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 March 31, 2000
Commission File Number 0-4186
THE SAGEMARK COMPANIES LTD.
(Exact name of registrant as specified in its charter)
New York 13-1948169
(State or other jurisdiction 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 May 15, 2000: 1,560,247
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<PAGE>
The Sagemark Companies Ltd. and Subsidiaries
Index
Page
----
Part I: - Financial Information:
Item 1. Financial Statements:
Condensed Consolidated Statements of Operations
- Unaudited - Three Months Ended March 31, 2000 and 1999 3
Condensed Consolidated Statements of Comprehensive Income
(Loss) - Unaudited - Three Months Ended March 31, 2000 and 1999 4
Condensed Consolidated Balance Sheets - Unaudited -
March 31, 2000 and December 31, 1999 5
Condensed Consolidated Statements of Cash Flows
- Unaudited - Three Months Ended March 31, 2000 and 1999 6
Notes to Unaudited Condensed Consolidated Financial Statements 7-11
Item 2. Management's Discussion and Analysis of the Financial
Condition and Results of Operations 12-14
Part II - Other Information:
Item 1. Legal Proceedings 15
Signatures 16
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<PAGE>
The Sagemark Companies Ltd. and Subsidiaries
Condensed Consolidated Statements of Operations
Unaudited
<TABLE>
<CAPTION>
Three Months Ended March 31,
2000 1999
---- ----
<S> <C> <C>
Revenue
Financing Fees $ 150,000 $ -
Financing Fees, related party 75,000 -
Interest 62,000 -
Interest, related party 106,000 -
------- ------
Total revenue 393,000 -
Operating Expenses
Professional fees 124,000 481,000
Salaries, payroll taxes and fringe benefits 222,000 146,000
Consulting fees 55,000 8,000
Other general and administrative expenses 93,000 65,000
------- -------
Total operating expenses 494,000 700,000
------- -------
Loss from Operations (101,000) (700,000)
--------- ---------
Other income(loss), net (6,000) 41,000
--------- ---------
Loss from Continuing Operations Before Minority (107,000) (659,000)
Minority Interest in (Income) Loss of Subsidiaries 226,000 (127,000)
------- ---------
Income (Loss) from Continuing Operations 119,000 (786,000)
Discontinued Operations:
Income (loss) from operations of discontinued segment
- 318,000
----------- ------------
Net Income (Loss) $ 119,000 $ (468,000)
=========== ============
Basic and Diluted Loss per Common Share:
Income (loss) from Continuing Operations $ 0.08 $ (0.50)
Income (loss) from operations of discontinued segment - 0.20
Net Income (Loss) $ 0.08 $ (0.30)
========= =========
Weighted average number of common shares 1,560,247 1,568,528
========= =========
</TABLE>
See notes to unaudited condensed consolidated financial statements.
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<PAGE>
The Sagemark Companies Ltd. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income (Loss )
Unaudited
<TABLE>
<CAPTION>
Three Months Ended March 31,
2000 1999
---- ----
<S> <C> <C>
Net Income (Loss) $ 119,000 $ (468,000)
Other Comprehensive Income (Expense):
Unrealized holding gains on available for sale securities 50,000 35,000
Reclassification for realized gains (losses) on available for sale securities 265,000 (20,000)
----------- ------------
Comprehensive Income (Loss) $ 434,000 $ (453,000)
=========== ============
</TABLE>
See notes to unaudited condensed consolidated financial statements.
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<PAGE>
The Sagemark Companies Ltd. and Subsidiaries
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
March 31,
2000 December 31,
Unaudited 1999
--------- ----
<S> <C> <C>
Assets:
Current Assets
Cash and cash equivalents $ 2,259,000 $ 1,860,000
Marketable securities 761,000 1,844,000
Receivable, related party 88,000 -
Note receivable, related party 2,976,000 2,976,000
Note receivable, other - 689,000
Other current assets 105,000 32,000
--------- ---------
Total Current assets 6,189,000 7,401,000
Notes receivable 3,620,000 420,000
Note receivable, related party 250,000 -
Marketable securities 72,000 201,000
Investment in non-marketable securities, related party 950,000 950,000
Other assets 71,000 75,000
------------- -------------
Total Assets $ 11,152,000 $ 9,047,000
============= =============
Liabilities and Shareholders' Equity:
Liabilities:
Accounts payable $ 141,000 $ 181,000
Other current liabilities 72,000 136,000
------ -------
Current liabilities 213,000 316,000
Minority Interest in Sagemark Capital, LP 1,774,000 -
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 March 31,
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 39,000 (276,000)
Accumulated deficit (48,801,000) (48,920,000)
Less common stock in treasury, at cost (247,000) (247,000)
-------------- -------------
Total shareholders' equity 9,159,000 8,731,000
------------- ------------
Total Liabilities and Shareholders' Equity $ 11,152,000 $ 9,047,000
============= =============
</TABLE>
See notes to unaudited condensed consolidated financial statements.
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<PAGE>
The Sagemark Companies Ltd. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
Unaudited
<TABLE>
<CAPTION>
Three Months Ended March 31,
2000 1999
---- ----
<S> <C> <C>
Net cash (used in) provided by continuing operations $ (321,000) $ (1,526,000)
Net cash (used in) provided by discontinued operations - (341,000)
--------- -----------
Net cash used in operating activities (321,000) (1,867,000)
--------- -----------
Cash Flows from Investing Activities:
Proceeds from sale of marketable securities 1,477,000 1,916,000
Advances made on notes receivable, related party (250,000) -
Advances made on notes receivable (3,200,000) -
Proceeds from note receivable 689,000 -
Other financing activities 4,000 1,000
----------- ---------
Net cash provided by (used in) investing activities (1,280,000) 1,917,000
----------- ---------
Cash Flows from Financing Activities:
Purchase treasury stock - (104,000)
Proceeds from Investors 2,000,000 -
--------- ---------
Net cash provided by (used in) financing activities 2,000,000 (104,000)
--------- ---------
Net increase (decrease) in cash and cash equivalents 399,000 (54,000)
Cash and cash equivalents at beginning of period 1,860,000 179,000
-------------- -------------
Cash and cash equivalents at end of period $ 2,259,000 $ 125,000
============== =============
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.
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<PAGE>
Consolidated Technology Group 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. Sagemark Capital is currently applying for a license by
the Small Business Administration ("SBA") to become a Small Business Investment
Company ("SBIC"). If Sagemark Capital is successful in obtaining an SBIC
license, then it will be able to obtain inexpensive capital of up to three times
its private capital from the SBA. There can be no assurance that the SBA will
give final approval for an SBIC license to Sagemark Capital. See note (7) 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 has
elected to utilize, however,
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<PAGE>
Consolidated Technology Group Ltd. and Subsidiaries
Footnotes to Unaudited Condensed Consolidated Financial Statements
------------------------------------------------------------------
the exemption from the provisions of the 1940 Act provided by Rule 3a-2
promulgated thereunder by the Securities and Exchange Commission because the
Company intends to become primarily engaged in non-investment company operating
businesses within one year of the date that it ceased to be primarily engaged in
an operating business. No decision has been made to date with regard to the
nature of the operating business or businesses to be acquired or as to any
specific acquisition opportunities. In the event that the Company does not
become primarily engaged in such businesses within one year, it may be required
to register as an investment company under the 1940 Act.
(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 a full
service provider of comprehensive, creative human resource management solutions.
People Solutions provides human resource consulting and outsourcing services in
areas such as recruiting, retention, career management and training. To date,
the Company has advanced $700,000 under the note agreement.
(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.
-8-
<PAGE>
Consolidated Technology Group Ltd. and Subsidiaries
Footnotes to Unaudited Condensed Consolidated Financial Statements
------------------------------------------------------------------
(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. 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.
(7) Minority Interest - In January 2000, five limited partners were admitted
into Sagemark Capital in exchange for a $3 million ($2 million cash and $1 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 pays the Company $50,000 per month for employee and other expenses of
the Company incurred on behalf of Sagemark Capital.
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.
-9-
<PAGE>
Consolidated Technology Group Ltd. and Subsidiaries
Footnotes to Unaudited Condensed Consolidated Financial Statements
------------------------------------------------------------------
Sagemark Management is owned by Mr. Frank DeLape, Mr. Richard Young and Mr.
Matthew Finch, all officers of the Company.
(8) Interim Results - The results of operations for the three months ended March
31, 2000 and 1999 are not necessarily indicative of the results to be expected
for the full year.
(9) 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 March 31, 2000, the Company does not have any dilutive items and
therefore, a dual presentation of earnings per share is not presented.
(10) 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 July 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 March 31, 2000. As of
the date of this report, no amounts have been paid. Arc Networks is
currently in negotiations to extend the promissory note to June 30, 2000.
(c) The Company, Benchmark Equity Group, Inc. and another principal shareholder
in Infohighway entered into an agreement with an investment advisor whereby
the advisor will perform certain sevices in exchange for, among other
things, warrants to purchase 2% of the common stock sold in the next
private placement. Benchmark Equity Group, Inc. is a privately held
company wholly owned by Mr. Frank DeLape.
(11) Discontinued Operations - As of March 31, 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
-10-
<PAGE>
Consolidated Technology Group Ltd. and Subsidiaries
Footnotes to Unaudited Condensed Consolidated Financial Statements
------------------------------------------------------------------
Arc Networks, as discontinued segments. During the three months ended March 31,
1999, the discontinued segments did not generate revenue. The following table
summarizes the net income of the discontinued segments. Three Months Ended March
31,1999
Income (Loss) from Discontinued Operations:
Arc Networks $ 318,000
Trans Global (57,000)
Intercompany Transactions 57,000
------------
$ 318,000
============
Per share $ .20
------------
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<PAGE>
Item 2. Management's Discussions and Analysis of Financial Condition
and Results of Operations
Forward Looking Statements
Statements in this Form 10-Q that are not descriptions of historical
facts may be forward-looking statements that are subject to risks and
uncertainties. Actual results could differ materially from those currently
anticipated due to a number of factors, including those identified in this Form
10-Q and in other documents filed by the Company with the Securities and
Exchange Commission.
Financial Condition - Liquidity and Capital Resources
As of March 31, 2000, ("March 2000"), the Company had cash and cash
equivalents of $2,259,000. The following table calculates the working capital
that the Company has available for use in its operations as of March 31, 2000
and December 31, 1999 ("December 1999"), respectively.
March 31, December 31,
2000 1999
---- ----
Current assets $ 6,189,000 $ 7,401,000
Current liabilities 213,000 316,000
-------- -------
Working capital available for the
Company's operations $ 5,976,000 $ 7,085,000
============= =============
During the three months ended March 31, 2000 (the "2000 1st Quarter"),
the Company's available working capital decreased by $1,108,000. Uses of working
capital during the 2000 1st Quarter included advances of loans of $3,450,000,
professional fees of $124,000, salaries, payroll taxes and fringe benefits of
$222,000, consulting fees of $55,000 and other operating expenses of $93,000.
Sources of working capital during the 2000 1st Quarter included
interest from Arc Networks of $106,000, interest income from other loans
receivable of $62,000, increases in the market value of securities which were
sold during the period of $56,000, other interest income from investees of
$32,000, financing fees from Infohighway of $75,000, financing fees from
investees of $150,000, proceeds from investors of $2,000,000, proceeds from the
sale of marketable securities of $340,000 and other operating income of $13,000.
As of the date of this report, the Company does not have definitive plans for
the use of its existing working capital.
The Company had guaranteed $1.2 million of indebtedness that Arc
Networks has outstanding to Trans Global and $550,000 of indebtedness that Arc
Networks has outstanding under a promissory note.
-12-
<PAGE>
Results of Operations
The Company's loss from operations for the 2000 and 1999 1st Quarters
was $101,000 and $700,000, respectively, a decrease of $599,000, or 85%. The
2000 1st Quarter income includes $106,000 interest from Arc Networks and $62,000
interest in other loans receivable, financing fees from Infohighway of $75,000,
$150,000 of financing fees from investees and the 1999 1st Quarter included no
such amounts. Professional fees decreased $357,000, or 74%, when comparing the
2000 and 1999 1st Quarters. 2000 1st Quarter professional fees includes $60,000
of legal fees incurred in connection with loan advances, $41,000 of legal fees
incurred for litigation settlements and other general matters and $23,000 of
audit and accounting fees. 1999 1st Quarter professional fees represents
$235,000 of legal fees incurred in connection with the disposal of Arc Networks,
Trans Global and the Netsmart shares, $176,000 of legal fees incurred for
litigation settlements and other general matters and $70,000 of audit and
accounting fees. The remaining operating expenses increased $151,000, or 69%,
when comparing the 2000 and 1999 1st Quarters, including an increase in
salaries, payroll taxes and fringe benefits of $76,000, or 52%.
Loss from Continuing Operations
The Company's consolidated income (loss) from continuing operations for
the respective 2000 and 1999 1st Quarters was $119,000, or $0.08 per share, and
$(786,000), or $(0.50) per share, respectively, representing an increase of
$905,000. Minority Interest in income (loss) in subsidiaries in 2000 1st Quarter
was $226,000 and the 1999 1st Quarter was $(127,000). The 2000 1st Quarter
amounts include i) Sagemark Capital's losses during the period ended March 31,
2000 of $11,000 and ii) pro rata allocation of previously expensed organization
costs to the new partners of $215,000. The1999 1st Quarter 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 which were discussed in the preceding
paragraph.
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 April
21, 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.
-13-
<PAGE>
In the absence of an applicable exemption or administrative relief, the
Company might be required to register as an investment company under the
Investment Company Act of 1940, as amended (the "1940 Act"), because more than
40% of the value of its assets other than government securities, cash and
temporary investments would be invested in securities of companies which are not
majority owned by the Company. The Company would then be subject to the
restrictions and limitations imposed by the 1940 Act on the activities of
registered investment companies. The Company has elected to utilize, however,
the exemption from the provisions of the 1940 Act provided by Rule 3a-2
promulgated thereunder by the Securities and Exchange Commission because the
Company intends to become primarily engaged in non-investment company operating
businesses within one year of the date that it ceased to be primarily engaged in
an operating business. No decision has been made to date with regard to the
nature of the operating business or businesses to be acquired or as to any
specific acquisition opportunities. In the event that the Company does not
become primarily engaged in such businesses within one year, it may be required
to register as an investment company under the 1940 Act.
-14-
<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.
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 March
31, 2000, the undisputed liability has been reduced to $605,000 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.
.........................
-15-
<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 and
in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/S/________________ Chief Executive Officer May 12, 2000
Frank DeLape (Principal Executive
Officer and Director)
/S/________________ President and Chief Operating Officer May 12, 2000
Richard Young (Principal Financial and
Accounting Officer)
/S/________________ Corporate Secretary May 12, 2000
Matthew Finch
-16-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND THE CONSOLIDATED STATEMENT OF OPERATIONS FILED
AS PART OF THE ANNUAL REPORT ON FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH ANNUAL REPORT ON FORM 10-K.
</LEGEND>
<S> <C>
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<PERIOD-END> MAR-31-2000
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0
3,000
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</TABLE>
