans and advances from shareholder 500,000 410,550
--------- ---------
Total liabilities 1,121,549 1,029,844
--------- ---------
Commitments and contingencies
(Notes 4, 6, 7, 8 and 9)
Shareholders' deficiency
Common stock, $100 par value; 5,000
shares authorized, 10 shares issued
and outstanding 1,000 1,000
Accumulated deficit (848,248) (468,663)
--------- ---------
Total shareholders' deficiency (847,248) (467,663)
--------- ---------
$ 274,301 $ 562,181
========= =========
The accompanying notes are an integral part of these financial statements
</TABLE>
2
<PAGE>
SALES AND MANAGEMENT CONSULTING, INC.
(d/b/a The Sullivan Group)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Consulting and training revenue $1,545,229 $1,709,957 $1,902,002
Cost of services 986,837 902,999 1,224,759
---------- ---------- ----------
Gross profit 558,392 806,958 677,243
---------- ---------- ----------
Operating expenses
General and administrative 862,090 757,130 847,611
Sales and marketing 13,658 5,030 1,831
---------- ---------- ----------
875,748 762,160 849,442
---------- ---------- ----------
Other income (expenses)
Interest income 32 124 790
Interest expense (62,261) (71,810) (67,537)
---------- ---------- ----------
(62,229) (71,686) (66,747)
---------- ---------- ----------
Net loss $ (379,585) $ (26,888) $ (238,946)
========== ========== ==========
The accompanying notes are an integral part of these financial statements
</TABLE>
3
<PAGE>
SALES AND MANAGEMENT CONSULTING, INC.
(d/b/a The Sullivan Group)
STATEMENT OF SHAREHOLDERS' DEFICIENCY
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
<TABLE>
<CAPTION>
Total
Common stock Accumulated shareholders'
Shares Amount deficit deficiency
------ ------ ------------ --------------
<S> <C> <C> <C> <C>
Balance, January 1, 1996 10 $ 1,000 $(202,829) $201,829)
Net loss, year ended
December 31, 1996 - - (238,946) (238,946)
-------- -------- ---------- ----------
Balance, December 31, 1996 10 1,000 (441,775) (440,775)
Net loss, year ended
December 31, 1997 - - (26,888) (26,888)
-------- -------- ---------- ----------
Balance, December 31, 1997 10 1,000 (468,663) (467,663)
Net loss, year ended
December 31, 1998 - - (379,585) (379,585)
-------- -------- ---------- ----------
Balance, December 31, 1998 10 $ 1,000 $ (848,248) $(847,248)
======== ======== ========== ==========
The accompanying notes are an integral part of these financial statements
</TABLE>
4
<PAGE>
SALES AND MANAGEMENT CONSULTING, INC.
(d/b/a The Sullivan Group)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
INCREASE (DECREASE) IN CASH
Cash flows from operating activities
Net loss $ (379,585) $ (26,888) $(238,946)
Adjustments to reconcile net loss to
net cash provided by (used in)
operating activities
Depreciation and amortization 44,022 107,759 128,647
Amortization of note discount - 1,350 9,320
Changes in operating assets and liabilities
Accounts receivable 266,206 (202,085) 45,025
Due to affiliate 15,000 (15,000) -
Accounts payable and accrued expenses 32,431 12,613 (30,607)
Deferred compensation 23,880 50,000 26,120
Accrued interest - 32,199 29,540
--------- --------- ---------
Net cash provided by (used in) operating
activities 1,954 (40,052) (30,901)
--------- --------- ---------
Cash flows from investing activities
Payments to purchase property and
equipment (6,056) (7,155) (25,641)
--------- --------- ---------
Cash flows from financing activities
Advances from shareholder, net 89,450 256,180 4,700
Proceeds from line of credit - - 275,000
Principal repayments of line of credit - (200,000) (175,000)
(Repayment of) proceeds from bank overdraft, net - (6,265) 6,265
Proceeds from borrowing against cash
surrender value of life insurance policies - - 51,622
Principal repayments of Noncompete Note (7,500) - (105,000)
Principal repayments of DVI Note (46,556) - -
--------- --------- ---------
Net cash provided by financing activities 35,394 49,915 57,587
--------- --------- ---------
Net increase in cash 31,292 2,708 1,045
Cash balance, beginning of year 7,507 4,799 3,754
--------- --------- ---------
Cash balance, end of year $ 38,799 $ 7,507 $ 4,799
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Interest paid $ 52,211 $ 38,261 $ 28,676
========= ========= =========
The accompanying notes are an integral part of these financial statements
</TABLE>
5
<PAGE>
SALES AND MANAGEMENT CONSULTING, INC.
(d/b/a The Sullivan Group)
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1 The Company
Sales and Management Consulting, Inc. (d/b/a The Sullivan Group) (the
Company), is a Connecticut corporation incorporated in 1980. The Company
provides consulting, educational and training services primarily to the oil
and gas and automotive industries throughout the United States.
On July 7, 1999, the Company was purchased by TSG Global Education Web,
Inc., a Delaware corporation and a direct, majority-owned subsidiary of
NetWolves Corporation (Note 9).
2 Summary of significant accounting policies
Use of estimates
In preparing financial statements in conformity with generally accepted
accounting principles, management makes estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements,
as well as the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue recognition
The Company recognizes revenue from consulting and training fees when the
services are provided.
Property and equipment
Property and equipment are stated at cost and depreciated on a
straight-line basis over the estimated useful lives of the related assets.
Expenditures for maintenance and repairs are charged directly to the
appropriate operating accounts at the time the expense is incurred.
Expenditures determined to represent additions and betterments are
capitalized.
Intangible assets
On October 1, 1992, the Company purchased certain assets of the Duffy-Vinet
Institute, Inc. ("DVI"), including furniture and fixtures and a library of
reference and training materials.
The excess of cost over fair market value of assets acquired in the
original amount of $24,788 represents the additional costs incurred in
acquiring the operating assets and business of DVI. These costs are being
amortized using the straight-line method over forty years and resulted in
amortization expense of $620, $619 and $620 for the years ended December
31, 1998, 1997 and 1996, respectively.
A noncompete covenant in the amount of $430,680 (Note 4) was being
amortized using the straight-line method over the life of the agreement
(five years) and was fully amortized during 1997. Amortization expense
relating to such covenant was $64,602 and $86,136 for the years ended
December 31, 1997 and 1996, respectively.
6
<PAGE>
SALES AND MANAGEMENT CONSULTING, INC.
(d/b/a The Sullivan Group)
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
2 Summary of significant accounting policies (continued)
Impairment of long-lived assets
The Company reviews its long-lived assets, including intangibles and
property and equipment, for impairment whenever events or changes in
circumstances indicate that the carrying amount of the assets may not be
fully recoverable. To determine recoverability of its long-lived assets,
the Company evaluates the probability that future undiscounted net cash
flows, without interest charges, will be less than the carrying amount of
the assets. The Company has determined that as of December 31, 1998, there
has been no impairment in the carrying value of long-lived assets.
Income taxes
The Company employs the cash basis of accounting for federal and state
income tax purposes whereby revenues are recognized when received and
expenses recognized when paid.
Deferred tax assets and liabilities are recognized based on the differences
between the financial and tax bases of assets and liabilities using enacted
tax rates in effect for the year in which differences are expected to
reverse. The Company has recorded no provisions for income taxes in the
accompanying financial statements as a result of incurred losses.
3 Property and equipment
Property and equipment consists of the following:
<TABLE>
<CAPTION>
December 31,
Useful life -------------------
in years 1998 1997
----------- ---- ----
<S> <C> <C> <C>
Equipment 5 to 7 $ 115,649 $ 109,593
Furniture and fixtures 5 to 7 314,573 314,573
--------- ---------
430,222 424,166
Less accumulated depreciation (372,964) (329,562)
--------- ---------
Property and equipment, net $ 57,258 $ 94,604
========= =========
</TABLE>
Deprecation expense for the years ended December 31, 1998, 1997 and 1996
totaled $43,402, $42,538 and $41,891, respectively.
7
<PAGE>
SALES AND MANAGEMENT CONSULTING, INC.
(d/b/a The Sullivan Group)
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
4 Long-term debt
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31,
---------------------
1998 1997
---- ----
<S> <C> <C>
DVI Note and accrued interest $ 343,411 $ 389,967
Noncompete Note 45,000 52,500
--------- ---------
388,411 442,467
Less current maturities of long-term debt (56,818) (54,057)
--------- ---------
Long-term debt, net of current maturities $ 331,593 $ 388,410
========= =========
</TABLE>
DVI Note
The note payable to DVI (the DVI Note) in the original amount of $247,875
accrued interest at 9% per annum and required no principal or interest
payments until October 1997. The DVI Note is secured by all of the assets
acquired from DVI, including all furniture, fixtures, equipment and library
of master tapes and completed programs. At the time the scheduled debt
repayments were to commence the Company was unable to make such repayments
based on the original terms and became in default of the DVI Note.
During January 1998 the Company restructured the DVI Note (the Restructured
DVI Note). The Restructured DVI Note calls for 84 monthly payments of
$5,655 commencing January 1998 (see Restructured Notes below).
Noncompete Note
In connection with the purchase of certain assets of DVI, the Company also
entered into a noncompete agreement with a former shareholder of DVI
whereby the Company agreed to pay such individual $525,000 over five years
in monthly installments of $8,750 (the Noncompete Note). The Noncompete
Note is non-interest bearing and is secured by all of the assets acquired
from DVI. The Company recorded the note and corresponding noncompete
covenant at $430,680, which represented the present value of amounts to be
paid using an implied interest rate of 9%. The Company ceased making
payments during 1997 and became in default under the terms of the
Noncompete Note.
During January 1998 the Company restructured the Noncompete Note (the
Restructured Noncompete Note). The Restructured Noncompete Note calls for
84 monthly payments of $625 commencing January 1998 (see Restructured Notes
below).
8
<PAGE>
SALES AND MANAGEMENT CONSULTING, INC.
(d/b/a The Sullivan Group)
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
4 Long-term debt (continued)
Restructured Notes
The Restructured DVI Note and the Restructured Noncompete Note
(collectively referred to as the "Restructured Notes") were accounted for
in accordance with the requirements of Statement of Financial Accounting
Standards No. 15, Accounting by Debtors and Creditors for Troubled Debt
Restructurings (SFAS #15). The Company did not reduce its recorded
obligations under the Restructured Notes, since the overall estimated
future cash flows (including interest) to be paid to DVI over the full term
of the Restructured Notes exceeded the recorded amounts at the date of the
restructuring. SFAS #15 requires the Company to continue to carry the
Restructured Notes at their recorded amounts and account for all future
payments as principal and interest in such a manner that interest expense
is computed on a constant effective interest rate applied to the carrying
amount of the Restructured Notes. Accordingly, the effective annual
interest rates for the Restructured DVI Note and the Restructured
Noncompete Note are 6% and 0%, respectively.
Aggregate maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
<S> <C>
Year ending December 31,
1999 $ 56,818
2000 59,743
2001 62,841
2002 66,124
2003 69,601
Thereafter 73,284
----------
$ 388,411
==========
</TABLE>
Line of credit
The Company maintained a $200,000 line of credit with Bank Boston which
provided for interest at a rate of prime plus 1% per annum. This line of
credit, which was guaranteed by one of the Company's principal
shareholders, was repaid during 1997 and resulted in interest expense of
$9,663 and $10,207 for the years ended December 31, 1997 and 1996,
respectively.
9
<PAGE>
SALES AND MANAGEMENT CONSULTING, INC.
(d/b/a The Sullivan Group)
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
5 Income taxes
The tax effects of temporary differences that give rise to deferred tax
assets and liabilities are summarized as follows:
<TABLE>
<CAPTION>
December 31,
------------------------
1998 1997
---- ----
<S> <C> <C>
Deferred tax assets and liabilities
Net operating loss carryforwards $ 81,000 $ 56,000
Deferred compensation 40,000 30,000
Accounts payable and accrued expenses 53,000 155,000
Accounts receivable (63,000) (169,000)
--------- --------
111,000 72,000
Valuation allowance (111,000) (72,000)
--------- --------
Deferred tax asset, net $ - $ -
========= =========
</TABLE>
A valuation allowance is required against deferred tax assets if, based on
the weight of available evidence, it is more likely than not that some or
all of the deferred tax assets may not be realized. The full valuation
allowances at December 31, 1998 and 1997 reflect uncertainties with respect
to future realization of the deferred tax assets.
At December 31, 1998, the Company has net operating loss tax carryforwards
of approximately $200,000 that expire in the years 2011 through 2018. Upon
consummation of the Merger (Note 9), these carryforwards became subject to
restriction in accordance with the Internal Revenue Code.
6 Related party transactions
The Company has entered into transactions with one of its principal
shareholders who is also the Chief Executive Officer and Chairman, as
follows:
-- From time to time, the shareholder advanced the Company funds to be
used for working capital purposes. As of December 31, 1998, these
advances had no scheduled repayment terms and bore interest at the
rate of 8% per annum. Repayment of these advances were scheduled in
connection with the Merger (Note 9).
-- Deferred compensation owed to the shareholder aggregated $100,000 and
$76,120 at December 31, 1998 and 1997, respectively. The shareholder
elected to defer payment of a portion of his employment related
compensation due to the Company's temporary cash flow concerns. As of
December 31, 1998 such amounts had no scheduled repayment terms,
however, repayment of these amounts were scheduled in connection with
the Merger (Note 9).
-- At December 31, 1998, the Company leased its office space from the
shareholder for annual lease payments of $69,378 for each of the years
ended December 31, 1998, 1997 and 1996. Effective January 1, 1999, the
Company extended the terms of the lease for five years at an annual
rent of approximately $75,000.
Additionally, commencing in 1998, the Company began receiving
consulting services from an entity owned by the shareholder. These
services totalled approximately $40,000, for the year ended December
31, 1998.
10
<PAGE>
SALES AND MANAGEMENT CONSULTING, INC.
(d/b/a The Sullivan Group)
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
7 Commitments and contingencies
Leases
In addition to Companys office space lease (Note 6), the Company has
entered into leases for additional office space, office equipment and
vehicles. At December 31, 1998, the approximate future minimum annual lease
payments (including the related party office space) are summarized as
follows:
<TABLE>
<S> <C>
Year ending December 31,
1999 $ 120,000
2000 105,000
2001 92,000
2002 84,000
2003 76,000
---------
$ 477,000
=========
</TABLE>
Defined contribution/profit sharing plan
The Company provides pension benefits to eligible employees through a
401(k) plan. Company contributions to the plan are discretionary. In
addition, employees have the option of deferring and contributing a portion
of their annual compensation to the plan under the provisions of the plan.
Employer matching contributions and profit sharing contributions to the
plan approximated $4,100, $36,200 and $20,700 for the years ended December
31, 1998, 1997 and 1996, respectively.
8 Major customers
The Company had the following balances and transactions with five unrelated
major customers:
<TABLE>
<CAPTION>
Revenue Accounts receivable
---------------------------- ----------------------
Year ended December 31, December 31,
----------------------------- ----------------------
1998 1997 1996 1998 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C>
$ 552,000 $ 362,000 $ 52,000 $ 115,000 $ 86,000
$ 522,000 $ 652,000 $ 742,000 $ - $ 99,000
$ 62,000 $ 215,000 $ 210,000 $ - $ -
$ - $ 95,000 $ 561,000 $ - $ -
$ 154,000 $ 232,000 $ - $ - $ 22,000
</TABLE>
9 Subsequent events
In January 1999, the Company entered into an agreement with NetWolves
Corporation ("NetWolves") whereby the Company appointed NetWolves as its
exclusive provider of the NetWolves multi-service Internet delivery system
(known as the "FoxBox") to be used in conjunction with the Companys
proprietary interactive distance learning training programs. The period of
the agreement is for a term of five years and shall be automatically
renewed for an additional five-year term unless six months notice of
termination is provided by either party.
11
<PAGE>
SALES AND MANAGEMENT CONSULTING, INC.
(d/b/a The Sullivan Group)
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
9 Subsequent events (continued)
On July 7, 1999, the Company and Netwolves executed a merger agreement (the
Merger) pursuant to which NetWolves acquired the outstanding capital stock
of the Company. Under the terms of the Merger, TSG Global Education Web,
Inc. (TSG) (a subsidiary of NetWolves), with 4,150,000 shares of
outstanding common stock, purchased all of the outstanding shares of the
Company's common stock in exchange for 180,000 shares of NetWolves
restricted common stock. At the effective date of the Merger (June 30,
1999), the Company merged into TSG, with TSG as the surviving entity.
Concurrent with the Merger, the shareholders of the Company purchased
70,000 shares of TSG's common stock for $.35 per share for an aggregate
cash proceeds of $24,500. This represents 1.7% of the outstanding common
stock of TSG.
At the time of the Merger and in accordance with TSGs newly formed stock
option plan, the shareholders of the Company received 605,000 five-year
options to purchase TSG common stock at an exercise price of $.35 per
share. Management estimates that the exercise price approximates the
estimated fair value of the TSG common stock.
The Merger also provides for NetWolves to make up to $4,750,000 of
non-interest bearing open account working capital advances to TSG pursuant
to an agreed-upon schedule through November 15, 1999. Through June 30,
1999, $949,000 had been advanced and an additional $801,000 has been
advanced in July and August 1999. Should NetWolves decide not to make
further working capital advances, the number of TSG shares owned by
NetWolves will be reduced in accordance with the agreement.
As part of the Merger, TSG issued 250,000 shares of TSG cumulative, 8%
preferred stock to a shareholder of the Company in partial settlement of
outstanding liabilities owed to such shareholder and also agreed to repay
the remaining amounts owed to the shareholder.
12
<PAGE>
SALES AND MANAGEMENT CONSULTING, INC.
(d/b/a The Sullivan Group)
CONDENSED BALANCE SHEET
(Unaudited)
JUNE 30, 1999
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Current assets
Cash $ 387,724
Accounts receivable 70,221
-----------
Total current assets 457,945
Property and equipment, net 35,255
Intangible assets, net 20,605
-----------
$ 513,805
===========
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
Current liabilities
Accounts payable and accrued expenses $ 151,685
Deferred compensation 100,000
Advances from NetWolves Corporation 949,000
Current maturities of long-term debt 58,260
-----------
Total current liabilities 1,258,945
Long-term debt, net of current maturities 302,097
Loans and advances from shareholder 388,391
-----------
Total liabilities 1,949,433
-----------
Commitments and contingencies
Shareholders' deficiency
Common stock, $100 par value; 5,000 shares
authorized, 10 shares issued and outstanding 1,000
Accumulated deficit (1,436,628)
-----------
Total shareholders' deficiency (1,435,628)
-----------
$ 513,805
===========
The accompanying notes are an integral part of these financial statements.
</TABLE>
13
<PAGE>
SALES AND MANAGEMENT CONSULTING, INC.
(d/b/a The Sullivan Group)
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Six months ended June 30,
-------------------------
1999 1998
---- ----
<S> <C> <C>
Consulting and training revenue $ 388,716 $ 819,420
Costs of services 343,287 528,774
--------- ---------
Gross profit 45,429 290,646
--------- ---------
Operating expenses
General and administrative 607,753 553,472
Sales and marketing 6,852 15,086
--------- ---------
614,605 568,558
--------- ---------
Other income (expenses)
Interest income 421 29
Interest expense (19,625) (26,987)
--------- ---------
(19,204) (26,958)
--------- ---------
Net loss $(588,380) $(304,870)
========= =========
The accompanying notes are an integral part of these financial statements.
</TABLE>
14
<PAGE>
SALES AND MANAGEMENT CONSULTING, INC.
(d/b/a The Sullivan Group)
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six months ended June 30,
-------------------------
1999 1998
---- ----
<S> <C> <C>
INCREASE (DECREASE) IN CASH
Cash flows from operating activities
Net loss $(588,380) $(304,870)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities
Depreciation and amortization 22,314 21,708
Changes in operating assets and liabilities
Accounts receivable 87,108 423,535
Due to affiliate - 15,000
Accounts payable and accrued expenses 18,546 (13,688)
--------- ---------
Net cash (used in) provided by
operating activities (460,412) 141,685
--------- ---------
Cash flows from financing activities
Repayments of advances from shareholder, net (111,609) (110,550)
Advances from NetWolves Corporation 949,000 -
Principal repayments of Noncompete Note (3,750) (3,750)
Principal repayments of DVI Note (24,304) (22,942)
--------- ---------
Net cash provided by (used in) financing activities 809,337 (137,242)
--------- ---------
Net increase in cash 348,925 4,443
Cash balance, beginning of period 38,799 7,507
--------- ---------
Cash balance, end of period $ 387,724 $ 11,950
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid $ 19,625 $ 31,577
========= =========
The accompanying notes are an integral part of these financial statements.
</TABLE>
15
<PAGE>
SALES AND MANAGEMENT CONSULTING, INC.
(d/b/a The Sullivan Group)
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
SIX MONTHS ENDED JUNE 30, 1999 AND 1998
1 Basis of presentation
The accompanying unaudited condensed financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and the rules and regulations of the
Securities and Exchange Commission. Accordingly, they do not include all of
the information and notes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments (consisting only of normal recurring adjustments)
considered necessary for a fair presentation have been included. Operating
results for the interim periods are not necessarily indicative of the
results that may be expected for the full year. It is suggested that these
financial statements be read in conjunction with the audited financial
statements and notes thereto of Sales and Management Consulting, Inc. (the
"Company") for the years ended December 31, 1998, 1997 and 1996.
2 Transactions with NetWolves Corporation
In January 1999, the Company entered into an agreement with NetWolves
Corporation ("NetWolves") whereby the Company appointed NetWolves as its
exclusive provider of the NetWolves multi-service Internet delivery system
(known as the "FoxBox") to be used in conjunction with the Companys
proprietary interactive distance learning training programs. The period of
the agreement is for a term of five years and shall be automatically
renewed for an additional five-year term unless six months notice of
termination is provided by either party.
On July 7, 1999, the Company and Netwolves executed a merger agreement (the
Merger) pursuant to which NetWolves acquired the outstanding capital stock
of the Company. Under the terms of the Merger, TSG Global Education Web,
Inc. (TSG) (a subsidiary of NetWolves) with 4,150,000 shares of outstanding
common stock, purchased all of the outstanding shares of the Company's
common stock in exchange for 180,000 shares of NetWolves restricted common
stock. At the effective date of the Merger (June 30, 1999), the Company
merged into TSG, with TSG as the surviving entity.
Concurrent with the Merger, the shareholders of the Company purchased
70,000 shares of TSG common stock for $.35 per share for an aggregate cash
proceeds of $24,500. This represents 1.7% of the outstanding common stock
of TSG.
At the time of the Merger and in accordance with TSGs newly formed stock
option plan, the shareholders of the Company received 605,000 five-year
options to purchase TSG common stock at an exercise price of $.35 per
share. Management estimates that the exercise price approximates the
estimated fair value of the TSG common stock.
The Merger also provides for NetWolves to make up to $4,750,000 of
non-interest bearing open account working capital advances to TSG pursuant
to an agreed-upon schedule through November 15, 1999. Through June 30,
1999, $949,000 had been advanced and an additional $801,000 has been
advanced in July and August 1999. Should NetWolves decide not to make
further working capital advances, the number of TSG shares owned by
NetWolves will be reduced in accordance with the agreement.
As part of the Merger, TSG issued 250,000 shares of TSG cumulative, 8%
preferred stock to a shareholder of the Company in partial settlement of
outstanding liabilities owed to such shareholder and also agreed to repay
the remaining amounts owed to the shareholder.
16
<PAGE>
NETWOLVES CORPORATION
INTRODUCTION TO UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL INFORMATION
The following unaudited pro forma condensed combined statement of
operations gives pro forma effect to the completion of the acquisition of
Sales and Management Consulting, Inc. (d/b/a the Sullivan Group) (the
Company), as if it had occurred at July 1, 1998. The Company was acquired
effective June 30, 1999 and is therefore included in Registrants
consolidated balance sheet as of June 30, 1999. Thus, a pro forma balance
sheet has been omitted from the pro forma presentation. This pro forma
information should be read in conjunction with the historical financial
statements of Registrant and the historical financial statements of the
Company appearing elsewhere herein.
Registrant has a fiscal year end of June 30, 1999 while the Company has a
calendar year end of December 31. The operations of Registrant for the year
ended June 30, 1999 have been combined with the Companys operations for the
twelve months ended June 30, 1999. The Companys financial statements for
the year ended June 30, 1999 have been derived by combining the Companys
results of operations for the six months ended December 31, 1998 and for
the six months ended June 30, 1999.
The pro forma adjustments reflecting the consummation of the acquisition
using the purchase method of accounting are based on available financial
information and certain estimates and assumptions set forth in the notes to
the unaudited pro forma condensed combined statement of operations. This
statement is presented for illustration purposes only and is not
necessarily indicative of the future results of operations of the combined
businesses or the results of operations of the combined businesses had the
acquisitions occurred on July 1, 1998. For purposes of preparing its
consolidated financial statements, Registrant will establish a new basis
for the Companys assets and liabilities based upon the fair value thereof,
including the costs of the acquisition. The unaudited pro forma condensed
statement of operations reflects Registrants best estimates; however, the
actual results of operations may differ from the pro forma amounts.
17
<PAGE>
NETWOLVES CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINED
STATEMENT OF OPERATIONS
YEAR ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
Sales and
Management
Consulting,
NetWolves Inc.
Historical Historical Adjustments Pro Forma
---------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
Sales $ 1,789,144 $ 1,114,525 - $ 2,903,669
Cost of sales 582,724 801,350 65,000 (c) 1,449,074
----------- ----------- --------- -----------
Gross profit from sales 1,206,420 313,175 (65,000) 1,454,595
----------- ----------- --------- -----------
Operating expenses
General and administrative 4,536,255 916,371 282,000 (a) 5,709,626
(25,000)(b)
Research and development 418,109 - - 418,109
Sales and marketing 2,002,330 5,424 - 2,007,754
---------- ---------- --------- ----------
6,956,694 921,795 257,000 8,135,489
---------- ---------- --------- ----------
Loss before other income (expense) (5,750,274) (608,620) (322,000) (6,680,894)
Other income (expense)
Interest income 48,608 424 - 49,032
Minority interest - - 16,274 (f) 16,274
Gain on sale of marketable securities 478,519 - - 478,519
Dividend income 10,275 - - 10,275
Interest expense (455) (54,899) (16,000) (d) (51,354)
20,000 (e)
------------ ---------- --------- ------------
Net loss $(5,213,327) $(663,095) (301,726) $(6,178,148)
============ ========== ========= ============
Earnings (loss) per share
Net loss $(5,213,327) $(663,095) $(301,726) $(6,178,148)
Less dividends on preferred stock - - (20,000) (g) (20,000)
------------ ---------- ---------- ----------
Net loss available to common
Shareholders $(5,213,327) (663,095) (321,726) (6,198,148)
=========== ========= ========== ==========
Basic and diluted net loss per
Share $ (1.11) $ (1.27)
=========== ============
Weighted average common
shares outstanding 4,691,651 180,000 (h) 4,871,651
=========== ======== ============
The accompanying notes are an integral part of these financial statements.
</TABLE>
18
<PAGE>
NETWOLVES CORPORATION
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED
STATEMENT OF OPERATIONS
YEAR ENDED JUNE 30, 1999
(a) As a result of the Merger, the Company expects to record approximately
$2,820,000 of purchased intangibles. Management is in the process of
analyzing the composition of these intangibles. For purposes of this pro
forma condensed combined statement of operations, the intangible assets are
being amortized using the straight-line method with an estimated average
life of 10 years.
(b) Represents an adjustment to depreciation expense of acquired property and
equipment based upon the fair value of the assets.
(c) Represents an adjustment to the historical salary expense relating to
employment agreements entered into with the Company's executives in
connection with the Merger.
(d) Represents additional interest expense resulting from a fair value
adjustment made to certain long-term debt assumed.
(e) Represents a reduction of interest expense relating to $250,000 of loans
and advances to shareholder that were converted to preferred stock of the
Company (see Note 9) in connection with the Merger.
(f) Represents the minority interest associated with the 1.7% ownership
interest retained by the shareholders of the Company.
(g) Represents an 8% dividend on the $250,000 of preferred stock issued in
connection with the Merger (see Note e).
(h) Represents the weighted average shares of common stock issued in connection
with the Merger.
19
