UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
The Quarter Ended June 30, 1996
Commission File Number 0-4186
CONSOLIDATED TECHNOLOGY GROUP LTD.
(Exact name of registrant as specified in its charter)
New York 13-1948169
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
160 Broadway, New York, NY 10038
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 233-4500
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes _X_ No____
Number of common shares outstanding as of August 16, 1996: 45,376,336
==========
<PAGE>
Consolidated Technology Group, Ltd.
Index
Page
----
Part I: - Financial Information:
Item 1. Financial Statements:
Consolidated Balance Sheets - June 30, 1996
and December 31, 1995. 2-3
Consolidated Statements of Operations - Three Months Ended
June 30, 1996 and 1995. 4
Consolidated Statements of Operations - Six Months Ended
June 30, 1996 and 1995 5
Consolidated Statement of Shareholders' Equity -
June 30, 1996 6-7
Consolidated Statements of Cash Flows - Six Months Ended
June 30, 1996 and 1995 8-10
Notes to Consolidated Financial Statements 11-19
Item 2. Management's Discussion and Analysis of the
Financial Condition and Results of Operations. 20-29
Part II:
Part II - Other Information:
Item 6. Exhibits and Reports on Form 8-K 30
1
<PAGE>
Consolidated Technology Group Ltd. and Subsidiaries
Consolidated Balance Sheets
(dollars in 000's)
June 30, December 31,
1996 1995
----------- ------------
Assets:
Current assets:
Cash and cash equivalents $ 2,637 $ 1,636
Receivables, net of allowances 21,916 19,216
Inventories 3,940 3,701
Loans receivable 401 396
Prepaid expenses and other
current assets 828 436
Excess of accumulated costs over
related billings 1,032 1,002
Investments in common stock -- 20
------ ------
Total current assets 30,754 26,407
------ ------
Property, plant and equipment, net 11,063 11,034
------ ------
Other assets:
Capitalized software development costs 896 502
Goodwill, net 11,376 11,881
Covenant not to compete, net 1,527 2,168
Customer lists, net 11,233 11,684
Deferred offering costs 188 --
Receivables, long-term 17 219
Receivables, related parties 1,164 544
Trademark, net 375 383
Investments in common stock, long-term 871 405
Other Assets 1,173 1,085
------ ------
Total other assets 28,820 28,871
------ ------
Total Assets $70,637 $66,312
====== ======
See notes to consolidated financial statements.
2
<PAGE>
Consolidated Technology Group Ltd. and Subsidiaries
Consolidated Balance Sheets
(dollars in 000's)
June 30, December 31,
1996 1995
----------- ------------
Liabilities and Shareholders' Equity:
Current liabilities:
Accounts payable and accrued expenses $11,739 $11,095
Accrued payroll and related expenses 5,136 2,332
Accrued interest 517 284
Income taxes payable 562 269
Interim billings in excess of costs
and estimated profits 1,760 1,701
Notes payable, related parties 287 290
Current portion of long-term debt 7,511 9,080
Current portion of subordinated debt 4,053 13,354
Current portion of capitalized
lease obligations 1,281 1,362
------ ------
Total current liabilities 32,846 39,767
------ ------
Long-term liabilities:
Long-term debt 13,935 6,210
Capitalized lease obligations 1,955 2,198
Subordinated debt 7,365 5,003
------ ------
Total long-term liabilities 23,255 13,411
------ ------
Minority interest 4,757 2,087
------ ------
Shareholders' Equity:
Preferred stock 29 70
Additional paid-in capital,
preferred stock 105 266
Common stock (50,000,000 shares authorized, 35,290,664 and 26,655,071 shares
issued and outstanding as of June 30, 1996 and December 31, 1995,
respectively) 453 267
Additional paid-in capital, common stock 51,992 51,020
Accumulated deficit (43,053) (40,648)
Unrealized gain (loss) on exchange translation 65 (17)
Net unrealized gain on long-term
investments in common stock 188 89
------ ------
Total shareholders' equity 9,779 11,047
------ ------
Total Liabilities and Shareholders' Equity $70,637 $66,312
====== ======
See notes to consolidated financial statements.
3
<PAGE>
Consolidated Technology Group Ltd. and Subsidiaries
Consolidated Statement of Operations
(dollars in 000's except per share data)
Three Months Ended
June 30,
---------------------
1996 1995
--------- ---------
Revenues $27,860 $27,733
Direct Costs 21,815 22,611
------ ------
Gross Profit 6,045 5,122
Selling, General and Administrative 5,684 5,535
------ ------
Income (loss) from operations 361 (413)
------ ------
Other Income (Expense):
Interest Expense (1,061) (1,170)
Other Income 438 (174)
Gain (Loss) from Security Sales 216 (10)
------ ------
Total Other Expense- Net (407) (1,354)
------ ------
Loss Before Income Taxes and Minority Interest (46) (1,767)
Income Taxes (246) (65)
Minority Interest in (Gain) Loss of Subsidiaries (21) 113
------ ------
Net Loss ($313) ($1,719)
====== ======
Loss per Common Share ($0.01) ($0.08)
====== ======
Weighted Average Number
of Common Shares 41,593,106 21,927,099
========== ==========
See notes to consolidated financial statements.
4
<PAGE>
Consolidated Technology Group Ltd. and Subsidiaries
Consolidated Statement of Operations
(dollars in 000's except per share data)
Six Months Ended
June 30,
---------------------
1996 1995
--------- ---------
Revenues $54,373 $56,144
Direct Costs 42,514 45,938
------ ------
Gross Profit 11,859 10,206
Selling, General and Administrative 13,506 11,932
------ ------
Income (loss) from operations (1,647) (1,726)
------ ------
Other Income (Expense):
Interest Expense (2,024) (2,154)
Other Income 603 (96)
Gain (Loss) from Security Sales 253 (131)
------ ------
Total Other Expense- Net (1,168) (2,381)
------ ------
Loss Before Income Taxes and Minority Interest (2,815) (4,107)
Income Taxes (323) (109)
Minority Interest in (Gain) Loss of Subsidiaries 733 108
------ ------
Net Loss ($2,405) ($4,108)
====== ======
Loss per Common Share ($0.06) ($0.20)
====== ======
Weighted Average Number
of Common Shares 37,632,489 20,360,328
========== ==========
See notes to consolidated financial statements.
5
<PAGE>
Consolidated Technology Group Ltd. and Subsidiaries
Consolidated Statements of Shareholders' Equity for the
Six Months Ended June 30, 1996
(dollars in 000's)
Shares Amounts
---------- -------
Preferred stock, $1.00 par value, 6% Series A 77,713 shares authorized:
Beginning balance 66,596 $ 66
Conversion of Series A to common stock (40,224) (40)
---------- ------
Ending balance 26,372 $ 26
========== ======
Preferred stock, $1.00 par value, $3.50 and $.10 Series B & E 8,000 shares
authorized each:
Beginning balance 262 $ 1
========== ======
Ending balance 262 $ 1
========== ======
Preferred stock, $1.00 par value, $8.00 subordinated Series F, 6,000 shares
authorized:
Beginning balance 2,700 $ 2
========== ======
Ending balance 2,700 $ 2
========== ======
Total preferred stock - par 29,334 $ 29
========== ======
Additional paid-in capital, preferred stock:
Beginning balance 266,384 $ 266
Conversion of Series A to common stock (160,896) (161)
-------- ------
Ending balance 105,488 $ 105
========== ======
Common stock, $0.01 par value, 50,000,000 shares authorized:
Beginning balance 26,655,071 $ 267
Stock issued (Note 6) 13,250,000 132
Stock issued for the exercise of stock options 200,000 2
Conversion of Series A preferred 5,237,502 52
---------- ------
Ending balance 45,342,573 $ 453
========== ======
Additional paid-in capital, common stock:
Beginning balance $51,020
Stock issued (Note 6) 780
Stock issued for the exercise of stock options 43
Conversion of Series A preferred 149
------
Ending balance $51,992
======
(continued)
See notes to consolidated financial statements.
6
<PAGE>
Consolidated Technology Group Ltd. and Subsidiaries
Consolidated Statements of Shareholders' Equity for the
Six Months Ended June 30, 1996
(dollars in 000's)
Shares Amounts
---------- -------
Accumulated deficit:
Beginning balance ($40,648)
Net loss (2,405)
------
Ending balance ($43,053)
======
Unrealized exchange translation:
Beginning balance ($ 17)
Unrealized gain on exchange translation 82
------
Ending balance $65
======
Net unrealized gain (loss) on long-term investments in common stock:
Beginning balance $ 89
Net unrealized investment security gains 99
------
Ending balance $ 188
======
Total shareholders' equity $ 9,779
======
(concluded)
See notes to consolidated financial statements.
7
<PAGE>
Consolidated Technology Group Ltd. and Subsidiaries
Consolidated Statement of Cash Flows
(dollars in 000's)
Six Months Ended
June 30,
---------------------
1996 1995
--------- ---------
Cash Flows from Operating Activities:
Net loss ($ 2,405) ($ 4,108)
------ ------
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and Amortization 3,430 3,507
Minority interest in loss of
consolidated subsidiaries (733) (108)
Bad debt expense 501 428
Noncash expense from subsidiary's issuance
of stock options and stock purchase warrants 2,229 --
Value of stock issued in lieu of cash
payments for services rendered 80 114
Deferred charges on option exercise 45 1,265
(Gain) Loss on common stock investments (253) 131
Loss on disposal of assets (144) --
Change in current assets and current liabilities:
(Increase) decrease in current
assets:
Receivables (3,206) (2,125)
Inventories (239) 51
Prepaid expenses and other current assets (392) 192
Excess of accumulated costs over
related billings (30) --
Increase (Decrease) in current liabilities:
Accounts payable and accrued expenses 644 464
Accrued payroll and related expenses 2,804 1,237
Accrued interest 233 121
Income taxes payable 293 138
Interim billings in excess of costs
and estimated profits 58 (449)
------ ------
Total adjustments 5,320 4,966
------ ------
Net cash provided by operating activities 2,915 858
------ ------
Cash Flows from Investing Activities:
(Increase) decrease in other assets (19) 234
Capital expenditures (1,459) (337)
Capitalized software development costs (280) (87)
Investments in common stock (550) (7)
Proceeds from sale of common stock Investments 854 358
Payments for loans made (2,176) (1,226)
(continued)
See notes to consolidated financial statements.
8
<PAGE>
Consolidated Technology Group Ltd. and Subsidiaries
Consolidated Statement of Cash Flows
(dollars in 000's)
Six Months Ended
June 30,
---------------------
1996 1995
--------- ---------
Cash Flows from Investing Activities(continued):
Collections for repayment of loans made 2,078 1,378
Cash of companies acquired and merged -- 504
------ ------
Net cash used in investing activities (1,552) 817
------ ------
Cash Flows from Financing Activities:
Deferred offering costs (188) (88)
Net payments to factor (1,512) (708)
Proceeds from issuance of long-term debt 9,777 1,686
Repayment of long-term debt (2,112) (1,801)
Repayment of capital lease obligation (675) (541)
Repayment of subordinated debt (6,940) (1,515)
Issuance of common stock 913 --
Subsidiary's issuance of common stock 375 454
Exercise of stock options -- 1,225
Subsidiary's issuance and exercise
of stock options -- 690
------ ------
Net cash provided by (used in)
financing activities (362) (598)
------ ------
Net Increase (Decrease) in Cash
and Cash Equivalents 1,001 1,077
Cash and Cash Equivalents at
Beginning of Period 1,636 1,727
------ ------
Cash and Cash Equivalents at
End of Period $ 2,637 $ 2,804
====== ======
Supplemental Disclosures of Cash
Flow Information:
Cash Paid for:
Interest $ 1,791 $2,033
====== ======
Income Taxes $ 30 $ --
====== ======
(concluded)
See notes to consolidated financial statements.
9
<PAGE>
Consolidated Technology Group Ltd. and Subsidiaries
Consolidated Statement of Cash Flows
(dollars in 000's)
Supplemental Disclosures of Noncash Investing and Financing Activities:
During the six month period ended June 30, 1996:
Non-Cash Investing Activities:
(1) - A subsidiary of the Company issued stock options and warrants to
purchase stock and in connection therewith recorded a noncash expense of
$2,229 which is the amount that the fair market value of the stock
exceeded the exercise price.
(2) - Pursuant to the terms of his employment agreement, an officer and
director of the Company exercised his option to purchase ten percent of
the equity holdings of the Company. In connections therewith, the Company
recorded a receivable of $300, the amount of the exercise price.
Non-Cash Financing Activities:
(1) - Acquired equipment under capital lease obligations with a net present
value of $352.
(2) - Issued stock options and incurred noncash consulting fees of $42.
(3 - A subsidiary of the Company issued common stock with a value of $80 in
lieu of cash payment for services rendered
During the six month period ended June 30, 1995:
Non-Cash Investing Activities:
(1) - Acquired equipment under capital lease obligations with a net present
value of $809.
(2) - Received common stock in lieu of cash payments for notes and accrued
interest receivable with a book value of $217.
(3) - Pursuant to an acquisition of another entity by one of the Company's
subsidiaries, in a transaction accounted for as a reverse merger (see the
notes to the consolidated financial statements):
(4) - Reduced the Company's equity ownership in such subsidiary which
resulted in an increase in minority interest of $2,110.
(5) - Acquired net assets with a book value of $983.
Non-Cash Financing Activities:
(1) - Issued stock options and received exercise proceeds of $1,225 and
incurred non-cash deferred consulting costs of $2,198 and non-cash
consulting fee expenses of $1,265.
(2) - Issued common stock with a value of $114 in lieu of cash payment for
services rendered
See notes to consolidated financial statements.
10
<PAGE>
Consolidated Technology Group, Ltd. and Subsidiaries
Notes to Consolidated Financial Statements
(dollars in 000's)
- --------------------------------------------------------------------------------
(1) In the opinion of the Company, the accompanying unaudited financial
statements contain all adjustments (consisting of only normal recurring
accruals) necessary to present fairly the financial position of the Company as
of June 30,1996 and December 31, 1995 and the results of its operations for the
three and six month periods ended June 30, 1996 and changes in cash flows for
the six months ended June 30, 1996 and 1995.
(2) The accounting policies followed by the Company are set forth in Note 1 to
the Company's financial statements in the December 31, 1995 Form 10-K.
(3) The results of operations for the three and six months ended June 30, 1996
and 1995 are not necessarily indicative of the results to be expected for the
full year.
(4) Loss Per Share - Loss per share is computed by dividing the net loss for the
period by the weighted average number of common shares outstanding. For purposes
of computing weighted average number of common shares outstanding the Company
has common stock equivalents consisting of stock options and warrants and Series
"A" Preferred Convertible Stock. The Series "A" Preferred Stock was deemed to be
a common stock equivalent when issued. The common stock equivalents are assumed
converted to common stock, when dilutive. During periods of operations in which
losses were incurred, common stock equivalents were excluded from the weighted
average number of common shares outstanding because their inclusion would be
anti-dilutive.
(5) Industry Segments:
The Company currently classifies its operations into eight business segments:
(i) Contract Engineering Services consists of subsidiaries that provide
engineers, designers and technical personnel on a temporary basis pursuant to
contracts with major corporations; (ii) Medical Diagnostics consists of a
subsidiary that performs magnetic resonance imaging and other medical diagnostic
services; (iii) Electro-Mechanical and Electro-Optical Products Manufacturing
consists of subsidiaries that manufacture and sell products such as devices that
measure distance and velocity, instrumentation devices, debit card vending
machines and industrial lighting products; (iv) Medical Information Services
consists of subsidiaries that provide medical information database services,
health care industry related software packages and the CarteSmart medical
identification cards and related software program; (v) Telecommunications
consists of a subsidiary that, among other things, installs telephonic network
systems and buys and resells local telephone service; (vi) Three Dimensional
Products and Services consists of subsidiaries that provide three dimensional
imaging services that are used in a variety of applications, such as proto-type
building and reverse engineering; (vii) Audio Visual Manufacturing and Services
consists of a subsidiary that manufactures and sells a professional line of
loudspeakers, and (viii) Business Consulting Services consists of subsidiaries
that provide a variety of financial and business related services. Corporate and
Other consists of the operating activities of the holding company entities.
Intersegment sales and sales outside the United States are not material.
Information concerning the Company's business segments is as follows:
See notes to consolidated financial statements.
11
<PAGE>
Consolidated Technology Group, Ltd. and Subsidiaries
Notes to Consolidated Financial Statements
(dollars in 000's)
- --------------------------------------------------------------------------------
(5) Industry Segments (continued)
Three Months Six Months
Ended Ended
------------------------- ---------------------------
June 30, June 30, June 30, June 30,
1996 1995 1996 1995
---- ---- ---- ----
Revenues:
Contract Engineering
Services $14,997 $15,434 $28,468 $33,234
Medical Diagnostics 7,579 7,052 15,692 14,079
Audio Products
Manufacturing 934 815 1,605 815
Electro-Mechanical and
Electro- Optical
Products Manufacturing 804 1,368 1,454 2,540
Medical Information
Services 2,375 1,920 4,936 3,347
Telecommunications 1,016 707 1,758 1,097
Three Dimensional
Products and Services 149 430 448 1,019
Business Consulting
Services 6 7 12 13
------- ------- ------- -------
Total Revenues $27,860 $27,733 $54,373 $56,144
======= ======= ======= =======
Gross Profit:
Contract Engineering
Services $ 1,460 $ 1,266 $ 2,293 $ 1,878
Medical Diagnostics 3,256 2,914 7,096 6,307
Audio Products
Manufacturing 220 152 357 152
Electro-Mechanical and
Electro- Optical
Products Manufacturing 158 55 252 418
Medical Information
Services 650 526 1,312 895
Telecommunications 193 120 232 177
Three Dimensional
Products and Services 103 83 303 367
Business Consulting
Services 5 6 14 12
------- ------- ------- -------
Total Gross Profit $ 6,045 $ 5,122 $11,859 $10,206
======= ======= ======= =======
12
<PAGE>
Consolidated Technology Group, Ltd. and Subsidiaries
Notes to Consolidated Financial Statements
(dollars in 000's)
- --------------------------------------------------------------------------------
(5) Industry Segments (continued)
Three Months Six Months
Ended Ended
------------------------- --------------------------
June 30, June 30, June 30, June 30,
1996 1995 1996 1995
---- ---- ---- ----
Income (Loss) from
Operations:
Contract Engineering
Services $ 447 $ 512 $ 192 $ 218
Medical Diagnostics 1,394 1,346 3,277 2,842
Audio Products
Manufacturing (70) (66) (213) (66)
Electro-Mechanical and
Electro- Optical
Products Manufacturing (130) (121) (299) (125)
Medical Information
Services 11 (197) (1,861) (633)
Telecommunications (179) (197) (451) (411)
Three Dimensional
Products and Services (387) (412) (837) (827)
Business Consulting
Services (9) (12) (18) (17)
Corporate and Other (716) (1,266) (1,437) (2,706)
-------- -------- -------- --------
Total loss
from operations $ 361 $ (413) $(1,647) $(1,727)
======= ======== ======== ========
Net Income (Loss):
Contract Engineering
Services $ 323 $ 105 $ (2) $ (469)
Medical Diagnostics 630 628 1,825 1,461
Audio Products
Manufacturing (97) (89) (254) (89)
Electro-Mechanical and
Electro- Optical
Products Manufacturing (133) (122) (305) (127)
Medical Information
Services (148) (309) (1,672) (776)
Telecommunications (203) (210) (496) (431)
Three Dimensional
Products and Services (25) (472) (243) (887)
Business Consulting
Services (8) (12) (17) (21)
Corporate and Other (652) (1,238) (1,241) (2,769)
-------- -------- -------- --------
Total net loss $ (313) $(1,719) $(2,405) $(4,108)
======== ======== ======== ========
13
<PAGE>
Consolidated Technology Group, Ltd. and Subsidiaries
Notes to Consolidated Financial Statements
(dollars in 000's)
- --------------------------------------------------------------------------------
(5) Industry Segments (continued)
Three Months Six Months
Ended Ended
------------------------- --------------------------
June 30, June 30, June 30, June 30,
1996 1995 1996 1995
---- ---- ---- ----
Depreciation and
Amortization:
Contract Engineering
Services $ 121 $ 128 $ 235 $ 256
Medical Diagnostics 1,256 1,237 2,498 2,490
Audio Products
Manufacturing 37 75 79 75
Electro-Mechanical and
Electro- Optical
Products Manufacturing 16 8 32 15
Medical Information
Services 111 134 220 265
Telecommunications 8 8 16 15
Three Dimensional
Products and Services 64 323 346 382
Business Consulting
Services 1 1 1 1
Corporate and Other -- 4 3 9
------- ------- ------- -------
Total depreciation
and amortization $ 1,614 $ 1,917 $ 3,430 $ 3,507
======= ======= ======= =======
Capital Expenditures:
Contract Engineering
Services $ 22 $ 9 $ 41 $ 20
Medical Diagnostics 183 55 1,304 102
Audio Products
Manufacturing 59 56 72 56
Electro-Mechanical and
Electro- Optical
Products Manufacturing -- 3 -- 6
Medical Information
Services 15 27 35 31
Telecommunications -- -- -- --
Three Dimensional
Products and Services -- 61 -- 101
Business Consulting
Services -- -- -- --
Corporate and Other 2 2 7 21
------ ------- ------- -------
Total capital
expenditures $ 281 $ 213 $ 1,459 $ 337
===== ======= ======= =======
14
<PAGE>
Consolidated Technology Group, Ltd. and Subsidiaries
Notes to Consolidated Financial Statements
(dollars in 000's)
- --------------------------------------------------------------------------------
(5) Industry Segments (continued):
At June 30,
---------------------
Segments: 1996 1995
- -------- --------- ---------
Identifiable Assets:
Contract Engineering Services $ 7,180 $10,685
Medical Diagnostics 42,885 40,864
Audio Visual Manufacturing
and services 1,913 2,397
Electro-Mechanical and Electro-Optical
Products Manufacturing 4,043 4,760
Medical Information Services 8,442 6,317
Telecommunications 1,559 1,225
Three Dimensional Products and Services 1,213 2,017
Business Consulting Services 270 287
Corporate and other 3,132 1,599
------ ------
Total Identifiable Assets 70,637 $70,151
====== =======
(6) Equity:
Conversion of Series A Preferred Stock - During the six months ended June 30,
1996 the Company issued 5,237,502 shares of common stock upon the conversion of
40,224 shares of series A preferred stock.
Regulation S Offerings - Pursuant to offerings made under Regulation S of the
Securities Act of 1933, the Company received net proceeds of $913 in conjunction
with the issuance of 13,250,000 shares of common stock for the six month period
ended June 30, 1996.
Non-Employee Directors, Consultants and Advisors Stock Options:
On August 20, 1993, the Company authorized a stock option plan for Non-Employee
Directors, Consultants and Advisors to provide compensation for services
rendered to the Company in lieu of cash payments. Pursuant to the plan during
April 1996, 200,000 shares were issued for no cash consideration, resulting in
$45 of consulting costs computed as follows:
Shares 200,000
Value of stock at date of grant $0.28125
-------
Full value of stock 56
20% discount (11)
-------
Discounted value of stock 45
Exercise proceeds --
-------
Total consulting costs $ 45
=======
15
<PAGE>
Consolidated Technology Group, Ltd. and Subsidiaries
Notes to Consolidated Financial Statements
(dollars in 000's)
- --------------------------------------------------------------------------------
(7) Issuance of Stock Options and Warrant to Purchase Stock of a Subsidiary:
A subsidiary of the Company issued stock options and warrants to purchase stock.
The fair market value of the underlying securities exceeded the exercise price
by $2,229 and this excess was expensed for the six months ended June 30, 1996.
The following details the calculation of the expense:
Per share fair market value
of underlying securities at
the date of grant $3.20
Per share exercise price 2.00
----
Excess of fair market value
over the exercise price $1.20
Number of underlying shares 1,857,750
---------
Total Expense (in 000's) $2,229
=========
As a result of recording the above expense, minority interest increased by
$2,229.
(8) Reverse Merger:
On May 8, 1995 SIS Capital Corp. ("SISC"), a wholly-owned subsidiary of the
Company, transferred all of its equity ownership in Trans Global Services, Inc.
("Trans Global") to Concept Technologies Group, Inc. ("Concept"), pursuant to an
agreement dated as of March 31, 1995, among SISC, DLB, Inc. ("DLB"), Joseph G.
Sicinski and Concept in exchange for a controlling interest in Concept.
Concept's common stock and warrants are traded on the Nasdaq SmallCap Market.
Trans Global's common stock was owned by SISC (91.6%), DLB (5.0%) and Mr.
Sicinski (3.4%). DLB is owned by Ms. Carol Schiller, wife of Mr. Lewis S.
Schiller, the Company's chairman of the board, president and chief executive
officer. Mr. Schiller disclaims all beneficial interest in the securities owned
by DLB. The acquisition by Concept of the Trans Global stock in exchange for
Concept's capital stock is referred to as the "Trans Global Transaction".
Pursuant to the Trans Global Transaction:
(i) - Warrants to purchase an aggregate of 500,000 shares of Trans Global
common stock held by SISC (475,000 shares) and DLB (25,000 shares) were
exchanged for Series B Common Stock Purchase Warrants ("Series B Warrants") to
purchase an aggregate of 500,000 shares of Common Stock until May 5, 1997.
(ii) - Concept issued to SISC 850,000 shares of Common Stock, Series B
Warrants to purchase 475,000 shares of Common Stock at $3.50 per share, 23,750
shares of Series A Preferred Stock, which will be converted into 1,900,000
shares of Common Stock upon the filing of the Certificate of Amendment, 23,750
shares of each of Series B and C Preferred Stock, which are convertible into an
aggregate of 2,375,000 shares of Common Stock if certain levels of income before
income tax are met, and 25,000 shares of Concept's Series D Preferred Stock,
which is not convertible and which has a redemption price of
16
<PAGE>
Consolidated Technology Group, Ltd. and Subsidiaries
Notes to Consolidated Financial Statements
(dollars in 000's)
- --------------------------------------------------------------------------------
(8) Reverse Merger (continued):
approximately $1,700. SISC has deferred taking the physical delivery of 400,000
of the shares of Common Stock issuable in order to provide Concept with
flexibility in issuing shares of Common Stock.
(iii) - Concept issued to DLB in respect of its Trans Global stock and
warrants, 50,000 shares of Common Stock, Series B Warrants to purchase 25,000
shares of Common Stock, 1,250 shares of Series A Preferred Stock, which are
convertible into 100,000 shares of Common Stock upon the filing of the
Certificate of Amendment, and 1,250 shares of each of Series B and C Preferred
Stock, which are convertible into an aggregate of 125,000 shares of Common Stock
if certain levels of income before income taxes are attained.
(iv) - Concept issued to Mr. Sicinski, 100,000 shares of Common Stock.
As a result of the Trans Global Transaction, SISC owned, at the closing,
approximately 32.2% of the outstanding Common Stock, and 59.3% of the voting
rights on all matters, including the election of directors, except where the
holders of Common Stock are required by law to vote as a single class. Upon the
filing of the Certificate of Amendment, based on outstanding Common Stock as of
the closing date, SISC would own 59.3% of the outstanding Common Stock.
(9) Pro Forma Results:
The following pro forma unaudited results assume that the reverse merger in Note
(8) had occurred at the beginning of the indicated periods:
Three Months Six Months
Ended Ended
------------------------- --------------------------
June 30, June 30, June 30, June 30,
1996 1995 1996 1995
---- ---- ---- ----
Net revenues $27,860 $27,733 $54,373 $ 56,800
====== ====== ====== ======
Net income (loss) ($ 313) ($ 1,719) ($ 2,405) $ (4,170)
====== ====== ====== ======
Income (loss) per share ($ 0.01) ($ 0.08) ($ 0.06) $ (0.20)
====== ====== ====== ======
The pro forma information is not necessarily indicative of either the results of
operations that would have occurred had the acquisition been effective at the
beginning of the indicated periods or of the future results of operations.
17
<PAGE>
Consolidated Technology Group, Ltd. and Subsidiaries
Notes to Consolidated Financial Statements
(dollars in 000's)
- --------------------------------------------------------------------------------
(10) Related Party Transactions
Sale of Common Stock Investments to an Officer:
During April 1996, the chief executive officer and director of the Company
exercised an option to purchase common stock investments held by the Company at
110% of the cost of such investments. The purchase of such investments was
consummated in a noncash transaction and such officer is to issue a note in
favor of the Company and payable within five years from the date of the
purchase. Total receivables outstanding under such sale approximates $445,
including imputed interest at 5.88%. $72 of such receivable relates to such
exercises that occurred during the year ended December 31, 1995.
(11) Subsequent Events
Conversion of Series A Preferred Stock:
From the period July 1, 1996 through August 16, 1996, the Company issued
approximately 34,000 shares of common stock upon the conversion of 8,441 shares
of series A preferred stock.
Subsidiary's Initial Public Offering:
During August 1996, NetSmart, a subsidiary of the Company operating in the
Medical Information Services segment completed an initial public offering
selling common shares representing 22% of the outstanding shares and expects
to receive net proceeds of approximately $4,500.
Subsidiary's Issuance of Stock:
During July 1996, Trans Global Services, Inc., a publicly held subsidiary of the
Company operating in the Contract Engineering Services segment, issued 5,000,000
shares of common stock pursuant to a Regulation S offering and received net
proceeds of $2,000.
Subsidiary's Tax Settlement:
In August 1996, Trans Global Services, Inc., a publicly held subsidiary of the
Company operating in the Contract Engineering Services segment, entered into an
agreement with the IRS to pay delinquent payroll taxes, interest and penalties.
Trans Global has paid $1,253 and has agreed to pay the balance in eight equal
monthly installments of $150 with the remaining balance to be paid in the ninth
installment. The IRS has agreed to subordinate this obligation to Trans Global's
asset based lender providing Trans Global is in compliance with current IRS
regulations concerning the timely deposits of Federal employment and withholding
taxes.
18
<PAGE>
Consolidated Technology Group, Ltd. and Subsidiaries
Notes to Consolidated Financial Statements
(dollars in 000's)
- --------------------------------------------------------------------------------
(12) Restated Employment Agreements:
Chief Executive Officer:
During May 1996, the chief executive officer's ("CEO") employment contract was
restated, effective as of January 1996, and supersedes the contract dated
October 1, 1994. Per the terms of the amended contract the CEO shall receive a
salary of $250 per year through the year 2000, the expiration date of the
contract. The annual compensation may be increased from time to time by the
Board of Director's of the Company and commencing January 1, 1996 and on each
January 1 thereafter during the term of the contract, the CEO shall receive an
increase in annual compensation equal to the greater of (A) 5% of his salary in
effect prior to the increase or (B) the cost of living increase as determined
per the Consumers Price Index as published by the Bureau of Labor Statistics of
the United States Department of Labor. In addition, the CEO is entitled to a
bonus equal to 10% of the amount by which the greater of (A) the Company's
consolidated income before taxes, determined in accordance with generally
accepted accounting principles or (B) the Company's consolidated net cash flow
exceeds $350. Net cash flow is calculated as consolidated net income, plus
depreciation, amortization and other noncash items of expense, minus payments of
principal amounts of indebtedness, all determined in accordance with generally
accepted accounting principles. Additional benefits to be received by the CEO
include: (a) four weeks paid vacation; (b) disability insurance providing for
the payment to the CEO of a minimum of 60% of his salary; (c) life insurance
with a face value of $2,000, payable to the CEO's designated beneficiary; (d)
health, vision and dental insurance; and (e)an automobile to be provided to the
CEO by the Company. Furthermore, the restated employment agreement confirms the
grant to the CEO of option to purchase 10% of any equity interest now held by
the Company or any of its subsidiaries. The option shall be exercisable during
the 5 year period commencing on the later of the date of this agreement or the
date the Company acquires the securities. The exercise price of the option shall
be equal to 110% of the Company's cost of such securities as determined in
accordance with generally accepted accounting principles. Payment of the option
exercise price shall be made by the CEO within 5 years from the date of the
exercise, without interest.
Chief Financial Officer:
During April 1996, the Chief Financial Officer's ("CFO") employment contract was
amended in order to be in compliance with loan covenants required by the lender
of the loans for the Medical Diagnostics segment. Such amendment extended the
term of employment from the December 31, 2000 to December 31, 2002. During the
years ended 2001 and 2002, the CFO's base salary shall be $236 and $252,
respectively.
. . . . . . . . . . . . . . . . . . . . . . . . . .
19
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (dollars in 000's)
FINANCIAL CONDITION
LIQUIDITY:
As of December 31, 1995, it was determined that the ability of the Company to
continue as a going concern was dependent upon the success of the Company's
subsidiary's marketing efforts and their efforts to obtain sufficient funding to
enable them to continue operations. Management believes that the Company has
made progress in achieving these goals during the quarter based on the
following:
Improved Operating Results:
The Company has a significant reduction in loss for six of the segments for the
three months June 30, 1996 and five of the segments for the six months June 30,
1996 compared to 1995 and also shows a significant reduction in corporate and
other expenses. On an overall basis, the net loss for the three months June 30,
1996 was $1,406 less than in 1995 and for the six months June 30, 1996, which
includes $2,229 of noncash expense related to a subsidiaries issuance of stock
options and stock purchase warrants in the medical information services segment,
was $1,703 less than in 1995.
Debt Refinancing:
In January 1996, the Company refinanced a significant portion of the current
subordinated debt that was to be paid by the Medical Diagnostics segment in
1996. Such financing consisted of a term loan of $2,000, a revolver loan of
$6,000 and the extension of approximately $6,300 of subordinated debt balloon
payments from a 1996 due date to a 2002 due date. At the time of the
refinancing, the effect was a reduction of current debt of approximately $8,363.
Improved Working Capital Condition:
As of December 31, 1995, the Company had a working capital deficit of $13,360.
As of June 30, 1996, this working capital deficit has been reduced to $2,092, in
large part to the aforementioned debt refinancing. The Company's continued
ability to reduce the working capital deficit relies primarily on the success of
continuing efforts to increase the profitability of the underlying subsidiaries
and a proposed additional refinancing of current subordinated debt which would
result in a shift of $4,000 of current debt, due in September 1996, to notes
with a five year amortization period in the Medical Diagnostics segment. As
further explained in the following "Sources of Cash" discussion, restrictions
exist with regards to the Company's use of the Medical Diagnostics segment's
cash.
Equity Offerings:
During August 1996, NetSmart, a subsidiary of the Company operating in the
Medical Information Services segment, completed an initial public offering
issuing common shares representing approximately 22% of the outstanding shares
and expects to receive net proceeds of approximately $4,500. In July 1996 a
subsidiary
20
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (dollars in 000's)
FINANCIAL CONDITION:
LIQUIDITY (continued):
CAPITAL RESOURCES:
operating in the contract engineering services segment (which is already
publicly held), raised $2,000 from the sale of common stock (note 11 to the
consolidated financial statements). This segment is currently in negotiations
with respect to an additional financing, however, no assurance can be given that
the segment will be successful in obtaining such financing.
Sources of Cash:
The Company's principal working capital consists of cash and cash equivalents.
Cash and cash equivalents were $2,637 at June 30, 1996 compared to $1,636 at
December 31, 1995. During the six months ended June 30, 1996, the Company's
operations generated $2,915 of cash from operations of which the medical
diagnostics segment company, International Magnetic Imaging, ("IMI") generated
approximately $3,822 from operations while the remaining segments used
approximately $907 in operations. Pursuant to an IMI financing agreement with a
creditor, restrictions exist on the distributions of IMI funds whereby IMI may
not make payments out of the ordinary course of IMI operations and specifically,
not to the parent company, (Consolidated), or any subsidiary or affiliate. The
other segments are thereby required to operate on their own cash flows and as of
June 30, 1996 the most significant impact from these restrictions is on the
Three Dimensional Products and Services segment which is currently unable to
operate without cash infusions from the parent company, (Consolidated). It is
imperative that this segment obtain alternative sources of funding (i.e. equity
offerings, creditor financing) or increased volume at higher operating margins,
in order to continue as an operating segment. The remaining segments were
relatively unaffected by the restrictions on IMI's cash since they operated
substantially with their own cash flows. Other significant sources of cash
includes proceeds from the issuance of long-term debt of $9,777, proceeds from
the issuance of stock of $1,288, collections on repayments of notes receivable
of $2,078 and proceeds from the sale of marketable securities of $854.
Uses of Cash:
Uses of cash includes the repayment of long-term and subordinated debt of
$9,052, capital expenditures of $1,459, payments on capital leases of $675,
advances on notes receivables of $2,176, net repayments to factors of $1,512,
purchases of investments of $550 and expenditures of $280 for software
development. Other net sources and uses of cash amounted to $207.
Changes in Other Working Capital Assets and Liabilities:
The other significant changes in working capital includes an increase in
accounts receivable of $3,206 (primarily from an increase in sales volume in the
Medical Diagnostics segment) and an increase in accounts payable and accrued
expenses and accrued payroll and related expenses of approximately $3,448
(primarily from an increase in payroll and payroll related obligations of the
contract engineering services segment).
21
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (dollars in 000's)
FINANCIAL CONDITION:
CAPITAL RESOURCES (continued):
Effect of Loan Defaults:
The Company is in default on loans approximating $1,000 as of June 30, 1996 in
the Medical Services and Audio/Visual Services segments. Such defaults have not
had, and are not expected to have a significant impact on the operations of the
related segments.
The creditors have not called such loans and are working under extended
repayment terms.
RESULTS OF OPERATIONS:
Consolidated operating income (losses) for the three months June 30, 1996
improved by $774 from an operating loss of $413 for the 1995 quarter to
operating income of $361 for the 1996 quarter. The operating loss for the six
months June 30, 1996 decreased by $79 from $1,726 for 1995 compared to $1,647
for 1996. The six months June 30, 1996 includes $2,229 of noncash expenses
related to a subsidiaries issuance of stock options and stock purchase warrants
in the medical information services segment. Excluding, the noncash expenses in
the medical information services segment, the overall improvement in operating
results was achieved by an increase in overall gross margins of $923 while
operating expenses remained relatively level for the three months June 30, 1996
and an increase in overall gross margins of $$1,653 and a reduction in operating
costs of $655 for the six months June 30, 1996. Such advances in profitability
were achieved while revenues remained relatively level for the three months June
30, 1996 and decreased by $1,771 for the six months June 30, 1996. The decrease
in revenues is attributed to the contract engineering services segment which on
January 1, 1996 lost a contract with one of its significant customers. By the
end of the six months June 30, 1996, the segment had recovered its revenues such
that the annual rate of revenue was substantially the same as prior to the loss
of the contract. On an overall basis, the consolidated net loss for the three
and six months June 30, 1996 compared to 1995 decreased by $1,406 or 82% and
$1,703 or 42%, respectively.
The percentage of relative contribution to revenues, gross profit, and selling
general and administrative expenses by industry segment is shown in the
following tables. Changes within the individual industry segments themselves is
discussed further within the respective industry segment discussions.
22
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (dollars in 000's)
RESULTS OF OPERATIONS (continued):
Percentage of Total
-------------------
Three Months Ended Six Months Ended
---------------------- ---------------------
June 30, June 30, June 30, June 30,
Revenues: 1996 1995 1996 1995
- -------- ---- ---- ---- ----
Contract Engineering
Services 53% 56% 52% 59%
Medical Diagnostics 27% 25% 29% 25%
Audio/Visual Manufact-
uring and Services 3% 3% 3% 2%
Electro-Mechanical and
Electro- Optical
Products Manufacturing 3% 5% 3% 4%
Medical Information
Services 8% 7% 8% 6%
Telecommunications 4% 2% 3% 2%
Three Dimensional
Products and Services 1% 1% 1% 1%
Business Consulting
Services 1% 1% 1% 1%
Percentage of Total
-------------------
Three Months Ended Six Months Ended
---------------------- ---------------------
June 30, June 30, June 30, June 30,
Gross Profit: 1996 1995 1996 1995
- ------------ ---- ---- ---- ----
Contract Engineering
Services 24% 25% 19% 18%
Medical Diagnostics 53% 57% 59% 62%
Audio/Visual Manufact-
uring and Services 4% 3% 3% 1%
Electro-Mechanical and
Electro- Optical
Products Manufacturing 3% 1% 2% 4%
Medical Information
Services 10% 10% 11% 9%
Telecommunications 3% 2% 2% 2%
Three Dimensional
Products and Services 2% 1% 3% 3%
Business Consulting
Services 1% 1% 1% 1%
23
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (dollars in 000's)
RESULTS OF OPERATIONS (continued):
Percentage of Total
-------------------
Three Months Ended Six Months Ended
---------------------- ---------------------
Selling, General and June 30, June 30, June 30, June 30,
Administrative Expenses 1996 1995 1996 1995
- ------------------------ ---- ---- ---- ----
Contract Engineering
Services 18% 13% 16% 14%
Medical Diagnostics 32% 28% 28% 29%
Audio/Visual Manufact-
uring and Services 5% 4% 4% 1%
Electro-Mechanical and
Electro- Optical
Products Manufacturing 5% 3% 4% 4%
Medical Information
Services 11% 13% 23% 13%
Telecommunications 7% 6% 5% 5%
Three Dimensional
Products and Services 9% 9% 8% 10%
Business Consulting
Services 1% 1% 1% 1%
Corporate and Other 12% 23% 11% 23%
Discussion of Operations by Segment:
Contract Engineering Services - This segment is engaged in the business of
providing engineers, designers and technical personnel on a temporary basis to
major corporations. Comparing 1996 to 1995, revenues decreased 3% and 14%,
respectively, for the three and six month periods while gross margins increased
15% and 22%, respectively, for the three and six month periods. The decrease in
revenues is attributed to the loss of a contract on January 1, 1996, from one of
the segment's significant customers. By the end of the six months June 30, 1996,
the segment had recovered its revenues such that the annual rate of revenue was
substantially the same as prior to the loss of the contract. The increase in the
gross margin is due to the fact that the remaining customers, as well as the
newly acquired customers, generated higher margins than the significant customer
that was lost. Selling, general and administrative expenses increased 34% and
27%. This increase primarily resulted from $250 in accrued penalties on late
payroll tax withholding obligations for each of the quarters ended March 31,
1996 and June 30, 1996 and $80 of noncash expenses associated with the issuance
of stock for consulting services during the six months June 30, 1996. Other
income and expense items decreased 70% for both the three and six months as a
result of lower interest expense from more favorable financing terms than those
that existed in the prior periods. Overall, this increased net income by $217
for the three months June 30, 1996 and decreased the net loss by $467 for the
six months June 30, 1996. Management believes that this segment can continue to
generate profits by continuing to increase its revenues and increasing its gross
margins. Profitability is dependent upon its ability to obtain equity
financings. In July 1996, this segment raised $2,000 from the sale of common
stock current. This segment is currently in negotiations with respect to an
24
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (dollars in 000's) RESULTS OF OPERATIONS (continued):
additional financing, however, no assurance can be given that the segment will
be successful in obtaining such financing, and the failure to obtain necessary
financing could have a materiel adverse effect upon the segment.
Medical Diagnostics - This segment is engaged in the business of performing MRI
and other diagnostic modality procedures in the health industry. Comparing 1996
to 1995 revenues increased 8% and 12% for the respective three and six month
periods, while gross margins increased 12% and 13% for the respective three and
six month periods. The increase in revenues is due to increases in scan
procedure volume which was partially offset by decreasing reimbursement rates.
Selling, general and administrative expenses increased 12% and 13% for the
respective three and six month periods. During the three months June 30, 1996,
this segment increased its staffing in order to have certain centers remain open
seven days a week instead of six days a week accounting for $200 of the
increase. The remaining increase for the three month comparative period is due
to additional equipment leasing of $150 that did not exist in the 1995
comparative period. The increase for the six month comparative period is due
primarily to the additional equipment leasing of $282 that did not exist in the
1995 comparative period. Other income and expense items (consisting primarily of
interest expense) remained relatively level for the three and six months ended
June 30, 1996. Net income for the three months ended June 30, 1996 remained
relatively level with the comparative period. Net income for the six months June
30, 1996 increased by 25% due wholly to increases in the first quarter activity
whereby revenues and gross margins increased while operating costs remained
relatively level. Typically, this segment has its greatest revenue activity in
the first quarter and management anticipated that revenues and gross margin in
the second quarter of 1996 would be moderately less, which is consistent with
the past performance of this segment. Management anticipates that the operating
results of this segment for the third quarter of 1996 will remain level with the
second quarter and the fourth quarter of 1996 will show a moderate increase.
Electro-Mechanical and Electro-Optical Products Manufacturing - This segment
consists of three companies, Sequential Electronic Systems, ("Sequential"),
which manufactures optical encoders, encoded motors and limit programmers,
S-Tech, which manufactures debit card vending machines and various avionics
instrumentation devices and Televend which markets telephone debit cards and
certain products manufactured by S-Tech. Comparing 1996 and 1995, revenues
decreased 41% for the three months June 30, 1996 and remained relatively level
for the six months June 30, 1996, while gross profit increased by 189% and 151%
for the three and six months June 30, 1996, respectively. The significant
decrease in revenues is attributed to lower levels of shipments to existing
customers while new customers have not been obtained to replace the lost
revenues. Gross margins went from 4% to 20% of revenues for the three month
comparative period and went from (12%) to 5% for the comparative six month
period which is due to the fact that the gross margins on current period
contracts have higher margins than on revenues that were lost. Selling, general
and administrative expenses decreased 28% which was the result of planned
cutbacks in such costs. Net losses increased from $4 for 1995 to $171 for 1996,
which again is primarily attributed to the decrease to government sector sales.
Management has placed more emphasis on sales to the private sector through the
marketing of the debit card vending machines and the
25
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (dollars in 000's) RESULTS OF OPERATIONS (continued):
debit card marketing efforts via agreements between distributors and Televend.
Management anticipates that revenues and profitability will improve in the
remaining quarters of 1996 if the proper financing is obtained, but is currently
unable to estimate the amount of such improvement.
Medical Information Services - This segment is engaged in developing, marketing
and supporting computer software designed to enable health service as well as
financial related organizations to provide a range of services in a network
computing environment. This segment has developed proprietary network technology
utilizing smart cards in financial network systems. Comparing 1996 to 1995, both
revenues and gross margins increased 24% and 48% for the three and six month
comparative periods, while selling, general and administrative expenses
decreased 12% for the three month comparative period and increased 108% for the
six month comparative period. The significant increase in selling, general and
administrative expenses for the six month comparative period was due to a
noncash expense resulting from a noncash expense of $2,229 related to the
issuance of stock options and stock purchase warrants. During the prior periods
this segment had relied primarily on revenues of previously existing customers
and software programs and services. During 1996, the segment has increased its
revenues and gross margins through contracts with new customers using the new
technologies that it has spent significant amounts of money in the past
developing. These positive developments were more than offset by the noncash
expense from the previously mentioned stock options and stock purchase warrants
which resulted in operating losses of $1,861 for the six months June 30, 1996
compared to operating losses of $663 for the six months 1995. For the three
months comparative period, operating income improved by $208. An increase in
interest expense of $44 and $127 for the three and six month comparative period
was incurred due to additional debt, of which $500 was incurred during 1996.
During August 1996, NetSmart, a subsidiary of the Company operating in the
Medical Information Services segment, completed an initial public offering
selling common shares representing approximately 22% of the outstanding shares
and receiving net proceeds of approximately $4,500. Management estimates
continued improvement in this segment's operating results in the future quarters
of 1996.
Telecommunications - This segment is engaged in the business of marketing a wide
range of telecommunications services including the resale of local exchange
services through Competitive Access Providers ("CAP", the design and
installation of end- user networks in addition to its newly formed debit card
services and domestic and international long distance services. Comparing 1996
to 1995, revenues increased 44% and 60% for the respective three and six month
periods while gross margins increased 61% and 31%. Comparing 1996 to 1995,
selling, general and administrative expenses increased 17% and 16% for the
respective three and six month periods. During 1996, this segment continued to
grow its market share by pricing its retail services more competitively and
incurred certain promotional costs that are estimated to be of a non-recurring
nature. On an overall basis, the increased gross margins of this segment offset
increased operational expense increases such that the net losses for both the
comparative periods remained relatively level. The telecommunications segment
operates in a highly competitive industry and management believes that in order
for this segment to become profitable, it will have to distinguish itself from
other telecommunications service companies. Additionally, this segment needs to
significantly increase its
26
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (dollars in 000's) RESULTS OF OPERATIONS (continued):
volume at higher margins in order to cover its operating costs. This segment
currently has a backlog of approximately $4,000, and management estimates that
revenues will increase throughout the remainder of the year, and if operating
costs are maintained at the current level, this segment could break-even during
the fourth quarter.
Three Dimensional Products and Services - This segment is engaged in the
business of developing and marketing products and services in the three
dimensional imaging and digitizing technology which the segment categorizes in
three primary market groups: 1) surfacer imaging products, 2) CAD/CAM software
products and services and 3) laser scanning products. Comparing the three months
June 30, 1996 to 1995, revenues decreased 65% while gross margins increased
marginally. Comparing the six months June 30, 1996 to 1995, revenues and gross
margins decreased 56% and 17%, respectively. The primary reason for such
decreases is due to the closure of one of the companies operating in this
segment which produced revenues and gross margins for the three months 1995 of
$247 and $78, respectively and for the six months ended June 30, 1995, $431 and
$44, respectively. Additionally, in July 1996, this segment significantly
reduced its operations in Europe and sold certain assets resulting in a one time
gain of approximately $450, which is included in other income. The decision to
close such operations was based on the fact that such companies operations did
not align with the planned future for this segment and was not producing margins
at a level sufficient to cover its operating costs. Selling, general and
administrative expenses remained relatively level, however, the 1996 expenses
includes $192 in noncash expense for the write-off of goodwill that could not be
supported by the segment's current cash flow under generally accepted accounting
principles. Excluding the goodwill write-off in the first quarter of 1996,
ongoing expenses decreased approximately $246 for the six months June 30, 1996
because of planned expense cut backs as well as a decrease in product
development costs. On an overall basis, the net loss for the three months June
30, 1996 was $25, a decrease of $447 from the 1995 comparative period. The net
loss for the six months June 30, 1996 was $243, a decrease of $645 from the 1995
comparative period. Management currently anticipates that revenues and operating
profits will significantly improve for this segment if the proper financing can
be obtained which would allow this segment to acquire a European partner to
market and expand its existing product lines. However, no assurances can be made
that such financing will be obtained and the ultimate profitability of this
segment is significantly dependent on the success of such acquisition.
Audio Visual Manufacturing and Services - This segment is engaged in the
business of manufacturing and marketing a professional line of loudspeakers.
This segment was acquired during the second quarter of 1995 and therefore there
is no comparable period for the six months June 30, 1995. During the three
months June 30, 1996 comparative period this segments revenues and gross margin
increased 15% and 45%. Such increases are due primarily to a an increase in
European and Far Eastern sales which was complimented with a reduction in per
unit manufacturing costs. Selling, general and administrative costs for the
three months June 30, 1996 comparative period remained relatively level as did
other income and expense items. For the six month period June 30, 1996, this
segment generated $1,605 in revenues of which $1,266 were from domestic sales
and $339 were from European and Far East sales. During the same period, gross
margins were $358 or 22% of revenues
27
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (dollars in 000's) RESULTS OF OPERATIONS (continued):
compared to 10% for the time period from acquisition in the second quarter of
1995 through December 31, 1995. This increase in gross margin percentage is due
primarily to increased sales volume which reduced the idle capacity related to
the manufacturing process. This segment continually evaluates and improves its
product line and management believes that if this segment is able to find an
appropriate financing package, it will be able to significantly increase its
revenues and overall profitability during 1996.
Business Consulting Services operations were not significant for 1996 or 1995
and management anticipates that consulting revenues and related expenses will
not be a significant portion of the Company's future operations in the near
term.
Corporate and Other selling, general and administrative expenses for the three
and six month June 30, 1996 comparative periods decreased 43% and 47%,
respectively. Such decrease is due primarily to noncash expense from the
exercise of stock options for payment of consulting services which amounted to
$740 and $1,265, respectively for the three and six months June 30, 1995.
Included in selling, general and administrative expenses for the six months June
30, 1996 was approximately $80 in a bonus paid to the Company's Chief Financial
Officer as a part of renegotiating the subordinated debt of the Medical
Diagnostics segment. Corporate and other selling, general and administrative
expense, other than that related to the exercise of stock options remained
relatively level and it is currently anticipated that such costs will remain
level throughout 1996. However, in the event that the Company negotiates
additional acquisitions, such costs would increase accordingly.
Discussion of Other Significant Financial Line Items
Interest Expense for 1996 remained relatively level compared to 1995. The
Company's debt financing activity during 1996 was primarily refinancing activity
which extended current debt to long-term and from a rate of 7% to 11%. The
increase in interest expense from the higher rate was offset by principal
payments on other debt.
Gains and (Losses) on Investment Securities - During 1996 the Company's reported
a gain on investment purchasing and sales activity of $138 and $175 for the
respective three and six months ended June 30, 1996 and a loss on such activity
of $10 and $131 for the respective comparable periods. The loss on investment
activity in 1995 consisted primarily of the recognition of investments that were
determined to have a permanent decline in market value and as such, the decline
was recognized in that period. During April 1996, the chief executive officer of
the Company exercised an option to purchase common stock investments held by the
Company at 110% of the cost of such investments. The gain from such transaction
with a related party was approximated $40. Security sales vary from period to
period based on, among other things, market activity and cash needs, and
management cannot estimate the amount of future security sales gains or losses,
if any, that will be generated from such transactions.
28
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (dollars in 000's) RESULTS OF OPERATIONS (continued):
Minority Interest in Loss of Subsidiaries - For the three months June 30, 1996
the minority interest in gain of subsidiaries was $21. For the three months June
30, 1995 and the six months June 30, 1996 and 1995, the minority interest in
loss of subsidiaries was $113, $733 and $108, respectively. Changes to the
minority interest in the gain and loss of subsidiaries, other than those changes
related to the inherent differences in the net income and loss of subsidiaries
from period to period, resulted from the minority issuance of stock options and
stock purchase warrants in the medical information services segment, the
issuance of minority owned stock in the contract engineering services segment
and the sale of 10% of the equity position of the Company's investments in
subsidiaries to the Company's CEO.
Impact of Inflation
The Company is subject to normal inflationary trends and anticipates that any
increased costs would be passed on to its customers.
. . . . . . . . . . . . . . . . . . . . . . . . . .
29
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
1. EX-11.1 Calculation of earnings per share.
2. EX-27 Financial Data Schedule
. . . . . . . . . . . . . . . . . . . . . . . . . .
30
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CONSOLIDATED TECHNOLOGY GROUP, LTD.
/S/ President and Director August 16, 1996
- -------------------- (Principal Executive
Lewis S. Schiller Officer)
/S/ Chief Financial Officer August 16, 1996
- -------------------- (Principal Financial and
George W. Mahoney Accounting Officer)
<PAGE>
Consolidated Technology Group Ltd. and Subsidiaries
Index to Exhibits
June 30, 1996
1. EX-11.1 Calculation of earnings per share.
2. EX-27 Financial Data Schedule
(filed in electronic format only with the SEC)
<PAGE>
Consolidated Technology Group, Ltd. and Subsidiaries
June 30, 1996
EX-11.1 Calculation of Earnings per Share
- ----------------------------------------------------------------------------
Three Six
Months Months
Ended Ended
June 30, June 30,
1996 1996
-------- --------
Net Loss ($313,000) ($2,405,000)
======= =========
Loss per Share:
Loss per share - Note 1 ($0.01) ($0.06)
==== ====
Loss per Share - assuming full
dilution - Note 2 ($0.01) ($0.06)
==== ====
Note 1:
Computed by dividing the net loss for the period by the weighted average number
of common shares outstanding (37,632,489 and 41,593,106 for the respective three
and six months period ended June 30, 1996). No stock options, warrants or
preferred convertible stock are assumed to be exercised because they are
anti-dilutive for the period. The weighted average number of common shares
outstanding is calculated by weighting common shares issued during the period by
the actual number of days that such shares are outstanding during the period.
Note 2:
(i) Assumes that 200,000 common shares issued pursuant to the exercise of stock
options were outstanding as of the beginning of the indicated periods.
(ii) Assumes that a warrant to purchase 1,000,000 common shares at $0.75 per
share was exercised at the beginning of the year, and that all proceeds from
such exercise were used to purchase treasury stock at a price equal to the
average market price of the Company's common shares for the period as quoted on
the NASD.
(iii) Assumes that the current year conversions of preferred stock into
1,601,909 and 5,237,502 of common shares for the three and six month periods
ended June 30, 1996, respectively, occurred at the beginning of the indicated
periods.
(iv) Assumes that at the beginning of the indicated periods, the 26,372
remaining shares of preferred convertible shares were converted to common shares
at the conversion rate of 130.2083 shares of common for each share of
convertible preferred stock.
NOTE: THIS CALCULATION IS SUBMITTED IN ACCORDANCE WITH THE SECURITIES ACT OF
1934 RELEASE NO. 9083, ALTHOUGH IT IS CONTRARY TO PARA. 40 OF APB 15 BECAUSE IT
MAY PRODUCE AN ANIT-DILUTIVE RESULT
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND THE CONSOLIDATED STATEMENT OF OPERATIONS
FILED AS PART OF THE QUARTERLY REPORT ON FORM 10-Q AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH QUARTERLY REPORT ON FORM 10-Q.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 2,637,000
<SECURITIES> 871,000
<RECEIVABLES> 25,108,000
<ALLOWANCES> 3,192,000
<INVENTORY> 3,940,000
<CURRENT-ASSETS> 30,754,000
<PP&E> 36,107,000
<DEPRECIATION> 25,044,000
<TOTAL-ASSETS> 70,637,000
<CURRENT-LIABILITIES> 32,846,000
<BONDS> 0
<COMMON> 453,000
0
29,000
<OTHER-SE> 9,297,000
<TOTAL-LIABILITY-AND-EQUITY> 70,637,000
<SALES> 3,059,000
<TOTAL-REVENUES> 54,373,000
<CGS> 2,449,000
<TOTAL-COSTS> 42,514,000
<OTHER-EXPENSES> 15,024,000
<LOSS-PROVISION> 506,000
<INTEREST-EXPENSE> 2,024,000
<INCOME-PRETAX> (2,082,000)
<INCOME-TAX> 323,000
<INCOME-CONTINUING> (2,405,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,405,000)
<EPS-PRIMARY> (.06)
<EPS-DILUTED> (.06)
</TABLE>
