NETWOLVES CORP
10-Q, 1999-11-19
COMPUTER INTEGRATED SYSTEMS DESIGN
Previous: THERMOVIEW INDUSTRIES INC, S-1/A, 1999-11-19
Next: ENGAGE TECHNOLOGIES INC, DEF 14A, 1999-11-19


                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-Q


[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

               For the quarterly period ended September 30, 1999
                                              -----------------

                        Commission file number 000-25831

                             NetWolves Corporation
             (Exact name of registrant as specified in its charter)

           New York                                            11-3439392
(State  or other  jurisdiction  of                          (I.R.S.  Employer
  incorporation  or organization)                           Identification No.)


                 200 Broadhollow Road, Melville, New York 11747
                    (Address of principal executive offices)

                                 (516) 393-5016
              (Registrant's telephone number, including area code)

                                      None
(Former name,former address and former fiscal year,if changed since last report)

Indicate by checkmark  whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days.

                      Yes    X *            No
                            ----

Indicate the number of shares  outstanding of each of issuer's classes of common
stock as of the latest practicable date:
<TABLE>
<CAPTION>
                                                 NUMBER OF SHARES OUTSTANDING ON
        TITLE OF CLASS                                  November 19, 1999
- ------------------------------                   -------------------------------
<S>                                                         <C>
Common Stock, $.0033 par value                              6,346,370
                                                            ---------
</TABLE>

Registrant became subject to the filing  requirements of the Securities Exchange
Act of 1934 on April 20, 1999,  when it filed a  Registration  Statement on Form
10.
<PAGE>
                     NETWOLVES CORPORATION AND SUBSIDIARIES

                         FORM 10-Q - SEPTEMBER 30, 1999

                                     INDEX


PART I - FINANCIAL INFORMATION


   ITEM 1 - FINANCIAL STATEMENTS

   CONSOLIDATED BALANCE SHEETS
      September 30, 1999 and June 30, 1999.................................    1

   CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND
    COMPREHENSIVE INCOME (LOSS)
      For the three months ended September 30, 1999 and September 30, 1998.    2

   CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
      For the three months ended September 30, 1999 and September 30, 1998.    3

   NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS...................  4-10

   ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
            CONDITION AND RESULTS OF OPERATIONS........................... 11-13

   ITEM 3  QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK......    13

PART II - OTHER INFORMATION

   ITEM 1 - LEGAL PROCEEDINGS.............................................    14

   ITEM 2  CHANGES IN SECURITIES AND USE OF PROCEEDS......................    14

   ITEM 3  DEFAULTS UPON SENIOR SECURITIES................................    14

   ITEM 4  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............    14

   ITEM 5  OTHER INFORMATION..............................................    14

   ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K..............................    14

SIGNATURES................................................................    15
<PAGE>
                     NETWOLVES CORPORATION AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS


<TABLE>
<CAPTION>
                                                      September 30,     June 30,
                                                           1999           1999
                                                      -------------     --------
                                                       (Unaudited)

<S>                                                    <C>            <C>
ASSETS

Current assets
   Cash and cash equivalents                            $ 5,376,269  $ 5,585,981
   Marketable securities, available for sale,
    at market value                                         527,500      606,000
   Accounts receivable, net of allowance of $40,000          87,429       76,907
   Inventories                                               64,790      118,354
   Prepaid expenses and other current assets                171,760      153,099
                                                        -----------  -----------
      Total current assets                                6,227,748    6,540,341
                                                        -----------  -----------
Property and equipment, net                                 278,560      224,691

Intangible assets, net                                    2,732,893    2,849,121

Other assets                                                 26,181       22,781
                                                        -----------  -----------
                                                        $ 9,265,382  $ 9,636,934
                                                        ===========  ===========
LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities
   Accounts payable and accrued expenses                $   530,987  $   453,336
   Deferred compensation                                    100,000      100,000
   Loans and advances from TSG officer                       37,203      144,348
   Current maturities of long-term debt                      44,616       43,411
                                                        -----------  -----------
      Total current liabilities                             712,806      741,095

Long term debt, net of current maturities                   254,921      266,537
                                                        -----------  -----------
      Total liabilities                                     967,727    1,007,632
                                                        -----------  -----------
Minority interest                                           265,450      274,500

Commitment and contingencies

Shareholders' equity
   Common stock, $.0033 par value; 10,000,000 shares
     authorized; issued and outstanding;
     6,163,870 on September 30, 1999                         20,341       20,011
     and 6,063,870 on June 30, 1999
   Additional paid-in capital                            18,170,607   14,013,687
   Unamortized value of warrant grants                   (1,606,406)         -
   Accumulated deficit                                   (8,849,682)  (6,054,741)
   Accumulated other comprehensive income                   297,345      375,845
                                                        -----------  -----------
     Total shareholders' equity                           8,032,205    8,354,802
                                                        -----------  -----------
                                                        $ 9,265,382  $ 9,636,934
                                                        ===========  ===========
<FN>
See notes to condensed consolidated financial statements                       1
</FN>
</TABLE>
<PAGE>
                     NETWOLVES CORPORATION AND SUBSIDIARIES

                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                         AND COMPREHENSIVE INCOME (LOSS)
                                   (Unaudited)
<TABLE>
<CAPTION>

                                                       For the three months ended
                                                               September 30,
                                                       --------------------------

                                                            1999        1998
                                                        -----------  -----------
<S>                                                     <C>          <C>
Sales                                                   $   137,951  $    44,753

Cost of sales                                                96,169       16,299
                                                        -----------  -----------
Gross profit                                                 41,782       28,454
                                                        -----------  -----------
Operating expenses
  General and administrative                              2,085,287      707,574
  Research and development                                  184,718       13,104
  Sales and marketing                                       606,007      905,062
                                                        -----------  -----------
                                                          2,876,012    1,625,740
                                                        -----------  -----------
Loss before other income (expense)                       (2,834,230)  (1,597,286)

Other income (expense)
  Investment income                                          45,730       15,716
  Minority interest                                           4,050          -
  Interest expense                                          (10,491)         -
                                                        -----------  -----------
Net loss                                                 (2,794,941)  (1,581,570)

Other comprehensive income (loss):
  Marketable securities valuation adjustment                 78,500      (41,186)
                                                        -----------  -----------
Comprehensive income (loss)                             $(2,716,441) $(1,622,756)
                                                        ===========  ===========

Basic and diluted net loss per share                    $      (.46) $      (.37)
                                                        ===========  ===========
Weighted average common
  shares outstanding                                      6,068,218    4,313,870
                                                        ===========  ===========

<FN>
See notes to condensed consolidated financial statements                       2
</FN>
</TABLE>
<PAGE>
                     NETWOLVES CORPORATION AND SUBSIDIARIES

                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (Unaudited)
<TABLE>
<CAPTION>

                                                       For the three months ended
                                                              September 30,
                                                       --------------------------

                                                           1999         1998
                                                        -----------  -----------
<S>                                                     <C>          <C>
INCREASE (DECREASE) IN CASH AND
   CASH EQUIVALENTS

Cash flows from operating activities
   Net loss                                             $(2,794,941) $(1,581,570)
   Adjustments to reconcile net loss to net cash used
    in operating activities
     Depreciation and amortization                          130,937        3,541
     Noncash charge to operations with respect to
      common stock and warrants issued for services       1,155,844    1,022,156
     Minority interest                                       (9,050)         -

  Changes in operating assets and liabilities
    Accounts receivable                                     (10,522)     (44,809)
    Inventories                                              53,564     (127,931)
    Other assets                                                -            993
    Prepaid expenses and other current assets               (73,661)         -
    Accounts payable and accrued expenses                    77,651       78,900
                                                        -----------  -----------
      Net cash used in operating activities              (1,470,178)    (648,720)
                                                        -----------  -----------
Cash flows from investing activities
  Purchase of marketable securities                             -         (3,034)
  Proceeds from assets held for sale, net                       -         40,764
  Issuance of note receivable                               (50,000)         -
  Purchase of property and equipment                        (68,578)     (34,753)
  Payments of security deposits                              (3,400)      (4,211)
                                                        -----------  -----------
     Net cash used in investing activities                 (121,978)      (1,234)
                                                        -----------  -----------
Cash flows from financing activities
  Repayment of advances from TSG officer                   (107,145)         -
  Repayment of long term debt                               (10,411)         -
  Cash proceeds from private sale of common stock         1,500,000          -
                                                        -----------  -----------
     Net cash provided by financing activities            1,382,444          -
                                                        -----------  -----------
Net decrease in cash and cash equivalents                  (209,712)    (649,954)

Cash and cash equivalents, beginning of period            5,585,981    1,118,416
                                                        -----------  -----------
Cash and cash equivalents, end of period                $ 5,376,269  $   468,462
                                                        ===========  ===========
<FN>
See notes to condensed consolidated financial statements                       3
</FN>
</TABLE>
<PAGE>
                     NETWOLVES CORPORATION AND SUBSIDIARIES

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                  (Unaudited)

                 THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998


1    Interim financial information

     The summary financial information  contained herein is unaudited;  however,
     in the opinion of management,  all adjustments  (consisting  only of normal
     recurring  accruals)  necessary for a fair  presentation  of such financial
     information  have been included.  The accompanying  condensed  consolidated
     financial  statements,  footnotes and discussions of NetWolves  Corporation
     ("NetWolves"  or the  "Company")  should  be read in  conjunction  with the
     Company's  consolidated  financial  statements,  and notes thereto, for the
     year ended June 30, 1999 and the period from February 13, 1998  (inception)
     to June 30,  1998.  The results of  operations  for the three  months ended
     September  30,  1999 are not  necessarily  indicative  of the results to be
     expected for the full year.

2    The Company

     NetWolves, LLC was an Ohio limited liability company formed on February 13,
     1998, which was merged into Watchdog Patrols, Inc. ("Watchdog") on June 17,
     1998.  Watchdog,  the legal surviving entity of the merger was incorporated
     under the laws of the State of New York on January 5, 1970.  As a result of
     the merger and subsequent sale of Watchdog's business, Watchdog changed its
     name to NetWolves Corporation.

     NetWolves is an Internet systems  developer that has designed and developed
     a multi-functional product that is a secure,  integrated,  modular Internet
     gateway.  The primary  product,  the FoxBox,  supports secure access to the
     Internet for multiple  users through a single  connection  and, among other
     things,  provides  electronic mail,  firewall security and web site hosting
     and also contains a network file server.  Since inception,  the Company has
     been developing its business plan and building its  infrastructure in order
     to effectively  market its products and shipped its first significant order
     in March 1999.

     Additionally,  in conjunction  with the acquisition of Sales and Management
     Consulting,  Inc.  (d/b/a The  Sullivan  Group,  see Note 4),  the  Company
     provides consulting, educational and training services primarily to the oil
     and gas and automotive industries throughout the United States.

3    Significant accounting policies

     Use of estimates

     In preparing condensed consolidated 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
     condensed  consolidated  financial  statements,  as  well  as the  reported
     amounts of revenue and expenses during the reporting period. Actual results
     could differ from those estimates.

     Risks and other factors

     As  a  company  that  has  developed  a  software  product  for  use  as  a
     multi-functional  Internet  communications device,  NetWolves faces certain
     risks.  These  include,  among  other  items,  the  ability to  continue to
     implement its business plan,  dependence on proprietary  technology,  rapid
     technological  change,  challenges  in  recruiting  personal  and a  highly
     competitive market place.

                                                                               4
<PAGE>
                     NETWOLVES CORPORATION AND SUBSIDIARIES

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                  (Unaudited)

                 THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998

3    Significant accounting policies (continued)

     Principles of consolidation

     The condensed consolidated financial statements include the accounts of the
     Company and its subsidiaries. All significant intercompany transactions and
     balances have been eliminated in consolidation.  The separate  ownership of
     one of the Company's  subsidiaries is reflected in the Company's  condensed
     consolidated  financial  statements  as  minority  interest  (Note 4).  The
     minority   interest   includes  common  stock   representing  1.7%  of  the
     outstanding shares of the subsidiary, plus preferred stock.

     The subsidiary has issued 250,000 shares of non-voting  Series A Cumulative
     Convertible  Preferred Stock with a $1 par value. The preferred stockholder
     is  entitled to  preferential  liquidation  rights and is also  entitled to
     cumulative  dividends  that are included in minority  interest  expense and
     accrue at the rate of 8% per annum, which commenced on June 30, 1999. On or
     after January 1, 2000, the preferred  stockholder  may elect to convert the
     preferred  stock into  NetWolves  common stock (at fair market value at the
     time of  conversion).  However,  within 15 days of receiving the conversion
     notice,  NetWolves  may elect to make a cash  redemption  of the  preferred
     stock at par value (including any unpaid cumulative  dividends) and thereby
     terminate the conversion right.

     Revenue recognition

     The Company  records  revenue in accordance with Statement of Position 97-2
     "Software  Revenue  Recognition"  ("SOP  97-2"),  issued  by  the  American
     Institute  of  Certified  Public  Accountants  (as modified by Statement of
     Position  98-9).  SOP 97-2  provides  additional  guidance  with respect to
     multiple element arrangements;  returns,  exchanges,  and platform transfer
     rights; resellers;  services; funded software development arrangements; and
     contract  accounting.  Accordingly,  revenue from the sale of perpetual and
     term software  licenses are recognized,  net of provisions for returns,  at
     the time of delivery and  acceptance of software  products by the customer,
     when the fee is fixed and  determinable  and  collectibility  is  probable.
     Maintenance revenue that is bundled with an initial license fee is deferred
     and recognized  ratably over the maintenance  period.  Amounts deferred for
     maintenance are based on the fair value of equivalent  maintenance services
     sold separately.

     The Company  recognizes  revenue from consulting and training fees when the
     services are provided.

     Basic and diluted net loss per share

     The Company  displays  earnings per share in accordance  with  Statement of
     Financial Accounting  Standards No.128,  "Earnings Per Share" ("SFAS 128").
     SFAS 128  requires  dual  presentation  of basic and diluted  earnings  per
     share.  Basic  earnings  per share  includes no dilution and is computed by
     dividing net income (loss) available to common shareholders by the weighted
     average  number  of  common  shares  outstanding  for the  period.  Diluted
     earnings per share  includes  the  potential  dilution  that could occur if
     securities  or other  contracts  to issue  common  stock were  exercised or
     converted into common stock.

                                                                               5
<PAGE>
                     NETWOLVES CORPORATION AND SUBSIDIARIES

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                  (Unaudited)

                 THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998

3    Significant accounting policies (continued)

     Basic and diluted net loss per share (continued)

     Outstanding  stock  options and warrants  have not been  considered  in the
     computation  of  diluted  per  share  amounts,  since  the  effect of their
     inclusion would be  antidilutive.  Accordingly,  basic and diluted earnings
     per share amounts are identical.

     Intangible assets

     Intangible assets at September 30, 1999 consist of $2,849,121 of intangible
     assets  acquired  in  connection  with  the  Company's   purchase  business
     combination  effective  June 30,  1999  (Note 4).  These  assets  include a
     training  library,   industry   benchmarking  data  and  the  Profit  Coach
     profitability  analysis module with a fair value of $400,000,  $100,000 and
     $500,000,  respectively.  The  estimated  useful lives of such assets are 5
     years,  1 year and 5 years,  respectively.  The  remaining  portion  of the
     intangible asset is allocated to goodwill,  which will be amortized over an
     estimated useful life of 10 years.

4    Purchase acquisition

     On July 7, 1999, NetWolves and Sales and Management Consulting, Inc. (d/b/a
     The Sullivan  Group)  ("SMCI")  executed a merger  agreement (the "Merger")
     pursuant to which NetWolves acquired the outstanding capital stock of SMCI.
     Under the terms of the Merger,  TSG Global  Education Web, Inc.  ("TSG") (a
     subsidiary  of   NetWolves),   with   4,150,000   shares  of  common  stock
     outstanding, purchased all of the outstanding shares of SMCI's common stock
     in exchange for 180,000 shares of NetWolves'  restricted  common stock. The
     shareholders  are restricted  from selling,  transferring  or pledging such
     shares for an eighteen-month  period.  Upon consummation of the Merger SMCI
     merged into TSG and TSG was the surviving entity.

     Concurrent  with the Merger,  the  shareholders  of SMCI  purchased  70,000
     shares of TSG common stock at $.35 per share for aggregate cash proceeds of
     $24,500.  This  represents  1.7% of the  outstanding  common  stock of TSG.
     Additionally,  TSG issued  250,000  shares of TSG Series A Cumulative  (8%)
     Convertible  Preferred  Stock to one of the SMCI  shareholders,  which  was
     issued  in  partial  settlement  of  outstanding  liabilities  owed  to the
     shareholder.  This TSG common and  preferred  stock has been  reflected  as
     minority interest in the accompanying consolidated financial statements.

     The purchase price approximated  $1,350,000 (exclusive of acquisition costs
     of  $82,875),  which  consisted of 180,000  shares of NetWolves  restricted
     common  stock valued at $7.50 per share (fair value of the common stock was
     based  upon the  gross  sales  price  received  by  NetWolves  in a private
     placement that was completed on June 29, 1999).  The  acquisition  has been
     accounted  for with an  effective  date of June 30, 1999 using the purchase
     method of accounting.  Accordingly, assets and liabilities were recorded at
     their fair values as of June 30,  1999,  and  operations  of SMCI have been
     included in the Company's condensed  consolidated  statements of operations
     commencing July 1, 1999.

                                                                               6

<PAGE>
                     NETWOLVES CORPORATION AND SUBSIDIARIES

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                  (Unaudited)

                 THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998





4    Purchase acquisition (continued)

     An  allocation  of the fair value of the assets  acquired  and  liabilities
     assumed at June 30, 1999 is as follows:
<TABLE>
<CAPTION>
       <S>                                                           <C>
       Purchase price
         NetWolves common stock issued                               $ 1,350,000
         Acquisition costs                                                82,875
                                                                     -----------
                                                                     $ 1,432,875
                                                                     ===========
       Allocation of purchase price
         Fair value of tangible assets and liabilities
            Current assets                                           $    70,221
            Non-current assets                                            35,255
            Current liabilities                                         (443,909)
            Non-current liabilities                                     (266,537)
            Advances to TSG, net of cash acquired of $412,224           (536,776)
                                                                     -----------
                                                                      (1,141,746)
                                                                     -----------
         Minority interest
            Common stock                                                 (24,500)
            Preferred stock                                             (250,000)
                                                                     -----------
                                                                        (274,500)
                                                                     -----------
         Intangible assets acquired                                    2,849,121
                                                                     -----------

                                                                     $ 1,432,875
                                                                     ===========
</TABLE>
     At the time of the Merger and in  accordance  with TSG's newly formed stock
     option plan, the SMCI  shareholders (who are all employees of TSG) received
     605,000 five-year options to purchase TSG common stock at an exercise price
     of $.35 per  share.  Management  has  determined  that the  exercise  price
     approximates  the  estimated  fair  value  of  the  TSG  common  stock  and
     accordingly, the options have an intrinsic value of zero. Additionally, the
     SMCI shareholders are entitled to an additional 175,000 options to purchase
     TSG  common  stock  (with an  exercise  price at fair  value at the time of
     grant),  subject to TSG meeting  specific  earnings  targets over the three
     years ending June 30, 2000, 2001 and 2002.  These options will be accounted
     for as compensation expense in accordance with Accounting  Principles Board
     Opinion No. 25,  "Accounting  for Stock Issued to Employees" in such future
     periods.  All of the  shareholders  of SMCI entered into 5-year  employment
     agreements with TSG.

     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 September 30,
     1999,  $2,600,000  has been  advanced and an  additional  $850,000 has been
     advanced from October 1, 1999 through  November 10, 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.

                                                                               7
<PAGE>
                     NETWOLVES CORPORATION AND SUBSIDIARIES

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                  (Unaudited)

                 THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998


4    Purchase acquisition (continued)

     Based upon the  $3,450,000  advanced  through  November  10,  1999  (should
     NetWolves  decide not to make any  further  advances),  NetWolves  could be
     required to return  400,000 TSG shares to the  treasury of TSG.  This would
     reduce  NetWolves'  current  ownership  interest from  4,150,000  shares to
     3,750,000  (from 98.34% to 98.17%).  Subject to  NetWolves'  first  refusal
     rights,  TSG has the  right  to sell any  shares,  ultimately  returned  by
     NetWolves,  to third  parties at fair  value,  which could  further  reduce
     NetWolves' ownership interest.

     In  accordance  with the Merger,  the Board of Directors of TSG consists of
     three members  designated  by NetWolves  and two members  designated by the
     SMCI shareholders.  A four-fifths majority of the TSG Board is required for
     specified  significant  actions including:  sale or merger of the business,
     changes  to  the  TSG  capital  structure,  declaration  of  dividends  and
     repayment  of the working  capital  advances  made by  NetWolves.  A simple
     majority of the TSG Board is required  for all general  operating  matters.
     Included in the consolidated  entity's cash and cash equivalents balance at
     September  30, 1999 is  approximately  $1,300,000 of cash held by TSG to be
     used for working capital purposes.

5    Shareholders' equity

     Common stock issuances

     On September  29, 1999,  the Company  sold 100,000  shares of  unregistered
     common  stock  to an  accredited  investor  at $15 per  share  (a  total of
     $1,500,000) exclusive of commissions totaling $105,000.

     Warrants

     *    On July 26, 1999 and in connection  with the Company  entering into an
          agreement with  Comdisco,  Inc.  ("Comdisco"),  Comdisco was granted a
          five-year   warrant  to  purchase  125,000  shares  of  the  Company's
          unregistered  common stock, at an exercise price of $10 per share. The
          warrants  are  immediately  exercisable.  The value of the warrants of
          approximately  $1,676,000  will be amortized  over the initial term of
          the  agreement  (four  years)  and  has  been  calculated   using  the
          Black-Scholes  option-pricing model with the following assumptions: no
          dividend yield, expected volatility of 65%, risk-free interest rate of
          5.84%, and an expected term of five years.

     *    For services rendered, on July 31, 1999, a financial consultant of the
          Company was granted a five-year  warrant to purchase 100,000 shares of
          common stock, at an exercise price of $12 per share.  The warrants are
          immediately  exercisable  and  the  shares  issuable  pursuant  to the
          warrants have piggyback registration rights. The value of the warrants
          of $768,000 has been calculated using the Black-Scholes option-pricing
          model with the  following  assumptions:  no dividend  yield,  expected
          volatility of 65%,  risk-free  interest rate of 5.84%, and an expected
          term of five years.

                                                                               8
<PAGE>
                     NETWOLVES CORPORATION AND SUBSIDIARIES

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                  (Unaudited)

                 THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998

6    Segment information

     The  Company  reports  segments in  accordance  with  Financial  Accounting
     Standards  Board  Statement  No.  131  "Disclosures  about  Segments  of an
     Enterprise  and Related  Information."  The  Company  and its  subsidiaries
     operate in two separate business  segments,  the Technology segment and the
     Training   and   consulting   segment.   These   operating   segments   are
     representative  of the Company's  management  approach to its evaluation of
     its  operations.  The  accounting  policies  of  the  reportable  operating
     segments  are the same as those  described  in the  summary of  significant
     accounting  policies.  The Technology segment,  which operates  principally
     domestically,  is primarily engaged in the design,  development,  marketing
     and support of information  delivery  hardware  products and software.  The
     Training and  consulting  segment,  which operates  domestically,  provides
     consulting,  educational and training services primarily to the oil and gas
     and automotive industries throughout the United States.
<TABLE>
<CAPTION>
                                                          Three Months Ended
                                                             September 30,
                                                          ------------------
                                                            1999        1998
                                                        -----------  -----------
        <S>                                             <C>          <C>
        Revenue
           Technology                                   $    13,200  $    44,753
           Training and consulting                          124,751          -
                                                        -----------  -----------
               Total                                    $   137,951  $    44,753
                                                        ===========  ===========
        Operating income (loss)
           Technology                                   $(2,294,613) $(1,597,286)
           Training and consulting                         (539,617)         -
                                                        -----------  -----------
               Total                                    $(2,834,230) $(1,597,286)
                                                        ===========  ===========
        Identifiable assets
           Technology                                   $ 5,030,452
           Training and consulting                        4,234,930
                                                        -----------
               Total                                    $ 9,265,382
                                                        ===========
</TABLE>
     The Company had two major  customers,  both  included in the  Training  and
     consulting  segment,  which accounted for 57% and 24% of consolidated sales
     for the three months ended September 30, 1999.

7    Commitments and contingencies

     Legal matters

     Certain  claims,  suits and  complaints  arising in the normal  course with
     respect to the Company's  uniformed security guard services operations have
     been filed or are pending against the Company. Generally, these matters are
     all  covered by a general  liability  insurance  policy.  In the opinion of
     management,  all such  matters  are without  merit or are of such kind,  or
     involve  such  matters,  as would  not  have a  significant  effect  on the
     financial position or results of operations of the Company,  if disposed of
     unfavorably.

                                                                               9
<PAGE>
                     NETWOLVES CORPORATION AND SUBSIDIARIES

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                  (Unaudited)

                 THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998



7    Commitments and contingencies (continued)

     Comdisco, Inc. agreement

     On July 26,  1999 the  Company  entered  into an  agreement  with  Comdisco
     whereby  Comdisco  will provide  management,  installation  and  technology
     services to the Company's  proprietary  Internet  distribution  system.  In
     addition,  the agreement  provides for the creation of a credit facility to
     be utilized in connection  with the sale and  installation of the FoxBox in
     up to 40,000 locations over a four-year  period.  However,  there can be no
     assurances  that the Company  will  actually  require the use of the credit
     facility.

     Under  the  agreement,  the  Company  intends  to lease  the  FoxBox to its
     customers for 48 months at a monthly fee  estimated  under the agreement at
     $200 . Comdisco  will then acquire all of the right,  title and interest in
     the equipment with the exception of intellectual property rights,  software
     upgrades and software application and content and take an assignment of the
     lease  from the  Company,  without  recourse.  At the  time of  assignment,
     Comdisco will pay the Company 95% of the present value of the rental stream
     using an interest rate  commensurate with each customer's credit rating and
     prevailing market rates.

     In connection with the agreement,  Comdisco was granted a five-year warrant
     to purchase 125,000 shares of the Company's  unregistered  common stock, at
     an exercise price of $10 per share (Note 5).

8    Subsequent events

     Private placement

     In November 1999, the Company sold 182,500  shares of  unregistered  common
     stock  to a group  of  accredited  investors  at $15 per  share (a total of
     $2,737,500) exclusive of commissions and fees of approximately 7%.

                                                                              10
<PAGE>
ITEM 7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
          CONDITION AND RESULTS OF OPERATIONS

Forward Looking Statements

The Form 10-Q includes,  without limitation,  certain statements  containing the
words  "believes."  "anticipates",  "estimates",  and words of a similar nature,
constitute  "forward-looking  statements"  within  the  meaning  of the  Private
Securities  Litigation Reform Act of 1995. This Act provides a "safe harbor" for
forward-looking   statements  to  encourage  companies  to  provide  prospective
information  about  themselves  so long as they  identify  these  statements  as
forward  looking  and  provide  meaningful,  cautionary  statements  identifying
important  factors that could cause actual  results to differ from the projected
results.  All statements  other than  statements of historical fact made in this
Form 10-Q are  forward-looking.  In particular,  the statements herein regarding
industry  prospects and future  results of operations or financial  position are
forward-looking  statements.  Forward-looking  statements  reflect  management's
current expectations and are inherently uncertain.  The Company's actual results
may differ significantly from management's expectations.

Overview

The  Company  is a  corporation  with a  limited  operating  history,  formed in
February  1998,  when it commenced  field trial and limited sales of its primary
product,  "The  FoxBox".  Additionally,  efforts  were made to obtain  operating
capital  and  convert  the  Company to a public  entity.  This was  successfully
accomplished  through a reverse merger with Watchdog  Patrols,  Inc., a publicly
traded (OTCBB),  non-reporting  corporation.  Operating  expenses have increased
significantly since the Company's  inception.  This reflects the cost associated
with the formation of the Company as well as increased  efforts to promote sales
of  the  FoxBox  (Multi-  services  Internet  communications  gateway),  recruit
personnel, build operating infrastructure and continued product development. The
FoxBox is a multi-  functional  product that connects  business  networks [Local
Area Networks (LANs) and Wide Area Networks (WANs)] to the Internet. It supports
secure  access to the Internet for 3 to 400 users  through a single  connection,
provides  advanced  electronic  mail functions for unlimited  users and delivers
firewall  security.  The Company's  initial  target markets are the end users in
small and mid-size businesses and large organizations with satellite offices. In
January  1999 the  Company  was able to secure  two  Agreements  which  have the
potential to generate significant revenue the terms of the agreements. The first
of which would be the TSG ("Sullivan")  agreements,  whereby Sullivan  appointed
the Company as its exclusive  provider of the Company's  multi-service  Internet
delivery  system (known as "FoxBox") to be used in conjunction  with  Sullivan's
proprietary  interactive distance learning training programs.  The period of the
agreement is for a term of five years.  In July 1999,  the Company  acquired TSG
and in July 1999 secured a $320 million credit  facility with Comdisco,  Inc. to
finance the anticipated sales to be generated from the application of the FoxBox
technology to TSG's client base. Comdisco also has agreed to provide management,
installation and technology  services for FoxBoxes sold to this client base. The
second  agreement is with Anicom,  Inc.  ("Anicom").  The Company entered into a
five-year  exclusive  master   distribution   agreement  with  Anicom,  Inc.  to
distribute the FoxBox throughout North America.

The Company has a limited  operating  history in which to base an  evaluation of
the business and prospects.  The Company's prospects must be considered in light
of the  risks  frequently  encountered  by  companies  in  their  early  stages,
particularly for companies in the rapidly evolving technology industry.  Certain
risks for the  Company  include,  but are not  limited to an  unproven  business
model,  capital  requirements and growth  management.  To counter this risk, the
Company  must,  among other  things,  increase  its customer  base,  continue to
develop its distribution network and product offerings, successfully execute its
business and marketing plan, and expand the operating infrastructure.  There can
be no assurance  that the Company will be successful  in addressing  such risks,
and the failure to do so could have a material  adverse  effect on the Company's
financial condition and results of operations.  Since inception, the Company has
incurred  significant  losses and as of  September  30, 1999 had an  accumulated
deficit of  approximately  $8.8 million.  The Company  believes that its success
depends in large part on its ability to create market  awareness and  acceptance
for the FoxBox,  raise additional  operating  capital to grow operations,  build
technology  and  non-technology  infrastructures,  expand  the  sales  force and
distribution network, and continue new product R&D.
<PAGE>
Results of Operations

As a result of the July 1999 acquisition of TSG,  NetWolves and its subsidiaries
operated in two business  segments,  the Technology segment and the Training and
consulting segment.  The net sales from operations were $137,951 and $44,753 for
the three months ended September 30, 1999 and September 30, 1998,  respectively.
Sales for the first quarter of fiscal 2000 were  primarily  attributable  to the
training and  consulting  business  segment.  Although  training and  consulting
revenue is currently derived from traditional leader-lead training and benchmark
studies,  the Company's strategic focus is on distance learning.  The Company is
currently  "beta testing"  products  utilizing the FoxBox  technology to deliver
distance learning to existing clients in the petroleum industry. In fiscal 1999,
the Company  delivered an initial  stocking order of 500 FoxBoxes ($1.7 million)
to Anicom.  As of July 1999 the Company  has  dedicated  resources  to train and
support the Anicom sales force in developing demand in the Anicom sales channel.
$45,730 of  investment  income  was  generated  through  September  30,  1999 as
compared to $15,716 for the period ended  September  30,  1998.  The increase is
primarily attributable to the additional amounts of securities held with respect
to the prior period.

NetWolves had gross profit of 31% for the period ended September 30, 1999. As of
yet, the Company has not had a full year of  production in order to have a basis
of comparison.  However, the Company believes that gross profit greater than 31%
are achievable at increased  production  levels.  These results will depend,  in
part, on the effects of  economies-of-scale,  the use of third-party  assemblers
and the ability to competitively  purchase rapidly evolving commodity  hardware,
which  is  a  significant  component  of  "cost  of  goods  sold."  The  use  of
non-Proprietary  hardware is one of many inherent  design features of the FoxBox
which   facilitates   an  efficient  and  cost   effective   production   cycle.
Additionally,  this  allows  the  Company  to  focus  its core  R&D  efforts  on
developing  cutting edge  Software.  There can be no assurance  that the Company
will be successful in increasing  its margins due to one or more factors.  These
factors include, but are not limited to  increases/decreases in direct labor and
material cost, as well as increased  competition and general economic conditions
in the future.

Operating  expenses were  $2,876,012  and  $1,625,740 for the three months ended
September  30,  1999 and  September  30,  1998,  respectively.  The  increase in
operating  expense is primarily due to the  continued  growth of the Company and
the addition of the training and  consulting  business  segment.  The  operating
expenses for September 30, 1999 consisted primarily of $2,085,287 of general and
administrative costs relating to the establishment of the infrastructure and the
continued  operations of the business.  $184,718 of costs were incurred relating
to research  and  development,  and $606,007  related to selling and  marketing.
Included in the above  mentioned  operating  expenses are $1,155,844 of non-cash
compensation for services in the form of the Company's common stock and options.
Operating  expenses  for the period  June 30,  1998 were  limited and provide an
inadequate basis for comparability purposes.

Liquidity and Capital Resources

On June 17, 1998 the Company  executed a reverse  merger with Watchdog  Patrols,
Inc.  a  publicly  traded  non-reporting  company  engaged  in the  activity  of
providing   armed   and   unarmed   security   guard   services   for   the  New
York/Metropolitan Area. This merger made available to the Company, approximately
$2.3 million of cash, cash  equivalents and marketable  securities to be used as
operating  capital.  On November 22, 1998 the Company sold substantially all the
assets  of the  security  guard  business,  consisting  primarily  of  uniforms,
vehicles,  computer  systems and furniture to a third party.  This  generated an
additional  $600,000 of cash flow to the  Company.  On June 29,  1999  NetWolves
concluded a private  offering of 800,000 shares of common stock which  generated
$5.4 million (net of $.6 million of  expenses).  Additionally,  on September 29,
1999 the Company completed a private placement of 100,000 shares of common stock
to one  accredited  investor for $1.4 million (net of 100,000 of expenses) to be
used in operations.

NetWolves had cash and cash equivalents of $5.3 million million at September 30,
1999. In November  1999,  the Company  completed a private sale of an additional
182,500 shares of common stock to accredited  investors for $2.5 million (net of
expenses of approximately 7%). Management believes that the Company has adequate
capital resources to meet its working capital needs for at least the next twelve
months  based  upon  its  current  operating  level.  However,  there  can be no
assurance that the Company will have  sufficient  capital to finance its planned
growth.  The  Company  intends to raise  additional  monies from the sale of its
capital stock to fund its growth over the next 24 to 36 months.
<PAGE>
Year 2000 Issues

Background.  Some computers,  software,  and other equipment include programming
code in which calendar year data is abbreviated to only two digits.  As a result
of this design decisions, some of these systems could fail to operate or fail to
produce  correct  results if "00" is interpreted to commonly  referred to as the
"Millennium Bug" or "Year 2000 problem.

Assessment.  The Year 2000 problem could affect computers,  software,  and other
equipment which NetWolves Corporation uses, operates, or maintains. Accordingly,
NetWolves Corporation has reviewed its internal computer programs and systems to
ensure  that the  programs  and  systems  are  Year  2000  complaint.  NetWolves
Corporation   presently  believes  that  its  computer  systems  are  Year  2000
complaint. However, while the estimated cost of these efforts is not expected to
be  material  to its  overall  financial  position,  or any  year's  results  of
operations, there can be no assurance to this effect.

Products  Sold  to  Consumers.   NetWolves  Corporation  believes  that  it  has
substantially  identified and resolved all potential Year 2000 problems with the
software products it develops and markets. However, it also believes that is not
possible  to  determine  with  complete  certainty  that all Year 2000  problems
affecting its products have been  identified or corrected due to the  complexity
of these  products and the fact that these  products  interact  with other third
party vendor  products and operate  with other  systems  which are not under its
control.

NetWolves  Corporation  recognizes the significance of the Year 2000 issue as it
relates to internal  systems,  including IT and non-IT  systems.  To that extent
NetWolves Corporation has achieved the following:

Internal Information Technology  Infrastructure.  NetWolves Corporation believes
that it has identified,  modified upgraded, or replaced substantially all of the
major computers, software applications, and related equipment used in connection
with its internal  operations in order to minimize the possibility of a material
disruption to its business. While most of the upgrades were planned as part of a
general  enhancement  to its  infrastructure,  the timing of the  upgrades  also
result in Year 2000 compliance.

Systems Other than Information  Technology Systems. In addition to computers and
related systems, the operation of office and facilities  equipment,  such as fax
machines,  photocopiers,  telephone switches,  security systems,  elevators, and
other  common  devices  may be  affected  by the Year  2000  problem.  NetWolves
Corporation  has assessed and  remediated the effect of the Year 2000 problem on
its office and  facilities  equipment  under its  control,  and the total  costs
associated with completing the required modifications, upgrades, or replacements
of these internal systems were not material.

Suppliers.   NetWolves  Corporation  has  initiated  communications,   including
surveys,  with business  critical third party suppliers of the major  computers,
software,  and other equipment which it uses, operates, or maintains to identify
and, to the extent possible,  to resolve issues involving the Year 2000 problem.
NetWolves Corporation has received vendor certification that all of its business
critical  information  technology  systems,  including  internal  communications
systems, accounting and finance systems, customer service systems, and sales and
marketing  tracking  systems,  are Year 2000 compliant.  Accordingly,  NetWolves
Corporation  does not anticipate any  significant  Year 2000 problems with these
systems;  however, it cannot ensure that these suppliers will resolve any or all
of their Year 2000  problems  with these  systems  before  the  occurrence  of a
material  disruption  to  its  business  or  that  of its  customers.  NetWolves
Corporation  believes  that its primary  exposure is  presently  with respect to
public utilities and  telecommunications  suppliers.  Any failure of these third
parties to resolve  Year 2000  problems  with their  systems in a timely  manner
could  have  a  material  adverse  affect  on  NetWolves  Corporation  business,
financial condition, and results of operation.
<PAGE>
Additionally,  NetWolves  Corporation  has initiated  communications,  including
surveys,  with all other  vendors  or  businesses  that  supply  any  service to
NetWolves Corporation.  While it has limited or no control over responses to its
inquiries and the actions of these third party suppliers,  NetWolves Corporation
does not view this category of services to be business critical and in the event
of a Year 2000 problem with a particular  vendor,  believes  that those goods or
services could easily be obtained from other sources.

Banking   Relationships.   NetWolves   Corporation   has  confined  its  banking
relationships to top tier financial institutions who have represented that their
respective  systems  are Year 2000  complaint.  Any  failure  of these  banks to
resolve Year 2000 problems with their systems in a timely manner would result in
financial  inconvenience and, depending upon the duration of the failure,  could
have a material adverse affect on NetWolves  Corporation financial condition and
results of operation.

Most Likely Consequences of Year 2000 Problems.  NetWolves  Corporation believes
that it has  identified all Year 2000 problems that could  materially  adversely
affect its business operations. However, it does not believe that it is possible
to determine with complete certainty that all Year 2000 problems which effect it
have been identified or corrected.

The number of devices  that could be affected and the  interactions  among these
devices are simply too numerous. In addition,  one cannot accurately predict how
many Year 2000 problem- related  failures will occur or the severity,  duration,
or financial  consequences of these perhaps  inevitable  failures.  In addition,
NetWolves  Corporation  is unable to determine  with any degree of certainty the
changes in buying  habits of its current and  potential  customers  due to their
concerns over Year 2000 issues. As a result,  NetWolves Corporation expects that
it could likely  experience a significant  number of operational  inconveniences
and  inefficiencies  that may divert  management's  time and  attention  and its
financial  and  human  resources  from  its  ordinary  business  activities.  In
addition, NetWolves Corporation may experience a lesser number of serious system
failures that may require  significant efforts by it or its customers to prevent
or alleviate material business disruptions.

ITEM 3  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.
<PAGE>
ITEM 1. LEGAL PROCEEDINGS

     None.


ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

     On September  29, 1999,  the Company  sold 100,000  shares of  unregistered
     common stock to an accredited investor at $15 per share.


ITEM 3. DEFAULTS UPON SENIOR SECURITIES

        Not applicable.


ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

        Not applicable.


ITEM 5. OTHER INFORMATION

        Not applicable.


ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

     (a)  Exhibits
          --------
          Exhibit 27- Financial Data Schedule (for electronic submission only).

     (b)  Reports on Form 8-K
          -------------------
          Report on Form 8-K dated July 7, 1999, as amended.
<PAGE>
                                   SIGNATURES


Pursuant  to the  requirements  of the  Securities  Exchange  Act of  1934,  the
Registrant  has duly  caused  this  report  to be  signed  on its  behalf by the
undersigned thereunto duly authorized.




                                 BY:     NETWOLVES CORPORATION



                                         /s/  Walter M. Groteke
                                         ---------------------------------------
                                         Walter M. Groteke
                                         Chief Executive Officer





                                         /s/   Peter C. Castle
                                         ---------------------------------------
                                         Peter C. Castle
                                         Secretary-Treasurer









Date: November 19, 1999








<TABLE> <S> <C>

<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial staements from the quarterly period ending September 30, 1999
and is qualified in its entirety by reference to such financial statements.
</LEGEND>

<S>                             <C>
<PERIOD-TYPE>                   3-MOS
<FISCAL-YEAR-END>                          JUN-30-1999
<PERIOD-END>                               SEP-30-1999
<CASH>                                       5,376,269
<SECURITIES>                                   527,500
<RECEIVABLES>                                  127,429
<ALLOWANCES>                                    40,000
<INVENTORY>                                     64,790
<CURRENT-ASSETS>                             6,227,748
<PP&E>                                         309,566
<DEPRECIATION>                                  31,006
<TOTAL-ASSETS>                               9,265,382
<CURRENT-LIABILITIES>                          712,806
<BONDS>                                              0
                                0
                                          0
<COMMON>                                        20,341
<OTHER-SE>                                   8,011,864
<TOTAL-LIABILITY-AND-EQUITY>                 9,265,382
<SALES>                                        137,951
<TOTAL-REVENUES>                               137,951
<CGS>                                           96,169
<TOTAL-COSTS>                                   96,169
<OTHER-EXPENSES>                             2,876,012
<LOSS-PROVISION>                                     0
<INTEREST-EXPENSE>                              10,491
<INCOME-PRETAX>                            (2,794,941)
<INCOME-TAX>                                         0
<INCOME-CONTINUING>                        (2,794,941)
<DISCONTINUED>                                       0
<EXTRAORDINARY>                                      0
<CHANGES>                                            0
<NET-INCOME>                               (2,794,941)
<EPS-BASIC>                                      (.46)
<EPS-DILUTED>                                    (.46)












</TABLE>



© 2019 IncJournal is not affiliated with or endorsed by the U.S. Securities and Exchange Commission