SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED SEPTEMBER 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to ____________
Commission File Number: 1-12536
STRATEGIC SOLUTIONS GROUP, INC.
(Exact name of Registrant as specified in its charter)
Delaware 11-2964894
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
326 First Street, Suite 100
Annapolis, Maryland 21403
- ---------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number,
including area code: (410) 263-7761
--------------
Not applicable
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year if changed since last
report)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
4,852,553 Common Shares, $.0001 par value were issued and outstanding at
September 30, 1999.
<PAGE>
STRATEGIC SOLUTIONS GROUP, INC.
TABLE OF CONTENTS
PAGE NO.
--------
PART I - FINANCIAL INFORMATION
Consolidated Balance Sheets, September 30, 1999 and
December 31, 1998 (unaudited) 3
Consolidated Statements of Operations for the three and nine
months ended September 30, 1999 and 1998 (unaudited) 4
Consolidated Statements of Cash Flows for the nine
months ended September 30, 1999 and 1998 (unaudited) 5
Notes to Consolidated Financial Statements (unaudited) 6
Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II - OTHER INFORMATION
Items 1-6 12
Signature 13
2
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STRATEGIC SOLUTIONS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
<S> <C> <C>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------ ------------
ASSETS
Current assets
Cash and cash equivalents $ 423,915 $ 67,991
Accounts receivable, net of allowance for doubtful
accounts of $35,000 and $45,000 103,036 189,630
Prepaid expenses and other current assets 21,018 24,497
------------ ------------
Total current assets 547,969 282,118
------------ ------------
Property and equipment, at cost
Computers, furniture and equipment 416,602 410,972
Less accumulated depreciation 353,780 325,656
------------ ------------
Net property and equipment 62,822 85,316
------------ ------------
Other assets 14,056 112,543
------------ ------------
$ 624,847 $ 479,977
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Accounts payable and accrued liabilities $ 401,948 $ 365,388
Convertible subordinated debenture 810,478 1,007,277
Other current liabilities 183,000 411,966
------------ ------------
Total liabilities 1,395,426 1,784,631
------------ ------------
Commitments and contingencies
Stockholders' deficit
Common stock, $.0001 par value. 25,000,000 shares
authorized; 4,852,553 and 3,399,671 issued and outstanding
at September 30, 1999 and December 31, 1998, respectively 486 340
Additional paid-in capital 15,331,265 15,230,243
Accumulated deficit (16,053,854) (16,457,675)
Deferred compensation (48,476) (77,562)
------------ ------------
Total stockholders' deficit (770,579) (1,304,654)
------------ ------------
$ 624,847 $ 479,977
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
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STRATEGIC SOLUTIONS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
----------- ----------- ----------- -----------
Revenue
<S> <C> <C> <C> <C>
Service fees $ 252,339 $ 262,687 $ 796,928 $ 1,229,632
Product sales -- -- -- 73,328
Royalties 5,359 9,934 19,948 39,216
----------- ----------- ----------- -----------
Total revenue 257,698 272,621 816,876 1,342,176
----------- ----------- ----------- -----------
Expenses
Cost of service fees 118,821 132,557 385,869 652,828
Cost of product sales -- -- -- 44,493
Research and development 23,373 7,218 62,101 53,412
Selling, general and administrative 301,153 413,682 615,887 2,004,162
----------- ----------- ----------- -----------
Total operating expenses 443,347 553,457 1,063,857 2,754,895
----------- ----------- ----------- -----------
Loss from operations (185,649) (280,836) (246,981) (1,412,719)
Other income/(expense) 672,801 (67,913) 650,802 (313,426)
----------- ----------- ----------- -----------
Net income (loss) $ 487,152 $ (348,749) $ 403,821 $(1,726,145)
=========== =========== =========== ===========
Net income (loss) per common share (basic) $ 0.11 $ (0.12) $ 0.10 $ (0.78)
=========== =========== =========== ===========
Weighted average number of shares outstanding (basic) 4,575,161 2,925,214 4,058,562 2,206,868
=========== =========== =========== ===========
Net income (loss) per common share (diluted) $ 0.10 $ (0.12) $ 0.10 $ (0.78)
=========== =========== =========== ===========
Weighted average number of shares outstanding (diluted) 4,775,798 2,925,214 4,185,910 2,206,868
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
STRATEGIC SOLUTIONS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
<S> <C> <C>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
1999 1998
----------- -----------
Cash flows from operating activities
Net income (loss) $ 403,821 $(1,726,145)
Adjustments to reconcile net income (loss) to net cash
used in operating activities
Depreciation and amortization 173,293 271,666
Allowance for Doubtful Accounts (10,000) --
Loss on disposal of assets -- 5,743
Noncash expense for services 29,086 180,000
Increase (decrease) in cash from changes in assets and liabilities
Accounts receivable 96,594 58,433
Prepaid expenses and other current assets 3,479 85,776
Other assets (530) (31,183)
Accounts payable and accrued liabilities 44,778 48,061
Other liabilities (228,967) 147,900
----------- -----------
Net cash provided by (used in) operating activities 511,554 (959,749)
----------- -----------
Cash flows from investing activities
Capital expenditures (5,630) (27,847)
Cash balance of divested subsidiary -- (7,188)
----------- -----------
Net cash used in investing activities (5,630) (35,035)
----------- -----------
Cash flows from financing activities
Principal payment on debenture (150,000) --
Payments on note payable to a bank -- (30,000)
----------- -----------
Net cash used in financing activities (150,000) (30,000)
----------- -----------
Net increase (decrease) in cash and cash equivalents 355,924 (1,024,784)
Cash and cash equivalents, beginning of period 67,991 1,149,372
----------- -----------
Cash and cash equivalents, end of period $ 423,915 $ 124,588
=========== ===========
SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING ACTIVITIES:
Stock issued upon conversion of convertible debentures $ 101,168 $ 545,826
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
STRATEGIC SOLUTIONS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. GENERAL
The consolidated financial statements of Strategic Solutions Group, Inc.
and its Subsidiaries, (the "Company") as of Septmber 30, 1999 and for the three
and nine month periods ended September 30, 1999 and 1998 are unaudited; however,
in the opinion of management, these consolidated financial statements include
all adjustments, consisting of normal recurring adjustments necessary for fair
presentation of such financial information. These financial statements should be
read in conjunction with the audited consolidated financial statements and notes
thereto for the year ended December 31, 1998 included in the Company's Annual
Report on Form 10-KSB previously filed with the Securities and Exchange
Commission.
2. LITIGATION
In January 1998, the Company issued a notice of redemption of its
Subordinated Convertible Debenture (the "Debenture") based on management's
interpretation of the contract and issued 1,052,624 shares of its common stock
in payment of the redemption amount. The holder of the Debenture refused to
accept the shares tendered, delivered a notice of partial conversion of the
Debenture, and filed suit against the Company in the Delaware Chancery Court
alleging that the terms of the Debenture permitted cash redemption only, that
the redemption was therefore invalid, and that the Company was required to honor
the holder's conversion notice. On April 23, 1998, the Court ruled in favor of
the Debenture holder, declaring the redemption invalid and imposing a penalty of
$106,000 against the Company for delay in delivering the shares issuable in
accordance with the holder's conversion notice. The $106,000 penalty was
expensed in the second quarter of 1998 and included in other expenses on the
statement of operations. In addition, the Company executed a judgment 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 US Technologies, Inc. ("UST"). The Company
received final payment from UST in August 1999 and is currently in default on
its payment of the penalty but is actively negotiating a resolution with the
debenture holder. 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.
3. AGREEMENT WITH U.S. TECHNOLOGIES, INC.
During the first quarter of 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, and accordingly, SSGI-UST Acquisition Corp ceased to exist.
Consideration payable to the Company for the merger consisted 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 was secured by all of the assets of
UST and the pledge of all of the outstanding stock of UST. The Company had 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.
6
<PAGE>
At December 31, 1998, the promissory note from UST in the principal
amount of $600,000 had not been paid. In addition, the Company was in the
process of renegotiating the terms of its agreement with UST. As a result of the
continued uncertainty of the ability of UST to meet its obligations due the
Company, management believed the assets recorded were impaired. Accordingly, the
Company reserved the entire promissory note receivable balance and wrote 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.
Pursuant to the ongoing renegotiations with UST, in May 1999, the Company
entered into a revised agreement with UST which amended all of the original
terms. The terms of the revised agreement are as follows: (1) UST will make an
immediate payment of $100,000 on the outstanding promissory note and delivery of
the 100,000 shares of UST stock which was to be issued to the Company under the
Original Agreement, (2) on or before August 15, 1999, or the closing date of
UST's initial public offering if sooner, UST will pay the Company $500,000 in
satisfaction of all obligations under the Original Agreements, (3) if UST does
not tender the $500,000 on or before August 15, 1999, UST will be obligated to
pay on or before October 8, 1999, or the date of the closing of its initial
public offering if sooner, the remaining face amount of the promissory note and
debenture of $1,525,808 reduced by $62,000 of administrative costs covered by
the Company, (4) delivery of 200,000 additional shares of UST stock to the
Company, (5) if at any time while owning UST stock, the conversion price of said
stock falls below $2.50 per share, the Company shall be issued a number of
shares that would equate to a purchase price of $2.50 per share, (6) UST shall
have the right to purchase all UST shares owned by the Company at $5.00 per
share. This call right shall expire upon the closing of the initial public
offering of UST's stock or April 30, 2000, and (7) if UST does not comply with
(2) above but with (3) above, the additional 200,000 shares shall be returned to
UST.
In accordance with the revised agreement, the Company received the
partial payment against the fully reserved promissory note of $100,000 along
with 100,000 shares from UST in May 1999 and the final payment of $500,000 along
with 200,000 shares in August 1999. The Company recorded the receipt of the cash
payments in other income. As a result of UST's compliance with the revised
agreement and settlement of its debts to the Company, the Company recognized the
deferred gain of approximately $228,000 in other income in September 1999.
On or about September 24, 1999, UST merged into a subsidiary of Digital
Chainsaw, Inc. ("Digital"), a Florida Corporation. As part of this transaction,
all 400,000 of the Company's shares of stock in UST were exchanged for 810,821
shares of Digital stock. As a result of the uncertainty of the fair market value
of the Company's holdings of Digital stock, management believes the assets
recorded remain impaired and as such are fully reserved for at September 30,
1999.
4. SEGMENT INFORMATION
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. In April 1998 the Company divested itself of its systems
integrations division. Accordingly, during 1999 the Company is operating under
only one segment, the mulimedia division.
Segment information for September 30, 1998 is as follows:
<TABLE>
<CAPTION>
Systems
For the Three Months Ended Integration Multimedia
September 30, 1998 Division Division Total
- ------------------------------------- --------------- ------------------- -------------------
<S> <C> <C> <C>
Revenues $ - $ 272,621 $ 272,621
Loss from operations $ - $ 280,836 $ 280,836
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
For the Nine Months Ended
September 30, 1998
- -------------------------------------
<S> <C> <C> <C>
Revenues $ 435,032 $ 907,144 $ 1,342,176
Loss from operations $ 376,121 $ 1,036,598 $ 1,412,719
</TABLE>
5. RECENT ACCOUNTING PRONOUNCEMENT
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, 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 does not believe that SOP 98-9
will have a material impact on the Company's results of operations or financial
condition.
6. SUBSEQUENT EVENT
The Company's convertible debenture and related accrued interest and
penalties was due on October 31, 1999. The Company is currently in default on
the debenture and is negotiating the ultimate resolution of the debt with the
debenture holder.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
The Company's revenues are comprised of service fees, product sales, and
royalties. Service fees are 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
related to software and hardware products sold by UST as part of their systems
integration services. In April 1998, UST was divested and, accordingly, its
revenues and results of operations are not included in the Company's results of
operations after that date. Royalties are paid to the Company by customers who
resell copies of software developed by the Company for such customers.
RESULTS OF OPERATIONS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE AND NINE MONTHS
ENDED SEPTEMBER 30, 1998
Total revenues for the three month period ended September 30, 1999 were
$257,698 as compared to $272,621 for the same period of 1998, a decrease of
approximately $15,000. This decrease is primarily attributed to the timing of
completion of the Company's contracts with customers. The net income and basic
earnings per share were $487,152 and $0.11, respectively, for the three month
period ended September 30, 1999, as compared to a net loss and loss per share of
$348,749 and $0.12, respectively, for the same period in 1998. The increase in
net income of approximately $836,000 is primarily due to the recovery of amounts
owed by UST during the third quarter and the Company's cost cutting efforts in
1999.
Total revenues for the nine month period ended September 30, 1999 were
$816,876 as compared to $1,342,176 for the same period of 1998, a decrease of
approximately $525,000. This decrease is primarily attributable to the inclusion
of UST revenues of approximately $435,000 in the nine month period ended
September 30, 1998. The net income and net income per share were $403,821 and
$0.10 per share, respectively, for the nine month period ended September 30,
1999, as compared to a net loss and net loss per share of $1,726,145 and $0.78
per share, respectively, for the same period of the prior year. The reduced net
loss is primarily due to the divestiture of UST, the recovery of amounts owed by
UST in the third quarter 1999 that had been previously written-off and the cost
trimming actions the Company has instituted during 1999.
8
<PAGE>
During the three and nine month periods ended September 30, 1999, revenue
from custom multimedia software development services was $252,339 and $796,928
respectively, as compared to $262,687 and $907,144, respectively, for the same
periods of the prior year, decreases of approximately $10,000 and $110,000,
respectively. The decreases are primarily a result of the timing of completion
of the Company's contracts with customers. The Company's strategy to increase
revenues prospectively includes targeting its sales and marketing efforts of
technology-based training solutions to the manufacturing and transportation
industries.
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 $5,359 and $19,948, respectively, during the three and
nine month periods ended September 30, 1999, as compared to $9,934 and $39,216,
respectively, for the same periods of the prior year, a decrease of
approximately $4,600 and $19,300, respectively. The Company generally expects
royalty revenue to remain constant with current levels 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.
For the three and nine month periods ended September 30, 1999, the cost
of service fees for custom multimedia software was $118,821 and $385,869,
respectively, as compared to approximately $132,000 and $413,800, respectively,
for the same periods of the prior year, resulting in gross margins of
approximately 54.5% and 51.7%, respectively, as compared to gross margins of
51.4% and 54.4%, respectively, for the same periods of 1998. Management expects
gross margins to be consistent in future periods when revenues are consistent.
During the three and nine month periods ended September 30, 1999, total
operating expenses were $443,347 and $1,063,857, respectively, as compared to
$553,457 and $2,754,895, respectively, for the same periods of the prior year,
decreases of approximately $110,000 and $1,690,000, respectively. This decrease
was primarily attributable to the inclusion of UST operating expenses of
approximately $811,000 during the three and nine month period ended September
30, 1998 as well as the Company's general cost cutting efforts.
During the three month period ended September 30, 1999, research and
development expenses were $23,373 as compared to $7,218 for the same period in
1998. During the nine month period ended September 30, 1999, research and
development expenses were $62,101 as compared to $53,412 for the same period of
the prior year. The variability in the amount of reasearch and development
expenses is directly related to the timing of the Company's product development
initiatives. Research and development expenses include improvements on existing
tools and the development of software tools and applications to be sold.
During the three and nine month periods ended September 30, 1999,
selling, general and administrative expenses were $301,153 and $615,887,
respectively, as compared to $413,682 and 2,004,162 respectively, for the same
periods of the prior year, decreases of approximately $112,500, or 27% and
$1,390,000, or 69%, respectively. For the nine months ended September 30, 1999,
approximately $484,000 of the decrease is the direct result of the divestiture
of UST in April 1998. The remaining decrease is primarily the result of
professional fees incurred during 1998 related to the debenture litigation and
the divestiture of UST as well as the Company's general cost cutting efforts
during 1999.
During the three and nine month periods ended September 30, 1999, total
other income increased by approximately $741,000 and $964,000, respectively,
from the same period in the prior year. The increase is the result of the
recovery of $600,000 in payments made by UST that had previously been reserved
for ($100,000 in May 1999 and $500,000 in August 1999), the recognition of
$228,000 of deferred gain from the divestiture of UST in the third quarter 1999,
a decrease in the interest expense and amortization of deferred costs as well as
a penalty of $105,800 in connection with the Company's convertible subordinated
debenture during the same period of the prior year.
CASH FLOW, LIQUIDITY AND CAPITAL RESOURCES
9
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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, during 1998, the Company's securities were delisted from the Nasdaq as
they were not in compliance with Nasdaq's new net tangible asset requirements.
See Strategy to Achieve Profitable Operations below for a discussion regarding
the Company's plans to address the losses and liquidity matters.
For the nine month period ended September 30, 1999, the Company's
operations provided cash of approximately $512,000. Included in net income for
the nine month period ended September 30, 1999 is the receipt of $600,000 as
payment on the Compnay's promissory note with UST. In addition, the Company
experienced a net increase in accounts payable and accrued liabilities during
the period and a decrease in accounts receivable. Net cash of approximately
$5,600 was used for investing activities for the purchase of equipment. The
Company made a principal payment of $150,000 on the outstanding convertible
subordinated debenture during the third quarter 1999.
For the nine month period ended September 30, 1998, the Company used cash
of approximately $959,800 in operations. In addition to the net loss, the
Company experienced increases in accounts receivable and and other assets. Net
cash of approximately $28,000 was used for investing activities for the purchase
of equipment. Net cash of $30,000 was used to make payments on UST's obligations
to a bank.
Current funds are not expected to provide sufficient liquidity to meet
anticipated cash needs on either a short-term or long-term basis. Management
recognizes that the Company will require additional financing until such time
that revenues are of sufficient volume to generate positive cash flows from
operations. Although the Company will be seeking financing from placements of
equity or debt securities, there can be no assurances that such financing will
be available, or if available, will be under terms and conditions suitable to
the Company.
In 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".
RECENT ACCOUNTING PRONOUNCEMENTS
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, 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 does not believe that SOP 98-9
will have a material impact on the Company's results of operations or financial
condition.
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 of 1998 and included in other expenses on the
statement of operations. In addition, the Company executed a judgment 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 US Technologies, Inc. ("UST"). The Company
received final payment from UST in August 1999 and is currently in default on
its payment of the penalty but is actively negotiating a resolution with the
debenture holder. 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
10
<PAGE>
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.
STRATEGY TO ACHIEVE PROFITABLE OPERATIONS
Subsequent to the merger and resulting divestiture of UST in April 1998,
the Company's strategy to increase revenue, which solely comprises the
multimedia division, includes the implementation of an operating plan built
around the division's mission statement - "We optimize human performance using
leading edge technology-based training solutions to eliminate the barriers of
time and space."
The plan also includes the implementation of a more focused sales and
marketing strategy which targets the division's sales and marketing efforts of
technology-based training solutions to the manufacturing and transportation
industries. Existing clients are also an important component of the Company's
marketing strategy. The Company believes that follow-on projects leverage sales
and marketing resources and strengthen the Company's client relationships. The
Company believes that it has good relationships with its existing customer base
and expects that these contacts will enable it to successfully pursue this
strategy.
In the normal course of business, the Company evaluates the acquisition
of businesses, products and technologies that complement the Company's business.
In addition, the Company may also evaluate other 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. The Company has no present commitments or agreements with
respect to any such transaction. However, the Company may acquire businesses,
products, or technologies in the future.
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 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 has substantially completed remediation and validation of
its internal systems, as well as developed contingency plans for certain
internal systems. 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. 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
11
<PAGE>
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.
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995: THE STATEMENTS CONTAINED IN THIS DOCUMENT AND OTHER STATEMENTS WHICH ARE
NOT HISTORICAL FACTS ARE FORWARD LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES, INCLUDING, THE SUCCESS OF NEWLY IMPLEMENTED SALES STRATEGIES; THE
CONTINUED EXISTENCE OF AGREEMENTS WITH PRODUCT PROVIDERS; MARKET ACCEPTANCE OF
THE COMPANY'S PRODUCTS AND SERVICES; THE ABILITY TO OBTAIN A LARGER NUMBER AND
SIZE OF CONTRACTS; THE TIMING OF CONTRACT AWARDS; WORK PERFORMANCE AND CUSTOMER
RESPONSE; THE IMPACT OF COMPETITIVE PRODUCTS AND PRICING; TECHNOLOGICAL
DEVELOPMENTS BY THE COMPANY'S COMPETITORS OR DIFFICULTIES IN THE COMPANY'S
RESEARCH AND DEVELOPMENT EFFORTS; AND OTHER RISKS AS DETAILED IN THE COMPANY'S
SECURITIES AND EXCHANGE COMMISSION FILINGS.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings:
See the footnotes to the unaudited consolidated financial
statements.
Item 2. Changes in Securities: None
Item 3. Defaults Upon Senior Securities: None
Item 4. Submission of Matters to a Vote of Security Holders: None
Item 5. Other Information: None
Item 6. Exhibits and Reports on Form 8-K:
(a) Exhibits: None
(b) No reports on Form 8-K were required to be filed for the three
months ended March 31, 1998.
The following report on Form 8-K was filed subsequent to March
31, 1998:
April 8, 1998 - Disposition of U.S. Technologies
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
STRATEGIC SOLUTIONS GROUP, INC.
-------------------------------
(Registrant)
Dated: November 15, 1999
12
<PAGE>
BY: /s/ John J. Cadigan
John J. Cadigan
President and Chief Executive Officer
13
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