<PAGE>
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 September 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 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)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes _X_ No __
Number of common shares outstanding as of November 13, 1996: 45,796,279
<PAGE>
Consolidated Technology Group, Ltd.
Index
Page
Part I: - Financial Information:
Item 1. Financial Statements:
Consolidated Balance Sheets - September 30, 1996 and December 31, 1995. 2-3
Consolidated Statements of Operations - Three and Nine Months
Ended September 30, 1996 and 1995 4
Consolidated Statement of Shareholders' Equity - September 30, 1996 5
Consolidated Statements of Cash Flows - Nine Months Ended
September 30, 1996 and 1995 6-8
Notes to Consolidated Financial Statements 9-16
Item 2. Management's Discussion and Analysis of the Financial
Condition and Results of Operations. 17-25
Part II:
Part II - Other Information:
Item 6. Exhibits and Reports on Form 8-K 26
<PAGE>
Consolidated Technology Group Ltd. and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
---- ----
<S> <C> <C>
Assets:
Current assets:
Cash and cash equivalents $4,530,000 $1,636,000
Receivables, net of allowances 23,254,000 19,216,000
Inventories 4,025,000 3,701,000
Loans receivable 1,746,000 396,000
Prepaid expenses and other current assets 898,000 436,000
Excess of accumulated costs over related billings 799,000 1,002,000
Investments in common stock -- 20,000
---------- ------
Total current assets 35,252,000 26,407,000
---------- ----------
Property, plant and equipment, net 14,072,000 11,034,000
---------- ----------
Other assets:
Capitalized software development costs 811,000 502,000
Goodwill, net 11,219,000 11,881,000
Covenants not to compete, net 1,207,000 2,168,000
Customer lists, net 11,003,000 11,684,000
Deferred offering costs 128,000 --
Loans receivable, long-term 1,673,000 219,000
Receivables, related parties 1,460,000 544,000
Trademark, net 372,000 383,000
Investments in common stock, long-term 586,000 405,000
Other assets 1,760,000 1,085,000
--------- ---------
Total other assets 30,219,000 28,871,000
---------- ----------
Total Assets $79,543,000 $66,312,000
=========== ===========
</TABLE>
See notes to consolidated financial statements.
2
<PAGE>
Consolidated Technology Group Ltd. and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
---- ----
<S> <C> <C>
Liabilities and Shareholders' Equity:
Current liabilities:
Accounts payable and accrued expenses $10,955,000 $11,095,000
Accrued payroll and related expenses 4,180,000 2,332,000
Accrued interest 238,000 284,000
Income taxes payable 647,000 269,000
Interim billings in excess of costs and estimated profits 1,496,000 1,701,000
Notes payable, related parties 335,000 290,000
Current portion of long-term debt 9,319,000 9,080,000
Current portion of subordinated debt 918,000 13,354,000
Current portion of capitalized lease obligations 1,588,000 1,362,000
--------- ---------
Total current liabilities 29,676,000 39,767,000
---------- ----------
Long-term liabilities:
Deferred interest 371,000 --
Long-term debt 19,262,000 6,210,000
Capitalized lease obligations 2,973,000 2,198,000
Subordinated debt 6,656,000 5,003,000
--------- ---------
Total long-term liabilities 29,262,000 13,411,000
---------- ----------
Minority interest 12,531,000 2,087,000
---------- ---------
Shareholders' equity:
Preferred stock 26,000 70,000
Additional paid-in-capital, preferred stock 92,000 266,000
Common stock (50,000,000 shares authorized, 45,795,828 and
26,655,071 shares issued and outstanding as of September 30,
1996 and December 31, 1995, respectively) 457,000 267,000
Additional paid-in-capital, common stock 52,005,000 51,020,000
Accumulated deficit (44,804,000) (40,648,000)
Unrealized gain on exchange translation 74,000 (17,000)
Net unrealized gain (loss) on long-term investment in common stock 224,000 89,000
------- ------
Total shareholders' equity 8,074,000 11,047,000
--------- ----------
Total Liabilities and Shareholders' Equity $79,543,000 $66,312,000
=========== ===========
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
Consolidated Technology Group Ltd. and Subsidiaries
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues $30,736,000 $26,868,000 $85,109,000 $83,012,000
Direct Costs 25,006,000 21,874,000 67,520,000 67,812,000
---------- ---------- ---------- ----------
Gross Profit 5,730,000 4,994,000 17,589,000 15,200,000
Selling, General and Administrative 8,265,000 6,030,000 21,771,000 17,963,000
--------- --------- ---------- ----------
Income (Loss) from Operations (2,535,000) (1,036,000) (4,182,000) (2,763,000)
----------- ----------- ----------- -----------
Other Income (Expense):
Interest expense (1,101,000) (933,000) (3,125,000) (3,087,000)
Other income (expense) 67,000 (312,000) 670,000 (408,000)
Gain (loss) from security sales 392,000 -- 645,000 (131,000)
------- --------- ------- ---------
Total other expense - Net (642,000) (1,245,000) (1,810,000) (3,626,000)
--------- ----------- ----------- -----------
Loss Before Income Taxes and
Minority Interest (3,177,000) (2,281,000) (5,992,000) (6,389,000)
Income Taxes 25,000 (39,000) (298,000) (148,000)
Minority Interest in (Gain) Loss
of Subsidiaries 1,400,000 272,000 2,134,000 380,000
--------- ------- --------- -------
Net Loss ($1,752,000) ($2,048,000) ($4,156,000) ($6,157,000)
============ ============ ============ ============
Loss per Common Share ($0.04) ($0.09) ($0.10) ($0.29)
======= ======= ======= =======
Weighted Average Number
Common Shares 45,454,442 23,707,264 40,258,838 21,488,233
========== ========== ========== ==========
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
Consolidated Technology Group, Ltd. and Subsidiaries
Consolidated Statement of Shareholders Equity
for the Nine Months Ended September 30, 1996
<TABLE>
<CAPTION>
Stock Unreal-
Issued ized Net Balance
Balance Conversion for the Gain on Unrealized at
at of Stock Exersize Exchange Investment Septem-
December 31, Series A Issued of Stock Net Trans- Security ber 30,
1995 Preferred (Note 6) Options Loss lation Gains 1996
---- --------- -------- ------- ---------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Preferred stock $1.00 par value,
6% Series A, Authorized
77,713 shares:
Shares 66,596 (43,705) -- -- -- -- -- 22,891
Amounts $67,000 ($44,000) -- -- -- -- -- $23,000
Preferred stock, $1.00 par value,
$3.50 and $.10, Series B and E,
8,000 shares authorized each:
Shares 262 -- -- -- -- -- -- 262
Amounts $1,000 -- -- -- -- -- -- $1,000
Preferred stock, $1.00 par value,
$8.00 subordinated Series F,
6,000 shares authorized:
Shares 2,700 -- -- -- -- -- -- 2,700
Amounts $2,000 -- -- -- -- -- -- $2,000
------ ------- --------- ------- ---------- ------- -------- ------
Total Preferred stock, par $70,000 ($44,000) -- -- -- -- -- $26,000
Additional paid-in capital
preferred stock $266,000 ($174,000) -- -- -- -- -- $92,000
Common stock, $0.01 par value.
50,000,000 shares authorized
Shares 26,655,071 5,690,757 13,250,000 200,000 -- -- -- 45,795,828
Amounts $267,000 $56,000 $132,000 $2,000 -- -- -- $457,000
Additional paid-in capital,
common stock $51,020,000 $162,000 $780,000 $43,000 -- -- -- $52,005,000
Accumualted deficit ($40,648,000) -- -- -- ($4,156,000) -- -- ($44,804,000)
Unrealized exchange translation ($17,000) -- -- -- -- $91,000 -- $74,000
Net unrealized gain on long-term
investments in common stock $89,000 -- -- -- -- -- $135,000 $224,000
----------- ---- -------- ------- ----------- ------- -------- ----------
Total shareholders' equity $11,047,000 ($0) $912,000 $45,000 ($4,156,000) $91,000 $135,000 $8,074,000
=========== ==== ======== ======= ============ ======= ======== ==========
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
Consolidated Technology Group Ltd. and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Nine Month Period Ended
September 30,
1996 1995
---- ----
<S> <C> <C>
Cash Flows from Operating Activities:
Net Loss ($4,156,000) ($6,157,000)
------------ ------------
Adjustments to reconcile netloss to net cash provided by operating activities:
Depreciation and amortization 5,470,000 5,365,000
Minority interest in loss of consolidated subsidiaries (2,134,000) (381,000)
Bad debt expense 1,258,000 765,000
Noncash expense from subsidiary's issuance of stock
options and stock purchase warrants 2,229,000 --
Value of stock issued by a subsidiary in lieu of
cash payments for services rendered 1,759,000 114,000
Consulting charges on option exercise 45,000 1,410,000
(Gain) Loss on common stock investments (645,000) 131,000
Minority interest loss on equity method investees 109,000 --
Loss on disposal of assets 119,000 --
Deferred interest 371,000 --
Write-off deferred offering costs -- 461,000
Change in assets and liabilities:
(Increase) decrease in assets:
Receivables (5,301,000) (3,336,000)
Inventories (324,000) 135,000
Prepaid expenses and other current assets (462,000) 31,000
Excess of accumulated costs over related billings 203,000 (628,000)
Increase (decrease) in liabilities: -- --
Accounts payable and accrued expenses (140,000) 1,978,000
Accrued payroll and related expenses 1,848,000 824,000
Accrued interest (46,000) 28,000
Income taxes payable 378,000 177,000
Interim billings in excess of costs and estimated profits (205,000) 357,000
--------- -------
Total adjustments 4,532,000 7,431,000
--------- ---------
Net cash provided by (used in) operating activities 376,000 1,274,000
------- ---------
(continued)
</TABLE>
See notes to consolidated financial statements.
6
<PAGE>
Consolidated Technology Group Ltd. and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Nine Month Period Ended
September 30,
1996 1995
---- ----
<S> <C> <C>
Cash Flows from Investing Activities:
Decrease in other assets 88,000 78,000
Capital expenditures (3,747,000) (683,000)
Capitalized software development costs (498,000) (98,000)
Investments in common stock (345,000) (7,000)
Proceeds from sale of common stock investments 944,000 364,000
Payments for loans made (5,306,000) (2,025,000)
Collections for repayment of loans made 2,009,000 1,954,000
Cash of companies acquired and merged -- 504,000
---------- -------
Net cash used in investing activities (6,855,000) 87,000
----------- ------
Cash Flows from Financing Activities:
Deferred offering costs (315,000) (129,000)
Deferred loan costs (487,000) --
Net payments to an asset based lendor (587,000) (173,000)
Proceeds from issuance of long-term debt 18,562,000 1,588,000
Repayment of long-term debt (4,639,000) (2,826,000)
Payment on capital lease obligations (1,093,000) (808,000)
Repayment of subordinated debt (10,783,000) (2,260,000)
Issuance of common stock 913,000 --
Subsidiaries issuance of stock 6,202,000 1,469,000
Exercise of stock options -- 1,225,000
Subsidiary's issuance and exercise of stock
options and stock purchase warrants 1,600,000 716,000
--------- -------
Net cash provided by financing activities 9,373,000 (1,198,000)
--------- -----------
Net Increase in Cash and Cash Equivalents 2,894,000 163,000
Cash and Cash Equivalents at Beginning of Period 1,636,000 1,727,000
--------- ---------
Cash and Cash Equivalents at End of Period $4,530,000 $1,890,000
========== ==========
Supplemental Disclosures of Cash Flow Information:
Cash paid for:
Interest $2,800,000 $2,977,000
========== ==========
State income taxes $301,000 $29,000
======== =======
(concluded)
</TABLE>
See notes to consolidated financial statements.
7
<PAGE>
Consolidated Technology Group Ltd. and Subsidiaries
Consolidated Statements of Cash Flows
Supplemental Disclosures of Noncash Investing and Financing Activities:
During the nine month period ended September 30, 1996:
(1) - A subsidiary of the Company issued stock options and warrants to purchase
stock and in connection therewith recorded a noncash expense of
$2,229,000 which is the amount that the fair market value of the stock
exceeded the exercise price.
(2) - Two subsidiaries of the Company issued common stock with a value of
$1,759,000 in lieu of cash payment for services rendered and in
connection therewith recorded a noncash expense for the value of the
stock issued.
(3) - 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 connection therewith the Company
recorded a receivable of $300,000, the amount of the exercise price.
(4) - Acquired equipment under capital lease obligations with a net present
value of $2,094,000..
During the nine month period ended September 30, 1995:
(1) - Acquired equipment under capital lease obligations with a net present
value of $836,000.
(2) - Received common stock in lieu of cash payments for notes and accrued
interest receivable with a book value of $217,000.
(3) - Pursuant to an acquisition of another entity by one of the Company's
subsidiaries, in a transaction accounted for as a reverse merger:
(a) - Reduced the Company's equity ownership in such subsidiary which
resulted in an increase in minority interest of $2,110,000.
(b) - Acquired net assets with a book value of $983,000.
(4) - Issued stock options and received exercise proceeds of $1,225,000 and
incurred noncash consulting fee consulting fee expenses of $1,265,000.
(5) - Issued common stock with a value of $114,000 in lieu of cash payment for
services rendered.
{6} - A subsidiary of the Company issued stock options and received exercise
proceeds of $716,000 and incurred noncash deferred charges of
$2,205,000.
See notes to consolidated financial statements.
8
<PAGE>
Consolidated Technology Group, Ltd. and Subsidiaries
Notes to Consolidated Financial Statements
---------------------------------------------
(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 September 30,1996 and December 31, 1995 and the results of its operations for
the three and nine month periods ended September 30, 1996 and 1995 and changes
in cash flows for the nine months ended September 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 nine months ended September
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:
9
<PAGE>
Consolidated Technology Group, Ltd. and Subsidiaries
Notes to Consolidated Financial Statements
--------------------------------------------
(5) Industry Segments - continued
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Contract Engineering Services $16,912,000 $14,935,000 $45,379,000 $48,169,000
Medical Diagnostics 8,084,000 6,796,000 23,775,000 20,874,000
Audio Products Manufacturing (I) 965,000 712,000 2,570,000 1,528,000
Electro-Mechanical and Electro-Optical
Products Manufacturing 860,000 994,000 2,315,000 3,534,000
Medical Information Services 1,564,000 2,049,000 6,499,000 5,397,000
Telecommunications 2,322,000 1,067,000 4,080,000 2,165,000
Three Dimensional Products and Services 23,000 248,000 472,000 1,266,000
Business Consulting Services 6,000 67,000 19,000 79,000
----- ------ ------ ------
Total Revenues $30,736,000 $26,868,000 $85,109,000 $83,012,000
=========== =========== =========== ===========
Gross Profit:
Contract Engineering Services $1,523,000 $1,241,000 $3,818,000 $3,118,000
Medical Diagnostics 3,766,000 2,645,000 10,862,000 8,953,000
Audio Products Manufacturing (I) 201,000 76,000 558,000 228,000
Electro-Mechanical and Electro-Optical
Products Manufacturing 140,000 264,000 391,000 682,000
Medical Information Services (28,000) 464,000 1,282,000 1,360,000
Telecommunications 138,000 215,000 369,000 392,000
Three Dimensional Products and Services (15,000) 23,000 288,000 389,000
Business Consulting Services 5,000 66,000 21,000 78,000
----- ------ ------ ------
Total Gross Profits $5,730,000 $4,994,000 $17,589,000 $15,200,000
========== ========== =========== ===========
Income (Loss) from Operations:
Contract Engineering Services $461,000 $667,000 $653,000 $885,000
Medical Diagnostics 1,263,000 1,025,000 4,540,000 3,868,000
Audio Products Manufacturing (I) (76,000) (229,000) (289,000) (296,000)
Electro-Mechanical and Electro-Optical
Products Manufacturing (301,000) (95,000) (598,000) (221,000)
Medical Information Services (2,264,000) (744,000) (4,125,000) (1,378,000)
Telecommunications (269,000) (111,000) (734,000) (521,000)
Three Dimensional Products and Services (315,000) (762,000) (1,153,000) (1,589,000)
Business Consulting Services (166,000) (24,000) (185,000) (40,000)
Corporate and Other (868,000) (763,000) (2,291,000) (3,471,000)
--------- --------- ----------- -----------
Total Income (Loss) from Operations ($2,535,000) ($1,036,000) ($4,182,000) ($2,763,000)
============ ============ ============ ============
</TABLE>
10
<PAGE>
Consolidated Technology Group, Ltd. and Subsidiaries
Notes to Consolidated Financial Statements
--------------------------------------------
(5) Industry Segments - continued
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Income (Loss):
Contract Engineering Services ($56,000) $151,000 ($60,000) ($317,000)
Medical Diagnostics 788,000 404,000 2,613,000 1,864,000
Audio Products Manufacturing (I) (107,000) (252,000) (360,000) (341,000)
Electro-Mechanical and Electro-Optical
Products Manufacturing (305,000) (97,000) (610,000) (225,000)
Medical Information Services (1,237,000) (829,000) (2,908,000) (1,605,000)
Telecommunications (238,000) (119,000) (749,000) (551,000)
Three Dimensional Products and Services (333,000) (763,000) (576,000) (1,650,000)
Business Consulting Services (4,000) 9,000 (20,000) (11,000)
Corporate and Other (260,000) (552,000) (1,486,000) (3,321,000)
--------- --------- ----------- -----------
Total Net Loss ($1,752,000) ($2,048,000) ($4,156,000) ($6,157,000)
============ ============ ============ ============
Depreciation and Amortization:
Contract Engineering Services $120,000 $128,000 $355,000 $384,000
Medical Diagnostics 1,386,000 1,284,000 3,884,000 3,774,000
Audio Products Manufacturing (I) 45,000 114,000 124,000 189,000
Electro-Mechanical and Electro-Optical
Products Manufacturing 18,000 13,000 51,000 28,000
Medical Information Services 317,000 141,000 536,000 406,000
Telecommunications 57,000 8,000 72,000 22,000
Three Dimensional Products and Services 89,000 94,000 436,000 549,000
Business Consulting Services 1,000 1,000 1,000 1,000
Corporate and Other 8,000 3,000 11,000 12,000
----- ----- ------ ------
Total Depreciation and Amortization $2,041,000 $2,247,000 $5,470,000 $5,826,000
========== ========== ========== ==========
</TABLE>
11
<PAGE>
Consolidated Technology Group, Ltd. and Subsidiaries
Notes to Consolidated Financial Statements
--------------------------------------------
(5) Industry Segments - continued
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Capital Expenditures:
Contract Engineering Services $4,000 $8,000 $45,000 $34,000
Medical Diagnostics 2,220,000 72,000 3,526,000 173,000
Audio Products Manufacturing (I), (II) 27,000 41,000 99,000 471,000
Electro-Mechanical and Electro-Optical
Products Manufacturing 3,000 1,000 3,000 6,000
Medical Information Services 28,000 107,000 62,000 137,000
Telecommunications -- -- -- --
Three Dimensional Products and Services 5,000 63,000 5,000 214,000
Business Consulting Services -- -- -- --
Corporate and Other -- -- 7,000 21,000
---------- -------- ---------- ----------
Total Capital Expenditures $2,287,000 $292,000 $3,747,000 $1,056,000
========== ======== ========== ==========
</TABLE>
(I) - The Audio Products Manufaturing segment only includes operations from
March 31, 1995 (date of acquisition) through September 30, 1996.
(II) - For the nine months ended September 30, 1995, capital expenditures
includes $373,000 for amounts allocated to property, plant and
equipment from the acquisition of a subsidiary.
At September 30,
1996 1995
---- ----
Identifiable Assets:
Contract Engineering Services $8,989,000 $10,988,000
Medical Diagnostics 44,374,000 40,249,000
Audio Products Manufacturing 1,812,000 4,145,000
Electro-Mechanical and Electro-Optical
Products Manufacturing 4,519,000 4,214,000
Medical Information Services 9,590,000 6,805,000
Telecommunications 1,866,000 1,403,000
Three Dimensional Products and Services 1,246,000 1,961,000
Business Consulting Services 3,327,000 236,000
Corporate and Other 3,820,000 15,000
--------- ------
Total Identifiable Assets $79,543,000 $70,016,000
=========== ===========
12
<PAGE>
Consolidated Technology Group, Ltd. and Subsidiaries
Notes to Consolidated Financial Statements
---------------------------------------------
(6) Equity
Conversion of Series A Preferred Stock - During the nine months ended September
30, 1996 the Company issued 5,690,757 shares of common stock upon the conversion
of 43,705 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 $913,000 in
conjunction with the issuance of 13,250,000 shares of common stock for the nine
month period ended September 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
$45,000 of consulting costs computed as follows:
Shares 200,000
Value of stock at date of grant $0.28125
-------
Full value of stock 56,000
20% discount 11,000
------
Discounted value of stock 45,000
Exercise proceeds --
------
Total consulting costs $45,000
======
(7) Stock Transactions of the Company's Subsidiaries
Medical Information Services Segment:
A publicly held subsidiary of the Company, which operates in the Medical
Information Services segment, had the following stock transactions during the
nine months ended September 30, 1996:
The subsidiary closed on a public offering whereby it sold 646,875 units at a
price of $8 per unit for net proceeds of $3,800,000. Each unit consisted of two
shares of common stock and one Series A Redeemable Common Stock Purchase
Warrant. On August 21, 1996, 800,000 $2 warrants were exercised and the Company
received $1,600,000 in proceeds.
The subsidiary issued stock options and warrants to purchase stock. The fair
market value of the underlying securities exceeded the exercise price by
$2,229,000 and this excess was expensed for the nine months ended September 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) $2,229,000
=========
The subsidiary also issued 500,000 shares of its common stock to its selling
shareholders and 25,000 shares of its common stock to it's asset based lender.
As a result of such issuances, the subsidiary incurred an expense of $1,680,000
which was charged to operations for the nine months ended September 30, 1996
13
<PAGE>
Consolidated Technology Group, Ltd. and Subsidiaries
Notes to Consolidated Financial Statements
---------------------------------------------
(7) Stock Transactions of the Company's Subsidiaries (continued)
Contract Engineering Services Segment:
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 $2,000,000.
The subsidiary also granted an option to a consultant to purchase 85,000 shares
of common stock in lieu of cash payment for services rendered. At a price of
$0.50 per share. The value of the stock at the date of grant was $1.4375 per
share resulting in $80,000 of consulting costs, computed as follows:
Shares 85,000
Value of stock at date of grant $1.4375
------
Full value of stock 123,000
Exercise proceeds 43,000
------
Total consulting costs $80,000
======
(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 approximately
$1,700,000. 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.
14
<PAGE>
Consolidated Technology Group, Ltd. and Subsidiaries
Notes to Consolidated Financial Statements
---------------------------------------------
(8) Reverse Merger (continued)
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:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Net revenues $30,736,000 $26,868,000 $85,109.000 $83,700.000
=========== =========== =========== ===========
Net income (loss) ($1,752,000) ($2,048,000) ($4,156.000) $(6,219.000)
============ ============ ============ ============
Income (loss) per share ($0.04) ($0.09) ($0.09) $(0.29)
======= ======= ======= =======
</TABLE>
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.
(10) Related Party Transactions
Sale of Common Stock Investments to an Officer:
During April 1996, the chief executive officer and board 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 without interest and payable within five years from the
date of the purchase. Total receivables outstanding under such sale approximates
$445,000 including imputed interest at 5.88%. $72,000 of such receivable relates
to such exercises that occurred during the year ended December 31, 1995.
(11) Subsequent Events
Subsidiaries' Registrations of Stock
On October 17, 1996, a publicly held subsidiary of the Company, operating in the
Contract Engineering Services segment, filed an S-1 Registration statement with
respect to additional equity shares. On November 6, 1996, a subsidiary of the
Company, operating in the Medical Diagnostics segment, filed an S-1 Registration
statement with the Securities and Exchange Commission with respect to an initial
public offering. No assurances can given that the above offerings will be
completed.
15
<PAGE>
Consolidated Technology Group, Ltd. and Subsidiaries
Notes to Consolidated Financial Statements
---------------------------------------------
(12) Restated Employment Agreements
Chief Executive Officer:
During May 1996, the Company agreed to an amendment and restatement the chief
executive officer's ("CEO") employment contract, effective as of January 1996,
which supersedes the prior contract. Per the terms of the restated contract the
CEO receives a salary of $500,000 per year through the year 2000, the expiration
date of the contract. 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) a cost of living increase. 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 $600,000. 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 $2,000,000, 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 right of the CEO to purchase 10% of the
Company's equity interest in its subsidiaries and other investments. The
purchase price for such interests is 110% of the Company's cost of such
securities as defined in the agreement, which is payable by the CEO's six year
non-interest bearing promissory notes. At September 30, 1996, the amount due
from the CEO with respect to such purchases was approximately $445,000.
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 $236,000 and $252,000,
respectively.
. . . . . . . . . . . . . . . . . . . . . . . . . .
16
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
---------------------------------------------
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 debt and
equity to enable them to continue operations. Management believes that the
Company has made progress in achieving these goals during 1996 based on the
following:
Improved Operating Results
As of the second quarter ended June 30, 1996, the Company had a significant
reduction in loss for five of the segments compared to the second quarter ended
June 30, 1995 and also had a significant reduction in corporate and other
expenses. As of the third quarter ended September 30, 1996, two (Contract
Engineering Services and medical Information Services) of the five segments
which reported improved results for the second quarter have increased losses for
the third quarter. However, both of these segments incurred significant single
item expenses that are not expected to be of a recurring nature, including
$300,000 for a contingency settlement and $1,679,000 of noncash expense related
to stock issuance's. Excluding these costs, these segments continued to show
improved operating results. On an overall basis, the net loss for the three
months September 30, 1996 was $296,000 less than in 1995 and $2,001,000 less for
the nine months September 30, 1996, which includes $4,033,000 of noncash expense
related to issuance's of stock options and stock purchase warrants which is
$3,507,000 less than in 1995.
Debt Refinancing
In January and September 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 term loans of $6,000,000, an
accounts receivable revolving loan of $6,000,00 and the extension of
approximately $6,300,000 of subordinated debt balloon payments from a 1996 due
date to a 2002 due date. As a result of the financing, approximately $12,400,000
of debt that was currently due was replaced by long-term debt.
Improved Working Capital Condition
As of December 31, 1995, the Company had a working capital deficit of
$13,360,000. As of September 30, 1996, the Company has positive working capital
of $5,576,000 representing an increase in working capital of $18,936,000 for the
nine months ended September 30, 1996. Due 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. 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 received net proceeds of approximately $3,800,000 and additionally, received
approximately $1,600,000 upon the exercise of 800,000 stock purchase warrants.
In July 1996 a subsidiary operating in the contract engineering services segment
(which is already publicly held), raised $2,000,000 from the sale of common
stock (note 7 to the consolidated financial statements). Additionally, on
October 17, 1996, this subsidiary filed an S-1 Registration statement with
respect to additional equity shares, however, no assurances can be given that
such offering will be completed.
On November 6, 1996, a subsidiary of the Company, operating in the Medical
Diagnostics segment, filed an S-1 Registration statement with the Securities and
Exchange Commission with respect to an initial public offering.
No assurances can given that the public offering will be completed.
17
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
---------------------------------------------
Financial Condition
Capital Resources
Sources of Cash
The Company's principal working capital consists of cash and cash equivalents.
Cash and cash equivalents were $4,530,000 at September 30, 1996 compared to
$1,636,000 at December 31, 1995. During the nine months ended September 30,
1996, the Company's operations generated $376,000 of cash from operations of
which the medical diagnostics segment company, International Magnetic Imaging,
("IMI") generated approximately $4,412,000 from operations while the remaining
segments used approximately $4,036,000 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 September 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, debt 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 $18,562,000, proceeds from the issuance of stock and the
exercise of options and warrants of $8,715,000, collections on repayments of
notes receivable of $2,009,000 and proceeds from the sale of marketable
securities of $944,000. Other net sources of cash amounted to $88,000.
Uses of Cash
Uses of cash includes the repayment of long-term and subordinated debt of
$15,422,000, capital expenditures of $3,747,000, payments on capital leases of
$1,093,000, payments for loans made of $5,306,000, net repayments to asset based
lendors of $587,000, purchases of investments of $345,000 and expenditures of
$498,000 for software development, $487,000 for deferred loan costs and $315,000
for deferred offering costs.
Changes in Other Working Capital Assets and Liabilities
The other significant changes in working capital includes an increase in
accounts receivable of $4,038,000 (primarily from an increase in sales volume in
the Medical Diagnostics segment), an increase in current loans receivable of
$1,350,000 from the issuance of a $3,000,000 loan of which approximately
$1,344,000 is due within twelve months, and an increase in accounts payable and
accrued expenses and accrued payroll and related expenses of approximately
$1,708,000 (primarily from an increase in payroll and payroll related
obligations of the contract engineering services segment).
Effect of Loan Defaults
The Company is in default on loans approximating $400,000 as of September 30,
1996 in the Audio/Visual 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.
18
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
---------------------------------------------
Results of Operations
Consolidated operating losses for the three months ended September 30, 1996
increased by $1,499,000 from an operating loss of $1,036,000 for the 1995
quarter to an operating loss of $2,535,000 for the 1996 quarter. The operating
loss for the nine months ended September 30, 1996 increased by $1,419,000 from
$2,763,000 for 1995 compared to $4,182,000 for 1996. The three and nine months
September 30, 1996 operating results includes certain noncash expenses as
follows:
Three Months Nine Months
Ended Ended
September 30, September 30,
1996 1996
---- ----
Medical Information Services segment - stock
options and stock purchase warrants -- $2,229,000
Medical Information Services segment - issuance
of stock in lieu of cash for services rendered $1,679,000 1,679,000
Contract Engineering Services segment- issuance
of stock in lieu of cash for services rendered 80,000 80,000
Corporate and Other - consulting expense
from exercise of stock options -- 45,000
---------- ----------
Total noncash Expenses $1,759,000 $4,033,000
========= =========
For the three months ended September 30, 1996, excluding the above noncash
expenses, an improvement in operating results was achieved by an increase in
overall gross margins of $736,000 while operating expenses increased only
$476,000. Excluding the above noncash expenses for the nine months ended
September 30, 1996, an improvement in operating results was achieved by an
increase in overall gross margins of $2,389,000 and a reduction in operating
costs of $225,000. Additionally, revenues increased $3,868,000 and $2,097,000,
respectively, for the three and nine month September 30, 1996 comparative
periods. On an overall basis, the consolidated net loss for the three and nine
months September 30, 1996 compared to 1995 decreased by $296,000 or 15% and
$2,001,000 or 33%, 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.
<TABLE>
<CAPTION>
Percentage of Total
Three Months Ended Nine Months Ended
Sept. 30, Sept. 30, Sept. 30, Sept.30,
Revenues: 1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Contract Engineering Services 54% 55% 52% 58%
Medical Diagnostics 25% 24% 28% 25%
Audio Manufacturing and Services 3% 3% 3% 2%
Electro-Mechanical and Electro- Optical
Products Manufacturing 3% 4% 3% 2%
Medical Information Services 5% 8% 7% 7%
Telecommunications 8% 4% 5% 3%
Three Dimensional Products and Services 1% 1% 1% 2%
Business Consulting Services 1% 1% 1% 1%
</TABLE>
19
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
---------------------------------------------
Results of Operations
<TABLE>
<CAPTION>
Percentage of Total
Three Months Nine Months Ended
Ended
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
<S> <C> <C> <C> <C>
Gross Profit: 1996 1995 1996 1995
---- ---- ---- ----
Contract Engineering Services 25% 26% 21% 20%
Medical Diagnostics 65% 54% 62% 58%
Audio Manufacturing and Services 3% 2% 3% 2%
Electro-Mechanical and Electro- Optical
Products Manufacturing 2% 5% 2% 5%
Medical Information Services 1% 9% 7% 8%
Telecommunications 2% 2% 2% 3%
Three Dimensional Products and Services 1% 1% 2% 3%
Business Consulting Services 1% 1% 1% 1%
</TABLE>
<TABLE>
<CAPTION>
Percentage of Total
Three Months Ended Nine Months Ended
Selling, General and Sept. 30, Sept. 30, Sept. 30, Sept. 30,
Administrative: 1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Contract Engineering Services 13% 10% 15% 12%
Medical Diagnostics 30% 27% 28% 28%
Audio Manufacturing and Services 3% 5% 4% 3%
Electro-Mechanical and Electro- Optical
Products Manufacturing 5% 6% 5% 5%
Medical Information Services 27% 20% 25% 15%
Telecommunications 5% 5% 5% 5%
Three Dimensional Products and Services 4% 13% 7% 11%
Business Consulting Services 2% 2% 1% 1%
Corporate and other 11% 12% 10% 20%
</TABLE>
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 increased 13% for the three
month periods and decreased 6% for nine month periods while gross margins
increased 23% and 22%, respectively, for the three and nine month periods. The
increase in revenues for the three month period is attributed to additional
revenues from the existing customer base as well as revenues from new customers.
The decrease in revenues for the nine month period is attributed to the loss of
a contract on January 1, 1996, from one of the segment's significant customers.
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 approximately $489,000 and $930,000 for the three and nine
month comparative periods. This increase primarily resulted from $250,000 in
accrued penalties on late payroll tax withholding obligations for each of the
quarters ended March 31, 1996 and June 30, 1996, $80,000 of noncash expenses
associated with the issuance of stock for consulting services during the nine
months September 30, 1996, and $300,000 of contingency settlement costs accrued
during the three months ended
20
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
---------------------------------------------
Results of Operations
September 30, 1996. The accrued contingency settlement costs relates to an
issue raised by the Department of Labor (DOL) concerning a subsidiary operating
in this segment. Prior the subsidiary's acquisition of the assets of Job Shop
Technical Services ("Job Shop"), amounts due to the subsidiary's 401-K plan were
not remitted by the prior owner. Although management believes that the
subsidiary is not a successor corporation to Job Shop, the DOL may take a
contrary position and the subsidiary's management believes that the remittance
of $300,000 into the Job Shop 401-K plan will resolve this matter. If an
agreement cannot be reached by the parties involved, it could have a material
adverse impact on the operations of this segment. Other income and expense items
remained relatively level for the three months ended September 30, 1996 and 1995
while such items decreased by 40% for the nine month comparative periods due
primarily as a result of lower interest expense from more favorable financing
terms than those that existed in the prior periods. As a result of the foregoing
factors, net income (loss) decreased from $151,000 of net income for the three
months ended September 30, 1995 to $56,000 of net loss for the three months
ended September 30, 1996, and net losses decreased from $317,000 for the nine
months ended September 30, 1995 to $60,000 for the nine months ended September
30, 1996. Management believes that this segment can to generate future profits
by continuing to increase its revenues and gross margins while stabilizing
operating costs. Profitability is dependent upon its ability to obtain equity
financings. In July 1996, this segment raised $2,000,000 from the sale of common
stock. 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, 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 care industry. Comparing
1996 to 1995 revenues increased 19% and 14% for the respective three and nine
month periods, while gross margins increased 42% and 21% for the respective
three and nine month periods. The increase in revenues is due to increases in
scan procedure volume while overall reimbursement rates increased marginally.
Selling, general and administrative expenses increased 55% and 24% for the
respective three and nine month periods due primarily to the following factors:
Increase Increase
for for
Three Months Nine Months
Ended Ended
September 30, September 30,
1996 1996
---- ----
Relocation of one of the MRI scanning centers (1) $186,000 $468,000
Provision for bad debts (2) 455,000 514,000
Amortization from loan costs (3) 32,000 96,000
Temporary employees (4) 40,000 40,000
Administrative fee paid to lender (5) 25,000 71,000
------ ------
$738,000 $1,189,000
(1) - During 1996, this segment was in the process of relocating one of the
centers to a new facility and, in connection therewith, it rented, on a short
term basis, mobile MRI equipment and is paying rent at two locations.
(2) - During 1996, the collectibility of receivables due from third-party
liability payors was evaluated and a significant amount of such receivables were
written-off. These third-party liability payors are no longer a significant part
of the segment's business representing only 5% of revenues for the 1996 and 1995
periods.
(3) - During 1996, the segment incurred deferred loan costs which are being
amortized over the life of the related loans. Such amortization did not exist
during the 1995 periods.
21
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
---------------------------------------------
Results of Operations
(4) - During 1996, the segment replaced certain permanent employees whose
compensation was included in direct costs for the 1995 periods with temporary
employees whose related costs are included in selling, general and
administrative costs for the 1996 periods.
(5) - The segment pays loan administration fees relating to a revolver loan that
did not exist during the 1995 comparable periods. Other income and expense items
(consisting primarily of interest expense) remained relatively level for the
three and nine months ended September 30, 1996. Net income for the three months
September 30, 1996 compared to the three months September 30, 1995, increased
$384,000, or 95% due to the aforementioned increased revenues and gross margin
which were partially offset by the increased operating expenses. Net income for
the nine months September 30, 1996 compared to the nine months September 30,
1995 increased $749,000, or 25% of which approximately $400,000 relates to the
first quarter activity wherein revenues and gross margins increased while
operating costs remained relatively level and the above mentioned third quarter
increases. Typically, this segment has its greatest revenue activity in the
first quarter and management anticipated that revenues and gross margin in the
second and third quarters 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 fourth quarter of 1996 will remain
relatively level with the third quarter 1996.
Electro-Mechanical and Electro-Optical Products Manufacturing - This segment
consists companies which manufactures optical encoders, encoded motors and limit
programmers, debit card vending machines and various avionics instrumentation
devices and markets telephone debit cards. Comparing 1996 and 1995, revenues
decreased 13% and 35%, respectively, for the three and nine months September 30,
1996. Additionally, gross profit decreased by 47% and 42%, respectively, for the
three and nine months September 30, 1996. The significant decrease in revenues
and gross margins is attributed to lower levels of shipments to existing
customers while new customers have not been obtained to replace the lost
revenues and the gross margins on current period contracts have lower margins
than on revenues that were lost. Selling, general and administrative expenses
increased 22% and 8%, respectively, for the three and nine month September 30,
1996 periods. These increases are due primarily to increased spending of
approximately $136,000 on developing new technologies, which was partially
offset by planned cutbacks in expenses related to existing operations. Net
losses increased from $97,000 for the three months September 30, 1995 to
$305,000 for the three months September 30, 1996 and from $225,000 for the nine
months September 30, 1995 to $610,000 for the nine months September 30, 1996. In
prior periods, this segment focused primarily on sales to the governmental
sector and currently management is attempting to place more emphasis on sales to
the private sector through the marketing of the debit card vending machines and
the debit card marketing efforts via agreements between distributors and
Televend and on developing new technologies to market to the private sector.
Subsequent to September 30, 1996, the Company has started negotiating in an
attempt to sell the companies operating in this segment, however, the terms of
such a sale have not been negotiated and management is currently unable to
estimate the likelihood of such a sale being finalized or the impact such sale
may have on the future operations of this segment.
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. For the three month
comparative periods revenues and gross profits decreased by 24% and 106%,
respectively. During the three months September 30, 1996, this segments sole
source of revenue was generated from its health information systems services
which includes data center (service bureau) revenue, turnkey system revenue,
software maintenance revenue, third party hardware and software revenue, and
software license revenue. The health information systems services revenue in
total decreased $384,000 for the three months September 30, 1996 compared to the
three months September 30, 1995. Additionally, during the
22
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
---------------------------------------------
Results of Operations
three months September 30, 1995, this segment generated SmartCard systems
revenues of $110,000 from a contract which was substantially complete as of
September 30, 1996 and no revenues were generated from this contract during the
three months September 30, 1996. For the nine month comparative periods revenues
increased 20% while gross profit decreased 6%. Approximately $1,389,000 of such
increase was related to SmartCard systems revenues related to one contract. This
increase in revenue was partially offset by a decrease in health information
services revenue. The decrease in gross profit for the nine month comparative
periods is due to the fact that the revenue generated from the SmartCard systems
had a lower gross profit return rate than the health information systems
services revenues. Selling, general and administrative expenses decreased 84%
and 98%, respectively, for the three and nine month comparative periods. During
the three and nine months September 30, 1996, this segment incurred $1,679,000
in noncash expense resulting from the issuance of common stock in lieu of cash
payment for services rendered. Additionally, during the second quarter of 1996,
this segment incurred $2,229,000 in noncash expense from the exercise of below
market stock options and stock purchase warrants. The remaining components of
selling, general and administrative expenses decreased approximately $654,000
and $1,237,000, respectively, for the three and nine month comparative periods.
Such decreases reflect reductions of executive and staff compensation of
approximately $182,000 and $460,000 of offering costs written off during the
1995 period. Other expense items increased due to the recognition of $109,000 in
loss from a joint venture for both the three and nine months September 30, 1996
which did not exist during the 1995 comparative periods. As a result of the
foregoing, net losses for the three and nine month comparative periods increased
49% and 81%, respectively. 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 received net proceeds of approximately $3,800,000 and
additionally, received $1,600,000 from the exercise of 800,000 stock purchase
warrants. Management estimates that losses for the fourth quarter of 1996 will
be comparable to the third quarter of 1996, with the exception that noncash
expenses from stock issuances are not currently anticipated, however, no
assurance can be given that such costs will not be incurred during future
periods of operations, including the fourth quarter 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 118% and 88% for the respective three and nine month
periods while gross margins decreased 36% and 6% for the respective three and
nine month comparative periods. Additionally, selling, general and
administrative expenses increased 25% and 21% for the respective three and nine
month periods. During 1996, this segment continued to grow its market share by
pricing its retail services more competitively, accounting for the decreased
margins, and incurred certain promotional costs. As a result of the foregoing,
net losses for the comparative three and nine month period increased 100% and
36%, respectively. 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 volume at higher margins in order to cover its
operating costs. This segment currently has a backlog of approximately
$4,000,000, and management estimates that revenues will increase throughout the
remainder of the year.
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) Computer Aided
Design ("CAD")/Computer Aided Manufacturing ("CAM") software products and
services and 3) laser scanning products. Comparing the three months September
30, 1996 to 1995, revenues and gross margins decreased 91% and 165%,
respectively. Comparing the nine months September 30, 1996 to 1995, revenues and
gross margins decreased 63%
23
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
---------------------------------------------
Results of Operations
and 26%, 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 nine months 1995 of $423,000 and $173,000,
respectively As a result, this segment had nominal revenue generation for the
three months ended September 30, 1996. Additionally, in July 1996, this segment
significantly reduced its operations in Europe and sold certain assets resulting
in a one time gain of approximately $450,000, 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 for the three and nine month comparative
periods decreased $484,000 and $538,000, respectively. Such expenses for the
nine months September 30, 1996 includes $192,000 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. On an overall basis, the
net loss for the three months September 30, 1996 was $333,000, a decrease of
$430,000 from the 1995 comparative period. The net loss for the nine months
September 30, 1996 was $576,000, a decrease of $1,074,000 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 nine months September 30, 1995. During the three
months September 30, 1996 comparative period this segments revenues and gross
margin increased 35% and 164%. Such increases are due primarily to 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 September 30, 1996 comparative period remained relatively level as
did other income and expense items. For the nine month period September 30,
1996, this segment generated $2,570,000 in revenues of which $1,980,000 were
from domestic sales and $590,000 were from European and Far East sales. During
the same period, gross margins were $558,000 or 21% of revenues 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 overhead cost, product
cost and non profitable product lines while maintaining or increasing the
quality in its products offered to the market. This segment plans to implement a
price increase of approximately 10% effective January 1997 and management
believes that this will not have a significant impact on sales volume due to
high product quality and the name recognition of "KLIPSCH PROFESSIONAL" in the
market place. 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 1997.
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 nine month September 30, 1996 comparative periods decreased 14% and 34%,
respectively. Such decrease is due primarily to noncash expense from the
exercise of stock options for payment of consulting services which amounted to
$740,000 and $1,265,000, respectively for the three and six months September 30,
1995 compared to $45,000 of such costs for the nine months September 30, 1996.
During the nine month period ended September 30, 1996, the Company's Chief
Financial Officer, as a part of renegotiating the subordinated debt of the
Medical Diagnostics Services
24
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
---------------------------------------------
Results of Operations
segment, received a bonus of $100,000 of which $75,000 was allocated to the
Medical Diagnostics Services segment and $25,000 was included in Corporate and
Other selling, general and administrative expenses. 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 the nine months September 30, 1996 remained relatively
level compared to the comparative 1995 period. Interest expense for the three
month comparative period increased $168,000 or 18%. 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 partially offset by principal payments on other debt.
Gains and (Losses) on Investment Securities - During 1996 the Company reported a
gain on investment purchasing and sales activity of $392,000 and $645,000 for
the respective three and nine months ended September 30, 1996 and a loss on such
activity of $131,000 for the nine months September 30, 1995. 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 approximated $40,000. 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.
Minority Interest in Loss of Subsidiaries - For the three and nine months
September 30, 1996 the minority interest in loss of subsidiaries was $1,400,000
and $2,134,000, respectively. For the three and nine months September 30, 1995
the minority interest in loss of subsidiaries was $272,000, and $380,000,
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 and the initial
public offering 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.
. . . . . . . . . . . . . . . . . . . . . . . . . .
25
<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 (filed only in electronic format with
the SEC)
. . . . . . . . . . . . . . . . . . . . . . . . . .
26
<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 November 14, 1996
Lewis S. Schiller (Principal Executive Officer)
/S/ Chief Financial Officer November 14, 1996
George W. Mahoney (Principal Financial and
Accounting Officer)
<PAGE>
Consolidated Technology Group Ltd. and Subsidiaries
Index to Exhibits
September 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
September 30, 1996
EX-11.1 Calculation of Earnings per Share
Three Nine
Months Months
Ended Ended
Sept. 30, Sept. 30,
1996 1996
---- ----
Net Loss: ($1,752,000) ($4,156,000)
============ ============
Loss per Share:
Loss per share - Note 1 ($0.04) ($0.10)
======= =======
Loss per Share - assuming full
dilution - Note 2
($0.04) ($0.01)
======= =======
Note 1:
Computed by dividing the net loss for the period by the weighted average number
of common shares outstanding (45,454,442 and 40,258,838) for the respective
three and nine month periods ended September 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 periods.
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 indicated 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 three
and nine month periods as quoted on the NASD.
(iii) Assumes that the current year conversions of preferred stock into 453,255
and 5,690,757 of common shares for the three and nine month periods ended
September 30, 1996, respectively, occurred at the beginning of the indicated
periods.
(iv) Assumes that at the beginning of the indicated periods, the 22,891
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
<PAGE>
<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-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 4,530,000
<SECURITIES> 586,000
<RECEIVABLES> 26,270,000
<ALLOWANCES> 3,016,000
<INVENTORY> 4,025,000
<CURRENT-ASSETS> 35,252,000
<PP&E> 39,306,000
<DEPRECIATION> 25,234,000
<TOTAL-ASSETS> 79,543,000
<CURRENT-LIABILITIES> 29,676,000
<BONDS> 0
<COMMON> 457,000
0
26,000
<OTHER-SE> 7,591,000
<TOTAL-LIABILITY-AND-EQUITY> 79,543,000
<SALES> 4,885,000
<TOTAL-REVENUES> 85,109,000
<CGS> 3,936,000
<TOTAL-COSTS> 67,520,000
<OTHER-EXPENSES> 20,513,000
<LOSS-PROVISION> 1,258,000
<INTEREST-EXPENSE> 3,125,000
<INCOME-PRETAX> (3,858,000)
<INCOME-TAX> 298,000
<INCOME-CONTINUING> (4,156,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,156,000)
<EPS-PRIMARY> (.10)
<EPS-DILUTED> (.00)
</TABLE>
