<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED SEPTEMBER 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to ____________
Commission File Number: 1-12536
- - --------------------------------
STRATEGIC SOLUTIONS GROUP, INC.
-------------------------------
(Exact name of Registrant as specified in its charter)
Delaware 11-2964894
- - ------------------------------- -------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
326 First Street, Suite 100
Annapolis, Maryland 21403
- - ------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number,
including area code: (410) 263-7761
--------------
Not applicable
- - -------------------------------------------------------------------------------
(Former name, former address and former fiscal year if changed since last
report)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
3,244,671 Common Shares, $.0001 par value were issued and outstanding at
September 30, 1998.
<PAGE>
STRATEGIC SOLUTIONS GROUP, INC.
TABLE OF CONTENTS
PAGE NO.
--------
PART I - FINANCIAL INFORMATION
Consolidated Balance Sheets, September 30, 1998 (unaudited)
and December 31, 1997 (unaudited) 3
Consolidated Statements of Operations for the three and nine
months ended September 30, 1998 and 1997 (unaudited) 4
Consolidated Statements of Cash Flows for the nine
months ended September 30, 1998 and 1997 (unaudited) 5
Notes to Consolidated Financial Statements (unaudited) 6
Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
PART II - OTHER INFORMATION
Items 1-6 11
Signature 12
2
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STRATEGIC SOLUTIONS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
-------------- -------------
<S> <C> <C>
Current assets
Cash and cash equivalents $ 124,588 $ 1,149,372
Accounts receivable, net of allowance for doubtful
accounts of $45,000 and $75,000, respectively 288,956 666,841
Prepaid expenses and other current assets 26,972 137,618
-------------- -------------
Total current assets 440,516 1,953,831
-------------- -------------
Property and equipment, at cost
Computers, furniture and equipment 410,972 1,058,313
Less accumulated depreciation 307,206 701,390
-------------- -------------
Net property and equipment 103,766 356,923
-------------- -------------
Long-term investment 500,000 --
Note receivable 1,625,808 --
Other assets 1,117,549 1,446,066
-------------- -------------
$ 3,787,639 $ 3,756,820
============== =============
Current liabilities
Accounts payable and accrued liabilities $ 426,400 $ 1,027,935
Deferred revenue 1,240 66,558
Note payable to bank -- 40,334
Other current liabilities 189,768 168,700
-------------- -------------
Total current liabilities 617,408 1,303,527
Convertible subordinated debenture 999,260 1,487,864
Deferred gain on sale of subsidiary 2,356,775 --
-------------- -------------
Total liabilities 3,973,443 2,791,391
-------------- -------------
Commitments and contingencies
Stockholders' equity
Common stock, $.0001 par value. Authorized 10,000,000
shares; issued and outstanding 3,224,671 and 1,768,839
shares as of September 30, 1998 and December 31, 1997 325 177
Additional paid-in capital 15,193,588 14,647,910
Accumulated deficit (15,292,460) (13,566,315)
Deferred compensation (87,257) (116,343)
-------------- -------------
Total stockholders' equity (185,804) 965,429
-------------- -------------
$ 3,787,639 $ 3,756,820
============== =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
3
<PAGE>
STRATEGIC SOLUTIONS GROUP, INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ---------------------------
1998 1997 1998 1997
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
Revenue
Service fees $ 262,687 $ 611,947 $1,229,632 $2,178,786
Product sales -- 94,451 73,328 2,003,456
Royalties 9,934 9,781 39,216 30,068
------------ ------------ ----------- ------------
Total revenue 272,621 716,179 1,342,176 4,212,310
------------ ------------ ----------- ------------
Expenses
Cost of services fees 132,557 388,573 652,828 1,314,327
Cost of product sales -- 91,126 44,493 1,775,339
Research and development 7,218 80,759 53,412 212,478
Selling, general and administrative 413,682 835,037 2,004,162 2,565,838
------------ ------------ ----------- ------------
Total operating expenses 553,457 1,395,495 2,754,895 5,867,982
------------ ------------ ----------- ------------
Loss from operations (280,836) (679,316) (1,412,719) (1,655,672)
Other income (expense) (67,913) 1,852 (313,426) 22,912
------------ ------------ ----------- ------------
Net loss $ (348,749) $ (677,464) $(1,726,145) $(1,632,760)
============ ============ =========== ============
Weighted average number of shares outstanding 2,925,214 1,733,839 2,206,868 1,684,229
============ ============ =========== ============
Net loss per common share $ (0.12) $ (0.39) $ (0.78) $ (0.97)
============ ============ =========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
STRATEGIC SOLUTIONS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997
-------------------- --------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(1,726,145) $(1,632,760)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation and amortization 271,666 205,790
Provision for bad debt expense -- 59,481
Loss on disposal of assets 5,743 --
Noncash expense for services 180,000
Increase (decrease) in cash from changes in a
assets and liabilities
Accounts receivable 58,433 (350,966)
Interest receivable -- 19,429
Inventory -- 5,108
Prepaid expenses and other current assets 85,776 77,344
Other assets (31,183) 2,414
Accounts payable and accrued liabilities 48,061 157,883
Other liabilities 147,900 (54,786)
-------------------- --------------------
Net cash (used in) provided by operating activities (959,749) (1,511,063)
-------------------- --------------------
Cash flows from investing activities:
Proceeds from maturity of U.S. government securities -- 474,144
Capital expenditures (27,847) (76,036)
Cash balance of divested subsidiary (7,188) --
-------------------- --------------------
Net cash (used in) provided by investing activities (35,035) 398,108
-------------------- --------------------
Cash flows from financing activities:
Net proceeds from exercise of options and warrants -- 981,608
Payments on line of credit -- (290,833)
Payments on note payable to a bank (30,000) (22,937)
-------------------- --------------------
Net cash (used in) provided by financing activities (30,000) 667,838
-------------------- --------------------
Net decrease in cash and cash equivalents (1,024,784) (445,117)
Cash and cash equivalents, beginning of period 1,149,372 939,281
-------------------- --------------------
Cash and cash equivalents, end of period $ 124,588 $ 494,164
==================== ====================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
5
<PAGE>
STRATEGIC SOLUTIONS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. GENERAL
The consolidated financial statements of Strategic Solutions Group, Inc.,
formerly Pacific Animated Imaging Corporation, (the "Company") as of September
30, 1998 and for the three and nine month periods ended September 30, 1998 and
1997 are unaudited; however, in the opinion of management, include all
adjustments, consisting of normal recurring adjustments necessary for fair
presentation of such financial information. These consolidated financial
statements should be read in conjunction with the audited consolidated financial
statements and notes thereto for the year ended December 31, 1997 included in
the Company's Annual Report on Form 10-KSB previously filed with the Securities
and Exchange Commission.
2. MERGER OF U.S. TECHNOLOGIES, INC.
On April 8, 1998, the Company merged UST into SSGI-UST Acquisition Corp., a
Florida corporation formed on March 5, 1998 and owned by the President of UST
and other third parties. UST continued as the surviving corporation and,
accordingly, SSGI-UST Acquisition Corp ceased to exist. Consideration payable
to the Company for the merger consists of (i) 100,000 shares of UST's Common
Stock valued at $500,000, or $5.00 per share; (ii) a promissory note from UST in
the principal amount of $600,000 with 6% interest due at the closing of a
$2,000,000 private placement of UST's equity securities; and (iii) a 6%
subordinated convertible debenture in the principal amount of $1,025,808 due the
earlier of a public offering of UST's common stock or the 545th day after the
closing of the merger. The promissory note is collateralized by all of the
assets of UST and the pledge of all of the outstanding stock of UST. As a result
of this transaction, the Company's direct ownership in UST was reduced from 100%
to approximately 14%. As a result of the divestiture, the Company deferred a
gain of $2,356,775. Because the ultimate collection of the consideration is
dependent upon UST's ability to obtain financing, the Company will recognize the
gain as cash payments are received from UST.
On May 21, 1998, the promissory note for $600,000 was amended with respect
to the payment of principal and interest such that SSGI would receive $200,000
at the time of the interim closing date of the minimum funding of the Private
Placement of UST in the amount of $1,300,000 to occur not later than June 26,
1998 ("Interim Closing") and the remaining principal and interest payable in
full to SSGI upon the earlier of the closing date of the maximum funding of the
Private Placement of UST, the closing date of the public offering of UST, or the
545th day from effective date of the Note. The 6% subordinated convertible
debenture in the face amount of $1,025,808 was also amended on May 21, 1998 to
remove the conversion rights of SSGI.
Because the Interim Closing did not occur on June 26, 1998, SSGI and UST
agreed to enter into a new payment arrangement rather than declaring UST in
default. On July 9, 1998, the promissory note was amended with respect to the
payment of principal and interest such that SSGI will receive sixteen (16%)
percent of any funding UST receives not in excess of $1,300,000. For any
proceeds received by UST in excess of $1,300,000 but not more than $2,000,000
SSGI shall receive a percentage of the funding ranging from 17% to 30% depending
on the amount received.
The full amount of UST's obligation to SSGI remains outstanding as UST has
not received any funding. The parties are presently negotiating a new
arrangement pertaining to UST's obligation to SSGI.
Due to the indefinite timing of receipt of the UST obligation, the entire
amount has been classified as a long term asset on the balance sheet.
6
<PAGE>
If the divestiture of UST had occurred on January 1, 1997, management
estimates that on an unaudited pro forma consolidated basis, revenues, total
operating expenses, net loss, and net loss per common share would have been as
follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED Nine months ended
SEPTEMBER 30, SEPTEMBER 30,
------------------------- ---------------------------
1998 1997 1998 1997
--------- --------- ----------- ----------
<S> <C> <C> <C> <C>
Total revenue $ 272,621 $ 92,920 $ 906,778 $ 695,205
Total operating expenses 553,457 511,396 2,039,744 1,692,849
--------- --------- ----------- ----------
Net loss $(348,749) $(410,212) $(1,455,384) $ (991,912)
========= ========== =========== ==========
Net loss per common
share (0.12) (0.24) (0.78) (0.59)
========= ========== =========== ==========
</TABLE>
These estimates are based on assumptions that management deems appropriate,
but the results are not necessarily indicative of those that might have occurred
had the divestititure taken place on January 1, 1997.
3. LITIGATION
In January 1998, the Company issued a notice of redemption of its
Subordinated Convertible Debenture (the "Debenture") based on management's
interpretation of the contract and issued 1,052,624 shares of its common stock
in payment of the redemption amount. The holder of the Debenture refused to
accept the shares tendered, delivered a notice of partial conversion of the
Debenture, and filed suit against the Company in the Delaware Chancery Court
alleging that the terms of the Debenture permitted cash redemption only, that
the redemption was therefore invalid, and that the Company was required to honor
the holder's conversion notice. On April 23, 1998, the Court ruled in favor of
the Debenture holder, declaring the redemption invalid and imposing a penalty of
$106,000 against the Company for delay in delivering the shares issuable in
accordance with the holder's conversion notice. The $106,000 penalty was
expensed in the second quarter and included in other expenses on the Statement
of Operations. In addition, the Company has executed an Agreement with the
Debenture holder to pay the $106,000 in monthly payments of $7,500 until paid in
full with acceleration upon SSGI's receipt of payments from UST. Subsequently,
the Debenture holder requested payment of an additional penalty of $160,000,
claiming that the Company did not register under the Securities Act of 1933 the
common stock issuable upon conversion of the Debenture within the time required
by a registration rights agreement between the Company and the Debenture holder.
The Company believes that it fully complied with its obligations under the
registration rights agreement and intends to vigorously defend any action
seeking to collect such penalty.
4. EARNINGS PER SHARE
Effective December 31, 1997, the Company adopted the provisions of
Statement of Financial Accounting Standards (SFARS) No. 128,"Earnings Per
Share", which specifies the computation, presentation, and disclosure
requirements of earnings per share. All prior period earnings per share data
has been restated, as applicable, to conform with the provisions of the
statement.
7
<PAGE>
Basic earnings (loss) per share is computed based upon the weighted average
number of common shares outstanding. Diluted earnings (loss) per share is
computed based upon the average number of common shares outstanding and any
potentially dilutive securities. Potentially dilutive securities are not
included in the diluted earnings per share calculation if their inclusion would
be anti-dilutive to the basic earnings (loss) per share calculations. The
Company's potentially dilutive securities would be anti-dilutive for all periods
presented, hence, dilutive earnings per share equals basic earnings per share.
5. USE OF ESTIMATES
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the cosolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.
6. PENDING ACQUISITION
In July 1998, the Company signed a non-binding letter of intent to acquire
a privately owned, high-technology company (the "Target"), located in Calverton,
MD. In connection therewith, the Company will acquire all of the outstanding
shares of the Target via the issuance of common stock of the Company based on a
6.5:1 ratio. As a result of this proposed transaction, the principles of the
Target will have majority ownership of the consolidated entities. Subsequently,
the Company signed a non-binding merger agreement which expired on October 30,
1998. The Company is continuing to have ongoing discussions with the Target.
The parties have agreed that should financing become available they will
effectuate a merger.
7. NEW ACCOUNTING PRONOUNCEMENTS
In June, 1997 the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income", and SFAS No. 131, "Disclosures About Segments
of an Enterprise and Related Information". Both SFAS No. 130 and SFAS No. 131
are required to be adopted for fiscal years beginning after December 15, 1997.
For fiscal year 1998, the Company will make the necessary changes to comply with
the provisions of each statement and restate all prior periods presented. The
Company does not expect the adoption of these statements to have a material
impact on the Company's financial condition or results of operations.
In June, 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 133. "Accounting for Derivative Instruments
and Hedging Activities" (SFAS 133). SFAS 133 is effective for fiscal years
beginning after June 15, 1999 and cannot be applied retroactively. SFAS 133
establishes accounting and reporting standards requiring that every derivative
instrument be recorded in the balance sheet as either an asset or liability
measured at its fair value. The Company believes that the adoption of SFAS 133
will not have a material effect on the financial statements.
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
- - --------
The Company's revenues are comprised of service fees, product sales, and
royalties. Service fees are for the development of custom multimedia software
and for systems integration services provided by UST, the Company's subsidiary
acquired in July 1996. Product sales are for software and hardware products
sold by UST as part of their systems integration services. In April 1998, UST
was divested via a merger into a separate operating entity and accordingly, its
revenues and results of operations have not been included in the Company's
results of operations after that date. See Note 2 to the Notes to Consolidated
Financial Statements. Royalties are paid to the Company by customers who resell
copies of software developed by the Company for such customers.
RESULTS OF OPERATIONS
- - ----------------------
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE AND NINE MONTHS
ENDED SEPTEMBER 30, 1997
Total revenues for the three month period ended September 30, 1998 were
$272,621 as compared to $716,179 for the same period of 1997 a decrease of
$443,558. This decrease was primarily attributable to the divestiture of UST
effective April 8, 1998. The net loss and net loss per share were $348,749 and
$.12 per share, respectively, for the three month period ended September 30,
1998, as compared to a net loss and net loss per share of $677,464 and $.39 per
share, respectively, for the same period of the prior year.
Total revenues for the nine month period ended September 30, 1998 were
$1,342,176 as compared to $4,212,310 for the same period of 1997, a decrease of
approximately $2.8 million. This decrease was primarily attributable to the
divestiture of UST effective April 8, 1998 as well as the discontinuance by UST
of sales of IBM AS/400 and RS/6000 midrange computers effective June 30, 1997.
The net loss and net loss per share were $1,726,145 and $.78 per share,
respectively, for the nine month period ended September 30, 1998, as compared to
a net loss and net loss per share of $1,632,760 and $0.97 per share,
respectively, for the same period of the prior year.
During the three and nine month periods ended September 30, 1998, revenue
from custom multimedia software development services was $262,687 and $867,572,
respectively, as compared to $83,833 and $665,137, respectively, for the same
periods of the prior year resulting in increases of approximately $179,000 and
$203,000, respectively. The increase was due to an increase in the size of
existing contracts as compared to the prior year. The Company's strategy to
increase revenues includes targeting its sales and marketing efforts of
technology-based training solutions to the manufacturing and transportation
industries.
During the three and nine month periods ended September 30, 1998, revenues
from services fees for systems integration and software development services
provided by UST were $0 and $362,060, respectively, as compared to $528,114 and
$1,513,649 in the same periods of the prior year. In April 1998, UST was merged
into a separate operating entity and accordingly, its revenues and results of
operations will not be included in the Company's results of operations after
that date.
9
<PAGE>
During the three and nine month periods ended September 30, 1998, revenue
from sales of products was $0 and $73,328, respectively, as compared to $94,451
and $2,003,456, respectively, in the same periods of the prior year, resulting
in decreases of approximately $94,451 and $1,930,128, respectively. The
decreases were primarily attributable to the divestiture of UST effective April
8, 1998 as well as the discontinuance by UST of sales of IBM AS/400 and RS/6000
midrange computers effective June 30, 1997.
The Company has entered into agreements that allow certain customers to
resell copies of the Company's software products in exchange for royalty
payments. Royalties were $9,934 and $39,215, respectively, during the three and
nine month periods ended September 30, 1998, as compared to $9,781 and $30,068,
respectively, for the same periods of the prior year, resulting in increases of
approximately $150 and $9,000, respectively. The Company generally expects
royalty revenue to decrease due to the aging shelf life of products for which
the Company currently receives royalties. However, the Company continually
explores additional marketing and development partners to increase revenues
generated from royalty arrangements.
During the three and nine month periods ended September 30, 1998, total
operating expenses were $553,457 and $2,754,149, respectively, as compared to
$1,395,495 and $5,867,982, respectively, in the same periods of the prior year,
resulting in decreases of $842,038 and $3,113,087, respectively. In addition to
the discontinuance by UST of sales of IBM AS/400 and RS/6000 midrange computers
effective June 30, 1997, the divestiture of the operations of UST primarily
accounted for the decrease.
For the three and nine month periods ended September 30, 1998, the cost of
service fees for custom multimedia software were $132,557 and $413,798,
respectively, as compared to approximately $113,915 and $493,421, respectively,
for the same periods of the prior year. The negative gross margin for the three
month period ended September 30, 1997 was primarily due to a decrease in revenue
for the period. The improvement in gross margin in 1998 is due to the
consolidation of the multimedia related operations into one location, as well as
slight cost reductions due to an increase in operating efficiency. Management
expects gross margins to be consistent in future periods when revenues are
consistent.
For the three and nine month periods ended September 30, 1998, the cost of
service fees for systems integration services provided by UST were approximately
$0 and $239,000, respectively, as compared to $275,000 and $821,000,
respectively, in the same periods of the prior year. In April 1998, UST's
operations were divested and, accordingly, UST'S revenues and results of
operations have not been included in the Company's results of operations after
that date.
For the three and nine month periods ended September 30, 1998, the cost of
product sales was approximately $0 and $44,000, respectively, as compared to
approximately $91,000 and $1.8 million, respectively, for the same periods of
the prior year. In addition to the discontinuance by UST of sales of IBM AS/400
and RS/6000 midrange computers effective June 30, 1997, the divestiture of the
operations of UST, primarily accounted for the decreases.
During the three and nine month periods ended September 30, 1998, research
and development expenses were $7,218 and $53,412, respectively, as compared to
$80,759 and $212,478, respectively, for same periods of the prior year.
Research and development expenses include improvement on existing tools and
applications. The decrease from the prior year is due to the divestiture of the
operations of UST.
During the three and nine month periods ended September 30, 1998, selling,
general and administrative expenses were approximately $414,000 and $2,004,000,
respectively, as compared to approximately $835,000 and $2,566,000,
respectively, in the same periods of the prior year, decreases of approximately
$421,000 and $562,000, respectively. The decreases are primarily due to the
divestiture of the UST operations and are offset by increases in professional
fees related to the debenture litigation, and the amortization of the deferred
asset in connection with the Company's five year financial consulting agreement.
10
<PAGE>
During the three and nine month periods ended September 30, 1998, total other
expense increased by approximately $70,000 and $336,000, respectively, from the
same periods of the prior year primarily due to interest expense and
amortization of deferred costs, as well as a penalty of $105,800 in connection
with the Company's convertible subordinated debenture.
CASH FLOW, LIQUIDITY AND CAPITAL RESOURCES
- - ------------------------------------------
The Report of Independent Accountants on the 1997 consolidated financial
statements of the Company includes an explanatory paragraph stating that the
recurring losses from operations and the existing cash resources may be
insufficient to fund planned operations and that these conditions raise
substantial doubt about the Company's ability to continue as a going concern.
The Company incurred a net loss of $2,900,356 for the year ended December 31,
1997, and as of December 31, 1997 had an accumulated deficit of $13,566,315.
For the nine month period ended September 30, 1998, the Company incurred a net
loss of $1,726,145. In addition, in April 1998, the Company's litigation with
the holder of its convertible subordinated debenture was finalized which
resulted in the debenture being reinstated. See Note 3 to the Notes to
Consolidated Financial Statements. See Strategy to Achieve Profitable
Operations below for a discussion regarding the Company's plans to address the
losses and liquidity matters.
For the nine month period ended September 30, 1998, the Company used cash of
approximately $959,749 in operations. In addition to the net loss, the Company
experienced increases in accounts receivable and other assets. Net cash of
approximately $28,000 was used for investing activities for the purchase of
equipment. Net cash of approximately $30,000 was used to make payments on UST's
obligations to a bank and pay a fee in connection with the Company's convertible
subordinated debenture.
For the nine month period ended September 30, 1997, the Company used cash of
approximately $1.5 million in operations primarily due to the net loss. The
Company also experienced increases in accounts receivable of approximately
$351,000. Net cash of approximately $474,000 was provided by investing
activities primarily from proceeds received at maturity of U.S. government
securities, offset by approximately $76,000 used for the purchase of equipment.
Net cash of approximately $982,000 was provided by the exercise of common stock
options and warrants, offset by approximately $314,000 used to make payments on
UST's obligations to a bank.
Current funds are not expected to provide sufficient liquidity to meet
anticipated cash needs on either a short-term or long-term basis. On April 8,
1998, the Company completed the divestiture of its wholly owned subsidiary, UST,
as described in Note 2 to the Notes to Consolidated Financial Statements.
Consideration received by the Company includes (i) 100,000 shares of common
stock of UST valued at $500,000 or $5.00 per share; (ii) a $600,000 promissory
note due at the closing of a $2,000,000 private placement; and (iii) a
convertible debenture for $1,025,808 due the earlier of 18 months from the
closing of the merger or at the time of a public offering by UST. Management
recognizes that the Company will require additional financing until such time
that revenues are of sufficient volume to generate positive cash flows from
operations. Although the Company will be seeking financing from placements of
equity or debt securities, there can be no assurances that such financing will
be available, or if available, will be under terms and conditions suitable to
the Company.
In February 1998, the Company was notified by Nasdaq that it was not in
compliance with Nasdaq's new net tangible assets requirement and that the
Company's securities were scheduled for delisting. On September 1, 1998 the
stock was formally delisted. In addition, in July 1998, the Company's stock was
delisted from the Boston Stock Exchange due to its failure to report
shareholder's equity of at least $500,000.
YEAR 2000
The Company is aware of and is addressing the issues associated with the
programming code in existing computer systems as the year 2000 approaches. The
"Year 2000" problem is complex, as many
11
<PAGE>
computer systems will be affected in some way by the rollover of the two-digit
year value to 00. Systems that do not properly recognize such information could
generate erroneous data or cause a system to fail. The "Year 2000" issue creates
risk for the Company from unforeseen problems in its own computer and embedded
systems and from third parties with whom the Company deals on financial and
other transactions worldwide. Failure of the Company's and/or third parties'
computer systems could have a material impact on the Company's ability to
conduct its business.
The Company's payroll information system includes an ADP system which was
upgraded to the most recent version in 1998. The system is believed to be "Year
2000" compliant.
For the year 2000 non-compliance issues identified to date, the cost of
remediation is currently not expected to be material to the Company's operating
results. The Company currently expects to substantially complete remediation
and validation of its internal systems, as well as develop contingency plans for
certain internal systems by mid-1999. However, if implementation of replacement
upgraded systems or software is delayed, if significant new non-compliance
issues are identified, or if contingency plans fail, the Company's results of
operations or financial condition could be materially adversely affected.
Where practicable, the Company will attempt to mitigate its risks with
respect to the failure of third parties to be Year 2000 ready, including
developing contingency plans where practicable. However such failures, including
failures of any contingency plans, remain a possibility and could have a
material adverse impact on the company's results of financial condition.
In addition, the "Year 2000" issue could affect the products that the Company
sells. The Company believes that the current versions of its products are "Year
2000" compliant. However, there can be mo assurance that the Company's current
products do not contain undetected errors or defects associated with Year 2000
that may result in material costs to the Company. Some commentators have stated
that a significant amount of litigation will arise out of Year 2000 compliance
issues, and the Company is aware of a growing number of lawsuits against other
software vendors. Because of the unprecedented nature of such litigation, it is
uncertain whether and to what extent the Company may be affected by it.
STRATEGY TO ACHIEVE PROFITABLE OPERATIONS
Subsequent to the merger and resulting divestiture of UST in April, 1998,
the Company's strategy to increase revenue, which solely comprises the
multimedia division, includes the implementation of an operating plan built
around the division's mission statement "We optimize human performance using
leading edge technology-based training solutions to eliminate the barriers of
time and space."
We continue to implement a more focused sales and marketing strategy which
targets the division's sales and marketing efforts of technology based training
solutions to the manufacturing and transportation industries.
Management believes that the growth in sales of its multimedia products and
improved production productivity, will result in increased revenue during
calandar 1999. The Company's current backlog of orders is at an historical high
and major customers have given strong indications that they intend to expand
their use of the Company's products and services in 1999. Severing its
relationship with U.S. Technologies Corporation caused the Company to incur
unusually high legal, accounting and miscellaneous expenses. The Company holds a
$1.6 million receivable from U.S. Technologies, and management anticipates
receipt of a portion of this indebtedness in the near future, which would
facilitate more vigorous sales and marketing to new customers. Technology-based
training solutions are becoming increasingly topical in major production
facilities, and the company is among the most experienced and credible suppliers
of such systems. Accordingly the company anticipates that it will participate
appreciably in the future market for such products.
12
<PAGE>
In addition, the division will endeavor to become a Microsoft Solutions
Provider which requires that the Company maintain two certified Microsoft
professionals on staff. The Company believes that it can acquire this
certification during 1999 and the affiliation will provide sales leads for its
services.
In the normal course of business, the Company continues to evaluate the
acquisition of businesses, products and technologies that complement the
Company's business. In July, 1998 the Company signed a non binding letter of
intent to acquire a privately owned, high technology company (the "Target") in
Calverton, MD. In connection therewith, the company will acquire all of the
outstanding shares of the Target via the issuance of common stock of the Company
based in a 6.5:1 ratio. As a result of this proposed transaction, the
principles of the Target will have majority ownership of the consolidated
entity.
There can be no assurance that the strategies addressed above and elsewhere
herein will generate sufficient revenues and cash flow for the company to reach
profitability or to ensure the continued existence of the Company.
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995: THE STATEMENTS CONTAINED IN THIS DOCUMENT AND OTHER STATEMENTS WHICH ARE
NOT HISTORICAL FACTS ARE FORWARD LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES, INCLUDING, THE SUCCESS OF NEWLY IMPLEMENTED SALES STRATEGIES; THE
CONTINUED EXISTENCE OF AGREEMENTS WITH PRODUCT PROVIDERS; MARKET ACCEPTANCE OF
THE COMPANY'S PRODUCTS AND SERVICES; THE ABILITY TO OBTAIN A LARGER NUMBER AND
SIZE OF CONTRACTS; THE TIMING OF CONTRACT AWARDS; WORK PERFORMANCE AND CUSTOMER
RESPONSE; THE IMPACT OF COMPETITIVE PRODUCTS AND PRICING; TECHNOLOGICAL
DEVELOPMENTS BY THE COMPANY'S COMPETITORS OR DIFFICULTIES IN THE COMPANY'S
RESEARCH AND DEVELOPMENT EFFORTS; AND OTHER RISKS AS DETAILED IN THE COMPANY'S
SECURITIES AND EXCHANGE COMMISSION FILINGS.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings:
-----------------
In January 1998, the Company issued a notice of redemption of its
Subordinated Convertible Debenture (the "Debenture") and issued 1,052,624 shares
of its common stock in payment of the redemption amount. The holder of the
Debenture refused to accept the shares tendered, delivered a notice of partial
conversion of the Debenture, and filed suit against the Company in the Delaware
Chancery Court alleging that the terms of the Debenture permitted cash
redemption only, that the redemption was therefore invalid, and that the Company
was required to honor the holder's conversion notice. On April 23, 1998, the
Court ruled in favor of the Debenture holder, declaring the redemption invalid
and imposing a penalty of $106,000 against the Company for delay in delivering
the shares issuable in accordance with the holder's conversion notice.
Subsequently, the Debenture holder requested payment of an additional penalty of
$160,000, claiming that the Company did not register under the Securities Act of
1933 the common stock issuable upon conversion of the Debenture within the time
required by a registration rights agreement between the Company and the
Debenture holder. The Company believes that it fully complied with its
obligations under the registration rights agreement and intends to vigorously
defend any action seeking to collect such penalty.
13
<PAGE>
The Company is not subject to any other legal proceedings other than claims
that arise in the ordinary course of its business.
Item 2. Changes in Securities: None
---------------------
Item 3. Defaults Upon Senior Securities: None
-------------------------------
Item 4. Submission of Matters to a Vote of Security Holders: None
---------------------------------------------------
Item 5. Other Information: None
-----------------
Item 6. Exhibits and Reports on Form 8-K:
--------------------------------
(a) Exhibits: None
(b) No reports on Form 8-K were required to be filed for the
three months Ended September 30, 1998.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
STRATEGIC SOLUTIONS GROUP, INC.
-------------------------------
(Registrant)
Dated: November 13, 1998
BY: /s/ John J. Cadigan
-------------------
John J. Cadigan
President and Chief Executive Officer
14
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