SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
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
incorporation or organization) Identification No.)
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
---------------
Securities registered pursuant to Section 12(b) of the Act: Common Stock,
$.0001 par value
Securities registered pursuant to Section 12(g) of the Act: None
- --------------------------------------------------------------------------------
(Title of Class)
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 ___.
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulations S-K (ss.229.405 of this chapter) is not contained
herein, and will not 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. [ ]
As of April 12, 1999 the aggregate market value of the voting stock held
by non-affiliates, approximately 3,746,000 shares of Common Stock, $.0001 par
value, was approximately $431,000 based on the closing sales price of $0.115 for
one share of Common Stock on the Nasdaq Small Cap Market on such date. The
number of shares outstanding of the Registrant's Common Stock, as of April 12,
1999 was 3,790,404.
Documents incorporated by reference: Portions of the Registrant's
definitive Proxy Statement regarding its 1999 Annual Meeting of Stockholders are
incorporated by reference in Part III of this Report.
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
GENERAL
During 1998, Strategic Solutions Group, Inc. and its subsidiaries ("the
Company") provided custom interactive multimedia software. In addition, through
April 8, 1998, the Company was a full service provider of technology based
solutions and computer systems integration and support services, including the
sale of hardware and software products, specializing in the development of
software applications related to work group and work flow computing solutions.
The Company's systems integration division was comprised of the business of U.S.
Technologies, Inc. ("UST"), a wholly owned subsidiary, which the Company
acquired in 1996. The Company's multimedia division designs, develops, and
markets custom multimedia software used to deliver computer-based and web-based
training, electronic performance support systems, multimedia manuals, sales and
marketing presentations, and corporate communications. For the year ended
December 31, 1998, approximately 74% of the Company's revenue was attributable
to the multimedia division and approximately 26% to the systems integration
division.
In April 1998, UST was merged into and with SSGI-UST Acquisition
Corporation, an existing 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. Effective
upon the merger, the Company's ownership in UST was reduced from 100% to
approximately 14%. See "Systems Integration Services - Merger of UST" below and
the Notes to the Consolidated Financial Statements. Accordingly, after that
date, the Company's operations comprised the multimedia division only.
CUSTOM MULTIMEDIA SOFTWARE
The Company's multimedia division (the "division") provides technical
consulting services that include analysis, design, and development of
technology-based solutions and specializes in providing training solutions.
Technology-based training encompasses a wide range of emerging technologies in
the area of employee training, and can come in the form of computer-based
training, web-based training, electronic performance support systems, and
multimedia manuals. In addition, the division also designs and develops software
for sales and marketing applications and corporate communications.
Depending on a customer's needs, the division can produce multimedia
software that includes interactive computer animation, full motion video, audio,
high-end color graphics, text and hypertext providing vivid and effective
instruction and information. The software developed by the division can be
distributed over multiple platforms including MSWindows(TM) and DOS and can be
delivered on diskette or CD-ROM. The Company believes that it can adapt its
services using new and emerging technologies, such as internal corporate
intranets or the Internet using the World Wide Web ("Web"). In addition, the
incorporation of Web-Based training ("WBT")
<PAGE>
allows users to have access from anywhere in the world. The Company believes
that the Internet and intranets will become increasingly important delivery
methods in the future.
According to a market research firm, International Data Corp. ("IDC"),
companies spent approximately $18 billion worldwide in training for their
workers in 1996 and by the year 2001 that annual bill is expected to grow to
approximately $27.9 billion. In addition, according to IDC, offering employee
training via the Internet and corporate intranets is a business that could grow
at annual rates greater than 100% over the next few years.
COMPUTER-BASED TRAINING ("CBT"). The division designs and develops custom
computer-based training software, which provides an interactive learning
experience to instruct employees how to use complex equipment or to understand
complicated industrial processes by simulating operation and production
procedures. The division's software typically replaces or supplements technical
manuals and operating documentation and provides interactive self-paced
training. It also often incorporates cut-away views of equipment that would be
difficult or impossible to display in a real-world setting and enables users to
learn complex processes by viewing them in real or lapsed time or in slow
motion. Based on studies conducted and published by the American Society for
Training and Development, management believes that CBT enables users to master
skills and retains information more effectively than traditional instructor-led
training.
WEB-BASED TRAINING. Recent technological developments and advances in
computer network technology enable the Company to deliver computer-based
training over corporate intranets or the Internet via the Web. Web-based
materials can be text-based (such as, lecture notes, case studies, and
assignments) or they may be much like sophisticated CBT courseware. As a result
of rapidly advancing Web browsers, high-speed communications, and innovative
instructional design, it is possible that real-time animation, video, audio, and
conferencing could be features included in a WBT solution. In addition, the
incorporation of WBT allows users to have access from anywhere in the world. The
Company believes that the Internet and intranets will become increasingly
important delivery methods in the future.
ELECTRONIC PERFORMANCE SUPPORT SYSTEMS ("EPSS"). The goal of an EPSS is to
provide whatever information is necessary to accelerate performance and learning
at the moment of need - commonly referred to as HELP SYSTEMS. The division
designs and develops custom EPSS software to enable users to perform better at
their jobs. This software provides computer-based support that is integrated
into a workstation or work environment, and acts as a combination
coach/trainer/job aid/reference. The Company believes that EPSS increases
employee productivity by providing needed information and training when and
where it is needed - and in an amount and format that is the most useful to the
user.
MULTIMEDIA MANUALS. The division provides turn-key multimedia manual
services, using internally developed software tools. These tools enable the
division to convert customer manuals, reference guides, or other technical
materials into interactive multimedia software, including full-motion video,
audio, animation and interaction. The Company believes that these services
enable customers to obtain a technology-based solution in less time and at a
relatively low cost as compared to traditional custom software services.
2
<PAGE>
SALES AND MARKETING. The division designs and develops custom sales and
marketing software which enables manufacturers and distributors to demonstrate
their products to potential customers at trade shows or in kiosks. This software
can enhance sales and marketing presentations by encouraging customer
participation through the use of interactive product demonstrations.
CORPORATE COMMUNICATIONS. The division designs and develops custom
multimedia software for internal and external corporate communications. Examples
include software used to disseminate corporate policies and procedures and
information about a company's products and services. The Company believes that
its custom multimedia development services can be used to create a
technology-based solution, including web-based, that is comprehensive and
cost-effective and delivers lively and compelling messages to large groups of
employees in disparate locations.
DEVELOPMENT AND SERVICES. The Company's custom multimedia services for the
above technology-based solutions include needs analysis, design specification
and product development. Needs analysis typically takes from three to four weeks
and the charges for such services can range from $10,000 to $20,000. The design
phase lasts from four to six weeks and the charges for such services can range
from $20,000 to $40,000. Depending upon a project's scope and features, the time
required to complete software development can range anywhere from one month to
several years and the charges for such services can range from $10,000 to $1
million.
At the outset of each project, the Company provides the customer with a
statement of work that details the services that the Company will provide, sets
forth the amount that the Company will charge, and provides a work and payment
schedule. Any changes to the project that will result in additional charges are
submitted to the customer for approval prior to providing the services. The
payment schedule varies from customer to customer, but usually includes some
form of up-front payment and progress payments based upon the completion of
phases of the project. To date, the Company has not experienced any significant
difficulties in delivering its custom software products to customers in
accordance with schedules.
The Company's contracts with respect to its services include an express
warranty that usually terminates upon acceptance of the software by the
customer. However, the Company generally will service the software to ensure
that it performs as set forth in the statements of work for a one-year period.
Because of the extensive testing and evaluation procedures performed in
conjunction with the customer that are undertaken during the development
process, to date, servicing cost after customer acceptance has been
insignificant. Post-development support services are available and are billed
separately, usually on an hourly basis.
SYSTEMS INTEGRATION SERVICES
The Company acquired UST, a full-service provider of computer systems
integration and support services, in July 1996. Products and services included
the sale of hardware and software products and the development of software
applications for and providing services related to work group and work
flow-computing solutions. UST is a Lotus Premium Business Partner that
3
<PAGE>
develops software applications used in conjunction with, and provides services
related to the use of Lotus Notes(R) and Domino(TM). Through June 30, 1997, UST
was also an IBM Industry Remarketer of AS/400(R) and RS/6000(R) midrange
computers. However, effective June 30, 1997, UST chose to no longer sell the IBM
AS/400(R) and RS/6000(R) midrange computers due to gross margins being lower
than originally anticipated.
LOTUS PREMIUM BUSINESS PARTNER. Lotus Notes(R) and Domino(TM) are
proprietary groupware and messaging software products developed by Lotus
Development Corporation that enable users to communicate and collaborate over a
local area network or telecommunications link and access documents and data
residing on a shared computer, or server. As a Lotus Premium Business Partner,
UST develops a wide variety of custom software applications expanding the
applicability of Lotus Notes(R)/Domino(TM) to a particular customer's needs.
Such applications have included numerous project, time, sales, and database
management applications. For example, UST developed a sales force automation
system for a publisher and distributor of secondary education products and a
quality control application for an international manufacturer of consumer goods.
UST also provides a full complement of services related to the use of Lotus
Notes(R)/Domino(TM), including the integration, design, development and
installation of computer systems, intranet and Internet services, and education
and support services.
DEVELOPMENT AND SERVICES. At the outset of each systems integration
project, UST provides each of its customers with a statement of work that
details the products and services that UST will provide, sets forth a good faith
estimate of the amount UST will charge, and provides a work and payment
schedule. The payment schedule varies from customer to customer, but usually
includes some form of up-front payment and either weekly or monthly payments or
payments based upon the completion of phases of the project.
Because of the extensive testing and evaluation procedures that are
undertaken in conjunction with its customers with respect to the Company's
systems integration services, the Company does not provide warranties with
respect to such services. Lotus Development Corporation and IBM, as well as
other equipment manufacturers, provide the Company's customers with limited
warranties on their products.
IBM INDUSTRY REMARKETER. In November 1996, UST became an IBM Industry
Remarketer for the AS/400(R) and RS/6000(R) midrange computers. Midrange
computers generally are the most powerful computers frequently used by mid-sized
companies (companies with annual sales of $25 to $250 million). During the
fourth quarter of 1996, UST entered into an agreement with Support Net, Inc.,
IBM's largest Managing Industry Remarketer, that enabled UST to sell the
AS/400(R) and RS/6000(R) midrange computers on a non-exclusive basis to end
users of those computers located in the United States. However, effective June
30, 1997, UST chose to no longer sell the IBM AS/400(R) and RS/6000(R) midrange
computers due to gross margins being lower than originally anticipated.
Accordingly, those agreements were terminated. Total product sales by UST for
the year ended December 31, 1997 was approximately $2.1 million, of which
approximately 64% was attributable to the sales of the IBM AS/400(R) and
RS/6000(R) midrange computers.
4
<PAGE>
DIVESTITURE OF UST. In April 1998, UST was merged into and with SSGI-UST
Acquisition Corporation, an existing Florida company owned by the President of
UST and other third parties, and UST continued as the surviving corporation.
Accordingly, after that date, the Company's operations do not include the
operations of UST. UST immediately began pursuing a private placement of its
equity securities in an attempt to raise approximately $2,000,000 and has
long-term plans to pursue a public offering of its equity securities.
In consideration for the merger, SSGI received the following:
(1) 100,000 shares of common stock of UST valued at $500,000 or $5.00
per share. These shares are subject to a registration rights
agreement giving the Company the right to demand registration or
a piggy back registration of UST's shares;
(2) A promissory note from UST in the principal amount of $600,000
with 6% interest due the earlier of the closing of the $2,000,000
private placement or 60 days from the closing of the merger. The
promissory note is secured by all the assets of UST and the
pledge of all of the outstanding stock of UST; As of December 31,
1998, UST is in default on the promissory note.
(3) A 6% subordinated convertible debenture in the principal amount
of $1,027,808. The debenture is due the earlier of a public
offering of UST's securities or 18 months from the date of the
merger. In addition, the Company has the option to convert the
debenture into shares of UST's common stock at a 20% discount at
the time of conversion.
In accordance with Staff Accounting Bulletin 5-E "Accounting for
Divestiture of a Subsidiary or Other Business Operation" ("SAB 5-E), the
transaction with UST was accounted for as a divestiture. Accordingly, the
consideration received was recorded as assets in the Company's consolidated
balance sheet and the related gain was deferred until the Company ultimately
collects the cash as prescribed under SAB 5-U, "Gain Recognition on the Sale of
a Business or Operating Assets to a Highly Leveraged Entity." Subsequent to the
divestiture, the Company determined that due to UST's financial prospects,
significant uncertainty existed relating to the realizability of the stock
received and the collectibility of the promissory note and debenture and wrote
off the assets related to the divestiture.
CUSTOMERS AND BACKLOG
The Company's multimedia customers traditionally have been comprised
primarily of large manufacturers who must train employees to use complex
equipment or understand complicated industrial processes. To date, such
customers have represented a broad range of industries, including the
automotive, packaging, electronics, pharmaceutical, beverage bottling, and
fitness and food manufacturing industries, as well as government agencies
located throughout the United States. As part of its strategy to grow revenues,
the multimedia division has identified strategic vertical markets with
business-critical needs that can be addressed by the Company's technology-based
solutions. The multimedia division has implemented a new sales and marketing
strategy which targets its efforts on the manufacturing and transportation
industries. The division intends to leverage its existing relationships and
expand its sales and marketing efforts to increase market share in these
industries.
5
<PAGE>
Systems integration services customers are generally mid to large size
companies that have or require at least 50 individual computers to be attached
to a network. These customers represent a wide variety of industries and service
organizations. While a substantial percentage of the systems integration
revenues historically have been generated by customers located within Florida,
where UST is located, this percentage has decreased as UST markets its products
and services to customers located outside of the state.
During fiscal 1998, there were two customers, Mack Trucks Inc. and Federal
Highway Administration, that accounted for at least 10% of the Company's
consolidated revenue. During fiscal 1997, there were no customers that accounted
for at least 10% of the Company's consolidated revenue. During fiscal 1996, one
systems integration customer, Data Systems International, accounted for
approximately 10% of the Company's consolidated revenue.
As of December 31, 1998, backlog (i.e., the difference between the fees
payable to the Company set forth in existing contracts and the amount of such
fees that had been recognized as revenue on the Company's financial statements)
of its custom multimedia software services totaled approximately $400,000, all
of which is expected to be earned during 1999. There can be no assurance that
contracts reflected in backlog will not be cancelled or delayed. Accordingly,
the Company believes that backlog is not a reliable measure of future revenue.
RESEARCH AND DEVELOPMENT
For the years ended December 31, 1998 and 1997, costs associated with
research and development activities totaled approximately $55,400 and $323,000,
respectively. Historically, research and development activities included the
development of a library of reusable applications, codes, utilities, and tools
that the Company can utilize in the early stages of development of many of its
software applications. To date, no costs have been capitalized due to the
expenditures for any one reusable application, code, utility, or tool not being
material. The Company believes that costs for research and development will
continue in the future at consistent levels as the Company plans to continue
improving its existing reusable applications, codes, utilities, and tools, as
well as the development of new reusable applications, codes, utilities, and
tools. In addition, future research and development efforts may include the
development of products to be sold.
SALES AND MARKETING
As of December 31, 1998, the Company employed three people involved in
sales who receive a combination of salary and commission. The direct sales force
focuses on large customers and leverages its industry experience to access
target organizations within particular vertical markets. These markets are
characterized by business areas to which the Company's services and technology
are particularly well suited, and by participants who possess the financial
resources and scale of operations necessary to support the types of services
provided the Company. The Company also employs other business development and
marketing techniques to communicate directly with current and prospective
clients.
6
<PAGE>
In order to increase revenues, the multimedia division has recently
implemented a more focused sales and marketing strategy which targets its
efforts to providing technology-based training solutions to the manufacturing
and transportation industries.
Existing clients are also an important component of the Company's
marketing strategy. 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.
COMPETITION
The information technology consulting, software development, and business
solution markets include a large number of participants, are subject to rapid
change, and are highly competitive. The Company competes with and faces
potential competition for clients and experienced personnel from a number of
companies that have substantially greater financial, technical, sales,
marketing, and other resources, and generate greater revenues, as well as have
greater name recognition than the Company. These markets are highly fragmented
and served by numerous firms, many of which serve only their respective local
markets. In addition, clients may elect to use their internal information
systems resources to satisfy their needs for software and application
development and consulting services, rather than using those offered by the
Company.
The Company's custom multimedia software business competes with companies
that produce interactive training software (custom and off-the-shelf) and other
third-party suppliers of training and marketing materials, as well as internal
training and information systems resources of potential customers.
The Company's clients primarily consist of large organizations, including
agencies of the federal government, and there are an increasing number of
professional services firms seeking information technology consulting and
software development engagements from that client base. The Company believes
that the principal competitive factors in the information technology consulting
and software development industry include responsiveness to client needs,
project completion time, quality of service, price, project management
capability, and technical expertise. The Company believes that it presently
competes favorably with respect to each of these factors. However, the Company's
markets are still evolving and there can be no assurance that the Company will
be able to compete successfully against current and future competitors and the
failure to do so successfully will have a material adverse effect upon the
Company's business, operating results, and financial condition. The Company
believes that its ability to compete also depends in part on a number of
competitive factors outside its control, including, the ability of its
competitors to hire, retain and motivate personnel; the development by others of
software that is competitive with the Company's services; the price at which
others offer comparable services; and the extent of its competitor's
responsiveness to customer needs.
7
<PAGE>
INTELLECTUAL PROPERTY
Most of the Company's contracts state that its software is proprietary and
that title to and ownership of its software generally reside with the Company.
The Company grants nonexclusive licenses to customers for software developed by
the Company for such customers. Like many software firms, the Company has no
patents. The Company attempts to protect its rights with a combination of
copyright, trade secret laws, and employee and third-party nondisclosure
agreements. Despite these precautions, it may be possible for unauthorized third
parties to copy certain portions of the Company's products or obtain and use
information that the Company regards as proprietary, such as source codes or
programming techniques.
As the number of software products increases and their functionality
further overlaps, the Company believes that software programs will increasingly
become the subject of infringement claims. Although the Company's products have
never been the subject of an infringement claim, there can be no assurance that
third parties will not assert infringement claims against the Company in the
future or that any such assertion may not require the Company to enter into
royalty arrangements or result in costly litigation.
PRODUCT LIABILITY INSURANCE
The Company does not currently carry product liability insurance and there
can be no assurance that such coverage, if obtainable, would be adequate in
terms and scope to protect the Company against material adverse effects in the
event of a successful product liability claim. Although the Company has not been
subject to any product liability claims, such claims could arise in the future.
There can be no assurance that the Company would have sufficient resources to
satisfy any liability resulting from these claims or would be able to have its
customers indemnify the Company against such claims.
EMPLOYEES
As of December 31, 1998, the Company had fourteen full-time employees,
three of whom were in administration, three of whom were in sales and marketing,
and eight of whom held professional technical positions. None of the Company's
employees are represented by unions. Management believes the Company's employee
relations are good.
The Company's success will depend upon its ability to attract, retain, and
motivate highly-skilled employees, particularly project managers and other
senior technical personnel. Qualified personnel are in particularly great demand
and are likely to remain a limited resource for the foreseeable future. However,
the Company believes that it has been successful in its efforts to attract and
retain the number and quality of professionals needed to support present
operations and future growth. Although the Company expects to continue to
attract sufficient numbers of highly skilled employees and to retain its
existing technical personnel for the foreseeable future, there can be no
assurance that the Company will be able to do so.
8
<PAGE>
ITEM 2. DESCRIPTION OF PROPERTY.
The Company leases office space in Annapolis, Maryland. The lease requires
the Company to pay monthly rent of approximately $4,400 and expires on December
31,1999. Management believes that its current office facilities are adequate and
suitable for the Company's current operations.
ITEM 3. LEGAL PROCEEDINGS.
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 executed a judgement note payable with
the Debenture holder to pay the $106,000 in monthly payments of $7,500 until
paid in full with interest at 10% per annum and 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 the
common stock issuable upon conversion of the Debenture under the Securities Act
of 1933 within the time required by a registration rights agreement between the
Company and the Debenture holder. No discovery has been taken and no prediction
can be made as to its outcome. 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
9
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock has been listed on the Nasdaq Small Cap Market
under the symbol "SSGI" and on the Boston Stock Exchange under the symbol "STG."
Before November 11, 1993, the Company's Common Stock traded in Nasdaq's
over-the-counter market and was quoted in the "Pink Sheets."
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
stockholder's equity of at least $500,000.
The following table shows the high and low sale prices for the Company's
Common Stock, for the periods indicated, based upon information supplied to the
Company from Nasdaq.
Year High Low
---- ---- ---
1998
----
1st Quarter $3.06 $0.81
2nd Quarter $1.50 $0.31
3rd Quarter $0.75 $0.16
4th Quarter $0.17 $0.02
1997
----
1st Quarter $15.625 $12.00
2nd Quarter $13.125 $4.50
3rd Quarter $7.125 $3.375
4th Quarter $5.375 $0.75
The closing bid price for the Company's Common Stock on December 31, 1998,
was $0.0469.
The Company had approximately 174 holders of record of Common Stock as of
December 31, 1998. Management believes that the number of beneficial holders of
the Company's Common Stock as of December 31, 1998, was approximately 3,000.
No cash dividends have been paid by the Company on its Common Stock and no
such payment is anticipated in the foreseeable future.
10
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
THE FOLLOWING PARAGRAPHS CONTAIN CERTAIN FORWARD LOOKING STATEMENTS, WHICH ARE
WITHIN THE MEANING OF AND MADE PURSUANT TO THE SAFE HARBOR PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. THE FORWARD LOOKING STATEMENTS
INCLUDE, WITHOUT LIMITATION, THOSE REGARDING THE PROSPECTS FOR AND FACTORS
AFFECTING FUTURE REVENUES AND PROFITABILITY, LIKELIHOOD OF ADDITIONAL FINANCING,
MARKETING, AND CASH REQUIREMENTS FOR FUTURE OPERATIONS. READERS ARE CAUTIONED
THAT FORWARD LOOKING STATEMENTS INVOLVE RISKS, UNCERTAINTIES, AND FACTORS THAT
MAY AFFECT THE COMPANY'S BUSINESS AND PROSPECTS, INCLUDING WITHOUT LIMITATION
THOSE DESCRIBED BELOW AS WELL AS THE RISKS ASSOCIATED WITH: THE NATURE OF
COMPETITION; TECHNOLOGICAL DEVELOPMENTS; AND EFFECTIVE MARKETING; ALL AS
DISCUSSED IN THE COMPANY'S FILINGS WITH THE U.S. SECURITIES AND EXCHANGE
COMMISSION.
OVERVIEW
The Company's revenues are comprised of service fees, product sales, and
royalties. Service fees are generated from the development of custom multimedia
software and from systems integration services provided by UST, the Company's
subsidiary acquired in July 1996 and divested in April 1998. Product sales are
for software and hardware products sold by UST as part of their system
integration services. In April 1998, UST was divested 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.
FISCAL 1998 COMPARED TO FISCAL 1997
Total revenues for the year ended December 31, 1998 were $1,658,596 as
compared to $4,791,823 for the same period of 1997, a decrease of approximately
$3.1 million. The decrease is primarily attributed to the inclusion of only
three months of UST revenues, approximately $435,000, in 1998 as compared to the
inclusion of twelve months of UST revenues, approximately $3.9 million, in the
prior year. Revenue from the Company's custom software services increased by
approximately $330,000 from the prior year. The net loss and net loss per share
were $2,662,394 and $1.06 per share, respectively, for the year ended December
31, 1998, as compared to a net loss and loss per share of $2,900,356 and $1.70,
respectively, for the prior year.
During the year ended December 31, 1998, revenue from custom multimedia
software development services was $1,171,648, as compared to $855,766, for the
prior year, an increase of approximately $315,900 or 37%. The increase was
primarily due to an increase in the size of new contracts the Company was able
to secure. The Company's strategy to grow revenue from custom multimedia
software development services includes targeting its sales and marketing efforts
of technology-based training solutions to the manufacturing and transportation
industries.
11
<PAGE>
During the year ended December 31, 1998, revenue from services fees for
systems integration and software development services provided by UST was
$361,704 as compared to $1,802,643 in the prior year, a decrease of
approximately $1.4 million. The decrease is due to the inclusion of only three
months of UST revenues in 1998 as compared to twelve months in the prior year.
During the year ended December 31, 1998, revenue from sales of products
was $73,328, as compared to $2,095,218 in the prior year, a decrease of
approximately $2 million. This revenue represents sales of computer hardware and
software products by UST as part of their systems integration services. The
decrease is due to the inclusion of only three months of UST revenues in 1998 as
compared to twelve months in the prior year.
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 $51,916 during the year ended December 31, 1998 as
compared to $38,196 for the prior year, an increase of approximately $13,700 or
36%. The increase is due primarily to an increase in the number of marketing and
development partners during 1998. The Company continually explores additional
marketing and development partners to increase revenues generated from royalty
arrangements.
During the year ended December 31, 1998, the cost of service fees for
custom multimedia software services was $562,137 as compared to $623,879 in the
prior year, resulting in gross margins of approximately 52% and 27%,
respectively. The improvement in gross margins is primarily due to the
consolidation of the multimedia related operations into one location, as well as
an increase in revenue.
During the year ended December 31, 1998, the cost of service fees for
systems integration services provided by UST was $239,031 as compared to
$1,054,825 in the prior year, resulting in gross margins of approximately 34%
and 41%, respectively. The decline in gross margin for 1998 is due to the
inclusion of only three months of UST operating expenses in 1998 as compared to
twelve months in the prior year.
.
Cost of product sales was $44,493 for the year ended December 31, 1998, as
compared to $1,848,385 in the prior year, resulting in gross margins of
approximately 39% and 12%, respectively. The higher gross margin for 1998 is due
to UST's discontinuance of the sale of certain less profitable computers during
1997. As such, UST focused its sales efforts on more profitable products during
1998.
During the year ended December 31, 1998, total operating expenses were
$3,327,090 as compared to $3,815,156 in the prior year, a decrease of
approximately $488,000 or 13%. This decrease is primarily due to the inclusion
of only three months of UST operating expenses in 1998 as compared to twelve
months in the prior year, and is offset by the write-off of the carrying amount
of an asset related to a consulting services contract as of December 31, 1998.
See Note 13 to the Company's financial statements herein for more information on
the consulting services contract written of as of December 31, 1998.
12
<PAGE>
During the year ended December 31, 1998, research and development expenses
were $55,455 as compared to $323,002 for the prior year. Research and
development expenses included improvements on existing tools and the development
of software tools and applications to be sold. The decrease of approximately
$268,000 in 1998 is primarily attributed to the divestiture of UST.
During the year ended December 31, 1998, selling, general and
administrative expenses were $2,361,634 as compared to $3,492,154 in the prior
year, a decrease of approximately $1,125,000, or 32%. The decrease is primarily
due to the inclusion of only three months of UST operations in 1998 as compared
to twelve months in the prior year.
During the year ended December 31, 1998, total other expense increased by
approximately $27,000 from the prior year primarily due to an increase in
amortization of deferred costs as well as a penalty of $105,800 paid pursuant to
a settlement relating to the Company's convertible subordinated debenture.
FISCAL 1997 COMPARED TO FISCAL 1996
Total revenues for the year ended December 31, 1997 were $4,791,823 as
compared to $1,588,094 for the same period of 1996, an increase of approximately
$3.2 million. This increase was primarily attributable to the inclusion of
twelve months of UST revenues of approximately $3.9 million in 1997 as compared
to the inclusion of six months of UST revenues of approximately $960,000 in the
prior year following its acquisition by the Company in July 1996, as well as an
increase in UST's revenue from product sales. In addition, revenue from the
Company's custom software services increased by approximately $303,000 from the
prior year. The net loss and net loss per share were $2,900,356 and $1.70 per
share, respectively, for the year ended December 31, 1997 as compared to a net
loss and net loss per share of $3,823,621 and $2.58 per share, respectively, for
the prior year.
During the year ended December 31, 1997, revenue from services fees for
systems integration and software development services provided by UST was
$1,802,643 as compared to $603,366 in the prior year, an increase of
approximately $1.2 million. The increase is due to the inclusion of twelve
months of UST revenues in 1997 as compared to only six months in the prior year
following its acquisition by the Company in July 1996. In addition, UST's
revenues increased during 1997 due to improved sales focus achieved after the
acquisition.
During the year ended December 31, 1997, revenue from custom multimedia
software development services was $855,766 as compared to $552,397 for the prior
year, an increase of approximately $303,000 or 55%. The increase was primarily
due to an increase in the size of new contracts the Company was able to secure.
The Company's strategy to grow revenue from custom multimedia software
development services includes continuing to pursue larger contracts.
13
<PAGE>
During the year ended December 31, 1997, revenue from sales of products
was $2,095,218, as compared to $372,256 in the prior year, an increase of
approximately $1.7 million. This revenue represents sales of computer hardware
and software products by UST as part of their systems integration services. The
increase is due to the inclusion of twelve months of UST revenues in 1997 as
compared to only six months in the prior year following its acquisition by the
Company in July 1996. In addition, UST's revenues increased during 1997 due to
the sales of IBM AS/40 and RS/6000 midrange computers under UST's Industry
Remarketer Agreement with IBM through June 30, 1997. Sales of the IBM midrange
computers accounted for approximately 70% of the revenue from product sales
through June 30, 1997. However, effective June 30, 1997, UST chose to no longer
sell the IBM AS/400 and RS/6000 midrange computers due to gross margins being
lower than anticipated. During 1997, UST continued to sell miscellaneous
computer hardware and software as part of their systems integration business.
Accordingly, revenue from product sales decreased in the second half of 1997 and
remained at similar levels through the date of the merger in April 1998.
The Company entered into agreements that allow certain customers to resell
copies of the Company's software products in exchange for royalty payments.
Royalties were $38,196 during the year ended December 31, 1997 as compared to
$60,075 for the prior year, a decrease of approximately $22,000 or 36%. 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 year ended December 31, 1997, total operating expenses were
$7,342,245 as compared to $5,419,016 in the prior year, an increase of
approximately $1.9 million, or 35%. The prior year expenses included
approximately $867,000 for the write-offs of purchased research and development
and goodwill in connection with the acquisitions of Forsight and UST.
Accordingly, the increase from the prior year excluding the write-offs was
approximately $2.8 million. This increase is primarily due to the inclusion of
twelve months of UST operating expenses in 1997 as compared to only six months
in the prior year following its acquisition by the Company in July 1996. In
addition, the first six months of 1997 included the cost of product sales
related to the sale of IBM AS/40 and RS/6000 midrange computers under UST's
Industry Remarketer Agreement with IBM.
During the year ended December 31, 1997, the cost of service fees for
systems integration services provided by UST was $1,054,825 as compared to
$602,718 in the prior year, resulting in gross margins of approximately 41% and
0%, respectively. The improved gross margin for 1997 is due to an increase in
revenue for services and improvements in UST's project bidding and tracking
procedures. The break-even gross margin for the 1996 period was primarily due to
the lower than anticipated level of sales for that period, as well as employee
turnover as a result of the July 1996 acquisition of UST by the Company.
During the year ended December 31, 1997, the cost of service fees for
custom multimedia software services was $623,879 as compared to $782,413 in the
prior year, resulting in gross margins (loss) of approximately 27% and (42%),
respectively. The improvement in gross margins
14
<PAGE>
is primarily due to the consolidation of the multimedia related operations into
one location, as well as an increase in revenue. The consolidation of the
Redmond, Washington office was completed by December 31, 1996.
Cost of product sales was $1,848,385 for the year ended December 31, 1997,
as compared to $223,498 in the prior year, resulting in gross margins of
approximately 12% and 40%, respectively. The lower gross margin for 1997 is due
to UST's attempt to enter the IBM AS/400 and RS/6000 midrange computer market by
making sales at low gross margins. As discussed above, UST discontinued the sale
of these computers effective June 30, 1997. Although UST will continue to sell
miscellaneous computer hardware and software items as part of their systems
integration business, gross margins are not expected to be significant in future
periods. The gross margin for 1996 was unusually high due to an unusual one-time
transaction related to the sale of an IBM mid-range computer recognized during
1996 by UST.
During the year ended December 31, 1997, research and development expenses
were $323,002 as compared to $251,778 for the prior year. Research and
development expenses included improvements on existing tools and the development
of software tools and applications to be sold.
During the year ended December 31, 1997, selling, general and
administrative expenses were $3,492,154 as compared to $2,691,483 in the prior
year, an increase of approximately $800,000, or 30%. The increase is primarily
due to the inclusion of twelve months of UST operations in 1997 as compared to
only six months in the prior year following its acquisition by the Company in
July 1996.
During the year ended December 31, 1997, total other income (expense)
increased by approximately $357,000 from the prior year primarily due to a
beneficial conversion interest charge of approximately $339,000 recognized in
1997 in connection with the Company's 6% subordinated convertible debenture. In
addition interest expense increased due to the inclusion of twelve months of
interest on UST's obligations to a bank in 1997 as compared to only six months
in the prior year following its acquisition by the Company in July 1996 and
interest expense for the Company's 6% debentures issued in October 1997.
CASH FLOW, LIQUIDITY AND CAPITAL RESOURCES
The Report of Independent Accountants on the 1998 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 $2,891,360 for the year ended December 31,
1998, and as of December 31, 1998 had an accumulated deficit of $16,457,675. In
addition, in April 1998, the Company settled certain litigious matters with the
holder of its convertible subordinated debenture, which resulted in the
debenture being reinstated. See Note 14 to the Notes to Consolidated Financial
Statements. As discussed in Note 1 to the Notes to the Consolidated Financial
Statements and under STRATEGY TO ACHIEVE PROFITABLE OPERATIONS below, the
Company plans to implement certain actions to address the
15
<PAGE>
losses and liquidity matters. However, there can be no assurance that such
actions will generate sufficient cash flow to ensure the continued existence of
the Company; or that additional financing will be available from any sources at
terms and conditions suitable to the Company.
For the year ended December 31, 1998, the Company used cash of
approximately $1,027,000 in operations. In addition to the net loss of
approximately $2.9 million, the Company experienced increases in accounts
receivable and other assets. Net cash of approximately $17,000 was used 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 year ended December 31, 1997, the Company used cash of
approximately $2.2 million in operations. In addition to the net loss of
approximately $2.9 million, the Company experienced an decrease in accounts
receivable and a corresponding decrease in accounts payable and accrued
expenses. Net cash of approximately $474,000 was provided from proceeds received
at maturity of U.S. government securities, offset by net cash of approximately
$87,000 used for the purchase of equipment. Net cash of approximately $2.0
million was provided by financing activities representing approximately $2.3
million provided by the issuance of the Company's 6% Subordinated Convertible
debenture and the exercise of common stock options and warrants, offset by
approximately $334,000 used to make payments on UST's obligations to a bank.
Existing cash and cash equivalent balances, together with funds to be
generated from investment income and future revenues 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 "Description of Business - Systems
Integration Services" and Note 2 to the Notes to the 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 the earlier of the closing of a $2,000,000 private placement
or sixty days of the closing of the merger; and (iii) a convertible debenture
for $1,025,000 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. The
unavailability or timing of any financing, could prevent or delay the continued
development and marketing of the products of the Company and could require
substantial curtailment of operations of the Company.
. In addition, 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. Although the Company formally
requested a temporary exemption, Nasdaq effected delisting on September 1, 1998,
after which SSGI's shares have traded on the Nasdaq "bulletin board". SSGI would
prefer that they be listed among the small cap companies, and the Company will
apply for such listing when its corporate profile again meets the
16
<PAGE>
requirements. Meanwhile, there is an efficient market for the sale and purchase
of the Company's shares.
OTHER FACTORS AFFECTING FUTURE RESULTS
RECENT LOSSES AND ACCUMULATED DEFICIT. The Company incurred a net loss
of approximately $2,891,000 for the year ended December 31, 1998 and had an
accumulated deficit of approximately $16,458,000 as of December 31, 1998. There
can be no assurance that the Company will not incur significant additional
losses for a longer period, will generate positive cash flow from its
operations, or that the Company will attain or thereafter sustain profitability
in any future period. To the extent the Company continues to incur losses or
grows in the future, its operating and investing activities may use cash and,
consequently, such losses or growth will require the Company to obtain
additional sources of financing in the future or to reduce operating expenses.
GOING CONCERN ASSUMPTIONS; FUTURE CAPITAL NEEDS; NO ASSURANCE OF FUTURE
FINANCING. The Company's independent accountants' report on its financial
statements as of and for the years ended December 31, 1998 and 1997 contains an
explanatory paragraph indicating that the Company's historical operating losses
and limited capital resources raise substantial doubt about its ability to
continue as a going concern. The Company may require substantial additional
funds in the future, and there can be no assurance that any independent
accountants' report on the Company's future financial statements will not
include a similar explanatory paragraph if the Company is unable to raise
sufficient funds or generate sufficient cash from operations to cover the cost
of its operations.
STRATEGY TO ACHIEVE PROFITABLE OPERATIONS
In April of 1998, the Company divested itself of UST, which had been a
wholly owned subsidiary. The rationale governing that divestiture recognized
that UST would require a disproportionately large part of the Company's present
and future capital in order to become viable. As an independent entity, UST has
been working closely with its investment bankers to obtain adequate new funding.
This effort by UST is important to the Company because, if it is successful, it
will enable UST to repay its obligations to the Company in the shortest time
possible. However, due to the uncertainty of UST's ability to raise additional
capital and perform on its obligations due the Company, management believes the
assets recorded at the time of the divestiture are fully impaired and as such,
has written them down to zero as of December 31, 1998.
The Company's current operations, subsequent to the UST divestiture, are
those comprising its former Multimedia Division which has as its mission
statement - "We optimize human performance using leading edge technology-based
training solutions to eliminate the barriers of time and space." Within those
parameters, there has been a substantial year-to-year growth in revenues. (1997
more than 50% over 1996: 1998 more than 37% over 1997). This trend appears to be
continuing into 1999.
17
<PAGE>
The Company's current growth strategy includes the implementation of a
more focused sales and marketing effort which targets the division's sales and
marketing of technology-based training solutions to the manufacturing and
transportation industries. Existing clients are an important component of the
Company's marketing strategy. 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 pursue this strategy successfully.
In addition, the Company is producing more and more Internet compatible
products, and is continually investigating and leveraging this knowledge for
future applications. The Company believes that Internet related projects will
become the primary source of revenue generation in the not too distant future.
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 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. During 1998, the Company and TAMSCO (a private corporation)
agreed to seek external financing which would facilitate a merger of their
operations. Unfortunately, our financial consultants have not yet been able to
arrange such funding on acceptable terms, and consequently we do not anticipate
that a merger with TAMSCO will be effected in the foreseable future.
Notwithstanding, SSGI intends to evaluate this and other potential mergers which
might enhance our Company's growth by adding complementary, similar product
lines.
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.
IMPACT OF INFLATION
Inflation has not had any significant effect of the Company's operations.
NEW ACCOUNTING STANDARDS
During 1998, the Company adopted SFAS No. 130 "Reporting Comprehensive
Income" and SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information." SFAS 130 established standards for reporting comprehensive
income in a full set of general purpose financial statements either in the
income statement or in a separate statement. The Company's comprehensive income
is the same as its net income for all periods presented. SFAS No. 131 requires
the Company to report financial and descriptive information about its reportable
operating segments. The accounting policies of the segments are the same as
those described in Note 1 to the Company's financial statements. From July 1996
through March 1998, the Company was a full service provider of technology based
software solutions and computer systems integration and support services. To
achieve these objectives, the Company had two reportable segments during that
timeframe: a systems integration division and a multimedia division. For a
description of the divisions see Note 1 in the financial statements.
In December 1998, the Accounting Standards Executive Committee of the
AICPA issued Statement of Position (SOP) 98-9, "Modification of SOP 97-2,
Software Revenue Recognition,
18
<PAGE>
With Respect to Certain Transactions." SOP 98-9 modifies SOP 97-2 by requiring
revenue to be recognized using the "residual method" if certain conditions are
met. SOP 98-9 will be effective for the Company's 2000 financial statements.
Management is assessing the impact that SOP 98-9 will have on the Company's
results of operations.
IMPACT OF YEAR 2000 ISSUE
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 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" complaint.
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 possibly 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 no 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.
19
<PAGE>
"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 AND MARKETING
STRATEGIES; THE CONTINUED EXISTENCE OF AGREEMENTS WITH CUSTOMERS; 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.
ITEM 7. FINANCIAL STATEMENTS
The information required by Item 7 begins at page F-1 that appears after
this page.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
20
<PAGE>
STRATEGIC SOLUTIONS GROUP, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
Page No.
Report of Independent Accountants, on the December 31, 1998
and 1997 Consolidated Financial Statements F-2
Consolidated Balance Sheets, December 31, 1998 and 1997 F-3
Consolidated Statements of Operations for the years
ended December 31, 1998, 1997, and 1996 F-4
Consolidated Statements of Stockholders' Equity (Deficit) for the years
ended December 31, 1998, 1997, and 1996 F-5
Consolidated Statements of Cash Flows for the years
ended December 31, 1998, 1997, and 1996 F-6
Notes to Consolidated Financial Statements F-7 - F-19
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
---------------------------------
To the Board of Directors and Stockholders of
Strategic Solutions Group, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of changes in stockholders' equity
(deficit) and of cash flows present fairly, in all material respects, the
financial position of Strategic Solutions Group, Inc. and its subsidiaries at
December 31, 1998 and 1997, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has incurred recurring losses from operations,
has a significant accumulated deficit, and its existing cash resources are
insufficient to fund its planned operations. These conditions raise substantial
doubt about the Company's ability to continue as a going concern. Management's
plans to address these matters are also described in Note 1. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
PricewaterhouseCoopers LLP
McLean, Virginia
April 12, 1999
F-2
<PAGE>
<TABLE>
<CAPTION>
STRATEGIC SOLUTIONS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, December 31,
1998 1997
----------------------------------------------
ASSETS
------
<S> <C> <C>
Current assets
Cash and cash equivalents $ 67,991 $ 1,149,372
Accounts receivable, net of allowance for doubtful accounts
of $45,000 and $75,000, respectively 189,630 666,841
Prepaid expenses and other current assets 24,497 137,618
--------------------- ----------------------
Total current assets 282,118 1,953,831
----------------------------------------------
Property and equipment, at cost
Computers, furniture and equipment 410,972 1,058,313
Less accumulated depreciation 325,656 701,390
----------------------------------------------
Net property and equipment 85,316 356,923
----------------------------------------------
Other assets 112,543 1,446,066
----------------------------------------------
$ 479,977 $ 3,756,820
==============================================
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
---------------------------------------------
<S> <C> <C>
Current liabilities
Accounts payable and accrued liabilities $ 364,148 $ 1,027,935
Deferred revenue 1,240 66,558
Note payable to bank -- 40,334
Convertible subordinated debenture 1,007,277 --
Other current liabilities 411,966 168,700
----------------------------------------------
Total current liabilities 1,784,631 1,303,527
Convertilble subordinated debenture -- 1,487,864
----------------------------------------------
Total liabilities 1,784,631 2,791,391
----------------------------------------------
Commitments and contingencies (Notes 10, 13 and 14)
Stockholders' equity (deficit)
Common stock, $.0001 par value. Authorized 10,000,000
and 5,000,000 shares; issued and outstanding 3,399,670
and 1,768,839 shares as of December 31, 1998 and 1997 340 177
Additional paid-in capital 15,230,243 14,647,910
Accumulated deficit (16,457,675) (13,566,315)
Deferred compensation (77,562) (116,343)
----------------------------------------------
Total stockholders' equity (deficit) (1,304,654) 965,429
----------------------------------------------
$ 479,977 $ 3,756,820
==============================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
STRATEGIC SOLUTIONS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended December 31,
-------------------------------------------------
1998 1997 1996
-------------------------------------------------
Revenues:
<S> <C> <C> <C>
Service revenues $ 1,533,352 $ 2,658,409 $ 1,155,763
Product revenues 73,328 2,095,218 372,256
Royalty revenues 51,916 38,196 60,075
-------------- --------------- -------------
Total revenue 1,658,596 4,791,823 1,588,094
-------------------------------------------------
Cost of revenues:
Cost of service revenues 801,168 1,678,704 1,385,131
Cost of product revenues 44,493 1,848,385 223,498
-----------------------------------------------
Total cost of revenues 845,661 3,527,089 1,608,629
-----------------------------------------------
Gross profit (loss) 812,935 1,264,734 (20,535)
-----------------------------------------------
Operating expenses:
Research and development 55,456 323,002 251,778
Selling, general and administrative 2,361,634 3,492,154 2,691,483
Write-off of impaired asset 910,000 -- --
Write-off of purchased research and development -- -- 289,330
Write-off of goodwill related to purchase of
U.S. Technologies, Inc. -- -- 577,796
-------------------------------------------------
Total operating expenses 3,327,090 3,815,156 3,810,387
-------------------------------------------------
Loss from operations (2,514,155) (2,550,422) (3,830,922)
Other (expense) income, net (377,205) (349,934) 7,301
-------------------------------------------------
Net loss $ (2,891,360) $ (2,900,356) $ (3,823,621)
=================================================
Net loss per common share - basic and diluted $ (1.15) $ (1.70) $ (2.58)
=================================================
Weighted average number of common shares outstanding 2,512,748 1,705,228 1,483,831
=================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
STRATEGIC SOLUTIONS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Common Stock Additional
--------------------------- Paid-in
Shares Amount Capital
-----------------------------------------------
<S> <C> <C> <C> <C>
Balance, December 31, 1995 1,441,024 $ 144 $ 11,280,624
Exercise of stock options 32,856 3 238,424
Stock issued for services 25,000 3 193,904
Stock issued in connection with
Forsight acquisition 20,000 2 159,373
Adjustment to 1995 offering costs -- -- 21,224
Amortization of deferred compensation -- -- --
Net loss -- -- --
-----------------------------------------------
Balance, December 31, 1996 1,518,880 152 11,893,549
Exercise of stock options and warrants 111,071 11 792,606
Grant of stock options in connection with
financial consulting agreement -- -- 1,150,000
Exercise of stock options in connection with
financial consulting agreement 100,000 10 188,979
Stock issued for services 38,888 4 171,246
Warrants issued in connection with
convertible subordinated debenture -- -- 112,136
Value of beneficial conversion feature on
convertible subordinated debenture -- -- 339,394
Amortization of deferred compensation -- -- --
Net loss -- -- --
-----------------------------------------------
Balance, December 31, 1997 1,768,839 177 14,647,910
Shares issued upon conversion of
subordinated debenture 1,630,831 163 548,018
Stock options granted to nonemployee for
consulting services -- -- 34,315
Amortization of deferred compensation -- -- --
Net loss -- -- --
-----------------------------------------------
Balance, December 31, 1998 3,399,670 $ 340 $ 15,230,243
===============================================
<CAPTION>
Accumulated Deferred
Deficit Compensation Total
--------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, December 31, 1995 $ (6,842,338) $ -- $ 4,438,430
Exercise of stock options -- -- 238,427
Stock issued for services -- (193,907) --
Stock issued in connection with
Forsight acquisition -- -- 159,375
Adjustment to 1995 offering costs -- -- 21,224
Amortization of deferred compensation -- 38,783 38,783
Net loss (3,823,621) -- (3,823,621)
--------------------------------------------------------
Balance, December 31, 1996 (10,665,959) (155,124) 1,072,618
Exercise of stock options and warrants -- -- 792,617
Grant of stock options in connection with
financial consulting agreement -- -- 1,150,000
Exercise of stock options in connection with
financial consulting agreement -- -- 188,989
Stock issued for services -- -- 171,250
Warrants issued in connection with
convertible subordinated debenture -- -- 112,136
Value of beneficial conversion feature on
convertible subordinated debenture -- -- 339,394
Amortization of deferred compensation -- 38,781 38,781
Net loss (2,900,356) -- (2,900,356)
--------------------------------------------------------
Balance, December 31, 1997 (13,566,315) (116,343) 965,429
Shares issued upon conversion of
subordinated debenture -- -- 548,181
Stock options granted to nonemployee for
consulting services -- -- 34,315
Amortization of deferred compensation -- 38,781 38,781
Net loss (2,891,360) -- (2,891,360)
--------------------------------------------------------
Balance, December 31, 1998 $ (16,457,675) $ (77,562) $ (1,304,654)
========================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
STRATEGIC SOLUTIONS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31,
1998 1997 1996
----------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities
Net loss $ (2,891,360) $ (2,900,356) $ (3,823,621)
Adjustments to reconcile net loss to net cash used in
operating activities, net of effects from purchases
of Forsight, Inc. and U.S. Technologies, Inc.:
Depreciation and amortization 161,968 224,132 269,741
Amortization of deferred financing costs 132,785 22,004 --
Loss on disposal of assets 5,743 4,666 22,634
Provision for bad debt expense -- 119,096 28,981
Interest expense associated with beneficial conversion
feature on convertible subordinated debentures -- 339,394 --
Noncash expense for services 240,000 171,250 --
Compensation expense on equity securities 73,096 38,781 38,783
Write-off of impaired asset 910,000 -- --
Write-off of purchased research and development -- -- 289,330
Write-off of goodwill -- -- 577,796
Increase (decrease) in cash from changes in assets and
liabilities:
Accounts receivable 157,759 (374,717) (31,119)
Prepaid expenses and other current assets 88,250 51,853 (27,009)
Other assets (31,183) 2,415 25,276
Accounts payable and accrued liabilities (13,770) 231,206 (1,146)
Other liabilities 139,892 (91,029) (130,659)
----------------------------------------------------
Net cash used in operating activities (1,026,820) (2,161,305) (2,761,013)
----------------------------------------------------
Cash flows from investing activities
Purchase of U.S. government securities -- -- (474,144)
Proceeds from maturity of U.S. government securities -- 474,144 --
Capital expenditures (17,372) (86,570) (134,033)
Cash balance of divested subsidiary (7,189)
Proceeds from sales of property and equipment -- -- 11,200
Payment for purchase of Forsight, Inc., net of cash
acquired -- -- (46,424)
Cash acquired from purchase of U.S. Technologies, Inc. -- -- 9,549
----------------------------------------------------
Net cash provided by (used in) investing activities (24,561) 387,574 (633,852)
----------------------------------------------------
Cash flows from financing activities
Net proceeds from issuance of convertible subordinated
debenture -- 1,335,957 --
Net proceeds from exercise of stock options and warrants -- 981,606 199,997
Net proceeds from sale of common stock -- -- --
Payments on line of credit -- (290,833) (26,886)
Payments on notes payable to bank (30,000) (42,908) (16,499)
----------------------------------------------------
Net cash provided by financing activities (30,000) 1,983,822 156,612
----------------------------------------------------
Net increase (decrease) in cash and cash equivalents (1,081,381) 210,091 (3,238,253)
Cash and cash equivalents, beginning of year 1,149,372 939,281 4,177,534
----------------------------------------------------
Cash and cash equivalents, end of year $ 67,991 $ 1,149,372 $ 939,281
====================================================
Supplemental disclosures of cash paid:
Interest $ 5,524 $ 33,901 $ 22,701
Supplemental schedule of noncash investing and financing
activities:
Stock issued as payment for unearned professional fees $ -- $ 1,150,000 $ 193,907
Stock options exercised in lieu of payment for
professional fees -- -- 38,430
Stock issued in connection with acquisition of Forsight -- -- 159,375
Discount on convertible subordinated debenture -- 112,136 --
Stock issued upon conversion of convertible debentures 548,181 -- --
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
STRATEGIC SOLUTIONS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
1. THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business. During 1997 and through March 1998, Strategic
Solutions Group, Inc. (formerly, Pacific Animated Imaging Corporation) and its
subsidiaries (the "Company") were full-service providers of technology based
software solutions and computer systems integration (including the sale of
hardware and software products) and support services. In April 1998, the Company
divested itself of its systems integration subsidiary U.S. Technologies, Inc.
("UST"). See Note 2 for further discussion. The Company's Multimedia division
specializes in the development of custom interactive multimedia software for use
in the areas of process enhancement, technical documentation, training, and
performance support for a variety of commercial and industrial end-users.
Going Concern. The Company's financial statements for the year ended
December 31, 1998 have been prepared on a going concern basis which contemplates
the realization of assets and the settlement of liabilities and commitments in
the normal course of business. The Company incurred a net loss of $2,891,360 for
the year ended December 31, 1998 and as of December 31, 1998 had an accumulated
deficit of $16,457,675. In addition, during 1998, the Company was notified by
Nasdaq that it was not in compliance with Nasdaq's new net tangible assets.
Subsequently, in 1998 the Company's securities were delisted. Management
recognizes that in order to develop and market its services effectively, the
Company will require additional financing until such time that service fees are
of sufficient volume to generate positive cash flows from operations. Although
the Company may seek financing from placements of its equity securities or
placements of debt, there can be no assurances that such financing will be
available or, if available, will be under terms and conditions suitable to the
Company. Management's plans to address the losses and liquidity matters include
(i) growing the multimedia operations by implementing a more focused marketing
and sales program; and (ii) pursuing an acquisition program of related
businesses. However, no assurances can be given that these measures, even if
successful, will ensure the continued existence of the Company. The Company's
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
Principles of Consolidation. The consolidated financial statements include
the accounts of Strategic Solutions Group, Inc. and its wholly owned
subsidiaries.
Revenue Recognition. Revenues generated from the sale of software products
are recognized in accordance with the Statement of Position ("SOP") 97-2,
"Software Revenue Recognition", as amended. Revenues from software product sales
are recorded when persuasive evidence of an arrangement exists, delivery has
occurred, the fee is fixed and determinable and collectibility is probable.
Revenues from software development, consulting and training services are
recognized as services are performed. Revenues from certain custom multimedia
software products are recognized using the percentage of completion method due
to the significant customization involved in their development. Cost estimates
are reviewed periodically as work progresses, and adjustments to revenue are
reflected in the period in which revisions to such estimates are deemed
necessary. Revenues from royalties are recognized in the period for which the
royalties are earned. Software products generally are delivered without post
sale vendor obligations and without a significant obligation to the customer.
Deferred revenue represents amounts advanced by customers and is recognized as
revenue upon delivery of the products or services and is adjusted on a quarterly
basis to reflect the status of projects.
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 contingent 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.
F-7
<PAGE>
STRATEGIC SOLUTIONS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
Cash and Cash Equivalents. The Company considers all highly liquid
investments with an original maturity of three months or less to be cash
equivalents.
Property and Equipment. Property and equipment are stated at cost.
Depreciation is computed using the straight-line method over the estimated
useful lives of the related assets. The Company has estimated the useful lives
of computer hardware and software to be three years and furniture and fixtures
to be seven years. Amortization of leasehold improvements is computed using the
straight-line method over the shorter of the estimated useful life of the
improvements or the remaining lease term. When assets are retired or disposed,
the cost and the related accumulated depreciation are removed from the accounts,
and any resulting gain or loss is recognized in operations for the period.
Per Share Data. Basic earnings per share is computed by dividing the net
loss by the weighted average number of common shares outstanding during the
period. Diluted earnings per share is computed by dividing the net loss by the
weighted average number of common shares outstanding after giving effect to all
dilutive potential common shares that were outstanding during the period.
Potential common shares include stock options, warrants, or other convertible
securities that could be exercised or converted into common stock and are not
included in the computation of dilutive earnings per share if they are
anti-dilutive. The Company did not have any dilutive potential common shares for
any of the years presented. Net loss available to common stockholders was not
adjusted for any of the years presented. For all periods presented herein,
diluted earnings per share is the same as basic earnings per share because the
effects of such items were antidilutive given the losses incurred in such
periods.
Research and Development Expenses and Software Development Costs.
Statement of Financial Accounting Standards No. 86, "Accounting for the Cost of
Computer Software to be Sold, Leased or Otherwise Marketed" requires the
capitalization of certain software development costs once technological
feasibility is established, which the Company generally defines as the
completion of a working model. Capitalization ceases when the products are
available for general release to customers, at which time amortization of the
capitalized costs begins on a straight-line basis over the estimated product
life, or on the ratio of current revenues to total projected product revenues,
whichever is greater. To date, software development costs qualifying for
capitalization have been insignificant. Accordingly, the Company has not
capitalized any software development costs with respect to its continuing
operations. In addition, research and development costs including software
development costs prior to technological feasibility are expensed in the period
in which they are incurred.
Concentration of Credit Risk. The Company had approximately zero and
$950,000 on deposit in money market funds with strong credit ratings and
checking accounts at various commercial banking institutions in excess of
insured amounts at December 31, 1998 and 1997, respectively. The Company has not
experienced losses on these investments.
The Company provides hardware and software products, develops software,
and performs services for its customers located throughout the United States.
The Company provides credit in the normal course of business and, to date, has
not experienced significant losses related to receivables from individual
customers or groups of customers in a particular industry or geographic area. In
addition, for certain orders for custom multimedia software development
projects, the Company requires advances or deposits of at least one-third of the
price of the custom software with additional amounts due at certain milestones
during the custom software development process. Due to these factors, management
believes no additional credit risk beyond amounts provided for in the doubtful
account allowance is inherent in the Company's accounts receivable.
F-8
<PAGE>
STRATEGIC SOLUTIONS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
For the year ended December 31, 1998, two customers, a truck manufacturer
and a government division, accounted for 35% and 25%, respectively, of the
Company's revenue. For the year ended December 31, 1997, no one customer
accounted for 10% of the Company's revenue. For the year ended December 31,
1996, one customer, a systems integrator, accounted for 10% of the Company's
revenue. At December 31, 1998, four customers accounted for 25%, 22%, 15% and
13%, respectively, of accounts receivable. At December 31, 1997, one customer,
an insurance company, accounted for approximately 12% of accounts receivable.
Recoverability of Long-Lived Assets. The Company evaluates the
recoverability of the carrying value of property and equipment and intangible
assets in accordance with the provisions of Statement of Accounting Standards
No. 121, "Accounting for the Impairment of Long-Lived Assets to be Disposed Of".
The Company considers historical performance and anticipated future results in
its evaluation of potential impairment. Accordingly, when indicators of
impairment are present, the Company evaluates the carrying value of these assets
in relation to the operating performance of the business and future and
undiscounted cash flows expected to result from the use of these assets.
Impairment losses are recognized when the sum of expected future cash flows are
less than the assets' carrying value. As of December 31, 1998, the Company
recognized an impairment loss of $910,000 related to the write-off of a deferred
asset relating to future consulting services, as the recoverability of the
carrying value of the asset was uncertain. As of December 31, 1996, the Company
recognized an impairment loss of approximately $578,000 related to the write-off
of goodwill that resulted from the purchase of UST (see Note 2). Factors leading
to the impairment were a combination of historical losses, anticipated future
losses, and inadequate cash flows.
Income Taxes. Deferred income taxes are recognized for the tax
consequences in future years of differences between the tax bases of assets and
liabilities and their financial reporting amounts at each year end based on
enacted tax laws and statutory tax rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount expected
to be realized. Income tax expense is the tax payable for the period and the
change during the period in deferred tax assets and liabilities.
Fair Value of Financial Instruments. The Company believes that for all
financial instruments the carrying amount, as reported in the balance sheet,
approximates fair value.
New Accounting Pronouncements. During 1998, the Company adopted SFAS No.
130 "Reporting Comprehensive Income" and SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." SFAS 130 established
standards for reporting comprehensive income in a full set of general purpose
financial statements either in the income statement or in a separate statement.
The Company's comprehensive income is the same as its net income for all periods
presented. See Note 15 for the Company's segment information pursuant to SFAS
131.
In December 1998, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants (the "AICPA") issued
Statement of Position (SOP) 98-9, "Modification of SOP 97-2, Software Revenue
Recognition, With Respect to Certain Transactions." SOP 98-9 modifies SOP 97-2
by requiring revenue to be recognized using the "residual method" if certain
conditions are met. SOP 98-9 will be effective for the Company's 2000 financial
statements. Management is assessing the impact that SOP 98-9 will have on the
Company's results of operations.
In March 1998, the AICPA issued SOP 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." SOP 98-1 became
effective January 1, 1999. Management does not believe that SOP 98-1 will have a
material impact on the Company's results of operations or financial condition.
F-9
<PAGE>
STRATEGIC SOLUTIONS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
Reclassifications. Certain prior year amounts have been reclassified to
correspond to the current year presentation.
2. ACQUISITIONS AND DIVESTITURE OF U.S. TECHNOLOGIES, INC.
During 1996, the Company acquired the entities described below, which were
accounted for by the purchase method of accounting. The results of operations of
the acquired companies are included in the Company's statement of income for the
period in which they were owned by the Company.
Acquisition of Forsight, Inc.
Effective February 2, 1996, the Company acquired substantially all the
assets of Forsight, Inc. ("Forsight"), a closely held corporation engaged in the
business of developing and selling interactive multimedia software to the
business communications and the consumer publishing market for a total purchase
price of approximately $375,000, plus direct expenses of the acquisition which
totaled approximately $23,000. The Company acquired cash, fixtures and
equipment, accounts receivable, intellectual property, and other miscellaneous
assets for the assumption of certain liabilities of Forsight, which totaled
approximately $200,000, and 20,000 unregistered shares of the Company's common
stock. Other terms of the acquisition included the employment by the Company of
certain of Forsight's key employees, who will continue as part of the Company's
senior management team; and the acquisition of all of the shares of Series A
Convertible Preferred Stock of Forsight from Circa Pharmaceuticals, Inc. in an
amount equal to thirty percent of the net income each year for three years of
Forsight's operations up to a maximum value of $600,000, payable in unregistered
shares of common stock of the Company. The Series A Convertible Preferred Stock
of Forsight was canceled after the acquisition. The Company allocated
approximately $109,000 to identifiable tangible assets and wrote-off
approximately $289,000 as in process research and development on the date of
acquisition. The acquisition did not meet materiality thresholds for separate
pro forma disclosure.
Acquisition of U.S. Technologies, Inc.
Effective July 19, 1996, U.S. Technologies Inc. Acquisition Corporation, a
wholly owned subsidiary of the Company, merged with and into U.S. Technologies,
Inc. ("UST"), with UST being the surviving corporation. As a result of the
merger, the Company owns 100% of UST. Consideration at the time of purchase
amounted to approximately $642,000 which represents the excess of UST's
liabilities over its assets as of the date of the merger. On December 31, 1996,
the Company wrote-off approximately $578,000, which represented the purchase
consideration of approximately $642,000, net of approximately $64,000 of
accumulated amortization, as an impairment loss (see Note 1).
In addition, under the terms of the merger, the former 100% owner of UST
had the ability to earn up to 31,068 shares of common stock in the Company (the
market value of which was $400,000 as of the date of the merger), provided
certain financial milestones were met by UST. The value of the shares of common
stock would have been accounted for as compensation at the time of issuance. As
of December 31, 1997 and the date of divestiture of UST, no shares of the
Company's common stock had been earned by the former 100% owner of UST.
F-10
<PAGE>
STRATEGIC SOLUTIONS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
If the acquisition of UST had occurred on January 1, 1996, 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:
1996
----
Revenues $2,918,235
Total operating expenses $6,945,473
Net loss ($4,036,851)
Net loss per common share - basic and diluted ($2.72)
These estimates were based on assumptions that management deems
appropriate, but the results are not necessarily indicative of those that might
have occurred had the acquisition taken place on January 1, 1996.
Divestiture of U.S. Technologies, Inc.
During the first quarter 1998, the Company made a strategic decision to
focus its business on its multimedia technology based software solutions and as
such divested itself of its computer systems integration division.
On April 8, 1998, the Company merged UST into SSGI-UST Acquisition Corp.,
an existing 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 the earlier of the closing of a $2,000,000 private placement of UST's equity
securities or 60 days after the closing of the merger; and (iii) a 6%
subordinated convertible debenture in the principal amount of $1,027,808 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 secured by all of the assets of
UST and the pledge of all of the outstanding stock of UST. The Company has the
option to convert the $1,027,808 debenture upon the occurrence of the first
public offering into shares of Common Stock of UST at a conversion price for
each share of Common Stock equal to the public offering price of the Common
Stock less twenty (20%) percent. As a result of this transaction, the Company's
direct ownership in UST was reduced from 100% to approximately 14%.
In accordance with Staff Accounting Bulletin 5-E "Accounting for
Divestiture of a Subsidiary or Other Business Operation" ("SAB 5-E), the
transaction was accounted for as a divestiture. Accordingly, the consideration
received was recorded as assets in the Company's consolidated balance sheet and
the related gain was deferred until the Company ultimately collects the cash as
prescribed under SAB 5-U, "Gain Recognition on the Sale of a Business or
Operating Assets to a Highly Leveraged Entity."
F-11
<PAGE>
STRATEGIC SOLUTIONS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
At December 31, 1998, the promissory note from UST in the principal amount
of $600,000 had not been paid. In addition, the Company is currently in the
process of renegotiating all of the terms of its agreement with UST. However, to
date an agreement has not yet been reached. As a result of the uncertainty of
the ongoing negotiations with UST and the inability of UST to meet its
obligations due the Company, management believes that the assets recorded at the
time of the divestiture have been impaired. Accordingly, the Company has
reserved the entire promissory note receivable balance and has written down its
investment of 100,000 shares in UST to zero at December 31, 1998. In addition,
the related deferred gain was written down to its net realizable value at
December 31, 1998.
3. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities as of December 31, 1998 and 1997
consist of the following:
December 31,
1998 1997
---- ----
Accounts payable $ 140,876 $ 673,417
Payroll and related expenses 52,981 192,552
Other 170,291 161,966
---------- ----------
$ 364,148 $1,027,935
========== ==========
4. NOTE PAYABLE TO BANK
As of December 31, 1997, UST had a note payable to a bank with a balance
of $40,334 due in April 1998. The note was payable in monthly installments of
$10,000, bearing interest at 10.5% and was collateralized by equipment and
accounts receivable. The Company paid $30,000 of the balance during 1998 and the
remaining amount was part of the divested entity in April 1998.
5. LONG-TERM DEBT
On October 31, 1997, the Company issued a $1,600,000 6% Convertible
Subordinated Debenture (the "Debenture"). The Debenture accrues interest from
the date of issuance and is due and payable on October 31, 1999. The Debenture
is subordinated to all indebtedness and obligations of the Company for borrowed
money, under financing leases, for all obligations issued or assumed as full or
partial payment for property, and any trade obligation entered into in the
ordinary course of business. The holder of the Debenture is entitled, at its
option, to convert, in $50,000 increments, at any time commencing the earlier of
(a) December 30, 1997 or (b) the effective date of a Registration Statement
filed with the Securities and Exchange Commission. The Company filed a Form S-3
with the Securities and Exchange Commission which was declared effective January
29, 1998. Pursuant to an agreement dated March 19, 1999, the holder of the
debenture has the right to convert monthly, beginning in March 1999, up to 4.99%
of the Company's outstanding common stock. This right expires in October 1999.
F-12
<PAGE>
STRATEGIC SOLUTIONS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
The conversion price for each share of common stock is equal to the lesser
of (a) $4.24 (the "Maximum Price") or (b) 80% of the average market price on the
five trading days immediately preceding the conversion date provided that in no
event shall the conversion price be less than a defined percentage of the
Maximum Price. During 1998, the holder converted $549,000 of the debentures to
shares of the Company's common stock. The Company recognized approximately
$80,000 and $16,000, respectively, of interest expense during 1998 and 1997. The
Company recognized interest expense of approximately $339,000 in 1997 resulting
from the beneficial conversion feature. Debt issuance costs were approximately
$264,000 and are being expensed over the term of the debt using the
straight-line method. The Company recognized approximately $132,000 and $22,000
of the debt issuance costs during the years ended December 31, 1998 and 1997,
respectively. See Note 14 for a discussion regarding litigation involving the
Debenture.
In connection with the issuance of the Debenture, the Company also issued
40,000 Warrants (the "Warrants") exercisable at a price of $4.5375. The Company
ascribed a fair value of $112,136 to the Warrants at the time of issuance. The
debt will be written up to its face value of $1,600,000, adjusted for
conversions, and the corresponding discount will be expensed using the
straight-line method, which approximates the interest method, over the term of
the debt.
6. COMMON STOCK
On June 16, 1998 the Board of Directors approved an amendment to the
certificate of incorporation to increase the number of authorized shares of the
Company's common stock from 5,000,000 to 10,000,000. During 1998, the Company
issued approximately 1,631,000 shares of common stock upon the conversion of
convertible debentures by the debenture holder.
In connection with the Company's public offering of 920,000 shares of its
common stock in December 1995, a warrant to purchase 80,000 shares of its common
stock was issued to the underwriter. The warrant is exercisable at the option of
the holder, in whole or in part, at a price of $7.09 per share at any time
during the period December 15, 1996 through December 15, 2000. These warrants
were exercised in February, 1997 for which the Company received net proceeds of
approximately $540,000.
7. STOCK OPTION PLANS
Stock Option Repricing
Effective June 16, 1998, the Company's Board of Directors approved a
repricing of all active employees, directors and consultant's stock options.
Accordingly, options with respect to 116,157 shares of the Company's common
stock were cancelled and new options with respect to the same number of shares
were granted with an exercise price of $0.375. Other terms and conditions of the
options remained the same.
F-13
<PAGE>
STRATEGIC SOLUTIONS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
Incentive Stock Option Plans
In 1992, the shareholders approved the Company's Incentive Stock Option
Plan ("ISO Plan No. 1") for its employees to purchase up to a total of 39,222
registered shares of the Company's common stock. In 1994, the shareholders
approved the Company's Incentive Stock Option Plan No. 2 ("ISO Plan No. 2") for
its employees to purchase up to a total of 28,571 registered shares of the
Company's common stock. In 1997, the shareholders approved the Company's
Incentive Stock Option Plan No. 3 ("ISO Plan No. 3") for its employees to
purchase up to a total of 80,000 registered shares of the Company's common
stock. In 1998, the shareholders approved the Company's Incentive Stock Option
Plan No. 4 ("ISO Plan No. 4") for its employees to purchase up to a total of
85,000 registered shares of the Company's common stock. For the Incentive Stock
Option Plans, the option price per share may not be less than the fair market
value of the stock on the date of the grant, the terms of the options are ten
years from the date of grant, and options vest over a five-year period beginning
on the date of grant. If immediately before a grant an employee owns more than
10% of the total combined voting stock of the Company, the exercise price shall
be at least 110% of the fair market value of the stock on the date of the grant
and the options expire five years from the date of grant.
A summary of option activity since December 31, 1995 under ISO Plans No.
1, No. 2, No. 3 and No. 4 is as follows:
Number Weighted Average
of Options Option Prices
---------- -------------
Options outstanding at December 31, 1995 55,136 $ 10.57
Granted 37,711 $ 10.50
Exercised -- --
Expired (45,708) $ 10.75
------
Options outstanding at December 31, 1996 47,139 $ 10.00
Granted 57,426 $ 6.34
Exercised -- --
Expired (57,139) $ 10.95
------
Options outstanding at December 31, 1997 47,426 $ 4.44
Granted 145,300 $ 0.85
Exercised -- --
Expired (112,900) $ 2.26
-------
Options outstanding at December 31, 1998 79,826 $ 1.02
------
Nonqualified Stock Option Plans
In 1992, the shareholders approved the Company's Nonqualified Stock Option
Plan ("Nonqualified Plan") for its directors to purchase up to a total of 8,571
registered shares of the Company's common stock. Effective in 1994, the Company
adopted Nonqualified Stock Option Plan No. 2, under which the Company authorized
the issuance of options to consultants for the purchase of up to a total of
71,428 registered shares of its common stock. Effective in 1995, the Company
adopted Nonqualified Stock Option Plan No. 3, under which the Company authorized
the issuance of options to consultants for the purchase of up to a total of
13,571 shares of its common stock.
F-14
<PAGE>
STRATEGIC SOLUTIONS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
Effective in 1996, the Company adopted Nonqualified Stock Option Plan Nos. 4, 5,
and 6 under which the Company authorized the issuance of options to employees
and consultants for the purchase of up to a total of 32,500, 100,000, and
150,000 shares, respectively, of its common stock. Effective in 1997, the
Company adopted Nonqualified Stock Option Plan No. 7 under which the Company
authorized the issuance of options to consultants for the purchase of up to a
total of 100,000 registered shares of its common stock. Effective in 1998, the
Company adopted Nonqualified Stock Option Plan Nos. 8 and 9 under which the
Company authorized the issuance of options to directors and consultants for the
purchase of up to a total of 25,000 registered shares of its common stock under
each of the new plans. Options granted under the Nonqualified Stock Option Plans
are accounted for based upon their fair value at the date of their issuance. The
option price per share under these plans may be greater than or less than the
fair market value of the stock on the date of the grant. Both the option price
and the terms of the options are determined by the Board of Directors or a
committee of the Board as of the date of the grant. Generally, the terms of the
options are ten years from the date of grant, and options vest 100% on the date
of grant.
A summary of option activity since December 31, 1995 under the
Nonqualified Plans is as follows:
Number Weighted Average
of Options Option Prices
---------- -------------
Options outstanding at December 31, 1995 83,568 $ 8.14
Granted 182,500 $ 10.67
Exercised (32,856) $ 7.26
Expired (28,500) $ 5.25
------
Options outstanding at December 31, 1996 204,712 $ 11.04
Granted 443,284 $ 4.69
Exercised (131,071) $ 3.44
Expired (244,284) $ 10.48
-------
Options outstanding at December 31, 1997 272,641 $ 4.80
Granted 122,862 $ 0.80
Exercised -- --
Expired (37,857) $ 3.03
------
Options outstanding at December 31, 1998 357,646 $ 4.20
-------
The weighted average fair value per share of options granted during 1998
and 1997 was $0.83 and $4.59, respectively. The following table summarizes
additional information about the stock options outstanding under the Company's
stock option plans at December 31, 1998:
<TABLE>
<CAPTION>
Weighted Weighted
Average Weighted Average
Remaining Average Exercise
Range of Exercise Number Contractual Exercise Number Price of
Prices Outstanding Life Price Exercisable Exercisable
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$0.08 - $0.08 2,000 9.8 $0.08 400 $0.08
$0.38 - $0.53 150,957 9.1 $0.39 150,957 $0.38
$1.50-$1.63 7,005 9.2 $1.59 5,405 $1.62
$4.44-$4.44 212,297 8.8 $4.44 212,297 $4.44
$7.00-$10.50 47,357 7.9 $7.42 47,357 $7.42
$11.38-$13.50 17,856 7.8 $13.16 17,283 $13.22
------ --- ------ ------ ------
437,472 8.8 $3.66 433,699 $3.25
======= === ===== ======= =====
</TABLE>
F-15
<PAGE>
STRATEGIC SOLUTIONS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
Pro Forma Information in Accordance with SFAS 123
The Company applies Accounting Principles Board Opinion No. 25 (APB 25),
"Accounting for Stock Issued to Employees", and related interpretations in
accounting for its equity participation programs. Accordingly, no compensation
cost has been recognized for its incentive and nonqualified stock option plans
related to stock options granted to employees. However, the Company has adopted
the disclosure-only provisions of Statements of Financial Accounting Standards
No. 123, "Accounting for Stock-based Compensation" ("SFAS 123") as they pertain
to the recognition of compensation expense attributable to option grants. If the
Company had elected to recognize compensation cost for the Company's incentive
and nonqualified stock option plans consistent with the method of accounting
under SFAS No. 123, the Company's net loss and net loss per share on a pro forma
basis would be:
1998 1997
---- ----
Net loss - as reported $2,891,360 $2,900,356
Net loss - pro forma $2,998,995 $3,945,620
Net loss per share (basic and diluted) -
as reported $1.15 $1.70
Net loss per share (basic and diluted) -
pro forma $1.19 $2.31
The fair value of each option grant was estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted average
assumptions for each year:
1998 1997
---- ----
Risk-free interest rate 5.50% 6.11%
Expected life of options - years 5.0 5.0
Expected stock price volatility 100% 88%
Expected dividend yield 0% 0%
8. INCOME TAXES
The tax effects of the primary temporary differences and carryforwards
which give rise to net deferred tax assets are as follows as of December 31,
1998 and 1997:
December 31,
1998 1997
---- ----
Net operating loss carryforwards $4,907,000 $4,618,000
Other 159,000 297,000
---------- ----------
5,066,000 4,915,000
Valuation allowance (5,066,000) (4,915,000)
---------- ----------
$ -- $ --
========== ===========
Realization of deferred tax assets at the balance sheet date are dependent
on the Company's ability to generate future taxable income which is uncertain.
Accordingly, management has provided a full valuation allowance against the
Company's deferred tax assets as of December 31, 1998 and 1997.
F-16
<PAGE>
STRATEGIC SOLUTIONS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
The change in the deferred tax asset valuation allowance is primarily
attributable to the increase in net operating loss carryforwards. As of December
31, 1998, net operating loss carryforwards total approximately $12.7 million
which expire at various times through 2012. As a result of certain changes in
ownership, the use of these carryforwards to offset future taxable income may be
limited.
9. RELATED PARTY TRANSACTIONS
Prior to the acquisition, UST's sole stockholder advanced amounts to UST
to fund working capital needs. The amounts due were non-interest bearing and
were to be repaid upon availability of funds and after all amounts due to the
bank were repaid in full by UST. These loans were classified as short-term
obligations as of December 31, 1997 and were included in other current
liabilities and long-term obligations as of December 31, 1996 which were
included in other long-term liabilities. The amount due as of December 31, 1997
and 1996 was $120,579. With the divestiture of UST in April 1998, these
obligations are no longer the responsibility of the Company.
10. LEASES
The Company leases office space and automobiles under separate
noncancelable operating leases which expire at various dates through 2000. The
agreements generally require that the Company pay applicable utility, property
taxes, maintenance, and insurance costs. Certain excess office space is
subleased to a third party. The future annual minimum rental payments, net of
sublease income, under these leases at December 31, 1998 are as follows: 1999,
$51,000; 2000 and thereafter, $0. Rental expense for the years ended December
31, 1998, 1997, and 1996, was approximately $54,000, $211,000, and $297,000,
respectively.
11. RETIREMENT AND OTHER BENEFIT PLANS
Effective January 1, 1994, the Company established a defined contribution
retirement plan covering eligible full-time employees. Under this plan,
participants can contribute up to the lesser of 15% of their compensation or the
maximum allowable by IRS regulations, currently $9,500. Employees may direct the
investment of their contributions among several mutual fund options. The Company
may make discretionary contributions out of current or accumulated net profit.
Contributions for the years ended December 31, 1998 and 1997 were immaterial.
During 1994, the Company entered into split dollar agreements with two
officers whereby the Company pays the premiums on split dollar life insurance
policies held by these individuals. Under the agreements, the Company has an
interest in the policy equal to the cumulative value of all premiums paid by the
Company and will be reimbursed for these premiums upon death, termination of the
agreement, or termination of employment. However, since it is possible that the
Company at its discretion may waive this requirement, no asset for the premium
has been recorded. The Company paid approximately $12,000 and $15,000,
respectively, in premiums for the years ended December 31, 1998 and 1997.
Effective June 14, 1995, this plan was terminated with respect to one officer in
connection with his resignation from the Company.
F-17
<PAGE>
STRATEGIC SOLUTIONS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
12. TITLELINK JOINT VENTURE
In December 1996, the Company's subsidiary at the time, UST, entered into
an agreement with Interliant to form a joint venture, Titlelink, L.L.C. Under
the terms of the agreement, the joint venture will be owned equally and managed
by both members, UST and Interliant. Interliant has been appointed as the
Administrative Member which has the right, power, and authority to act on behalf
of the joint venture all things necessary to carry out the business of the joint
venture. The joint venture owns and markets Titlelink, an on-line software
application designed to streamline the real estate closing process. The initial
investment in the joint venture totaled $26,000 and has been reduced by UST's
proportionate share of the joint venture's operating results. UST's
proportionate share of the joint venture's operating results are reflected in
the Company's consolidated statements of operations, which for the year ended
December 31, 1997 total a loss of approximately $215,000. Total revenue,
expenses, and net loss for the joint venture for the year ended December 31,
1997 were $44,990, $474,520, and $429,530, respectively. The Company divested
itself of UST during 1998, as such, the results of the joint venture are not
included in the Company's consolidated financial statements for the year ended
December 31, 1998.
13.COMMITMENTS
On March 20, 1997, the Company entered into a financial consulting
agreement ("consulting agreement") with First Cambridge Securities Corporation
("First Cambridge"). The terms of the agreement included that First Cambridge
receive 100,000 stock options at an exercise price of $2.00 per share. First
Cambridge vested immediately in the 100,000 options and exercised their options
on March 28, 1997. The consulting agreement permitted the assignment by First
Cambridge of its obligation to perform financial consulting services thereunder.
First Cambridge has assigned its obligation to another party (the "assignee")
and the Company has accepted the assignment. The assignee is required to review
materials provided by the Company, perform financial consulting services, and
advise the Company and provide at least 50 hours of service per month on a
yearly average. The consulting agreement is for the five year period January 1,
1998 - December 31, 2002. Accordingly, the Company will be recognizing an
expense of $1,150,000, using the straight-line method over the term of the
consulting agreement, or approximately $20,000 per month, beginning January 1,
1998. As of December 31, 1997, the Company had a deferred asset of $1,150,000
arising from this transaction. At December 31, 1998, the Company reviewed the
asset for impairment and determined the services performed by the assignee were
not deemed satisfactory. Further, there was uncertainty as to the extent of
services to be performed in the future. As a result, the Company expensed the
remaining deferred asset balance of $910,000.
14. 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.
F-18
<PAGE>
STRATEGIC SOLUTIONS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
The $106,000 penalty was expensed in the second quarter and included in other
expenses on the statement of operations. In addition, the Company executed a
judgement note payable with the Debenture holder to pay the $106,000 in monthly
payments of $7,500 until paid in full with interest at 10% per annum and
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 the common stock issuable upon
conversion of the Debenture under the Securities Act of 1933 within the time
required by a registration rights agreement between the Company and the
Debenture holder. No discovery has been taken and no prediction can be made as
to its outcome. 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.
15. SEGMENT INFORMATION
During 1998, the Company adopted SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." SFAS No. 131 requires the
Company to report financial and descriptive information about its reportable
operating segments. The accounting policies of the segments are the same as
those described in Note 1. From July 1996 through March 1998, the Company was a
full service provider of technology based software solutions and computer
systems integration and support services. To achieve these objectives, the
Company had two reportable segments during that timeframe: a systems integration
division and a multimedia division. For a description of the divisions see Note
1.
Segment information for 1998, 1997 and 1996 is as follows:
Systems
Integration Multimedia
Division Division Other Total
------------- ------------ ----------- -----------
Revenues:
1998 $ 435,000 $ 1,223,596 $ -- $ 1,658,596
1997 3,897,861 893,962 -- 4,791,823
1996 960,257 627,838 -- 1,588,095
Loss from Operations:
1998 $ (377,051) $ (2,137,104) -- $(2,514,155)
1997 (1,340,857) (1,209,565) -- (2,550,422)
1996 (541,094) (2,422,702) (867,126)(1) (3,830,922)
Total Assets:
1998 $ -- $ 479,977 -- 479,977
1997 752,580 3,004,240 -- 3,756,820
1996 570,131 2,539,004 -- 3,109,135
(1) This amount represents nonrecurring charges to operations for the year ended
December 31, 1996 related to the write-off of purchased research and development
and goodwill that were not associated with the two operating segments.
F-19
<PAGE>
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT; COMPLIANCE WITH
SECTION 16(A) OF THE EXCHANGE ACT.
The following table sets forth certain information concerning the
directors and executive officers of the Company as of December 31, 1998.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
John J. Cadigan 68 Chairman of the Board, President, Chief Executive
Officer, Secretary, and Treasurer of the Company
Ernest A. Wagner 38 President of the Company's Multimedia Division
A. David Rossin, Ph.D. 67 Director
Nagesh S. Mhatre, Ph.D. 66 Director
John Morgenstern 65 Director
</TABLE>
JOHN J. CADIGAN has been Chairman, Chief Executive Officer, Secretary,
Treasurer, and a director of the Company since February, 1991. He assumed the
position of President in July 1995. Prior to joining the Company, Mr. Cadigan
served as Chairman of PAI from its inception in 1989 until it was merged into
the Company in February, 1991.
ERNEST A. WAGNER has been with the Company since February, 1994. In
1998, Mr. Wagner was promoted to President of the Company's Multimedia Division.
From 1985 to February, 1994, Mr. Wagner served in various engineering and
management positions with SuperFlow Corporation, a manufacturer of computerized
engine and vehicle testing equipment.
DR. A. DAVID ROSSIN has been a director of the Company since February,
1991. Dr. Rossin is currently the Center Affiliated Scholar at the Center for
International Security of Arms Control at Stanford University. He has been
employed since August 1987 as President of Rossin and Associates, a California
consulting firm which specializes in nuclear energy matters. Dr. Rossin served
as Assistant Secretary of the U.S. Energy Department from 1986 to 1987.
DR. NAGESH S. MHATRE currently serves on the Boards of three small
business ventures. Dr. Mhatre served as President and a Director of the
Becton-Dickinson Co., a multibillion dollar international company in the medical
and hospital equipment field from 1979 to 1984. Dr. Mhatre has held senior
management, CEO, and corporate officer positions in the biomedical and
biotechnology fields and has worked with numerous startup companies during the
period from 1975 to 1979.
21
<PAGE>
John Morgenstern is a specialist in Command, Control, Communications and
Intelligence Systems. Mr. Morgenstern is the former Director for Strategic and
Theater Command and Control Systems, Office of the Secretary of Defense. Mr.
Morgenstern is a business development strategist with extensive experience in
proposal preparation and evaluation, fiscal and program management, and tradeoff
studies for large scale and small scale system design.
BOARD OF DIRECTORS
The Company's Certificate of Incorporation and Bylaws, as
amended, divide the Company's directors into three classes designated as Class
I, Class II and Class III, that serve staggered three-year terms that expire at
the annual meeting of the Stockholders in the final year of the term. Each class
consists, as nearly as may be possible, of one-third of the total number of
directors constituting the entire Board of Directors. Directors serve for their
term and until their successors are duly elected, or until their earlier
resignation, removal from office, or death. The remaining directors may fill any
vacancy in the Board of Directors for an unexpired term.
There are presently four directors serving on the Board. A. David Rossin
has been designated as a Class I director and his term expires in 1999. Nagesh
Mhatre has been designated as a Class II director and his term expires in 2000.
John J. Cadigan and John Morgenstern are designated as Class III directors and
with terms expiring in 2001.
The Company has two standing committees, the Executive Compensation and
Stock Option Committee and the Audit Committee. The following directors are
members are appointed to the Executive Compensation and Stock Option Committee
until the next annual election and until their successors are duly elected and
shall qualify until their earlier death resignation or removal: A. David Rossin,
John J. Cadigan, Chairman, John C. Morgenstern. The following directors are
appointed to the Audit Committee until the next annual election and until their
successors are duly elected and shall qualify or until their earlier death,
resignation or removal: A. David Rossin, Chairman, Nagesh Mhatre. The Executive
Compensation and Stock Option Committee has the power and authority to
designate, recommend and/or review compensation of the Company's executive
officers and other employees, including salaries, bonuses, fringe benefits and
the grant of stock options. The Audit Committee has the power and authority to
recommend the engagement of independent accountants, review external and
internal auditing procedures and policies, review compensation paid to auditors
and make recommendations and/or implement changes with respect to the foregoing.
Officers are elected by the Board of Directors at the annual meeting of
directors following the annual shareholders meeting and serve until their
successors are duly elected, subject to earlier removal by the Board of
Directors.
22
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
This information will be contained in the definitive proxy statement of
the Company for the 1999 Annual Meeting of Stockholders under the captions
"Directors' Compensation", "Executive Compensation", "Employment Agreements",
and "Executive and Other Employee Benefit Plans" and is incorporated herein by
reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
This information will be contained in the definitive proxy statement of
the Company for the 1999 Annual Meeting of Stockholders under the caption
"Security Ownership of Certain Beneficial Owners and Management" and is
incorporated herein by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
This information will be contained in the definitive proxy statement of
the Company for the 1999 Annual Meeting of Stockholders under the caption
"Transactions Involving Directors and Officers" and is incorporated herein by
reference.
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a)(1)(2) Financial Statements
--------------------
A list of the Financial Statements filed as a part of this Report is set
forth in Item 7 and appears at Page F-1 of this Report; which list is
incorporated herein by reference.
(a)(3) Exhibits
--------
1(A) Stock Purchase Agreement with Forsight, Inc. (6)
1(B) Asset Purchase Agreement with Forsight, Inc. (6)
2 Plan of Merger between U.S. Technologies, Inc. Acquisition
Corporation and U.S. Technologies, Inc (7)
2(A) Articles of Merger of U.S. Technologies, Inc and U.S.
Technologies, Inc. Acquisition Corporation (7)
2(B) Agreement and Plan of Merger Among Strategic Solutions Group
and U.S. Technologies, Inc. (11)
2(B)(i) State of Florida Articles of Merger (11)
2(C) Promissory Note (11)
2(D) Pledge Agreement (11)
2(E) General Security Agreement for Promissory Note (11)
2(F) Secured Subordinated Debenture (11)
2(G) General Security Agreement for Debenture (11)
2(H) Registration Rights Agreement (11)
3 Certificate of Incorporation and Amendment thereto (1)
3(B) By-Laws (1)
3(C) Form of Amendments to Certificate of Incorporation and Bylaws
dated October 20, 1995 (5)
10 Form of Indemnification Agreement executed in favor of each
officer and director of the
Company (1)
10(A) Form of Indemnification Agreement Amendment executed in favor
of certain officers and directors of the Company (6)
10(B) Form of Indemnification Agreement executed in favor of each
officer and director of the Company (6)
10(C) Securities Purchase Agreement, for 6% Convertible Subordinated
Debentures (10)
10(D) Form of Debenture (10)
10(E) Registration Rights Agreement (10)
10(F) Form of Common Stock Purchase Warrant (10)
10(H) Employment Agreement with John J. Cadigan dated
September 1, 1995 (5)
10(I) Amendment to Employment Agreement with John J. Cadigan (11)
10(U) Employment Agreement (7/15/96) - Peter S. Steele (9)
10(V) Loan Renewal and Modification Agreement (9)
21 Subsidiaries of Registrant (2)
23
<PAGE>
23 Consent of PricewaterhouseCoopers LLP (11)
99 Incentive Stock Option Plan No. 1 (4)
99(A) Nonqualified Stock Option Plan No. 1(4)
99(B) Incentive Stock Option Plan No. 2 (5)
99(D) Phantom Stock Performance Stock Plan (3)
99(E) Nonqualified Stock Option Plan No. 2 (5)
99(F) Nonqualified Stock Option Plan No. 3 (5)
99(H) Split Dollar Plan Agreement (11/21/94) - John J. Cadigan (3)
99(I) Nonqualified Stock Option Plan No. 4 (6)
99(J) Nonqualified Stock Option Plan No. 5 (9)
99(K) Nonqualified Stock Option Plan No. 6 (9)
99(L) Nonqualified Stock Option Plan No. 7 (8)
99(M) Incentive Stock Option Plan No. 3 (11)
99(N) Incentive Stock Option Plan No. 4 (12)
99(O) Nonqualified Stock Option Plan No. 8 (13)
99(P) Nonqualified Stock Option Plan No. 9 (14)
- -------------------
(1) Incorporated by reference to Form S-1 Registration Statement, File No.
33-68826
(2) JMC Company, Inc. and Forsight, Inc., are wholly owned subsidiaries of
the Company incorporated under the laws of the State of Maryland.
(3) Incorporated by reference to December 31, 1994 Form 10-K.
(4) Incorporated by reference to Form S-8 Registration Statement, File No.
33-53536.
(5) Incorporated by reference to Original Form SB-2, File No. 33-97776.
(6) Incorporated by reference to December 31, 1995 Form 10-K.
(7) Incorporated by reference to Form 8-K, dated July 19, 1996.
(8) Incorporated by reference to Form S-8 Registration Statement, File No.
333-23777.
(9) Incorporated by reference to December 31, 1996 Form 10-KSB.
(10) Incorporated by reference to Form 8-K, dated October 31, 1997
(11) Incorporated by reference to December 31, 1997 Form 10-KSB.
(12) Filed herewith.
(13) Filed herewith.
(14) Filed herewith.
(b) Reports on Form 8-K
-------------------
The following report on Form 8-K was filed during the three months ended
December 31, 1997: October 31, 1997 - Other Events - Issuance of
$1,600,000 6% Convertible Subordinated Debentures.
24
<PAGE>
SIGNATURES
Pursuant to the requirements Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
STRATEGIC SOLUTIONS GROUP, INC.
BY: /s/ John J. Cadigan Dated: April 15, 1999
---------------------
John J. Cadigan, Chief Executive Officer & President
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 and in the capacities and on the dates indicated:
Signature Title Date
- --------- ----- ----
/s/ John J. Cadigan Chairman of the Board, April 15, 1999
- ------------------- President, Chief Executive
John J. Cadigan Officer, Secretary and
Treasurer
/s/ Dr. A. David Rossin Director April 15, 1999
- -----------------------
Dr. A. David Rossin
/s/ Dr. Nagesh S. Mhatre Director April 15, 1999
- ------------------------
Dr. Nagesh S. Mhatre
/s/ John Morgenstern Director April 15, 1999
25
STRATEGIC SOLUTIONS GROUP, INC.
INCENTIVE STOCK OPTION PLAN NO. 4
Effective June 16, 1998
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
1. Definitions........................................................................ 1
2. Purpose............................................................................ 1
3. Administration..................................................................... 1
4. Shares Subject to Plan............................................................. 2
5. Eligible Employees, Directors, and Consultants..................................... 2
6. Restrictions on Eligibility. ...................................................... 2
7. Allotment of Shares................................................................ 2
8. Grant of Option.................................................................... 2
9. Option Price....................................................................... 2
10. Option Period...................................................................... 3
11. Termination of Option.............................................................. 3
12. Rights in Event of Termination of Service, Retirement, Disability or Death......... 3
13. Payment and Notice of Exercise..................................................... 3
14. Exercise of Option................................................................. 4
15. Changes in Capital Structures...................................................... 4
16. Nontransferability................................................................. 5
17. Transfers of Stock Received Upon Exercise.......................................... 5
18. Re-Issuance of Shares.............................................................. 5
19. Interpretation..................................................................... 5
20. Term of Plan, Amendment, Discontinuance............................................ 5
21. Effect of the Plan, etc............................................................ 6
22. Governing Law...................................................................... 6
</TABLE>
<PAGE>
STRATEGIC SOLUTIONS GROUP, INC.
-------------------------------
INCENTIVE STOCK OPTION PLAN NO. 4
---------------------------------
1. Definitions. As used herein, the following terms shall have the
following meanings:
(a) "Board" shall mean the Board of Directors of Strategic Solutions
Group, Inc.
(b) "Code" shall mean the Internal Revenue Code of 1986, as amended.
Reference herein to specific sections of the Code shall include references to
any successor provisions to such sections.
(c) "Committee" shall mean the committee appointed by the Board pursuant
to Section 3. of this Plan to administer this Plan.
(d) "Company" shall mean Strategic Solutions Group, Inc. and its
subsidiaries, if any.
(e) "Effective Date" shall mean the date this Plan is approved by the
stockholders of Strategic Solutions Group, Inc, as provided in Section 19.
hereof.
(f) "Option Period" shall mean the period during which an option granted
under this Plan shall be exercisable, as set forth in Section 10. hereof.
(g) "Subsidiary", for purposes of this Plan, shall mean any corporation
(or similar organization) of which the Company owns, directly or indirectly,
more than 50% of the total voting power of all classes of stock entitled to vote
therein.
2. Purpose. The purpose of this Plan is to increase the interest in the
welfare of the Company of those employees, directors, and consultants of the
Company who have made valuable contributions to the business of the Company, to
furnish such employees, directors, and consultants with an incentive to continue
their services to the Company, and to attract able personnel to the employ of
the Company through the grant to such employees of options to purchase shares of
the Company's Common Stock. The Company intends that options granted pursuant to
the provisions of this Plan will qualify as "incentive stock options" within the
meaning of Section 422 of the Code.
3. Administration. This Plan shall be administered by the Board or a
committee (the "Committee") of not less than two (2) members of the Board.
Members of the Committee shall be appointed, and vacancies shall be filled, by
the Board. No member of the Board or Committee shall participate in any action
by the Board or Committee which allots or grants options to him/her personally.
1
<PAGE>
4. Shares Subject to Plan. Options may be granted from time to time
under this Plan providing for the purchase of not more than 85,000 shares of the
common stock, par value $.0001 per share, of the Company ("Common Stock"), as
constituted on the Effective Date (subject to adjustment pursuant to Section
15.), plus such number of such shares as may become available for reissuance
pursuant to Section 17. Shares of authorized and unissued Common Stock
reacquired by the Company and held in its Treasury, as from time to time
determined by the Board, may be issued upon exercise of options granted under
this Plan.
5. Eligible Employees, Directors, and Consultants. Except as provided in
Section 6. hereof, employees, directors, and consultants of the Company who are
designated by the Board or the Committee shall be eligible to be granted options
under this Plan. Said designated employee, director, or consultant shall
hereinafter be referred to as "Participant".
6. Restrictions on Eligibility. No option shall be granted under this
Plan to any employee, director, or consultant who, immediately before the option
is granted, owns stock possessing more than ten (10%) percent of the total
combined voting power of all classes of stock of (i) the Company or (ii) any of
the Company's subsidiaries (within the meaning of Section 422(b)(6) of the Code
and the Treasury Regulations thereunder), unless (a) at the time of such grant
the option price is at least one hundred ten (110%) percent of the fair market
value of the shares represented by such option on that date, and (b) such option
is not exercisable after the expiration of five (5) years from the date of
grant.
7. Allotment of Shares. The grant of an option to an eligible employee,
director, or consultant under this Plan shall not be deemed either to entitle
such employee, director, or consultant to, or to disqualify such employee,
director, or consultant from, participation in any other grant of options under
this Plan.
8. Grant of Option. Except as otherwise provided in Section 6., options
may be granted under this Plan from time to time prior to the expiration of ten
(10) year period commencing with the Effective Date. The aggregate fair market
value (determined as of the date such options are granted) of the stock with
respect to which incentive stock options are exercisable for the first time by
such Participant in any calendar year under all stock option plans of the
Company and its subsidiaries shall not exceed one hundred thousand ($100,000)
dollars, or such other amount as may be specified from time to time in Section
422(b)(7) of the Code. Grants under this Plan shall be made only by resolution
adopted by Board or the Committee. The grant of an option under this Plan shall
commence to have legal force and effect at the time of adoption by the Board or
the Committee of the resolutions making the grant, and the employee to whom such
option is granted shall become a Participant in this Plan at such time.
9. Option Price. Except as otherwise provided in Section 6., the price
at which the Common Stock may be purchased upon the exercise of an option
granted under this Plan shall be fixed by the Board or the Committee but shall
be not less than the fair market value of such shares on the date on which the
option is granted. The fair market value of such shares shall be determined in
accordance with the provisions of the Code and Treasury Regulations promulgated
thereunder.
2
<PAGE>
10. Option Period. Subject to the provisions of Section 14. below, an
option granted under this Plan may be exercised during the period (the "Option
Period") which begins on the date the option is granted (or such other time as
may be determined by the Committee as set forth in the resolutions evidencing
the grant of the option) and which ends
(a) on the earlier of
(i) the expiration of 10 years (5 years in the case of an
employee, director, or consultant described in Section 6.) after the date the
option is granted; or
(ii) the termination of the Participant's employment with
the Company (within the meaning of Section 422(a)(2) of the Code) for any reason
except as provided in Section 12. of this Plan; or
(b) such shorter period of time as may be determined by the Board
or the Committee, as set forth in the resolution evidencing the grant of the
option.
11. Termination of Option. All rights to exercise an option granted
under this Plan shall terminate at the end of the Option Period, as described in
Section 10. above.
12. Rights in Event of Termination of Service, Retirement, Disability or
Death. If a Participant terminates service with the Company, retires from the
Company on or after attainment of age 65, has his/her employment by the Company
terminated due to disability (within the meaning of Section 22(e)(3) of the
Code, as determined by the Board or the Committee) or dies without having fully
exercised an option granted under this Plan, the Participant, his/her
representative or custodian (in the event of his/her incompetency), or the
executors, administrators, legatees or distributees of his/her estate (in the
event of his/her death) shall have the right, for a period of three (3) months
after the date of his/her termination of service, retirement or death or for a
period of one (1) year after the date of his/her termination of employment due
to disability, to exercise the unexercised and unexpired portion, if any, of
such option, in whole or in part, to the same extent that the Participant could
have exercised such option before the expiration of such three-month or one-year
period had the Participant continued to be an employee of the Company.
13. Payment and Notice of Exercise. Full payment of the purchase price
for shares purchased upon the exercise, in whole or in part, of an option
granted under this Plan shall be made at the time of such exercise. The purchase
price may be paid for with cash, stock in the Company, or a combination thereof.
No such shares shall be issued or transferred to a Participant until full
payment therefor has been made and the Participant has delivered his/her written
Notice of Exercise of the respective options to the Company at its principal
office, and a Participant who is not already a stockholder at the time of the
issue shall have none of the rights of a stockholder until shares are issued or
transferred to him/her.
3
<PAGE>
14. Exercise of Option. No option under this Plan shall be exercisable
at any time by a Participant to whom an "incentive stock option" (as such term
is defined in Section 422 of the Code) has previously been granted prior to
December 31, 1986 while such previously granted incentive stock option is
"outstanding" (within the meaning of Section 422 of the Code), in whole or in
part. Unless the Board or Committee otherwise directs, options granted hereunder
shall be exercisable by a Participant pursuant to the Vesting Formula defined
below, provided the Participant is employed by Company on the Allocation Dates
as defined below. On the original date of grant the Participant shall have the
right to purchase as much as twenty (20%) percent of the shares of Common Stock
which are the subject of his/her option. On the first anniversary of the
original date of grant and on the second, third and fourth anniversary of the
original date of grant thereafter, Participant shall have the right to purchase
as much as an additional twenty (20%) percent of the shares of Common Stock
which are the subject of his/her option. As of the fourth anniversary of the
original date of grant, Participant shall have the right to purchase one hundred
(100%) percent of the shares of Common Stock which are the subject of his/her
option. The Allocation Dates are the above mentioned four (4) anniversary dates
of the original date of grant. Options granted under this Plan shall otherwise
be exercisable during the Option Period at such times, in such amounts, in
accordance with such terms and conditions, and subject to such restrictions as
may be determined by the Board or Committee, and as are set forth in the
resolutions and the Notice of Grant evidencing a Participant's exercise of such
options. In no event shall an option be exercised or shares be issued pursuant
to an option if any applicable laws shall not have been conformed with or if
requisite approval or consent of any governmental authority having jurisdiction
over the exercise of the options or the issue and sale of the Common Stock shall
not have been secured, unless in the opinion of counsel for the Company, the
exercise or issuance is exempt from the obligation to obtain such approval or
consent. Each Participant shall agree not to offer, sell, pledge, hypothecate or
otherwise transfer any shares of Common Stock purchased pursuant to the exercise
of an option granted under this Plan unless the shares have been registered
under applicable federal and state securities laws or unless the proposed
transaction is exempt from such registration in the opinion of counsel for the
Company. Each Participant shall, at the time of purchase of shares of Common
Stock upon the exercise of an option, if requested by the Company upon advice of
its counsel that the same is necessary or desirable, deliver to the Company
his/her written representation that he/she is purchasing the shares for his/her
own account for investment and not with a view to public distribution or with
any present intention of reselling any of such shares, and deliver such other
written representations as may be reasonably requested by the Company to assure
compliance with applicable laws. If a Participant so requests, shares purchased
upon the exercise of any option may be issued in or transferred into the name of
the Participant and another person jointly with right of survivorship.
15. Changes in Capital Structures. In the event of the payment of any
dividend payable in, or the making of any distribution of, Common Stock of the
Company to holders of record of Common Stock of the Company, which increases the
outstanding Common Stock of the Company by more than twenty-five (25%) percent
during the period any option granted under this Plan is outstanding or in the
event of any stock split,
4
<PAGE>
combination of shares, recapitalization or other similar change in the
authorized capital stock of the Company during such period or in the event of
the merger or consolidation of the Company into or with any other corporation or
the reorganization, dissolution, liquidation or winding up of the Company during
such period, Participants shall be entitled, upon the exercise of any
unexercised option held by them, to receive such new, additional or other shares
of stock of any class, or other property (including cash), as they would have
been entitled to receive as a matter of law in connection with such payment,
distribution, stock split, combination, recapitalization, as the case may be,
had they held the shares of the Common Stock being purchased upon exercise of
such option on the record date set for such payment or distribution or on the
date of such stock split, combination, recapitalization, change, merger,
consolidation, reorganization, dissolution or liquidation, and the option price
under any such option shall be appropriately adjusted. In case any such event
shall occur during the term of this Plan, the number of shares that may be
optioned and sold under this Plan as provided in Section 4. shall be
appropriately adjusted. The decision of the Board or the Committee, with respect
to all such adjustments shall be conclusive.
16. Nontransferability. Options granted under this Plan shall not be
transferable other than by will or by the laws of descent and distribution, and
shall be exercisable only by the Participant or by Participant's heirs or
personal representatives in accordance with Section 12. of this Plan.
17. Transfers of Stock Received Upon Exercise. Pursuant to ?423(a) of
the Code, there shall be no income tax consequences incurred upon the grant of
an option or upon the exercise of an option, provided, a Participant who has
received stock pursuant to exercise of an option to purchase Common Stock, does
not dispose of such shares of stock for a period of 2 years from the date of the
grant of the option or for a period of 1 year from the date of transfer of such
stock to Participant, whichever is later.
18. Re-Issuance of Shares. Any shares of Common Stock which, by reason
of the expiration of an option or otherwise, are no longer subject to purchase
pursuant to an option granted under this Plan shall be available for re-issuance
under this Plan.
19. Interpretation. The Board or the Committee shall interpret this Plan
and prescribe, amend or rescind rules and regulations relating to it and make
any and all other determinations necessary or advisable for its administration.
20. Term of Plan, Amendment, Discontinuance. This Plan shall be or has
been submitted for approval by the holders of at least a majority of the shares
called for that purpose within twelve months before or after adoption of the
Plan by the Board. Upon stockholder approval, the Plan shall be deemed effective
and adopted as of such date. This Plan, unless sooner terminated or discontinued
by the Board pursuant to this Section 19., shall expire on the tenth anniversary
of the Effective Date (except to the extent necessary for administration of
options exercisable but unexercised on that date), and no options shall be
granted under this Plan after that date. The Board may terminate or discontinue
this Plan at any time and may suspend this Plan or amend or modify this Plan in
any respect at any time or from time to time, without the approval of the
stockholders, except that the number of shares of Common Stock that may be
optioned and sold under this Plan, as provided in Section 4., above, may not be
changed (except pursuant to Section 15., above) and the class of eligible
employees to whom options may be granted, as provided in Sections 5. and 6.
above, may not be modified without the approval of the stockholders of the
Company and the Board or the Committee. No action of the Board, the Committee or
stockholders may alter or impair the rights of a Participant under any option
theretofore granted to him/her without his/her consent to such action.
5
<PAGE>
21. Effect of the Plan, etc. Neither the adoption of this Plan nor any
action of the Board or Committee, shall be deemed to give any employee any right
to be granted an option to purchase Common Stock of the Company or any other
rights hereunder unless and until the Board or Committee shall have adopted a
resolution granting such employee an option, and then only to the extent and on
such terms and conditions as may be set forth in such resolution; the terms and
conditions of options granted under this Plan may differ from one another as the
Board or Committee shall at its discretion determine, as long as all options
granted under the Plan satisfy the requirements in this Plan.
Date Adopted by Board: February 26, 1998
Date Approved by Stockholders: June 16, 1998
Effective Date: June 16, 1998
22. Governing Law. The validity, construction, interpretation and effect
of this instrument shall exclusively be governed by and determined in accordance
with the laws of the State of Delaware, except to the extent preempted by
federal law, which shall to such extent govern.
6
STRATEGIC SOLUTIONS GROUP, INC.
NONQUALIFIED STOCK OPTION PLAN NO. 8
EFFECTIVE JUNE 16, 1998
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
1. Definitions................................................................. 1
2. Purpose..................................................................... 1
3. Administration.............................................................. 1
4. Shares Subject to Plan...................................................... 2
5. Eligibility................................................................. 2
6. Allotment of Shares......................................................... 2
7. Option Price................................................................ 2
8. Option Period............................................................... 2
9. Termination of Option....................................................... 2
10. Rights in Event of Death.................................................... 2
11. Payment and Notice of Exercise.............................................. 2
12. Exercise of Option.......................................................... 3
13. Changes in Capital Structures, etc.......................................... 3
14. Nontransferability.......................................................... 4
15. Other Provisions............................................................ 4
16. Re-Issuance of Shares....................................................... 4
17. Interpretation.............................................................. 4
18. Term of Plan, Amendment, Discontinuance..................................... 4
19. Effect of the Plan, etc..................................................... 4
</TABLE>
<PAGE>
STRATEGIC SOLUTIONS GROUP, INC.
-------------------------------
NONQUALIFIED STOCK OPTION PLAN NO. 8
------------------------------------
1. Definitions. As used herein, the following terms shall have the
following meanings:
(a) "Board" shall mean the Board of Directors of Strategic
Solutions Group, Inc.
(b) "Committee" shall mean the Committee appointed by the
Board pursuant to Section 3. of this Plan to administer
this Plan, if appointed.
(c) "Company" shall mean Strategic Solutions Group, Inc.
(d) "Effective Date" shall mean the date this Plan is approved
by the Board of Directors of Strategic Solutions Group,
Inc., as provided in Section 18. hereof.
(e) "Option Period" shall mean the period during which an
option granted under this Plan shall be exercisable, as
set forth in Section 8. hereof.
(f) "Subsidiary", for purposes of this Plan, shall mean any
corporation (or similar organization) of which the Company
owns, directly or indirectly, more than 50% of the total
voting power of all classes of stock entitled to vote
therein.
2. Purpose. The purpose of this Plan is to increase the interest in the
welfare of the Company of those directors, officers and consultants of the
Company who have made valuable contributions to the business of the Company, to
furnish such directors, officers and consultants with an incentive to continue
their services to and for the Company, by enabling such directors, officers and
consultants to acquire an interest in the Company through a grant to them of
options to purchase shares of the Company's Common Stock.
3. Administration. This Plan shall be administered by the Board or a
Committee (the "Committee"), if appointed by the Board, which shall consist of
not less than two (2) members of the Board. No member of the Board or Committee
shall participate in any action by the Board or Committee which allots or grants
options to him personally.
4. Shares Subject to Plan. Options may be granted from time to time
under this Plan providing for the purchase of not more than twenty-five thousand
(25,000) shares of the common stock, par value $.0001 per share, of the Company
("Common Stock"), as constituted on the Effective
1
<PAGE>
Date (subject to adjustment pursuant to Section 13.), plus such number of such
shares as may become available for reissuance pursuant to Section 16. Shares of
authorized and unissued Common Stock reacquired by the Company and held in its
Treasury, as from time to time determined by the Board, may be issued upon
exercise of options granted under this Plan.
5. Eligibility. Except as otherwise provided herein, those directors,
officers and consultants of the Company who have performed or who are about to
perform services for the Company and who are designated by the Board or the
Committee shall be eligible to be granted options under this Plan. Said
designated person shall hereinafter be referred to as "Participant".
6. Allotment of Shares. The grant of an option to an eligible person
under this Plan shall not be deemed either to entitle such person to, or to
disqualify such person from, participation in any other grant of options under
this Plan or under any other plan of the Company.
7. Option Price. The price at which shares of Common Stock may be
purchased upon the exercise of an option granted under this Plan shall be fixed
by the Board or the Committee, and may be greater than or less than the fair
market value of such shares at the time of grant.
8. Option Period. An option granted under this Plan may be exercised
during the period (the "Option Period") which begins upon the date the option is
granted (or at such other time as may be determined by the Board or Committee,
as set forth in the resolutions evidencing the grant of the option) and which
ends no later than ten (10) years after the date the option is granted or such
lesser time as may be determined by the Board or the Committee as set forth in
the resolutions evidencing the grant of the option.
9. Termination of Option. All rights to exercise an option granted under
this Plan shall terminate at the end of the Option Period, as described in
Section 8. above.
10. Rights in Event of Death. If a Participant dies without having fully
exercised an option granted under this Plan, the executors, administrators,
legatees or distributees of his estate shall have the right, for a period of one
(1) year after the date of his death to exercise the unexercised and unexpired
portion, if any, of such option, in whole or in part, to the same extent that
the Participant could have exercised such option at the expiration of such one
(1) year period had the Participant lived.
11. Payment and Notice of Exercise. Full payment of the purchase price
for shares purchased upon the exercise, in whole or in part, of an option
granted under this Plan shall be made at the time of such exercise. The purchase
price must be paid for with cash. No such shares shall be issued or transferred
to a Participant until full payment therefor has been made and the Participant
has delivered his written Notice of Exercise of the respective options to the
Company at its principal office, and a Participant who is not already a
stockholder at the time of the issue shall have none of the rights of a
stockholder until shares are issued or transferred to him.
2
<PAGE>
12. Exercise of Option. As directed by the Board or Committee, options
granted hereunder may be exercisable by a Participant pursuant to a vesting
formula which will set forth the dates and the number of options which are then
available to the Participant. Options granted under this Plan shall be
exercisable during the Option Period at such times, in such amounts, in
accordance with such terms and conditions, and subject to such restrictions as
may be determined by the Board or Committee, and as are set forth in the
resolutions and the Notice of Grant evidencing the grant of such options as well
as the Notice of Exercise evidencing a Participant's exercise of such options.
In no event shall an option be exercised or shares be issued pursuant to an
option if any applicable laws shall not have been conformed with or if any
requisite approval or consent of any governmental authority having jurisdiction
over the exercise of the options or the issue and sale of the Common Stock shall
not have been secured, unless in the opinion of counsel for the Company the
exercise or issuance is exempt from the obligation to obtain approval or
consent. Each Participant shall agree not to offer, sell, pledge, hypothecate or
otherwise transfer any shares of Common Stock purchased pursuant to the exercise
of an option granted under this Plan unless the shares have been registered
under applicable federal and state securities laws or unless the proposed
transaction is exempt from such registration in the opinion of Counsel for the
Company. Each Participant shall, at the time of purchase of shares of Common
Stock upon the exercise of an option, if requested by the Company upon advice of
its counsel that the same is necessary or desirable, deliver to the Company his
written representation that he is purchasing the shares for his own account for
investment and not with a view to public distribution or with any present
intention of reselling any of such shares, and deliver such other written
representations as may be reasonably requested by the Company to assure
compliance with applicable laws. If a Participant so requests, shares purchased
upon the exercise of an option may be issued in or transferred into the name of
the Participant and other person jointly with the right of survivorship.
13. Changes in Capital Structures, etc. In the event of the payment of
any dividend payable in, or the making of any distribution of, Common Stock of
the Company to holders of record of Common Stock of the Company, which increases
the outstanding Common Stock of the Company by more than twenty-five (25%)
percent during the period any option granted under this Plan is outstanding or
in the event of any stock split, combination of shares, recapitalization or
other similar change in the authorized capital stock of the Company during such
period or in the event of the merger or consolidation of the Company into or
with any other corporation or the reorganization, dissolution, liquidation or
winding up of the Company during such period, Participants shall be entitled,
upon the exercise of any unexercised option held by them, to receive such new,
additional or other shares of stock of any class, or other property (including
cash), as they would have been entitled to receive as a matter of law in
connection with such payment, distribution, stock split, combination,
recapitalization, change, merger, consolidation, reorganization, dissolution or
liquidation, as the case may be, had they held the shares of the Common Stock
being purchased upon exercise of such option on the record date set for the such
payment or distribution or on the date of such stock split, combination,
recapitalization, change, merger, consolidation, reorganization, dissolution or
liquidation, and the option price under any such option shall be appropriately
adjusted. In case any such event shall occur during the term of this Plan, the
number of shares that my be optioned and sold under this Plan as provided in
Section 4. shall be appropriately adjusted. The decision of the Board or the
Committee, with respect to all such adjustments shall be conclusive.
3
<PAGE>
14. Nontransferability. Options granted under this Plan shall not be
transferable other than by will or by the laws of descent and distribution, and
shall be exercisable only by the Participant or by Participant's heirs or
personal representatives as provided in Section 10. of this Plan.
15. Other Provisions. Options granted under this Plan shall contain such
other provisions, including, without limitation, restrictions upon the exercise
of the option, as the Board or Committee shall deem advisable by written notice
to Participant.
16. Re-Issuance of Shares. Any shares of Common Stock which, by reason
of the expiration of an option or otherwise, are no longer subject to purchase
pursuant to an option granted under this Plan shall be available for re-issuance
under this Plan.
17. Interpretation. The Board shall interpret this Plan and prescribe,
amend or rescind rules and regulations relating to it and make any and all other
determinations necessary or advisable for its administration.
18. Term of Plan, Amendment, Discontinuance. Upon approval by the Board
of Directors, the Plan shall be deemed effective and adopted as of such date.
This Plan, unless sooner terminated or discontinued by the Board pursuant to
this Section 18, shall expire on the tenth anniversary of the Effective Date
(except to the extent necessary for administration of options exercisable but
unexercised on that date), and no options shall be granted under this Plan after
that date. The Board may terminate or discontinue this Plan at any time and may
suspend this Plan or amend or modify this Plan in any respect at any time or
from time to time, without the approval of the stockholders, except that the
number of shares of Common Stock that may be optioned and sold under this Plan,
as provided in Section 4., above, may not be changed (except pursuant to Section
13., above) and the class of eligible persons to whom options may be granted, as
provided in Section 5., above, may not be modified without the approval of the
Board or the Committee. No action of the Board, the Committee or stockholders
may alter or impair the rights of a Participant under any option theretofore
granted to him without his consent to such action.
19. Effect of the Plan, etc. Neither the adoption of this Plan, nor any
action of the Board or Committee, shall be deemed to give any person any right
to be granted an option to purchase Common Stock of the Company or any other
rights hereunder unless and until the Board or Committee shall have adopted a
resolution granting such person an option, and then only to the extent and on
such terms and conditions as may be set forth in such resolution; the terms and
conditions of options granted under this Plan may differ from one another as the
Board or Committee shall at its discretion determine, as long as all options
granted under the Plan satisfy the requirements in this Plan.
Date Adopted by Board: June 16, 1998
Effective Date: June 16, 1998
4
STRATEGIC SOLUTIONS GROUP, INC.
NONQUALIFIED STOCK OPTION PLAN NO. 9
Effective August 10, 1998
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
1. Definitions................................................................. 1
2. Purpose..................................................................... 1
3. Administration.............................................................. 1
4. Shares Subject to Plan...................................................... 2
5. Eligibility................................................................. 2
6. Allotment of Shares......................................................... 2
7. Option Price................................................................ 2
8. Option Period............................................................... 2
9. Termination of Option....................................................... 2
10. Rights in Event of Death.................................................... 2
11. Payment and Notice of Exercise.............................................. 2
12. Exercise of Option.......................................................... 3
13. Changes in Capital Structures, etc.......................................... 3
14. Nontransferability.......................................................... 4
15. Condition to Grant.......................................................... 4
16. Other Provisions............................................................ 4
17. Re-Issuance of Shares....................................................... 4
18. Interpretation.............................................................. 4
19. Term of Plan, Amendment, Discontinuance..................................... 4
20. Effect of the Plan, etc..................................................... 5
</TABLE>
<PAGE>
STRATEGIC SOLUTIONS GROUP, INC.
-------------------------------
NONQUALIFIED STOCK OPTION PLAN NO. 9
------------------------------------
1. Definitions. As used herein, the following terms shall have the
following meanings:
(a) "Board" shall mean the Board of Directors of Strategic
Solutions Group, Inc.
(b) "Committee" shall mean the Committee appointed by the
Board pursuant to Section 3. of this Plan to administer
this Plan, if appointed.
(c) "Company" shall mean Strategic Solutions Group, Inc.
(d) "Effective Date" shall mean the date this Plan is approved
by the Board of Directors of Strategic Solutions Group,
Inc., as provided in Section 18. hereof.
(e) "Option Period" shall mean the period during which an
option granted under this Plan shall be exercisable, as
set forth in Section 8. hereof.
(f) "Subsidiary", for purposes of this Plan, shall mean any
corporation (or similar organization) of which the Company
owns, directly or indirectly, more than 50% of the total
voting power of all classes of stock entitled to vote
therein.
2. Purpose. The purpose of this Plan is to increase the interest in the
welfare of the Company of those consultants of the Company who have made
valuable contributions to the business of the Company, to furnish such
consultants with an incentive to continue their services to and for the Company,
by enabling such consultants to acquire an interest in the Company through a
grant to them of options to purchase shares of the Company's Common Stock.
3. Administration. This Plan shall be administered by the Board or a
Committee (the "Committee"), if appointed by the Board, which shall consist of
not less than two (2) members of the Board. No member of the Board or Committee
shall participate in any action by the Board or Committee which allots or grants
options to him personally.
4. Shares Subject to Plan. Options may be granted from time to time
under this Plan providing for the purchase of not more than twenty-five thousand
(25,000) shares of the common stock, par value $.0001 per share, of the Company
("Common Stock"), as constituted on the Effective Date (subject to adjustment
pursuant to Section 13.), plus such number of such shares as may become
available for reissuance pursuant to Section 16. Shares of authorized and
unissued Common Stock
<PAGE>
reacquired by the Company and held in its Treasury, as from time to time
determined by the Board, may be issued upon exercise of options granted under
this Plan.
5. Eligibility. Except as otherwise provided herein, those consultants
of the Company who have performed or who are about to perform services for the
Company and who are designated by the Board or the Committee shall be eligible
to be granted options under this Plan. Said designated person shall hereinafter
be referred to as "Participant".
6. Allotment of Shares. The grant of an option to an eligible person
under this Plan shall not be deemed either to entitle such person to, or to
disqualify such person from, participation in any other grant of options under
this Plan or under any other plan of the Company.
7. Option Price. The price at which shares of Common Stock may be
purchased upon the exercise of an option granted under this Plan shall be fixed
by the Board or the Committee, and may be greater than or less than the fair
market value of such shares at the time of grant.
8. Option Period. An option granted under this Plan may be exercised
during the period (the "Option Period") which begins upon the date the option is
granted (or at such other time as may be determined by the Board or Committee,
as set forth in the resolutions evidencing the grant of the option) and which
ends no later than ten (10) years after the date the option is granted or such
lesser time as may be determined by the Board or the Committee as set forth in
the resolutions evidencing the grant of the option.
9. Termination of Option. All rights to exercise an option granted under
this Plan shall terminate at the end of the Option Period, as described in
Section 8. above.
10. Rights in Event of Death. If a Participant dies without having fully
exercised an option granted under this Plan, the executors, administrators,
legatees or distributees of his estate shall have the right, for a period of one
(1) year after the date of his death to exercise the unexercised and unexpired
portion, if any, of such option, in whole or in part, to the same extent that
the Participant could have exercised such option at the expiration of such one
(1) year period had the Participant lived.
11. Payment and Notice of Exercise. Full payment of the purchase price
for shares purchased upon the exercise, in whole or in part, of an option
granted under this Plan shall be made at the time of such exercise. The purchase
price must be paid for with cash. No such shares shall be issued or transferred
to a Participant until full payment therefor has been made and the Participant
has delivered his written Notice of Exercise of the respective options to the
Company at its principal office, and a Participant who is not already a
stockholder at the time of the issue shall have none of the rights of a
stockholder until shares are issued or transferred to him.
12. Exercise of Option. As directed by the Board or Committee, options
granted hereunder may be exercisable by a Participant pursuant to a vesting
formula which will set forth the dates and the number of options which are then
available to the Participant. Options granted under this
<PAGE>
Plan shall be exercisable during the Option Period at such times, in such
amounts, in accordance with such terms and conditions, and subject to such
restrictions as may be determined by the Board or Committee, and as are set
forth in the resolutions and the Notice of Grant evidencing the grant of such
options as well as the Notice of Exercise evidencing a Participant's exercise of
such options. In no event shall an option be exercised or shares be issued
pursuant to an option if any applicable laws shall not have been conformed with
or if any requisite approval or consent of any governmental authority having
jurisdiction over the exercise of the options or the issue and sale of the
Common Stock shall not have been secured, unless in the opinion of counsel for
the Company the exercise or issuance is exempt from the obligation to obtain
approval or consent. Each Participant shall agree not to offer, sell, pledge,
hypothecate or otherwise transfer any shares of Common Stock purchased pursuant
to the exercise of an option granted under this Plan unless the shares have been
registered under applicable federal and state securities laws or unless the
proposed transaction is exempt from such registration in the opinion of Counsel
for the Company. Each Participant shall, at the time of purchase of shares of
Common Stock upon the exercise of an option, if requested by the Company upon
advice of its counsel that the same is necessary or desirable, deliver to the
Company his written representation that he is purchasing the shares for his own
account for investment and not with a view to public distribution or with any
present intention of reselling any of such shares, and deliver such other
written representations as may be reasonably requested by the Company to assure
compliance with applicable laws. If a Participant so requests, shares purchased
upon the exercise of an option may be issued in or transferred into the name of
the Participant and other person jointly with the right of survivorship.
13. Changes in Capital Structures, etc. In the event of the payment of
any dividend payable in, or the making of any distribution of, Common Stock of
the Company to holders of record of Common Stock of the Company, which increases
the outstanding Common Stock of the Company by more than twenty-five (25%)
percent during the period any option granted under this Plan is outstanding or
in the event of any stock split, combination of shares, recapitalization or
other similar change in the authorized capital stock of the Company during such
period or in the event of the merger or consolidation of the Company into or
with any other corporation or the reorganization, dissolution, liquidation or
winding up of the Company during such period, Participants shall be entitled,
upon the exercise of any unexercised option held by them, to receive such new,
additional or other shares of stock of any class, or other property (including
cash), as they would have been entitled to receive as a matter of law in
connection with such payment, distribution, stock split, combination,
recapitalization, change, merger, consolidation, reorganization, dissolution or
liquidation, as the case may be, had they held the shares of the Common Stock
being purchased upon exercise of such option on the record date set for the such
payment or distribution or on the date of such stock split, combination,
recapitalization, change, merger, consolidation, reorganization, dissolution or
liquidation, and the option price under any such option shall be appropriately
adjusted. In case any such event shall occur during the term of this Plan, the
number of shares that my be optioned and sold under this Plan as provided in
Section 4. shall be appropriately adjusted. The decision of the Board or the
Committee, with respect to all such adjustments shall be conclusive.
14. Nontransferability. Options granted under this Plan shall not be
transferable other than by will or by the laws of descent and distribution, and
shall be exercisable only by the Participant or by Participant's heirs or
personal representatives as provided in Section 10. of this Plan.
<PAGE>
15. Conditions to Grant. Options granted under this Plan shall be
conditioned on the Company receiving payment from U.S. Technologies pursuant to
a Merger Agreement dated April 8, 1998, as amended.
16. Other Provisions. Options granted under this Plan shall contain such
other provisions, including, without limitation, restrictions upon the exercise
of the option, as the Board or Committee shall deem advisable by written notice
to Participant.
17. Re-Issuance of Shares. Any shares of Common Stock which, by reason
of the expiration of an option or otherwise, are no longer subject to purchase
pursuant to an option granted under this Plan shall be available for re-issuance
under this Plan.
18. Interpretation. The Board shall interpret this Plan and prescribe,
amend or rescind rules and regulations relating to it and make any and all other
determinations necessary or advisable for its administration.
19. Term of Plan, Amendment, Discontinuance. Upon approval by the Board
of Directors, the Plan shall be deemed effective and adopted as of such date.
This Plan, unless sooner terminated or discontinued by the Board pursuant to
this Section 18, shall expire on the tenth anniversary of the Effective Date
(except to the extent necessary for administration of options exercisable but
unexercised on that date), and no options shall be granted under this Plan after
that date. The Board may terminate or discontinue this Plan at any time and may
suspend this Plan or amend or modify this Plan in any respect at any time or
from time to time, without the approval of the stockholders, except that the
number of shares of Common Stock that may be optioned and sold under this Plan,
as provided in Section 4., above, may not be changed (except pursuant to Section
13., above) and the class of eligible persons to whom options may be granted, as
provided in Section 5., above, may not be modified without the approval of the
Board or the Committee. No action of the Board, the Committee or stockholders
may alter or impair the rights of a Participant under any option theretofore
granted to him without his consent to such action.
20. Effect of the Plan, etc. Neither the adoption of this Plan, nor any
action of the Board or Committee, shall be deemed to give any person any right
to be granted an option to purchase Common Stock of the Company or any other
rights hereunder unless and until the Board or Committee shall have adopted a
resolution granting such person an option, and then only to the extent and on
such terms and conditions as may be set forth in such resolution; the terms and
conditions of options granted under this Plan may differ from one another as the
Board or Committee shall at its discretion determine, as long as all options
granted under the Plan satisfy the requirements in this Plan.
Date Adopted by Board: August 10, 1998
Effective Date: August 10, 1998
