UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For The Quarterly Period Ended June 30, 2000
Commission File Number 0-4186
THE SAGEMARK COMPANIES LTD.
(Exact name of registrant as specified in its charter)
(Formerly known as Consolidated Technology Group Ltd.)
New York 13-1948169
(State or other jurisdiction of (IRS Employer
Incorporation or organization) Identification Number)
700 Gemini, Houston, TX 77058
(Address of principal executive offices) (Zip Code)
(281) 488-8484
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No ____
-----
Number of common shares outstanding as of August 11, 2000: 1,560,247
1
<PAGE>
The Sagemark Companies Ltd.
Index
Page
----
Part I: - Financial Information:
Item 1. Financial Statements:
Condensed Consolidated Statements of Operations - Unaudited
- Three and Six Months Ended June 30, 2000 and 1999 3
Condensed Consolidated Statements of Comprehensive Income
(Loss) - Unaudited - Three and Six Months Ended June 30,
2000 and 1999 4
Condensed Consolidated Balance Sheets - June 30, 2000
(Unaudited) and December 31, 1999 5
Condensed Consolidated Statements of Cash Flows
- Unaudited - Six Months Ended June 30, 2000 and 1999 6
Notes to Unaudited Condensed Consolidated Financial Statements 7-12
Item 2. Management's Discussion and Analysis of the Financial
Condition and Results of Operations 13-17
Part II - Other Information:
Item 1. Legal Proceedings 18
Signatures 19
2
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The Sagemark Companies Ltd. and Subsidiaries
Condensed Consolidated Statements of Operations
Unaudited
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended
June 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue
Financing Fees $ 90,000 $ - $240,000 $ -
Financing Fees, related party - - 85,000 -
Interest from portfolio companies 137,000 - 199,000 -
Interest, related party 113,000 - 219,000 -
------------------------------- ---------------------------------
Total revenue 340,000 - 743,000 -
Operating Expenses:
Salaries, payroll taxes and fringe benefits 224,000 199,000 446,000 344,000
Professional fees 95,000 195,000 218,000 676,000
Other general and administrative expense 82,000 186,000 176,000 244,000
Consulting fees 40,000 67,000 95,000 75,000
Termination payments for executive contracts - 48,000 - 48,000
Settlement costs - 30,000 - 38,000
------------------------------- ---------------------------------
Total Operating expenses 441,000 725,000 935,000 1,425,000
Loss from Operations (101,000) (725,000) (192,000) (1,425,000)
Gain from Marketable Securities - 1,032,000 6,000 1,062,000
Other Income (Loss), Net 41,000 3,000 20,000 14,000
------------------------------- ---------------------------------
Income (Loss) from Continuing Operations Before Minority
Interest and Share of Loss of Unconsolidated Affiliate (60,000) 310,000 (166,000) (349,000)
Minority Interest in Income (Loss) of Subsidiaries (32,000) (169,000) 194,000 (296,000)
Share of Income of Unconsolidated Affiliates - 113,000 - 113,000
------------------------------- ---------------------------------
Income (Loss) from Continuing Operations (92,000) 254,000 28,000 (532,000)
Discontinued Operations:
Income from operations of discontinued segment - 319,000 - 637,000
Gain on disposal of segment - 8,124,000 - 8,124,000
------------------------------- ---------------------------------
Net Income (Loss) $ (92,000) $ 8,697,000 $ 28,000 $8,229,000
=========== ============ =========== ============
Basic and Diluted Income (Loss) per Common Share:
Income (Loss) from Continuing Operations $(0.06) $0.16 $0.02 $ (0.34)
Income from operations of discontinued segment 0.00 0.20 0.00 0.41
Gain from disposal of segment 0.00 5.21 0.00 5.19
------------------------------- ---------------------------------
Net Income (Loss) $(0.06) $5.57 $0.02 $ 5.26
=============================== =================================
Weighted average number of common shares 1,560,247 1,561,837 1,560,247 1,565,164
=============================== =================================
</TABLE>
See notes to unaudited condensed consolidated financial statements.
3
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The Sagemark Companies Ltd. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income
Unaudited
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Income (Loss) $ (92,000) $ 8,697,000 $ 28,000 $ 8,229,000
Other Comprehensive Income (Expense):
Unrealized holding gains (losses) on available
for sale securities (31,000) 773,000 19,000 808,000
Reclassification for realized (gains) losses on
available for sale securities - (67,000) 265,000 (87,000)
---------------------------------------------------------------
Comprehensive Income (Loss) $ (123,000) $ 9,403,000 $ 312,000 $ 8,950,000
===============================================================
</TABLE>
See notes to unaudited condensed consolidated financial statements.
4
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The Sagemark Companies Ltd. and Subsidiaries
Condensed Consolidated Balance Sheets
Unaudited
<TABLE>
<CAPTION>
June 30,
2000 December 31,
---- 1999
----
<S> <C> <C>
Assets:
Cash and cash equivalents $ 729,000 $ 1,860,000
Marketable securities, current - 1,844,000
Receivables, related parties 204,000 -
Note receivable, related party 2,976,000 2,976,000
Note receivable, other - 689,000
Other current assets 167,000 32,000
------------- ------------
Total Current assets 4,076,000 7,401,000
Notes receivable 5,120,000 420,000
Notes receivable, related party 253,000 -
Deferred financing cost 75,000 -
Marketable securities 41,000 201,000
Investment in non-marketable securities, related party 950,000 950,000
Investment in non-marketable securities 525,000 -
Other Assets 71,000 75,000
------------- ------------
Total Assets $11,111,000 $ 9,047,000
=========== ============
Liabilities and Shareholders' Equity:
Liabilities:
Accounts payable $ 164,000 $ 181,000
Other current liabilities 98,000 136,000
------------- ------------
Current liabilities 262,000 316,000
------------- ------------
Minority interest in Sagemark Capital, LP 1,806,000 -
------------- ------------
Shareholders' equity
Preferred stock 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 June 30, 2000 and December 31, 1999) 16,000 16,000
Additional paid-in-capital, common stock 58,155,000 58,155,000
Accumulated other comprehensive income 8,000 (276,000)
Accumulated deficit (48,892,000) (48,920,000)
Less common stock in treasury, at cost (247,000) (247,000)
-------------- -------------
Total shareholders' equity 9,043,000 8,731,000
-------------- -------------
Total Liabilities and Shareholders' Equity $11,111,000 $ 9,047,000
=========== ============
</TABLE>
See notes to unaudited condensed consolidated financial statements.
5
<PAGE>
The Sagemark Companies Ltd. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
Unaudited
<TABLE>
<CAPTION>
Six Months Ended June 30,
2000 1999
---- ----
<S> <C> <C>
Net cash used in continuing operations $ (508,000) $ (2,482,000)
Net cash used in discontinued operations - (12,000)
----------- -------------
Net cash used in operating activities 508,000) (2,494,000)
Cash Flows from Investing Activities:
Proceeds from sale of marketable securities 2,238,000 6,735,000
Advances made on notes receivable, related party (253,000) -
Advances made on notes receivable (4,700,000) -
Proceeds from note receivable 689,000 -
Investment in marketable securities - (3,219,000)
Investment in non-marketable securities (525,000) -
Net proceeds for disposal of segments - 855,000
Other net investing activities 3,000 (397,000)
------------ -------------
Net cash provided by (used in) investing activities (2,548,000) 3,974,000
Cash Flows from Financing Activities:
Purchase treasury stock - (104,000)
Deferred financing cost 75,000 -
Proceeds from investors 2,000,000 -
----------- -------------
Net cash provided by (used in) investing activities 2,075,000 (104,000)
Net increase (decrease) in cash and cash equivalents (1,131,000) 1,376,000
Cash and cash equivalents at beginning of period 1,860,000 179,000
----------- ------------
Cash and cash equivalents at end of period $ 729,000 $ 1,555,000
=========== ============
Supplemental Disclosures of Cash Flow Information:
Cash paid for:
Interest $ - $ -
===========================
Income taxes $ 46,000 $ 10,000
===========================
</TABLE>
See notes to unaudited condensed consolidated financial statements.
6
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The Sagemark Companies Ltd. and Subsidiaries
Footnotes to Unaudited Condensed Consolidated Financial Statements
------------------------------------------------------------------
(1) Basis of Presentation - The accompanying unaudited consolidated condensed
financial statements of Sagemark Companies Ltd. ("Sagemark", the "Company") have
been prepared in accordance with Rule 10-01 of Regulation S-X promulgated by the
Securities and Exchange Commission and do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, the Company has made all
adjustments necessary for a fair presentation of the results of the interim
periods, and such adjustments consist of only normal recurring adjustments. The
results of operations for such interim periods are not necessarily indicative of
results of operations for a full year. The unaudited condensed consolidated
financial statements should be read in conjunction with the audited consolidated
financial statements and notes thereto of the Company and management's
discussion and analysis of financial condition and results of operations
included in the Annual Report on Form 10-K for the year ended December 31, 1999.
Certain reclassifications were made to prior year amounts to conform with
current year presentation.
(2) Nature of Operations - During 1999, the Company entered into transactions
whereby the operations of Trans Global Services, Inc. ("Trans Global") and Arc
Networks, Inc. ("Arc Networks") are presented as discontinued for accounting
purposes and has disposed of its ownership in Netsmart Technologies, Inc.
("Netsmart"), an unconsolidated affiliate. As a result of these transactions,
the Company has no operating segments.
Thereafter Sagemark has become a financial services company that seeks to
identify, acquire, develop and support emerging growth companies. Sagemark is
attempting to identify one or more businesses that will constitute its primary
operations in the future. The Company focuses on, but is not limited to,
companies that are expected to benefit from the growing use of the Internet, in
such industries as eCommerce, software, and telecommunications. There can be no
assurance that the Company will be able to locate investments in such industries
on terms favorable to it.
Sagemark Capital, LP ("Sagemark Capital"), a partnership in which Sagemark holds
a 61.5% limited partnership interest, was organized during 1999 for the purpose
of making investments. On May 23, 2000, Sagemark Capital was awarded a license
by the Small Business Administration ("SBA") to operate as a Small Business
Investment Company ("SBIC"). See note (8) for a further explanation of Sagemark
Capital.
(3) 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 continues
to seek businesses for purchase by the Company, but 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.
7
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The Sagemark Companies Ltd. and Subsidiaries
Footnotes to Unaudited Condensed Consolidated Financial Statements
------------------------------------------------------------------
(4) Accounting Policies - The accounting policies followed by the Company are
set forth in Note 1 to the Company's financial statements in the December 31,
1999 Form 10-K.
(5) Notes Receivable -
(a) 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.
(b) 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 not in
compliance with certain loan covenants, one of which relates to interest
coverage ratios. The Company is currently evaluating the defaults to determine
what action, if any, is necessary. 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. As of June 30, 2000, the
Company has advanced $700,000 under the note agreement. The Company advanced the
remaining $300,000 in July 2000.
(c) 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
383,000 shares of FutureMed's common shares at a nominal price. 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.
(d) e-Qcare, LLC - In June 2000, the Company made an investment in e-Qcare, LLC
("e-Qcare") whereby the Company loaned e-Qcare $1,500,000 pursuant to a note
bearing interest at 14% with principal and interest due beginning twelve months
from the date of execution. In addition, the Company received warrants to
purchase 30% of e-Qcare`s ownership units, computed on a fully-diluted basis, at
a nominal price. If the note is repaid during the period December 2000 through
April 2001, the percentage of e-Qcare's ownership units will be reduced by 2.5%
for each month prepayment is made prior to May 2001. The percentage may not be
reduced to less than 15% of e-Qcare's ownership units. e-Qcare is a healthcare
technology
8
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The Sagemark Companies Ltd. and Subsidiaries
Footnotes to Unaudited Condensed Consolidated Financial Statements
------------------------------------------------------------------
company established to capitalize on the outsourcing trend within the health
plan benefits arena. The Company provides a unique, proprietary reimbursement
system for health plans to reduce medical and surgical healthcare costs.
(6) Note receivable, related party
(a) JewelersEdge - In March 2000, the Company made an investment in
JewelersEdge.com (f.k.a. JewelsOnRodeo.com, Inc.) ("JewelersEdge") whereby the
Company loaned JewelersEdge $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 JewelersEdge's common
shares. The Company has exercised its option to purchase the shares. In June
2000, the Company advanced JewelersEdge $3,000 through a convertible note
receivable. Mr. Frank DeLape, the Company's Chief Executive Officer and Chairman
of the Board is the beneficial owner of 45.8 %, and is a director of,
JewelersEdge. JewelersEdge is positioning itself to become the leading provider
of web based e-commerce solutions to the jewelry industry. Through JewelersEdge,
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 jewelry dealers worldwide. Moreover through JewelersEdge,
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.
(b) Arc Networks - In March 2000, the Company extended its note receivable from
Arc Networks from March 31, 2000 to June 19,2000. Contemporaneously with this
extension, the Company entered into an agreement with Infohighway Communications
Corporation ("Infohighway"), the parent of Arc Networks whereby Infohighway
issued the Company 5,000 shares of its common stock and a warrant to purchase
200,000 shares of its common stock with an exercise price equal to the share
price of the next private placement or public offering. The warrant expires on
May 5, 2005. The note receivable is currently due and payable. Interest thru
June 30,2000 has been paid. The Company currently owns 5,000 shares of its
common stock and warrants to purchase 670,000 shares of its common stock with an
exercise price ranging from $3.00 to the price of the next private placement or
public offering.
(7) Investment in non-marketable securities
(a) Bynari, Inc - In June 2000, the Company made an equity investment in Bynari,
Inc. ("Bynari") of $275,000 in exchange for 250,000 shares of common stock.
Bynari develops, markets and supports Linux based applications for the
enterprise and consumer marketplace. Bynari is currently launching two
proprietary products that allow UNIX and Linux desktops, workstations and
servers to participate and communicate with Microsoft Exchange (Outlook)
enterprises, which permit UNIX and Linux based e-mail users to communicate with
Microsoft's Exchange (Outlook) e-mail users.
(b) PrintOnTheNet - In May 2000, the Company made an equity investment in
PrintOnTheNet.com, Inc. ("PrintOnTheNet") of $250,000 in exchange for 125,000
shares of
9
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The Sagemark Companies Ltd. and Subsidiaries
Footnotes to Unaudited Condensed Consolidated Financial Statements
------------------------------------------------------------------
Series B Convertible Preferred Stock. Each share is automatically convertible
into 20 shares of common stock at such time as PrintOnTheNet has sufficient
authorized number of shares of Common Stock to permit the conversion of all the
shares of Series B Convertible Preferred Stock. PrintOnTheNet is an Internet
based provider of on-line printing services for small to medium-sized
businesses.
(8) Minority Interest - In January 2000, five limited partners were admitted
into Sagemark Capital in exchange for a $3 million ($2 million cash and $1
million in the form of a subscription receivable) contribution. As a result, the
Company's limited partnership interest was reduced from 99% to 61.5%. For
financial reporting purposes, the assets, liabilities and results of operations
and cash flows of Sagemark Capital are included in the Company's consolidated
financial statements, and the outside investors' interest in Sagemark Capital is
reflected as a minority interest.
Sagemark Capital is managed by its general partner, Sagemark Management, LLC
("Sagemark Management"). Sagemark Management collects a management fee of
$50,000 per month pursuant to the partnership agreement and is responsible for
certain general and administrative expenses of Sagemark Capital. Sagemark
Management reimburses the Company for employee and other expenses incurred on
behalf of Sagemark Capital not to exceed $50,000 per month.
Sagemark Capital's distributions are to be made as follows:
First, to the partners in accordance with their respective ownership
percentages until each partner has received distributions equal to the entire
amount each partners' contributed capital.
Second, to the partners pro rata in accordance with their respective capital
account and
Third, 20% to Sagemark Management and 80% to the remaining partners.
Sagemark Management is owned by Mr. Frank DeLape and Mr. Richard Young, both
officers of the Company.
(9) Related Party Transactions - During the three and six month periods ending
June 30, 2000, the Company paid Benchmark Equity Group, Inc. ("Benchmark") $
9,000 and $ 29,000, respectively, for office rent, services, and other office
expenses. The Company believes that the amounts paid to Benchmark approximate
those that would have been paid if the transactions had been conducted at arm's
length. Benchmark is a privately held company wholly owned by Mr. Frank DeLape.
During the three and six month periods ending June 30, 2000, the Company
incurred $20,000 in consulting fees from Trans@ctive Partners, Ltd.
("Transactive") for evaluating potential acquisitions. The Company believes that
the amounts paid to Transactive approximate those that would have been paid if
the transactions had been conducted at arm's length. Transactive is 37.5% owned
by Mr. Frank DeLape. Mr. DeLape made no decision related to the transaction.
10
<PAGE>
The Sagemark Companies Ltd. and Subsidiaries
Footnotes to Unaudited Condensed Consolidated Financial Statements
------------------------------------------------------------------
(10) Interim Results - The results of operations for the three months ended June
30, 2000 and 1999 are not necessarily indicative of the results to be expected
for the full year.
(11) Earnings/(Loss) Per Share -On July 22, 1999, the Company's shareholders'
approved a 1 for 30 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 loss
for the period available to each share of common stock outstanding during the
reporting period. Diluted loss per share reflects basic 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. 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 loss per share. It assumes that any proceeds would be used to
purchase common stock at the average market price of the common stock during the
period. As of June 30, 2000, the Company does not have any dilutive items and
therefore, a dual presentation of earnings per share is not presented.
(12) Contingencies
(a) Trans Global is the holder of a $1.2 million promissory note issued by Arc
Networks which became due and payable on December 31, 1999. The note has
been extended to September 10, 2000. The Company confirmed its guarantee of
the outstanding indebtedness of Arc Networks to Trans Global.
(b) In addition to the Trans Global debt guarantee noted in 10(a) above,
during 1998, the Company guaranteed $550,000 of indebtedness that Arc
Networks has outstanding under a promissory note due September 30, 2000.
As of the date of this report, $50,000 has been paid.
(c) The Company, Benchmark and another principal shareholder in Infohighway
entered into an agreement with an investment advisor whereby the advisor
will perform certain services in exchange for, among other things,
warrants to purchase 2% of the common stock of Infohighway sold in the
next private placement.
(13) Discontinued Operations - As of June 30, 1999 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 is accounting for Trans Global
and Arc Networks, as discontinued segments. During the three months
ended June 30, 1999, the discontinued segments did not generate
revenue. The following table summarizes the net income of the
discontinued segments.
11
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The Sagemark Companies Ltd. and Subsidiaries
Footnotes to Unaudited Condensed Consolidated Financial Statements
------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C>
Income (Loss) from Discontinued Operations: Three Months Ended Six Months Ended
June 30, 1999 June 30, 1999
-----------------------------------------
Arc Networks $ 181,000 $ 499,000
Trans Global 57,000 --
Intercompany Transactions 81,000 133,000
---------- ----------
$ 319,000 $ 637,000
=========== ===========
Per share $ .20 $ -
=========== ===========
</TABLE>
(14) Gain on Disposal of Segments
(a) Trans Global - The Company and Trans Global entered into an agreement
whereby in May 1999, the Company 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.
(b) Arc Networks - The Company entered into an agreement with Arc Networks and
Technology Acquisitions, Ltd, pursuant to which the Company sold all of
its equity interest in Arc Networks for $855,000. As a result of the sale,
the Company recognized a gain of approximately $7,365,000 during the three
months ended June 30, 1999.
<TABLE>
<CAPTION>
<S> <C> <C>
Gain on Disposal of Segments: Three Months Ended Six Months Ended
June 30, 1999 June 30, 1999
-----------------------------------------
Trans Global $ 759,000 $ 759,000
Arc Networks 7,365,000 7,365,000
----------- -----------
$ 8,124,000 $ 8,124,000
=========== ===========
</TABLE>
(15) Subsequent Events - The Company is involved in discussions with certain
shareholders that may lead to a change in control. There can be no assurances to
the outcome.
Pursuant to those discussions, on August 4, 2000, the Company and the
shareholders entered into a standstill agreement whereby the Company will not
engage in or consummate any transaction or perform any activity outside the
ordinary course of business, including obtaining a commitment for funds from the
SBA. The agreement will remain in effect until either i) ten business days after
the notice by the shareholders, ii) one day after the notice by the Company or
iii) the shareholders commence a derivative action involving substantially the
same issues being discussed by the Company and the shareholders.
12
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The Sagemark Companies Ltd. and Subsidiaries
Footnotes to Unaudited Condensed Consolidated Financial Statements
------------------------------------------------------------------
Item 2. Management's Discussions and Analysis of Financial Condition
and Results of Operations
Forward Looking Statements
Statements in this Form 10-Q that are not descriptions of historical
facts may be forward-looking statements that are subject to risks and
uncertainties. Actual results could differ materially from those currently
anticipated due to a number of factors, including those identified in this Form
10-Q and in other documents filed by the Company with the Securities and
Exchange Commission.
Financial Condition - Liquidity and Capital Resources
As of June 30, 2000, ("June 2000"), the Company had cash and cash
equivalents of $729,000. The following table calculates the working capital that
the Company has available for use in its operations as of June 30, 2000 and
December 31, 1999 ("December 1999"), respectively.
June 30, December 31,
2000 1999
---- ----
Current assets $ 4,076,000 $ 7,401,000
Current liabilities 262,000 316,000
------- -------
Working capital available
for the Company's operations $ 3,814,000 $ 7,085,000
=========== ============
During the six months ended June 30, 2000 (the "2000 Six Month
Period"), the Company's available working capital decreased by $3,271,000. Uses
of working capital during the 2000 Six Month Period included advances of loans
of $4,953,000, investments in non-marketable securities of $525,000,
professional fees of $218,000, salaries, payroll taxes and fringe benefits of
$446,000, consulting fees of $95,000 deferred financing cost of $75,000 and
other operating expenses of $181,000.
Sources of working capital during the 2000 Six Month Period included
interest from related parties of $219,000, interest income from other loans
receivable of $199,000, increases in the market value of securities which were
sold during the period of $56,000, other interest income of $75,000, financing
fees from related parties of $85,000, financing fees from investees of $240,000,
proceeds from investors of $2,000,000, proceeds from the sale of marketable
securities of $340,000 and other operating income of $3,000. As of the date of
this report, the Company does not have definitive plans for the use of its
existing working capital.
In March 1998, the Company guaranteed $1.2 million of indebtedness that
Arc Networks has outstanding to Trans Global. Additionally, in September 1998,
the Company guaranteed
13
<PAGE>
$550,000 of indebtedness that Arc Networks has outstanding under a promissory
note, of which $50,000 has been paid. These guarantees remain in effect.
2000 and 1999 Second Quarter Operating Losses
The Company's loss from operations for the 2000 and 1999 2nd Quarters
was $101,000 and $725,000, respectively, a decrease of $6240, or 86%. The 2000
2nd Quarter income includes $104,000 interest from Arc Networks, $137,000
interest in loans receivable from portfolio companies, and $90,000 of financing
fees from portfolio companies. The 1999 2nd Quarter included no such amounts.
Professional fees decreased $100,000, or 51%, when comparing the 2000
and 1999 2nd Quarters. 2000 2nd Quarter professional fees includes $46,000 of
legal fees incurred in connection with loan advances, $35,000 of legal fees
incurred for litigation settlements and other general matters and $13,000 of
accounting fees. 1999 2nd Quarter professional fees represents $169,000 of legal
fees incurred for litigation settlements and other general matters and $26,000
of accounting fees.
Other general and administrative expenses decreased $104,000, or 56%,
when comparing the 2000 and 1999 2nd Quarters. The decrease was largely a result
of printing cost of $33,000 and shareholder expenses of $27,000 incurred in the
1999 Second Quarter relating to the annual shareholders' meeting and proxy vote.
No such amounts were paid in the 2000 Second Quarter. In addition, rent expense
decreased $40,000 relating to offices that were occupied during 1999 and not
occupied during 2000.
Termination payments for the 1999 2nd Quarter was $48,000. There was no
such payments in the 2000 2nd Quarter. Termination payments for executive
contracts relates to the termination of an employment agreement between the
Company and George W. Mahoney, its former CFO. In the 1999 2nd Quarter, the
Company and Mr. Mahoney mutually terminated the amended and restated employment
agreement and the Company paid Mr. Mahoney $48,000 in full satisfaction of any
amounts owed to Mr. Mahoney.
Consulting fees decreased $27,000, or 40%, from $67,000 for the 1999
2nd Quarter to $40,000 for the 2000 2nd Quarter. On April 20, 1999, Seymour
Richter resigned as the Company's president and chief executive officer.
Simultaneously with his resignation, Mr. Richter entered into a nine-month
consulting agreement with the Company pursuant to which he received an aggregate
of $56,000. During the 2000 2nd Quarter, the Company incurred fees of $40,000 to
consultants for evaluating potential acquisitions and other investment advisory
services.
During the 1999 2nd Quarter, the Company paid $30,000 in order to settle two
claims relating to IMI, a disposed subsidiary. No such amounts were paid in the
2000 2nd Quarter
Gain (Loss) on Marketable Securities
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During the 1999 Second Quarter, the Company realized gains of $964,000
from the sale of Netsmart common stock and $68,000 from the sale of US Treasury
Bills. During the 1999 Six Month Period total realized gains on US Treasury
Bills amounted to $98,000.
Loss from Continuing Operations
The Company's consolidated income (loss) from continuing operations for
the respective 2000 and 1999 2nd Quarters was $(92,000), or $(0.06) per share,
and $254,000, or $0.16 per share, respectively, representing a decrease of
$346,000. Minority interest in loss of subsidiaries in 2000 2nd Quarter was
$(32,000) and the 1999 2nd Quarter was $(169,000). The 2000 2nd Quarter amounts
include Sagemark Capital's income during the period. The 1999 2nd Quarter
amounts related to Trans Global's income. The decrease in income from continuing
operations is the result of the interest income as well as a decrease in general
and administrative expenses, offset by a gain on marketable securities in the
1999 2nd Quarter. Due to the non-recurring nature of realized gains on
marketable securities and contract termination expense, future reductions of
operating losses can not be assured.
2000 and 1999 Six Month Period Operating Losses
The Company's loss from operations for the 2000 and 1999 2000 Six Month
Period was $192,000 and $1,425,000, respectively, a decrease of $1,233,000, or
87%. The 2000 2nd Quarter income includes $208,000 interest from Arc Networks,
$199,000 interest in loans receivable from portfolio companies, $240,000 of
financing fees from portfolio companies, and $85,000 of financing fees from
related parties. The 1999 2nd Quarter included no such amounts.
Professional fees decreased $458,000, or 68%, when comparing the 2000
and 1999 2nd Quarters. 2000 2nd Quarter professional fees includes $95,000 of
legal fees incurred in connection with loan advances, $86,000 of legal fees
incurred for litigation settlements and other general matters and $37,000 of
accounting fees. During the 1999 Six Month Period, the Company incurred legal
fees of $265,000 related to the disposal of Arc Networks, Trans Global and
Netsmart shares, $127,000 related to litigation settlements, $36,000 related to
annual shareholders meeting, and $150,000 related to general matters.
Other general and administrative expenses decreased $68,000, or 28%,
when comparing the 2000 and 1999 2nd Quarters. The decrease was largely a result
of printing cost of $33,000 and shareholder expenses of $27,000 incurred in the
1999 2nd Quarter relating to the annual shareholders' meeting and proxy vote. No
such amounts were paid in the 2000 2nd Quarter. In addition, rent expense
decreased $40,000 relating to offices that were occupied during 1999 and not
occupied during 2000. In the 2000 2nd Quarter, employee expenses of $30,000 were
incurred relating to recruiting additional employees. No such amounts were paid
in the 1999 2nd Quarter.
Termination payments for the 1999 Six Month Period was $48,000. There
was no such payments in the 2000 Six Month Period . Termination payments for
executive contracts relates to
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the termination of an employment agreement between the Company and George W.
Mahoney, its former CFO. In the 1999 Six Month Period, the Company and Mr.
Mahoney mutually terminated the amended and restated employment agreement and
the Company paid Mr. Mahoney $48,000 in full satisfaction of any amounts owed to
Mr. Mahoney.
Consulting fees increased $20,000, or 27%, from $75,000 for the 1999
Six Month Period to $80,000 for the 2000 Six Month Period. On April 20, 1999,
Seymour Richter resigned as the Company's president and chief executive officer.
Simultaneously with his resignation, Mr. Richter entered into a nine-month
consulting agreement with the Company pursuant to which he received an aggregate
of $56,000. During the 2000 Six Month Period, the Company incurred fees of
$80,000 to consultants for evaluating potential acquisitions and other
investment advisory services.
During the 1999 Six Month Period, the Company paid $30,000 in order to settle
two claims relating to IMI, a disposed subsidiary. No such amounts were paid in
the 2000 Six Month Period
Gain (Loss) on Marketable Securities
During the 1999 Second Quarter, the Company realized gains of $964,000
from the sale of Netsmart common stock and $68,000 from the sale of US Treasury
Bills. During the 1999 Six Month Period total realized gains on US Treasury
Bills amounted to $98,000.
Loss from Continuing Operations
The Company's consolidated income (loss) from continuing operations for
the respective 2000 and 1999 Six Month Periods was $28,000, or $0.02 per share,
and $(532,000), or $(0.34) per share, respectively, representing an increase of
$560,000. Minority Interest in income (loss) in subsidiaries in 2000 Six Month
Period was $194,000 and the 1999 Six Month Period was $(296,000). The 2000 Six
Month Period amounts include i) Sagemark Capital's income during the period
ended June 30, 2000 of $54,000 and ii) pro rata allocation of previously
expensed organization costs to the new partners of $215,000. The 1999 Six Month
Period amounts related to Trans Global's income. The increase in income from
continuing operations is the result of the interest income and financing fees as
well as a decrease in general and administrative expenses, offset by a gain on
marketable securities in the 1999 Six Month Period. Due to the non-recurring
nature of realized gains on marketable securities and contract termination
expense, future reductions of operating losses can not be assured.
Other Events
See footnote (15) Subsequent Events for information relating to
discussions with certain shareholders.
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Future Operations
As of the date of this report the Company does not have any
consolidated operating subsidiaries. The future operating losses of the Company
will be comprised of its general and administrative expenses, which currently
consist primarily of salaries and related taxes and fringe benefits,
professional fees and other general and administrative costs. Effective August
15, 2000, the Company has five employees with annual base salaries aggregating
approximately $585,000, 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 commitment and application fees and interest earned on loans and
certificates of deposit and the Company's money market account, which in the
aggregate are expected to be 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.
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 continues to seek businesses for purchase by the Company,
but 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.
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PART II. OTHER INFORMATION
Item 1. 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 SIS Capital Corp., a
wholly owned subsidiary, and purportedly served Technology Acquisitions Ltd., 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
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. Arc Networks
has not made the required escrow payment; however, it continues to perform all
work requested by Mitel. As of Dec. 31, 1999, Arc Networks has completed, and
Mitel has accepted, $973,000 of work under the original contract. As of June 30,
2000, the undisputed liability has been reduced to $400,000 through additional
jobs awarded to and completed by Arc Networks. To the extent Arc Networks
satisfies the terms of the settlement agreement in full, it is envisioned that
the Company will be released from the litigation.
.............................
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following personnel on behalf of the Registrant and
in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/S/________________ Chief Executive Officer August 21, 2000
Frank DeLape (Principal Executive Officer
and Director)
/S/________________ President and Chief Operating Officer August 21, 2000
Richard Young (Principal Financial and Accounting
Officer)
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