UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE
ACT OF 1934 For the transition period from ______________ to _____________.
Commission file Number 0-4186
THE SAGEMARK COMPANIES LTD.
(Exact name of registrant as specified in its charter)
New York 13-1948169
(State or other jurisdiction (I.R.S. Employer Identification Number)
of incorporation or organization)
700 Gemini, Houston, TX 77058
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (281) 488-8484
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of Each Class Outstanding shares as of March 17, 2000
------------------- ---------------------------------------
Common Stock, par value 0.01 per share 1,560,216
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No ___
Indicate by a check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
State the aggregate market value of the voting and non-voting common
equity held by non-affiliates computed by reference to the price at which the
common equity was sold, or the average bid and asked price of such common
equity, as a specified date within the past 60 days.
As of March 17, 2000, the aggregate market value of the common equity
held by non-affiliates approximated $6.61 million.
DOCUMENTS INCORPORATED BY REFERENCE
None
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PART I
Item 1. Business
General Development of Business
The Sagemark Companies Ltd. ("Sagemark", the "Company" or the
"Registrant"), (formerly Consolidated Technology Group Ltd., formerly Sequential
Information Systems, Inc.) is a New York corporation organized in 1961. The
Compamy is a publicly held holding company which has, or has had controlling
interests, (either directly or indirectly through its wholly owned subsidiary,
SIS Capital Corp. ("SISC")), in its consolidated subsidiaries which previously
operated in various business segments throughout the United States. During 1999,
1998 and 1997, the Company discontinued all of its operating segments.
Thereafter Sagemark has become a financial services company that seeks to
identify, acquire, develop and support emerging growth Internet and information
technology companies. Sagemark currently focuses on companies engaged in
eCommerce, telecommunications, and human resources outsourcing, areas that are
expected to benefit from the growing use of the Internet. The Company works
closely with the companies in which it has an investment to provide operational
and management services in an attempt to build value for the Company. These
services include active strategic management, operating guidance, merger and
acquisition assistance, board participation and recruitment, and innovative
financing.
Sagemark Capital LP ("Sagemark Capital"), a partnership in which
Sagemark holds a limited partnership interest, was organized during 1999 for the
purpose of making future investments that are in line with the Company's new
investment philosophy. Sagemark Capital is currently applying for a license by
the Small Business Administration ("SBA") to become a Small Business Investment
Company ("SBIC"). If Sagemark Capital is successful in obtaining an SBIC
license, then it will be able to obtain inexpensive capital of up to three times
its private capital from the SBA.
SIS Capital Corp. ("SISC") is a wholly owned, non-operating subsidiary
of Sagemark, which held the Company's prior investments. In keeping with the
Company's new investment philosophy and pursuant to certain transactions that
were consummated prior to 1999, the Company has discontinued all prior-operating
segments.
Current Developments
GAVELNET.COM
In September 1999, the Company invested $950,000 for the purchase of
100,000 preferred shares of GAVELNET.COM. The preferred shares hold standard
preferences to the common shares, hold voting rights, carry a 12% dividend,
payable in-kind, and are convertible at $1.25 into 800,000 common shares of
GAVELNET.COM. GAVELNET.COM operates an Internet auction site offering premium
collectibles, decorative and fine art items in an entertaining, interactive
online format, targeting affluent buyers. Concurrent with Sagemark's
investment in GAVELNET.COM, Technology Acquisition Ltd. ("TAL") is investing $1
million under substantially the same terms as the Company. See "Recent
Developments Relating to Control" for further discussion of TAL.
EnTotal.com
In January 2000 the Company made an investment in Eclipse
Communications Corporation d.b.a. enTotal.com ("enTotal.com") whereby the
Company loaned enTotal.com $1.5 million pursuant to a note bearing interest at
14 % with principal due in sixteen equal quarterly installments beginning June
30, 2001. Additionally, the Company received a warrant to purchase 2.5 million
shares of enTotal.com's common shares at a nominal price. EnTotal.com is a newly
formed development stage company that was formed for the purpose of providing an
online electronic commerce marketplace which through its enTotal.com brands,
will enable small business, small offices/home offices and residential customers
to shop for, purchase and pay for a broad range of communication services.
People Solutions
In February 2000, the Company made an investment in People Solutions,
Inc. ("People Solutions") whereby the Company will loan people Solutions up to
$1 million pursuant to a note bearing interest at 14% with principal due in
twelve equal quarterly installments beginning April 30, 2001. Additionally, the
Company received a warrant to purchase 1 million shares of People Solution's
common shares at a nominal price. People Solutions is a full service provider of
comprehensive, creative human resource management solutions. People Solutions
provides human resource consulting and outsourcing services in areas such as
recruiting, retention, career management and training. To date, the Company has
advanced $500,000 under the note agreement.
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FutureMed
In February 2000, the Company made an investment in FutureMed
Interventional, Inc. ("FutureMed") whereby the Company loaned FutureMed $1
million pursuant to a note bearing interest at 13.5% with principal due February
29, 2005. In addition, the Company is entitled to receive a warrant to purchase
FutureMed common shares. FutreMed develops and manufactures disposable medical
devices, such as specialized catheters and stents, which are used in radiology,
cardiology, and urology applications. These highly sophisticated devices are
used primarily for minimally invasive medical procedures. FutureMed serves
primarily as an outsource solution for large medical supply companies providing
quick customized products to the medical community.
JewelsOnRodeo.com
In March 2000, the Company made an investment in JewelsOnRodeo.com, Inc. ("JOR")
whereby the Company loaned JOR $250,000 pursuant to a note bearing interest at
13% with principal due thirteen months from the date of execution. In addition,
the Company received warrants to purchase 137,500 shares of JOR's common shares.
JOR, founded by Benchmark Equity Group, Inc., Kazanjian Brothers, Inc., an 82
year old estate jeweler, and JOR's management is positioning itself to become
the leading provider of web based business to business e-commerce solutions to
the jewelry industry. Through JOR, lifestyle portal sites, general auction
sites, and conventional jewelry retailers will have real time access to
"one-of-a-kind" pieces of fine and estate jewelry from the most elite jewelry
dealers in the world. Moreover through JOR, jewelers are able to automate the
inventory management process thereby lowering the costs associated with
procurement, evaluation, authentication and distribution of fine and estate
jewelry.
Financial Information and Employees
The current sources of income for the Company are earnings on its
marketable securities and notes receivable. As of December 31, 1999 the
Company's cash and cash equivalents consisted of $1.86 million of money market
accounts with an average annual yield of 5.05% and marketable securities
consisting of $1.25 million invested in certificates of deposit with interest
rates ranging from 5.05% to 5.8%, $517,000 invested in commercial paper with
average yields to maturity of 6% and $553,000 invested in common stocks with a
fair market value of $277,000. Notes receivable as of December 31, 1999 consists
of a $2.976 million note bearing interest at 14% and a $675,000 note bearing
interest at 8%. Additionally, the Company will earn interest income on the note
receivable investments made subsequent to December 31, 1999 as more fully
described in the preceding description of "Current Developments". As a result of
the discontinuation of all prior-operating entities, the Company will not
generate any operating revenue, direct costs or gross profit until such time, if
ever, that new operating subsidiaries are acquired. The income earned on
Sagemark's investments and notes receivable are expected to be less than the
Company's operating costs which are expected to consist of salaries and related
taxes and fringe benefits, professional fees and other general and
administrative costs. As of December 31, 1999, the Company had seven employees
and in January 2000, the Company added one additional employee.
Discontinued Business Segments
The 1999, 1998 and 1997 operating activity of the discontinued business
segments is classified as net income or loss from discontinued segments in the
Company's consolidated statement of operations. The assets and liabilities of
the business segments that were discontinued have been netted and classified as
net assets or liabilities of discontinued segments in the Company's consolidated
balance sheets. Information regarding the discontinued business segments
follows:
Contract Engineering Services consisted of Trans Global Services, Inc.
("Trans Global"), and its subsidiaries, Avionics-Research Holdings ("Avionics"),
and Resource Management International, Inc. ("RMI"), which provides engineers,
designers and technical personnel on a temporary basis pursuant to contracts
with major corporations. 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 on disposal of approximately
$759,000 during 1999. The revenues of the contract engineering services segment
approximated $11.2 million for the period from January 1, 1999 through the
effective date of the share transfer and $67 million and $75.7 million for all
of 1998 and 1997, respectively.
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Telecommunications consisted of Arc Networks, Inc. ("Arc Networks"), an
integrated communications provider offering end-to-end connectivity including
broadband data and voice telecommunication services primarily to small- and
medium-sized businesses and tenants of multi-tenant units in Tier I and Tier II
markets in the northeastern and southern United States. The Company entered into
an agreement with Arc Networks and TAL, pursuant to which on June 23, 1999 the
Company sold all of its equity interest in Arc Networks for $855,000, resulting
in a gain on disposal of approximately $7.4 million. The revenues of the
telecommunications segment approximated $4 million from January 1, 1999 through
the date of the sale and $13.9 million and $9.6 million for all of 1998 and
1997, respectively. As of December 31, 1999, Arc Networks owes the Company
approximately $2.976 million pursuant to a note receivable agreement and
currently the Company holds warrants to purchase common stock of InfoHighway
Communications Corp. ("InfoHighways"), Arc Networks parent company, consisting
of the right to purchase 190,000 common shares at an exercise price of either
90% of the exercise price of any warrants (or other convertible securities)
issued by InfoHighways in connection with the first public or private placement
of securities by InfoHighways, or $6.00 if no such public or private placement
occurs, the right to purchase 180,000 common shares at an exercise price of $3,
the right to purchase 180,000 common shares at the fair market price of
InfoHighway's common stock at the date of a public or private placement and the
right to 5,000 common shares at no cost.
Medical Diagnostics consisted of International Magnetic Imaging, Inc.
("IMI") which performed magnetic resonance imaging and other medical diagnostic
services. 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 $4.88 million that was recorded in 1998. In
1999, the Company recognized an additional gain of $156,000 representing the
excess of estimated accrued taxes as of December 31, 1998 and the amount
actually paid for taxes in 1999. The revenues of the medical diagnostics segment
approximated $6.8 million from January 1, 1998 through the date of the sale on
April 2, 1998 and $29.4 million for 1997. Additionally, on August 12, 1998, IMI
consummated a settlement with the holders of certain of IMI's subordinated
promissory notes, which were issued by IMI in 1994 in connection with the
acquisition of the Medical Diagnostics segment. IMI paid approximately $1.9
million, of which approximately $1.6 million was paid in cash and approximately
$324,000 was applied in payment of certain promissory notes due to IMI by one of
the holders of the subordinated promissory notes, in full settlement and
satisfaction of the approximate $7.7 million outstanding balance of such notes.
In connection with the settlement, Consolidated issued 333,000 shares of its
common stock, valued at $80,000, to the holders of the subordinated promissory
notes in satisfaction of IMI's contractual obligations under the agreements
relating to the 1994 acquisition of the Medical Diagnostics segment. IMI
recognized an extraordinary gain on debt extinguishment of approximately $5.6
million for 1998, in connection with this settlement.
Electro-Mechanical and Electro-Optical Products Manufacturing consisted
of Sequential Electronic Systems, Inc. ("SES"), and S-Tech, Inc. ("S-Tech")
which were subsidiaries of SES Holdings Inc. ("SESH") which was a wholly owned
subsidiary of SpecTec, Inc. ("SpecTec") and Televend, Inc. ("Televend"), and FMX
Corp. ("FMX"). During the period owned by the Company, this group of companies
manufactured and sold products such as devices that measure distance and
velocity, instrumentation devices, debit card vending machines, prepaid
telephone calling cards and finger print identification products. During 1998,
the Company sold all of the companies operating in the electro-optical and
electro-mechanical products manufacturing segment resulting in a loss on
disposal of the segment of approximately $31,000. The revenues of the
electro-optical and electro-mechanical products manufacturing segment for 1997
were $3.1 million.
Three Dimensional Products and Services consisted of 3D Holdings
International, Inc. ("3D"), and its subsidiaries, 3D Technology, Inc. ("3D
Tech"), 3D Imaging International, Inc. ("3DI"), and Vero International, Inc.
("Vero"), which are companies that provided three dimensional imaging services
that are used in a variety of applications, such as prototype building and
reverse engineering. 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, in 1997 the Company sold
one of the subsidiaries operating in the segment, wrote-off all of the segment's
remaining assets and reclassified the remaining liabilities as net current
liabilities of a discontinued segment, which resulted in a $465,000 loss on
disposal of the segment. During 1998, the Company recorded an approximate $1.9
million gain on the disposal of the segment resulting from the write-off of
additional liabilities that the Company believes it will not be obligated to
pay. Finally, in 1999, the Company wrote-off all remaining liabilities, all of
which were all in excess of three years old and had no claim activity, and
recognized a $481,000 gain on disposal of the segment. The revenues of the
three-dimensional products and services segment approximated $92,000 and
$281,000 for 1998 and 1997, respectively.
Audio Products Manufacturing reflected the operations of WWR
Acquisition Corp. and its wholly owned subsidiary WWR Technology, Inc.,
collectively referred to as "WWR". WWR was formed for the purpose of acquiring
the professional products business segment of the KlipschTM loudspeaker line
from Klipsch and
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Associates, Inc. In May 1997, the Company sold all of the issued and outstanding
capital stock of WWR Technology, Inc. ("WWR"), the subsidiary in which all of
the audio products manufacturing segment's operating activities were conducted,
for $100,000. As a result of the sale, the Company received net proceeds of
approximately $62,000 and recorded a gain on disposal of approximately $129,000
on the disposal in the second quarter of 1997. The revenues of the audio
products manufacturing segment through May 1997 approximated $1.2 million.
Business Consulting Services reflected the activity of The Trinity
Group, Inc. ("Trinity"). Trinity provided management and related services both
to the Company's former subsidiaries and affiliates. While owned by the Company,
Trinity's management services included management, finance, accounting,
operations, marketing and other services, which were typically rendered pursuant
to consulting agreements. During 1998 the Company sold the business consulting
services segment resulting in a loss on the disposal of approximately $1,000.
The revenues of the business consulting services for 1997 were $508,000.
Risk Factors and Forward Looking Statements
Statements in this Form 10-K that are not descriptions of historical
facts may be forward-looking statements that are subject to risks and
uncertainties. Important factors that may cause actual results to differ
include, but are not limited to, Sagemark's limited operating history,
anticipated losses, unpredictability of future revenues, competition, risks
associated with acquisitions, development and operations, management of
potential growth, and risks of business combinations and new business areas, the
effect of changing economic and business conditions, and Sagemark's ability to
identify, attract and acquire a controlling interest in one or more successful
operating entities. Actual results could differ materially from those currently
anticipated due to the factors just discussed and other risks as identified in
this Form 10-K and in other documents filed by the Company with the Securities
and Exchange Commission.
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.
Recent Developments Relating to Control
TAL owns approximately 17% of the Company's outstanding common shares
and has an option, which expires in April 2000, 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
December 31, 1999, Arc Networks owes the Company approximately $2.976 million
under a line of credit agreement 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.
Item 2. Properties
The Company leases all of its facilities on a month to month basis.
Presently, the Company's executive offices are located in Houston, Texas, which
the Company leases from Benchmark Equity Group ("Benchmark") for $1,200 per
month. Benchmark is a privately held company, which is owned by Mr. DeLape, the
Company's CEO and Chairman of the Board. The Company believes that the amounts
paid to Benchmark approximate those that would have been paid if the
transactions had been conducted at arms length.The Company's prior executive
offices were leased in New York under a lease that expired February 28, 1999.
The Company continued to lease such offices on a month to month basis until
March 2000 and was entitled to receive a monthly sub-lease payment of $4,300
from Arc Networks, which occupied such offices, until the lease was cancelled in
March 2000. The Company closed its offices in Boca Raton, Florida on July 23,
1999 as the related lease for such offices were
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transferred to the buyer of the assets of its former subsidiary which was
located in Boca Raton, Florida. The current base rent for occupied premises, net
of sub-lease income, approximates $1,200 per month.
Item 3. Legal Proceedings
Although the Company is a party to certain legal proceedings that have
occurred in the ordinary course of business, the Company does not believe such
proceedings to be of a material nature with the exception of the following. Due
to uncertainties in the legal process, it is at least reasonably possible that
management's view of the outcome of the following contingent liabilities will
change in the near term and there exists the possibility that there could be a
material adverse impact on the operations of the Company and its subsidiaries as
a result of such 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 $1.7 million,
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 has responded by denying
all relevant allegations and it is the Company's position that it is in no way
responsible for any liability Arc Networks may or may not have to the plaintiff
under the facts as alleged by the plaintiff and the Company intends to contest
this case vigorously. The Company's counsel has been advised that Arc Networks
entered into a settlement agreement on December 1, 1999 with the plaintiff
whereby Arc Networks agreed to perform certain work for the plaintiff and make a
certain escrow payment.
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PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters
From August 15, 1997, through July of 1999, the Company's common stock
was traded on the Over-the-Counter Bulletin Board ("OTCBB") under the symbol
COTG and since July 22, 1999 has been traded under the symbol SKCO. The
following table sets forth the reported high and low bid prices as provided by
the OTCBB for each of the quarters then ended during 1999 and 1998. Such OTCBB
bid quotations reflect interdealer prices, without retail mark-up, markdown or
commission and may not necessarily represent actual transactions.
Quarter Ending High Bid Low Bid
- -------------- -------- -------
March 31, 1998 $1.80 $1.80
June 30, 1998 $6.90 $4.20
September 30, 1998 $7.80 $3.60
December 31, 1998 $4.20 $3.00
March 31, 1999 $6.60 $2.70
June 30, 1999 $5.18 $3.30
September 30, 1999 $4.50 $3.90
December 31, 1999 $3.56 $1.50
As of March 17, 2000, the closing price of the Company's common stock
as reported by the OTCBB was $6.44 and there were approximately 18,723 holders
of record of the Company's common stock including one beneficial owner, TAL,
which owns approximately 17% of the outstanding common stock and has irrevocable
proxies on an additional 17% of the outstanding common stock.
No cash dividends were paid to the holders of the common stock during
1999, 1998 and 1997.
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ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------
Selected Statements of Operations Data
Years Ended December 31, 1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------
Revenues -- -- $ 7,882,000 $ 8,541,000 $ 7,381,000
- ----------------------------------------------------------------------------------------------------------------------
Loss from operations $ (2,330,000) $ (5,481,000) $ (6,545,000) $ (8,387,000) $ (8,620,000)
- ----------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing
operations $ 542,000 $ (5,442,000) $ (5,230,000) $ (4,953,000) $ (4,954,000)
Income (loss) from operations of
discontinued segments 638,000 (2,929,000) (7,099,000) (4,617,000) (6,406,000)
Gain (loss) on disposal of
segments 8,730,000 6,792,000 (336,000) -- --
Income (loss) before
extraordinary items 9,910,000 (1,579,000) (12,665,000) (9,570,000) (11,360,000)
Extraordinary gain -- 5,676,000 -- -- --
- ----------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 9,910,000 $ 4,097,000 $ (12,665,000) $ (9,570,000) $ (11,360,000)
- ----------------------------------------------------------------------------------------------------------------------
Basic and diluted earnings (loss)
per common share:
Income (loss) from
continuing operations $ $0.33 $ (3.33) $ (3.33) $ (3.90) $ (6.60)
Income (loss) from
operations of discontinued
segments $0.41 (1.79) (4.52) (3.00) (8.70)
Gain (loss) on disposals $5.58 4.15 (0.21) -- --
Extraordinary income -- 3.46 -- -- --
- ----------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 6.32 $ 2.49 $ (8.06) $ (6.90) $ (15.30)
- ----------------------------------------------------------------------------------------------------------------------
Dividends Declared per Common
Share -- -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
Selected Balance Sheet Data
Years Ended December 31, 1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------
Total Assets $ 9,047,000 $ 11,375,000 $ 28,983,000 $ 26,374,000 $ 26,305,000
- ----------------------------------------------------------------------------------------------------------------------
Long-term Obligations:
Debt and Capital Lease
Obligations $ -- -- -- -- $ 33,000
Subordinated Debt -- -- $ 139,000 --
- ----------------------------------------------------------------------------------------------------------------------
Total Long-term Obligations -- -- $ 139,000 -- $ 33,000
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
(A) The financial data for periods prior to 1998 has been restated to reflect
the discontinuation of the contract engineering services, telecommunications,
medical diagnostics, three dimensional products and services, electro mechanical
and electro optical products manufacturing, business consulting services and
audio products manufacturing segments.
(B) The earnings per share data for periods prior to 1999 have been restated to
reflect the 1-for-30 reverse stock split.
(C) The following factors make the
above selected financial data non-comparable for the following indicated periods
and reasons:
(1) Effective January 1, 1998, the Company converted Netsmart from a
consolidated subsidiary to an investment in unconsolidated affiliate
resulting in a decrease in total assets of approximately $6.4 million.
(2) 1999 and 1998 include expense for termination payments of executive
contracts approximating $48,000 and $1.97 million, respectively.
(3) 1995 includes expense of $3.869 million from the issuance of stock
options to consultants.
(4) 1994 includes expense of $4.14 million from the issuance of stock
options to consultants.
(5) In May 1995 the Company acquired Concept Technologies resulting in an
increase in loss from operations of discontinued segments and net loss
of approximately $553,000 for 1995.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Financial Condition - Liquidity and Capital Resources
As of December 31, 1999, the Company's working capital assets include
cash of $1.86 million, current marketable securities of $1.844 million and notes
receivable of $3.665 million. The following table calculates the working capital
that the Company has available for use in its operations as of December 31, 1999
and 1998.
- --------------------------------------------------------------------------------
Calculation of Available Working Capital
As of December 31, 1999 1998
- --------------------------------------------------------------------------------
Current assets $ 7,401,000 $ 6,214,000
Current liabilities 316,000 5,675,000
- --------------------------------------------------------------------------------
Working capital 7,085,000 539,000
Plus total net current liabilities of
discontinued segments -- 4,194,000
Less net current assets of discontinued
segments not available to the Company -- (926,000)
- --------------------------------------------------------------------------------
Working capital available for the Company's
operations $ 7,085,000 $ 3,807,000
- --------------------------------------------------------------------------------
During 1999, the Company's available working capital increased by
$3.278 million of which approximately $2 million 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 million note receivable balance was
eliminated in consolidation under generally accepted accounting principles
pursuant to Accounting Research Bulletin No. 51 "Consolidated Financial
Statements". As of December 31 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.
During 1999, the Company used net cash of $3.307 million in operating
activities and $255,000 in financing activities and generated net cash of $5.243
million from investing activities. The uses of cash in operating activities
included $2.14 million related to 1999 operations, $1.115 million related to
1998 settlements and professional fees which were accrued as of December 31,
1998 and $42,000 related to operations of discontinued segments. Cash generated
from investing activities included $12.549 million from the sale of marketable
securities and $855,000 from the disposal of Arc Networks. Cash used in
investing activities included $5.607 million for the purchase of marketable
securities, $1.557 million in advances made under notes receivable and $950,000
for an investment in GAVELNET.COM. Cash used in financing activities included
$129,000 for the purchase of treasury stock and $93,000 for payment of
discontinued subsidiaries obligations.
Sources and Uses of Working Capital Subsequent to December 31, 1999
Subsequent to December 31, 1999, significant sources of working capital
included the receipt of $690,000 of principal and interest on notes receivable
and $397,000 from the sale of marketable securities, while significant uses of
working capital includes $3.25 million in advances under new note receivable
agreements with People Solutions, enTotal.com, FutureMed and JOR (see Part I.,
Item. 1 "Current Developments"). Contingent obligations of the Company as of
December 31, 1999 includes two debt guarantees made on behalf of Arc Networks
totaling $1.730 million. In the event that Arc Networks is unable to obtain or
generate adequate working capital to make payments under its related debt
obligations, the Company could be required to make payments on Arc Network's
behalf.
Results of Operations
Revenue and Gross Profit
During the years ended December 31, 1999, 1998 and 1997, the Company
discontinued all prior-operating segments, and effective January 1, 1998
Netsmart no longer was a consolidated affiliate. As such, the Company's only
operating revenue and gross profit was Netsmart's 1997 activity, wherein
revenues approximated $7.882 million and gross profit approximated $1.727
million.
9
<PAGE>
Operating Losses
Comparing 1999 and 1998, the Company's loss from operations decreased
$3.151 million, or 57.49%, from $5.481 million for 1998 to $2.33 million for
1999. Comparing 1998 to 1997, the Company's loss from operations decreased
$1.064 million, or 16.26%, from $6.545 million for 1998 to $5.481 million for
1998. During 1999 and 1998, the Company had no revenues or gross profits and as
such, the operating losses for such periods consisted entirely of operating
expense. The operating loss for 1997 was the net result of gross profits of
$1.727 million less operating expense of $8.272 million of which $4.410 million
related to Netsmart's selling, general and administrative expense. The following
discusses the separate components of operating expense.
Professional Fees
Comparing 1999 and 1998, professional fees decreased $260,000, or
22.05%, from $1.179 million for 1998 to $919,000 for 1999. Comparing 1998 and
1997, professional fees increased $911,000, or 339.93%, from $268,000 for 1997
to $1.179 million for 1998. Professional fees during 1999 included legal fees of
$774,000 and accounting and auditing fees of $145,000. The legal fees in 1999
included $306,000 related to the disposal of Arc Networks, Trans Global and
Netsmart, $166,000 related to litigation settlements and the remaining $302,000
related to general legal matters, including proxy and change of control issues.
Professional fees during 1998 included legal fees of $1.076 million and
accounting and auditing fees of $103,000. The legal fees in 1998 included
$390,000 related to change of control issues, $205,000 related to litigation
settlements, $122,000 related to the disposal of IMI, and the remaining $359,000
related to general legal matters. Professional fees during 1997 included legal
fees of $138,000 and accounting and auditing fees of $130,000.
Salaries, Payroll Taxes and Fringe Benefits
Comparing 1999 and 1998, salaries, payroll taxes and fringe benefits
decreased $42,000, or 5.71%, from $735,000 for 1998 to $693,000 for 1999.
Comparing 1998 and 1997, salaries, payroll taxes and fringe benefits decreased
$605,000, or 45.15%, from $1.340 million for 1997 to $735,000 for 1998.
Salaries, payroll taxes and fringe benefits for 1999 consisted of $311,000 for
officer salaries, $159,000 for non-officer salaries, $56,000 for payroll taxes
and fringe benefits and $167,000 for employees who were terminated during 1999.
Salaries, payroll taxes and fringe benefits for 1998 consisted of $102,000 for
non-officer salaries, $13,000 for payroll taxes and fringe benefits and $620,000
related to terminated employees. Salaries, payroll taxes and fringe benefits for
1997 consisted of $49,000 for non-officer salaries, $5,000 for payroll taxes and
fringe benefits and $1.286 million related to terminated employees.
Other General and Administrative Expense
Comparing 1999 and 1998, other general and administrative expense
decreased $182,000, or 24.73%, from $736,000 for 1998 to $554,000 for 1999.
Comparing 1998 and 1997, other general and administrative expense increased
$36,000, or 5.14%, from $700,000 for 1997 to $736,000 for 1998. For 1998, other
general and administrative expense includes a credit of approximately $176,000
for negotiated trade payable write-offs. Excluding these trade payable
write-offs, actual general and administrative expenses for 1999 were
approximately $358,000 less than those of 1998 and actual general and
administrative expense for 1997 was $140,000 less than those of 1998. The most
significant increase in 1998 other general and administrative expense was
insurance costs, which were $245,000 in 1998 compared to $46,000 and $10,000 for
1999 and 1997, respectively. The increase in 1998 insurance costs resulted from
the one time purchase of a professional liability coverage policy in connection
with the disposal of the medical diagnostics segment.
Consulting Fees
Comparing 1999 and 1998, consulting fees decreased $251,000, or 76.29%,
from $329,000 for 1998 to $78,000 for 1999. Comparing 1998 and 1997, consulting
fees increased $201,000, or 157.03%, from $128,000 for 1997 to $329,000 for
1998. Consulting fees for 1999 included $60,000 paid to Seymour Richter pursuant
to a consulting agreement he received upon his April 20, 1999 resignation as the
Company's president and chief executive officer and $18,000 paid to a consultant
in connection with the closing of the Company's New York offices. During 1998,
consulting fees consisted of $200,000 paid to Lewis Schiller pursuant to a
consulting agreement he received upon his April 2, 1998 resignation as the
Company's president and chief executive officer, $113,000 paid to a consultant
who was evaluating financing sources for potential acquisitions and $16,000 paid
to other consultants. During 1997, $128,000 was paid to consultants who were
primarily hired to seek equity and other financing sources for the Company's
subsidiaries.
10
<PAGE>
Termination Payments for Executive Contracts
Comparing 1999 and 1998, termination payments for executive contracts
decreased $1.922 million, or 97.56%, from $1.970 million for 1998 to $48,000 for
1999. During 1997 the Company incurred no such costs. Termination payments for
executive contracts for 1999 and 1998 relate to the termination of contracts
with Mr. Schiller, a former CEO of the Company, Ms. Grazyna Wnuk (Ms. Wnuk), a
former Secretary of the Company, and Mr. George W. Mahoney (Mr. 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 1998, 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 1999, 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 Mr. Schiller and Ms.
Wnuk. Pursuant to the agreements, Mr. Schiller and Ms. Wnuk resigned as
directors and officers of the Company and its subsidiaries. In consideration for
payments of approximately $4 million to Mr. Schiller and Ms. Wnuk and the return
to the Company by Mr. Schiller of 39,667 shares of the Company's common stock he
then held, the Company purchased from Mr. Schiller and Ms. Wnuk all of their
rights under their respective employment agreements with the Company and their
stock interest in IMI. Approximately $1.6 million of the $4 million of such
payments related to Mr. Schiller and Ms. Wnuk's stock interest in the IMI sale.
The remainder of $2.4 million related to obligations of the Company, of which
approximately $561,000 was accrued at December 31, 1997, for commissions and
salaries payable to Mr. Schiller and Ms. Wnuk and $1.62 million related to
contract termination expense for 1998.
Settlement Costs
Comparing 1999 and 1998, settlement costs decreased $359,000, or
90.43%, from $397,000 for 1998 to $38,000 for 1999. Comparing 1998 and 1997,
settlement costs decreased $326,000, or 45.09%, from $723,000 for 1997 to
$397,000 for 1998. During 1999, the Company incurred $38,000 of expense to
settle claims relating to former subsidiaries. During 1998, the Company incurred
$387,000 of expense to settle claims made by former employees of the Company and
its subsidiaries and $10,000 to settle a claim relating to a disposed
subsidiary. During 1997, the Company incurred $221,000 in costs to settle claims
against the Company and former subsidiaries and $502,000 of costs related to the
acquisition and subsequent divestiture of Lafayette Industries, Inc.
("Lafayette"). On December 20, 1996, the Company purchased Lafayette.
Lafayette's Form 10-KSB for 1996 included a disclaimer of opinion by Lafayette's
independent certified public accountants. This report disclosed that there was
substantial doubt with respect to Lafayette's ability to continue as a going
concern. In addition, Lafayette's accountants reported that they were unable to
obtain written representations from Lafayette's counsel regarding litigation
relating, among other things, to financial guarantees. Because of material
uncertainties on the part of the Company with respect to Lafayette's guarantees,
pending litigation, the accuracy of representations and warranties made by
Lafayette, the accuracy and completeness of Lafayette's financial statements
with respect to material liabilities, Lafayette's financial condition and other
matters, the Company's and Lafayette's respective boards of directors determined
that, in order to avoid costly and time consuming litigation, Lafayette and the
Company would enter into an agreement providing for, among other things, the
reversal of the acquisition and the payment by the Company of approximately
$502,000 of costs incurred by Lafayette during 1996.
Related Party Bad Debt Expense
The Company had no related party bad debt expense for 1999. Comparing
1998 and 1997, related party bad debt expense decreased $210,000, or 60.87%,
from $345,000 for 1997 to $135,000 for 1998. Pursuant to a settlement agreement,
negotiated by a shareholder representative, between the Company and Mr.
Schiller, the Company forgave all amounts due from Televend, a company that was
sold to Mr. Schiller, Universal International, Inc. ("Universal"), a company of
which Ms. Wnuk is the president, and Fingermatrix, Inc., a Company of which Mr.
Schiller was a board member. During 1998 the Company recognized bad debt expense
of $86,000 related to Televend and $49,000 related to Universal. During 1997 the
Company recognized bad debt expense of $250,000 related to Universal and $95,000
related to Fingermatrix, Inc.
Related Party Commissions
The Company had no related party commissions for 1999 or 1998. During
1997 the Company recognized $358,000 of expense for commissions earned by Mr.
Schiller on the Company's investment activity pursuant to Schiller's employment
agreement that was in effect prior to his resignation in April 1998.
11
<PAGE>
Non Operating Income and Expense
Gain (Loss) from Marketable Securities
Comparing 1999 and 1998, net gain on marketable securities increased
$2.683 million, or 2,374.34%, from $113,000 for 1998 to $2.796 million for 1999.
Comparing 1998 and 1997, net gain or loss on marketable securities increased
$481,000, or 130.71%, from a net loss of $368,000 for 1997 to a net gain of
$113,000 for 1998. During 1999 the Company realized gains of $2.624 million from
the sale of Netsmart common stock, $168,000 from the sale of US Treasury Bills
and $4,000 from the sale of commercial paper. During 1998 the Company realized
gains of 195,000 from the sale of US Treasury Bills which was partially offset
by the recognition of an $82,000 loss for declines in common stock investments
which were deemed to be permanent. During 1997 the Company realized a loss of
$203,000 on the sale of Trans Global common stock to the president of Trans
Global and $165,000 on the sale of Netsmart common stock to three executives of
Netsmart.
Interest Income and Loan Fees, Related Party
During 1999, the Company earned $197,000 of interest income and loan
fees on its note receivable to Arc Networks. Interest and loan fees earned on
the Arc Network's note receivable related to 1998 were eliminated in
consolidation since prior to 1999 Arc Networks was a consolidated subsidiary of
the Company.
Other Income and Expense
Comparing 1999 and 1998, net other income increased $33,000, or 6.11%,
from $54,000 for 1998 to $87,000 for 1999. Comparing 1998 and 1997, net other
income or expense increased $219,000, or 132.72%, from net other expense of
$165,000 for 1997 to net other income of $54,000 for 1998. During 1999, the
Company earned $28,000 of interest income and loan fees on a note receivable to
an unrelated party and $59,000 of interest income on money market funds. During
1998 the Company earned $56,000 from consulting fees and incurred net other
expense of $2,000. During 1997 the Company recognized expense of $240,000 from
the write-off of a joint venture investment, interest income of $114,000 on
notes receivable and net other expense of $39,000. The 1997 net other expense of
subsidiary of $595,000 pertains to the operations of Netsmart.
Minority Interest in Income or Loss of Subsidiaries
Changes in minority in income or loss of subsidiaries are a result of
the inherent differences in the net income and loss of the related subsidiaries
from period to period. In 1999 the minority interest relates only to the
minority portion of Trans Global's income prior to the disposal of Trans Global
in the first quarter of 1999. During 1998, the minority portion of Trans
Global's income amounted to $375,000, which was partially offset by $196,000
representing the minority portion of Arc Network's loss. During 1997, the
minority interest portions of subsidiaries with losses included $2.041 million
related to Netsmart, $468,000 related to SpecTec, $449,000 related to Arc
Networks and $120,000 related to IMI. Minority interest portions of subsidiaries
with income during 1997 included $605,000 related to Trans Global and $30,000
related to 3D Tech.
Share of Income of Unconsolidated Affiliate
The share of income of unconsolidated affiliate represents the
Company's 36% share of Netsmart's income, which approximated $113,000 for 1999
and $71,000 for 1998. During 1999 the Company sold all of its interest in
Netsmart.
Income Tax Expense
The Company's income tax expense includes federal taxes of $17,000 for
1999 and includes state taxes of $8,000 and $20,000 for 1999 and 1998,
respectively. The Company had net operating loss carryforwards of approximately
$46.875 million as of December 1999, which expire during the years from 2000
through 2018.
Income or Loss from Continuing Operations
As a result of the foregoing, the Company's income from continuing
operations was $542,000, or $0.33 per share for 1999. The Company's loss from
continuing operations for 1998 was $5.442 million, or $3.33 per share, and for
1997 was $5,230,000, or $3.33 per share. 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
12
<PAGE>
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.
Discontinued Operations
The Company's income (loss) from operations of discontinued segments
and the gain or (loss) on disposal of segments are presented in the following
table.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Years ended December 31, 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------
Income (loss) from operations of discontinued segments:
Contract engineering services $ 499,000 $ 222,000 $ 1,023,000
Telecommunications -- (2,709,000) (2,734,000)
Medical diagnostics -- (577,000) (1,188,000)
Electro-optical and electro-mechanical products manufacturing -- -- (2,604,000)
Three dimensional products and services -- -- (1,636,000)
Audio products manufacturing -- -- (293,000)
Business consulting services -- 221,000
Intercompany transactions 139,000 135,000 112,000
- ----------------------------------------------------------------------------------------------------------------------
$ 638,000 $ (2,929,000) $ (7,099,000)
======================================================================================================================
Net gain (loss) from disposal of segments (net of taxes):
Telecommunications $ 7,365,000 -- --
Contract engineering services 759,000 -- --
Three dimensional products and services 481,000 $ 1,941,000 $ (465,000)
Medical diagnostics 156,000 4,883,000 --
Electro-optical and electro-mechanical products manufacturing -- (31,000) --
Business consulting services -- (1,000) --
Audio products manufacturing -- -- 129,000
Income tax expense (31,000) -- --
- ----------------------------------------------------------------------------------------------------------------------
$ 8,730,000 $ 6,792,000 $ (336,000)
======================================================================================================================
</TABLE>
Extraordinary Gain on Debt Extinguishment
On August 12, 1998, IMI consummated a settlement with the holders of
certain subordinated promissory notes, which were issued by IMI in 1994 in
connection with the acquisition of the Medical Diagnostics segment. The Company
paid approximately $1.9 million in full settlement and satisfaction of the
approximate $7.7 million outstanding balance of such notes, of which
approximately $1.6 million was paid in cash and approximately $324,000 was
applied in payment of certain promissory notes due to IMI by one of the holders
of the subordinated promissory notes. In connection with the settlement, the
Company issued 11,100 shares of its common stock, valued at $80,000, to the
holders of the subordinated promissory notes in satisfaction of IMI's
contractual obligations under the agreements relating to the 1994 acquisition of
the Medical Diagnostics segment. In connection with this settlement, the Company
recognized an extraordinary gain on debt extinguishment of approximately $5.676
million for 1998.
Net Income or Loss
As a result of the foregoing, the Company's net income for 1999 was
$9.91 million, or $6.32 per share, and for 1998 was $4.097 million, or $2.49 per
share. The Company's net loss for 1997 was $12.665 million, or $8.06 per share.
Item 8. Financial Statements and Supplementary Data
The financial statements and supplementary data begin on page F-1 of
this Form 10-K.
13
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
Set forth below is information concerning the directors and executive
officers of the registrant as of December 1999.
Name Age Position with the Company
- ---- --- -------------------------
Frank DeLape 46 Chairman of the Board and Chief Executive Officer
Richard Young 32 Director, President, Chief Operating Officer and
Chief Accounting Officer
Matthew J. Finch 32 Secretary
Mr. DeLape has been the Company's Chairman of the Board and Chief
Executive Officer ("CEO") of the Company since April 1999. He is also the
president and a director of Benchmark; a Houston, Texas based merchant banking
firm, a position he has held since 1994, and is CEO and a director of TAL, a
position he has held since the organization of TAL in March 1999. Mr. DeLape is
also a director of JOR and GAVELNET.COM.
Mr. Young has been the Company's President, Chief Operating Officer
("COO") and a director since April 1999 and has been the Company's Chief
Accounting Officer since May 1999. From 1997 through 1999, Mr. Young served in
various positions with, and eventually as a principal of, Benchmark. From 1996
until 1997, Mr. Young served as regional controller for IKON Office Solutions,
Inc., which is engaged in the office systems design and outsourcing business.
During part of 1996, Mr. Young was assistant to the president and CEO of
Learmonth & Burchette Management Systems, Plc., an English company engaged in
the application development process software business. From 1992 to 1996, Mr.
Young was employed by Price Waterhouse, LLP in various accounting positions. Mr.
Young is a certified public accountant.
Mr. Finch has been Secretary of the Company since April 1999. He is
also General Counsel to Benchmark. Mr. Finch is a 1994 graduate of the
Georgetown University Law Center. From 1994 to 1996, Mr. Finch was an associate
with the law firm of Jenkens & Gilchrist, P.C., and in 1996 and 1997, Mr. Finch
was an associate with the law firm of Akin, Gump, Strauss, Hauer & Field, LLP.
From 1997 to 1998, Mr. Finch was an associate with the law firm of Andrews &
Kurth in Houston, Texas and in 1998, Mr. Finch joined Benchmark as its General
Counsel.
Officers are elected by, and serve at the pleasure of, the board of
directors. Messrs. DeLape, Young and Finch were elected to their positions
following the resignations of Mssrs. Richter, Bright and Chaifetz.
Item 11. Executive Compensation
Summary Compensation Table
Set forth below is information concerning the Company's Chief Executive
Officer and other executive officers who received or accrued compensation from
the Company and its subsidiaries in excess of $100,000 (on an annualized basis)
during 1999, 1998 and 1997.
14
<PAGE>
<TABLE>
<CAPTION>
Long-term Compensation
Annual Compensation Awards Payouts
------------------- ------ -------
Other Securities All
Annual Restricted Underlying LTIP Other
Compen- Stock Options/ Payouts Compen-
Name and Principal Position Year Salary Bonus(1) Sation(2) Awards ($) SARs (#) ($) sation
- --------------------------- ---- ------ ----- ------ ---------- -------- --- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Frank DeLape, CEO since April
1999 1999 $170,000 -- $9,000 -- 400,0003 -- --
Richard Young, President and
COO since April 1999 1999 $92,000 -- $7,000 -- 250,0003 -- --
Seymour H. Richter, President
and CEO April 1998 through 1999 $27,000 $40,000 $61,000 -- -- -- --
April 1999 1998 $60,000 $5,000 -- -- -- -- --
George W. Mahoney, Chief 1999 $95,000 -- $48,000 -- -- -- --
Financial Officer through 1998 $202,000 $30,000 $953,000 -- -- -- --
May 1999 1997 $189,000 $65,000 $11,000 -- -- -- --
Lewis S. Schiller, CEO through 1998 $138,000 -- $3,503,000 -- -- -- --
March 1998 1997 $616,000 -- $358,000 -- -- -- --
Grazyna B. Wnuk, secretary 1998 $53,000 -- $215,000 -- -- -- --
Through March 1998 1997 $229,000 -- -- -- -- -- --
</TABLE>
(1) Mr. Richter received discretionary bonuses in 1999 and 1998 as approved
by the board of directors. Mr. Mahoney received his bonuses pursuant
to his employment agreement with the Company.
(2) Other annual compensation consists of the following:
Mr. DeLape's other annual compensation consists of car and
club membership allowances paid to him pursuant to his employment
agreement.
Mr. Young's other annual compensation consists of car
allowances paid to him pursuant to his employment agreement.
Mr. Richter's other annual compensation for 1999 includes
$56,000 paid to him pursuant to a consulting agreement for services
performed after his resignation, and $5,000 for post employment,
medical insurance reimbursements.
Mr. Mahoney's other annual compensation for 1999 represents
early termination compensation. Other annual compensation for 1998
includes, (a) a finders fee of $414,000 paid to him in connection with
the sale of IMI, a subsidiary of the Company which was sold in April
1998, (b) $350,000 paid in settlement of Mr. Mahoney's claims under his
employment agreement which provided for a lump sum payment in the event
of a change of control, (c) $186,000 for net proceeds received by him
at the time of the sale of IMI from certain IMI incentive stock
options, and (d) $3,000 for automobile and life insurance allowances.
Other annual compensation for 1997 represents automobile and life
insurance allowances to which he was entitled under his employment
agreement.
Mr. Schiller's other annual compensation for 1998 includes
$1.2 million paid to him and certain of his family members for his 10%
ownership interest in IMI, $1.9 million for the purchase of his
contract rights by the Company in April 1998 and $350,000 of amounts
accrued in connection with a January 1999 settlement agreement between
the Company and Mr. Schiller, which was paid in February 1999. Other
annual compensation for 1997 consists of commissions that Mr. Schiller
earned on the Company's investment activities, a portion of which was
paid during 1998.
Ms. Wnuk's other annual compensation for 1998 includes
$135,000 paid for her 1% ownership interest in IMI and $80,000 for the
purchase by the Company in April 1998 of her rights under her
employment agreement.
(3) Options were awarded on April 20, 1999 under the Company's 1999
Long-term Incentive Plan at an exercise price equal to the fair market
value of the Common Stock on the date of grant ($4.20). Mr. DeLape
transferred 150,000 of his options to his assignees on October 11,
1999.
15
<PAGE>
Option/SAR Grants in Last Year
The following table sets forth certain information concerning options
and stock appreciation rights granted to the named executive officers during
1999.
<TABLE>
<CAPTION>
Potential
Individual Grants Realized Value at
-----------------
Number of % of Total Assumed Annual
Securities Options/ SARs Exercise Rates of Stock Price
Underlying Granted to Or Base Appreciation
Options/SARs Employees Price Expiration For Option Term
---------------
Name Granted (#) in Year ($/Share) Date 5% 10%
- ---- ----------- ------- --------- ---- -- ---
<S> <C> <C> <C> <C> <C> <C>
Frank DeLape 400,000(1) 60% $4.20 04/19/2004 $464,000 $1,296,000
Richard Young 250,000(1) 37% $4.20 04/19/2004 $290,000 $1,860,000
</TABLE>
(1) Options vest when the Company has an aggregate market capitalization of at
least $25 million. On October 11, 1999, Mr. DeLape transferred 150,000 of
such options to his assignees.
Aggregated Option/SAR Exercises in Last Year and Year-end Option/SAR Values
The following table sets forth certain information with respect to the
unexercised options and stock appreciation rights to purchase the Common Stock
held by the named executive officers at December 31, 1999. None of the named
executive officers exercised any stock options or stock appreciation rights
during 1999.
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money
Shares Options/SARs Options/SARs
Acquired on Value At Year End (#) at Year End ($)
--------------- ---------------
Name Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
------------ ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Frank DeLape -- -- -- 400,000(2) -- --(1)
Richard Young -- -- -- 250,000 -- --(1)
</TABLE>
(1) The exercise price of the options is $4.20 and the fair market value of
the options at December 31, 1999 was $2.8125.
(2) On October 11, 1999, Mr. DeLape transferred 150,000 of such options to his
assignees.
Compensation of Directors
Mssrs. Bright and Richter, who were directors of the Company from April
1998 until April 1999, were also directors of Netsmart and Trans Global, both
former subsidiaries of the Company. As non-employee directors of Netsmart and
Trans Global, Messrs. Bright and Richter received options granted under Netsmart
and Trans Global's long-term incentive plans. In addition, in 1998, Mr. Bright
received an option to purchase 5,000 shares of the Company's common stock at an
exercise price of $7.50 per share, the fair market value of the common stock at
the date of issuance and in 1999, pursuant to the Company's 1999 Long-term
Incentive Plan received an option to purchase 3,333 shares of the Company's
common stock at an exercise price of $4.50 per share, the fair market value of
the common tock at the date of grant.
16
<PAGE>
Employment and Consulting Agreements
Effective April 21, 1999, the Company entered into three-year
employment agreements with Mr. Frank DeLape and Mr. Richard Young pursuant to
which such individuals will receive annual salaries of $250,000 and $135,000,
respectively. Pursuant to such agreements, Mr. DeLape serves as the Chairman of
the Board and CEO of the Company and Mr. Young serves as the President and COO
of the Company. The agreements require Mr. DeLape to devote such time as is
necessary to perform his duties as Chairman of the Board and CEO of the Company
and Mr. Young to devote his full time to the performance of his duties as
President and COO of the Company. The agreements provide for annual cash
bonuses, annual equity incentive awards, including the grant of stock options
and restricted stock grants, and certain fringe benefits, including life
insurance, severance compensation and an automobile allowance. The options
granted to Messrs. DeLape and Young during 1999 were granted pursuant to their
employment agreements. Their employment agreements also provide for additional
option purchases whereby on the last day of each fiscal year, provided they have
met or exceeded performance objectives agreed upon by the board of directors and
them for such fiscal year, Mssr. DeLape and Young shall have the right to
purchase from the Company additional options with respect to 250,000 and 100,000
shares of Common Stock, respectively, which options shall have a per share
exercise price equal to the closing price of the Common Stock on the trading day
immediately prior to the date of purchase. Under the terms of his employment
agreement, if Mr. DeLape is terminated without cause or resigns with good
reason, including a change in control of the existing board of directors, he is
entitled to receive a lump-sum payment equal to his salary for the remainder of
the term, plus the bonuses he would have received for the remainder of the term
and other benefits which he would have been entitled to for the remainder of the
term. Under the terms of his employment agreement, if Mr. Young is terminated
without cause or resigns with good reason, including a change in control of the
existing board of directors, he is entitled to receive a lump-sum payment equal
to the lessor of his base multiplied by the number of years and fractional
portions thereof remaining under the employment agreement or his base salary for
a one year term, plus the bonuses he would have received for the then current
year and other benefits which he would have been entitled to for the remainder
of the term.
Contemporaneously with Mr. Richter's resignation as an officer and
director of the Company in April 1999, Mr. Richter and the Company entered into
a consulting agreement for a nine-month period expiring in December 1999.
Pursuant to such agreement, Mr. Richter received a monthly consulting fee of
$6,250.
Mr. Mahoney, Mr. Schiller and Ms. Wnuk were parties to employment
agreements with the Company. Mr. Mahoney's agreement was terminated by mutual
consent in May 1999 and Mr. Mahoney received $48,000 in consideration of such
early termination. Mr. Schiller and Ms. Wnuk's agreements were terminated in
April 1998 and the Company purchased from Mr. Schiller and Ms. Wnuk all of their
rights under their contracts. The compensation paid to Mr. Mahoney, Mr. Schiller
and Ms. Wnuk pursuant to their employment agreements and to Mr. Schiller in
connection with a certain settlement agreement is reflected in the Summary
Compensation Table.
17
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management
Set forth below is information as of March 17, 2000, based on
information provided to the Company by the individuals named below, as to each
person owning of record or known by the Company to own beneficially, 5% or more
of the Company's Common Stock, each director and nominee for director and all
officers and directors as a group.
Name and Address(1) Shares Percent
- ---------------- ------ -------
Technology Acquisitions, Ltd. 533,326(2) 34.2%
700 Gemini Street
Houston, Texas 77058
Frank DeLape 533,326(3) 34.2%
700 Gemini Street
Houston, Texas 77058
Richard Young --(4) --
700 Gemini Street
Houston, Texas 77058
All directors and officers as a 533,326(3),(4),(5) 34.2%
group (three individuals)
(1) Unless otherwise indicated, each person or entity has the sole voting
and sole investment power and direct beneficial ownership of the shares.
(2) Represents (a) 266,667 shares of Common Stock owned by TAL, and (b)
266,660 shares of Common Stock for which TAL holds irrevocable proxies.
(3) Represents shares owned by or subject to proxies held by TAL. Because
Mr. DeLape is the chief executive officer of TAL, he has the right to
vote the shares owned by TAL. Does not include 400,000 shares of Common
Stock, which are the subject of an option held by Mr. DeLape and his
assigns. The option does not become exercisable until the Company's
aggregate market capitalization, as defined in the option, is at least
$25,000,000. Due to such vesting contingency, it is not treated as
being presently exercisable. Assuming satisfaction of the $25,000,000
aggregate market capitalization vesting contingency, the shares which
are the subject of such option will, assuming the full exercise of such
option, represent approximately 20% of the outstanding shares of Common
Stock.
(4) Does not include 250,000 shares of Common Stock which are the subject
of an option held by Mr. Young. The option does not become exercisable
until the Company's aggregate market capitalization is at least
$25,000,000. Due to such vesting contingency, it is not treated as
being presently exercisable. Assuming satisfaction of the $25,000,000
aggregate market capitalization vesting contingency, the shares which
are the subject of such option will, assuming the full exercise of such
option, represent approximately 14% of the then outstanding shares of
Common Stock.
(5) Does not include the 650,000 shares of Common Stock described in
footnotes 3 and 4 to this table or an additional 15,000 shares of
Common Stock which are the subject of an option held by another
officer. Such option is subject to the same vesting contingency as the
options described in footnotes 3 and 4 to this table. Due to such
vesting contingency, it is not treated as being presently exercisable.
Accordingly, assuming satisfaction of the $25,000,00 aggregate market
capitalization vesting contingency, the shares which are the subject of
the options held by all officers and directors as a group will,
assuming the full exercise of such options, represent approximately 30%
of the then outstanding shares of Common Stock.
18
<PAGE>
Item 13. Certain Relationships and Related Transactions
In March 1999, the Company entered into an agreement with TAL, pursuant
to which the Company sold all of its 67% equity interest in Arc Networks to TAL
for $850,000. The sale was completed in June 1999.
On April 20, 1999, TAL purchased 266,667 shares, or approximately 17.1%
of the outstanding shares of Common Stock, from nine shareholders of the Company
in a private transaction, for an aggregate purchase price of $2,000,000 or $7.50
per share. Contemporaneously with such purchase, TAL was also granted options to
purchase an aggregate of additional 266,660 shares of the Common Stock from six
other shareholders of the Company, such options having a term of 13 months and
providing for an aggregate exercise price of $2,799,925 or $10.50 per share. TAL
has proxies with respect to all of the shares covered by such options during the
13-month term thereof. Accordingly, as a consequence of such purchase and
proxies, TAL owns and/or has the right to vote approximately 34% of the
outstanding shares of the Company's Common Stock.
In April and June 1999, the Company sold an aggregate of 792,624 shares
of the common stock of Netsmart owned by it to a group of investors, including
officers and directors of Netsmart, pursuant to a March 25, 1999 agreement
between the Company, Netsmart, and such investors. All of such shares were sold
at $2.014 per share. Mr. Edward D. Bright, who was then a director of the
Company, purchased 62,500 of such shares on the same terms as the other
investors.
On June 10, 1999 the Company executed an agreement between the Company
and Benchmark whereby the Company reimburses Benchmark for its allocable portion
of shared office and administrative support services. Benchmark is a privately
held company, which is owned by Mr. DeLape, the Company's CEO and Chairman of
the Board. During 1999 the Company paid Benchmark $117,000 pursuant to the
agreement and paid an additional $29,000 for reimbursement of a portion of the
March 1999 and April 1999 salaries of Mr. DeLape, Mr. Young and Mr. Finch.
Additionally, the Company paid Mr. DeLape $11,000 for furniture and leasehold
improvements sold by Mr. DeLape to the Company. The Company believes that the
amounts paid to Benchmark and Mr. DeLape approximate those that would have been
paid if the transactions had been conducted at arms length.
On September 7, 1999, the Company acquired 100,000 12% convertible
preferred shares of GAVELNET.COM for approximately $1 million. The preferred
shares hold standard preferences to the common shares, hold voting rights, carry
a 12% dividend, payable in-kind, and are convertible at $1.25 into 800,000
common shares of GAVELNET.COM. GAVELNET.COM is a start-up company, which was
incorporated on July 20, 1999 as a Delaware company and operates an Internet
auction site offering premium collectibles, decorative and fine art items in an
entertaining, interactive online format, which targets affluent buyers.
GAVELNET.COM's preferred and common shares do not have readily determinable
values and as such are not considered marketable securities. Concurrent with the
Company's investment in GAVELNET.COM, TAL invested $1 million under
substantially the same terms. GAVELNET.COM will require additional funding in
addition to the investments described herein. Prior to the Company's investment
in GAVELNET.COM, certain affiliates and related parties of Benchmark acquired
approximately 4.1 million common shares, on a fully diluted basis, of
GAVELNET.COM for financial investments and services rendered that enabled
GAVELNET.COM to clear significant hurdles in validating its business model. Mr.
DeLape is a member of the board of directors of GAVELNET.COM.
In March 2000, the Company made an investment in JOR whereby the
Company loaned JOR $250,000 pursuant to a note bearing interest at 13% with
principal due thirteen months from the date of execution. In addition, the
Company received warrants to purchase 137,500 shares of JOR's common shares.
JOR, founded by Benchmark, Kazanjian Brothers, Inc., an 82 year old estate
jeweler, and JOR's management is positioning itself to become the leading
provider of web based business to business e-commerce solutions to the jewelry
industry. Through JOR, lifestyle portal sites, general auction sites, and
conventional jewelry retailers will have real time access to "one-of-a-kind"
pieces of fine and estate jewelry from the most elite jewelry dealers in the
world. Moreover through JOR, jewelers are able to automate the inventory
management process thereby lowering the costs associated with procurement,
evaluation, authentication and distribution of fine and estate jewelry. Mr.
DeLape is a member of the board of directors of JOR.
19
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
1. Financial Statements
F-3 Report of Moore Stephens, P.C. Independent Certified
Accountants
F-4 Consolidated Balance Sheets as of December 31, 1999 and 1998
F-5 Consolidated Statements of Operations for the Years Ended
December 31, 1999, 1998 and 1997
F-6 Consolidated Statements of Comprehensive Income (Loss) for
the Years Ended December 31, 1999, 1998 and 1997
F-7 - F-8 Consolidated Statements of Cash Flows for the Years Ended
December 31, 1999, 1998 and 1997
F-9 Consolidated Statements of Shareholders' Equity for the
Years Ended December 31, 1999, 1998 and 1997
F-10 - F-28 Notes to Consolidated Financial Statements
2. Financial Statement Schedules
None
3. Reports on Form 8-K
None
4.Exhibits
(2.1) Agreement dated February 25, 1999 between the Company and Trans
Global.(1)
(2.2) Agreement dated March 23, 1999 among the Company, Arc Networks and
Technology Acquisition, Ltd.(2)
(2.2) Agreement dated March 25, 1999 among the Company, Netsmart and
Anthony Grisanti, as representative of the purchasers.(2)
(3)(i) Certificate of Incorporation.(3)
(3)(ii) By-laws.(3)
(10.1) Consulting agreement dated April 29, 1999 between the Company and
Seymour Richter.(4)
(10.2) Employment agreement dated April 21, 1999 between the Company and
Frank DeLape.(4)
(10.3) Employment agreement dated April 21, 1999 between the Company and
Richard Young.(4)
(10.4) Stock option agreement between the Company and Frank DeLape.(4)
(10.5) Stock option agreement between the Company and Richard Young.(4)
(10.6) Letter agreement dated May 24, 1999 between the Company and George W.
Mahoney.(5)
(21) List of Subsidiaries of Registrant.
(27) Financial Data Schedule.(6)
- -------
(1) Filed as an exhibit to the Company's report on Form 8-K dated February 26,
1999, and incorporated herein by reference.
(2) Filed as an exhibit to the Company's report on Form 8-K dated March 23,
1999, and incorporated herein by reference.
(3) Filed as an exhibit to the Company's annual report on Form 10-K for the
fiscal year ended July 31, 1994 and incorporated herein by reference.
(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.
(6) Filed only to the SEC in electronic format.
20
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 COMPANY, LTD.
Date: March 17, 2000 /s/________________________________
Frank DeLape
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following personal on behalf of the Registrant and
in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/________________ Chief Executive Officer March 17, 2000
Frank DeLape (Principal Executive
Officer and Director)
/s/________________ President and Chief Operating Officer March 17, 2000
Richard Young (Principal Financial and
Accounting Officer)
/s/________________ Corporate Secretary March 17, 2000
Matthew Finch
21
<PAGE>
The Sagemark Company Ltd. and Subsidiaries
Index to Attached Exhibits
December 31, 1999
Page
----
1. 21 List of Subsidiaries of the Registrant Ex-2
2. 27 Financial Data Schedule (filed only in electronic
format with the SEC) n/a
3. F-1 Financial Statements F-1
22
<PAGE>
The Sagemark Company Ltd., Ltd.
December 31, 1998
Exhibit 21 List of Subsidiaries of the Registrant
Company State of Incorporation
- ------- ----------------------
The Sagemark Companies, Ltd. New York
SIS Capital Corp. Delaware
Sagemark Capital LP Delaware
23
<PAGE>
THE SAGEMARK COMPANIES LTD. AND SUBSIDIARIES
FINANCIAL STATEMENTS
DECEMBER 31, 1999
F-1
<PAGE>
- --------------------------------------------------------------------------------
The Sagemark Companies Ltd. and Subsidiaries
Financial Statements
December 31, 1999
Index
- --------------------------------------------------------------------------------
Independent Auditor's Report F-3
Consolidated Balance Sheets - December 31, 1999 and 1998 F-4
Consolidated Statements of Operations - Years Ended
December 31, 1999, 1998 and 1997 F-5
Consolidated Statements of Comprehensive Income (Loss)
- Years Ended December 31, 1999, 1998 and 1997 F-6
Consolidated Statements of Cash Flows - Years Ended
December 31, 1999, 1998 and 1997 F-7 - F-8
Consolidated Statements of Shareholders' Equity (Deficit)
- Years Ended December 31, 1999, 1998 and 1997 F-9
Notes to Consolidated Financial Statements F-10 - F-28
- --------------------------------------------------------------------------------
F-2
<PAGE>
INDEPENDENT AUDITOR'S REPORT
- --------------------------------------------------------------------------------
To the Board of Directors and Stockholders of
The Sagemark Companies Ltd.
Houston, Texas
We have audited the accompanying consolidated balance sheets of The
Sagemark Companies Ltd. and its subsidiaries as of December 31, 1999 and 1998,
and the related consolidated statements of operations, comprehensive income
(loss), shareholders' equity (deficit), and cash flows for each of the three
years in the period ended December 31, 1999. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
The Sagemark Companies Ltd. and its subsidiaries as of December 31, 1999 and
1998, and the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 1999, in conformity
with generally accepted accounting principles.
MOORE STEPHENS, P.C.
Certified Public Accountants,
Cranford, New Jersey
March 18, 2000
F-3
<PAGE>
- --------------------------------------------------------------------------------
The Sagemark Companies Ltd. and Subsidiaries
Consolidated Balance Sheets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
As of December 31, 1999 1998
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,860,000 $ 179,000
Notes receivable, related party 2,976,000 --
Marketable securities, current 1,844,000 5,092,000
Notes receivable, other 689,000 --
Other current assets 32,000 17,000
Net current assets of discontinued segments -- 926,000
- ---------------------------------------------------------------------------------------------------------------------
Total current assets 7,401,000 6,214,000
Investment in non marketable securities 950,000 --
Long-term note receivable, related party 420,000 420,000
Marketable securities, related party 190,000 --
Other long-term assets 86,000 2,000
Net assets of discontinued segments -- 3,979,000
Investment in unconsolidated affiliate -- 760,000
- ---------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 9,047,000 $ 11,375,000
- ---------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
- ---------------------------------------------------------------------------------------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 181,000 $ 452,000
Income taxes payable 48,000 101,000
Accrued dividends 44,000 22,000
Subordinated debt 27,000 27,000
Other current liabilities 16,000 36,000
Net current liabilities of discontinued segments -- 4,194,000
Accrued litigation settlement costs -- 843,000
- ---------------------------------------------------------------------------------------------------------------------
Total current liabilities 316,000 5,675,000
- ---------------------------------------------------------------------------------------------------------------------
MINORITY INTEREST -- 6,367,000
- ---------------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (footnote 12 and 19)
- ---------------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY (DEFICIT)
- ---------------------------------------------------------------------------------------------------------------------
Preferred stock, par value $0.01 per share 3,000 3,000
Common stock, par value $0.01 per share, (25,000,000 shares authorized,
1,640,343 shares issued and 1,560,247 shares outstanding as of December 31,
1999 and 1,635,133 shares issued and 1,595,584 shares outstanding as of
December 31, 1998) 16,000 16,000
Additional paid-in-capital, common stock 58,155,000 58,188,000
Accumulated other comprehensive income (loss) (276,000) 52,000
Accumulated deficit (48,920,000) (58,808,000)
Less common stock in treasury (247,000) (118,000)
- -------------------------------------------------------------------------------------------------------------------
Total shareholders' equity (deficit) 8,731,000 (667,000)
- ---------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) $ 9,047,000 $ 11,375,000
- ---------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
</TABLE>
F-4
<PAGE>
- --------------------------------------------------------------------------------
The Sagemark Companies Ltd. and Subsidiaries
Consolidated Statements of Operations
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended December 31, 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues -- -- $ 7,882,000
Cost of sales -- -- 6,155,000
- ---------------------------------------------------------------------------------------------------------------------
Gross profit -- -- 1,727,000
- ---------------------------------------------------------------------------------------------------------------------
Operating expenses
Professional fees $ 919,000 $ 1,179,000 268,000
Salaries, payroll taxes and fringe benefits 693,000 735,000 1,340,000
Other general and administrative expenses 554,000 736,000 700,000
Consulting fees 78,000 329,000 128,000
Termination payments for executive contracts 48,000 1,970,000 --
Settlement costs 38,000 397,000 723,000
Related party bad debt expense -- 135,000 345,000
Subsidiary's selling, general and administrative expense -- -- 4,410,000
Related party commissions -- -- 358,000
- ---------------------------------------------------------------------------------------------------------------------
Total operating expenses 2,330,000 5,481,000 8,272,000
- ---------------------------------------------------------------------------------------------------------------------
Loss from operations (2,330,000) (5,481,000) (6,545,000)
Gain from marketable securities, related party 2,624,000 -- --
Interest income and loan fees, related party 197,000 -- --
Gain (loss) from marketable securities, other 172,000 113,000 (368,000)
Other income (expense), net 87,000 54,000 (165,000)
Subsidiary's other expense, net -- -- (595,000)
- ---------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations before minority
interest, share of income of unconsolidated affiliate and 750,000 (5,314,000) (7,673,000)
income taxes
Minority interest in (income) loss of subsidiaries (296,000) (179,000) 2,443,000
Share of income of unconsolidated affiliates 113,000 71,000 --
Income tax expense (25,000) (20,000) --
- ---------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations 542,000 (5,442,000) (5,230,000)
Discontinued operations:
Income (loss) from operations of discontinued segments 638,000 (2,929,000) (7,099,000)
Gain (loss) from disposal of segments (net of taxes of $31,000
for 1999) 8,730,000 6,792,000 (336,000)
- ---------------------------------------------------------------------------------------------------------------------
Income (loss) before extraordinary item 9,910,000 (1,579,000) (12,665,000)
Extraordinary gain on debt extinguishment -- 5,676,000 --
- ---------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 9,910,000 $ 4,097,000 $ (12,665,000)
- ---------------------------------------------------------------------------------------------------------------------
Amounts available to common shareholders:
Income (loss) from continuing operations, less preferred
dividends of $22,000 for both 1999 and 1998 $ 520,000 $ (5,464,000) $ 5,230,000)
Net income (loss) less preferred dividends of $22,000 for both
1999 and 1998 $ 9,888,000 $ 4,075,000 $ (12,665,000)
Weighted average common shares outstanding 1,563,579 1,638,492 1,571,308
Basic and diluted income (loss) per common share:
Income (loss) from continuing operations $ 0.33 $ (3.33) $ (3.33)
Income (loss) from operations of discontinued segment 0.41 (1.79) (4.52)
Gain (loss) from disposal of segment 5.58 4.15 (0.21)
Extraordinary gain on debt extinguishment -- 3.46 --
- ---------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 6.32 $ 2.49 $ (8.06)
- ---------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
</TABLE>
F-5
<PAGE>
- --------------------------------------------------------------------------------
The Sagemark Companies Ltd. and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended December 31, 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income (loss) $ 9,910,000 $ 4,097,000 $ (12,665,000)
- ---------------------------------------------------------------------------------------------------------------------
Other comprehensive income (expense):
Unrealized holding gains on available for sale securities 1,357,000 329,000 (132,000)
Reclassification for realized (gains) losses on available for
sale securities (1,685,000) (161,000) --
- ---------------------------------------------------------------------------------------------------------------------
Total unrealized investment holding income (expense) (328,000) 168,000 (132,000)
Unrealized gain (loss) on foreign exchange translation -- -- (86,000)
- ---------------------------------------------------------------------------------------------------------------------
Total other comprehensive income (expense) (328,000) 168,000 (218,000)
- ---------------------------------------------------------------------------------------------------------------------
Comprehensive income (loss) $ 9,582,000 $ 4,265,000 $ (12,883,000)
- ---------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
</TABLE>
F-6
<PAGE>
- --------------------------------------------------------------------------------
The Sagemark Companies Ltd. and Subsidiaries
Consolidated Statements of Cash Flows
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended December 31, 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income (loss) from continuing operations $ 542,000 $ (5,442,000) $ (5,230,000)
Gain (loss) on disposal of segments 8,730,000 6,792,000 (336,000)
Extraordinary gain on debt extinguishment -- 5,676,000 --
- ---------------------------------------------------------------------------------------------------------------------
9,272,000 7,026,000 (5,566,000)
Adjustments to reconcile loss from continuing operations to net cash used in
continuing operations:
(Gain) loss on disposal of segments (8,730,000) (6,792,000) 336,000
Gain on sale of marketable securities, related party (2,624,000) -- --
Minority interest in net income (loss) of subsidiaries 296,000 179,000 (2,443,000)
(Gain) loss on sale of marketable securities, other (172,000) (113,000) 368,000
Other non-cash components of operating activities (105,000) 58,000 351,000
Extraordinary gain on debt extinguishment -- (5,676,000) --
Related party bad debt expense -- 135.000 345,000
Subsidiaries trade receivable bad debt expense -- -- 814,000
Subsidiaries depreciation and amortization -- -- 619,000
Subsidiaries write-off of deferred offering costs -- -- 480,000
Subsidiaries impaired asset write-offs -- -- 415,000
Subsidiaries non-cash expense from issuance of stock options -- -- 300,000
Change in assets and liabilities:
(Increase) decrease in assets:
Other current assets (15,000) (12,000) 193,000
Subsidiaries trade receivables -- -- (711,000)
Increase (decrease) in liabilities:
Accrued litigation settlement costs (843,000) 527,000 316,000
Accounts payable (271,000) (857,000) 826,000
Other current liabilities (73,000) (391,000) 120,000
- ---------------------------------------------------------------------------------------------------------------------
Net cash used in continuing operations (3,265,000) (5,916,000) (3,237,000)
- ---------------------------------------------------------------------------------------------------------------------
Income (loss) from operations of discontinued segments 638,000 (2,929,000) (7,099,000)
Adjustments to reconcile loss from discontinued operations to net
cash used by discontinued operations:
Net change in assets and liabilities (680,000) (1,290,000) (297,000)
Depreciation and amortization -- 1,447,000 5,926,000
Bad debt expense -- 684,000 2,449,000
Loss on disposal of fixed assets -- -- 324,000
- ---------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) discontinued operations (42,000) (2,088,000) 1,303,000
- ---------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (3,307,000) (8,004,000) (1,934,000)
- ---------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
- ---------------------------------------------------------------------------------------------------------------------
Proceeds from sale of marketable securities, other 9,052,000 8,967,000 97,000
Investment in marketable securities (5,607,000) (13,761,000) (20,000)
Proceeds from sale of marketable securities, related party 3,497,000 -- --
Investment in non marketable securities (950,000) -- --
Advances made on notes receivable, related party (868,000) (49,000) (220,000)
Net proceeds from disposal of segments 855,000 14,994,000 --
Advances made on notes receivable, other (689,000) -- --
Other net investing activities (83,000) 98,000 (346,000)
Collections on notes receivable, related party 36,000 -- 342,000
Cash of affiliate converted to an equity method investment -- (855,000) --
Capitalized software development costs -- -- (462,000)
- ---------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 5,243,000 9,394,000 (609,000)
- ---------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
(continued)
</TABLE>
F-7
<PAGE>
- --------------------------------------------------------------------------------
The Sagemark Companies Ltd. and Subsidiaries
Consolidated Statements of Cash Flows
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended December 31, 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Purchase treasury stock (129,000) (118,000) --
Payment of discontinued segments debt obligations (93,000) (1,620,000) --
Payment for fractional shares upon 1-for-30 reverse split (33,000) -- --
Other financing activities -- (121,000) 120,000
Value of common stock returned as part of termination payments
for executive contracts -- (223,000) --
Proceeds from exercise of subsidiary's stock options -- -- 1,958,000
Net advances from an asset based lender -- -- 345,000
Cost of subsidiaries issuance of common stock -- -- (75,000)
- ---------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (255,000) (2,082,000) 2,348,000
- ---------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 1,681,000 (692,000) (195,000)
Cash and cash equivalents at beginning of year 179,000 871,000 1,066,000
- ---------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 1,860,000 $ 179,000 $ 871,000
- ---------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
- ---------------------------------------------------------------------------------------------------------------------
Cash paid during the year for:
Interest $ 1,000 $ 12,000 $ 295,000
Income taxes $ 109,000 -- --
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
SUPPLEMENTAL DISCLOSURES OF NON CASH INVESTING AND FINANCING ACTIVITIES
- --------------------------------------------------------------------------------
During the year ended December 31, 1999
- --------------------------------------------------------------------------------
o As of December 31, 1998, Arc Networks was a consolidated subsidiary and a
$2 million note receivable balance, advanced by the Company to Arc
Networks, was eliminated in consolidation. As of December 31 1999, the
Company has sold all of its equity investment in Arc Networks, and
accordingly, the note receivable balance is not eliminated, resulting in
a non cash increase in notes receivable for 1999.
- --------------------------------------------------------------------------------
During the year ended December 31, 1998
- --------------------------------------------------------------------------------
o In lieu of cash payment, the Company issued 11,100 shares of common stock
valued at $80,000.
o In connection with the termination of an executive's contract, received
1,190,000 shares of common stock previously issued to executive valued at
$223,000, which was recorded as a reduction of contract termination
expense.
o Effective January 1, 1998, the Company converted Netsmart Technologies,
Inc. ("Netsmart"), from a consolidated subsidiary to an investment in
unconsolidated affiliate. As a result, the following balances that were
included in the December 31, 1997 balance sheet are not included for
1998: $84,000 of prepaid and other current assets, $2.2 million of net
receivables, $542,000 of excess of accumulated costs over billings,
$308,000 of property, plant and equipment, $3.1 million of customer
lists, $183,000 of capitalized software development costs, $13,000 of
other assets, $2.1 million of accounts payable and accrued expense, $1.1
million of interim billings in excess of costs and estimated profits,
$955,000 of current debt obligations, $23,000 of current capitalized
lease obligations and $8,150,000 of minority interest. When the segment
was converted to an investment in unconsolidated affiliate, the resulting
investment balance was in excess of the Company's ownership share in the
affiliate's equity by $5.7 million and such excess was credited to
additional paid-in capital. The Company's investment in the
unconsolidated affiliate amounted to $689,000 at the date of the
conversion.
- --------------------------------------------------------------------------------
During the year ended December 31, 1997
- --------------------------------------------------------------------------------
o In lieu of cash payment, the Company issued 1,223,225 shares of common
stock valued at $73,000. o Netsmart incurred non-cash expense from the
issuance of common stock valued at $300,000 for the acquisition of
certain assets.
See Notes to Consolidated Financial Statements.
(concluded)
F-8
<PAGE>
- --------------------------------------------------------------------------------
The Sagemark Companies Ltd. and Subsidiaries
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Consolidated Statements of Shareholders' Equity (Deficit) - Years Ended December 31, 1996 through December 31, 1999
- -----------------------------------------------------------------------------------------------------------------------
Common Additional
Preferred Common Stock, Paid-in
Shares Shares Preferred Par Capital, Common
Outstanding Outstanding Stock Value Stock
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance December 31, 1996 as
previously reported 25,853 45,795,828 $ 118,000 $ 458,000 $ 52,005,000
1-for-30 reverse stock split
effective July 22, 1999 -- (44,269,299) -- (443,000) 443,000
- -----------------------------------------------------------------------------------------------------------------------
BALANCE, December 31, 1996 25,853 1,526,529 118,000 15,000 52,448,000
- -----------------------------------------------------------------------------------------------------------------------
Convert Series A Preferred stock (22,891) 96,396 (115,000) 1,000 114,000
Stock issued in lieu of cash
payments -- 40,775 -- -- 73,000
Unrealized loss on foreign exchange
translation -- -- -- -- --
Unrealized investment holding losses
-- -- -- -- --
Net loss -- -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------
BALANCE, December 31, 1997 2,962 1,663,700 3,000 16,000 52,635,000
- -----------------------------------------------------------------------------------------------------------------------
Convert affiliate to equity method
investment -- -- -- -- 5,696,000
Stock issued in lieu of cash
payments -- 11,100 -- -- 80,000
Cancellation of common stock -- (39,667) -- -- (223,000)
Unrealized investment holding gains
-- -- -- -- --
Net income -- -- -- -- --
Preferred dividends -- -- -- -- --
Cost of treasury shares acquired -- -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------
BALANCE, December 31, 1998 2,962 1,635,133 3,000 16,000 58,188,000
- -----------------------------------------------------------------------------------------------------------------------
Fractional shares adjustment and
payment on 1-for-30 reverse split -- 5,210 -- -- (33,000)
Unrealized investment holding gains
-- -- -- -- --
Net income -- -- -- -- --
Preferred dividends -- -- -- -- --
Cost of treasury shares acquired -- -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------
BALANCE, December 31, 1999 2,962 1,640,343 $ 3,000 $ 16,000 $ 58,155,000
- -----------------------------------------------------------------------------------------------------------------------
(continued)
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
- --------------------------------------------------------------------------------
The Sagemark Companies Ltd. and Subsidiaries
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Consolidated Statements of Shareholders' Equity (Deficit) - Years Ended December 31, 1996 through December 31, 1999
- -------------------------------------------------------------------------------------------------------------------
Accumulated Total
Other Less Common Shareholders'
Comprehensive Accumulated Stock in Treasury Equity
Income (Loss) Deficit (Deficit)
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance December 31, 1996 as
previously reported $ 102,000 $ (50,218,000) -- $ 2,465,000
1-for-30 reverse stock split
effective July 22, 1999 -- -- -- --
- -------------------------------------------------------------------------------------------------------
BALANCE, December 31, 1996 102,000 (50,218,000) -- 2,465,000
- -------------------------------------------------------------------------------------------------------
Convert Series A Preferred stock -- -- -- --
Stock issued in lieu of cash
payments -- -- -- 73,000
Unrealized loss on foreign exchange
translation (86,000) -- -- (86,000)
Unrealized investment holding losses
(132,000) -- -- (132,000)
Net loss -- (12,665,000) -- (12,665,000)
- -------------------------------------------------------------------------------------------------------
BALANCE, December 31, 1997 (116,000) (62,883,000) -- (10,345,000)
- -------------------------------------------------------------------------------------------------------
Convert affiliate to equity method
investment -- -- -- 5,696,000
Stock issued in lieu of cash
payments -- -- -- 80,000
Cancellation of common stock -- -- -- (223,000)
Unrealized investment holding gains
168,000 -- -- 168,000
Net income -- 4,097,000 -- 4,097,000
Preferred dividends -- (22,000) -- (22,000)
Cost of treasury shares acquired -- -- $ (118,000) (118,000)
- -------------------------------------------------------------------------------------------------------
BALANCE, December 31, 1998 52,000 (58,808,000) (118,000) (667,000)
- -------------------------------------------------------------------------------------------------------
Fractional shares adjustment and
payment on 1-for-30 reverse split -- -- -- (33,000)
Unrealized investment holding gains
(328,000) -- -- (328,000)
Net income -- 9,910,000 -- 9,910,000
Preferred dividends -- (22,000) -- (22,000)
Cost of treasury shares acquired -- -- (129,000) (129,000)
- -------------------------------------------------------------------------------------------------------
BALANCE, December 31, 1999 $ (276,000) $ (48,920,000) $ (247,000) $ 8,731,000
- -------------------------------------------------------------------------------------------------------
(concluded)
</TABLE>
See Notes to Consolidated Financial Statements.
F-9
<PAGE>
The Sagemark Companies Ltd. and Subsidiaries
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
Years Ended December 31, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
(1) Summary of Significant Accounting Policies
(a) Nature of Operations - The Sagemark Companies, Ltd., (the "Company",
"Sagemark" or the "Registrant") is a publicly held holding company which has, or
has had, controlling interests, (either directly or indirectly through its
wholly owned subsidiary, SIS Capital Corp. ("SISC")), in its consolidated
subsidiaries which previously operated in various business segments throughout
the United States. During 1999, 1998 and 1997, the Company discontinued all of
its operating segments and as of December 31, 1999, the Company has cash of
$1.86 million and investments consisting of $1.844 million of marketable
securities and $950,000 of non-marketable securities. Additionally, the Company
has advanced funds under notes receivable with outstanding balances as of
December 31, 1999 of $3.67 million.
Because the Company does not have any consolidated operating subsidiaries that
are not classified as discontinued segments, the Company will have no operating
revenues, direct costs or gross profit until such time, if ever, that other
subsidiaries are acquired. During 1999 the Company formed a wholly owned
subsidiary, Sagemark Capital LP ("Sagemark Capital"), through which the Company
anticipates future investments will be made. The operating losses of the Company
in the near future 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.
Currently, the Company has seven employees with annual base salaries aggregating
approximately $753,000, 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 its marketable securities and interest earned on outstanding
notes receivable, 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.
(b) 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.
(c) Prior Operations - The prior operating segments of the Company consisted of
the following:
(i) Netsmart Technologies, Inc. ("Netsmart"), through its wholly owned
subsidiary, Creative Socio-Medics, Corp., ("CSM") is a supplier of enterprise
wide software solutions for the mental health and behavioral health market
place. Netsmart is a publicly held company whose stock is traded on the NASDAQ
stock market under the ticker symbol "NTST". During 1997 the Company had
effective control of Netsmart's board of directors and as such, the Company's
investment in Netsmart was accounted for as a consolidated subsidiary and
comprised the Company's Medical Information services segment. In April of 1998,
the Company's control of Netsmart's board was diminished and as of such date,
the Company's investment in Netsmart was accounted for as an unconsolidated
affiliate under the equity method of accounting. On March 25, 1999, the Company
and SISC entered into an agreement (the "Netsmart Transaction") 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 million. The Netsmart
Transaction 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 Netsmart Transaction, the Company had the option to not
sell up to 200,000 of the additional shares. In addition,
F-10
<PAGE>
The Sagemark Companies Ltd. and Subsidiaries
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
Years Ended December 31, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
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 1999, SISC completed the sale of 792,624 of such shares for approximately
$1.6 million 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 Company's sale of Netsmart shares pursuant to 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 no longer
qualified to be accounted for under the equity method of accounting and was
accounted for as an available for sale marketable security. Subsequent to the
consummation of the Netsmart Transaction, the Company sold its remaining 201,875
shares of Netsmart common stock on the open market for approximately $1.5
million.
(ii) Trans Global Services, Inc., ("Trans Global"), and its subsidiaries,
Avionics-Research Holdings, ("Avionics"), and Resource Management International,
Inc., ("RMI"), which provide engineers, designers and technical personnel on a
temporary basis pursuant to contracts with major corporations, was formerly the
Contract Engineering Services segment. Trans Global is a publicly held company
whose stock is traded on the NASDAQ stock market under the ticker symbol "TGSI".
During 1998 and 1997 the Company had effective control of Trans Global's board
of directors and owned approximately 40%, or 1,529,994 shares, of the
outstanding common stock of Trans Global and the Company's investment in Trans
Global was accounted for as a consolidated subsidiary. On February 25, 1999, the
Company, SISC and Trans Global entered into an agreement (the "Trans Global
Transaction"), pursuant to which on May 3, 1999, SISC 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
$2.1 million 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 the Trans Global 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. As of the date of this report, Trans Global has registered the
remaining shares owned by the Company of which 50,000 shares were transferred to
Trans Global in consideration of an extension on a debt guarantee (see the
commitments and contingency footnotes herein) and 308,500 shares were sold for
an aggregate of $340,000, subseuqent to which the Company's remaining ownership
in Trans Global represents less than 1% of Trans Global outstanding common
shares.
(iii)Arc Networks, Inc. ("Arc Networks"), a privately held company which, among
other things, installs telephonic network systems and buys and resells local
telephone service, was formerly the Telecommunications segment. As of December
31, 1998, the Company owned approximately 67%, or 6,392,800 shares, of the
outstanding common stock of Arc Networks and as such, Arc Networks was treated
as a consolidated subsidiary. On March 23, 1999, the Company and SISC entered
into an agreement with Arc Networks and TAL, pursuant to which SISC sold all of
its equity interest in Arc Networks for $855,000, to TAL. The sale of Arc
Networks was consummated on June 22, 1999.
(iv) International Magnetic Imaging, Inc., ("IMI") which performed magnetic
resonance imaging and other medical diagnostic services, the former Medical
Diagnostics segment, was sold in April of 1998.
(v) Sequential Electronic Systems, Inc. ("SES"), and S-Tech, Inc. ("S-Tech")
which are subsidiaries of SES Holdings Inc., ("SESH") which is a wholly owned
subsidiary of SpecTec, Inc. ("SpecTec") and Televend, Inc., ("Televend"), and
FMX Corp. ("FMX"), all of which manufacture and sell products such as devices
that measure distance and velocity, instrumentation devices, debit card vending
machines, prepaid telephone calling cards and finger print identification
products, formerly, the Electro-Optical and Electro-Mechanical Products
Manufacturing segment, were sold in April 1998.
(vi) 3D Holdings International, Inc., (3D"), and its subsidiaries, 3D
Technology, Inc., ("3D Tech"), 3D Imaging International, Inc. ("3DI"), and Vero
International, Inc. ("Vero"), were companies that provided three dimensional
imaging services that were used in a variety of applications, formerly the Three
Dimensional Products and Services segment, were discontinued in June of 1997.
(vii) WWR Technology, Inc. ("WWR"), a subsidiary of SESH which manufactured and
sold a professional line
F-11
<PAGE>
The Sagemark Companies Ltd. and Subsidiaries
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
Years Ended December 31, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
of loudspeakers, formerly the Audio Products Manufacturing segment, was sold in
May of 1997.
(viii) The Trinity Group, Inc. ("Trinity") which provided a variety of financial
and business related services, formerly the Business Consulting Services
segment, was sold in April of 1998.
Principles of Consolidation - The accompanying consolidated financial statements
include the accounts of the Company and all of its majority-owned and voting
controlled subsidiaries. Investments in 20% to 50% owned companies in which the
Company does not have effective control are accounted for by the equity method.
All significant intercompany balances and transactions have been eliminated.
Cash and Cash Equivalents - The Company considers all highly liquid instruments
purchased with an original maturity of three months or less to be cash
equivalents.
Marketable Securities - All of the Company's investments that are classified as
marketable securities have readily determinable fair values, are categorized as
available-for-sale and are recorded at fair value. Unrealized gains and losses
are recorded as a separate component of stockholders' equity and are included in
the statement of other comprehensive income (loss). Additionally,
available-for-sale investments that are deemed to be permanently impaired are
written down to fair market value and such write down is charged to earnings as
a realized loss. As of December 31, 1999 the marketable securities that are
classified as current assets consist of certificates of deposit and commercial
paper that have maturity dates of six months or less from the date of purchase.
As of December 31, 1998 all marketable securities that are classified as current
assets consisted of U.S. Treasury Bills.
Long-Lived Assets - Long-lived assets are reviewed for possible impairment
whenever events or changes in circumstances indicate that the carrying amount of
such assets may not be recoverable. If such review indicates that the carrying
amount of long-lived assets is not recoverable, the carrying amount of such
assets is reduced to the estimated recoverable value. Based on this evaluation,
as of December 31, 1999, the balances as reported in the accompanying balance
sheet are expected to be fully recoverable. However, it is at least reasonably
possible that management's estimate of future recoverability may change in the
near term, thus resulting in an acceleration in or complete write-off of certain
long-lived assets. During 1997, Netsmart wrote-off impaired assets approximating
$415,000, which is included in operating expense.
Minority Interest - For consolidated subsidiaries that are not wholly owned the
Company eliminates the minority interest portion of the related profits and
losses of such investments. As of December 31, 1998, the allocable losses of
such minority interests related to the Company's investment in Arc Networks was
in excess of the Company's investment in Arc Network's by approximately $1.5
million. As of December 31, 1999 the Company has no minority interest balances.
Revenue Recognition - All of the Company's revenue in 1997 was generated by
Netsmart, which recognized revenue as services were performed.
Income Taxes - The Company accounts for income taxes using the asset and
liability approach. The measurement of deferred tax assets is reduced, if
necessary, by the amount of any tax benefits that, based on available evidence,
management does not expect to be realized.
Basic and Diluted Earnings (Loss) Per Share -On July 22, 1999, the Company's
shareholders' approved a 1-for30 reverse split of its common stock. All share
and per share amounts in the accompanying financial statements have been
restated to give effect to the split. Basic earnings (loss) per share reflects
the amount of earnings or loss for the period available to each share of common
stock outstanding during the reporting period. For each of 1999 and 1998, income
available to common stockholders includes a reduction for accrued dividends of
$22,000. Diluted earnings (loss) per share reflects basic earnings (loss) 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
December 31, 1999, the Company does not have any dilutive items and a
F-12
<PAGE>
The Sagemark Companies Ltd. and Subsidiaries
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
Years Ended December 31, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
dual presentation of earnings per share is not presented. Employee stock options
to purchase in the aggregate 670,000 shares of common stock at $4.20 per share
were outstanding from April 20, 1999 through the end of 1999. An option issued
to a former director of the Company to purchase 5,000 shares of common stock at
$7.50 was outstanding for all of 1999 and from July 7, 1998 through the end of
the year for 1998 and an option to purchase 3,333 shares of common stock at
$4.50 per share was outstanding from April 22, 1999 through the end of 1999. A
warrant, which expired unexercised on October 1, 1999, to purchase 33,333 shares
of common stock at $22.50 per share was outstanding for the first nine months of
1999 and all of 1998 and 1997. None of the aforementioned options and warrants
were included in the computation of diluted loss per common share because the
related exercise prices were greater than the average market price of the common
shares for the periods while they were outstanding.
Research and Development - The Company had no research and development expense
for 1999 and 1998. The Company's research and product development activities in
1997 were conducted by Netsmart. Netsmart's research and development expense for
1997 approximated $217,000 and was Company financed and was expensed as
incurred.
Fair Value of Financial Instruments - The Generally accepted accounting
principles require disclosing the fair value of financial instruments to the
extent practicable for financial instruments, which are recognized or
unrecognized in the balance sheet. The fair value of the financial instruments
disclosed herein is not necessarily representative of the amount that could be
realized or settled, nor does the fair value amount consider the tax
consequences of realization or settlement. In assessing the fair value of these
financial instruments, the Company used a variety of methods and assumptions,
which were based on estimates of market conditions and risks existing at that
time. For certain instruments, including cash and cash equivalents, notes
receivable and other current liabilities, it was estimated that the carrying
amount approximated fair value for the majority of these instruments because of
their short maturity. For investment in marketable securities, fair value is
estimated based on current quoted market price. The fair value of the Company's
investment in nonmarketable securities and other long-term assets are estimated
to approximate cost.
Concentration of Credit Risk - Financial instruments, which potentially subject
the Company to concentrations of credit risk, are cash and cash equivalents and
notes receivable arising from normal business activities. The Company routinely
assesses the financial strength of its debtors and based upon factors
surrounding the credit risk of its customers, establishes an allowance for
uncollectible accounts, when appropriate, and as a consequence, believes that
its notes receivable credit risk exposure beyond such allowances is limited. The
Company requires collateral or other security to support notes receivable
subject to credit risk. The Company places its cash and cash equivalents with
high credit quality financial institutions. The amount on deposit in any one
institution that exceeds federally insured limits is subject to credit risk. As
of December 31, 1999 the Company had cash balances in excess of federally
insured limits of $1.66 million.
Stock Options and Similar Equity Instruments - On January 1, 1996, the Company
adopted the disclosure requirements of Statement of Financial Accounting
Standards ("SFAS") No. 123, "Accounting for Stock Based Compensation," for stock
options and similar equity instruments (collectively "Options") issued to
employees. SFAS No. 123 allows for the option of recording stock options to
employees using Accounting Principles Board ("APB") Opinion No. 25 "Accounting
for Stock Issued to Employees" while disclosing the effects, on a pro forma
basis, of using SFAS No. 123 in the footnotes to the financial statements. The
Company will continue to apply the intrinsic value based method of accounting
for options issued to employees prescribed by APB Opinion No. 25, rather than
the fair value based method of accounting prescribed by SFAS No. 123. SFAS No.
123 also applies to transactions in which an entity issues its equity
instruments to acquire goods or services from non-employees. Those transactions
must be accounted for based on the fair value of the consideration received or
the fair value of the equity instruments issued whichever is more reliably
measurable.
Use of Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Reclassifications - Certain 1998 and 1997 items have been reclassified to
conform to the December 31, 1999 presentation.
F-13
<PAGE>
The Sagemark Companies Ltd. and Subsidiaries
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
Years Ended December 31, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
(2) Change of Control and Management of the Company
On April 20, 1999, Technology Acquisitions Ltd. ("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 million 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 $2.8
million in the aggregate. The options may be exercised at any time during the
thirteen-month period ending April 23, 2000. 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 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.
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 received
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.
Pursuant to an agreement dated May 24, 1999, (the "Termination Agreement")
between the Company and George W. Mahoney, former Chief Financial Officer, Mr.
Mahoney's employment agreement, dated as of June 16, 1998, as amended, was
terminated on May 25, 1999. Pursuant to the Termination Agreement, the Company
paid Mr. Mahoney $48,000 in full satisfaction of any salary, reimbursable
expenses, fringe benefits, severance payments and other compensation owed to Mr.
Mahoney. Mr. Mahoney's rights to indemnification survive the 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.
(3) Notes Receivable, Related Party
Arc Networks Note Receivable - The note receivable due from Arc Networks
includes amounts due to the Company pursuant to a line of credit and amounts due
to the Company pursuant to a rental reimbursement agreement, whereby Arc
Networks is required to reimburse the Company for rentals paid on an office
lease in New York of approximately $4,000 per month. Subsequent to December 31,
1999, the related lease, which was a month to month lease, was cancelled.
On September 18, 1998, the Company provided Arc Networks with a line of credit
pursuant to a loan agreement (the "Original Loan Agreement") which was
subsequently amended on January 25, 1999 (the "January 1999 Amendment"), March
18, 1999 (the "March 1999 Amendment"), May 19, 1999 (the May 1999 Amendment")
and December 17, 1999 (the "December 1999 Amendment").
The Original Loan Agreement provided Arc Networks with a $2 million line of
credit collateralized by all of the assets of Arc Networks (primarily current
trade receivables) and bore interest at prime plus 2% whereby advances would be
made on the line of credit against eligible accounts receivable of Arc Networks
that were not more than ninety days outstanding. Interest payments pursuant to
the Original Loan Agreement were due monthly, beginning on October 5, 1998 and
the principal was due on the earlier of August 31, 2000 or the date in which Arc
Networks was no longer in compliance with the terms of the agreement. Prior to
the January 1999 Amendment the Company had advanced Arc Networks the full $2
million allowable under the line of credit. At the time that the Original Loan
Agreement was consummated, the Company owned 67% of the outstanding common stock
of Arc Networks.
F-14
<PAGE>
The January 1999 Amendment increased the maximum borrowing base from $2 million
to $2.25 million and an additional $250,000 was advanced to Arc Networks upon
the consummation of the January 1999 Amendment.
The March 1999 Amendment increased the maximum borrowing base from $2.25 million
to $2.4 million and an additional $150,000 was advanced to Arc Networks upon the
consummation of the March 1999 Amendment. Additionally, on March 23, 1999, the
Company entered into a purchase agreement with TAL to sell all of its Arc
Networks stock to TAL. The repayment terms were modified such that $2.25 million
of the outstanding principal became due on the earlier of August 31, 2000 or six
months from the date of the closing of the purchase agreement between the
Company and TAL and the remaining $150,000 of principal became due upon the
earlier of August 31, 2000, six months from the date of the closing of the
purchase agreement between the Company and TAL, or the date, if any, on which
the sale of Arc Networks to TAL was consummated. Additionally, TAL guaranteed
the $150,000 principal repayment and placed such amount into an escrow account.
The purchase agreement was closed on March 23, 1999 and the sale of Arc Networks
was consummated on June 23, 1999. As such, pursuant to the terms of the March
1999 Loan Amendment, $2.25 million of principal was to be repaid on September
22, 1999 and $150,000 was to be repaid on June 22, 1999.
The May 1999 Loan Amendment modified the principal repayment terms whereby
$750,000 was to be repaid on the earlier of October 19, 1999 or the receipt by
Arc Networks' parent Company, InfoHighway Communications Corp., ("InfoHighway")
of at least $10 million in gross proceeds from an initial public offering of
debt or equity securities, $450,000 was to be repaid on January 31, 2000 and
$1.2 million was to be repaid on June 19, 2000. Additionally, the Company
received the right to convert an aggregate of $1.7 million of the principal
amount into common shares of either Arc Networks or InfoHighway. Simultaneously
with the execution of the May 1999 Loan Amendment, the Company received a
warrant to purchase 90,000 shares of InfoHighway at an exercise price of $8.00
per share.
During the time period from February 1999 through the date of the May 1999 Loan
Amendment, Arc Networks was in default under the terms of the line of credit for
non-payment of scheduled interest and loan maintenance fees. Pursuant to the
terms of the May 1999 Loan Amendment, effective June 18, 1999, the interest rate
was changed from prime plus 2% to 14% per annum 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. Arc Networks failed to make the $83,000
payment due on August 5, 1999. On June 17, 1999, the Company entered into an
amended guaranty with TAL whereby TAL guaranteed to pay the Company $150,000 in
the event that Arc Networks fails to make any principal repayments on the
scheduled due dates as modified by the May 1999 Loan Amendment.
On October 19, 1999, the Company agreed to extend the due date of the $750,000
principal payment from October 19, 1999 to November 14, 1999, however, Arc
Networks failed to make the November 14, 1999 payment. As of the date of the
December 1999 Loan Amendment, TAL had not made the required $150,000 payment as
a guarantor on the line of credit and Arc Networks was in default for non
payment of interest and loan maintenance fees approximating $223,000 and for non
payment of $750,000 principal, which was due on November 14, 1999. Additionally,
Arc Networks owed the Company approximately $26,000 for rental reimbursements.
Pursuant to the terms of the December 1999 Loan Amendment, the maximum loan
amount was increased by $576,000 from $2.4 million to $2.976 million and all
past due interest, maintenance fees and rental reimbursements were converted to
principal and the Company advanced Arc Networks an additional $300,000.
Additionally, a loan origination fee approximating $28,000 was applied to the
total advances made under the December 1999 Loan Amendment.
The December 1999 Loan Amendment modified the principal repayment terms whereby
$1.326 million is due on the earlier of March 31, 2000 or the receipt by
InfoHighway of at least $10 million in gross proceeds from an initial public
offering of debt or securities, $450,000 is due on March 31, 2000 and $1.2
million is due on June 19, 2000. Simultaneously with the execution of the
December 1999 Loan Amendment, InfoHighway executed a guarantee for $2.976
million in favor of the Company. The December 1999 Loan Amendment also gives the
Company the right to convert $1.65 million of principal into common shares of
either InfoHighway or Arc Networks at a conversion rate of $8 per share.
F-15
<PAGE>
The Sagemark Companies Ltd. and Subsidiaries
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
Years Ended December 31, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
The December 1999 Loan Amendment provided the Company with a warrant to purchase
190,000 shares of InfoHighway's common stock. The warrant expires on December
16, 2004 and the warrant's exercise price is either 90% of the exercise price of
any warrants (or other convertible securities) issued by InfoHighway in
connection with the first public or private placement of securities by
InfoHighway, or $6.00 if no such public or private placement takes place prior
to the expiration date of the warrant. The December 1999 Loan Amendment also
amended and restated the warrant whereby on a split adjusted basis, the Company
has the right to purchase 180,000 shares of InfoHighway's common stock at an
exercise price of $3.00 per share. Such warrant, which expires on May 18, 2004
amends and restates the warrant issued in conjunction with the May 1999 Loan
Amendment which was a warrant for 90,000 shares at an exercise price of $8.00
per share.
Subsequent to December 31, 1999, the Company received additional warrants to
acquire InfoHighway common stock consisting of the right to purchase an
additional 180,000 common shares at the fair market price of InfoHighway's
common stock at the date of a public or private placement and the right to 5,000
common shares at no cost. As of the date of this report, Arc Networks has paid
all accrued interest and rent that is currently due.
(4) Notes Receivable, Other
William Baquet Note Receivable - On September 27, 1999 the Company loaned
William Baquet ("Mr. Baquet") $675,000 in receipt of an 8% promissory note due,
together with all accrued interest on December 28, 1999. The Company advanced
Mr. Baquet $650,000 representing the note of $675,000 less a $15,000 loan
origination fee. The promissory note was secured with 400,000 shares of common
stock of I-Link, Inc. ("I-Link"). The 400,000 I-Link shares were held in the
Company's investment account and had a value as of December 31, 1999 of
approximately $1.11 million. In conjunction with the loan, the Company purchased
25,000 shares of freely tradable common stock of I-Link at a price of $0.01 per
share. Such shares were included as a part of the 400,000 shares held in the
Company's investment account. Additionally, the Company received options to
purchase 15,000 shares of I-Link's common stock at an exercise price of $0.01
per share. Such options vested and were exercisable in installments of 5,000
shares each on December 29, 1999, January 12, 2000 and January 26, 2000,
provided that the note had not been paid in full on such dates. As of December
31, 1999, the note was in default and the Company exercised its option on the
first installment of 5,000 shares. On January 10, 2000, the note and interest
were repaid in full and the remaining options expired. The note receivable
balance as of December 31, 1999 approximated $689,000, including accrued
interest of approximately $14,000.
F-16
<PAGE>
The Sagemark Companies Ltd. and Subsidiaries
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
Years Ended December 31, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
(5) Marketable Securities
As of December 31, 1999 1998
- ---------------------------------------------------------
Current:
Certificates of
deposit $ 1,251,000 --
Commercial paper 517,000 --
U.S. treasury bills -- $ 5,040,000
Unrealized holding
gains 76,000 52,000
- ---------------------------------------------------------
Market value $ 1,844,000 $ 5,092,000
- ---------------------------------------------------------
As of December 31, 1999 1998
- ---------------------------------------------------------
Related party:
Trans Global $ 552,000 $ 2,000
Unrealized holding
loss (362,000) --
- ---------------------------------------------------------
Market value $ 190,000 $ 2,000
- ---------------------------------------------------------
The changes in net unrealized holding gain (loss) on marketable securities is as
follows:
<TABLE>
<CAPTION>
As of December 31, 1999 1998
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Balance at the beginning of the period $ 52,000 $ (116,000)
Unrealized holding gain (loss) 1,357,000 329,000
Reclassification for realized gain (loss) on sale of securities (1,685,000) (242,000)
Recognize permanent decline in value of stocks -- 81,000
- -----------------------------------------------------------------------------------------------------------------------
Balance at end of period $ (276,000) $ 52,000
- -----------------------------------------------------------------------------------------------------------------------
The calculation of gain or loss from marketable securities is as follows:
Years Ended December 31, 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------
Related party:
Proceeds from sale of Netsmart common $ 3,497,000 -- --
Cost basis of Netsmart common sold 873,000 -- --
- ----------------------------------------------------------------------------------------------------------------------
Gain from marketable securities, related party $ 2,624,000 -- --
- ----------------------------------------------------------------------------------------------------------------------
Other:
Proceeds from sale of Netsmart common $ 9,052,000 $ 8,967,000 $ 455,000
Cost basis of Netsmart common sold 8,880,000 8,773,000 823,000
- ----------------------------------------------------------------------------------------------------------------------
Gain (loss) on sale of marketable securities 172,000 194,000 (368,000)
Permanent decline in value of marketable securities -- 81,000 --
- ----------------------------------------------------------------------------------------------------------------------
Gain (loss) from marketable securities $ 172,000 $ 113,000 $ (368,000)
- ----------------------------------------------------------------------------------------------------------------------
For purposes of determining gain or (loss) on the sale of securities, the cost
is based on the average cost of all shares of each such security held at the
date of sale.
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
F-17
<PAGE>
The Sagemark Companies Ltd. and Subsidiaries
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
Years Ended December 31, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
(6) Investment in Non Marketable Securities
On September 7, 1999, the Company acquired 100,000 12% convertible preferred
shares of GAVELNET.COM for approximately $950,000. The preferred shares hold
standard preferences to the common shares, hold voting rights, carry a 12%
dividend, payable in-kind, and are convertible at $1.25 into 800,000 common
shares of GAVELNET.COM. GAVELNET.COM is a start-up company, which was
incorporated on July 20, 1999 as a Delaware company and operates an Internet
auction site offering premium collectibles, decorative and fine art items in an
entertaining, interactive online format, which targets affluent buyers.
GAVELNET.COM's preferred and common shares do not have readily determinable
values and as such are not considered marketable securities.
Concurrent with the Company's investment in GAVELNET.COM, TAL invested $1
million under substantially the same terms. GAVELNET.COM will require additional
funding in addition to the investments described herein. Prior to the Company's
investment in GAVELNET.COM, certain affiliates and related parties of Benchmark
Equity Group ("Benchmark") acquired approximately 4.1 million common shares, on
a fully diluted basis, of GAVELNET.COM for financial investments and services
rendered that enabled GAVELNET.COM to clear significant hurdles in validating
its business model. Benchmark is a privately held company wholly owned by Frank
M. DeLape, Sagemark's Chief Executive Officer and Chairman of the Board, which
also holds 100% of TAL's voting stock.
(7) Long-term Note Receivable, Related Party
In 1997, SISC sold 258,333 common shares of Trans Global to the president of
Trans Global at $1.67 per share, the fair market value of the Trans Global
common stock on the date of sale. Payment by the president of Trans Global for
such shares is evidenced by a $420,000, non-recourse, non-interest bearing,
promissory note from the president of Trans Global due 2002.
During 1998 and 1997, the Company wrote-off approximately $135,000 and $345,000,
respectively, of amounts due from Universal International, Inc., a company
affiliated with the former CEO and Secretary of the Company. During 1997,
Netsmart's provision for bad debt expense on trade receivables approximated
$814,000. Effective January 1, 1998 Netsmart was accounted for as an investment
in an unconsolidated affiliate and as such, the Company has no trade receivable
bad debt expense for 1999 and 1998.
(8) Depreciation and Amortization
During 1997, Netsmart's depreciation of fixed assets was $188,000 and Netsmart's
amortization of intangible assets was $431,000. Additionally, during 1997,
Netsmart wrote-off $415,000 of impaired capitalized software development costs.
All of such amounts are included in subsidiary selling, general and
administrative expense.
Effective January 1, 1998, due to a change in effective control, the Company's
investment in Netsmart was converted from an investment in a consolidated
affiliate to an investment in an unconsolidated affiliate. On March 25, 1999,
pursuant to the Netsmart Transaction (see note 1(c)(i)), the Company reduced its
ownership level in Netsmart to approximately 10% at which point the investment
in Netsmart no longer qualified for treatment as an equity method investment and
was converted to a marketable security. At the time that Netsmart was converted
from a consolidated affiliate to an investment in an unconsolidated affiliate,
the cost basis of the Company's investment in Netsmart differed from the
underlying value of Netsmart's equity and such difference was recorded as an
increase in the additional paid-in capital of the Company. The following
calculates the amount applied to the Company's additional paid-in capital.
- --------------------------------------------------------------------------------
Investment basis in Netsmart prior to converting Netsmart
to an equity method investment at January 1, 1998 $ 5,116,000
Company's share of Netsmart's losses while accounted for
as a consolidated affiliate (10,122,000)
- --------------------------------------------------------------------------------
(5,006,000)
Company's equity method share of Netsmart's equity at
January 1, 1998 690,000
- --------------------------------------------------------------------------------
Adjustment to the Company's additional paid-in capital $ 5,696,000
- --------------------------------------------------------------------------------
The Company's investment in Netsmart under the equity method, amounted to
$760,000 as of December 31, 1998 and the Company's share of Netsmart's income
amounted to $113,000 and $71,000, respectively, for 1999 and 1998.
F-18
<PAGE>
The Sagemark Companies Ltd. and Subsidiaries
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
Years Ended December 31, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
(9) Investment in Unconsolidated Affiliated Companies
The results of operations and financial position of Netsmart is summarized as
follows up to the date that Netsmart was converted to a marketable security:
<TABLE>
<CAPTION>
Three Month
Period Ended Years Ended December 31,
Condensed statement of operations information March 31, 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net revenues $ 5,235,000 $ 13,165,000 $ 7,636,000
Gross profit $ 1,788,000 $ 5,084,000 $ 2,747,000
Net income (loss) $ 327,000 $ 124,000 $ (3,507,000)
As of As of December
March 31, 31,
Condensed balance sheet information 1999 1998
- ----------------------------------------------------------------------------------------------------------------------
Current assets $ 6,816,000 $ 6,958,000
Non-current assets $ 3,270,000 $ 3,331,000
Current liabilities $ 6,284,000 $ 6,948,000
Shareholders' equity $ 3,717,000 $ 3,284,000
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
(10) Income Taxes
Federal and state taxes were approximately as follows:
Years ended
- ---------------------------------------------------------
December 31, 1999 1998 1997
- ---------------------------------------------------------
Federal:
Current $ 17,000 -- --
Deferred -- -- --
State:
Current 8,000$ 20,000 --
Deferred -- -- --
- ---------------------------------------------------------
Total $ 25,000$ 20,000 --
- ---------------------------------------------------------
Deferred taxes based upon differences between the financial statement and tax
bases of assets and liabilities and available tax carry-forwards consisted of:
As of December 31, 1999 1998
- ---------------------------------------------------------
Net operating loss
carry-forward $ 14,855,000 $ 17,241,000
Unrealized holding
(gain) loss 97,000 (18,000)
Alternative minimum
tax credit
carry-forward 17,000 --
Depreciation (2,000) --
- ---------------------------------------------------------
Net deferred tax asset 14,967,000 17,223,000
Valuation allowance $ (14,967,000) $ (17,223,000)
- ---------------------------------------------------------
-- --
- ---------------------------------------------------------
The valuation allowance for net deferred tax assets decreased by approximately
$2.26 million. The reduction was the result of the utilization of $2.34 million
of net operating loss carry-forwards against 1999 taxable income offset by a
$130,000 net change in temporary differences. Based upon the level of historical
tax losses, the Company has established the valuation allowance against the
entire net deferred tax asset.
As of December 31, 1999, the Company has net operating loss carry-forwards
approximating $46.88 million. Pursuant to section 382 of the Internal Revenue
Code, utilization of these losses may be limited if substantial changes in the
Company ownership were to occur
The Company's net operating loss carry-forwards at December 31, 1999 expire as
follows:
Year carry-forward expires Amount
- ---------------------------------------------------------
2000 $ 3,185,000
2001 736,000
2002 2,809,000
2003 372,000
2004 305,000
2005 299,000
2006 246,000
2007 206,000
2008 1,505,000
2009 4,482,000
2010 6,241,000
2011 4,413,000
2012 7,017,000
2018 15,059,000
- ---------------------------------------------------------
Total $ 46,875,000
- ---------------------------------------------------------
A reconciliation of the statutory federal income tax rate to the effective rate
is as follows:
Years ended
December 31, 1999 1998 1997
- ---------------------------------------------------------
Statutory federal income
tax rate 35.0% (35.0%) (35.0%)
Increase in (utilization
of) net operating loss
carry-forward (24.9) 35.3 35.5
Permanent differences (6.4) (0.2) (0.5)
Effective state tax rate (0.4) (0.1) --
- ---------------------------------------------------------
Effective income tax rate 3.3% 0.0% 0.0%
- ---------------------------------------------------------
F-19
<PAGE>
The Sagemark Companies Ltd. and Subsidiaries
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
Years Ended December 31, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
(11) Subordinated Debt
In July 1997, the Company issued 15% subordinated promissory notes. In April
1998, the Company repaid $112,000 of such notes and the remainder was due in
July 1999. The Company has attempted to repay the remaining balance of the
subordinated debt, however the original addresses note holders has changed and
no forwarding mailing instructions are available. Accrued interest on the
subordinated debt as of December 31, 1999 and 1998 was $9,000 and $5,000,
respectively.
(12) Commitments and Contingencies
(a) Operating Lease Obligations
The Company leases all of its facilities on a month to month basis. Presently,
the Company's executive offices are located n Houston, Texas, which the Company
leases from Benchmark for $1,200 per month. The Company's prior executive
offices were leased in New York under a lease that expired February 28, 1999.
The Company continues to lease such offices that are currently occupied by Arc
Networks. Arc Networks sub-leases the offices from the Company at a monthly rate
that is equal to the Company's monthly cost of $4,300. The Company closed its
offices in Boca Raton, Florida on July 23, 1999 as the related lease for such
offices were transferred to the buyer of the assets of its former subsidiary
which occupied the space. Rental expense, net of sub-lease income, under all
facility and equipment operating leases was approximately $52,000 (net of
sub-lease income of $42,000), $81,000 and $441,000 for 1999, 1998 and 1997,
respectively. Rental expense for 1997 included $341,000 related to Netsmart and
1999 and 1998 include no amounts related to Netsmart, which effective January 1,
1998 was converted to an equity method investment.
(b) Employment Agreements
The Company has employment agreements with two executive officers that are in
effect until April 21, 2002. Such agreements provide for minimum salary levels
as well as fringe benefits and incentive stock options. The Company's aggregate
annual commitment for future salaries at December 31, 1999, excluding fringe
benefits and stock option compensation, was approximately $385,000.
(c) Debt Guarantees
On September 18, 1998, the date on which the Company advanced Arc Networks $2
million pursuant to a loan agreement, Arc Networks had outstanding, a $1.22
million promissory note for amounts owed to Trans Global. On the same date,
Trans Global agreed to subordinate the debt it was owed from Arc Networks to the
loan from the Company to Arc Networks. Concurrently, the Company guaranteed Arc
Network's performance on the promissory note owed to Trans Global. On March 23,
1999, in connection with the Company's sale of Arc Network's to TAL, the
Company, Arc Networks, Trans Global, TAL and InfoHighway entered into an
agreement, which modified the prior agreements, relating to the Arc Networks
promissory note owed to Trans Global. Most significantly, the subordination
agreement was terminated and TAL and InfoHighway were added as guarantors on the
note. On January 3, 2000, Trans Global gave notice to the Company that Arc
Networks was in default on the note and demanded payment from the Company for
$1.18 million, including interest and principal. The Company has responded to
Trans Global stating the Company disagrees with Trans Global's contention that
the Arc Network's promissory note owed to Trans Global is due. On February 7,
2000, the Company, Trans Global, Arc Networks, TAL and InfoHighway entered into
an agreement whereby, among other things, the due date of the note was extended
to April 24, 2000, and the note is no longer in default. In addition, the
agreement required that the Company transfer 50,000 shares of its Trans Global
common shares to Trans Global.
Arc Networks owes $550,000 to Batei Sefer Limlacha ("BSL"), a religious
organization, pursuant to a subordinated note payable due has outstanding, a
subordinated note, requiring principal repayments of $275,000 each on January 2,
2000 and 2001. On September 18, 1998, the Company guaranteed Arc Networks
performance under the subordinated loan agreement. On December 17, 1999, BSL
agreed to extend the due date of the first principal installment from January 2,
2000 to March 31, 2000.
(13) Capital Stock
Common Stock - As of December 31, 1999, the authorized number of shares of
common stock, par value $0.01, is 25,000,000 shares of which 1,640,343 shares
are issued, 1,560,247 shares are outstanding
and 80,096 shares are held in treasury. On July 22, 1999, the stockholders of
the Company approved a reduction of the Company's authorized number of common
shares from 50,000,000 to 25,000,000 and approved a 1-for-30 reverse split of
its common stock. All share and per share amounts in the accompanying financial
statements and notes thereto have been restated to give effect to the reverse
split. In order to effectuate the reverse split, 5,210 common shares were issued
representing the net impact of rounding fractional shares and the Company paid
$33,000 to fractional shareholders.
F-20
<PAGE>
The Sagemark Companies Ltd. and Subsidiaries
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
Years Ended December 31, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
Stock Issued in Lieu of Cash Payment - The Company issued 11,100 and 40,775
shares for 1998 and 1997, respectively, in connection with consulting and
financing services valued at $80,000 and $73,000, respectively.
Value of Common Stock Returned as Part of Termination Payments for Executive
Contracts - In connection with the termination of an executive's contract, the
Company received 39,667 shares of common stock previously issued to such
executive valued at $223,000, which was recorded as a reduction of contract
termination expense.
Conversion of Series A Preferred Stock - During 1997 the Company issued 96,396
shares of common stock upon the conversion of 22,891 shares of series A
preferred stock.
Preferred Stock - As of December 31, 1999, the authorized number of shares of
undesignated preferred stock, par value $1.00 per share, is 2,000,000 shares of
which 2,962 are issued and outstanding as of December 31, 1999.
Series A - The series A convertible preferred stock, which was all issued during
1993 through July 1993, bore a cumulative dividend of 6%, was redeemable at any
time at the option of the Company at a redemption price of $10 per share, and
was convertible at the option of the holder at any time commencing two years
from the date of issuance, unless sooner called for redemption by the Company at
the rate of 4.34 shares of common stock for each share of preferred stock. All
of the series A convertible preferred shares were converted in 1997 and 1996 and
none remain outstanding as of December 31, 1999.
Series B (170 shares issued and outstanding) - The Series B subordinated
preferred stock is redeemable at the option of the Company at the issue price of
$87.50 per share. The stock is entitled to a $3.50 annual dividend, which is
contingent upon after tax earnings in excess of $200,000. In the event of
involuntary liquidation, the holders may receive $87.50 per share and all
accrued dividends. Accumulated dividends on the series B Preferred stock as of
December 31, 1999 approximated $1,000. No dividends were declared for 1999, 1998
and 1997.
Series E (92 shares issued and outstanding) - The Series E preferred stock is
entitled to an annual dividend of $.10 per share contingent upon after tax
earnings in excess of $200,000. Accumulated dividends on the series E preferred
stock as of December 31, 1999 approximated $18. No dividends were declared for
1999, 1998 and 1997.
Series F (2,700 shares issued and outstanding) - As consideration for granting
extensions on former debts, the Company issued, in 1984, 2,700 shares of
preferred stock at $1.00 per share. The nonvoting preferred stock, designated
series F, with a dividend rate of $8.00 per share, is redeemable at the option
of the Company after July 1993 for $1.00 per share. The dividend is
non-cumulative and is payable within 100 days from the close of any year in
which net income after tax exceeds $500,000, and all dividends due on the series
B preferred stock are paid or provided for. Accumulated dividends on the series
F preferred stock as of December 31, 1999 approximated $43,000. No dividends
were declared for 1999, 1998 and 1997.
Series G - The Company issued the series G preferred stock to Trans Global in
consideration for $2.1 million that another subsidiary of the Company owed to
Trans Global. Originally, the series G preferred stock converted automatically
on September 30, 1999 into such number of the Company's common stock as having a
value equaling $2.1 million. In March 1998, the Company amended its certificate
of incorporation, with the consent of Trans Global as the sole holder of the
series G preferred stock, to change the rights and preferences of such preferred
stock such that the conversion privileges were terminated and the series G
preferred stock became redeemable at an aggregate redemption price of $2.1
million. The series G preferred stock required dividend payments at $42 per
share and were payable when declared by the Company's board of directors. No
dividends were declared during 1999 and 1998 and accrued and unpaid dividends as
of December 31, 1998 approximated $137,000. Because the series G preferred stock
was held solely by a consolidated subsidiary, all such amounts were eliminated
in consolidation. On February 25, 1999, the Company, SISC and Trans Global
entered into an agreement, pursuant to which on May 3, 1999, SISC 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
$2.1 million payable with respect to the series G 2% preferred stock then owned
by Trans Global, together with accrumulateddividends of approximately $140,000
and (ii) the Company's obligations to pay Trans Global $326,000. Trans Global
returned the series G preferred stock to the Company and none remain outstnaidng
as of December 31, 1999.
F-21
<PAGE>
The Sagemark Companies Ltd. and Subsidiaries
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
Years Ended December 31, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
(14) 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 December 31, 1999, the Company had repurchased 80,096 shares in
transactions with an aggregate value of $247,000. Treasury share changes for the
years ended December 31, 1999, 1998 and 1997 are as follows:
Years ended
December 31, 1999 1998 1997
- ---------------------------------------------------------
Beginning of year 39,549 -- --
Stock purchases 40,547 39,549 --
Stock issuance's -- -- --
- ---------------------------------------------------------
End of year 80,096 39,549 --
- ---------------------------------------------------------
(15) Series A Common Stock Purchase Warrant:
On September 30, 1994, in connection with the financing of the IMI acquisition,
the Company issued to a financing company, a warrant to purchase 33,333 shares
of the Company's common stock at an exercise price of $0.75 per share. The
warrant expired unused on October 1, 1999.
(16) Stock Option Plans
On July 22, 1999, the stockholder's of the Company approved the 1999 long-term
incentive plan. Pursuant to the plan, in April 1999 the Company issued, in the
aggregate, options to purchase 673,333 shares of the Company's common stock.
Additionally, in 1998, a former director of the Company received an option to
purchase 5,000 shares of the Company's common stock.
In October 1995, SFAS No. 123, "Accounting for Stock-Based Compensation," was
issued and is effective for financial statements for fiscal years beginning
after December 15, 1995. As permitted by the statement, the Company continues to
measure compensation cost for stock option plans in accordance with APB No. 25,
"Accounting for Stock Issued to Employees."
Options issued to current employees of the company include stock appreciation
rights ("SAR's"), whereby the option holders are entitled to receive cash or
stock upon the exercise of the options without remitting exercise proceeds to
the Company. Pursuant to APB 25, the Company is required to recognize
compensation expense at each reporting period related to the SAR's computed as
the fair market value of the underlying shares less the total exercise proceeds
assumed to be received upon exercise. As of December 31, 1999, the fair market
value of the Company's common stock is less than the exercise price of the
related options and no APB No. 25 compensation expense is recorded.
For purposes of calculating the pro forma expense under SFAS No. 123, the fair
value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model. The following assumptions were used during
the respective years to estimate the fair value of options granted:
Years ended
December 31, 1999 1998 1997
- ---------------------------------------------------------
Dividend yield 0.0% 0.0% --
Expected volatility 72.0% 119.3% --
Risk-free interest rate 6.0% 6.000% --
Expected life of options 4.99 years 3 years --
Had compensation cost for the Company's stock option plan been determined
consistent with the fair value method outlined in SFAS No. 123, the impact on
the Company's net income and earnings per common share would have been as
follows:
<TABLE>
<CAPTION>
Years Ended December 31, 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------
Net income (loss):
<S> <C> <C> <C>
As reported $ 9,910,000 $ 4,097,000 $ (12,665,000)
Pro forma under SFAS No. 123 $ 9,689,000 $ 4,092,000 $ (12,665,000)
Basic and diluted net income (loss) per common share:
As reported $ 6.32 $ 2.49 $ (8.06)
Pro forma under SFAS No. 123 $ 6.18 $ 2.48 $ (8.06)
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
F-22
<PAGE>
The Sagemark Companies Ltd. and Subsidiaries
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
Years Ended December 31, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
A summary of the Company's fixed stock options for the years ended December 31,
1999, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
average average Average
1999 exercise 1998 exercise 1997 exercise
Shares Price Shares Price Shares Price
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year 5,000 $ 7.50 -- -- -- --
Granted 673,333 4.20 5,000 $ 7.50 -- --
Exercised -- -- -- -- -- --
Forfeited -- -- -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------
Outstanding at end of year 678,333 $ 4.23 5,000 $ 7.50 -- --
Options exercisable at
year end 8,333 $ 6.30 5,000 $ 7.50 -- --
Weighted-average fair
value of options granted
during the year $ 2.69 $ 5.43 --
</TABLE>
As of December 31, 1999, the 678,333 options outstanding have exercise prices
between $4.20 and $73.50 and a weighted-average remaining contractual life of
4.39 years.
- --------------------------------------------------------------------------------
(17) Extraordinary Gain on Extinguishment of Debt
On August 12, 1998, IMI consummated a settlement with the holders of certain
subordinated promissory notes, which were issued by IMI in 1994 in connection
with the acquisition of IMI. The Company paid approximately $1.9 million in full
settlement and satisfaction of the approximate $7.7 million outstanding balance
of such notes, of which approximately $1.6 million was paid in cash and
approximately $324,000 was applied in payment of certain promissory notes due to
IMI by one of the holders of the subordinated promissory notes. In connection
with the settlement, the Company issued 11,100 shares of its common stock,
valued at $80,000, to the holders of the subordinated promissory notes in
satisfaction of IMI's contractual obligations under the agreements relating to
the 1994 acquisition of IMI. The Company recognized an extraordinary gain on
debt extinguishment of approximately $5.6 million for the year ended December
31, 1998 in connection with the debt settlement.
(18) Related Party Transactions
On June 10, 1999 the Company executed an agreement between the Company and
Benchmark whereby the Company reimburses Benchmark for its allocable portion of
shared office and administrative support services. During 1999 the Company paid
Benchmark $117,000 pursuant to the agreement and paid an additional $29,000 for
reimbursement of a portion of the March 1999 and April 1999 salaries of Mr.
DeLape, Mr. Young and Mr. Mathew Finch, Corporate Secretary. Additionally, the
Company paid Mr. DeLape $11,000 for furniture and leasehold improvements sold by
Mr. DeLape to the Company. The Company believes that the amounts paid to
Benchmark and Mr. DeLape approximate those that would have been paid if the
transactions had been conducted at arms length.
Prior to 1998, the Company and its then subsidiary, Trans Global, had made
advances to Universal International, Inc. ("Universal"), a company that the
Company's former Secretary is an owner. These advances had no fixed due dates or
terms and as of April 1998, all of such advances were written-off pursuant to an
agreement between the Company and the former Secretary, which was negotiated by
a shareholder representative. The greatest amount outstanding to Universal
during the years ended December 31, 1998 and 1997 was $600,000.
In July 1997, the Company's former Chief Executive Officer, purchased 39,667
shares of common stock from the Company at $0.03 per share, reflecting a
discount from the bid price on the date of sale, which was $1.80 per share.
Payment for the purchase price of such shares was effected by a reduction of the
Company's obligation to the CEO for accrued and unpaid compensation. In April
1998, in connection with the former CEO's resignation, these shares were
returned to the Company.
In 1997, SISC sold 258,333 common shares of Trans Global to the president of
Trans Global at $1.67 per share, the fair market value of the Trans Global
common stock on the date of sale. The Company's book basis in such shares
approximated $622,000 resulting in a loss on the sale of approximately $191,000
for the year ended December 31, 1997.
F-23
<PAGE>
The Sagemark Companies Ltd. and Subsidiaries
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
Years Ended December 31, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
Payment by the president of Trans Global is evidenced by a non-interest bearing,
non-recourse promissory note from the president of Trans Global, due 2002.
In 1997, SISC sold 151,920 common shares of Netsmart to certain employees of
Netsmart at $0.23 per share. The Company's book basis in such shares
approximated $201,000 resulting in a loss on the sale of approximately $165,000
for the year ended December 31, 1997.
During 1998, the Company paid approximately $50,000 to each of Edward D. Bright,
a former Chairman of the Board, Treasurer, Secretary and a former director of
Consolidated, and Patterson Travis, a brokerage firm that represents certain
shareholders of Consolidated for reimbursement of legal expenses incurred by the
two related parties in conjunction with the former Chief Executive Officer's
termination.
(19) Legal Proceedings
Although the Company is a party to certain legal proceedings that have occurred
in the ordinary course of business, the Company does not believe such
proceedings to be of a material nature with the exception of the following. Due
to uncertainties in the legal process, it is at least reasonably possible that
management's view of the outcome of the following contingent liabilities will
change in the near term and there exists the possibility that there could be a
material adverse impact on the operations of the Company and its subsidiaries as
a result of such 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 $1.7 million, 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 has responded by denying all relevant
allegations and it is the Company's position that it is in no way responsible
for any liability Arc Networks may or may not have to the plaintiff under the
facts as alleged by the plaintiff and the Company intends to contest this case
vigorously. The Company's counsel has been advised that Arc Networks entered
into a settlement agreement on December 1, 1999 with the plaintiff whereby Arc
Networks agreed to perform certain work for the plaintiff and make a certain
escrow payment.
(20) Discontinued Operations
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, formerly the Three Dimensional
Products and Services segment, 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.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
As of December 31, 1999 1998
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net current assets of discontinued segments:
Contract engineering services -- $ 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 -- 482,000
Medical diagnostics -- 249,000
- ----------------------------------------------------------------------------------------------------------------------
-- $ 4,194,000
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
F-24
<PAGE>
The Sagemark Companies Ltd. and Subsidiaries
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
Years Ended December 31, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years ended December 31, 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income (loss) from operations of discontinued segments:
Contract engineering services $ 499,000 $ 222,000 $ 1,023,000
Telecommunications -- (2,709,000) (2,734,000)
Medical diagnostics -- (577,000) (1,188,000)
Electro-optical and electro-mechanical products manufacturing -- -- (2,604,000)
Three dimensional products and services -- -- (1,636,000)
Audio products manufacturing -- -- (293,000)
Business consulting services -- 221,000
Intercompany transactions 139,000 135,000 112,000
- ----------------------------------------------------------------------------------------------------------------------
$ 638,000 $ (2,929,000) $ (7,099,000)
- ----------------------------------------------------------------------------------------------------------------------
Gain (loss) from disposal of segments (net of taxes):
Telecommunications $ 7,365,000 -- --
Contract engineering services 759,000 -- --
Three dimensional products and services 481,000 $ 1,941,000 $ (465,000)
Medical diagnostics 156,000 4,883,000 --
Electro-optical and electro-mechanical products manufacturing -- (31,000) --
Business consulting services -- (1,000) --
Audio products manufacturing -- -- 129,000
Income tax expense (31,000) -- --
- ----------------------------------------------------------------------------------------------------------------------
$ 8,730,000 $ 6,792,000 $ (336,000)
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
(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 approximately $759,000 during the
three months ended June 30, 1999 [see note (1)(c)(ii)]. The revenues of the
contract engineering services segment approximated $11.2 million for the period
from January 1, 1999 through the effective date of the share transfer and $67
million and $75.7 million for all of 1998 and 1997, respectively. The operations
of the contract engineering services segment up to the date of the disposal are
classified as income (loss) from the operations of a discontinued segment.
Assets and liabilities of the contract engineering services segment included in
the Company's consolidated balance sheet consisted of the following:
As of December 31, 1999 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 expected 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
- -----------------------------------------------------------
--
As of December 31, 1999 1998
- ----------------------------------------------------------
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
- -----------------------------------------------------------
F-25
<PAGE>
The Sagemark Companies Ltd. and Subsidiaries
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
Years Ended December 31, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
(b) 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, in
1997 the Company sold one of the subsidiaries operating in the segment,
wrote-off all of the segment's remaining assets and reclassified the remaining
liabilities as net current liabilities of a discontinued segment, which resulted
in a $465,000 loss on disposal of the segment. During 1998, the Company recorded
an approximate $1.9 million gain on the disposal of the segment resulting from
the write-off of additional liabilities that the Company believes it will not be
obligated to pay. Finally, in 1999, the Company wrote-off all remaining
liabilities, all of which were all in excess of three years old and had no claim
activity, and recognized a $481,000 gain on disposal of the segment. The
revenues of the three dimensional products and services segment approximated
$92,000 and $281,000 for 1998 and 1997, respectively. The operations of the
three dimensional products and services segment up to the date of the disposal
are classified as income (loss) from the operations of a discontinued segment.
Assets and liabilities of the three dimensional products and services segment
included in the Company's consolidated balance sheet consisted of the following:
As of December 31, 1999 1998
- ----------------------------------------------------------
Accounts payable and accrued
expenses -- $ 130,000
Accrued payroll and related
expenses -- 98,000
Accrued interest -- 24,000
Notes payable, related
parties -- 95,000
Current portion of long-term
debt -- 135,000
- ----------------------------------------------------------
Net current liabilities of
discontinued segment -- $ (482,000)
- ----------------------------------------------------------
(c) Telecommunications - The Company entered into an agreement with Arc Networks
and TAL, pursuant to which on June 23, 1999 the Company sold all of its equity
interest in Arc Networks for $855,000, resulting in a a gain of approximately
$7.4 million [see note (1)(c)(iii)]. The revenues of the telecommunications
segment approximated $4 million from January 1, 1999 through the date of the
sale and $13.9 million and $9.6 million for all of 1998 and 1997, respectively.
The operations of the telecommunications segment up to the date of the disposal
are classified as income (loss) from the operations of a discontinued segment.
Assets and liabilities of the telecommunications segment included in the
Company's consolidated balance sheet consisted of the following:
As of December 31, 1999 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 offering 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)
- ----------------------------------------------------------
As of December 31, 1999 1998
- ----------------------------------------------------------
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)
- ----------------------------------------------------------
F-26
<PAGE>
The Sagemark Companies Ltd. and Subsidiaries
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
Years Ended December 31, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
(d) Medical Diagnostics - On April 2, 1998, the Company consummated the sale of
substantially all of the assets of IMI resulting in a gain on disposal of
approximately $4.88 million that was recorded in. In 1999, the Company
recognized an additional gain of $156,000 representing the excess of estimated
accrued taxes as of December 31, 1998 and the amount actually paid for taxes in
1999. The revenues of the medical diagnostics segment approximated $6.8 million
from January 1, 1998 through the date of the sale on April 2, 1998 and $29.4
million for 1997. The operations of the medical diagnostics segment up to the
date of the disposal are classified as income (loss) from the operations of a
discontinued segment. As of December 31, 1998, the remaining net current
liabilities of the Medical Diagnostic segment consisted of estimated accrued
income taxes of $249,000 which were settled in 1999.
(e) Electro-Optical and Electro-Mechanical Products Manufacturing - During 1998,
the Company sold all of the companies operating in the electro-optical and
electro-mechanical products manufacturing segment the resulting in a loss on
disposal of the segment of approximately $31,000. The revenues of the
electro-optical and electro-mechanical products manufacturing segment for 1997
were $3.1 million. The operations of the electro-optical and electro-mechanical
products manufacturing segment up to the date of the disposal are classified as
income (loss) from the operations of a discontinued segment.
(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. The revenues of the business consulting services segment
for 1997 were $508,000. The operations of the business consulting services
segment up to the date of the disposal are classified as income (loss) from the
operations of a discontinued segment.
(g) Audio Products Manufacturing - In May 1997, the Company sold all of the
issued and outstanding capital stock of WWR Technology, Inc. ("WWR"), the
subsidiary in which all of the audio products manufacturing segment's operating
activities were conducted, for $100,000. As a result of the sale, the Company
received net proceeds of approximately $62,000 and recorded a gain of
approximately $129,000 on the disposal in the second quarter of 1997. The
revenues of the audio products manufacturing segment through May 1997
approximated $1.2 million. The operations of WWR up to the date of the disposal
are classified as a loss from the operations of a discontinued segment.
(21) Subsequent Events
On January 7, 2000, the Company made an investment in Eclipse Communications
Corporation d.b.a. enTotal.com ("enTotal.com") whereby the Company loaned
enTotal.com $1.5 million pursuant to a note bearing interest at 14 % with
principal due in sixteen equal quarterly installments beginning June 30, 2001.
Additionally, the Company received a warrant to purchase 2.5 million shares of
enTotal.com's common shares at a nominal price. EnTotal.com is a newly formed
development stage company that was formed for the purpose of providing an online
electronic commerce marketplace which through its enTotal.com brands, will
enable small business, small offices/home offices and residential customers to
shop for, purchase and pay for a broad range of communication services.
On February 7, 2000, the Company made an investment in People Solutions, Inc.
("People Solutions") whereby the Company will loan people Solutions up to $1
million pursuant to a note bearing interest at 14% with principal due in twelve
equal quarterly installments beginning April 30, 2001. Additionally, the Company
received a warrant to purchase 1 million shares of People Solution's common
shares at a nominal price. People Solutions is a full service provider of
comprehensive, creative human resource management solutions. The Company
provides human resource consulting and outsourcing services in areas such as
recruiting, retention, career management and training. To date, the Company has
advanced $500,000 under the note agreement.
On February 29, 2000, the Company made an investment in FutureMed
Interventional, Inc. ("FutureMed") whereby the Company loaned FutureMed $1
million pursuant to a note bearing interest at 13.5% with principal due February
29, 2005. In addition, the Company is entitled to receive a warrant to purchase
FutureMed common shares. FutreMed develops and manufactures disposable medical
devices, such as specialized catheters and stents, which are used in radiology,
cardiology, and urology applications. These highly sophisticated devices are
used primarily of minimally invasive medical procedures. FutureMed serves
primarily as an outsource solution for large medical supply companies providing
quick customized products to the medical community.
F-27
<PAGE>
The Sagemark Companies Ltd. and Subsidiaries
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
Years Ended December 31, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
In March 2000, the Company made an investment in JewelsOnRodeo.com, Inc. ("JOR")
whereby the Company loaned JOR $250,000 pursuant to a note bearing interest at
13% with principal due thirteen months from the date of execution. In addition,
the Company received warrants to purchase 137,500 shares of JOR's common shares.
JOR, founded by Benchmark Equity Group, Inc., Kazanjian Brothers, Inc., an 82
year old estate jeweler, and JOR's management is positioning itself to become
the leading provider of web based business to business e-commerce solutions to
the jewelry industry. Through JOR, lifestyle portal sites, general auction
sites, and conventional jewelry retailers will have real time access to
"one-of-a-kind" pieces of fine and estate jewelry from the most elite jewelry
dealers in the world. Moreover through JOR, jewelers are able to automate the
inventory management process thereby lowering the costs associated with
procurement, evaluation, authentication and distribution of fine and estate
jewelry.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
F-28
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND THE CONSOLIDATED STATEMENT OF OPERATIONS FILED
AS PART OF THE ANNUAL REPORT ON FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH ANNUAL REPORT ON FORM 10-K.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 1,860,000
<SECURITIES> 1,844,000
<RECEIVABLES> 3,665,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 7,401,000
<PP&E> 83,000
<DEPRECIATION> 8,000
<TOTAL-ASSETS> 9,047,000
<CURRENT-LIABILITIES> 316,000
<BONDS> 0
<COMMON> 16,000
0
3,000
<OTHER-SE> 8,712,000
<TOTAL-LIABILITY-AND-EQUITY> 9,047,000
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 2,330,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,000
<INCOME-PRETAX> 567,000
<INCOME-TAX> (25,000)
<INCOME-CONTINUING> 542,000
<DISCONTINUED> 9,368,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,910,000
<EPS-BASIC> 6.32
<EPS-DILUTED> 6.32
</TABLE>
