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TRANS GLOBAL SERVICES, INC.
1393 Veterans Memorial Hwy
Hauppauge, New York 11788
March 30, 2001
Securities and Exchange Commission
450 5th Street, N.W.
Judiciary Plaza
Washington, D.C. 20549
Dear Sirs:
Pursuant to regulations of the Securities and Exchange Commission, submitted
herewith for filing on behalf of Trans Global Services, Inc. (the "Company") is
the Company's Annual Report on Form 10-K for the year ended December 31, 2000.
This filing is being effected by direct transmission to the Commission's EDGAR
System.
Very truly yours,
Glen R. Charles
Chief Financial Officer
Trans Global Services, Inc. Form 10-K 12/31/00
Form 10-K 12/31/00
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
- -------------------
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______ TO ________
Commission File No. 0-23382
Trans Global Services, Inc.
(Exact name of Company as Specified in its Charter)
Delaware 62-1544008
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
1393 Veterans Memorial Hwy.,
Hauppauge, New York 11788
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (631) 724-0006
Securities registered pursuant to Section 12(b) of the Act: None Securities
registered pursuant to Section 12(g) of the Act:
Title of Each Class
Common Stock, par value .01 per share
Indicate by a check mark whether the Company (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 twelve months (or such shorter period that the Company was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by a check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Company's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock as of March 28, 2001: $ 421,875
State the number of shares outstanding of each of the Company's classes of
common stock as of March 30, 2001: 3,364,295 shares of Common Stock, par value
$.01 per share.
DOCUMENTS INCORPORATED BY REFERENCE: None
2
PART I
Item 1. Business.
Trans Global Services, Inc. is engaged in providing technical temporary staffing
services. In performing such services, we address the current trend of major
corporations in "downsizing" and "outsourcing" by providing engineers, designers
and technical personnel on a temporary contract assignment basis pursuant to
contracts with major corporations. The engagement may relate to a specific
project or may cover an extended period based on the client's requirements. We
believe that the market for outsourcing services such as those which we offer
results from the trend in employment practices by major corporations principally
in the aircraft and aerospace industries as well as the electronics, energy,
telecommunications, banking and computer science industries and public utilities
industries to reduce their permanent employee staff and to supplement their
staff with temporary personnel on an as-needed basis. We seek to offer our
clients a cost-effective means of work force flexibility and the elimination of
the inconvenience associated with the employment of temporary personnel, such as
advertising, initial interviewing, fringe benefits and record keeping. Although
the employees provided by the Company are on temporary contract assignment, they
work with the client's permanent employees; however, they may receive different
compensation and benefits than permanent employees.
In providing our services, we engage the employees, pay the payroll and related
costs, including FICA, worker's compensation and similar Federal and state
mandated insurance and related payments. We charge our clients for services
based upon the hourly payroll cost of the personnel. Each temporary employee
submits to us a weekly time sheet with work hours approved by the client. The
employee is paid on the basis of such hours, and the client is billed for those
hours at agreed upon billing rates.
Our strategy has been directed at increasing our customer base and providing
additional services, such as integrated logistics support, to our existing
customer base. We believe that the key to profitability is to provide a range of
services to an increased customer base. In this connection, we are increasing
our marketing effort both through our own personnel and in marketing efforts
with other companies that offer complementary services.
3
Item 1. Business [Continued]
Our Organization
We are a Delaware corporation which was incorporated in September 1993 under the
name Concept Technologies Group, Inc. Our executive offices are
located at 1393 Veterans Memorial Hwy., Hauppauge, New York 11788, telephone
(631) 724-0006.
Our operations are conducted through our two subsidiaries, Avionics ReseArch
Holdings, Inc. and Resource Management International, Inc.
References to us refer to us and our subsidiaries, unless the context indicates
otherwise.
Forward-Looking Statements
The statements in this Form 10-K Annual Report that are not descriptions of
historical facts may be forward-looking statements that are subject to risks and
uncertainties. In particular, statements in this Form 10-K Annual Report,
including any material incorporated by reference in this Form 10-K, that state
our intentions, beliefs, expectations, strategies, predictions or any other
statements relating to our future activities or other future events or
conditions are "forward-looking statements." Forward-looking statements are
subject to risks, uncertainties and other factors, including, but not limited
to, those identified under "Risk Factors," those described in Management's
Discussion and Analysis of Financial Conditions and Results of Operations and
those described in any other filings with the Securities and Exchange
Commission, as well as general economic conditions, any one or more of which
could cause actual results to differ materially from those stated in such
statements.
Risk Factors
Our clients are concentrated in the aircraft and aerospace industries, which has
resulted in a downturn in our business because of the downturn in business from
these industries
Our three largest clients for 2000 and 1999 were in the aircraft and aerospace
industries, accounting for revenue of approximately $13.4 million, or 58% of
revenue, in 2000, and $17 million, or 47% of revenue, in 1999. Revenue from
Lockheed Martin, which was our largest client in 2000, declined from $7.3
million, or 20.2% of revenue, in 1999 to $5.7 million, or 24.5% of revenue, in
2000. These decreases can be attributed to the slowdown in the aircraft and
aerospace industries. We cannot assure you that we will be able to increase our
revenue from the aircraft and aerospace industries or to develop any significant
client base in other industries.
4
We do not have substantial working capital which could impair our ability to
operate.
At December 31, 2000, we had working capital of $102,000, sufficient to meet
only our present needs. Our current assets, include a note from
i-engineering.com, a start-up company which requires financing for its
operations, in the principal amount of $200,000, plus interest, of which
$150,000 plus interest remains outstanding and due March 31, 2001.
i-engineering.com has requested that we accept a partial payment immediately,
and extend the time for payment of the balance of the note. The request is under
consideration by the board of directors. We cannot assure you that this note
will be paid. If i-engineering.com fails to make payment, it could impair our
operations, and, even if i-engineering.com makes payment our failure to increase
our working capital could impair our ability to continue our operations.
We incurred losses during 2000 and our losses are continuing.
As a result of the decline in business from our clients in the aircraft and
aerospace industries, we sustained a loss of $1.9 million, or $.67 per share
(basic and diluted) for 2000. We cannot assure you that we will be able to
generate profits in the future.
Our credit agreement expires in June 2001, and we cannot assure you that we will
be able to renew or replace it.
Our principal source of cash during 2000 was our credit facility with our
asset-based lender. This facility expires in June 2001. We require this facility
in order to meet our payroll obligations since we pay our employees before we
receive payment from our customers. We may not be able to continue in business
unless we are able to extend our credit facility or otherwise obtain necessary
financing, and the terms of any financing which is available to us may be less
favorable to us that the terms of our present credit arrangement.
Because of our financial position, we may have difficulty generating business in
a highly competitive industry.
The temporary technical staffing business is highly competitive with respect to
both employers and employees. In order to attract both clients and employees, we
must show that we have the financial capability to meet our obligations and we
must offer employees benefits that our competitors offer. Our financial position
has in the past limited our ability to grow. Our current financial position,
particularly our limited working capital, may increase the difficulty in both
retaining existing clients and obtaining new clients.
We need to offer direct payroll deposit to our employees.
At present, because of our financial position, we do not offer our employees a
direct deposit payroll program by which we deposit the employees' compensation
directly into their bank accounts so that the employee's money will be
immediately available. Employees believe that direct payroll deposit is an
important element to consider in evaluating employment opportunities. In order
to offer this service, we require significant additional funds, and these funds
are not available to us. We believe that our ability to attract new clients will
continue to be impaired by our inability to offer employees direct payroll
deposit.
5
Item 1. Business [Continued]
Our business may be impaired by any trends in employment practices which result
in temporary staffing employees being treated the same as permanent employees.
Our temporary staffing business is based in part on providing employees at a
lower cost than employers would pay permanent employees. Many of the temporary
employees work with permanent employees and perform similar duties. Our
business would be impaired if temporary employees are required to be treated
like permanent employees, whether as a result of labor negotiations, court or
administrative decisions, legislation or regulation, or other factors outside
of our control.
We need to attract qualified employees to service our clients.
We are dependent upon both our ability to obtain contracts with clients and to
provide those clients with qualified employees. The market for qualified
personnel is highly competitive, and we compete with other companies in
obtaining contracts with potential clients and in attracting employees.
We may be held liable for the actions of our employees when on assignment.
Although our client agreements disclaim responsibility for the conduct of our
employees, we may be exposed to liability with respect to actions taken by our
employees while on assignment, such as damages caused by their errors, misuse of
client proprietary information or theft of client property. We do not maintain
insurance coverage against this risk. Due to the nature of our assignments, we
cannot assure you that we will not be exposed to liability as a result of our
employees being on assignment.
We are dependent upon our management.
Our business is dependent upon our senior executive officers, principally Mr.
Joseph G. Sicinski, president and chief executive officer, who is responsible
for the Company's operations, including marketing and business development.
Although we have an employment agreement with Mr. Sicinski, the agreement does
not guarantee that he will continue in his employment with us. Our business may
be adversely affected if any of our key officers left our employ.
We may consider an acquisition.
We may seek to address our lack of liquidity through an acquisition. Any
acquisition may result in a change of control and substantial dilution to our
stockholders. An acquisition may also result in a significant change in our
business. We cannot assure you that we will be able to complete any acquisition
on terms that are favorable to us or our stockholders or will result in
increased liquidity or profitable operations.
We do not anticipate paying dividends on our common stock.
We presently intend to retain future earnings, if any, in order to provide funds
for use in the operation and expansion of our business and, accordingly, we do
not anticipate paying cash dividends on our Common Stock in the foreseeable
future.
6
Item 1. Business [Continued]
The rights of the holders of common stock may be impaired by the potential
issuance of preferred stock.
Our certificate of incorporation gives our board of directors the right to
create new series of preferred stock. As a result, the board of directors may,
without stockholder approval, issue preferred stock with voting, dividend,
conversion, liquidation or other rights which could adversely affect the voting
power and equity interest of the holders of common stock. The preferred stock,
which could be issued with the right to more than one vote per share, could be
utilized as a method of discouraging, delaying or preventing a change of
control. The possible impact on takeover attempts could adversely affect the
price of our common stock. Although we have no present intention to issue any
additional shares of preferred stock or to create any series of preferred stock,
we may issue such shares in the future.
Our common stock is subject to the SEC's penny-stock rules.
Our common stock is subject to the SEC's penny-stock rules, which impose
additional sales practice requirements on broker-dealers which sell our stock to
persons other than established customers and institutional accredited investors.
These rules may affect the ability of broker-dealers to sell our common stock
and may affect the ability of our stockholders to sell any common stock they may
own.
Shares may be issued pursuant to options and warrants.
We may issue stock upon the exercise of options to purchase up to an aggregate
784,829 shares of common stock pursuant to our long-term incentive plans and
warrants to purchase an aggregate of 1,429,162 shares.
Markets and Marketing
The market for our services is comprised of major corporations in such
industries as aircraft, aerospace, electronics, energy, engineering, computer
services and telecommunications, where "downsizing" and "outsourcing" have
become an increasingly important method of cost reduction. Typically, a client
enters into an agreement with one or a small number of companies to serve as
employer of record for its temporary staff, and its agreements are terminable by
the client without significant notice.
We maintain a computerized data base of technical personnel based upon their
qualifications and experience. The data base, which contains more than 100,000
names, is generated through employees previously employed by us, referrals and
responses to advertisements placed by us in the media, including newspapers,
yellow pages, magazines and trade publications. Part of our responsibilities for
any engagement is the recruitment and initial interviewing of potential
employees, with the client conducting any final interviews it deems necessary.
The majority of work performed by our employees is performed at the client's
premises and under the client's direction, although we are the employer of
record.
We market our services to potential clients through our officers, management and
recruitment personnel who seek to provide potential clients with a program
designed to meet the client's specific requirements. The marketing effort
utilizes referrals from other clients, sales calls, mailings and telemarketing.
We also conduct an ongoing program to survey and evaluate the clients' needs and
satisfaction with our services, which we use as part of our marketing effort.
Although we have five offices, including our main office in Long Island, New
York, throughout the United States, there are no limited geographic markets for
our services. We have in the past established offices in new locations when we
7
Item 1. Business [Continued]
receive a contract in the area and we cannot effectively service such contract
from our existing offices. We intend to continue to establish new offices as
necessary to meet the needs of our customers.
A client will utilize contract engineering services such as those provided by us
when it requires a person with specific technical knowledge or capabilities
which are not available from the client's permanent staff or to supplement its
permanent staff for a specific project or to meet peak load requirements. When
the client requires personnel, it provides us with a detailed job description.
We then conduct an electronic seArch in our computerized resume data base for
candidates matching the job description. In addition, each branch office
maintains a file of active local resumes for candidates available for assignment
in the vicinity of the branch office. The candidates are then contacted by
telephone by our recruiters, who interview interested candidates. If a candidate
is acceptable to us and interested in the position, we refer the candidate to
the client. An employment agreement is executed with us prior to the
commencement of employment.
We serve primarily the aircraft and aerospace industries as well as the
electronics, energy, telecommunications, banking and computer science industries
and public utilities along with numerous manufacturing companies. We are
expanding our effort to address the general trend of "downsizing" and
"outsourcing" by major corporations on a national basis. To meet this goal, we
have commenced a national sales campaign addressing a broad spectrum of Fortune
500 companies, offering a managed staffing service to those companies in the
process of downsizing and outsourcing specific functions. Since a company
engaged in downsizing seeks to focus on its core business needs with its
in-house staff, we seek to identify and address the needs of a specific task or
department not part of the core business for which outsourcing would be an
appropriate method of addressing those needs. In addressing these needs, we have
conducted marketing efforts with Manpower International, Inc., Adecco and Olsten
Corporation.
Our contracts are generally terminable by the client on short notice.
The following table shows the revenue and the percentage of our total revenue
from those clients that accounted for at least 5% of our revenue in 2000:
Client Revenue Percent
Lockheed-Martin $ 5.7 million 24.5%
Bell Helicopter Textron 4.1 million 17.8%
Boeing 3.6 million 15.5%
Gulfstream Aerospace 2.2 million 9.3%
8
Item 1. Business [Continued]
The following table shows the revenue and the percentage of our total revenue
from our largest clients in 1999:
Client Revenue Percent
Lockheed-Martin $7.3 million 20.2%
Bell Helicopter Textron 4.9 million 13.7%
Boeing 4.6 million 12.8%
Gulfstream Aerospace 3.0 million 8.2%
Northrop Grumman 2.8 million 7.9%
CDI Corp. 2.4 million 6.7%
Competition
The business of providing employees on either a permanent or temporary basis is
highly competitive and is typically local in nature. We compete with numerous
technical service organizations, a number of which are better capitalized,
better known, have more extensive industry contacts and conduct extensive
advertising campaigns aimed at both employers and job applicants than we have.
We believe that the ability to demonstrate a pattern of providing reliable
qualified employees is an important aspect of developing new business and
retaining existing business. Furthermore, our ability to generate revenue is
dependent not only upon our ability to obtain contracts with clients, but also
to provide these clients with qualified employees. The market for qualified
personnel is highly competitive, and we compete with other companies in
attracting employees. Our ability to increase our business with existing clients
or to attract other clients will be affected by our working capital.
Accordingly, our failure to increase our working capital may adversely effect
our ability to expand our business. In addition, our failure to offer employees
the direct deposit of their payroll may affect their willingness to be employed
by us.
Government Regulations
The technical temporary staffing industry, in which we are engaged, does not
require licensing as a personnel or similar agency. However, as a provider of
personnel for other corporations, we are subject to Federal and state
regulations concerning the employment relationship, including those relating to
wages and hours and unemployment compensation. We also maintain a 401(k) plan
for our employees and we are subject to regulations concerning such plan.
We do not have contracts with any government agencies. However, our clients
include major defense contractors, that have contracts with government agencies.
Our contracts with our clients are based on hourly billing rates for each
technical discipline. Many of the clients' contracts with government agencies
are subject to renegotiation or cancellation for the convenience of the
government. Since the manpower needs of each of our clients are based on the
9
Item 1. Business [Continued]
clients own requirements and the clients' needs are affected by any modification
in requirements, any reduction in staffing by a client resulting from
cancellation or modification of government contracts could adversely impact our
business.
Employees
At December 31, 2000, we had 321 employees, 297 of which were contract service
employees who performed services on the clients' premises and 24 were executive
and administrative employees. Each of our offices is staffed by recruiters and
sales managers. Each contract service employee enters into a contract with us
which sets forth the client for whom and the facility at which the employee's
services are to be performed and the rate of pay. If an employee ceases to be
required by our clients for any reason, we have no further obligation to the
employee. Although assignments can be for as short as 90 days, in some cases,
they have been for several years. The average assignment is in the range of six
to nine months. Our employees are not represented by a labor union, and we
consider our employee relationships to be good.
Executive Officers of the Company
The following are the executive officers of the Company as of March 31, 2001:
Name Age Position with the Company
----- ---- -------------------------
Joseph G. Sicinski 69 Chief Executive Officer and President
Edward D. Bright 63 Chairman of the Board
Glen R. Charles 47 Chief Financial Officer, Secretary and Treasurer
Mr. Joseph G. Sicinski has been our president and a director since May 1995 and
our chief executive officer since April 1998. He served in the same capacities
for our predecessors since 1992. For more than eight years prior thereto, he was
executive vice president of corporate marketing for Interglobal Technical
Services, Inc., which was engaged in providing technical temporary staffing
services. Mr. Sicinski is also a director of Netsmart Technologies, Inc., which
is a leading supplier of enterprise wide software solutions for human service
providers.
Mr. Edward Bright has been our chairman of the board and a director since April
1998. Mr. Bright is also the chairman of the Board of the Sagemark Companies,
Ltd., a public corporation which was formerly our principal stockholder. In
April 1998, Mr. Bright was also elected as chairman, secretary, treasurer and a
director of The Sagemark Companies, Ltd.
Mr. Glen R. Charles has been our chief financial officer and treasurer since May
1995 and of our predecessor since January 1995. He has been secretary of the
Company since April 1998 and a director since May 1999. Mr. Charles served as
chief financial officer of one of our subsidiaries since its acquisition
November 1994. From 1992 to November 1994, he was engaged in the private
practice of accounting.
10
Item 2. Description of Property.
We lease approximately 7,500 square feet of office facilities in Hauppauge, New
York, where we maintain our executive offices. We also rent modest office space
in Phoenix Arizona, Arlington Texas, Seattle Washington and Orlando Florida. Our
aggregate annual rent is approximately $200,000, which is subject to annual
increases. We believe that our present office space is adequate for our present
needs and that additional office space is readily available on commercially
reasonable terms.
Item 3. Legal Proceedings.
In November 1997, an action was commenced in the Supreme Court of the State of
New York, County of Suffolk, by Ralph Corace against our subsidiary, Resource
Management International, Inc. seeking damages of approximately $1.1 million for
an alleged breach of contract by us. Mr. Corace was the president of Job Shop
Technical Services, Inc., from which we, through Resource Management
International, Inc., purchased assets in November 1994. We believe that the
action is without merit, we are contesting this matter and we have filed
counterclaims against Mr. Corace.
Item 4. Submission of Matters to a vote of Security Holders.
No matters were voted upon during the fourth quarter of 2000.
11
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
Our common stock is traded on OTC Bulletin Board Market under the symbol TGSI.
Prior to March 16, 2000, our common stock was traded on the Nasdaq SmallCap
Market.
The high and low closing price for the Company's Common Stock since January 1999
are as follows:
Common Stock
---------------
High Low
1999
First Quarter 1.875 .75
Second Quarter 1.75 .75
Third Quarter 1.375 .6875
Fourth Quarter .7813 .4063
2000
First Quarter 2.625 .563
Second Quarter 1.1875 .75
Third Quarter .75 .125
Fourth Quarter .4531 .125
2001
First Quarter (through March 28th) .4375 .125
The closing price for the common stock on March 28, 2001 was $.1875. These
quotations reflect inter-dealer prices, without retail mark-up, mark-down or
commission and may not represent actual transactions.
As of February 28, 2001, we believe that there were approximately 1,500
beneficial holders of our common stock.
We have not paid dividends on our common stock since inception, and we do not
expect to pay any dividends for the foreseeable future.
During 2000, we issued the following equity securities.
In January 2000, we issued $1,000,000 of subordinated notes in the principal
amount of $1,000,000. In connection with the financing, we issued warrants to
purchase 250,000 shares of common stock at $.35 per share to the investors. In
addition, we issued warrants to purchase 300,000 shares of common stock at $.35
per share to SG Martin Securities, LLC, the placement agent. We also issued a
warrant to purchase 25,000 shares of common stock at $.35 per share, to Mr.
James Conway, a director, for services relating to the financing.
Pursuant to a restated agreement dated January 21, 2000, we issued 270,000
shares of common stock to i-engineering.com. In December 2000, i-engineering.com
returned those shares to us. For information concerning our agreement with
i-engineering.com, see "Item 13. Certain Relationships and Related
Transactions."
12
Item 6. Selected Financial Data.
TRANS GLOBAL SERVICES, INC.
SELECTED FINANCIAL DATA
(In thousands, except per share amounts)
Set forth below is selected financial data with respect to the Company for the
years ended December 31, 2000, 1999, 1998, 1997 and 1996. The selected financial
data for the years ended December 31, 2000, 1999 and 1998 have been derived from
the financial statements which appear elsewhere in this Report. The data for the
years ended December 31, 1997 and 1996 have been derived from our audited
financial statements which are not included in this report. This data should be
read in conjunction with the financial statements of the Company and the related
notes which are included elsewhere in this Report.
Statement of Operations Data 1:
- ------------------------------
Year Ended December 31,
-------------------------------------------------------
2000 1999 1998 1997 1996
Revenue $ 23,325 $ 36,015 $67,244 $75,725 $62,594
Net (loss)income (1,923) ( 1,853) 805 1,023 (681)
Net (loss)income per share
of common stock (basic)( .67) ( .61) .21 .27 ( .27)
Weighted average number of
shares of common stock
outstanding 2,861 3,048 3,820 3,820 2,530
Net (loss) income per
share of common
stock (diluted) ( .67) ( .61) .21 .26 ( .27)
Weighted average number of
shares of common stock
outstanding 2,861 3,048 3,831 3,889 2,530
Balance Sheet Data:
December 31,
-----------------------------------------------------
2000 1999 1998 1997 1996
Working capital
(deficiency) $ 102 $ ( 156) $ 972 $ 257 $ (755)
Total assets 4,794 7,365 12,597 13,942 13,100
Total liabilities 1,960 2,818 3,630 5,943 6,274
Accumulated deficit (7,735) (5,813) (3,959) (4,765) (5,788)
Stockholders' equity 2,834 4,547 8,967 7,999 6,826
13
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Results of Operations
Years ended December 31, 2000, 1999, and 1998
Revenue from technical temporary staffing services is based on the hourly cost
of payroll plus a percentage. The success of our business will be dependent upon
our ability to generate sufficient revenue to enable it to cover our fixed costs
and other operating expenses, and to reduce our variable costs. Under our
agreements with our clients, we are required to pay our employees and pay all
applicable Federal and state withholding and payroll taxes prior to the receipt
of payment from the clients. Furthermore, our payments from our clients are
based upon the hourly rate paid to the employee, without regard to when payroll
taxes are payable with respect to the employee.
Accordingly, our cost of services are greater during the first part of the year,
when Federal Social Security taxes and state unemployment and related taxes,
which are based on a specific level of compensation, are due. Thus, until we
satisfy our payroll tax obligations, we will have a lower gross margin than
after such obligations are satisfied. Furthermore, to the extent that we
experience turnover in employees, our gross margin will be adversely affected.
For example, in 2001, Social Security taxes are payable on the first $80,400 of
compensation. Once that level of compensation is paid with respect to any
employee, there is no further requirement for us to pay Social Security tax for
such employee. Since many of our employees receive compensation in excess of
that amount, our costs with respect to any employee are significantly higher
during the period when we are required to pay Social Security taxes than it is
after such taxes have been paid.
Our revenue is derived principally from the aircraft and aerospace industries.
In 2000 revenue totaled $23 million. This reflected a decrease of 35.2% from the
revenue in 1999. In 1999 we experienced a 46.4% decrease from the revenue in
1998. The decrease over the past two years continues to be the slowdown in the
aircraft and aerospace industries and the continuing delay of requests for
personnel by our multi-national fortune 500 clients we serve. During 2000,
approximately $15.6 million, or 67% of our revenue, was generated from our four
largest clients, Lockheed-Martin, Bell Helicopter Textron, The Boeing Companies
and Gulfstream Aerospace. During 1999, approximately $17 million, or 47% of our
revenue was derived from our three largest clients, Lockheed-Martin, Bell
Helicopter Textron and The Boeing Companies and 69.5% was generated from our six
largest clients. In 1998, approximately $40 million, or 60.1%, of our revenue
was derived from our three largest clients, Boeing, Lockheed-Martin and
Northrop-Grumman, and 75.4% of our revenue was generated from our five largest
clients. The reduction in business from these clients has had a material impact
on our business. However, in the first quarter of 2001, we are experiencing an
increase in revenue compared to revenue of the fourth quarter of 2000. We cannot
assure you that this trend will continue.
14
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations [Continued].
Our gross margins were 10.1% for 2000, 8.2% for 1999 and 9.2% for 1998. The
increased gross margin from 1999 to 2000 can be attributed to the reduction in
business with some of the Company's lower margin aircraft and aerospace clients
combined with a slight increase in revenue from clients in other industries. The
decrease in the gross margin from 1998 to 1999 reflects the loss of some of our
higher gross margin business.
Selling, general and administrative expenses, exclusive of amortization of
intangibles, in 2000 decreased by 21.6% from 1999 which was a decrease of 18.5%
from those expenses in 1998 excluding related party expenses. These selling,
general and administrative expenses were $3.2 million in 2000, $4.1 million in
1999 and $5.0 million in 1998. The decline reflects principally the effects of
our cost reduction program necessitated by the significant drop in revenue.
As a result of the decrease in revenue, in 2000, and the decrease in revenue and
gross margin in 1999, our gross profit was not sufficient to cover our selling,
general and administrative expenses, resulting in operating losses of $1.1
million in 2000 and $1.4 million in 1999.
Interest expense for 2000, which was $472,000, increased by approximately
$215,000, or 83%, over interest expenses of $257,000 for 1999. Approximately
$210,000 of the interest expense is attributable to the amortization of non-cash
debt finance costs associated with the 575,000 warrants issued in January 2000
in connection with the $1.0 million of debt financing raised at that time.
Interest expense for 1999 decreased by 50% from $517,000 in 1998 as a result of
a full year's lower financing rates payable through the change in the Company's
credit facility in 1998 as well as the reduced borrowing reflecting a reduced
level of revenue and accounts receivable.
Other income increased by approximately $140,000 in 2000 compared to 1999.
approximately $80,000 of this increase is attributable to fees paid by Arc
Networks in connection with our agreement to extend the Arc Networks' note.
Our net loss before income tax expense was $1.4 million in 2000 compared with a
net loss of $1.6 million in 1999 and net income of $469,000 for 1998. After
eliminating the deferred tax benefit of $490,000 in 2000 our net loss amounted
to $1.9 million, or $.67 per share (basic and diluted), in 2000 compared to a
net loss of $1.8 million, or $.61 per share (basic and diluted) in 1999 and net
income of $805,000, or $.21 per share (basic and diluted), for 1998.
Gross revenue has increased slightly in the first quarter of 2001, however, we
continue to operate at a loss, and we anticipate that we will incur a loss for
at least the first and second quarters of 2001. We can not predict when or
whether we will operate profitably.
Liquidity and Capital Resources
At December 31, 2000, we had working capital of $102,000. Our working capital is
sufficient only to meet our most immediate needs, and our failure to increase
our working capital could impair our ability to continue our operations.
15
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations [Continued].
During 2000, our operations generated cash flow of $143,000. Our principal
source of cash during 2000 was our credit facility with our asset-based lender.
This facility expires in June 2001.
Pursuant to the credit agreement, we can borrow up to 85% of our qualified
accounts receivables at an interest rate of prime plus 2% with a minimum monthly
interest of $12,000 and an additional fee of $500 per month. The maximum
availability on the credit agreement is $2.5 million. The maximum available
under our borrowing formula was $1,226,000 at December 31, 2000 and $1,687,000
at February 28, 2001. We will not be able to continue in operations if we are
not able to extend or replace our credit agreement.
In January 2000, we raised $1.0 million through the issuance of our 10%
subordinated promissory notes due the earlier of receipt of payment from the
note issued by Arc Networks or 18 months from the date of issuance. In
connection with this financing we issued warrants to purchase 575,000 shares of
our common stock at $.35 per share to the investors and others who performed
services relating to the financing.
Our current assets include a $225,000 note payable from i-engineering.com, Inc.
In accordance with our agreement relating to the issuance of the notes, we
loaned $500,000 of the proceeds to i-engineering.com for a term of 120 days at
an interest rate of 10%. In addition, we acquired an equity interest in
i-engineering.com and issued to i-engineering.com 270,000 shares of our common
stock. i-engineering.com is a start-up company which requires funds for its
operations. The note was initially due in June 2000 and has been extended twice
as a result of the inability of i-engineering.com to make the full payment. On
December 5, 2000 we entered into a new agreement with i-engineering.com to give
back one-half of our interest in i-engineering.com in exchange for the 270,000
shares of our common stock held by i-engineering.com. The agreement provided for
i-engineering.com to make a payment of $50,000 on January 2, 2001, which was
made. The balance of the note was extended until March 31, 2001, at which time,
the balance of our interest in i-engineering.com, net of shares of
i-engineering.com which are to be transferred to the holders of the promissory
notes which we issued in January 2000 would be returned. i-engineering.com has
requested that we accept another partial payment and extend the time for payment
of the balance of the note. This request is presently under consideration by the
board of directors.
In September 2000, we received payment in full on the Arc Networks Note, and
used a portion of the proceeds to pay principal and interest on the 10%
promissory notes in the principal amount of $850,000. The remaining noteholders
have agreed to extend the balance until March 31, 2001 in exchange for warrants
to purchase 37,500 shares of our common stock at $.35 per share.
We are seeking to address our working capital needs by negotiating an extension
of our present credit agreement with our asset-based lender. Because of our
present stock price, it is highly unlikely that we will be able to raise funds
through the sale of our equity securities, and our financial condition prevents
us from issuing debt securities.
16
PART III
Item 10. Directors and Executive Officers of the Company (continued)
We may consider an acquisition if we believe that the acquired company would
provide us with adequate financial resources. Any acquisition may result in a
change of control and substantial dilution to our stockholders. Although we have
engaged in negotiations in the past, none of such negotiations has resulted in
an agreement. We are not presently engaged in negotiations with respect to any
acquisitions.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk.
Not Applicable.
Item 8. Financial Statements.
The Financial Statements begin on Page F-1.
Item 9. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure.
None
PART III
Item 10. Directors and Executive Officers of the Company
The following table sets forth certain information concerning the directors and
the executive officers of the Company as of March 31, 2001:
Name Age Position with the Company
Joseph G. Sicinski 69 President, chief executive officer and director
Edward D. Bright-1 63 Chairman of the board and director
Glen R. Charles 47 Chief financial officer, secretary, treasurer
and director
James L. Conway-1 52 Director
1 Member of the audit committee.
Mr. Joseph G. Sicinski has been president and a director of us and our
predecessor since September 1992 and our chief executive officer since April
1998. For more than eight years prior thereto, he was executive vice president
of corporate marketing for Interglobal Technical Services, Inc., which was
engaged in providing technical temporary staffing services. Mr. Sicinski is also
a director of Netsmart Technologies, Inc., a publicly-held company that markets
medical information systems.
Mr. Edward D. Bright has been a director since April 1998. He is also chairman
of the board and a director of The Sagemark Companies, Ltd., a position he has
held since 2000. Sagemark is a public company that was formerly our principal
stockholder. From January 1996 until April 1998, Mr. Bright was an executive
officer of or advisor to Creative Socio Medics Corp., a subsidiary of Netsmart.
From June 1994 until January 1996, he was chief executive officer of Netsmart.
17
PART III Continued
Item 10, Directors and Executive Officers of the Company
Mr. Glen R. Charles has been chief financial officer and treasurer of us and our
predecessor since November 1994 and secretary since April 1998. Mr. Charles has
been a director of the Company since May 1999. From 1992 to November 1994, he
was engaged in the private practice of accounting.
Mr. James L. Conway has been a director since June 1998. He has been president
and a director of Netsmart since January 1996 and chief executive officer of
Netsmart since April 1998. From 1993 until April 1998, he was president of
S-Tech Corporation, which, until April 1998, was a wholly-owned subsidiary of
Consolidated which manufactures specialty vending equipment for postal,
telecommunication and other industries.
In 1999, the board of directors created an audit committee.
The audit committee consists of two independent directors. The audit committee
presently consists of Messrs. Edward D. Bright and James L. Conway.
The audit committee is charged with the following responsibilities:
Recommend to the board the selection of the independent accountants.
Review the scope of the audit with the independent accountants.
Review the annual and quarterly financial statements with the independent
accountants prior to the filing of the Form 10-K and 10-Q.
Review any issues relating to the independence of the independent
accountants.
Review with the independent accountants and the board of directors any
matters raised in any management letters issued by the independent
accountants.
Review any material transactions between us and any of its officers
and directors, other than employment agreements and other matters which are
subject to approval of the board of directors or any stock option committee.
Directors are elected for a term of one year. During 2000, we paid directors who
are not also employees a fee of $500 per month, which rate is continuing in
effect during 2001.
None of the Company's officers and directors are related.
Messrs. James Conway and Edward Bright filed their Form 5 for 2000 in March
2001.
The Company's Certificate of Incorporation provides that to the fullest extent
provided by Delaware law, a director shall not be liable to the Company or its
stockholders for monetary damages for breach of fiduciary duty as a director.
The Certificate of Incorporation also contains broad indemnification provisions.
These provisions do not affect the liability of any director under Federal or
applicable state securities laws.
18
Item 11. Executive Compensation
Set forth below is information with respect to compensation paid or accrued by
us for 2000, 1999 and 1998 to our chief executive officer. No other officer had
compensation of $100,000 or more for 2000.
SUMMARY COMPENSATION TABLE
Annual Compensation Long-Term
Compensation (Awards)
Name and Principal Restricted Stock Options,SARS
Position Year Salary Bonus Awards (Dollars) (Number)
Joseph G. Sicinski,
president and chief
executive officer 2000 $235,299 -- -- --
1999 265,957 -- -- 85,000
1998 267,173 $48,800 -- 60,000
On January 10, 2001 the exercise price of the outstanding options held by our
officers, directors and employees, including the options to purchase 368,333
shares at $.53 per share held by Mr. Sicinski were repriced at $.125 per share,
which was the fair market value of our common stock on that day. In connection
with the repricing, we agreed that payment of the exercise price could be made
by issuance of a non-interest bearing non-recourse promissory note due the
earlier of January 2006 or the date the shares are sold by the employee. The
shares are held by us as security for payment of the notes. In February 2001,
Mr. Sicinski exercised his option to purchase 368,333 shares of common stock at
$.125 per share, for which he issued a promissory note in the principal amount
of $46,041.63.
Employment Contracts, Compensation Agreements and Termination of Employment and
Change in Control Arrangements
In October 1997, Mr. Joseph G. Sicinski entered into a five-year employment
agreement with us pursuant to which he received minimum annual compensation of
$260,000, subject to an annual increase equal to the greater of the increase in
the cost of living index or 5%. The term of the agreement was amended in March
1999 to extend the term until September 30, 2005. In addition, Mr. Sicinski is
entitled to a bonus of 5% of the Company's income before taxes, all non-cash
adjustments and all payments to our former parent, provided, that his maximum
bonus is 200% of his annual salary. We also provide Mr. Sicinski with an
automobile which he may use for personal use. Mr. Sicinski is also entitled to
severance payments in the event of a termination of his employment following a
change of control, which would equal the greater of five times his annual
compensation or his annual compensation multiplied by the number of years
remaining in the term.
In September 1999, Mr. Glen R. Charles entered into a four-year employment
agreement with us, pursuant to which he receives a minimum base salary of
$127,960 subject to an annual increase of not less than 5%.
19
Item 11. Executive Compensation [Continued]
In June 2000, Mr. Sicinski and Mr. Charles both agreed to reduce their salaries
until such time as the board of directors of the Company shall determine that
sufficient working capital is available to the Company to reinstate their agreed
upon salaries. The amount shown in the summary compensation table reflects the
reduced rate of compensation for 2000.
Option Exercises and Outstanding Options
The following table sets forth information concerning the exercise of options
during 2000 and the year-end value of options and warrants held by our officers
named in the Summary Compensation Table. No stock appreciation rights have been
granted.
Aggregate Option Exercises in Last Fiscal Year and Fiscal Year-End Option Value
Number of
Securities Value of
Underlying Unexercised In-
Unexercised the- Money
Options at Fiscal Options at Fiscal
Year End -1 Year End-2
Shares Acquired Value Exercisable/ Exercisable/
Name Upon Exercise Realized Unexercisable Unexercisable
- ---- ------------- -------- ------------- -------------
Joseph G. Sicinski -- -- 434,999/-- --/--
Options and warrants are considered in the money if their exercise price was
less than last reported sales price of our common stock on December 31, 2000,
which was $.125 per share.
We have three long-term incentive plans, pursuant which options to purchase an
aggregate of 895,388 shares of common stock may be issued. At December 31, 2000,
options to purchase 784,829 shares off common stock had been granted, of which
options to purchase 0 shares had been exercised, options to purchase 0 shares
had expired and options to purchase 784,829 shares were outstanding. At such
date, there were options to purchase 110,559 shares of common stock available
for grant in addition to any options which become available as a result of the
cancellation or expiration of outstanding options.
The board of directors or a stock option committee, if appointed, has the
authority to grant the following types of awards under the three option plans:
incentive or non-qualified stock options; stock appreciation rights; restricted
stock; deferred stock; stock purchase rights and/or other stock-based awards.
The option plans are designed to provide us with broad discretion to grant
incentive stock-based rights. All officers, including Mr. Joseph G. Sicinski,
who is also a director, are eligible for awards under the option plans. On April
1 of each year, all outside directors are awarded options to purchase 5,000
shares of common stock at the fair market value on that date.
20
Item 11. Executive Compensation [Continued]
Tax consequences of awards provided under the options plans are dependent upon
the type of award granted. The grant of an incentive or non-qualified stock
option does not result in any taxable income to the recipient or deduction to
us. Upon exercise of a non-qualified stock option, the recipient recognizes
income in the amount by which the fair market value on the date of exercise
exceeds the exercise price of the option, and we receive a corresponding tax
deduction. In the case of an incentive stock option, no income is recognized to
the employee, and no deduction is available to us, if the stock issued upon
exercise of the option is not transferred within two years from the date of
grant or one year from the date of exercise, whichever occurs later. However,
the exercise of an incentive stock option may result in additional taxes through
the application of the alternative minimum tax. In the event of a sale or other
disqualifying transfer of stock issued upon exercise of an incentive stock
option, the employee realizes income, and we receive a tax deduction, equal to
the amount by which the lesser of the fair market value at the date of exercise
or the proceeds from the sale exceeds the exercise price. The issuance of stock
pursuant to a stock grant results in taxable income to the recipient at the date
the rights to the stock become nonforfeitable, and we receive a deduction in
such amount. However, if the recipient of the award makes an election in
accordance with the Internal Revenue Code of 1986, as amended, the amount of his
or her income is based on the fair market value on the date of grant rather than
the fair market value on the date the rights become nonforfeitable. When
compensation is to be recognized by the employee, appropriate arrangements may
be required to be made with respect to the payment of withholding tax.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Set forth below is information as of March 15, 2001 as to our chief executive
officer, each director, each person owning of record or known by us, based on
information provided to the Company by the persons named below, to own
beneficially at least 5% of the Company's Common Stock and for all officers and
directors as a group.
Percent of Outstanding
Name and Address Shares Common Stock
- -------------------- ---------- -----------------------
Joseph G. Sicinski
1393 Veterans Memorial Hwy.
Hauppauge, NY 11788 709,998 21.1%
Glen R. Charles 107,988 3.2%
Edward D. Bright 50,000 1.5%
James L. Conway 65,000 1.9%
All directors and officers
as a group (four individuals owning
stock, warrants or options) 932,996 27.7%
21
Item 12. Security Ownership of Certain Beneficial Owners and Management.
(Continued)
The number of shares of common stock owned by our directors and officers shown
in the table includes shares of common stock which are issuable upon exercise of
options and warrants that are exercisable at March 15, 2001 or will become
exercisable within 60 days after that date. Set forth below is the number of
shares issuable upon exercise of those options for each of our directors and the
officers named in the summary compensation table.
Name Shares
Joseph G. Sicinski 66,666
James L. Conway 65,000
All officers and directors
as a group 131,666
Mr. Sicinski's options and warrants include 66,666 shares of common stock
issuable upon exercise of warrants and Mr. Conway's options and warrants include
25,000 shares of common stock issuable upon exercise of warrants and 40,000
shares of common stock issuable upon exercise of options. All other officers and
directors only hold options.
Certain relationships and related transactions
At December 31, 1999 Arc Networks, Inc., a former subsidiary of The Sagemark
Companies, Ltd., owed us approximately $1.2 million, which was represented by
Arc Networks promissory note. This promissory note was guaranteed by Sagemark,
which had been our principal stockholder, and other parties affiliated with Arc
Networks. Pursuant to an agreement dated February 7, 2000 with Arc Networks,
Sagemark and the other guarantors, Sagemark transferred 50,000 shares of our
common stock to us, and we agreed to extend the maturity date of the note from
Arc Networks to April 2000. Neither Sagemark nor Arc were our affiliates at
December 31, 2000. In September 2000, Arc Networks paid the note in full.
We entered into a restated agreement dated as of January 21, 2000 with
i-engineering.com, pursuant to which:
We lent i-engineering.com $500,000, for which it issued its 10% promissory notes
which are due on the earlier of 120 days from the date of issuance in January
and February 2000 or the first to occur of (i) the date i-engineering.com
receives gross proceeds of at least $5,000,000 from a private placement or
public offering of its securities, or (ii) the date i-engineering.com obtains
bank or other debt financings or credit lines or other credit facility or
facilities of at least $750,000.
We agreed to provide i-engineering.com with services to assist it in developing
its business.
i-engineering.com issued to us i-engineering.com's common stock equal to
approximately 10% of the then outstanding i-engineering.com common stock.
We issued to i-engineering.com 270,000 shares of our common stock.
i-engineering.com elected Mr. Joseph G. Sicinski, our president and chief
executive officer, a director, and we agreed to include Mr. Naval Kapoor, i-
engineering's president and chief executive officer, as one of our board of
directors nominees for director at the 2000 meeting.
Mr. Kapoor was elected as a director at the 2000 annual meeting.
i-engineering.com did not pay the $300,000 note when due and we agreed to two
extensions. In connection with the second extension, Mr. Kapoor resigned as a
director, i-engineering.com returned to us the 270,000 shares which had been
issued to i- engineering, and we returned 50% of the i-engineering.com shares
issued to us (net
22
Item 12. Security Ownership of Certain Beneficial Owners and Management.
of shares to be issued to certain of our lenders pursuant to agreements with the
lenders) and agreed to return the remaining 50% if the balance of note is paid.
i-engineering.com was required to make one payment in January 2001, which was
made, and is required to pay the principal balance of $150,000, plus interest,
on March 31, 2001. i-engineering.com has requested that we accept another
partial payment and extend the time for payment of the balance of the note. This
request is presently under consideration by the board of directors. Mr. Joseph
G. Sicinski, resigned as a director of i-engineering.com in October 31, 2000.
In January 2000, we issued to James L. Conway a warrant to purchase 25,000
shares of common stock at $.35 per share for services rendered in connection
with a $1,000,000 debt financing. The terms of the warrants issued to Mr. Conway
are the same as the terms of the warrants which were issued to the lenders.
23
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) Financial Statements.
The following financial statements are filed as part of this Form 10-K:
Trans Global Services, Inc. and Subsidiaries
Report of Independent Certified Public Accountants
Consolidated Balance Sheets as of December 31, 2000 and 1999
Consolidated Statements of Operations for the years ended December 31, 2000,
1999 and 1998
Consolidated Statements of Changes in Stockholders' Equity for the years
ended December 31, 2000, 1999 and 1998
Consolidated Statements of Cash Flows for the years ended December 31, 2000,
1999 and 1998
Notes to Financial Statements
(b) Financial Statement Schedules.
None
(c) Exhibits
3.1- (1) Restated Certificate of Incorporation.
3.2- (2) By-Laws.
10.1- (3) Employment agreement dated October 15, 1997, between the Company and
Joseph G. Sicinski, as amended.
10.2 -(4) 1995 Long-Term Incentive Plan.
10.3 -(5) 1998 Long-Term Incentive Plan
10.4 -(6) 1999 Long-Term Incentive Plan.
10.5 -(2) Form of Series A Common Stock Purchase Warrants.
10.7 Credit Agreement dated June 7, 2000 between the Company and
Sterling National Bank
21.1(3) Subsidiaries of the Registrant
24.1 Consent of Moore Stephens, P.C.
25.1 Powers of attorney (See Signature Page).
24
Part IV [Continued]
1. Filed as an exhibit to the Company's registration statement on Form S-1,
File No. 333-14289, and incorporated herein by reference.
2. Filed as an exhibit to the Company's Annual Report on Form 10-KSB for the
year ended December 31, 1995 and incorporated herein by reference.
3. Filed as an exhibit to the Company's Annual Report on Form 10-K for the year
ended December 31, 1999 and incorporated herein by reference.
4. Filed as an exhibit to the Company's definitive proxy statement for its
special meeting of stockholders for November 1996 and incorporated herein by
reference.
5. Filed as an exhibit to the Company's definitive proxy statement for its 1998
annual meeting of stockholders for August 1998 and incorporated herein
by reference.
6. Filed as an exhibit to the Company's definitive proxy statement for its 2000
annual meeting of stockholders held in May 2000 and incorporated herein by
reference.
(d) Reports on Form 8-K
None
25
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934,
as amended, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
TRANS GLOBAL SERVICES, INC.
Date: March 30, 2001 By:
Joseph G. Sicinski
President, Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
this report has been signed by the following persons on behalf of the Company
and in the capacities and on the dates indicated. Each person whose signature
appears below hereby authorizes Joseph G. Sicinski as his true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution
for him and in his name, place and stead, in any and all capacities to sign any
and all amendments to this report, and to file the same, with all exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission.
Signature Title Date
Joseph G. Sicinski President, Chief Executive March 30, 2001
Officer and Director
(Principal Executive Officer)
Glen R. Charles Chief Financial Officer (Principal March 30, 2001
Financial and Accounting Officer)
and Director
Edward D. Bright Director March 30, 2001
James Conway Director March 30, 2001
26
INDEX TO FINANCIAL STATEMENTS
TRANS GLOBAL SERVICES, INC. AND SUBSIDIARIES PAGE
Report of Independent Certified Public Accounts
Consolidated Balance Sheets as of December 31, 2000 and 1999 F-3
Consolidated Statements of Operations for the years ended
December 31, 2000, 1999 and 1998 F-5
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 2000, 1999,and 1998 F-7
Consolidated Statements of Cash Flows for the years ended
December 31, 2000, 1999 and 1998 F-10
Notes to Consolidated Financial Statements F-13
27
INDEPENDENT AUDITOR'S REPORT
To the Stockholders and Board of Directors of Trans Global Services, Inc.
Hauppauge, New York
We have audited the accompanying consolidated balance sheets of Trans Global
Services, Inc. and its subsidiaries as of December 31, 2000 and 1999, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 2000. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall consolidated financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Trans
Global Services, Inc. and its subsidiaries as of December 31, 2000 and 1999, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 2000, in conformity with accounting principles
generally accepted in the United States of America.
MOORE STEPHENS, P.C.
Certified Public Accountants
Cranford, New Jersey
February 7, 2001
28
TRANS GLOBAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
2 0 0 0 1 9 9 9
Assets:
Current Assets:
Cash $ 58,463 $ 43,141
Accounts Receivable - Net 1,702,998 2,518,343
Note Receivable -i-engineering.com, Inc. 225,451 -0-
Prepaid Expenses and Other Current Assets 75,199 100,865
---------- ----------
Total Current Assets 2,062,111 2,662,349
---------- ---------
Property and Equipment - Net 113,683 162,820
---------- ---------
Other Assets:
Due from Arc Networks -0- 1,171,673
Customer Lists 1,938,703 2,163,655
Goodwill - Net 629,816 678,392
Deferred Tax Asset-Non Current -0- 490,000
Other Assets 49,864 36,373
---------- --------
Total Other Assets 2,618,383 4,540,093
Total Assets $ 4,794,177 7,365,262
================ ==========
See Notes to Consolidated Financial Statements.
F-3
29
TRANS GLOBAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
2 0 0 0 1 9 9 9
Liabilities and Stockholders' Equity:
Current Liabilities:
Accounts Payable and Accrued Expenses $ 465,981 $ 402,735
Accrued Payroll and Related Taxes and Expenses 477,154 359,295
Loan Payable - Asset-Based Lender 852,035 2,056,372
Notes Payable - Outside Investors(7) 165,000 -0-
--------- --------
Total Current Liabilities 1,960,170 2,818,402
--------- --------
Commitments and Contingencies [10] -- --
--------- --------
Stockholders' Equity:
Common Stock $.01 Par Value, 25,000,000
Shares authorized. 2000: 4,089,716 issued
2,619,716 outstanding. 1999: 3,819,716
issued 2,669,716 outstanding 40,897 38,197
Capital in Excess of Par Value 13,499,281 12,887,851
Accumulated Deficit (7,735,359) (5,812,506)
---------- ---------
5,804,819 7,113,542
---------- --------
Less Treasury Stock, at cost
1,150,000 shares - 1999
1,470,000 shares - 2000 (2,970,812) (2,566,682)
---------- --------
Total Stockholders' Equity 2,834,007 4,546,860
Total Liabilities and Stockholders' Equity $ 4,794,177 $ 7,365,262
=========== ===========
See Notes to Consolidated Financial Statements.
F-4
30
TRANS GLOBAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Y e a r s e n d e d
D e c e m b e r 31,
2 0 0 0 1 9 9 9 1 9 9 8
Revenue $ 23,325,194 $ 36,015,273 $ 67,243,713
Cost of Services Provided 20,975,439 33,049,393 61,023,970
---------- ---------- ----------
Gross Profit 2,349,755 2,966,880 6,219,743
---------- ---------- ----------
Operating Expenses:
Selling, General and
Administrative Expenses 3,220,718 4,109,663 5,040,121
Related Party Administrative Expenses -0- -0- 55,000
Amortization - Intangibles 273,528 273,528 273,537
--------- --------- -------
Total Operating Expenses 3,494,246 4,383,191 5,368,658
--------- --------- ---------
Operating (Loss) Profit (1,144,491) (1,416,311) 851,085
--------- --------- ---------
Other Income (Expenses):
Interest Expense (471,544) (257,039) (516,698)
Interest Income 110,036 119,708 130,000
Other Income (Expense) 73,146 ( 67,389) 4,611
--------- -------- -------
Total Other Expenses - Net (288,362) (204,720) (382,087)
--------- -------- --------
(Loss)Income before Income
Tax (Expense) Benefit (1,432,853) (1,621,031) 468,998
Income Tax (Expense) Benefit ( 490,000) ( 232,000) 336,263
--------- -------- ---------
Net (Loss) Income $(1,922,853) $ (1,853,031) $ 805,261
========= =========== ===========
Basic (Loss) Earnings Per Share $ (.67) $ (.61) $ .21
Weighted Average Number of Shares 2,860,700 3,047,798 3,819,716
Diluted (Loss) Earnings Per Share:
Incremental Shares from Assumed
Conversion of Options and Warrants -0- -0- 11,500
--------- ---------- ----------
Weighted Average Number of
Shares Assuming Dilution 2,860,700 3,047,798 3,831,216
Diluted (Loss) Earnings Per Share $ (.67) $ (.61) $ .21
See Notes to Consolidated Financial Statements
F-5
31
Trans Global Services, Inc.
Consolidated Statement of Stockholders' Equity
Shares Amounts
Common Stock $.01 Par Value Authorized 25,000,000 shares at December 31, 1998,
1999 and 2000
Balance - December 31, 1997 3,819,716 $38,197
--------- -------
Balance - December 31, 1998 3,819,716 $38,197
----------- -------
Balance December 31, 1999 3,819,716 $38,197
--------- -------
Issuance of shares of Common Stock
i-engineering.com, Inc. 270,000 $ 2,700
---------- -------
Balance - December 31, 2000 4,089,716 $40,897
=========== =======
Capital in Excess of Par Value
Balance - December 31, 1997 12,887,851
----------
Balance - December 31, 1998 12,887,851
----------
Balance - December 31, 1999 12,887,851
----------
Issuance of below market warrants (7) 210,000
Issuance of shares of Common Stock i-engineering.com,Inc. 326,430
Purchase of Treasury Stock 75,000
----------
Balance - December 31, 2000 13,499,281
==========
Accumulated Deficit
Balance - December 31, 1997 $(4,764,736)
Net Income 805,261
-----------
Balance - December 31, 1998 $(3,959,475)
Net (Loss) (1,853,031)
-----------
Balance - December 31, 1999 $(5,812,506)
Net (Loss) (1,922,853)
-----------
Balance - December 31, 2000 (7,735,359)
===========
Treasury Stock
Purchase of treasury stock - 1999 1,150,000 $(2,566,682)
--------- -----------
Balance December 31, 1999 1,150,000 $(2,566,682)
Purchase of treasury stock - 2000 320,000 ( 404,130)
--------- ------------
Balance - December 31, 2000 1,470,000 $(2,970,812)
========= ===========
See Notes to Consolidated Financial Statements
F-6
32
TRANS GLOBAL SERVICES, INC. AND SUBSIDIARIES
STATEMENTS OF STOCKHOLDERS' EQUITY
AMOUNT
Deferred Charges
Balance - December 31, 1997 ( 162,601)
Amortization of Deferred Consulting Costs 162,601
--------
Balance - December 31, 1998 -0-
--------
Balance - December 31, 1999 -0-
--------
Balance - December 31, 2000 -0-
=========
Total Stockholders' Equity
Balance - December 31, 1997 $ 7,998,711
Amortization of deferred Consulting Costs 162,601
Net Income for the Year Ended December 31, 1998 805,261
----------
Balance - December 31, 1998 $ 8,966,573
Purchase of treasury stock (2,566,682)
Net Loss for the Year Ended December 31, 1999 (1,853,031)
----------
Balance - December 31, 1999 $ 4,546,860
Issuance of below market warrants 210,000
Issuance of shares of Common Stock - i-engineering.com, Inc. 329,130
Purchase of treasury stock - i-engineering.com, Inc. (329,130)
Net Loss for the Year Ended December 31, 2000 (1,922,853)
----------
Balance - December 31, 2000 $ 2,834,007
==========
See Notes to Consolidated Financial Statements
F-7
33
TRANS GLOBAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Y e a r s e n d e d
D e c e m b e r 31,
2 0 0 0 1 9 9 9 1 9 9 8
Operating Activities:
Net (Loss) Income $(1,922,853) $(1,853,031) $ 805,261
Adjustments to Reconcile Net (Loss) Income
to Net Cash Provided By (Used in)
Operations:
Depreciation and Amortization 344,194 345,921 393,364
Charges from Option Exercise -0- -0- 162,601
Deferred Acquisition Costs -0- 235,560 -0-
Debt Issuance Costs 210,000 -0- -0-
Deferred Loan Costs -0- 82,266 -0-
Deferred Income Taxes 490,000 232,000 (367,000)
Changes in Operating Assets and Liabilities:
(Increase) Decrease in Assets:
Accounts Receivable-Net 815,345 1,404,500 1,547,510
Loan Receivable - Officer -0- 5,000 42,500
Prepaid Expenses and Other
Current Assets 25,666 113,458 ( 37,970)
Increase (Decrease) in Liabilities:
Accounts Payable and Accrued
Expenses 63,246 88,110 ( 276,989)
Accrued Payroll and Related
Taxes and Expenses 117,859 (169,279) ( 887,560)
Accrued Income Taxes Payable -0- ( 13,496) ( 62,861)
Accrued Voluntary Settlement Agreement -0- -0- ( 150,000)
--------- ---------- --------
Total Adjustments 2,066,310 2,324,040 363,595
----------- --------- ----------
Net Cash - Operating Activities 143,457 471,009 1,168,856
---------- --------- ----------
Forward
See Notes to Consolidated Financial Statements.
F-8
34
TRANS GLOBAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Y e a r s e n d e d
D e c e m b e r 31,
2 0 0 0 1 9 9 9 1 9 9 8
Net Cash -
Operating Activities Forwarded $ 143,457 $ 471,009 $ 1,168,856
Investing Activities:
Capital Expenditures (21,529) (64,090) (55,307)
Deferred Acquisition Costs -0- -0- (74,915)
Repayments from Arc Networks 1,171,673 117,410 60,920
Note Receivable i-engineering.com ( 500,000) -0- -0-
Repayments from i-engineeing.com 274,549 -0- -0-
Other, net ( 13,491) 5,034 1,825
Investments in Preferred Stock
of Affiliate -0- ( 3,500) (136,500)
-------- -------- --------
Net Cash - Investing Activities 911,202 54,854 (203,977)
---------- ----------- ---------
Financing Activities:
Net Payments to
Asset-Based Lender (1,204,337) ( 590,872) (923,584)
Deferred Loan Costs -0- -0- 123,399
Note Payable -outside investors 1,000,000 -0- -0-
Repayment of note payable
-outside investors ( 835,000) -0- -0-
Repayment of Note Payable -0- ( 126,767) ( 11,463)
--------- --------- ----------
Net Cash -
Financing Activities (1,039,337) ( 717,639) (1,058,446)
Net Increase (Decrease)in Cash and
Cash Equivalents 15,322 ( 191,776) ( 93,567)
Cash and Cash Equivalents
- Beginning of Year 43,141 234,917 328,484
Cash and Cash Equivalents
- End of Year $ 58,463 $ 43,141 $ 234,917
=========== =========== ===========
Supplemental Disclosures of Cash
Flow Information:
Interest $ 244,741 $ 257,039 $ 516,698
Income Taxes $ -0- $ -0- $ 68,936
Supplementary Disclosure of Non Cash Investing and Financing Activities during
the three years ended December 31, 2000.
See Notes to Consolidated Financial Statements.
F-9
35
TRANS GLOBAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
In connection with the $1,000,000 raised in January, 2000, from the sale of
subordinated notes due on the earlier of July 2001 or upon the Company's receipt
of the note receivable from Arc Networks, Inc., the Company issued warrants to
purchase 250,000 shares of the Company's common stock at $.35 per share to the
investors. In addition, the Company issued warrants to purchase 300,000 shares
of the Company's common stock at $.35 per share to the placement agent and
25,000 shares to a director for services relating to the financing. The Company
incurred a charge of $210,000. This charge has been credited to capital in
excess of par value. The Company used $500,000 of the proceeds of the loan to
make a loan to i-engineering.com, as described in the following paragraph, and
the Company agreed to transfer to the lenders 10% of the shares of i-
engineering.com, which it acquired.
On May 3, 1999, the Company acquired 1,150,000 shares of Common Stock in
exchange for the Investment in Preferred Stock of an Affiliate, which was held
by the Company in the amount of $2,240,730, and a reduction in Due from
Affiliates in the amount of $325,952.
36
TRANS GLOBAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
[1] Basis of Presentation
Trans Global Services, Inc. (the "Company" or "Trans Global"), a Delaware
corporation, operates through two subsidiaries, Avionics Research Holdings,
Inc., ["Holdings"] and Resource Management International, Inc. ["RMI"]. The
Company is engaged in providing technical temporary staffing services throughout
the United States, principally in the aircraft and aerospace industries.
[2] Summary of Significant Accounting Policies
Principles of Consolidation - The consolidated financial statements include the
accounts of Trans Global Services, Inc. and its subsidiaries. All intercompany
transactions have been eliminated in consolidation.
Cash and Cash Equivalents - The Company considers all highly liquid instruments
purchased with a maturity of three months or less to be cash equivalents. There
were no cash equivalents at December 31, 2000 and 1999.
Prepaid Expenses and Other Current Assets - Prepaid expenses primarily consist
of approximately $71,000 and $93,000 of prepaid insurance at December 31, 2000
and 1999, respectively.
Property and Equipment - Property and Equipment are stated at cost less
accumulated depreciation and amortization. Depreciation and amortization are
computed using straight-line and accelerated methods over the estimated useful
lives of the respective assets. Amortization of leasehold improvements is
provided using the straight-line method over the term of the respective lease or
the useful life of the asset, whichever period is less. Estimated useful lives
range from 3 to 5 years as follows:
Furniture and Fixtures 3 - 5 years
Leasehold Improvements 5 years
Equipment 3 - 5 years
Expenditures for maintenance and repairs, which do not improve or extend the
life of the respective assets are expensed currently while major repairs are
capitalized.
F-10
37
TRANS GLOBAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
Deferred Acquisition Costs - Deferred acquisition costs represent legal,
accounting and other costs associated with the planned business acquisitions by
the Company. Since these acquisitions were not completed those costs were
expensed at December 31, 1999.
Revenue Recognition - The Company records revenue as services are provided.
Stock Options and Similar Equity Instruments - On January 1, 1996, the Company
adopted the disclosure requirements of Statement of Financial Accounting
Standards ["SFAS"] No. 123, "Accounting for Stock-Based Compensation," for stock
options and similar equity instruments [collectively, "Options"] issued to
employees, however, the Company will continue to apply the intrinsic value based
method of accounting for options issued to employees prescribed by Accounting
Principles Board ["APB"] Opinion No. 25, "Accounting for Stock Issued to
Employees" rather than the fair value based method of accounting prescribed by
SFAS No.123. SFAS No. 123 also applies to transactions in which an entity issues
its equity instruments to acquire goods or services from non- employees. Those
transactions must be accounted for based on the fair value of the consideration
received or the fair value of the equity instruments issued, whichever is more
reliably measurable.
Income Taxes - The Company accounts for income taxes under SFAS No. 109,
"Accounting for Income Taxes." Under SFAS No. 109, the asset and liability
method is used to determine deferred tax assets and liabilities based on
differences between financial reporting and tax bases of assets and liabilities
and are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse.
Earnings Per Share- Earnings per share of Common Stock reflects the weighted
average number of shares outstanding for each year.
The Financial Accounting Standards Board has issued SFAS No.128, "Earnings Per
Share," which is effective for financial statements issued for periods ending
after December 15, 1997. Accordingly, earnings per share data in the financial
have been calculated in accordance with SFAS No. 128.
F-11
38
TRANS GLOBAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
SFAS No. 128 supercedes APB Opinion No.15, "Earnings Per Share," and replaces
its primary earnings per share with a new basic earnings per share representing
the amount of earnings for the period available to each share of common stock
outstanding during the reporting period. SFAS No.128 also requires a dual
presentation of basic and diluted earnings per share on the face of the
statement of operations for all companies with complex capital structures.
Diluted earnings per share reflects the amount of earnings for the period
available to each share of common stock outstanding during the reporting period,
while giving effect to all dilutive potential shares of common stock that were
outstanding during the period, such as common stock 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 antidulutive
effect on earnings per share (i.e. increasing earnings per share or reducing
loss per share). The dilutive effect of outstanding options and warrants and
their equivalents are reflected in dilutive earnings per share by the
application of the treasury stock method which recognizes the use of proceeds
that could be obtained upon the exercise of options and warrants in computing
diluted earnings per share. It assumes that any proceeds would be used to
purchase common stock at the average market price during the period. Options and
warrants will have a dilutive effect only when the average market price of the
common stock during the period exceeds the exercise price of the options or
warrants.
Securities that could potentially dilute earnings per share in the future are
disclosed in Notes 13 and 14.
Impairment - The Company reviews certain long-lived assets, including goodwill
and other intangibles for impairment whenever events or changes in circumstances
indicate that the carrying amount of such assets may not be recoverable pursuant
to guidance established in SFAS No. 121, "Accounting for the impairment of
long-lived assets and for long-lived assets to be disposed of." [See Note 5]
Estimates - The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
F-12
39
TRANS GLOBAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
[2] Summary of Significant Accounting Policies [Continued]
Concentration of Credit Risk - The Company extends credit to customers which
results in accounts receivable arising from its normal business activities. The
Company does not require collateral or other security to support financial
instruments subject to credit risk. It routinely assesses the financial strength
of its customers and believes that its accounts receivable credit risk exposure
is limited. Such estimate of the financial strength of such customers may be
subject to change in the near term. For each of the years ended December 31,
2000, and 1999, a significant portion of the Company's receivables were derived
from three customers [See Note 12].
Due to the nature of its operations, the Company deposits, on a monthly basis,
amounts in excess of the federally insured limit in financial institutions for
the payment of payroll costs. Such amounts are reduced below the federally
insured limit as payroll checks are presented for payment. Such reduction
generally occurs over three to four business days. At December 31, 2000, the
Company had amounts on deposit which exceeded the federally insured limit by
approximately $43,000. The Company has not experienced any losses and believes
it is not exposed to any significant credit risk from cash and cash equivalents.
[3] Accounts Receivable and Loan Payable - Asset Based Lender
Receivables are shown net of an allowance for doubtful accounts of $62,500 at
December 31, 2000 and 1999. On June 7, 2000 the Company entered into a one year
revolving credit agreement with an asset-based lender. Pursuant to the credit
agreement, the Company can borrow up to 85% of its qualified accounts
receivables at an interest rate of prime plus 2% with a minimum monthly interest
of $12,000. The maximum availability on the credit agreement is $2.5 million.
The borrowings are secured by a security interest in all of the Company's
assets. At December 31, 2000 such borrowings were approximately $900,000. At
December 31, 1999 the borrowings from the Company's prior lender amounted to
$2.1 million. The interest rate (exclusive of any fees) payable by the Company
at December 31, 2000 was 11.5% and at December 31, 1999 and December 31, 1998
9.75% and 8.5% respectively.
F-13
40
TRANS GLOBAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
[4] Property and Equipment
Property and equipment at December 31, 2000 and 1999 is as follows:
2 0 0 0 1 9 9 9
Equipment $ 472,929 $ 454,214
Furniture and Fixtures 199,921 197,107
Leasehold Improvements 100,510 100,510
--------- ---------
Totals - At Cost 773,360 751,831
Less: Accumulated Depreciation 659,677 589,011
--------- ---------
Totals $ 113,683 $ 162,820
Depreciation expense charged to operations was $70,666 in 2000, and $72,393 in
1999 and $78,694 in 1998.
[5] Intangibles
The Company acquired its subsidiaries during 1994. As part of the purchase
agreements, the Company acquired customer lists, a restrictive covenant and
goodwill. The intangible assets acquired and the related amortization on the
straight-line method are summarized as follows:
Accumulated Amortization Net of Amortization
Life December 31, December 31,
Years Cost 2000 1999 2000 1999
Customer Lists 15 $3,374,477 $1,435,774 $1,210,822 $1,938,703 $2,163,655
Goodwill 20 $ 971,623 $ 341,807 $ 293,231 $ 629,816 $ 678,392
Goodwill represents the excess of the acquisition costs over the fair value of
net assets of business acquired. Amortization expense is calculated on a
straight-line basis over twenty years. Customer Lists represent listings of
customers obtained through acquisitions to which the Company can market its
services. Customer Lists are recorded at cost and are amortized on a straight-
line basis over the estimated useful life of fifteen years. The Company reviews
Goodwill and other intangibles to assess recoverability from future operations
using undiscounted cash flows. If the review indicates impairment, the Company
will incur a charge against operations to the extent that carrying value exceeds
fair value. Management has determined that fair value exceeds carrying value as
of December 31, 2000.
F-14
41
TRANS GLOBAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
[6] Related Party Transactions
Pursuant to an agreement with i-engineering.com, Inc., the Company (i) loaned
$500,000 to i-engineering.com on a short-term basis, (ii) issued 270,000 shares
of Common Stock to i-engineering.com and (iii) acquired a minority interest in
i-engineering.com. The value of this interest was determined by the market value
of the Company's shares exchanged which was $331,830.
On December 5, 2000, following the failure of i-engineering.com, Inc. to make
timely payment of principal and interest in the aggregate amount of $223,951,
the Company entered into an agreement with i-engineering.com pursuant to which ,
among other things, the Company extended payment of the note, i- engineering.com
returned to us the 270,000 shares of Common Stock, and the Company returned to
i-engineering.com, 50% of the shares of i- engineering.com which it received
(other than shares which are to be issued to the lenders described above) and
placed the remaining shares in escrow pending payment by i-engineering.com of
its notes to the Company.
In September 2000, Arc Networks, which was formerly a subsidiary of The Sagemark
Companies Ltd. ("Sagemark"), made payment in full on the 10% installment
promissory note due the Company August 21, 2003 in the principal amount of
$1,216,673, (the "Arc Note"). Sagemark was formerly know as Consolidated
Technology Group Ltd. On December 31, 1999, Arc Networks was in default on the
Arc Note which was guaranteed by Sagemark and others. In February, April and
July 2000 the Company agreed to extend the maturity date of the Arc Note until
September 15, 2000 in exchange for $80,000 and a transfer to the Company of
50,000 shares of common stock from Sagemark. This transfer reduced Sagemark's
holdings in the Company to 329,994, or approximately 11.4%. At December 31,
2000, Sagemark was not considered an affiliate of the Company.
On May 3, 1999, Sagemark, through a subsidiary, transferred 1,150,000 shares of
the Company's common stock to the Company in consideration of the cancellation
of shares of Sagemarks Series G 2% Cumulative Redeemable Preferred Stock owned
by the Company, including accrued dividends, and certain other obligations due
to the Company. The transfer of the 1,150,000 shares to the Company reduced
Sagemark's holdings in the Company to 379,994 shares, or approximately 14.2% of
its outstanding common stock. Prior to the transfer, Sagemark owned 40.1% of the
Company's outstanding common stock. The effect of this transaction is the
elimination of the investment in preferred stock of affiliate and the reduction
of the amount due from affiliates by $325,952, and an increase in Treasury Stock
of approximately $2.6 million, which resulted in a reduction in stockholders
equity for the same amount.
The Company had a management services agreement with a wholly-owned subsidiary
of Sagemark pursuant to which the Company paid a monthly fee of $10,000 through
January 1998. Commencing February 1998 such fee was increased to $15,000. The
Company terminated the management services agreement effective April 30, 1998.
F- 15
42
TRANS GLOBAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENT
[7] Notes Payable
In January, 2000 the Company raised $1 million through the issuance of 10%
subordinated promissory notes due July 2001 or earlier upon the Company's
receipt of payment of the note from Arc Networks, Inc. At June 30, 2000, the
unpaid principal balance of the note from Arc Networks ("the Arc Note") was
$994,000. In connection with the subordinated notes, the Company issued warrants
to purchase 575,000 shares of the Company's common stock at $.35 per share to
the investors, the placement agent and others who assisted the Company in the
financing, including a director of the Company. The Company incurred a financing
charge of $210,000 which was credited to paid in capital for the fair value of
the warrants. The Company also agreed to transfer to the lenders 10% of its
equity interest in i-engineering.com. At December 31, 2000 the Company had
repaid the noteholders $850,000 of the principal amount plus interest. The
remaining noteholders have agreed to extend the due date of the notes to the
earlier of March 31, 2001 or when the Company is able to raise $300,000 from
outside sources.
[8] Income Taxes
Deferred income taxes reflect the net tax effects of (a) temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes, and (b) operating loss
carryforwards. The tax effects of significant items comprising the Company's net
deferred tax asset as of December 31, 2000 and 1999 are as follows:
December 31,
2000 1999
Deferred Tax Liabilities $ -- $ --
-------- --------
Deferred Tax Assets:
Allowance for Doubtful Accounts not
Currently Deductible 25,000 25,000
Net Operating Loss Carryforwards 2,320,000 1,748,000
---------- -----------
Totals 2,345,000 1,773,000
Valuation Allowance 2,345,000 1,283,000
----------- -----------
Net Deferred Tax Asset -0- 490,000
Net Deferred Tax Asset - Current Portion -0- -0-
--------- ---------
Net Deferred Tax Asset - Non Current $ -0- $ 490,000
The Company's deferred tax asset valuation allowance was $2,345,000 and
$1,283,000 as of December 31, 2000 and 1999, respectively. The valuation
allowance represents the tax effects of net operating loss carryforwards and
other temporary differences which the Company does not expect to realize. The
increase in the valuation allowance amounted to $1,062,000 and $648,000 for the
years ended December 31, 2000 and 1999, respectively.
F-16
43
TRANS GLOBAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
The current and deferred income tax components of the provision [benefit] for
income taxes consist of the following:
Years ended December 31,
2000 1999 1998
----- ---- -----
Current:
Federal $ -0- $ -0- $ 149,009
State -0- -0- 49,965
Tax Benefit of Net Operating
Loss Carryforwards -0- -0- (168,237)
-------- ------- -------
Totals $ -0- $ -0- $ 30,737
Deferred:
Federal $ 382,000 $ 181,424 $(286,994)
State 108,000 50,576 ( 80,006)
--------- --------- --------
Totals $ 490,000 $ 232,000 $(367,000)
-------- ---------- --------
Totals $ 490,000 $ 232,000 $(336,263)
========== ========== ========
A reconciliation of the federal statutory rate to the Company's effective tax
rate is as follows:
Years Ended December 31,
2000 1999 1998
---- ---- ----
Federal Statutory Rate (34%) 34% 34%
State Income Taxes, net of
federal tax ( 7%) 7% 7%
Federal tax benefit of net operating
loss carryforwards -0- -0- (32%)
Increase (Decrease)in valuation allowance 75% 55% (81%)
----- ----- -----
Effective tax rate 34% 14% (72%)
===== ===== =====
The following summarizes the operating loss carryforwards by year of expiration:
Amount Expiration Date
$ 80,000 December 31, 2009
2,163,000 December 31, 2010
189,000 December 31, 2011
438,000 December 31, 2012
1,500,000 December 31, 2014
1,430,000 December 31, 2015
---------
$5,800,000
========== F-17
44
TRANS GLOBAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
[9] Commitments
The Company leases office space and several office machines under operating
leases which expire in 2002. The following is an analysis of future minimum
lease commitments as of December 31, 2000:
2000 208,717
2001 205,331
2002 79,385
2003 27,960
2004 1,120
--------
Total $ 522,513
Rent expense amounted to $208,717, $202,802, and $225,198 for the years ended
December 31, 2000, 1999 and 1998, respectively.
The company has an employment agreement with the chief executive officer which
expires in 2005. Pursuant to the agreement, the chief executive officer received
minimum annual compensation of $260,000, subject to an annual increase equal to
the greater of the increase in the cost of living index or 5%. The chief
executive officer is entitled to a bonus of 5% of the Company's income before
taxes, as defined, up to a maximum of 200% of his annual salary. The chief
executive officer is also entitled to severance payments in the event of a
termination of his employment following a change of control, which would equal
the greater of five times his annual compensation or his annual compensation
multiplied by the number of years remaining in the term.
The Company also has an employment agreement with its chief financial officer
which expires in 2003, pursuant to which he receives a minimum base salary of
$127,960 subject to an annual increase not less than 5%.
In January 2000, we entered into a two year consulting agreement with Westwind
Holdings, Inc. to provide advisory services to the Company specifically
concerning strategic planning, mergers and acquisitions , public relations,
raising capital and other related matters. The Company agreed to pay $10,000
each month for the services.
[10] Contingencies
In November 1997, an action was commenced in the Supreme Court of the State of
New York, County of Suffolk, by Ralph Corace against RMI seeking damages of
approximately $1.1 million for an alleged breach of contract by the Company. Mr.
Corace was the president of Job Shop Technical Services, Inc., from which the
Company, through a subsidiary, purchased assets in November 1994. We believe
that the action is without merit, we are contesting this matter and we have
filed counterclaims against Mr. Corace.
Due to the uncertainties in the legal process it is reasonably possible that
management's view of the outcome of this may change in the near term.
[11] Fair Value of Financial Instruments
Effective December 31, 1995, the Company adopted SFAS No. 107, which requires
disclosing fair value to the extent practicable for financial instruments which
F-18
45
TRANS GLOBAL SERVICES,INC.
NOTES TO FINANCIAL STATEMENTS
are recognized or unrecognized in the balance sheet. The fair value of the
financial instruments disclosed therein is not necessarily representative of the
amount that could be realized or settled, nor does the fair value amount
consider the tax consequences or realization or settlement.
For certain financial instruments, including cash and cash equivalents,notes
receivable, trade receivables and payables, and short-term debt, it was assumed
that the carrying amount approximated fair value because of the near term
maturities of such obligations.
[12] Economic Dependency
In 2000, three customers accounted for revenue of approximately $13.4 million or
57% of the Company's total revenue. Accounts receivable of $940,000 were due
from these customers collectively at December 31, 2000.
In 1999, three customers accounted for revenue of approximately $17 million, or
47% of the Company's total revenue. Accounts receivable of $670,000 were due
from these customers collectively at December 31, 1999. In 1998, three customers
accounted for approximately $40 million, or 60% of the Company's total revenue.
Accounts receivable of $1,720,000 were due from these customers collectively at
December 31, 1998.
Revenues for the twelve
months ended December 31
2000 1999 1998
Lockheed-Martin 5,700,000 7,300,000 12,200,000
Bell Helicopter Textron 4,100,000 4,900,000
Boeing 3,600,000 4,600,000 16,300,000
Northrop Grumman 11,600,000
--------- ---------- ----------
13,400,000 16,800,000 40,100,000
[13] Stockholders Equity
At December 31, 2000 and 1999, the authorized capital stock of the Company
consisted of 5,000,000 shares of preferred stock, par value $.01 per share, and
25,000,000 shares of common stock, par value $.01 per share. The Board of
Directors has the right to create and to define the rights, preferences and
privileges of the holders of one or more series of Preferred Stock.
F-19
46
TRANS GLOBAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
At December 31, 2000 and 1999 there were no shares of any series of preferred
stock outstanding.
At December 31, 2000, there were outstanding warrants to purchase 1,429,162
shares of Common Stock at prices ranging from $.35 - $21.00 per share.
A summary of warrant activity is as follows:
2000 1999 1998
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
Outstanding-Beginning
of Years 892,312 8.64 901,485 $ 9.07 913,359 $9.36
Granted or Sold
during the years 612,500 .35 -- -- -- --
Cancelled during
the years -- -- -- -- -- --
Expired during
the years -- -- 9,173 50.70 11,874 30.95
Exercised during
the years -- -- -- -- -- --
Outstanding-
End of Years 1,504,812 5.27 892,312 8.64 901,485 9.07
======= ==== ========= ===== ======= =====
Exercisable -
End of Years 1,429,162 4.44 816,662 7.50 825,835 7.98
======= ==== ========= ===== ======= ======
The following table summarizes warrant information as of December 31, 2000
Weighted Avg. Weighted Avg.
Range of Exercise Price Remaining Exercise
Shares Contractual Life Price
.35 612,500 1 Year .35
7.50 816,662 .3 Years 7.50
21.00 75,650 (A) 21.00
-------
1,504,812
(A) These warrants are exercisable immediately upon issuance and expire 45 days
after the effective date of the first registration statement under the
Securities Act of 1933, as amended, in which the holders of the warrants are
given the opportunity to include the shares of Common Stock issuable upon
exercise of the warrants.
F-20
47
TRANS GLOBAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
[14] Stock Option Plans
The Company presently has three stock option plans. In 1993, the Company adopted
the 1993 Stock Incentive Plan [the "1993 Plan"], covering an aggregate of 25,000
shares of Common Stock. In January 1995, the board of directors adopted the 1995
Stock Incentive plan [the "1995 Plan"], pursuant to which stock options and
stock appreciation rights can be granted with respect to 50,833 shares of Common
Stock. All of the options outstanding under the "1993 Plan" and "1995 Plan"
expired prior to December 31, 2000.
In May 1995, the board of directors adopted, and, in March 1996, the
stockholders approved the 1995 Long Term Incentive Plan [the "1995 Incentive
Plan"], initially covering 83,333 shares of Common Stock.
In April and November 1996, the board of directors and stockholders approved an
amendment to the 1995 Incentive Plan which increased the number of shares of
Common Stock currently subject to the 1995 Incentive Plan to 415,388 shares. The
number of shares of common stock subject to the 1995 Incentive Plan
automatically increases by 5% of any shares of Common Stock issued by the
Company other than shares issued pursuant to the 1995 Incentive Plan.
In October 1997, the committee granted incentive stock options to purchase an
aggregate of 216,000 shares of common stock at $3.875 per share, being the fair
market value on the date of grant. Such options were granted to Mr. Joseph G.
Sicinski, president of the Company, who received an option to purchase 90,000
shares of common stock, Mr. Lewis S. Schiller, chairman of the board of the
Company, at that time, who received an option to purchase 25,000 shares of
common stock, one other officer, who received an option to purchase 20,000
shares of common stock and twenty other employees who received options to
purchase an aggregate of 81,000 shares of common stock. All options have a 5
year term.
During 1998, the Company adopted the 1998 Long-Term Incentive Plan (the "1998
Plan"), covering 350,000 shares of common stock. In June 1998, the committee
granted stock options to purchase an aggregate of 215,000 shares of common stock
at $4.00 per share, being the fair market value on the date of grant. In
December 1998, these options were repriced to $1.25 per share of common stock,
the fair market value on that date. All options are fully vested as of December
31, 1998. Such options were granted to Mr. Joseph G. Sicinski, president and CEO
of the Company, who received an option to purchase 60,000 shares of common
stock, two other officers who received options to purchase an aggregate of
40,000 shares of common stock, the chairman of the board received options to
purchase 20,000 shares of common stock, the three other directors of the Company
each received options to purchase 10,000 shares of common stock and seven other
employees who received options to purchase an aggregate of 65,000 shares of
common stock. All options have a five year term.
F-21
48
TRANS GLOBAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
In June 1999, the committee granted stock options to purchase an aggregate of
254,332 shares of common stock, 122,224 under the 1995 Plan and 132,108 under
the 1998 Plan, at $.80 per share, being the fair market value on the date of
grant.
In December 1999, the board of directors repriced all of the outstanding stock
options held by present employees and directors to $.53, the fair market value
on that date. (See Note 17)
During 2000, the Company adopted the 1999 Long-Term Incentive Plan (the "1999
Plan"), covering 130,000 shares of common stock. On the date of the adoption of
the Plan, each of three Non-Employee Directors received a Non-Qualified Stock
Option to purchase 10,000 shares of Common Stock at an option price of $.9375.
During 2000, options to purchase 35,000 shares became available under the 1998
Plan due to employee terminations and the board granted stock options to
purchase an aggregate of 37,333 at an option price of $.1562 per share, being
the fair market value on the date of grant.
No compensation cost was recognized for stock-based employee awards.
A summary of the activity under the Company's stock option plans is as follows:
1993 1995 1995 1998 1999
Plan Plan Plan Plan Plan
Options Outstanding
and Exercisable
- December 31, 1997 18,992 5,833 434,333 -- --
Weighted Average Exercise
Price $ 13.50 $ 5.28 $ 5.39 -- --
Granted -- -- -- 215,000 --
Exercised -- -- -- -- --
Canceled or expired -- -- (141,169) -- --
Options Outstanding and
Exercisable
- December 31, 1998 18,992 5,833 293,164 215,000 --
Weighted Average Exercise
Price $ 13.50 $ 5.28 $ 5.39 $ 1.25 --
Granted -- -- 122,224 132,108 --
Exercised -- -- -- -0- --
Canceled or expired -- -- -- (10,000) --
Options Outstanding and
Exercisable
- December 31, 1999 18,992 5,833 415,388 337,108 --
Weighted Average Exercise
Price $ 13.50 $ 5.28 $ .53 $ .53 $ .9375
Granted -- -- -- 37,333 30,000
Exercised -- -- -- -0- --
Canceled or expired (18,992) (5,833) -- (35,000) --
Options Outstanding and
Exercisable
- December 31, 2000 -- -- 415,388 339,441 30,000
Weighted Average Remaining
Contractual Life 3.42 years 3.0 years 9.6 years
F-22
49
TRANS GLOBAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
The following table summarizes option information as of December 31, 2000
Weighted Avg. Weighted Avg.
Range of Exercise Price Remaining Exercise
Shares Contractual Life Price
.9375 30,000 9.6 Years .9375
.53 339,441 4.0 Years .53
.53 415,388 4.42 Years .53
If the Company had accounted for the issuance of all options and compensation
based warrants pursuant to the fair value based method of SFAS No. 123, the
Company would have recorded compensation expense totaling $42,300, $135,441 and
$168,439, for the years ended December 31, 2000, 1999 and 1998, respectively,
and the Company's net income (loss) and net income (loss) per share would have
been as follows:
Years ended
December 31,
2 0 0 0 1 9 9 9 1 9 9 8
Net(Loss) Income as Reported $(1,922,853) $(1,853,031) $ 805,261
========== ========= ===========
Pro Forma Net(Loss) Income $(1,965,153) $(1,988,472) $ 636,822
========== ========= ===========
Basic (Loss) Earnings
Per Share as Reported $ (.67) $ (.61) $ .21
========== ========= ===========
Pro Forma Basic (Loss) Earnings
Per Share $ (.69) $ (.65) $ .17
========= =========== ============
The fair value of options and warrants [See Note 13] at date of grant was
estimated using the fair value based method with the following weighted average
assumptions:
2000 1999 1998
Expected Life [Years] 5 4 5
Interest Rate 6.2% 6.4% 4.67%
Annual Rate of Dividends 0% 0% 0%
Volatility 126.59% 120.53% 71.99%
The weighted average fair value of options at date of grant using the fair value
based method during 2000, 1999, and 1998 is estimated at $0.63, $0.44, and $0.78
respectively.
F-23
50
TRANS GLOBAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
[15] Employment Benefit Plans
The Company sponsors a Qualified Retirement Plan under section 401(k) of the
Internal Revenue Code. Employees become eligible for participation after
completing three months of service and attaining the age of twenty-one. The
Company has the option to make a matching contribution to the Plan for the years
ended December 31, 2000, 1999 and 1998, however, it has not made any matching
contributions to the Plan.
[16] New Authoritative Accounting Pronouncements
In December 1999, the SEC issued Staff Accounting Bulletin No. 101 ("SAB 101"),
"Revenue Recognition in Financial Statements." SAB 101 summarized the SEC's view
in applying generally accepted accounting principles to selected revenue
recognition issues. SAB 101 was effective as of October 1, 2000. The adoption of
SAB 101 did not have a material impact on the Company's financial position or
results of operations.
In April 2000, the Financial Accounting Standards Board issued FASB
Interpretation No 44 ("FIN44"), "Accounting for Certain Transactions Involving
Stock Compensation," and interpretation of APB Opinion No.25. FIN 44 is
effective for transactions occurring after July 1, 2000. The application of FIN
44 did not have material impact on the Company's financial statements.
(17) Subsequent Events
In January 2001, the exercise price of all stock options outstanding was reduced
to $.125 per share, and the option holders were given the right to exercise the
options through the issuance of their non-interest bearing non-recourse
promissory notes which are payable on the earlier of January 2006 or the date
the shares are sold. The shares are held by the Company as security for payment
of the notes.
(18) Selected Quarterly Financial Data (Unaudited)
The following information shows selected items by quarter fo rthe years ended
December 2000 and 1999 respectively.
First Second Third Fourth
Quarter Quarter Quarter Quarter
Net Revenue:
2000 6,503,330 5,498,973 5,455,547 5,867,344
1999 11,218,307 9,477,423 8,353,145 6,966,398
Gross Profit:
2000 646,011 580,314 512,166 611,264
1999 725,810 757,570 740,321 743,179
Net (Loss):
2000 ( 308,161) (323,608) ( 443,608) ( 847,476)-2
1999 1- ( 139,555) (435,368) ( 414,517) ( 863,590)-2
Basic and diluted
(Loss) per share:
2000 ( 0.11) ( 0.11) ( 0.15) ( 0.30)
1999 ( 0.04) ( 0.14) ( 0.16) ( 0.27)
1- Includes a $323,000 payroll tax refund from the IRS, that was a result of the
Company's successful efforts in collecting contested tax penalties which were
paid in previous years.
2 Includes an adjustment to the deferred tax asset valuation allowance of
$490,000 in 2000 and $232,000 in 1999.
F-24
51
EXHIBIT 10.7
Credit Agreement dated June 7,2000 between the Company and Sterling National
Bank
SECURITY AGREEMENT
ACCOUNTS RECEIVABLE
AGREEMENT dated June 7, 2000 between STERLING NATIONAL BANK ("Secured Party"), a
national banking association having an office at 500 Seventh Avenue, New York,
New York 10018, and TRANS GLOBAL SERVICES, INC. ("Trans Global"), 1393 Veterans
Memorial Highway, Hauppauge, New York 11788, a Delaware corporation, RESOURCE
MANAGEMENT INTERNATIONAL, INC., 1393 Veterans Memorial Highway, Hauppauge, New
York 11788, a Delaware corporation, AVIONICS RESEARCH HOLDINGS, INC., 1393
Veterans Memorial Highway, Hauppauge, New York 11788 a New York Corporation,
AVIONICS RESEARCH CORPORATION, 1393 Veterans Memorial Highway, Hauppauge, New
York 11788 a New York corporation and AVIONICS RESEARCH CORPORATION OF FLORIDA,
1393 Veterans Memorial Highway, Hauppauge, New York 11788 a Florida corporation,
hereinafter collectively referred to as ("Debtor") and each of whom shall be
jointly and severally bound hereunder.
Debtor desires to obtain loans from Secured Party from time to time on a
revolving basis on the security of Debtor's "Receivables," as herein defined,
upon the following terms and conditions:
All advances shall be disbursed by Secured Party from its office in the City and
State of New York, may be made by crediting the account of Trans Global with
Secured Party or otherwise as Secured Party may determine and shall be payable
at such office, and this Agreement and all transactions hereunder shall be
deemed to be consummated in, shall be governed by, and shall be construed under
the laws of such State.
1. Secured Party agrees to make advances to Debtor from time to time in such
amounts as may be mutually agreed upon to an aggregate amount outstanding up to
85% of the outstanding amount of Receivables, which shall have been assigned,
pledged or transferred to Secured Party as provided in paragraph 5 of this
Agreement and still held by Secured Party and shall conform to the definition of
"Eligible Receivables" herein. All amounts collected by Secured Party on
Receivables shall be credited to Debtor's current account with Secured Party.
The excess of collections over Obligations as defined herein shall be paid to
Debtor at the termination of this Agreement, or at such earlier time as Secured
Party may determine. Unless Debtor is in default to Secured Party collections in
excess of Obligations shall be paid over to Debtor upon request.
2 (a). If at any time the ratio of Obligations to Eligible Receivables shall
exceed the foregoing percentage, Debtor shall on notification of such fact by
Secured Party forthwith pay to Secured Party such amount as will reduce the
Obligations to the foregoing percentage of Eligible Receivables. Such excess
Obligations shall be deemed an "Overadvance." Any Overadvance which Secured
Party, in its sole discretion, permits to exist shall bear interest at a rate
equal to five percent (5%) above the contractual rate of interest set forth in
paragraph 7 of this Agreement.
52
EXHIBIT 10.7
Credit Agreement dated June 7,2000 between the Company and Sterling National
Bank
(b) Debtor shall pay to Secured Party on demand the unpaid portion of any
Receivable which was formerly an Eligible Receivable and which has been assigned
or transferred to Secured Party or in which Secured Party otherwise has an
interest (i) if such Receivable was not paid promptly at its maturity; (ii) if
the services out of which the Receivable arises have not been performed to the
satisfaction of the Account Debtor, or the goods out of which the Receivable
arises have not been delivered to and accepted by the Account Debtor, or if
Account Debtor has returned or sought to return the goods or made any complaint
or claimed any adjustment with respect thereto; (iii) if any petition under the
Bankruptcy Act or any similar Federal or State statute or a petition for
receivership has been filed by or against the Account Debtor or its property or
if it has made an assignment for the benefit of creditors or (iv) if the Secured
Party shall at any time reasonably have rejected the Receivable as no longer
eligible.
(c) All advances and all other Obligations of Debtor shall be payable to
the Secured Party without the necessity of the Secured Party resorting to or
having recourse to any Collateral, as herein defined, or at Secured Party's
option such amount may be charged against and deducted from any payment then or
thereafter due from Secured Party to Debtor.
(d) Upon the effective date of termination of this Agreement, all
Obligations shall be due and payable by Debtor to Secured Party.
(e) Upon full payment of all Obligations, Secured Party shall reassign to
Debtor, without recourse and without warranties express or implied, all
Collateral.
3. Secured Party shall render to Debtor each month by mailing to Trans Global,
by ordinary mail prepaid, a statement of Debtor's account with Secured Party,
which shall be deemed to be correct and accepted by and binding upon Debtor
unless Secured Party shall have received a written statement of Debtor's
exceptions within 15 days after the mailing thereof, and in any event shall be
deemed correct and accepted except as to the matters stated in such exceptions.
4. Definitions:
(a) "Receivables" includes but is not limited to open accounts whether or
not matured and whether or not executory, contract rights, chattel paper, notes,
rental receivables, tax refunds, installment payment obligations and other
obligations for the payment of money payable to Debtor and created by Debtor or
acquired by Debtor from others, and contracts, documents, invoices and other
instruments evidencing the same, which Receivables are created or otherwise
arise out of the sale of merchandise or the supplying of services by Debtor in
the regular course of its business or otherwise. The term includes any property
or interest in property classified as "Accounts" or an "Account" under the
Uniform Commercial Code in effect in the State of New York, as the same may be
amended from time to time, as well as accounts receivable, contract rights,
general intangibles, chattel paper or instruments, and all cash and non-cash
proceeds thereof, and all security therefor and all of Debtor's rights present
or future to any property sold or leased which is represented thereby.
53
EXHIBIT 10.7
Credit Agreement dated June 7,2000 between the Company and Sterling National
Bank
(b) "Eligible Receivables" mean open account Receivables which are and at
all times shall continue to be acceptable to Secured Party in all respects, as
determined in its sole discretion exercised reasonably and in good faith. No
Receivable the amount of which the Debtor is obliged to pay to the Secured Party
pursuant to paragraph 2 (b) shall be deemed to be an Eligible Receivable unless
otherwise deemed ineligible by Secured Party. Eligible Receivable may include
Receivables payable within 90 days of invoice. Eligible Receivables shall not
include the Arc Note and the i-engineering.com Note. The Arc Note is the 10%
promissory note issued by Arc Networks, Inc. in the principal amount of
approximately $1.0 million at June 2, 2000, and the i-engineering.com Note is
the 10% promissory note issued by i-engineering.com, Inc. in the principal
amount of $300,000 at June 2, 2000. The Arc Note and the i-engineering.com Note
are collectively referred to as the "Outstanding Notes." Nevertheless, the
Outstanding Notes shall be deemed security for the payment in full of all
Obligations, subject to existing obligations of Debtor to the holders of the 10%
Subordinated Note due July 12, 2001 related thereto, provided such existing
obligations are not extended or renewed without consent of Secured Party.
Secured Party hereby consents to a 90 day extension of the i-engineering.com
Note. Collections on the Outstanding Notes shall be deposited by Debtor in a
separate bank account maintained with Secured Party for that purpose. Provided
Debtor is not in default under this Agreement, proceeds from payment of the Arc
Note may be used by Debtor to pay principal and interest on the existing note of
Trans Global Services, Inc. to the holders of the 10% Subordinated Note due in
July , 2001.
(c) "Obligations" shall mean all advances from time to time made by Secured
Party to Debtor and to others at Debtor's request or for Debtor's account under
this Agreement and also all other indebtedness and obligations owing by Debtor
or its subsidiaries or affiliates or persons controlling the Debtor to Secured
Party and its affiliates under this Agreement or otherwise, now existing or
hereafter arising, whether such Obligations be absolute or contingent, joint or
several, matured or unmatured, direct or indirect, primary or secondary, due or
to become due, including without limitation Secured Party's compensation and all
fees referred to herein, all charges and fees that Secured Party may have
incurred in filing public notices and any local taxes relating thereto, all
costs and expenses (including attorneys' fees) incurred by Secured Party in
efforts made to enforce payment or to otherwise effect collection of any
Receivables, in protecting, maintaining, preserving, enforcing or foreclosing
the pledge, lien and security interest in Receivables of Secured Party
hereunder, and in defending or prosecuting any actions or proceedings arising
out of or relating to Secured Party's transactions with Debtor or Secured
Party's transactions with third parties that refer to or relate to Debtor,
through judicial proceedings or otherwise, all of which Debtor agrees to pay as
provided herein. If the Secured Party shall become liable to the United States
in relation to wages of employees of Debtor by virtue of Section 3505 of the
Internal Revenue Code of 1954 (as added by Section 105 of the Federal Tax Lien
Act of 1966), whether or not such amount has been paid by Secured Party, such
amount shall be an Obligation payable by Debtor to Secured Party hereunder.
Debtor authorizes Secured Party to pay any such amount to the United States on
behalf of Debtor, but Secured Party shall not be obligated to do so or continue
to do so. Debtor authorizes Secured Party to pay to any landlord on behalf of
Debtor the amount of any statutory landlord's lien on premises on which or in
the contents of which Secured Party has a security interest. Secured Party shall
not take any action to pay any taxes or make any payments to any landlord
without notice to Debtor unless the claim involves $150,000.00 or more, in which
event Secured Party shall give Debtor five days written notice, unless there is
a valid dispute and Debtor has posted an appropriate bond..
54
EXHIBIT 10.7
Credit Agreement dated June 7,2000 between the Company and Sterling National
Bank
(d) "Base Rate" is the interest rate announced by Secured Party from time
to time as a guide for determining interest and is not necessarily the rate
charged to Secured Party's most creditworthy customers.
(e) "Account Debtor" shall mean a person (other than the Debtor or a
guarantor of the Debtor) who is obligated on an account, chattel paper, contract
right, general intangible, instrument or other Receivable.
5 As security for the payment in full of all Obligations, including all advances
made and to be made hereunder by Secured Party, Debtor does hereby grant to
Secured Party a continuing security interest in, and hereby assigns, transfers,
pledges and sets over to Secured Party all of Debtor's right, title and interest
in and to: all property and all assets and interests in property and assets of
Debtor, of whatever kind or nature, whether real, personal, or mixed, wherever
located, now existing or hereafter acquired or created, including, but not
limited to all the Debtor's Receivables present and future, whether or not now
or hereafter specifically assigned or pledged to Secured Party, and whether or
not constituting Eligible Receivables, whether now existing or hereafter
created; all proceeds of such Receivables in whatever form, including cash,
deposit accounts, negotiable instruments and other instruments for the payment
of money; the merchandise or other property represented by such Receivables or
out of which they arise; all such property that may be reclaimed or repossessed
from Account Debtors; all other accounts due from Account Debtors to Debtor; all
of Debtor's right as an unpaid vendor or lienor including stoppage in transit,
replevin and reclamation; any other of Debtor's property held by Secured Party
or by others for the Secured Party's account, including any deposit or other
balances standing to the Debtor's credit on Secured Party's books which Secured
Party may at any time, without notice, apply against payment of any or all of
the Obligations, whether or not due. The continuing general assignment of and
security interest in Receivables contained herein shall include all documents,
contracts, lien and security instruments, guarantees, books and records (whether
in paper form on kept on computer) evidencing, securing or relating to such
property, computer programs and data files, discs, diskettes, drives,
print-outs, any other computer materials, data processing cards, tapes,
tabulating runs, programs and similar material pertaining to the foregoing,
together with all of Debtor's rights and remedies of whatever kind or nature it
may hold or acquire for the purpose of securing and enforcing such Receivables.
Debtor will mark its ledger cards, books of account and other records (including
computer records) relating to Receivables with appropriate notations
satisfactory to Secured Party disclosing that such Receivables have been
pledged, transferred and assigned to Secured Party.
55
EXHIBIT 10.7
Credit Agreement dated June 7,2000 between the Company and Sterling National
Bank
6. In furtherance of the continuing assignment and security interest herein
contained, Debtor will, upon the creation of Receivables, or at such intervals
as Secured Party may require, provide Secured Party with confirmatory
assignments in form satisfactory to Secured Party, copies of invoices to
customers, evidence of shipment and delivery, and such further information and
documentation as Secured Party may require and Debtor, at Secured Party's
request or performance of services, shall deliver to Secured Party all documents
and written instruments constituting or relating to Receivables. Debtor will
take any and all steps and observe such formalities and will execute and deliver
all papers and instruments and do all things necessary to effectuate this
agreement and facilitate collection of Receivables. The delivery of any
information and documentation pursuant to this Agreement shall be deemed to be a
certification by Debtor that as of the date of such delivery, such information
and documentation is true and correct in all material respects and does not omit
any material fact required to be stated therein or necessary in order to make
such information and documentation not misleading and shall also be deemed a
certification that Debtor has no knowledge of any default or Event of Default
under this Agreement.
7 (a). Debtor will pay Secured Party as its compensation, monthly, as billed,
within seven (7) days of receipt of monthly statement of charges: the higher of
(i) Base Rate plus one and three-quarters of one percent (1.75%) or (ii) the
prime rate as published in the Wall Street Journal from time to time ("Prime
Rate") plus two percent (2%) per annum on all Obligations outstanding hereunder.
Monthly Minimum Compensation: $12,000.00
(b) The amount billed may be charged into the Debtor's Account by Secured
Party as of the first day of the month following the month for which it is
billed. Such amount shall be deemed paid out of the first collections in the
account subsequent to the date of the charge. At Secured Party's option up to
three business days shall be allowed subsequent to receipt of remittances,
without regard to the form thereof, from Account Debtors or the Debtor to permit
bank clearance and collection of such remittances before the amount thereof
shall be deemed collected by Secured Party, which time interval Debtor agrees is
reasonable. If the Secured Party's Base Rate or the Prime Rate shall be
increased, the compensation to be paid by Debtor to Secured Party shall be
increased by 1/4 of 1% per annum for each 1/4 of 1% per annum of increase in
said Base Rate or Prime Rate: The Secured Party's present Base Rate is 9.75 %
per annum. The Prime rate is 9.50% per annum. If the Secured Party's Base Rate
or the Prime Rate shall be decreased, the compensation to be paid to Secured
Party shall be reduced by 1/4 of 1% per annum for each 1/4 of 1% per annum
reduction in the said Base Rate or Prime Rate. In no event, however, shall the
compensation to be paid by Debtor to Secured Party be less than the contractual
rate first shown in this Paragraph 7. Remittances received by Secured Party by
wire transfer shall be deemed collected upon receipt.
(c) If Obligations become immediately due and payable pursuant to the
provisions of this Agreement, or if Obligations are not paid in full upon the
effective date of termination of this Agreement, or if Debtor is in default
under this Agreement (whether or not an Event of Default has been declared),
Debtor shall thereafter pay interest on Obligations from the date of such
declaration, termination, or default, as the case may be, until the date
Obligations are paid in full at a rate per annum (calculated for the actual
number of days based upon a thirty (30) day month elapsed over a year of
360-days) equal to 5% plus the rate of compensation set forth in paragraph 7
then in effect, provided, however, that such interest rate shall in no event
exceed the maximum interest rate which Debtor may by law pay.
56
EXHIBIT 10.7
Credit Agreement dated June 7,2000 between the Company and Sterling National
Bank
(d) In addition to the foregoing compensation, Debtor shall pay the following
fees and charges. Debtor agrees that such fees and charges represent reasonable
compensation for services rendered by Secured Party in administering the
collateral and the credit facility established herein or in otherwise providing
reasonable and necessary services to Debtor, and that such fees are not, and
will not be deemed or alleged to be, disguised interest in any form:
(i) A per diem fee of $750.00 per person per day to a maximum amount of
$10,000.00 per year, plus out-of-pocket expenses, for any examination performed
by or on behalf of Secured Party;
(ii) An annual facility fee of $18,750.00 which fee shall be payable at closing
and annually on the anniversary of this Agreement if renewed.
(iii) A monthly fee of $500.00 for monitoring Receivables.
8. With respect to each Receivable, present or future, Debtor hereby makes the
following representations, covenants and warranties, which shall be deemed to be
incorporated by reference in each confirmatory assignment submitted by Debtor to
Secured Party and shall in any event be deemed to be repeated and confirmed with
respect to each item of Collateral as it is created or otherwise acquired by
Debtor:
(a) Debtor's chief place of business, the office where its records
concerning Receivables are kept, is at the address shown at the head of this
Agreement. Debtor has no other place of business except as set forth in Exhibit
C.
Secured Party may rely upon the foregoing until it shall have received written
notice to the contrary from Debtor. Debtor shall give Secured Party 30 days
prior written notice of any change of its address, which shall set forth the new
address.
(b) Debtor shall not, directly or indirectly, merge into or with or
consolidate with any other corporation, partnership, or limited liability
company or permit any other corporation, partnership, or limited liability
company to merge into or with or consolidate with it. There shall be no change
in the control or management of Debtor without Secured Party's prior written
consent. Debtor shall give Secured Party 30 days prior written notice of any
proposed change in its legal name or any name under which it transacts business,
which notice shall set forth the new name, and Debtor shall deliver to Secured
Party a copy of any amendment to the applicable organizational document
providing for the name change certified by the Secretary of State of the
jurisdiction of Debtor's organization as soon as it is available.
57
EXHIBIT 10.7
Credit Agreement dated June 7,2000 between the Company and Sterling National
Bank
(c) So long as any Obligations to Secured Party shall be outstanding,
Debtor shall not, without the prior written consent of Secured Party, pledge,
assign, or grant any security interest in any Receivable or pledge, mortgage or
grant a security interest in any of its inventory, equipment, or other property
to anyone except Secured Party, or permit any lien or encumbrance to attach to
any of the foregoing, or any levy to be made thereon, or any financing statement
(except the Secured Party's) to be on file with respect thereto, or sell any
Receivable otherwise than in the ordinary course of business. Notwithstanding
the foregoing, Debtor may grant security interest in its assets leased pursuant
to a capital lease or liens for the purchase of assets where the lien secures
payment of the purchase price of the assets and is secured only by the purchased
assets; provided, however, that the purchase price of the assets subject to such
capital leases or security interests shall not exceed $150,000.00 in any
calendar year. All such proposed transactions shall first be offered exclusively
to Secured Party for a period of 10 business days. In the event Secured Party
declines such proposed transactions Debtor may proceed to consummate such
transactions with others, subject to the terms of this Agreement.
(d) Debtor is solvent and will remain so and has induced Secured Party to
make advances hereunder upon Debtor's written representation concerning its
financial responsibility, which Debtor agrees to renew in writing to Secured
Party upon request from time to time, but in any event not less often than once
each year. No federal tax lien has been assessed against Debtor which remains
unpaid and undischarged. Debtor is not and will not be during the term of this
Agreement in default to the United States in payment or deposit of any
withholding taxes or F.I.C.A. taxes, and will furnish proof in respect thereto
on request.
(e) Debtor will furnish to Secured Party within 90 days after the close of
Debtor's fiscal year and within 60 days after the close of the second quarter of
each fiscal year a balance sheet of Debtor as of the end of such fiscal year and
second quarter, and a profit and loss statement and surplus statement, all
reviewed by independent public accountants acceptable to Secured Party. Debtor
will furnish to Secured Party within 60 days after the close of the first, and
third quarters of each fiscal year similar statements, certified by a principal
financial officer of Debtor, for the elapsed portion of the fiscal year. All
such statements shall correspond to the books of account of Debtor and such
books shall have been kept and such statements prepared in accordance with
generally accepted accounting principles. The delivery of any financial
information pursuant to this Agreement shall be deemed to be a certification by
Debtor that as of the date of such delivery, such information is true and
correct in all material respects and does not omit any material fact required to
be stated therein or necessary in order to make such information not misleading
and shall also be deemed a certification that Debtor has no knowledge of any
default or Event of Default under this Agreement. Debtor may satisfy its
obligations to deliver consolidated financial statements by delivering its Form
10-K annual report and 10-Q quarterly reports within five days after such
reports are required to be filed with the Securities and Exchange Commission.
58
EXHIBIT 10.7
Credit Agreement dated June 7,2000 between the Company and Sterling National
Bank
(f) All statements made and all unpaid balances appearing in the invoices,
documents and instruments representing or constituting any Collateral or in the
title retention or security agreement accompanying such Collateral, and the
nature of the transaction as indicated, are true and correct and are in all
respects what they purport to be. All signatures and endorsements that appear
thereon are genuine and all signatories and endorsers have full capacity to
contract.
(g) At the time any Receivable becomes subject to a security interest in
favor of Secured Party: Said Receivable shall be a good and valid account
representing an undisputed, unconditional bona fide indebtedness incurred by the
Account Debtor named therein for merchandise sold and delivered, or if so
indicated in the papers delivered to Secured Party, sold and shipped, or sold
and held subject to delivery instructions, or for services theretofore fully
performed by the Debtor for said Account Debtor. There are and shall be no
setoffs or counterclaims or rights of recoupment against any such Receivable; no
agreement under which any deduction or discount may be claimed shall have been
made with Debtor on any such Receivable except as indicated in a written list,
statement, or invoice furnished to Secured Party; and Debtor shall be the lawful
owner of each such Receivable and shall have the right to subject the same to a
first and prior security interest in favor of Secured Party, without limitation
by any agreement or document to which Debtor is a party or by which Debtor is
bound. No such Receivable shall have been or shall thereafter be sold, assigned
or transferred to any person other than Secured Party or in any way encumbered
except to Secured Party and no other person shall have proceeds claims thereto,
and the Debtor shall defend the same against the claims and demands of all
persons.
(h) Any reprogramming or other corrective modifications required to permit
the proper functioning in and following the year 2000 of (1) the computer
systems of Debtor and (2) equipment containing embedded microchips (including
systems and equipment supplied to Debtor by third parties or with which the
systems of Debtor interface) and the testing of all such systems and equipment,
as so reprogrammed, has been completed. The cost to Debtor of such
reprogramming, modifications and testing and of the reasonably foreseeable
consequences of year 2000 to Debtor (including, without limitation reprogramming
errors and failure of the systems and equipment of third parties) will not have
a material adverse effect on the business, properties or financial condition of
Debtor or result in an Event of Default hereunder. Except for such of the
reprogramming and modifications referred to in the preceding sentence as may be
necessary, the computer and management information systems of Debtor are, and
with ordinary course upgrading and maintenance, will continue to be sufficient
to permit Debtor to conduct its business without any adverse effect thereon.
(i) Debtor shall not terminate any plan of a type described in Section
4021(a) of ERISA in respect of which a Debtor is an "employer" as defined in
Section 3(5) of ERISA (a "Plan") so as to result in any material liability to
the Pension Benefit Guaranty Corporation established pursuant to subtitle A of
Title IV of ERISA (the "PBGC"), (ii) engage in or permit any person to engage in
any "prohibited transaction" (as defined in Section 406 of ERISA or Section 4975
of the Internal Revenue Code of 1954, as amended) involving any Plan which would
subject a Debtor to any material tax, penalty or other liability, (iii) incur or
suffer to exist any material "accumulated funding deficiency" (as defined in
Section 302 of ERISA), whether or not waived, involving any Plan, or (iv) allow
or suffer to exist any event or condition, which presents a material risk of
incurring a material liability to the PBGC by reason of termination of any Plan.
59
EXHIBIT 10.7
Credit Agreement dated June 7,2000 between the Company and Sterling National
Bank
(j) Debtor agrees not to take or suffer any action affecting any premises
owned, leased, operated or controlled by it that violates any federal, state or
local statute, law, regulation, or ordinance relating to health, safety or
environmental protection ("Environmental Laws"). Debtor agrees not to use,
store, dispose of or release any Hazardous Substance, as hereinafter defined, on
such premises or to permit or suffer any Hazardous Substance to be present,
used, stored, disposed of, or released on such premises by others. For purposes
of this Agreement, "Hazardous Substance" shall include any substance or material
defined as toxic or hazardous under any Environmental Law and shall also include
gasoline, kerosene, other flammable or toxic petroleum products, toxic
pesticides and herbicides, volatile solvents, materials containing asbestos or
formaldehyde, and radioactive materials. This paragraph shall not apply to small
quantities of Hazardous Substances that are generally recognized as appropriate
for normal use and maintenance of Debtor's premises. Debtor shall promptly
notify Secured Party in writing of any investigation, claim, demand, lawsuit, or
other action by any governmental entity or private party involving Debtor's
premises and any Hazardous Substance or Environmental Law.
(k) Debtor shall cause a policy of life insurance in the amount of
$500,000.00 to be maintained on Joseph Sicinski in which Secured Party shall be
designated the beneficiary, said designation to be irrevocable. Any payments to
Secured Party under said policy shall be applied to Obligations.
9. Until Debtor's authority so to do is terminated by written notice from
Secured Party (which notice Secured Party may give at any time in its discretion
or at any time after default by Debtor under this Agreement) Debtor will, at its
own cost and expense, but on Secured Party's behalf and for Secured Party's
account, collect and otherwise enforce as Secured Party's property and in trust
for Secured Party, all amounts unpaid on Receivables, and shall not commingle
such collections with Debtor's own funds or use the same except to pay Debtor's
obligations to Secured Party. Following execution of this Agreement, Debtor
shall promptly notify and instruct, pursuant to a letter in the form attached
hereto as Exhibit B, all Account Debtors to make payments owing to Debtor with
respect to Receivables by wire transfer or other electronic means to an account
designated by Secured Party ( the "Payment Account") or if wire transfer or
electronic payments are not possible, by check mailed to a secure post office
box (the "Lockbox") as designated by Secured Party on Exhibit A annexed hereto
and made a part hereof. Only Secured Party shall be authorized to remove
payments and other items from the Lockbox and Debtor shall have no access
thereto. Debtor shall not change such instructions, and it shall constitute an
Event of Default under Paragraph 14 of this agreement if Debtor changes such
instructions. At Debtor's expense, Secured Party shall remove all payments and
other items from Lockbox each business day. Debtor agrees that all funds which
have been mailed to the Lockbox will be applied first to Obligations. Debtor
shall forthwith remit all amounts so collected in kind, whether in the form of
electronic payment, cash, checks, drafts, notes, acceptances or other evidence
of payment, including all prepayments by Account Debtors to Debtor in the form
received.
60
EXHIBIT 10.7
Credit Agreement dated June 7,2000 between the Company and Sterling National
Bank
10. Any remittance received by Debtor from any Account Debtor shall be presumed
applicable to Receivables and subject to Secured Party's security interest and
shall be turned over by Debtor to Secured Party forthwith. No electronic
payment, check, note, draft or other instrument for the payment of money which
may be received on any Collateral shall be considered to be payment thereof for
any purpose whatsoever hereunder unless and until the same has actually been
collected by Secured Party.
11. Secured Party shall at all reasonable times have full access to and the
right to audit or examine Debtor's accounts, books, records, shipping records
and correspondence; to confirm orders and sales, and to verify all Collateral
assigned to Secured Party in the name of Secured Party or any other name used by
Secured Party for verifications or through any public accountant, and to take
any other steps deemed necessary or advisable by Secured Party to protect its
interest. Debtor shall reimburse Secured Party for all fees incurred by Secured
Party in obtaining an appraisal or verification of Inventory.
12. Debtor hereby irrevocably authorizes and directs all accountants and
auditors employed or engaged by Debtor at any time during the term of this
Agreement and all data processing centers or other persons holding materials
herein mentioned relating to Debtor to exhibit to Secured Party and to deliver
to it copies of any of Debtor's financial statements, trial balances or other
accounting records of any sort in their possession, or data processing cards,
tapes, programs, tabulating runs, or similar material and to disclose to Secured
Party any information they may have concerning Debtor's financial status and
business operations, whether relating to Collateral or otherwise, and authorizes
Secured Party to rely thereon. Debtor will at the request of Secured Party
execute confirmatory letters of direction in accordance with this paragraph.
13. Debtor shall immediately notify Secured Party of all cases involving the
return, rejection, repossession, loss of or damage to merchandise covered by the
Receivables, of any request for credit or adjustment of any merchandise or
services or other dispute arising with respect to the Receivables; and generally
of all happenings and events affecting Receivables or the value or amount
thereof. If any Account Debtor shall reject or return merchandise, or if any
merchandise be repossessed, Debtor will forthwith deliver the same to Secured
Party or notify Secured Party and hold the same segregated in trust for and
subject to the order of Secured Party, and Secured Party may take and sell the
same without notice upon such terms as it shall determine. Debtor is to remain
liable for any difference between the original invoice price and the net
proceeds of resale, after expenses. At Secured Party's option, Debtor will pay
to Secured Party the amount of the original Receivable relating to such goods or
any services reduced to Account Debtors the object of which are disputed. In
case any such goods should be resold, the Receivable thereby created shall be
deemed subject to Secured Party's security interest hereunder.
61
EXHIBIT 10.7
Credit Agreement dated June 7,2000 between the Company and Sterling National
Bank
14. In the event any one or more of the following Events of Default shall occur
and be continuing as to any one or more of the corporations comprising Debtor as
set forth at the head of this Agreement: if Debtor shall have failed to pay any
Obligation when due; or if Debtor shall have breached any of the provisions of
this Agreement or any other agreement between the parties now existing or
hereafter entered into, or if any statements furnished by Debtor relating to the
Receivables or to the operations and financial condition of Debtor shall have
proved to be false in any material respect; or if Debtor shall become insolvent;
or if Debtor shall be unable to meet its debts as they mature, or shall have
suspended operations; or if Debtor shall have discontinued its business as a
going concern, or shall have committed an act of bankruptcy or made an
assignment for the benefit of creditors; or if a meeting of Debtor's creditors
shall have been called; or if there shall have been filed by or against Debtor a
petition under any of the provisions of the Bankruptcy Act; or if any proceeding
shall have been commenced by or against Debtor under any insolvency law; or if a
receiver or trustee shall have been appointed to administer the assets or
affairs of Debtor; or if a judgment shall have been entered or an attachment
shall have been levied involving $150,000.00 or more against the assets of
Debtor which, in the judgment of Secured Party, will adversely affect Debtor's
ability to perform this Agreement or which, in Secured Party's judgment, will
impair the enforceability of Secured Party's lien upon and security interest in
the Receivables or if the condition or affairs of Debtor shall so change as, in
the opinion of Secured Party shall increase its credit risk, or if it reasonably
deems itself insecure; or if Debtor shall have breached any agreement between
Debtor and any third party now existing or hereafter entered into involving
$150,000.00 and such breach remains uncured or results in the acceleration of
any indebtedness owed by Debtor to such third party; or if any of the foregoing
events shall have occurred in reference to any one of the corporations
comprising Debtor as set forth at the head of this agreement or any guarantor
for the Debtor; then in any of such events, all of Debtor's Obligations shall at
the option of Secured Party immediately become due and payable without notice
and Secured Party shall have in any jurisdiction where enforcement hereof is
sought, in addition to all other rights and remedies, the rights and remedies of
a secured party under the Uniform Commercial Code of New York. All requirements
of notice shall be met if Secured Party shall give to Debtor at least five (5)
days' prior written notice of the time and place of any public sale of
Receivables or other property or of the time after which any private sale or any
other disposition is to be made, which period of notice Debtor agrees is
reasonable; nor shall notice be required if the property is perishable or
threatens to decline speedily in value or is of a type customarily sold on a
recognized market. The net cash proceeds resulting from the exercise of any of
the foregoing rights, after deducting all charges, expenses, costs and
attorneys' fees relating thereto, shall be applied by Secured Party to the
payment of Obligations, whether due or to become due, in such order as Secured
Party may elect, and Debtor shall remain liable to Secured Party for any
deficiency, which shall be paid on demand. If an attorney is used to enforce or
collect the Obligations, a reasonable attorney's fee shall be added thereto.
Debtor further agrees to indemnify and hold Secured Party harmless from and
against all costs and expenses, including attorneys' fees, incurred by Secured
Party as a result of, arising out of, or relating to the transactions of Debtor
or any guarantor of Debtor with any third party.
62
EXHIBIT 10.7
Credit Agreement dated June 7,2000 between the Company and Sterling National
Bank
15. Debtor shall notify Secured Party if any Receivable includes an amount equal
to any tax due to any governmental taxing authority. If a Receivable includes a
charge for any tax payable to any governmental taxing authority, Secured Party
is authorized, in its discretion, to pay the amount of such tax for the account
of Debtor and to charge Debtor's account therefor. If at any time Secured Party
shall be required to pay any Federal, State or local taxes of any kind in
relation to the Receivables, Secured Party may charge to Debtor as an advance
the amount of tax so paid. If Secured Party becomes liable to the United States
on Debtor's account by virtue of Section 3505 of the Internal Revenue Code of
1954 (as added by Section 105 of the Federal Tax Lien Act of 1966) Secured Party
may charge the amount thereof to Debtor's current account whether or not Secured
Party has made payment, and Debtor shall pay Secured Party the amount thereof on
demand or present satisfactory proof that Debtor has paid the amount involved to
the United States. Secured Party shall not take any action to make any payments
pursuant to this paragraph 15 unless the claim involves $150,000.00 or more and
Secured Party shall give Debtor notice thereof.
16. Debtor hereby constitutes Secured Party and each of its officers, agents or
designees as Debtor's Attorney in Fact, with power to endorse the name of Debtor
upon any notes, acceptances, checks, drafts, money orders or other evidences of
payment or collateral that may come into Secured Party's possession; to sign
Debtor's name to any invoice or bill of lading relating to any Receivable,
drafts against Account Debtors, assignments, verifications and notices to
Account Debtors; to send verifications of Receivables to any Account Debtor; to
execute in Debtor's name as well as its own name and to file financing
statements and other instruments or documents; to do all other acts and things
necessary to carry out this Agreement; to receive, open and dispose of all mail
addressed to Debtor and to notify the post office authorities to change the
address for delivery of mail addressed to Debtor to such address as Secured
Party may designate. All acts of said attorney or designee are hereby ratified
and approved, and said attorney or designee shall not be liable for any acts of
commission or omission, nor for any error of judgment or mistake of fact or law.
This power, being coupled with an interest, is irrevocable while any Obligations
shall remain unpaid. Debtor authorizes Secured Party to file in its own name as
Secured Party any financing statement under the Uniform Commercial Code which
Secured Party deems necessary or advisable to perfect the security interests
which it is intended that Secured Party have under this Agreement.
17. Debtor subordinates to the payment of any obligations due or to become due
to Secured Party from Account Debtors on Collateral, any and all sums then and
thereafter due and to become due to Debtor from such Account Debtors, waiving
and postponing all rights with respect thereto until such obligations to Secured
Party shall have been fully discharged. In addition to such subordination,
Debtor hereby assigns such sums to Secured Party as additional collateral for
all Obligations hereunder.
63
EXHIBIT 10.7
Credit Agreement dated June 7,2000 between the Company and Sterling National
Bank
18. Secured Party may, without notice to or consent from Debtor, sue upon or
otherwise collect, extend the time of payment of, or compromise or settle for
cash, credit or otherwise, upon any terms, any Receivable or Inventory or any
security or insurance applicable thereto, which is hereby assigned to Secured
Party, and release any Account Debtor thereon, or accept the return of any
merchandise, all without affecting in any way the liability of Debtor hereunder.
19. Debtor shall not, without the consent of Secured Party, compromise or adjust
any Receivable (or extend the time for payment thereof) or grant any additional
discounts, allowances or credits thereon in excess of $1,000.00, or accept the
return of any merchandise. Upon the making of any such unauthorized discounts,
allowances or credits or acceptance of returns, Debtor shall forthwith pay to
Secured Party a sum equal thereto to apply on the Obligations.
20. Failure by Secured Party to exercise any right, remedy or option under this
Agreement or declare any default herein or delay by Secured Party in exercising
the same shall not operate as a waiver thereof or as a waiver of any similar
right or remedy in any other situation. No waiver by Secured Party shall be
effective unless it is confirmed in writing and then only to the extent
specifically stated. Secured Party's rights and remedies under this Agreement
shall be cumulative and not exclusive of any other right or remedy which Secured
Party may have. No course of dealing shall be effective to change, modify or
discharge any provision hereof. Secured Party's rights shall remain in full
force and effect notwithstanding the fact that Debtor's account may from time to
time be temporarily in a credit position, until final payment of all Obligations
in full. To the extent that Debtor's Obligations are now or hereafter secured by
property other than the Collateral or supported by the guarantee, endorsement or
property of any person, firm or corporation, then Secured Party shall have the
right in its sole discretion to determine which rights, security, liens,
security interests, or remedies Secured Party shall at any time pursue,
relinquish, subordinate, modify or otherwise act with respect thereto, without
in any way modifying or affecting any of Secured Party's rights hereunder.
Debtor hereby waives presentment, notice of dishonor and protest of all
instruments included in or evidencing Receivables or collateral and, except as
specified herein, any and all other notices and demands whatsoever, whether or
not relating to such instruments. Secured Party shall not, under any
circumstances or in any event whatsoever, have any liability for any error or
omission or delay of any kind occurring in the settlement, collection,
liquidation or payment of any Receivable or any instrument received in payment
thereof or for any damage resulting therefrom. Secured Party shall not be
obligated to take any particular steps in collection in any situation where it
has taken over collection of any Receivable or Receivables.
21. Neither this Agreement, nor any portion or provision hereof, may be changed,
modified, amended, waived, supplemented, discharged, canceled, or terminated
orally or in any manner other than by an agreement in writing signed by the
party to be charged. Any notices to be served hereunder must (except as stated)
be served by certified mail, addressed to the last known post office address of
the party to whom such notice is given and shall be deemed served when deposited
in any post office or branch post office. Demands or notices addressed to the
Debtor's address at which Secured Party customarily communicates with the Debtor
or Trans Global by hand delivery or by facsimile transmission shall also be
effective.
64
EXHIBIT 10.7
Credit Agreement dated June 7,2000 between the Company and Sterling National
Bank
22. This Agreement shall inure to the benefit of and shall be binding upon the
respective successors and/or assigns of Debtor and Secured Party. It shall
become effective on the day when finally accepted by Secured Party at its office
in the State of New York. This Agreement shall remain in effect for a period of
one year from date hereof and shall be deemed automatically renewed for
successive periods of one year; subject, however, to the right of either party
to terminate it at any time upon at least sixty (60) days' written notice,
provided, however, that the Debtor shall remain obligated to pay the Monthly
Minimum Compensation set forth in Paragraph 7(a) for the full term of the
Agreement in the event Debtor gives notice of termination effective prior to the
end of any one year term. So long as no Event of Default as defined hereunder
shall have occurred and be continuing, Secured Party shall not be entitled to
the remaining Monthly Minimum Compensation if Secured Party gives notice of
termination effective prior to the end of any one year term, but should an Event
of Default as defined hereunder have occurred and be continuing, this Agreement
shall be terminable at any time by Secured Party forthwith on written notice and
Debtor shall remain liable for the Monthly Minimum Compensation until the date
the Agreement would have expired but for termination by reason of the Event of
Default and without regard to Debtor's right to terminate. The termination of
this Agreement shall not affect any of Debtor's obligations with respect to
Receivables assigned to Secured Party or any obligations to Secured Party
incurred prior to the effective date of such termination, and the provisions
hereof shall continue to be fully operative until all transactions entered into,
rights created, or obligations incurred prior to the termination have been fully
disposed of, concluded or liquidated.
23. This Agreement and all other agreements between Secured Party and Debtor
together with all assignments made hereunder shall be deemed made in New York
and subject to the laws of the State of New York and Debtor consents to the
jurisdiction of any local, State or Federal Court located within the State of
New York, which jurisdiction shall be exclusive. Debtor hereby waives personal
service of any and all process and consents that all such service of process
shall be made by certified mail, return receipt requested, directed to Debtor at
its address appearing on the records of the Secured Party and service so made
shall be complete ten (10) days after the same has been posted as aforesaid,
provided, however, that if such certified mail is rejected, unclaimed or
undeliverable, service may be made by ordinary mail. DEBTOR AND SECURED PARTY
EACH HEREBY UNCONDITIONALLY WAIVES ITS RIGHT TO A JURY TRIAL OF ANY CLAIM OR
CAUSE OF ACTION BASED UPON OR ARISING OUT OF, DIRECTLY OR INDIRECTLY, THIS
AGREEMENT, ANY RELATED DOCUMENTS, ANY DEALINGS BETWEEN THEM RELATING TO THE
SUBJECT MATTER OF THIS AGREEMENT, AND/OR THE RELATIONSHIP THAT IS BEING
ESTABLISHED BY THEM.
IN WITNESS WHEREOF, Secured Party and Debtor have caused this Agreement to
be executed by their respective officers duly authorized the day and year first
above written.
Trans Global Services, Inc.
By:________________________
Seal
Resource Management International, Inc.
By:______________________________
Seal Avionics Research Holdings, Inc.
By:________________________
Seal
Avionics Research Corporation
By:________________________
Seal
Avionics Research Corporation of Florida
By:________________________
Seal
ACCEPTED:
STERLING NATIONAL BANK
By:_________________________
Date:_______________________