SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------------
FORM 10-KSB/A
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 1999 .
--------------------------------------------
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from: to
------------------- ----------------
Commission file number: 000-25257
---------
ELLIGENT CONSULTING GROUP, INC.
-------------------------------
(Name of Small Business Issuer in Its Charter)
Nevada 87-0453842
------ ----------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
152 West 57th Street, 40th floor
New York, New York 10019
------------------ -----
(Address of Principal Executive Offices) (Zip Code)
(212) 765-2915
--------------
(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $0.001 par value
(Title of Class)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 NO X
--------- -----
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B in this Form, and no disclosure will be contained, to the best of
registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB.
X
State issuer's revenues for its most recent fiscal year: $3,328,907
As of May 30, 2000, the number of shares of Common Stock outstanding was
17,119,226 and the aggregate market value of the Common Stock (based on the
closing price on that date) held by non-affiliates of the Company was
approximately $22,928,294.
<PAGE>
This Annual Report on Form 10-KSB (the "10-KSB") contains certain statements
concerning the future that are subject to risks and uncertainties. Additional
written or oral forward-looking statements may be made by the Company from time
to time, in filings with the Securities and Exchange Commission or otherwise.
Such statements include, among other things, information concerning
possible-future results of operations, capital expenditures, the elimination of
losses under certain programs, financing needs or plans relating to products or
services of the Company, assessments of materiality, predictions of future
events, and the effects of pending and possible litigation, as well as
assumptions relating to the foregoing, and those accompanied by the words
"anticipates," "estimates," "expects," "intends," "plans," or similar
expressions. For those statements we claim the protection of the safe harbor for
forward-looking statements contained in the Private Securities Litigation Reform
Act of 1995.
You should specifically consider the various factors identified in this 10-KSB,
including the matters set forth in "Item 1. Business," "Item 3. Legal
Proceedings," "Item 7. Management's Discussion and Analysis of Financial
Conditions and Results of Operations" and the Notes to Consolidated Financial
Statements that could cause actual results to differ materially from those
indicated in any forward-looking statements. Other factors that could contribute
to or cause such differences include, but are not limited to, capital
requirements, market acceptance, intellectual property rights and litigation,
risks in product and technology development and other risk factors detailed in
the Company's Securities and Exchange Commission filings.
Readers are cautioned not to place undue reliance on any forward-looking
statements contained in this 10-KSB, which speak only as of the date hereof. The
Company undertakes no obligation to publicly release the results of any
revisions to these forward-looking statements that may be made to reflect events
or circumstances after the date hereof or to reflect the occurrence of
unexpected events.
PART I
ITEM 1. BUSINESS
Current
Operations Elligent Consulting Group, Inc. ("Elligent"), a Nevada
corporation, is a holding company with two operating
subsidiaries, e-Vantage Company Limited ("e-Vantage") and
Elligent Consulting Services, Inc. ("ECS"). References in this
10-KSB to the Company, "we," "us" or "our" refer to Elligent,
e-Vantage, and ECS, unless otherwise noted.
Until December 1999, we had another operating subsidiary,
Conversion Services International, Inc. ("CSI"). Through this
subsidiary, we were engaged in the provision of information
technology consulting services, including data warehousing,
applications development, and information technology staffing
services (the "IT Business"). In December 1999, we adopted a
formal plan to dispose of CSI and have ceased its IT Business. As
part of the settlement agreement relating to the arbitration
proceeding known as Elligent Consulting Group, Inc. and Andreas
Typaldos, Petitioners v. Scott Newman and Glenn Peipert,
Respondents, CSI was sold or returned to its original owners from
whom Elligent had purchased it in September 1998.
Recently, we have started to focus our business on high end
e-business technology consulting as an "e-architect" consulting
firm . To that end, we acquired the consulting operations of a
small e-business consulting technology company, e-Vantage Company
Limited ("e-Vantage') in the United Kingdom.
Our goal is to focus on Internet and e-business related
consulting and services and to provide a full range of e-business
enablement services to major enterprises worldwide. Additionally,
we will continue our IT Technology Consulting business, as needed
in support of our e-business consulting and existing clients.
Our principal executive office is located at 152 West 57th
Street, 40th Floor, New York, New York 10019 and our telephone
number is (212) 765-2915.
The Industry Businesses today are using the Internet to create new revenue
opportunities by enhancing their interactions with new and
existing customers. Businesses are also using the Internet to
increase efficiency in their operations through improved
communications, both internally and with suppliers and other
business partners. This emerging business use of the Internet
encompasses both business-to-business and business-to-consumer
communications and transactions.
2
<PAGE>
While there are numerous benefits associated with e-business, to
gain or maintain a competitive advantage, companies must fully
understand the enterprise-wide implications of proposed solutions
and must implement these solutions with the most effective
technologies, systems and processes. Companies must integrate new
Internet applications within existing systems, deploying
mission-critical solutions rapidly with advanced technology to
support the solutions. In addition, the creation of e-business
solutions requires personnel with extensive technological skills
to plan and implement effective solutions that fully exploit the
benefits of e-business. Because the expertise needed by companies
to address e-business needs is typically outside their core
competencies, companies must either recruit and employ experts or
retain outside technology specialists.
The dramatic growth of the Internet and the expertise required to
create sophisticated e- business solutions has fueled the need
for the outsourcing of these solutions and the information
technology professionals who are capable of addressing the
challenges posted by e-business. It has become increasingly
difficult for companies to identify, recruit and retain these
skilled information technology professionals. Accordingly, to
augment internal resources, many companies have engaged
independent service providers to develop, design and maintain
their intranets, extranets, web sites and e-business
applications. The trend toward outsourcing these services has
generated an increased demand for providers of e-business
services.
Today, companies have extremely complex e-business needs, ranging
from Internet technology professionals to sophisticated
solutions. Due to the range of expertise required to address
these needs, and the time associated with hiring and training new
personnel, bringing expertise in-house is often not a viable
option. When retaining outside specialists and in order to
capitalize on e-business opportunities, companies need experts
who fully understand their industry. As companies increasingly
outsource their e-business solutions needs, and as these
e-business solutions become more complex, a significant need for
highly qualified e-business solutions providers has emerged.
Services Our mission is to offer a wide range of services to companies who
seek to capitalize on Internet-related opportunities to improve
and expand their businesses. Through our e- business services, we
will provide the strategy, design, development and support of
advanced e-business solutions that improve communications and
commerce on an enterprise-wide basis. Additionally, we will
continue our IT Technology Consulting business to meet the
demands of our current clients and to support the IT Technology
requirements of our e-business practice.
We wish to offer clients a comprehensive range of services that
focus on the efficient delivery of reliable and scalable
e-business solutions. These services include e-business strategy,
systems architectures and development, analysis of
infrastructures, design and planning, implementation, testing,
and training. While we may offer comprehensive, end- to-end
e-business solutions, our clients may contract for the specific
services they require. Depending on their requirements, our
clients may engage us to perform one or more of the following
services:
e-Business Strategy. We work with clients to analyze their
strategic e-business position. We demonstrate, among other
things, how clients can use interactive and transactional systems
to achieve their business objectives. We recommend strategies
that use clients' existing strengths, and explain how the latest
technology can improve their business processes. Depending on the
project, we can then prepare a plan that specifies how the client
can use technology to become more competitive, become an
e-business leader and increase revenue and profitability.
e-Business Solutions Architectures and Enablement. We design and
build solutions that encompass our clients' enterprises. These
solutions can take into account various e- business architectures
and may involve the creation of new web-centric systems or the
transformation and enablement of current systems that customers
may have for the web.
Clients Since we have only recently entered the e-business service
market, we do not have many existing clients. Currently, our
biggest clients are Deutsche Bank and Revco. Most of our
agreements are generally terminable by the client upon 30 days
notice.
3
<PAGE>
Sales Our principal target clients are companies who seek to capitalize
on Internet-related opportunities to improve and expand their
businesses. We market our services through our direct sales force
and referrals, including our listing as an IBM preferred
provider. Our direct sales organization consists of five sales
representatives, and we anticipate adding personnel in the future
as needed.
Competition The information technology services industry is extremely
competitive. A number of companies compete with us in select
markets with substantially similar services. In most of the
markets in which we compete, we believe that there are
participants that have significantly greater financial, technical
and marketing resources than we do. Also, in order to remain on
our clients' vendor lists and develop new client relationships,
we must satisfy their requirements at competitive rates. Although
we continually attempt to lower our costs, there are other
similar service organizations that may offer the same or similar
services as we offer at the same or lower costs. Additionally, in
some cases certain of our clients require that their vendors
reduce rates after services have commenced. There can be no
assurance that we will be able to compete effectively on pricing
or other requirements and, as a result, we may lose clients or be
unable to maintain historic gross margin levels or to operate
profitably.
The market for e-business solutions is subject to rapid
technological change and is significantly affected by new product
introduction and other activities of industry participants. While
the market for e-business solutions is relatively new, it is
already highly competitive and characterized by an increasing
number of entrants that have introduced or developed products and
services similar to those we offer. We believe that competition
will intensify in the future. We compete on the basis of a number
of factors, including architectural design and systems
engineering expertise, quality, pricing and speed of service
delivery, and industry knowledge. With our planned growth of
service offerings, we believe that we will have an advantage in
cross-selling additional services and solutions to our client
base. However, there can be no assurances that our growth of
service offerings will provide any such advantages. In addition,
we intend to target new clients by (i) utilizing the business
contacts of management personnel, (ii) continuing to leverage and
expand our direct sales efforts, (iii) increasing the hiring of
consultants with existing client relationships, and (iv) pursuing
referrals from existing clients and third- party organizations
including hardware partners, software partners and industry
research organizations.
We believe that we will compete principally with strategy
consulting firms, Internet professional services firms, systems
integration firms, technology vendors, advertising and
interactive agencies and internal information systems groups. Our
competitors may be better positioned to address developments or
may react more favorably to changes, which could have a material
adverse effect on our business, results of operations and
financial condition. Many of the companies that provide services
in our markets have significantly greater financial, technical
and marketing resources than we do and generate greater revenues
and have greater name recognition than we do. In addition, there
are relatively low barriers to entry into our markets and we have
faced, and expect to continue to face, competition from new
entrants into our markets.
Strategy and
Growth Plans In our view, companies today require strategic service providers
to provide a broad range of Internet related capabilities and
services. Such a service provider must provide strategic industry
insights combined with extensive technological skills to design
and create applications, technology infrastructure and business
systems that are reliable, robust, secure, scalable and
extensible. Moreover, it must have a structured approach and the
skills necessary to achieve the rapid innovation and deployment
of e-business demanded by today's competitive marketplace. Such a
skill set must include the ability to understand and integrate a
wide spectrum of both emerging and existing technologies.
Our plan, therefore, is to maintain a comprehensive understanding
of the relevant business issues, develop the ability to design
and implement appropriate integrated e-business solutions that
can help our clients meet their strategic business goals, and
evolve the skill sets, practice areas, and tools necessary to
deliver such solutions in a timely and cost- effective manner. We
believe that we can achieve this strategy through internal growth
and through strategic acquisitions that will provide us with
additional well-trained, high- quality professionals, new service
offerings, additional industry expertise, a broader client base
and an expanded geographic presence.
Employees and
Recruitment Taking into account the discontinuation of CSI's operations, as
of December 31, 1999, we had 43 employees and consultants. Of
this total, 36 were employees and consultants offering billable
services to our customers and seven were in sales, finance,
administration, and executive management. Including CSI, as of
December 31, 1999, we had 186 employees and consultants. Of this
total, 162 were employees and consultants offering billable
services to our clients and 24 were in sales, finance,
administration and executive management. As of May 30, 2000 we
had approximately 65 employees and consultants. Of this total,
approximately 50 were employees and consultants offering billable
services our customers and the remainder were in sales, finance,
administration and executive management. Our future success will
depend in part on our ability to hire adequately trained
personnel who address the increasingly sophisticated needs of our
clients. Our on-going employee and consultant needs arise from:
Increasing demand for our services;
Consultant turnover; and
The clients' requests for professionals trained in the newest
information and development tools and technologies.
Few of our employees are bound by non-compete agreements.
Competition for personnel in our industry is significant and we
may have difficulty in attracting and retaining an optimal level
of qualified personnel in the future. In particular, competition
for the limited number of qualified project managers and
professionals with certain specialized skills, such as working
knowledge of certain sophisticated software and the Internet is
intense. Because of this, recruitment of employees and
consultants is a critical element in our success. We will
continue to devote significant resources to meeting our personnel
requirements.
The Company offers or is committed to offering a number of
programs designed to retain our trained personnel, including:
Competitive salaries;
Stock option plan;
Training of employees and consultants in new skill sets; and
medical benefits.
Intellectual
Property
Rights We rely upon a combination of trade secrets, nondisclosure and
other contractual arrangements, and copyright and trademark laws,
to protect our proprietary rights. We enter into confidentiality
agreements with our employees, generally require that our
consultants and clients enter into such agreements, and limit
access to and distribution of our proprietary information. There
can be no assurance that the steps we take in this regard will be
adequate to deter misappropriation of our proprietary information
or that we will be able to detect unauthorized use and take
appropriate steps to enforce our intellectual property rights.
Our History In March 1987, our predecessor, Coronado Ventures, Inc., was
incorporated in Nevada. As Coronado Ventures, we filed a
registration statement on Form S-18 with the SEC, which became
effective in November 1989. Pursuant to the registration
statement we sold 1,000,000 units consisting of one share of
Common Stock and three Common Stock purchase warrants, raising
$50,000 in gross proceeds. None of the warrants were exercised
prior to expiration.
Shortly after the completion of the above offering, we acquired
100% of the issued and outstanding common stock of Tahoeview
Cablevision, Inc., a cable television company, for which we
issued shares of our Common Stock. At the time of this
transaction we changed our name to Westar Group, Inc. Tahoeview
Cablevision operated as a subsidiary of Westar Group.
In 1991, we acquired the assets of several other cable television
systems located in eastern Montana through a newly formed
subsidiary, Westar Group North. We issued shares of our Common
Stock and paid cash for the purchase of these assets. The cash
portion of
4
<PAGE>
the purchase price was part of a revolving credit facility
obtained from a financial institution. Upon expiration of the
revolving credit facility in 1993, and the inability of Tahoeview
Cablevision and Westar Group North to either renew the facility
or pay off the balance owed, the financial institution filed a
suit in U.S. District Court, District of Massachusetts, naming
our subsidiaries Tahoeview Cablevision and Westar Group North as
defendants. The district court appointed a permanent receiver to
oversee our subsidiaries during the pendency of their bankruptcy.
Westar Group was not directly involved in this action. On July
31, 1997, the district court ordered the receivership closed and
that Tahoeview Cablevision and Westar Group North be dissolved.
This left Westar Group, the holding company, as the only
surviving entity.
In July 1997, we changed our name from Westar Group to Arena
Group, Inc. and began a search to locate suitable businesses with
which to reorganize. On July 23, 1998, we entered into a
non-binding letter of intent to merge with Patra Capital Ltd., a
Delaware corporation ("Patra Capital"). In order to complete this
merger we formed a special purpose acquisition subsidiary, Patra
Acquisition, Inc., a Delaware corporation. Effective July 31,
1998, Patra Acquisition and Patra Capital merged under an
agreement and plan of merger and Patra Capital was the surviving
entity. As a result of this transaction, Patra Capital became our
wholly-owned subsidiary, the management of Patra Capital became
the management of Arena and we changed our name to Elligent
Consulting Group, Inc.
On September 3, 1998, with an effective date of August 1, 1998,
for accounting purposes, we issued 12,950,000 shares of
Elligent's restricted common stock to the then current
shareholders of Patra Capital in exchange for all of the issued
and outstanding common stock of Patra Capital.
On September 21, 1998, effective August 1, 1998, for accounting
purposes, we purchased CSI through our wholly owned subsidiary,
Patra Capital.
On July 27, 1999, the Company acquired all of the issued and
outstanding common stock of ECS. Due to common ownership, the
acquisition was accounted for at book value in a manner similar
to a pooling of interests. In anticipation of the acquisition,
options to acquire common stock in ECS previously granted to ECS
employees were converted to options to acquire common stock in
Elligent at a price of $0.05 per common stock.
Effective January 1, 2000, we acquired all of the issued and
outstanding stock of e- Vantage. In connection with the
transaction, we issued 1,000,000 shares of our Common Stock and
have provided e-Vantage with approximately $1,000,000 in working
capital, as of May 30, 2000.
Cautionary Factors that May Affect Future Results
The following important factors, among others, could cause our actual results to
differ materially from those contained in forward-looking statements made in
this 10-KSB or presented elsewhere by management from time to time.
Unprofitable Operating
History, Discontinued
Operations and Limited
Financial
Resources Our Company began operations by purchasing CSI, the Company's
first operating subsidiary which has since been discontinued as
of December 31, 1999 (the "Discontinued Business"), in order to
enter into the IT Technology Consulting business on September 21,
1998. While the CSI operating subsidiary was profitable, the
consolidated operations of the Company, which include holding
company overhead, executive and administration costs, legal and
professional expenditures in connection with the acquisition of
CSI, and legal and professional expenditures in connection with
other acquisitions and plans, have not historically been
profitable, and as of December 31, 1999, the Company suffered a
net loss of $7,338,070, and at December 31, 1999, had a net
capital deficiency and a net working capital deficiency. Of this
$7,338,070 net loss , $3,492,755 was contributed from losses from
operations of the Discontinued Business and $2,244,909 was
contributed from losses on disposal of the Discontinued Business,
for a total of $5,737,664 of net losses related to the
Discontinued Business. These
5
<PAGE>
conditions raise substantial doubts about our ability to continue
as a going concern. During fiscal 2000, we expect to meet working
capital and other cash requirements with cash derived from
operations and other financing as required, including the
issuance of equity securities and other consideration that can
dilute current owners or investors purchasing our Common Stock,
although there can be no assurance that we will generate cash
from our operations in the near future or that we will obtain
financing on acceptable terms. We must continue to improve the
efficiency of our operations to achieve and maintain positive
cash flow from operations. See "- Liquidity and Capital
Resources," and Note 10- Going Concern of the Notes to Financial
Statements. There is no assurance, however, that we will be able
to continue as a going concern, that cash from operations and the
other sources described above will be achieved or will be
sufficient for our needs, or that we will be able to achieve
profitability on a consistent basis.
If Businesses Do
Not Increase Their
Use of the Internet as a
Means for Conducting
Commerce, Our Revenues
will be Adversely
Affected Our future success depends heavily on the increased acceptance
and use of the Internet as a means for conducting commerce. We
will focus our services on the development and implementation of
Internet strategies and solutions. If commerce on the Internet
does not continue to grow, or grows more slowly than expected,
our business, financial conditions and results of operations
would be materially adversely affected.
We Have A Limited
Operating History In
E-Business Solutions
Services, And It May
Be Difficult For You
To Assess Our Prospects
For Success Although we began operations in September 1998, until January
2000, our principal business was information technology
consulting, from which we derived all of our revenue in 1999. We
have not generated a significant portion of our revenue from the
design and development of e-business solutions services. We use
technologies and sell services that are themselves part of a
relatively new industry known as the e-business services market.
Accordingly, we cannot predict future results of operations as a
provider of e-business solutions services, and we cannot assure
you that we have accurately identified all of the risks that
relate to this business.
If We Do Not Attract And
Retain Qualified Professional
Staff, We May Not Be Able to
Adequately Perform Our
Client Engagements And
Could Be Limited In
Accepting New Client
Engagements Our business is labor intensive and our success will depend in
large part upon our ability to attract, retain, train and
motivate highly skilled employees. Because of the rapid growth of
the Internet, there is intense competition for employees who have
strategic, creative design, technical and program management
experience. In addition, the Internet has created many
opportunities for people with the skills we seek to form their
own companies or join startup companies and these opportunities
frequently offer the potential for significant future financial
profit through equity incentives which we cannot match. We may
not be successful in attracting a sufficient number of highly
skilled employees in the future, or in retaining, training and
motivating the employees we are able to attract. Any inability to
attract, retain, train and motivate employees could impair our
ability to adequately manage and complete existing projects and
to bid for or accept new client engagements.
Contracts We normally offer professional services through agreements
providing that our services are rendered on a best-efforts basis,
that we make no express or implied warranties and that the client
must continue to pay all charges incurred prior to the
termination of the
6
<PAGE>
agreement. Because services are typically rendered on an
as-required basis, we do not consider our backlog of unfinished
assignments significant in understanding our business.
The typical client contract term is for a few months but may upon
extension last for more than one year and there can be no
assurance that a client will renew its contract when it
terminates. In fact, following expiration of an original contract
term with any given client, it is often the case that we begin
operating on an as-needed basis not under any contract of
specific duration. Our contracts are generally cancelable by the
client at any time and clients may unilaterally reduce or
increase their use of our services under such contracts without
penalty. The termination or significant reduction of our business
relationship with any of our significant clients could have an
adverse effect on our operating results.
We generally price our services to clients on a time and
materials basis and maintain price ranges that reflect the
technical skills and experience levels of the consultants on each
project.
We Will Incur
Additional Expenses
As We Continue The
Development Of Our
E-Business
Infrastructure We intend to continue to develop new services and product lines
to address our clients' diverse needs. As a result, we will need
to increase our research and product development, sales and
marketing, client support and administrative functions to support
anticipated increased levels of operations from these new
services and products. We may not be successful in creating this
infrastructure, and we may not realize any increase in the level
of our revenue and operations to offset the additional expenses
that we incur.
Acquisition
Strategy A key element of our strategy for the future is expansion through
the acquisition of companies that have complementary businesses,
that can utilize or enhance our existing capabilities and
resources or that expand our existing range of services in the
e-business service marketplace.
As a result, we continually evaluate potential acquisition
opportunities, some of which may be large in size or scope when
compared to our size. Acquisitions involve a number of special
risks, including the time associated with identifying and
evaluating possible acquisitions, the diversion of management's
attention to the integration of the operations and personnel of
the acquired companies, the incorporation of acquired services
into our services, possible adverse short-term effects on our
operating results, the realization of acquired intangible assets
and the loss of key employees of the acquired companies.
To accomplish future acquisitions we may issue equity securities
and other forms of consideration that could cause dilution to
investors purchasing our Common Stock. There can be no assurance
that we will be able to identify additional suitable acquisition
candidates, consummate or finance any such acquisitions, or
integrate any such acquisitions successfully into our operations.
International Expansion
Of Our Business Could
Result In Financial Losses
Due To Changes In Foreign
Economic Conditions Or
Fluctuations In Currency
And Exchange
Rates We expect to continue to depend heavily on and to expand our
international operations. We currently have offices in the United
Kingdom and are beginning operations in Germany. While our
international subsidiaries have experience in marketing, selling
and providing services internationally, the Company as a whole
has limited experience in being a global company and in operating
across a number of international markets. Consolidated financial
results of the Company could be affected and suffer because they
7
<PAGE>
depend heavily on international operations which are further
subject to other inherent risks, including:
- recessions in foreign countries;
- fluctuations in currency exchange rates;
- the scheduled conversion to the euro by most European Union
members;
- difficulties and costs of staffing and managing foreign
operations;
- reduced protection for intellectual property in some countries;
- political instability or changes in regulatory requirements;
and
- U.S. imposed restrictions on the import and export of
technologies.
We Will Need To Expand
Our Sales And Distribution
Capabilities In Order To
Increase Market Awareness
Of Our Name And
Increase Our
Revenues We will need to expand our marketing efforts to increase
awareness and positive reaction in the business community to our
name and to our new focus on e-business, as well as to generate
increased revenues. Our services require a sophisticated sales
effort targeted at the senior management of prospective clients,
and new employees require extensive training, in terms of both
time and resources, before they become productive. We may not be
able to hire enough qualified individuals in the future and our
new employees may not achieve necessary productivity levels.
If We Do Not Keep Pace
With Technological Changes,
Our Competitive Position
Will Suffer Our markets and the technologies used in our solutions are
characterized by rapid technological change. Failure to respond
in a timely and cost-effective way to these technological
developments would have a material adverse effect on our
business, financial condition and results of operations. We
expect to derive a substantial portion of our revenues from
providing Internet solutions that are based upon leading
technologies and that are capable of adapting to future
technologies. As a result, our success will depend on our ability
to offer services that keep pace with continuing changes in
technology, evolving industry standards and changing client
preferences. We may not be successful in addressing future
developments on a timely basis. Our failure to keep pace with the
latest technological developments would have a material adverse
effect on our business, financial condition and results of
operations.
Our Failure To Meet
Our Client Expectations
Could Result In Losses
And Negative
Publicity Our client engagements involve the creation, implementation and
maintenance of e- business systems and other applications that
are often critical to our clients' businesses. Any defects or
errors in these systems or failure to meet clients' expectations
could result in:
- delayed or lost revenues;
- increased costs in correcting any problems or errors;
- negative publicity regarding us and the quality of our
services;
- claims for substantial damages against us, regardless of our
responsibility for such failure, which claims may exceed our
insurance coverage; and
8
<PAGE>
- our inability to attract or retain clients.
We Face Significant
Competition In The
Markets That Are
New And Rapidly
Changing The markets for the services we provide are highly competitive.
We believe that we currently compete principally with strategy
consulting firms, Internet professional services firms, systems
integration firms, technology vendors and internal information
systems groups. Many of the companies that provide services in
our markets have significantly greater financial, technical and
marketing resources than we do and generate greater revenues and
have greater name recognition than we do. In addition, there are
relatively low barriers to entry into our markets and we have
faced, and expect to continue to face competition from new
entrants into our markets.
We believe that the principal competitive factors in our markets
include:
- ability to integrate strategy, creative design and technology
services;
- quality of service, speed of delivery and price;
- industry knowledge;
- sophisticated project and program management capability; and
- Internet technology expertise and talent.
We believe that our ability to compete also depends in part on a
number of competitive factors outside our control, including:
- the ability of our competitors to hire, retain and motivate
professional staff;
- the development by others of Internet services or software that
is competitive with our solutions; and
- the extent of our competitors' responsiveness to client needs.
There can be no assurance that we will be able to compete
successfully in our markets.
Dependence Upon Major
Customers and Large
Contracts Our five largest clients, when combined, account for 52% of our
total revenues and 40% of accounts receivable as of December 31,
1999. Our largest client accounts for 36% of our total revenues
and 26% of accounts receivable as of December 31, 1999. These
clients are CSI clients, and the operations of CSI have been
discontinued.
Dependence on Key
Management
Personnel The success of our growth and business strategies will be highly
dependent upon the efforts of our key management personnel and
management personnel of acquired companies, particularly our
executive officers. The loss of the services of any one of our
executive officers could have an adverse effect on our business
and on the implementation and success of our growth strategy.
However, we have applied for key man insurance with respect to
Andreas Typaldos in the amount of $500,000. We will evaluate the
necessity of carrying such insurance on selected individuals at
acquired companies on an ongoing basis. The amount of insurance,
however, may not be sufficient to offset our losses if the
services of any of our executive officers were unavailable. It is
not possible to estimate the amount of any such loss.
Government Regulation
Could Interfere With The
Acceptance Of The Internet
And Electronic Commerce,
Which Would Adversely
9
<PAGE>
Affect The
Demand For Our
Services Any new laws and regulations applicable to the Internet and
electronic commerce that are adopted by federal, state or foreign
governments could dampen the growth of the Internet and decrease
its acceptance as a commercial medium. If this occurs, companies
may decide in the future not to pursue Internet initiatives,
which would decrease demand for our services. A decrease in the
demand for our services would have a material adverse effect on
our business, financial condition and results of operations.
If We Are Unable To
Protect Our Intellectual
Property, Our Business
Could Be Adversely
Affected Our success depends, in part, upon our intellectual property
rights. We rely upon a combination of trade secrets,
nondisclosure and other contractual arrangements to protect our
proprietary rights. We enter into confidentiality agreements with
our employees, generally require that our consultants and clients
enter into these agreements, and limit access and distribution of
our proprietary information. There can be no assurance that the
steps we take in this regard will be adequate to deter
misappropriation of our proprietary information or that we will
be able to detect unauthorized use and take appropriate steps to
enforce our intellectual property rights. In addition, although
we believe that our services and products do not infringe on the
intellectual property rights of others, there can be no assurance
that infringement claims will not be asserted against us in the
future, or that if asserted that any infringement claim will be
successfully defended. A successful claim against us could
materially adversely affect our business, financial condition and
results of operations.
We May Need Additional
Financing For Our Future
Capital Needs, Which May
Not Be Available On
Acceptable Terms,
If At All We may need additional financing within the next year if:
- our cash flow is not sufficient to fund our continuing
operations and growth;
- we increase our proposed rate of expansion;
- we require funds to develop or acquire new technology; or
- we acquire other businesses, products or technologies.
These transactions may dilute the value of the Common Stock
outstanding. We may have to issue securities that may have
rights, preferences and privileges senior to our Common Stock. We
cannot assure you that we will be able to raise additional funds
on terms acceptable to us, if at all. If future financing is not
available or is not available on acceptable terms, we may not be
able to fund our future needs which could have a material adverse
effect on our results of operations and financial condition.
Breaches Of Security On
The Internet May Adversely
Affect Our Business By
Slowing The Growth Of
E-Business The need to transmit confidential information, such as credit
card and other personal information, securely over the Internet
has been a significant barrier to e-business. Any well-publicized
compromise of security could deter more people from using the
Internet or from using information technology to conduct
transactions that involve transmitting confidential information
over the Internet. Furthermore, decreased traffic and e-business
sales as a result of general security concerns could cause
companies to reduce their spending on Internet-based solutions.
Insurance We have directors and officers, errors and omissions and
employment practice insurance in place. We purchased directors
and officers insurance in order to assist us in attracting and
retaining qualified individuals to serve on our board and to
become our officers. We
10
<PAGE>
obtained errors and omission insurance to help protect us from
liabilities arising from claims that our work on a particular
project resulted in losses to a client. We purchased employment
practices insurance to protect us against damages resulting from
claims by employees under various state and federal employment
laws. A finding by a court with jurisdiction over such a suit
that we were responsible for damages as claimed by a client or an
employee may have a material adverse effect on our operating
results. The insurance we have in place may not be sufficient to
cover the full extent of such losses.
Potential Fluctuations
in Operating
Results Our quarterly operating results may fluctuate significantly in
the future as a result of a variety of factors, many of which are
outside our control. Factors that may affect our quarterly
revenue or operating results generally include:
- costs relating to the expansion of the Company's business;
- the extent and timing of business acquisitions;
- the incurrence of merger costs;
- the timing of assignments from customers;
- the seasonal nature of our business due to variations in
holidays and vacation schedules;
- the introduction of new services by us or our competitors;
- price competition or price changes; and
- general economic conditions and economic conditions specific to
the information technology, consulting or information technology
staffing industries.
Quarterly sales and operating results can be difficult to
forecast even in the short term. Due to all of the foregoing
factors, it is possible that our revenues or operating results in
one or more future quarters will fail to meet or exceed the
expectations of securities analysts or investors. In such event,
the trading price of our common stock would likely be materially
adversely affected.
Price
Volatility The market price of our Common Stock could be subject to
significant fluctuations in response to variations in quarterly
operating results, our prospects, changes in earnings estimates
by securities analysts and by economic, financial and other
factors and market conditions that can affect the capital markets
generally, the industry segment of which we are a part, including
the level of and fluctuations in the trading prices of stocks
generally and by other events that are difficult to predict and
beyond our control. In addition, the securities markets have
experienced significant price and volume fluctuations from time
to time in recent years that have often been unrelated or
disproportionate to the operating performance of particular
companies. Such broad fluctuations may adversely affect the
market price of our common stock in the future.
Control by Current
Stockholders At May 30, 2000, our directors and executive officers owned
beneficially 11,383,618 shares of common stock, representing
approximately 76% of the outstanding common stock. As a result,
our directors and executive officers are able to exercise
significant influence on the election of our board of directors
and thereby direct our policies.
ITEM 2. DESCRIPTION OF PROPERTY
We maintain our principal executive office in approximately 2,000 square feet of
leased space at 152 West 57th Street, 40th Floor, New York, New York 10019.
ITEM 3. LEGAL PROCEEDINGS
11
<PAGE>
While from time to time the Company may be party to legal disputes or
proceedings, as of May 30, 2000 the Company is not party to any legal dispute or
proceeding. However, the Company is indirectly involved as beneficiary or
plaintiff in the Meinert et al. v. NetGain, Typaldos, and Berty action that is
pending before the US District Court of New Jersey. NetGain is an internet
incubator and venture capital provider, of which Messrs Typaldos and Berty are
directors. Furthermore, Typaldos is also a major shareholder of NetGain, even
though his percent shares in it are significantly less than those in the
Company, to which he has also provided loans of almost $6 million. Despite
these, the action is a derivative suit brought on behalf of the Company, and it
alleges that even though the Company did not have any funds or authority to
invest in internet start-ups as an internet incubator and venture capital
company like Netgain, nevertheless Typaldos and Berty, Directors of both the
Company and NetGain, diverted corporate opportunities for the Company to invest
in internet start- ups, notwithstanding the fact that such investments were not
exclusively provided to NetGain but were available to the Company as well as
other investors, and that they also misappropriated the idea of an internet
incubator and venture capital provider from the Company to NetGain. Without
comment to the merits of the case, and given the costs of time, management
attention, and legal fees, all parties have agreed to settle the action, and as
of May 30, 2000, the Court has been so notified. Final settlement and resolution
of the action, however, is awaiting formal approval of the settlement by the
Court. Pursuant to the proposed settlement the Company will receive up to
375,000 shares of newly issued shares of the Common Stock of NetGain.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We did not submit any matter for a vote by our shareholders, through the
solicitation of proxies or otherwise, during the fourth quarter of 1999.
12
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is traded over the counter on the bulletin board under the
symbol "ECGR." The following table sets forth, for the periods shown, closing
bid prices in dollars per share as reported by Bloomberg. Such prices generally
reflect market making transactions, but may also reflect inter-dealer prices
without retail mark- up, mark-down or commission and may not represent actual
transactions.
Fiscal Years Ended December 31, 1998 and 1999 Low High
--------------------------------------------- --- ----
Third Quarter (commencing August 1998) $4 7/8 $7 5/8
Fourth Quarter 1998 7 1/4 10 3/4
First Quarter 1999 9 1/2 10 3/4
Second Quarter 1999 7 7/8 10 3/4
Third Quarter 1999 1 1/4 8 1/8
Fourth Quarter 1999 1/2 1 1/2
The number of record holders of our common stock as of the close of business on
December 31, 1999, were approximately 525.
Dividend Policy
Holders of common stock are entitled to receive such dividends as may be
declared by our Board of Directors. We have not declared nor paid cash dividends
on our common stock and we do not anticipate that we will pay such dividends in
the foreseeable future. Rather, we intend to apply any earnings to the expansion
and development of the business. Any payment of future dividends on the common
stock and the amount thereof will be determined by the Board of Directors and
will depend among other factors, upon our earnings, financial condition and cash
requirements, and any other factors our Board of Directors deems relevant.
Recent Sales Of Unregistered Securities
In July 1997, we sold 214,285 shares of our common stock to two individuals at a
cash price of $0.07 per share under the private offering exemption of Section
4(2) of the Securities Act of 1933, as amended (the "Securities Act"). Lloyd T.
Rochford, who at the time of the placement was a director and an officer,
purchased 174,285 shares for $12,200 and Robert Morley purchased 40,000 shares
for $2,800.
In January 1998, we issued 200,000 shares of our common stock to KM Financial
for services rendered having a value of $14,000 or $0.07 per share under the
private offering exemption of Section 4(2) of the Securities Act.
In June 1998, we sold an additional 400,000 shares of our common stock to Robert
Morley at a price of $0.90 per share under the private offering exemption of
Section 4(2) of the Securities Act for $359,799, representing the purchase price
of $360,000 less certain incidental costs of $201.
In connection with our merger with Patra Capital we issued 12,950,000 shares of
our common stock, including 1,100,000 shares in connection with the acquisition
of CSI.
These 1,100,000 shares were subsequently returned to the Company as of may 30,
2000, in connection with the divestiture of CSI, and are now part of the
Company's Treasury Stock.
As of January 21, 1999, we issued 166,667 shares of common stock to Scott Newman
in lieu of cash due for the $1,000,000 installment due on the purchase note
payable to Mr. Newman.
As of January 21, 1999, we issued 83,334 shares of common stock to Glenn Peipert
in lieu of cash due for the $500,000 installment due on the purchase note
payable to Mr. Peipert.
As of May 30, 2000, we issued 1,000,000 shares to Hermann Seiler.
As of May 30, 2000, we issued 140,000 shares to Streich Lang in consideration of
payment for legal fees.
As of May 30, 2000, we issued 1,000,000 shares to the owners of e-Vantage
Company Limited.
13
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Summary Financial Information
The following table contains certain selected financial data of the Company and
is qualified by the more detailed financial statements and the notes thereto
provided in this report. The financial data for the short year (five months)
ended December 31, 1998, has been derived from the Company's financial
statements, which statements have been audited by Moore Stephens, P.C. and are
included elsewhere in this Report.
Statement of Operations Data
($ in thousands)
Twelve Months Ended Twelve Months Ended
December 31, 1999 December 31, 1998
Actual Pro Forma
------ ---------
Gross revenue $ 3,329 $ 0
Balance Sheet Data
As at December 31, 1999
Actual
------
Current Assets $ 1,273
Total Assets 1,293
Current Liabilities 7,723
Total Liabilities 7,723
Shareholders' Equity (6,429)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview As part of the Reorganization, we changed our name to Elligent
Consulting Group, Inc. on July 31, 1998. On September 3, 1998, with an effective
date of August 1, 1998, for accounting purposes, we issued 12,950,000 shares of
our restricted common stock to the then current shareholders of Patra Capital in
exchange for all of the issued and outstanding common stock of Patra Capital. At
that time, the management of Patra Capital became our management. The merger was
accounted for as a recapitalization.
On September 21, 1998, effective August 1, 1998, for accounting purposes, we,
through our wholly owned subsidiary, Patra Capital, purchased Conversion
Services International, Inc. Subsequently, the Company decided in December of
1999 to divest CSI and completed the divestiture on March 31, 2000 (see the
accompanying discontinued operations note to the financial statements).
In July 1999, the Company purchased the operations of ECS, which is a small
technology consulting company that provides infrastructure consulting services
to primarily New York financial services industry customers.
During end of year 1999 and in the first quarter of 2000, the Company planned
and began implementation of a shift and focus on e-business and e-architect
services. It did so by discontinuation of its general technology consulting
business, through the divestiture of its operating subsidiary in that area, CSI;
by re-aligning and limiting the operations of its ECS subsidiary into the
technology infrastructure area; and most importantly by acquiring and then
investing in the growth of its international e-business and e-architect
subsidiary, the e- Vantage Company Limited, which is exclusively focused on
e-business. The Company believed that successful operations and focus on
e-business through e-Vantage could then be used to affect the refocus on
e-business by its US operations and operating subsidiary there, ECS.
For the twelve month period ended December 31, 1999, we had revenue of $3.3
million versus $0.0 million in the year earlier period, an increase of 100%, and
a loss from continuing operations of $1.7 million with a net loss $7.3 million,
which includes $5.7 million in operating and disposal losses of the discontinued
operations.
14
<PAGE>
The major components of this loss are as follows:
Operating loss $1.1 million
Interest $0.6 million
Loss from discontinued operations $3.5 million
Loss on disposal of discontinued operations $2.2 million
The operating loss from our continued operations includes holding company
management and overhead expenses, including legal and professional fees related
to the Company's operation as a public company and to acquisition related
activities and efforts to locate equity and debt financing required to achieve
our growth goals.
The remaining analysis of results focuses on the operations of our operating
subsidiary, ECS.
ECS has been in the business of providing information technology and
infrastructure consulting services for less than two years. While ECS's revenue
in 1998 was not significant, its revenue for 1999 grew to $3.3 million.
The cost of revenues for fiscal 1999 was $2.6 million. This reflected higher
than expected costs related to obtaining consultants to staff all the projects,
subsequently resulting in a gross margin of 21.5%. Operating expenses were $1.1
million with 75% attributable to salaries and wages and associated benefits.
While we have not allocated these expenses to the discontinued operations of CSI
(see accompanying notes to the financial statements), a significant portion of
these salaries and overhead expenses were related to the management and
operations of this discontinued business.
Liquidity and Financial Condition
As of December 31, 1999, we had working capital deficit that reflected (i)
accounts payable and accrued expenses of $1.9 million, and (ii) amounts due to
related parties of $5.7 million, working capital advances and the funding of
costs related to future acquisitions in progress. These latter amounts are
principally due to our principal stockholder and entities owned or controlled by
him, who's also CEO of the Company, Mr. Andreas Typaldos.
We believe that sufficient sources of funds can be found to cover the working
capital needs of the Company. Such sources of funds are (i) from the projected
cash flow from operations (ii) from the issuance of the Company's Common Stock,
and (iii) from other public and private financing sources, including strategic
partners with whom the Company is doing or plans to do business and existing
shareholders of the Company that have an interest in preserving their investment
in the Company.
However, no assurance can be given that we will be successful in obtaining such
financing, and the failure to obtain necessary financing could have a material
adverse effect on the Company. At the present time, our management believes that
while able to support day to day operations and reasonable internal growth, our
current sources of funding are not adequate to support our growth plans.
Inflation
Inflation has not had a material effect upon our results of operations to date.
In the event the rate of inflation should accelerate in the future, it is
expected that costs in connection with our provision of services and products
will increase, and, to the extent such increased costs are not offset by
increased revenues, our operations may be adversely affected.
Forward Looking Information
This report contains certain forward-looking statements and information. The
cautionary statements made in this report should be read as being applicable to
all related forward-looking statements wherever they appear. Forward-looking
statements, by their very nature, include risks and uncertainties. Accordingly,
our actual results could differ materially from those discussed herein. A wide
variety of factors could cause or contribute to such differences and could
adversely impact revenues, profitability, cash flows and capital needs. Such
factors, many of which are beyond our control, include the following: our
success in obtaining new contracts; the volume and type of work orders that are
received under such contracts; levels of, and ability to, collect accounts
receivable; availability of trained personnel and utilization of our capacity to
complete work; competition and competitive pressures on pricing; availability,
cost and terms of debt or equity financing; and economic conditions in the
United States and in the regions served.
15
<PAGE>
Quantitative and Qualitative Disclosures about Market Risk Quantitative and
Qualitative Disclosures about Market Risk
The Company is not exposed to material risk based on interest rate fluctuation,
exchange rate fluctuation, or commodity price fluctuation.
ITEM 7. FINANCIAL STATEMENTS
The financial statements and schedules are attached to this report beginning on
page F-1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
We have not had any disagreements with our accountants on matters relating to
accounting and financial disclosures.
16
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The following sets forth certain information with respect to our directors and
executive officers. Each of the directors was elected for a three year term,
commencing July 1, 1999.
Andreas Typaldos
(age 54) Chairman of the Board and President since August 1, 1999.
Until 1996, Mr. Typaldos was a founder and President, Chief
Executive Officer and a major shareholder of Computron
Software, Inc., an international public software and
consulting company. He is also a founder, the Chairman, and
a major shareholder of Enikia, LLC, a private advanced home
networking and communications company. Mr. Typaldos is also
Chairman of the Board and interim Chief Executive Officer of
NetGain Development, Inc., a publicly traded internet
incubator and capital and services provider company.
Edwin T. Brondo
(age 53) Director, and Executive Vice President, Chief Financial
Officer, Secretary and Treasurer from August 1998 until
January 2000. Mr. Brondo was Vice President of First Albany
Companies, Inc. and Senior Vice President, Chief
Administrative Officer of First Albany Companies, Inc. from
May 1993 until December 1997. Additionally, during the last
five years, Mr. Brondo was a senior consultant at Comtex
Information Systems, Inc. and a senior financial executive
at Bankers Trust Company. He has also held senior positions
at Goldman Sachs & Co., Morgan Stanley & Co., G.A. Saxton
and Ernst & Young. Mr. Brondo serves as a director of
Computron Software, Inc., a publicly traded enterprise
applications company, of which the Company's CEO, Mr.
Typaldos was founder and CEO until 1995 and is still major
shareholder.
Michel Berty
(age 61) Director since August 1, 1999. From 1992 until 1997, Mr.
Berty was the Chief Executive Officer and a member of the
executive committee of Cap Gemini, an international
consulting services company. Mr. Berty is a member of the
board of directors of (i) Mastech, a private consulting
services company, (ii) LEVEL 8, a private software and
services company, (iii) MERANT, a private software and
services company, (iv) SAPIENS International, a public
software and services company, (v) Ascent Logic Corporation,
a private risk management systems engineering company, and
(vi) NetGain, a publicly traded internet incubator and
capital provider company, of which Mr. Typaldos is also
interim Chairman and CEO and a major shareholder.
Lloyd T. Rochford
(age 54) Director since 1997. In February of 1989, Mr. Rochford
founded Magnum Hunter Resources, Inc. and served as a
director and Chief Executive Officer through the end of
1995. Commencing in January 1996 through June 1997, Mr.
Rochford served as Magnum's Chairman of the Board of
Directors. Magnum is engaged in the exploration for and the
production of oil and gas and is a company listed on the
American Stock Exchange. Since his resignation from Magnum,
Mr. Rochford has pursued his own personal business interests
until being elected a director of the Company. Mr. Rochford
served as Chairman of the Board of the Company until August
1, 1998.
Compliance with Section 16(a) of the Securities Exchange Act of 1934.
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors and executive officers, and persons who own more than ten percent
(10%) of a registered class of the Company's equity securities (collectively
"reporting persons"), to file with the Securities and Exchange Commission
initial reports of ownership and reports of changes in ownership of Common Stock
and other equity securities of the Company. Reporting persons are required by
the SEC regulations to furnish the Company with copies of all Section 16(a)
forms they file.
17
<PAGE>
To the Company's knowledge, based solely on information received from each
reporting person which includes written representations that no other reports
were required during the fiscal year ended December 31, 1999, all Section 16(a)
filing requirements applicable to its reporting persons were complied with.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth all compensation paid by us in 1999, 1998 and
1997 to our Chief Executive Officer and the four executive officers other than
the Chief Executive Officer whose base salary and bonus exceeded $100,000 for
services rendered in all capacities to the Company during the fiscal year ending
December 31, 1999.
Summary Compensation Table
Long Term
Annual Compensation (1) Compensation
Payouts
Other
Name and Fiscal Annual All Other
Principal Position Year Salary BonusCompensation Compensation
Andreas Typaldos 1999 $125,000 (2) --- ---
Chief Executive 1998 $104,167 (2) --- ---
Officer, President 1997 --- --- ---
Edwin T. Brondo 1999 $105,000 --- ---
Executive Vice 1998 $ 72,917 (3) --- ---
President, Chief 1997 --- --- ---
Financial Officer,
Secretary and
Treasurer
Scott Newman 1999 $250,000 --- ---
Vice President 1998 $104,167 (4) $23,664 $36,629
1997 --- --- ---
Lloyd T. Rochford 1999 --- --- ---
Prior Chief 1998 $ 12,000 (5) ---
Executive Officer 1997 --- --- ---
Glenn Peipert 1999 $250,000 --- ---
Vice President 1998 $104,167 (4) $3,151 $6,976
1997 --- --- ---
--------------------
(1) No executive officer named in the Summary Compensation Table received
perquisites in excess of the lesser of $50,000 or 10% of his aggregate
salary and bonus.
(2) Salary for Mr. Typaldos was accrued beginning August 1, 1998, based upon an
annual rate of $250,000. No payments were made to Mr. Typaldos since August
1, 1998. No salary was accrued for Mr. Typaldos since July 1, 1999.
(3) Salary for Mr. Brondo reflects payments made during the five month period
ended December 31, 1998, and for the period through June 30, 1999, based
upon an annual rate of $250,000. No salary has been accrued or is due to Mr.
Brondo after July 1, 1999. After January 1, 2000, Mr. Brondo also resigned
his position as an executive of the Company, but remains on the Company's
Board of Directors, and no salary, severance, retirement or any other
payments have been accrued or are due to him.
(4) Salary for Messrs. Newman and Peipert reflect payments made during the five
months period ended December 31, 1998, based on an annual rate of $250,000.
As a result of the divestiture of CSI, Messrs Newman and Peipert are no
longer employees or executives of the Company or its subsidiaries.
(5) Mr. Rochford's salary was paid during the fiscal year ended July 31, 1998.
Director
Compensation Directors currently receive no cash compensation for their
services in that capacity. Reasonable out of pocket expenses may
be reimbursed directors in connection with attendance at
meetings.
18
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Except as otherwise noted, the following table sets forth certain information as
of May 30, 2000 as to the security ownership of those persons owning of record
or known to us to be the beneficial owner of more than five percent of our
Common Stock and the security ownership of our Common Stock by each of our
directors, director nominees, executive officers, and all directors and
executive officers as a group. All information with respect to beneficial
ownership has been furnished by the respective director, director nominee,
executive officer or five percent beneficial owner, as the case may be. Unless
otherwise indicated, the persons named below have sole voting and investment
power with respect to the number of shares set forth opposite their names.
Beneficial ownership of our Common Stock has been determined for this purpose in
accordance with applicable rules and regulations promulgated under the Exchange
Act. Except as otherwise described below, all shares of our Common Stock are
owned directly and the indicated person has sole voting and investment power.
As of May 30, 2000, there were 17,119,226 shares of Common Stock and 100,000
options to purchase a like number of shares of Common Stock issued and
outstanding. Unless otherwise noted, each beneficial owner's address is c/o the
Company at 152 West 57th Street, 40th Floor, New York, New York 10019.
Number of Shares And
Amount and Nature of
Name of Beneficial Owner Beneficial Ownership Percent of Class
------------------------ -------------------- ----------------
Patra Holdings, LLC 10,000,000 (1) 66.76%
Andreas Typaldos 10,350,000 (1) 69.10%
Edwin T. Brondo 101,000 *
Michel Berty 25,000 *
Lloyd T. Rochford 174,285 (2) 1.16%
Executive officers and directors
as a group ( 4 persons) 10,650,285 71.10%
* Less than 1%
(1) Mr. Typaldos controls Patra Holdings, LLC and therefore beneficial
ownership of shares held by Patra Holdings are attributed to Mr. Typaldos
for the purposes of this table.
(2) Mr. Rochford's holdings include 3,000 shares owned by his wife as to which
Mr. Rochford disclaims beneficial ownership.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
19
<PAGE>
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
(a) EXHIBITS.
Exhibit
Notes Number Description
(6) 2.1 Agreement and Plan of Merger dated as of August 26,
1998, by and among Elligent Consulting Group, Inc.,
Patra Acquisition, Inc., Patra Capital Limited and the
Shareholders of Patra Capital Limited
(6) 2.2 Plan and Agreement of Merger dated as of August 1, 1998,
by and among Patra Capital Limited, Patra Holdings LLC,
Conversion Services International, Inc., Scott Newman
and Glenn Peipert
* 2.3 Settlement Agreement effective March 31, 2000, among
Elligent Consulting Group, Inc. Scott Newman, Glenn
Peipert and Arndreas Typaldos regarding the arbitration
proceeding known as Elligent Consulting Group, Inc. and
------------------------------------
Andreas Typaldos, Petitioners v. Scott Newman and Glenn
----------------- -------------------------------------
Peipert, Respondents, which resulted in the
-------- ------------ ----- -------- -- ---
discontinuation of the operations of CSI.
* 2.4 Agreement effective January 1, 2000 between Elligent
Consulting Group,Inc. and e-Vantage Company Limited
(1) 3.1 Initial Articles of Incorporation
(2) 3.2 Articles of Incorporation, as amended on January 5, 1990
(4) 3.3 Articles of Incorporation, as amended on August 5, 1997
(5) 3.4 Articles of Incorporation, as amended on July 25, 1998
(1) 3.5 Initial Bylaws
(3) 3.2 Bylaws, as amended on July 2, 1991
(5) 3.3 Bylaws, as amended on April 1, 1998
* 21.1 Subsidiaries
* 27.1 Financial Data Schedule
____________
* Filed herewith.
(1) Incorporated by reference to the Company's Registration Statement on Form
S-18 (File Number 33- 23314) and filed herewith.
(2) Incorporated by reference to the Company's Form 10-QSB for the quarter ended
December 31, 1989 and filed herewith.
(3) Incorporated by reference to the Company's Form 10-KSB for the year ended
June 30, 1991 and filed herewith.
(4) Incorporated by reference to the Company's Form 10-KSB for the year ended
July 31, 1997 and filed herewith.
(5) Incorporated by reference to the Company's Form 10-KSB for the year ended
July 31, 1998 and filed herewith.
(6) Incorporated by reference to the Company's Form 8-K/A Amendment No. 3 to
report dated September 21, 1998 and filed herewith.
b) CURRENT REPORTS ON FORM 8-K
None.
20
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
ELLIGENT CONSULTING GROUP, INC.,
a Nevada corporation
By /s/ Andreas Typaldos
-------------------------------
Andreas Typaldos
Chief Executive Officer
Dated: May 30, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant in
the capacities and on the dates indicated.
Signature Capacities in which signed Date
/s/ Andreas Typaldos
--------------------
Andreas Typaldos Chairman of the Board of Directors,May 30, 2000
Chief Executive Officer and President
(Principal Executive Officer)
/s/ Edwin T. Brondo
-------------------
Edwin T. Brondo Director May 30, 2000
/s/ Michel Berty
----------------
Michel Berty Director May 30, 2000
/s/ Lloyd T. Rochford
---------------------
Lloyd T. Rochford Director May 30, 2000
21
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Stockholders and Board of Directors of
Elligent Consulting Group, Inc.
New York, New York
We have audited the accompanying consolidated balance sheet of
Elligent Consulting Group, Inc. and Subsidiaries as of December 31, 1999, and
the related consolidated statements of operations, stockholders' equity, and
cash flows for the year ended December 31, 1999, and the five months ended
December 31, 1998. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated 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 consolidated financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall consolidated financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated financial
position of Elligent Consulting Group, Inc. and Subsidiaries as of December 31,
1999, and the consolidated results of their operations and their cash flows for
the year ended December 31, 1999, and the five months ended December 31, 1998,
in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been
prepared assuming that the Company will continue as a going concern. As
discussed in Note 10 to the consolidated financial statements, the Company
incurred a net loss of approximately $7,338,000 and utilized cash for operating
activities of approximately $380,000 for the year ended December 31, 1999, and
had a working capital deficit of approximately $6,449,000 at December 31, 1999.
These factors raise substantial doubt about its ability to continue as a going
concern. Management's plans in regard to these matters are also described in
Note 10. The consolidated financial statements do not include any adjustments
that might result from the outcome of these uncertainties.
MOORE STEPHENS, P. C.
Certified Public Accountants.
Cranford, New Jersey
May 5, 2000
F-1
<PAGE>
ELLIGENT CONSULTING GROUP, INC. AND SUBSIDIARIES
------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1999.
------------------------------------------------------------------------------
Assets:
Current Assets:
Cash $ 60,523
Trade Accounts Receivable - Net of Allowance
for Doubtful Accounts of $110,330 467,074
Net Assets of Discontinued Operations 726,011
Other Current Assets 19,667
-----------
Total Current Assets 1,273,275
-----------
Other Assets 20,097
-----------
Total Assets $ 1,293,372
===========
Liabilities and Stockholders' Equity:
Current Liabilities:
Accounts Payable $ 1,164,753
Accrued Expenses 753,566
Income Taxes Payable 107,831
Accrued Interest - Stockholders 108,900
Notes Payable - Stockholders 2,500,000
Advances from Stockholders 2,872,156
Due to Affiliates 215,535
-----------
Total Current Liabilities 7,722,741
-----------
Commitment and Contingencies --
-----------
Stockholders' Equity:
Common Stock - $0.001 Par Value; 50,000,000 Shares
Authorized 14,979,226 Shares Issued of which 1,161,002 are
in Treasury 14,979
Capital in Excess of Par Value 5,028,970
Unearned Compensation (94,500)
Accumulated Deficit (8,372,806)
-----------
Sub-total (3,423,357)
Treasury Stock - 1,161,002 Shares at Cost (3,006,012)
-----------
Total Stockholders' Equity (6,429,369)
-----------
Total Liabilities and Stockholders' Equity $ 1,293,372
===========
See Accompanying Notes to Consolidated Financial Statements.
F-2
<PAGE>
ELLIGENT CONSULTING GROUP, INC. AND SUBSIDIARIES
------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
------------------------------------------------------------------------------
Year ended Five months ended
December 31, December 31,
1 9 9 9 1 9 9 8
------- -------
Income:
Revenue $3,328,907 $ --
Cost of Revenue (2,612,937)
----------
Gross Profit 715,970 --
---------- ---------
Cost and Expenses:
General and Administrative 1,767,332 107,767
Depreciation 10,093 --
Amortization -- 4,390
---------- ---------
Total Cost and Expenses 1,777,425 112,157
---------- ---------
Operating Loss (1,061,455) (112,157)
---------- ---------
Other Expenses:
Interest Expense - Stockholders -- (9,540)
Interest Expense (642,342) --
---------- ---------
Total Other Expense (642,342) (9,540)
---------- ---------
Loss from Continuing Operations (1,703,797) (121,697)
Discontinued Operations:
Loss from Operations of Discontinued Business
Segment [Net of Taxes of $103,425 in 1999 and
Deferred Tax Benefit of $120,000 in 1998] (3,492,755) (617,283)
Loss on Disposal of Business Segment Including a
Provision of $800,000 for Operating Losses
During the Phase out Period Net of
Taxes of $-0-] (2,244,909) --
Deferred Income Tax [Benefit] (103,391) (60,200)
---------- ---------
Net Loss $(7,338,070) $(678,780)
=========== =========
Loss per Share of Common Stock:
Loss from Continuing Operations $ (.08) $ (.01)
Loss from Operation of Discontinued Operations $ (.22) $ (.04)
Loss on Disposal of Discontinued Operations $ (.13) $ --
Basic and Diluted Loss per Share of Common Stock $ (.43) $ (.05)
=========== =========
Weighted Average Shares of Common Stock
Outstanding 14,841,183 14,544,225
=========== ==========
See Accompanying Notes to Consolidated Financial Statements.
F-3
<PAGE>
ELLIGENT CONSULTING GROUP, INC. AND SUBSIDIARIES
------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY [DEFICIT] FOR THE YEAR ENDED
DECEMBER 31, 1999.
------------------------------------------------------------------------------
<TABLE>
Total
Capital in Stockholders'
Common Stock Excess of Unearned Treasury Accumulated Subscription Equity
Shares Amount Par Value Compensation Stock Deficit Receivable [Deficit]
------ ------ --------- ------------ ----- ------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance - July 31, 1998 1,000 $ 1,000 $ -- $ -- $ -- $ (153,114) $ (1,000)$ (153,114)
Common Stock Issued in
Merger 12,950,000 12,950 2,627,050 -- -- -- -- 2,640,000
Acquired Equity of Merged
Company 1,594,225 1,594 331,310 -- -- -- -- 332,904
Recapitalization (1,000) (1,000) -- -- -- -- 1,000 --
Imputed Interest -- -- 34,157 -- -- -- -- 34,157
Net Loss for the Five
Months Ended December 31,
1998 -- -- -- -- -- (678,780) -- (678,780)
---------- ------- ---------- ------- ---------- ---------- -------- -----------
Balance - December 31,
1998 14,544,225 14,544 2,992,517 -- -- (831,894) -- 2,175,167
Equity of Merged Entity -- -- 1,000 -- -- (202,842) -- (201,842)
Common Stock Issued on
January 21, 1999 250,001 250 1,499,750 -- -- -- -- 1,500,000
Common Stock Issued on
April 15, 1999
in Payment for Services 63,000 63 377,937 (378,000) -- -- -- --
Treasury Stock Purchased
61,002 Shares
on June 30, 1999 -- -- -- -- (366,012) -- -- (366,012)
Stock Options Exercised on
June 30, 1999 22,000 22 1,078 -- -- -- -- 1,100
Stock Options Exercised on
November 30, 1999 100,000 100 4,900 -- -- -- -- 5,000
Imputed Interest -- -- 151,788 -- -- -- -- 151,788
Amortization of Unearned
Compensation -- -- -- 283,500 -- -- -- 283,500
Disposal of Subsidiary [3] -- -- -- -- (2,640,000) -- -- (2,640,000)
Net Loss for the Year Ended
December 31, 1999 -- -- -- -- -- (7,338,070) -- (7,338,070)
---------- ------- --------- ------- ---------- ----------- -------- -----------
Balance - December 31,
1999 14,979,226 $14,979 $5,028,970 $(94,500)$(3,006,012) $(8,372,806) $ -- $(6,429,369)
========== ======= ========== ======== =========== =========== ======== ===========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
F-4
<PAGE>
ELLIGENT CONSULTING GROUP, INC. AND SUBSIDIARIES
------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
------------------------------------------------------------------------------
Year ended Five months ended
December 31, December 31,
1 9 9 9 1 9 9 8
------- -------
Operating Activities:
Net Loss from Continuing Operations $(1,703,797) $ (61,497)
----------- ---------
Adjustments to Reconcile Net Loss to
Cash [Used For] Operating Activities:
Depreciation and Amortization 10,093 4,390
Provision for Doubtful Accounts 176,555 --
Amortization of Discount 110,330 --
Imputed Interest 151,788 213,911
Deferred Income Tax Benefit (103,391) (60,200)
Non-Cash Consideration for Marketing Services (94,500) --
Change in Assets and Liabilities:
[Increase] Decrease In:
Accounts Receivable (577,404) --
Other Current Assets 1,270 (17,872)
Due from Employees (3,063) --
Other Assets 103,002 (43,313)
Increase [Decrease] In:
Accounts Payable 816,325 (62,896)
Accrued Expenses 693,559 (61,942)
Accrued Expenses - Related Parties 157,349 108,551
Income Taxes Payable (117,669) --
---------- ---------
Total Adjustments 1,324,244 80,629
---------- ---------
Net Cash - Continuing Operations (379,553) 19,132
---------- ---------
Discontinued Operations:
Loss From Discontinued Business (3,492,755) (617,283)
Adjustments to Reconcile Loss to Net Cash:
Depreciation and Amortization 916,099 356,663
Loss on Disposal of Businesses [Including
Provision of $800,000 for Operating Loss
During Phase Out Period] (2,244,909) --
Changes in Net Assets, Liabilities 6,286,288 (2,213,393)
---------- ----------
Net Cash - Discontinued Operations 1,464,723 (2,474,013)
---------- ----------
Investing Activities - Continuing Operations:
Purchase of Property and Equipment (3,443) --
---------- ---------
Investing Activities - Discontinued Operations:
Purchase of Property and Equipment $ (403,869) $ (74,341)
See Accompanying Notes to Consolidated Financial Statements.
F-5
<PAGE>
ELLIGENT CONSULTING GROUP, INC. AND SUBSIDIARIES
------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
------------------------------------------------------------------------------
Year ended Five months ended
December 31, December 31,
1 9 9 9 1 9 9 8
------- -------
Financing Activities - Continuing Operations:
Increase in Cash Overdraft $ (74,612) $ 24,549
Due to Affiliates 138,441 --
Advances from Stockholders 166,453 1,068,955
Proceeds from Notes Payable - Stockholders 53,000 --
Payment on Notes Payable - Stockholders (750,000) --
Acquisition of Treasury Stock (366,012) --
Proceeds from Issuance of Common Stock 6,100 --
---------- ---------
Net Cash - Financing Activities - Continuing
Operations (826,630) 1,093,504
-------- ---------
Financing Activities - Discontinued Operations:
Increase in Overdraft (130,496) 322,516
Payments on Notes and Leases (60,809) (38,863)
Proceeds of Demand Notes Payable 400,000 815,000
---------- ---------
Net Cash - Financing Activities 208,695 1,098,653
---------- ---------
Net Increase [Decrease] in Cash 59,923 (337,065)
Cash - Beginning of Periods 600 337,665
---------- ---------
Cash - End of Periods $ 60,523 $ 600
========== =========
Supplemental Disclosures of Cash Flow Information:
Cash Paid During the Periods for:
Interest $ 108,000 $ 210,953
Income Taxes $ -- $ --
Supplemental Schedule of Non-Cash Investing and Financing Activities:
During the five months ended December 31, 1998, the Company acquired all of
the outstanding common stock of Patra Capital in exchange for 12,950,000 shares
of its common stock.
During the five months ended December 31, 1998, Patra Capital acquired all of
the outstanding common stock of CSI in exchange for 1,100,000 shares of Elligent
common stock, notes payable of $8,500,000, with a discounted value of $7,561,292
and $1,500,000, which was paid by a stockholder of the Company and related
companies owned or controlled by a principal stockholder of the Company.
During the five months ended December 31, 1998, the Company entered into
capital leases for $104,954.
During the five months ended December 31, 1998, the Company incurred $258,516
in acquisition related costs which are included in accounts payable.
During the March and April 1999, the Company issued 250,001 shares of common
stock valued at $1,500,000 to related parties in settlement of the January 21,
1999, installment of notes payable related to the acquisition of CSI.
On April 15, 1999, the Company issued 63,000 shares of restricted common stock
in connection with an agreement to obtain marketing services. The value
associated with the issuance of these shares was $378,000.
See Accompanying Notes to Consolidated Financial Statements.
F-6
<PAGE>
ELLIGENT CONSULTING GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------
[1] Organization and Business
Elligent Consulting Group, Inc., [the "Company"] was incorporated in February of
1987 under the laws of the state of Nevada as Coronado Ventures, Inc. During the
period commencing in 1990 through 1992, the Company acquired Tahoeview
Cablevision, Inc. ["Tahoe"] and Weststar Group North ["North"] and changed its
name to Weststar Group, Inc. Subsequently, Tahoe and North became subject to a
bankruptcy proceeding, which, on July 31, 1996, was concluded by an Order and
Judgment from the Court regarding the Final Distribution of Proceeds of Sale of
Assets by the Receiver. The Company was not named as a defendant in the
bankruptcy and was not involved in any manner, except that it was the sole
shareholder of Tahoe and North. The conclusion of the aforementioned proceedings
resulted in the Company emerging without any business operations and being
deemed to be a new entity for financial statement reporting purposes. As such,
the Company was considered to be a development stage company. Pursuant to the
order and Judgment of the Court, Tahoe and North were ordered dissolved.
In July of 1997, the Company changed its name to Arena Group, Inc. and began the
process of locating a business venture with which the Registrant could enter
into a Reorganization.
On July 23, 1998, the Registrant, through its wholly owned subsidiary Patra
Acquisition, Inc., a Delaware corporation ["Patra Acquisition"], entered into a
Non-Binding Letter of Intent [the "Letter of Intent"] with Patra Capital Ltd., a
Delaware corporation ["Patra Capital"]. The Letter of Intent provided for the
execution of a definitive merger agreement [the "Merger Agreement"]. Pursuant to
the Merger Agreement, Patra Capital merged with Patra Acquisition and Patra
Capital, the surviving corporation of the merger, became a wholly owned
subsidiary of the Registrant [the "Reorganization"]. As part of the
Reorganization, the Registrant changed its name to Elligent Consulting Group,
Inc. and Patra Capital changed its name to Conversion Services International,
Inc. On September 3, 1998, with an effective date of August 1, 1998, for
accounting purposes, the Registrant issued 12,950,000 shares of its restricted
common stock to the then current shareholders of Patra Capital in exchange for
all of the issued and outstanding common stock of Patra Capital. At that time,
the management of Patra Capital became the management of the Company. The merger
was accounted for as a Recapitalization of the Company with Patra as the
acquiror.
On September 21, 1998, effective August 1, 1998, for accounting purposes, the
Company through its wholly owned subsidiary, Patra Capital, purchased Conversion
Services International, Inc. ["CSI"] and Doorways, Inc. ["Doorways"]. Doorways
is a wholly-owned subsidiary of CSI. The operations of CSI and Doorways are
included in the Company's results of operations commencing on August 1, 1998.
The purchase price was $12,298,885, consisting of 1,100,000 shares of the
Company's common stock [valued at $2,640,000], cash payments of $1,500,000
delivered at the closing and notes payable of $8,500,000, less amounts due from
stockholders acquired in the transaction of $582,399. The net discounted value
of the consideration, net of the acquired loan from the stockholders, was
$7,561,292. CSI was disposed of on March 31, 2000 [See Note 3].
On July 27, 1999, Elligent Consulting Group, Inc. [Elligent], Elligent
Consulting Services, Inc. ["ECS"], a Delaware corporation and Andreas Typaldos
["Typaldos"] signed a Stock Purchase Agreement providing for the acquisition of
all of the issued and outstanding common stock of ECS in accordance with the
Delaware General Corporation Law ["The Delaware Act"]. The Stock Purchase
Agreement provides that Typaldos will receive $1.00. Mr. Typaldos is also the
President and Chief Executive Officer of Elligent. Due to common ownership, the
acquisition was accounted for at book value in a manner similar to a pooling of
interests. In anticipation of the acquisition, options to acquire common stock
in ECS previously granted to ECS employees were converted to options to acquire
common stock in Elligent at a price of $0.05 per common stock. In prior years,
the Company was considered a development stage company and the operations were
not meaningful.
F-7
<PAGE>
ELLIGENT CONSULTING GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #2
------------------------------------------------------------------------------
[2] Summary of Significant Accounting Policies
[A] Principles of Consolidation - The accompanying consolidated financial
statements include the accounts of the Company, and its wholly-owned subsidiary,
Elligent Consulting Services, Inc. ["ECS"]. All significant intercompany
transactions and balances have been eliminated in the consolidation.
[B] Revenue Recognition - Revenue from consulting and professional services are
recognized at the time the services are provided. Revenue from systems
integration and software development are recognized based on the terms of the
contracts. Revenue under maintenance contracts is recognized ratably over the
life of the contract.
[C] Property and Equipment - Property and equipment are stated at cost less
accumulated depreciation and amortization and includes equipment held under
capital lease agreements. Depreciation and amortization, which includes
amortization of leased equipment, are computed using the straight-line method
over the estimated useful lives of the respective assets. Estimated useful lives
range from one to ten years. When the assets are sold or retired, the cost and
accumulated depreciation are removed from the accounts and any gain or loss is
included in operations.
[D] Use of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
[E] Concentrations of Credit Risk - Financial instruments which potentially
subject the Company to concentrations of credit risk are cash and accounts
receivable arising from its normal business activities. The Company routinely
assesses the financial strength of its customers, based upon factors surrounding
their credit risk, establishes an allowance for uncollectible accounts, and as a
consequence, believes that its accounts receivable credit risk exposure beyond
such allowances is limited. The Company places its cash with a high credit
quality financial institutions. The amount on deposit in any one institution
that exceeds federally insured limits is subject to credit risk. The Company had
no amount as of December 31, 1999, with financial institutions subject to credit
risk beyond the insured amount. The Company has not experienced any losses in
such accounts. The Company does not require collateral or other security to
support financial instruments subject to credit risk.
[F] Income Taxes - Income taxes are provided based upon the provisions of
Statement of Financial Accounting Standards ["SFAS"] No. 109, "Accounting for
Income Taxes," which requires recognition of deferred tax liabilities and assets
for the expected future tax consequences of events that have been included in
the financial statements or tax returns. Under this method, deferred tax
liabilities and assets are determined based on the difference between the
financial statement and tax bases of assets and liabilities using enacted tax
rates in effect for the year in which the differences are expected to reverse.
[G] Cash and Cash Equivalents - The Company considers certain highly liquid
investments with a maturity of three months or less when purchased to be cash
equivalents. The Company has no cash equivalents at December 31, 1999.
[H] Basic and Diluted Loss per Common Share - The Company adopted Statement of
Financial Accounting Standards ["SFAS"] No. 128, "Earnings Per Share. Under SFAS
128," loss per common share is computed by dividing net loss available to common
stockholders by the weighted-average number of common shares outstanding during
the period. In the Company's present position, diluted loss per share is the
same as basic loss per share. Securities that could potentially dilute EPS in
the future include the issuance of common stock in settlement of notes payable
and the exercise of stock options.
F-8
<PAGE>
ELLIGENT CONSULTING GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #3
------------------------------------------------------------------------------
[2] Summary of Significant Accounting Policies [Continued]
[I] Impairment - Certain long-term assets of the Company are reviewed
periodically as to whether their carrying value has become impaired, pursuant to
guidance established in Statement of Financial Accounting Standards ["SFAS"] No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of." Management considers assets to be impaired if the
carrying value exceeds the future projected cash flows from related operations
[undiscounted and without interest charges]. If impairment is deemed to exist,
the assets will be written down to fair value or projected discounted cash flows
from related operations. Management also reevaluates the periods of amortization
to determine whether subsequent events and circumstances warrant revised
estimates of useful lives. As of December 31, 1999, management expects these
remaining assets to be fully recoverable.
[J] Stock Options and Similar Equity Instruments - On August 1, 1998, the
Company adopted the disclosure requirements of Statement of Financial Accounting
Standards ["SFAS"] No. 123, "Accounting for Stock-Based Compensation," for stock
options and similar equity instruments [collectively "Options"] issued to
employees and directors, however, the Company will continue to apply the
intrinsic value based method of accounting for options issued to employees
prescribed by Accounting Principles Board ["APB"] Opinion No. 25, "Accounting
for Stock Issued to Employees" rather than the fair value based method of
accounting prescribed by SFAS No. 123. SFAS No. 123 also applies to transactions
in which an entity issues its equity instruments to acquire goods and services
from non-employees. Those transactions must be accounted for based on the fair
value of the consideration received or the fair value of the equity instruments
issued, whichever is more reliably measurable.
[3] Discontinued Operations
In December 1999, the Company adopted a formal plan to dispose of CSI. The
disposal date was March 31, 2000.
As part of the settlement agreement relating to the arbitration proceeding known
as Elligent Consulting Group, Inc. and Andreas Typaldos, Petitioners v. Scott
Newman and Glenn Peipert, Respondents, CSI was returned to its original owners,
Newman and Peipert. The settlement was agreed to as of March 31, 2000.
The arbitration was settled by the return to the Company of 1,100,000 shares of
Company common stock [valued at $2.40 per share] by Newman and Peipert, a
payment by them to the Company of $500,000, plus CSI promissory notes of
$500,000 due September 30, 2000 and $500,000 due March 31, 2001. The notes are
personally guaranteed by the individuals. Additionally, the Company received
marketable securities valued at $678,375 and the original purchase price of
CSI's stock was adjusted by an amount equal to the remaining unpaid balance of
certain promissory notes due from the Company to the individuals.
F-9
<PAGE>
ELLIGENT CONSULTING GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #4
------------------------------------------------------------------------------
[3] Discontinued Operations [Continued]
Assets and Liabilities disposed of consisted of the following at the disposal
date:
Assets:
Cash $ 110,361
Accounts Receivable - Net 2,431,645
Other Current Assets 6,945
Notes Receivable 1,442,139
Marketable Securities 678,375
Other Assets 91,166
Due from Related Parties 628,367
----------
Total Assets 5,388,998
----------
Liabilities:
Cash Overdraft 192,020
Accounts Payable 1,045,211
Accrued Expenses 94,405
Loans 2,362,500
Leases 168,851
Accrued Expenses - Phase Out 800,000
----------
Total Liabilities 4,662,987
----------
Net Assets of Discontinued Operations $ 726,011
------------------------------------- ==========
Net assets to be disposed of, at their expected net realizable values, have been
respectively classified in the accompanying balance sheet at December 31, 1999.
Revenues of the discontinued segment were approximately $22,230,000 for the year
ended December 31, 1999.
The fair value of marketable securities is approximately $226,000 less than the
fair value at March 31, 2000. Management believes this decline to be temporary.
[4] Due From Employees
Included in other current assets are amounts due from employees of $3,063,
consisting of loans and advances which are non-interest bearing and have no
stated terms of repayment.
[5] Related Party Transactions
Amounts due to affiliates of $215,535 are working capital loans due to
affiliated companies controlled by a principal stockholder of the Company. The
loans are non-interest bearing and have no stated terms of repayment.
The advances from stockholders of $2,872,156 are working capital advances which
were non-interest bearing until August 1, 1999. Since July 31, 1999, the loans
bear interest at 8% and have no stated terms of repayment. Imputed interest
expense of $151,788 was recorded at 8% interest for the seven months ended July
31, 1999, and was recorded as an increase to capital in excess of par value.
F-10
<PAGE>
ELLIGENT CONSULTING GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #5
------------------------------------------------------------------------------
[5] Related Party Transactions [Continued]
Notes Payable - Stockholders represent amounts due to principal stockholders of
the Company. Total notes payable as of December 31, 1999, are $2,500,000. The
remaining payments were expected to be made on August 1, 1999. Discussions are
now ensuing to determine when the notes will be paid.
Since July 31, 1999, the notes bear interest at 8%. Interest expense of $83,333
was recorded for the five months ended December 31, 1999
[6] Commitments and Contingencies
The Company occupies office space, which is leased by a related company, of
which one of the stockholders is a stockholder of the Company, under an
operating lease which expires in April of 2002. The Company pays rent in the
amount of $1,500 on a month-to-month basis.
[7] Fair Value of Financial Instruments
In assessing the fair value of these financial instruments, the Company has used
a variety of methods and assumptions, which were based on estimates of market
conditions and risks existing at that time. For all financial instruments,
including cash, due from related parties, due to affiliates and stockholders,
debt maturing within one year, it was estimated that the carrying amount
approximated fair value for these financial instruments because of their short
maturities.
[8] Income Tax [Benefit]
The income tax [benefit] consists of the following:
Current Taxes:
Federal $ --
State --
-----------
Total --
-----------
Deferred Taxes:
Federal (103,391)
State --
-----------
Total (103,391)
-----------
Income Tax [Benefit] $ (103,391)
-------------------- ===========
[9] Stock Options
An incentive stock option plan, which was adopted by the Company and approved by
the shareholders, in August of 1998, reserves 1,500,000 shares of the Company's
common stock. Options granted under the plan are intended to qualify as
incentive stock options under existing tax regulations.
Coincident with the acquisition of Elligent Consulting Services, Inc., the
Company merged Services' plan into its plan. All of the outstanding options of
Services became fully vested options in the Company's plan.
F-11
<PAGE>
ELLIGENT CONSULTING GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #6
------------------------------------------------------------------------------
[9] Stock Options [Continued]
The following table summarizes the activity in common shares subject to
incentive stock options for the five months ended December 31, 1998:
Weighted Average
Number of Shares Exercise Price
July 31, 1998 - Balance -- $ --
Granted 90,100 $ 5.00
Exercised -- $ --
Canceled or Expired -- $ --
------------- ---------
Options Outstanding at December 31, 1998 90,100 $ 5.00
---------------------------------------- ============= =========
No options were exercisable at December 31, 1998.
The following table summarizes information about stock options outstanding at
December 31, 1998:
Options Outstanding
Weighted-Average
Number Remaining Weighted-Average
Exercise Prices Outstanding Contractual Life Exercise Price
$ 5.00 90,100 9.67 $ 5.00
=======
There was no compensation cost recognized in income for the five months ended
December 31, 1998.
Had compensation cost been determined on the basis of fair value pursuant to
FASB Statement No. 123, net loss and loss per share would have been recorded as
follows:
1 9 9 8
-------
Net Loss:
As Reported $ (678,780)
Pro Forma $ (925,857)
Loss Per Share:
As Reported $ (.05)
Pro Forma $ (.06)
The fair value of each option granted is estimated on the grant date using an
option pricing model which takes into account, as of the grant date, the
exercise price and the expected life of the option, the current price of the
underlying stock and its expected volatility, expected dividends on the stock
and the risk-free interest rate for the expected term of the option. The
following is the average of the data used for the following items:
Risk-Free Expected Expected
Interest Rate Expected Life Volatility Dividends
1998 4.95% 3 Years 80.26% N/A
F-12
<PAGE>
ELLIGENT CONSULTING GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #7
------------------------------------------------------------------------------
[9] Stock Options [Continued]
The following table summarizes the activity in common shares subject to
incentive stock options for the year ended December 31, 1999:
Weighted Average
Number of Shares Exercise Price
December 31, 1998 - Balance 90,100 $ 5.00
Granted 173,400 $ 1.60
Exercised 122,000 $ 0.05
Canceled or Expired 12,350 $ 5.00
------------- ---------
Options Outstanding at December 31, 1999 129,150 $ 3.65
---------------------------------------- ============= =========
There were 30,033 options exercisable at December 31, 1999.
The following table summarizes information about stock options outstanding at
December 31, 1999:
Options Outstanding
Weighted-Average
Number Remaining Weighted-Average
Exercise Prices Outstanding Contractual Life Exercise Price
$1.60 - 8.00 129,150 8.72 $ 3.65
=======
There was no compensation cost recognized in income for the year ended December
31, 1999.
The fair value of each option granted is estimated on the grant date using an
option pricing model which takes into account, as of the grant date, the
exercise price and the expected life of the option, the current price of the
underlying stock and its expected volatility, expected dividends on the stock
and the risk-free interest rate for the expected term of the option. The
following is the average of the data used for the following items:
Risk-Free Expected Expected
Interest Rate Expected Life Volatility Dividends
1999 4.70% 3 Years 51.97% N/A
[10] Going Concern
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles, which contemplates continuation of the
Company as a going concern and realization of assets and settlement of
liabilities and commitments in the ordinary course of business.
As of December 31, 1999, the Company had a working capital deficit of
approximately $6,449,000, and incurred a net loss of approximately $7,338,000
and utilized cash for operations of approximately $380,000 for the year ended
December 31, 1999. The working capital deficit reflects amounts due to principal
stockholders and affiliates of approximately $5,697,000.
F-13
<PAGE>
ELLIGENT CONSULTING GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #8
------------------------------------------------------------------------------
[10] Going Concern [Continued]
The Company believes that sufficient sources of funds exist to cover working
capital needs. The principal sources of these funds are (i) anticipated cash
flow from operations, (ii) the issuance of Company common stock and (iii) other
public and private financing sources, including strategic partners with whom the
Company is doing or plans to do business and existing shareholders of the
Company that have an interest in preserving their investment in the Company.
The continuation of the Company as a going concern is dependent upon the success
of these plans.
There can be no assurances that management's plans to reduce operating losses
and to obtain additional financing to fund operations will be successful. The
financial statements do not include any adjustments relating to the
recoverability and classification of recorded assets, or the amounts and
classification of liabilities that might be necessary in the event the Company
cannot continue in existence.
[11] Subsequent Events
Effective January 1, 2000, the Company acquired all of the issued and
outstanding stock of e-Vantage Company Limited ["e-Vantage"], a consulting
technology company. The Company issued 1,000,000 shares of its common stock in
connection with the acquisition. Substantial working capital advances have been
made to e-Vantage since the acquisition date.
In April 2000, 140,000 shares of Company common stock were issued in
consideration of payment for legal fees.
[12] New Authoritative Pronouncements
In March 2000, the Financial Accounting Standards Board issued Interpretation
#44, "Accounting for Certain Transactions involving Stock Compensation," among
other issues, this interpretation clarifies (a) the definition of employee for
purposes of applying Opinion 25, (b) the criteria for determining whether a plan
qualifies as a noncompensatory plan, (c) the accounting consequent of various
modifications to the terms of a previously fixed stock option or award, and (d)
the accounting for an exchange of stock compensation awards in a business
combination in relation to (c) the interpretation states, "If the exercise price
of fixed stock option award is reduced, the award shall be accounted for as a
variable from the date of the modification to the date the award is exercised,
is forfeited, or expires unexercised. The exercise price of an option award has
been reduced if the fair value of the consideration required to be remitted by
the grantee upon exercise is less than or potentially less than the fair value
of the consideration that was required to be remitted pursuant to the award's
original terms."
The interpretation is generally effective July 1, 2000.
. . . . . . . . .
F-14
