UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
Amendment No. 1
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
The Quarter Ended September, 1995
Commission File Number 0-4186
CONSOLIDATED TECHNOLOGY GROUP LTD.
(Exact name of registrant as specified in its charter)
New York 13-1948169
(State of 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)
(212) 233-4500
(Registrant's telephone number, including area code)
Number of common shares outstanding as of November 15, 1995: 24,724,644
Purpose of Amendment:
Part I. - Financial Information:
Item 1. Financial Statements - The financial statements are restated to reflect
the following changes:
1) Increase additional paid-in capital and accumulated deficit to reflect an
increase in the fiscal year ended July 31, 1994 expense of approximately
$5,870,000 relating to a reduction in the discount taken on stock option
issuances.
2) Increase additional paid-in capital and accumulated deficit to reflect an
increase in the five month period ended December 31, 1994 expense of
approximately $36,000 relating to a reduction in the discount taken on stock
issued in lieu of cash for services rendered.
3) Increase additional paid-in capital and accumulated deficit to reflect an
increase in the five month period ended December 31, 1994 expense of
approximately $338,000 relating to a reduction in the discount taken on stock
issued for an acquisition.
4) For the nine months ended September 30, 1995, increased selling, general and
administrative expenses for the write-off of $460,459 of deferred offering costs
and $21,000 for the write-off of investments in the Medical Information Services
segment and $127,142 for increased payroll tax liabilities in the Three
Dimensional Products and Services segment.
5) For the nine months ended October 31, 1994 statement of operations, reclass
approximately $115,000 of expense related to the issuance of stock options from
unusual expense to selling, general and administrative expense and increase
selling, general and administrative expenses by approximately $2,450,000
relating to a reduction in the discount taken on stock option issuances. Related
changes were also made to the cash flow statement.
6) In the cash flow statement for the nine months ended September 30, 1995 and
October 31, 1994 the following changes were made:
a) The noncash portions of the reverse merger are removed from the cash flow
statement and are included in the supplemental disclosures of noncash
investing activities
b) Added supplemental disclosures of noncash investing and financing
activities for the nine months ended October 31, 1994.
7) Disclosed the number of common shares authorized, issued and outstanding on
the face of the balance sheet.
<PAGE>
Purpose of Amendment (continued):
8) Expanded the discussion regarding the computation of earnings per share in
the footnotes to describe the Company's treatment of the convertible preferred
stock in calculating weighted average number of shares outstanding.
9) Added additional footnote disclosure regarding the restatement of prior
period financial statements.
10) Added full disclosure of acquisitions that affect all periods presented in
the financial statements. 11) Adjusted the segment analysis to reflect the
increase in selling, general and administrative expenses.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations:
11) Liquidity and Capital Resources
a) Expanded discussion regarding the restriction of the use of a
subsidiary's cash is added.
b) Expanded discussion of changes in working capital assets/liabilities is
added, including the proposed refinancing of current debt obligations.
c) Disclosure of the impact of loan defaults is added.
12) Results of Operations
a) Adjusted the segment percentage tables to reflect the increase in the
Corporate and Other segment's selling, general and administrative
expenses.
b) Discussion is changed to reflect the changes made to the nine months
ended September 30, 1995 of $481,459 of expense related to the medical
Information Services segment and $127,142 of expense related to the Three
Dimensional Products and Services segment and for the nine months ended
October 31, 1994, of approximately $115,000 of expense related to the
issuance of stock options from unusual expense to selling, general and
administrative expense and the $2,450,000 increase in selling, general
and administrative expense relating to a reduction in the discount taken
on the stock option issuances.
<PAGE>
Consolidated Technologies Group Ltd.
Index
Page
Part I: - Financial Information:
Item 1. Financial Statements:
Consolidated Balance Sheets - September 30, 1995 and December 31, 1994. 2-3
Consolidated Statements of Operations - Three Months Ended September
30, 1995 and October 31, 1994 and the Nine Months Ended September 30,
1995 and October 31, 1994 4-5
Consolidated Statement of Shareholders' Equity - September 30, 1995 6-8
Consolidated Statements of Cash Flows - Nine Months Ended September
30, 1995 and October 31, 1994 9-11
Notes to Consolidated Financial Statements 12-21
Item 2. Management's Discussion and Analysis of the Financial
Condition and Results of Operations. 22-27
Part II:
Part II - Other Information:
Item 6. Exhibits and Reports on Form 8-K 28
<PAGE>
Consolidated Technology Group Ltd. and Subsidiaries
Consolidated Balance Sheets
September 30,
1995 December 31,
(Unaudited) 1994
----------- -----------
Assets:
Current assets:
Cash and cash equivalents $ 1,892,009 $ 1,726,796
Receivables, net of allowances 19,731,384 16,819,356
Costs and estimated profits in
excess of interim billings 1,130693 501,713
Inventories 4,142,402 3,466,328
Loans receivable 618,263 1,363,249
Prepaid expenses and other current assets 475,437 412,243
Investments in common stock -- 150,892
---------- ----------
Total current assets 27,990,188 24,440,577
---------- ----------
Property, plant and equipment, net 12,015,272 12,984,305
---------- ----------
Other assets:
Capitalized software development costs 878,460 1,064,418
Equipment leased to others 94,035 --
Goodwill, net 12,040,130 12,622,620
Covenants not to compete, net 2,488,925 3,450,665
Customer lists, net 12,134,994 12,770,200
Deferred offering costs -- 331,334
Receivables, long-term 420,800 --
Receivables, related parties 348,949 159,824
Trademark, net 385,606 --
Investments in common stock, long-term 557,204 383,345
Other assets 661,745 382,969
---------- ----------
Total other assets 30,010,848 31,165,375
---------- ----------
Total Assets $70,016,308 $68,590,257
========== ==========
See notes to consolidated financial statements.
2
<PAGE>
Consolidated Technology Group Ltd. and Subsidiaries
Consolidated Balance Sheets
September 30,
1995 December 31,
(Unaudited) 1994
----------- -----------
Liabilities and Shareholders' Equity:
Current liabilities:
Accounts payable and accrued expenses $ 9,406,347 $ 6,741,080
Accrued payroll and related expenses 2,598,595 1,774,160
Accrued interest 223,754 112,524
Income taxes payable 197,849 20,000
Interim billings in excess of costs and
estimated profits 1,514,365 1,156,674
Notes payable, related parties 183,496 183,496
Current portion of long-term debt 8,171,589 8,109,956
Current portion of subordinated debt 13,808,332 3,437,050
Current portion of capitalized lease
obligations 1,428,167 1,206,710
---------- ----------
Total current liabilities 37,532,494 22,741,650
---------- ----------
Long-term liabilities:
Long-term debt 8,064,946 8,541,930
Capitalized lease obligations 2,490,930 2,676,085
Subordinated debt 5,294,047 17,925,868
---------- ----------
Total long-term liabilities 15,849,923 29,143,883
---------- ----------
Minority Interest 2,769,566 --
---------- ----------
Shareholders' equity:
Preferred stock 80,675 80,675
Additional paid-in-capital, preferred stock 310,852 310,852
Common stock (50,000,000 shares authorized,
23,707,264 and 17,577,260 shares issued and
outstanding as of September 30, 1995 and
December 31, 1994, respectively) 237,073 175,773
Additional paid-in-capital, common stock 50,337,873 45,597,653
Accumulated deficit (35,444,844) (29,287,714)
Unrealized exchange translation 243,585 (33,200)
Deferred consulting fees (2,053,126) -
Net unrealized gain (loss) on long-term
investments in common stock 152,237 (139,315)
---------- -----------
Total shareholders' equity 13,864,325 16,704,724
---------- ----------
Total Liabilities and Shareholders' Equity $70,016,308 $68,590,257
========== ==========
See notes to consolidated financial statements.
3
<PAGE>
Consolidated Technology Group Ltd. and Subsidiaries
Consolidated Statements of Operations
For the Three Month Periods
Ended September 30, 1995 and October 31, 1994
(Unaudited)
Three Month Periods Ended
---------------------------
September 30, October 31,
1995 1994
---------- ----------
Revenues $26,867,836 $10,705,195
Direct Costs 21,873,963 8,552,547
---------- ----------
Gross Profit 4,993,873 2,152,648
Selling, General and Administrative 6,030,833 2,480,644
---------- ----------
Loss from Operations (1,036,960) (327,996)
---------- ----------
Other Income (Expense):
Interest expense (933,284) (487,085)
Other income (expense) (311,817) 137,897
Losses on investment securities -- (11)
---------- ----------
Total other income (expense) (1,245,101) (349,199)
---------- ----------
Loss from Continuing Operations Before
Income Taxes and Minority Interest (2,282,061) (677,195)
Income Taxes (39,269) --
Minority Interest 272,128 7,235
---------- ----------
Net Loss ($ 2,049,202) ($ 669,960)
========== ==========
Net loss per share ($0.09) ($0.05)
==== ====
Weighted average number of common shares 23,707,264 14,205,789
========== ==========
See notes to consolidated financial statements.
4
<PAGE>
Consolidated Technology Group Ltd. and Subsidiaries
Consolidated Statements of Operations
For the Nine Month Periods
Ended September 30, 1995 and October 31, 1994
(Unaudited)
Nine Month Periods Ended
---------------------------
September 30, October 31,
1995 1994
---------- ----------
Revenues $83,011,548 $23,964,291
Direct Costs 67,812,085 20,834,158
---------- ----------
Gross Profit 15,199,463 3,130,133
Selling, General and Administration 17,962,426 9,095,187
---------- ----------
Loss from Operations (2,762,963) (5,965,054)
---------- ----------
Other Income (Expense):
Interest expense (3,087,305) (828,420)
Other income (expense) (407,960) 504,229
Losses on investment securities (130,515) (531)
Unusual items -- --
---------- ----------
Total other income (expense) (3,625,780) (324,722)
---------- ----------
Loss from Continuing Operations Before
Income Taxes and Minority Interest (6,388,743) (6,289,776)
Income Taxes (148,497) --
Minority Interest 380,110 121,073
---------- ----------
Net Loss ($ 6,157,130) ($ 6,168,703)
========== ==========
Net loss per share ($0.29) ($0.43)
==== ====
Weighted average number of common shares 21,488,233 14,205,789
========== ==========
See notes to consolidated financial statements.
5
<PAGE>
Consolidated Technology Group Ltd. and Subsidiaries
Consolidated Statement of Shareholders' Equity
For the Nine Month Period Ended September 30, 1995
(Unaudited)
<TABLE>
<CAPTION>
Stock
Issued Unreal- Amort- Recog-
in Lieu ized ization nized
Balance of Cash Gain on of Def- Invest- Balance
at Stock for Exchange erred ment at
December Options Services Net Trans- Consult- Security September 30,
31, 1994 Exercised Rendered Loss lation ing Fees Losses 1995
-------- --------- -------- ------ -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Preferred stock, $1.00
par value, 6% series
"A", 77,713 shares
authorized:
Shares 77,713 -- -- -- -- -- -- 77,713
======= ======= ======= ======= ======= ======= ======= =======
Amount $ 77,713 -- -- -- -- -- -- $ 77,713
======= ======= ======= ======= ======= ======= ======= =======
Preferred stock, $3.50
and $0.10 par value,
series "B" and "E",
8,000 shares
authorized each:
Shares 262 -- -- -- -- -- -- 262
======= ======= ======= ======= ======= ======= ======= =======
Amount $ 262 -- -- -- -- -- -- $ 262
======= ======= ======= ======= ======= ======= ======= =======
Preferred stock, $1.00
par value, $8.00
subordinated, series
"F", 6,000 shares
authorized:
Shares 2,700 -- -- -- -- -- -- 2,700
====== ====== ======= ======= ======= ======= ======= =======
Amount $ 2,700 -- -- -- -- -- -- $ 2,700
====== ====== ======= ======= ======= ======= ======= =======
(continued)
</TABLE>
See notes to consolidated financial statements.
6
<PAGE>
Consolidated Technology Group Ltd. and Subsidiaries
Consolidated Statement of Shareholders' Equity
For the Nine Month Period Ended September 30, 1995
(Unaudited)
<TABLE>
<CAPTION>
Stock
Issued Unreal- Amort- Recog-
in Lieu ized ization nized
Balance of Cash Gain on of Def- Invest- Balance
at Stock for Exchange erred ment at
December Options Services Net Trans- Consult- Security September 30,
31, 1994 Exercised Rendered Loss lation ing Fees Losses 1995
-------- --------- -------- ------ -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total preferred stock:
Shares 80,675 -- -- -- -- -- -- 80,675
======= ====== ======= ======= ======= ======= ======= =======
Amount $ 80,675 -- -- -- -- -- -- $ 80,675
======= ====== ======= ======= ======= ======= ======= =======
Additional Paid- in
capital, preferred
stock $ 310,852 -- -- -- -- -- -- $ 310,852
======== ======= ======= ======= ======= ======= ======= ========
Common stock, $0.01
par value, 50,000,000
shares authorized:
Shares 17,577,260 6,000,000 130,004 -- -- -- -- 23,707,264
========== ========= ======== ======= ======= ======= ======= ==========
Amount $ 175,773 $ 60,000 $ 1,300 -- -- -- -- $ 237,073
======== ======= ====== ======= ======= ======= ======= ========
Additional paid- in
capital, common
stock $ 45,597,653 $ 4,627,500 $ 112,720 -- -- -- -- $ 50,337,873
=========== ========== ======== ======== ======= ======= ======= ============
Accumulated deficit ($29,287,714) -- -- ($ 6,157,130) -- -- -- ($ 35,444,844)
========== ======= ======== ========== ======= ======= ======= ===========
(continued)
</TABLE>
See notes to consolidated financial statements.
7
<PAGE>
Consolidated Technology Group Ltd. and Subsidiaries
Consolidated Statement of Shareholders' Equity
For the Nine Month Period Ended September 30, 1995
(Unaudited)
<TABLE>
<CAPTION>
Stock
Issued Unreal- Amort- Recog-
in Lieu ized ization nized
Balance of Cash Gain on of Def- Invest- Balance
at Stock for Exchange erred ment at
December Options Services Net Trans- Consult- Security September 30,
31, 1994 Exercised Rendered Loss lation ing Fees Losses 1995
-------- --------- -------- ------ -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Unrealized exchange
translation ($ 33,200) -- -- -- $ 276,785 -- -- $ 243,585
======= ======= ====== ======= ======== ======= ======= ========
Deferred consult-
ing fees -- ($2,312,500) -- -- -- $ 259,374 -- ($ 2,053,126)
======= ========= ====== ======= ======= ======= ======= ==========
Unrealized gain (loss)
on long-term invest-
ments in common stock ($139,315) -- -- -- -- -- $ 291,552 $152,237
======= ======= ====== ======= ======= ======= ======== =======
Total $ 16,704,724 $ 2,375,000 $ 114,020 ($6,157,130) $ 276,785 $ 259,374 $ 291,552 $ 13,864,325
=========== ========== ======== ========= ======== ======== ======== ===========
(concluded)
</TABLE>
See notes to consolidated financial statements.
8
<PAGE>
Consolidated Technology Group Ltd. and Subsidiaries
Consolidated Statements of Cash Flows
For the Nine Month Periods
Ended September 30, 1995 and October 31, 1994
(Unaudited)
Nine Month Periods Ended
---------------------------
September 30, October 31,
1995 1994
---------- ----------
Cash Flows from Operating Activities:
Net loss ($ 6,157,130) ($6,168,703)
---------- ---------
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization 5,365,696 854,370
Minority interest in loss of
consolidated subsidiaries (380,110) (121,073)
Bad debt expense 764,852 62,940
Value of stock issued in lieu of cash
payments for services rendered 114,020 --
Deferred charges on option exercise 1,409,374 2,870,000
Other Compensation -- 135,000
Loss on common stock investments 130,515 13,044
Write-down of fixed assets to fair value -- 225,000
Write-off deferred offering costs 460,459 --
Change in assets and liabilities:
(Increase) decrease in assets:
Receivables (3,335,739) (963,959)
Inventories 135,429 458,849
Costs and estimated profits in
excess of interim billings (628,980) --
Prepaid expenses and other current assets 31,697 (768,504)
Increase (decrease) in liabilities:
Accounts payable and accrued expenses 1,978,635 762,560
Accrued payroll and related expenses 824,435 (1,271,873)
Income taxes payable 177,849 (5,550)
Accrued interest 28,587 (312,228)
Interim billings in excess of costs
and estimated profits 357,691 --
---------- ----------
Total adjustments 7,434,410 (1,938,576)
---------- ----------
Net cash provided by (used in)
operating activities 1,277,280 (4,230,127)
---------- ----------
Cash Flows from Investing Activities:
Increase in other assets 78,912 (324,234)
Capital expenditures (683,762) (318,248)
Capitalized software development costs (97,950) (375,735)
Investments in common stock (7,406) (506,453)
Proceeds from sale of common
stock investments 364,578 --
Payments for loans made (2,025,108) (1,565,339)
Collections for repayment of loans made 1,954,017 298,340
Acquisition of subsidiary -- (8,788,787)
Cash of companies acquired and merged 504,210 2,494,290
Cash of company sold -- (5,945)
---------- ----------
Net cash provided by (used in)
investing activities 87,491 (9,092,111)
---------- ----------
(continued)
See notes to consolidated financial statements.
9
<PAGE>
Consolidated Technology Group Ltd. and Subsidiaries
Consolidated Statements of Cash Flows
For the Nine Month Periods
Ended September 30, 1995 and October 31, 1994
(Unaudited)
Nine Month Periods Ended
---------------------------
September 30, October 31,
1995 1994
---------- ----------
Cash flows from financing activities:
Increase in deferred offering costs (129,125) (85,708)
Net advances from (payments to) a factor (172,504) 750,910
Proceeds from issuance of long-term debt 1,588,803 7,035,940
Repayment of long-term debt (2,826,683) (2,453,636)
Payments on capital lease obligations (808,989) (88,306)
Repayment of subordinated debt (2,260,539) --
Subsidiary's issuance of common stock 1,468,479 --
Issuance of common stock 8,161,500
Exercise of stock options 716,000
Proceeds from exercise of stock options 1,225,000 2,050,000
---------- ----------
Net cash provided by (used in)
financing activities (1,199,558) 15,370,700
---------- ----------
Net Increase in Cash and Cash Equivalents 165,213 2,048,462
Cash and Cash Equivalents
at Beginning of Period 1,726,796 1,195,527
---------- ----------
Cash and Cash Equivalents
at End of Period $ 1,892,009 $ 3,243,989
========== ==========
Supplemental Disclosures of Cash
Flow Information:
Cash paid for:
Interest $ 2,976,075 $ 799,313
========== ==========
State income taxes $ 29,352 $ 5,550
========== ==========
(concluded)
See notes to consolidated financial statements.
10
<PAGE>
Consolidated Technology Group Ltd. and Subsidiaries
Consolidated Statements of Cash Flows
For the Nine Month Periods
Ended September 30, 1995 and October 31, 1994
(Unaudited)
Suplemental Disclosure on Noncash Investing and Financing Activities:
During the nine month period ended September 30, 1995:
Non-Cash Investing Activities:
- acquired equipment under capital lease obligations with a net present value
of $835,774.
- received common stock in lieu of cash payments for notes and accrued interest
receivable with a book value of $217,162.
- pursuant to an acquisition of another entity by one of the Company's
subsidiaries, in a transaction accounted for as a reverse merger:
- reduced the Company's equity ownership in such subsidiary which resulted
in an increase in minority interest of $3,149,676.
- acquired net assets with a book value of $982,822
Non-Cash Financing Activities:
- - issued stock options and received exercise proceeds of $1,225,000 and
incurred non-cash deferred consulting costs of $2,197,657 and non-cash
consulting fee expenses of $1,264,843.
- - issued common stock with a value of $114,020 in lieu of cash payment for
services rendered
During the nine months ended October 31, 1994:
Non-Cash Financing Activities:
- - issued stock options and received exercise proceeds of $2,050,000 and
incurred non-cash consulting fee expenses of $2,870,000.
See notes to consolidated financial statements
11
<PAGE>
Consolidated Technology Group Ltd. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(1) Basis of Presentation
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 September 30, 1995
and December 31, 1994 and the results of its operations for the three and nine
months ended September 30, 1995 and October 31, 1994 and the changes in cash
flows for the nine months ended September 30, 1995 and October 31, 1994. The
December 31, 1994 balance sheet data was derived from audited financial
statements, but does not include all disclosures required by generally accepted
accounting principles.
(2) Periods Reported
Effective December 31, 1994, the Company changed to a calendar year. Prior to
December 31,1994 the Company utilized a fiscal year ending July 31 of each year.
The accompanying financial statements include interim period results for the
three months and nine months ended September 30, 1995 and for the three months
and nine months ended October 31, 1994. The Company's operations are not
affected by significant seasonal fluctuations that would make the periods
reported herein not comparable.
(3) Accounting Policies
The accounting policies followed by the Company are set forth in Note 1 to the
Company's financial statements in the December 31, 1994 Form 10-K transition
report and in Note 3 of the June 30, 1995 Form 10-Q quarterly report.
(4) Interim Results
The results of operations for the three and nine months ended September 30, 1995
and October 31, 1994 are not necessarily indicative of the results to be
expected for the full year.
(5) 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 ba 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.
(6) Income Taxes
The Company's provision for income taxes for the three and nine month periods
ended September 30, 1995 is related to state income and franchise taxes. Federal
and state tax benefits have not been recognized for the current losses for the
three and nine months ended September 30, 1995 due to the fact that all
potential loss carry backs have been fully utilized and, under SFAS No. 109,
"Accounting for Income Taxes", the Company has determined that it is more likely
than not that the tax asset will not be realized.
(7) 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) Audio Products Manufacturing consists principally of a
subsidiary that produces, markets and sells loudspeakers; (iv) Electro-
Mechanical and Electro-Optical
12
<PAGE>
Consolidated Technology Group Ltd. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
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; (v)
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;
(vi) Telecommunications consists of a subsidiary that, among other things,
installs telephonic network systems and buys and resells local telephone
service; (vii) 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; and (viii)
Business Consulting Services consists of subsidiaries that provide a variety of
financial and business related services. Corporate and Other consists of
theoperating activities of the holding company entities. Previously, the
segmentation consisted of (i) Manufacturing, which is now included in the
Electro- Mechanical and Electro-Optical segment; (ii) Fees and Services, which
included the subsidiaries that are now classified in the Contract Engineering
Services, Telecommunications and Business Consulting Services segments; and
(iii) Development Stage which previously included Medical Information Services
and Three Dimensional Products and Services. Intersegment sales and sales
outside the United States are not material. Information concerning the Company's
business segments is as follows:
Three Months Nine Months
Ended Ended
------------------------- ---------------------------
September 30, October 31, September 30, October 31,
1995 1994 1995 1994
---- ---- ---- ----
Revenues:
Contract Engineering
Services $14,934,874 $ 5,220,581 $48,168,633 $15,441,701
Medical Diagnostics 6,795,225 2,354,406 20,873,826 2,354,406
Audio Products
Manufacturing 711,987 -- 1,527,338 --
Electro-Mechanical and
Electro- Optical
Products Manufacturing 994,426 905,034 3,533,944 2,632,456
Medical Information
Services 2,049,725 1,344,000 5,396,984 1,344,000
Telecommunications 1,067,835 437,200 2,165,020 1,568,171
Three Dimensional
Products and Services 247,264 437,474 1,266,303 561,074
Business Consulting
Services 66,500 6,500 79,500 62,483
---------- ---------- ---------- ----------
Total Revenues $26,867,836 $10,705,195 $83,011,548 $23,964,291
========== ========== ========== ==========
Gross Profit:
Contract Engineering
Services $ 1,241,168 $ 314,069 $ 3,118,926 $ 1,260,538
Medical Diagnostics 2,645,420 997,352 8,952,412 997,352
Audio Products
Manufacturing 76,176 -- 228,325 --
Electro-Mechanical and
Electro- Optical
Products Manufacturing 263,828 372,299 681,374 92,551
Medical Information
Services 464,390 81,000 1,359,106 81,000
Telecommunications 214,154 110,364 391,074 386,574
Three Dimensional
Products and Services 22,237 271,064 388,746 249,635
Business Consulting
Services 66,500 6,500 79,500 62,483
---------- ---------- ---------- ----------
Total Gross Profit $ 4,993,873 $ 2,152,648 $15,199,463 $ 3,130,133
========== ========== ========== ==========
13
<PAGE>
Consolidated Technology Group Ltd. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(7) Industry Segments (continued)
Three Months Nine Months
Ended Ended
------------------------- ---------------------------
September 30, October 31, September 30, October 31,
1995 1994 1995 1994
---- ---- ---- ----
Income (Loss) from
Operations:
Contract Engineering
Services $ 667,011 $ 75,026 $ 884,899 $ (113,085)
Medical Diagnostics 1,025,775 469,367 3,868,080 469,367
Audio Products
Manufacturing (229,468) -- (295,670) --
Electro-Mechanical and
Electro- Optical
Products Manufacturing (95,770) 102,163 (220,363) (680,454)
Medical Information
Services (744,600) (395,000) (1,377,199) (862,302)
Telecommunications (110,338) (24,630) (521,494) 2,309
Three Dimensional
Products and Services (762,091) (271,016) (1,589,129) (849,838)
Business Consulting
Services (23,652) (15,894) (41,696) (173,492)
Corporate and Other (763,827) (268,012) (3,470,328) (3,757,559)
---------- ---------- ---------- ----------
Total loss
from operations $(1,036,960) $ (327,996) $(2,762,963) $(5,965,054)
========== ========== ========== ==========
Net Income (Loss):
Contract Engineering
Services $ 151,974 $ (76,392) $ (316,707) $ (174,379)
Medical Diagnostics 403,505 276,997 1,864,777 276,997
Audio Products
Manufacturing (251,450) -- (340,140) --
Electro-Mechanical and
Electro- Optical
Products Manufacturing (97,795) 90,350 (224,309) (568,830)
Medical Information
Services (829,845) (469,266) (1,605,879) (898,425)
Telecommunications (119,212) (30,736) (550,426) (3,797)
Three Dimensional
Products and Services (763,466) (276,945) (1,650,820) (888,180)
Business Consulting
Services 9,148 (19,311) (11,852) (183,736)
Corporate and Other (552,061) (164,657) (3,321,774) (3,728,353)
---------- ---------- ---------- ----------
Total net loss $(2,049,202) $ (669,960) $(6,157,130) $(6,168,703)
========== ========== ========== ==========
14
<PAGE>
Consolidated Technology Group Ltd. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(7) Industry Segments (continued)
Three Months Nine Months
Ended Ended
------------------------- ---------------------------
September 30, October 31, September 30, October 31,
1995 1994 1995 1994
---- ---- ---- ----
Depreciation and
Amortization:
Contract Engineering
Services $ 128,052 $ 46,863 $ 384,141 $ 189,107
Medical Diagnostics 1,284,514 418,038 3,774,787 418,038
Audio Products
Manufacturing 114,046 -- 189,097 --
Electro-Mechanical and
Electro- Optical
Products Manufacturing 12,229 5,625 27,524 33,907
Medical Information
Services 141,509 78,624 406,496 98,159
Telecommunications 7,502 -- 22,559 14,989
Three Dimensional
Products and Services 93,669 36,668 548,455 92,725
Business Consulting
Services 528 528 1,584 1,585
Corporate and Other 3,684 2,536 11,053 5,860
---------- ---------- ---------- ----------
Total depreciation
and amortization $ 1,785,623 $ 588,882 $ 5,365,696 $ 854,370
========== ========== ========== ==========
Capital Expenditures (i):
Contract Engineering
Services $ 8,807 $ 7,880 $ 34,571 $ 7,880
Medical Diagnostics 71,611 10,950,122 173,863 10,950,122
Audio Products
Manufacturing 41,626 -- 471,258 --
Electro-Mechanical and
Electro- Optical
Products Manufacturing -- -- 6,473 23,191
Medical Information
Services 106,220 9,867 137,300 1,013,807
Telecommunications -- -- -- --
Three Dimensional
Products and Services 62,365 24,286 213,112 168,744
Business Consulting
Services -- -- -- 3,628
Corporate and Other -- 521 20,658 57,359
---------- ---------- ---------- ----------
Total capital
expenditures $ 290,629 $10,992,676 $ 1,057,235 $12,224,731
========== ========== ========== ==========
(i) - For the nine month period ended September 30, 1995, capital expenditures
includes $373,473 for amounts allocated to property and equipment from the
acquisition of a company. For the three and nine month periods ended October 31,
1994, capital expenditures includes $10,902,543 and $11,906,483, respectively,
for amounts allocated to property and equipment from the acquisitions of
companies.
15
<PAGE>
Consolidated Technology Group Ltd. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(7) Industry Segments (continued)
At At
September 30, October 31,
1995 1994
------------- -----------
Identifiable Assets:
Contract Engineering
Services $10,988,517 $ 5,216,992
Medical Diagnostics 40,248,781 41,300,463
Audio Products
Manufacturing 4,144,686 --
Electro-Mechanical and
Electro- Optical
Products Manufacturing 4,213,853 5,216,137
Medical Information
Services 6,804,098 7,075,874
Telecommunications 1,402,969 1,012,649
Three Dimensional
Products and Services 1,961,947 1,702,323
Business Consulting
Services 236,363 477,777
Corporate and Other 15,094 2,419,337
---------- ----------
Total identifiable
assets $70,016,308 $64,421,552
========== ==========
(8) Capital Stock Transactions
During the nine months ended September 30, 1995, the following capital stock
transactions occurred:
Stock Issued for Services Rendered:
On February 28, 1995 and April 10, 1995, the Company issued 75,000 and 25,004
common shares, respectively, pursuant to a financing agreement with a creditor
of the Company. The value of the stock ($88,520) was expensed.
On April 10, 1995, the Company issued 30,000 common shares in lieu of cash
payment for services rendered to the Company. The value of the stock ($25,500)
was expensed.
Non-Employee Directors, Consultants and Advisors Stock Plan:
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. At various times, the Company
has registered and granted options pursuant to the plan. During the nine months
ended September 30, 1995, options to purchase 3,500,000 shares were granted and
exercised of which 1,000,000 were exercised at $0.50 per share, 1,000,000 were
exercised at $0.35 per share and 1,500,000 were exercised at $0.25 per share.
Additionally, 2,500,000 shares were granted for which no cash consideration was
received. The above transactions resulted in $3,462,500 of consulting costs,
computed as follows:
Shares 6,000,000
Value of stock at date of grant
(weighted average) $ 0.9766
---------
Aggregate fair market value of stock issued 5,859,375
20% discount (1,171,875)
---------
Discounted value of stock issued 4,687,500
Exercise proceeds (1,225,000)
---------
Total consulting costs 3,462,500
Portion expensed at the time of exercise 1,150,000
---------
Portion deferred at the time of exercise $2,312,500
=========
16
<PAGE>
Consolidated Technology Group Ltd. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(8) Capital Stock Transactions (continued)
In accordance with the agreements relating to the various parties involved,
$662,500, $137,500, and $350,000 were charged as consulting services, public
relation services and non-cash compensation, respectively, in the determination
of income from operations for the nine months ended September 30, 1995.
Additionally, amortization of the deferred portion in the amount of $144,531 and
$259,374 was charged to income from operations for the three and nine month
periods ended September 30, 1995, respectively. The unamortized deferred
consulting expense is recorded in the equity section of the balance sheet. Such
deferred charges are being amortized over four years, the term of the related
contracts. A 20% discount was utilized because the shares issued represent large
blocks of stock.
(9) Acquisitions:
(i) - On June 16, 1994, a subsidiary of the Company, Carte Medical Holdings
("CMH"), through a wholly-owned subsidiary, CSM Acquisition Corp. ("Acquisition
Corporation"), acquired the assets and assumed liabilities of Creative
Socio-Medics Inc. ("CSM") pursuant to a plan and agreement of reorganization
dated as of April 13, 1994, as amended (the "Purchase Agreement"), among the
Company, Carte Medical Corp. ("Carte"), Acquisition Corporation, CSM and
Advanced Computer Techniques, Inc. ("ACT"), the parent of CSM. The Company is
the parent of SIS Capital Corp. ("SISC"), which is the parent of CMH. In
connection with the purchase, (i) Acquisition Corporation purchased the assets
and assumed liabilities of CSM in exchange for 800,000 shares of the Company's
common stock and $500,000 which was advanced by Carte to Acquisition Corporation
from the proceeds of a loan made by SISC, (ii) CMH transferred the stock of
Acquisition Corporation to Carte, (iii) in consideration for the transfer of the
Acquisition Corporation stock, Carte is to issue to CMH an aggregate of
1,000,000 shares of common stock, of which 450,000 shares are issuable on or
about the date Carte receives the proceeds from an initial public offering, and
(iv) Acquisition Corporation changed its corporate name to Creative Socio-Medics
Corp. At the time of the execution of the Purchase Agreement, SISC granted to
former officers of ACT and CSM, options to purchase an aggregate of 202,560
shares of Carte's common stock owned by SISC. The shares of common stock owned
by SISC were transferred to CMH subject to the options. The options are
exercisable at an exercise price of $.174 per share during the five-year period
commencing on June 16, 1994, the date the acquisition of CSM was consummated. At
the closing of the acquisition, the Company issued to such individuals an
aggregate of 40,000 shares of its common stock. The purchase price of this
acquisition included $3,851 for customer lists of CSM which will be amortized
over 15 years under the straight line method. For accounting purposes, the
results of operations of CSM are included with the results of the Company from
July 1, 1994 onward.
(ii) - As of September 30, 1994, the Company acquired International Magnetic
Imaging, Inc. and its affiliated entities ("IMI, Inc.") in a business
combination accounted for as a purchase. The principal operations of IMI, Inc.
are in the establishment and operation of outpatient diagnostic centers
providing MRI services and other modalities. The results of operations of IMI,
Inc. are included in the accompanying combined financial statements since the
date of acquisition. The total cost of the acquisition was $31,872,000 which
exceeded the fair value of net assets of IMI, Inc. by $11,068,000. The excess
purchase price, or goodwill, will be amortized by the straight-line method over
20 years.
The other intangibles, specifically restrictive covenants and customer lists,
will be amortized by the straight-line method over 3 years and 15 years,
respectively.
The following summarizes the purchase price allocated to acquired assets at fair
value.
Cash $ 6,960,000
Subordinated Debt 19,863,000
Stock (3,343,000) 2,920,000
Notes [Covenants] 800,000
Acquisition Costs 1,329,000
----------
Purchase Cost $31,872,000
==========
17
<PAGE>
Consolidated Technology Group Ltd. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(9) Acquisitions (continued):
Allocated to:
Cash $ 2,350,000
Other Assets 421,000
Covenants-Not-to-Compete 3,303,000
Property, Plant and Equipment 10,903,000
Accounts Receivable 7,379,000
Managed Care Contracts - Customer Lists 5,656,000
Liabilities Assumed ( 9,208,000)
Goodwill 11,068,000
----------
Total $31,872,000
==========
The cash portion of the purchase price was subsequently refinanced through DVI.
The notes issued in connection with the acquisition of the centers balloon
primarily in September 1996, with notes in the principal amount of $860,000
maturing in September 1997. The notes issued to acquire IMI and MD Corp. balloon
and mature in September 1997 and 1999, respectively. In connection with this
acquisition, the Company, through its subsidiaries, borrowed an aggregate of
approximately $7.1 million on a secured, term-loan basis over 60 months pursuant
to loan and security agreements among the Company's subsidiaries and DVI
Financial Services, Inc. dba DVI Capital. For accounting purposes, the results
of operations of IMI are included with the results of the Company from October
1, 1994 onward.
(iii) - In November 1994, the Company acquired the assets of two businesses, Job
Shop Technical Services, Inc. ("Job Shop") and Computer Engineering Services,
Inc. ("CES"). Job Shop provides engineers, designers and technical personnel on
a temporary basis, which is similar to the business performed by Avionics
Research Corporation, a subsidiary of the Company. CES is engaged in the
business of performing CAD (computer aided design) and CAM (computer aided
manufacturing) related services and the marketing and sale CAD/CAM software.
(a) - Pursuant to an asset purchase agreement dated as of August 19, 1994 among
ITS Management Corp., a Delaware Corporation and wholly-owned subsidiary of the
Company ("ITS"), Job Shop and the sole stockholder of Job Shop, ITS acquired
substantially all of the assets of Job Shop in exchange for 750,000 shares of
the Company's common stock valued at $450, and the assumption of certain
scheduled liabilities. The principal liability assumed was a $2 million
obligation due to the Internal Revenue Service pursuant to a settlement
arrangement which Job Shop had negotiated. The initial $500,000 payment was made
in November, 1994. The balance is due in 15 monthly installments of $100,000,
commencing May, 1995.
(b) - Pursuant to a plan and agreement of reorganization among CDS Acquisition
Corp. ("CDS"), a Delaware corporation and wholly-owned subsidiary of the
Company, CES and the sole stockholder of CES, CDS acquired substantially all of
the assets of CES in exchange for 750,000 shares of the Company's common stock
valued at $450,000, and the assumption of certain scheduled liabilities.
Prior to the acquisition, the businesses of Job Shop and CES were operated as
divisions of the same company, along with one other division which was not
acquired by the Company. For accounting purposes the results of operations of
ITS and CDS are included with the results of the Company from November 22, 1994
onward.
(10) 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. The transaction was accounted for as a
reverse merger, with Trans Global being
18
<PAGE>
Consolidated Technology Group Ltd. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(10) Reverse Merger (continued)
the surviving company. As a result of the transaction, the Company's ownership
in Trans Global decreased which increased minority interest by $2,109,597. The
statement of operations for the three and six month periods ended June 30, 1995
and the cash flow statement for the six month period ended June 30, 1995 reflect
the operations of Trans Global from the beginning of the respective periods and
Trans Global includes Concept's operations from the date of the reverse merger.
The consolidated balance sheet as of June 30, 1995 includes the net book value
of Concept's assets and liabilities. The net assets of Concept at the date of
the reverse merger were as follows:
Cash $ 504,210
Receivables, net 293,043
Inventories, net 811,503
Prepaid expenses and other assets 94,891
Property, plant and equipment, net 373,473
Equipment leased to others, net 171,600
Trademark, net 389,389
Other long-term assets 68,695
Accounts payable and accrued expenses (686,632)
Long-term debt (1,027,833)
Capital lease obligations (9,517)
---------
Net assets at book value $ 982,822
=========
(11) Pro Forma Results
The following pro forma unaudited results assume that the reverse merger with
Concept Technologies (as disclosed in footnote (10) above) and the acquisitions
of Creative Socio-Medics, International Magnetic Imaging, Inc., Job Shop
Technical Services and Computer Engineering Services (as disclosed in footnote
(9) above) had occurred at the beginning of the indicated periods:
Three Months Nine Months
Ended Ended
--------------------------- ---------------------------
September 30, October 31, September 30, October 31,
1995 1994 1995 1994
---- ---- ---- ----
(in 000's except per share data))
Net revenues $26,870 $24,760 $83,675 $69,705
====== ====== ====== ======
Net loss $(2,049) $(2,780) $(6,218) $(7,763)
====== ====== ====== ======
Loss per share $ (0.09) $ (0.18) $ (0.29) $(0.55)
====== ====== ====== ======
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.
19
<PAGE>
Consolidated Technology Group Ltd. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(12) Restatements of Prior Period Financial Statements
The years ended December 31, 1994 and July 31, 1994 financial statements have
been restated. The following summarizes and describes impact of the restatement
on the periods included as a part of these financial statements.
Three Months Ended Nine Months Ended
--------------------- ---------------------
Sept. 30, Oct. 31, Sept. 30, Oct. 31,
1995 1994 1995 1994
--------- --------- -------- --------
(in 000's)
Income (Loss) from Operations:
Prior to Restatement ($1,037) ($ 328) ($2,763) ($3,400)
Prior Period Adjustments:
Decrease in discount on shares
issued for stock options [1] -- -- -- (2,450)
Reclass stock option expense
from unusual to selling, general
and administrative expenses [2] -- -- -- (115)
------ ------ ------ ------
As restated ($ 413) ($2,411) ($1,726) ($5,965)
====== ====== ====== ======
Other Income (Expense):
Prior to Restatement ($1,245) ($ 349) ($3,526) ($ 440)
Prior Period Adjustments:
Reclass stock option expense from
unusual to selling, general and
administrative expenses [2] -- -- -- 115
------ ------ ------ ------
As restated ($1,245) ($ 349) ($3,526) ($ 325)
====== ====== ====== ======
Net Income (Loss):
Prior to Restatement ($2,049) ($ 670) ($6,157) ($3,719)
Prior Period Adjustments:
Decrease in discount on
shares issued for stock
options [1] -- -- -- (2,450)
------ ------ ------ ------
As restated ($2,049) ($ 670) ($6,157) ($6,169)
====== ====== ====== ======
As of As of
Sept. 30, December 31,
1995 1994
--------- ------------
Accumulated Deficit: (in 000's)
Prior to Restatement ($29,201) ($23,044)
Prior Period Adjustments:
Decrease in discount on
shares issued for stock
options [1] (5,870) (5,870)
Decrease in discount on shares
issued in lieu of cash payment
for services rendered [3] (36) (36)
Decrease in discount on shares
issued for acquisitions [4] (338) (338)
------ ------
As restated ($35,445) ($29,288)
====== ======
20
<PAGE>
Consolidated Technology Group Ltd. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(12) Restatements of Prior Period Financial Statements
As of As of
Sept. 30, December 31,
1995 1994
--------- ------------
Additional Paid-in Capital,
Common Stock:
Prior to Restatement $44,094 $39,353
Prior Period Adjustments:
Decrease in discount on
shares issued for stock
options [1] 5,870 5,870
Decrease in discount on shares
issued in lieu of cash payment
for services rendered [3] 36 36
Decrease in discount on shares
issued for acquisitions [4] 338 338
------ ------
As restated $50,338 $45,597
====== ======
[1] - The Company originally used a 60% discount for valuing shares issued and
exercised pursuant to a Non Employee Directors, Consultants and Advisors Stock
Plan and it was subsequently determined that only a 20% discount should be used
resulting in an increase in noncash expenses of $5,870,000 in prior periods of
which $2,450,000 relates to the six months ended July 31, 1994. Such change did
not impact the operating statement for the three and six months ended June 30,
1995 and the three months ended July 31, 1994.
[2] - The Company originally included $115,000 of noncash expenses from the
issuance and exercise of stock options pursuant to a Non Employee Directors,
Consultants and Advisors Stock Plan as an unusual expense in other income and
expense. Such expense has been reclassified as an operating expense for the six
months ended July 31, 1994 but did not impact the three and six months ended
June 30, 1995 and the three months ended July 31, 1994.
[3] - The Company originally used a 50% discount for valuing shares issued in
lieu of cash payment for services rendered and it was subsequently determined
that only a 20% discount should be used resulting in an increase in noncash
expenses of $36,000 in prior periods. Such change did not impact the three and
six months ended June 30, 1995 or July 31, 1994.
[4] - The Company originally used a 50% discount for valuing shares issued in
connection with the acquisition of a subsidiary and it was subsequently
determined that only a 20% discount should be used resulting in an increase in
noncash expenses of $338,000 in prior periods. Such change did not impact the
three and six months ended June 30, 1995 and July 31, 1994.
. . . . . . . . . . . . . . . . . . . . . . . . . .
21
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Financial Condition:
Liquidity and Capital Resources:
As of September 30, 1995 the working capital deficit was $9,542,306 compared to
postive working capital of $1,698,927 at December 31, 1994. The Company's
principal working capital consists of cash and cash equivalents which was
$1,892,009 at September 30 compared to $1,726,796 at December 31, 1994. During
the nine months ended September 30, 1995, the Company's principal source of cash
was from the operations of the medical diagnostics segment company,
International Magnetic Imaging, ("IMI"),. 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 September 30, 1995 the most significant impact from these
restrictions is on the Three Dimensional Products and Services and Medical
Information Services segments which are currently unable to operate without cash
infusions from the parent company, (Consolidated). If these segments do not
obtain alternative sources of funding (i.e. equity offerings, creditor financing
or increased volume), it is uncertain whether these segments will continue as
operating groups. The remaining segments are relatively unaffected by the
restrictions on IMI's cash since they operate substantially with their own cash
flows. Other sources of cash were proceeds from the issuance of long-term debt
and common stock and proceeds from the exercise of stock options. During the
same period, the principal use of cash was to purchase capital assets and to
repay scheduled debt maturities and capital lease obligations.
Other significant changes in working capital include an increase in accounts
receivable of approximately $2,912,000, due primarily to increased revenue
volumes in the medical diagnostics and contract engineering services segments,
an increase in accounts payable and accrued expenses of approximately
$3,490,000, the result of extending trade payables and an increase in accrued
payroll and related expenses of approximately $824,000, the result of the timing
of payroll payments in the contract engineering services segment.
The Company has significant current portions of debt obligations that will
require cash payment in 1996. In 1996, subordinated debt, payable to the former
owners of IMI, require principal and interest payments of approximately
$2,500,000 and balloon payments due in September of 1996 of approximately
$10,500,000. It is not expected that the Company will generate funds from
operations in order to cover these impending obligations and funding will have
to come from a third party source. As a result, management is currently
negotiating terms with financing sources to extend the repayment terms on the
subordinated debt prior to the due date of the balloon payments, however it
cannot be currently determined whether such negotiation efforts will be
successful. Debt service due on the subordinated debt subsequent to 1996
approximates $5,250,000 of which approximately $3,900,000 is due in 1997 and the
remainder in 1998 and 1999. Management anticipates that if the refinancing
negotiations are successful that debt service related to these years will also
be extended over a longer time period. If the Company is not successful in
refinancing the subordinated debt, it will be in default on these commitments
and as of December 31, 1994, the Company has no other plan of action to rectify
the impending default.
Effect of Loan Defaults:
The Company is in default on loans approximating $400,000 as of September 30,
1995 in the Medical Informations Services segment. Such default has not had, and
is not expected to have a significant impact on the operations of the related
segment. The creditors have not called such loans and are working under extended
repayment terms.
22
<PAGE>
Managements Discussion and Analysis (continued):
Results of Operations:
Consolidated revenues, gross profit and selling, general and administrative
expenses for the three and nine months ended September 30, 1995 compared to the
three and nine months ended October 31, 1994 increased significantly due
primarily to the acquisition of companies in various industry segments. 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.
Percentage of Total
-------------------
Three Months Ended Nine Months Ended
------------------------- -------------------------
September 30, October 31, September 30, October 31,
Revenues: 1995 1994 1995 1994
- -------- ---- ---- ---- ----
Contract Engineering
Services 55.6% 48.8% 58.0% 64.4%
Medical Diagnostics 25.3% 22.0% 25.1% 9.8%
Audio Products
Manufacturing 2.7% -- 1.8% --
Electro-Mechanical and
Electro- Optical
Products Manufacturing 3.7% 8.4% 4.3% 11.0%
Medical Information
Services 7.6% 12.5% 6.6% 5.7%
Telecommunications 4.0% 4.1% 2.6% 6.5%
Three Dimensional
Products and Services 0.9% 4.1% 1.5% 2.3%
Business Consulting
Services 0.2% 0.1% 0.1% 0.3%
Percentage of Total
- -------------------
Three Months Ended Nine Months Ended
------------------------- -------------------------
September 30, October 31, September 30, October 31,
Gross Profit: 1995 1994 1995 1994
- ------------ ---- ---- ---- ----
Contract Engineering
Services 24.9% 14.6% 20.5% 40.3%
Medical Diagnostics 53.0% 46.3% 58.9% 31.9%
Audio Products
Manufacturing 1.5% -- 1.5% --
Electro-Mechanical and
Electro- Optical
Products Manufacturing 5.3% 17.3% 4.5% 3.0%
Medical Information
Services 9.3% 3.8% 8.9% 2.5%
Telecommunications 4.3% 5.1% 2.6% 12.3%
Three Dimensional
Products and Services 0.4% 12.6% 2.6% 8.0%
Business Consulting
Services 1.3% 0.3% 0.5% 2.0%
23
<PAGE>
Managements Discussion and Analysis (continued):
Results of Operations:
Percentage of Total
-------------------
Three Months Ended Nine Months Ended
------------------------- -------------------------
Selling, General and September 30, October 31, September 30, October 31,
Administrative Expense: 1995 1994 1995 1994
- ----------------------- ---- ---- ---- ----
Contract Engineering
Services 9.5% 9.6% 12.4% 15.1%
Medical Diagnostics 26.9% 21.3% 28.4% 5.8%
Audio Products
Manufacturing 5.1% -- 2.9% --
Electro-Mechanical and
Electro- Optical
Products Manufacturing 6.0% 10.9% 5.0% 8.5%
Medical Information
Services 20.0% 19.2% 15.2% 10.4%
Telecommunications 5.3% 5.4% 5.1% 4.2%
Three Dimensional
Products and Services 13.0% 21.9% 11.0% 12.1%
Business Consulting
Services 1.5% 0.9% 0.7% 2.6%
Corporate and Other 12.7% 10.8% 19.3% 41.3%
Discussion of Operations by Segment:
Contract Engineering Services - This segment consists of two companies, ARC
Acquisition and Resource Management International, ("RMI"), which are a part of
Trans Global Services. Revenues and gross profit increased 186% and 295%,
respectively, when comparing the three month periods ended September 30, 1995
and October 31, 1994, and increased 212% and 147%, respectively, when comparing
the nine month periods ended September 30, 1995 and October 31, 1994. These
significant increases are attributed to the operations of RMI, which was
acquired in November 1994. Income from operations increased from $75,000 to
$667,000 when comparing the three month periods ended September 30, 1995 and
October 31, 1995 and from a loss of ($113,000) to income of $885,000 when
comparing the nine month comparable periods. These increases in profitability
are due primarily to significantly increased revenues while selling, general and
administrative expenses have increased only marginally. Interest expense has
increased significantly for both comparative periods due to the higher debt
balances at RMI. During the second quarter, the companies operating in this
segment have negotiated more favorable terms for trade receivable financing,
which has reduced interest expense. This segment operates in a highly
competitive environment with low margins; however, management anticipates that
the reduced cost of the receivable financing along with an increase in volume
will allow this segment to increase profitability for the remainder of 1995. The
ultimate long-term profitability of this segment cannot be determined.
Medical Diagnostics - This segment consists of a medical diagnostic imaging
company, which performs MRI and other diagnostic modalities, that was purchased
in September 1994 and as such there is no comparable period of operations for
this filing. During the three and nine month periods ended September 30, 1995,
this segment operated at a gross margin percent of approximately 39% and 43%,
respectively, and generated income from operations of approximately $1,026,000
and $3,868,000, respectively. Selling, general and administrative expense for
the three and nine month periods ended September 30, 1995 approximated
$1,620,000 and $5,084,000, respectively, and interest expense approximated
$629,000 and $1,954,000, for the same respective periods. Revenue in the third
quarter declined approximately $250,000 from the average revenue of the first
and second quarter. Although the volume of diagnostic procedures remained
relatively level, the mix changed from higher to lower reimbursement rates.
Additionally, one of the diagnostic centers operating in this segment ceased
operations in the third quarter. The lower reimbursement rates also accounts for
the 16% decrease in gross margin from the prior quarters. Interest expense
remained relatively level; however, additional interest expense will be incurred
during the remainder of the year due to financing of equipment upgrades for some
of the MRI equipment. The ongoing profitability of this segment will depend
heavily on the ability of management to market scans with higher reimbursement
rates than those currently experienced. The health care industry continues to
remain
24
<PAGE>
Managements Discussion and Analysis (continued):
Results of Operations:
unpredictable and there exists a possibility of a continued decline in
reimbursement rates. Although it is anticipated that revenue and expense levels
will remain relatively level in the fourth quarter, management is currently
unable to determine the future long-term profitability of this segment.
Audio Products Manufacturing - This segment consists principally of WWR
Technology, Inc. (d/b/a Klipsch Professional), which produces, markets and sells
loudspeakers. This segment was acquired via a reverse merger in the second
quarter and as such there is no comparable period of operations for this filing.
During the second and third quarters, WWR Technology, Inc. had revenues of
approximately, $811,000 and $713,000, respectively, and gross margins of
approximately, $191,000 and $117,000, respectively. Since they were acquired,
the other entities in this segment had total revenues of only $4,000 and other
direct costs of $83,000, which consisted primarily of depreciation and
amortization of equipment leased to others. Overall, this segment had losses
from operations and net losses of approximately, $296,000 and $340,000,
respectively. The ability of this segment to become profitable on a long-term
basis would require a significant increase in sales volume and the closure of
the inactive companies, and it cannot be determined at this time whether future
profitability will, if ever, be realized.
Electro-Mechanical and Electro-Optical Products Manufacturing - This segment
consists of three companies, Sequential Electronic Systems, ("Sequential"),
S-Tech and Televend. Televend, which started in 1995, markets telephone debit
cards and products manufactured by S-Tech. Revenues increased 10% and gross
profit decreased 29%, respectively, when comparing the three month periods ended
September 30, 1995 and October 31, 1994. Revenues and gross profit increased 34%
and 636%, respectively, when comparing the nine month periods ended September
30, 1995 and October 31, 1994. The increase in revenues is due in large part to
S-Tech which in itself accounts for approximately 62% of the total increase for
the nine months. In prior periods S-Tech was in a development period, designing
and marketing its new debit card vending machines, and has recently started to
increase sales of its telephone debit card machines and instrumentation devices.
The significant increase in gross margin for the nine month comparable period is
due to large inventory obsolescence write-offs that occurred in the prior
comparable periods, while such write-offs in the current period were not as
significant. A portion of the revenues in this segment are generated from
government sales and while there exists a possibility that there will be
reversals in government spending cutbacks, it is more likely that defense and
military spending will remain sluggish. In response, management has placed more
emphasis on sales to the private sector which has resulted in an overall
increase in revenues and a decline in operating losses. It is anticipated that
the current trend of increasing revenues and profitability will continue in the
short term, however, management is currently unable to determine the ultimate
long-term profitability of this segment.
Medical Information Services - This segment's operations are accounted for in
one group referred to as CSMC which consists of two companies, CSMC and Creative
Socio-Medics, ("CSM"), which was acquired in June 1994. This segment did not
start having revenue and gross profit activity until the three month period
ended October 31, 1994. As such there is no prior period comparability for the
nine month periods. Revenues during the three and nine months ended September
30, 1995 approximated $2,050,000 and $5,397,000, respectively, and generated
gross profits of approximately $464,000 and $1,359,000. Of such revenues, the
Smart Card generated approximately, $111,000 and $215,000 for the three and nine
months ended September 30, 1995. All other revenues and gross profits were
generated from the on-going operations of CSM. Selling, general and
administrative expenses for the three and nine month periods ended September 30,
1995 included approximately $195,000 and $529,000, respectively, of product
enhancement expenses incurred by CSM. During the nine months ended September 30,
1995, expenses also included approximately $91,000 of non-cash financing costs
and $300,000 for amortization of capitalized software development costs and
customer lists. Additionally, selling, general and administrative expenses for
the three and nine months ended September 30, 1995 includes $460,459 for the
write-off of deferred offering costs and $21,000 for the write-off of
permanently imparied investments. Up until July 31, 1994, all operations in this
segment related to Carte's start-up costs which were charged to selling, general
and administrative expenses. Management anticipates that the on-going operations
of CSM will
25
<PAGE>
Managements Discussion and Analysis (continued):
Results of Operations:
remain relatively level and in order for this segment to achieve long-term
profitability, sales of CSMC's Smart Card operations will need to increase
significantly. At this time, it remains uncertain whether the Smart Card
operations will generate sufficient revenue activity in order for this segment
to become profitable.
Telecommunications - In December of 1993 the Company acquired ARC Networks which
is the only entity operating in this segment. Comparing the three and nine
months ended September 30, 1995 to the three and nine months ended October 31,
1994, revenues increased 144% and 38%, respectively, while gross profit
increased 94% and 1%. The increased revenue activity is attributed to an
increased sales force and accordingly, selling, general and administrative
expenses, which consist primarily of salaries and commissions, increased
approximately $190,000 and $528,000 from the prior comparable periods. The
telecommunications segment operates in a highly competitive industry and
management believes that for this segment to become profitable, it will have to
distinguish itself from other telecommunications service companies in order to
significantly increase volume and revenues. Although management anticipates that
revenues and overall profitability on an annualized basis will marginally
increase during the remainder of 1995, the ultimate profitability of this
segment remains uncertain.
Three Dimensional Products and Services - This segment consists of three
companies, 3D Technology, Inc., ("3D Tech"), 3D Imaging International, Inc.,
("3DI") and Computer Design Services, ("CDS"), which was acquired in November
1994. For the three and nine months ended September 30, 1995 compared to the
three and nine months ended October 31, 1994, revenues have increased or
(decreased) (44%) and 126%, respectively, and gross profits have increased or
(decreased) (92%) and 56%, respectively. For both comparable periods, revenues
and gross profits increased from the acquisition of CDS but such increases were
offset by a decrease of approximately $183,000 in revenues and $120,0000 in
gross profit during the third quarter for 3D Tech and 3DI. Losses from
operations approximated $762,000 and $1,589,000, respectively for the three and
nine months ended September 30, 1995. Although this segment has significantly
increased revenues and gross profit, they have not yet reached a level to cover
selling, general and administrative expenses. Additionally, included in selling,
general and administrative expense is approximately $118,000 of amortized
software development costs. During the remainder of 1995, management anticipates
that this segment will have increasing sales based on current sales orders for
the segment's surfacer software, optical laser scanner and laser tracer and
other CAD/CAM products which will result in higher gross margins. Additionally,
selling, general and administrative expenses are expected to decrease based on a
reduction of overhead costs from the combining of resources functions of 3D Tech
and CDS. Although the current trend is expected to result in a higher level of
revenues and gross margins, it can not be determined at this time whether profit
levels, if any, will be significant on a long-term basis.
Business Consulting Services operations were not significant for the three and
nine months ended September 30, 1995 and October 31, 1994 which is consistent
with management's decision to concentrate time and resources managing internal
operations of the pre-existing and newly acquired companies. During the
remainder of 1995, management anticipates that consulting revenues and related
expenses will not be a significant portion of the Company's operations.
Corporate and Other selling, general and administrative expenses for the three
and nine months ended September 30, 1995 compared to the comparable prior
periods increased $496,000 and $2,278,000, respectively, due primarily to the
expenses resulting from the issuance and exercise of stock options for payment
of consulting services which accounted for approximately, $145,000 and
$1,410,00, respectively, of the increase. Other increases were due to increased
legal and accounting fees to outside firms related to the reverse merger with
Concept Technologies and an increase in the number of financial support staff.
During the remainder of 1995 and in the near future, it is anticipated that
corporate selling, general and administrative expense levels will be a factor of
the activity of additional acquisitions and capitalization activities. The
Company will need to raise additional capital in the short-term and it is
anticipated that corporate and other costs will increase.
26
<PAGE>
Managements Discussion and Analysis (continued):
Results of Operations:
Discussion of Other Significant Financial Line Items
Interest Expense for the three and nine months ended September 30, 1995 compared
to the three and nine months ended October 31, 1994 increased by approximately,
$446,000 and $2,259,000 which is primarily attributed to the issuance of debt
instruments in connection with the acquisition of IMI. During the three and nine
month periods ended September 30, 1995, interest expense related to IMI was
approximately, $629,000 and $1,954,000, respectively. The remaining increase in
interest expense is from the contract engineering services segment which, for
the three and nine month periods ended September 30, 1995, had interest expense
of approximately $105,000 and $687,000.
Income taxes - The Company has not provided for income taxes for the three and
nine month periods ended September 30, 1995 due to current period losses.
Federal and state tax benefits have not been recognized for the three and nine
month periods ended September 30, 1995 due to the fact that all potential loss
carry backs have been fully utilized and, under SFAS No. 109, "Accounting for
Income Taxes", the Company has determined that it is more likely than not, that
the deferred tax asset will not be realized.
Impact of Inflation
The Company is subject to normal inflationary trends and anticipates that any
increased costs would be passed on to its customers.
. . . . . . . . . . . . . . . . . . . . . . . . . .
27
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On or about September 29, 1995, an action was commenced against the Company and
others by the filing of a summons with notice in the Supreme Court of the State
of New York, County of New York. The action was commenced by Jacque W. Pate,
Jr., Melvin Pierce, Herbert A. Meisler, John Gavin, Elaine Zanfini, individually
and derivatively as shareholders of Onecard Health Systems Corporation and
Onecard Corporation, which corporations are collectively referred to as
"Onecard". The named defendants include, the Company, Mr. Lewis S. Schiller,
chairman of the board and chief executive officer of the Company, certain
wholly-owned or controlled subsidiaries of the Company, including Carte Medical
Corporation, which is now known as CSMC Corporation ("Carte"), certain
stockholders, directors and officers of Carte and certain former directors of
Onecard. A complaint was served on November 15, 1995. The complaint makes broad
claims respecting alleged misappropriation of Onecard's trade secrets, corporate
assets and corporate opportunities, breach of fiduciary relationship, unfair
competition, fraud, breach of trust and other similar allegations, apparently
arising at the time, or in connection with the organization of, Carte in
September 1992. The complaint seeks injunctive relief and damages, including
punitive damages, of $130,000,000. The management and legal counsel believe that
the Company has meritorious defenses against such lawsuit. No estimate of
potential losses relating to this action can currently be determined.
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 Schedules.
28
<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.
(Registrant)
Date: November 14, 1996 /S/
---------------------
LEWIS S. SCHILLER
(President & Chief Executive Officer)
Date: November 14, 1996 /S/
---------------------
GEORGE W. MAHONEY
(Chief Financial Officer)
<PAGE>
Consolidated Technology Group Ltd. and Subsidiaries
Index to Exhibits
September 30, 1995
EX-11.1 Calculation of earnings per share.
EX-27 Financial Data Schedule (filed only to the SEC in electronic format)
<PAGE>
Consolidated Technology Group, Ltd. and Subsidiaries
EX-11.1 Calculation of Earnings per Share
- ----------------------------------------------------------------------------
Three Nine
Month Month
Period Period
Ended Ended
September 30, September 30,
1995 1995
---- ----
Net Loss $(2,049,202) $(6,157,130)
========= =========
Loss per Share:
Loss per share - Note 1 $(0.09) $(0.29)
==== ====
Loss per Share - assuming full
dilution - Note 2 $(0.06) $(0.18)
==== ====
Note 1:
Computed by dividing the net loss for the period by the weighted average number
of common shares outstanding (23,707,264 and 21,488,233 for the three and nine
months ended September 30, 1995). No stock options, warrants or preferred
convertible stock are assumed to be exercised because they are anti-dilutive for
the periods. 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 for the period.
Note 2:
(i) Assumes that the 6,000,000 common shares issued pursuant to the exercise of
stock options were outstanding as of the beginning of the respective
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 respective periods, 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
respective period as quoted on the NASD.
(iii) Assumes that at the beginning of the respective periods, the 77,713 shares
of preferred convertible stock, were converted to common shares at the
conversion rate of 130.20833 shares of common for each share of
convertible preferred stock.
<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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> SEP-30-1995
<CASH> 1,892,009
<SECURITIES> 557,204
<RECEIVABLES> 24,496,244
<ALLOWANCES> 4,764,860
<INVENTORY> 4,142,402
<CURRENT-ASSETS> 27,990,188
<PP&E> 20,887,707
<DEPRECIATION> 8,872,435
<TOTAL-ASSETS> 70,016,308
<CURRENT-LIABILITIES> 37,532,494
<BONDS> 0
<COMMON> 237,073
0
80,675
<OTHER-SE> 13,546,077
<TOTAL-LIABILITY-AND-EQUITY> 70,016,308
<SALES> 6,327,585
<TOTAL-REVENUES> 83,011,548
<CGS> 5,029,140
<TOTAL-COSTS> 67,812,085
<OTHER-EXPENSES> 18,500,901
<LOSS-PROVISION> 764,852
<INTEREST-EXPENSE> 3,087,305
<INCOME-PRETAX> (6,008,633)
<INCOME-TAX> 148,497
<INCOME-CONTINUING> (6,157,130)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,157,130)
<EPS-PRIMARY> (.29)
<EPS-DILUTED> (.00)
</TABLE>
