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 March 31, 1997
Commission File Number 0-4186
CONSOLIDATED TECHNOLOGY GROUP LTD.
(Exact name of registrant as specified in its charter)
New York 13-1948169
(State of other jurisdiction of (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 April 30, 1997: 45,799,579
<PAGE>
Consolidated Technology Group, Ltd.
Index
Page
----
Part I: - Financial Information:
Item 1. Financial Statements:
Consolidated Balance Sheets - March 31, 1997 and December 31, 1996 3-4
Consolidated Statements of Operations - Three Months Ended
March 31, 1997 and 1996 5
Consolidated Statement of Shareholders' Equity - Three Months
Ended March 31, 1997 6
Consolidated Statements of Cash Flows - Three Months Ended
March 31, 1997 and 1996 7-9
Notes to Consolidated Financial Statements 10-15
Item 2. Management's Discussion and Analysis of the Financial
Condition and Results of Operations: 16-28
Part II:
Part II - Other Information:
Item 6. Exhibits and Reports on Form 8-K: 29
2
<PAGE>
Consolidated Technology Group Ltd. and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31,
March 31, 1996
1997 Restated
(Unaudited) (footnote 7)
----------- ------------
<S> <C> <C>
Assets:
Current assets:
Cash and cash equivalents $ 2,652,000 $ 2,846,000
Receivables, net of allowances 21,887,000 21,134,000
Inventories 3,160,000 3,138,000
Loans receivable 112,000 269,000
Prepaid expenses and other current assets 696,000 619,000
Excess of accumulated costs over related billings 1,026,000 938,000
--------- -------
Total current assets 29,533,000 28,944,000
---------- ----------
Property, plant and equipment, net 13,700,000 14,421,000
---------- ----------
Other assets:
Capitalized software development costs 496,000 251,000
Goodwill, net 10,404,000 10,553,000
Covenants not to compete, net 565,000 886,000
Customer lists, net 10,546,000 10,775,000
Deferred offering costs 979,000 589,000
Loans receivable, long-term -- 7,000
Receivables, related parties 1,003,000 1,296,000
Trademark, net 365,000 368,000
Investments in common stock, long-term 353,000 241,000
Other assets 1,752,000 1,395,000
--------- ---------
Total Other Assets 26,463,000 26,361,000
---------- ----------
Total Assets $69,696,000 $69,726,000
=========== ===========
</TABLE>
See notes to consolidated financial statements
3
<PAGE>
Consolidated Technology Group Ltd. and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31,
March 31, 1996
1997 Restated
(Unaudited) (footnote 7)
----------- ------------
<S> <C> <C>
Liabilities and Shareholders' Equity:
Current liabilities:
Accounts payable and accrued expenses $11,089,000 $11,185,000
Accrued payroll and related expenses 3,313,000 2,731,000
Accrued interest 732,000 170,000
Income taxes payable 746,000 738,000
Interim billings in excess of costs and estimated profits 1,351,000 1,444,000
Notes payable, related parties 399,000 295,000
Subordinated debt, related parties 924,000 924,000
Current portion of long-term debt 9,831,000 9,183,000
Current portion of subordinated debt 6,242,000 6,269,000
Current portion of capitalized lease obligations 1,348,000 1,377,000
--------- ---------
Total current liabilities 35,975,000 34,316,000
---------- ----------
Long-term liabilities:
Deferred interest 224,000 568,000
Long-term debt 15,956,000 16,467,000
Capitalized lease obligations 2,635,000 2,981,000
Subordinated debt 268,000 312,000
------- -------
Total long-term liabilities 19,083,000 20,328,000
---------- ----------
Minority interest 14,360,000 12,617,000
---------- ----------
Shareholders' equity:
Preferred stock 31,000 26,000
Additional paid-in-capital, preferred stock 112,000 92,000
Common stock (50,000,000 shares authorized, 45,795,828
shares issued and outstanding as of March 31, 1997
and December 31, 1996) 458,000 458,000
Additional paid-in-capital, common stock 52,005,000 52,005,000
Accumulated deficit (52,525,000) (50,218,000)
Unrealized gain on exchange translation 185,000 86,000
Net unrealized gain (loss) on long-term investments
in common stock 12,000 16,000
------ ------
Total shareholders' equity 278,000 2,465,000
------- ---------
Total Liabilities and Shareholders' Equity $69,696,000 $69,726,000
=========== ===========
</TABLE>
See notes to consolidated financial statements
4
<PAGE>
Consolidated Technology Group Ltd. and Subsidiaries
Consolidated Statements of Operations
Unaudited
Three Months Ended March 31,
1997 1996
---- ----
Revenues $31,969,000 $26,513,000
Direct Costs 26,994,000 20,699,000
---------- ----------
Gross Profit 4,975,000 5,814,000
Selling, General and Administrative 6,482,000 7,822,000
--------- ---------
Loss from Operations (1,507,000) (2,008,000)
----------- -----------
Other Income (Expense):
Interest expense (1,220,000) (963,000)
Other income, net 451,000 164,000
Gain (loss) from security sales -- 37,000
---------- ------
Total other expense, net (769,000) (762,000)
--------- ---------
Loss Before Income Taxes and Minority Interest (2,276,000) (2,770,000)
Income Taxes (478,000) (76,000)
Minority Interest in Loss of Subsidiaries 447,000 754,000
------- -------
Net Loss ($2,307,000) ($2,092,000)
============ ============
Net loss per common share ($0.05) ($0.06)
======= =======
Weighted average number of common shares 45,795,828 33,671,873
========== ==========
See notes to consolidated financial statements
5
<PAGE>
Consolidated Technology Group, Ltd. and Subsidiaries
Consolidated Statement of Shareholders Equity
for the Three Months Ended March 31, 1997
<TABLE>
<CAPTION>
Balance at Net
December 31, Unrealized Unrealized Balance
1996 Issuance Gain on Investment at
Restated of Series H Net Exchange Security March 31,
(footnote 7) Preferred Loss Translation Loss 1997
------------ ---------- ---- ----------- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Preferred stock $1.00 par value,
6% Series A, Authorized
77,713 shares:
Shares 22,891 0 0 0 0 22,891
Amounts $ 23,000 $ 0 $ 0 $ 0 $ 0 $ 23,000
Preferred stock, $1.00 par value,
$3.50 and $.10, Series B and E,
8,000 shares authorized each:
Shares 262 0 0 0 0 262
Amounts $ 1,000 $ 0 $ 0 $ 0 $ 0 $ 1,000
Preferred stock, $1.00 par value,
$8.00 subordinated Series F,
6,000 shares authorized:
Shares 2,700 0 0 0 0 2,700
Amounts $ 2,000 $ 0 $ 0 $ 0 $ 0 $ 2,000
Preferred stock, $1.00 par value,
Convertible Series H,
55,000 shares authorized, with a
liquidation preference of $25,330:
Shares 0 5,066 0 0 0 5,066
Amounts $ 0 $ 5,000 $ 0 $ 0 $ 0 $ 5,000
----------- ------- ---------- -------- ------ -----------
Total Preferred stock, par $ 26,000 $ 5,000 $ 0 $ 0 $ 0 $ 31,000
Additional paid-in capital preferred
stock $ 92,000 $20,000 $ 0 $ 0 $ 0 $ 112,000
Common stock, $0.01 par value,
50,000,000 shares authorized:
Shares 45,795,828 0 0 0 0 45,795,828
Amounts $ 458,000 $ 0 $ 0 $ 0 $ 0 $ 458,000
Additional paid-in capital,
common stock $52,005,000 $ 0 $ 0 $ 0 $ 0 $52,005,000
Accumulated deficit ($50,218,000) $ 0 ($2,307,000) $ 0 $ 0 ($52,525,000)
Unrealized exchange translation $ 86,000 $ 0 $ 0 $ 99,000 $ 0 $ 185,000
Net unrealized gain on long-term
investments in common stock $ 16,000 $ 0 $ 0 $ 0 ($4,000) $ 12,000
----------- ------- ---------- -------- -------- -----------
Total shareholders' equity $ 2,465,000 $25,000 ($2,307,000) $ 99,000 ($4,000) $ 278,000
=========== ======= ============ ======== ======== ===========
</TABLE>
See notes to consolidated financial statements.
6
<PAGE>
Consolidated Technology Group Ltd. and Subsidiaries
Consolidated Statements of Cash Flows
Unaudited
<TABLE>
<CAPTION>
Three Months Ended March 31,
1997 1996
---- ----
<S> <C> <C>
Cash Flows from Operating Activities:
Net loss ($2,307,000) ($2,092,000)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,813,000 1,626,000
Impaired asset write-offs -- 192,000
Minority interest in net loss of consolidated subsidiaries (447,000) (754,000)
Bad debt expense 491,000 238,000
Loss from equity method investments 58,000 --
Noncash expense from subsidiaries issuance of options and warrants 52,000 2,075,000
(Gain) loss from security sales -- (37,000)
Loss on disposal of fixed assets -- 99,000
Deferred interest (344,000) --
Change in assets and liabilities:
(Increase) decrease in assets:
Receivables (1,244,000) (2,191,000)
Inventories (22,000) 65,000
Prepaid expenses and other current assets (77,000) (374,000)
Excess of accumulated costs over related billings (88,000) (108,000)
Increase (decrease) in liabilities:
Accounts payable and accrued expenses (96,000) (883,000)
Accrued payroll taxes and related expenses 582,000 2,732,000
Accrued interest 562,000 108,000
Income taxes payable 8,000 75,000
Interim billings in excess of costs and estimated profits (93,000) (385,000)
-------- ---------
Total adjustments 1,155,000 2,478,000
--------- ---------
Net cash provided by (used in) operating activities (1,152,000) 386,000
----------- -------
(continued)
</TABLE>
See notes to consolidated financial statements
7
<PAGE>
Consolidated Technology Group Ltd. and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Three Months Ended March 31,
1997 1996
---- ----
<S> <C> <C>
Cash Flows from Investing Activities:
Increase in other assets 114,000 105,000
Capital expenditures (275,000) (1,176,000)
Capitalized software development costs (258,000) (1,000)
Investments in securities (148,000) (325,000)
Proceeds from sale of securities -- 128,000
Payments for loans made (20,000) (1,011,000)
Collections for repayment of loans made 114,000 926,000
------- -------
Net cash used in investing activities (473,000) (1,354,000)
--------- -----------
Cash Flows from Financing Activities:
Deferred offering costs (389,000) (114,000)
Net advances from asset based lender 639,000 (1,179,000)
Proceeds from issuance of notes payable 671,000 9,001,000
Repayment of notes payable (1,069,000) (1,046,000)
Repayment of subordinated debt (71,000) (6,333,000)
Payments on capital lease obligations (375,000) (326,000)
Issuance of common stock -- 500,000
Subsidiaries issuance of common stock 2,000,000 375,000
Issuance of preferred stock 25,000 --
------ ---------
Net cash provided by (used in) financing activities 1,431,000 878,000
--------- -------
Net Increase (Decrease) in Cash and Cash Equivalents (194,000) (90,000)
Cash and Cash Equivalents at Beginning of Period 2,846,000 1,636,000
--------- ---------
Cash and Cash Equivalents at End of Period $2,652,000 $1,546,000
========== ==========
Supplemental Disclosures of Cash Flow Information:
Cash paid for:
Interest $1,001,000 $855,000
========== ========
Income taxes $469,000 --
========
(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 Three Month Period Ended March 31, 1997:
(1) - A subsidiary of the Company, operating in the Telecommunications
segment, issued warrants to purchase stock that carry a below market exercise
price and in connection therewith recorded a non cash deferred discount of
$485,000 of which $52,000 was expensed during the three months ended March 31,
1997.
During the Three Month Period Ended March 31, 1996:
(1) - A subsidiary of the Company, operating in the Medical Information
Services segment, issued stock options and warrants to purchase stock and in
connection therewith recorded non cash expense of $2,075,000 which is the
amount that the fair market value of the stock exceeded the exercise price.
See notes to consolidated financial statements
9
<PAGE>
Consolidated Technology Group Ltd. and Subsidiaries
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
March 31, 1997 and December 31, 1996, the statement of changes in shareholders'
equity for the three months ended March 31, 1997 and the results of its
operations and changes in cash flows for the three months ended March 31, 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 months ended
March 31, 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) Equity - Issuance of Series H Convertible Preferred Stock - During the three
months ended March 31, 1997 the Company issued 5,066 shares in a private
placement to qualified investors and received proceeds of $25,000. Each share of
the Series H Preferred stock will be automatically converted into 2,727 shares
of common stock upon the filing of a certificate of amendment to the Company's
certificate of incorporation which increases the Company's authorized common
stock to at least 200 million shares and reduces the par value per share of
common stock to $0.0018 per share, subject to adjustment in the event of any
reverse split of common stock. The Series H Preferred stock will receive a
non-cumulative annual dividend of $0.30 per share if and when declared by the
board of directors. No such dividends have been declared as of March 31, 1997.
The Series H Preferred stockholders have no voting rights except as provided by
law. The Series H Preferred Stock is redeemable at the option of the Company for
$10.00 per share plus any unpaid dividends and have a liquidation preference of
$5.00 per share plus any unpaid dividends.
(6) Industry Segments - The Company currently classifies its operations into
eight business segments: (i) Contract Engineering Services consists of
subsidiaries that provide engineers, designers and technical personnel on a
temporary basis pursuant to contracts with major corporations; (ii) Medical
Diagnostics consists of a subsidiary that performs magnetic resonance imaging
and other medical diagnostic imaging services; (iii) Electro-Mechanical and
Electro- Optical Products Manufacturing consists of subsidiaries that
manufacture and sell products such as devices that measure distance and
velocity, instrumentation devices, debit card vending machines, prepaid
telephone calling cards and finger print identification products; (iv) 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; (v)
Telecommunications consists of a subsidiary that, among other things, installs
telephonic network systems and buys and resells local and long-distance
telephone service; (vi) Three Dimensional Products and Services consists of
subsidiaries that provide three dimensional imaging services that are used in a
variety of applications, such as prototype building and reverse engineering;
(vii) Audio Products Manufacturing consists of a subsidiary that manufactures
and sells a professional line of loudspeakers, and (viii) Business Consulting
Services consists of subsidiaries that provide a variety of financial and
business related services. Corporate and Other consists of the operating
activities of the holding company entities. 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.
Inter segment sales 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
- --------------------------------------------------------------------------------
(6) Industry Segments:
Three Months Ended March 31,
1997 1996
---- ----
Revenues:
Contract Engineering Services $19,249,000 $13,471,000
Medical Diagnostics 7,699,000 8,114,000
Audio Products Manufacturing 694,000 671,000
Electro-Mechanical and Electro-Optical
Products Manufacturing 704,000 649,000
Medical Information Services 1,572,000 2,561,000
Telecommunications 1,978,000 742,000
Three Dimensional Products and Services 66,000 298,000
Business Consulting Services 7,000 7,000
----- -----
Total Revenues $31,969,000 $26,513,000
=========== ===========
Gross Profit (Loss):
Contract Engineering Services $ 1,417,000 $ 834,000
Medical Diagnostics 3,028,000 3,841,000
Audio Products Manufacturing 97,000 137,000
Electro-Mechanical and Electro-Optical
Products Manufacturing 17,000 94,000
Medical Information Services 157,000 662,000
Telecommunications 214,000 39,000
Three Dimensional Products and Services 38,000 200,000
Business Consulting Services 7,000 7,000
----- -----
Total Gross Profits $4,975,000 $5,814,000
========== ==========
Income (Loss) from Operations:
Contract Engineering Services $ 55,000 ($ 456,000)
Medical Diagnostics 898,000 1,883,000
Audio Products Manufacturing (160,000) (144,000)
Electro-Mechanical and Electro-Optical
Products Manufacturing (252,000) (168,000)
Medical Information Services (482,000) (1,872,000)
Telecommunications (366,000) (280,000)
Three Dimensional Products and Services (323,000) (450,000)
Business Consulting Services (27,000) (9,000)
Corporate and Other (850,000) (512,000)
--------- ---------
Total Loss from Operations ($1,507,000) ($2,008,000)
============ ============
11
<PAGE>
Consolidated Technology Group, Ltd. and Subsidiaries
Unaudited Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(6) Industry Segments:
Three Months Ended March 31,
1997 1996
---- ----
Net Income (Loss):
Contract Engineering Services ($ 98,000) ($ 473,000)
Medical Diagnostics 106,000 1,196,000
Audio Products Manufacturing (194,000) (158,000)
Electro-Mechanical and Electro-Optical
Products Manufacturing (262,000) (171,000)
Medical Information Services (255,000) (1,525,000)
Telecommunications (424,000) (301,000)
Three Dimensional Products and Services (414,000) (499,000)
Business Consulting Services (27,000) (9,000)
Corporate and Other (739,000) (152,000)
--------- ---------
Total Net Loss ($2,307,000) ($2,092,000)
============ ============
Depreciation and Amortization:
Contract Engineering Services $ 123,000 $ 114,000
Medical Diagnostics 1,337,000 1,242,000
Audio Products Manufacturing 81,000 41,000
Electro-Mechanical and Electro-Optical
Products Manufacturing 17,000 16,000
Medical Information Services 128,000 110,000
Telecommunications 21,000 8,000
Three Dimensional Products and Services 101,000 90,000
Business Consulting Services -- 1,000
Corporate and Other 5,000 4,000
----- -----
Total Depreciation and Amortization $1,813,000 $1,626,000
========== ==========
12
<PAGE>
Consolidated Technology Group, Ltd. and Subsidiaries
Unaudited Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(6) Industry Segments:
Three Months Ended March 31,
1997 1996
---- ----
Capital Expenditures:
Contract Engineering Services $ 18,000 $ 19,000
Medical Diagnostics 146,000 1,121,000
Audio Products Manufacturing 43,000 12,000
Electro-Mechanical and Electro-Optical
Products Manufacturing 7,000 --
Medical Information Services 48,000 20,000
Telecommunications 6,000 --
Three Dimensional Products and Services 7,000 --
Business Consulting Services -- --
Corporate and Other -- 4,000
---------- -----
Total Capital Expenditures $ 275,000 $1,176,000
========== ==========
March 31, December 31,
1997 1996
---- ----
Identifiable Assets:
Contract Engineering Services $10,652,000 $ 9,691,000
Medical Diagnostics 41,607,000 42,987,000
Audio Products Manufacturing 1,556,000 1,478,000
Electro-Mechanical and Electro-Optical
Products Manufacturing 3,613,000 3,386,000
Medical Information Services 7,436,000 8,258,000
Telecommunications 2,691,000 1,655,000
Three Dimensional Products and Services 1,018,000 1,068,000
Business Consulting Services 253,000 278,000
Corporate and Other 870,000 925,000
------- -------
Total Net Loss $69,696,000 $69,726,000
=========== ===========
13
<PAGE>
Consolidated Technology Group Ltd. and Subsidiaries
Footnotes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(7) 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
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.
14
<PAGE>
Consolidated Technology Group Ltd. and Subsidiaries
Footnotes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
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 three months ended March 31, 1997 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 $1,020,056
Loans receivable 49,000
Prepaid and other current assets 23,724
Receivables, long-term 441,000
Receivables, related parties 85,000
Other assets 469,227
---------
Total assets 2,088,007
---------
Accounts payable and accrued expenses 1,201,975
Notes payable, related parties 689,447
Current portion of long-term debt 458,333
Convertible debentures 700,000
Current portion of capitalized lease obligations 99,182
---------
Total liabilities 3,148,937
---------
Net liabilities disposed of $1,060,930
=========
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 $1,060,930. 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.
(8) - 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 payables to
the segments. 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 81% of the total revenues of the
segment for the three months ended March 31, 1997. These same clients account
for approximately 80% of the outstanding accounts receivable of TGS. TGS's
revenues for the three months ended March 31, 1997 amount to $19,249,000, or
60%, of the Company's consolidated revenues. TGS's outstanding accounts
receivable amounts to $5,689,000, or 26%, of the Company's consolidated accounts
receivable as of March 31, 1997. Netsmart Technologies, Inc., ("Netsmart"),
which operates in the Medical Information Services segment, cumulatively, from
1995 through March 31, 1997 has derived approximately $2.4 million, or 88.1%, of
its revenue from one contract and as of March 31, 1997 such contract is more
than 80% complete. As of March 31, 1997, the receivable balance due from such
contract represents 21% of Netsmart's outstanding receivables. Netsmart's
outstanding receivables as of March 31, 1997 amounts to $2,110,000, or 10%, of
the Company's consolidated accounts receivable as of March 31, 1997. Overall,
between these two segments, six customers represent approximately 53% of the
Company's consolidated revenue for the three months ended March 31, 1997 and
approximately 23% of the Company's consolidated accounts receivable balance at
March 31, 1997.
15
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
- --------------------------------------------------------------------------------
Liquidity and Capital Resources
-------------------------------
Going Concern
For the three months ended March 31, 1997, (the "March 1997 period"), the
Company incurred a net loss of $2,307,000 and has an accumulated deficit at
March 31, 1997 of $52,525,000 and approximately $6,760,000 of debt that is in
default. These conditions raise substantial doubt about the Company's ability to
continue as a going concern. The ability of the Company to continue as a going
concern is dependent upon the success of the Company's subsidiary's marketing
efforts and their efforts to obtain sufficient funding to enable them to
continue operations. Management's plan is to continue efforts to raise capital
through initial public offerings of the underlying 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. 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 certain segments of operations
and could ultimately force the Company as a whole to cease operations.
Working Capital Condition
As of December 31, 1996, the Company had negative working capital of $5,372,000.
As of March 31, 1997, the Company has negative working capital of $6,442,000
representing an increase in negative working capital of $1,070,000. Restrictions
exist with regards to the Company's use of the Medical Diagnostics segment's
cash which approximated $1,401,000 of working capital as of March 31, 1997. The
Company's principal working capital consists of cash and cash equivalents. Cash
and cash equivalents were $2,652,000 at March 31, 1997 compared to $2,846,000 at
December 31, 1996. During the March 1997 period, International Magnetic Imaging,
Inc., ("IMI"), and Trans Global Services, Inc., ("TGS"), generated approximately
$976,000 and $917,000, respectively, in cash from operations while the remaining
segments used approximately $3,045,000 of cash for operations. Pursuant to an
IMI financing agreement with a creditor, restrictions exist on the distributions
of IMI funds whereby IMI may not make payments out of the ordinary course of IMI
operations and specifically, not to the parent company, (Consolidated), or any
subsidiary or affiliate. The other segments are thereby required to operate on
their own cash flows and as of March 31, 1997 the most significant impact from
these restrictions is on the Three Dimensional Products and Services, Audio
Products Manufacturing and the Electro-Mechanical Electro-Optical Products
Manufacturing segments which are currently unable to operate without cash
infusions from the parent company, (Consolidated). It is imperative that these
segments 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. The remaining segments are less affected
by the restrictions on IMI's cash since they operated substantially with their
own cash flows during the March 1997 period.
Sources of Cash
Sources of cash includes proceeds from the issuance of long-term debt of
$671,000, net advances from asset based lendors of $639,000, proceeds of $25,000
from a private placement of the Company's preferred stock, $2,000,000 from a
subsidiaries private issuance of equity (see footnote 7 of the accompanying
financial statements), collections on repayments of notes receivable of $114,000
and other sources of approximately $114,000.
16
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
- --------------------------------------------------------------------------------
Uses of Cash
Uses of cash, other than in operations, includes the repayment of long-term and
subordinated debt of $1,140,000, capital expenditures of $275,000, payments on
capital leases of $375,000, payments for loans made of $20,000, purchases of
investments of $148,000 and expenditures of $258,000 for software development
and $389,000 for deferred offering costs.
Changes in Other Working Capital Assets and Liabilities
Significant changes in working capital, other than cash, includes an increase in
accounts receivable of $753,000 (primarily from an increase in volume primarily
from the Contract Engineering Services segment), an increase in accrued payroll
and related expenses of approximately $582,000 (primarily from an increase in
payroll and payroll related obligations of the Contract Engineering Services
segment) and an increase in accrued interest of approximately $562,000
(primarily from the Medical Diagnostics segment's).
Effect of Loan Defaults
The Company is in technical default on loans approximating $6,760,000 as of
December 31, 1996 of which $6,300,000 relates to the Medical Diagnostics
segment, $325,000 relates to the Audio Products Manufacturing segment and
$135,000 relates to the Three Dimensional Products and Services segment. Such
default has not had, and is not expected to have a significant impact on the
operations of the related segment. The creditors have not called such loans and
all amounts are classified as current liabilities in the Company's March 31,
1997 balance sheet.
Results of Operations
---------------------
Consolidated operating losses for the March 1997 period, decreased by
approximately $500,000 from $2 million for the three months ended March 31,
1996, (the "March 1996 period"), to $1.5 million for the March 1997 period. The
March 1996 period included approximately $2 million of non cash expense from the
exercise of below market warrants in the medical information services segment.
Excluding the non cash expenses for the March 1996 period, the March 1997
period's operating losses increased approximately $1.5 million due primarily to
a $1 million decrease in operating profit of the medical diagnostics segment, an
increase of $350,000 in corporate and other expenses and an aggregate increase
in operating losses of $150,000 in the remaining segments.
The percentage of relative contribution to revenues, gross profit, and selling
general and administrative expenses by industry segment is shown in the
following tables. Changes within the individual industry segments themselves is
discussed further within the respective industry segment discussions.
17
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
- --------------------------------------------------------------------------------
Percentage of Total
-------------------
March March
1997 1996
Revenues: Period Period
------ ------
Contract Engineering Services 60% 51%
Medical Diagnostics 24% 30%
Audio Products Manufacturing 2% 2%
Electro-Mechanical and Electro-Optical
Products Manufacturing 3% 3%
Medical Information Services 5% 10%
Telecommunications 5% 3%
Three Dimensional Products and Services 1% 1%
Business Consulting Services -- --
Percentage of Total
-------------------
March March
1997 1996
Gross Profit: Period Period
------ ------
Contract Engineering Services 28% 14%
Medical Diagnostics 61% 66%
Audio Products Manufacturing 2% 3%
Electro-Mechanical and Electro-Optical
Products Manufacturing 1% 2%
Medical Information Services 3% 11%
Telecommunications 4% 1%
Three Dimensional Products and Services 1% 3%
Business Consulting Services -- --
Percentage of Total
-------------------
March March
1997 1996
Selling, General & Administrative Expense: Period Period
------ ------
Contract Engineering Services 21% 17%
Medical Diagnostics 33% 25%
Audio Products Manufacturing 4% 4%
Electro-Mechanical and Electro-Optical
Products Manufacturing 4% 3%
Medical Information Services 10% 32%
Telecommunications 9% 4%
Three Dimensional Products and Services 6% 8%
Business Consulting Services -- --
Corporate and Other 13% 7%
18
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
- --------------------------------------------------------------------------------
Discussion of Operations by Segment
-----------------------------------
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.
TGS had revenues of $19.25 million for the March 1997 period, reflecting a 43%
increase from the revenues of $13.5 million for the March 1996 period. This
increase is attributable to increased sales and placement efforts and success in
replacing the loss of a contract on January 1, 1996 from one of TGS's larger
clients. The sales volume from that lost contract has been more than replaced by
the first quarter of 1997. For the March 1997 period, approximately 81% of TGS's
revenue was derived from its five largest clients. For the March 1997 period,
TGS had a gross margin of 7.4% as compared to 6.2% for the March 1996 period.
This increase reflects the segment's continuing efforts to generate increased
revenues at greater gross margins.
Selling, general and administrative expenses were approximately $1.36 million or
7% of revenues for the March 1997 period and were $1.29 million or 9.6% of
revenues for the March 1996 period. This percentage decrease is an indication of
TGS's ability to increase revenues while holding selling, general and
administrative costs down.
TGS finances its payroll obligations by borrowing from an asset-based lender at
an interest rate of 2% in excess of prime. TGS also pays a fee of .3% of the
face amount of the invoices financed. The borrowings are secured by a security
interest in all of TGS's assets. Pursuant to an April 1997 amendment to the
agreement, on May 30, 1997, or earlier at the request of TGS, the borrowing
availability will be reduced to $3.0 million and TGS will pay a fixed monthly
fee of $10,500 to the asset-based lender. The fee will be subject to increases
to the extent that receivables in any month exceed $10 million. The interest
rate of 2% in excess of prime will not be affected by the amendment. At March
31, 1997, such borrowings from the asset-based lender were approximately $3.6
million. The interest rates (exclusive of the fee) payable by the segment at
March 31, 1997 was 10.50% and 10.25% at March 31, 1996. During the March 1997
period, interest expense was approximately $186,000.
As a result of the foregoing and after the elimination of intercompany
transactions, TGS sustained a net loss of $98,000 for the March 1997 period as
compared to a net loss of $473,000 for the March 1996 period.
Under its agreements with its clients, TGS is required to pay its employees and
pay all applicable Federal and state withholding and payroll taxes when the
expense is incurred although TGS is paid by the client 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. Management believes that with the increased revenues at higher
gross margin levels and stabilized selling, general and administrative costs it
has improved its operations. Management 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.
19
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
- --------------------------------------------------------------------------------
Medical Diagnostics - This segment consists of the operations of International
Magnetic Imaging, Inc., ("IMI"), a medical diagnostic imaging company, which
primarily performs MRI and other diagnostic imaging modalities. The following
Table I shows the mix of procedures by class of payor for MRI procedures and
other multi-modality procedures:
<TABLE>
<CAPTION>
Table I - Mix of Procedures by Payor Class
------------------------------------------
March March
1997 1996
Class of Payor Period Period
- -------------- ------ ------
<S> <C> <C>
MRI Procedures (representing 83% and 89%, respectively of net patient
service revenue for the March 1997 and 1996 period):
Managed Care 47% 34%
Commercial 16% 17%
Medicare 15% 12%
Contract Worker's Compensation 10% 5%
Worker's Compensation 8% 13%
Brokered -- 13%
Liability 3% 5%
Other 1% 1%
Multi-modality procedures, other than MRI(1) (representing 17% and 11%,
respectively of net patient service revenue for the March 1997 and
1996 period):
Managed Care 85% 84%
Medicare 7% 8%
Commercial 5% 5%
Other 3% 3%
</TABLE>
- ---------
(1) Includes CAT scans, nuclear medicine, mammography, fluoroscopy, ultrasound
and X-Rays.
Net patient service revenue for performing MRI and other diagnostic modality
procedures decreased $564,000, or 5%, from $7,847,000 for the March 1996 period
to $7,283,000 for the March 1997 period due to the following:
Decrease in Reimbursement Rates for MRI ($585,000)
Decrease in Reimbursement Rates for Multi-Modality (39,000)
Decrease in Scan Procedure Volume for MRI (233,000)
Increase in Scan Procedure Volume for Multi-Modality 293,000
-------
Total Decrease in Net Patient Service Revenue ($564,000)
=======
Other service revenues and management fee income represented only 5% and 3% of
total revenues, respectively, for the March 1997 and 1996 periods. Such fees
increased approximately $149,000 from $267,000 for the March 1996 period to
$416,000 for the March 1997 period, due primarily to the operations of MRI Net,
an MRI referral service company owned by IMI.
20
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
- --------------------------------------------------------------------------------
IMI's gross profit decreased $813,000, or 21%, from $3,841,000 for the March
1996 period to $3,028,000 for the March 1997 period due to the aforementioned
net decrease in revenues of $415,000 and an increase in direct costs of
$398,000. Income from operations decreased $985,000, or 52%, from $1,883,000 for
the March 1996 period to $898,000 for the March 1997 period of which $813,000
relates to the aforementioned decrease in gross profit and $172,000 relates to
an increase in selling, general and administrative expense. The overall increase
in direct costs and selling, general and administrative expense reflected a
number of factors discussed below.
Radiology fees increased $20,000 or 3% when comparing the March 1997 period to
the March 1996 period. During both periods, the radiology fees were incurred
based on cash collections related to services performed in all but two of IMI's
centers. Cash collections for services were $7 million and $6.3 million,
respectively, for the March 1997 and 1996 periods, representing an overall
increase of approximately 3%, which accounts for the increase in radiology fees.
IMI entered into four radiology agreements which expire approximately four years
from December 31, 1996 and which require that radiologists interpret and report
the results of the MRI and multi-modality procedures and which require IMI to
pay the radiology company's fees based on cash collections for seven centers, a
flat fee for one center and a per scan fee for another center.
Equipment maintenance costs relate primarily to fixed contract payment schedules
and generally do not fluctuate from period to period unless repairs and
maintenance are required that are not covered by the equipment contracts or new
equipment is placed into service or removed from service. Substantially all
maintenance costs incurred for the March 1997 and 1996 periods were incurred
pursuant to fixed maintenance contracts, and as a result such costs did not
fluctuate significantly, increasing $94,000 of which $45,000 related to repairs
on telecommunications equipment which is expected to be of a non recurring
nature. The remaining increase relates to repairs of medical equipment outside
of the service contracts.
Patient service costs and expenses consist primarily of film, contrast agents
and utility costs used in MRI and multi-modality procedures. Such costs
increased $89,000, or 15%, from the March 1996 period to the March 1997 period.
An increase in multi-modality procedures accounted for approximately $53,000 of
the increase and the remainder related to an increase in MRI procedures which
required contrast agents.
Salaries and benefits increased $66,000 or 4% from the March 1996 period to the
March 1997 period which represents increases in pay to previously existing
employee positions.
Professional services, consisting primarily of legal, accounting and consulting
services, increased $48,000 or 20% when comparing the March 1997 and 1996
periods due to marketing agreements that were not in place during the March 1996
period.
Other management, general and administrative expenses, decreased $94,000, or 8%,
from the March 1996 period to the March 1997 period. During 1996, one of the
Centers was in the process of relocating to a new facility and in connection
with the relocation, it rented, on a short-term basis, MRI equipment.
Provision for bad debts increased $254,000, or 107%, from the March 1996 period
to the March 1997 period. Substantially all of this increase reflects the
write-off of amounts due from scan brokers who went out of business and
liability accounts receivable whose aging had reached the point where IMI's
receivable policy and evaluation required that such receivables be provided for
with an additional allowance.
Depreciation and amortization consists of the depreciation of purchased
equipment, buildings, leasehold improvements and capital leases and the
amortization of goodwill, customer lists, restrictive covenants and loan costs.
Depreciation expense increased $82,000, or 12%, when comparing the March 1997
and 1996 periods which reflects the addition of equipment in certain Centers.
Amortization remained relatively level increasing $12,000, or 2%, from the March
1996 period to the March 1997 period.
21
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
- --------------------------------------------------------------------------------
Interest and other income increased $479,000 from $61,000 for the March 1996
period to $540,000 for the March 1997 period. During the March 1997 period, IMI
recognized $502,000 of income from a joint venture and during the March 1996
period, joint venture income amounted to only $38,000.
Interest expense increased $176,000, or 26%, from the March 1996 period to the
March 1997 period. Approximately $90,000 of the increase relates to new debt for
the purchase of equipment and the remainder relates to the refinancing of
subordinated notes at a higher interest rate.
IMI files a consolidated tax return with the Company and as a result, $385,000
of federal taxes accrued by IMI are eliminated in consolidation with the
Company. The remaining portion of taxes relate to state and Puerto Rico taxes
which increased by $23,000 from $70,000 for the March 1996 period to $93,000 for
the March 1997 period.
Overall profitability decreased $1.1 million, from $1.2 million for the March
1996 period to $106,000 for the March 1997 period, reflecting increased overall
costs and a decrease in revenues. During the March 1997 period, four of the
Centers operated at an aggregate net loss of $406,000 while the remaining
Centers generated net income of $512,000. During the March 1996 period, three of
the Centers operated at an aggregate net loss of $604,000 while the remaining
Centers generated net income of $1.8 million.
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.
Optical-encoders, encoded motors and limit programmers, debit card vending
machines and avionics instrumentation device revenues, when comparing the March
1997 period to the March 1996 period, increased 19% from $579,000 to $688,000.
Cost of sales for the March 1997 and 1996 periods includes $150,000 and $25,000,
respectively, for the write-off of obsolete inventory. Excluding such
write-offs, the gross profit percentages for the March 1997 and 1996 periods
were 24% and 21%, respectively. Selling, general and administrative expenses
decreased 16% from $225,000 for the March 1996 period to $188,000 for the March
1997 period due to planned cutbacks in expenses related to existing operations.
Net losses increased from $134,000 for the March 1996 period to $182,000 for the
March 1997, reflecting the increase in write-off for obsolete inventory of
$125,000 which was partially offset by an improvement in operating activities of
$77,000. 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 $1,280,000 exists as of March 31, 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 sustaining improvement for this segment.
22
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
- --------------------------------------------------------------------------------
Prepaid telephone calling card revenues decreased from $72,000 for the March
1996 period to $16,000 for the March 1997 period on which substantially no gross
profit was earned for either period. Selling, general and administrative expense
increased from $37,000 for the March 1996 period to $43,000 for the March 1997
period. The net loss remained relatively level approximating $42,000 and $37,000
for the March 1997 and 1996 periods, respectively. 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 March 1997 period approximated
$38,000. 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
$262,000 and $171,000, respectively, for the March 1997 and 1996 periods.
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.
Netsmart's revenue for the March 1997 period was $1,572,000, a decrease of
$989,000, or 39% from the revenue for March 1996 period which was $2,561,000.
Approximately $857,000 of this decrease represented revenue in the March 1996
period generated from a contract with IBN. IBN represented Netsmart's most
significant customer in the March 1996 period, accounting for approximately
36.4% of revenue for the quarter. The IBN contract has generated revenue of $2.4
million, or approximately 88.1% of Netsmart's total revenue from the SmartCard
Systems cumulatively from 1995 through March 31, 1997 including $419,000 of
guaranteed royalties. As of March 31, 1997 the contract was more than 80%
complete. Netsmart is continuing to provide professional services to IBN,
although revenues have declined substantially from the level during 1996.
Netsmart intends to expand its marketing effort for its CarteSmart System,
however, at March 31, 1997, no significant contracts for the CarteSmart system
have been entered into. The remainder of the decrease in revenue for the March
1997 period was attributable to the Netsmart's health information systems
divisions license revenue which was $25,000 for the March 1997 period, a
decrease of $143,000 or 85% from the revenue for the March 1996 period which was
$168,000.
23
<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 the
principal source of revenue in the March 1997 period, accounting for $1,396,000
or 91% of revenue. The largest component of revenue in the March 1997 period was
data center (service bureau) revenue which increased to $485,000 from $481,000
in the March 1996 period, reflecting a less than 1% increase. The turnkey
systems labor revenue decreased to $351,000 in the March 1997 period from
$410,000 in the March 1996 period, reflecting a decrease of 15%. This decrease
was the result of a slow down in new business bookings during the March 1996
period. Maintenance revenue increased to $324,000 in the March 1997 period from
$289,000 in the March 1996 period, reflecting an increase of 12%. Revenue from
third party hardware and software decreased to $212,000 in the March 1997 period
from $268,000 in the March 1996 period, a decrease of 21%. Sales of third party
hardware and software are made only in connection with the sales of turnkey
systems. License revenue decreased to $25,000 in the March 1997 period from
$168,000 in the March 1996 period, a decrease of 85%. 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.
Revenue from contracts with government agencies represented 33% of total revenue
and 37% of health information systems revenue for March 1997 period. Management
believes that such contracts will continue to represent an important part of its
business, particularly its health information systems business.
Gross profit decreased to $157,000 in the March 1997 period from $662,000 in the
March 1996 period, a 76% decrease. The decrease in the gross profit was
substantially the result of costs associated with the completion of the IBN
contract as well as a decrease in the health information systems license
revenue.
Selling, general and administrative expenses were $639,000 in the March 1997
period, an decrease of 75% from the $2,534,000 in the March 1996 period. During
the March 1996 period, Netsmart incurred non cash compensation charges of $2.1
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. Expenses, other than the non cash
compensation increased approximately $205,000 from 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.
Interest expense was $68,000 in the March 1997 period, a decrease of $46,000, or
46% from the $114,000 in the March 1996 period. This is a result of less
borrowings during the March 1997 period. The most significant component of the
interest expense on an ongoing basis is the interest payable to Netsmart's
asset-based lender, which interest is equal to the greater of 18% per annum or
prime plus 8% plus a fee of 1% of the face amount of the invoice.
Other expense in the March 1997 period represents the recognition of a 50% share
of its loss in its joint venture corporation with respect to the purchase of
SATC software. The amount of such loss was $58,000.
As a result of the foregoing factors, Netsmart incurred a loss before minority
interest of $609,000 in the March 1997 period, as compared with a loss before
minority interest of $1,987,000 in the March 1996 period. For the March 1997 and
1996 periods, minority interest portions of the Netsmart's losses were $354,000
and $462,000, respectively, resulting in net losses for this segment of $255,000
and $1,525,000, respectively.
24
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
- --------------------------------------------------------------------------------
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 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.
Revenue for the March 1997 period were $1,978,000, reflecting an increase of
167%, or $1,235,000 from the March 1996 period. The following table sets forth
the revenues and percentage of revenues during 1997 and 1996 from each of its
business segments. (amounts in thousands).
March 1997 Period March 1996 Period
----------------- -----------------
Revenue Percent Revenue Percent
------- ------- ------- -------
Telephone services $1,486,000 75% $506,000 68%
Data cabling installation services $ 492,000 25% $236,000 32%
The increase in revenue for the March 1997 period compared to the March 1996
period is principally a result of the sale of debit calling cards initiated in
the latter part of 1996. Such sales in the current quarter amounted to $246,000
and is expected to become a major contributor to future sales growth. In
addition, due to increased sales personnel, as discussed further below, ARC has
increased its market penetration into the local telephone market, principally
New York City metropolitan area. In March 1997, the ARC also began offering long
distance phone services.
Cost of revenue for the March 1997 period was $1.8, reflecting an increase of
$1.1 million, or 151% from $703,000 for the March 1996 period. Gross margins in
the March 1997 period were 10.8% compared to 5.3% for the March 1996 period.
Gross margins in ARC's telephone services segment were 4.46% for the March 1997
period compared to 10.7% for the March 1996 period. In the fourth quarter of
1996, ARC 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 with the ability to manage the
traffic over its phone lines more effectively and, with the addition of certain
other hardware to be purchased later in 1997, will be able to provide least cost
routing to its customers. In the first quarter of 1997, ARC discovered an error
in its rate tables in its platform that manages its outgoing calls for its debit
calling cards which resulted in a loss of $40,000. ARC has taken corrective
actions to ensure this problem does not recur. During the March 1997 period, ARC
incurred approximately $38,000 of costs in managing the platform which it did
not incur in the March 1996 period. These costs will be ongoing but will become
a smaller percentage of cost of sales as ARC's revenue base in this segment
continues to grow.
ARC'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, such as waiving
installation charges and acquiring certain equipment by the customer needed to
make the connection. Such costs are being amortized into the monthly recurring
billings to these customers over the term of their agreements and would account
for the lower margins in the initial phase of the service cycle. In addition,
approximately $588,000 of sales were to one customer at a margin of 5%. These
sales at lower margins, although not customary, were done on a temporary basis
and will be phased out in the second half of 1997.
25
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
- --------------------------------------------------------------------------------
Gross margins for ARC's data cabling installation services were 30.1% for the
March 1997 period and a negative 6.3% for the March 1996 period. During the
March 1997 period, ARC was managing 14 different jobs and is benefiting from its
contract with the State of New York to provide data and voice cabling for
certain NYC schools. For the March 1996 period, ARC incurred a loss of $15,000
on the jobs it was performing during the quarter. All jobs in process during the
previous quarter have been completed and ARC does not anticipate losses on any
further jobs.
Selling, general and administrative expenses for the March 1997 period were
$580,000, or 29% of total sales, compared to $319,000, or 43% of total sales,
for the March 1996 period. In the second half of 1996, ARC added four sales
personnel to promote ARC's phone services, certain administrative personnel to
manage its platform, an additional cable installer and in March 1997 hired a
controller to manage its finances. ARC also opened offices in Florida and
Illinois to begin a direct sales effort. It is ARC'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. As of March 31,
1997 ARC is qualified to sell phone service in 18 states. In this regard, ARC
has spent approximately $30,000 in legal fees which it is amortizing over one
year. The principle components of selling, general and administrative expenses
for the March 1997 period were: $315,000 of personnel costs, third party sales
commissions of $56,000, travel and trade show expenses of $41,000, office
equipment and supplies of $64,000, depreciation and amortization of $28,000,
rent and utilities expenses of $28,000 and amortization of costs of issuing
below market warrants of $52,000. The principle components of selling, general
and administrative expenses for the March 1996 period were: personnel costs of
$165,000, third party sales commissions of $41,000, travel and trade show
expenses of $33,000, office equipment and supplies of $55,000, and rent and
utilities expenses of $16,000.
In the fourth quarter of 1996, ARC obtained a $350,000 equipment loan in which
it incurred interest of $22,000 for the March 1997 period. ARC incurred interest
expense of $5,000 on a $550,000 loan it obtained in February 1997. Such loan was
received in anticipation of ARC's potential initial public offering which may
close in 1997. Interest expense of $4,000 and $2,000 was also incurred on a loan
from the Company's asset based lender for the respective March 1997 and 1996
periods. Interest expense of $27,000 and $19,000 for the March 1997 and 1996
periods, respectively, was also incurred on financing provided by an affiliate.
As discussed above, in February 1997, ARC obtained a $550,000 bridge loan in
anticipation of ARC's potential initial public offering which may close later in
1997. As part of such financing, a 10% fee was paid to the underwriter who
arranged the financing. Such fee has been deferred and is being amortized over
the life of the loan which matures on the earlier of the closing of the
potential initial public offering or April 1, 1998. Also, as part of the bridge
financing, ARC issued 500,000 warrants with an exercise price of $5.00 and
1,000,000 warrants at $1.00 and in conjunction therewith, ARC recorded deferred
debt costs for the value of the warrants issued below the current market value
using the fair value method. Such calculation generates a discount of $485,000
to be amortized over the life of the loan. For the March 1997 period,
amortization expense was $52,000.
As a result of the above and after eliminating intercompany transactions, ARC
sustained a net loss of $424,000 for the March 1997 period compared to a loss of
$301,000 for the March 1996 period.
26
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
- --------------------------------------------------------------------------------
Three Dimensional Products and Services - The three dimensional products and
services segment consists of the consolidated operations of 3D Holdings
International, ("3D"), which is engaged in the business of developing and
marketing products and services in the three dimensional imaging and digitizing
technology which 3D categorizes in three primary market groups: 1) Surfacer
imaging products, 2) Computer Aided Design ("CAD")/Computer Aided Manufacturing
("CAM") software products and services and 3) laser scanning products. 3D's
revenues decreased $232,000, or 78%, from $298,000 for the March 1996 period to
$66,000 for the March 1997 period and gross margins decreased $162,000, or 81%,
from $200,000 for the March 1996 period to $38,000 for the March 1997 period. In
July 1996, 3D significantly reduced its operations in Europe which accounts for
the decrease in revenues and gross profits. The decision to close such
operations was based on the fact that certain of the European operations did not
align with the planned future for 3D and was not producing margins at a level
sufficient to cover its operating costs. Selling, general and administrative
expenses from the March 1997 period to the March 1996 period decreased $288,000
due primarily to the reduction of the European operations. 3D incurred interest
expense of approximately $14,000 and $18,000, respectively, for the March 1997
and 1996 periods primarily from the amortization of interest on capital lease
obligations. Other expense amounted to $77,000 and $31,000, respectively for the
March 1997 and 1996 periods from the loss on foreign exchange. On an overall
basis, the net loss for the March 1997 period was $414,000, and for the March
1996 period was $499,000. Management currently anticipates that revenues and
operating profits will improve for 3D if the proper financing can be obtained
which would allow 3D to acquire a European partner to market and expand its
existing product lines. However, no assurances can be made that such financing
will be obtained and the ultimate profitability of 3D is significantly dependent
on the success of such acquisition.
Audio Products Manufacturing
This segment consists of WWR Technology, Inc., ("WWR"), which is engaged in the
business of manufacturing and marketing a professional line of loudspeakers.
Revenue increased $23,000, or 3.5%, from $671,000 for the March 1996 period to
$694,000 for the March 1997 period, while gross margins decreased $40,000, or
29% from $137,000 for the March 1996 period to 97,000 for the March 1997 period.
A significant cause of the low margins relates to idle plant capacity, an
outdated production machine and a lack of funds to purchase the parts required
to build product. Since the acquisition of WWR in 1995, its gross margins have
been less than that required to operate profitably. During the fourth quarter of
1996, WWR replaced its existing debt with financing obtained from an asset based
lender, that has allowed WWR to purchase product for production but not at a
level that allows for significantly increased production. The fourth quarter
financing was from an asset based lender which bears interest at 12%, plus a 1%
fee on funds advanced. As of March 31, 1997, WWR has received net advances of
$211,000 from the lender. WWR is attempting to obtain financing to purchase a
new production machine which would produce products significantly faster and
additionally, reduce the need to purchase assembly parts from an outside source
since the new production machine would be able to produce such parts on a timely
basis. No assurance can be given that such financing will be obtained.
Selling, general and administrative expenses decreased $24,000, or 8%, from
$281,000 for the March 1996 period to $257,000 for the March 1997 period. The
excess of expenses over gross profit is a reflection of the volume problem of
WWR. In January management implemented a price increase of approximately 10% and
management believes that this will not have a significant impact on sales volume
due to high product quality and the name recognition of "KLIPSCH PROFESSIONAL"
in the market place. Interest expense increased from $19,000 for the March 1996
period to $35,000 for the March 1997 period. The increase in interest expanse is
due to the aforementioned asset based financing that was obtained in the fourth
quarter of 1996.
27
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
- --------------------------------------------------------------------------------
As a result of the foregoing, WWR incurred net losses of $194,000 and $158,000,
respectively for the March 1997 and 1996 periods. Management believes that if
WWR is able to find an appropriate financing package, it will be able to
significantly increase its revenues and overall profitability. However, due to
the uncertainties surrounding the ability of WWR to obtain adequate financing,
management is unable to determine at this time whether WWR will continue as a
part of the Consolidated group.
Business Consulting Services operations were not significant for the March 1997
and 1996 periods generating losses of $27,000 and $9,000 respectively..
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 $338,000,
from $512,000 for the March 1996 period to $850,000 for the March 1997 period
due primarily to the legal and accounting fees incurred with respect to the
Lafayette Industries reverse acquisition and subsequent settlement (see footnote
7 to the consolidated financial statements). The remaining expenses, which
consist primarily of executive and administrative salaries and benefits,
consulting fees and operating expense remained relatively level from the March
1996 period to the March 1997 period. During the remainder of 1997, it is
anticipated that corporate 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 March 1996 period, the Company realized a gain of $37,000 from sales
of securities. During the March 1997 period, no sales of securities occurred.
Security sales vary from period to period based on, among other things, market
activity and cash needs, and management cannot estimate the amount of future
security sales gains or losses, if any, that will be generated from such
transactions.
Minority Interest in Loss of Subsidiaries
For the March 1997 and 1996 periods, the minority interest in loss of
subsidiaries was $447,000 and $754,000, respectively. 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.
..........................
28
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
1. EX-11.1 Calculation of earnings per share.
2. EX-27 Financial Data Schedule (filed only in electronic format with
the SEC)
..........................
29
<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 May 19, 1997
Lewis S. Schiller (Principal Executive Officer)
/S/ Chief Financial Officer May 19, 1997
George W. Mahoney (Principal Financial and
Accounting Officer)
30
<PAGE>
Consolidated Technology Group Ltd. and Subsidiaries
Index to Exhibits
March 31, 1997
1. EX-11.1 Calculation of earnings per share.
2. EX-27 Financial Data Schedule
(filed in electronic format only with the SEC)
<PAGE>
Consolidated Technology Group, Ltd. and Subsidiaries
March 31, 1997
EX-11.1 Calculation of Earnings per Share
Three
Months
Ended
March 31,
1997
----
Net Loss: ($2,307,000)
Loss per Share:
Loss per share - Note 1 ($0.05)
Loss per Share - assuming full dilution - Note 2 ($0.01)
Note 1:
Computed by dividing the net loss for the period by the weighted average number
of common shares outstanding (45,795,828) for the three month period ended March
31, 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:
(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 as quoted on the NASD.
(ii) Assumes that at the beginning of the indicated periods, the 22,891
remaining shares of preferred convertible shares were converted to 2,980,599
shares at the conversion rate of 130.2083 shares of common for each share of
convertible preferred stock.
NOTE - THIS CALCULATION IS SUBMITTED IN ACCORDANCE WITH THE SECURITIES ACT OF
1934 RELEASE NO. 9083, ALTHOUGH IT IS CONTRARY TO PARA. 40 OF APB 15
BECAUSE IT MAY PRODUCE AN ANIT-DILUTIVE RESULT
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND THE CONSOLIDATED STATEMENT OF OPERATIONS
FILED AS PART OF THE QUARTERLY REPORT ON FORM 10-Q AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH QUARTERLY REPORT ON FORM 10-Q.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 2,652,000
<SECURITIES> 353,000
<RECEIVABLES> 24,249,000
<ALLOWANCES> 2,362,000
<INVENTORY> 3,160,000
<CURRENT-ASSETS> 29,533,000
<PP&E> 39,946,000
<DEPRECIATION> 26,246,000
<TOTAL-ASSETS> 69,696,000
<CURRENT-LIABILITIES> 35,975,000
<BONDS> 0
<COMMON> 458,000
0
31,000
<OTHER-SE> (211,000)
<TOTAL-LIABILITY-AND-EQUITY> 69,696,000
<SALES> 1,398,000
<TOTAL-REVENUES> 31,969,000
<CGS> 1,284,000
<TOTAL-COSTS> 26,994,000
<OTHER-EXPENSES> 6,482,000
<LOSS-PROVISION> 491,000
<INTEREST-EXPENSE> 1,220,000
<INCOME-PRETAX> (2,723,000)
<INCOME-TAX> 478,000
<INCOME-CONTINUING> (2,307,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,307,000)
<EPS-PRIMARY> (.05)
<EPS-DILUTED> 0
</TABLE>
