UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For The Quarterly Period Ended June 30, 1999
Commission File Number 0-4186
THE SAGEMARK COMPANIES LTD.
(Exact name of registrant as specified in its charter)
(Formerly known as Consolidated Technology Group Ltd.)
New York 13-1948169
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
700 Gemini, Houston, TX 77058
(Address of principal executive offices) (Zip Code)
(281) 488-8484
(Registrant's telephone number, including area code)
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 ____
Number of common shares outstanding as of August 13, 1999: 1,561,837
1
<PAGE>
The Sagemark Companies Ltd.
Index
Page
----
Part I: - Financial Information:
Item 1. Financial Statements:
Condensed Consolidated Statements of Operations - Unaudited
- Three and Six Months Ended June 30, 1999 and 1998 3
Condensed Consolidated Statements of Comprehensive Income
(Loss) - Unaudited - Three and Six Months Ended June 30,
1999 and 1998 4
Condensed Consolidated Balance Sheets - June 30, 1999
(Unaudited) and December 31, 1998 5
Condensed Consolidated Statements of Cash Flows -
Unaudited - Six Months Ended June 30, 1999 and 1998 6
Notes to Unaudited Condensed Consolidated Financial Statements 7-16
Item 2. Management's Discussion and Analysis of the Financial
Condition and Results of Operations 17-25
Part II - Other Information:
Item 6. Exhibits and Reports on Form 8-K 26-27
Signatures 28
2
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The Sagemark Companies Ltd. and Subsidiaries
Condensed Consolidated Statements of Operations
Unaudited
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Operating Expenses:
Salaries, payroll taxes and fringe benefits $ 199,000 $ 102,000 $ 344,000 $ 456,000
Professional fees 195,000 323,000 676,000 404,000
Other general and administrative expense 186,000 87,000 244,000 332,000
Consulting fees 67,000 55,000 75,000 113,000
Termination payments for executive contracts 48,000 350,000 48,000 2,189,000
Settlement costs 30,000 30,000 38,000 30,000
Related party bad debt expense -- 86,000 -- 135,000
----------- ----------- ----------- -----------
Loss from Operations (725,000) (1,033,000) (1,425,000) (3,659,000)
Gain (Loss) from Marketable Securities 1,032,000 (10,000) 1,062,000 (10,000)
Other Income, Net 3,000 102,000 14,000 142,000
----------- ----------- ----------- -----------
Income (Loss) from Continuing Operations
Before Minority Interest and Share of Loss of
Unconsolidated Affiliate 310,000 (941,000) (349,000) (3,527,000)
Minority Interest in Income of Subsidiaries (169,000) (132,000) (296,000) (98,000)
Share of Income (Loss) of Unconsolidated Affiliates 113,000 (36,000) 113,000 (134,000)
----------- ----------- ----------- -----------
Income (Loss) from Continuing Operations 254,000 (1,109,000) (532,000) (3,759,000)
Discontinued Operations:
Income (loss) from operations of discontinued segment 319,000 46,000 637,000 (801,000)
Gain from disposal of segment 8,124,000 4,882,000 8,124,000 6,782,000
----------- ----------- ----------- -----------
Net Income $ 8,697,000 $ 3,819,000 $ 8,229,000 $ 2,222,000
=========== =========== =========== ===========
Basic and Diluted Income (Loss) per Common Share:
Income (Loss) from Continuing Operations $0.16 $(0.68) $(0.34) $(2.28)
Income (loss) from operations of discontinued segment 0.20 0.03 0.41 (0.49)
Gain from disposal of segment 5.21 2.99 5.19 4.12
----- ----- ----- -----
Net Income $5.57 $2.34 $5.26 $1.35
===== ===== ===== =====
Weighted average number of common shares 1,561,837 1,632,751 1,565,164 1,648,140
========= ========= ========= =========
</TABLE>
See notes to condensed consolidated financial statements.
3
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The Sagemark Companies Ltd. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income
Unaudited
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Income $ 8,697,000 $ 3,819,000 $ 8,229,000 $ 2,222,000
Other Comprehensive Income (Expense):
Unrealized holding gains on available
for sale securities 773,000 106,000 808,000 150,000
Reclassification for realized (gains)
losses on available for sale securities (67,000) 11,000 (87,000) 11,000
------------ ------------ ------------ -------------
Comprehensive Income $ 9,403,000 $ 3,936,000 $ 8,950,000 $ 2,383,000
============ ============ ============ ============
</TABLE>
See notes to condensed consolidated financial statements.
4
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The Sagemark Companies Ltd. and Subsidiaries
Condensed Consolidated Balance Sheets
June 30,
1999 December 31,
Unaudited 1998
--------- ----
Assets:
Cash and cash equivalents $ 1,555,000 $ 179,000
Marketable securities, current 4,052,000 5,092,000
Note receivable 2,508,000 --
Other current assets 7,000 17,000
Net current assets of discontinued segment -- 926,000
----------- ------------
Current assets 8,122,000 6,214,000
Marketable securities, long-term 734,000 2,000
Other assets 453,000 420,000
Net assets of discontinued segments -- 3,979,000
Investment in unconsolidated affiliate -- 760,000
----------- ------------
Total Assets $ 9,309,000 $ 11,375,000
=========== ============
Liabilities and Shareholders' Equity (Deficit):
Liabilities:
Net current liabilities of discontinued
segments $ 730,000 $ 4,194,000
Accounts payable 232,000 452,000
Other current liabilities 168,000 186,000
Accrued litigation settlement costs -- 843,000
----------- ------------
Current liabilities 1,130,000 5,675,000
Minority interest -- 6,367,000
Shareholders' equity (deficit):
Preferred stock 3,000 3,000
Common stock (25,000,000 shares authorized,
1,635,133 shares issued and 1,561,837
shares outstanding as of June 30, 1999 and
1,635,133 shares issued and 1,595,583 shares
outstanding as of December 31, 1998) 16,000 16,000
Additional paid-in-capital, common stock 58,188,000 58,188,000
Accumulated other comprehensive income 773,000 52,000
Accumulated deficit (50,579,000) (58,808,000)
Less common stock in treasury (222,000) (118,000)
----------- ------------
Total shareholders' equity 8,179,000 (667,000)
Total Liabilities and Shareholders'
Equity (Deficit) $ 9,309,000 $ 11,375,000
=========== ============
See notes to condensed consolidated financial statements.
5
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The Sagemark Companies Ltd. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
Unaudited
Six Months Ended June 30,
1999 1998
---- ----
Net cash used in continuing operations $(2,482,000) $ (5,021,000)
Net cash used in discontinued operations (12,000) (1,718,000)
----------- ------------
Net cash used in operating activities (2,494,000) (6,739,000)
----------- ------------
Cash Flows from Investing Activities:
Proceeds from sale of marketable securities 6,735,000 6,000
Investment in marketable securities (3,219,000) (8,000,000)
Net proceeds for disposal of segments 855,000 14,994,000
Other net investing activities (397,000) (58,000)
Cash of affiliate converted to an equity
method investment -- (855,000)
----------- ------------
Net cash provided by investing activities 3,974,000 6,087,000
----------- ------------
Cash Flows from Financing Activities:
Net cash used in financing activities (104,000) (84,000)
----------- ------------
Net increase (decrease) in cash and
cash equivalents 1,376,000 (736,000)
Cash and cash equivalents at beginning of period 179,000 871,000
----------- ------------
Cash and cash equivalents at end of period $ 1,555,000 $ 135,000
=========== ============
Supplemental Disclosures of Cash Flow Information:
Cash paid for:
Interest $ -- $ 12,000
=========== ============
Income taxes $ 10,000 $ --
=========== ============
See notes to condensed consolidated financial statements.
6
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The Sagemark Companies Ltd. and Subsidiaries
Footnotes to Unaudited Condensed Consolidated Financial Statements
- --------------------------------------------------------------------------------
(1) Basis of Presentation - In the opinion of the Company, the accompanying
unaudited financial statements contain all adjustments (consisting of only
normal, recurring accruals) necessary to present fairly the financial position
of The Sagemark Companies Ltd. and Subsidiaries (the "Company") as of June 30,
1999 and December 31, 1998, the statement of operations and the statements of
comprehensive income for the three and six month periods ended June 30, 1999 and
1998 and the statements of cash flows for the six month periods ended June 30,
1999 and 1998.
(2) At the annual shareholders meeting held July 22, 1999, the shareholders,
among other things, approved a change in the name of the Company from
"Consolidated Technology Group, Ltd." to "The Sagemark Companies Ltd." and
approved a decrease in the authorized number of common shares from 50,000,000
shares to 25,000,000 and a 1-for-30 reverse split. All common share-related data
included in these financial statements have been restated to reflect the
1-for-30 reverse split which became effective subsequent to June 30, 1999 but
prior to the issuance of the June 30, 1999 quarterly report.
(3) Nature of Operations - During the three months ended June 30, 1999, the
Company consummated transactions disposing of Trans Global Services, Inc.
("Trans Global") and Arc Networks, Inc. ("Arc Networks") which consequently are
presented as discontinued operations for accounting purposes and has disposed of
a significant portion of its ownership in Netsmart Technologies, Inc.
("Netsmart"), an unconsolidated affiliate. As a result of these transactions,
the Company has no operating segments.
(a) Trans Global Transaction
Trans Global is a publicly-owned company whose stock is traded on the
NASDAQ stock market under the ticker symbol "TGSI". On February 25, 1999, the
Company, SIS Capital Corp. ("SISC") and Trans Global entered into an agreement,
pursuant to which on May 3, 1999, SISC, a wholly-owned subsidiary of the
Company, transferred to Trans Global 1,150,000 shares of Trans Global common
stock then owned by SISC, in satisfaction of (i) the Company's obligations to
pay the redemption price of $2,101,000 payable with respect to its Series G 2%
Cumulative Redeemable Preferred Stock then owned by Trans Global, together with
accrued dividends of approximately $140,000 and (ii) the Company's obligations
to pay Trans Global $326,000. Trans Global returned the Series G 2% Cumulative
Redeemable Preferred Stock to the Company. As a result of this transaction, the
Company's ownership in Trans Global decreased from 40% to 14% and Trans Global
is presented as a discontinued segment in the accompanying financial statements
and the Company's remaining investment in Trans Global is accounted for as
available for sale.
(b) Arc Networks Transaction
Arc Networks is a privately owned company. On March 23, 1999, the
Company and SISC entered into an agreement with Arc Networks and Technology
Acquisitions, Ltd., a Bermuda corporation, ("TAL"), pursuant to which SISC sold
all of its equity interest in Arc Networks for $855,000, to TAL. The proceeds of
the sale and the shares of Arc Networks were held in escrow, until June 22,
1999, pending receipt of the consent of the New York Public
7
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The Sagemark Companies Ltd. and Subsidiaries
Footnotes to Unaudited Condensed Consolidated Financial Statements
- --------------------------------------------------------------------------------
Service Commission to the sale of the shares to TAL. TAL is a privately owned
company, which on April 20, 1999 acquired a controlling interest in the Company
(see footnote 4a). As a result of the sale, Arc Networks is presented as a
discontinued segment in the accompanying financial statements.
(c) Netsmart Transaction
On March 25, 1999, the Company and SISC entered into an agreement with
Netsmart and a group of purchasers, consisting principally of Netsmart's
management and directors, including Edward D. Bright (Chairman of the Board and
a director of both the Company and Netsmart at the time of the transaction) (the
"Management Investors"), whereby SISC agreed to sell an aggregate of 496,312
shares of Netsmart's common stock for an aggregate price of $1,000,000. The
agreement also gave the Management Investors the right to buy up to between
296,312 and 496,312 additional shares of Netsmart at the same purchase price per
share. Pursuant to the agreement, the Company had the option to not sell up to
200,000 of the additional shares. In addition, SISC agreed to transfer to
Netsmart all of its shares of Netsmart's preferred stock and warrants to
purchase shares of Netsmart's common stock, in exchange for which Netsmart
issued 100,000 shares of its common stock to the Company. During the three month
period ended June 30, 1999, SISC completed the sale of 792,624 of such shares
for approximately $1,597,000 in the aggregate and notified Netsmart that it was
exercising its option to not sell 200,000 additional shares of Netsmart's common
stock to the Management Investors. The Netsmart transaction resulted in a
reduction of the Company's ownership in Netsmart from 36% to approximately 10%.
As a result of the reduction in the Company's ownership in Netsmart, the
Company's investment in Netsmart is no longer accounted for under the equity
method of accounting, which required the Company to recognize its share of
Netsmart's income or loss. As of March 31, 1999 and December 31, 1998, the
Company's investment in Netsmart, under the equity method of accounting,
amounted to $760,000 and the Company's share of Netsmart's income (loss) for the
six months ended June 30, 1999 and 1998 was $113,000 and ($134,000),
respectively. As of June 30, 1999, the Company's investment in Netsmart is
classified as available for sale and subsequent to June 30, 1999 the Company has
sold an additional 98,125 shares of Netsmart on the open market for an aggregate
of approximately $400,000.
(4) Change in Control and Management of the Company
(a) Change in Control
On April 20, 1999, TAL purchased, from certain of the Company's
shareholders, 266,667 shares, or approximately 17% of the Company's outstanding
common stock, in a private transaction at a purchase price of $7.50 per share,
or approximately $2,000,000 in the aggregate. Contemporaneously with the
purchase, certain of the Company's shareholders granted TAL an option to
purchase an aggregate of 266,660 shares of the Company's outstanding common
stock for $10.50 per share, or approximately $2,800,000 in the aggregate. The
options may be exercised at any time during the thirteen-month period commencing
March 23, 1999. The shareholders who granted the options have the right to
require TAL to exercise the options at $10.50 per share within twenty days after
TAL's receipt of notice that the Company's common stock has traded at an average
share price in excess of $13.50 for a period of ten consecutive
8
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The Sagemark Companies Ltd. and Subsidiaries
Footnotes to Unaudited Condensed Consolidated Financial Statements
- --------------------------------------------------------------------------------
trading days. As long as the options are outstanding, TAL has the right to vote
the 266,660 shares of common stock, representing an additional 17% of the
Company's outstanding common stock. As a result of the purchase of the 266,667
shares and the grant of the voting rights with respect to the 266,660 shares of
common stock subject to the options, TAL has voting rights with respect to
approximately 34% of the Company's common stock and may be deemed to be a
control person with respect to the Company.
(b) Change in Directors and Officers
On April 19, 1999, in anticipation of TAL's purchase of 266,667 shares
of common stock of the Company and the grant to TAL of options to purchase
266,660 additional shares of common stock of the Company, the board of directors
elected Mr. Frank DeLape as a director.
On April 20, 1999, Seymour Richter resigned as the Company's president
and chief executive officer. Simultaneously with his resignation, Mr. Richter
entered into a nine-month consulting agreement with the Company pursuant to
which he will receive an aggregate of $56,000.
On April 22, 1999, the board of directors elected Mr. Richard Young as
a director and chief operating officer of the Company and Mr. DeLape as chairman
of the board of the Company and Messrs. Richter, Bright and Chaifetz resigned as
directors of the Company. Messrs. DeLape and Young were re-elected as directors
at the July 22, 1999 shareholders meeting.
On April 22, 1999, the board of directors also approved three-year
employment agreements between the Company and Messrs. DeLape and Young pursuant
to which they will receive annual salaries of $250,000 and $135,000,
respectively. The agreements require Mr. DeLape to devote such time as is
necessary to perform his duties as chairman of the board and chief executive
officer of the Company and Mr. Young to devote his full time to the performance
of his duties as president and chief operating officer of the Company. The
agreements provide for annual cash bonuses, annual equity incentive awards
including grants of restricted stock and stock options, certain fringe benefits
and severance compensation.
Subsequent to April 22, 1999, the new board also elected Mr. DeLape as
chief executive officer and Mr. Young as president of the Company in addition to
their respective positions as chairman of the board and chief operating officer.
Mr. DeLape is also a director and president of TAL.
Pursuant to an agreement dated May 24, 1999, (the "Termination
Agreement") between the Company and George W. Mahoney, Chief Financial Officer,
the Amended and Restated Employment Agreement dated as of June 16, 1998, as
amended, between the Company and Mr. Mahoney (the "Employment Agreement") was
terminated on May 25, 1999. In consideration of the termination of the
Employment Agreement, the Company paid Mr. Mahoney $48,000 in full satisfaction
of any salary, unreimbursed expenses, fringe benefits, severance payments and
other compensation owed to Mr., Mahoney. Mr. Mahoney's rights to indemnification
survive the
9
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The Sagemark Companies Ltd. and Subsidiaries
Footnotes to Unaudited Condensed Consolidated Financial Statements
- --------------------------------------------------------------------------------
consummation of the Termination Agreement. Effective as of May 25, 1999, Mr.
Richard Young, in addition to his other duties, is acting as the Company's Chief
Accounting Officer.
(c) Issuance of Stock Options and Warrants
Pursuant to their respective employment agreements, the Company granted
Messrs. DeLape and Young options to purchase 400,000 and 250,000 shares of the
common stock of the Company, respectively, at $4.20 per share, being the closing
price of the Company's common stock on April 20, 1999. Both of such options
become exercisable only upon the Company's aggregate market capitalization being
at least $25,000,000. The options provide the holders with stock appreciation
rights, which can be exercised to the extent that the options are exercisable.
Additionally, the employment agreements provide Messrs. DeLape and Young with
the right to purchase from the Company, on the last business day of each fiscal
year during the term thereof, an additional option with respect to 250,000 and
100,000 shares, respectively, of common stock of the Company, exercisable at the
closing price of the Company's common stock on the business day immediately
prior to the date of purchase, any such options being subject to performance
objectives to be agreed upon by the board and such persons for each such year
The purchase price for any additional options shall be determined by the
Company's independent accountants based on a Black-Scholes valuation
methodology. All of such options were approved at the July 22, 1999 annual
shareholders' meeting.
In connection with Mr. Bright's resignation as chairman of the board,
the board of directors approved the issuance to Mr. Bright of a three-year
warrant to purchase 3,333 shares of the common stock of the Company at $4.50 per
share, being the closing price of the Company's common stock on such date.
(5) Accounting Policies - The accounting policies followed by the Company are
set forth in Note 1 to the Company's financial statements in the December 31,
1998 Form 10-K.
(6) Interim Results - The results of operations for the three and six month
periods ended June 30, 1999 and 1998 are not necessarily indicative of the
results to be expected for the full year.
(7) Earnings Per Share - All earnings per share data has been restated to
reflect the 1-for-30 reverse split which was approved at the July 22, 1999
annual shareholders meeting. Basic earnings per share reflects the amount of
income for the period available to each share of common stock outstanding during
the reporting period. Diluted earnings per share reflects basic income per
share, while giving effect to all dilutive potential common shares that were
outstanding during the period, such as common shares that could result from the
potential exercise or conversion of securities into common stock. The
computation of diluted earnings per share does not assume conversion, exercise,
or contingent issuance of securities that would have an antidilutive effect on
earnings per share, i.e., increasing earnings per share or reducing loss per
share. The dilutive effect of outstanding options and warrants and their
equivalents are reflected in dilutive earnings per share by the application of
the treasury stock method which recognizes the use of proceeds that could be
obtained upon the exercise of options and warrants in computing diluted earnings
per share. It assumes that any proceeds would be used to purchase common stock
at the average market price of the common stock during the period. As of June
10
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The Sagemark Companies Ltd. and Subsidiaries
Footnotes to Unaudited Condensed Consolidated Financial Statements
- --------------------------------------------------------------------------------
30, 1999, the Company does not have any dilutive items and therefore, a dual
presentation of earnings per share is not presented. A warrant to purchase
33,333 shares of common stock at $22.50 per share was outstanding during all of
1999 and 1998 and options to purchase an aggregate of 678,333 shares of common
stock at prices ranging from $4.20 to $7.50 per share which were outstanding
during the three and six months ended June 30, 1999, were not included in the
computation of diluted earnings per common share because the exercise prices of
said warrant and options was greater than the average market price of the common
shares. The warrant, which expires October 1, 1999, and the options were
outstanding at June 30, 1999.
(8) Treasury Stock - In October 1998, the Board of Directors authorized the
Company to repurchase its common stock in unsolicited open market transactions
in amounts of up to $500,000. As of June 30, 1999, the Company had repurchased
73,297 shares in transactions with an aggregate purchase price of approximately
$222,000.
(9) Note Receivable
In September of 1998, the Company provided Arc Networks with a
$2,000,000 line of credit collateralized by all of the assets of Arc Networks
and bearing interest at prime plus 2%. During the three months ended March 31,
1999, the Company increased the line of credit and advanced Arc Networks an
additional $400,000. As of June 30, 1999, total outstanding principal, interest
and loan maintenance fees due under the line of credit amounted to $2,504,000.
From February 1999 through May 19, 1999, the line of credit owed to the Company
by Arc Networks was in default for non-payment of scheduled interest and loan
maintenance fees.
Pursuant to the terms of a modified loan agreement entered into on May
19, 1999, (the "Modified Arc Loan Agreement") the interest rate was changed to
14% per annum effective June 18, 1999 and Arc Networks was required to pay
$50,000 of the accrued and unpaid interest by June 30, 1999 and was required to
pay the $83,000 balance of all unpaid interest accrued through July 31, 1999 on
or before August 5, 1999. The June 30, 1999 interest payment of $50,000 was paid
by Arc Networks on July 9, 1999, however; as of the date of this report, the
$83,000 which was due on or before August 5, 1999 has not been paid and as a
result the line of credit is again in default.
The loan principal repayment terms prior to the execution of the
Modified Arc Loan Agreement required a June 22, 1999 repayment of $150,000 and a
September 22, 1999 repayment of the remaining balance. TAL had guaranteed the
$150,000 principal payment, which prior to the Modified Loan Agreement was due
on June 22, 1999. On June 17, 1999, the Company entered into an amended guaranty
with TAL whereby TAL guarantees to pay the Company $150,000 in the event that
Arc Networks fails to make any principal repayments on the modified scheduled
due dates. Pursuant to the Modified Loan Agreement, $750,000 is due on the
earlier of October 19, 1999 or the receipt by Arc Networks' parent Company,
Gemini II, Inc. ("Gemini II") of at least $10,000,000 in gross proceeds from an
initial public offering of debt or equity securities, $450,000 is due on January
31, 2000 and $1,200,000 is due on June 19, 2000. Additionally, the Company has
the right to convert an aggregate of $1,650,000 of the principal amount into
common shares of either Arc Networks or Gemini II. Simultaneously with the
11
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The Sagemark Companies Ltd. and Subsidiaries
Footnotes to Unaudited Condensed Consolidated Financial Statements
- --------------------------------------------------------------------------------
execution of the Modified Arc Loan Amendment, the Company received a warrant to
purchase 90,000 shares of Gemini II at an exercise price of $8.00 per share.
On May 18, 1999 the Company entered into a sub-lease agreement with Arc
Networks whereby Arc Networks is required to reimburse the Company for rentals
paid on an office lease in New York. Pursuant to the agreement, Arc Networks is
required to pay the Company approximately $4,000 per month and must give the
Company at least 45 days notice prior to canceling such agreement. As of June
30, 1999, $4,000 is outstanding pursuant to the sub-lease agreement.
(10) Debt Guarantees
During 1998, the Company guaranteed Arc Networks' repayment of
$1,217,000 of advances from Trans Global as represented by Arc Networks'
installment promissory note due August 31, 2003. Additionally, during 1998, the
Company guaranteed $550,000 of indebtedness that Arc Networks owes to Betei
Sefer Limlachah, a New York religious organization, represented by Arc Networks'
promissory note due January 1, 2001.
(11) Discontinued Operations - As of the date of this report the Company has no
operating segments and all of the operations and net assets and liabilities of
its subsidiaries are presented as discontinued. Effective December 31, 1998, the
Company has accounted for Trans Global and Arc Networks, formerly the Contract
Engineering Services and Telecommunications segments, as discontinued segments.
During 1997, the Company discontinued 3D Holdings International, Inc., formerly
the Three Dimensional Products and Services segment, International Magnetic
Imaging, Inc. ("IMI"), formerly the Medical Diagnostics segment, SpecTec, Inc.
and its subsidiaries, Televend and FMX Corp., collectively the former
Electro-Optical and Electro-Mechanical Products Manufacturing segment and The
Trinity Group, Inc., formerly the Business Consulting Services segment. The
following table summarizes the financial statement information of the
discontinued segments.
12
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The Sagemark Companies Ltd. and Subsidiaries
Footnotes to Unaudited Condensed Consolidated Financial Statements
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Income (Loss) from Discontinued Operations:
Contract Engineering Services $ 181,000 $ 248,000 $ 499,000 $ 163,000
Telecommunications 57,000 (143,000) -- (597,000)
Medical Diagnostics -- (104,000) -- (457,000)
Intercompany Transactions 81,000 45,000 138,000 90,000
----------- ----------- ----------- -----------
$ 319,000 $ 46,000 $ 637,000 $ (801,000)
=========== =========== =========== ===========
Gain (Loss) on Disposal of Segments:
Contract Engineering Services $ 759,000 -- $ 759,000 --
Telecommunications 7,365,000 -- 7,365,000 --
Medical Diagnostics -- $ 4,882,000 -- $ 4,882,000
Three Dimensional Products and Services -- -- -- 1,932,000
Electro-Optical and Electro-Mechanical Products
Manufacturing -- -- -- (31,000)
Business Consulting Services -- -- -- (1,000)
----------- ----------- ----------- -----------
$ 8,124,000 $ 4,882,000 $ 8,124,000 $ 6,782,000
=========== =========== =========== ===========
</TABLE>
June 30, December 31,
1999 1998
---- ----
Net Current Assets of Discontinued Segments:
Contract Engineering Services -- $ 926,000
--------- ----------
-- $ 926,000
========= ==========
Net Long-term Assets of Discontinued Segments:
Contract Engineering Services -- $ 3,791,000
Telecommunications -- 188,000
--------- -----------
-- $ 3,979,000
========= ===========
Net Current Liabilities of Discontinued Segments:
Telecommunications -- $ 3,463,000
Three Dimensional Products and Services $ 481,000 482,000
Medical Diagnostics 249,000 249,000
--------- -----------
$ 730,000 $ 4,194,000
========= ===========
(a) Contract Engineering Services - The Company and Trans Global entered into an
agreement whereby in May 1999, SISC transferred 1,150,000 shares of Trans Global
common stock owned by it to Trans Global and Trans Global transferred all of the
Series G 2% Cumulative Redeemable Preferred Stock of the Company that it owned
to the Company and cancelled accrued dividends of approximately $140,000 and
intercompany debt obligations of approximately $326,000 owed by the Company to
Trans Global. As a result of the foregoing transaction between the Company and
Trans Global, the Company recognized a gain of
13
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The Sagemark Companies Ltd. and Subsidiaries
Footnotes to Unaudited Condensed Consolidated Financial Statements
- --------------------------------------------------------------------------------
approximately $759,000 during the three months ended June 30, 1999 [See footnote
(3a) Trans Global Transaction]. The revenues of the Contract Engineering
Services segment approximated $11,218,000 for the period from January 1, 1999
through the date of the share transfer and $18,682,000 and $37,171,000,
respectively, for the three and six months ended June 30, 1998 and the
operations of the Contract Engineering Services segment are classified as income
(loss) from the operations of discontinued segments. As of December 31, 1998,
the assets and liabilities of the Contract Engineering Services segment included
in the Company's consolidated balance sheet consisted of the following:
December 31,
1998
----
Cash $ 35,000
Accounts receivable, net 3,923,000
Loans receivable 5,000
Prepaid expenses and other current assets 474,000
Property, plant and equipment 170,000
Goodwill 727,000
Customer lists, net 2,389,000
Deferred offering costs 236,000
Receivable, related parties 50,000
Other assets 219,000
-----------
Total assets 8,228,000
-----------
Accrued estimated losses through disposal date 128,000
Accounts payable and accrued expenses 267,000
Accrued payroll and related expenses 529,000
Income taxes payable 13,000
Current debt obligations 2,574,000
-----------
Total liabilities 3,511,000
-----------
Net assets to be disposed of $ 4,717,000
===========
Presented in the balance sheet as follows:
Net current assets of discontinued segment $ 926,000
Net long-term assets of discontinued segment 3,791,000
-----------
Net assets to be disposed of $ 4,717,000
===========
(b) Telecommunications - The Company entered into an agreement with Arc Networks
and Technology Acquisitions, Ltd. ("TAL"), pursuant to which the Company sold
all of its equity interest in Arc Networks for $855,000. As a result of the
sale, the Company recognized a gain of approximately $7,365,000 during the three
months ended June 30, 1999 [See footnote (3b) Arc Networks Transaction]. The
revenues of the Telecommunications segment from January 1, 1999 through the date
of the sale approximated $4,001,000 and for the three and six month periods
ended June 30, 1998 approximated $3,197,000 and $6,660,000, respectively. As of
December
14
<PAGE>
The Sagemark Companies Ltd. and Subsidiaries
Footnotes to Unaudited Condensed Consolidated Financial Statements
- --------------------------------------------------------------------------------
31, 1998, the assets and liabilities of the Telecommunications segment included
in the Company's consolidated balance sheet consisted of the following:
December 31,
1998
----
Cash $ 193,000
Accounts receivable, net 2,992,000
Excess of accumulated costs over related billings 159,000
Prepaid expenses and other current assets 98,000
Property, plant and equipment 125,000
Goodwill 240,000
Customer lists, net 53,000
Deferred loan costs 249,000
Other assets 86,000
-----------
Total assets 4,195,000
-----------
Accrued estimated losses through expected disposal date 800,000
Accounts payable and accrued expenses 5,320,000
Excess of accumulated billings over related costs 463,000
Current debt obligations 250,000
Current portion of capitalized lease obligations 20,000
Notes payable, related parties 52,000
Long-term debt 550,000
Capitalized lease obligations 15,000
-----------
Total liabilities 7,470,000
-----------
Net liabilities to be disposed of $(3,275,000)
===========
Presented in the balance sheet as follows:
Net long-term assets of discontinued segment $ 188,000
Net current liabilities of discontinued segment 3,463,000
-----------
Net liabilities to be disposed of $(3,275,000)
===========
(c) Three Dimensional Products and Services - In 1997, the Company formulated a
plan to discontinue the operations of all of the subsidiaries operating in the
Three Dimensional Products and Services segment. As a result of the plan, the
Company sold one of the subsidiaries operating in the segment and wrote-off all
of the segment's remaining assets and reclassified the remaining liabilities as
net current liabilities of a discontinued segment. During the first quarter of
1998, the Company recorded an approximate $1,932,000 million gain on the
disposal of the segment resulting from the write-off of liabilities that the
Company believes it will not be obligated to pay. As of June 30, 1999 and
December 31, 1998 the liabilities of the Three Dimensional Products and Services
segment included in the Company's consolidated balance sheet consisted of the
following:
15
<PAGE>
The Sagemark Companies Ltd. and Subsidiaries
Footnotes to Unaudited Condensed Consolidated Financial Statements
- --------------------------------------------------------------------------------
June 30, December 31,
1999 1998
---- ----
Accounts payable and accrued expenses $ 129,000 $ 130,000
Accrued payroll and related expenses 98,000 98,000
Accrued interest 24,000 24,000
Notes payable, related parties 95,000 95,000
Current portion of long-term debt 135,000 135,000
---------- -----------
Net current liabilities of discontinued segment $ 482,000 $ 482,000
========== ===========
(d) Medical Diagnostics - On April 2, 1998, the Company consummated the sale of
substantially all of the assets of International Magnetic Imaging, Inc. ("IMI")
resulting in a gain on disposal of approximately $4,882,000 that was recorded in
the second quarter of 1998. The revenues of the Medical Diagnostics segment
approximated $6,764,000 from January 1, 1998 through the date of the sale on
April 2, 1998 and the operations of the Medical Diagnostics segment are
classified as income (loss) from the operations of discontinued segments. As of
June 30, 1999 and December 31, 1998 the remaining net current liabilities of the
Medical Diagnostic segment consisted of income taxes of $249,000.
(e) Electro-Optical and Electro-Mechanical Products Manufacturing - During 1998,
the Company sold the Electro-Optical and Electro-Mechanical Products
Manufacturing segment resulting in a loss on disposal of a segment of
approximately $31,000.
(f) Business Consulting Services - During 1998 the Company sold the Business
Consulting Services segment resulting in a loss on the disposal of a segment of
approximately $1,000.
(13) Subsequent Event
In July 1999, Mitel Communications Solutions, Inc. ("Mitel") served an
amended Complaint upon the Company, impleading the Company and SISC and
purportedly served TAL, in a case commenced against Arc Networks, in the Supreme
Court of the State of New York, County of New York, entitled, Mitel
Communications Solutions, Inc. v. Arc Networks, Inc. et al., Index No. 99-600123
(Sup. Ct. N.Y. Cty., 1999). Mitel seeks to recover the sum of $1,715,000,
which it allegedly paid to Arc Networks as a pre-payment when it engaged Arc
Networks as a subcontractor for a subsequently aborted project for the New York
City Board of Education. Mitel seeks to recover the purported pre-payment with
interest against all defendants, including the Company, SISC and TAL on a
variety of legal and equitable theories. The Company, SISC and TAL have filed an
Answer denying liability, and are vigorously contesting the allegations.
.............................
16
<PAGE>
Item 2. Management's Discussions and Analysis of Financial Condition and
Results of Operations
Forward Looking Statements
Statements in this Form 10-Q that are not descriptions of historical
facts may be forward-looking statements that are subject to risks and
uncertainties. Actual results could differ materially from those currently
anticipated due to a number of factors, including those identified in this Form
10-Q and in other documents filed by the Company with the Securities and
Exchange Commission.
Recent Developments Relating to Control
TAL owns approximately 17% of the Company's outstanding common shares
and has an option to purchase an additional 17% of the outstanding common shares
and as long as such option is outstanding has the right to vote such common
shares. As a result, TAL has voting rights with respect to 34% of the Company's
common shares and may be deemed a control person with respect to the Company.
Prior to purchasing the shares of the Company's common stock, TAL purchased the
Company's 67% interest in Arc Networks. As of June 30, 1999, Arc Networks owes
the Company approximately $2,508,000 under a line of credit agreement (see
footnote 9 to the attached unaudited condensed consolidated financial
statements) and TAL has guaranteed the repayment of $150,000 of such
indebtedness. The aforementioned circumstances give rise to a potential conflict
of interest whereby TAL may have the power to determine the terms of any
agreement between the Company and Arc Networks.
Restatements
The following discussion, as it relates to the three and six month
periods ended June 30, 1998 (the "1998 Second Quarter" and "1998 Six Month
Period"), have been restated from the prior year's discussion to reflect the
discontinuation of Trans Global (the former Contract Engineering Services
segment) and Arc Networks (the former Telecommunications segment).
Financial Condition - Liquidity and Capital Resources
As of June 30, 1999, ("June 1999"), the Company had cash of $1,555,000
and marketable securities of $4,052,000 of which $3,252,000 is invested in US
Treasury Bills and $800,000 represents the current portion of the Company's
investment in Netsmart. The following table calculates the working capital that
the Company has available for use in its operations as of June 1999 and December
31, 1998 ("December 1998").
17
<PAGE>
June 30, December 31,
1999 1998
---- ----
Current assets $ 8,122,000 $ 6,214,000
Current liabilities 1,130,000 5,675,000
------------ ------------
Working capital 6,992,000 539,000
Plus total net current liabilities of
discontinued segments 730,000 4,194,000
Less:
Portion of total current liabilities of
discontinued segments that the
Company may be obligated to pay (730,000) (731,000)
Net current assets of discontinued segments
not available to the Company -- (926,000)
------------ ------------
Working capital available for the Company's
operations $ 6,992,000 $ 3,076,000
============ ============
During the six month period ended June 30, 1999 (the "1999 Six Month
Period"), the Company's available working capital increased by $3,916,000 of
which approximately $2,017,000 is the non-cash effect of the note receivable due
from Arc Networks. As of December 1998, Arc Networks was a consolidated
subsidiary and the $2,017,000 note receivable balance was eliminated in
consolidation under generally accepted accounting principles pursuant to
Accounting Research Bulletin No. 51 "Consolidated Financial Statements". As of
June 1999, the Company has sold all of its equity investment in Arc Networks,
and accordingly, the note receivable balance is not eliminated, resulting in an
increase in current assets and therefore an increase in working capital. As of
the date of this report, the note receivable is in default for non-payment of
scheduled interest. Significant sources of cash and investment related working
capital during the 1999 Six Month Period included $5,137,000 from the sale of US
Treasury Bills, $1,597,000 from the sale of Netsmart common stock and $855,000
from the disposal of Arc Networks, while significant uses of working capital
included $3,220,000 for the purchase of US Treasury Bills, $1,081,000 for
payment of amounts accrued as of December 31, 1998, including $843,000 for
litigation settlements and $238,000 for accounts payable and accrued expenses,
$676,000 for professional fees, $400,000 in advances to Arc Networks under a
line of credit, $344,000 for salaries, payroll taxes and fringe benefits,
$104,000 for purchases of treasury stock and $400,000 for other operating
expenses. With the principal assets consisting of cash and cash equivalents and
marketable securities, the Company's management is seeking and evaluating a
number of new business opportunities that are focused on increasing the
Company's market capitalization.
As of June 1999, the Company had guaranteed Arc Networks' repayment of
$1,217,000 of advances from Trans Global as represented by Arc Networks'
installment promissory note due August 31, 2003 and $550,000 of indebtedness
that Arc Networks owes to Betei Sefer Limlachah, a New York religious
organization, represented by Arc Networks' promissory note due January 1, 2001.
In July 1999, Mitel Communications Solutions, Inc. ("Mitel") served an
amended Complaint upon the Company, impleading the Company and SISC and
purportedly seved TAL, in a case commenced against Arc Networks, in the Supreme
Court of the State of New York, County of New York, entitled, Mitel
Communications Solutions, Inc. v. Arc Networks, Inc. et al., Index No. 99-600123
18
<PAGE>
(Sup. Ct. N.Y. Cty., 1999). Mitel seeks to recover the sum of
$1,715,000, which it allegedly paid to Arc Networks as a pre-payment when it
engaged Arc Networks as a subcontractor for a subsequently aborted project for
the New York City Board of Education. Mitel seeks to recover the purported
pre-payment with interest against all defendants, including the Company, SISC
and TAL on a variety of legal and equitable theories. The Company, SISC and TAL
have filed an Answer denying liability, and are vigorously contesting the
allegations.
Results of Operations
Loss from Operations
During 1997 and 1998, the Company discontinued all of its operating
segments and as of June 1999, has no operating revenue or gross margin. As a
result, all of the Company's loss from operations for the three month period
ended June 30, 1999 (the "1999 Second Quarter") and the 1998 Second Quarter and
the 1999 and 1998 Six Month Periods consisted of general and administrative
expenses.
1999 and 1998 Second Quarter Operating Losses
The Company's loss from operations for the 1999 and 1998 Second
Quarters was $725,000 and $1,033,000, respectively, representing a net decrease
of $308,000, or 30%.
Components of operating expenses that decreased when comparing the 1999
and 1998 Second Quarters aggregated $516,000 and included termination payments
for executive contracts which decreased by $302,000, professional fees which
decreased by $128,000 and related party bad debt expense which decreased by
$86,000.
Termination payments for executive contracts decreased $302,000, or
86%, from $350,000 for the 1998 Second Quarter to $48,000 for the 1999 Second
Quarter. Termination payments for executive contracts relates to the termination
of two separate employment agreements between the Company and George W. Mahoney,
its former CFO. In the 1998 Second Quarter, the Company paid Mr. Mahoney
$350,000 related to a change of control provision included in Mr. Mahoney's
contract which was in effect at that time, and entered into an amended and
restated employment agreement with Mr. Mahoney. In the 1999 Second Quarter, the
Company and Mr. Mahoney mutually terminated the amended and restated employment
agreement and the Company paid Mr. Mahoney $48,000 in full satisfaction of any
amounts owed to Mr. Mahoney.
Professional fees decreased $128,000, or 40%, from $323,000 for the
1998 Second Quarter to $195,000 for the 1999 Second Quarter. During the 1998
Second Quarter, the Company incurred legal fees of $225,000 in connection with
the change of control that occurred in April 1998 and for the Second Quarter of
1999, the Company incurred $16,000 in legal fees for the change of control that
occurred in April 1999, representing a $209,000 decrease. During the 1998 Second
Quarter, the Company paid approximately $50,000 to each of Edward D. Bright, the
Company's Chairman of the Board at the time of the payment and Patterson Travis
Operating Account, a brokerage firm that represents certain shareholders of the
Company, for
19
<PAGE>
reimbursement of legal expenses incurred in connection with the April 1998
change of control. Professional fees related to other matters increased $81,000
when comparing the 1999 and 1998 Second Quarters which included a $36,000
increase related to the 1999 proxy, a $27,000 increase related to accounting and
tax services and a $18,000 increase related to other legal matters.
Related party bad debt expense decreased by $86,000, or 100%, when
comparing the 1999 and 1998 Second Quarters. During the 1998 Second Quarter,
pursuant to a settlement agreement, the Company wrote-off $86,000 of amounts due
from Televend, a Company that was sold to Lewis S. Schiller, a former CEO and
Director of the Company. During the 1999 Second Quarter no such bad debts were
incurred.
Components of operating expenses that increased when comparing the 1999
and 1998 Second Quarters aggregated $208,000 and included salaries, payroll
taxes and fringe benefits which increased by $97,000, consulting fees which
increased by $12,000 and other general and administrative expense which
increased by $99,000.
Salaries, payroll taxes and fringe benefits increased $97,000, or 95%,
from $102,000 for the 1998 Second Quarter to $199,000 for the 1999 Second
Quarter. Salaries, payroll taxes and fringe benefits for the 1999 Second Quarter
consisted of $92,000 for officer salaries, $36,000 for non-officer salaries,
$13,000 for payroll taxes and fringe benefits and $58,000 for employees who were
terminated during the 1999 Second Quarter. Salaries, payroll taxes and fringe
benefits for the 1998 Second Quarter consisted of $26,000 for non-officer
salaries, $1,000 for payroll taxes and fringe benefits and $75,000 for employees
who were terminated during the 1998 Second Quarter.
Consulting fees increased $12,000, or 22%, from $55,000 for the 1998
Second Quarter to $67,000 for the 1999 Second Quarter. On April 20, 1999,
Seymour Richter resigned as the Company's president and chief executive officer.
Simultaneously with his resignation, Mr. Richter entered into a nine-month
consulting agreement with the Company pursuant to which he will receive an
aggregate of $56,000. Other consulting fees paid during the 1999 Second Quarter
amounted to $11,000 paid to a consultant in connection with the closing of the
Company's New York offices. During the 1998 Second Quarter, the Company paid a
consultant $55,000 who was evaluating financing sources for potential
acquisitions.
Other general and administrative expenses increased $99,000, or 114%,
from $87,000 for the 1998 Second Quarter to $186,000 for the 1999 Second
Quarter. During the 1998 Second Quarter, other general and administrative
expenses included a credit of approximately $178,000 for negotiated trade
payable write-offs. Excluding these trade payable write-offs, actual general and
administrative expenses for the 1999 Second Quarter were approximately $79,000
less than those of the 1998 Second Quarter. Significant reductions from the 1998
Second Quarter to the 1999 Second Quarter included reduced travel costs of
approximately $48,000, reduced insurance costs of $44,000, reduced directors
fees of $18,000 and reduced vehicle expenses of $14,000. These reductions were
partially offset by the 1999 Second Quarter expenses incurred for the July 22,
1999 shareholders meeting, including $33,000 of printing costs and $12,000 of
mailing costs.
20
<PAGE>
Settlement costs remained unchanged and approximated $30,000 for both
the 1999 and 1998 Second Quarters. During the 1999 Second Quarter, the Company
paid $30,000 in order to settle two claims relating to IMI, a disposed
subsidiary and during the 1998 Second Quarter paid $20,000 to settle a claim
relating to a disposed subsidiary which operated in the discontinued Three
Dimensional Products and Services segment and paid $10,000 to settle a claim
relating to a disposed subsidiary which operated in the discontinued Audio
Products segment.
1999 and 1998 Six Month Period Operating Losses
The Company's loss from operations for the 1999 and 1998 Six Month
Periods was $1,425,000 and $3,659,000, respectively, a decrease of $2,234,000,
or 61%.
Components of operating expenses that decreased when comparing the 1999
and 1998 Six Month Periods aggregated $2,514,000 and included termination
payments for executive contracts which decreased by $2,141,000, related party
bad debt expense which decreased by $135,000, salaries, payroll taxes and fringe
benefits which decreased by $112,000, other general and administrative expense
which decreased by $88,000 and consulting fees which decreased by $38,000.
Termination payments for executive contracts decreased $2,141,000, or
98%, from $2,189,000 for the 1998 Six Month Period to $48,000 for the 1999 Six
Month Period. Termination payments for executive contracts for the 1999 and 1998
Six Month Periods relates to the termination of contracts with Mr. Lewis S.
Schiller, a former CEO of the Company, Ms. Grazyna Wnuk, a former Secretary of
the Company, and Mr. George W. Mahoney, the former CFO of the Company. The
contract termination payments paid to Mr. Mahoney involve two separate
employment agreements between the Company and Mr. Mahoney. During the 1998 Six
Month Period, the Company paid Mr. Mahoney $350,000 related to a change of
control provision included in Mr. Mahoney's contract, which was in effect at
that time, and entered into an amended and restated employment agreement with
Mr. Mahoney. During the 1999 Six Month Period, the Company and Mr. Mahoney
mutually terminated the amended and restated employment agreement and the
Company paid Mr. Mahoney $48,000 in full satisfaction of any amounts owed to Mr.
Mahoney. On March 30, 1998, the Company entered into a series of agreements with
Lewis S. Schiller ("Schiller") and Grazyna B. Wnuk ("Wnuk"). Pursuant to the
agreements, Schiller and Wnuk resigned as directors and officers of the Company
and its subsidiaries. In consideration for payments of approximately $4,000,000
to Schiller and Wnuk and the return to the Company by Schiller of 1,190,000 of
the Company's common stock he then held, the Company purchased from Schiller and
Wnuk all of their rights under their respective employment agreements with the
Company and their stock interest in IMI. $1,600,000 of the $4,000,000 of such
payments related to Schiller's and Wnuk's stock interest in the IMI sale. The
remainder of $2,400,000 related to obligations of the Company, of which
approximately $561,000 was accrued at December 1997, for commissions and
salaries payable to Schiller and Wnuk and $1,839,000 related to contract
termination expense for 1998.
Related party bad debt expense decreased by $135,000, or 100%, when
comparing the 1999 and 1998 Second Quarters. During the 1998 Six Month Period,
pursuant to a settlement agreement, the Company wrote-off $86,000 of amounts due
from Televend, a company that was
21
<PAGE>
sold to Mr. Schiller, and $49,000 of amounts due from Universal International,
Inc., a company of which Ms. Wnuk is the president. During the 1999 Six Month
Period no such bad debts were incurred.
Salaries, payroll taxes and fringe benefits decreased $112,000, or 25%,
from $456,000 for the 1998 Six Month Period to $344,000 for the 1999 Six Month
Period. Salaries, payroll taxes and fringe benefits for the 1999 Six Month
Period consisted of $91,000 for officer salaries, $70,000 for non-officer
salaries, $18,000 for payroll taxes and fringe benefits and $165,000 for
employees who were terminated during the 1999 Six Month Period. Salaries,
payroll taxes and fringe benefits for the 1998 Six Month Period consisted of
$47,000 for non-officer salaries, $3,000 for payroll taxes and fringe benefits
and $406,000 for employees who were terminated during the 1998 Six Month Period.
Other general and administrative expenses decreased $88,000, or 27%,
from $332,000 for the 1998 Six Month Period to $244,000 for the 1999 Six Month
Period. During the 1998 Six Month Period other general and administrative
expenses included a credit of approximately $178,000 for negotiated trade
payable write-offs. Excluding these trade payable write-offs, actual general and
administrative expenses for the 1999 Six Month Period were approximately
$266,000 less than those of the 1998 Six Month Period. Significant reductions
from the 1998 Six Month Period to the 1999 Six Month Period included reduced
travel costs of approximately $75,000, reduced vehicle and limousine service
expenses of $73,000, reduced insurance costs of $44,000, reduced directors fees
of $35,000, reduced meals and entertainment costs of $18,000, reduced equipment,
computer and depreciation costs of $17,000, reduced office rent of $15,000 and
other net reductions of $34,000. These reductions were partially offset by the
1999 Six Month Period expenses incurred for the July 22, 1999 shareholders
meeting, including $33,000 of printing costs and $12,000 of mailing costs.
Consulting fees decreased $38,000, or 34%, from $113,000 for the 1998
Six Month Period to $75,000 for the 1999 Six Month Period. On April 20, 1999,
Seymour Richter resigned as the Company's president and chief executive officer.
Simultaneously with his resignation, Mr. Richter entered into a nine-month
consulting agreement with the Company pursuant to which he will receive an
aggregate of $56,000. Other consulting fees paid during the 1999 Second Quarter
amounted to $18,000 paid to a consultant in connection with the closing of the
Company's New York offices. During the 1998 Six Month Period, the Company paid a
consultant $113,000 who was evaluating financing sources for potential
acquisitions.
Components of operating expenses that increased when comparing the 1999
and 1998 Six Month Periods aggregated $280,000 and included professional fees
which increased by $272,000 and settlement costs which increased by $8,000.
Professional fees increased $272,000, or 67%, from $404,000 for the
1998 Six Month Period to $676,000 for the 1999 Six Month Period. During the 1999
Six Month Period, the Company incurred legal fees of $265,000 related to the
disposal of Arc Networks, Trans Global and Netsmart shares, $127,000 related to
litigation settlements, $36,000 related to the July 22, 1999 shareholders
meeting, $16,000 related to the April 1999 change of control and $134,000
related to general matters. During the 1998 Six Month Period, the Company
incurred legal fees
22
<PAGE>
of $225,000 in connection with the change of control that occurred in April
1998, $85,000 related to litigation settlements and $89,000 related to general
matters. During the 1998 Six Month Period, the Company paid approximately
$50,000 to each of Edward D. Bright, the Company's Chairman of the Board at the
time of the payment and Patterson Travis Operating Account, a brokerage firm
that represents certain shareholders of the Company for reimbursement of legal
expenses incurred in connection with the April 1998 change of control. Audit,
accounting and tax service expenses amounted to $98,000 for the 1999 Six Month
Period and were incurred primarily in connection with the disposal of
subsidiaries. Audit and tax services for the 1998 Six Month Period amounted to
$5,000.
Settlement costs increased $8,000, or 27%, from $30,000 for the 1998
Six Month Period to $38,000 for the 1999 Six Month Period. During the 1999 Six
Month Period, the Company paid $30,000 in order to settle two claims relating to
IMI, a disposed subsidiary and $8,000 to settle a claim relating to a disposed
subsidiary which operated in the discontinued Three Dimensional Products and
Services segment. During the 1998 Six Month Period, the Company paid $20,000 to
settle a claim relating to a disposed subsidiary which operated in the
discontinued Three Dimensional Products and Services segment and paid $10,000 to
settle a claim relating to a disposed subsidiary which operated in the
discontinued audio products segment.
Gain (Loss) on Marketable Securities
During the 1999 Second Quarter, the Company realized gains of $964,000
from the sale of Netsmart common stock and $68,000 from the sale of US Treasury
Bills. During the 1999 Six Month Period total realized gains on US Treasury
Bills amounted to $98,000.
Loss from Continuing Operations
The Company's consolidated income (loss) from continuing operations for
the respective 1999 and 1998 Second Quarters was $254,000, or $0.16 per share,
and ($1,109,000), or ($0.68) per share, representing an increase in income of
$1,363,000. The Company's consolidated (loss) from continuing operations for the
respective 1999 and 1998 Six Month Periods was ($532,000), or ($0.34) per share,
and ($3,759,000), or ($2.28) per share, representing a decrease in loss of
$3,227,000. As more fully described in the preceding paragraphs, the decrease in
losses from continuing operations is primarily the result of significant gains
on marketable securities realized in the 1999 periods, the significant reduction
in contract termination expense from the 1998 to 1999 periods and to a lesser
extent, a reduction of operating expenses from the 1998 to 1999 periods. Due to
the non-recurring nature of realized gains on marketable securities and contract
termination expense, future reductions of operating losses cannot be assured.
23
<PAGE>
Discontinued Operations
The Company's income (loss) from operations of discontinued segments
and gain or (loss) on disposal of segments are presented in the following table.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Income (Loss) from Discontinued Operations:
Contract Engineering Services $ 181,000 $ 248,000 $ 499,000 $ 163,000
Telecommunications 57,000 (143,000) -- (597,000)
Medical Diagnostics -- (104,000) -- (457,000)
Intercompany Transactions 81,000 45,000 138,000 90,000
----------- ----------- ----------- -----------
$ 319,000 $ 46,000 $ 637,000 $ (801,000)
=========== =========== =========== ===========
Gain (Loss) on Disposal of Segments:
Contract Engineering Services $ 759,000 -- $ 759,000 --
Telecommunications 7,365,000 -- 7,365,000 --
Medical Diagnostics -- $ 4,882,000 -- $ 4,882,000
Three Dimensional Products and Services -- -- -- 1,932,000
Electro-Optical and Electro-Mechanical Products
Manufacturing -- -- -- (31,000)
Business Consulting Services -- -- -- (1,000)
----------- ----------- ----------- -----------
$ 8,124,000 $ 4,882,000 $ 8,124,000 $ 6,782,000
=========== =========== =========== ===========
</TABLE>
Net Loss
As a result of the foregoing, the Company incurred net income during
the respective 1999 and 1998 Second Quarters of $8.7 million, or $5.57 per
share, and $3.8 million, or $2.34 per share and net income during the respective
1999 and 1998 Six Month Periods of $8.2 million, or $5.26 per share, and $2.2
million, or $1.35 per share..
Future Operations of Sagemark
As of the date of this report the Company does not have any
consolidated operating subsidiaries that are not classified as discontinued
segments. As a result, the Company will have no operating revenues, direct costs
or gross profit until such time, if ever, that other subsidiaries are acquired.
Currently the Company has no definitive plans for any acquisitions. The future
operating losses of the Company will be comprised of its general and
administrative expenses, which currently consist primarily of salaries and
related taxes and fringe benefits, professional fees and other general and
administrative costs. Effective June 30, 1999, the Company has five employees
with annual base salaries aggregating approximately $550,000, excluding payroll
taxes and fringe benefits. Professional fees will vary depending on the level of
future litigation, acquisition and other activity. The current sources of income
for the Company are earnings on the US Treasury Bill investments and its
investments in Netsmart and Trans Global and the
24
<PAGE>
Company's money market account, which in the aggregate are expected to be
significantly less than the Company's operating costs. As a result, it is
estimated that the Company will incur operating losses at least until such time,
if ever, that acquisitions of new subsidiaries are made.
Investment Company Act
In the absence of an applicable exemption or administrative relief, the
Company might be required to register as an investment company under the
Investment Company Act of 1940, as amended (the "1940 Act"), because more than
40% of the value of its assets other than government securities, cash and
temporary investments would be invested in securities of companies which are not
majority owned by the Company. The Company would then be subject to the
restrictions and limitations imposed by the 1940 Act on the activities of
registered investment companies. The Company has elected to utilize, however,
the exemption from the provisions of the 1940 Act provided by Rule 3a-2
promulgated thereunder by the Securities and Exchange Commission because the
Company intends to become primarily engaged in non-investment company operating
businesses within one year of the date that it ceased to be primarily engaged in
an operating business. No decision has been made to date with regard to the
nature of the operating business or businesses to be acquired or as to any
specific acquisition opportunities. In the event that the Company does not
become primarily engaged in such businesses within one year, it may be required
to register as an investment company under the 1940 Act.
During the one-year period in which the Company will be seeking
opportunities for the acquisition of non-investment company operating
businesses, the Company's cash and investment securities, other than the stock
of any operating subsidiaries that it may acquire or establish, will be invested
in a manner consistent with the preservation of principal in liquid
fixed-income, high-grade, short-term instruments which are expected to provide
relatively low fixed-income yields.
Year 2000 Issues
Many existing computer programs use only two digits to identify a year
in a date field. These programs were designed and developed without considering
the impact of the upcoming change in the century. If not corrected, many
computer applications could fail or create erroneous results by or at the year
2000. This is referred to as the "Year 2000 Issue". Management believes that all
of the in-house computer applications used by the holding companies (Sagemark
and SISC) are year 2000 compliant. The Company is reliant on other outside
services, including banks and investment companies as well as a payroll
servicing company and such companies have indicated that they are taking
appropriate measures to be year 2000 compliant. Although the Company believes it
will not incur significant expenses to become Year 2000 compliant, no assurance
can be given that the Company will not incur significant cost in addressing the
Year 2000 Issue or that the failure to adequately address the Year 2000 Issue
will not have a material adverse effect upon the Company.
25
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
In July 1999, Mitel Communications Solutions, Inc. ("Mitel") served an
amended Complaint upon the Company, impleading the Company and SISC and
purportedly served TAL, in a case commenced against Arc Networks, in the Supreme
Court of the State of New York, County of New York, entitled, Mitel
Communications Solutions, Inc. v. Arc Networks, Inc. et al., Index No. 99-600123
(Sup. Ct. N.Y. Cty., 1999). Mitel seeks to recover the sum of $1,715,000, which
it allegedly paid to Arc Networks as a pre-payment when it engaged Arc Networks
as a subcontractor for a subsequently aborted project for the New York City
Board of Education. Mitel seeks to recover the purported pre-payment with
interest against all defendants, including the Company, SISC and TAL on a
variety of legal and equitable theories. The Company, SISC and TAL have filed an
Answer denying liability, and are vigorously contesting the allegations.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
2.1 Agreement dated February 25, 1999 among the Company, SISC and Trans
Global.(1)
2.2 Agreement dated March 23, 1999 among the Company, SISC, Arc Networks and
Technology Acquisition, Ltd.(2)
2.3 Agreement dated March 25, 1999 among the Company, SISC, Netsmart and the
Management Investors.(2)
27 Financial Data Schedule.(3)
99.1 Consulting agreement dated April 29, 1999 between the Company and
Seymour Richter.(4)
99.2 Employment agreement dated April 21, 1999 between the Company and Frank
DeLape.(4)
99.3 Employment agreement dated April 21, 1999 between the Company and
Richard Young.(4)
99.4 Stock option agreement between the Company and Frank DeLape.(4)
99.5 Stock option agreement between the Company and Richard Young.(4)
99.6 Letter agreement dated May 24, 1999 between the Company and George W.
Mahoney.(5)
(1) Filed as an exhibit to the Company's report on Form 8-K filed on March 1,
1999, and incorporated herein by reference.
(2) Filed as an exhibit to the Company's report on Form 8-K filed on April 7,
1999, and incorporated herein by reference.
(3) Filed only with the SEC in electronic format.
(4) Filed as an exhibit to the Company's report on Form 8-K/A filed on June 29,
1999, and incorporated herein by reference. 5 Filed as an exhibit to the
Company's report on Form 8-K filed on June 8, 1999, and incorporated herein
by reference.
26
<PAGE>
(b) Reports on Form 8-K
1. Filed an 8-K with an earliest date of event of April 20, 1999, reporting
a change of control of the Registrant, reporting notification to certain
buyers of the Company's investment in Netsmart that 200,000 shares would
not be sold to such buyers and reporting the consummation of the share
exchange between the Company and Trans Global.
2. Filed an 8-K with an earliest date of event of May 24, 1999, reporting
the termination of an employment agreement between the Company and its
former chief financial officer and reporting the sale of a portion of its
investment in Netsmart.
3. Filed an 8-K with an earliest date of event of June 17, 1999, reporting
the consummation of the sale of the Company's investment in Arc Networks.
.............................
27
<PAGE>
SIGNATURES
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.
THE SAGEMARK COMPANIES LTD.
/S/____________ Chief Executive Officer and Director August 13, 1999
Frank M. DeLape (Principal Executive Officer)
/S/__________ President and Chief Operating Officer August 13, 1999
Richard Young (Principle Accounting Officer)
28
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND THE CONSOLIDATED STATEMENT OF OPERATIONS
FILED AS PART OF THE QUARTERLY REPORT ON FORM 10-Q AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH QUARTERLY REPORT ON FORM 10-Q.
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<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
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