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 June 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
--- ---
2,254,200 Common Shares, $.0001 par value were issued and outstanding at
June 30, 1998.
<PAGE>
STRATEGIC SOLUTIONS GROUP, INC.
TABLE OF CONTENTS
Page No.
--------
Part I - Financial Information
Consolidated Balance Sheets, June 30, 1998 (unaudited)
and December 31, 1997 3
Consolidated Statements of Operations for the three and six
months ended June 30, 1998 and 1997 (unaudited) 4
Consolidated Statements of Cash Flows for the six
months ended June 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
<PAGE>
STRATEGIC SOLUTIONS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, 1998 December 31,
1998 1997
--------------- --------------
(Unaudited)
<S><C>
ASSETS
------
Current assets
Cash and cash equivalents $ 232,086 $ 1,149,372
Accounts receivable, net of allowance for doubtful
accounts of $45,000 and $75,000, respectively 438,066 666,841
Prepaid expenses and other current assets 47,747 137,618
------------ ------------
Total current assets 717,899 1,953,831
------------ ------------
Property and equipment, at cost
Computers, furniture and equipment 408,240 1,058,313
Less accumulated depreciation 288,756 701,390
------------ ------------
Net property and equipment 119,484 356,923
------------ ------------
Long-term investment - UST 500,000 --
Note receivable - UST 1,625,808 --
Other assets 1,218,454 1,446,066
------------ ------------
$ 4,181,645 $ 3,756,820
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
Current liabilities
Accounts payable and accrued liabilities $ 488,221 $ 1,027,935
Deferred revenue 1,240 66,558
Note payable to bank -- 40,334
Other current liabilities 208,752 168,700
------------ ------------
Total current liabilities 698,213 1,303,527
Convertible subordinated debenture 1,245,243 1,487,864
Deferred gain on sale of subsidiary 2,356,775 --
------------ ------------
Total liabilities 4,300,231 2,791,391
------------ ------------
Commitments and contingencies
Stockholders' equity
Common stock, $.0001 par value. Authorized 10,000,000
shares; issued and outstanding 2,254,190 and 1,768,839
shares as of June 30, 1998 and December 31, 1997 226 177
Additional paid-in capital 14,921,852 14,647,910
Accumulated deficit (14,943,711) (13,566,315)
Deferred compensation (96,953) (116,343)
------------ ------------
Total stockholders' equity (deficit) (118,586) 965,429
------------ ------------
$ 4,181,645 $ 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 six months ended June 30, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
------------------------- --------------------------
1998 1997 1998 1997
---------- ---------- ----------- ----------
<S><C>
Revenue
Service fees $ 320,032 $ 893,460 $ 966,945 $1,566,839
Product sales -- 854,002 73,328 1,909,005
Royalties 14,218 10,940 29,282 20,287
---------- ---------- ----------- ----------
Total revenue 334,250 1,758,402 1,069,555 3,496,131
---------- ---------- ----------- ----------
Expenses
Cost of service fees 151,468 513,331 520,271 925,754
Cost of product sales -- 741,329 44,493 1,684,213
Research and development 1,478 59,274 46,194 131,719
Selling, general and administrative 613,154 915,993 1,590,480 1,730,801
---------- ---------- ----------- ----------
Total operating expenses 766,100 2,229,927 2,201,438 4,472,487
---------- ---------- ----------- ----------
Loss from operations (431,850) (471,525) (1,131,883) (976,356)
Other income (expense) (170,001) 5,239 (245,513) 21,060
---------- ---------- ----------- ----------
Net loss $ (601,851) $ (466,286) $(1,377,396) $ (955,296)
========== ========== =========== ==========
Weighted average number of shares outstanding 1,897,152 1,733,839 1,851,642 1,659,152
========== ========== =========== ==========
Net loss per common share - basic and diluted $ (0.32) $ (0.27) $ (0.74) $ (0.58)
========== ========== =========== ==========
</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 six months ended June 30, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
Six Months Six Months
Ended Ended
June 30, June 30,
1998 1997
----------- -----------
<S><C>
Cash flows from operating activities
Net loss $(1,377,396) $ (955,296)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation and amortization 190,711 136,977
Provision for bad debt expense -- 34,799
Loss on disposal of assets 5,743 --
Noncash expense for services 120,000 20,000
Increase (decrease) in cash from changes in assets and liabilities
Accounts receivable (90,677) (1,142,301)
Prepaid expenses and other current assets 65,000 64,298
Other assets (39,121) 1,714
Accounts payable and accrued liabilities 103,873 402,719
Other liabilities 166,884 (6,676)
----------- -----------
Net cash used in operating activities (854,983) (1,443,766)
----------- -----------
Cash flows from investing activities
Proceeds from maturity of U.S. government securities -- 474,144
Capital expenditures (25,115) (63,719)
Cash balance of divested subsidiary (7,188) --
----------- -----------
Net cash (used in) provided by investing activities (32,303) 410,425
----------- -----------
Cash flows from financing activities
Net proceeds from exercise of options and warrants -- 981,608
Payments on line of credit -- (35,000)
Payments on note payable to a bank (30,000) (17,031)
----------- -----------
Net cash (used in) provided by financing activities (30,000) 929,577
----------- -----------
Net decrease in cash and cash equivalents (917,286) (103,764)
Cash and cash equivalents, beginning of period 1,149,372 939,281
----------- -----------
Cash and cash equivalents, end of period $ 232,086 $ 835,517
=========== ===========
</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 June
30, 1998 and for the three and six month periods ended June 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 financial statements should be read in
conjunction with the audited financial statements and notes thereto included in
the consolidated financial statements 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;
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 uncertainty in the collection of the UST obligation, the
entire amount has been classified as a long term asset on the balance sheet.
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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------------- --------------------------------
1998 1997 1998 1997
---------- ---------- ----------- -----------
<S><C>
Total revenue 334,250 325,940 631,971 601,591
Total operating
expenses 766,100 594,944 1,384,645 1,181,453
---------- ---------- ----------- -----------
Net loss $ (601,851) $ (269,004) $(1,015,369) $ (548,015)
========== ========== =========== ===========
Net loss per
Common Share (0.32) (0.16) (0.55) (0.33)
====== ====== ====== ======
</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.
6
<PAGE>
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 $7,500.00 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. 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 entity.
5. NEW PRONOUNCEMENTS
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.
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 Six Months Ended June 30, 1998 Compared to Three and Six Months Ended
June 30, 1997
Total revenues for the three month period ended June 30, 1998 were
$334,250 as compared to $1,758,402 for the same period of 1997, a decrease of
approximately $1.4 million. This decrease was primarily attributable to the
divestiture of UST effective April 8, 1998. The net loss and net loss per share
7
<PAGE>
were $601,851 and $.32 per share, respectively, for the three month period ended
June 30, 1998, as compared to a net loss and net loss per share of $466,286 and
$.27 per share, respectively, for the same period of the prior year.
Total revenues for the six month period ended June 30, 1998 were
$1,069,555 as compared to $3,496,131 for the same period of 1997, a decrease of
approximately $2.4 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 $1,377,396 and $.74 per share,
respectively, for the six month period ended June 30, 1998, as compared to a net
loss and net loss per share of $955,296 and $0.58 per share, respectively, for
the same period of the prior year.
During the three and six month periods ended June 30, 1998, revenue from
custom multimedia software development services was $320,032 and $605,241,
respectively, as compared to $315,415 and $581,304, respectively, for the same
periods of the prior year, increases of approximately $5,000 and $24,000,
respectively. This revenue stream is consistent given that there is no
significant change in the existing contracts with any customers. 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 six month periods ended June 30, 1998, revenues from
services fees for systems integration and software development services provided
by UST were $0 and $361,704, respectively, as compared to $578,045 and $985,535
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.
During the three and six month periods ended June 30, 1998, revenue from
sales of products was $0 and $73,328, respectively, as compared to $854,002 and
$1,909,005, respectively, in the same periods of the prior year, decreases of
approximately $854,000 and $1,836,000, 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 $14,218 and $29,282, respectively, during the three and
six month periods ended June 30, 1998, as compared to $10,940 and $20,287,
respectively, for the same periods of the prior year, increases of approximately
$3,000 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 six month periods ended June 30, 1998, total
operating expenses were $766,100 and $2,201,438, respectively, as compared to
$2,229,927 and $4,472,487, respectively, in the same periods of the prior year,
decreases of approximately $1.5 million and $2.3 million, 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 decreases.
For the three and six month periods ended June 30, 1998, the cost of
service fees for custom multimedia software were approximately $151,000 and
$281,000, respectively, as compared to approximately $169,000 and $380,000,
respectively, for the same periods of the prior year. The gross margins for the
three and six month periods ended June 30, 1998 was approximately 53% and 53%,
respectively, as compared to gross margins of 46% and 35%, respectively, for the
same periods of 1997. The improvement in gross margin is primarily due to the
consolidation of the multimedia related
8
<PAGE>
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 six month periods ended June 30, 1998, the cost of
service fees for systems integration services provided by UST were approximately
$0 and $239,000, respectively, as compared to $345,000 and $546,000,
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.
For the three and six month periods ended June 30, 1998, the cost of
product sales was approximately $0 and $44,000, respectively, as compared to
approximately $741,000 and $1.7 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 six month periods ended June 30, 1998, research and
development expenses were $1,478 and $46,194, respectively, as compared to
$59,274 and $131,719, 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 six month periods ended June 30, 1998, selling,
general and administrative expenses were approximately $613,000 and $1,590,000,
respectively, as compared to approximately $916,000 and $1,730,000,
respectively, in the same periods of the prior year, decreases of approximately
$303,000 and $140,000, 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.
During the three and six month periods ended June 30, 1998, total other
income (expense) increased by approximately $175,000 and $267,000, 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 six month period ended June 30, 1998, the Company incurred a net loss of
$1,377,396. 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 six month period ended June 30, 1998, the Company used cash of
approximately $854,983 in operations. In addition to the net loss, the Company
experienced increases in accounts receivable and other assets. Net cash of
approximately $25,000 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.
9
<PAGE>
For the six month period ended June 30, 1997, the Company used cash of
approximately $1,444,000 in operations. In addition to the net loss, the Company
experienced increases in accounts receivable. Net cash of approximately $410,000
was provided by investing activities primarily from proceeds received at
maturity of U.S. government securities, offset by approximately $64,000 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
$52,000 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. However, the Company has
requested a temporary exemption to the new requirements by its submission of a
proposed compliance plan at a hearing with Nasdaq's Listing Qualifications
Panel. The Company is awaiting the decision of Nasdaq regarding its request and
until a decision is reached by Nasdaq the delisting action has been stayed. 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 in the process of assessing its computer applications to
ensure their functionality with respect to the "Year 2000" millennium change. At
present, the Company does not anticipate that material incremental costs will be
incurred in any single future year.
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."
The plan also includes the implementation of 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. Existing clients are also an important component of the Company's
marketing strategy. The Company believes that follow-on projects leverage sales
and marketing resources and strengthen the Company's client relationships. The
Company believes that it has good relationships with its existing customer base
and expects that these contacts will enable it to successfully pursue this
strategy.
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 1998 and that this affiliation will provide sales leads for
its services.
In the normal course of business, the Company evaluates the acquisition
of businesses, products and technologies that complement the Company's business.
In addition, the Company may also evaluate other
10
<PAGE>
strategic alliances and joint ventures that can provide the Company with
additional complementary capabilities or further broaden its base of customers
requiring the products and services currently provided. 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 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 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.
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:
---------------------------------------------------
11
<PAGE>
On June 16, 1998, the following items were submitted to a vote at the Company's
annual meeting of shareholders:
<TABLE>
<CAPTION>
For Against Abstain/Nonvotes
--- ------- ----------------
<S><C>
1. Election of John J. Cadigan as
Class III Director 1,381,883
2. Approval of Adoption of Incentive
Stock Option Plan No. 4 1,284,574 164,707 18,510
3. Approval of Amendment to the Certificate of
Incorporation to increase the number of authorized
shares of the Company's common stock 1,283,761 164,429 19,601
4. Approval of Amendment to the Certificate of
Incorporation providing that shareholders may
only take actions at a stockholders meeting 510,187 160,436 797,168
5. Approval of Appointment of PricewaterhouseCoopers
L.L.P. (formerly Coopers & Lybrand L.L.P.) as
auditors for the fiscal year 1998 1,419,757 34,280 13,755
</TABLE>
Item 5. Other Information: None
-----------------
Item 6. Exhibits and Reports on Form 8-K:
--------------------------------
(a) Exhibits: None
(b) The following report on Form 8-K was filed April 8, 1998:
Disposition of U.S. Technologies, Inc.
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: August 14, 1998
BY: /s/ John J. Cadigan
_____________________
12
<PAGE>
John J. Cadigan
President and Chief Executive Officer
13
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 232,086
<SECURITIES> 0
<RECEIVABLES> 483,066
<ALLOWANCES> 45,000
<INVENTORY> 0
<CURRENT-ASSETS> 717,898
<PP&E> 408,240
<DEPRECIATION> 288,756
<TOTAL-ASSETS> 4,181,645
<CURRENT-LIABILITIES> 698,213
<BONDS> 0
<COMMON> 226
0
0
<OTHER-SE> (118,812)
<TOTAL-LIABILITY-AND-EQUITY> 4,181,645
<SALES> 320,032
<TOTAL-REVENUES> 334,250
<CGS> 151,468
<TOTAL-COSTS> 766,100
<OTHER-EXPENSES> 170,001
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (601,851)
<INCOME-TAX> 0
<INCOME-CONTINUING> (601,851)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (601,851)
<EPS-PRIMARY> (0.32)
<EPS-DILUTED> (0.32)
</TABLE>
