UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [Fee Required] For the fiscal year ended December 31, 1997.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [No Fee Required] For the transition period from ______________ to
_____________.
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 (I.R.S. Employer Identification Number)
of incorporation or organization)
160 Broadway, New York, NY 10038
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 233-4500
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of Each Class Outstanding shares as of April 14, 1998
------------------- --------------------------------------
Common Stock, par value 0.01 per share 49,910,996
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
--- ---
Indicate by a check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
DOCUMENTS INCORPORATED BY REFERENCE
Item III is incorporated by reference from the Registrant's definitive proxy
statement relating to its 1998 Annual Meeting of Shareholders.
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PART I
ITEM 1. BUSINESS
Introduction
Consolidated Technology Group Ltd. (the "Company", the "Registrant" or
"Consolidated"), through its wholly owned or controlled subsidiaries, is engaged
in various businesses classified into four business segments which consist of
subsidiaries that are indirectly controlled or owned through SIS Capital Corp.,
("SISC"), a wholly owned subsidiary of Consolidated. During the year ended
December 31, 1997, the Company discontinued five of its operating segments,
Three Dimensional Products and Services, Medical Diagnostics, Electro-Mechanical
and Electro-Optical Products Manufacturing, Audio Products Manufacturing and
Business Consulting Services. Additionally, during the year ended December 31,
1997, the Company is reporting a new segment called Development Stage, which
includes a subsidiary that has not yet developed a salable or marketable
product. During the years ended December 31, 1997, 1996 and 1995, (referred to
herein as 1997, 1996 and 1995, respectively), segment revenues as a percentage
of total were as follows:
1997 1996 1995
---- ---- ----
Contract Engineering Services 82% 82% 86%
Medical Information Services 8% 11% 10%
Telecommunications 10% 7% 4%
Development Stage -- -- --
Additional financial information regarding the Company's business
segments is presented in the Company's financial statements (see Part IV, Item
14) including revenues, gross profit or loss, income or loss from operations,
net income or loss and identifiable assets attributable to each of the Company's
business segments. Consolidated provides its subsidiaries with management,
marketing, accounting, administrative support and financing. Consolidated's
revenue and net loss reflect the consolidated revenue and results of operations
of its subsidiaries. Set forth below is a description of the Company's business
segments.
Organization and Changes in Management of the Company
Consolidated is a New York corporation, organized in 1961 under the
name Sequential Information Systems, Inc. Its corporate name was changed to
Consolidated Technology Group, Ltd. in 1993. In April 1998, all of the members
of the Company's board of directors resigned as officers and directors of the
Company and its subsidiaries. Mr. Lewis S. Schiller, who was chairman of the
board, chief executive officer and a director of Consolidated and other
subsidiaries of Consolidated, including its two public subsidiaries, Trans
Global Services, Inc. ("Trans Global") and Netsmart Technologies, Inc.
("Netsmart"), resigned as an officer and director of Consolidated and such
subsidiaries, including Trans Global and Netsmart. Ms. Grazyana B. Wnuk, who was
a director and secretary of the Company and secretary of Trans Global, resigned
from such positions. Mr. Norman J. Hoskin, who was a director of the Company,
Trans Global and Netsmart, Mr. E. Gerald Kay, who was a director of the Company
and Trans Global, resigned from such positions. Contemporaneously with the
effectiveness of such resignations, Messrs. Edward D. Bright, Seymour Richter
and Don Chaifetz were elected as directors to fill the vacancies created by the
resignation of Messrs. Schiller, Hoskin and Kay and Ms. Wnuk. Messrs. Bright and
Richter were elected as directors of Netsmart.
Pursuant to the agreements, as previously reported by the Company:
1. 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
International magnetic Imaging, Inc. and certain of its
subsidiaries (collectively, "IMI") of substantially all of
their assets pursuant to an asset purchase agreement (the
"Asset Purchase Agreement") dated January 28, 1998 between IMI
and Comprehensive Medical Imaging, Inc. IMI is a subsidiary of
the Company. The sale by IMI is referred to as the "IMI sale".
2. In consideration for payments of an aggregate of approximately
$4 million to Mr. Schiller and Ms. Wnuk, Consolidated agreed
to purchase from them 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.
3. Mr. Schiller agreed to transfer to the Company 1,190,000
shares of the Company's Common stock owned by him.
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4. The Company agreed to transfer to Mr. Schiller or his
designees, for nominal consideration, certain subsidiaries of
the Company. Such subsidiaries are included in the Company's
1997 financial statements as discontinued operations.
5. Mr. Schiller agreed to enter into a three year consulting
agreement with the Company, for which he will receive annual
compensation of $100,000.
6. The Company, its subsidiaries and Messrs. Schiller, Kay and
Hoskin and Ms. Wnuk agreed to execute mutual releases, and the
Company agreed to provide them with certain indemnification
rights.
The negotiations were conducted with representatives of
shareholders who are not affiliated either with present management or
with the plaintiffs in certain recent litigation against the Company,
which was disclosed in the Company's prior filings on Form 8-K.
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.
Forward Looking Statements
Statements in this Form 10-K 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-K and in other documents filed by the Company with the Securities and
Exchange Commission.
CONTRACT ENGINEERING SERVICES
The contract engineering services segment reflects the operations of
Trans Global Services, Inc. ("Trans Global"). Trans Global is a Delaware
corporation, which was incorporated in January 1995 to hold the stock of its two
subsidiaries, Avionics Research Holdings, Inc. ("Avionics") and Resource
Management International, Inc. ("RMI"). Prior to the formation of Trans Global,
Avionics, which was acquired in December 1993, and RMI, which was organized to
acquire the assets of Job Shop Technical Services, Inc. in November 1994, were
directly owned by SISC. The revenues of the contract engineering services
segment for 1997, 1996 and 1995 were $75.7 million, $62.6 million and $63.2
million, respectively. Net income and losses of the contract engineering
services segment during 1997, 1996 and 1995 approximated $1 million, ($607,000)
and ($4.7 million), respectively.
Trans Global is engaged in providing technical temporary staffing
services. In performing such services, Trans Global addresses the current trend
of major corporations in "downsizing" and "outsourcing" by providing engineers,
designers and technical personnel on a temporary contract assignment basis
pursuant to contracts with major corporations. The engagement may relate to a
specific project or may cover an extended period based on the client's
requirements. Trans Global believes that the market for outsourcing services
such as those offered by Trans Global results from the trend in employment
practices by major corporations in the aircraft, aerospace, electronics, energy,
engineering and telecommunications industries to reduce their permanent employee
staff and to supplement their staff with temporary personnel on an as-needed
basis. Trans Global seeks to offer its clients a cost-effective means of work
force flexibility and the elimination of the inconvenience associated with the
employment of temporary personnel, such as advertising, initial interviewing,
fringe benefits and record keeping. Although the employees provided by Trans
Global are on temporary contract assignment, they work with the client's
permanent employees; however, they receive different compensation and benefits
than permanent employees. In providing its services, Trans Global engages the
employees, pays the payroll and related costs, including FICA, worker's
compensation and similar Federal and state mandated insurance and related
payments. Trans Global charges its clients for services based upon the hourly
payroll cost of the personnel. Each temporary employee submits to Trans Global a
weekly time sheet with work hours approved by the client. The employee is paid
on the basis of such hours, and the client is billed for those hours at agreed
upon billing rates.
Although Trans Global has eight offices, including its main office in
Long Island, NY, throughout the United States, there is no limited geographic
market for Trans Global's services. Trans Global has in the past established
offices in new locations when it receives a contract in the area and it cannot
effectively service such contract from its existing offices. Trans Global
intends to continue to establish new offices as necessary to meet the needs of
its customers.
A client will utilize contract engineering services such as those
provided by Trans Global when it requires a person with specific technical
knowledge or capabilities which are not available from the client's permanent
staff or to supplement its permanent staff for a specific project or to meet
peak load requirements. When the client requires personnel, it provides Trans
Global with a detailed job description. Trans Global then conducts an electronic
search in its computerized resume database for candidates matching the job
description. In addition, each branch office maintains a file of active local
resumes for candidates available for assignment in the vicinity of the branch
office. The candidates are then contacted by telephone by Trans Global's
recruiters, who interview interested candidates. If a candidate is acceptable to
Trans Global and interested in the position, Trans Global refers the candidate
to the client. An employment agreement is executed with Trans Global prior to
the commencement of employment.
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Trans Global also offers its clients a range of integrated logistical
support services, which are performed at Trans Global's facilities. These
services, which are ancillary to a project, include the management of technical
documents involving technical writing, preparation of engineering reports, parts
provisioning documents and test equipment support documents, establishing
maintenance concepts and procedures, and providing manpower and personnel
support. In performing these services, Trans Global hires the necessary
employees for its own account and may work with the client in developing and
preparing the documentation. Payments are made pursuant to a purchase order from
the client on a project basis and not as a percentage of the cost of the
employees. To date, the integrated logistics support business has not generated
more than nominal revenue, and no assurance can be given that Trans Global will
generate any significant revenue or profit from such services.
Trans Global's strategy has been directed at increasing its customer
base and providing additional services, such as integrated logistics support, to
its existing customer base. Trans Global believes that the key to profitability
is to provide a range of services to an increased customer base. In this
connection, Trans Global is increasing its marketing effort both through its own
personnel and in marketing efforts with other companies that offer complementary
services.
Markets and Marketing
The market for Trans Global's services is comprised of major
corporations in such industries as aircraft, aerospace, electronics, energy,
engineering, computer services and telecommunications, where "downsizing" and
"outsourcing" have become an increasingly important method of cost reduction.
Typically, a client enters into an agreement with one or a small number of
companies to serve as employer of record for its temporary staff, and its
agreements are terminable by the client without significant notice.
Trans Global maintains a computerized data base of technical personnel
based upon their qualifications and experience. The data base, which contains
more than 100,000 names, is generated through employees previously employed by
Trans Global, referrals and responses to advertisements placed by Trans Global
in a variety of local media, including newspapers, yellow pages, magazines and
trade publications. Part of Trans Global's responsibilities for any engagement
is the recruitment and initial interviewing of potential employees, with the
client conducting any final interviews it deems necessary. The majority of work
performed by Trans Global employees is performed at the client's premises and
under the client's direction, although Trans Global is the employer of record.
Trans Global markets its services to potential clients through its
officers, management and recruitment personnel who seek to provide potential
clients with a program designed to meet the client's specific requirements. The
marketing effort utilizes referrals from other clients, sales calls, mailings
and telemarketing. Trans Global also conducts an ongoing program to survey and
evaluate the clients' needs and satisfaction with Trans Global's services, which
it uses as part of its marketing effort.
Trans Global serves primarily the aircraft, aerospace and electronics
industries as well as the telecommunications, banking and computer science
industries and public utilities along with numerous manufacturing companies.
Trans Global is expanding its effort to address the general trend of
"downsizing" and "outsourcing" by major corporations on a national basis. To
meet this goal, Trans Global has commenced a national sales campaign addressing
a broad spectrum of Fortune 500 companies, offering a managed staffing service
to those companies in the process of downsizing and outsourcing specific
functions. Since a company engaged in downsizing seeks to focus on its core
business needs with its in-house staff, Trans Global seeks to identify and
address the needs of a specific task or department not part of the core business
for which outsourcing would be an appropriate method of addressing those needs.
In addressing these needs, Trans Global has conducted marketing efforts with
Manpower International, Inc., Adecco and Olsten Corporation.
Trans Global's contracts are generally terminable by the client on
short notice. Trans Global Services' largest customers for 1997 were Boeing,
Northrop Grumman, Lockheed, Gulfstream Aerospace and Bell Helicopter Textron
which accounted for approximately $20 million, $15 million, $13 million, $7
million and $6 million or 26%, 20%, 17%, 9% and 8% of revenue, respectively. No
other client accounted for 5% or more of Trans Global's revenues in either the
year ended December 31, 1997 or the years ended December 31, 1996 and 1995.
Trans Global's largest customers for 1996 were Boeing, Lockheed,
Northrop Grumman, Gulfstream Aerospace Corp. and Bell Helicopter Textron, which
accounted for approximately $16 million, $13 million, $9 million, $5 million and
$4million, or 26%, 21%, 14%, 8% and 6% of revenue, respectively. For the year
ended December 31, 1995, Northrop Grumman, Lockheed and Boeing accounted for
$19.4 million, $10.2 million and $9.6 million, or 30.7%, 16.1% and 15.2% of
revenue, respectively.
Avionics' largest clients for 1994 were Northrop Grumman and Martin
Marietta Corp., which accounted for approximately $14.5 million and $2.0
million, respectively, which represented approximately 57% and 8% of Trans
Global's revenue for 1994.
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RMI was formed in 1994 to acquire assets of Job Shop in November 1994.
RMI conducts business under the name The RMI Group. During 1994, six clients of
RMI and Job Shop accounted for aggregate revenues of $32 million or
approximately90% of their combined revenue for the year. Boeing and Lockheed Ft.
Worth Company, which accounted for revenues of $10 million and $7.5 million, or
22%and 17% of such combined revenue for 1994, were the only clients which
accounted for more than 10% of the combined revenue of RMI and Job Shop. Four
other clients, three of which are in the aerospace industry, accounted for
aggregate revenue of $14.7 million, or 51% of the combined revenue of RMI and
Job Shop for1994.
Competition
The business of providing employees on either a permanent or temporary
basis is highly competitive and is typically local in nature. Trans Global
competes with numerous technical service organizations, a number of which are
better capitalized, better known, have more extensive industry contacts and
conduct extensive advertising campaigns aimed at both employers and job
applicants. Trans Global believes that the ability to demonstrate a pattern of
providing reliable qualified employees is an important aspect of developing new
business and retaining existing business. Furthermore, the ability of Trans
Global to generate revenues is dependent not only upon its ability to obtain
contracts with clients, but also to provide its clients with qualified
employees. The market for qualified personnel is highly competitive, and Trans
Global competes with other companies in attracting employees.
Government Regulations
The technical temporary staffing industry, in which Trans Global is
engaged, does not require licensing as a personnel or similar agency. However,
as a provider of personnel for other corporations, Trans Global is subject to
Federal and state regulations concerning the employment relationship, including
those relating to wages and hours and unemployment compensation. Trans Global
also maintains a 401-(k) plan for its employees and is subject to regulations
concerning such plan.
Trans Global does not have contracts with any government agencies.
However, Trans Global does have contracts with clients, including major defense
contractors that have contracts with government agencies. Trans Global's
contracts with its clients are based on hourly billing rates for each technical
discipline. Many of the clients' contracts with government agencies are subject
to renegotiations or cancellation for the convenience of the government. Since
the manpower needs of each of Trans Global's clients are based on the clients
own requirements and the client's needs are affected by any modification in
requirements, any reduction in staffing by a client resulting from cancellation
or modification of government contracts could adversely impact the business of
Trans Global.
Employees
At December 31, 1997, Trans Global had 931 employees, of which 879 were
contract service employees who performed services on the clients' premises and
52 were executive and administrative employees. Each of Trans Global's offices
is staffed by recruiters and sales managers. Each contract service employee
enters into a contract with Trans Global, which sets forth the client for whom
and the facility at which the employee's services are to be performed and the
rate of pay. If an employee ceases to be required by Trans Global's clients for
any reason, Trans Global has no further obligation to the employee. Although
assignments can be for as short as 90 days, in some cases, they have been for
several years. The average assignment is in the range of six to nine months.
Trans Global's employees are not represented by a labor union, and Trans Global
considers its employee relationship to be good.
MEDICAL INFORMATION SERVICES
The medical information services segment reflects the activity of
Netsmart Technologies, Inc., ("Netsmart"). Netsmart is a Delaware corporation,
organized in September 1992 under the name Medical Services Corp., a holding
company, whose operations were conducted by its wholly owned subsidiary, Carte
Medical Corp. In October 1993, Medical Services Corp. merged its subsidiary into
itself and changed its name to Carte Medical Corporation. In June 1995, Carte
Medical Corporation's name was changed to CSMC Corporation, and in February
1996, Netsmart's name was changed to Netsmart Technologies, Inc. Substantially
all of Netsmart's revenue through 1997 has been generated by its health
information systems and related services which are marketed by its subsidiary
Creative Socio Medics, Corp. ("CSM") which was acquired by Carte Medical
Holdings, Inc., a wholly owned subsidiary of SISC. In September of 1995 Carte
Medical Holdings, Inc. transferred the stock of CSM to Netsmart. The revenues of
the medical information services segment for 1997, 1996 and 1995 were $7.9
million, $8.5 million and $7.4 million, respectively. Net losses of the medical
information services segment during 1997, 1996 and 1995 approximated $3.5
million, $6.6 million and $2.8 million, respectively.
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Netsmart develops, markets and supports health information systems and
computer software designed to enable behavioral health care organizations to
manage their administrative, clinical and billing requirements in a network
computing environment. Netsmart has also developed proprietary technology
utilizing smart cards. A smart card is a plastic card about the size of a
standard credit card, which contains a single embedded microprocessor chip with
both data storage and computing capabilities.
Except for revenue from one customer, Netsmart's revenue from its smart
card technology has not been significant. Netsmart believes that it may be in
its best interests to dispose of the smart card business. As a result, Netsmart
is engaged in negotiations with respect to the possible sale of its smart card
business to two directors of Netsmart, one of whom is also an officer of
Netsmart. However, if Netsmart cannot negotiate such a sale on reasonable terms,
Netsmart may discontinue such operations.
Health Information Systems and Services
Since the June 1994 acquisition of CSM, Netsmart has offered its
customers a range of products and services principally based upon the health
information systems, which were developed and marketed by CSM prior to the
acquisition. Users typically purchase one of the health information systems, in
the form of a perpetual license to use the system, as well as contract services,
maintenance and third party hardware and software which Netsmart offers pursuant
to arrangements with the hardware and software vendors. The contract services
include project management, training, consulting and software development
services, which are provided either on a time and material basis or pursuant to
a fixed-price contract. The software development services may require CSM to
adapt one of its health information systems to meet the specific requirements of
the customer.
Although the health information systems constituted the basis of CSM's
business, revenue from the license of such systems has not represented a major
component of its revenues. The typical price for a license for CSM's health
information systems ranges from $10,000 to $30,000. For 1997, 1996 and 1995, CSM
installed health information systems licensing of such systems representing
revenues of approximately $737,000, $329,000 and $162,000, respectively,
accounting for approximately 9%, 4% and 2% of revenue for such periods.
A customer's purchase order may also include third party hardware or
software. For 1997, 1996 and 1995, revenue from hardware and third party
software accounted for approximately $1 million, $1.1 million and $2.1 million,
representing 14%, 13% and 29%, respectively, of revenues in such periods.
In addition to its health information systems and related services, CSM
offers specialty care facilities a data center, at which its personnel perform
data entry and data processing and produce operations reports. These services
are typically provided to smaller substance-abuse clinics. For 1997, 1996 and
1995, CSM's service bureau operation generated revenue of approximately $2.2
million, $2.2 million and $1.7 million, respectively, representing approximately
28%, 26% and 24% of CSM's revenues for such periods.
Maintenance services have generated increasing revenue and are becoming
a more significant portion of CSM's business. Since purchasers of health
information system licenses typically purchase maintenance service. Maintenance
revenue increases as new customers obtain licenses for its health information
services. Under its maintenance contracts, which are executed on an annual
basis, CSM maintains its software and provides certain upgrades. Its obligations
under the maintenance contract may require CSM to make any modifications
necessary to meet new Federal reporting requirements. CSM does not maintain the
hardware and third party software sold to its customers, but does provide a
telephone help line service for certain of the third party software, which it
relicenses.
The CarteSmart System
Although the initial applications of the CarteSmart System were
designed to meet the needs of managed care organizations and entitlement
programs and Netsmart developed a smart card interface to its health management
systems, Netsmart was not successful in implementing such a program on more than
a modest scale and revenue from such applications were not substantial.
To date, Netsmart has licensed its CarteSmart software as part of a
pilot project for San Diego County, which involved the issuance of smart cards
to approximately 1,200 mental health patients participating in the California
Medical Managed Care Initiative. Netsmart is presently contracted to develop a
plan for an expansion of the program to include substance abuse and acute care
as well as mental health for the county's total health care population. Netsmart
is also marketing its CarteSmart System to other entitlement programs and
managed care organizations; however, except for the pilot project in San Diego
County, Netsmart has not entered into any agreements with any such
organizations, and no assurance can be given that Netsmart will enter into any
such agreements.
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Netsmart believes that a major market for its smart card technology is
the financial services industry, including banks and credit card issuers.
Commencing in May 1995, Netsmart entered into a series of letter agreements with
IBN for services and CarteSmart software licenses for the implementation of a
satellite based distributed network of automatic teller machines and off-line
point of sale terminals using smart cards for the former Soviet Union. Netsmart
entered into a definitive agreement to develop the system and license the system
to IBN. IBN is a New York-based company, which has rights to install such
systems in the former Soviet Union. In late 1997, Netsmart learned that IBN has
not been successful in marketing its system in the former Soviet Union and as a
result Netsmart wrote-off approximately $1.5 million of assets related to the
IBN project.
Netsmart is currently evaluating its CarteSmart business and the
investment which it would be required to make to further develop and enhance its
CarteSmart System to succeed in the increasingly competitive smart card market.
At the current time it is largely continuing to market its CarteSmart System
only in the health and human services market. In the event of a disposition of
the CarteSmart business, Netsmart would seek to obtain certain rights to the
CarteSmart technology.
Markets and Marketing
The market for CSM's health information systems and related services is
comprised of various providers of specialty care involving long-term treatment
of a repetitive nature rather than short-term critical care, such as medical and
surgical hospitals or clinics. CSM believes that there are approximately 15,000
providers of such treatment programs in the United States, including public and
private hospitals, private and community-based residential facilities and
Federal, state and local governmental agencies. Of these facilities,
approximately 200 are customers of CSM.
Many of the long-term health care facilities which are potential CSM
customers are operated by government entities and include entitlement programs.
During the 1997, 1996 and 1995, approximately %, 31% and 54%, respectively, of
revenues was generated from contracts with government agencies. Contracts with
government agencies generally include provisions, which permit the contracting
agency to cancel the contract at its convenience.
During 1997, no one customer accounted for more than 10% of Netsmart's
revenue. For 1996, IBN generated revenue of approximately $1.9 million
representing 22% of Netsmart's 1996 revenue.
Netsmart may enter into negotiations with other companies which have
business, product lines or products which are compatible with Netsmart's
business objectives. However, no assurance can be given as to the ability of
Netsmart to enter into any agreement with such a company or that any agreement
will result in licenses of the CSM behavioral care system or the CarteSmart
System.
At December 31, 1997 and 1996, Netsmart had a backlog of orders,
including ongoing maintenance and data center contracts, in the aggregate amount
of $4.8 million and $3.7 million respectively. Substantially the entire backlog
at December 31, 1997 is expected to be filled during 1998. Such orders and
contracts relate substantially to health information sales and services.
Product Development
During 1997 Netsmart incurred $201,000 of research and development
expenses, principally to enhance its software systems. During 1996, personnel
assigned to work on the IBN contract and the development of Smart Card products
resulting in $279,000 in capitalized software costs. During 1995 research and
development expenses were $699,000 relating primarily to enhancements in the
CarteSmart System.
Competition
Netsmart's principal business is marketing of health information
systems and related services to specialty care institutions and managed care
organizations, who have a need for access to a distributed data network and
marketing health information systems software to specialty care organizations.
The software industry in general is highly competitive, in addition, with
technological developments in the communications industry, it is possible that
communications as well as computer and software companies may offer similar or
compatible services. Although Netsmart believes that it can provide a health
care facility or managed care organization with software to enable it to perform
its services more effectively, other companies, including major computer and
communications companies have the staff and resources to develop competitive
systems, and users, such as insurance companies, have the ability to develop
software systems in house. Because of the large subscriber base participating in
the major managed care organizations, the inability of Netsmart to license any
such organizations could have a materially adverse effect upon its business.
Furthermore, various companies have offered smart card programs, by which a
person can have his medical records stored and
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software vendors and insurance companies have developed software to enable a
physician or other medical care provider to have direct access to the insurer's
computer and other software designed to maintain patient health and/or
medication records. Many of Netsmart's potential customers include government
agencies and major specialized health care providers. Netsmart's marketing
effort with respect to such potential customers has been adversely affected by
its negative working capital and its continuing losses.
The health information systems business is highly competitive, and is
serviced by a number of major companies and a larger number of smaller
companies, many of which are better capitalized, better known and have better
marketing staffs than Netsmart, and no assurance can be given that Netsmart will
be able to compete effectively with such companies. Major vendors of health
information systems include Shared Medical Systems Corp. and HBO Corp.
In order to market Netsmart's CarteSmart System, it must be able to
demonstrate that it meets the technical and pricing requirements of its
potential customers and that it has the financial capability to be able to
provide the ongoing support and development which may be required. In marketing
systems such as the CarteSmart System, Netsmart must be able to demonstrate the
ability of the network sponsor to provide enhanced services at a lower effective
cost. Major systems and consulting vendors, such as Unisys, AT&T Corp. and
Anderson Worldwide may offer packages which include smart cards and other
network services. No assurance can be given that Netsmart will be able to
compete successfully with such competitors or that it will continue to offer
software or services based on its CarteSmart System other than in connection
with its health information systems and such business may be sold or
discontinued.
Government Regulations
The Federal and State governments have adopted numerous regulations
relating to the health care industry, including regulations relating to the
payments to health care providers for various services. The adoption of new
regulations can have a significant effect upon the operations of health care
providers and insurance companies. Although Netsmart's business is aimed at
meeting certain of the problems resulting from government regulations and from
efforts to reduce the cost of health care, the effect of future regulations by
governments and payment practices by government agencies or health insurers,
including reductions in the funding for or scope of entitlement programs, cannot
be predicted. Any change in, the structure of health care in the United States
can have a material effect on companies providing services, including those
providing software. Although Netsmart believes that one likely direction which
may result from the current study of the health care industry would be an
increased trend to managed care programs, which is the market to which Netsmart
is seeking to license its CarteSmart System. No assurance can be given that
Netsmart's business will benefit from any changes in the industry structure.
Even if the industry does evolve toward more health care being provided by
managed care organizations, it is possible that there will be substantial
concentration in a few very large organizations, which may seek to develop their
own software or obtain software from other sources. To the extent that the
health care industry evolves with greater government sponsored programs and less
privately run organizations, Netsmart's business may be adversely affected.
Furthermore, to the extant that each state changes its own regulations in the
health care field, it may be necessary for Netsmart to modify its health
information systems to meet any new record-keeping or other requirements imposed
by changes in regulations, an no assurance can be given that Netsmart will be
able to generate revenues sufficient to cover the costs of developing the
modifications.
A substantial percentage of CSM's business has been with government
agencies, including specialized care facilities operated by, or under contract
with, government agencies. The decision on the part of a government agency to
enter into a contract is dependent upon a number of factors, including economic
and budgetary problems affecting the local area, and government procurement
regulations, which may include the need for approval by more than one agency
before a contract is signed, and the financial condition and earnings history of
the potential vendor. In addition, contracts with government agencies generally
include provisions, which permit the contracting agency to cancel the contract
at its convenience.
Intellectual Property Rights
The CarteSmart System is a proprietary system developed by Netsmart.
Netsmart has no patent rights for the CarteSmart System or health information
system software, but it relies upon non-disclosure and secrecy agreements with
its employees and third parties to whom Netsmart discloses information. No
assurance can be given that Netsmart will be able to protect its proprietary
rights to its system or that any third party will not claim rights in the
system. Disclosure of the codes used in the CarteSmart System or in any
proprietary product, whether or not in violation of a non-disclosure agreement,
could have a materially adverse affect upon Netsmart, even if Netsmart is
successful in obtaining injunctive relief. Furthermore, Netsmart may not be able
to enforce its rights in the CarteSmart System in certain foreign countries.
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Source of Supply
Since Netsmart does not provide any of the hardware or the smart cards
it is the responsibility of the licensee to obtain the hardware smart cards and
other supplies. Netsmart's software operates on computer hardware and smart
cards manufactured by a number of suppliers.
Employees
As of December 31, 1997, Netsmart had 85 employees, including five
executive, four marketing and marketing support, 69 technical and seven clerical
and administrative employees. The chief executive officer and the president of
Netsmart devote only a portion of their time to the business of Netsmart.
TELECOMMUNICATIONS
The telecommunications segment reflects the operations of ARC Networks,
Inc. ("ARC"). ARC's primary business provides local and long-distance telephone
services and data cable installation services to commercial customers. The
revenues of the telecommunications segment for 1997, 1996 and 1995 were $9.6
million, $5.6 million and $3.3 million, respectively. Net losses of the
telecommunications segment during 1997, 1996 and 1995 approximated $2.7 million,
$1.1 million and $543,000, respectively.
ARC Networks, Inc. (ARC) is a Delaware corporation organized on January
15, 1997 to acquire all of the issued and outstanding stock of A.R.C. Networks,
Inc., a New York corporation ("ARC-NY"), which commenced operations in January
1994. The acquisition of Arc-NY is referred to as the "Arc Reorganization."
Pursuant to an agreement and plan of reorganization dated January 17, 1997, the
stockholder of ARC-NY transferred their stock in ARC-NY to ARC for 100%
ownership in ARC. From 1993 until the organization of Arc-NY in 1994, the
business of the Company was conducted as a division of Avionics Research
Corporation, a New York corporation ("Avionics") and a wholly owned subsidiary
of Trans Global Services, Inc., a publicly-held subsidiary of Consolidated.
References to ARC include ARC, Arc-NY and the operations as a division of
Avionics, unless the content indicates otherwise.
ARC offers local and long-distance telephone services to, and provides
data cable installation services for computer systems for, commercial customers.
The market for the telecommunication services offered by ARC results from a
combination of the trends toward competition and deregulation together with
technological developments which enable telecommunications service providers to
offer a range of services to commercial and, to a lesser extent, residential
users.
Telephone Services
Local Telephone Service
Local telephone services, which are provided by the Incumbent Local
Exchange Carriers ("ILEC's") and Competitive Local Exchange Carrier's ("CLEC's")
include (i) local telephone exchange service, by which local telephone services,
such as dial tone and local phone calls, are provided to end users, (ii)
dedicated telephone service, which includes private lines and special access
services, (iii) switched access services, which consist of charges received by
the local exchange carriers from long-distance carriers, and (iv) toll services,
which include intra-LATA long-distance calls. All of these services, other than
switched-access service are resold by the Company as a switchless reseller. As
such, the Company does not maintain any telephone lines or switching equipment,
but, rather, uses the lines and switches of the underlying carriers.
ARC currently offers local telephone services in six states,
principally to commercial users in New York City and long-distance, including
international, telephone services in a total of 15 states. The local telephone
services offered by ARC includes all of the local telephone service, which are
offered by the CLEC's from which ARC purchases services and all services offered
by Bell Atlantic. In New York, Chicago and South Florida, ARC offers telephone
service provided by Teleport Communications Group ("TCG") and Frontier
Communications. In New York City, ARC also offers service provided by three
other CLEC's and Bell Atlantic.
ARC has a ten-year agreement with TCG, pursuant to which ARC may resell
TCG's local telephone service in New York City, Chicago, South Florida and each
other metropolitan area in which TCG offers such service. Since February 1997,
ARC has purchased Bell Atlantic local telephone service for resale pursuant to
Bell Atlantic' tariffs. ARC's agreements with CLEC's provide it with the ability
to offer services in certain regions of the United States, which are not served
by TCG.
ARC's contracts with the CLEC's from which it purchases telephone
services requires ARC to purchase a specified dollar volume of service each
month. Except for its agreement with TCG, which has been in effect since
1993, ARC's purchase commitments do not become effective until the contract has
been in effect for a specified period. Based on the contracts in effect in
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March 1998, the minimum annual commitments, including TCG, will be approximately
$6.2 million for 1998 and 1999, $1.2 million for 2000, $171,000 for 2001 and
$214,000 thereafter. ARC's purchases are presently in excess of its minimum
requirements.
ARC's rates for local, long-distance and international telephone
service are set forth in its tariffs, which are filed with the FCC and state
public service commission's in each state in which it offers such service. The
tariff sets forth the charges for each service provided by ARC. ARC has two rate
structures for local telephone service -- one for service obtained by ARC from
TCG or other CLEC's and the other for services provided by an ILEC, which, in
New York City, is Bell Atlantic.
ARC has no minimum purchase obligations with Bell Atlantic, however,
the prices paid to Bell Atlantic are higher than they would be if there were a
provision for guaranteed usage. Although the rates paid by ARC under its
agreement with Bell Atlantic are typically higher than the rates paid to the
CLEC's, ARC believes that its ability to offer Bell Atlantic service is
important to ARC's customers. The rates paid by ARC to Bell Atlantic for local
telephone service are set forth in Bell Atlantic's tariffs, which are subject to
change with notice. Bell Atlantic is required to file tariff changes with the
New York Public Service Commission and ARC monitors such filings. ARC can change
its pricing with respect to Bell Atlantic service in response to changes by Bell
Atlantic. Although ARC must file new tariffs any time it changes its rates, it
is not subject to public hearings and the waiting period prior to the
effectiveness of new tariffs is considerably shorter for ARC than for Bell
Atlantic. ARC's agreements with the CLEC's require the CLEC's to provide ARC
with 15 to 30 days notice prior to any change, during which period ARC can
change its pricing.
The use of ARC's services rather than those of the underlying carrier
are transparent to the user. The lines used by the customer are the same lines
that are provided by the CLEC's or ILEC's to their own customers. The only
difference is that the rate paid to ARC may be lower than that which would be
charged directly by the CLEC or ILEC to the customer and any servicing of the
telephone lines is referred to the CLEC's or ILEC's.
The local carrier for ARC's customers is generally selected by the
customer or by ARC with the consent of the customer. ARC may provide its
customers with two carriers for local service, and, in New York City, may
include both Bell Atlantic and a CLEC. By offering a choice of carriers, ARC can
offer telephone redundancy to major commercial users to provide them with
telecommunications capability even if the principal carrier is experiencing
problems in providing service.
In addition to offering local telephone service to its customers, ARC
offers a range of telecommunications services, which are customized to meet the
particular needs of its clients. These services include the development of
custom billing records and management reports, bundled billing and customer
service on a 24-hours a day, seven days a week basis. Bundled billing separately
identifies service provided through the ILEC, service provided through CLEC's,
long-distance services, the amount which would have been paid under the tariffs
of the customer's prior carriers and the amount of savings. ARC also offers data
communications users a number of products for the installation and maintenance
of LAN lines, such as concentrators and bridges and design services relating to
ARC's data transmission and distribution requirements.
In addition to providing local telephone service, ARC designs and
installs a wide area network ("WAN"). A WAN is used to connect telephone users
in more than one location, which may be in the same or different geographical
areas. Since WAN service requires a telephone link between two locations, ARC
uses the services of an underlying carrier to provide such services. ARC
presently uses TCG and Bell Atlantic for such services. Because of the lack of
installation and support staff outside of the New York City metropolitan area,
ARC generally limits these services to customers in the New York City area. To
the extent that such service is required outside of the New York City
metropolitan area, ARC will subcontract such service.
Long-distance and International Telephone Services
ARC also offers long-distance and international telephone service,
which it purchases from a number of carriers such as Frontier, PT-1 and Citizens
Communications. Although the long-distance telephone market is dominated by
AT&T, WorldCom and Sprint, many long-distance companies such as Frontier offer
such service on a regional or national basis.
ARC charges its customers at rates which it believes are generally
lower than the rates offered by the three major long-distance providers,
although no assurance can be given that ARC's rates are or will be lower than or
competitive with the rates charged by its competitors. Long-distance telephone
service provided by ARC is processed through the underlying carriers switching
equipment, but ARC bills the customers and has the obligation to provide any
required service. The Company generally bills its long-distance service at a
flat per minute rate, which is not dependent upon the time of day that such
calls are made.
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Cabling and Wiring Services
ARC also offers data and telephone cable installation services for
computer systems for commercial users and all telephone users. This service is
not related to any telephone service provided by ARC and consists of cable
installation for local area networks and related wiring services.
Markets and Marketing
ARC markets its products and services through an in-house sales staff
and commissioned sales agents. ARC directs its marketing efforts toward medium
to large businesses that have significant telecommunications requirements. In
general, ARC's employees market its local and long-distance service to
commercial users, principally medium to large telephone users, and the
commissioned sales agents market ARC's long-distance and local telephone
services to a broader range of telephone users. The commissioned sales agents
are not employees of ARC, and their compensation consists solely of commissions
based on revenues generated.
The market for ARC's data cabling installation services is primarily
institutional customers, including hospitals and government agencies. ARC's two
largest customers for such services in 1997 were New York State and Mitel.
Pursuant to a contract, New York State agencies are authorized to purchase such
services from ARC. Since the contract was signed in January 1997, ARC generated
1997 revenues from such contract of approximately $1 million, or 10% of ARC's
total 1997 revenues. Revenues from Mitel, through which ARC provided services
for the New York City Board of Education approximated $520,000, $869,000 and
$629,000, respectively, representing 5%, 16% and 19%, respectively, of ARC's
total revenues for 1997, 1996 and 1995. The only other customer for data cabling
installation services that accounted for more than 10% of total revenue was
Newark Beth Israel Hospital, which accounted for revenue of approximately
$200,000, or 2% of ARC's total revenues in 1997 and $542,000, or 17% of ARC's
total revenue in 1995. The nature of data cable installation services is such
that once the installation project is completed, there is no further revenue
from the customer unless the customer separately purchases other services from
ARC.
At March 31, 1997, ARC had a backlog of firm orders for data cabling
and wiring services of approximately $8.1 million, of which $5.6 million is
expected to be completed during 1998. ARC has received, as of March 31, 1998,
approximately $1 million of advance funding against such orders. There is no
backlog for telephone service. In addition, ARC had billings in excess of costs
and earnings of $1.2 million and costs and earnings in excess of billings of
$100,000 as of December 31, 1997, all of which is expected to be completed in
1998.
Agreements with Telephone Carriers
ARC has an agreement dated March 18, 1993, with TCG, pursuant to which
ARC can resell TCG's local telephone services. The agreement has a term of ten
years, which continues on a year-to-year basis thereafter unless terminated by
either party. The agreement provides for minimum usage requirements, based on
the number of minutes of telephone service purchased. The estimated minimum
dollar volume of service is approximately $50,000 per month. If ARC fails to
meet the minimum requirements, it will be billed for a surcharge. ARC does not
have any funds on deposit with TCG, and TCG provides the Company with an open
line of credit.
ARC has an agreement with Frontier, pursuant to which ARC may offer
Frontier's domestic and international long-distance telephone service. The
agreement has a term of three years, commencing in February 1997, and continues
on a year-to-year basis unless terminated by either party. ARC has provided
Frontier with a $50,000 deposit. The agreement has minimum monthly requirements,
which start at $10,000 for the fourth month and increase to $500,000 for the
thirteenth month and thereafter. If the minimum is not met, ARC can either pay
the amount of the shortfall or pay a surcharge on the service actually used. ARC
is not prohibited from offering long-distance services from other carriers. In
order to obtain long-distance service from additional carriers, ARC may be
required to post substantial deposits or letters of credit.
ARC has an agreement with Citizens pursuant to which it purchases
domestic long-distance telephone service. The agreement has a two-year term,
commencing in August 1996. The agreement provides for a monthly commitment of
$50,000, commencing January 1997. If the minimum is not met for any month, ARC
pays a surcharge equal to 25% of the deficiency. ARC has met its minimum
requirements for 1997.
In November 1996, ARC entered into an agreement with Brooks Fiber
Properties, Inc. ("Brooks") pursuant to which the ARC may resell Brooks' local
telephone service in certain metropolitan areas for a three-year period
beginning in March 1997. The agreement provides for minimum usage starting at
$6,000 in April 1997 and increasing to $18,000 in October 1997. Thereafter the
agreement requires an annual minimum of $300,000. If a minimum is not attained
in any month, ARC pays the shortfall and, during the following year, may use the
unused telephone usage in a subsequent month after the minimum has been met. No
deposit is required pursuant to this agreement. In March 1998, ARC agreed to pay
Brooks $25,000 to terminate this agreement.
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Although ARC does not have a formal agreement with Bell Atlantic, it
purchases for resale Bell Atlantic' local telephone service based on Bell
Atlantic' tariffs for the sale of such services to resellers. ARC has no minimum
obligations under the Bell Atlantic tariffs.
Service and Maintenance
ARC is required to provide customer service for all of its telephone
customers. Regardless of which carrier provides the underlying service that is
resold by ARC, the bills sent by ARC to its telephone customers list a local
Company telephone number to be called for any service problems. ARC refers any
service problem to the appropriate carrier.
With respect to its data cable installation service, ARC provides the
customer with a warranty with respect to its workmanship of one to five years,
depending on the nature of the work. ARC obtains from its supplier of cable and
related equipment used in providing data cable wiring services a 15-year
warranty, which is issued after the project is completed and certified by ARC.
As of March 15, 1997, the Company had not incurred any costs in connection with
its warranties.
Competition
Telecommunications
The telecommunications industry in general is highly competitive. Major
industry participants such as AT&T, WorldCom, Sprint and the Bell Operating
Companys ("BOCs") have far more resources and experience than ARC in providing
local, long-distance. Moreover, foreign carriers are entering the United States
market through alliances with larger domestic telecommunication carriers. No
assurance can be given that ARC can successfully compete against these larger
industry participants.
ARC anticipates that competition with respect to local telephone
service will increase and that other major companies, including other BOCs and
other telephone operating companies and long-distance telephone providers, will
offer local telephone services in major markets. Such competition could result
in price competition and erosion of gross margins, which could have a materially
adverse affect upon ARC's ability to compete. Furthermore, CLEC's, such as TCG,
whose telephone service is resold by ARC, compete with ARC in offering telephone
service to commercial users, which is ARC's targeted customer base.
Competition for providing local telephone service to commercial users
is based on price, reliability and quality of service. The ability of ARC
compete successfully is dependent upon its ability to demonstrate to commercial
customers that the price, reliability and service which it offers compares
favorably with the price, reliability and service offered by its competitors, as
to which no assurance can be given. Furthermore, as a result of the 1996 Act,
local telephone operating companies may have more flexibility in their pricing
structure, which could result in lower rates to major telephone users, which
constitute the market targeted by ARC. Since the 1996 Act is designed to
encourage competition in the local telephone market, there can be no assurance
that ARC will not be adversely affected by the implementation of the 1996 Act.
Data cable installation services
Competition in the cable and wiring service business is highly
competitive. In providing these services, ARC competes with major computer and
telecommunications companies such as AT&T, as well as a large number of
independent companies that offer such services. Because of the fragmented nature
of this business, no single company or group of companies dominates the field.
Competition is based on price and service, and ARC believes that its charges and
services compare favorably with other companies offering such services in the
New York City metropolitan area.
Government Regulations
The telecommunications industry is subject to regulation at the Federal
level by the FCC and at the state level by state public utility and public
service commissions. Changes in regulation have resulted in reduced rates for
telephone services where demand is great, such as long-distance service between
major metropolitan areas and additional competition. While the changes in
regulation may have made rate changes easier for CLEC's, ILEC's are presently
subject in many states to regulations which do not permit them to offer
significant discounts to major users of local telephone services. To the extent
that ILEC's are able to offer more favored rates to business customers, which
represents the principal market for ARC's services, ARC's ability to compete
could be adversely affected. Although the effects of the AT&T Divestiture Order
which resulted in the divestiture by AT&T of the BOCs, as well as recent changes
in Federal law have reduced regulations in a manner which encourages competition
for local and long-distance telephone service. ARC is and will continue to be
subject to certain regulations by the FCC and state public utility and public
service
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commissions. At the Federal level, as a common carrier, ARC may not unjustly
discriminate, must offer service upon reasonable request and charge just and
reasonable rates, pursuant to publicly filed tariffs. At the state level, ARC
must be certified prior to providing local or long-distance, maintain tariffs
with current rates, terms and conditions and file reports as required by the
individual public service commissions. Changes in government regulations may
have an adverse effect upon ARC's business and prospects, particularly as ARC
seeks to enter new markets. There can be no assurance that ARC will receive all
state authorizations required for ARC to enter new markets or that ARC will be
able to comply with ongoing federal and state regulatory requirements.
ARC is subject to state regulation, including tariff and other filings
in each state in which it offers telephone services. ARC's rates for local,
long-distance and international telephone service are set forth in its tariffs,
which are filed with the FCC and state public service commissions. The tariffs
set forth the charges for each service provided by ARC. In New York City, ARC
has two rate structures for local telephone service -- one for service obtained
by ARC from TCG or other CLEC's and the other for services provided by Bell
Atlantic. ARC must file new tariffs any time it changes its rates or rate
structure; however, it is not subject to public hearings and the waiting period
prior to the effectiveness of new tariffs is typically shorter for ARC than for
ILEC's.
As a result of the 1996 Act, the BOCs may offer long-distance telephone
service and other services not previously permitted to the BOCs; however, their
ability to offer such services is conditioned upon the meeting of certain
requirements that are expected to lead to additional competition in the local
telephone market. These requirements include making their local services
available for resale, providing competitors access to their network facilities,
implementing number portability and dialing parity. Additional competition for
local exchange service may have the effect of reducing the rates charged by, and
improving the services provided by, the ILEC's, which could have a downward,
effect on rates to major commercial telephone users. Such a development could
reduce the margin between the price at which ARC can sell service and the price
paid by ARC for such service, which could have a material adverse effect upon
ARC.
Product Development
ARC does not engage in product development and enhancement or research
and development. ARC does, however, consider new products and services, which it
believes, are consistent with its business. ARC does not anticipate that, in the
near future, it will develop any proprietary telephone products, however, it may
seek to acquire such products or to obtain marketing rights to such products. No
assurance can be given that ARC can or will obtain any such products or rights
to any such products or that any products which are obtained by ARC can or will
be profitably developed.
Employees
At December 31, 1997, ARC had 26 employees, of which 4 were executive,
5 were administrative, 3 were sales and marketing and 3 were technical support
and 8 were customer service. ARC's employees are not represented by a labor
union, and ARC considers its employee relationship to be good.
DEVELOPMENT STAGE
The development stage segment consists of one company, which has had no
operating activity. Total expenses and losses for 1997 approximated $16,000.
There can be no assurance that this development stage company will develop a
marketable product or generate significant levels of revenue or operating
income, if any.
CORPORATE AND OTHER
The corporate and other segment reflects the activity of the holding
companies, Consolidated Technology Group Ltd., the Registrant, and SISC, a
wholly owned subsidiary of the Registrant. For 1997, 1996 and 1995, the holding
companies incurred expenses and operating losses of approximately $3.3 million,
$3 million and $6.3 million, respectively, and net losses of $4 million, $1.5
million and $5.9 million, respectively.
Consolidated Technology Group, Ltd.
Consolidated Technology Group, Ltd., ("Consolidated" or "the Company"),
(formerly Sequential Information Systems, Inc.) is a New York corporation
organized in 1961. Consolidated does not generate revenues but does incur
expenses including executive and administrative salaries and related payroll
taxes and benefits, consulting fees, legal and accounting fees, public relations
fees and other general and administrative fees. Consolidated charges the
underlying subsidiaries for specifically identified expenses incurred on behalf
of the subsidiaries. Transactions between Consolidated and its subsidiaries are
eliminated in consolidation. As of
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December 31, 1997, Consolidated had four employees that provide management and
administrative services for Consolidated, SIS Capital Corp. and Trinity.
SIS Capital Corp.
SIS Capital Corp., ("SISC"), was organized by Consolidated for the purposes of
making investments in or advancing funds to companies in which Consolidated has
or proposes to obtain an equity position. SISC or one of SISC's subsidiaries
holds the Company's equity and debt position in all of the operating
subsidiaries. SISC also invests in companies in which it does not intend to
obtain an equity position for the purpose of generating investment income.
During 1997, 1996 and 1995, SISC advanced funds to an unconsolidated affiliate
in which the Company owns a minority interest.
DISCONTINUED OPERATIONS
During 1997, the Company implemented a plan to discontinue the
operations of the three dimensional products and services, medical diagnostics
and audio products manufacturing segments. The decision to discontinue the three
dimensional products and services and audio products manufacturing segments was
made in order the stop the cash flow drain that such operations caused. The
decision to sell the medical diagnostics segment was made to provide the Company
with significant working capital to fund the operations of the remaining and
future segments of the Company. Additionally, effective December 31, 1997, the
Company sold the Electro Mechanical Electro Optical Products Manufacturing
Products and the Business Consulting Services segments. The following discusses
separately, each of the discontinued segments.
Three Dimensional Products and Services
The three-dimensional products and services segment reflects the
consolidated operations of 3D Holdings International, Inc., ('"3D"), a Delaware
corporation. The operations of 3D includes the operating activity of 3D
Technology, Inc. ("3D Tech"), Computer Design Services, Inc. ("CDS") and 3D
Imaging International, Inc. ("3DI") and Vero International, Inc., ("Vero") all
of which are or were directly or indirectly, controlled by 3D. 3D was originally
formed to provide three dimensional imaging and scanning services to be used in
engineering and manufacturing applications. Effective April 1, 1997, 3D sold all
of its ownership in Vero for nominal consideration. Effective June 30, 1997, the
measurement date of the 3D discontinuation, (the "3D Measurement Date"), the
Company formulated a plan to discontinue the operations of the remaining
subsidiaries. Such plan includes the transfer of certain assets and contractual
rights of the 3D subsidiaries to a subsidiary operating in the
electro-mechanical and electro-optical products manufacturing segment in
exchange for the related debt and capital lease obligations which encumbered the
transferred assets. The remaining assets of 3D are estimated to have little if
any value and have been written off. 3D has substantial unpaid liabilities
approximating $1.8 million of which approximately $250,000 relates to unpaid
payroll taxes. The Company has been in correspondence with the IRS and is making
monthly payments on the outstanding payroll taxes. To date, the Company has not
determined the final dissolution of the non-payroll tax related liabilities. As
of the 3D Measurement Date, the Company has accrued $250,000 in estimated losses
to be incurred from the 3D Measurement Date until the final disposition of 3D.
All remaining liabilities of 3D, including the $250,000 in estimated losses from
operations, are classified as net current liabilities of a discontinued segment.
The Company has recorded an estimated loss on disposal of 3D of approximately
$465,000, which includes a gain of $135,000 on the actual sale of Vero and an
estimated loss of $600,000 on the planned disposition of the remaining 3D
subsidiaries. For 1997, 1996 and 1995, 3D incurred net losses approximating $1.6
million, $1.5 million and $2.3 million, respectively, which are classified as
losses from operations of a discontinued segment.
Medical Diagnostics
The medical diagnostics segment reflects the operations of
International Magnetic Imaging, Inc. and its affiliated entities ("IMI"). IMI
was formed to acquire and operate ten medical diagnostic imaging centers and a
referral network through which patients are referred to diagnostic imaging
centers. Effective September 1, 1997, (the "IMI Measurement Date"), the Company
formulated a plan to discontinue the operations of IMI. The plan contemplated
the sale of substantially all of the assets of IMI for cash and the assumption
of specific IMI liabilities. Pursuant to the plan, on January 28, 1998, the
Company entered into an asset purchase agreement for the sale of substantially
all of the assets of IMI for approximately $20 million in cash and the
assumption of $21 million in debt. Such sale was consummated on April 2, 1998.
The sale of IMI resulted in a gain on sale, which will be recognized in 1998.
IMI's net remaining assets and liabilities have been classified as net current
liabilities of a discontinued segment. For 1997 IMI incurred a net loss of
approximately $1.9 million (the medical diagnostics segment loss was $1.2
million after elliminating an intra-segment tax benefit for 1997) which includes
a $250,000 estimate of loss for the period from January 1, 1998 until the
anticipated sale date. For 1996 and 1995, IMI reported net income of $1.5
million and $2.7 million, respectively. The net income and loss for all of the
periods reported are classified as net income or loss from operations of a
disposed segment.
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Audit Products Manufacturing
The audio products manufacturing segment reflects the operations of WWR
Acquisition Corp. and its wholly owned subsidiary WWR Technology, Inc.,
collectively referred to as "WWR". WWR was formed for the purpose of acquiring
the professional products business segment of the Klipsch TM loudspeaker line
from Klipsch and Associates, Inc. On May 20, 1997, the Company sold all of its
ownership in WWR for $100,000 and was released as a guarantor on obligations
approximating $394,000. As a result of the sale, the Company received net
proceeds of $62,000 and recorded a gain of approximately $129,000 on the
disposal. The operations of WWR up to the date of disposal are classified as
loss from operations of a discontinued segment, which approximated $293,000,
$893,000 and $544,000 for 1997, 1996 and 1995, respectively.
Electro Mechanical Electro Optical Products Manufacturing
The electro-mechanical and electro-optical products manufacturing
segment reflects the consolidated results of operations of Spectec, Inc.,
("Spectec"). Spectec, a holding company owns a controlling interest in Spectec
Acquisition Corp. Spectec Acquisition Corp. is a holding company that owns a
controlling interest in SES Holdings, Corp., ("SESH"). SESH, a holding company,
owns a controlling interest in Sequential Electronic Systems, Inc., ("SES") and
S-Tech, Inc., ("S-Tech"). Additionally, Televend, Inc. ("Televend") and FMX
Corp. ("FMX") represent two other entities which operated in the
electro-mechanical and electro-optical products manufacturing segment. The
principal business of Spectec is the design, manufacture and sale of
electro-optical and electro-mechanical products, such as (1) devices that
measure pressure, relative position and velocity; (2) avionics instrumentation
devices that are used primarily in U.S. military aircraft to measure and display
oil pressure; (3) specialty vending machines used to dispense various products
such as prepaid telephone calling cards, postage stamps and tokens; and (4) the
integration, sale and servicing of three dimensional laser scanners which are
used in various phases of the design, development and manufacturing of various
products and offering such scanning services to others. The principal business
of Televend is the sale and distribution of prepaid telephone debit cards and
the principal business of FMX is the establishment of a fingerprint
identification system. Effective December 31, 1997, all of the entities
operating in the electro-mechanical and electro-optical products manufacturing
segment were discontinued pursuant to a settlement agreement between the
shareholders and the former chief executive officer of the Company (see the
subsequent events footnote to the financial statements, Part IV, 1). The
operations of the electro-mechanical and electro-optical products manufacturing
segment up to December 31, 1997 are classified as loss from operations of a
discontinued segment, which approximated $2.6 million, $2.2 million and $1.2
million for 1997, 1996 and 1995, respectively.
Business Consulting Services
The business consulting services segment reflects the activity of The
Trinity Group, Inc., ("Trinity"). Trinity provides management and related
services both to Consolidated's subsidiaries and an unconsolidated affiliate in
which the Company owns a minority interest. Trinity's management services
include management, finance, accounting, operations, marketing and other
services, which are typically rendered pursuant to a consulting agreement.
Transactions between Trinity and the subsidiaries are eliminated in
consolidation. Effective December 31, 1997, Trinity was discontinued pursuant to
a settlement agreement between the shareholders and the former chief executive
officer of the Company (see the subsequent events footnote to the financial
statements, Part IV, 1), however, certain consulting contracts between Trinity
and the subsidiaries of the Company have been assigned to Consolidated. The
operations of Trinity have no material impact on the consolidated results of the
Company because significantly all of its operations are eliminated in
consolidation.
15
<PAGE>
ITEM 2. PROPERTIES
Contract Engineering Services
Trans Global leases approximately 7,500 square feet of office
facilities at its location in Long Island, New York, where it maintains its
executive offices, which terminates in 2002. It also rents modest office space
in Houston, Texas; Phoenix, Arizona; Arlington, Texas; Los Angeles, California;
Seattle, Washington; Orlando, Florida and Wichita, Kansas. The aggregate annual
rent payable by Trans Global is approximately $210,000, which is subject to
annual increases. Trans Global believes that its present office space is
adequate for its present needs and that additional office space is readily
available on commercially reasonable terms.
Medical Information Services
Netsmart's executive offices and facilities are located in
approximately 15,000 square feet of space at 146 Nassau Avenue, Islip, New York,
pursuant to a lease, which terminates on February 28, 1999, at a minimum annual
rental of $263,000. This lease provides for fixed annual increases ranging from
4% to 5%. Netsmart believes that this space is inadequate for its needs and is
investigating an extension to the existing lease for an additional 2,500 square
feet. Netsmart also leases approximately 3,500 square feet of office space at
1335 Dublin Road, Columbus, Ohio, pursuant to a lease, which terminates on
November 30, 2002, at a minimum annual rental of $50,000. This lease provides
for annual increases for operating expenses and real estate taxes. Netsmart also
leases approximately 5,700 square feet of office space at 18B Ledgebrook Run,
Mansfield Center, Connecticut, pursuant to a lease, which terminates on October
31, 2002, at a minimum annual rental of $21,000. This lease provides for annual
increases for operating expenses and real estate taxes. Netsmart also leases
approximately 1,800 square feet of office space at 7590 Fay Avenue, La Jolla,
California, pursuant to a lease, which terminates on March 31, 1999, at a
minimum annual rental of $31,000. This lease provides for fixed annual increases
of 4%. Netsmart occupies, on a month to month basis, approximately 2,000 square
feet of office space in Ashland, Oregon, at a monthly rental of $700. Netsmart
believes that its space is adequate for its immediate needs and that, if
additional space is required, it would be readily available on commercially
reasonable rates.
Telecommunications
ARC occupies approximately 1,600 square feet of office space in
Hauppauge, New York which it rents from TGS at an annual rent of approximately
$12,000 and 1,000 square feet of office space in New York City, which it rents
on a month-to-month basis from SISC at an annual rental of approximately
$24,000. The rent paid by ARC reflects the cost of such space to TGS and SISC.
ARC's debit card platform is located in office space in New York City, pursuant
to a month-to-month lease, for which ARC pays an annual rental of approximately
$3,600. ARC's offices in Chicago and Ft. Lauderdale, Florida are located in
office space rented on a month-to-month basis for an aggregate of $300 per
month. ARC believes that additional office space would be readily available as
and where required.
Corporate and Other
Consolidated and SISC lease approximately 7,000 square feet of office
space at 160 Broadway, New York, NY, at an annual rental of approximately
$100,000, which terminates in 2002. Approximately 1,500 square feet of such
space is used by subsidiaries for which they are charged approximately $32,000
on an annual basis. Additionally, approximately 1,000 square feet of such space
is occupied by a related company that is accounted for under the equity method
and is not a consolidated subsidiary, for which the related company is charged
approximately $16,500 on an annual basis.
ITEM 3. LEGAL PROCEEDINGS
Holding Company and Discontinued Segments
(1) The Company is a defendant in a lawsuit filed in the Supreme Court
of the State of New York, Queens County captioned 5 Boro Beverage Distributors,
Inc. v. Consolidated Technology Group, Ltd. "Metro, 5" Absolute, et al. which
was initiated in 1995. The action has been filed by the owners of a company
that the Company was contemplating acquiring in January 1995 for alleged
unauthorized use of proprietary information specific to that line of business.
The plaintiffs are seeking $1 million in damages and the Company has filed a
counter claim for $35,000 advanced to the plaintiff. The action is presently in
abeyance and their has been no action by either side in over two years. Outside
counsel handling this case has advised the Company that it has meritorious
defenses.
16
<PAGE>
(2) The Company is a defendant in a lawsuit filed in the United States
District Court for the Southern District of New York captioned Naval Kapoor and
Dirk Esselens v. SIS Capital Corp. that was initiated in 1998, whereby certain
shareholders of 3D Technology, Inc., a subsidiary of the Company which has been
discontinued, filed a lawsuit against the Company in December 1997. The
complaint states that the Company wrongfully seized and transferred the assets
of 3D Technology, Inc. for the benefit of the Company and at the detriment of
the minority shareholders of 3D Technology, Inc. The plaintiffs are seeking
$3,000,000 in damages. No assessments as to any outcome can be made at this time
as the matter is in its preliminary stages. The Company denies any allegation of
wrongdoing and intends to vigorously defend the action.
(3) On February 23, 1998, the Company was advised of the commencement
of an action in the United States District Court for the Southern District of
New York captioned Grino Corporation, LLC and SMACS Holding Corp. ("SMACS"),
individually and as shareholders of and in the right of Consolidated Technology
Group Ltd. v. Consolidated Technology Group Ltd., SIS Capital Corp., Lewis S.
Schiller, Norman J. Hoskin, E. Gerald Kay and Grazyna B. Wnuk. The action sought
to enjoin the Company from (a) proceeding with its 1998 Annual Meeting of
Stockholders scheduled for March 26, 1998, and (b) making any payment to Mr.
Schiller, Ms. Wnuk and others from the proceeds of the sale of International
Magnetic Imaging, Inc. ("IMI"). The complaint also alleges that the directors
breached their fiduciary duty with respect to, and seeks to have declared void,
(i) employment agreements with Mr. Schiller, which agreements ran from 1989, as
amended and restated from time to time, resulting in a final agreement which was
approved by the Compensation Committee and the full Board of Directors in July
1997, and Ms. Wnuk, (ii) agreements to issue stock or stock options of the
Company and/or its subsidiaries to Messrs. Schiller, Hoskin and Kay and Ms.
Wnuk, (iii) all completed transfers and issuances of stock and stock options by
the Company to Messrs. Schiller, Hoskin and Kay and Ms. Wnuk without fair and
adequate consideration by the Company, and (iv) all agreements to pay to Messrs.
Schiller, Hoskin and Kay and Ms. Wnuk or any other officer of the Company or any
of its subsidiaries, any bonus, finder's fee, stock or option liquidation
payment, consent fee, professional fee, or profit share or any other payment
arising out of or resulting from or based upon the sale or the profits from the
sale of IMI or the assets of IMI or the assets or business of IMI without fair
consideration to the Company. The complaint also alleges violations of Section
10(b) of the Securities Exchange Act of 1934, as amended, and common law fraud
based upon the same and similar allegations, and seeks monetary damages to be
proved at trial. On February 24, 1998, the Court granted a temporary restraining
order. On March 9, 1998, the United States District Court for the Southern
District of New York vacated the temporary restraining order issued on February
24, 1998. The Court vacated the temporary restraining order because, inter alia,
it did not appear that the plaintiffs had a likelihood of success in the
ultimate action, particularly with respect to the alleged 10b-5 claim. On March
19, 1998, the United States District Court for the Southern District of New York
dismissed the action.
(4) One of the plaintiffs in the Federal Court action described above,
SMACS Holdings Corp. ("SMACS"), and certain affiliates of SMACS are plaintiffs
in an action commenced in November 1997 in the Supreme Court of the State of New
York, County of New York, captioned Bridge Ventures, Inc. etal v. Lewis S.
Schiller, etal. The action, brought against Mr. Schiller, the Company, SIS
Capital Corp. and IMI by SMACS, certain affiliates of SMACS and others seeks,
inter alia, monetary damages in excess of $500,000 allegedly due pursuant to
consulting agreements with the Company, an alleged equity interest in IMI and
punitive damages of at least $5 million. The Company believes that it has
meritorious defenses to the claims made in this action. In March 1998, the
plaintiffs sought to amend the complaint to assert claims of a derivative nature
alleging claims similar to those in the Federal Court action and obtained a
temporary restraining order prohibiting payments to Mr. Schiller and others from
the proceeds of the IMI sale. The temporary restraining order was lifted and, as
of the date of this Form 10-K, the complaint had not been amended. At the time
the temporary restraining order was lifted, the negotiations relating to the
resignation of Messrs. Schiller, Hoskin and Kay and Ms. Wnuk, which are
described in Item 1 under the caption "Organization and Changes in Management of
the Company" had been substantially negotiated and the courts were so advised.
The Company has accrued $250,000 for this contingency, which is included in
selling, general and administrative expense.
(5) "Vanguard Limited ("Vanguard"), on its own behalf or on behalf of
other persons who may be affiliated with Vanguard, based on a purported
agreement relating to the introduction of Consolidated to IMI and assistance in
the negotiation of the acquisition of IMI in 1994, has asserted a claim that it
has the right, among other things, to a 10% interest in the Common Stock of IMI
at or about the time of the acquisition for no cash consideration. In addition,
Vanguard has claimed that it is entitled to a $200,000 fee due at the time of
the acquisition of the Centers, consulting fees of $240,000 per year for five
years, reimbursement of nonaccountable expenses and a 5% interest in any future
medical acquisition by the Company. No assurance can be given that any
litigation which may ensue would not seek damages exceeding the claim described
above and, if decided unfavorably to the Company, would not have a material
adverse affect on the Company."
(6) In January 1996, Drs. Ashley Kaye and James Sternberg, two former
stockholder-directors of the company that sold diagnostic imaging centers to
IMI, and Dr. Sternberg's wife, threatened to commence an action against two
subsidiaries of IMI, Consolidated and Mr. Lewis S. Schiller, formerly chairman
of the board of Consolidated, for alleged violations of securities laws and
common law in connection with an asset purchase agreement which was executed in
conjunction with the acquisition of IMI in September 1994 and non-payment of
$3,375,000 subordinated notes of two subsidiaries of IMI. Company. In 1997 they,
along with Dr. Stephen Schulman, a holder of subordinated notes in the principal
amount of approximately $6.4 million issued by subsidiaries of
17
<PAGE>
IMI who was the president of the company that sold the diagnostic centers to IMI
and was president and chief executive officer of IMI, commenced involuntary
bankruptcy proceedings against certain subsidiaries of IMI. Such bankruptcy
proceedings were dismissed. It is possible that any action which may be brought
against the Company may include Dr. Schulman as a plaintiff. No assurance can be
given that an adverse decision in any action based on such claims will not have
a material adverse effect upon the Company.
Contract Engineering Services
In November 1997, an action was commenced in the Supreme Court of the
State of New York, County of Suffolk, by Ralph Corace against RMI seeking
damages of approximately $1.1 million for an alleged breach of contract by the
Company. Mr. Corace was the president of Job Shop Technical Services, Inc., from
which RMI purchased assets in November 1994. The Company believes that the
action is without merit, will vigorously contest this matter and has filed
counterclaims against Mr. Corace.
Medical Information Services
In March 1997, an action was commenced against Netsmart and certain of
its officers, directors and stockholders by Onecard Health Services Corporation
in the Supreme Court of the State of New York, County of New York. The named
defendants include, in addition to Netsmart, Messrs. Lewis S. Schiller, formerly
chief executive officer and a director of Netsmart, Leonard M. Luttinger, vice
president and a director of Netsmart, Thomas L. Evans, formerly a vice president
of Netsmart, Consolidated and certain of its subsidiaries, other stockholders of
Netsmart and other individuals who were or may have been officers or directors
of Onecard but who have no affiliation with Netsmart or Consolidated. Mr.
Luttinger and Mr. Evans were employees of Onecard prior to the formation of
Netsmart. Mr. Schiller was not an employee or director or, consultant to, or
otherwise affiliated with, Onecard. The complaint makes broad claims respecting
alleged misappropriation of Onecard's trade secrets, corporate assets and
corporate opportunities, breach of fiduciary relationship unfair competition,
fraud, breach of trust and other similar allegations, apparently arising at the
time of, or in connection with, the organization of Netsmart in September 1992.
The complaint seeks injunctive relief and damages, including punitive damages,
of $130 million. Netsmart believes that the action is without merit, and it will
vigorously defend the action. Netsmart has filed an answer denying all of the
plaintiffs' allegations and has asserted affirmative defenses. In addition,
Netsmart believes that there is a difference in the technology used in the
Onecard software and Netsmart's CarteSmart software and in the type of computer
network on which the software operates. Netsmart has demanded that the plaintiff
particularize the broad allegations of the complaint and the produce documents
referred to in the complaint. No assurance can be given as to the ultimate
disposition of the action, and an adverse decision may have a material adverse
effect upon the business of Netsmart.
18
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
In January 1998, the Company issued a proxy statement to shareholders
which included matters to be voted on by the Company's security holders at a
stockholders meeting scheduled for March 26, 1998. On March 9, 1998, the proxy
was withdrawn and the meeting was cancelled due to uncertainties regarding the
litigation outlined in above in Item 3. "Holding Company" (3).
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
On August 15, 1997, the Company was delisted from the NASDAQ due to a
failure to meet minimum bid and net tangible worth requirements. Since August
15, 1997, Consolidated's common stock has been traded on the Over-the-Counter
("OTC") Bulletin Board under the symbol COTG. As such, the following table sets
forth the reported high and low bid prices as reported by the Nasdaq SmallCap
Market for the quarters ended March 31, 1996 through June 30, 1997 and the high
and low bid prices as provided by the National Quotation Bureau derived from the
OTC Bulletin Board for the quarters ended September 30, 1997 and December 31,
1997. Such OTC bid quotations reflect interdealer prices, without retail
mark-up, markdown or commission and may not necessarily represent actual
transactions.
Quarter Ending High Bid Low Bid
March 31, 1996 $0.41 $0.16
June 30, 1996 $0.63 $0.22
September 30, 1996 $0.31 $0.13
December 31, 1996 $0.30 $0.06
March 31, 1997 $0.06 $0.09
June 30, 1997 $0.06 $0.09
September 30, 1997 $0.17 $0.18
December 31, 1997 $0.16 $0.17
As of February 10, 1998, there were approximately 27,287 holders of record of
the Company's common stock.
No cash dividends have been paid to the holders of the Common Stock during the
years ended December 31, 1997, 1996 and 1995.
19
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Year Ended
Year Ended December 31, July 31,
-----------------------
1996 1995 1994 1994
1997 Restated Restated Restated Restated
---- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Selected Statements of
Operations Data
Revenues $92,717,000 $76,718,000 $73,790,000 $37,042,000 $11,359,000
=========== =========== =========== =========== ===========
Loss from Operations ($ 7,077,000) ($ 9,548,000) ($12,910,000) ($ 7,402,000) ($ 9,178,000)
============= ============= ============= ============= =============
Loss from Continuing
Operations ($7,067,000) ($6,571,000) ($10,248,000) ($7,826,000) ($9,305,000)
Loss from Operations of
Discontinued Segments (5,262,000) (2,999,000) (1,112,000) (3,602,000) (1,467,000)
Loss on Disposal of Segments (336,000) -- -- -- --
--------- --------- --------- --------- ----------
Net Loss ($12,665,000) ($ 9,570,000) ($11,360,000) ($11,428,000) ($10,772,000)
============= ============= ============= ============= =============
Loss per Common Share:
Loss from Continuing
Operations ($0.15) ($0.17) ($0.46) ($0.55) ($1.17)
Loss from Operations of
Discontinued Segments ($0.11) ($0.06) ($0.05) ($0.25) ($0.18)
Loss on Disposal of Segments ($0.01) -- -- -- --
------ ------ ------ ------ ------
Net Loss per Common Share ($0.27) ($0.23) ($0.51) ($0.80) ($1.35)
======= ======= ======= ======= =======
Selected Balance Sheet Data
Total Assets $37,671,000 $34,134,000 $38,474,000 $28,977,000 $23,863,000
=========== =========== =========== =========== ===========
Long-term Obligations:
Debt and Capital Lease
Obligations $ 158,000 $ 244,000 $ 33,000 $ 172,000 $ 260,000
Subordinated Debt 139,000 -- -- 700,000
---------- ------------ ----------- ----------- -----------
Total Long-term Obligations $ 297,000 $ 244,000 $ 33,000 $ 872,000 $ 260,000
======== ============ =========== =========== ===========
Dividends Declared per Common
Share -- -- -- -- --
</TABLE>
(A) The financial data for periods prior to 1997 has been restated to reflect
the discontinuation of the medical diagnostics, three dimensional products and
services, electro mechanical and electro optical products manufacturing,
business consulting services and audio products manufacturing segments.
Additionally, the financial data for 1996 has been restated to reflect the
settlement agreement with Lafayette Industries, Inc. See footnotes 19 and 20 to
the financial statements in Part IV, Item 14)
(B) The following factors make the above selected financial data non-comparable
for the following indicated periods and reasons:
(1) The fiscal year ended July 31, 1994 includes expense of $7,140,000 from the
issuance of stock options to consultants.
(2) The year ended December 31, 1994 includes expense of $4,140,000 from the
issuance of stock options to consultants.
(3) The year ended December 31, 1995 includes expense of $3,869,000 from the
issuance of stock options to consultants.
(4) In December 1993, the Company acquired ARC Acquisition Group, Inc. and ARC
Networks, Inc. and in June 1994, the Company acquired Creative Socio-Medics,
Inc. Such acquisitions resulted in: (i) an increase in assets of approximately
$13,000,000 as of July 31, 1994; (ii) an increase in revenues of approximately
$11,000,000 for the fiscal year ended July 31, 1994 and $14,400,000 for the year
ended December 31, 1994; and (iii) a net increase in net loss of approximately
$173,000 for the fiscal year ended July 31, 1994 and $1,600,000 for the year
ended December 31, 1994.
(5) In May 1995 the Company acquired Concept Technologies resulting in: (i) an
increase in assets of approximately $1,780,000 as of December 31, 1995; (ii) an
increase in revenues of approximately $2,149,000 for the year ended December 31,
1995; and (iii) an increase in net loss of approximately $553,000 for the year
ended December 31, 1995.
Item 7. Management's Discussion and Analysis of Financial Condition and Results\
of Operations
Financial Condition - Liquidity and Capital Resources
20
<PAGE>
Going Concern
For the three years ended December 31, 1997, the Company incurred
cumulative net losses of $33.6 million and as of December 31, 1997 ("December
1997") has an accumulated deficit approximating $62.9 million. Furthermore, on
August 15, 1997, the Company was delisted from Trading on the NASDAQ because it
failed to meet the minimum bid requirements of $1 and the minimum net tangible
worth requirement of $1 million. Finally, the Company continues to have
operating cash flow short falls in all of its segments other than contractual
engineering services segment. These conditions raise substantial doubt about the
Company's ability to continue as a going concern.
Management recognizes the need to increase the profitability of the
Company and in conjunction therewith, has discontinued three unprofitable
segments and a fourth segment which had nominal revenue sources other than
intercompany billings to the Company's subsidiaries.
On May 20, 1997, the Company sold the audio products manufacturing
segment, which had accumulated losses of $1.7 million through the date of
disposal. The sale of the audio products segment will reduce operating losses
and will also eliminate the need to fund cash to the segment. On June 30, 1997,
management developed a plan to discontinue the three dimensional products and
services segment, which has accumulated losses of $8 million through December
1997 and required accumulated cash infusions from the Company in excess of $5
million through December 1997. Effective December 31, 1997, the Company disposed
of the electro mechanical and electro optical products manufacturing and
business consulting services segments, which have net accumulated losses of $5.9
million through December 31, 1997 and required cash infusions from the Company
in excess of $6 million through December 31, 1996.
Additionally, effective September 1, 1997, the Company formulated a
plan to sell the medical diagnostics segment and such sale was consummated on
April 2, 1998. The sale of the medical diagnostics segment resulted in a gain
which will be recognized by the company in 1998, and provided the Company with
approximately $11 million in net cash, disposed of approximately $13.5 million
of intangible assets and relieved the Company from approximately $21 million in
debt and capital lease obligations, approximately $3 million of accounts payable
and accrued expenses. Management currently anticipates that approximately $3
million of the net proceeds from the sale will be used to pay existing creditors
of the Company, leaving $8 million for future investment. Management's on-going
plans to achieve profitability require the prudent use of the net cash generated
form the sale of the medical diagnostics segment. With that in mind, management
intends to evaluate the expected return on investment in determining where to
invest such cash whether it be invested in existing business segments or in new
business ventures.
Management recognizes that the sale of the medical diagnostics segment
is only one step in addressing the financial difficulties of the Company. For
the year ended December 31, 1997 ("1997"), the contract engineering services
segment reported net income of $1 million for the first time since it was
acquired by the Company in 1994. However, the medical information services,
telecommunications and development stage segments continue to report significant
losses, a total of $6.2 million for 1997. Recent attempts to adequately fund the
telecommunications segment through both private and public funding have not been
successful. Although management plans to continue efforts to raise capital for
this segment, no assurances can be given that such efforts will be successful
and if they are successful that the segment will be managed to profitable levels
once adequate funding is in place. During 1996, the medical information services
segment completed an initial public offering and received net proceeds of
approximately $3.8 million and an additional $1.6 million from the exercise of
stock purchase warrants. To date, significantly all of such proceeds have been
depleted and the segment has yet to establish significantly increased revenues
while current obligations have increased. In December 1997, certain of the
medical information services segment's warrant's were exercised providing the
segment with approximately $1.9 million in gross proceeds which management
estimates will provide one years operating capital for the segment. The failure
of the Company to raise significant capital for the unprofitable segments and to
achieve profitability when and if adequate funding is in place may force the
Company to reduce or cease operations in unprofitable segments and could
ultimately force the Company as a whole to cease operations.
Working Capital Condition
As of December 31, 1996, ("December 1996"), the Company had negative
working capital of $5.4 million. As of December 1997, the Company has negative
working capital of $18.9 million representing an increase in negative working
capital of $13.5 million. Approximately $13.5 million of the negative working
capital relates to the net current assets and liabilities of discontinued
segments. Excluding the discontinued segments, the Company has approximately
$5.3 million in negative working capital for continuing operations. The
Company's principal working capital consists of cash and cash equivalents which
were $1.3 million at
21
<PAGE>
December 1997 and $1.2 million at December 1996. For 1997, cash provided by
discontinued operations amounted to $1.5 million and net cash provided by
(used in) continuing operations was as follows:
Contract Engineering Services $ 752,000
Medical Information Services ( 1,493,000)
Telecommunications ( 988,000)
Development Stage ( 16,000)
Corporate and Other ( 939,000)
-------------
Net Cash Used in Continuing Operations ($ 2,684,000)
==============
The cash generated by the Contract Engineering Services segment is
generated by a publicly held company and as such is not necessarily available to
other subsidiaries of the Company. It is imperative that the segments which use
significant amounts of cash in operating activities obtain alternative sources
of funding, (i.e. equity offerings, debt financing) or increased volume at
higher operating margins, in order to continue as operating segments and no
assurance can be given that these segments will be able to continue as operating
entities.
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.
Sources of Cash
During 1997, sources of cash, other than from operations, included
proceeds from the issuance of long-term debt of $680,000 and subordinated debt
of $139,000, net advances from asset based lenders of $377,000 million, proceeds
from the issuance and exercise of subsidiary stock options and stock purchase
warrants of $2 million, collections on repayments of notes receivable of
$475,000 and proceeds from the sale of marketable securities of $97,000.
Uses of Cash
During 1997, uses of cash included $118,000 of debt repayments,
payments on capital leases of $37,000, expenditures for software development of
$462,000, deferred offering costs of $400,000, capital expenditures of $440,000,
payments for loans made of $220,000, purchases of marketable securities of
$20,000, equity issuance costs of $75,000 and an increase in other assets of
$693,000.
Changes in Other Working Capital Assets and Liabilities
From December 1996 to December 1997, working capital assets other than
cash decreased $230,000. Accounts receivable increased approximately $1.5
million of which $1.3 million relate to the telecommunications segment. The
increase in accounts receivable was partially offset by a decrease in the net
current assets of discontinued segments of $1.3 million. During the same period,
working capital liabilities increased $13.4 of which $8.5 million relates to the
net current liabilities of discontinued segments and $4.9 million relates to
continuing operations. Accounts payable and accrued expenses increased $3.4
million due primarily to a build up of trade payables of $1.8 million in the
telecommunications segment and $898,000 in corporate and other. The build up in
payables for the telecommunications segment is a result of not generating
adequate cash flows to cover commitments to vendors and the increase in
corporate and other payables is due primarily to an increase in accrued
compensation payable to the former chief operating officer. Current debt
increased approximately $1 million, which is a factor of $377,000 of net
advances from asset-based lenders and approximately $680,000 of new debt net of
scheduled repayments. The remaining increase in working capital liabilities is a
$902,000 increase in billings on uncompleted projects within the
telecommunications and medical information services segments.
Effect of Loan Defaults
The Company is in technical default on loans and interest approximating
$7.1 million at December 1997 relating to the discontinued medical diagnostics
segment. On October 22, 1997, involuntary petitions (the "Petitions") were filed
under chapter 7 of the U.S. Bankruptcy Code against certain subsidiaries of the
Company operating in the medical diagnostics segment. In January 1998 such
petitions were dismissed. Currently, it is estimated that 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 $190,000. It is anticipated that
such obligations will be repaid during 1998.
22
<PAGE>
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, during 1997, the Company is
reporting a new segment called development stage, which includes a subsidiary
that has not yet developed a salable or marketable product. As a result of the
above, the prior period data has been reclassified to conform to the above
changes in segment reporting.
Loss from Continuing Operations
Comparing 1997 to the year ended December 31, 1996 ("1996"), the
aggregate decrease in loss from continuing operations consisted of the
following:
<TABLE>
<CAPTION>
Income (Loss) from Operations
1997 1996 Variance
---- ---- --------
<S> <C> <C> <C>
Contract Engineering Services $ 1,402,000 $ 187,000 $ 1,215,000
Medical Information Services ( 2,863,000) ( 5,843,000) 2,980,000
Telecommunications ( 2,018,000) ( 929,000) ( 1,089,000)
Development Stage ( 16,000) -- ( 16,000)
Corporate and Other ( 3,343,000) ( 3,143,000) ( 200,000)
Intercompany Transactions ( 239,000) 180,000 ( 419,000)
-------------- ------------- --------------
Loss from Operations ($ 7,077,000) ($ 9,548,000) $ 2,471,000
=============== =============== =============
Comparing 1996 to the year ended December 31, 1995 ("1995"), the aggregate decrease in loss from continuing operations
consisted of the following:
Income (Loss) from Operations
1996 1995 Variance
---- ---- --------
Contract Engineering Services $ 187,000 ($ 3,816,000) $ 4,003,000
Medical Information Services ( 5,843,000) ( 2,274,000) ( 3,569,000)
Telecommunications ( 929,000) ( 474,000) ( 455,000)
Corporate and Other ( 3,143,000) ( 6,319,000) 3,176,000
Intercompany Transactions 180,000 ( 27,000) 207,000
------- -------------- -------
Loss from Operations ($ 9,548,000) ($ 12,910,000) $ 3,362,000
=============== =============== =============
</TABLE>
During 1996, the medical information services segment incurred non-cash
expense of $3.7 million from the issuance of below market stock options and
stock purchase warrants and $1.8 million from the issuance of common stock in
lieu of cash for services rendered. During 1995, contract engineering services
and corporate and other includes $2.2 million and $3.9 million, respectively,
from the issuance of non-employee directors and consultants stock options.
Other Income and Expense
Interest expense approximated $1.1 million for 1997, 1996 and 1995.
Such interest is primarily from advances on receivables from asset based lendors
in the contract engineering, medical information services and telecommunications
segments. During 1997, the Company realized losses of $368,000 on the sale of
marketable securities of which $203,000 relates to the sale of Trans Global
Services, Inc. ("Trans Global") stock to the president of Trans Global and
$165,000 relates to the sale of Netsmart, Inc. stock to executives of Netsmart,
Inc. During 1996 the Company realized $823,000 on the sale of marketable
securities primarily from the sale of Netsmart warrants held by the Company.
Other net expense amounted to $1.2 million for 1997 of which the major
components consist of $500,000 for the Lafayette settlement (see footnote 19 of
the financial statements), $140,000 of loss on a joint venture of the medical
information services segment and $390,000 of financing costs for the
telecommunications segment.
23
<PAGE>
Income Tax Benefit (Provision)
The Company's benefit (provision) for income taxes was 2.8%, (0.5%) and
0.1% of income before taxes for 1997, 1996 and 1995, respectively. The Company
will have a net operating loss carryforward of approximately $33.4 million. The
net operating loss carryforward expires beginning in 1998 through 2012.
Minority Interest in (Income) Loss of Subsidiaries
For 1997, 1996 and 1995, the minority interest in loss of subsidiaries
approximated $2.4 million, $3.1 million and $3.7 million, respectively. Changes
in the minority interest in the income and loss of subsidiaries are a result of
the inherent differences in the net income and loss of subsidiaries from period
to period.
Discontinued Operations
The operations of discontinued segments resulted in losses of $5.3
million, $3 million and $1.1 million for 1997, 1996 and 1995, respectively. The
aggregate losses from discontinued operations consists of the following:
<TABLE>
<CAPTION>
Income (Loss) from Discontinued Operations
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Medical Diagnostics ($ 1,188,000) $ 1,446,000 $ 2,682,000
Audio Products Manufacturing ( 293,000) ( 893,000) ( 544,000)
Electro Mechanical and Electro Optical Products
Manufacturing ( 2,604,000) ( 2,164,000) ( 1,184,000)
Business Consulting Services 221,000 263,000 191,000
Three Dimensional Products and Services ( 1,636,000) ( 1,471,000) ( 2,284,000)
Intercompany Transactions 238,000 ( 180,000) 27,000
------- ------- ------
Loss from Discontinued Operations ($ 5,262,000) ($ 2,999,000) ($ 1,112,000)
=============== =============== ===============
</TABLE>
The medical diagnostics segment's 1997 loss includes the write-off of
deferred offering costs of approximately $750,000 from the terminated public
offering, $408,000 for settlement costs paid to former limited partners of one
of the medical diagnostics segment's imaging centers and increased legal and
professional fees of approximately $1 million. The increased legal fees resulted
from litigation that occurred during 1997. Additionally, the 1997 medical
diagnostics loss includes $250,000 of estimated losses to be incurred from
December 1997 until the date that the sale was consummated.
The audio products manufacturing segment's 1997 loss includes the
operating activity through May 20, 1997, the date of disposal and for 1995
includes the operating activity from April 1, 1995, the date of acquisition,
through December 31, 1995.
The electro mechanical and electro optical products manufacturing
segment includes Televend, Inc. and FMX Corp., which did not start operations
until 1996 and as such are not included in 1995. The operations of SpecTec,
Inc., the holding company of two operating entities is included in the results
of operations for all three years reported.
The business consulting services segment's only significant activity is
intersegment sales. The portions of such intersegment among the other
discontinued segments are included in the intercompany transaction line of the
above table.
The three dimensional products and services segment's 1997 loss
includes $250,000 for estimated loss to be incurred from December 1997 until
the complete disposal of the segment. The 1995 three dimensional products and
services segment loss includes approximately $250,000 of loss from European
operations that were shut-down in the first quarter of 1996.
The loss on disposal of segments includes a gain of $129,000 related to
the sale of the audio products manufacturing segment and an estimated loss on
the disposal of the three dimensional products and services segment of and
$465,000.
Consolidated Net Loss
As a result of the foregoing, the Company incurred net losses of $12.7
million, $9.6 million and $11.4 million, respectively and net losses per common
share of $0.27, $0.23 and $0.51, respectively, for 1997, 1996 and 1995.
Year 2000 Issues
24
<PAGE>
The Company's subsidiaries have not conducted a comprehensive review of
their computer systems to identify the systems that could be affected by the
"Year 2000" issue. The Company plans to address the Year 2000 Issue at the
subsidiary level during 1998. All computer systems used by the holding company
are already year 2000 compliant. The year 2000 problem is the result of computer
programs being written using two digits rather than four to define the
applicable year. Any of the Company's programs that have time-sensitive software
may recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a major system failure or miscalculations. The Company presently
is not in a position to determine the short or long-term impact of the Year 2000
Issue on its subsidiaries, however if significant year 2000 Issues exist and are
not addressed timely, the impact may have a material adverse effect on the
Company as a whole.
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.
<TABLE>
<CAPTION>
Percentage of Total
Year Ended December 31,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Revenues
Contract Engineering Services 82% 82% 86%
Medical Information Services 9% 11% 10%
Telecommunications 10% 7% 4%
Intercompany Transactions (1%) -- --
Gross Profit (Loss)
Contract Engineering Services 77% 74% 60%
Medical Information Services 20% 19% 30%
Telecommunications 9% 7% 10%
Intercompany Transactions (6%)
Selling, General and Administrative Expense
Contract Engineering Services 34% 30% 40%
Medical Information Services 29% 43% 22%
Telecommunications 18% 9% 6%
Development Stage * -- --
Corporate and Other 21 19% 32%
Intercompany Transactions (2%) (1%) *
* - Less than one percent.
</TABLE>
Contract Engineering Services
The contract engineering services segment reflects the operations of
Trans Global Services, Inc. ("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 the receipt of payment from the
clients. Furthermore, Trans Global's payments from its clients are based upon
the hourly rate paid to the employee, without regard to when payroll taxes are
payable with respect to the employee. Accordingly, Trans Global'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 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 1997, Social Security taxes are payable on the first $65,400 of
compensation. Once that level of compensation is paid with respect to any
employee, there is no further requirement for 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
25
<PAGE>
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.
For 1997, Trans Global had revenues of $75.7 million reflecting an
increase of 21% over the revenues of 1996 and a 20% increase over the revenues
of 1995. This increase is significant because it includes the impact of the loss
of a sizable contract on January 1, 1996 from one of Trans Global's larger
customers. This increase is a reflection of the success of Trans Global's
continuing sales and placement efforts. During 1997, approximately 63% of Trans
Global's revenue was derived from its three largest clients and 80% of such
revenue was derived from its five largest clients. In 1996, approximately 61%
and 75% of Trans Global's revenue was derived from those same clients. In 1995,
62% of Trans Global's revenues were derived from the three largest clients. The
merger and acquisition trend in the aircraft and aerospace industry is the major
reason why a high percentage of Trans Global's revenues are from a small number
of clients. However, Trans Global does business with various divisions of each
of those clients, who act autonomously when selecting their suppliers. Gross
margins for 1997 are 6.5% and 38.8% higher than they were for 1996 and 1995
respectively. This increase can be attributed to Trans Global's recent
successful efforts to penetrate the "Information Technology" sector of the
marketplace, which generates higher gross margins than Trans Global's more
traditional marketplace, as well as Trans Global's strategy to drop those
clients with relatively low margins.
Selling, general and administrative expenses exclusive of related party
expenses increased by 5.7% compared to 1996 and decreased by 24.8% compared to
1995. The increase in 1997 can be attributed to costs of $322,000 that were
incurred with respect to an aborted attempt to raise capital. Although, Trans
Global still plans on raising capital through an equity placement those costs
associated with the initial placement had to be written off. Trans Global is
committed to controlling selling, general and administrative costs as these
financial statements illustrate. The decrease in 1997 with respect to the
selling, general and administrative expenses incurred in 1995 is due to the high
level of expenses in 1995 resulting from the issuance of securities to
consultants in 1995 ($2.3 million) and penalties for late withholding taxes ($1
million). Trans Global completed its payment schedule with the Internal Revenue
Service in July 1997 and is presently current with regard to all of its taxes.
During 1995, Trans Global incurred $528,000 of acquisition expenses
relating to the issuance of securities in connection with the Trans Global
Transaction. The acquisition expenses reflect the value of Common Stock issued
to a finder in connection with the Trans Global Transaction and in consideration
of agreements by certain of Trans Global's stockholders to enter into lock-up
agreements. The delivery of such shares of Common Stock was deferred until after
Trans Global's certificate of incorporation was amended to increase its
authorized Common Stock. No comparable expenses were incurred in 1997 or 1996.
Trans Global finances its payroll obligations 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. This reflects a
reduction in the financing charges resulting from a June 1995 amendment to its
borrowing agreement. Prior to the amendment, Trans Global paid interest at a
rate of 4% in excess of prime and a fee of 1% of its borrowings relating to
RMI's operations. Pursuant to a letter dated January 29, 1998 the asset-based
lender has agreed to continue the present financial agreement through December
31, 1998. The borrowings are secured by a security interest in all of Trans
Global's assets. At December 31, 1997, such borrowings from the asset-based
lender were approximately $3.6 million. The ability of Trans Global to increase
profits is dependent in part upon its ability to reduce its financing costs. The
interest rate (exclusive of the fee) payable by Trans Global at December 31,
1997 was 10.50% and at December 31, 1996 and 1995 was 10.25%. During 1997, the
interest expense was approximately $775,000 as compared to $712,000 in 1996 and
$963,000 in 1995. The increase in interest expense from 1996 to 1997 can be
attributed to the increased borrowing during the year as a result of the
increase in the accounts receivable borrowing base. The decrease in interest
expense from 1995 to 1996 reflects the reduced borrowing rates, which became
effective June 1995
Amortization of customer lists and other intangible assets was reduced
in 1997 by 26.6% as compared to 1996 and 1995 due to certain intangible assets
related to Avionics Research Holdings having been fully amortized during the
year.
During 1996 Trans Global established a $300,000 reserve in connection
with the claim by the DOL arising from the acquisition of Job Shop assets. In
1997, Trans Global reached an agreement with the DOL and the independent trustee
of the Job Shop technical Services, Inc., 401(k) Plan (collectively "DOL").
Trans Global agreed to pay the DOL an aggregate of $300,000 in 18 monthly
installments of $16,667 of which nine payments remain as of December 31, 1997.
As a result of the above, Trans Global had net income of approximately
$1 million for 1997, as compared with a loss of $681,000 1996 and a loss of $4.7
million in 1995. Trans Global believes that now that it has completed its
obligation to the IRS with regard to the delinquent payroll taxes and has
resolved the situation with the DOL it will be successful in its negotiations
with asset-based lenders towards reducing its finance costs which will increase
profits to a greater extent. However, no assurance can be given that Trans
Global can or will operate profitably in the future.
26
<PAGE>
Medical Information Services:
The medical information services segment 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 he
operation 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 I financial health care
network systems.
Years Ended December 31, 1997 and 1996
Netsmart's revenue for 1997 was $7.9 million, a decrease of
approximately $659,000, or 8% from the revenue for 1996 which was $8.5 million.
This decrease results from a decrease in revenue from $1,879,000 in 1996 to
$95,000 in 1997, from a contract with IBN Inc. ("IBN"). IBN represented
Netsmart's most significant customer for 1996, accounting for approximately 22%
of revenue. Netsmart is no longer providing professional services to IBN.
Revenue from Netsmart's health information systems continued to
represent Netsmart's principal source of revenue in 1997, accounting for $7.6
million or 97% of revenue. The largest component of revenue in 1997 was data
center (service bureau) revenue, which increased to $2,235,000 in 1997 from
$2,207,000 in 1996, reflecting an increase of 1%. The turnkey systems revenue
increased to $2,107,000 in 1997 from $1,663,000 in 1996, reflecting an increase
of 27%. This increase is substantially the result of growth in the turnkey
backlog and the ability of Netsmart to provide the staff necessary to generate
the additional revenue. Maintenance revenue increased to $1,280,000 in 1997 from
$1,226,000 in 1996, reflecting a 4% increase. Revenue from third party hardware
and software decreased to $1,078,000 in 1997 from $1,114,000 in 1996, a decrease
of 3%. Sales of third party hardware and software are made in connection with
the sales of turnkey systems. License revenue increased to $737,000 in 1997 from
$329,000 in 1996, a 124% increase. 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. Netsmart believes that the
increase in 1997 installations should enable Netsmart to increase the
maintenance revenue in future periods. Revenue associated with methadone turnkey
installations, which were partially the result of the Johnson Computer Systems
acquisition in October 1997 amounted to $198,000 in 1997.
Revenue from contracts from government agencies represented 34% of
revenue for 1997. Netsmart believes that such contracts will continue to
represent an important part of its business, particularly its health information
systems business.
Gross profit increased to $1,727,000 in 1997 from $1,332,000 in 1996, a
30% increase. The increase in the gross profit was substantially the result of a
reduction of costs associated with the IBN contract as well as the increase in
revenue from the health information systems mentioned above, particularly the
increase in license revenue which is highly margined.
Selling, general and administrative expenses were $4.6 million in 1997,
a decrease of 36% from the $7.1 million in 1996. During 1996, Netsmart incurred
non cash compensation charges of $3.5 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. During 1996, Netsmart issued 500,000 common shares to certain note
holders and 25,000 common shares to Netsmart's asset based lender. As a result
of such issuance, Netsmart incurred a financing cost charge to operations of
approximately $1.7 million. During 1997, Netsmart incurred research and
development expenses in the amount of $201,000, which were related to Netsmart's
health information systems products. In addition, Netsmart capitalized $204,000
of health information systems software development costs associated with such
products as its clinician workstation, BHIS for windows, managed care and
methadone dispensing products. Netsmart also capitalized $258,000 of software
development costs associated with a customer activated terminal product. The
amount of amortization associated with these products in 1997 amounted to
$59,000 and was charged to cost of sales. In 1996, Netsmart incurred research
and development expenses of $278,000, which were related to Netsmart's contract
with IBN and the development of SmartCard products. During 1997 Netsmart wrote
down to net realizable value substantially all of the assets associated with its
EDTO division. Such assets consisted of accounts receivable, costs and estimated
profits in excess of interim billings, computer equipment, capitalized software
and its investment in the CCAC joint venture. The effect of this adjustment
resulted in a one time charge to income in the amount of $1.5 million.
In 1997, Netsmart's 50% share of its loss in its joint venture
corporation with respect to the development of CCAC software purchased in 1996
decreased from $264,000 in 1996 to $140,000 in 1997.
Interest expense was $308,000 in 1997, a decrease of $164,000, or 35%
from the interest expense in 1996. This is a result of a decrease in the average
borrowings during 1997. The most significant component of the interest expense
on an ongoing basis is the interest payable to Netsmart's asset-based lender.
Netsmart pays interest on such loans at a rate equal to prime plus 8 1/2% plus a
fee of 5/8% of the face amount of the invoice.
27
<PAGE>
As a result of the foregoing factors, Netsmart incurred a net loss of
$3.5 million in 1997 as compared with a net loss of $6.6 million in 1996.
Years Ended December 31, 1996 and 1995
Netsmart's revenue for 1996 was $8.5 million, an increase of $1.1
million, or 15% from the revenue for 1995 which was $7.4 million. Approximately
$1,550,000 of the increase in revenue was generated pursuant to Netsmart's
agreement with IBN. IBN represented Netsmart's most significant customer for
1996, accounting for approximately 22% of revenue. Furthermore, through December
31, 1996 IBN has generated revenue of $2.4 million, or approximately 89.6% of
Netsmart's total revenue from the SmartCard systems during the two years ended
December 31, 1996 and 1995 on a combined basis. The revenue generated to date
includes approximately $419,000 of guaranteed royalties. As of December 31,
1996, the contract was more than 80% complete. Netsmart is continuing to provide
professional services to IBN, although revenues from such services have declined
substantially from the level at the beginning of the year. Netsmart intends to
expand its marketing effort for its CarteSmart System, however, at December 31,
1996, Netsmart did not have any significant contracts for the CarteSmart system.
Revenue from Netsmart's health information systems continued to
represent Netsmart's principal source of revenue in 1996, accounting for $6.5
million or 76% of revenue. However, as a result of the increase of revenue from
SmartCard systems, principally from IBN, revenue from health information systems
and services declined as a percentage of total revenue. Except for revenue from
the IBN contract, the largest component of revenue in 1996 was data center
(service bureau) revenue which increased to $2,207,000 in 1996 from $1,742,000
in 1995, reflecting an increase of 27%. The turnkey systems revenue decreased to
$1,663,000 in 1996 from $1,777,000 in 1995, reflecting a decrease of 6%.
Maintenance revenue increased to $1,226,000 in 1996 from $1,099,000 in 1995,
reflecting a 11% increase. Revenue from third party hardware and software
decreased to $1,114,000 in 1996 from $2,148,000 in 1995, a decrease of 48%.
Sales of third party hardware and software are made only in connection with the
sales of turnkey systems. License revenue increased to $329,000 in 1996 from
$162,000 in 1995. 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. Netsmart believes that the increase in 1996
installations should enable Netsmart to increase the maintenance revenue in
future periods.
Revenue from contracts from government agencies represented 31% of
revenue for 1996. Netsmart believes that such contracts will continue to
represent an important part of its business, particularly its health information
systems business. In 1996, contracts from government agencies accounted for
approximately 40% of its revenue from health information systems.
Gross profit decreased to $1,610,000 in 1996 from $1,764,000 in 1995, a
9% decrease. The decrease in the gross profit was substantially the result of
costs associated with the completion of the IBN contract. At December 31, 1996
the IBN contract was more than 80% complete.
Selling, general and administrative expenses were $7.1 million in 1996,
an increase of 69% from the $4.2 million in 1995. During 1996, Netsmart
incurred non cash compensation charges of $3.5 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. During 1996, Netsmart issued 500,000 common shares to
certain note holders and 25,000 common shares to Netsmart's asset based lender.
As a result of such issuance, Netsmart incurred a financing cost charge to
operations of approximately $1.7 million. Additionally, Netsmart wrote off
$460,000 of deferred offering costs in 1995. During 1996, Netsmart incurred
research and development expenses in the amount of $278,000, which were related
to Netsmart's contract with IBN and the development of SmartCard products. Also
during 1996 Netsmart incurred capitalized software development costs in the
amount of $279,000 of which $28,000 has been amortized in 1996 and charged to
cost of sales. In 1995, Netsmart incurred research and development expenses in
the amount of $699,000.
In 1996 Netsmart recognized its 50% share of its loss in its joint
venture corporation with respect to the purchase of SATC software. The amount of
such loss was $264,000.
Interest expense was $473,000 in 1996, an increase of $118,000, or 33%
from the interest expense in 1995. The most significant component of the
interest expense on an ongoing basis is the interest payable to Netsmart's
asset-based lender, which it pays interest equal to the greater if 18% per annum
or prime plus 8% plus a fee of 1% of the face amount of the invoice.
As a result of the foregoing factors, Netsmart incurred a net loss of
$6.6 million in 1996 as compared with a net loss of $2.9 million in 1995.
28
<PAGE>
Telecommunications:
This 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 ("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.
Revenues for 1997 were $9.7 million compared to $5.6 million and $3.3
million 1996 and 1995, respectively, reflecting increases of 73% and 72%, or $4
million and $2.3 million. The following table sets forth the revenues from
continuing operations and percentage of revenues during 1997, 1996 and 1995 from
each business line.
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Telephone Services $ 7,184,000 75% $ 4,410,000 79% $ 1,275,000 39%
Data Cabling Services 2,464,000 25% 1,173,000 21% 1,978,000 61%
--------- --------- ---------
Total $ 9,648,000 $ 5,583,000 $ 3,253,000
========= ========= =========
</TABLE>
The increase in revenue in 1997 compared to 1996 and 1995 is a result
of greater market penetration into the local telephone market, principally NYC,
through ARC Network's reseller programs with Teleport Communications Group
("TCG"), a Competitive Local Exchange Carrier and, beginning in April 1997, ARC
Network's reseller program with Bell Atlantic, the Incumbent Local Exchange
Carrier, and increases in ARC Network's data cabling installation business,
respectively.
Sales to customers made through TCG's reseller program increased by
$1.3 million, or 45% to $4.3 million in 1997 from $2.9 million in 1996 and sales
increased $1.7 million, or 134% in 1996 from $1.3 million in 1995. Sales to
customers made through the Bell Atlantic reseller program were $992,000 during
1997. In May 1997, ARC Networks also began reselling long distance phone service
through several carriers, but predominantly Frontier Communications. Revenues
attributed to long distance in 1997 were $432,000. ARC Networks also recorded
$17,000 of commission income on telecommunications products in 1997.
Sales in the Data Cabling Installation line increased 111% in 1997
compared to 1996 but decreased 810,000, or 41%, from 1995 to 1996. In 1997, ARC
Networks performed approximately $1 million of services for New York State in
connection with updating its buildings for computers and Internet services. ARC
Networks also continued to benefit from its subcontract with Mitel Systems,
Inc., which is the primary contractor with the NYC Schools to rewire classrooms
for computer and Internet services. Sales to Mitel in 1997 and 1996,
respectively, were $538,000 and $327,000. At December 31, 1997 ARC Networks had
billed unearned revenues, for which the work has not yet been completed, of
approximately $1,1 million which will all be recognized in the first half of
1998.
Total cost of revenue operations during 1997 was $8.9 million compared
to $5 million and $2.6 million for 1996 and 1995, respectively, reflecting an
increase of $3.8 million and $2.6 million, or 75% and 98%, respectively. Total
gross margins were 8%, 9% and 2l%, respectively during 1997, 1996 and 1995,
respectively.
Gross margins for Arc Networks telephone service were 1%, 7% and 15%
during 1997, 1996 and 1995, respectively. The most significant reasons for the
continuing decline in Arc Networks' margins are (1) Arc Networks' continuing
inability to generate sufficient revenue from its debit card operations to cover
both the cost of providing telephone service and the cost of maintaining the
equipment used to track debit card usage and (2) significant start-up costs
incurred in 1997 in connection with Arc Networks' reseller agreement with Bell
Atlantic, which costs are charged to cost of revenue. In addition, although Arc
Networks priced the telephone service offered pursuant to the Bell Atlantic
program to take advantage of the large volume purchase discount provided by Bell
Atlantic, it has not reach the necessary volume level, which had an adverse
effect upon its gross margin for such service. No assurance can be given that
Arc Networks will generate sufficient volume to enable it to benefit from such
discount.
It is ARC Network's intention to significantly restructure the debit
card operation by eliminating the unprofitable sale of debit cards on a prepaid
basis and only selling cards on a cost plus basis which would allow it to recoup
all costs incurred after the card has been used. ARC Networks has experienced
problems with the sale of prepaid debit cards because of its inability to price
the cards properly and track the usage properly with these cards. ARC Networks
believes that it requires approximately $350,000 of sales of cost plus debit
cards per month in order to be profitable in this line of business. It currently
has orders, which are below that level, however, it is currently negotiating
with several large customers, which should enable it to reach the required level
of sales to be profitable. In 1998, ARC Networks received an open purchase order
from Southern New England Telephone ("SNET") to purchase up to a maximum of $5
million of debit card services. However, there is no commitment from SNET to
purchase any
29
<PAGE>
minimum debit card services and there can be no assurances that ARC Networks
will ever generate sufficient debit card business to enable it generate a
positive gross margin.
ARC Network's initial focus in the resale of telephone services has
been to build its customer base and market share. In this regard, ARC Networks
has waived installation charges and has absorbed certain costs and charges
relating to signing up new customers and acquiring certain equipment needed to
make the connection to the customer. Such costs are being expensed immediately
without a corresponding increase in revenue. In addition, $1.8 million and
$710,000 of sales in 1997 and 1996 were to one customer at a margin of 5% for
service and 10% for recurring charges, such as line features. These sales at
lower margins, although not customary, will become a smaller percentage of total
sales if revenues continue to grow in this line.
Gross margins for ARC Network's data cabling installation services were
28%, 16% and 9% during 1997, 1996 and 1995, respectively. During the 1997, ARC
Networks managed approximately 60 different jobs, principally with the State of
New York and Mitel. In 1995 and 1996, the projects received by ARC Networks were
based on the lowest bid, where as the jobs currently being received are based on
a market niche carved out in the government sector.
Selling, general and administrative expenses were $2.7 million, $1.5
million and $1.2 million, or 28%, 26% and 36% of total sales during 1997, 1996
and 1995, respectively. In the second half of 1996, ARC Networks added four
sales personnel to promote ARC Network's phone services and a Vice President of
Sales, in March 1997 it hired a controller to manage its finances, several
supervisors were added to manage its cable installation business as volume in
this line continued to grow and a customer service department was established in
mid 1997 to support the local telephone market which ARC Networks is
penetrating. The customer service department is required by state statute in the
various areas in which ARC Networks is selling local phone service. ARC Networks
also opened offices in Florida and Illinois in 1997 to begin direct sales
efforts in those regions, although these offices were closed before year end due
to ARC Network's inability to fund these marketing efforts. As of December 31,
1997, ARC Networks was qualified to sell phone service in 15 states. In this
regard, ARC Networks has spent approximately $50,000 in legal fees in 1997. The
principal components of selling, general and administrative expenses during 1997
were: personnel costs of $1.4 million, sales commissions of $217,000, travel and
trade show expenses of $144,000, costs associated with a failed underwriting of
ARC Network's common stock of $162,000, rent and utilities of $125,000, legal
and accounting fees of $74,000, advertising of $52,000, office equipment and
supplies of $146,000, depreciation expense of $47,000 and provision for bad
debts of $30,000. The principle components of selling, general and
administrative expenses for 1996 were: personnel costs of $773,000, sales
commissions of $144,000, travel and trade show expenses of $151,000, office
equipment, supplies and other expenses of $203,000, rent and utilities of
$68,000, legal and accounting of $54,000, a provision for bad debts of $55,000
and advertising of $8,000. The principle components of selling, general and
administrative expenses for 1995 were: $694,000 for personnel costs, $190,000
for sales commissions, $108,000 for travel and trade show expenses and $124,000
for office equipment, supplies and other expenses, $45,000 for rent and
utilities and $18,000 for provision for bad debts.
ARC Networks will be adding a Director of Sales to organize its sales
and marketing efforts and its agent program at an estimated cost of $75,000 to
$100,000 annually. Offsetting this requirement, in the fourth quarter of 1997,
ARC Networks restructured certain positions and eliminated four others, which
should produce savings of approximately $450,000 to $500,000 annually. It also
has contracted with an advertising firm to provide it with sales and marketing
support for its various product lines.
ARC Networks incurred total interest expense of $326,000, $167,000 and
$69,000 during 1997, 1996 and 1995, respectively. ARC Networks obtained an 8%
$550,000 loan in February 1997 on which it recorded $39,000 of interest expense.
In September 1997, ARC Networks received a 12% $250,000 loan on which it
recorded interest expense of $9,000. The loan from ARC Network's asset based
lender, which was outstanding in both 1997 and 1996, produced interest expense
of $32,000 and 35,000, respectively. The interest rate on such loan was 10.25%
for the past two years. Interest expense of $121,000, $107,000 and $69,000 was
incurred on loans from related parties during 1997, 1996 and 1995. ARC Networks
received a $350,000 equipment loan in 1996 on which interest in 1997 and 1996
was $117,000 and $25,000.
As a result of the above, ARC Networks reported net losses of $2.7
million, $1.1 million and $545,000 during 1997, 1996 and 1995, respectively.
30
<PAGE>
Development Stage
The development stage segment consists of a company, which has no
operating activity and incurred approximately $16,000 in research and
development expenses.
Corporate and Other:
Selling, General and Administrative Expense
Corporate selling, general and administrative expenses increased
$200,000 when comparing 1997 to 1996 and decreased by $3.3 million when
comparing 1996 to 1995. In 1995 selling, general and administrative expenses
included non-cash consulting fee expenses incurred upon the issuance of
non-employee directors and consultant's stock options of $3.9 million. No such
consulting fees were incurred at the holding company level during 1997 and 1996.
The remaining expenses, which consist primarily of executive and administrative
salaries and benefits, accounting and legal fees, consulting fees and office
expenses, remained relatively level with the prior periods. During 1998, 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.
Impact of Inflation:
The Company is subject to normal inflationary trends and anticipates
that any increased costs would be passed on to its customers.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk.
Not applicable
Item 8. Financial Statements and Supplementary Data
The financial statements and supplementary data begin on page F-1 of
this Form 10-K.
Item 9. Changes and Disagreements with Accountants on Accounting and Financial
Disclosure
None
Part III
Part III, consisting of Items 10, 11, 12 and 13, is incorporated by
reference from the definitive proxy statement relating to the Company's 1998
Annual Meeting of Shareholders, to be filed with the Securities and Exchange
Commission within 120 days after the end of the year ended December 31, 1997.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
1. Financial Statements
F-3 Report of Moore Stephens, P.C. Independent Certified Accountants
F-4 & F-5 Consolidated Balance Sheets as of December 31, 1997 and 1996
F-6 Consolidated Statements of Operations for the Years Ended
December 31, 1997, 1996 and 1995
F-7 - F-9 Consolidated Statements of Shareholders' Equity for the
Years Ended December 31, 1997, 1996 and 1995
F-10 - F-12 Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1996 and 1995
F-13 - F-45 Notes to Consolidated Financial Statements
2. Financial Statement Schedules
None
31
<PAGE>
3. Reports on Form 8-K
On April 21, 1997, the Company filed an 8-K regarding the Lafayette
Industries, Inc. settlement agreement.
4. Exhibits
1 Certificate of Incorporation(1)
3.2 By-laws(1)
10.1 Agreements relating to the acquisition and financing of International
Magnetic Imaging, Inc. and its affiliated companies.(2)
10.2 Plan and agreement of reorganization dated as of April 13, 1994 by and
among the Registrant, CSM Acquisition Corp., Carte Medical Corporation,
Creative Socio-Medics Corp. and Advanced Computer Techniques, Inc., as
amended.(3)
10.3 Employment agreement dated March 21, 1995, between the Registrant and
George W. Mahoney.(6)
10.4 Employment agreement dated October 1, 1994, between the Registrant and
Lewis S. Schiller.(6)
10.5 Agreement dated as of March 31, 1995 among SIS Capital Corp., DLB, Inc.,
Joseph G. Sicinski and Concept Technologies Group, Inc., including
exhibits and disclosure letters.(5)
10.6 Agreement dated December 20, 1996 relating to the acquisition of Lafayette
Industries, Inc.(8)
10.7 Employment agreement dated April 11, 1997, between the Registrant and
George W. Mahoney.(10)
10.8 Settlement agreement between SIS Capital and Lafayette Industries, Inc.(9)
10.9 Employment agreement dated January 1, 1997.(11)
11.1 Calculation of earnings per share
21.1 List of Subsidiaries of Registrant.
27 Financial Data Schedule.(7)
- -------
(1) Filed as an exhibit to the Company's annual report on Form 10-K for the
fiscal year ended July 31, 1994 and incorporated herein by reference.
(2) Included as exhibits to the Registrant's report on Form 8-K, as amended,
dated July 19, 1994, and incorporated herein by reference.
(3) Included as exhibits to the Registrant's report on Form 8-K, as amended,
dated June 16, 1994, and incorporated herein by reference.
(4) Filed as an exhibit to the Company's annual report on Form 10-K for the
year ended December 31, 1995 and incorporated herein by reference.
(5) Filed as exhibit to the Company's report on Form 8-K, dated April 19,
1995, and incorporated herein by reference.
(6) Filed as an exhibit to the Company's annual report on Form 10-K for the
five month transition period from August 1, 1994 to December 31, 1994.
(7) Filed only to the SEC in electronic format.
(8) Included as exhibits to the Registrant's report on Form 8-K dated December
20, 1996, and incorporated herein by reference.
(9) Included as exhibits to the Registrant's report on Form 8-K dated April
21, 1997, and incorporated herein by reference.
(10) Filed as an exhibit to the Company's annual report on Form 10-K for the
year ended December 31, 1996.
(11) Filed as an exhibit to the Company's quarterly report on Form 10-Q for the
six months ended June 30, 1997.
32
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: April 14, 1998 /s/_____________________________
Seymour Richter
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following personal on behalf of the Registrant and
in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/________________ President and Chief Executive April 14, 1998
Seymour Richter Officer (Principal Executive
Officer)
/s/________________ Chief Financial Officer April 14, 1998
George W. Mahoney (Principal Financial and
Accounting Officer)
/s/________________ Director April 14, 1998
Edward D. Bright
/s/________________ Director April 14, 1998
Don Chaifetz
33
<PAGE>
CONSOLIDATED TECHNOLOGY GROUP, LTD. AND SUBSIDIARIES
FINANCIAL STATEMENTS
DECEMBER 31, 1997
F-1
<PAGE>
CONSOLIDATED TECHNOLOGY GROUP, LTD AND SUBSIDIARIES
FINANCIAL STATEMENTS
DECEMBER 31, 1997
INDEX
Independent Auditor's Report F-3
Consolidated Balance Sheets - December 31, 1997 and 1996 F-4 - F-5
Consolidated Statements of Operations - Years Ended
December 31, 1997, 1996 and 1995 F-6
Consolidated Statement of Shareholders' Equity -
Years Ended December 31, 1997, 1996 and 1995 F-7 - F-9
Consolidated Statements of Cash Flows -
Years Ended December 31, 1997, 1996 and 1995 F-10 - F12
Notes to Consolidated Financial Statements F-13 - F-45
F-2
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders of
Consolidated Technology Group Ltd..
New York, New York
We have audited the accompanying consolidated balance sheets of
Consolidated Technology Group Ltd. and its subsidiaries as of December 31, 1997
and 1996, and the related consolidated statements of operations, shareholders'
equity (deficit), and cash flows for each of the three years in the period ended
December 31, 1997. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Consolidated Technology Group Ltd. and its subsidiaries as of December 31, 1997
and 1996, and the consolidated results of their operations and their cash flows
for each of the three years in the period ended December 31, 1997, in conformity
with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As shown in the
consolidated financial statements and as discussed in Note 2 to the consolidated
financial statements, the Company has suffered recurring losses from operations,
has certain debt in default; and has an accumulated deficit at December 31, 1997
of approximately $63 million. These conditions raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 2. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
MOORE STEPHENS, P.C.
Certified Public Accountants,
Cranford, New Jersey
March 30, 1998
F-3
<PAGE>
Consolidated Technology Group Ltd. and Subsidiaries
Consolidated Balance Sheets
December 31,
------------
1996
Restated
(footnotes
1997 19 & 20 )
---- ---------
Assets:
Current assets:
Cash and cash equivalents $ 1,268,000 $ 1,185,000
Receivables, net of allowances 10,039,000 8,580,000
Inventories -- 13,000
Loans receivable -- 269,000
Excess of accumulated costs over related billings 642,000 938,000
Prepaid expenses and other current assets 298,000 142,000
Net current assets of discontinued segments 1,044,000 2,311,000
--------- ---------
Total current assets 13,291,000 13,438,000
---------- ----------
Property, plant and equipment, net 636,000 919,000
------- -------
Other assets:
Capitalized software development costs 183,000 251,000
Goodwill, net 776,000 824,000
Covenants not to compete, net -- 60,000
Customer lists, net 5,681,000 5,967,000
Deferred offering costs 71,000 151,000
Receivables, related parties 655,000 918,000
Marketable securities 19,000 241,000
Other assets 742,000 49,000
Net assets of discontinued segments 15,617,000 11,316,000
---------- ----------
Total Other Assets 23,744,000 19,777,000
---------- ----------
Total Assets $37,671,000 $34,134,000
=========== ===========
See notes to consolidated financial statements
F-4
<PAGE>
Consolidated Technology Group Ltd. and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31,
------------
1996
Restated
(footnotes
1997 19 & 20 )
---- ---------
<S> <C> <C>
Liabilities and Shareholders' Equity:
Current liabilities:
Accounts payable and accrued expenses $ 7,632,000 $ 4,236,000
Accrued payroll and related expenses 1,834,000 2,187,000
Accrued interest 9,000 101,000
Income taxes payable 76,000 85,000
Interim billings in excess of costs and estimated profits 2,346,000 1,444,000
Current debt obligations 5,651,000 4,618,000
Current portion of capitalized lease obligations 39,000 41,000
Notes payable, related parties 10,000 --
Net current liabilities of discontinued segments 14,611,000 6,096,000
---------- ---------
Total current liabilities 32,208,000 18,808,000
---------- ----------
Long-term liabilities:
Long-term debt 124,000 228,000
Capitalized lease obligations 34,000 16,000
Subordinated debt 139,000 --
------- -------
Total long-term liabilities 297,000 244,000
------- -------
Minority interest 15,511,000 12,617,000
---------- ----------
Shareholders' equity (deficit):
Preferred stock 3,000 26,000
Additional paid-in-capital, preferred stock -- 92,000
Common stock (50,000,000 shares authorized, 49,910,996
and 45,795,828 shares issued and outstanding as of
December 31, 1997 and 1996, respectively) 499,000 458,000
Additional paid-in-capital, common stock 52,152,000 52,005,000
Unrealized gain on exchange translation -- 86,000
Unrealized gain (loss) on marketable securities (116,000) 16,000
Accumulated deficit (62,883,000) (50,218,000)
------------ ------------
Total shareholders' equity (deficit) (10,345,000) 2,465,000
------------ ---------
Total Liabilities and Shareholders' Equity (Deficit) $37,671,000 $34,134,000
=========== ===========
</TABLE>
See notes to consolidated financial statements
F-5
<PAGE>
Consolidated Technology Group Ltd. and Subsidiaries
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1996 1995
Restated Restated
(footnotes (footnotes
1997 19 & 20 ) 19 & 20 )
---- --------- ---------
<S> <C> <C> <C>
Revenues $92,717,000 $76,718,000 $73,790,000
Direct Costs 84,127,000 69,718,000 67,123,000
---------- ---------- ----------
Gross Profit 8,590,000 7,000,000 6,667,000
Selling, General and Administrative 15,667,000 16,548,000 19,577,000
---------- ---------- ----------
Loss from Operations (7,077,000) (9,548,000) (12,910,000)
----------- ----------- ------------
Other Income (Expense):
Interest expense (1,130,000) (1,089,000) (1,069,000)
Other income (expense), net (1,210,000) 194,000 59,000
Realized gain (loss) on marketable securities (368,000) 823,000 (35,000)
--------- ------- --------
Total other expense, net (2,708,000) (72,000) (1,045,000)
----------- -------- -----------
Loss from Continuing Operations Before
Income Taxes and Minority Interest (9,785,000) (9,620,000) (13,955,000)
Income Tax Benefit (Provision) 275,000 (49,000) (17,000)
Minority Interest in Loss of Subsidiaries 2,443,000 3,098,000 3,724,000
--------- --------- ---------
Loss from continuing operations (7,067,000) (6,571,000) (10,248,000)
Discontinued Operations (footnote 20):
Income (Loss) from operations of discontinued segments (5,262,000) (2,999,000) (1,112,000)
Loss on disposal of segments (336,000) -- --
--------- -- --
Net Loss ($12,665,000) ($9,570,000) ($11,360,000)
============= ============ =============
Loss per common share:
Loss from continuing operations ($0.15) ($0.17) ($0.46)
Loss from operations of discontinued segments ($0.11) ($0.06) ($0.05)
Loss on disposal of segments ($0.01) -- --
------- -- --
Net loss per common share ($0.27) ($0.23) ($0.51)
======= ======= =======
Weighted average number of common shares 47,161,799 41,639,293 22,423,035
========== ========== ==========
</TABLE>
See notes to consolidated financial statements
F-6
<PAGE>
Consolidated Technology Group, Ltd. and Subsidiaries
Consolidated Statement of Shareholders Equity
for the Year Ended December 31, 1997
<TABLE>
<CAPTION>
Balance at Stock
December 31, Issued in Unrealized
1996 Conversion Lieu of Loss on
Restated of Series A Cash Exchange
(footnote 19) Preferred Payment Translation
------------- ---------- ------- -----------
<S> <C> <C> <C> <C>
Preferred stock $1.00 par value,
6% Series A, Authorized
77,713 shares:
Shares 22,891 (22,891) -- --
Amounts $ 23,000 ($ 23,000) -- --
Preferred stock, $1.00 par value,
$3.50 and $.10, Series B and E,
8,000 shares authorized each:
Shares 262 -- -- --
Amounts $ 1,000 -- -- --
Preferred stock, $1.00 par value,
$8.00 subordinated Series F,
6,000 shares authorized:
Shares 2,700 -- -- --
Amounts $ 2,000 -- -- --
----------- ------------ ----------- ----------
Total Preferred stock, par $ 26,000 ($ 23,000) -- --
Additional paid-in capital
preferred stock $ 92,000 ($ 92,000) -- --
Common stock, $0.01 par value.
50,000,000 shares authorized
Shares 45,795,828 2,891,943 1,223,225 --
Amounts $ 458,000 $ 29,000 $ 12,000 --
Additional paid-in capital,
common stock $52,005,000 $ 86,000 $ 61,000 --
Unrealized gain on exchange
translation $ 86,000 -- -- ($ 86,000)
Unrealized gain on Marketable
Securities $ 16,000 -- -- --
Accumulated deficit ($50,218,000) -- -- --
----------- ---------- ----------- ----------
Total shareholders' equity (deficit) $ 2,465,000 -- $ 73,000 ($ 86,000)
=========== ========== =========== ==========
(continued)
</TABLE>
See notes to consolidated financial statements.
<PAGE>
Consolidated Technology Group, Ltd. and Subsidiaries
Consolidated Statement of Shareholders Equity
for the Year Ended December 31, 1997
<TABLE>
<CAPTION>
Net
Unrealized Balance
Investment at
Security Net December 31,
Loss Loss 1997
---- ---- ----
<S> <C> <C> <C>
Preferred stock $1.00 par value,
6% Series A, Authorized
77,713 shares:
Shares -- -- --
Amounts -- -- --
Preferred stock, $1.00 par value,
$3.50 and $.10, Series B and E,
8,000 shares authorized each:
Shares -- -- 262
Amounts -- -- $ 1,000
Preferred stock, $1.00 par value,
$8.00 subordinated Series F,
6,000 shares authorized:
Shares -- -- 2,700
Amounts -- -- $ 2,000
------- ------ ------------
Total Preferred stock, par -- -- $ 3,000
Additional paid-in capital
preferred stock -- -- --
Common stock, $0.01 par value.
50,000,000 shares authorized
Shares -- -- 49,910,996
Amounts -- -- $ 499,000
Additional paid-in capital,
common stock -- -- $ 52,152,000
Unrealized gain (loss) on exchange
translation -- -- --
Unrealized gain (loss) on marketable
securities ($ 132,000) -- ($ 116,000)
Accumulated deficit -- ($12,665,000) ($ 62,883,000)
------------ ------------- --------------
Total shareholders' equity (deficit) ($ 132,000) ($12,665,000) ($ 10,345,000)
============ ============= ==============
(concluded)
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE>
Consolidated Technology Group, Ltd. and Subsidiaries
Consolidated Statement of Shareholders Equity
for the Year Ended December 31, 1996
<TABLE>
<CAPTION>
Stock Issued
Balance Stock in Lieu
at Conversion Issued of Cash for
December 31, of Series A for Services
1995 Preferred Offerings Rendered
---- --------- --------- --------
<S> <C> <C> <C> <C>
Preferred stock $1.00 par value,
6% Series A, Authorized
77,713 shares:
Shares 66,596 (43,705) -- --
Amounts $ 67,000 ($ 44,000) -- --
Preferred stock, $1.00 par value,
$3.50 and $.10, Series B and E,
8,000 shares authorized each:
Shares 262 -- -- --
Amounts $ 1,000 -- -- --
Preferred stock, $1.00 par value,
$8.00 subordinated Series F,
6,000 shares authorized:
Shares 2,700 -- -- --
Amounts $ 2,000 -- -- --
----------- ------------ -------- --------
Total Preferred stock, par $ 70,000 ($ 44,000) -- --
Additional paid-in capital
preferred stock $ 266,000 ($ 174,000) -- --
Common stock, $0.01 par value.
50,000,000 shares authorized
Shares 26,655,071 5,690,757 13,250,000 200,000
Amounts $ 267,000 $ 57,000 $ 132,000 $ 2,000
Additional paid-in capital,
common stock $51,021,000 $ 161,000 $ 780,000 $ 43,000
Unrealized gain on exchange
translation ($ 17,000) -- -- --
Unrealized gain on Marketable
Securities $ 89,000 -- -- --
Accumulated deficit ($40,648,000) -- -- --
----------- ---------- ----------- --------
Total shareholders' equity $11,048,000 $ -- $ 912,000 $ 45,000
=========== ========== =========== ========
(continued)
</TABLE>
See notes to consolidated financial statements.
<PAGE>
Consolidated Technology Group, Ltd. and Subsidiaries
Consolidated Statement of Shareholders Equity
for the Year Ended December 31, 1996
<TABLE>
<CAPTION>
Unrealized Unrealized Balance at
Gain on Investment December 31,
Exchange Security Net 1996 Restated
Translation Gain Loss (footnote 19)
----------- ---- ---- -------------
<S> <C> <C> <C> <C>
Preferred stock $1.00 par value,
6% Series A, Authorized
77,713 shares:
Shares -- -- -- 22,891
Amounts -- -- -- $ 23,000
Preferred stock, $1.00 par value,
$3.50 and $.10, Series B and E,
8,000 shares authorized each:
Shares -- -- -- 262
Amounts -- -- -- $ 1,000
Preferred stock, $1.00 par value,
$8.00 subordinated Series F,
6,000 shares authorized:
Shares -- -- -- 2,700
Amounts -- -- -- $ 2,000
------- ------ ----- ------------
Total Preferred stock, par -- -- -- $ 26,000
Additional paid-in capital
preferred stock -- -- -- $ 92,000
Common stock, $0.01 par value.
50,000,000 shares authorized
Shares -- -- -- 45,795,828
Amounts -- -- -- $ 458,000
Additional paid-in capital,
common stock -- -- -- $ 52,005,000
Unrealized gain (loss) on exchange
translation $ 103,000 -- -- $ 86,000
Unrealized gain (loss) on marketable
securities -- ( 73,000) -- $ 16,000
Accumulated deficit -- -- ($ 9,570,000) ($ 50,218,000)
---------- ---------- ------------- --------------
Total shareholders' equity $ 103,000 ($ 73,000) ($ 9,570,000) $ 2,465,000
========== ========== ============= ============
(concluded)
</TABLE>
See notes to consolidated financial statements.
F-8
<PAGE>
Consolidated Technology Group, Ltd. and Subsidiaries
Consolidated Statement of Shareholders Equity
for the Year Ended December 31, 1995
<TABLE>
<CAPTION>
Stock Issued
Balance Stock in Lieu
at Conversion Issued of Cash for
December 31, of Series A for Services
1994 Preferred Offerings Rendered
---- --------- --------- --------
<S> <C> <C> <C> <C>
Preferred stock $1.00 par value,
6% Series A, Authorized
77,713 shares:
Shares 77,713 (11,117) -- --
Amounts $ 78,000 ($ 11,000) -- --
Preferred stock, $1.00 par value,
$3.50 and $.10, Series B and E,
8,000 shares authorized each:
Shares 262 -- -- --
Amounts $ 1,000 -- -- --
Preferred stock, $1.00 par value,
$8.00 subordinated Series F,
6,000 shares authorized:
Shares 2,700 -- -- --
Amounts $ 2,000 -- -- --
----------- ------------ -------- --------
Total Preferred stock, par $ 81,000 ($ 11,000) -- --
Additional paid-in capital
preferred stock $ 310,000 ($ 44,000) -- --
Common stock, $0.01 par value.
50,000,000 shares authorized
Shares 17,577,260 1,447,807 1,000,000 130,004
Amounts $ 176,000 $ 15,000 $ 10,000 $ 1,000
Additional paid-in capital,
common stock $45,598,000 $ 42,000 $ 240,000 $113,000
Unrealized gain on exchange
translation ($ 33,000) -- -- --
Unrealized gain on Marketable
Securities ($ 139,000) -- -- --
Accumulated deficit ($29,288,000) -- -- --
----------- ---------- ----------- --------
Total shareholders' equity $16,705,000 $ 2,000 $ 250,000 $114,000
=========== ========== =========== ========
(continued)
</TABLE>
See notes to consolidated financial statements.
<PAGE>
Consolidated Technology Group, Ltd. and Subsidiaries
Consolidated Statement of Shareholders Equity
for the Year Ended December 31, 1995
<TABLE>
<CAPTION>
Stock Issued Unrealized Unrealized
for the Gain on Investment Balance at
Exercise of Exchange Security Net December 31,
Stock Options Translation Gain Loss 1995
------------- ----------- ---- ---- -------------
<S> <C> <C> <C> <C> <C>
Preferred stock $1.00 par value,
6% Series A, Authorized
77,713 shares:
Shares -- -- -- -- 66,596
Amounts -- -- -- -- $ 67,000
Preferred stock, $1.00 par value,
$3.50 and $.10, Series B and E,
8,000 shares authorized each:
Shares -- -- -- -- 262
Amounts -- -- -- -- $ 1,000
Preferred stock, $1.00 par value,
$8.00 subordinated Series F,
6,000 shares authorized:
Shares -- -- -- -- 2,700
Amounts -- -- -- -- $ 2,000
------ ------- ------ ----- ------------
Total Preferred stock, par -- -- -- -- $ 70,000
Additional paid-in capital
preferred stock -- -- -- -- $ 266,000
Common stock, $0.01 par value.
50,000,000 shares authorized
Shares 6,500,000 -- -- -- 26,655,071
Amounts $ 65,000 -- -- -- $ 267,000
Additional paid-in capital,
common stock $5,028,000 -- -- -- $ 51,021,000
Unrealized gain (loss) on exchange
translation -- $ 16,000 -- -- ($ 17,000)
Unrealized gain (loss) on marketable
securities -- -- $228,000 -- $ 89,000
Accumulated deficit -- -- ($11,360,000) ($ 40,648,000)
----------- ---------- -------- ------------- --------------
Total shareholders' equity $ 5,093,000 $ 16,000 $228,000 ($11,360,000) $ 11,048,000
=========== ========== ======== ============= ============
(concluded)
</TABLE>
See notes to consolidated financial statements.
F-9
<PAGE>
Consolidated Technology Group Ltd. and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1996 1995
Restated Restated
(footnotes (footnotes
1997 19 & 20) 19 & 20)
---- -------- --------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Loss from continuing operations ($7,067,000) ($6,571,000) ($10,248,000)
Adjustments to reconcile loss from continuing operations to net cash
provided by (used in) continuing operations:
Depreciation and amortization 1,050,000 1,028,000 2,085,000
Minority interest in net loss of consolidated subsidiaries (2,443,000) (3,098,000) (3,724,000)
Bad debt expense 1,195,000 110,000 237,000
Loss from equity method investments 140,000 264,000 --
Noncash expense from issuance of options and warrants -- -- 3,869,000
Noncash expense from subsidiaries issuance of options and warrants 926,000 3,722,000 2,214,000
Value of stock issued in lieu of cash payments for services rendered 73,000 45,000 114,000
Value of subsidiaries stock issued in lieu of cash payments
for services rendered -- 1,827,000 11,000
Realized (gain) loss on marketable securities 368,000 (823,000) 35,000
(Gain) loss on disposal of fixed assets 491,000 -- --
Impaired asset write-offs 415,000 509,000 --
Write-off deferred offering costs 480,000 -- --
Change in assets and liabilities:
(Increase) decrease in assets:
Receivables (2,309,000) (963,000) (121,000)
Inventories 13,000 8,000 74,000
Excess of accumulated costs over related billings (156,000) 65,000 (1,002,000)
Prepaid expenses and other current assets 296,000 (174,000) 66,000
Increase (decrease) in liabilities:
Accounts payable and accrued expenses 3,396,000 (716,000) 2,251,000
Accrued payroll taxes and related expenses (353,000) 283,000 202,000
Accrued interest (9,000) 85,000 232,000
Income taxes payable (92,000) 49,000 17,000
Interim billings in excess of costs and estimated profits 902,000 (256,000) 1,046,000
------- --------- ---------
Net cash used in continuing operations (2,684,000) (4,606,000) (2,642,000)
----------- ----------- -----------
Income (loss) from discontinued operations (5,262,000) (2,999,000) (1,112,000)
Adjustments to reconcile loss from discontinued operations to net cash
provided by (used in) discontinued operations:
Depreciation and amortization 5,495,000 5,938,000 5,517,000
Bad debt expense 2,413,000 2,478,000 986,000
(Gain) loss on disposal of fixed assets (29,000) 167,000 (148,000)
Loss on disposal of segments (336,000) -- --
Net change in assets and liabilities (784,000) (7,837,000) (5,661,000)
--------- ----------- -----------
Net cash provided by (used in) discontinued operations 1,497,000 (2,253,000) (418,000)
--------- ----------- ---------
Net cash used in operating activities (1,187,000) (6,859,000) (3,060,000)
----------- ----------- -----------
(continued)
</TABLE>
See notes to consolidated financial statements
F-10
<PAGE>
Consolidated Technology Group Ltd. and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1996 1995
Restated Restated
(footnotes (footnotes
1997 19 & 20) 19 & 20)
---- -------- --------
<S> <C> <C> <C>
Cash Flows from Investing Activities:
(Increase) decrease in other assets (693,000) 289,000 (463,000)
Capital expenditures (440,000) (661,000) (273,000)
Capitalized software development costs (462,000) (279,000) --
Investments in marketable securities (20,000) (385,000) (7,000)
Proceeds from sale of marketable securities 97,000 1,244,000 530,000
Payments for loans made (220,000) (3,208,000) (3,022,000)
Collections for repayment of loans made 475,000 3,449,000 3,223,000
Acquisition of a subsidiary -- -- (983,000)
Cash of subsidiaries acquired and merged -- -- 504,000
----------- ------- -------
Net cash provided by (used in) investing activities (1,263,000) 449,000 (491,000)
Cash Flows from Financing Activities:
Deferred offering costs (400,000) (152,000) (129,000)
Net advances from (payments to) asset based lender 377,000 (25,000) 366,000
Proceeds from issuance of debt 680,000 3,332,000 --
Repayment of debt (118,000) (3,462,000) (572,000)
Proceeds from issuance of subordinated debt 139,000 -- --
Repayment of subordinated debt -- (700,000) (800,000)
Payments on capital lease obligations (37,000) (192,000) (29,000)
Issuance of common stock -- 912,000 250,000
Issuance of subsidiaries common stock -- 7,510,000 2,990,000
Cost of subsidiaries issuance of common stock (75,000) (1,369,000) --
Issuance and exercise of stock options -- -- 1,225,000
Subsidiaries issuance and exercise of stock options 1,967,000 1,625,000 716,000
--------- --------- -------
Net cash provided by financing activities 2,533,000 7,479,000 4,017,000
--------- --------- ---------
Net Increase in Cash and Cash Equivalents 83,000 1,069,000 466,000
Cash and Cash Equivalents (Overdraft) at Beginning of Period 1,185,000 116,000 (350,000)
--------- ------- ---------
Cash and Cash Equivalents at End of Period $1,268,000 $1,185,000 $116,000
========== ========== ========
Supplemental Disclosures of Cash Flow Information:
Cash paid for:
Interest $1,105,000 $1,004,000 $840,000
========== ========== ========
Income taxes $ 0 $ 0 $ 0
========== ========== ========
(concluded)
</TABLE>
See notes to consolidated financial statements
F-11
<PAGE>
Consolidated Technology Group, Ltd. and Subsidiaries
Consolidated Statement of Cash Flows
Years Ended December 31, 1997, `1996 and 1995
Supplemental Disclosures of Non-Cash Investing and Financing Activities:
During the Year Ended December 31, 1997:
(1) The Company acquired equipment under capital lease obligations with a net
present value of $53,000.
(2) The Company issued common stock valued at $73,000 in lieu of cash
payments for services performed.
(3) A subsidiary of the Company, operating in the contract engineering
services segment, incurred non-cash expense from the issuance of stock
options valued at $141,000.
(4) A subsidiary of the Company, operating in the telecommunications segment,
incurred non-cash expense from the issuance of stock purchase warrants
valued at $485,000.
(5) A subsidiary of the Company, operating in the medical information
services segment, incurred non-cash expense from the issuance of common
stock valued at $300,000 for the acquisition of certain assets.
During the Year Ended December 31, 1996:
(1) A subsidiary of the Company, operating in the medical information services
segment, incurred non-cash expense from the issuance of stock options and
warrants to purchase stock valued at $3.7 million.
(2) The Company issued common stock valued at $45,000 in lieu of cash payments
for services performed.
(3) Subsidiaries of the Company operating in the contract engineering services
and medical information services segments issued common stock valued at $80,000
and $1.7 million, respectively, in lieu of cash payments for services performed.
During the Year Ended December 31, 1995:
(1) The Company issued stock options and incurred non-cash expense of $3.9
million.
(2) A subsidiary of the Company operating in the contract engineering
services segment incurred non-cash expense from the issuance of stock options
and warrants to purchase stock valued at $2.2 million.
(3) The Company issued common stock valued at $114,000 in lieu of cash payment
for services rendered.
(4) Pursuant to a reverse acquisition between a subsidiary of the Company and
another entity: (a) Reduced the Company's equity ownership in such subsidiary
resulting in increased minority interest of $5.8 million. (b) Acquired net
assets with a book value of $983,000. (5) The Company received marketable
securities in lieu of cash payments for notes and interest receivable with a
book value of $217,000.
See notes to consolidated financial statements
F-12
<PAGE>
Consolidated Technology Group, Ltd. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(1) Summary of Significant Accounting Policies
Nature of Operations - Consolidated Technology Group, Ltd., (the "Company",
"Consolidated" or the "Registrant") is a publicly held holding company which has
controlling interests, (either directly or indirectly through its wholly owned
subsidiary, SIS Capital Corp., ("SISC")), in its consolidated subsidiaries
operating in various business segments throughout the United States. During the
1997, the Company discontinued five of its eight operating segments that existed
at December 31, 1996 and added one segment.
The operating business segments of the Company as of December 31, 1997 are as
follows:
(i) Contract Engineering Services consists of Trans Global Services, Inc.,
("TGS"), and its subsidiaries, Avionics-Research Holdings, ("Avionics"), and
Resource Management International, Inc., ("RMI"), which provide engineers,
designers and technical personnel on a temporary basis pursuant to contracts
with major corporations.
(ii) Medical Information Services consists of Netsmart Technologies, Inc.,
("Netsmart") and its subsidiary, Creative Socio-Medics, Corp., ("CSM") which are
companies that provide medical information database services, health care
industry related software packages and the SmartCard medical identification
cards and related software program.
(iii) Telecommunications consists of ARC Networks, Inc., ("ARC") which, among
other things, installs telephonic network systems and buys and resells local
telephone service.
(iv) Development stage consists of one company, which has not had any operating
activity.
The business segments, which were discontinued during 1997, are as follows:
(i) Medical Diagnostics consists of International Magnetic Imaging, Inc.,
("IMI") which performs magnetic resonance imaging and other medical diagnostic
services.
(ii) Electro-Mechanical and Electro-Optical Products Manufacturing consists of
Sequential Electronic Systems, Inc. ("SES"), and S-Tech, Inc. ("S-Tech") which
are subsidiaries of SES Holdings Inc., ("SESH") which is a wholly owned
subsidiary of SpecTec, Inc. ("SpecTec") and Televend, Inc., ("Televend"), and
FMX, Corp. ("FMX"). This group of companies are those which manufacture and sell
products such as devices that measure distance and velocity, instrumentation
devices, debit card vending machines, prepaid telephone calling cards and finger
print identification products.
(iii) Three Dimensional Products and Services consists of 3D Holdings
International, Inc., (3D"), and its subsidiaries, 3D Technology, Inc., ("3D
Tech"), 3D Imaging International, Inc., ("3DI"), and Vero International, Inc.,
("Vero"), which are companies that provide three dimensional imaging services
that are used in a variety of applications, such as prototype building and
reverse engineering.
(iv) Audio Products Manufacturing consists of WWR Technology, Inc., ("WWR"), a
subsidiary of SESH which manufactures and sells a professional line of
loudspeakers.
(v) Business Consulting Services consists of The Trinity Group, Inc.,
("Trinity") which provides a variety of financial and business related services.
Corporate and Other consists of the operating activities of the holding company
entities, primarily Consolidated and SISC.
The percentage of revenues produced by the various business segments are as
follows:
1997 1996 1995
---- ---- ----
Contract Engineering Services 82% 83% 86%
Medical Information Services 9% 11% 10%
Telecommunications 9% 6% 4%
For further discussions of the Company's business segments, see footnote 14,
"Industry Segments".
F-13
<PAGE>
Consolidated Technology Group, Ltd. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Principles of Consolidation - The accompanying consolidated financial statements
include the accounts of the Company and all of its majority-owned and voting
controlled subsidiaries. Investments in 20% to 50% owned companies in which the
Company does not have voting control are accounted for on the equity method. All
significant intercompany balances and transactions have been eliminated.
Cash and Cash Equivalents - The Company considers all highly liquid instruments
purchased with a maturity of three months or less to be cash equivalents.
Inventories - Inventories are valued at the lower of cost or market and consist
of raw material and parts.
Property, Plant and Equipment - Property, plant and equipment are carried at
cost less allowances for accumulated depreciation. The cost of furniture and
equipment held under capital leases is equal to the lower of the net present
value of the minimum lease payments or the fair value of the leased property at
the inception of the lease. Depreciation is computed generally by the
straight-line method at rates adequate to allocate the cost of applicable assets
over their expected useful lives which ranges from 2-7 years for furniture and
fixtures, 5-10 years for and machinery and equipment and 3-4 years for vehicles.
Leasehold improvements are amortized over periods not in excess of applicable
lease terms. Amortization of capitalized leases and leasehold improvements is
included with depreciation expense.
Research and Development - The Company's research and product development
activities are conducted by the medical information services and development
stage segments. The Company's research and development expense for 1997, 1996
and 1995 approximated $217000, $278,000 and $699,000. All of the Company's
research and development activities were company financed. Research and
development costs are expensed as incurred.
Intangible Assets - Intangible assets consist of capitalized software
development costs, goodwill, covenants not to compete and customer lists.
Capitalized Software Development Costs - Capitalization of computer software
development costs begins upon the establishment of technological feasibility.
Technological feasibility for the Company's computer software products is
generally based upon achievement of a detail program design free of high risk
development issues. The establishment of technological feasibility and the
ongoing assessment of recoverability of capitalized computer software
development costs requires considerable judgment by management with respect to
certain external factors, including, but not limited to, technological
feasibility, anticipated future gross revenues, estimated economic life and
changes in software and hardware technology. Amortization of capitalized
software development costs commences when the related products become available
for general release to customers. Amortization is provided on a product by
product basis using the straight-line method over the estimated economic life of
the product, estimated to be approximately 2-5 years. Research and development
costs incurred to establish technological feasibility are expensed as incurred.
Goodwill - Goodwill represents the excess of the cost of companies acquired over
the fair value of their net assets at dates of acquisition and is being
amortized over a twenty-year period on the straight-line method.
Covenants Not to Compete - The capitalized value of covenants not to compete are
amortized on the straight-line basis over their contractual lives, which range
from three to five years. As of December 31, 1997, all amounts capitalized for
covenants not to compete have been fully amortized.
Customer Lists - Customer lists are being amortized over twelve to fifteen years
on the straight-line basis.
F-14
<PAGE>
Consolidated Technology Group, Ltd. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Impairment - Certain long-term assets of the Company including goodwill and the
other intangible assets described above, are reviewed on a quarterly basis as to
whether their carrying value has become impaired. Management considers assets to
be impaired if the carrying value exceeds the future projected net cash flows
from related operations. If impairment is deemed to exist, the assets will be
written-down to fair value or projected net cash flows from related operations.
Management also re-evaluates the periods of amortization to determine whether
subsequent events and circumstances warrant revised estimates of useful lives.
Impairment and the method of projecting net cash flows (discounted or
undiscounted and without interest charges) is determined at the subsidiary
level. Based on this evaluation, as of December 31, 1997, the balances as
reported in the accompanying balance sheet are expected to be fully recoverable.
However, it is at least reasonably possible that management's estimate of future
cash flows may change in the near term, thus resulting in an acceleration in or
complete write-off of the unamortized balance of certain long lived assets.
During 1997, the medical information services segment wrote-off $1.5 million of
impaired assets During 1996, the Company wrote-off impaired goodwill of $509,000
related to the telecommunications segment. All of the impairment write-offs are
included in the selling, general and administrative expense.
Deferred Offering Costs - Deferred offering costs represent amounts paid or
accrued for costs associated with anticipated public offerings for three of the
Company's a subsidiaries. During 1997, the contract engineering services segment
wrote-off $320,000 of deferred offering costs which were incurred during 1997
and 1996 and the telecommunications segment incurred $233,000 of such costs and
wrote-off $162,000. Additionally, during 1996, the medical information services
segment completed a public offering in which offering costs of $1.4 million were
incurred and offset against the total gross proceeds of the offering. During
1995 the medical information services segment wrote-off $460,000 of deferred
offering costs that were incurred for a prior offering that was not consummated.
Marketable Securities -All of the Company's investments have readily
determinable fair values which are categorized as available-for-sale and are
recorded at fair value with unrealized gains and losses recorded as a separate
component of stockholders' equity. Additionally, available-for-sale investments
that are deemed to be permanently impaired are written down to fair market value
and such write down is charged to earnings as a realized loss.
Minority Interest - For consolidated subsidiaries that are not wholly owned the
Company eliminates the minority interest portion of the related profits and
losses. The allocable losses of such minority interests is in excess of the
Company's investment in such subsidiaries by approximately $2.8 million and $1.8
million, respectively, at December 31, 1997 and 1996.
Revenue Recognition - The Company's segments that generate revenues apply the
following revenue recognition policies:
Contract Engineering Services - The contract engineering services segment
recognizes revenue as services are provided.
Medical Information Services - The medical information services segment
anticipates that it will recognize revenue principally from the licensing of its
software, and from consulting and maintenance services rendered in connection
with such licensing activity. Revenues from licensing will be recognized under
the terms of the licenses. Consulting revenue is recognized when the services
are rendered. Revenues from fixed price software development contracts and
revenue under license agreements, which require significant modification of the
software package to the customer's specification, are recognized on the
estimated percentage-of-completion method. Using the units-of-work performed
method to measure progress towards completion, revisions in cost estimates and
recognition of losses on these contracts are reflected in the accounting period
in which the facts become known. Contract terms provide for billing schedules
that differ from revenue recognition and give rise to excess of accumulated
costs over related billings and interim billings in excess of costs and
estimated profits. It is reasonably possible that the excess of accumulated
costs over related billings and interim billings in excess of costs and
estimated profits may be subject to change in the near future. Revenue from the
software package license agreements without significant vendor obligation is
recognized upon delivery of the software. Information processing revenues are
recognized in the period in which the service is provided. Maintenance contract
revenue is recognized on a straight-line basis over the life of the respective
contract. Software development revenues from time-and-materials contracts are
recognized as services are performed.
F-15
<PAGE>
Consolidated Technology Group, Ltd. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Telecommunications - For local and long distance telephone service, the
telecommunications segment recognizes revenue as service is provided to
customers. For telephone service provided through the sale of prepaid debit
cards the segment invoices the customer, principally distributors, at a discount
from the face amount of the debit card, when the debit cards are distributed.
The telecommunications segment records the invoice as deferred revenue and
recognizes as telephone usage is provided. Data cable installation revenue is
recognized using the percentage of completion method, measured by the percentage
of cost incurred to date to the total estimated cost for each contract.
Revisions in cost estimates and recognition of losses on these contracts are
reflected in the accounting period in which the facts become known. Contract
terms provide for billing schedules that differ from revenue recognition and
give rise to excess of accumulated costs over related billings and interim
billings in excess of costs and estimated profits. It is reasonably possible
that the excess of accumulated costs over related billings and interim billings
in excess of costs and estimated profits may be subject to change in the near
future.
Costs, estimated profits, and billings on uncompleted contracts are summarized
as follows:
December 31,
------------
1997 1996
---- ----
Costs Incurred on Uncompleted Contracts $4,099,000 $3,906,000
Estimated Profits 1,699,000 740,000
Less Billings to Date (7,502,000) (5,152,000)
----------- -----------
Net ($1,704,000) ($ 506,000)
============ ============
Excess of Accumulated Costs Over
Related Billings 642,000 938,000
Interim Billings in Excess of Costs
And Estimated Profits (2,346,000) (1,444,000)
----------- -----------
Net ($1,704,000) ($ 506,000)
============ ============
Loss Per Share - The Financial Accounting Standards Board has issued Statement
of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share", which
is effective for financial statements issued for periods ending after December
15, 1997. Accordingly, earnings per share data in the financial statements for
1997 have been calculated in accordance with SFAS No. 128. Prior period earnings
per share data did not require restatement in order to conform to SFAS No. 128.
SFAS No. 128 supersedes Accounting Principles Board Opinion No. 15, "Earnings
per Share" and replaces its primary earnings per share with a new basic earnings
per share representing the amount of earnings for the period available to each
share of common stock outstanding during the reporting period. SFAS No. 128 also
requires a dual presentation of basic and diluted earnings per share on the face
of the statement of operations for all companies with complex capital
structures. Diluted earnings per share reflects the amount of earnings for the
period available to each share of common stock outstanding during the reporting
period, while giving effect to all dilutive potential common shares that were
outstanding during the period, such as, common shares that could result from the
potential exercise or conversion of securities into common stock. The
computation of diluted earnings per share does not assume conversion, exercise,
or contingent issuance of securities that would have an antidilutive effect on
earnings per share (i.e. increasing earnings per share or reducing loss per
share). The dilutive effect of outstanding options and warrants and their
equivalents are reflected in dilutive earnings per share by the application of
the treasury stock method which recognizes the use of proceeds that could be
obtained upon the exercise of options and warrants in computing diluted earnings
per share. It assumes that any proceeds would be used to purchase common stock
at the average market price of the common stock during the period exceeds the
exercise price of the options or warrants. Securities that could potentially
dilute earnings per share in the future are disclosed in footnote 13 and consist
of the Series A Common Stock Purchase Warrants to purchase 1,000,000 shares of
the Company's common stock. As of December 31, 1997, the Company does not have
any dilutive items and a dual presentation of earnings per share is not
presented.
Earnings (loss) per share are computed by dividing the net income (loss) for the
year 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.
F-16
<PAGE>
Consolidated Technology Group, Ltd. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Fair Value of Financial Instruments - Generally accepted accounting principles
require disclosing the fair value of financial instruments to the extent
practicable for financial instruments, which are recognized or unrecognized in
the balance sheet. The fair value of the financial instruments disclosed herein
is not necessarily representative of the amount that could be realized or
settled, nor does the fair value amount consider the tax consequences of
realization or settlement. In assessing the fair value of these financial
instruments, the Company used a variety of methods and assumptions, which were
based on estimates of market conditions and risks existing at that time. For
certain instruments, including cash and cash equivalents, trade receivables and
trade payables and officer advances, it was estimated that the carrying amount
approximated fair value for the majority of these instruments because of their
short maturities. For long-term investment in marketable securities, fair value
is estimated based on current quoted market price. Management estimates that the
fair value of its long-term obligations is as follows:
Carrying Amount Fair Value
December 31, December 31,
------------ ------------
1997 1996 1997 1996
---- ---- ---- ----
Debt maturing Within One Year $5,661,000 $4,618,000 $5,661,000 $4,618,000
========== ========== ========== ==========
Long-term debt $263,000 $ 28,000 $263,000 $ 28,000
======== ======== ======== ========
Concentration of Credit Risk - Financial instruments, which potentially subject
the Company to concentrations of credit risk, are cash and cash equivalents and
accounts receivable arising from normal business activities. The Company
routinely assesses the financial strength of its customers and based upon
factors surrounding the credit risk of its customers, establishes an allowance
for uncollectible accounts, and as a consequence, believes that its accounts
receivable credit risk exposure beyond such allowances is limited. The Company
does not require collateral or other security to support financial instruments
subject to credit risk. The Company places its cash and cash equivalents with
high credit quality financial institutions. The amount on deposit in any one
institution that exceeds federally insured limits is subject to credit risk. As
of December 31, 1997 and 1996, the Company had cash balances in excess of
federally insured limits of approximately $952,000 and $1.8 million,
respectively. The contract engineering services segment has three customers
accounting for approximately $20 million, $15 million and $13 million,
respectively, of revenue for 1997, and $16 million, $13 million and $9 million,
respectively, of revenue for 1996. As of December 31, 1997 and 1996, these three
customers represented $2.7 million and $2.9 million, respectively, of accounts
receivable. For 1996 and 1995, the medical information services segment received
22% and 19%, or $1.9 million and $1.4 million, respectively, of its revenue from
one customer and received $2.8 million, $2.6 million and $4 million in revenue
for 1997, 1996 and 1995, respectively, from contracts with government agencies.
Stock Options and Similar Equity Instruments - On January 1, 1996, the Company
adopted the disclosure requirements of Statement of Financial Accounting
Standards ("SFAS") No. 123, "Accounting for Stock Based Compensation," for stock
options and similar equity instruments (collectively "Options") issued to
employees. SFAS No. 123 allows for the option of recording stock options to
employees to be recorded using Accounting Principles Board ("APB") Opinion No.
25 "Accounting for Stock Issued to Employees" while disclosing the effects, on a
pro forma basis, of using SFAS No. 123 in the footnotes to the financial
statements. The Company will continue to apply the intrinsic value based method
of accounting for options issued to employees prescribed by APB Opinion No. 25,
rather than the fair value based method of accounting prescribed by SFAS No.
123. SFAS No. 123 also applies to transactions in which an entity issues its
equity instruments to acquire goods or services from non-employees. Those
transactions must be accounted for based on the fair value of the consideration
received or the fair value of the equity instruments issued, whichever is more
reliably measurable.
Use of Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Reclassifications - Certain 1996 and 1995 items have been reclassified to
conform to the December 31, 1997 presentation.
F-17
<PAGE>
Consolidated Technology Group, Ltd. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(2) Going Concern
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As shown in the financial
statements, the Company incurred a net loss of $12.7 million for 1997, and has
an accumulated deficit as of 1997 of $63 million. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
The Company has discontinued certain of its unprofitable segments and the
ability of the Company to continue as a going concern is dependent upon the
success of the Company's remaining segments 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 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. The financial statements do not include any
adjustments relating to the recoverability and classification of recorded
assets, or the amounts and classifications of liabilities that might be
necessary in the event the Company cannot continue in existence.
(3) Receivables, Net of Allowances
December 31,
------------
1997 1996
---- ----
Receivables $10,535,000 $8,986,000
Less: Allowance for bad debts (496,000) (406,000)
--------- ---------
Receivables, net of allowances $10,039,000 $8,580,000
=========== ==========
The contract engineering services, medical information services and
telecommunications segments all have agreements with asset-based lenders
pursuant to which significantly all of the above receivables represent
collateral.
The changes in the allowance for bad debts are as follows:
Year Ended December 31,
-----------------------
1997 1996 1995
---- ---- ----
Balance at beginning of period $406,000 $209,000 $94,000
Provision for the period 850,000 370,000 138,000
Write-offs for the period (760,000) (173,000) (23,000)
--------- --------- --------
Balance at end of periods $496,000 $406,000 $209,000
======== ======== ========
(4) Loans Receivable
December 31,
------------
1997 1996
---- ----
Fingermatrix (a) $95,000 $217,000
Other -- 52,000
Less: Allowance for Doubtful Accounts ($95,000) --
--------- --------
Net Loans Receivable -- $269,000
========= ========
(a) Fingermatrix was in Chapter 11 pursuant to a petition filed on September 11,
1993 and whose plan was confirmed in March of 1995. The bankruptcy court has
classified the Company as having a first security in the assets of the debtor.
On March 31, 1995, Fingermatrix emerged out of bankruptcy and the Company
received its first payment of $250,000 on its secured debt and its initial
payment of $2,000 on its unsecured debt. The Company received 150,000 common
shares and 250,000 warrants equaling less than 5% of the emerging debtor upon
confirmation. The common shares and warrants received were recorded at $240,000
which was the book value of the receivable and the related accrued interest
exchanged for the receipt of such common stock and warrants. As of December 31,
1997, the final payment is delinquent and is reserved.
F-18
<PAGE>
Consolidated Technology Group, Ltd. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(5) Receivables, Related Parties
December 31,
------------
1997 1996
---- ----
Universal International, an
unconsolidated affiliate consisting
of cash advances without fixed
due dates $187,000 $517,000
Loan to the president of Trans Global
Services, Inc., due 2002, loan is for
the president's purchase of SISC's
Trans Global Services, Inc. common
stock 420,000 --
Advances to president of Trans Global
Services, Inc., no repayment terms 48,000 45,000
Receivable from the chief executive
officer of the Company -- 356,000
-------- -------
Receivables, related parties $655,000 $918,000
======== ========
(6) Marketable Securities
December 31,
------------
1997 1996
---- ----
Cost Basis $135,000 $225,000
Net Unrealized Gain (Loss) Included
as a Separate Component of
Shareholders' Equity (116,000) 16,000
Market Value $19,000 $241,000
Change in Net Unrealized Gain (Loss)
on Marketable Securities:
Balance at the Beginning of the Period $16,000 $89,000
Adjust Marketable Securities
to Fair Market Value (132,000) 250,000
Realization of Previously Unrealized
Gain (Loss) on Securities Sold -- (323,000)
---------- -------
Balance at End of Period ($116,000) $16,000
========== =======
For purposes of determining gain or (loss) on the sale of securities, the cost
is based on the average cost of all shares of each such security held at the
date of sale. Gain or (Loss) on security sales is calculated as follows:
Year Ended December 31,
-----------------------
1997 1996 1995
---- ---- ----
Proceeds from Security Sales $455,000 $1,244,000 $530,000
Cost of Securities Sold 823,000 421,000 565,000
------- ------- -------
Gain (Loss) on Sale of
Marketable Securities ($368,000) $823,000 ($35,000)
========== ======== =========
F-19
<PAGE>
Consolidated Technology Group, Ltd. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(7) Property, Plant and Equipment
December 31,
------------
1997 1996
---- ----
Machinery and Equipment $ -- $419,000
Furniture and Office Equipment 1,218,000 843,000
Leasehold Improvements 276,000 182,000
------- -------
Cost 1,494,000 1,444,000
Less: Accumulated Depreciation
and Amortization (924,000) (550,000)
--------- ---------
Net 570,000 894,000
------- -------
Equipment Held Under Capital Lease Obligations 103,000 50,000
Less: Accumulated Amortization (37,000) (25,000)
-------- --------
Net 66,000 25,000
------ ------
Property, Plant and Equipment, Net $636,000 $919,000
======== ========
Depreciation expense charged to operations was $285,000, $201,000 and $236,000
for 1997, 1996 and 1995, respectively. All of the property, plant and equipment
serve as collateral for debt and capital lease obligations.
(8) Intangible Assets
December 31,
------------
1997 1996
---- ----
Capitalized Software Development Costs $326,000 $279,000
Less: Accumulated Amortization (143,000) (28,000)
--------- --------
Capitalized Software Development Costs, Net $183,000 $251,000
======== ========
Goodwill $972,000 $972,000
Less: Accumulated Amortization (196,000) (148,000)
--------- ---------
Goodwill, Net $776,000 $824,000
======== ========
Covenants Not to Compete $907,000 $907,000
Less: Accumulated Amortization (907,000) (847,000)
--------- ---------
Covenants Not to Compete, Net $ -- $60,000
========= =======
Customer Lists $7,481,000 $7,226,000
Less: Accumulated Amortization (1,800,000) (1,259,000)
----------- -----------
Customer Lists, Net $5,681,000 $5,967,000
========== ==========
The increase in customer lists resulted from an acquisition made by the medical
information services segment. Amortization expense charged to operations was
$765,000, $826,000 and $1.9 million for 1997, 1996 and 1995. During 1997, the
medical information services segment wrote-off $415,000 of impaired intangible
assets and during 1996, Company wrote-off $509,000 of impaired goodwill related
to the telecommunications segment. All impairment write-offs are included in
selling, general and administrative expenses.
F-20
<PAGE>
Consolidated Technology Group, Ltd. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(9) Current and Long-term Debt Obligations
December 31,
------------
1997 1996
---- ----
Notes Payable, Related Parties:
Advances from the former CEO's Wife,
repaid in 1998 without interest $10,000 --
======= ======
Debt Obligations:
Pre 1993 recapitalization debt,
written-off during 1997 -- $15,000
Asset-Based Lender - Contract
Engineering Services segment (a) 3,571,000 3,691,000
Asset-Based Lender - Medical
Information Services segment (b) 935,000 590,000
Asset-Based Lender - Accounts
Receivables - Telecommunications
segment (c) 231,000 80,000
Asset-Based Lender - Equipment -
Telecommunications segment (d) 230,000 332,000
Interim Financing Note -
Telecommunications segment (e) 400,000 --
Accredited Investor Notes -
Telecommunications segment (f) 250,000 --
Former Shareholders of the Contract
Engineering Services segment (g) 138,000 138,000
8% Promissory Note - Development
Stage segment, due on demand 20,000 --
------ ---------
Total Debt Obligations 5,775,000 4,846,000
Current Debt Obligations 5,651,000 4,618,000
--------- ---------
Long-term debt $ 124,000 228,000
============ =======
Subordinated Debt:
15% Promissory Notes, interest and
principle due July 1999 $139,000 --
========
Total Debt Obligations $5,924,000 $4,846,000
========== ==========
Five Year Maturities as of December 31,
1997 are as follows:
1998 $5,661,000
1999 243,000
2000 20,000
------
Total $5,924,000
==========
F-21
<PAGE>
Consolidated Technology Group, Ltd. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(a) The contract engineering services segment finances a majority of its
receivables from an asset-based lender under agreements entered into in February
1995 and subsequently amended. The agreements have a maximum availability of
funds of $5.5 million. Funds can be advanced in an amount equal to 85% of the
total face amount of outstanding and unpaid receivables, with the asset-based
lender having the right to reserve 15% of the outstanding and unpaid receivables
financed. The interest rate is equal to the base lending rate of an agreed upon
bank, which was 8.5% at December 31, 1997 plus 2% and a fee of 0.3% of the
receivables financed. The asset-based lender has a security interest in all
accounts receivables, contract rights, personal property, fixtures and inventory
of the contract engineering services segment. The weighted average interest rate
on this short-term borrowing outstanding for the years 1997 and 1996 was
approximately 10.5% and 10.25%, respectively. The contract engineering services
segment has received a commitment from its asset-based lender to continue its
present financial agreement through 1998. The contract engineering services
segment is seeking alternative financing sources, however no assurance can be
given that the contract engineering services segment can or will be able to
obtain an alternate financing source, the failure of which could have a material
adverse affect upon the contract engineering services segment.
(b) In February 1995, the medical information services segment entered into an
accounts receivable financing agreement with an asset-based lender. The medical
information services segment can borrow up to 80% of eligible receivables, and
it pays interest at the rate of prime plus 8.5% and a fee equal to 0.625% of the
amount of the invoice. All of the accounts receivable and property and equipment
of the medical information services segment collateralize this note. In July
1997, the agreement with the asset-based lender was modified to allow borrowings
up to 80% instead of 75% of eligible receivables to a maximum of $1.3 million
through July 31, 1998 and $1.5 million through July 31, 1999. The previous
amount of maximum borrowings was capped at $750,000. The interest rate was
adjusted from the greater of 18% per annum or prime plus 8% to prime plus 8.5%
per annum. The fee on the amount of the invoice was reduced from 1% to 0.625%.
The weighted average interest rate on this short-term borrowing outstanding for
both 1997 and 1996 was approximately 22%.
(c) In August 1994, the telecommunications segment entered into an agreement
with an asset-based lender to finance its accounts receivable. The agreement had
an initial term of one year and was renewed in August 1995, 1996 and 1997. The
maximum availability of funds is $3 million. Funds can be advanced in an amount
to equal 85% of the total face amount of outstanding eligible receivables. The
interest rate is equal to the base lending rate of an agreed upon bank, 8.25% at
December 31, 1997, plus 2% and a commission of 0.3% of the receivables financed.
The lender has a security interest in all accounts receivable, contract rights,
personal property, fixtures and any inventory of the Telecommunications segment.
The weighted average interest rate on the balances outstanding at December 31,
1997 was 10.25%.
(d) In September 1996, the telecommunications segment entered into a term loan
agreement with an asset based-lender. Such agreement remains in effect until
August 2000 and allows the telecommunications segment to borrow up to $350,00
for the purpose of purchasing equipment to be used in the business. The loan
agreement provides for weekly principal payments of $2,000 until the loan is
repaid. Interest is charged monthly at a rate equal to the highest prime
interest charged in New York City plus 12%. Such rate shall not be less than
20.25% (the effective rate at December 31, 1997). The prime rate at December 31,
1997 and 1996 was 8.25% and 8.5%, respectively. The loan is collateralized by
the telecommunications segment accounts receivable and equipment. The security
interest granted to this lender is junior to the security interest granted to
telecommunications segment other asset-based lender (see (c) above) as to all
assets except for the equipment specifically financed under this loan agreement.
The Company has also guaranteed the obligations under this loan. The weighted
average interest rate on the balances outstanding at December 31, 1997 was
20.25%.
(e) In February 1997, the Telecommunications segment issued 8% promissory notes
in the principal amount of $550,000, from which it received net proceeds of
approximately $495,000 after deducting a $55,000 commission paid to the
placement agent, and in connection therewith, the related subsidiary issued
stock purchase warrants which are valued at $485,000. Such notes are due, with
interest on the earlier of April 1, 1998 or the closing of a potential public
offering.
(f) In September 1997, the telecommunications segment borrowed $250,000 from two
accredited investors and issued its 12% demand notes. No fee was incurred in
connection with the issuance of such demand notes. The demand notes, plus
accrued interest are to be repaid from the proceeds of a potential public
offering.
(g) These notes payable owed to certain former shareholders of Trans Global
Services, Inc. were due in 1996 and bear interest at 7%. The payment of
principle and interest on this note has been suspended pending the outcome of
the Government Printing Office contingency (see footnote 16).
F-22
<PAGE>
Consolidated Technology Group, Ltd. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(10) Lease Obligations
Capitalized Lease Obligations - The Company leases equipment under noncancelable
capital leases. Capitalized lease obligations are collateralized by leased
equipment which has a net book value of $66,000 at December 31, 1997.
Future minimum payments under capital lease obligations are as
follows at December 31, 1997:
1998 $ 46,000
1999 21,000
2000 19,000
------
Total 86,000
Less: Portion Representing Interest 13,000
------
Present Value of Net Minimum Payments 73,000
Current Portion of Capitalized Lease Obligations 39,000
------
Long-term Portion of Capitalized Lease Obligations $34,000
=======
Operating Lease Obligations - The Company leases real estate for certain of its
operational and administrative facilities under noncancelable operating leases
expiring during the next fifteen years. The real estate leases contain clauses
which permit adjustments of lease payments based upon changes in the "Consumer
Price Index", options to renew the leases for periods up to an additional
fifteen years and additional payments for a proportionate share of real estate
taxes and common area operating expenses. The Company's present executive
offices are located at 160 Broadway, New York, NY 10038, which it occupies
pursuant to a lease expiring February 28, 1999. The current base rent for such
premises is $7,000 per month. The Company's subsidiaries lease office space and
office machines under operating leases expiring through 2001. The current base
rent for such leases approximates $38,000 month.
Minimum future rental payments under noncancelable operating leases having a
remaining term in excess of one year are as follows:
1998 $674,000
1999 357,000
2000 269,000
2001 222,000
2002 120,000
-------
Total $1,642,000
==========
Rent expense for 1997, 1996 and 1995 approximated $653,000, $632,000 and
$551,000, respectively.
(11) Income Taxes
Under SFAS No. 109 "Accounting for Income Taxes", deferred income taxes reflect
the net tax effects of (a) temporary differences between the carrying amounts of
assets and liabilities for financial reporting purposes and the amounts used for
income tax purposes, and (b) operating loss and tax credit carryforwards. The
tax effects of significant items composing the Company's net deferred tax
liability as of December 31, 1997 and 1996 are as follows:
December 31,
------------
1997 1996
---- ----
Deferred Tax Liabilities:
Marketable Securities -- ($199,000)
Deferred Tax Assets:
Stock Based Compensation $1,400,000 1,668,000
Federal and State Net Operating
Loss Carryforward 6,362,000 4,062,000
--------- ---------
7,762,000 5,730,000
--------- ---------
Valuation Allowance ($7,407,000) ($5,531,000)
------------ ------------
Net Deferred Tax Asset - included in
other assets 355,000 --
======= =====
F-23
<PAGE>
Consolidated Technology Group, Ltd. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
The Company's deferred tax asset valuation allowance was $7.4 million and $5.5
million as of December 31, 1997 and 1996, respectively. The increase in the
valuation allowance of $1.9 million for 1997 is comprised of the following:
Marketable Securities $199,000
Stock Based Compensation (268,000)
Federal and State Net Operating Loss Carryforward 2,945,000
---------
Total $2,876,000
==========
The current and deferred income tax components of the (provision) benefit for
income taxes consist of the following:
Year Ended December 31,
-----------------------
1997 1996 1995
---- ---- ----
Current:
Federal $ -- -- --
State (80,000) ($49,000) ($17,000)
-------- --------- ---------
(80,000) (49,000) (17,000)
Deferred 355,000 -- --
------- ------ ------
Total $275,000 ($49,000) ($17,000)
======== ========= =========
The provision for income taxes varies from the amount computed by applying the
statutory rate for the reasons below:
Year Ended December 31,
-----------------------
1997 1996 1995
---- ---- ----
Provision Based on Statutory Rate 35.0% 35.0% 35.0%
Benefit of Graduated Rates (1.0%) (1.0%) (1.0%)
State Taxes (Net of Federal Benefit) -- 0.5% 0.1%
Valuation Allowance (34.0%) (34.0%) (34.0%)
Net Operating Loss (2.8%) n/a n/a
------ --- ---
(2.8%) 0.5% 0.1%
====== ==== ====
The Company's (provision) benefit for income taxes is comprised of federal
income taxes for 1997 and state income taxes 1996 and 1995. The Company will
have a federal and state net operating loss carryforward of approximately $33.4
million. The federal and state net operating loss carryforwards expire in years
1998 through 2012 (the state expiration dates vary based on individual state
income tax laws).
(12) Capital Stock
Common Stock
Stock Options - On August 20, 1993, the Company authorized a stock option plan
for Non Employee Directors, Consultants and Advisors to provide compensation for
services rendered to the Company in lieu of cash payment. At various times the
Company has registered and granted options pursuant to the plan. During 1995,
6,500,000 shares were granted and exercised. The value of such issuance was
calculated in accordance with Accounting Principles Board ("APB") No. 25.
Stock Issued in Lieu of Cash Payment - For 1997, 1996 and 1995 the Company
issued 1,223,225, 200,000 and 130,004 shares, respectively, in connection with
consulting and financing services valued at $73,000, $45,000 and $114,000,
respectively. The expense calculated for 1997 and 1996 was determined in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 123 and
the expense for 1995 was calculated in accordance with APB No. 25.
F-24
<PAGE>
Consolidated Technology Group, Ltd. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Regulation S Offerings - Pursuant to offerings in September 1996 and October
1995 made under Regulation S of the Securities Act of 1933, the Company received
net proceeds of $912,000 and $250,000, respectively, in conjunction with the
respective issuance of 13,250,000 and 1,000,000 shares of common stock.
Conversion of Series A Preferred Stock - During 1997, 1996 and 1995,
respectively, the Company issued 2,891,943; 5,690,757 and 1,447,807 shares of
common stock upon the conversion of 22,891; 43,705 and 11,117 shares,
respectively, of series A preferred stock.
Preferred Stock - Effective September 1, 1993, the authorized number of shares
of undesignated preferred stock, par value $1.00 per share, was increased from
1,000,000 to 2,000,000 shares.
Series A - The series A convertible preferred stock, which was all issued during
the period April 1993 through July 1993, bears a cumulative dividend of 6%, is
redeemable at any time at the option of the Company at a redemption price of $10
per share, and is convertible at the option of the holder at any time commencing
two years from the date of issuance, unless sooner called for redemption by the
Company at the rate of 130.208 (7,812.5 prior to 60:1 reverse split) shares of
common stock for each share of preferred stock. As of December 31, 1997, all of
the Preferred Series A stock has been converted.
Series B - The Series B subordinated preferred stock is redeemable at the option
of the Company at the issue price of $87.50 per share. The stock is entitled to
a $3.50 annual dividend, which is contingent upon after tax earnings in excess
of $200,000. In the event of involuntary liquidation, the holders may receive
$87.50 per share and all dividends. No dividends were declared for 1997, 1996
and 1995.
Series E - The Series E preferred stock is entitled to an annual dividend of
$.10 per share contingent upon after tax earnings being in excess of $200,000.
No dividends were declared for 1997, 1996 and 1995.
Series F - As consideration for granting extensions on former debts, the Company
issued, in 1984, 2,700 shares of preferred stock at $1.00 per share. The
nonvoting preferred stock, designated Series F, with a dividend rate of $8.00
per share is redeemable at the option of the Company after July 1993 for $1.00
per share. One share will be issued for each $100 (one hundred dollars) of
principal indebtedness owed. The dividend will be non-cumulative and is payable
within 100 days from the close of any year where net income after tax exceeds
$500,000, and all dividends due on the Series B preferred stock are paid or
provided for. No dividends were declared for 1997, 1996 and 1995.
Series G - The Company issued the Series G Preferred stock to Trans Global in
consideration for $2.1 million that another subsidiary of the Company owed to
Trans Global. Originally, the series G Preferred stock converted automatically
on September 30, 1999 into such number of the Company's common stock as having a
value equaling $2.1 million. 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 such that the
conversion privileges were terminated and the Series G Preferred stock became
redeemable at an aggregate redemption price of $2.1 million. Because the series
G Preferred stock is held solely by an consolidated subsidiary all such amounts
eliminate in consolidation.
(13) Non-Employee Directors, Consultants and Advisors Stock Options
On August 20, 1993, the Company authorized a stock option plan for Non-Employee
Directors, Consultants and Advisors. Pursuant to the plan during the year ended
December 31, 1995, 6,500,000 shares were granted and exercised of which
1,500,000 were exercised at $0.25 per share, 1,000,000 were exercised at $0.35
per share 1,000,000 were exercised at $0.50 per share and 3,000,000 were
exercised at $0.00 per share, resulting in $3,869,000 of expenses computed as
follows using the intrinsic value method per APB No. 25:
Shares 6,500,000
Weighted Average Value of stock at date of grant $ 0.9796
---------
6,367,000
20% discount (1,273,000)
-----------
5,094,000
Exercise proceeds (1,225,000)
-----------
Total consulting costs $3,869,000
==========
F-25
<PAGE>
Consolidated Technology Group, Ltd. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
In accordance with the agreements relating to the various parties involved, for
1995 $3.9 million was charged as consulting services in the determination of
income from operations. A 20% discount was utilized because the shares issued
represent a large block of stock.
SFAS No. 123 applies to the above stock option transactions wherein the
calculation of the expense must be disclosed and pro forma results are to be
presented. The following disclosures are pursuant to SFAS No. 123 although the
amounts actually reported in the Company's accompanying financial statements are
based on APB No. 25. As of December 31, 1997, 1996 and 1995, the Company had no
outstanding, unexercised stock options. The activity in the Companies stock
option plan is as follows:
Weighted
Weighted Average
Number Average Remaining
of Exercise Contractual
Options Price Life
------- ----- ----
Options Outstanding at
December 31, 1994 -- None
Granted 6,630,004 $0.19
Exercised 6,630,004 $0.19
Expired --
---------
Options Outstanding at
December 31, 1995 -- None
Granted 200,000 $0.00
Exercised 200,000 $0.00
Expired --
Options Outstanding
at December 31, 1996 -- None None
Options Outstanding and Exercisable
at December 31, 1997 --
The Company's expense for 1997 and 1996 for the issuance of stock under SFAS No.
123 was approximately $73,000 and $45,000, respectively. If the Company had
accounted for the issuance of all options pursuant to the fair value based
method of SFAS No. 123, the Company would have recorded additional compensation
expense of approximately $1.4 million for 1995 and the Company's net loss and
loss per share would have been as follows:
1995
----
Net loss as reported ($11,360,000)
=============
Pro forma net loss ($12,760,000)
=============
Loss per share as reported ($0.51)
=======
Pro forma net loss ($0.57)
=======
F-26
<PAGE>
Consolidated Technology Group, Ltd. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
The fair value of options to purchase common stock at the date of grant was
estimated using the fair value based method with the following weighted average
assumptions:
1997 1996 1995
---- ---- ----
Expected Life (Exercised on
date of issuance) 1 year 1 year 1 year
Interest Rate 6% 6% 6%
Annual rate of Dividends None None None
Volatility 86.00% 86.10% 87.48%
The weighted average fair value of options at date of grant using the fair value
based method during 1997, 1996 and 1995 was estimated at $0.0; $0.0 and $0.19,
respectively.
Series A Common Stock Purchase Warrant:
On September 30, 1994, in conjunction with the financing of the IMI acquisition,
the Company issued to a financing company, a warrant to purchase 1,000,000
shares of the Company's common stock at an exercise price of $0.75 per share.
This warrant is exercisable on or before September 30, 1999 and expires on
October 1, 1999. The number and kind of securities purchasable upon the exercise
of this warrant and the exercise price is subject to adjustment from time to
time upon the happening of (a) certain stock reclassification, consolidation or
merger events; (b) certain stock split transactions; or (c) certain dividend
declarations, such that the value of shares that would have been received upon
exercise of the warrant immediately prior to the above events is equivalent to
the value of shares receivable upon exercise of the warrant immediately
subsequent to the above events. The weighted average exercise price of such
warrants is $0.75 for each of 1997, 1996 and 1995 and the weighted average
remaining contractual life of such warrants as of December 31, 1997, 1996 and
1995 was 2 years, 3 years and 4 years, respectively.
(14) Industry Segments
During 1997, the Company has discontinued five of its operating segments,
Electro-Mechanical and Electro-Optical Products Manufacturing, Three Dimensional
Products and Services, Medical Diagnostics, Business Consulting Services and
Audio Products Manufacturing. Additionally, as of December 31, 1997, the Company
is reporting a new segment called Development Stage, which includes a subsidiary
that has not yet developed a salable or marketable product. As a result, the
Company currently classifies its operations into four business segments: (i)
Contract Engineering Services, which consists of subsidiaries that provide
engineers, designers and technical personnel on a temporary basis pursuant to
contracts with major corporations; (ii) Medical Information Services, which
consists of subsidiaries that provide medical information database services,
health care industry related software packages and the SmartCard medical
identification cards and the related software program; (iii) Telecommunications,
which consists of a subsidiary that, among other things, installs telephonic
network systems and buys and resells local telephone service; and Development
Stage, which consists of a subsidiary that is attempting to obtain patent rights
to a hot food vending machine. Corporate and Other consists of the operating
activities of the holding company entities. Inter segment sales and sales
outside the United States are not material. Information concerning the Company's
business segments is as follows:
F-27
<PAGE>
Consolidated Technology Group, Ltd. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(14) Industry Segments:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1996 1995
Restated Restated
(footnotes (footnotes
1997 19 & 20) 19 & 20)
---- -------- --------
<S> <C> <C> <C>
Revenues:
Contract Engineering Services $75,725,000 $62,594,000 $63,156,000
Medical Information Services 7,882,000 8,541,000 7,381,000
Telecommunications 9,648,000 5,583,000 3,253,000
Intercompany Transactions (538,000) -- --
----------- ----------- -----------
Total Revenues $92,717,000 $76,718,000 $73,790,000
=========== =========== ===========
Gross Profit (Loss):
Contract Engineering Services $6,648,000 $5,159,000 $3,998,000
Medical Information Services 1,727,000 1,332,000 1,974,000
Telecommunications 753,000 509,000 695,000
Intercompany Transactions (538,000) -- --
---------- ---------- ----------
Total Gross Profits $8,590,000 $7,000,000 $6,667,000
========== ========== ==========
Income (Loss) from Operations:
Contract Engineering Services $1,402,000 $187,000 ($3,816,000)
Medical Information Services (2,863,000) (5,843,000) (2,274,000)
Telecommunications (2,018,000) (929,000) (474,000)
Development Stage (16,000) -- --
Corporate and Other (3,343,000) (3,143,000) (6,319,000)
Intercompany Transactions (239,000) 180,000 (27,000)
------------ ------------ -------------
Total Loss from Operations ($7,077,000) ($9,548,000) ($12,910,000)
============ ============ =============
Net Income (Loss):
Contract Engineering Services $1,022,000 ($607,000) ($4,682,000)
Medical Information Services (3,459,000) (6,599,000) (2,827,000)
Telecommunications (2,734,000) (1,095,000) (543,000)
Development Stage (16,000) -- --
Corporate and Other (4,086,000) (1,549,000) (5,894,000)
Minority Interest in Loss of Subsidiaries 2,443,000 3,098,000 3,724,000
Discontinued Segments (5,835,000) (2,818,000) (1,138,000)
------------- ------------ -------------
Total Net Loss ($12,665,000) ($9,570,000) ($11,360,000)
============= ============ =============
</TABLE>
F-28
<PAGE>
Consolidated Technology Group, Ltd. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(14) Industry Segments:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1996 1995
Restated Restated
(footnotes (footnotes
1997 19 & 20) 19 & 20)
---- -------- --------
<S> <C> <C> <C>
Depreciation and Amortization:
Contract Engineering Services $385,000 $477,000 $706,000
Medical Information Services 601,000 488,000 1,334,000
Telecommunications 46,000 17,000 --
Corporate and Other 18,000 46,000 45,000
---------- ---------- -----------
Total Depreciation and Amortization $1,050,000 $1,028,000 $2,085,000
========== ========== ==========
Capital Expenditures:
Contract Engineering Services $171,000 $57,000 $110,000
Medical Information Services 234,000 181,000 138,000
Telecommunications 30,000 416,000 3,000
Corporate and Other 5,000 7,000 22,000
-------- -------- --------
Total Capital Expenditures $440,000 $661,000 $273,000
======== ======== ========
December 31,
1996
Restated
December 31, (footnotes
1997 19 & 20 )
---- ---------
Identifiable Assets:
Contract Engineering Services $13,943,000 $13,181,000
Medical Information Services 7,340,000 8,257,000
Telecommunications 4,000 --
Development Stage 2,793,000 1,655,000
Corporate and Other 23,230,000 49,546,000
Discontinued Segments 20,015,000 18,615,000
Intercompany Balances (29,654,000) (57,120,000)
------------ ------------
Total Identifiable Assets: $37,671,000 $34,134,000
=========== ===========
</TABLE>
F-29
<PAGE>
Consolidated Technology Group, Ltd. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(15) Related Party Transactions
Trans Global Services, Inc. Transaction:
Trans Global Services, Inc. ("Trans Global") was organized by SIS Capital Corp.
("SISC") in January 1995 to hold all of the stock of Avionics Research Holdings,
Inc. ("Avionics"), (formerly ARC Acquisition Group, Inc.), which was acquired by
SISC in December 1993, and Resource Management International, Inc.
("RMI"), (formerly ITS Management Corp.), which was acquired by SISC in November
1994. At the time of the organization of Trans Global, Trans Global issued to
SISC, in consideration for the equity consideration issued by Consolidated in
connection with the acquisitions of Avionics and RMI, 500 shares of Series A 5%
Redeemable Cumulative Preferred Stock. Trans Global also issued to SISC warrants
to purchase shares of its common stock. The Trans Global stock and warrants were
issued to SISC in consideration for the transfer of the stock of Avionics and
RMI and the advances made by SISC. In connection with the organization of Trans
Global, Trans Global also issued a 3.4% interest to the president of Trans
Global in exchange for certain rights he had with respect to the stock of
Avionics.
In connection with the organization of Trans Global in January 1995, SISC
transferred a 5% interest in its common stock and warrants in Trans Global to
DLB, Inc. ("DLB"), in exchange for DLB's 10% interest in another subsidiary of
Consolidated. The wife of the former chairman of the board and chief executive
officer of the Company owns DLB.
During 1995, SISC, DLB, the president of Trans Global and the stockholders of
Trans Global, entered into an agreement (the "Trans Global Agreement") with
Concept Technologies Group, Inc. ("Concept") pursuant to which they would
transfer to Concept all of the issued and outstanding capital stock of Trans
Global in exchange for a controlling equity interest in Concept.
Pursuant to the Trans Global Agreement, Concept issued to SISC in respect of its
Trans Global Common Stock, preferred stock and warrants, 850,000 shares of
Concept Common Stock, two-year warrants (the "Concept Warrants") to purchase
475,000 shares of Concept Common Stock, 23,750 shares of Concept's Series A
Participating Convertible Preferred Stock ("Series A Preferred Stock"), which
are convertible into 1,900,000 shares of Concept Common Stock upon the filing of
an amendment to Concept's certificate of incorporation which increases its
capital stock, 23,750 shares of each of Concept's Series B and C Preferred
Stock, which are convertible into an aggregate of 2,375,000 shares of Concept
Common Stock if certain levels of income before income tax are met, and 25,000
shares of Concept's Series D 5% Redeemable Cumulative Preferred Stock ("Series D
Preferred Stock"), which is not convertible and which is redeemable after three
years for an aggregate of approximately $1.7 million. The Series D Preferred
Stock is also redeemable from the sale by Concept of its equity securities,
including the sale of stock upon exercise of options and warrants. The Concept
Warrants become exercisable until the Warrants included in the Units either
expire or are exercised in full. The exercise price of the Concept Warrants is
$3.50 per share or the exercise price of the warrants included in a proposed
private placement by Concept, whichever is lower.
Pursuant to the Trans Global Agreement, Concept issued to DLB in respect of its
Trans Global stock and warrants, 50,000 shares of Concept Common Stock, Concept
Warrants to purchase 25,000 shares of Concept Common Stock, 1,250 shares of
Concept's Series A Preferred Stock, which are convertible into 100,000 shares of
Common Stock, and 1,250 shares of each of Concept's Series B and C Preferred
Stock, which are convertible into in aggregate of 125,000 shares of Concept
Common Stock if certain levels of income before income taxes are attained.
Pursuant to the Trans Global Agreement, Concept issued to Mr. Sicinski in
respect of his Trans Global Stock, 100,000 shares of Concept Common Stock.
The Trans Global Agreement provides SISC and DLB with certain registration
rights with respect to their Concept warrants and the underlying common stock
and provides the president of Trans Global with certain registration rights with
respect to the 100,000 shares of Common Stock issued to him pursuant to the
Trans Global Agreement. The shares owned by the president of Trans Global are
subject to a one-year lockup agreement, subject to earlier release under certain
conditions.
F-30
<PAGE>
Consolidated Technology Group, Ltd. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Advances to an Unconsolidated Subsidiary:
The Company and its subsidiary, Trans Global, have made advances to Universal
International, in which the former Consolidated Secretary is an owner, from time
to time in various amounts. These advances have no fixed due dates or terms and
$145,000 of such advances have been written-off. The outstanding balances owed
to the Company and Trans Global from this subsidiary was $187,000 and $517,000,
respectively, at December 31, 1997 and 1996 and the greatest amount outstanding
to Universal during 1997 and 1996 was $600,000.
Common Stock Sold to former Chief Executive Officer:
In July 1997, the Company's former Chief Executive Officer, ("CEO"), purchased
1,190,000 shares of common stock from the Company at $0.03 per share, reflecting
a discount from the bid price on the date of sale, which was $0.06 per share.
Payment for the purchase price of such shares was effected by a reduction of the
Company's obligation to the CEO for past compensation.
Sale of Subsidiary Stock to Subsidiary Employees:
In 1997, SIS Capital Corp., ("SISC"), a wholly owned subsidiary of the Company,
sold 258,333 common shares of Trans Global, a majority owned, publicly held
subsidiary of the Company operating in the Contract Engineering Services
segment, to the president of Trans Global at $1.67, the fair market value of the
Trans Global common stock on the date of sale. The Company's book basis in such
shares approximated $622,000 resulting in a loss on the sale of approximately
$191,000. Payment by the president of Trans Global is evidenced by a promissory
note from the president of Trans Global.
In 1997, SIS Capital Corp., ("SISC"), a wholly owned subsidiary of the Company,
sold 151,920 common shares of Netsmart, Inc. ("Netsmart"), a majority owned,
publicly held subsidiary of the Company operating in the Medical Information
Services segment, to certain employees of Netsmart at $0.23 per share. The
Company's book basis in such shares approximated $201,000 resulting in a loss on
the sale of approximately $165,000.
(16) Commitments and Contingencies
(I) Employment Agreements
Subsequent to December 31, 1997 the following executive officers of the Company
resigned, see footnote 21. The following describes the employment agreements
that were in effect as of December 31, 1997.
(a) Chief Executive Officer
During 1997, the Company entered into a restated employment agreement, (the
"CEO's Agreement"), with the Company's chief executive officer, (the "CEO"),
whereby the Board of Directors of the Company, (the "Board"), and the CEO agreed
that the prior employment agreements, (original employment agreement dated
January 1988, and certain restated employment agreements entered into in
September 1993, October 1994 and January 1996 did not accurately and properly
reflect the intent and prior understanding and agreement of the parties as to
certain matters.
Term of CEO's Agreement:
The term of the CEO's Agreement commenced January 1988, the date of the original
employment agreement, and expires on December 31, 2000. The CEO's Agreement is
subject to termination prior to December 31, 2000 pursuant to certain
termination provisions contained in the agreement.
CEO's Compensation:
Effective September 1996, the CEO's annual salary is $500,000 and shall increase
annually by the greater of 5% or the increase in the cost of living index. A
bonus for each year is payable in an amount equal to 10% of the amount by which
the greater of (A) the Company's consolidated net income before taxes, or, (B)
the Company's consolidated net cash flow calculated as the Company's net income
plus depreciation, amortization and other non-cash items of expense, minus
payments of all principal amounts of outstanding debt, exceeds $600,000..
CEO's Benefits:
The CEO is entitled to four weeks paid vacation and fifteen paid sick days
during each year. The Company will pay for and maintain for the CEO disability
insurance providing for payment to the CEO of a minimum of 60% of his salary.
The Company is also required to pay and maintain for the CEO major medical,
hospitalization, dental and vision insurance and life insurance having a face
value of not less than $2,000,000, the proceeds of which shall be payable to
such beneficiaries as may be designated by the CEO. The Company will maintain
such disability, medical, dental, and vision insurance, at the Company's expense
for a period of 10 years after the expiration or termination of the CEO's
Agreement. The Company provides the CEO with a vehicle and reimburses the CEO
for all costs incurred by the CEO in connection therewith.
F-31
<PAGE>
Consolidated Technology Group, Ltd. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
CEO's Severance:
In addition to any salary or bonus payable pursuant to the CEO's Agreement, the
CEO is entitled to severance compensation under the following circumstances:
(i) - In the event of the death of the CEO, the Company shall pay to the CEO's
beneficiary the face value of the life insurance policy to be maintained by the
Company.
(ii) - In the event of the permanent disability of the CEO, the Company shall
pay to the CEO, 60% of his then salary for 10 years. In the event of a temporary
disability, (generally 6 months), the Company shall pay to the CEO 100% of his
salary and bonus for the period of the disability.
(iii) - The CEO will continue to receive his salary for 10 years, if the CEO's
Agreement is terminated due to any of the following events, (1) upon notice to
the Company by the CEO of the termination of the agreement for any breach or
default by the Company of any of its obligations or covenants under the CEO's
Agreement, provided that any such breach or default is not cured within 30 days
from notice; (2) in the event of a change of control, the CEO may terminate the
CEO's Agreement upon 90 days notice; wherein change of control is defined as the
date on which the Company sells all or substantially all of its assets or sells
more than 50% of the outstanding capital stock of any one or more subsidiaries,
the aggregate gross revenues of which constitute 33.33% or more of the aggregate
gross revenues of the Company on a consolidated basis, merges with or into or
consolidates with any entity, issues to an independent, non-affiliated third
party such number of shares of its outstanding capital stock (or equity or debt
instruments securities convertible into or exchangeable for shares of the
Company's capital stock) as shall equal 25% or more of its total issued and
outstanding shares of capital stock, or the CEO is removed from the Board,
without cause, provided, however, that a change of control shall not be deemed
to occur as a result of or in conjunction with any recapitalization or public
offering of the Company's securities or the occurrence of any of the foregoing
transactions which is approved by the CEO; (3) upon 30 days notice from the CEO
if the CEO is removed from the Board without cause; or (4) upon seven days
notice from the CEO in the event of the entry by a court of competent
jurisdiction of a decree or order for relief in respect of the Company in an
involuntary case under any applicable bankruptcy, insolvency, or similar law
then in effect or the appointment of a receiver, liquidator, assignee,
custodian, trustee, or sequestrator of the Company or any substantial part of
its property or an order by any such court for the wind-up or liquidation of the
Company's affairs; or a petition initiating an involuntary case under any such
bankruptcy, insolvency, or similar law is filed against the Company and is
pending for 60 days without a stay or dismissal; or the Company commences a
voluntary case under any such bankruptcy, insolvency, or similar law then in
effect, or makes any general assignment for the benefit of its creditors or
fails generally to pay its debts as such debts become due or takes corporate
action in furtherance of any of the foregoing.
CEO's Retirement:
In the event of the retirement of the CEO, the CEO or his beneficiary will
continue to receive monthly retirement compensation equal to one-twelfth of the
greater of, (A) the CEO's then annual salary; or (B) the average of the annual
salary and bonus of the CEO for each of the five years preceding the year of
retirement, for a period of 10 years from the date of retirement. Retirement
shall be deemed to have occurred at the expiration of the CEO's Agreement, or
any renewal of the CEO's Agreement, or at the mutual consent of the CEO and the
Company.
CEO's Participation in the Future Expansion of the Company:
During the term of the CEO's Agreement, the CEO or his designees shall have the
right to participate in the future expansion of the Company whereby, if the
Company, or any subsidiary of the Company proposes to form a subsidiary for any
purpose, the CEO shall have the right to form or cause to be formed, at the
CEO's sole cost and expense, such subsidiary and, in consideration of the CEO
bearing such cost and expense, the CEO shall receive 10% of the authorized
securities of each class and series of such newly formed subsidiary and the CEO
will be deemed to have equitable and beneficial ownership of 10%of such
securities. If subsequent to the formation of such subsidiary, the subsidiary
issues any securities as a dividend, stock split or any other recapitalization,
the CEO shall be entitled to receive his proportionate share of such securities
issued.
F-32
<PAGE>
Consolidated Technology Group, Ltd. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
CEO's Purchase of 10% of SIS Capital Corp.:
SIS Capital Corp., ("SISC"), is a wholly owned subsidiary of the Company.
Substantially all of the operating subsidiaries of the Company are owned by
SISC. The CEO may, at any time during the term of the CEO's Agreement, upon 10
days notice, purchase up to 10% of the equity securities of SISC (on a fully
diluted basis) for a purchase price equal to the then fair market value of such
securities. The purchase price for such securities shall be payable by delivery
of the CEO's 10 year recourse promissory note, bearing interest at the lowest
rate necessary to avoid imputed interest under the Internal Revenue Code of
1986.
CEO's Profit Sharing Bonus:
In the event of the sale of any subsidiary or the business thereof or any
business combination including any subsidiary or of any securities purchased or
acquired by the Company or any subsidiary thereof as investment securities, the
CEO shall be entitled to a profit-sharing bonus equal to 20% of the gross
profit, if any received as a result of the sale or business combination.
CEO's Expense Reimbursement:
The Company is obligated to reimburse the CEO for all ordinary and necessary
expenses incurred in the performance of his services. In the event that the
Company moves its headquarters from the New York metropolitan area, and the CEO
elects to move, the Company will pay the CEO's moving costs, or if the CEO
elects not to move, the Company will provide the CEO with an office and a staff
in the New York metropolitan area. In the event that the Company establishes
multiple offices, the Company will pay the CEO a housing allowance of $3,500 per
month for as long as more than one office is maintained.
(b) Corporate Secretary
On August 14, 1997, the Company entered into an employment agreement, (the
"Secretary's Agreement"), with the Company's Corporate Secretary. Such agreement
includes the following terms:
Term of Secretary's Agreement:
The term of the Secretary's Agreement is from the date of commencement until
December 31, 2002 and, at the option of the Secretary, may be extended for five
more years. The Secretary's Agreement is subject to termination prior to
December 31, 2002 pursuant to certain termination provisions contained within
the agreement.
Secretary's Compensation:
For 1997 the Secretary's annual salary is $200,000 and shall increase annually
by the greater of 5% or the increase in the cost of living index. A bonus for
each year is payable in an amount equal to 0.5% of the amount by which the
greater of (A) the Company's consolidated net income before taxes, or, (B) the
Company's consolidated net cash flow calculated as the Company's net income plus
depreciation, amortization and other non-cash items of expense, minus payments
of all principal amounts of outstanding debt, exceeds $600,000.
Secretary's Benefits:
The Secretary is entitled to three weeks paid vacation and fifteen paid sick
days during each year. The Company will pay for and maintain for the Secretary
disability insurance providing for payment to the Secretary of a minimum of 60%
of her salary. The Company is required to pay and maintain for the Secretary
major medical, hospitalization, dental and vision insurance and life insurance
having a face value of not less than $400,000, the proceeds of which shall be
payable to such beneficiaries as may be designated by the Secretary. The Company
will maintain such disability, medical, dental, and vision insurance, at the
Company's expense for a period of 10 years after the expiration or termination
of the Secretary's Agreement.
F-33
<PAGE>
Consolidated Technology Group, Ltd. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Secretary's Severance:
In addition to any salary or bonus payable pursuant to the Secretary's
Agreement, the Secretary is entitled to severance compensation under the
following circumstances:
(i) - In the event of the death of the Secretary, the Company shall pay to the
Secretary's beneficiary the face value of the life insurance policy to be
maintained by the Company.
(ii) - In the event of the permanent disability of the Secretary, the Company
shall pay to the Secretary, 60% of her then salary for 10 years. In the event of
a temporary disability, (generally 6 months), the Company shall pay to the
Secretary 100% of her salary and bonus for the period of the disability.
(iii) - The Secretary will continue to receive her salary for 10 years, if the
Secretary's Agreement is terminated due to any of the following events, (1) upon
notice to the Company by the Secretary of the termination of the agreement for
any breach or default by the Company of any of its obligations or covenants
under the Secretary's Agreement, provided that any such breach or default is not
cured within 30 days from notice; (2) in the event of a change of control, the
Secretary may terminate the Secretary's Agreement upon 90 days notice; wherein
change of control is defined as the date on which the Company sells all or
substantially all of its assets or sells more than 50% of the outstanding
capital stock of any one or more subsidiaries, the aggregate gross revenues of
which constitute 33.33% or more of the aggregate gross revenues of the Company
on a consolidated basis, merges with or into or consolidates with any entity,
issues to an independent, non-affiliated third party such number of shares of
its outstanding capital stock (or equity or debt instruments securities
convertible into or exchangeable for shares of the Company's capital stock) as
shall equal 25% or more of its total issued and outstanding shares of capital
stock, or the Secretary is removed from the Board, without cause, provided,
however, that a change of control shall not be deemed to occur as a result of or
in conjunction with any recapitalization or public offering of the Company's
securities or the occurrence of any of the foregoing transactions which is
approved by the Secretary; (3) upon 30 days notice from the Secretary if the
Secretary is removed from the Board without cause; or (4) upon seven days notice
from the Secretary in the event of the entry by a court of competent
jurisdiction of a decree or order for relief in respect of the Company in an
involuntary case under any applicable bankruptcy, insolvency, or similar law
then in effect or the appointment of a receiver, liquidator, assignee,
custodian, trustee, or sequestrator of the Company or any substantial part of
its property or an order by any such court for the wind-up or liquidation of the
Company's affairs; or a petition initiating an involuntary case under any such
bankruptcy, insolvency, or similar law is filed against the Company and is
pending for 60 days without a stay or dismissal; or the Company commences a
voluntary case under any such bankruptcy, insolvency, or similar law then in
effect, or makes any general assignment for the benefit of its creditors or
fails generally to pay its debts as such debts become due or takes corporate
action in furtherance of any of the foregoing.
Secretary's Retirement:
In the event of the retirement of the Secretary, the Secretary or her
beneficiary will continue to receive monthly retirement compensation equal to
one-twelfth of the greater of, (A) the Secretary's then annual salary; or (B)
the average of the annual salary and bonus of the Secretary for each of the five
years preceding the year of retirement, for a period of 10 years from the date
of retirement. Retirement shall be deemed to have occurred at the expiration of
the Secretary's Agreement, or any renewal of the Secretary's Agreement, or at
the mutual consent of the Secretary and the Company.
Secretary's Participation in the Future Expansion of the Company:
During the term of the Secretary's Agreement, the Secretary or her designees
shall have the right to participate in the future expansion of the Company
whereby, if the Company, or any subsidiary of the Company proposes to form a
subsidiary for any purpose, the Secretary shall have the right to purchase 1% of
the authorized securities of each class and series of such newly formed
subsidiary at a purchase price that is equal to fair market value. The purchase
price for such securities shall be payable by delivery of the Secretary's 10
year recourse promissory note, bearing interest at the lowest rate necessary to
avoid imputed interest under the Internal Revenue Code of 1986. If subsequent to
the formation of such subsidiary, the subsidiary issues any securities as a
dividend, stock split or any other recapitalization, the Secretary shall be
entitled to receive her proportionate share of such securities issued.
F-34
<PAGE>
Consolidated Technology Group, Ltd. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Secretary's Profit Sharing Bonus:
In the event of the sale of any subsidiary or the business thereof or any
business combination including any subsidiary or of any securities purchased or
acquired by the Company or any subsidiary thereof as investment securities, the
Secretary shall be entitled to a profit-sharing bonus equal to 1% of the gross
profit, if any, received as a result of the sale or business combination.
Secretary's Expense Reimbursement:
The Company is obligated to reimburse the Secretary for all ordinary and
necessary expenses incurred in the performance of her services. In the event
that the Company moves its headquarters from the New York metropolitan area, and
the Secretary elects to move, the Company will pay the Secretary's moving costs,
including 6 months temporary housing, or if the Secretary elects not to move,
the Company will provide the Secretary with an office and a staff in the New
York metropolitan area. In the event that the Company establishes multiple
offices, the Company will pay the Secretary a housing allowance of $1,000 per
month for as long as more than one office is maintained.
(c) Chief Financial Officer
Mr. George W. Mahoney, chief financial officer of the Company, has an employment
agreement with Consolidated for a term commencing October 1, 1994 and ending
December 31, 2007. Mr. Mahoney's annual salary increases to $202,000 for the
current contract year, which ends on December 31, 1998 and increases annually
thereafter until the twelfth year for which his annual salary is $353,000. The
agreement also provides for two bonuses to Mr. Mahoney. One bonus is equal to
the greater of 2.5% of Consolidated's net pre-tax profits or 2.5% of
Consolidated's net cash flow, and the other is equal to the greater of 2.5% of
IMI's net pre-tax profits or 2.5% of IMI's net cash flow. In addition, the
Company paid Mr. Mahoney bonuses of $100,000 and $40,000 in 1996 for services
relating to certain of the Company's loans from DVI pursuant to amendments to
his employment agreement. Mr. Mahoney also receives a $6,000 allowance for an
automobile which may be used for personal as well as business purposes and life
insurance of $1,000,000 on which he may designate the beneficiary.
(II) Contingent Liabilities - Although the Company is a party to certain legal
proceedings that have occurred in the ordinary course of business, the Company
does not believe such proceedings to be of a material nature with the exception
of the following. Due to uncertainties in the legal process, it is at least
reasonably possible that management's view of the outcome of the following
contingent liabilities will change in the near term and there exists the
possibility that there could be a material adverse impact on the operations of
the Company and its subsidiaries.
Holding Company and Discontinued Segments:
(a) The Company is a defendant in a lawsuit filed in the Supreme Court of the
State of New York, Queens County captioned 5 Boro Beverage Distributors, Inc. v.
Consolidated Technology Group, ltd. "Metro, 5" Absolute, et al. which was
initiated in 1995. The action has been filed by the owners of a company that
the Company was contemplating acquiring in January 1995 for alleged unauthorized
use of proprietary information specific to that line of business. The plaintiffs
are seeking $1 million in damages and the Company has filed a counter claim for
$35,000 advanced to the plaintiff. The action is presently in abeyance and there
has been no action by either side in over two years. Outside counsel handling
this case has advised the Company that it has meritorious defenses.
F-35
<PAGE>
Consolidated Technology Group, Ltd. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(b) The Company is a defendant in a lawsuit filed in the United States District
Court for the Southern District of New York captioned Naval Kapoor and Dirk
Esselens v. SIS Capital Corp. that was initiated in 1998, whereby certain
shareholders of 3D Technology, Inc., a subsidiary of the Company which has been
discontinued, filed a lawsuit against the Company in December 1997. The
complaint states that the Company wrongfully seized and transferred the assets
of 3D Technology, Inc. for the benefit of the Company and at the detriment of
the minority shareholders of 3D Technology, Inc. The plaintiffs are seeking
$3,000,000 in damages. No assessments as to any outcome can be made at this time
as the matter is in its preliminary stages. The Company denies any allegation of
wrongdoing and intends to vigorously defend the action.
(c) On February 23, 1998, the Company was advised of the commencement of an
action in the United States District Court for the Southern District of New York
captioned Grino Corporation, LLC and SMACS Holding Corp. ("SMACS"), individually
and as shareholders of and in the right of Consolidated Technology Group Ltd. v.
Consolidated Technology Group Ltd., SIS Capital Corp., Lewis S. Schiller, Norman
J. Hoskin, E. Gerald Kay and Grazyna B. Wnuk. The action sought to enjoin the
Company from (a) proceeding with its 1998 Annual Meeting of Stockholders
scheduled for March 26, 1998, and (b) making any payment to Mr. Schiller, Ms.
Wnuk and others from the proceeds of the sale of International Magnetic Imaging,
Inc. ("IMI"). The complaint also alleges that the directors breached their
fiduciary duty with respect to, and seeks to have declared void, (i) employment
agreements with Mr. Schiller, which agreements ran from 1989, as amended and
restated from time to time, resulting in a final agreement which was approved by
the Compensation Committee and the full Board of Directors in July 1997, and Ms.
Wnuk, (ii) agreements to issue stock or stock options of the Company and/or its
subsidiaries to Messrs. Schiller, Hoskin and Kay and Ms. Wnuk, (iii) all
completed transfers and issuances of stock and stock options by the Company to
Messrs. Schiller, Hoskin and Kay and Ms. Wnuk without fair and adequate
consideration by the Company, and (iv) all agreements to pay to Messrs.
Schiller, Hoskin and Kay and Ms. Wnuk or any other officer of the Company or any
of its subsidiaries, any bonus, finder's fee, stock or option liquidation
payment, consent fee, professional fee, or profit share or any other payment
arising out of or resulting from or based upon the sale or the profits from the
sale of IMI or the assets of IMI or the assets or business of IMI without fair
consideration to the Company. The complaint also alleges violations of Section
10(b) of the Securities Exchange Act of 1934, as amended, and common law fraud
based upon the same and similar allegations, and seeks monetary damages to be
proved at trial. On February 24, 1998, the Court granted a temporary restraining
order. On March 9, 1998, the United States District Court for the Southern
District of New York vacated the temporary restraining order issued on February
24, 1998. The Court vacated the temporary restraining order because, inter alia,
it did not appear that the plaintiffs had a likelihood of success in the
ultimate action, particularly with respect to the alleged 10b-5 claim. On March
19, 1998, the United States District Court for the Southern District of New York
dismissed the action.
(d) One of the plaintiffs in the Federal Court action described above, SMACS
Holdings Corp. ("SMACS"), and certain affiliates of SMACS are plaintiffs in an
action commenced in November 1997 in the Supreme Court of the State of New York,
County of New York, captioned Bridge Ventures, Inc. etal v. Lewis S. Schiller,
etal. The action, brought against Mr. Schiller, the Company, SIS Capital Corp.
and IMI by SMACS, certain affiliates of SMACS and others seeks, inter alia,
monetary damages in excess of $500,000 allegedly due pursuant to consulting
agreements with the Company, an alleged equity interest in IMI and punitive
damages of at least $5 million. The Company believes that it has meritorious
defenses to the claims made in this action. In March 1998, the plaintiffs sought
to amend the complaint to assert claims of a derivative nature alleging claims
similar to those in the Federal Court action and obtained a temporary
restraining order prohibiting payments to Mr. Schiller and others from the
proceeds of the IMI sale. The temporary restraining order was lifted and, as of
the date of this Form 10-K, the complaint had not been amended. At the time the
temporary restraining order was lifted, the negotiations relating to the
resignation of Messrs. Schiller, Hoskin and Kay and Ms. Wnuk, which are
described in Item 1 under the caption "Organization and Changes in Management of
the Company" had been substantially negotiated and the courts were so advised.
The Company has accrued $250,000 for this contingency which is included in
selling, general and administrative expense.
F-36
<PAGE>
Consolidated Technology Group, Ltd. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(e) "Vanguard Limited ("Vanguard"), on its own behalf or on behalf of other
persons who may be affiliated with Vanguard, based on a purported agreement
relating to the introduction of Consolidated to IMI and assistance in the
negotiation of the acquisition of IMI in 1994, has asserted a claim that it has
the right, among other things, to a 10% interest in the Common Stock of IMI at
or about the time of the acquisition for no cash consideration. In addition,
Vanguard has claimed that it is entitled to a $200,000 fee due at the time of
the acquisition of the Centers, consulting fees of $240,000 per year for five
years, reimbursement of nonaccountable expenses and a 5% interest in any future
medical acquisition by the Company. No assurance can be given that any
litigation which may ensue would not seek damages exceeding the claim described
above and, if decided unfavorably to the Company, would not have a material
adverse affect on the Company."
(f) In January 1996, Drs. Ashley Kaye and James Sternberg, two former
stockholder-directors of the company that sold diagnostic imaging centers to
IMI, and Dr. Sternberg's wife, threatened to commence an action against two
subsidiaries of IMI, Consolidated and Mr. Lewis S. Schiller, formerly chairman
of the board of Consolidated, for alleged violations of securities laws and
common law in connection with an asset purchase agreement which was executed in
conjunction with the acquisition of IMI in September 1994 and non-payment of
$3,375,000 subordinated notes of two subsidiaries of IMI. Company. In 1997 they,
along with Dr. Stephen Schulman, a holder of subordinated notes in the principal
amount of approximately $6.4 million issued by subsidiaries of IMI who was the
president of the company that sold the diagnostic centers to IMI and was
president and chief executive officer of IMI, commenced involuntary bankruptcy
proceedings against certain subsidiaries of IMI. Such bankruptcy proceedings
were dismissed. It is possible that any action which may be brought against the
Company may include Dr. Schulman as a plaintiff. No assurance can be given that
an adverse decision in any action based on such claims will not have a material
adverse effect upon the Company.
(g) In 1994, the Company purchased the assets of IMI and its partnerships for
cash and stock of the Company. Certain of the limited partners of one of the
partnerships from which assets were purchased, claim that one of the principals
of IMI and the council of the seller, allegedly guaranteed that the common stock
given as a part of the purchase would have a value of $4 on the second
anniversary following the closing of the purchase. Subsequent to December 31,
1997, IMI settled this claim for $408,000 and such amount has been accrued as of
December 31, 1997 and is included in selling, general and administrative
expense.
Contract Engineering Services
(a) In November 1997, an action was commenced in the Supreme Court of the State
of New York, County of Suffolk, by Ralph Corace against RMI seeking damages of
approximately $1.1 million for an alleged breach of contract by the Company. Mr.
Corace was the president of Job Shop Technical Services, Inc., from which RMI
purchased assets in November 1994. The Company believes that the action is
without merit, will vigorously contest this matter and has filed counterclaims
against Mr. Corace.
(b) On May 14, 1991, the Government Printing Office wrote Trans Global asking to
be reimbursed a total of $296,000 for "unauthorized time work" on two programs.
Trans Global has been in contact with the Department of Justice, which has
stated that they were declining prosecution of Trans Global regarding this
matter. Management believes these claims are without merit and intends to
contest these claims vigorously if reasserted by the Government Printing Office
and believes that the ultimate disposition of this matter will not have a
material adverse effect on the financial position of Trans Global.
(c) Voluntary Settlement Agreement - As of December 31, 1997 Trans Global has a
$150,000 obligation remaining with regard to an agreement it entered into with
the United States Department of Labor and the independent trustee of the Job
Shop Technical Services, Inc. 401(k) Plan ("collectively "DOL"). Trans Global
agreed to pay the DOL an aggregate of $300,000 in 18 monthly installments of
$16,667.
F-37
<PAGE>
Consolidated Technology Group, Ltd. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(d) Trans Global previously was delinquent in filing payroll taxes during the
quarter ended March 31, 1996 and incurred significant penalties. In August 1996,
Trans Global entered into an agreement with the Internal Revenue Service ("IRS")
to pay those taxes, interest and penalties. Trans Global satisfied this
agreement in full as of July 14, 1997, at which point it began proceedings to
contest the penalties and is presently seeking to recover these amounts.
Medical Information Services
In March 1997, an action was commenced against Netsmart and certain of its
officers, directors and stockholders by Onecard Health Services Corporation in
the Supreme Court of the State of New York, County of New York. The named
defendants include, in addition to Netsmart, Messrs. Lewis S. Schiller, formerly
chief executive officer and a director of Netsmart, Leonard M. Luttinger, vice
president and a director of Netsmart, Thomas L. Evans, formerly a vice president
of Netsmart, Consolidated and certain of its subsidiaries, other stockholders of
Netsmart and other individuals who were or may have been officers or directors
of Onecard but who have no affiliation with Netsmart or Consolidated. Mr.
Luttinger and Mr. Evans were employees of Onecard prior to the formation of
Netsmart. Mr. Schiller was not an employee or director or, consultant to, or
otherwise affiliated with, Onecard. The complaint makes broad claims respecting
alleged misappropriation of Onecard's trade secrets, corporate assets and
corporate opportunities, breach of fiduciary relationship unfair competition,
fraud, breach of trust and other similar allegations, apparently arising at the
time of, or in connection with, the organization of Netsmart in September 1992.
The complaint seeks injunctive relief and damages, including punitive damages,
of $130 million. Netsmart believes that the action is without merit, and it will
vigorously defend the action. Netsmart has filed an answer denying all of the
plaintiffs' allegations and has asserted affirmative defenses. In addition,
Netsmart believes that there is a difference in the technology used in the
Onecard software and Netsmart's CarteSmart software and in the type of computer
network on which the software operates. Netsmart has demanded that the plaintiff
particularize the broad allegations of the complaint and the produce documents
referred to in the complaint. No assurance can be given as to the ultimate
disposition of the action, and an adverse decision may have a material adverse
effect upon the business of Netsmart.
(17) New Authoritative Pronouncements
The following describes new authoritative pronouncements that are expected to be
applicable to the accounting of the Company's operations:
The Financial Accounting Standards Board ("FASB") issued Statement of Financial
Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income." SFAS
No. 130 is effective for fiscal year's beginning after December 15, 1997.
Earlier application is permitted. Reclassification of financial statements for
earlier periods provided for comparative purposes is required. SFAS No. 130 is
not expected to have a material impact on the Company.
The FASB has issued SFAS No. 131 "Disclosures about Segments of an Enterprise
and Related Information." SFAS changes how operating segments are reported in
annual financial statements and requires the reporting of selected information
about operating segments in interim financial reports issued to shareholders.
SFAS No. 131 is effective for periods beginning after December 15, 1997, and
comparative information for earlier years is to be restated. SFAS No. 131 need
not be applied to interim financial statements in the initial year of its
application. SFAS No. 131 is not expected to have a material impact on the
Company.
During 1997, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position ("SOP")
97-2, "Software Revenue Recognition." SOP 97-2 provides guidance on revenue
recognition on software transactions and is effective for transactions entered
into in fiscal years beginning after December 15, 1997. The Company is taking
steps to meet the requirements of SOP 97-2 and expects that it will not have a
material impact on the financial position or results of operations of the
Company.
(18) Acquisitions
In May 1995, SIS Capital Corp., a wholly-owned subsidiary of the Company
("SISC"), entered into an agreement among SISC, DLB, Inc. ("DLB"), Joseph G.
Sicinski and Concept Technologies Group, Inc. ("Concept"), pursuant to which
SISC, DLB and Mr. Sicinski transferred to Concept all of the issued and
outstanding common stock of Trans Global, in exchange for a controlling interest
in Concept. Concept's common stock and warrants are traded on the NASDAQ Small
Cap Market. Trans Global's common stock was owned by SISC (91.6%), DLB (5.0%)
and Mr. Sicinski (3.4%). DLB is owned by Ms. Carol Schiller, wife of Mr. Lewis
S. Schiller, the Company's chairman of the board, president and chief executive
officer. Mr. Schiller disclaims all beneficial interest in the securities owned
by DLB. Mr. Sicinski is president of Trans Global. Trans Global, which operates
through two subsidiaries, ARC and RMI is engaged in the business of providing
engineers, designers and other technical personnel to its clients, which include
major companies in the aerospace, electronics and computer industries. Concept
owns and operates Klipsch Loudspeaker business, and, through a subsidiary, is
the developer and owner of proprietary technologies with applications in
environmental noise cancellation, medical monitoring, defense and
communications. Following the consummation of the transaction, the business of
Trans Global became Concept's principal business. The acquisition was accounted
for as a reverse acquisition with Trans Global being the surviving entity. The
equity of Trans Global, as the surviving entity, and Concept, the acquired
entity, was recapitalized including a reclassification of Concept's accumulated
deficit of $11.1 million to additional paid-in capital of Trans Global.
Furthermore, no goodwill was generated on the transaction because pursuant to
reverse acquisition accounting, the book values of Concept were carried over to
Trans Global and were not adjusted to fair market value. The operations of Trans
Global, the surviving entity, are included in the Company's consolidated results
of operations for 1997, 1996 and 1995.
F-38
<PAGE>
Consolidated Technology Group, Ltd. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
The following pro forma unaudited results assume the above acquisition had
occurred at the beginning of 1995.
1995
----
Net Revenues $74,454,000
===========
Net Loss ($11,420,000)
=============
Net Loss per Share ($0.51)
=======
The pro forma information is not necessarily indicative of either the results of
operations that would have occurred had the acquisition been effective at the
beginning of the indicated periods or of the future results of operations.
(19) 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.
F-39
<PAGE>
Consolidated Technology Group, Ltd. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
At the time of the reverse acquisition, Lafayette's prior operations were
discontinued and the statement of operations for 1996 and the 1997 operations do
not include any operating activity related to Lafayette. As of December 31,
1996, the assets and liabilities of Lafayette included in the Company's
consolidated balance sheet consisted of the following
Cash $1,020,000
Loans receivable 49,000
Prepaid and other current assets 24,000
Receivables, long-term 441,000
Receivables, related parties 85,000
Other assets 469,000
-------
Total assets 2,088,000
---------
Accounts payable and accrued expenses 1,202,000
Notes payable, related parties 690,000
Current portion of long-term debt 458,000
Convertible debentures 700,000
Current portion of capitalized lease obligations 99,000
------
Total liabilities 3,149,000
---------
Net liabilities disposed of $1,061,000
==========
As of December 31, 1996, the Company's investment in Lafayette was in excess of
Lafayette's equity resulting in a reduction in the Company's additional paid-in
capital of $1,061,000. The December 31, 1996 balance sheet has been restated to
conform with the current period presentation whereby the above assets and
liabilities and the decrease in additional paid-in capital were reversed.
(20) Discontinued Operations - During 1997, the Company discontinued the Audio
Products Manufacturing, Three Dimensional Products and Services, Medical
Diagnostics, Electro-Optical Electro Mechanical Products Manufacturing and
Business Consulting Services segments.
(a) Audio Products Manufacturing - On May 20, 1997, pursuant to a Comprehensive
Agreement, (the "WWR Agreement") by and among Mr. Donald L. Shamsie and Malco
Theatres, (the "Purchasers") and WWR Acquisition Corp., a majority owned holding
company of the Company which owned all of the capital stock of WWR Technology,
Inc., ("WWR"), (the "Seller"), the Company sold all of the issued and
outstanding capital stock of WWR, the subsidiary in which all of the operations
of the Audio Products Manufacturing segment operating activities were conducted,
for $100,000. As a part of the WWR agreement, the Company was released as a
guarantor on approximately $394,000 in debt obligations owed by WWR to two
lenders. As a result of the sale, the Company received net proceeds of
approximately $62,000 and recorded a gain of approximately $129,000 on the
disposal. The revenues of the audio products manufacturing segment were $1.2
million, 3.3 million and 2.8 million for 1997, 19996 and 1995, respectively. The
operations of WWR up to the date of the WWR Agreement are classified as loss
from the operations of a discontinued segment.
F-40
<PAGE>
Consolidated Technology Group, Ltd. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
As of December 31, 1996 the assets and liabilities of the Audio Products
Manufacturing segment included in the Company's consolidated balance sheet
consisted of the following:
Cash $50,000
Accounts receivable, net 336,000
Inventories 386,000
Prepaid and other current assets 10,000
Property, plant and equipment 309,000
Receivables, long-term 7,000
Trademark, net 368,000
Other assets 13,000
------
Total assets 1,479,000
---------
Accounts payable and accrued expenses 1,010,000
Accrued payroll and related expenses 146,000
Accrued interest 4,000
Current portion of long-term debt 541,000
Current portion of capitalized lease obligations 4,000
Capitalized lease obligations 10,000
------
Total liabilities 1,715,000
---------
Net liabilities disposed of $ 236,000
==========
Presented in the balance sheet as follows:
Net long-term assets of discontinued segment $687,000
Net current liabilities of discontinued segment 923,000
-------
Net liabilities disposed of $236,000
========
(b) Three Dimensional Products and Services - Effective June 30, 1997, (the
Measurement Date"), the Company formulated a plan to discontinue the operations
of all of the subsidiaries operating in the Three Dimensional Products and
Services segment. As of the measurement date, the Company accrued an estimate of
$250,000 for anticipated losses from the measurement date until the date the
disposal is completed, which is not expected to take longer than one year. The
Company has written-off all assets of the Three Dimensional Products and
Services subsidiaries, consisting primarily of capitalized product development
costs and property, plant and equipment, and has recorded the remaining
liabilities, including the estimated loss to be incurred until the plan is
complete, as net liabilities of a discontinued segment. As a result of the plan,
the Company has recorded a loss of approximately $465,000 on the planned
disposal. The revenues of the three dimensional products and services segment
were $281,000, $839,000 and $1.8 million for 1997, 1996 and 1995, respectively.
The operations of the Three Dimensional Products and Services segment up to the
Measurement Date, have been restated to present the operations of the Three
Dimensional Products and Services segment as a discontinued segment.
F-41
<PAGE>
Consolidated Technology Group, Ltd. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
As of December 31, 1997 and 1996 the assets and liabilities of the Three
Dimensional Products and Services segment included in the Company's consolidated
balance sheet consisted of the following.
December 31,
------------
1997 1996
---- ----
Cash -- $48,000
Accounts receivable, net -- 100,000
Prepaid and other current assets -- 11,000
Property, plant and equipment -- 444,000
Deferred offering costs -- 115,000
Other assets -- 350,000
------ -------
Total assets -- 1,068,000
------ ---------
Accounts payable and accrued expenses $1,882,000 1,007,000
Accrued payroll and related expenses 246,000 343,000
Accrued interest 24,000 1,000
Notes payable, related parties 278,000 295,000
Current portion of long-term debt 175,000 175,000
Current portion of capitalized
lease obligations -- 43,000
Capitalized lease obligations -- 68,000
------ ------
Total liabilities 2,605,000 1,932,000
--------- ---------
Net liabilities to be disposed of $2,605,000 $864,000
========== ========
Presented in the balance sheet as follows:
Net long-term assets of discontinued segment -- $841,000
Net current liabilities of discontinued
segment $2,605,000 1,705,000
---------- ---------
Net liabilities to be disposed of $2,605,000 $864,000
========== ========
(c) Medical Diagnostics - Effective September 1, 1997, (the Measurement Date"),
the Company formulated a plan to discontinue the operations of all of the
subsidiaries operating in the Medical Diagnostics segment. Pursuant to such
plan, on April 2, 1998, the Company consummated the sale of substantially all of
the assets of International Magnetic Imaging, Inc. Such sale resulted in a gain
on disposal, which will be recognized during 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 $29.4 million, $31.1
million and $28 million for 1997, 1996 and 1995, respectively. The operations of
the Medical Diagnostics segment up to the Measurement Date have been restated to
present the operations as a discontinued segment.
F-42
<PAGE>
Consolidated Technology Group, Ltd. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
As of December 31, 1997 and 1996 the assets and liabilities of the Medical
Diagnostics segment included in the Company's consolidated balance sheet
consisted of the following.
December 31,
1997 1996
---- ----
Cash $1,813,000 $1,539,000
Accounts receivable, net 9,803,000 11,822,000
Prepaid and other current assets 325,000 254,000
Property, plant and equipment 9,738,000 12,561,000
Goodwill 9,181,000 9,729,000
Covenant not to compete -- 826,000
Customer lists, net 4,430,000 4,807,000
Deferred offering costs -- 322,000
Receivable, long-term 1,271,000 --
Receivable, related parties -- 308,000
Other assets 735,000 882,000
------- -------
Total assets 37,296,000 43,050,000
---------- ----------
Accounts payable and accrued expenses 5,049,000 4,134,000
Accrued interest 814,000 61,000
Income taxes payable 249,000 652,000
Subordinated debt related parties 924,000 924,000
Current portion of long-term debt 10,932,000 3,686,000
Current portion of subordinated debt 5,721,000 6,268,000
Current portion of capitalized lease
obligations 1,240,000 1,273,000
Deferred interest 498,000 568,000
Long-term debt 7,710,000 16,240,000
Capitalized lease obligations 1,702,000 2,864,000
Subordinated debt 8,000 313,000
----- -------
Total liabilities 34,847,000 36,983,000
---------- ----------
Net assets to be disposed of $ 2,449,000 $ 6,067,000
=========== ===========
Presented in the balance sheet as follows:
Net current liabilities
of discontinued segment $12,987,000 $ 9,452,000
Net long-term assets of
discontinued segment 15,436,000 3,385,000
---------- ---------
Net assets to be disposed of $ 2,449,000 $ 6,067,000
=========== ===========
(d) Electro-Optical Electro-Mechanical Products Manufacturing - Effective
December 31, 1997, the Company entered into an agreement to sell the
Electro-Optical Electro-Mechanical Products Manufacturing segment. It is
anticipated that such sale will result in a gain on disposal, which will be
recognized during 1998. The Company has classified all assets and liabilities
disposed of as net assets of a discontinued segment. The revenues of the
electro-optical and electro-mechanical products manufacturing segment were $3.1
million, $2.4 million and $3.9 million for 1997, 1996 and 1995, respectively.
The operations of the Electro-Optical and Electro-Mechanical Products
Manufacturing segment up to December 31, 1997 have been restated to present the
operations as a discontinued segment.
F-43
<PAGE>
Consolidated Technology Group, Ltd. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
As of December 31, 1997 and 1996 the assets and liabilities of the
Electro-Optical Electro-Mechanical Products Manufacturing segment included in
the Company's consolidated balance sheet consisted of the following.
December 31,
1997 1996
---- ----
Cash $29,000 $24,000
Accounts receivable, net 304,000 296,000
Inventories 1,820,000 2,739,000
Prepaid and other current assets 4,000 40,000
Property, plant and equipment 161,000 186,000
Other assets 20,000 101,000
------ -------
Total assets 2,338,000 3,386,000
--------- ---------
Accounts payable and accrued expenses 778,000 797,000
Accrued payroll and related obligations 34,000 54,000
Accrued interest -- 2,000
Notes payable, related parties 34,000 --
Current portion of long-term debt 303,000 162,000
Current portion of capitalized
lease obligations 54,000 17,000
Capitalized lease obligations -- 24,000
------ ------
Total liabilities 1,203,000 1,056,000
--------- ---------
Net assets to be disposed of $1,135,000 $2,330,000
========== ==========
Presented in the balance sheet as follows:
Net current assets of discontinued Segment $1,044,000 $2,150,000
Net current liabilities of
discontinued segment 90,000 83,000
Net long-term assets of discontinued segment 181,000 263,000
------- -------
Net assets to be disposed of $1,135,000 $2,330,000
========== ==========
(e) Business Consulting Services - Effective December 31, 1997, the Company
entered into an agreement to sell the Business Consulting Services segment. It
is anticipated that such sale will not result in a material loss on disposal.
The Company has classified all assets and liabilities disposed of as net assets
of a discontinued segment. The operations of the Business Consulting Services
segment up to December 31, 1997 have been restated to present the operations as
a discontinued segment.
As of December 31, 1997 and 1996 the assets and liabilities of the Business
Consulting Services segment included in the Company's consolidated balance sheet
consisted of the following.
December 31,
1997 1996
---- ----
Prepaid and other current assets -- $162,000
Property, plant and equipment $1,000 3,000
Receivables, related parties -- 70,000
------ ------
Total assets 1,000 235,000
----- -------
Accounts payable and accrued expenses -- 2,000
----- -----
Total liabilities -- 2,000
------ -----
Net assets to be disposed of $1,000 $233,000
====== ========
Presented in the balance sheet as follows:
Net current assets of discontinued segment -- $160,000
Net long-term assets of discontinued segment $1,000 73,000
------ ------
Net assets to be disposed of $1,000 $233,000
====== ========
F-44
<PAGE>
Consolidated Technology Group, Ltd. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(21) Subsequent Events
Sale of Medical Diagnostics Segment:
On January 28, 1998, International Magnetic Imaging, Inc. ("IMI"), a subsidiary
of the Company, and certain of IMI's subsidiaries entered into an asset purchase
agreement with Comprehensive Medical Imaging, Inc. ("CMI"), a subsidiary of
Syncor International Corporation, pursuant to which CMI agreed to purchase
substantially all of the assets of IMI and such subsidiaries for approximately
$20 million in cash and the assumption of $21 million in debt. The transaction
was consummated on April 2, 1998.
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 International Magnetic Imaging, Inc. and certain of its subsidiaries
(collectively, "IMI") of substantially all of their assets pursuant to an asset
purchase agreement (the "Asset Purchase Agreement") dated January 28, 1998
between IMI and Comprehensive Medical Imaging, Inc. IMI is a subsidiary of the
Company. The sale by IMI is referred to as the "IMI Sale."
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.
c) Schiller agreed to transfer to the Company 1,190,000 shares of the Company's
Common Stock owned by him.
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.
e) Schiller agreed to enter into a three-year consulting agreement with the
Company, for which he will receive annual compensation of $100,000.
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 either with present management or with the plaintiffs in certain
recent litigation against the Company, which is disclosed in footnote 16,
"Contingencies".
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 and who are reasonably
acceptable to the present directors.
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 emmployment 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.
F-45
<PAGE>
Consolidated Technology Group Ltd. and Subsidiaries
Index to Exhibits
December 31, 1997
1. 11.1 Calculation of earnings per share.
2. 21.1 List of Subsidiaries of the Registrant
2. 27 Financial Data Schedule (filed only in electronic format with the SEC)
<PAGE>
Consolidated Technology Group, Ltd. and Subsidiaries
December 31, 1997
Exhibit 11.1 Calculation of Earnings per Share
December 31, December 31, December 31,
1997 1996 1997
---- ---- ----
Net Loss ($13,871,000) ($ 9,570,000) ($11,360,000)
============= ============= =============
Loss per Share:
Loss per Share (note 1) ($0.29) ($0.23) ($0.51)
------- ------- -------
Loss per Share -
Assuming Full Dilution
(note 2) ($0.29) ($0.23) ($0.51)
------- ------- -------
Note 1:
Computed by dividing the net loss for the period by the weighted average number
of common shares outstanding, 47,161,799, 41,639,293 and 22,423,035,
respectively, for 1997, 1996 and 1995 respectively. No stock options, warrants
or preferred convertible stock are assumed to be exercised because they are
anti-dilutive for the period. The weighted average number of common shares
outstanding is calculated by weighting common shares issued during the period by
the actual number of days that such shares are outstanding during the periods.
Note 2:
Computed by dividing the net loss for the period by the fully diluted weighted
average number of common shares outstanding, 53,346,057, 43,087,307 and
25,136,125, respectively, for 1997, 1996 and 1995. The fully diluted calculation
comprehends the following assumptions:
(i) Assumes that a warrant to purchase 1,000,000 common shares at $0.75 per
share was exercised at the beginning of the indicated periods, and that all
proceeds from such exercise were used to purchase treasury stock at a price
equal to the average market price of the Company's common shares for the three
and nine month periods resulting in a net decrease in outstanding shares of
4,098,572, 2,554,873, and 153,719, respectively, for 1997, 1996 and 1995.
(ii) Assumes that for 1997 and 1996 approximately 2,980,000 shares of
preferred stock were converted at the beginning of the indicated periods.
(iii) Assumes that for 1997, outstanding options to purchase 2,490,000 common
shares at $0.125 per share were exercised at the beginning of the indicated
periods, and that all proceeds from such exercise were used to purchase treasury
stock at a price equal to the average market price of the Company's common
shares for the three and nine month periods resulting in a net decrease in
outstanding shares of 2,697,500.
(iv) Assumes that for 1997 5,000,000 shares subscribed to the CEO were issued as
of the beginning of the respective periods.
(v) Assumes that for 1997 the subordinated promissory notes were converted to
4,644,000 common shares as of the beginning of the respective periods.
NOTE - THIS CALCULATION IS SUBMITTED IN ACCORDANCE WITH THE SECURITIES ACT
OF 1934 RELEASE NO. 9083, ALTHOUGH IT IS CONTRARY TO PARA. 40 OF APB 15 BECAUSE
IT MAY PRODUCE AN ANIT-DILUTIVE RESULT
<PAGE>
Consolidated Technology Group, Ltd.
December 31, 1997
Exhibit 21.1 List of Subsidiaries of the Registrant
State of Company Incorporation
- ---------------- -------------
Consolidated Technology Group Ltd. New York
SIS Capital Corp. Delaware
The Trinity Group Inc. Delaware
Carte Medical Holdings Delaware
Carte Medical Corp. Delaware
Creative Socio-Medics Delaware
IMI Acquisition Corp. Delaware
International Magnetic Imaging Florida
MD Corp. Florida
MRI-Net Florida
IMI Acquisition of Pine Island Corporation Florida
IMI Ltd. Partner Acq. of Pine Island, Inc. Florida
IMI Acquisition of North Miami Beach Corporation Florida
IMI Ltd. Partner Acq. of North Miami, Inc. Florida
IMI Acquisition of Boca Raton Corporation Florida
IMI Ltd. Partner Acq. of Boca Raton, Inc. Florida
IMI Acquisition of South Dade Corporation Florida
IMI Ltd. Partner Acq. of South Dade, Inc. Florida
IMI Acquisition of Oakland Park Corporation Florida
IMI Ltd. Partner Acq. of Oakland, Inc. Florida
IMI Acquisition of Orlando Corporation Florida
IMI Ltd. Partner Acq. of Orlando, Inc. Florida
PODC Acquisition Corporation Florida
PODC Ltd. Partner Acq. Corporation Florida
IMI Acquisition of Puerto Rico Incorporated Puerto Rico
IMI Acquisition of Arlington Corp. Virginia
IMI Acquisition of Kansas Corporation Kansas
MD Acquisition Corporation Delaware
MD Ltd. Partner Acq. Corporation Delaware
TeleVend, Inc. Delaware
ARC Networks Corp. New York
Trans Global Services, Inc. Delaware
Resource Management International, Inc. Delaware
ARC Acquisition Group, Inc. New York
Avionics Research Corp. New York
Avionics Research Corporation of Florida Florida
SES Holdings Corp. Delaware
Sequential Electronic Systems, Inc. Delaware
S-Tech, Inc. Delaware
Industry Lighting, Inc. Delaware
3D Holdings, Inc. Delaware
CDS Acquisition Corp. Delaware
CDS, Inc. Delaware
3D Technology, Inc. Delaware
3D Imaging International, Inc. Delaware
Universal International, Inc. Delaware
Universal International of Orlando, Inc. Florida
WWR Technology, Inc. Delaware
Audio Animation, Inc. Delaware
Prime Access, Inc. Delaware
TGS Services Corp. Delaware
Concept Technologies Group, Inc. Delaware
<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 ANNUAL REPORT ON FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH ANNUAL REPORT ON FORM 10-K.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 1,268,000
<SECURITIES> 19,000
<RECEIVABLES> 10,535,000
<ALLOWANCES> 496,000
<INVENTORY> 0
<CURRENT-ASSETS> 13,291,000
<PP&E> 1,597,000
<DEPRECIATION> 961,000
<TOTAL-ASSETS> 37,671,000
<CURRENT-LIABILITIES> 32,208,000
<BONDS> 0
<COMMON> 499,000
0
3,000
<OTHER-SE> (9,843,000)
<TOTAL-LIABILITY-AND-EQUITY> 37,671,000
<SALES> 0
<TOTAL-REVENUES> 92,717,000
<CGS> 0
<TOTAL-COSTS> 84,127,000
<OTHER-EXPENSES> 15,682,000
<LOSS-PROVISION> 1,195,000
<INTEREST-EXPENSE> 1,130,000
<INCOME-PRETAX> (7,342,000)
<INCOME-TAX> (275,000)
<INCOME-CONTINUING> (7,067,000)
<DISCONTINUED> (5,598,000)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (12,665,000)
<EPS-PRIMARY> (.27)
<EPS-DILUTED> 0
</TABLE>
