UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
The Quarter Ended September 30, 1997
Commission File Number 0-4186
CONSOLIDATED TECHNOLOGY GROUP LTD.
(Exact name of registrant as specified in its charter)
New York 13-1948169
(State or other jurisdiction of (IRS 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 14, 1997: 49,910,996
==========
<PAGE>
Consolidated Technology Group, Ltd.
Index
Page
Part I: - Financial Information: ----
Item 1. Financial Statements:
Consolidated Balance Sheets - September 30, 1997 and December
31, 1996 3-4
Consolidated Statements of Operations - Three and Nine Months
Ended September 30, 1997 and 1996 5
Consolidated Statement of Shareholders' Equity - Nine Months
Ended September 30, 1997 6
Consolidated Statements of Cash Flows - Nine Months Ended
September 30, 1997 and 1996 7-9
Notes to Consolidated Financial Statements 10-23
Item 2. Management's Discussion and Analysis of the Financial
Condition and Results of Operations 24-36
Part II - Other Information
Item 1. Legal Matters 37
Item 5. Other Matters 37
Item 6. Exhibits and Reports on Form 8-K 37-38
<PAGE>
Consolidated Technology Group Ltd. and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31,
September 30, 1996
1997 Restated
(Unaudited) (footnote 11 & 12)
----------- ------------------
<S> <C> <C>
Assets:
Current assets:
Cash and cash equivalents $ 706,000 $ 1,209,000
Receivables, net of allowances 11,358,000 8,876,000
Inventories 2,753,000 2,752,000
Loans receivable 95,000 269,000
Excess of accumulated costs over related billings 960,000 938,000
Prepaid expenses and other current assets 438,000 344,000
Net current assets of discontinued segments 3,640,000 4,281,000
---------- ----------
Total current assets 19,950,000 18,669,000
---------- ----------
Property, plant and equipment, net 1,245,000 1,107,000
--------- ---------
Other assets:
Capitalized software development costs 627,000 251,000
Goodwill, net 788,000 824,000
Covenants not to compete, net -- 60,000
Customer lists, net 5,564,000 5,967,000
Deferred offering costs 318,000 151,000
Receivables, related parties 1,063,000 1,296,000
Marketable securities 446,000 241,000
Other assets 227,000 152,000
Net assets of discontinued segments 8,889,000 10,672,000
---------- ----------
Total Other Assets 17,922,000 19,614,000
---------- ----------
----------- -----------
Total Assets $39,117,000 $39,390,000
=========== ===========
</TABLE>
See notes to consolidated financial statements
3
<PAGE>
Consolidated Technology Group Ltd. and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31,
September 30, 1996
1997 Restated
(Unaudited) (footnote 11 & 12)
----------- ------------------
<S> <C> <C>
Liabilities and Shareholders' Equity:
Current liabilities:
Accounts payable and accrued expenses $ 7,709,000 $ 5,034,000
Accrued payroll and related expenses 2,798,000 2,241,000
Accrued interest 695,000 104,000
Income taxes payable 356,000 738,000
Interim billings in excess of costs and estimated profits 1,773,000 1,444,000
Subordinated debt, related parties 924,000 924,000
Current portion of long-term debt 6,816,000 4,780,000
Current portion of subordinated debt 5,371,000 6,089,000
Current portion of capitalized lease obligations 46,000 59,000
Notes payable, related parties 14,000 --
Net current liabilities of discontinued segments 2,572,000 2,628,000
---------- ----------
Total current liabilities 29,074,000 24,041,000
---------- ----------
Long-term liabilities:
Long-term debt 150,000 227,000
Capitalized lease obligations 57,000 40,000
Subordinated debt 139,000 --
------- --
Total long-term liabilities 346,000 267,000
------- -------
Minority interest 14,312,000 12,617,000
---------- ----------
Shareholders' equity:
Preferred stock 3,000 26,000
Additional paid-in-capital, preferred stock -- 92,000
Common stock (50,000,000 shares authorized, 45,798,692
shares issued and outstanding as of September 30, 1997
and December 31, 1996) 499,000 458,000
Additional paid-in-capital, common stock 52,152,000 52,005,000
Unrealized gain on exchange translation -- 86,000
Unrealized gain on marketable securities 181,000 16,000
Accumulated deficit (57,450,000) (50,218,000)
------------ -----------
Total shareholders' equity (4,615,000) 2,465,000
----------- ---------
Total Liabilities and Shareholders' Equity $39,117,000 $39,390,000
=========== ===========
</TABLE>
See notes to consolidated financial statements
4
<PAGE>
Consolidated Technology Group Ltd. and Subsidiaries
Consolidated Statements of Operations
Unaudited
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
1996 1996
Restated Restated
1997 (footnote 11) 1997 (footnote 11)
---- ------------- ---- -------------
<S> <C> <C> <C> <C>
Revenues $24,518,000 $21,808,000 $72,521,000 $58,364,000
Direct Costs 22,237,000 20,030,000 66,402,000 52,484,000
---------- ---------- ---------- ----------
Gross Profit 2,281,000 1,778,000 6,119,000 5,880,000
Selling, General and Administrative 4,093,000 5,258,000 10,558,000 13,197,000
--------- --------- ---------- ----------
Loss from Operations (1,812,000) (3,480,000) (4,439,000) (7,317,000)
----------- ----------- ----------- -----------
Other Income (Expense):
Interest expense (375,000) (275,000) (944,000) (837,000)
Other income (expense), net 156,000 13,000 (600,000) 10,000
Realized gain (loss) on marketable securities (191,000) 392,000 (191,000) 645,000
--------- ------- --------- -------
Total other expense, net (410,000) 130,000 (1,735,000) (182,000)
--------- ------- ----------- ---------
Loss from Continuing Operations Before
Income Taxes and Minority Interest (2,222,000) (3,350,000) (6,174,000) (7,499,000)
Income Tax Provision (5,000) -- (7,000) --
Minority Interest in Loss of Subsidiaries 122,000 1,401,000 749,000 2,134,000
------- --------- ------- ---------
Loss from continuing operations (2,105,000) (1,949,000) (5,432,000) (5,365,000)
Discontinued Operations (footnote 10):
Income (Loss) from operations of discontinued segment 329,000 198,000 (1,404,000) 1,209,000
Loss on disposal of segments -- -- (396,000) --
------------ ------------ --------- ---------
Net Loss ($1,776,000) ($1,751,000) ($7,232,000) ($4,156,000)
============ ============ ============ ============
Loss per common share:
Loss from continuing operations ($0.05) ($0.05) ($0.12) ($0.13)
Loss from operations of discontinued segments $0.01 $0.01 ($0.03) $0.03
Loss on disposal of segments -- -- ($0.01) --
Net loss per common share ($0.04) ($0.04) ($0.16) ($0.10)
======= ======= ======= =======
Weighted average number of common shares 47,053,320 45,454,442 46,220,542 40,258,838
========== ========== ========== ==========
</TABLE>
See notes to consolidated financial statements
5
<PAGE>
Consolidated Technology Group, Ltd. and Subsidiaries
Consolidated Statement of Shareholders Equity for the
Nine Months Ended September 30, 1997
Unaudited
<TABLE>
<CAPTION>
Balance at Net
December 31, Stock Unrealized Unrealized Balance
1996 Conversion Issued in Gain on Investment at
Restated of Series A Lieu of Net Exchange Security September 30,
(footnote 12) Preferred Cash Payment Loss Translation Loss 1997
------------- ---------- ------------ ---- ----------- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Preferred stock $1.00 par value,
6% Series A, Authorized
77,713 shares:
Shares 22,891 (22,891) -- -- -- -- --
Amounts $ 23,000 ($ 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 $ 26,000 ($ 23,000) -- -- -- -- $ 3,000
Additional paid-in capital
preferred stock $ 92,000 ($ 92,000) -- -- -- -- --
Common stock, $0.01 par value,
50,000,000 shares authorized:
Shares 45,795,828 2,891,943 1,223,225 -- -- -- 49,910,996
Amounts $ 458,000 $ 29,000 $ 12,000 -- -- -- $ 499,000
Additional paid-in capital,
common stock $52,005,000 $ 86,000 $ 61,000 -- -- -- $52,152,000
Unrealized gain on exchange
translation $ 86,000 -- -- -- ($ 86,000) -- --
Unrealized gain on marketable
securities $ 16,000 -- -- -- -- $ 165,000 $ 181,000
Accumulated deficit ($50,218,000) -- -- ( $7,232,000) -- -- ($57,450,000)
------------- ---------- ---------- ------------- --------- --------- -------------
Total shareholders' equity $ 2,465,000 -- $ 73,000 ( $7,232,000) ($ 86,000) $ 165,000 ($ 4,615,000)
=========== ========== ========== ============= ========== ========= =============
</TABLE>
See notes to consolidated financial statements.
6
<PAGE>
Consolidated Technology Group Ltd. and Subsidiaries
Consolidated Statements of Cash Flows
Unaudited
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1996
Restated
1997 (footnote 11)
---- -------------
<S> <C> <C>
Cash Flows from Operating Activities:
Loss from continuing operations ($ 5,432,000) ($ 5,365,000)
Adjustments to reconcile loss from continuing operations to net cash
provided by (used in) continuing operations:
Depreciation and amortization 864,000 1,026,000
Minority interest in net loss of consolidated subsidiaries (749,000) (2,134,000)
Bad debt expense 462,000 116,000
Loss from equity method investments 140,000 109,000
Noncash expense from subsidiaries issuance of options and warrants 106,000 2,229,000
Value of stock issued in lieu of cash payments for services rendered 73,000 1,759,000
Consulting charges on option exercise -- 45,000
Realized (gain) loss on marketable securities 191,000 (645,000)
(Gain) loss on disposal of fixed assets -- (2,000)
Write-off deferred offering costs 162,000 --
Change in assets and liabilities:
(Increase) decrease in assets:
Receivables (2,565,000) (3,350,000)
Inventories (1,000) (470,000)
Excess of accumulated costs over related billings (94,000) 203,000
Prepaid expenses and other current assets (22,000) (245,000)
Increase (decrease) in liabilities:
Accounts payable and accrued expenses 2,676,000 117,000
Accrued payroll taxes and related expenses 557,000 1,791,000
Accrued interest 591,000 15,000
Income taxes payable (382,000) 146,000
Interim billings in excess of costs and estimated profits 329,000 (205,000)
------- ---------
Net cash used in continuing operations (3,094,000) (4,860,000)
----------- -----------
Income (loss) from discontinued operations (1,800,000) 1,209,000
Adjustments to reconcile loss from discontinued operations to net cash
provided by (used in) discontinued operations:
Depreciation and amortization 4,643,000 1,688,000
Bad debt expense 1,864,000 1,142,000
(Gain) loss on disposal of fixed assets (31,000) 119,000
Loss on disposal of segments 396,000 --
Net change in assets and liabilities (4,720,000) (4,254,000)
----------- -----------
Net cash provided by (used in) discontinued operations 352,000 (96,000)
------- --------
Net cash used in operating activities (2,742,000) (4,956,000)
----------- -----------
(continued)
</TABLE>
See notes to consolidated financial statements
7
<PAGE>
Consolidated Technology Group Ltd. and Subsidiaries
Consolidated Statements of Cash Flows
Unaudited
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1996
Restated
1997 (footnote 11)
---- -------------
<S> <C> <C>
Cash Flows from Investing Activities:
(Increase) decrease in other assets (10,000) (99,000)
Capital expenditures (361,000) (117,000)
Capitalized software development costs (462,000) (278,000)
Investments in marketable securities (149,000) (345,000)
Proceeds from sale of marketable securities 62,000 944,000
Payments for loans made (252,000) (5,306,000)
Collections for repayment of loans made 348,000 2,009,000
------- ---------
Net cash used in investing activities (824,000) (3,192,000)
--------- -----------
Cash Flows from Financing Activities:
Deferred offering costs (329,000) (187,000)
Net advances from (payments to) asset based lender 1,182,000 (587,000)
Proceeds from issuance of debt 814,000 3,000,000
Repayment of debt (23,000) (519,000)
Proceeds from issuance of subordinated debt 139,000 --
Repayment of subordinated debt (718,000) (700,000)
Payments on capital lease obligations (52,000) (34,000)
Issuance of common stock -- 913,000
Subsidiaries issuance of common stock 2,000,000 6,202,000
Subsidiaries issuance and exercise of stock options 50,000 1,600,000
------ ---------
Net cash provided by financing activities 3,063,000 9,688,000
--------- ---------
Net Increase (Decrease) in Cash and Cash Equivalents (503,000) 1,540,000
Cash and Cash Equivalents at Beginning of Period 1,209,000 2,990,000
--------- ---------
Cash and Cash Equivalents at End of Period $ 706,000 $4,530,000
=========== ==========
Supplemental Disclosures of Cash Flow Information:
Cash paid for:
Interest $ 353,000 $2,800,000
=========== ==========
Income taxes $ 389,000 $ 301,000
=========== ==========
(concluded)
</TABLE>
See notes to consolidated financial statements
8
<PAGE>
Consolidated Technology Group, Ltd. and Subsidiaries
Consolidated Statement of Cash Flows
Unaudited
Supplemental Disclosures of Non Cash Investing and Financing Activities:
During the Nine Month Period Ended September 30, 1997:
(1) - Acquired equipment under capital lease obligations with a net present
value of $56,000.
(2) - Issued common stock with a value of $73,000 in lieu of cash payments for
services performed.
(3) - A subsidiary of the Company, operating in the Contract Engineering
Services segment, incurred noncash compensation expense from the issuance of
stock options with a value of $106,000
During the Nine Month Period Ended September 30, 1996:
(1) - A subsidiary of the Company, operating in the Medical Information
Services segment, incurred noncash compensation expense from the issuance of
stock options and warrants to purchase stock with a value of $2,229,000.
(2) - Acquired equipment under capital lease obligations with a net present
value of $175,000.
(3) - Issued stock options and incurred noncash consulting fees of $45,000.
(4) - A subsidiary of the Company issued common stock with a value of
$1,759,000 in lieu of cash payments for services performed.
See notes to consolidated financial statements
9
<PAGE>
Consolidated Technology Group Ltd. and Subsidiaries
Unaudited Footnotes 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
Consolidated Technology Group, Ltd. and Subsidiaries, (the "Company"), as of
September 30, 1997 and December 31, 1996, the statement of changes in
shareholders' equity for the nine months ended September 30, 1997, the results
of its operations for the three and nine months ended September 30, 1997 and
1996 and the changes in cash flows for the nine months ended September 30, 1997
and 1996.
(2) 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,
1996 Form 10-K.
(3) Interim Results - The results of operations for the three and nine months
ended September 30, 1997 and 1996 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 - During the nine months ended September 30, 1997, the
Company discontinued three of its operating subsidiaries, Three Dimensional
Products and Services, Audio Products Manufacturing and Medical Diagnostics (see
footnote 11), and as a result, currently classifies its continuing operations
into five 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)
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,
prepaid telephone calling cards and finger print identification products; (iii)
Medical Information Services consists of subsidiaries that provide medical
information database services, health care industry related software packages
and the SmartCard medical identification cards and related software program;
(iv) Telecommunications consists of a subsidiary that, among other things,
installs telephonic network systems and buys and resells local and long-distance
telephone service and (v) 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.
Intercompany transactions represent the consulting fees that the Business
Consulting Services segment charges to the other segments. Intercompany balances
represents amounts that are due the Company and the Business Consulting Services
segment from the business segments for advances that have been made to the
segments and for unpaid consulting fees. Certain reclassifications have been
made from the prior year presentation whereby the holding company of Trans
Global Services, Inc. is presented as a part of the Contract Engineering
Services segment and in the prior year it was included with corporate and other.
Additionally, the prior period segment information has been restated to reflect
the discontinuation of the Three Dimensional Products and Services, Audio
Products Manufacturing and Medical Diagnostics segments. Inter segment sales
(other than those with the Business Consulting services segment) and sales
outside the United States are not material. Information concerning the Company's
business segments is as follows:
10
<PAGE>
Consolidated Technology Group, Ltd. and Subsidiaries
Unaudited Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(5) Industry Segments:
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
1996 1996
Restated Restated
1997 (footnote 11) 1997 (footnote 11)
---- ------------- ---- -------------
<S> <C> <C> <C> <C>
Revenues:
Contract Engineering Services $18,799,000 $16,912,000 $57,689,000 $45,380,000
Electro-Mechanical and Electro-Optical
Products Manufacturing 1,101,000 1,005,000 2,623,000 2,386,000
Medical Information Services 1,831,000 1,563,000 5,144,000 6,499,000
Telecommunications 2,780,000 2,322,000 7,046,000 4,080,000
Business Consulting Services 127,000 97,000 381,000 261,000
Intercompany Transactions (120,000) (91,000) (362,000) (242,000)
----------- ----------- ----------- -----------
Total Revenues $24,518,000 $21,808,000 $72,521,000 $58,364,000
=========== =========== =========== ===========
Gross Profit (Loss):
Contract Engineering Services $ 1,761,000 $ 1,524,000 $ 4,782,000 $ 3,817,000
Electro-Mechanical and Electro-Optical
Products Manufacturing 219,000 124,000 162,000 345,000
Medical Information Services (87,000) (29,000) 335,000 1,283,000
Telecommunications 366,000 137,000 774,000 369,000
Business Consulting Services 127,000 97,000 381,000 261,000
Intercompany Transactions (105,000) (75,000) (315,000) (195,000)
----------- ----------- ----------- -----------
Total Gross Profits $ 2,281,000 $ 1,778,000 $ 6,119,000 $ 5,880,000
=========== =========== =========== ===========
Income (Loss) from Operations:
Contract Engineering Services $ 689,000 $ 261,000 $ 1,167,000 ($ 19,000)
Electro-Mechanical and Electro-Optical
Products Manufacturing (150,000) (383,000) (809,000) (735,000)
Medical Information Services (540,000) (2,279,000) (1,525,000) (4,140,000)
Telecommunications (297,000) (261,000) (943,000) (712,000)
Business Consulting Services (152,000) (76,000) 42,000 56,000
Corporate and Other (1,362,000) (742,000) (2,371,000) (1,767,000)
------------- ------------- ------------- -------------
Total Loss from Operations ($ 1,812,000) ($ 3,480,000) ($ 4,439,000) ($ 7,317,000)
============= ============= ============= =============
Net Income (Loss):
Contract Engineering Services $ 521,000 ($ 201,000) $ 679,000 ($ 695,000)
Electro-Mechanical and Electro-Optical
Products Manufacturing (229,000) (424,000) (980,000) (845,000)
Medical Information Services (665,000) (2,536,000) (1,904,000) (4,662,000)
Telecommunications (362,000) (294,000) (1,146,000) (803,000)
Business Consulting Services (223,000) 89,000 (30,000) 223,000
Corporate and Other (1,147,000) 1,417,000 (1,922,000) 1,417,000
Discontinued Segments 329,000 198,000 (1,929,000) 1,209,000
------------- ------------- ------------- -------------
Total Net Loss ($ 1,776,000) ($ 1,751,000) ($ 7,232,000) ($ 4,156,000)
============= ============= ============= =============
</TABLE>
11
<PAGE>
Consolidated Technology Group, Ltd. and Subsidiaries
Unaudited Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(5) Industry Segments:
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
1996 1996
Restated Restated
1997 (footnote 11) 1997 (footnote 11)
---- ------------- ---- -------------
<S> <C> <C> <C> <C>
Depreciation and Amortization:
Contract Engineering Services $ 191,000 $ 118,000 $ 296,000 $ 354,000
Electro-Mechanical and Electro-Optical
Products Manufacturing 19,000 17,000 55,000 49,000
Medical Information Services 161,000 316,000 440,000 537,000
Telecommunications 22,000 71,000 59,000 72,000
Business Consulting Services -- 1,000 1,000 2,000
Corporate and Other 4,000 8,000 13,000 12,000
----------- ----------- ----------- -----------
Total Depreciation and Amortization $ 397,000 $ 531,000 $ 864,000 $ 1,026,000
=========== =========== =========== ===========
Capital Expenditures:
Contract Engineering Services $ 55,000 $ 5,000 $ 159,000 $ 46,000
Electro-Mechanical and Electro-Optical
Products Manufacturing -- 1,000 7,000 2,000
Medical Information Services 53,000 27,000 137,000 62,000
Telecommunications 51,000 -- 52,000 --
Business Consulting Services -- -- -- --
Corporate and Other 1,000 -- 6,000 7,000
----------- ----------- ----------- -----------
Total Capital Expenditures $ 160,000 $ 33,000 $ 361,000 $ 117,000
=========== =========== =========== ===========
December 31,
1996
September 30, Restated
1997 (footnote 11 & 12)
---- -----------
Identifiable Assets:
Contract Engineering Services $14,655,000 $13,181,000
Electro-Mechanical and Electro-Optical
Products Manufacturing 3,689,000 3,388,000
Medical Information Services 7,082,000 8,258,000
Telecommunications 3,468,000 1,655,000
Business Consulting Services 1,686,000 1,754,000
Corporate and Other 44,050,000 49,437,000
Discontinued Segments 14,641,000 18,837,000
Intercompany Balances (50,154,000) (57,120,000)
------------ ------------
Total Identifiable Assets: $39,117,000 $39,390,000
=========== ===========
</TABLE>
12
<PAGE>
Consolidated Technology Group Ltd. and Subsidiaries
Unaudited Footnotes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(6) Matters Subject to Stockholder Approval - The following matters are being
presented to the stockholders for their approval at the 1997 Annual Meeting of
Stockholders:
(a) The election of four (4) directors to serve until the 1998 Annual Meeting
of Shareholders and until their successors shall be elected and qualified;
(b) The approval of a one-for-30 reverse split of the Company's common stock;
(c) The approval of an amendment to the Company's certificate of incorporation
to change the number of authorized shares of common stock to (i) 25,000,000 if
the one-for-30 reverse spilt is approved by the shareholders or (ii) 150,000,000
if the one-for-30 reverse split is not approved by the shareholders;
(d) The approval of the reincorporation of the Company into Delaware through
the merger of the Company into its wholly-owned subsidiary, Consolidated
Technology Group Ltd., a Delaware corporation;
(e) The approval of the Company's 1997 Long-Term Incentive Plan;
(f) The approval of Moore Stephens, P.C. as the Company's independent
certified public accountants for the year ending December 31, 1997; and
(g) The transaction of such other and further business as may properly come
before the meeting.
All per share amounts reflected in the financial statements do not reflect the
approval of the above pending reverse split of the Company's common stock.
(7) Related Party Transactions
Common Stock Sold to CEO - In July 1997, the Company's Chief Executive Officer,
("CEO"), purchased 1,190,000 shares of common stock from the Company at $0.03
per share, reflecting a discount from the bid price on the date of sale, which
was $0.06 per share. Payment for the purchase price of such shares was effected
by a reduction of the Company's obligation to the CEO for past compensation.
Contemporaneously, the CEO agreed to purchase an additional 5,000,000 shares of
common stock at $0.03 per share. Such shares are to be issued and paid for at
such time as the Company has a sufficient number of shares of common stock for
issuance and if such shares do not become available by January 31, 1998, the CEO
may cancel the subscription agreement. Payment of the purchase price of such
shares are expected to be paid through a reduction of the Company's obligations
to the CEO. As of September 30, 1997, the balance due the CEO was $642,000 of
which $319,000 represented accrued salary, vacation and sick pay and $323,000
represents accrued commissions on sales of the Company's investment securities.
Sale of Subsidiary Stock to Subsidiary Employee - In July 1997, SIS Capital
Corp., ("SISC"), a wholly owned subsidiary of the Company, sold 258,333 common
shares of Trans Global Services, Inc., ("TGS"), a majority owned, publicly held
subsidiary of the Company operating in the Contract Engineering Services
segment, to the president of TGS at $1.67, the fair market value of the TGS
common stock on the date of sale. The Company's book basis in such shares
approximated $622,000 resulting in a loss on the sale of approximately $191,000.
Payment by the president of TGS is to be evidenced by a prommissory note from
the president of TGS.
(8) Subordinated Promissory Notes - During the nine months ended September 30,
1997, the Company received $139,000 from the issuance of subordinated notes. The
subordinated notes accrue interest at 15% and principal and accrued interest are
due on July 1, 1999. The subordinated note holders have the right to convert the
notes to 4,644,000 shares of common stock at $0.03. As of September 30, 1997 the
Company's Chief Financial Officer, ("the CFO"), and three key employees hold
subordinated notes of $15,000 and $9,000, respectively, which bear the right to
convert to 488,866 and 305,542 shares of common stock, respectively, at $0.03
per share.
13
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Consolidated Technology Group Ltd. and Subsidiaries
Unaudited Footnotes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(9) 1997 Long-Term Incentive Plan - In July 1997, the Board of Directors
adopted, subject to stockholder approval, the 1997 Long-Term Incentive Plan (the
"Plan"), covering 2,490,000 shares of Common Stock. All officers and directors
of the Company are eligible for options under the Plan. If shares subject to an
option or other right under the Plan cease to be subject to such option or
right, or if shares awarded under the Plan are forfeited, or otherwise terminate
without a payment being made to the participant in the form of stock, such
shares will again be available for future issuance under the Plan.
Awards under the Plan may be made to key employees, including officers,
directors and consultants to the Company and its subsidiaries, except that
options or rights cannot be granted to directors who are not otherwise employed
or engaged as a consultant by the Company or its subsidiaries. The Plan imposes
no limit on the number of officers and other key employees to whom awards may be
made.
The Plan will be administered by a committee of at least two non-employee
directors to be appointed by the board (the "Committee"). The Committee has
broad discretion in determining the persons to whom stock options or other
awards are to be granted, the terms and conditions of the award, including the
type of award, the exercise price and term, the vesting provisions and the
restrictions and forfeiture conditions. Members of the Committee are eligible
for the grant of options and other rights under the Plan. If no committee is
appointed, the functions of the committee shall be performed by the board of
directors. The Committee will have the authority to grant the following types of
awards under the Plan: incentive or non-qualified stock options; stock
appreciation rights; restricted stock; deferred stock; stock purchase rights
and/or other stock-based awards. The Plan is designed to provide the Committee
with broad discretion to grant incentive stock-based rights.
In July 1997, the Committee granted options to purchase 460,000 shares of Common
Stock to each of two board members, the CEO, CFO and Secretary and options to
purchase an aggregate of 190,000 shares of Common Stock to three key employees.
The options granted to the CEO, CFO, Secretary and three key employees are
incentive stock options, and the options granted to the two board members are
non-qualified stock options. The exercise price of the options is $.125 per
share, which was the fair market value on the date of grant. The options have a
term of seven years from the date of grant and are immediately exercisable,
subject to stockholder approval of the Plan. These option grants are subject to
stockholder approval of the Plan. In the event that stockholder approval of the
Plan is not obtained, the options will terminate.
(10) Concentrations of Credit Risk - The Company's segments extend credit to
customers which result in accounts receivable arising from their normal business
activities and do not require its customers to collateralize their payable. The
Company's segments routinely assess the financial strength of its customer and
believe that their accounts receivable credit risk exposure is limited. Such
estimate of the financial strength of such customers may be subject to change in
the near future. Trans Global Services, Inc., (TGS"), which operates in the
Contract Engineering Services segment, has five clients, which when combined,
account for approximately 80% of the total revenues and accounts receivable of
the segment TGS's revenues for the nine months ended September 30, 1997 amount
to $57,390,000, or 80%, of the Company's consolidated revenues. TGS's
outstanding accounts receivable amounts to $6,295,000, or 55%, of the Company's
consolidated accounts receivable as of September 30, 1997.
14
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Consolidated Technology Group Ltd. and Subsidiaries
Unaudited Footnotes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(11) Discontinued Operations - During the nine months ended September 30, 1997,
the Company discontinued the Three Dimensional Products and Services, Audio
Products Manufacturing and Medical Diagnostics segments.
(a) Audio Products Manufacturing - On May 20, 1997, pursuant to a Comprehensive
Agreement, (the "WWR Agreement") by and among Mr. Donald L. Shamsie and Malco
Theatres, (the "Purchasers") and WWR Acquisition Corp., a majority owned holding
company of the Company which owned all of the capital stock of WWR Technology,
Inc., ("WWR"), (the "Seller"), the Company sold all of the issued and
outstanding capital stock of WWR, the subsidiary in which all of the operations
of the Audio Products Manufacturing segment operating activities were conducted,
for $100,000. As a part of the WWR agreement, the Company was released as a
guarantor on approximately $394,000 in debt obligations owed by WWR to two
lenders. As a result of the sale, the Company received net proceeds of
approximately $62,000 and recorded a gain of approximately $129,000 on the
disposal. The operations of WWR up to the date of the WWR Agreement are
classified as loss from the operations of a discontinued segment.
As of December 31, 1996 the assets and liabilities of the Audio Products
Manufacturing segment included in the Company's consolidated balance sheet
consisted of the following:
Cash $ 50,000
Accounts receivable, net 336,000
Inventories 386,000
Prepaid and other current assets 10,000
Property, plant and equipment 309,000
Receivables, long-term 7,000
Trademark, net 368,000
Other assets 13,000
---------
Total assets 1,479,000
---------
Accounts payable and accrued expenses 1,010,000
Accrued payroll and related expenses 146,000
Accrued interest 4,000
Current portion of long-term debt 541,000
Current portion of capitalized lease obligations 4,000
Capitalized lease obligations 10,000
---------
Total liabilities 1,715,000
---------
Net liabilities disposed of $ 236,000
===========
Presented in the balance sheet as follows:
Net long-term assets of discontinued segment $ 687,000
Net current liabilities of discontinued segment 923,000
-----------
Net liabilities disposed of $ 236,000
===========
15
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Consolidated Technology Group Ltd. and Subsidiaries
Unaudited Footnotes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(b) Three Dimensional Products and Services - Effective June 30, 1997, (the
Measurement Date"), the Company formulated a plan to discontinue the operations
of all of the subsidiaries operating in the Three Dimensional Products and
Services segment. As of the measurement date, the Company accrued an estimate of
$250,000 for anticipated losses from the measurement date until the date the
disposal is completed, which is not expected to take longer than one year. The
Company has written-off all assets of the Three Dimensional Products and
Services subsidiaries, consisting primarily of capitalized product development
costs and property, plant and equipment, and has recorded the remaining
liabilities, including the estimated loss to be incurred until the plan is
complete, as net liabilities of a discontinued segment. As a result of the plan,
the Company has recorded a loss of approximately $525,000 on the planned
disposal. The operations of the Three Dimensional Products and Services segment
up to the Measurement Date, have been restated to present the operations of the
Three Dimensional Products and Services segment as a discontinued segment.
As of September 30, 1997 and December 31, 1996 the assets and liabilities of the
Three Dimensional Products and Services segment included in the Company's
consolidated balance sheet consisted of the following.
September 30, December 31,
1997 1996
---- ----
Cash $ 48,000
Accounts receivable, net 100,000
Prepaid and other current assets 11,000
Property, plant and equipment 444,000
Deferred offering costs 115,000
Other assets 350,000
-------
Total assets 1,068,000
---------
Accounts payable and accrued expenses $ 1,814,000 1,007,000
Accrued payroll and related expenses 282,000 343,000
Accrued interest 22,000 1,000
Notes payable, related parties 279,000 295,000
Current portion of long-term debt 175,000 175,000
Current portion of capitalized lease obligations 43,000
Capitalized lease obligations -- 68,000
----------- ------
Total liabilities 2,572,000 1,932,000
--------- ---------
Net liabilities to be disposed of $ 2,572,000 $ 864,000
=========== ===========
Presented in the balance sheet as follows:
Net long-term assets of discontinued segment -- $ 841,000
Net current liabilities of discontinued segment $ 2,572,000 1,705,000
----------- ---------
Net liabilities to be disposed of $ 2,572,000 $ 864,000
=========== ===========
16
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Consolidated Technology Group Ltd. and Subsidiaries
Unaudited Footnotes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(c) Medical Diagnostics - Effective September 1, 1997, (the Measurement Date"),
the Company formulated a plan to discontinue the operations of all of the
subsidiaries operating in the Medical Diagnostics segment. Such plan
contemplates the sale of substantially all of the assets and certain liabilities
of the Medical Diagnostics segment. As of the measurement date it is not
anticipated that this segment will incur any material losses until the date the
disposal is completed, which is not expected to take longer than one year.
Furthermore it is not anticipated that the disposal of the assets will result in
a loss on disposal. The Company has classified all assets and liabilities to be
disposed of as net assets of a discontinued segment. The operations of the
Medical Diagnostics segment up to the Measurement Date, have been restated to
present the operations as a discontinued segment.
As of September 30, 1997 and December 31, 1996 the assets and liabilities of the
Medical Diagnostics segment included in the Company's consolidated balance sheet
consisted of the following.
September 30, December 31,
1997 1996
---- ----
Cash $ 1,803,000 $ 1,539,000
Accounts receivable, net 9,848,000 11,822,000
Prepaid and other current assets 282,000 254,000
Property, plant and equipment 9,971,000 12,561,000
Goodwill 9,317,000 9,729,000
Covenant not to compete -- 826,000
Customer lists, net 4,525,000 4,807,000
Deferred offering costs 257,000 322,000
Receivable, long-term 1,543,000 --
Other assets 777,000 882,000
---------- ----------
Total assets 38,323,000 42,742,000
---------- ----------
Accounts payable and accrued expenses 2,810,000 4,134,000
Accrued payroll and related expenses 149,000 --
Accrued interest 71,000 61,000
Current portion of long-term debt 3,758,000 3,686,000
Current portion of subordinated debt 180,000 180,000
Current portion of capitalized lease obligations 1,325,000 1,273,000
Deferred interest 411,000 568,000
Long-term debt 14,968,000 16,240,000
Capitalized lease obligations 1,941,000 2,864,000
Subordinated debt 181,000 312,000
---------- ----------
Total liabilities 25,794,000 29,318,000
---------- ----------
Net assets to be disposed of $12,529,000 $13,424,000
=========== ===========
Presented in the balance sheet as follows:
Net current assets of discontinued segment $ 3,640,000 $ 4,281,000
Net long-term assets of discontinued segment 8,889,000 9,143,000
----------- -----------
Net assets to be disposed of $12,529,000 $13,424,000
=========== ===========
(12) Lafayette Settlement Agreement - On December 20, 1996, SIS Capital Corp., a
wholly-owned subsidiary of the Company ("SISC"), entered into an agreement among
SISC, DLB, Inc. ("DLB") and Lafayette Industries, Inc., ("Lafayette"), pursuant
to which SISC and DLB transferred to Lafayette all of the issued and outstanding
common stock of SES Holdings, Corp. ("SESH"), in exchange for a controlling
interest in Lafayette. At the date of the acquisition, SESH was an 80% owned
subsidiary of SISC. Lafayette issued to SISC 1,000 shares of Class A preferred
stock which is convertible at a ratio that will give SISC a 65% ownership of
Lafayette's fully diluted common stock upon stockholder approval of an increase
in the authorized number of common shares of Lafayette. Contemporaneously with
the reverse acquisition, Lafayette issued 1,000 shares of Class B preferred
stock which has a redemption value of $6,750,000. The Series B preferred stock
was issued as payment to SISC for $4,000,000 of subordinated debt due to SISC
and in exchange for the cancellation of $2,750,000 of preferred stock of the
17
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Consolidated Technology Group Ltd. and Subsidiaries
Unaudited Footnotes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
underlying entities of SESH which was held by SISC. Lafayette's prior principal
business, which was principally the manufacture and sale of store fixtures, has
been discontinued.
Lafayette's Form 10-KSB for its year ended December 31, 1996, filed April 15,
1997, included a disclaimer of opinion by Lafayette's independent certified
public accountants. This report disclosed that there was substantial doubt with
respect to Lafayette's ability to continue as a going concern. In addition,
Lafayette's accountants reported that they were unable to obtain written
representations from Lafayette's counsel regarding litigation relating, among
other things, to financial guarantees. Because of material uncertainties on the
part of the Company and SISC with respect to Lafayette's guarantees, pending
litigation, the accuracy of representations and warranties made by Lafayette in
the December 20, 1996 Stock Purchase Agreement with SISC, DLB, Inc. ("DLB") and
Lewis S. Schiller ("LSS") (the "Agreement"), the accuracy and completeness of
Lafayette's financial statements with respect to material liabilities,
Lafayette's financial condition and other matters, all of which were brought to
the attention of Lafayette by SISC following the discovery thereof, SISC's and
Lafayette's respective boards of directors determined that, in order to avoid
costly and time consuming litigation, Lafayette and SISC would enter into an
agreement providing for, among other things, the following: (a) Lafayette's
transfer to SPECTEC, Inc., ("SPECTEC"), a majority owned subsidiary of SISC, and
to DLB and LSS, as their respective interest appear, of all of Lafayette's
interest in SES Holdings Corp. ("SESH") acquired by Lafayette pursuant to the
Agreement; (b) SISC's transfer (or the transfer to Lafayette by any other
holder) of all of the Class A Convertible Preferred Stock and Series B
Redeemable Preferred Stock of Lafayette issued by Lafayette in consideration of
the purchase of the capital stock of SESH under the Agreement; (c) DLB's and
LSS's waiver of their respective rights, as provided for in the Agreement, to
receive any shares of Lafayette Common Stock; (d) the cancellation of all
obligations for loans and/or advances by Lafayette to SESH or subsidiaries of
SESH and the treatment of the amount of any such loans and/or advances as
additional contributions to capital; (e) the indemnification by SPECTEC of
Lafayette, on a limited basis, from and against any losses or damages resulting
from claims by those investors who purchased from Lafayette 8,000,000 shares of
Lafayette's capital stock in private transactions between December 20, 1996 and
April 21, 1997; and (f) the delivery by SPECTEC to Lafayette of any of such
securities purchased by such investors which were delivered to such investors by
Lafayette. A Settlement Agreement containing the foregoing provisions was
consummated between Lafayette, SISC., DLB, Lewis S. Schiller and SPECTEC as of
April 21, 1997.
At the time of the reverse acquisition, Lafayette's prior operations were
discontinued and the statement of operations for the year ended December 31,
1996 and the 1997 operations do not include any operating activity related to
Lafayette. As of December 31, 1996, the assets and liabilities of Lafayette
included in the Company's consolidated balance sheet consisted of the following
Cash $ 1,020,000
Loans receivable 49,000
Prepaid and other current assets 24,000
Receivables, long-term 441,000
Receivables, related parties 85,000
Other assets 469,000
---------
Total assets 2,088,000
---------
Accounts payable and accrued expenses 1,202,000
Notes payable, related parties 690,000
Current portion of long-term debt 458,000
Convertible debentures 700,000
Current portion of capitalized lease obligations 99,000
---------
Total liabilities 3,149,000
---------
Net liabilities disposed of $ 1,061,000
===========
As of December 31, 1996, the Company's investment in Lafayette was in excess of
Lafayette's equity resulting in a reduction in the Company's additional paid-in
capital of $1,061,000. The December 31, 1996 balance sheet has been restated to
conform with the current period presentation whereby the above assets and
liabilities and the decrease in additional paid-in capital were reversed.
18
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Consolidated Technology Group Ltd. and Subsidiaries
Unaudited Footnotes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(13) Contingencies
Involuntary Bankruptcy Petitions - On October 22, 1997, involuntary petitions,
(the"Petitions"), were filed under chapter 7 of the U.S. Bankruptcy Code against
certain subsidiaries of the Company operating in the Medical Diagnostics
segment. Such subsidiaries have filed a motion to dismiss the petitions.
Although counsel has advised the Company that such filings were improper as a
matter of law, the outcome of the motion to dismiss the Petitions can not be
predicted with certainty. Currently, the Company is unable to estimate the
impact, if any, of such Petitions on the financial statements.
Consultants Claims - A claim has been made against the Company by two
consultants claiming, among other things, an equity interest in one of the
Company's subsidiaries operating in the Medical Diagnostics segment, shares of
the Company's common stock and certain consulting fees of approximately $300,000
in addition to ongoing consulting fees allegedly due pursuant to certain
agreements with the Company. The Company believes that it has valid defenses to
the claims and that any liability to which the Company will be subject will not
be material.
(14) Employment Agreements
Chief Executive Officer
During 1997, the Company entered into a restated employment agreement, (the
"CEO's Agreement"), with the Company's chief executive officer, (the "CEO"),
whereby the Board of Directors of the Company, (the "Board"), and the CEO agreed
that the prior employment agreements, (original employment agreement dated
January 1988, and certain restated employment agreements entered into in
September 1993, October 1994 and January 1996 did not accurately and properly
reflect the intent and prior understanding and agreement of the parties as to
certain matters.
Term of CEO's Agreement:
The term of the CEO's Agreement commenced January 1988, the date of the original
employment agreement, and expires on December 31, 2000. The CEO's Agreement is
subject to termination prior to December 31, 2000 pursuant to certain
termination provisions contained in the agreement.
CEO's Compensation:
Effective September 1996, the CEO's annual salary is $500,000 and shall increase
annually by the greater of 5% or the increase in the cost of living index. A
bonus for each year is payable in an amount equal to 10% of the amount by which
the greater of (A) the Company's consolidated net income before taxes, or, (B)
the Company's consolidated net cash flow calculated as the Company's net income
plus depreciation, amortization and other non-cash items of expense, minus
payments of all principal amounts of outstanding debt, exceeds $600,000..
CEO's Benefits:
The CEO is entitled to four weeks paid vacation and fifteen paid sick days
during each year. The Company will pay for and maintain for the CEO disability
insurance providing for payment to the CEO of a minimum of 60% of his salary.
The Company is also required to pay and maintain for the CEO major medical,
hospitalization, dental and vision insurance and life insurance having a face
value of not less than $2,000,000, the proceeds of which shall be payable to
such beneficiaries as may be designated by the CEO. The Company will maintain
such disability, medical, dental, and vision insurance, at the Company's expense
for a period of 10 years after the expiration or termination of the CEO's
Agreement. The Company provides the CEO with a vehicle and reimburses the CEO
for all costs incurred by the CEO in connection therewith.
CEO's Severance:
In addition to any salary or bonus payable pursuant to the CEO's Agreement, the
CEO is entitled to severance compensation under the following circumstances:
19
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Consolidated Technology Group Ltd. and Subsidiaries
Unaudited Footnotes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(i) - In the event of the death of the CEO, the Company shall pay to the CEO's
beneficiary the face value of the life insurance policy to be maintained by the
Company.
(ii) - In the event of the permanent disability of the CEO, the Company shall
pay to the CEO, 60% of his then salary for 10 years. In the event of a temporary
disability, (generally 6 months), the Company shall pay to the CEO 100% of his
salary and bonus for the period of the disability.
(iii) - The CEO will continue to receive his salary for 10 years, if the CEO's
Agreement is terminated due to any of the following events, (1) upon notice to
the Company by the CEO of the termination of the agreement for any breach or
default by the Company of any of its obligations or covenants under the CEO's
Agreement, provided that any such breach or default is not cured within 30 days
from notice; (2) in the event of a change of control, the CEO may terminate the
CEO's Agreement upon 90 days notice; wherein change of control is defined as the
date on which the Company sells all or substantially all of its assets or sells
more than 50% of the outstanding capital stock of any one or more subsidiaries,
the aggregate gross revenues of which constitute 33.33% or more of the aggregate
gross revenues of the Company on a consolidated basis, merges with or into or
consolidates with any entity, issues to an independent, non-affiliated third
party such number of shares of its outstanding capital stock (or equity or debt
instruments securities convertible into or exchangeable for shares of the
Company's capital stock) as shall equal 25% or more of its total issued and
outstanding shares of capital stock, or the CEO is removed from the Board,
without cause, provided, however, that a change of control shall not be deemed
to occur as a result of or in conjunction with any recapitalization or public
offering of the Company's securities or the occurrence of any of the foregoing
transactions which is approved by the CEO; (3) upon 30 days notice from the CEO
if the CEO is removed from the Board without cause; or (4) upon seven days
notice from the CEO in the event of the entry by a court of competent
jurisdiction of a decree or order for relief in respect of the Company in an
involuntary case under any applicable bankruptcy, insolvency, or similar law
then in effect or the appointment of a receiver, liquidator, assignee,
custodian, trustee, or sequestrator of the Company or any substantial part of
its property or an order by any such court for the wind-up or liquidation of the
Company's affairs; or a petition initiating an involuntary case under any such
bankruptcy, insolvency, or similar law is filed against the Company and is
pending for 60 days without a stay or dismissal; or the Company commences a
voluntary case under any such bankruptcy, insolvency, or similar law then in
effect, or makes any general assignment for the benefit of its creditors or
fails generally to pay its debts as such debts become due or takes corporate
action in furtherance of any of the foregoing.
CEO's Retirement:
In the event of the retirement of the CEO, the CEO or his beneficiary will
continue to receive monthly retirement compensation equal to one-twelfth of the
greater of, (A) the CEO's then annual salary; or (B) the average of the annual
salary and bonus of the CEO for each of the five years preceding the year of
retirement, for a period of 10 years from the date of retirement. Retirement
shall be deemed to have occurred at the expiration of the CEO's Agreement, or
any renewal of the CEO's Agreement, or at the mutual consent of the CEO and the
Company.
CEO's Participation in the Future Expansion of the Company:
During the term of the CEO's Agreement, the CEO or his designees shall have the
right to participate in the future expansion of the Company whereby, if the
Company, or any subsidiary of the Company proposes to form a subsidiary for any
purpose, the CEO shall have the right to form or cause to be formed, at the
CEO's sole cost and expense, such subsidiary and, in consideration of the CEO
bearing such cost and expense, the CEO shall receive 10% of the authorized
securities of each class and series of such newly formed subsidiary and the CEO
will be deemed to have equitable and beneficial ownership of 10%of such
securities. If subsequent to the formation of such subsidiary, the subsidiary
issues any securities as a dividend, stock split or any other recapitalization,
the CEO shall be entitled to receive his proportionate share of such securities
issued.
20
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Consolidated Technology Group Ltd. and Subsidiaries
Unaudited Footnotes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
CEO's Purchase of 10% of SIS Capital Corp.:
SIS Capital Corp., ("SISC"), is a wholly owned subsidiary of the Company.
Substantially all of the operating subsidiaries of the Company are owned by
SISC. The CEO may, at any time during the term of the CEO's Agreement, upon 10
days notice, purchase up to 10% of the equity securities of SISC (on a fully
diluted basis) for a purchase price equal to the then fair market value of such
securities. The purchase price for such securities shall be payable by delivery
of the CEO's 10 year recourse promissory note, bearing interest at the lowest
rate necessary to avoid imputed interest under the Internal Revenue Code of
1986.
CEO's Profit Sharing Bonus:
In the event of the sale of any subsidiary or the business thereof or any
business combination including any subsidiary or of any securities purchased or
acquired by the Company or any subsidiary thereof as investment securities, the
CEO shall be entitled to a profit-sharing bonus equal to 20% of the gross
profit, if any received as a result of the sale or business combination.
CEO's Expense Reimbursement:
The Company is obligated to reimburse the CEO for all ordinary and necessary
expenses incurred in the performance of his services. In the event that the
Company moves its headquarters from the New York metropolitan area, and the CEO
elects to move, the Company will pay the CEO's moving costs, or if the CEO
elects not to move, the Company will provide the CEO with an office and a staff
in the New York metropolitan area. In the event that the Company establishes
multiple offices, the Company will pay the CEO a housing allowance of $3,500 per
month for as long as more than one office is maintained.
Corporate Secretary
On August 14, 1997, the Company entered into an employment agreement, (the
"Secretary's Agreement"), with the Company's Corporate Secretary. Such agreement
includes the following terms:
Term of Secretary's Agreement:
The term of the Secretary's Agreement is from the date of commencement until
December 31, 2002 and, at the option of the Secretary, may be extended for five
more years. The Secretary's Agreement is subject to termination prior to
December 31, 2002 pursuant to certain termination provisions contained within
the agreement.
Secretary's Compensation:
For 1997 the Secretary's annual salary is $200,000 and shall increase annually
by the greater of 5% or the increase in the cost of living index. A bonus for
each year is payable in an amount equal to 0.5% of the amount by which the
greater of (A) the Company's consolidated net income before taxes, or, (B) the
Company's consolidated net cash flow calculated as the Company's net income plus
depreciation, amortization and other non-cash items of expense, minus payments
of all principal amounts of outstanding debt, exceeds $600,000.
Secretary's Benefits:
The Secretary is entitled to three weeks paid vacation and fifteen paid sick
days during each year. The Company will pay for and maintain for the Secretary
disability insurance providing for payment to the Secretary of a minimum of 60%
of her salary. The Company is required to pay and maintain for the Secretary
major medical, hospitalization, dental and vision insurance and life insurance
having a face value of not less than $400,000, the proceeds of which shall be
payable to such beneficiaries as may be designated by the Secretary. The Company
will maintain such disability, medical, dental, and vision insurance, at the
Company's expense for a period of 10 years after the expiration or termination
of the Secretary's Agreement.
21
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Consolidated Technology Group Ltd. and Subsidiaries
Unaudited Footnotes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Secretary's Severance:
In addition to any salary or bonus payable pursuant to the Secretary's
Agreement, the Secretary is entitled to severance compensation under the
following circumstances:
(i) - In the event of the death of the Secretary, the Company shall pay to the
Secretary's beneficiary the face value of the life insurance policy to be
maintained by the Company.
(ii) - In the event of the permanent disability of the Secretary, the Company
shall pay to the Secretary, 60% of her then salary for 10 years. In the event of
a temporary disability, (generally 6 months), the Company shall pay to the
Secretary 100% of her salary and bonus for the period of the disability.
(iii) - The Secretary will continue to receive her salary for 10 years, if the
Secretary's Agreement is terminated due to any of the following events, (1) upon
notice to the Company by the Secretary of the termination of the agreement for
any breach or default by the Company of any of its obligations or covenants
under the Secretary's Agreement, provided that any such breach or default is not
cured within 30 days from notice; (2) in the event of a change of control, the
Secretary may terminate the Secretary's Agreement upon 90 days notice; wherein
change of control is defined as the date on which the Company sells all or
substantially all of its assets or sells more than 50% of the outstanding
capital stock of any one or more subsidiaries, the aggregate gross revenues of
which constitute 33.33% or more of the aggregate gross revenues of the Company
on a consolidated basis, merges with or into or consolidates with any entity,
issues to an independent, non-affiliated third party such number of shares of
its outstanding capital stock (or equity or debt instruments securities
convertible into or exchangeable for shares of the Company's capital stock) as
shall equal 25% or more of its total issued and outstanding shares of capital
stock, or the Secretary is removed from the Board, without cause, provided,
however, that a change of control shall not be deemed to occur as a result of or
in conjunction with any recapitalization or public offering of the Company's
securities or the occurrence of any of the foregoing transactions which is
approved by the Secretary; (3) upon 30 days notice from the Secretary if the
Secretary is removed from the Board without cause; or (4) upon seven days notice
from the Secretary in the event of the entry by a court of competent
jurisdiction of a decree or order for relief in respect of the Company in an
involuntary case under any applicable bankruptcy, insolvency, or similar law
then in effect or the appointment of a receiver, liquidator, assignee,
custodian, trustee, or sequestrator of the Company or any substantial part of
its property or an order by any such court for the wind-up or liquidation of the
Company's affairs; or a petition initiating an involuntary case under any such
bankruptcy, insolvency, or similar law is filed against the Company and is
pending for 60 days without a stay or dismissal; or the Company commences a
voluntary case under any such bankruptcy, insolvency, or similar law then in
effect, or makes any general assignment for the benefit of its creditors or
fails generally to pay its debts as such debts become due or takes corporate
action in furtherance of any of the foregoing.
Secretary's Retirement:
In the event of the retirement of the Secretary, the Secretary or her
beneficiary will continue to receive monthly retirement compensation equal to
one-twelfth of the greater of, (A) the Secretary's then annual salary; or (B)
the average of the annual salary and bonus of the Secretary for each of the five
years preceding the year of retirement, for a period of 10 years from the date
of retirement. Retirement shall be deemed to have occurred at the expiration of
the Secretary's Agreement, or any renewal of the Secretary's Agreement, or at
the mutual consent of the Secretary and the Company.
Secretary's Participation in the Future Expansion of the Company:
During the term of the Secretary's Agreement, the Secretary or her designees
shall have the right to participate in the future expansion of the Company
whereby, if the Company, or any subsidiary of the Company proposes to form a
subsidiary for any purpose, the Secretary shall have the right to purchase 1% of
the authorized securities of each class and series of such newly formed
subsidiary at a purchase price that is equal to fair market value. The purchase
price for such securities shall be payable by delivery of the Secretary's 10
year recourse promissory note, bearing interest at the lowest rate necessary to
avoid imputed interest under the Internal Revenue Code of 1986. If subsequent to
the formation of such subsidiary, the subsidiary issues any securities as a
dividend, stock split or any other recapitalization, the Secretary shall be
entitled to receive her proportionate share of such securities issued.
22
<PAGE>
Consolidated Technology Group Ltd. and Subsidiaries
Unaudited Footnotes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Secretary's Profit Sharing Bonus:
In the event of the sale of any subsidiary or the business thereof or any
business combination including any subsidiary or of any securities purchased or
acquired by the Company or any subsidiary thereof as investment securities, the
Secretary shall be entitled to a profit-sharing bonus equal to 1% of the gross
profit, if any, received as a result of the sale or business combination.
Secretary's Expense Reimbursement:
The Company is obligated to reimburse the Secretary for all ordinary and
necessary expenses incurred in the performance of her services. In the event
that the Company moves its headquarters from the New York metropolitan area, and
the Secretary elects to move, the Company will pay the Secretary's moving costs,
including 6 months temporary housing, or if the Secretary elects not to move,
the Company will provide the Secretary with an office and a staff in the New
York metropolitan area. In the event that the Company establishes multiple
offices, the Company will pay the Secretary a housing allowance of $1,000 per
month for as long as more than one office is maintained.
23
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
- --------------------------------------------------------------------------------
Liquidity and Capital Resources
Going Concern
For the three and nine months ended September 30, 1997, (the "1997 three and
nine month periods"), the Company incurred net losses of $1.8 million and $7.2
million, respectively, has an accumulated deficit at September 30, 1997,
("September 1997"), of $57.5 million, and approximately $6.3 million of debt
that is in default. These conditions raise substantial doubt about the Company's
ability to continue as a going concern. Furthermore, on August 15, 1997, the
Company was delisted from Trading on the NASDAQ because it failed to meet the
minimum bid requirements of $1 and the minimum net tangible worth requirement of
$1 million. In order to address the minimum bid requirements, the Company's
Board of Directors has approved a 1 for 30 reverse split which will be voted on
at a stockholders meeting. In order to address the financial difficulties that
the Company is experiencing, management has disposed of the unprofitable Audio
Products Manufacturing segment, has developed a plan to discontinue the
unprofitable operations of the Three Dimensional Products and Services segment
and is attempting to sell the Medical Diagnostics segment in anticipation that
such a sale would provide the Company with adequate income and working capital
to rectify the NASDAQ net tangible worth deficiency as well as enable the
Company to properly fund the remaining subsidiaries. Additionally, management
plans to continue efforts to raise capital through initial and secondary public
offerings of the remaining subsidiary's equity and to manage them to profitable
levels once adequate funding is in place. There can be no assurances that
management's plans to raise additional capital and to manage the subsidiaries to
profitable levels will be successful. Additionally, no assurances can be given
that the Company will be able to sell the Medical Diagnostics segment or that
any potential sale would result in a significant gain. The failure of the
Company to sell the Medical Diagnostics segment and the failure of the
subsidiaries to raise capital by equity offerings of their stock may force the
Company to reduce operations via the closure of additional unprofitable segments
and could ultimately force the Company as a whole to cease operations.
Working Capital Condition
As of December 31, 1996, ("December 1996"), the Company had negative working
capital of $5.4 million. As of September 1997, the Company has negative working
capital of $9.1million representing an increase in negative working capital of
$3.7 million. The Company's principal working capital consists of cash and cash
equivalents which were $706,000 at September 1997 and $1.2 million at December
1996. Cash provided by discontinued operations amounted to $352,000 and net cash
used in continuing operations was $3.1 million as follows:
Cash Provided
By (Used In)
Continuing
Operations
----------
Contract Engineering Services $ 603,000
Electro-Mechanical and Electro- Optical Products
Manufacturing (1,000,000)
Medical Information Services (538,000)
Telecommunications (713,000)
Business Consulting Services 275,000
Corporate and Other (1,446,000)
Intercompany Transactions (275,000)
------------
Cash Used in Continuing Operations ($3,094,000)
------------
It is imperative that the segments which use significant amounts of cash in
operating activities obtain alternative sources of funding. (i.e. equity
offerings, debt financing) or increased volume at higher operating margins, in
order to continue as operating segments and no assurance can be given that these
segments will be able to continue as operating entities.
24
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
- --------------------------------------------------------------------------------
Sources of Cash
During the 1997 nine month period, sources of cash, other than from operations,
included proceeds from the issuance of long-term debt of $814,000 and
subordinated debt of $139,000, net advances from asset based lenders of $1.2
million, $2 million from a subsidiaries private issuance of equity (see footnote
11 of the accompanying financial statements), collections on repayments of notes
receivable of $348,000, proceeds from the disposal of a subsidiary of $62,000
and proceeds from the issuance of stock options of $50,000..
Uses of Cash
During the 1997 nine month period, uses of cash included the repayment of
long-term debt of $23,000 and subordinated debt of $718,000, payments on capital
leases of $52,000, expenditures for software development of $462,000, $329,000
for deferred offering costs, capital expenditures of $361,000, payments for
loans made of $252,000, purchases of investments of $149,000 and an increase in
other assets of $10,000.
Changes in Other Working Capital Assets and Liabilities
From December 1996 to June 1997, working capital assets other than cash
increased $1.7 million due primarily to accounts receivable of the contract
engineering services segment. During the same period, working capital
liabilities increased $5 million due to the following factors; (1) corporate and
other accrued expense increased approximately $423,000 due primarily to the
accrual of amounts due to the CEO pursuant to his restated employment contract;
(2) increased accounts payable of $2.8 million from the inability of the Medical
Information Services, Telecommunicaitons and Electro-Mechanical and
Electro-Optical Products Manufacturing segments to make timely payments on trade
payables; (3) increased accrued interest on subordinated notes of $591,000 and
an increase in current debt obligations of $1,318,000 due primarily from
advances from asset based lendors.
Effect of Loan Defaults
The Company is in technical default on loans approximating $6.3 million at
September 1997 which relates to the Medical Diagnostics segment. On October 22,
1997, involuntary petitions, (the"Petitions"), were filed under chapter 7 of the
U.S. Bankruptcy Code against certain subsidiaries of the Company operating in
the Medical Diagnostics segment. Such subsidiaries have filed a motion to
dismiss the petitions. Although counsel has advised the Company that such
filings were improper as a matter of law, the outcome of the motion to dismiss
the Petitions can not be predicted with certainty. Currently, the Company is
unable to estimate the impact, if any, of such Petitions on the financial
statements.
Delinquent Payroll Taxes
A subsidiary of the Company, which operated in the discontinued Three
Dimensional Products and Services segment, owes delinquent payroll taxes and
related interest and penalties of approximately $80,000. It is anticipated that
such obligations will be resolved as a part of the planned discontinuation of
such segment.
25
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
- --------------------------------------------------------------------------------
Results of Operations
Loss from Continuing Operations
The Company's loss from continuing operations increased $156,000 and $67,000,
respectively, for the comparative three and nine month periods.
Comparing the 1997 three month period with the three months ended September 30,
1996, (the "1996 three month period"), aggregate increases in loss from
continuing operations consisted of the following:
<TABLE>
<CAPTION>
1997 Three 1996 Three Month
Loss from Continuing Operations Month Period Period Variance
- ------------------------------- ------------ ------ --------
<S> <C> <C> <C>
Contract Engineering Services $ 521,000 $ (201,000) $ 722,000
Electro-Mechanical and Electro-
Optical Products Manufacturing (229,000) (424,000) 195,000
Medical Information Services (665,000) (2,536,000) 1,871,000
Telecommunications (362,000) (295,000) (67,000)
Business Consulting Services (223,000) 89,000 (312,000)
Corporate and Other (1,147,000) 1,418,000 (2,565,000)
----------- ------------ ------------
Loss from Continuing Operations ($2,105,000) ($1,949,000) ($ 156,000)
============ ============ ============
</TABLE>
Comparing the 1997 nine month period with the nine months ended September 30,
1996, (the "1996 nine month period"), aggregate increases in loss from
continuing operations consisted of the following:
<TABLE>
<CAPTION>
1997 Nine 1996 Nine
Loss from Continuing Operations Month Period Month Period Variance
- ------------------------------- ------------ ------------ --------
<S> <C> <C> <C>
Contract Engineering Services $ 679,000 ($ 695,000) $1,374,000
Electro-Mechanical and Electro-
Optical Products Manufacturing (980,000) (845,000) (135,000)
Medical Information Systems (1,905,000) (4,662,000) 2,757,000
Telecommunications (1,146,000) (803,000) (343,000)
Business Consulting Services (30,000) 223,000 (253,000)
Corporate and Other (2,050,000) 1,417,000 (3,467,000)
------------ ------------ ------------
Loss from Continuing Operations ($5,432,000) ($5,365,000) ($ 67,000)
============ ============ ============
</TABLE>
The 1996 nine month period loss from continuing operations includes $2.2 million
of non cash expense from the exercise of below market warrants in the Medical
Information Services segment.
Discontinued Operations
Income (loss) from operations of discontinued segments includes the operating
activity of the Audio Products Manufacturing segment through the date of
disposal on May 20, 1997 and the operating activity of the Three Dimensional
Products and Services and Medical Diagnostics segments through September 30,
1997 and amounted to income of $329,000 and $198,000 for the 1997 and 1996 three
month periods, respectively, and a loss of $1.4 million for the 1997 nine month
period and income of $1.2 million for the 1996 nine month period.
The 1997 nine month period includes a gain on disposal of the Audio Products
manufacturing segment of $129,000 and an estimated loss on the disposal of the
Three Dimensional Products and Services segment of $525,000.
26
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
- --------------------------------------------------------------------------------
Consolidated Net Loss
The Company's net loss increased $25,000 and $3 million, respectively, for the
comparative three and nine month periods as a result of the aforementioned
increases in losses of both the continuing and discontinued operations.
Discussion of Operations by Segment
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
-------------------
1997 1996 1997 1996
Three Three Nine Nine
Month Month Month Month
Revenues: Period Period Period Period
<S> <C> <C> <C> <C>
Contract Engineering Services 76% 77% 79% 78%
Electro-Mechanical and Electro-Optical
Products Manufacturing 5% 5% 4% 4%
Medical Information Services 8% 7% 7% 7%
Telecommunications 11% 11% 10% 11%
Business Consulting Services 1% 1% 1% 1%
Intercompany Transactions (1)% (1)% (1)% (1)%
Percentage of Total
-------------------
1997 1996 1997 1996
Three Three Nine Nine
Month Month Month Month
Gross Profit: Period Period Period Period
Contract Engineering Services 77% 86% 78% 65%
Electro-Mechanical and Electro-Optical
Products Manufacturing 10% 7% 3% 6%
Medical Information Services (4)% (2)% 6% 22%
Telecommunications 16% 8% 12% 6%
Business Consulting Services 6% 6% 6% 4%
Intercompany Transactions (5)% (5)% (5)% (3)%
Percentage of Total
-------------------
1997 1996 1997 1996
Three Three Nine Nine
Month Month Month Month
Selling, General & Administrative Expense: Period Period Period Period
Contract Engineering Services 26% 24% 34% 29%
Electro-Mechanical and Electro-Optical
Products Manufacturing 9% 10% 9% 8%
Medical Information Services 11% 43% 17% 41%
Telecommunications 16% 8% 16% 8%
Business Consulting Services 7% 3% 3% 2%
Corporate and Other 34% 13% 24% 14%
Intercompany Transactions (3)% (1)% (3)% (2)%
</TABLE>
27
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
- --------------------------------------------------------------------------------
Contract Engineering Services - The contract engineering services segment
reflects the operations of Trans Global Services, Inc., ("TGS"), and its two
subsidiaries, Avionics Research Holdings, Inc., ("Avionics"), and Resource
Management International, Inc., ("RMI"). TGS is engaged in the business of
providing engineers, designers and technical personnel on a temporary basis to
major corporations.
Revenue from technical temporary staffing services is based on the hourly cost
of payroll plus a percentage. The success of TGS's business will be dependent
upon its ability to generate sufficient revenues to enable it to cover its fixed
costs and other operating expenses, and to reduce its variable costs,
principally its interest. Under its agreements with its clients, TGS is required
to pay its employees and pay all applicable Federal and state withholding and
payroll taxes prior to receipt of payment from the clients. Furthermore, TGS's
payments from its clients are based upon the hourly rate paid to the employee,
without regard to when payroll taxes are payable with respect to the employee.
Accordingly, TGS's cost of services are greater during the first part of the
year, when Federal Social Security taxes and state unemployment and related
taxes, which are based on a specific level of compensation, are due. Thus, until
TGS satisfies its payroll tax obligations, it will have a lower gross margin
than after such obligations are satisfied. Furthermore, to the extent that TGS
experiences turnover in employees, its gross margin will be adversely affected.
For example, in 1997, Social Security taxes are payable on the first $65,000 of
compensation. Once that level of compensation is paid with respect to any
employee, there is no further requirement for TGS to pay Social Security tax for
such employee. Since most of TGS's employees receive compensation in excess of
that amount, TGS's costs with respect to any employee are significantly higher
during the period when it is required to pay Social Security taxes than it is
after such taxes have been paid.
1997 and 1996 Three Month Periods
TGS had revenues for the 1997 three month period of $18.8million reflecting an
11% increase in revenues over the $16.9 million during the 1996 three month
period. This increase is a reflection of the success of TGS's continuing sales
and placement efforts. The gross margin for the 1997 three month period was 9.4%
compared to 9.0% for the 1996 three month period. This increase was a result of
TGS having completed paying the FICA for a larger percentage of its workforce in
the current period than it had in 1996.
Selling, general and administrative expenses, exclusive of related party
expenses, were $975,000, or 5.2% of revenues, for the 1997 three month period
and $1.1 million, or 6.6% of revenues, for the 1996 three month period. This
decrease can be attributed to the continuing effort TGS is placing on
controlling costs and the conclusion of payroll tax penalties which TGS has had
to incur in previous periods. Amortization of intangibles decreased by
approximately $42,000 for the 1997 three month period compared to the 1996 three
month period, due to the completion of amortization of the covenant not to
compete.
During the 1997 three month period interest expense was $201,000, a 10% increase
from the $183,000 interest costs during the 1996 three month period. This was a
result of increased borrowings due to greater revenues and slightly higher
interest rates.
As a result of the foregoing, TGS earned $521,000 for the 1997 three month
period, as compared to a net loss of $201,000 loss for the 1996 three month
period. This increase can be attributed to a combination of the increase in
sales and a stabilization of selling, general and administrative expenses.
1997 and 1996 Nine Month Periods
TGS had revenues of $57.7 million for the 1997 nine month period reflecting a
27% increase from the revenues of $45.4 million for the 1996 nine month period.
This increase is attributable to TGS's increased sales and placement efforts and
success in replacing the loss of a contract on January 1, 1996 with one of TGS's
larger clients. For the 1997 nine month period, TGS had a gross margin of 8.3%
as compared to 8.4% for the 1996 nine month period.
28
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
- --------------------------------------------------------------------------------
The slight decrease in margin reflects the additional payroll taxes incurred
because of TGS's continued increase in staffing.
TGS's selling, general and administrative expenses decreased by $145,000 for the
1997 nine months period as compared to the 1996 nine month period. This decrease
can be attributed to a reduction of $400,000 in payroll tax penalties in 1997
from 1996. Other selling, general and administrative expenses increased modestly
despite a significant increase in revenue.
During the 1997 nine month period, interest expense was $584,000, a 14.7%
increase from $509,000 in the 1996 nine month period as a result of increased
borrowings and slightly higher interest rates.
TGS had net income of approximately $679,000 for the 1997 nine month period as
compared to a net loss of $695,000 for the 1996 nine month period. TGS believes
that with the continued increased revenues and stabilized selling, general and
administrative costs it has improved its operations. TGS is continuing to search
for ways to reduce its financing costs by seeking to enter into agreements with
other financing sources which would offer lower financing costs. However, no
assurance can be given that TGS can or will operate profitably in the future.
Electro-Mechanical and Electro-Optical Products Manufacturing - This segment
consists of two companies which manufactures optical encoders, encoded motors
and limit programmers, debit card vending machines and various avionics
instrumentation devices, a company that markets telephone debit cards and a
company that designs, develops and integrates all of the critical building
blocks of a Fingerprint ID System which commenced operations in 1996.
1997 and 1996 Three Month Period
Optical-encoders, encoded motors and limit programmers, debit card vending
machines and avionics instrumentation device revenues, when comparing the 1997
three month period to the 1996 three month period, increased $242,000, or 40%
from $841,000 to $599,000, due primarily to new contracts received during 1997.
Cost of sales for the 1996 three month period includes $100,000 for the
write-off of obsolete inventory. Excluding such write-offs, the gross profit
percentages for the 1997 and 1996 three month periods decreased from 32% to 28%,
respectively, due primarily to decreases in gross profit of the debit card
vending machine line. Selling, general and administrative expenses increased
$48,000, or 20% from $240,000 for the 1996 three month period to $288,000 for
the 1997 three month period. Net losses decreased from $184,000 for the 1996
three month period to $120,000 for the 1997 three month period, due primarily to
the decrease in write-off for obsolete inventory of $100,000 offset by increased
administrative costs.
Prepaid telephone calling card revenues decreased from $333,000 for the 1996
three month period to $260,000 for the 1997 three month period on which
substantially no gross profit was earned for either period. Selling, general and
administrative expense decreased from $132,000 for the 1996 three month period
to $51,000 for the 1997 three month period. The net loss decreased by $30,000
from $104,000 for the 1996 three month period to $74,000 for the 1997 three
month period.
Finger print identification products activity to date have been the costs of
developing its products. Such amounts for the 1997 and 1996 three month periods
approximated $35,000 and $136,000, respectively.
As a result of the foregoing, this segment as a whole sustained net losses of
$229,000 and $424,000, respectively, for the 1997 and 1996 three month periods,
reflecting a $100,000 decrease in inventory reserves and an additional decrease
in administrative expenses.
29
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
- --------------------------------------------------------------------------------
1997 and 1996 Nine Month Period
Optical-encoders, encoded motors and limit programmers, debit card vending
machines and avionics instrumentation device revenues, when comparing the 1997
nine month period to the 1996 nine month period, increased $402,000, or 13% from
$1.9 million to $2.3 million. Cost of sales for the 1997 and 1996 nine month
periods include $300,000 and $175,000, respectively, for the write-off of
obsolete inventory. Excluding such write-offs, the gross profit percentages for
the 1997 and 1996 nine month periods decreased from 26% to 22%, respectively,
due primarily to decreases in gross profit of the debit card vending machine
line. Selling, general and administrative expenses decreased $37,000, or 2% from
$760,000 for the 1996 nine month period to $723,000 for the 1997 nine month
period due to planned cutbacks in expenses related to existing operations. Net
losses increased from $561,000 for the 1996 nine month period to $708,000 for
the 1997 nine month period, due primarily to the increase in write-off for
obsolete inventory of $125,000. 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 sale of encoders
to private manufacturing companies while also trying to capitalize on the recent
potential for increased governmental military spending. During 1996, the segment
participation in government awarded contracts was not significant, however,
during 1997, this segment was awarded certain government contracts on which a
current backlog of $620,000 exists as of September 30, 1997 and management
believes that revenues from these contracts will enable this segment to
significantly improve its profitability during the remainder of 1997. However,
no assurance can be made that such backlog will result in net income or
long-term profitability for this segment.
Prepaid telephone calling card revenues decreased from $457,000 for the 1996
nine month period to $363,000 for the 1997 nine month period on which
substantially no gross profit was earned for either period. Selling, general and
administrative expense decreased from $186,000 for the 1996 nine month period to
$144,000 for the 1997 nine month period. The net loss increased by $20,000 from
$148,000 for the 1996 nine month period to $169,000 for the 1996 nine month
period. This segment operates in a highly competitive market and is competing
against companies that are larger, more well established and have significantly
greater resources. The impact of this competition has required the segment to
sell the calling cards at below cost in order to attempt to establish a market
presence which has resulted in a negative gross margin. Based on the competitive
environment that this segment operates in, no assurances can be given that its
operations will ever reach profitable levels.
Finger print identification products activity to date have been the costs of
developing its products. Such amounts for the 1997 and 1996 nine month periods
approximated $104,000 and $136,000, respectively. Due to the nature of a
development stage company, no assurances can be given that it will ever be able
to develop a marketable product and achieve revenues that will allow it to
operate profitably.
As a result of the foregoing, this segment as a whole sustained net losses of
$980,000 and $845,000, respectively, for the 1997 and 1996 nine month periods,
due primarily to increased inventory write-offs of $125,000.
Medical Information Services - The medical information services segments
consists of the activity of two companies, Netsmart Technologies, Inc.,
("Netsmart") and Creative Socio Medics, Inc. ("CSM"). For purposes herein,
references to Netsmart relate to the operations of both Netsmart and CSM unless
indicated otherwise. Netsmart 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.
Netsmart has developed proprietary network technology utilizing smart cards in
financial and health care network systems.
1997 and 1996 Three Month Period
Netsmart's revenue for the 1997 three month period was $1.8 million, an increase
of $267,000, or 17% from the revenue for the 1996 three month period which was
$1.6 million.
30
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
- --------------------------------------------------------------------------------
Revenue from Netsmart's health information systems continued to represent
Netsmart's principal source of revenue in the 1997 three month period,
accounting for $1.8 million or 99% of revenue. The largest component of revenue
in the 1997 three month period was turnkey systems revenue which increased to
$650,000 from $415,000 in the 1996 three month period, reflecting a 57%
increase. This increase is substantially the result of growth in turnkey backlog
and the ability of Netsmart to provide the staff necessary to generate the
additional revenue. The data center (service bureau) revenue increased to
$548,000 in the 1997 three month period from $506,000 in the 1996 three month
period, reflecting an increase of 8%. Maintenance revenue decreased to $309,000
in the 1997 three month period from $317,000 in the 1996 three month period,
reflecting a decrease of 3%. License revenue remained constant at $69,000 for
both the 1997 and 1996 three month periods. License revenue is generated as part
of a sale of a turnkey system pursuant to a contract or purchase order that
includes development of a turnkey system and maintenance. Third party hardware
and software revenue decreased to $235,000 in the 1997 three month period from
$256,000 in the 1996 three month period, reflecting a decrease of 8%. Sales of
third party hardware and software are made in connection with the sales of
turnkey systems.
Revenue from contracts from government agencies represented 40% of revenue for
the 1997 three month period. Netsmart believes that such contracts will continue
to represent an important part of its business.
Gross profit decreased to $(87,000) in the 1997 three month period from
$(29,000) in the 1996 three month period, a 200% increase. The negative gross
profit was substantially due to costs incurred relating to the IBN contract.
Selling, general and administrative expenses were $540,000 in the 1997 three
month period, a decrease of 80% from the $2.3 million in the 1996 three month
period. During the 1996 three month period, Netsmart issued shares of Common
Stock to certain lenders and as a result, incurred a financing cost of $1.7
million which was charged to operations. No such charges were incurred during
the 1997 three month period. This decrease was partially offset by an increase
in personnel and salaries in the sales and marketing and administrative areas as
well as an increase in other direct sales expenses and insurance. Netsmart did
not incur any research and development costs in the 1997 and 1996 three month
periods.
Interest expense was $89,000 in the 1997 three month period, a decrease of
$30,000, or 25% from the $119,000 in the 1996 three month period. This is a
result of a decrease in the average borrowings during the 1997 quarter. The most
significant component of the interest expense on an ongoing basis is the
interest payable to Netsmart's asset-based lender. Netsmart pays interest on
such loan at a rate of prime plus 8.5% plus a fee of 5/8% of the face amount of
the invoice.
In the 1997 three month period, Netsmart's 50% share of the loss in its joint
venture corporation with respect to the development of CCAC software purchased
in 1996 increased from $9,000 in the 1996 three month period to $35,000 in the
1997 three month period.
As a result of the foregoing factors, Netsmart incurred a net loss of $665,000
in the 1997 three month period, as compared with a net loss of $2.5 million in
the 1996 three month period.
1997 and 1996 Nine Month Period
Netsmart's revenue for the 1997 nine month period was $5.1 million, a decrease
of $1.4 million, or 21% from the revenue for the 1996 nine month period which
was $6.5 million. This decrease results from a decrease in revenue from $1.6
million in the 1996 nine month period to $95,000 in the 1997 nine month period,
from a contract with IBN Inc., ("IBN"). IBN represented Netsmart's largest
customer in the 1996 nine month period, accounting for approximately 24.5% of
revenue. As of September 30, 1997 the contract is substantially complete.
Netsmart is no longer providing professional services to IBN. Netsmart intends
to expand its marketing effort for its CarteSmart System; however, at September
30, 1997, Netsmart did not have any significant contracts for the CarteSmart
system.
31
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
- --------------------------------------------------------------------------------
Revenue from Netsmart's health information systems continued to represent
Netsmart's principal source of revenue in the 1997 nine month period, accounting
for $4.9 million, or 96% of revenue. The largest component of revenue in the
1997 nine month period was data center (service bureau) revenue which increased
to $1.6 million from $1.5 million in the 1996 nine month period, reflecting a 2%
increase. The turnkey systems revenue increased to $1.4 million in the 1997 nine
month period from $1.2 million in the 1996 nine month period, reflecting an
increase of 18%. Maintenance revenue increased to $975,000 in the 1997 nine
month period from $890,000 in the 1996 nine month period, reflecting an increase
of 10%. License revenue decreased to $214,000 in the 1997 nine month period from
$309,000 in the 1996 nine month period, a decrease of 31%. License revenue is
generated as part of a sale of a turnkey system pursuant to a contract or
purchase order that includes development of a turnkey system and maintenance.
Third party hardware and software revenue decreased to $724,000 in the 1997 nine
month period from $919,000 in the 1996 nine month period, reflecting a decrease
of 21%. Sales of third party hardware and software are made in connection with
the sales of turnkey systems.
Revenue from contracts from government agencies represented 35% of revenue for
September 1997 period . Netsmart believes that such contracts will continue to
represent an important part of its business.
Gross profit decreased to $335,000 in the 1997 nine month period from $1.3
million in the 1996 nine month period, a 51% decrease. The decrease in the gross
profit was substantially the result of the reduction in revenue from the IBN
contract, on which there was a negative gross profit as well as a decrease in
the health information systems license revenue.
Selling, general and administrative expenses were $1.9 million in the 1997 nine
month period, a decrease of 66% from the $5.4 million in the 1996 nine month
period. During the 1996 nine month period, Netsmart incurred non cash
compensation charges of $2.2 million arising out of the issuance by Netsmart of
warrants and options having exercise prices which were less than the market
value of the Common Stock at the date of approval by the board of directors. No
such charges were incurred during the 1997 nine month period. Additionally,
during the 1996 nine month period, Netsmart issued shares of Common Stock to
certain lenders and as a result, incurred a financing cost of $1.7 million which
was charged to operations. No such charges were incurred during the 1997 nine
month period. These decreases were partially offset by an increase in personnel
and salaries in the sales and marketing and administrative areas as well as an
increase in other direct sales expenses and insurance. Netsmart did not incur
any research and development costs in the 1997 and 1996 nine month periods.
In the 1997 nine month period, Netsmart's 50% share of the loss in its joint
venture corporation with respect to the development of CCAC software purchased
in 1996 increased from $109,000 in the 1996 nine month period to $140,000 in the
1997 nine month period.
Interest expense was $239,000 in the 1997 nine month period, a decrease of
$155,000, or 39% from the $394,000 in the 1996 nine month period . This is a
result of a decrease in the average borrowings during the 1997 nine month
period. The most significant component of the interest expense on an ongoing
basis is the interest payable to Netsmart's asset-based lender. Netsmart pays
interest on such loan at a rate equal to the greater of 18% per annum or prime
plus 8% plus a fee of 1% of the face amount of the invoice. Effective August 1,
1997, Netsmart renegotiated its agreement with its asset - based lender whereby
the interest rate was reduced to a basic interest rate of prime plus 8.5% plus a
fee of 5/8% of the face amount of the invoice.
As a result of the foregoing factors, Netsmart incurred a net loss of $1.9
million in the 1997 nine month period, as compared with a net loss of $4.7
million in the 1996 nine month period.
Telecommunications - This segment consists of the operations of ARC Networks,
("ARC"), which is engaged in the business of marketing a wide range of
telecommunications services including the resale of local exchange
32
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
- --------------------------------------------------------------------------------
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.
1997 and 1996 Three and Nine Month Periods
Revenues for the 1997 three and nine month periods were $2.8 million and $7
million, reflecting increases of 20% and 73%, or $458,000 and $3 million from
the 1996 three and nine month periods. The following table sets forth the
revenues and percentage of revenues during 1997 and 1996 from each business
line).
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
September 30, 1997 September 30, 1996
------------------ ------------------
Revenue Percent Revenue Percent
------- ------- ------- -------
<S> <C> <C> <C> <C>
Telephone Services $2,000,000 72% $1,809,000 78%
Data Cabling Installation Services $ 780,000 28% $ 513,000 22%
Nine Months Ended Nine Months Ended
September 30, 1997 September 30, 1996
------------------ ------------------
Revenue Percent Revenue Percent
------- ------- ------- -------
Telephone Services $5,013,000 71% $3,008,000 74%
Data Cabling Installation Services $2,033,000 29% $1,072,000 26%
</TABLE>
The increase in revenue in the 1997 three and nine month periods compared to the
1996 three and nine month periods is a result of greater market penetration into
the local telephone market, principally NYC, the sale of debit calling cards
initiated in the latter part of 1996 and, as more fully discussed below, a 52%
and 90% increase in ARC Network's data cabling installation business for the
1997 three and nine month periods, respectively. The sales increase for the
local telephone market was principally due to the addition of one customer in
June 1996 which increased sales in the 1997 three and nine month periods by
$437,000 and $1.5 million, respectively. In May 1997, ARC Networks also began
offering long distance phone service. Revenue attributed to the sale of debit
calling cards in the 1997 three and nine month periods amounted to $483,000 and
$971,000, respectively, and is expected to become a major contributor to future
sales growth.
Cost of revenue for the 1997 three and nine month periods was $2.4 million and
$6.2 million, respectively, reflecting an increase of $229,000 and $2.6 million,
or 11% and 69%, respectively, from the cost of revenue of $2.2 million and $3.7
million for the 1996 three and nine month periods in 1996. Total gross margins
for the 1997 three and nine month periods were 13% and 11%, respectively
compared to 6% and 9% for the 1996 three and nine month periods.
Gross margins in ARC Network's Telephone services segment were 2% and 3%,
respectively, for the 1997 three and nine month periods compared to 17% and 15%,
respectively, in the 1996 nine and three month periods. In the fourth quarter of
1996, ARC Networks purchased certain hardware and software for approximately
$416,000 in order to install a platform in New York City to improve the
reliability of its phone services and obtain certain cost benefits which were
not possible without the improvements. The software will provide ARC Networks
with the ability to manage the traffic over its phone lines more effectively
and, with the addition of certain other hardware which ARC Networks anticipates
purchasing later in 1997, will be able to provide least cost routing to its
customers. In the first quarter of 1997, ARC Networks discovered an error in its
rate tables for its outgoing calls related to debit calling cards resulting in a
loss of $40,000. ARC Networks has taken corrective action to ensure this problem
does not recur. ARC Networks incurred approximately $57,000 and $157,000 of
costs in the 1997 three and nine month
33
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
- --------------------------------------------------------------------------------
periods related to managing its debit card platform and $58,000 for the both the
1996 three and nine month periods. Although ARC Networks did not have sufficient
call volume to produce positive cash flows in this line, it was required to
staff the platform with a full time technician. ARC Networks estimates that it
must generate between $300,000 and $400,000 in call volume per month in order
for the platform to operate profitably. For the 1997 three and nine month
periods, ARC Networks had sales of $483,000 and $971,000 for its debit card
operations compared to $931,000 and $1 million for the 1996 three and nine month
periods. For the 1997 three and nine month periods, ARC Networks incurred as
gross loss from its debit card operations of $50,000 and $186,000, respectively,
compared to a $130,000 gross loss for both the 1996 three and nine month
periods.. ARC Networks recently signed a contract with SNET of Connecticut to
provide debit card services and is currently in negotiations with two other
potential customers to implement debit card programs. ARC Networks can not
provide assurances that such negotiations will be successful or that if
successful, will make the debit card platform profitable. The cost of managing
the platform will be ongoing but will remain relatively fixed and will become a
smaller percentage of cost of sales as ARC Network's revenue base in this line
of business continues to grow.
ARC Network's initial focus in the telephone services segment has been to build
its customer base and market share. In this regard, certain costs and charges
relating to signing up new customers have been absorbed by ARC Networks such as
waiving installation charges and acquiring certain equipment needed to make the
connection to the customer. Such costs are being expensed immediately without a
corresponding increase in revenue and would account for the lower margins in the
initial phase of the service cycle. In addition, approximately $437,000 and $1.5
million of sales in the 1997 three and nine month periods were to one customer
at a margin of 5% for service and 10% for recurring charges, such as line
features. These sales at lower margins, although not customary, will become a
smaller percentage of total sales as revenues continue to grow in this line.
Gross margins for ARC Network's data cabling and installation services were 41%
and 30% for the 1997 three and nine month periods, respectively, compared to 19%
and 18%, respectively, for the 1996 three and nine month periods. During the
1997 nine month period, ARC Networks managed 50 different jobs and continues to
benefit from its contract with the State of New York to provide data and voice
cabling for certain NYC schools.
Selling, general and administrative expenses for the 1997 three and nine month
periods were $663,000 and $1.7 million or 24% of total sales compared to
$366,000 and $1.1 million, or 17% and 26% of total sales, for the 1996 three and
nine month period. In the second half of 1996, ARC Networks added four sales
personnel to promote ARC Network's phone services, administrative personnel to
manage its platform, an additional cable installer and in March 1997 hired a
controller to manage its finances. ARC Networks also opened offices in Florida
and Illinois to begin direct sales efforts in those regions. It is ARC Network's
intention to build a nationwide network of commissioned sales agents, however,
it must qualify to do business in all states in order to implement such a
program and be able to fund such plans. As of September 30 1997, ARC Networks
was qualified to sell phone service in 20 states. In this regard, ARC Networks
has spent approximately $40,000 in legal fees which it is amortizing over one
year. The principle components of selling, general and administrative expenses
for the 1997 nine month period were: $1 million of personnel costs, sales
commissions of $255,000, travel and trade show expenses of $122,000, office
equipment and supplies of $95,000, depreciation and amortization of $96,000 and
rent and utilities of $88,000. The principle components of Selling, general and
administrative expenses for the 1996 nine month period were: personnel costs of
$516,000, sales commissions of $118,000, travel and trade show expenses of
$19,000, office equipment, supplies and other expenses of $335,000, rent and
utilities, $20,000 and depreciation of $25,000.
In the third quarter and continuing into the fourth quarter of 1997, ARC
Networks has had to add additional personnel in order to properly provide the
required customer service associated with the local telephone market which it is
penetrating. It is estimated that approximately 5 to 10 people in total will be
required to satisfy this requirement which will cost approximately $150,000 to
$250,000 annually. In addition, ARC Networks will be adding a director of sales
to organize its sales and marketing efforts and its agent program at an
estimated cost of $75,000 to $100,000 annually. Offsetting this requirement, in
the fourth quarter of 1997, ARC Networks
34
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
- --------------------------------------------------------------------------------
restructured certain positions and eliminated four others which should produce
savings of approximately $450,000 to $500,000 annually. It also has contracted
with an advertising firm to provide it with sales and marketing support for its
various product lines.
ARC Networks incurred interest expense of $11,000 and $27,000 for the 1997 three
and nine month periods on an 8% $550,000 loan it obtained in February 1997. In
the fourth quarter of 1996, ARC Networks obtained a $350,000 equipment loan on
which it incurred interest of $14,000 and $52,000 for the 1997 three and nine
month periods. Interest expense of $9,000 and $19,000 was also incurred for the
1997 three and nine month periods on a loan from ARC Network's asset based
lender. Interest expense of $21,000 and $93,000 was incurred on loans from
related parties for the 1997 three and nine month periods and $27,000 and
$77,000 for the 1996 three and nine month periods , respectively.
As a result of the above, ARC Networks reported a loss of $362,000 and $1.1
million for the 1997 three and nine month periods compared to a loss of $294,000
and $803,000, for the 1996 three and nine month periods.
Business Consulting Services operations are primarily intercompany fees charged
to the subsidiaries of the Company. Consulting fees amounted to $127,000 and
$97,000, respectively, for the 1997 and 1996 three month periods of which
$120,000 and $91,000, respectively were charged to the Company's subsidiaries
and eliminated in consolidation. Expenses amounted to $278,000 and $173,000 for
the 1997 and 1996 three month periods consisting primarily of travel related
expenses. Other income and expense amounted to expense of $72,000 for the 1997
three month period and income of $165,000 for the 1996 three month period. As a
result of the foregoing, the business consulting segment incurred a net loss of
$223,000 for the 1997 three month period and net income of $89,000 for the 1996
three month period. Consulting fees amounted to $381,000 and $261,000,
respectively, for the 1997 and 1996 nine month periods of which $362,000 and
$242,000, respectively were charged to the Company's subsidiaries and eliminated
in consolidation. Expenses amounted to $339,000 and $205,000 for the 1997 and
1996 nine month periods consisting primarily of travel related expenses. Other
income and expense amounted to expense of $72,000 for the 1997 three month
period and income of $167,000 for the 1996 nine month period. As a result of the
foregoing, the business consulting segment incurred a net loss of $30,000 for
the 1997 nine month period and net income of $223,000 for the 1996 nine month
period. 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 Expense
Corporate selling, general and administrative expenses increased by $619,000,
from $742,000 for the 1996 three month period to $1.4 million for the 1997 three
month period and increased $604,000 from $1.8 million for the 1996 nine month
period to $2.4 million for the 1997 nine month period. Included in Corporate and
Other expenses is approximately, $450,000 of legal and accounting fees incurred
with respect to the Lafayette Industries reverse acquisition and subsequent
settlement (see footnote 11 to the consolidated financial statements).
Additional increases were a result of increased salaries from the addition of
one employee as well as contracted salary increases for the CEO and corporate
secretary and approximately $323,000 in commissions in the 3rd quarter of 1997
payable to the CEO for commissions on investment activity of the Company's
marketable securities. Future selling, general and administrative expense levels
will be a factor of the activity of additional acquisitions and capitalization
activities which cannot be quantified on a prospective basis.
Gain (Loss) from Security Sales
During the 3rd quarter of 1997, the Company sold shares TGS common shares to the
president of TGS and in conjunction therewith realized a loss of $191,000 for
the 1997 three and nine month periods. During the 1996 three and nine month
periods, the Company realized gains of $392,000 and 645,000, respectively.
Security sales vary
35
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
- --------------------------------------------------------------------------------
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 Gain and Loss of Subsidiaries
For the 1997 and 1996 three month periods, the minority interest in loss of
subsidiaries was $122,000 and 1.4 million, respectively, and for the 1997 and
1996 nine month periods was $749,000 and $2.1 million. Changes to the minority
interest in the gain and loss of subsidiaries relates primarily to the inherent
differences in the net income and loss of subsidiaries from period to period.
Impact of Inflation
The Company is subject to normal inflationary trends and anticipates that any
increased costs would be passed on to its customers.
36
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
A claim has been made against the Company by two consultants claiming, among
other things, an equity interest in one of the Company's subsidiaries operating
in the Medical Diagnostics segment, shares of the Company's common stock and
certain consulting fees of approximately $300,000 in addition to ongoing
consulting fees allegedly due pursuant to certain agreements with the Company.
The Company believes that it has valid defenses to the claims and that any
liability to which the Company will be subject will not be material.
Item 5. Other Matters
(a) Restated Employment Agreement with the CEO - During the six months ended
June 30, 1997, the Company and the CEO entered into a restated employment
agreement. Reference is made herein to the footnotes to the financial statements
and Exhibit 10.1.
(b) Corporate Secretary's Employment Agreement - On August 14, 1997, the Company
entered into an employment agreement with the Company's Corporate Secretary.
Reference is made herein to the footnotes to the financial statements and
Exhibit 10.2
(c) Delisting from the NASDAQ - Effective August 15, 1997, the Company was
delisted from trading on the NASDAQ stock market for failure to meet a minimum
bid requirement of $1 and failure to meet a minimum net tangible worth
requirement of $1 million. Subsequent to the delisting from the NASDAQ stock
market, the Company's stock is traded on the OTCB Electronic Bulletin Board.
(c) Involuntary Bankruptcy Petition - On October 22, 1997, involuntary
petitions, (the"Petitions"), were filed under chapter 7 of the U.S. Bankruptcy
Code against IMI Acquisition of Boca Raton Corporation, IMI Acquisition of Pine
Island Corporation, IMI Acquisition of North Miami Beach Corporation, IMI
Acquisition of Kansas Corporation, IMI Acquisition of Orlando Corporation, PODC
Corporation, MD Acquisition Corporation and MD Ltd. Partner Acquisition
Corporation (the "Involuntary Debtors") in the United States Bankruptcy Court
for the Southern District of Florida. The Involuntary Debtors are wholly-owned
subsidiaries of International Magnetic Imaging, Inc., a majority-owned
subsidiary of SIS Capital Corp., a wholly owned subsidiary of the Registrant.
The Involuntary Debtors have filed a motion to dismiss the petitions. Although
counsel to the Involuntary Debtors has advised the Involuntary Debtors that such
filings were improper as a matter of law, the outcome of the motion to dismiss
the Petitions can not be predicted with certainty.
37
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 CEO's Employment Agreement.(1)
10.2 Corporate Secretary's Employment Agreement. (2)
10.3 Comprehensive Agreement dated May 20, 1997 between WWR Acquisition,
Corp., Don Shamsie and Malco Theatres relating to the sale of WWR
Technology, Inc. (2)
11.1 Calculation of earnings per share.
27 Financial Data Schedule (filed only in electronic format with the SEC).
- ---------------
(1) - Incorporated by reference to Form 10-Q/A for the Quarter Ended June 30,
1997 filed September 23, 1997. 2 - Incorporated by reference to Form 10-Q for
the Quarter Ended June 30, 1997 filed August19, 1997
...........................
38
<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 18, 1997
Lewis S. Schiller (Principal Executive Officer)
/S/______________ Chief Financial Officer November 18, 1997
George W. Mahoney (Principal Financial and
Accounting Officer)
<PAGE>
Consolidated Technology Group Ltd. and Subsidiaries
Index to Exhibits
September 30, 1997
1. 11.1 Calculation of earnings per share.
2. 27 Financial Data Schedule (filed only in electronic format with the SEC).
<PAGE>
Consolidated Technology Group, Ltd. and Subsidiaries
September 30, 1997
Exhibit 11.1 Calculation of Earnings per Share
Three Nine
Months Months
Ended Ended
September 30, September 30,
1997 1997
---- ----
Net Loss: ($1,776,000) ($7,232,000)
============ ============
Loss per Share:
Loss per share - Note 1 ($0.04) ($0.16)
======= =======
Loss per Share - assuming full dilution - Note 2 ($0.02) ($0.09)
======= =======
Note 1:
Computed by dividing the net loss for the period by the weighted average number
of common shares outstanding, 47,053,320 and 46,220,542, respectively, for the
three and nine month periods ended September 30, 1997. 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:
Computed by dividing the net loss for the period by the fully diluted weighted
average number of common shares outstanding, 78,035,496 and 77,224,493,
respectively, for the three and nine month periods ended September 30, 1997. The
fully diluted calculation comprehends the following assumptions:
(i) 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 resulting in a net decrease in outstanding shares of
11,500,000.
(ii) Assumes that the 2,891,943 shares of preferred stock converted during the
respective periods were converted at the beginning of the periods.
(iii) Assumes that outstanding options to purchase 2,490,000 common shares at
$0.125 per share were 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 resulting in a net decrease in outstanding shares
of 2,697,500.
(iv) Assumes that 5,000,000 shares subscribed to the CEO were issued as of the
beginning of the respective periods.
(v) Assumes that the subordinated promissory notes were converted to 4,644,000
common shares as of the beginning of the respective periods.
(vi) Assumes that preferred stock held by a subsidiary operating in the Contract
Engineering Services segment were converted into 35,000,000 common shares.
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
Exhibit 11.1 Page 1 of 1
<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-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 706,000
<SECURITIES> 446,000
<RECEIVABLES> 11,814,000
<ALLOWANCES> 456,000
<INVENTORY> 2,753,000
<CURRENT-ASSETS> 19,950,000
<PP&E> 6,847,000
<DEPRECIATION> 5,602,000
<TOTAL-ASSETS> 39,117,000
<CURRENT-LIABILITIES> 29,074,000
<BONDS> 0
<COMMON> 499,000
0
3,000
<OTHER-SE> (5,117,000)
<TOTAL-LIABILITY-AND-EQUITY> 39,117,000
<SALES> 2,623,000
<TOTAL-REVENUES> 72,521,000
<CGS> 2,461,000
<TOTAL-COSTS> 66,402,000
<OTHER-EXPENSES> 11,158,000
<LOSS-PROVISION> 462,000
<INTEREST-EXPENSE> 944,000
<INCOME-PRETAX> (5,425,000)
<INCOME-TAX> 7,000
<INCOME-CONTINUING> (5,432,000)
<DISCONTINUED> (1,800,000)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,232,000)
<EPS-PRIMARY> (.16)
<EPS-DILUTED> 0
</TABLE>
