UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q/A
Amendment No. 1
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
The Quarter Ended March 31, 1998
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 May 13, 1998: 48,720,996
==========
Purpose of Amendment:
On March 13, 1998, the former board of directors of the Company, agreed to
guarantee $1.2 million owed to Trans Global Services, Inc., a subsidiary of
the Company, by ARC Networks, Inc., a subsidiary of the Company. The Company's
Form 10-Q filed for the quarter ended March 31, 1998 stated that the Company had
not guaranteed such indebtedness. As such, the amendment herein, restates Part
I, Item 1. - Financial Information - financial statement footmote 11
"Contingencies" and Part I, Item 2. - Management's Discussion and Analysis of
Financial Condition and Results of Operations "Contingencies" to reflect that
such guarantee does exsist. Because such amount is an intercompany balance it
is eliminated in the balance sheet as of March 31, 1998 and the statement of
operations for the three months ended March 31, 1998, which remain unaffected by
this guarantee.
1
<PAGE>
Consolidated Technology Group, Ltd.
Index
Page
----
Part I: - Financial Information:
Item 1. Financial Statements:
Consolidated Balance Sheets - March 31, 1998 and December 31, 1997. 3
Consolidated Statements of Operations - Three Months Ended
March 31, 1998 and 1997 5
Consolidated Statement of Shareholders' Deficit - Three
Months Ended March 31, 1998 6
Consolidated Statements of Cash Flows - Three Months Ended
March 31, 1998 and 1997 7
Notes to Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis of the
Financial Condition and Results of Operations. 17
Part II - Other Information:
Item 6. Exhibits and Reports on Form 8-K 26
Signatures 27
2
<PAGE>
Consolidated Technology Group Ltd. and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
March 31,
1998 December 31,
Unaudited 1997
--------- ----
<S> <C> <C>
Assets:
Current assets:
Cash and cash equivalents $ 997,000 $ 1,268,000
Receivables, net of allowances 9,273,000 10,039,000
Excess of accumulated costs over related billings 162,000 642,000
Prepaid expenses and other current assets 495,000 298,000
Net current assets of discontinued segments -- 1,044,000
---------- ---------
Total current assets 10,927,000 13,291,000
---------- ----------
Property, plant and equipment, net 333,000 636,000
------- -------
Other assets:
Capitalized software development costs -- 183,000
Goodwill, net 763,000 776,000
Customer lists, net 2,557,000 5,681,000
Deferred offering costs -- 71,000
Receivables, long-term 188,000 --
Receivables, related parties 467,000 655,000
Marketable securities 63,000 19,000
Investment in unconsolidated affiliate 592,000 --
Other assets 452,000 742,000
Net assets of discontinued segments 16,135,000 15,617,000
---------- ----------
Total Other Assets 21,217,000 23,744,000
---------- ----------
Total Assets $ 32,477,000 $37,671,000
============ ===========
</TABLE>
See notes to consolidated financial statements
3
<PAGE>
Consolidated Technology Group Ltd. and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
March 31,
1998 December 31,
Unaudited 1997
--------- ----
<S> <C> <C>
Liabilities and Shareholders' Deficit:
Current liabilities:
Accounts payable and accrued expenses $ 7,976,000 $ 7,632,000
Accrued payroll and related expenses 3,182,000 1,834,000
Accrued interest 14,000 9,000
Income taxes payable -- 76,000
Interim billings in excess of costs and estimated profits 2,452,000 2,346,000
Current debt obligations 5,023,000 5,651,000
Current portion of capitalized lease obligations 16,000 39,000
Notes payable, related parties 10,000 10,000
Net current liabilities of discontinued segments 13,922,000 14,611,000
---------- ----------
Total current liabilities 32,595,000 32,208,000
---------- ----------
Long-term liabilities:
Long-term debt obligations 82,000 124,000
Capitalized lease obligations 30,000 34,000
Subordinated debt 139,000 139,000
------- -------
Total long-term liabilities 251,000 297,000
------- -------
Contingencies (footnotes 10 and 11
Minority interest 5,836,000 15,511,000
--------- ----------
Shareholders' deficit:
Preferred stock 3,000 3,000
Common stock (50,000,000 shares authorized, 49,910,996
shares issued and outstanding as of March 31, 1998
and December 31, 1997) 499,000 499,000
Additional paid-in-capital 57,848,000 52,152,000
Unrealized gain on marketable securities (73,000) (116,000)
Accumulated deficit (64,482,000) (62,883,000)
------------ ------------
Total shareholders' deficit (6,205,000) (10,345,000)
----------- ------------
Total Liabilities and Shareholders' Deficit $ 32,477,000 $ 37,671,000
============ ============
</TABLE>
See notes to consolidated financial statements
4
<PAGE>
Consolidated Technology Group Ltd. and Subsidiaries
Unaudited Consolidated Statements of Operations
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
---- ----
<S> <C> <C>
Revenues $ 21,951,000 $ 22,799,000
Direct Costs 20,054,000 21,011,000
---------- ----------
Gross Profit 1,897,000 1,788,000
Selling, General and Administrative 4,718,000 2,984,000
--------- ---------
Loss from Operations (2,821,000) (1,196,000)
----------- -----------
Other Income (Expense):
Interest expense (315,000) (315,000)
Other income (expense), net 55,000 (7,000)
------ -------
Total other expense, net (260,000) (322,000)
--------- ---------
Loss from Continuing Operations Before Minority
Interest and Share of Unconsolidated Affiliates Loss (3,081,000) (1,518,000)
Minority Interest in Loss of Subsidiaries 34,000 319,000
Share of Loss of Unconsolidated Affiliate (98,000) --
-------- ---------
Loss from continuing operations (3,145,000) (1,199,000)
Discontinued Operations:
Loss from operations of discontinued segments (354,000) (1,109,000)
Gain on disposal of segments 1,900,000 --
--------- ---------
Net Loss ($ 1,599,000) ($ 2,308,000)
============== ==============
Loss per share of common share:
Loss from continuing operations ($0.06) ($0.03)
Loss from operations of discontinued segments ($0.01) ($0.02)
Gain on disposal of segments $0.04 --
----- -----
Net loss per common share ($0.03) ($0.05)
======= =======
Weighted average number of common shares 49,910,996 45,775,828
========== ==========
Net Loss ($ 1,599,000) ($ 2,308,000)
Other Comprehensive Income (Loss):
Unrealized gain (loss) on marketable securities 43,000 (4,000)
------ -------
Comprehensive Loss ($ 1,556,000) ($2,312,000)
============== ============
</TABLE>
See notes to consolidated financial statements
5
<PAGE>
Consolidated Technology Group Ltd. and Subsidiaries
Unaudited Consolidated Statement of Shareholders' Deficit
Three Months Ended March 31, 1998
<TABLE>
<CAPTION>
Other
Convert Comprehensive
Balance Affiliate to Income - Balance
at an Equity Unrealized at
December 31, Method Net Investment March 31,
1997 Investment Loss Security Gain 1998
---- -------- ---- ------------- ------------
<S> <C> <C> <C> <C> <C>
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 $ 0 $ 0 $ 0 $ 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 $ 0 $ 0 $ 0 $ 2,000
------------ ----------- ---------- ------- ------------
Total Preferred stock, par $ 3,000 $ 0 $ 0 $ 0 $ 3,000
Common stock, $0.01 par value.
50,000,000 shares authorized
Shares 49,910,996 -- -- -- 49,910,996
Amounts $ 499,000 $ 0 $ 0 $ 0 $ 499,000
Additional paid-in capital $ 52,152,000 $ 5,696,000 $ 0 $ 0 $ 57,848,000
Unrealized loss on marketable
securities ($ 116,000) $ 0 $ 0 $43,000 ($ 73,000)
Accumulated deficit ($ 62,883,000) $ 0 ($1,599,000) $ 0 ($ 64,482,000)
-------------- ----------- ------------ ------- --------------
Total shareholders' deficit ($ 10,345,000) $ 5,696,000 ($1,599,000) $43,000 ($ 6,205,000)
============== =========== ============ ======= ==============
</TABLE>
See notes to consolidated financial statements.
6
<PAGE>
Consolidated Technology Group Ltd. and Subsidiaries
Unaudited Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
---- ----
<S> <C> <C>
Cash Flows from Operating Activities:
Loss from continuing operations ($ 3,145,000) ($ 1,199,000)
Adjustments to reconcile loss from continuing operations to net cash
provided by continuing operations:
Depreciation and amortization 246,000 277,000
Minority interest in net loss of consolidated subsidiaries (34,000) (447,000)
Bad debt expense 132,000 --
Share of loss of unconsolidated affiliate 98,000 58,000
Noncash expense from subsidiaries issuance of options and warrants -- 52,000
Write-off deferred offering costs 71,000 --
Change in assets and liabilities:
(Increase) decrease in assets:
Receivables (1,499,000) (408,000)
Excess of accumulated costs over related billings (281,000) (88,000)
Prepaid expense and other current assets (62,000) 341,000
Increase (decrease) in liabilities:
Accounts payable and accrued expenses 2,410,000 1,869,000
Accrued payroll and related expenses 1,348,000 742,000
Accrued interest 5,000 (58,000)
Income taxes payable (76,000) (85,000)
Interim billings in excess of costs and estimated profits 1,175,000 (34,000)
--------- --------
Net cash provided by continuing operations 388,000 1,020,000
------- ---------
Income (loss) from discontinued operations (354,000) (1,109,000)
Adjustments to reconcile loss from discontinued operations to net cash
used in discontinued operations:
Depreciation and amortization 743,000 1,536,000
Bad debt expense 338,000 491,000
Loss on disposal of segments (1,900,000) --
Net change in assets and liabilities 1,024,000 (1,293,000)
----------- -----------
Net cash used in discontinued operations (149,000) (375,000)
--------- ---------
Net cash provided by operating activities 239,000 645,000
------- -------
(continued)
</TABLE>
See notes to consolidated financial statements
7
<PAGE>
Consolidated Technology Group Ltd. and Subsidiaries
Unaudited Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
---- ----
<S> <C> <C>
Cash Flows from Investing Activities:
Decrease in other assets 267,000 114,000
Capital expenditures (33,000) (72,000)
Capitalized software development costs -- (258,000)
Investments in marketable securities -- (148,000)
Payments for loans made -- (13,000)
Collections for repayment of loans made -- 107,000
Cash of affiliate converted to an equity method investment (855,000) --
------- -------
Net cash used in investing activities (621,000) (270,000)
------- ---------
Cash Flows from Financing Activities:
Deferred offering costs -- (115,000)
Net advances from asset based lender 133,000 119,000
Proceeds from issuance of debt -- 551,000
Repayment of debt (18,000) (38,000)
Proceeds from issuance of subordinated debt -- 25,000
Payments on capital lease obligations (4,000) (25,000)
------- --------
Net cash provided by financing activities 111,000 517,000
------- -------
Net Increase (Decrease) in Cash and Cash Equivalents (271,000) 892,000
Cash and Cash Equivalents at Beginning of Period 1,268,000 167,000
--------- -------
Cash and Cash Equivalents at End of Period $ 997,000 $ 1,059,000
============ ============
Supplemental Disclosures of Cash Flow Information:
Cash paid for:
Interest $ 310,000 $ 373,000
============ ============
Income taxes $ 82,000 $ 0
============ ============
(concluded)
</TABLE>
Supplemental Disclosures of Non Cash Investing and Financing Activities:
During the three months ended March 31, 1997, 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.
See notes to consolidated financial statements
8
<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
March 31, 1998 and December 31, 1997, the statement of changes in shareholders'
deficit for the three months ended March 31, 1998 and the results of its
operations and changes in cash flows for the three months ended March 31, 1998
and 1997. At March 31, 1998 and December 31, 1997, the Company owned
approximately 40% of the outstanding common stock of Trans Global Services, Inc.
("Trans Global"), a public company. At December 31, 1997, the Company and Trans
Global shared a common chief executive officer ("CEO") and chairman of the
board, who owned approximately 4% of Trans Global's common stock and held
warrants to purchase additional shares of Trans Global's common stock. During
1998, the former CEO and chairman of the board of the Company and Trans Global
resigned as an officer and director of both companies. As of the date of this
report, the Company and Trans Global do not have a common CEO, however, because
of the Company's ownership interest in Trans Global and because the three
present directors of the Company are three of the four directors of Trans
Global, Trans Global is treated as a consolidated subsidiary as of March 31,
1998. See footnote 11 in connection with obligations and potential obligations
of the Company has to Trans Global.
(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,
1997 Form 10-K except as disclosed herein in footnotes 1 and 5.
(3) Interim Results - The results of operations for the three months ended March
31, 1998 and 1997 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 a stock purchase warrant. 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) Unconsolidated Affiliated Companies - As of December 31, 1997 and March 31,
1998, the Company owned approximately 36% of the common stock of Netsmart
Technologies, Inc. ("Netsmart), a publicly held company. As of December 31,
1997, the Company and Netsmart shared two common board of directors and the same
CEO and chairman of the board, which resulted in the Company having significant
influence over the operations and decisions of Netsmart. Furthermore, the former
CEO and chairman of the board owned a large block of Netsmart common stock.
Accordingly, as of December 31, 1997, Netsmart was considered a consolidated
affiliate for accounting purposes. During 1998, the former CEO and chairman of
the board of both the Company and Netsmart resigned from both positions and the
two common board directors of both the Company and Netsmart resigned. Due to the
above change in effective control, Netsmart, for the three months ended March
31, 1998 is presented in the financial statements as an unconsolidated
affiliate. The investment in Netsmart, accounted for under the equity method
amounted to $592,000 and the Company's share of Netsmart's loss amounted to
$98,000. The results of operations and financial position of Netsmart is
summarized as follows:
Condensed Statement of Operations Information:
Three Months Ended March 31,
1998 1997
---- ----
Net revenues $ 2,541,000 $ 1,572,000
========= =========
Gross profit $ 857,000 $ 157,000
======= =======
Net loss ($ 275,000) ($ 300,000)
======= =======
9
<PAGE>
Consolidated Technology Group Ltd. and Subsidiaries
Unaudited Footnotes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(5) Unconsolidated Affiliated Companies (continued):
Condensed Balance Sheet Information:
March 31, December
1998 31, 1997
---- --------
Current assets $ 3,643,000 $ 3,664,000
========= =========
Non-current assets $ 3,570,000 $ 3,676,000
========= =========
Current liabilities $ 4,348,000 $ 4,200,000
========= =========
Shareholders' equity $ 2,865,000 $ 3,140,000
========= =========
(6) Industry Segments - During 1997, the Company discontinued the Medical
Diagnostics, Electro-Mechanical and Electro-Optical Products Manufacturing,
Audio Products Manufacturing, Three Dimensional Products and Services and
Business Consulting Services segments. Additionally, effective January 1, 1998,
Netsmart, an affiliate which represented the Medical Information Services
segment, is no longer a consolidated affiliate and instead is an equity method
investment (see footnote 5). As a result, the Company currently classifies its
operations into two business segments: (i) Contract Engineering Services, which
consists of Trans Global, a subsidiary that provide engineers, designers and
technical personnel on a temporary basis pursuant to contracts with major
corporations and (ii) Telecommunications, which consists of ARC Networks, Inc.
("ARC Networks"), a subsidiary that installs telephonic network systems and buys
and resells local and long-distance telephone service. Corporate and Other
consists o the operating activities of the Company and SISC Capital Corp.
("SISC"), a wholly owned holding company. During 1997, the business segments
also include Medical Information Services since during 1997, Netsmart was still
a consolidated affiliate. Inter segment sales are eliminated and sales outside
the United States are not material. Information concerning the Company's
business segments is as follows:
Three Months Ended March 31,
1998 1997
---- ----
Revenues:
Contract Engineering $ 18,489,000 $ 19,249,000
Medical Information -- 1,572,000
Telecommunications 3,462,000 1,978,000
---------- -----------
$ 21,951,000 $ 22,799,000
========== ==========
Gross Profit:
Contract Engineering $ 1,464,000 $ 1,417,000
Medical Information -- 157,000
Telecommunications 433,000 214,000
------- ---------
$ 1,897,000 $ 1,788,000
========= =========
Operating Income (Loss):
Contract Engineering $ 83,000 $ 55,000
Medical Information -- (527,000)
Telecommunications (322,000) (365,000)
Corporate and Other (2,627,000) (434,000)
Intercompany Transactions 45,000 75,000
--------- ---------
($ 2,821,000) ($ 1,196,000)
========= =========
10
<PAGE>
Consolidated Technology Group Ltd. and Subsidiaries
Unaudited Footnotes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(6) Industry Segments (continued)
Three Months Ended March 31,
1998 1997
---- ----
Net Income (Loss):
Contract Engineering ($ 85,000) ($ 97,000)
Medical Information -- (300,000)
Telecommunications (454,000) (435,000)
Corporate and Other (2,542,000) (686,000)
Minority Interest in Loss
of Subsidiaries 34,000 319,000
Share of Loss of
Unconsolidated Affiliate (98,000) --
Loss from Operations of
Discontinued segments (354,000) (1,109,000)
Gain on Disposal of
Segments 1,900,000 --
--------- ---------
($ 1,599,000) ($ 2,308,000)
========= =========
Depreciation and
Amortization:
Contract Engineering $ 87,000 $ 123,000
Medical Information -- 128,000
Telecommunications 155,000 21,000
Corporate and Other 4,000 5,000
------- -------
$ 246,000 $ 277,000
======= =======
Capital Expenditures:
Contract Engineering $ 15,000 $ 19,000
Medical Information -- 48,000
Telecommunications 18,000 5,000
------ ------
$ 33,000 $ 72,000
====== ======
March 31, December
1998 31, 1997
Identifiable Assets: ---- --------
Contract Engineering $ 14,886,000 $ 13,943,000
Medical Information -- 7,340,000
Telecommunications 3,926,000 2,793,000
Corporate and Other 34,181,000 23,234,000
Discontinued Segments 17,919,000 20,015,000
Intercompany Balances (38,435,000) (29,654,000)
---------- ----------
$ 32,477,000 $ 37,671,000
========== ==========
(7) 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 customers 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 operating in the Contract
Engineering Services segment, has five clients, which when combined, account for
approximately 77% and 81% of the total revenues of the segment for the three
months ended March 31, 1998 and 1997. These same clients account for
approximately 70% of the outstanding accounts receivable of Trans Global. On a
consolidated basis these five customers represent approximately 65% of the
Company's consolidated revenue for the three months ended March 31, 1998 and
approximately 48% of the Company's consolidated accounts receivable balance at
March 31, 1998.
11
<PAGE>
Consolidated Technology Group Ltd. and Subsidiaries
Unaudited Footnotes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(8) Discontinued Operations - During 1997, the Company discontinued the Audio
Products Manufacturing, Three Dimensional Products and Services, Medical
Diagnostics, Electro-Optical and Electro-Mechanical Products Manufacturing and
Business Consulting Services segments.
(a) Audio Products Manufacturing - In May 1997, the Company sold all of the
issued and outstanding capital stock of WWR Technology, Inc., ("WWR"), the
subsidiary in which all of the operations of the Audio Products Manufacturing
segment operating activities were conducted, for $100,000. 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 in the second quarter of 1997.
The revenues of the Audio Products Manufacturing segment were approximately
$694,000 for the three months March 31, 1997. The operations of WWR up to the
date of the disposal are classified as loss from the operations of a
discontinued segment.
(b) Three Dimensional Products and Services - Effective June 30, 1997, (the "3D
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 3D Measurement Date, the Company accrued an estimate
of $250,000 for anticipated losses from the 3D Measurement Date until the date
the disposal is completed, which is expected to be completed during 1998. 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. As of the 3D Measurement Date, it was
not known which liabilities the Company would be obligated to pay on behalf of
the discontinued segment and as of December 31, 1997 all of the segment's
remaining liabilities were recorded as net liabilities of a discontinued
segment. As of March 31, 1998, management estimates that the Company will be
obligated to pay approximately $511,000 of the segment's liabilities and has
written-off the remaining $1.1 million of liabilities that existed as of March
31, 1998. As of December 31, 1997 the estimated loss on disposal was
approximately $649,000 and as of March 31, 1998 the actual gain on the disposal
is approximately $1.3 million, as a result of the Company's belief that it will
not have to pay certain obligations of the segment. However, because an
estimated loss was recorded in 1997, the actual gain recorded by the Company for
the disposal during the three months ended March 31, 1998 approximates $1.9
million. The revenues of the Three-Dimensional Products and Services segment
were $66,000 for the three months ended March 31 1997. The operations of the
Three Dimensional Products and Services segment are classified as loss from the
operations of a discontinued segment.
As of March 31, 1998 and December 31, 1997 the liabilities of the
Three-Dimensional Products and Services segment included in the Company's
consolidated balance sheet consisted of the following.
March 31, December
1998 31, 1997
---- --------
Accounts payable and accrued expenses $ 159,000 $ 1,882,000
Accrued payroll and related expenses 98,000 246,000
Accrued interest 24,000 24,000
Notes payable, related parties 95,000 278,000
Current portion of long-term debt 135,000 175,000
------- -------
Net current liabilities of discontinued segment $ 511,000 $ 2,605,000
======= =========
12
<PAGE>
Consolidated Technology Group Ltd. and Subsidiaries
Unaudited Footnotes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(8) Discontinued Operations (continued)
(c) Medical Diagnostics - Effective September 1, 1997, the Company formulated a
plan to discontinue the operations of all of the subsidiaries operating in the
Medical Diagnostics segment. Pursuant to such plan, on April 2, 1998, the
Company consummated the sale of substantially all of the assets of International
Magnetic Imaging, Inc. ("IMI"). Such sale resulted in a gain on disposal, which
will be recognized during the second quarter of 1998. The Company has classified
all assets and liabilities disposed of as net assets of a discontinued segment.
The revenues of the medical diagnostics segment were $6.8 million and $7.74
million for three months ended March 31, 1998 and 1997, respectively. The
operations of the Medical Diagnostics segment are classified as loss from the
operations of a discontinued segment.
As of March 31, 1998 and December 31, 1997 the assets and liabilities of the
Medical Diagnostics segment included in the Company's consolidated balance sheet
consisted of the following.
March 31, December
1998 31, 1997
---- --------
Cash $ 982,000 $ 1,813,000
Accounts receivable, net 9,073,000 9,803,000
Prepaid and other current assets 423,000 --
Loans Receivable 325,000 325,000
Property, plant and equipment 9,341,000 9,738,000
Goodwill 9,044,000 9,181,000
Customer lists, net 4,336,000 4,430,000
Receivable, long-term 1,477,000 1,271,000
Other assets 426,000 735,000
---------- ----------
Total assets 35,427,000 37,296,000
---------- ----------
Accounts payable and accrued expenses 4,887,000 3,978,000
Accrued interest 914,000 814,000
Income taxes payable 249,000 249,000
Subordinated debt related parties 924,000 924,000
Current portion of long-term debt 10,290,000 10,932,000
Current portion of subordinated debt 5,711,000 5,721,000
Current portion of capitalized lease obligations 1,238,000 1,240,000
Deferred interest 581,000 498,000
Long-term debt 6,533,000 7,710,000
Capitalized lease obligations 1,375,000 1,702,000
Subordinated debt -- 8,000
--------- ----------
Total liabilities 32,702,000 33,776,000
---------- ----------
Net assets to be disposed of $ 2,725,000 $ 3,520,000
========= =========
Presented in the balance sheet as follows:
Net current liabilities of discontinued segment $ 13,411,000 $ 11,916,000
Net long-term assets of discontinued segment 16,135,000 15,436,000
---------- ----------
Net assets to be disposed of $ 2,725,000 $ 3,520,000
========= =========
13
<PAGE>
Consolidated Technology Group Ltd. and Subsidiaries
Unaudited Footnotes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(8) Discontinued Operations (continued)
(d) Electro-Optical and Electro-Mechanical Products Manufacturing - Effective
December 31, 1997, the Company entered into an agreement to sell the
Electro-Optical and Electro-Mechanical Products Manufacturing segment. The loss
on the disposal of the segment approximates $31,000. The revenues of the
electro-optical and electro-mechanical products manufacturing segment were
$704,000 for the three months ended March 31, 1997. The operations of the
Electro-Optical and Electro-Mechanical Products Manufacturing segment are
classified as loss from the operations of a discontinued segment.
As of December 31, 1997 the assets and liabilities of the Electro-Optical
and Electro-Mechanical Products Manufacturing segment included in the Company's
consolidated balance sheet consisted of the following.
December
31, 1997
--------
Cash $ 29,000
Accounts receivable, net 304,000
Inventories 1,820,000
Prepaid and other current assets 4,000
Property, plant and equipment 161,000
Other assets 20,000
---------
Total assets 2,338,000
---------
Accounts payable and accrued expenses 778,000
Accrued payroll and related obligations 34,000
Notes payable, related parties 34,000
Current portion of long-term debt 303,000
Current portion of capitalized lease obligations 54,000
---------
Total liabilities 1,203,000
---------
Net assets to be disposed of $ 1,135,000
=========
Presented in the balance sheet as follows:
Net current assets of discontinued segment $ 1,044,000
Net current liabilities of discontinued segment 90,000
Net long-term assets of discontinued segment 181,000
Net assets to be disposed of $ 1,135,000
=========
(e) Business Consulting Services - Effective December 31, 1997, the Company
entered into an agreement to sell the Business Consulting Services segment. The
loss on the disposal of the segment approximates $1,000. The revenues of the
Business Consulting Services segment were $37,000 for the three months ended
March 31, 1997. The operations of the Business Consulting Services segment are
classified as loss from the operations of a discontinued segment. As of December
31, 1997 assets of the Business Consulting Services segment consisted of $1,000
of net property plant and equipment presented in the balance sheet as net
long-term assets of discontinued assets.
14
<PAGE>
Consolidated Technology Group Ltd. and Subsidiaries
Unaudited Footnotes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(9) Resignation of Registrant's Directors, Chief Executive Officer and Corporate
Secretary:
On March 30, 1998, the "Company and its wholly-owned subsidiary, SISC,
entered into a series of agreements with Lewis S. Schiller ("Schiller"), Grazyna
B. Wnuk ("Wnuk"), E. Gerald Kay ("Kay") and Norman J. Hoskin ("Hoskin").
Pursuant to the agreements:
a) Schiller, Wnuk, Kay and Hoskin agreed to resign as directors and
officers of the Company and its subsidiaries contemporaneously with the
closing of the sale by IMI of substantially all of their assets
pursuant to an asset purchase agreement dated January 28, 1998 between
IMI and Comprehensive Medical Imaging, Inc. IMI is a subsidiary of the
Company, which operated in the Medical Diagnostics segment. The sale by
IMI is referred to as the "IMI Sale" (see footnote 8(c)).
b) In consideration for payments of approximately $4.0 million to
Schiller and Wnuk, the Company agreed to purchase from Schiller and
Wnuk all of their rights under their respective employment agreements
and their stock interest in IMI. Such payments represent a significant
discount from the amounts due under their respective employment
agreements. $1.6 million of the above $4 million settlement relates to
Schiller's and Wnuk's stock interest in the IMI sale. The remainder of
$2.4 million relates to obligations of Consolidated of which
approximately $600,000 has been previously accrued in the financial
statements, resulting in increased accrued expense of approximately
$1.8 million for the three months ended March 31, 1998.
c) Schiller agreed to transfer to the Company 1,190,000 shares of the
Company's Common Stock owned by him. Such shares were transferred back
to the Company in April 1998.
d) The Company agreed to transfer to Schiller or his designees for
nominal consideration, certain subsidiaries of the Company. Such
subsidiaries operate at a loss and have, in the aggregate, either a
negative or zero net worth (see footnotes 8(d) and 8(e)).
e) Schiller agreed to enter into a three-year consulting agreement with
the Company, for which he will receive annual compensation of $100,000.
Such consulting fees will start accruing in April 1998.
f) The Company, its subsidiaries and Schiller, Wnuk, Kay and Hoskin
agreed to execute mutual releases and the Company will provide
Schiller, Wnuk, Kay and Hoskin with certain indemnification rights.
The negotiations were conducted with representatives of shareholders who are not
affiliated with the prior management or with the plaintiffs in certain recent
litigation against the Company.
Immediately prior to the completion of the IMI Sale, Schiller, Wnuk, Kay and
Hoskin elected as their successors as directors three individuals who were
designated by the representative of the shareholders.
(10) Subsequent Events
On April 15, 1998, Mr. George W. Mahoney gave the Company notice that he was
exercising his right under his employment agreement with Consolidated to
terminate his employment on 90 days' notice. Mr. Mahoney has advised the Company
that in his view the agreement requires the Company to pay him a lump sum
payment equal to his salary for the balance of the term of the agreement, which
is approximately $2.4 million. The Company's board of directors is evaluating
the Company's and Mr. Mahoney's respective rights under his employment contract.
15
<PAGE>
Consolidated Technology Group Ltd. and Subsidiaries
Unaudited Footnotes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(11) Contingencies
Series G Preferred Stock - During 1995, the Company issued to Trans Global 1,000
shares of series G 2% cumulative, convertible, preferred stock, which
automatically converted on September 30, 2000 into such number of shares of the
Company's common stock as having a value equaling $2.1 million. Such shares were
issued in order to satisfy an intercompany payable that was owed to Trans Global
by WWR, a discontinued subsidiary of the Company. In March 1998, the Company
amended its certificate of incorporation, with the consent of Trans Global as
the sole holder of the Series G Preferred Stock, to change the rights,
preferences and privileges of the holders of the Series G Preferred Stock. As a
result of such amendment, the conversion provisions were terminated and the
Series G Preferred Stock became subject to redemption at the option of either
the Company or of the holders of the Series G Preferred Stock at an aggregate
redemption price of $2.1 million. Because Trans Global is a consolidated
subsidiary of the Company, the Series G Preferred Stock is eliminated in
consolidation against Trans Global's investment in the Series G Preferred Stock.
If Trans Global were to become an unconsolidated affiliate, the Series G
Preferred Stock would be classified as an obligation of the Company.
Furthermore, upon the redemption of the Series G Preferred Stock, the Company is
obligated to pay $2.1 million to Trans Global.
Intercompany Debt Obligations - As of March 31, 1998, the Company owes Trans
Global approximately $338,000 in consideration of amounts that were owed to
Trans Global by a discontinued subsidiary of the Company. Additionally, ARC
Networks owes Trans Global approximately $1.2 million for advances made to ARC
Networks by Trans Global. Because Trans Global is a consolidated subsidiary of
the Company, such intercompany obligations are eliminated in consolidation. If
Trans Global were to become an unconsolidated affiliate, the amounts would be
classified as debt obligations. On March 13, 1998, the Company agreed to
guarantee the outstanding indebtedness of ARC Networks to Trans Global.
.............................
16
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
- --------------------------------------------------------------------------------
Forward Looking Statements
Statements in this Form 10-Q that are not descriptions of historical facts may
be forward-looking statements that are subject to risks and uncertainties.
Actual results could differ materially from those currently anticipated due to a
number of factors, including those identified in this Form 10-Q, the Company's
Annual Report on Form 10-K for the year ended December 31, 1997 and in other
documents filed by the Company with the Securities and Exchange Commission.
Financial Condition - Liquidity and Capital Resources
Going Concern
For the three months ended March 31, 1998, (the "1998 period"), the Company
incurred a net loss of $1.6 million, has an accumulated deficit at March 31,
1998 of $64.5 million and $7.3 million of debt that is in default. Additionally,
during 1997, the Company was delisted from trading on the NASDAQ because it
failed to meet the minimum bid requirement of $1 and the minimum net tangible
worth requirement of $1 million. Furthermore, the Company has historically, had
operating cash flow shortfalls in all of its segments other than the Contract
Engineering Services and the Medical Diagnostics segment. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
In 1997, the Company discontinued three of its unprofitable segments for nominal
consideration. Such segments had combined accumulated losses of $15.6 million
through the date of the disposals and had required cash infusions from the
Company in excess of $11 million. Additionally, on April 2, 1998, the Company
sold the Medical Diagnostics segment which will result in a gain on sale and
should provide the Company with approximately $11 million in net cash and will
dispose of approximately $13.5 million in intangible assets and approximately
$21 million in debt and capital lease obligations. It is anticipated that
approximately $3 million of the proceeds will be used to pay existing
obligations of the Company leaving approximately $8 million for future
investment. As of the date of this report, the Company does not have any
specific plan for the use, other than working capital, of any substantial
portion of the net proceeds from the sale of the Medical Diagnostics segment.
However, as disclosed under the caption "Contingencies" that follows, the
Company has contingent obligations, which represent a significant portion of
such proceeds.
Effective 1998, the Company no longer reports Netsmart as a consolidated
affiliate and instead reports its investment in Netsmart under the equity method
whereby only the Company's proportionate share of income or loss of Netsmart is
reported. See footnote 5 to the financial statements. Future losses on the
Company's investment in Netsmart are limited to the level of investment in
Netsmart, which is currently $592,000.
As a result of the foregoing factors, the Company's ability to continue as a
going concern is dependent upon the success of the Company's remaining two
operating segments -- Contract Engineering Services and Telecommunications.
The Contract Engineering Services segment is represented by Trans Global, a
public company in which the Company has a 40% equity interest. Although Trans
Global reported income in 1997 for the first time since it was acquired by the
Company in 1994, it generated a net loss for the first quarter of 1998.
Furthermore, to the extent
17
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
- --------------------------------------------------------------------------------
that Trans Global generates cash flow, such cash flow will not be available to
the Company to fund its operations, and the Company has significant contingent
obligations to Trans Global as discussed under the caption "Contingencies" that
follows.
The Telecommunications segment is represented by ARC Networks, a company in
which the Company has an 80% equity interest. ARC Networks has operated at
significant losses and recent attempts to fund the segment through both public
and private financings have not succeeded. In February 1997, this segment
received net proceeds of $495,000 through the issuance of notes in the principal
amount of $550,000 and warrants. The notes matured on April 1, 1998, ARC
Networks is in default on the notes together with interest of approximately
$50,000, and the holders of the notes have commenced an action seeking payment
of the notes. The Company does not anticipate that ARC Networks can operate
profitably without significant additional funding nor can any assurances be made
that ARC Networks will operate profitably if significant funding sources are
found.
Management is currently evaluating its investment in its remaining operating
segments in order to determine whether to provide additional investment or
whether to divest from its existing affiliates and as a result of the foregoing
uncertainties it is at least possible that the Company could be forced to cease
operations in its current segments.
Working Capital Condition
As of December 31, 1997, the Company had negative working capital of $18.9
million. As of March 31, 1998, the Company has negative working capital of $21.7
million, representing an increase in negative working capital of $2.8 million.
Approximately $13.9 million of the negative working capital relates to the net
current liabilities of discontinued segments. Excluding the discontinued
segments, the Company has approximately $7.8 million in negative working capital
for continuing operations. The Company principal working capital consists of
cash and cash equivalents which were $1.3 million at December 31, 1997 and $1
million at March 31, 1998. For the 1998 period, cash used in discontinued
operations amounted to $149,000 and net cash provided by continuing operations
was as follows:
Contract Engineering Services $116,000
Telecommunications 428,000
Corporate and Other (156,000)
-------
Net Cash Provided by Continuing Operations $388,000
=======
The cash generated by the Contract Engineering Services segment is generated by
Trans Global, a publicly held company, and as such is not necessarily available
to other subsidiaries of the Company. As of March 31, 1998, Trans Global is owed
approximately $1.2 million from advances made to ARC Networks.
Other Sources and Uses of Cash
Sources of cash other than from operations were primarily from net advances from
asset based lendors of $133,0000 and uses of cash includes $33,000 for capital
expenditures and $22,000 for debt and capital lease payments.
Changes in Other Working Capital Assets and Liabilities
Significant changes in working capital, other than cash, includes an increase in
accounts receivable of $1.5 million of which $933,000 relates to Contract
Engineering Services and $484,000 relates to Telecommunications. The increase in
accounts receivables was more than offset by an increase in accounts payable and
accrued expenses of approximately $2.4 million, an increase in accrued payroll
and related expense of $1.4 million and an increase in interim billings in
excess of costs and estimated profits of $1.2 million. The increase in accrued
expenses is due primarily to the accrual of $1.8 million to buy out the former
CEO's employment agreement (see footnote 9 of the financial statements). The
increase in accrued payroll and related expense is due primarily to the timing
of tax
18
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
- --------------------------------------------------------------------------------
payments of the Contract Engineering Services segment. The increase in interim
billings in excess of costs and estimated profits is related to contracts of the
Telecommunications segment whereby billing schedules differ from revenue
recognition.
Contingencies
On April 15, 1998, Mr. George W. Mahoney gave the Company notice that he was
exercising his right under his employment agreement with Consolidated to
terminate his employment on 90 days' notice. Mr. Mahoney has advised the Company
that in his view the employment agreement requires the Company to pay him a lump
sum payment equal to his salary for the balance of the term of the agreement
which is approximately $2.4 million. The Company's board of directors is
evaluating the Company's and Mr. Mahoney's respective rights under his
employment contract. See footnote 10 of the financial statements.
Trans Global has the right to redeem $2.1 million of the Company's Series G
Preferred Stock which it holds. Furthermore, the Company's consolidated
subsidiary, ARC Networks, owes Trans Global approximately $1.2 million. See
footnote 11 of the financial statements. The three present directors of the
Company are three of the four directors of Trans Global and as of the date of
this report the redemption provision of the Series G Preferred Stock has not
been invoked. On March 13, 1998, the Company agreed to guarantee the
outstanding indebtedness of ARC Networks to Trans Global. If the Series G
Preferred Stock is redeemed and the Company is required to pay the amount that
ARC Networks owes Trans Global, the Company would use approximately $3.3
million, or 41% of the net proceeds anticipated to be generated from the IMI
sale.
Year 2000 Issues
Many existing computer programs use only two digits to identify a year in a date
field. These programs were designed and developed without considering the impact
of the upcoming change in the century. If not corrected, many computer
applications could fail or create erroneous results by or at the year 2000. This
issue is referred to as the "Year 2000 Issue". All of the computer applications
used by the holding companies (i.e. Consolidated and SIS Capital Corp.) are year
2000 compliant. The Company's affiliates have a significant portion of computer
software, particularly the software relating to payroll and other employee
records, that is managed for the affiliates by an outside service company. Such
service company has advised the affiliates that it will be year 2000 compliant.
The Company is in the process of evaluating the potential cost to it in
addressing the year 2000 Issue with respect to its other software and the
potential consequences of an incomplete or untimely resolution of the Year 2000
issue. Although the Company believes it will not incur significant expenses for
its affiliates to become Year 2000 compliant, no assurance can be given that the
Company will not incur significant cost in addressing the Year 2000 Issue or
that the failure to adequately address the Year 2000 Issue will not have a
material adverse effect upon the Company.
Effect of Loan Defaults
The Company is currently in default on loans approximating $7.3 million.
$550,000 of such amount relates to the Telecommunications segment as previously
discussed. The remaining debt that is in default relates to the discontinued
Medical Diagnostics segment and currently, it is estimated the Company will pay
approximately $1.5 million for full settlement of such debt.
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 $98,000. It is anticipated
that such obligations will be repaid during 1998.
19
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
- --------------------------------------------------------------------------------
Results of Operations
During 1997, the Company discontinued five of its operating segments,
Three-Dimensional Products and Services, Medical Diagnostics, Electro-Mechanical
and Electro-Optical Products Manufacturing, Business Consulting Services and
Audio Products Manufacturing segments. Additionally, as of 1998, the Medical
Information Services segment is no longer included in the consolidated results
of operations and instead is reported as an equity method investment, whereby
the Company only reports its proportionate share of income or loss. As a result
of the above, the prior period data has been reclassified to conform to the
above changes in segment reporting.
Loss from Operations of Continuing Segments
Comparing the 1998 period to the three months ended March 31, 1997 (the "1997
Period"), the aggregate increase in loss from operations consisted of the
following:
Income (Loss) from Operations
1998 1997
Period Period Variance
------ ------ --------
Contract Engineering Services $ 83,000 $ 55,000 $ 28,000
Medical Information Services (--) (527,000) 527,000
Telecommunications (322,000) (365,000) 43,000
Corporate and Other (2,627,000) (434,000) (2,193,000)
Intercompany Transactions 45,000 75,000 (30,000)
------ ------ ------
Loss from Operations ($2,821,000) ($1,196,000) ($1,625,000)
========= ========= =========
During the 1998 period, corporate and other loss includes approximately $1.8
million of expense to accrue for the buy out of the former CEO's employment
agreement (see footnote 9 to the financial statements). The other segments
income (loss) from operations remained relatively level.
Non Operating Components of Continuing Income (Loss)
Interest expense amounted to $315,000 for both the 1998 and 1997 Periods and was
paid primarily to asset based lendors of the Contract Engineering and
Telecommunications segments. The minority interest in loss of subsidiaries
represents the minority share of Trans Global's loss for the 1998 Period which
amounted to $34,000 and represents the minority share of both Trans Global's and
Netsmart's loss for the 1997 Period which in the aggregate amounted to $319,000.
The share of loss of unconsolidated affiliate represents the Company's
proportionate share of Netsmart's 1998 Period net loss which amounted to
$98,000. Changes in minority interest and the share of loss of unconsolidated
affiliates are a result of the inherent changes in the net income and loss of
the related affiliates from period to period.
Discontinued Operations
The aggregate losses from discontinued operations consists of the following:
1998 1997
Period Period
------ ------
Medical Diagnostics ($ 354,000) $ 106,000
Audio Products -- (194,000)
Electro-Mechanical -- (527,000)
Business Consulting -- (9,000)
Three Dimensional -- (485,000)
------- -------
($ 354,000) ($1,109,000)
======= =========
20
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
- --------------------------------------------------------------------------------
The above discontinued segments will not have operating income or loss beyond
the 1998 period shown above for future reporting periods. The gain on disposal
of segments includes a $1.9 million gain on the disposal of the
Three-Dimensional Products and Services segment and a loss on disposal of
approximately $32,000 for the Electro-Mechanical and Electro-Optical Products
Manufacturing and Business Consulting Services segments combined. The gain on
the disposal of the Audio Products segment was recorded in the second quarter of
1997 and the anticipated gain on the disposal of the Medical Diagnostics segment
will not be realized until the second quarter of 1998.
Consolidated Net Loss
As a result of the foregoing, the Company incurred net losses of $1.6 million
and $2.3 million, respectively, and net losses per common share of $0.03 and
$0.05, respectively, for the 1998 and 1997 Periods.
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 are
discussed further within the respective industry segment discussions.
Percentage of Total
-------------------
1998 1997
Period Period
Revenues: ------ ------
Contract Engineering Services 84% 84%
Medical Information Services -- 7%
Telecommunications 16% 9%
Gross Profit:
Contract Engineering Services 77% 79%
Medical Information Services -- 9%
Telecommunications 23% 12%
Selling, General & Administrative Expense:
Contract Engineering Services 29% 46%
Medical Information Services -- 23%
Telecommunications 16% 19%
Corporate and Other 56% 15%
Intercompany Transactions (1%) (3%)
Contract Engineering Services
The contract engineering services segment reflects the operations of Trans
Global and its two subsidiaries, Avionics Research Holdings, Inc., ("Avionics"),
and Resource Management International, Inc., ("RMI"). Trans Global 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 Trans Global'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, Trans Global 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, Trans Global's payments
21
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
- --------------------------------------------------------------------------------
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, Trans Global's cost of services is 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
Trans Global satisfies its payroll tax obligations, it will have a lower gross
margin than after such obligations are satisfied. Furthermore, to the extent
that Trans Global experiences turnover in employees, its gross margin will be
adversely affected. For example, in 1998, Social Security taxes are payable on
the first $68,400 of compensation. Once that level of compensation is paid with
respect to any employee, there is no further requirement for the Trans Global to
pay Social Security tax for such employee. Since most of Trans Global's
employees receive compensation in excess of that amount, Trans Global'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.
Trans Global had revenues of $18.5 million for the 1998 Period, reflecting a 4%
decrease from the revenues of $19.2 million for 1997 Period. This decline in
revenue reflects a reduction by Trans Global of business generating a lower
gross margin, which was partially offset by revenue from other clients. During
the March 1998 and 1997 Periods, approximately 77% and 81%, respectively, of
revenue was generated from its five largest customers, which were the same for
both periods.
Trans Global's gross margin for the 1998 Period was 7.9%, compared to 7.4% for
the 1997 Period, resulting from both increased business generating a higher
gross margin and reduced business generating a lower gross margin.
Selling, general and administrative expenses for the 1998 Period, exclusive of
related party expenses, remained at approximately the same level as it did for
the 1997 Period.
Trans Global has been financing its payroll obligation by borrowing from a
non-affiliated asset-based lender at an interest rate of 2% in excess of prime.
Trans Global also pays a fee of 0.3% of the face amount of the invoices
financed, regardless of the amount borrowed against the invoice. The borrowings
are secured by a security interest in all of Trans Global's assets. At March 31,
1998, such borrowings from the asset-based lender were approximately $3.5
million. The interest rate (exclusive of the fee) payable by Trans Global at
March 31, 1998 and 1997 was 10.50%. During the 1998 Period, interest expense was
approximately $183,000, 1% less than the amount for the 1997 Period.
On April 23, 1998, Trans Global entered into a two-year revolving credit
agreement with Citizens Business Credit Company, a division of Citizen's Leasing
Corporation ("Citizens"). Pursuant to the credit agreement, Trans Global can
borrow up to 85% of its qualified accounts receivables at an interest rate of
prime plus 3/4% with a maximum availability of $7.5 million. Trans Global
terminated its lending agreement with its previous lender. Trans Global
anticipates that the credit agreement with Citizens will enable it to
significantly reduce its interest costs.
Amortization of customer lists and other intangible assets was reduced by 40%
during the 1998 Period as compared to the 1997 Period due to certain intangible
assets related to Avionics having been fully amortized during 1997.
Trans Global had a net loss of $85,000 for the 1998 Period, as compared with a
net loss of $97,999 for the 1997 Period. This loss can be attributed to the
greater cost of services during this period, when federal social security taxes
and state unemployment insurance and related taxes, which are based on specific
levels of compensation are due.
22
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
- --------------------------------------------------------------------------------
Medical Information Services
The medical information services segment consists of the activity of two
companies, 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.
Effective 1998, the Company's investment in Netsmart is reported under the
equity method, whereby, only the Company's proportionate share of Netsmart's
loss is included in a single financial statement line item. Accordingly, the
following only discusses the 1997 Period in which the revenues and expenses of
Netsmart were included in the Company's consolidated statement of operations.
Netsmart's revenue for the 1997 period was $1.6 million. Revenue from Netsmart's
health information systems represented the principal source of revenue
accounting for $1.4 million or 91% of revenue. The largest component of revenue
in the 1997 Period was data center (service bureau) revenue of $485,000. The
turnkey systems labor revenue was $351,000 and maintenance revenue was $324,000.
Revenue from third party hardware and software amounted to $212,000 and license
revenue was only $25,000. Approximately, $200,000 of revenue was generated
pursuant to a contract with IBN which contract was substantially completed
during the 1997 Period. Revenue from contracts with government agencies
represented 33% of total revenue and 37% of health information systems revenue
for the 1997 Period. Gross profits amounted to $157,000 for the 1997 Period or
10% of revenues. Selling, general and administrative expenses were $639,000 in
the 1997 period. Interest expense was $68,000 in the 1997 Period, payable to
Netsmart's asset-based lender. Other expense in the 1997 period represents the
recognition of a 50% share of its loss on a joint venture, which amounted to
$58,000. As a result of the foregoing factors, Netsmart incurred a net loss
before minority interest of $609,000 in the 1997 period and a net loss after
minority interest of $300,000
Telecommunications
The telecommunications segment consists of the operations of ARC Networks,
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 ("CAPs"), the design and installation of
end-user networks in addition to its newly formed debit card services and
domestic and international long distance services.
Revenues for the 1998 Period were $3.5 million and $2 million for the 1997
Period, reflecting an increase of 75%, or $1,484,000 from the 1997 period. The
following table sets forth the revenues and percentage of revenues during the
1998 and 1997 Periods from each of its lines of business.
1998 Period 1997 Period
----------- -----------
Revenue Percent Revenue Percent
------- ------- ------- -------
Telephone services $2,341,000 68% $1,486,000 75%
Data cabling
installation Services 1,121,000 32% 492,000 25%
--------- ------
Total Sales $3,462,000 $1,978,000
========= =========
The increase in revenue in the 1998 Period compared to the 1997 Period is a
result of a 58% increase in the telephone services segment brought about by ARC
Networks' continued marketing efforts in the local telephone market, principally
New York City ("NYC"), which began in the second quarter of 1997, and a 128%
increase in ARC Networks' data cabling installation business. In May 1997, ARC
Networks also began offering long distance phone service. Revenue attributed to
the sale of telephone debit calling cards in the 1998 Period amounted to
$651,000 compared to $246,000 in the 1997 Period. Although this represents a
165% increase in sales over the
23
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
- --------------------------------------------------------------------------------
1997 Period, ARC Networks is restructuring this portion of its business and
anticipates a decline in revenues in future periods resulting from the sale of
telephone debit calling cards.
Cost of revenue for the 1998 Period was $3 million compared to $1.8 million,
reflecting an increase of $1.2 million, or 72%, from the 1997 Period. ARC
Networks' total gross margin for the 1998 Period was 12.5% compared to 10.5% for
the 1997 Period.
Gross margins in ARC Networks' telephone services segment were 3.4% for the 1998
Period compared to 4.2% for the 1997 Period. The most significant reason for the
decreased margin was the start up costs of entering the local telephone market
in competition with Bell Atlantic. ARC Networks' initial focus in the telephone
services segment has been to build its customer base and market share. In this
regard, ARC Networks have absorbed certain costs and charges relating to signing
up new customers, 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.
Gross margins for ARC Networks' data cabling installation service were 31.5% and
29.7% for the 1998 and 1997 Periods. During the 1998 Period, ARC Networks
managed 60 different jobs and continues to benefit from its contracts with Mitel
to provide data and voice cabling for certain NYC schools. ARC Networks has a
backlog of approximately $8 million, of which ARC Networks anticipates
completing approximately $5 million during calendar 1998.
Selling, general and administrative expenses for the 1998 Period were $523,000,
or 15.1% of total sales, compared to $518,000, or 26.2% of total sales, for the
1997 Period and reflects ARC Networks' efforts to bring its overhead structure
more in line with its sales base. As of March 31, 1998 ARC Networks was
qualified to sell phone service in 15 states. The principle components of
selling, general and administrative expenses for the 1998 Period were: $320,000
of personnel costs, sales commissions of $28,000, travel and trade show expenses
of $30,000, office equipment and supplies of $38,000, depreciation and
amortization of $5,000, rent and utilities of $48,000, advertising of $13,000,
legal and accounting of $34,000 and $83,000 of bad debt expense. The principal
components of selling, general and administrative expenses for the 1997 Period
were: personnel costs of $274,000, sales commissions of $90,000, travel and
trade show expenses of $40,000, office equipment, supplies and other expenses of
$62,000, rent and utilities, $28,000 and depreciation of $21,000.
ARC Networks incurred interest expense of $11,000 and $5,000 for the 1998 and
1997 Periods on an 8%, $550,000 loan it obtained in February 1997. In the fourth
quarter of 1996, ARC Network obtained a $350,000 equipment loan on which it
incurred interest of $12,000 and $22,000 for the 1998 and 1997 Periods. Interest
expense of $14,000 and $4,000 was also incurred for the 1998 and 1997 Periods on
a loan from ARC Networks' asset based lender. Interest expense of $38,000 and
$35,000 was incurred on loans from related parties (primarily Trans Global) for
the 1998 and 1997 Periods. In the 1998 Period interest expense of $8,000 was
incurred on a $250,000 short term financing obtained in September 1997.
Equipment purchased in 1997 through the issuance of capitalized leases increased
interest expense in the 1998 Period by $3,000 and late charges and fees
associated with trade payables amounted to $41,000 in the 1998 Period. Also, ARC
Networks amortized the remaining $150,000 of the warrants issued in connection
with the $550,000 interim financing referred to above.
As a result of the foregoing, ARC Networks reported a loss of $454,000 and
$435,000 for the 1998 and 1997 Periods.
24
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
- --------------------------------------------------------------------------------
Corporate and Other
Selling, General and Administrative Expense
Corporate selling, general and administrative expenses increased by $2.2
million, from $434,000 for the 1997 Period to $2.6 million for the 1998 Period
due primarily to the accrual of $1.8 million to buy out the former CEO's
employment agreement (see footnote 9 of the financial statements) and increases
in the salary amounts paid to the former CEO and the former Corporate Secretary
when comparing the 1998 and 1997 Periods. The remaining expenses, which consist
primarily of accounting and administrative salaries and benefits, consulting
fees and operating expense remained relatively level for the 1998 and 1997
periods. During the remainder of 1998, it is anticipated that corporate selling,
general and administrative expense levels will be a factor of the activity of
additional acquisition, disposition and capitalization activities, which cannot
be quantified on a prospective basis.
Impact of Inflation
The Company is subject to normal inflationary trends and anticipates that any
increased costs would be passed on to its customers.
.............................
25
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
1. EX-11.1 Calculation of earnings per share.
2. EX-27 Financial Data Schedule (filed only in electronic format with
the SEC)
(b) Form 8-K Filings during the Quarter Ended March 31, 1998 are as
follows:
1. Filed an 8-K with an earliest date of event of January 28, 1998,
reporting the asset purchase agreement for the sale of International
Magnetic Imaging, Inc.'s assets to Comprehensive Medical Imaging, Inc,
including pro forma financial statements reflecting the disposal of the
medical diagnostics segment as of September 30, 1997.
2. Filed an 8-K with an earliest date of event of February 23, 1998,
reporting an action commenced against the Company seeking to enjoin the
Company from (a) proceeding with the 1997 stock holders meeting and (b)
making any payment to former executives and directors of the Company
from the proceeds of the IMI asset sale. Further the action sought to
void (i) the employment agreements of the former CEO and Corporate
Secretary, (ii) agreements to issue stock or options to the former CEO,
Corporate Secretary and Directors, (iii) all completed transfers and
issuance of stock and stock options to the former CEO, Corporate
Secretary and Directors and (iv) all agreements to pay CEO, Corporate
Secretary and Directors or any other officers of the Company money
arising out of the IMI asset sale. In connection therewith, on February
24, 1998, the Court granted a temporary restraining order.
3. Filed an 8-K with an earliest date of event of March 9, 1998, reporting
that the restraining order imposed on the IMI asset sale on February 24,
1998 had been vacated.
4. Filed an 8-K with an earliest date of event of March 19, 1998, reporting
that the courts dismissed the action filed against the Company as
reported on February 23, 1998.
5. Filed an 8-K with an earliest date of event of March 30, 1998, reporting
the resignation of the Company's board of directors, CEO and Corporate
secretary.
.............................
26
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CONSOLIDATED TECHNOLOGY GROUP, LTD.
/S/____________ Chief Executive Officer and Director August 14, 1998
Seymour Richter (Principal Executive Officer)
/S/______________ Chief Financial Officer August 14, 1998
George W. Mahoney (Principal Financial and
Accounting Officer)
27
<PAGE>
Consolidated Technology Group Ltd. and Subsidiaries
Index to Exhibits
March 31, 1998
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, 1998
EX-11.1 Calculation of Earnings per Share
Three
Months
Ended
March 31,
1998
----
Net Loss: ($1,599,000)
============
Loss per Share:
Loss per share - Note 1 ($0.03)
=======
Loss per Share - assuming full dilution - Note 2 ($0.04)
=======
Note 1:
Computed by dividing the net loss for the period by the weighted average number
of common shares outstanding (49,910,996) for the three month period ended March
31, 1998. 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:
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 period as quoted on
the OTC Bulletin Board. Such calculation resulted in a net reduction of
outstanding shares of 4,098,118 and weighted average shares outstanding on a
fully diluted basis of 45,901,118.
NOTE - THIS CALCULATION IS SUBMITTED IN ACCORDANCE WITH THE SECURITIES EXCHANGE
ACT OF 1934 RELEASE NO. 9083, ALTHOUGH IT IS CONTRARY TO PARA. 40 OF APB 15
BECAUSE IT MAY PRODUCE AN ANTI-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/A AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH QUARTERLY REPORT ON FORM 10-Q/A.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 997,000
<SECURITIES> 0
<RECEIVABLES> 9,473,000
<ALLOWANCES> 200,000
<INVENTORY> 0
<CURRENT-ASSETS> 10,927,000
<PP&E> 884,000
<DEPRECIATION> 551,000
<TOTAL-ASSETS> 32,477,000
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<OTHER-EXPENSES> 4,586,000
<LOSS-PROVISION> 132,000
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<DISCONTINUED> 1,546,000
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