<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended March 31, 2000
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)
1598 Whitehall Road, Suite E
Annapolis, Maryland 21401
- ------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number,
including area code: (410) 757-2728
--------------
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
--- ---
7,606,690 Common Shares, $.0001 par value were issued
and outstanding at April 30, 2000.
<PAGE>
STRATEGIC SOLUTIONS GROUP, INC.
TABLE OF CONTENTS
Page No.
--------
Part I - Financial Information
Consolidated Balance Sheets, March 31, 2000 and
December 31, 1999 (unaudited) 3
Consolidated Statements of Operations for the three
months ended March 31, 2000 and 1999 (unaudited) 4
Consolidated Statements of Cash Flows for the three
months ended March 31, 2000 and 1999 (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
Item 1. Legal Proceedings 10
Item 2. Exhibits and Reports on Form 8-K 11
2
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STRATEGIC SOLUTIONS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
------------ ------------
<S> <C> <C>
ASSETS
------
Current assets:
Cash and cash equivalents $ 216,208 $ 146,107
Accounts receivable, net of allowance for doubtful accounts
of $35,000 267,982 190,653
Prepaid expenses and other current assets 91,495 22,085
------------ ------------
Total current assets 575,685 358,845
------------ ------------
Property and equipment, at cost:
Computers, furniture and equipment 426,456 416,602
Less accumulated depreciation 375,946 365,622
------------ ------------
Net property and equipment 50,510 50,980
------------ ------------
Other assets 12,847 13,591
------------ ------------
$ 639,042 $ 423,416
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
-------------------------------------
Current liabilities
Accounts payable and accrued liabilities $ 259,670 $ 369,643
Capital lease obligation 1,353 0
Notes payable 150,742 0
Convertible subordinated debenture 0 779,650
Other current liabilities 101,987 183,000
------------ ------------
Total current liabilities 513,752 1,332,293
Convertible subordinated debenture 228,061 0
------------ ------------
Total liabilities 741,813 1,332,293
------------ ------------
Commitments and contingencies
Stockholders' deficit
Common stock, $.0001 par value. Authorized 25,000,000
shares; issued and outstanding 7,606,690 and 5,356,690
shares as of March 31, 2000 and December 31, 1999 761 536
Additional paid-in capital 15,893,123 15,370,848
Accumulated deficit (15,967,570) (16,241,480)
Deferred compensation (29,085) (38,781)
------------ ------------
Total stockholders' deficit (102,771) (908,877)
------------ ------------
$ 639,042 $ 423,416
============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
3
<PAGE>
STRATEGIC SOLUTIONS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2000 and 1999
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
March 31,
-------------------------
2000 1999
------------ ----------
<S> <C> <C>
Revenue
Service fees $ 270,361 $ 271,211
Product sales 0 0
Royalties 4,039 4,475
---------- ----------
Total revenue 274,400 275,686
---------- ----------
Expenses
Cost of service fees 114,323 128,229
Cost of product sales 0 0
Research and development 3,356 29,381
Selling, general and administrative 290,639 166,842
---------- ----------
Total operating expenses 408,318 324,452
---------- ----------
Loss from operations (133,918) (48,766)
Other expense, net 427 62,395
---------- ----------
Net (loss) before extraordinary item (134,345) (111,161)
Extinguishment of Debt 408,255 0
---------- ----------
Net income (loss) $ 273,910 $ (111,161)
========== ==========
Earnings per common share - Basic
Loss before extraordinary item $ (0.02) $ (0.03)
Extraordinary item $ 0.07 $ 0.00
---------- ----------
Net income (loss) per common share $ 0.05 $ (0.03)
========== ==========
Weighted average number of common shares outstanding - basic 5,782,879 3,416,015
========== ==========
Earnings per common share - assuming dilution
Loss before extraordinary item $ (0.02) $ (0.03)
Extraordinary item $ 0.06 $ 0.00
---------- ----------
Net income (loss) per common share $ 0.04 $ (0.03)
========== ==========
Weighted average number of common shares outstanding - assuming dilution 6,604,226 3,416,015
========== ==========
</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 three months ended March 31, 2000 and 1999
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
March 31,
-----------------------
2000 1999
--------- ---------
<S> <C> <C>
Cash flows from operating activities
Net income (loss) $ 273,910 $(111,161)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation and amortization 10,885 58,773
Deferred compensation 9,696 9,696
Gain on debt extingishment (408,255) --
Changes in assets and liabilities
Accounts receivable (77,329) 38,478
Prepaid expenses and other current assets 8,190 (3,280)
Other assets 744 (2,000)
Accounts payable and accrued liabilities 2,003 56,837
Other liabilities 1,970 (2,190)
--------- ---------
Net cash provided by (used in) operating activities (178,186) 45,153
--------- ---------
Cash flows from investing activities
Capital expenditures (9,855) --
--------- ---------
Net cash used in investing activities (9,855) --
--------- ---------
Cash flows from financing activities
Proceeds from sale of common stock 250,000 --
Proceeds from convertible debentures 250,000 --
Payment of financing debt and promissory note (26,858) --
Redemption of convertible debt (215,000) --
--------- ---------
Net cash provided by financing activities 258,142 --
--------- ---------
Net increase (decrease) in cash and cash equivalents 70,101 45,153
Cash and cash equivalents, beginning of period 146,107 67,991
--------- ---------
Cash and cash equivalents, end of period $ 216,208 $ 113,144
========= =========
</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. FINANCIAL STATEMENT PRESENTATION
Strategic Solutions Group, Inc. (the "Company") has prepared the accompanying
unaudited condensed consolidated financial statements pursuant to the rules
and regulations of the Securities and Exchange Commission. These financial
statements should be read together with the financial statements and notes in
the Company's 1999 Annual Report on Form 10-KSB filed with the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted. The
accompanying condensed consolidated financial statements reflect all
adjustments and disclosures which, in our opinion, are necessary for fair
presentation. All such adjustments are of a normal recurring nature. The
results of operations for the interim periods are not necessarily indicative
of the results of the entire year.
The Company currently operates in only one segment.
2. CONVERTIBLE DEBT
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. 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. The Company received final payment from UST in August 1999 and at
December 31, 1999 was in default on its payment of the penalty. 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.
On March 1, 2000 the Company settled all outstanding issues with the holder
of this Debenture. Under the terms of the Settlement Agreement with Releases
(the "Agreement"), the Company paid the holder of the Debenture $200,000
cash, issued a $100,000 non-interest bearing promissory note secured by
certain assets of the Company, payable in installments of $10,000 per month
beginning in March 2000 and secured by certain assets of the Company, issued
1,000,000 shares of the Company's common stock, and transferred to the holder
certain other assets owned by the Company which had a negligible book value.
The Company also incurred legal fees totaling $15,000 related to this
transaction.
The Company recognized a gain on the cancellation and extinguishments of this
debt and the related accrued interest and penalties as an extraordinary item
in the operating statement of $408,255.
6
<PAGE>
On February 24, 2000 ("Issuance Date"), the Company issued a convertible
subordinated debenture for $250,000. This debenture bears interest at 10%,
matures February 24, 2004 and is convertible into common stock, beginning the
earlier of 180 days after the Issuance Date or the effective date of the
Registration Statement filed pursuant to a Registration Rights Agreement, at
a conversion price equal to the lower of $0.50 or 200% of the average closing
bid price for the three days prior to the Issuance Date. The closing bid
price on the Issuance Date was $0.1406.
The Company has the right to redeem this debenture at redemption prices
increasing from 125% of the principle amount of the debenture, if redeemed
before the first anniversary of the Issuance Date to 200% of the principle
amount of the debenture after the third anniversary date of the Issuance
Date. Upon notice of redemption, the holder of the debenure has the right to
convert the redemption proceeds into common stock.
The Company granted the holder of this debenture a security interest in
certain assets of the Company.
In connection with this issuance of this debenture, the Company issued a
stock purchase warrant for the purchase of up to 250,000 shares of the
Company's common stock at $0.75 per share. This stock purchase warrant
expires on February 24, 2004. Based on the relative fair value of the
debenture and stock purchase warrant, the stock purchase warrant has been
assigned a value of $22,500, which represents a debenture discount and will
be amortized to interest expense over the life of the debenture.
3. STOCKHOLDERS' EQUITY
During the three months ended March 31, 2000, the Company sold 1,250,000
shares of common stock in a private placement of $250,000.
On February 23, 2000 the Board of Directors authorized the adoption of a
Stock Option Plan, subject to stockholder approval, for the issuance of stock
options to purchase up to 1,600,000 shares of the Company's common stock.
7
<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Overview
- --------
The Company's revenues are comprised of service fees, product sales, and
royalties. Service fees are generated from the development of custom multimedia
software . Royalties are paid to the Company by customers who resell copies of
software developed by the Company for such customers.
Results of Operations
- ----------------------
Three Months Ended March 31, 2000 Compared to Three Months Ended March 31, 1999
Total revenues for the three months ended March 31, 2000 were $274,400 as
compared to $275,686 for the same period of 1999.
During the three months ended March 31, 2000, revenue from custom multimedia
software development services was $270,361 as compared to $271,211 for the same
period of the prior year. The Company's strategy to increase revenues
prospectively from custom multimedia software development services 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 $4,039 during the three months ended March 31, 2000, as compared
to $4,475 for the same period of the prior year. 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.
The net income and net income per share - diluted $273,910 and $0.04 per share,
respectively, for the three months ended March 31, 2000, as compared to a net
loss and net loss per share of $111,161 and $0.03 per share, respectively, for
the same period of the prior year. Our net income for the three months ended
March 31, 2000 is primarily due to an extraordinary gain of $408,255 from the
conversion and cancellation of debt (see Note 2 to the Financial Statements).
During the three months ended March 31, 2000, the cost of service fees for
custom multimedia software was $114,323 as compared to $128,229, for the same
period of the prior year, resulting in gross margins of approximately 58% and
53%, respectively. Management anticipates margins to remain consistent with
this level.
During the three months ended March 31, 2000, total operating expenses were
$408,318 as compared to $324,452 in the same period of the prior year, an
increase of approximately $84,000. This increase was primarily attributable to
the inclusion of professional fees associated with the conversion and
cancellation of debt. Our research and development expenses were $3,356 for the
three months ended March 31, 2000 compared to $29,381 for the same period of the
prior year. Research and development expenses include improvements on existing
tools and development of software tools and applications to be sold. The
decrease is primarily attributed to less time devoted to research and
development as compared to contract work.
During the three months ended March 31, 2000, selling, general and
administrative expenses were $290,639 as compared to $166,842 in the same period
of the prior year, an increase of approximately $124,000, or 74%. The increase
is primarily the result of professional fees associated with the conversion and
cancellation of debt.
8
<PAGE>
During the three months ended March 31, 2000, other income increased by
approximately $385,000. The increase is the result of the conversion and
cancellation of $408,255 in debt by the Subordinated Convertible Debenture
holder (see Note 2 to the Financial Statements). Interest expense and other
decreased by approximately $63,000 related primarily to a decrease in interest
expense and a penalty of $105,800 related to the Convertible Subordinated
Debenture which was recorded during 1998.
Cash Flow, Liquidity and Capital Resources
- ------------------------------------------
The Report of Independent Accountants on the 1999 consolidated financial
statements of the Company included 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 had net income of $216,195 for the year ended December 31, 1999, but
had a loss from operation of $415,179. In addition, as of December 31, 1999 had
an accumulated deficit of $16,241,480. For the three month period ended March
31, 2000, the Company had net income of $273,910. As discussed in Strategy to
Achieve Profitable Operations below, the Company's plans to implement certain
actions to address the 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. In
February and March 2000, the Company received an additional $250,000 in
debenture financing and an additional $250,000 related to a purchase of the
Company's common stock.
For the three months ended March 31, 2000, the Company used cash of $178,186
from operations. In addition to the net income, the Company experienced a net
increase in the extinguisment of debt and accounts receivable. The Company used
cash of $9,855 for investing activities. The Company received net cash of
$258,142 from financing activities.
For the three months ended March 31, 1999, the Company provided cash of
approximately $45,000 from operations. In addition to the net loss, the Company
experienced a net increase in accounts receivable and other assets. The Company
did not receive or use any cash for investing or financing activities.
Strategy to Achieve Profitable Operations
During 1998, management laid out its Strategy to Achieve Profitable Operations,
which included intensified development of its technology-based training
software, greater penetration of the needs of existing, major customers, and
initial exploitation of the internet applications for Strategic Solutions
Group's expertise. Coupled with careful management, the Company believes it
began to stabilize its business during 1999. There are no assurances that the
Company can achieve its strategy.
Strategic Solutions Group entered year 2000 with backlog for its multimedia
products, and with indications that the market demand is increasing. Without
the financial impediment formally imposed by an outstanding convertible
debenture issue, and with a modest amount of new operating funding in hand,
management can address this growing market appropriately.
During year 2000, Strategic Solutions Group expects to achieve higher revenues
and positive financial results in part through its expanding presence in the
fast-growing field of web-based training. We were an early entrant in this
specialty, and our experience and reputation are advantages. The Company has
also taken initial steps to participate in the joint-venture development of a
related product line, working closely with one of Strategic Solutions Group's
principal investors. We believe that this joint effort will create expanded
future sales opportunities.
Strategic Solutions Group's Profit Strategy For 2000 has refocused from
attaining to maintaining profitability. The current condition of the Company
and a realistic assessment of opportunities available
9
<PAGE>
to us lead to the conclusion that the Company will improve upon 1999's results
in 2000, and that the upward trend-line can be maintained for the foreseeable
future.
Impact of Year 2000 Issue
To date, the Company has experienced no significant adverse effects related to
the Year 2000 computer issue. All important internal information technology
systems made a seamless transition into the Year 2000 and there were no notable
problems with equipment or systems that may have been affected by Year 2000
problems. The Company is not aware of any significant Year 2000 problems at any
of its customers nor has the Company noted any disruption in its supply chain
related to Year 2000 issues.
The Company implemented a comprehensive project plan to identify internal and
external information technology and non-information technology systems that
required modification to be Year 2000 compliant. An inventory and assessment of
these systems was completed prior to year-end. Remediation and testing of non-
Year 2000 compliant systems was completed prior to year-end. As part of this
project, the Company developed and tested contingency plans that identified
workarounds in the event of a malfunction of a system designated as a priority
system at the inventory stage. In addition, the Company identified suppliers of
key goods and services to all business areas and requested information about
their Year 2000 readiness.
"Safe Harbor" Statement under the Private Securities Litigation Reform Act of
1995: The statements contained in this document and other statements which are
not historical facts are forward looking statements that involve risks and
uncertainties, including, the success of newly implemented sales strategies; the
continued existence of agreements with product providers; market acceptance of
the Company's products and services; the ability to obtain a larger number and
size of contracts; the timing of contract awards; work performance and customer
response; the impact of competitive products and pricing; technological
developments by the Company's competitors or difficulties in the Company's
research and development efforts; and other risks as detailed in the Company's
Securities and Exchange Commission filings.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings:
-----------------
In January 1998, the Company issued a notice of redemption of its Subordinated
Convertible Debenture (the "Debenture") 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 in favor
of 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 Strategic
Solutions Group, Inc.'s receipt of payments from U.S. Technologies, Inc.
("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.
10
<PAGE>
On March 1, 2000, the Company settled all outstanding issues with the holder of
the Debenture. Under the terms of the Settlement Agreement with Releases (the
"Agreement"), the Company paid the holder of the Debenture $200,000 cash, issued
a $100,000 promissory note to the Debenture holder, agreed to honor conversions
under the original Subordinated Convertible Debenture for up to 1,000,000 shares
of the Company's common stock, which has now been completed, and transferred to
the holder of the Debenture 150,000 shares of common stock that the Company
owned in Digital Chainsaw, Inc., a privately held entity. The promissory note is
secured by the 641,045 shares of common stock in Digital Chainsaw, Inc. that the
Company did not transfer to the holder of the Debenture. The payment terms of
the promissory note are $10,000 per month starting March 30, 2000 and each month
thereafter until paid in full. This promissory note is non-interest bearing.
In addition, the Company agreed to honor conversions of the Debenture into the
Company's common stock under the original Subordinated Convertible Debenture for
a sixty (60) day period commencing March 1. The Company also paid $15,000 of
legal fees on the behalf of the holder of the Debenture. The Company has
recorded the settlement of this matter during this first quarter of 2000.
The Company is not subject to any other legal proceedings other than claims that
arise in the ordinary course of its business.
Item 2. Exhibits and Reports on Form 8-K:
--------------------------------
(a) Exhibits
10(G) Subordinated Debenture*
----------
* Filed herewith.
(b) No reports on Form 8-K were required to be filed for the three
months ended March 31, 2000.
Item 3. Changes in Securities: None
---------------------
Item 4. Defaults Upon Senior Securities: None
-------------------------------
Item 5. Submission of Matters to a Vote of Security Holders: None
---------------------------------------------------
Item 6. Other Information: None
-----------------
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: May 22, 2000
BY: /s/ John J. Cadigan
--------------------
John J. Cadigan
Chief Executive Officer
11
<PAGE>
EXHIBIT 10(G)
SUBORDINATED DEBENTURE
THESE SECURITIES (THE "SECURITIES") HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR THE
SECURITIES LAWS OF ANY STATE AND MAY NOT BE SOLD OR OFFERED FOR SALE IN THE
ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES OR AN
OPINION OF COUNSEL OR OTHER EVIDENCE ACCEPTABLE TO THE CORPORATION THAT
SUCH REGISTRATION IS NOT REQUIRED.
No. 00- US $250,000
----------- -------
STRATEGIC SOLUTIONS GROUP, INC.
10% CONVERTIBLE SUBORDINATED DEBENTURE DUE February 24, 2004
-----------------
THIS DEBENTURE is one of a duly authorized issue up to $500,000 in
principal amount of Debentures of STRATEGIC SOLUTIONS GROUP, INC., a corporation
duly organized and existing under the laws of the State of Delaware (the
"Company") designated as its 10% Convertible Debenture Due February 24, 2004.
FOR VALUE RECEIVED, the Company promises to pay to Thomas Stone, the
registered holder hereof (the "Holder"), the principal sum of 250,000 00/100
(US $250,000) Dollars on February 24, 2004 (the "Maturity Date") and to pay
interest on the principal sum outstanding as provided herein on February 24,
2004 at the rate of 10% per annum accruing from the date of initial issuance.
Accrual of interest shall commence on the first business day to occur after the
date hereof until payment in full of the principal sum has been made or duly
provided for. The Company will pay the principal of and interest upon this
Debenture on the Maturity Date, less any amounts required by law to be deducted,
to the registered holder of this Debenture as of the tenth day prior to the
Maturity Date and addressed to such holder as the last address appearing on the
Debenture Register. The forwarding of a check shall constitute a payment of
principal and interest hereunder and shall satisfy and discharge the liability
for principal and interest on this Debenture to the extent of the sum
represented by such check plus any amounts so deducted. As security for the
repayment of the principal of and interest on this Debenture, the Company hereby
grants the Holder hereof a security interest in all of its interest in Digital
Chainsaw, Inc. Common Stock pursuant to a General Security Agreement of even
date herewith.
SUBORDINATION
1. Subordination of Debenture to Senior Indebtedness. All indebtedness
-------------------------------------------------
evidenced by this Debenture shall, to the extent and in the manner hereinafter
set forth, be subordinated and junior in right of payment to the prior payment
in full of all amounts due under the Senior Indebtedness (as hereinafter
defined). For the purposes of this Section, the term "Senior Indebtedness" shall
mean all indebtedness of the Company for borrowed money, including any extension
or renewal of such indebtedness, all indebtedness and obligations of the Company
under financing leases, conditional sale and other title retention agreements
and all obligations issued or assumed as full or partial payment for property,
whether or not secured by a purchase money mortgage, whether outstanding on the
date hereof or hereafter created or incurred, which is not by its terms
subordinate and junior to or on a parity with this Debenture. The term "Senior
Indebtedness" shall include any obligation of the Company to any trade creditor
entered into in the ordinary course of business of the Company or the assignee
of any trade creditor provided that such assignment was in the ordinary course
of business of the Company.
<PAGE>
2. Priority of Senior Indebtedness on Distribution of Assets. Upon (a)
---------------------------------------------------------
any payment being required to be made by the Company under this Debenture upon
any declaration of acceleration of the principal amount hereof or (b) any
payment or distribution of assets of the company of any kind or character,
whether in money, property or securities, to creditors upon any dissolution or
winding up or total or partial liquidation or reorganization of the Company,
whether voluntary or involuntary or in bankruptcy, insolvency, receivership or
other proceedings, all amounts due or to become due upon, all Senior
Indebtedness of the Company shall first be paid in full, or payment thereof
provided for in money, before any payment is made on this Debenture; and upon
any such declaration of acceleration or dissolution or winding up or liquidation
or reorganization, any distribution of assets of the Company of any kind or
character, whether in money, property or securities, to which the holder of this
Debenture would be entitled except for the provisions hereof shall be paid by
the Company or by any receiver, trustee in bankruptcy, liquidating trustee,
agent or other person making such payment or distribution, or by the holder of
this Debenture if received by it directly, to the holders of Senior Indebtedness
(pro rata to each such holder on the basis of the respective amounts of such
Senior Indebtedness held by such holder), or its representatives, to the extent
necessary to pay all such Senior Indebtedness in full, in money, after giving
effect to any concurrent payment or distribution to or for the benefit of the
holders of such Senior Indebtedness, before any payment or distribution is made
hereunder to holder of this Debenture.
3. Treatment of Mistaken Payments and Distributions. If any payment
------------------------------------------------
or distribution of assets of the Company of any kind or character, whether in
money, property or securities, not permitted by the foregoing shall be received
by the holder of this Debenture before all Senior Indebtedness is paid in full
or provision is made for such payment in accordance with its terms, such payment
or distribution shall be held for the benefit of, and shall be paid over or
delivered to, the holders of such Senior Indebtedness, or their representatives,
or to the trustee or trustees under any indenture pursuant to which any
instruments evidencing any of such Senior Indebtedness may have been issued or
under which such instruments are pledged or secured, as their respective
interests may appear, for application to the payment of all Senior Indebtedness
remaining unpaid to the extent necessary to pay all such Senior Indebtedness in
full in accordance with its terms, after giving effect to any concurrent payment
or distribution to or for the holders of such Senior Indebtedness.
4. Subrogation. Subject to the payment in full of all Senior
-----------
Indebtedness, the Holder of this Debenture shall be subrogated to the rights of
the holders of Senior Indebtedness to receive payment or distributions of assets
of the Company applicable to the Senior Indebtedness until this Debenture shall
be paid in full, and no such payment or distribution to the holders of Senior
Indebtedness shall, as among the Company, its creditors other than the holders
of Senior Indebtedness, and the holder of this Debenture, be deemed to be a
payment by the Company to or on account of this Debenture.
5. Conversion Rights Not Subject to Subordination. Notwithstanding
----------------------------------------------
anything to the contrary set forth above, the subordination provisions of this
Debenture will have no force and effect and will be deemed null and void under
the conversion or attempted conversion of this Debenture, in whole or in part,
by the Holder in accordance with the terms hereof.
This Debenture is subject to the following additional provisions:
1. The Debentures are issuable in denominations of Fifty Thousand Dollars
(US$50,000) and integral multiples thereof. The Debentures are exchangeable for
an equal aggregate principal amount of Debentures of different authorized
denominations, as requested by the Holders surrendering the same and authorized
by the Company. No service charge will be made for such registration or
transfer or exchange.
2. The Company shall be entitled to withhold from all payments of
principal of, and interest on, this Debenture any amounts required to be
withheld under the applicable provisions of the United
<PAGE>
States income tax laws or other applicable laws at the time of such payments,
and Holder shall execute and deliver all required documentation in connection
therewith.
3. This Debenture has been issued subject to investment representations
of the original purchaser hereof and may be transferred or exchanged only in
compliance with the Securities Act of 1933, as amended (the "Act"), and other
applicable state and foreign securities laws. In the event of any proposed
transfer of this Debenture, the Company may require, prior to issuance of a new
Debenture in the name of such other person, that it receive reasonable transfer
documentation including opinions that the issuance of the Debenture in such
other name does not and will not result in a violation of the Act or any
applicable state or foreign securities laws. Prior to due presentment for
transfer of this Debenture, the Company and any agent of the Company may treat
the person in whose name this Debenture is duly registered on the Company's
Debenture Register as the owner hereof for the purpose of receiving payment as
herein provided and for all other purposes, whether or not this Debenture be
overdue, and neither the Company nor any such agent shall be affected by notice
to the contrary.
4. A. Subject to the other provisions of this Section 4, the Holder of
this Debenture is entitled, at its option, to convert at any time commencing the
earlier of (a) one hundred eighty (180) days after date of issuance (the
"Issuance Date") of the Initial Debentures (as that term is defined in the
Securities Purchase Agreement defined below), or (b) the effective date of the
Registration Statement filed pursuant to the Registration Rights Agreement
between the Company and the Holder, or the Holder's predecessor in interest (the
"Registration Rights Agreement"), the principal amount of this Debenture,
provided that the principal amount is at least US $10,000 (unless if at the time
of such election to convert the aggregate principal amount of all Debentures
registered to the Holder is less than Ten Thousand Dollars (US $10,000), then
the whole amount thereof) into shares of Common Stock of the Company at a
conversion price for each share of Common Stock (the "Conversion Price") equal
to the lower of $.50 or 200% of the average closing bid price for the Issuance
Date and one (1) day prior to the Issuance Date. Conversion shall be
effectuated by surrendering the Debentures to be converted to the Company with
the form of conversion notice attached hereto as Exhibit A, executed by the
Holder of the Debenture evidencing such Holder's intention to convert this
Debenture or a specified portion (as above provided) hereof, and accompanied, if
required by the Company, by proper assignment hereof in blank. Interest accrued
or accruing from the date of issuance to the date of conversion shall, at the
option of the Issuer, be paid in cash or Common Stock (based on the same
Conversion Price) upon conversion at the Conversion Date. No fraction of Shares
or scrip representing fractions of shares will be issued on conversion, but the
number of shares issuable shall be rounded to the nearest whole share. The date
on which notice of conversion is given (the "Conversion Date") shall be deemed
to be the date on which the Holder has delivered this Debenture, with the
conversion notice duly executed, to the Company or, the date set forth in such
facsimile delivery of the notice of conversion if the Debenture is received by
the Company within three (3) business days therefrom. Facsimile delivery of the
conversion notice shall be accepted by the Company at telephone number (410)757-
5094, ATTN: John Cadigan. Certificates representing Common Stock upon
conversion will be delivered within five (5) business days from the date the
notice of conversion with the original Debenture is delivered to the Company.
B. Notwithstanding any other provision hereof to the contrary, at any
time prior to the Conversion Date, the Company may redeem one-half or more of
the Debentures outstanding on a pro-rata basis. The Company shall have the
right to redeem all or any portion of the then outstanding principal amount of
the Debentures then held by the Holder for an amount (the "Redemption Amount")
equal to the sum of (a) One hundred twenty-five (125%) percent of the principal
sum of the Debenture if redeemed before the first anniversary of the Issuance
Date; (b) One hundred fifty (150%) percent of the principal sum of the Debenture
if redeemed before the second anniversary of the Issuance Date; (c) One hundred
seventy-five (175%) percent of the principal sum of the Debenture if redeemed
before the third anniversary of the Issuance Date; or (d) Two hundred (200%)
percent of the principal sum of the Debenture if redeemed after the third
anniversary of the Issuance Date but before the Maturity Date. The Company
shall give ten (10) days written notice of
<PAGE>
such redemption to the Holder (the "Notice of Redemption"). Within ten (10) days
after receipt of the Company's Notice of Redemption, the Holder may elect to
convert that portion of the Debenture to be redeemed by Company to Common Stock
of Company.
5. Subject to the terms of the Securities Purchase Agreement, dated (the
"Securities Purchase Agreement"), between the Company and the Holder (or the
Holder's predecessor in interest), no provision of this Debenture shall alter or
impair the obligation of the Company, which is absolute and unconditional, to
pay the principal of, and interest on, this Debenture at the time, place, and
rate, and in the coin or currency, herein prescribed. This Debenture and all
other Debentures now or hereafter issued of similar terms are direct obligations
of the Company.
6. No recourse shall be had for the payment of the principal of, or the
interest on, this Debenture, or for any claim based hereon, or otherwise in
respect hereof, against any incorporator, shareholder, officer or director, as
such, past, present or future, of the Company or any successor corporation,
whether by virtue of any constitution, statute or rule of law, or by the
enforcement of any assessment or penalty or otherwise, all such liability being,
by the acceptance hereof and as part of the consideration for the issue hereof,
expressly waived and released.
7. If the Company merges or consolidates with another corporation or
sells or transfers all or substantially all of its assets to another person and
the holders of the Common Stock are entitled to receive stock, securities or
property in respect of or in exchange for Common Stock, then as a condition of
such merger, consolidation, sale or transfer, the Company and any such
successor, purchaser or transferee agree that the Debenture may thereafter be
converted on the terms and subject to the conditions set forth above into the
kind and amount of stock, securities or property receivable upon such merger,
consolidation, sale or transfer by a holder of the number of shares of Common
Stock into which this Debenture might have been converted immediately before
such merger, consolidation, sale or transfer, subject to adjustments which shall
be as nearly equivalent as may be practicable. In the event of any proposed
merger, consolidation or sale or transfer of all or substantially all of the
assets of the Company (a "Sale"), the Holder hereof shall have the right to
convert by delivering a Notice of Conversion to the Company within fifteen (15)
days of receipt of notice of such Sale from the Company. In the event the Holder
hereof shall elect not to convert, the Company may prepay all outstanding
principal and accrued interest on this Debenture, less all amounts required by
law to be deducted, upon which tender of payment following such notice, the
right of conversion shall terminate.
8. The Holder of the Debenture, by acceptance hereof, agrees that this
Debenture is being acquired for investment and that such Holder will not offer,
sell or otherwise dispose of this Debenture or the Shares of Common Stock
issuable upon conversion thereof except under circumstances which will not
result in a violation of the Act or any applicable state Blue Sky or foreign
laws or similar laws relating to the sale of securities.
9. This Debenture shall be governed by and construed in accordance with
the laws of the State of Delaware for contracts to be wholly performed in such
state and without regard to the principles thereof regarding the conflict of
laws. Each of the parties consents to the jurisdiction of the federal courts
whose districts encompass any part of the City of Wilmington or the state courts
of the State of Delaware sitting in the City of Wilmington in connection with
any dispute arising under this Agreement and hereby waives, to the maximum
extent permitted by law, any objection, including any objection based on forum
non coveniens, to the bringing of any such proceeding in such jurisdictions.
10. The following shall constitute an "Event of Default":
a. The Company shall default in the payment of principal or interest
on this Debenture and such default shall remain unremedied for
ten (10) business
<PAGE>
days after the Company has been notified of the default in
writing by a Holder; or
b. Any of the representations or warranties made by the Company
herein, in the Securities Purchase Agreement, or in any
certificate or financial or other written statements furnished by
the Company in connection with the execution and delivery of this
Debenture or the Securities Purchase Agreement shall be false or
misleading in any material respect at the time made; or
c. The Company fails to issue shares of Common Stock to the Holder
or to cause its Transfer Agent to issue shares of Common Stock
upon exercise by the Holder of the conversion rights of the
Holder in accordance with the terms of this Debenture, fails to
transfer or to cause its Transfer Agent to transfer any
certificate for shares of Common Stock issued to the Holder upon
conversion of this Debenture and when required by this Debenture
or the Registration Rights Agreement, or fails to remove any
restrictive legend or to cause its Transfer Agent to transfer on
any certificate or any shares of Common Stock issued to the
Holder upon conversion of this Debenture as and when required by
this Debenture, the Securities Purchase Agreement or the
Registration Rights Agreement and any such failure shall continue
uncured for ten (10) business days after the Company has been
notified of such failure in writing by Holder; or
d. The Company shall fail to perform or observe, in any material
respect, any other covenant, term, provision, condition,
agreement or obligation of the Company under this Debenture and
such failure shall continue uncured for a period of thirty (30)
days after written notice from the Holder of such failure; or
e. The Company shall (1) admit in writing its inability to pay its
debts generally as they mature; (2) make an assignment for the
benefit of creditors or commence proceedings for its dissolution;
or (3) apply for or consent to the appointment of a trustee,
liquidator or receiver for its or for a substantial part of its
property or business; or
f. A trustee, liquidator or receiver shall be appointed for the
Company or for a substantial part of its property or business
without its consent and shall not be discharged within ninety
(90) days after such appointment; or
g. Any governmental agency or any court of competent jurisdiction at
the instance of any governmental agency shall assume custody or
control of the whole or any substantial portion of the properties
or assets of the Company and shall not be dismissed within ninety
(90) days thereafter; or
h. Any unappealable money judgment, writ or warrant of attachment,
------------
or similar process in excess of Five Hundred Thousand ($500,000)
Dollars in the aggregate shall be entered or filed against the
Company or any of its properties or other assets and shall remain
unpaid, unvacated, unbonded or unstayed for a period of ninety
(90) days or in any event later than ten (10) days prior to the
date of any proposed sale thereunder; or
i. Bankruptcy, reorganization, insolvency or liquidation proceedings
or other proceedings for relief under any bankruptcy law or any
law for the relief of debtors shall be instituted by or against
the Company and, if instituted against the Company, shall not be
dismissed within ninety (90) days after such
<PAGE>
institution or the Company shall by any action or answer approve
of, consent to, or acquiesce in any such proceedings or admit the
material allegations of, or default in answering a petition filed
in any such proceeding;
Then, or at any time thereafter, and in each and every such case, unless such
Event of Default shall have been waived in writing by the Holder (which waiver
shall not be deemed to be a waiver of any subsequent default) at the option of
the Holder and in the Holder's sole discretion, the Holder may consider this
Debenture immediately due and payable, without presentment, demand, protest or
notice of any kinds, all of which are hereby expressly waived, anything herein
or in any note or other instruments contained to the contrary notwithstanding,
and the Holder may immediately enforce any and all of the Holder's rights and
remedies provided herein or any other rights or remedies afforded by law.
11. Nothing contained in this Debenture shall be construed as conferring
upon the Holder the right to vote or to receive dividends or to consent or
receive notice as a shareholder in respect of any meeting of shareholders or any
rights whatsoever as a shareholder of the Company, unless and to the extent
converted in accordance with the terms hereof.
IN WITNESS WHEREOF, the Company has caused this instrument to be duly
executed by an officer thereunto duly authorized.
Dated: February 24, 2000
-----------------
STRATEGIC SOLUTIONS GROUP, INC.
By: /s/ John J. Cadigan
---------------------------------
John J. Cadigan
-------------------------------------
(Print Name)
Chief Executive Officer
-------------------------------------
(Title)
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