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 SEPTEMBER 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 November 17, 2000: 1,560,247
<PAGE>
THE SAGEMARK COMPANIES LTD. AND SUBSIDIARIES
FOOTNOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The Sagemark Companies Ltd.
Index
PAGE
Part I: - Financial Information:
Item 1. Financial Statements:
Condensed Consolidated Statements of Operations - Unaudited -
Three and Nine Months Ended September 30, 2000 and 1999 3
Condensed Consolidated Statements of Comprehensive Income
(Loss) - Unaudited - Three and Nine Months Ended
September 30, 2000 and 1999 4
Condensed Consolidated Balance Sheets - September 30, 2000
(Unaudited) and December 31, 1999 5
Condensed Consolidated Statements of Cash Flows - Unaudited
- Nine Months Ended September 30, 2000 and 1999 6
Notes to Unaudited Condensed Consolidated Financial Statements 7-15
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 16-20
Part II - Other Information:
Item 1. Legal Proceedings 21
Item 6. Exhibits 22
Signatures 23
<PAGE>
<TABLE>
<CAPTION>
The Sagemark Companies Ltd. and Subsidiaries
Condensed Consolidated Statements of Operations
UNAUDITED
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue
Financing Fees $ 8,000 $ -- $ 248,000 $ --
Financing Fees, related party -- -- 85,000 --
Interest from portfolio companies 166,000 -- 365,000 --
Interest, related party 86,000 -- 305,000 --
----------- ----------- ----------- -----------
Total revenue 260,000 -- 1,003,000 --
Operating Expenses:
Salaries, payroll taxes and fringe benefits 192,000 226,000 637,000 570,000
Professional fees 104,000 95,000 322,000 771,000
Other general and administrative expense 101,000 171,000 277,000 415,000
Consulting fees -- 3,000 95,000 78,000
Termination payments for executive contracts -- -- -- 48,000
Settlement costs -- -- -- 38,000
----------- ----------- ----------- -----------
Total Operating expenses 397,000 495,000 1,331,000 1,920,000
Loss from Operations (137,000) (495,000) (328,000) (1,920,000)
Loss from Investment write-off (950,000) -- (950,000) --
Gain from Marketable Securities 369,000 385,000 374,000 1,447,000
Other Income (Loss), Net (12,000) 113,000 8,000 127,000
----------- ----------- ----------- -----------
Income (Loss) from Continuing Operations Before Minority
Interest and Share of Loss of Unconsolidated Affiliate (730,000) 3,000 (896,000) (346,000)
Minority Interest in Income (Loss) of Subsidiaries (6,000) -- 188,000 (296,000)
Share of Income of Unconsolidated Affiliates -- -- -- 113,000
----------- ----------- ----------- -----------
Income (Loss) from Continuing Operations (736,000) 3,000 (708,000) (529,000)
Discontinued Operations:
Income from operations of discontinued segment -- -- -- 637,000
Gain on disposal of segment -- -- -- 8,124,000
----------- ----------- ----------- -----------
Net Income (Loss) $ (736,000) $ 3,000 $ (708,000) $ 8,232,000
=========== =========== =========== ===========
Basic and Diluted Income (Loss) per Common Share:
Income (Loss) from Continuing Operations $ (0.47) $ 0.00 $ (0.45) $ (0.34)
Income from operations of discontinued segment 0.00 0.00 0.00 0.41
Gain from disposal of segment 0.00 0.00 0.00 5.19
----------- ----------- ----------- -----------
Net Income (Loss) $ (0.47) $ 0.00 $ (0.45) $ 5.26
=========== =========== =========== ===========
Weighted average number of common shares 1,560,247 1,558,319 1,560,247 1,564,043
=========== =========== =========== ===========
</TABLE>
See notes to unaudited condensed consolidated financial statements.
3
<PAGE>
<TABLE>
<CAPTION>
The Sagemark Companies Ltd. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income
UNAUDITED
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net Income (Loss) $ (736,000) $ 3,000 $ (708,000) $ 8,232,000
Other Comprehensive Income (Expense):
Unrealized holding gains (losses) on available for sale securities (21,000) 661,000 (3,000) 1,469,000
Reclassification for realized gains (losses) on available for
sale securities -- (346,000) 265,000 (433,000)
----------- ----------- ----------- -----------
Comprehensive Income (Loss) $ (757,000) $ 318,000 $ (446,000) $ 9,268,000
=========== =========== =========== ===========
</TABLE>
4
See notes to unaudited condensed consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
The Sagemark Companies Ltd. and Subsidiaries
Condensed Consolidated Balance Sheets
UNAUDITED
September 30, December 31,
2000 1999
------------ ------------
<S> <C> <C>
Assets:
Cash and cash equivalents $ 3,361,000 $ 1,860,000
Marketable securities, current -- 1,844,000
Receivables, related parties 68,000 --
Note receivable, related party -- 2,976,000
Note receivable, other -- 689,000
Note Receivable, current 557,000 --
Other current assets 256,000 32,000
------------ ------------
Total current assets 4,242,000 7,401,000
Notes receivable 4,863,000 420,000
Notes receivable, related party 253,000 --
Deferred financing cost 75,000 --
Marketable securities 20,000 201,000
Investment in non-marketable securities, related party 10,000 950,000
Investment in non-marketable securities 775,000 --
Other Assets 76,000 75,000
------------ ------------
Total Assets $ 10,314,000 $ 9,047,000
============ ============
Liabilities and Shareholders' Equity:
Liabilities:
Accounts payable $ 91,000 $ 181,000
Other current liabilities 116,000 135,000
------------ ------------
Total current liabilities 207,000 316,000
Minority interest in Sagemark Capital, LP 1,812,000 --
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
September 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 loss (3,000) (276,000)
Accumulated deficit (49,629,000) (48,920,000)
Less common stock in treasury, at cost (247,000) (247,000)
------------ ------------
Total shareholders' equity 8,295,000 8,731,000
------------ ------------
Total Liabilities and Shareholders' Equity $ 10,314,000 $ 9,047,000
============ ============
</TABLE>
See notes to unaudited condensed consolidated financial statements.
5
<PAGE>
<TABLE>
<CAPTION>
The Sagemark Companies Ltd. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
UNAUDITED
Nine Months Ended
September 30,
2000 1999
------------ ------------
<S> <C> <C>
Net cash used in continuing operations $ (308,000) $ (3,147,000)
Net cash used in discontinued operations -- (12,000)
------------ ------------
Net cash used in operating activities (308,000) (3,159,000)
Cash Flows from Investing Activities:
Proceeds from sale of marketable securities 2,238,000 10,418,000
Advances made on notes receivable, related party (253,000) --
Advances made on notes receivable (5,000,000) (1,060,000)
Proceeds from note receivable 689,000 --
Proceeds from note receivable, related party 2,976,000 --
Investment in marketable securities -- (3,220,000)
Investment in non-marketable securities (775,000) (950,000)
Net proceeds for disposal of segments -- 855,000
Other net investing activities 9,000 (44,000)
------------ ------------
Net cash provided by (used in) investing activities (116,000) 5,999,000
Cash Flows from Financing Activities:
Repayment of discontinued segments liabilities -- (93,000)
Deferred financing cost (75,000) --
Proceeds from investors 2,000,000 --
Other net financing activities -- (162,000)
------------ ------------
Net cash provided by (used in) financing activities 1,925,000 (255,000)
Net increase in cash and cash equivalents 1,501,000 2,585,000
Cash and cash equivalents at beginning of period 1,860,000 179,000
------------ ------------
Cash and cash equivalents at end of period $ 3,361,000 $ 2,764,000
============ ============
Supplemental Disclosures of Cash Flow Information:
Cash paid for:
Interest $ -- $ --
============ ============
Income taxes $ 49,000 $ 36,000
============ ============
</TABLE>
See notes to unaudited condensed consolidated financial statements.
6
<PAGE>
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" or 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" or the "Partnership"), 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 (9) 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 deemed invested
in securities of companies which are not majority owned subsidiaries of 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,
which may have a material adverse affect on the Company. 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
<PAGE>
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 Partnership made an investment in Eclipse
Communications Corporation d.b.a. enTotal.com ("enTotal.com") whereby the
Partnership loaned enTotal.com $1.5 million pursuant to a note bearing interest
at 14 % with principal due in fourteen equal quarterly installments beginning
June 30, 2001. Additionally, the Partnership received a warrant to purchase 2.5
million shares of enTotal.com's common shares at a nominal price. EnTotal.com is
a 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 Partnership made an investment in
People Solutions, Inc. ("People Solutions") whereby the Partnership has loaned
People Solutions $1 million pursuant to a note bearing interest at 14% with
principal due in twelve equal quarterly installments beginning April 30, 2001.
Additionally, the Partnership received a warrant to purchase 1 million shares of
People Solutions' common shares at a nominal price. People Solutions is not in
compliance with certain loan covenants, one of which relates to interest
coverage ratios; however, all required interest payments have been made to date.
The Partnership granted People Solutions a waiver through December 2000. People
Solutions is a full service provider of comprehensive, creative human resource
management solutions providing human resource consulting and outsourcing
services in areas such as recruiting, retention, career management and training.
(c) FutureMed - In February 2000, the Partnership made an investment in
FutureMed Interventional, Inc. ("FutureMed") whereby the Partnership loaned
FutureMed $1 million pursuant to a note bearing interest at 13.5% with principal
due February 29, 2005. In addition, the Partnership is entitled to receive a
warrant to purchase 383,000 shares of FutureMed's common shares at a nominal
price. FutureMed 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 May 2000, the Partnership made an investment in e-Qcare,
LLC ("e-Qcare") whereby the Partnership loaned e-Qcare $1,500,000 (the "Loan")
pursuant to a note bearing interest at 14% per annum with equal principal and
interest payments due beginning May 2001. In addition, the Partnership received
warrants representing the right to purchase 1,842,857 ownership units of e-Qcare
at a nominal price. If the note is prepaid during the period December 2000
through April 2001, the amount of warrants representing the right to purchase
ownership units of e-Qcare will be reduced based upon the month in which the
Loan prepayment is actually paid prior to May 2001. However, the number of units
8
<PAGE>
THE SAGEMARK COMPANIES LTD. AND SUBSIDIARIES
FOOTNOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
of ownership units may not be reduced to less than an amount representing the
right to purchase 15% of e-Qcare's issued and outstanding ownership units.
e-Qcare is a healthcare technology company established to capitalize on the
outsourcing trend within the health plan benefits arena and provides a unique,
proprietary reimbursement system for health plans to reduce medical and surgical
healthcare costs.
(6) Notes 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%
per annum 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 at a nominal price. The Company has exercised its
option to purchase the shares at a nominal price. 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 24.3% of the common stock of JewelersEdge, and is a director
of JewelersEdge. 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 will be 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 - On September 6, 2000 the Company received from Arc Networks,
Inc. ("Arc") $3,053,000 representing payment of all principal and accrued
interest then due from Arc pursuant to Arc's outstanding promissory note to the
Company. On September 15, 2000, the Company received from InfoHighway
Communications Corporation ("InfoHighway"), Arc's parent, the sum of $368,500
representing the purchase price for certain warrants to purchase common stock of
InfoHighway then owned by the Company. The Company currently owns 5,000 shares
of InfoHighway's common stock.
(7) Investment in non-marketable securities, related party - In September 2000,
the Company recorded a permanent investment write-off of $950,000 of its
Gavelnet investment as a result of its review of the realizable value of its
investment.
(8) Investment in non-marketable securities
(a) Bynari, Inc - In June 2000, the Partnership made an equity investment in
Bynari, Inc. ("Bynari") of $275,000 in exchange for 250,000 shares of Bynari's
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.
9
<PAGE>
THE SAGEMARK COMPANIES LTD. AND SUBSIDIARIES
FOOTNOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(b) PrintOnTheNet - In May 2000, the Partnership made an equity investment in
PrintOnTheNet.com, Inc. ("PrintOnTheNet") of $250,000 in exchange for 125,000
shares of 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.
(c) Rocket8 Global Networks, Inc. - In July 2000, the Partnership made an equity
investment in Rocket8 Global Networks, Inc ("Rocket8") of $250,000 in exchange
for 625,000 shares of Series A Convertible Preferred Stock. Each share is
automatically convertible into one share of common stock. Rocket8 Global
Networks, Inc. is an interactive media company that allows businesses to display
interactive TV and magazine style advertisements to captive audiences that
actively want to view them.
(9) 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) capital 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
$46,875 per month, subject to adjustment pursuant to SBA rules, and 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
$46,875 per month. As of September 30, 2000, Sagemark Management has not
reimbursed any amounts to the Company subsequent to the July management fee.
Subsequent to September 30, 2000, the September management fee was reimbursed to
the Company. Pursuant to the Transition Agreement described in Note 17, the
reimbursement arrangement described above will be terminated.
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.
10
<PAGE>
THE SAGEMARK COMPANIES LTD. AND SUBSIDIARIES
FOOTNOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Sagemark Management is owned by Mr. Frank DeLape and Mr. Richard Young, both
officers of the Company.
(10) Related Party Transactions - During the three and nine month periods ending
September 30, 2000, the Company paid Benchmark Equity Group, Inc. ("Benchmark")
$15,000 and $44,000, respectively, for office rent, services, and other office
expenses pursuant to an Expense Sharing Agreement dated June 10, 1999 between
the Company and Benchmark Equity Group, Inc. (the "Expense Sharing Agreement").
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. Pursuant
to the Transition Agreement described in Note 17, the Expense Sharing Agreement
will be terminated.
During the nine-month period ending September 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.
See Note (17) below, which is incorporated herein by reference.
(11) Interim Results - The results of operations for the three months ended
September 30, 2000 and 1999 are not necessarily indicative of the results to be
expected for the full year.
(12) 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 September 30, 2000, the Company does not have any dilutive items
and therefore, a dual presentation of earnings per share is not presented.
(13) Contingencies -
(a) Trans Global Services, Inc., ("TransGlobal") was the holder of a $1.2
million promissory note issued by Arc. The Company guaranteed the outstanding
indebtedness of Arc Networks to Trans Global. In addition, during 1998, the
11
<PAGE>
THE SAGEMARK COMPANIES LTD. AND SUBSIDIARIES
FOOTNOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Company guaranteed $550,000 of indebtedness that Arc Networks had outstanding
under a promissory note to Batei Sefer Limlacha. On September 6, 2000,
InfoHighway paid, on behalf of Arc, all outstanding indebtedness of Arc to
TransGlobal Services, Inc. and Batei Sefer Limlacha. Effective upon such
payments by InfoHighway, the Company's aforementioned guaranties were canceled
and are no longer in force or effect.
(b) The Company, Benchmark and another principal shareholder in Infohighway
("InfoHighway Stakeholders") 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, payable jointly and severally by the InfoHighway
stakeholders. The contemplated private placement has been consummated. On
November 13, 2000, the Company received notice form the other principal
shareholder that the Company has no liability to the investment advisor.
(14) Discontinued Operations - As of September 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 September 30, 1999, the discontinued
segments did not generate revenue. The following table summarizes the net income
of the discontinued segments.
Three Months Ended Nine Months Ended
September 30, 1999 September 30, 1999
------------------ ------------------
Income from Discontinued Operations:
Arc Networks $ -- $ 499,000
Trans Global -- --
Intercompany Transactions -- 138,000
------------------ ------------------
$ -- $ 637,000
================== ==================
Per share $ -- $ --
(15) 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 nine months ended September 30, 1999.
(b) Arc Networks - The Company entered into an agreement with Arc Networks
and Technology Acquisitions, Ltd, pursuant to which the Company sold
12
<PAGE>
THE SAGEMARK COMPANIES LTD. AND SUBSIDIARIES
FOOTNOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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.
Gain on Disposal of Segments: Three Months Ended Nine Months Ended
September 30, 1999 September 30, 1999
------------------ ------------------
Trans Global $ -- $ 759,000
Arc Networks -- 7,365,000
------------------ ------------------
$ -- $ 8,124,000
================== ==================
(16) Subsequent Events - In anticipation of an investment by the Partnership, in
October 2000, the Partnership issued a $1,500,000 debenture with a 10-year term
with interest payable semi-annually. The interim interest rate is 7.201%; the
permanent interest rate will be determined in March 2001. In connection with
this issuance, the Partnership paid $37,500 in fees to the SBA.
(17) Change of Control - On November 20, 2000, the Company and Frank DeLape and
Richard Young, the Company's Chief Executive Officer and President and Chief
Operating Officer, respectively, entered into a Transition Agreement (the
"Transition Agreement") with Edward D. Bright, acting on his own behalf and on
behalf of certain shareholders of the Company. The Transition Agreement was
consummated in order to effectuate an agreed upon change of management whereby
Messrs. DeLape and Young would continue to own and manage Sagemark Management
and be released from their contracts with the Company.
The Transition Agreement provides for, among other things, the
termination of the existing Employment Agreements between the Company and
Messrs. DeLape and Young, the payment to Richard Young of $60,000 of severance
compensation therefor, the termination of the Expense Sharing Agreement, the
retention of Messrs. DeLape and Young to provide certain consulting services
during the transition period of 60 and 90 days, respectively, and the payment to
Richard Young of $60,000 as compensation for such consulting services, the
resignation of Messrs. DeLape, Young and Steve Jones ("Jones") as officers and
directors of the Company and all of its subsidiaries, the execution and delivery
by the Company and its subsidiaries of Releases and Covenants Not to Sue to
Messrs. DeLape, Young, Jones and certain other persons identified as their
Affiliates in the Transition Agreement, the execution and delivery by Messrs.
DeLape, Young and such Affiliates of Releases and Covenants Not to Sue to the
Company and certain others named in the Transition Agreement, the
indemnification by the Company of Messrs. DeLape, Young and Jones, and the
issuance to Frank DeLape of 24,000 shares of the Company's common stock in
consideration of the return and cancellation of certain stock options previously
issued to Mr. DeLape by the Company.
Edward D. Bright and Theodore B. Shapiro were appointed to the
Company's Board of Directors pursuant to the terms of the Transition Agreement
to fill the vacancies created by the resignations of Messrs. DeLape, Young and
Jones. Messrs. DeLape and Young will continue to provide their services to
Sagemark Management, following the consummation of the Transition agreement.
13
<PAGE>
THE SAGEMARK COMPANIES LTD. AND SUBSIDIARIES
FOOTNOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Simultaneously with the execution of the Transition Agreement, the
Company and Gemini VII, Inc. ("Gemini"), a company with negligible assets and
liabilities which is owned by Messrs. DeLape and Young, entered into a Stock
Purchase Agreement pursuant to which Sagemark sold the 100,000 shares of
preferred stock of Gavelnet.com, Inc. (the "Gavelnet Shares") and the 137,500
shares of common stock of JewelersEdge (the "JewelersEdge Shares") owned by it
to Gemini for $3,500,000 (the "Purchase Price"). The Purchase Price was paid by
Gemini's non-interest bearing, non-negotiable promissory note (the "Note") due
on the later of November 30, 2009 or the date of expiration of the term of the
Agreement of Limited Partnership of the Partnership. The Note is mandatorily
prepayable if and to the extent that Sagemark Management receives distributions
from the Partnership (and, in such instance, in such amount as shall equal 50%
of any such distributions, less certain amounts specified in the Note) or Gemini
receives the proceeds of any sale by it of the Gavelnet Shares or the
JewelersEdge Shares. The Note is with recourse to Gemini only to the extent of
any breach of such mandatory prepayment provisions. The principal amount of the
Note will be reduced at the maturity date by an amount equal to the difference
between such principal and the aggregate amount of all such distribution and
sales proceeds actually received prior to the maturity date.
The obligations of Gemini under the Note, to the extent that there is
recourse against Gemini thereunder, is severally personally guaranteed by
Messrs. DeLape and Young, but only to the extent that either of such individuals
receives the proceeds of any such distributions (less the amount of all
applicable Federal, state and local taxes computed at the maximum applicable tax
rate). There is no assurance that any such distribution or sale proceeds will be
received or, if so, when and to what extent.
On November 20, 2000, Sagemark Management and the Company also executed
a Letter Agreement that provides, in pertinent part, that Sagemark Management in
its capacity as general partner of Sagemark Capital, LP, will not seek to have
the Company contribute the $333,155 balance of its $4,920,000 capital
contribution commitment until every other limited partner of Sagemark Capital,
LP has fully funded such portion of his/its capital contribution as represented
a proportionate percentage of its capital contribution commitment, and Sagemark
Capital has drawn and fully invested all funds which it is allowed to borrow
under the Small Business Company Act of 1958, as amended; that Sagemark
Management is precluded from offsetting against the Company's capital account
any amounts due to Sagemark Capital by the Company; that Sagemark Management
will pay to Messrs. DeLape and Young such amounts, if any, as may be due to them
from the Partnership, from time to time, contemporaneously with Sagemark
Management's receipt of the same from Sagemark Capital; that in consideration of
$126,781 from Sagemark Management for reimbursement of services, the January 1,
2000 Reimbursement Agreement between the Company and Sagemark Management was
terminated; that effective November 1, 2000, the monthly management fee payable
to Sagemark Management from Sagemark Capital shall be $46,875 during the
remainder of the term of the partnership agreement governing Sagemark Capital;
that Sagemark Management agreed that Sagemark Capital owed it $118,750 in
management fees for the period August 4, 2000 through October 31, 2000; and that
Sagemark Management assumed certain equipment lease agreements. Sagemark
Management also agreed that, upon written request of the Company, to appoint
Theodore B. Shapiro to the Advisory Board of Sagemark Management.
14
<PAGE>
THE SAGEMARK COMPANIES LTD. AND SUBSIDIARIES
FOOTNOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The foregoing discussion is merely a summary of such agreements and is qualified
in its entirety by the text of the Transition Agreement, the Letter Agreement by
and between the Company and Sagemark Management, the Note, the Stock Purchase
Agreement by and between Gemini VII, Inc. and the Company, and the Guaranty
executed by Messrs. Frank DeLape and Richard Young, the form of each of which
documents is attached hereto as an exhibit and is incorporated herein by
reference.
Notwithstanding the closing of the above-described transactions, the
Company will continue to own its limited partnership interest in Sagemark
Capital, and Sagemark Capital will continue to be managed by Sagemark
Management; but, by virtue of the disassociation of Messrs. DeLape and Young
from the Company, the Company will have a limited say in the day to day
operations of Sagemark Capital and the operating results of Sagemark Capital may
not be allowed to be reported by the Company on a consolidated basis. Rather,
the Company may be required to account for its interest in Sagemark Capital on
the equity method. The Company and Sagemark Management are actively discussing
the sale of the Company's interest in Sagemark Capital. There can be no
assurance that such sale will be consummated.
15
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION 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 September 30, 2000, ("September 2000"), the Company had cash and
cash equivalents of $3,361,000. The following table calculates the working
capital that the Company has available for use in its operations as of September
30, 2000 and December 31, 1999 ("December 1999"), respectively.
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- -------------
<S> <C> <C>
Current assets $ 4,242,000 $ 7,401,000
Current liabilities 207,000 316,000
------------- -------------
Working capital available for the Company's operations $ 4,035,000 $ 7,085,000
============= =============
</TABLE>
During the nine months ended September 30, 2000 (the "2000 Nine Month
Period"), the Company's available working capital decreased by $3,050,000. Uses
of working capital during the 2000 Nine Month Period included advances or loans
of $5,253,000, investments in non-marketable securities of $775,000,
professional fees of $322,000, salaries, payroll taxes and fringe benefits of
$637,000, consulting fees of $95,000, deferred financing cost of $75,000,
interest expense of $20,000, and other operating expenses of $277,000.
Sources of working capital during the 2000 Nine Month Period included
interest from related parties of $305,000, interest income from other loans
receivable of $365,000, increases in the market value of securities which were
sold during the period of $56,000, other interest income of $83,000, financing
fees from related parties of $85,000, financing fees from portfolio companies of
$248,000, proceeds from investors of $2,000,000, proceeds from the sale of
marketable securities of $709,000 and reclassification of $557,000 of Notes
receivable as current. As of the date of this report, the Company does not have
definitive plans for the use of its existing working capital.
16
<PAGE>
TransGlobal was the holder of a $1.2 million promissory note issued by Arc. The
Company guaranteed the outstanding indebtedness of Arc to Trans Global. In
addition, during 1998, the Company guaranteed $550,000 of indebtedness that Arc
had outstanding under a promissory note to Batei Sefer Limlacha. On September 6,
2000, InfoHighway paid, on behalf of Arc, all outstanding indebtedness of Arc to
TransGlobal Services, Inc. and Batei Sefer Limlacha. Effective upon such
payments by InfoHighway, the Company's aforementioned guaranties were canceled
and are no longer in force or effect.
2000 and 1999 Third Quarter Operating Losses
The Company's loss from operations for the 2000 and 1999 3rd Quarters
was $137,000 and $495,000, respectively, a decrease of $358,000, or 72%. The
2000 3rd Quarter income includes $86,000 in related party interest income,
primarily from Arc Networks, $166,000 interest in loans receivable from
portfolio companies, and $8,000 of financing fees from portfolio companies. The
1999 3rd Quarter included no such amounts.
Other general and administrative expenses decreased $70,000, or 41%,
when comparing the 2000 and 1999 3rd Quarters. The decrease was largely a result
of printing cost of $9,000, postage of $33,000 and shareholder expenses of
$19,000 incurred in the 1999 3rd Quarter relating to the annual shareholders'
meeting and proxy vote. No such amounts were paid in the 2000 3rd Quarter. In
addition, rent expense decreased $40,000 relating to offices that were occupied
during 1999 and not occupied during 2000. Marketing and business development
expenses of $21,000 relating to the formation of Sagemark Capital were incurred
in the 1999 3rd Quarter. No such amounts were paid in the 2000 3rd Quarter.
Employee expenses of $20,000 relating to personnel recruitment was incurred in
2000 3rd Quarter. No such amounts were incurred in 1999 3rd Quarter. Penalties
of $20,000 relating to unpaid 1995-1997 state taxes were accrued in 2000 3rd
Quarter. No such amounts were incurred in the 1999 3rd Quarter.
Loss from Investment Write-off
In September 2000, the Company recorded a permanent investment
write-off of $950,000 of its Gavelnet investment as a result of its review of
the realizable value of its investment.
Gain on Marketable Securities
During the 1999 3rd Quarter, the Company realized gains of $315,000
from the sale of Netsmart common stock and $70,000 from the sale of US Treasury
Bills. During the 2000 3rd Quarter, the Company realized a gain of $369,000 from
the sale of all of its warrants to purchase common stock of InfoHighway.
Income (Loss) from Continuing Operations
The Company's consolidated income (loss) from continuing operations for
the respective 2000 and 1999 3rd Quarters was ($736,000), or $(0.47) per share,
and $3,000, or $0.00 per share, respectively, representing a decrease of
$739,000. Minority interest in loss of subsidiaries in the 2000 3rd Quarter was
$6,000 and the 1999 3rd Quarter was $0. The 2000 3rd Quarter amounts include
17
<PAGE>
Sagemark Capital's income during the period. Other income largely represents
interest income on idle funds offset by $20,000 interest expense accrued in 2000
3rd Quarter relating to unpaid 1995-1997 state taxes. Subsequent to the 1999
Third Quarter, idle funds have been utilized to make investments in portfolio
companies, thereby decreasing interest income generated from idle funds. The
decrease in income from continuing operations is largely the result of the Loss
from Investment Write-off of $950,000 relating to Gavelnet as well as an
increase in interest income, a decrease in general and administrative expenses,
offset by management fees in the 2000 3rd Quarter. Due to the non-recurring
nature of realized gains on marketable securities and contract termination
expense, future reductions of operating losses cannot be assured.
2000 and 1999 Nine Month Period Operating Losses
The Company's loss from operations for the 2000 and 1999 Nine Month
Period was $328,000 and $1,920,000, respectively, a decrease of $1,592,000, or
83%. The 2000 Nine Month Period income includes $305,000 in related party
interest income primarily from Arc Networks, $365,000 of interest loans
receivable from portfolio companies, $248,000 of financing fees from portfolio
companies, and $85,000 of financing fees from related parties. The 1999 Nine
Month Period included no such amounts.
Professional fees decreased $450,000, or 58%, when comparing the 2000
and 1999 Nine Month Period. 2000 Nine Month Period professional fees includes
$108,000 of legal fees incurred in connection with loan advances, $167,000 of
legal fees incurred for litigation settlements and other general matters and
$47,000 of accounting fees. During the 1999 Nine Month Period, the Company
incurred legal fees of $274,000 related to the disposal of Arc Networks, Trans
Global and Netsmart shares, $155,000 related to litigation settlements, $36,000
related to the annual shareholders meeting, $22,000 related to the April 1999
change of control and $160,000 related to general matters. Audit, accounting and
tax service expenses amounted to $124,000 for the 1999 Nine Month Period and
were incurred primarily in connection with the disposal of subsidiaries.
Other general and administrative expenses decreased $138,000, or 33%,
when comparing the 2000 and 1999 Nine Month Period. The decrease was largely a
result of printing costs of $43,000, postage of $38,000 and shareholder expenses
of $27,000 incurred in the 1999 Nine Month Period relating to the annual
shareholders' meeting and proxy vote. No such amounts were paid in the 2000 Nine
Month Period. In addition, rent expense decreased $40,000 relating to offices
that were occupied during 1999 and not occupied during 2000. Marketing and
business development expenses of $21,000 relating to the formation of Sagemark
Capital were incurred in the 1999 Nine Month Period. No such amounts were paid
in the 2000 Nine Month Period.
Termination payments for the 1999 Nine Month Period were $48,000. There
were no such payments in the 2000 Nine Month Period. 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 Nine
Month Period, the Company and Mr. Mahoney mutually terminated the amended and
18
<PAGE>
restated employment agreement and the Company paid Mr. Mahoney $48,000 in full
satisfaction of any amounts owed to Mr. Mahoney.
Consulting fees increased $17,000, or 22%, from $78,000 for the 1999
Nine Month Period to $95,000 for the 2000 Nine 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 Nine Month Period, the Company incurred fees of
$95,000 to consultants for evaluating potential acquisitions and other
investment advisory services.
During the 1999 Nine Month Period, the Company paid $38,000 consisting
primarily of $30,000 in order to settle two claims relating to IMI, a disposed
subsidiary. No such amounts were paid in the 2000 Nine Month Period
Loss from Investment Write-off
In September 2000, the Company recorded a permanent investment
write-off of $950,000 of its Gavelnet investment as a result of its review of
the realizable value of its investment.
Gain (Loss) on Marketable Securities
During the 1999 Nine Month Period the Company realized gains of $1.3
million from the sale of Netsmart common stock and $168,000 from the sale of US
Treasury Bills. During the 2000 Nine Month Period, the Company realized a gain
of $369,000 from the sale of all of its warrants to purchase common stock of
InfoHighway.
Loss from Continuing Operations
The Company's consolidated loss from continuing operations for the
respective 2000 and 1999 Nine Month Periods was $708,000, or $0.45 per share,
and $529,000, or $0.34 per share, respectively, representing a decrease of
$179,000. Minority interest in income (loss) in subsidiaries in the 2000 Nine
Month Period was $188,000 and in the 1999 Nine Month Period was $(296,000). The
2000 Nine Month Period amounts include i) Sagemark Capital's income during the
period ended September 30, 2000 of $26,000 and ii) pro rata allocation of
previously expensed organization costs to the new partners of $215,000. The 1999
Nine Month Period amounts related to Trans Global's income. The decrease in
income from continuing operations is the result of the Loss from Investment
write-off of $950,000 relating to Gavelnet as well as the interest income and
financing fees as well as a decrease in general and administrative expenses,
offset by the increase of $1,072,000 of gains on marketable securities. Due to
the non-recurring nature of realized gains on sales of marketable securities and
contract termination expense, future reductions of operating losses cannot be
assured.
19
<PAGE>
Other Events
See footnote (17) "Change of Control" of the Notes to the Financial
Statements set forth elsewhere herein, which is incorporated herein by
reference, for information relating to a series of transactions that took place
on November 20, 2000 resulting in a change of control of the Company.
Notwithstanding those transactions, the Company will continue to own its limited
partnership interest in Sagemark Capital, LP, and Sagemark Capital, LP will
continue to be managed by Sagemark Management; but, by virtue of the
disassociation of Messrs. DeLape and Young (the indirect and beneficial owners
of Sagemark Management) from the Company, the Company will have a limited
involvement in the operations of Sagemark Capital, LP and the operating results
of Sagemark Capital, LP may not be able to continue to be reported by the
Company on a consolidated basis. Rather, the Company may be required to account
for its interest in Sagemark Capital, LP on the equity method. The Company and
Sagemark Management are actively discussing the sale of the Company's interest
in Sagemark Capital. There can be no assurance that the sale will be
consummated.
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 $505,000, excluding payroll taxes and fringe benefits.
Professional fees will vary depending on the level of future litigation,
acquisitions and other activities. The current sources of income for the
Partnership 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 profitable entities 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 deemed invested in securities of companies which
are not majority owned subsidiaries of 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, which may have a material adverse
affect on the Company. The Company continues to seek acquisition opportunities,
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.
20
<PAGE>
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.
On or about December 14, 1999, an action styled Expert Radiology
Network v. Comprehensive Medical Imaging, Inc.; International Magnetic Imaging,
Inc., George Mahoney; and Joe Does 1 through 100 was filed in the Circuit Court
of the Fifteenth Judicial Circuit, in and for Palm Beach County Florida, and
assigned Case No. CL99-11947AD. The action seeks damages against International
Magnetic Imaging, Inc. ("IMI"), a subsidiary of the Company, in excess of
$15,000 for alleged breaches of a contract and for allegedly fraudulently
inducing Expert Radiology Network ("ERN") to enter said contract, under which
ERN was to read and interpret diagnostic imaging scans performed at certain
magnetic resonance imaging centers owned by IMI. The action also seeks an
accounting of amounts due and owing under the contract. The contract was
assigned to Comprehensive Medical Imaging, Inc. ("CMI"), in March 1998 in
connection with the sale of IMI's assets to CMI. The third named Defendant,
George Mahoney, is a former Chief Financial Officer of IMI.
IMI has answered the complaint, denying any liability and raising
various affirmative defenses. It intends to contest the case vigorously. At this
stage of the proceedings, it is not possible to evaluate the outcome of the
action, nor to reasonably estimate the amount of any judgment that might be
entered against IMI.
On or about July 6, 1998, an action styled Ronald Feldstein v.
Consolidated Technology Group, Inc., a Florida corporation was filed in the
Circuit Court of the Fifteenth Judicial Circuit, in and for Palm Beach County
Florida, and assigned Case No. 98-5943-AG. The action seeks damages in excess of
$15,000 for an alleged breach by Consolidated Technology Group, Ltd. ("CTGL") of
an alleged consulting agreement under which CTGL allegedly promised to deliver
to the Plaintiff, Ronald Feldstein 250,000 options to purchase stock of
International Magnetic Imaging, Inc. at $3.50 per share, and 200,000 share of
the stock of Trans Global Services, Inc. ("Trans Global"). It is alleged the
shares of Trans Global stock were to have been delivered by April 18, 1997.
CTGL answered the Plaintiff's complaint denying liability and asserting
various defenses. CTGL also propounded discovery requests, which were not
answered by the Plaintiff. The Court ordered the Plaintiff to respond to the
discovery requests, but he has not yet complied with the Court's order. At this
stage of the proceedings, it is no possible to evaluate the outcome of the
action, nor to reasonably estimate the amount of any judgment to which the
Plaintiff would be entitled should it prevail in the action.
21
<PAGE>
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 of the Company, and purportedly served
Technology Acquisitions Ltd. ("TAL"), a wholly owned subsidiary of the Company,
in a case commenced against Arc Networks, Inc. ("ARC") 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). Pursuant to the Amended Complaint, Mitel seeks to recover the sum
of $1.7 million, allegedly pre-paid to ARC when Mitel engaged ARC as a
subcontractor on 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 responded by denying all of the
relevant allegations set forth in the Amended Complaint and it is the Company's
position that it is in no way responsible for any liability ARC may or may not
have to the plaintiff under the facts as alleged by the plaintiff. The Company
is contesting this case vigorously. The Company ahs been advised that, on
December 1, 1999, ARC and Mitel entered into a Settlement Agreement pursuant to
which, among other things, ARC agreed to perform certain work for Mitel and make
a certain escrow payment. Since the date of the Settlement Agreement, no further
proceedings have been taken in the litigation. ARC has not made the required
escrow payment; however, it continues to perform all work requested by Mitel
under the terms of the Settlement Agreement. As of this date, the Company is
advised that the balance due from ARC to Mitel has been reduced to less than
$300,000 and ARC is currently engaging in work for Mitel to further reduce and
eventually eliminate the alleged obligation underlying the litigation. To the
extent ARC satisfies the terms of the Settlement Agreement in full, it is
anticipated that the Company will be released from the litigation. However,
there can be no assurance that ARC will fully discharge the terms of the
Settlement Agreement.
ITEM 6. EXHIBITS
EXHIBIT NUMBER DESCRIPTION
(2), (10) Form of Transition Agreement among the Registrant, Frank
DeLape, Richard Young and Edward D. Bright, individually and
on behalf of certain shareholders of the Registrant.
(10) Form of Letter Agreement by and between The Sagemark
Companies, Ltd. and Sagemark Management.
(10) Form of Promissory Note by and between Gemini VII, Inc. and
the Sagemark Companies, Ltd.
(10) Form of Stock Purchase Agreement by and between Gemini VII,
Inc. and the Sagemark Companies, Ltd.
22
<PAGE>
(10) Form of Guaranty executed by Frank DeLape and Richard Young
to be dated November 20, 2000.
(21) Subsidiaries of the Registrant.
(27) Financial Data Schedule1
-----------
(1) Filed in electronic format only.
23
<PAGE>
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 by
the undersigned and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/ FRANK DELAPE Chief Executive Officer November 17, 2000
------------------- (Principal Executive Officer
Frank DeLape and Director)
/s/ RICHARD YOUNG President and Chief Operating November 17, 2000
------------------- Officer
Richard Young (Principal Financial and
Accounting Officer)
24
