UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q/A
Amendment No. 1
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
The Quarter Ended June 30, 1998
Commission File Number 0-4186
CONSOLIDATED TECHNOLOGY GROUP LTD.
(Exact name of registrant as specified in its charter)
New York 13-1948169
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
160 Broadway, New York, NY 10038
(Address of principal executive offices) (Zip Code)
(212) 233-4500
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No ____
Number of common shares outstanding as of August 7, 1998: 48,720,996
Purpose of Amendment:
On June 16, 1998, ARC Networks, Inc., a subsidiary of the Company, gave Trans
Global Services, Inc., a subsidiary of the Company, a first security interest in
all of its assets. Part I, Item 1. - Financial Information - financial
statement footnote 11, "Contingencies" and Part I, Item 2. - Management's
Discussion and Analysis of Financial Condition and Results of Operations,
"Contingencies have been amended to disclose such security interest.
1
<PAGE>
Consolidated Technology Group Ltd. and Subsidiaries
Index
Page
----
Part I: - Financial Information:
Item 1. Financial Statements:
Consolidated Balance Sheets - June 30, 1998 and December 31, 1997 3-4
Unaudited Consolidated Statements of Operations - Three and
Six Months Ended June 30, 1998 and 1997 5
Unaudited Consolidated Statements of Comprehensive Income
(Loss) - Three and Six Months Ended June 30, 1998 and 1997 6
Unaudited Consolidated Statements of Cash Flows - Six Months
Ended June 30, 1998 and 1997 7-8
Unaudited Consolidated Statement of Shareholders' Deficit
- Six Months Ended June 30, 1998 9
Unaudited Notes to Consolidated Financial Statements 10-20
Item 2. Management's Discussion and Analysis of the
Financial Condition and Results of Operations 21-30
Part II - Other Information:
Item 6. Exhibits and Reports on Form 8-K 31
Signatures 32
2
<PAGE>
Consolidated Technology Group Ltd. and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
June 30,
1998 December 31,
Unaudited 1997
--------- ----
<S> <C> <C>
Assets:
Current assets:
Cash and cash equivalents $ 577,000 $ 1,268,000
Receivables, net of allowances 9,085,000 10,039,000
Marketable securities 8,093,000 --
Excess of accumulated costs over related billings 185,000 642,000
Prepaid expenses and other current assets 669,000 298,000
Net current assets of discontinued segments -- 1,044,000
---------- ----------
Total current assets 18,609,000 13,291,000
---------- ----------
Property, plant and equipment, net 348,000 636,000
------- -------
Other assets:
Capitalized software development costs -- 183,000
Goodwill, net 960,000 776,000
Customer lists, net 2,701,000 5,681,000
Deferred offering costs -- 71,000
Receivables, long-term 108,000 --
Receivables, related parties 425,000 655,000
Marketable securities 70,000 19,000
Investment in unconsolidated affiliate 586,000 --
Other assets 468,000 742,000
Net assets of discontinued segments -- 15,617,000
--------- ----------
Total Other Assets 5,318,000 23,744,000
---------- ----------
Total Assets $ 24,275,000 $ 37,671,000
========== ==========
</TABLE>
See notes to consolidated financial statements
3
<PAGE>
Consolidated Technology Group Ltd. and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
June 30,
1998 December 31,
Unaudited 1997
--------- ----
<S> <C> <C>
Liabilities and Shareholders' Deficit:
Current liabilities:
Accounts payable and accrued expenses $ 4,438,000 $ 7,632,000
Accrued payroll and related expenses 2,269,000 1,834,000
Accrued interest 3,000 9,000
Income taxes payable -- 76,000
Interim billings in excess of costs and estimated profits 2,378,000 2,346,000
Current debt obligations 5,120,000 5,651,000
Current portion of capitalized lease obligations 17,000 39,000
Notes payable, related parties -- 10,000
Net current liabilities of discontinued segments 6,251,000 14,611,000
---------- ----------
Total current liabilities 20,476,000 32,208,000
---------- ----------
Long-term liabilities:
Long-term debt obligations -- 124,000
Capitalized lease obligations 25,000 34,000
Subordinated debt 34,000 139,000
------ -------
Total long-term liabilities 59,000 297,000
------ -------
Contingencies (footnotes 10 and 11)
Minority interest 6,008,000 15,511,000
--------- ----------
Shareholders' deficit:
Preferred stock 3,000 3,000
Common stock (50,000,000 shares authorized, 48,720,996 and
49,910,996 shares issued and outstanding as of June 30, 1998
and December 31, 1997, respectively) 488,000 499,000
Additional paid-in capital 57,859,000 52,152,000
Accumulated Other Comprehensive Income (Expense):
Unrealized holding gain (loss) on available for sale securities 44,000 ( 116,000)
Accumulated deficit (60,662,000) (62,883,000)
---------- ----------
Total shareholders' deficit ( 2,268,000) (10,345,000)
---------- ----------
Total Liabilities and Shareholders' Deficit $ 24,275,000 $ 37,671,000
========== ==========
</TABLE>
See notes to consolidated financial statements
4
<PAGE>
Consolidated Technology Group Ltd. and Subsidiaries
Unaudited Consolidated Statements of Operations
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues $ 21,879,000 $ 23,670,000 $ 43,830,000 $ 46,469,000
Direct Costs 19,712,000 21,606,000 39,766,000 42,617,000
---------- ---------- ---------- ----------
Gross Profit 2,167,000 2,064,000 4,064,000 3,852,000
Selling, General and Administrative 2,538,000 2,879,000 5,412,000 5,863,000
Termination Payments for Executive
Contracts (footnotes 9 and 10) 350,000 -- 2,194,000 --
------------ ------------ ------------ -------------
Loss from Operations ( 721,000) ( 815,000) ( 3,542,000) ( 2,011,000)
------------ ------------ ------------ -------------
Other Income (Expense):
Interest expense ( 172,000) ( 335,000) ( 487,000) ( 650,000)
Other income (expense), net 112,000 ( 748,000) 167,000 ( 755,000)
Loss on sale of marketable securities ( 10,000) -- ( 10,000) --
------------ ------------ ------------ -------------
Other expense, net ( 70,000) ( 1,083,000) ( 330,000) ( 1,405,000)
------------ ------------ ------------ -------------
Loss from Continuing Operations Before
Minority Interest and Share of
Unconsolidated Affiliate's Loss ( 791,000) ( 1,898,000) ( 3,872,000) ( 3,416,000)
Minority Interest in (Income) Loss of
Subsidiaries ( 132,000) 188,000 ( 98,000) 507,000
Share of Loss of Unconsolidated Affiliate ( 36,000) -- ( 134,000) --
------------ ------------ ------------ -------------
Loss from Continuing Operations ( 959,000) ( 1,710,000) ( 4,104,000) ( 2,909,000)
Discontinued Operations:
Income (loss) from operations of
discontinued segments ( 104,000) 324,000 ( 458,000) ( 785,000)
Gain (loss) on disposal of segments 4,883,000 ( 396,000) 6,783,000 ( 396,000)
------------ ------------ ------------ -------------
Net Income (Loss) $ 3,820,000 ($ 1,782,000) $ 2,221,000 ($ 4,090,000)
============ ============= ============ =============
Basic and Diluted Earnings (Loss) per
Common Share:
Loss from continuing operations ($0.02) ($0.04) ($0.09) ($0.06)
Income (loss) from operations of
discontinued segments * 0.01 (0.01) (0.02)
Gain (loss) on disposal of segment 0.10 (0.01) 0.14 (0.01)
---- ---- ---- ----
Net income (loss) $0.08 ($0.04) $0.04 ($0.09)
==== ==== ==== ====
Weighted average number of common shares
49,071,228 45,376,336 49,532,894 45,376,336
========== ========== ========== ==========
</TABLE>
* - Less than ($0.01).
See notes to consolidated financial statements
5
<PAGE>
Consolidated Technology Group Ltd. and Subsidiaries
Unaudited Consolidated Statements of Comprehensive Income (Loss)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Income (Loss) $ 3,820,000 ($ 1,782,000) $ 2,221,000 ($ 4,090,000)
Other Comprehensive Income:
Unrealized holding gains on available
for sale securities 107,000 8,000 150,000 4,000
Reclassification for realized losses on
available for sale securities
10,000 -- 10,000 --
------ -- ------ --
Comprehensive Income (Loss) $ 3,937,000 ($ 1,774,000) $ 2,381,000 ($ 4,086,000)
============ ============ ============ =============
</TABLE>
See notes to consolidated financial statements
6
<PAGE>
Consolidated Technology Group Ltd. and Subsidiaries
Unaudited Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Six Months Ended June 30,
1998 1997
---- ----
<S> <C> <C>
Cash Flows from Operating Activities:
Loss from continuing operations ($ 4,104,000) ($ 2,909,000)
Adjustments to reconcile loss from continuing operations to net cash used in
continuing operations:
Depreciation and amortization 347,000 541,000
Minority interest in net (income) loss of subsidiaries 98,000 ( 507,000)
Bad debt expense 239,000 --
Share of loss of unconsolidated affiliate 134,000 --
Equity method loss in subsidiaries joint venture -- 104,000
Loss on sale of marketable securities 10,000 --
Write-off of deferred offering costs 71,000 --
Change in assets and liabilities:
(Increase) decrease in assets:
Receivables ( 1,418,000) ( 2,890,000)
Excess of accumulated costs over related billings ( 456,000) 34,000
Prepaid expense and other current assets ( 85,000) 435,000
Increase (decrease) in liabilities:
Accounts payable and accrued expenses ( 1,128,000) 2,306,000
Accrued payroll and related expenses 435,000 337,000
Accrued interest ( 6,000) ( 479,000)
Income taxes payable ( 76,000) --
Interim billings in excess of costs and estimated profits 1,101,000 ( 1,000)
--------- -------------
Net cash used in continuing operations ( 4,838,000) ( 3,029,000)
--------- ---------
Loss from discontinued operations ( 458,000) ( 785,000)
Adjustments to reconcile loss from discontinued operations to net cash used by
discontinued operations:
Depreciation and amortization 743,000 2,978,000
Bad debt expense 338,000 977,000
Loss on sale of fixed assets -- 36,000
(Gain) loss on disposal of segments ( 6,783,000) 396,000
Net change in assets and liabilities 4,260,000 ( 1,125,000)
--------- ---------
Net cash provided by (used in) discontinued operations ( 1,900,000) 2,477,000
--------- ---------
Net cash used in operating activities ( 6,738,000) ( 552,000)
--------- -------
(continued)
</TABLE>
See notes to consolidated financial statements
7
<PAGE>
Consolidated Technology Group Ltd. and Subsidiaries
Unaudited Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Six Months Ended June 30,
1998 1997
---- ----
<S> <C> <C>
Cash Flows from Investing Activities:
(Increase) decrease in other assets 221,000 ( 121,000)
Capital expenditures ( 77,000) ( 193,000)
Capitalized software development costs -- ( 462,000)
Investments in marketable securities ( 8,000,000) ( 82,000)
Proceeds from sale of marketable securities 6,000 62,000
Net proceeds from disposal of segments 14,994,000 --
Acquisition of customer list ( 413,000) --
Payments for loans made -- ( 120,000)
Collections for repayment of loans made 122,000 228,000
Cash of affiliate converted to an equity method investment ( 855,000) --
------------ -------------
Net cash provided by (used in) investing activities 5,998,000 ( 688,000)
--------- -------------
Cash Flows from Financing Activities:
Deferred offering costs -- ( 295,000)
Net advances from asset based lender 194,000 342,000
Proceeds from issuance of debt -- 550,000
Debt repayments ( 54,000) ( 65,000)
Proceeds from issuance of subordinated debt -- 115,000
Repayment of subordinated debt ( 84,000) --
Payments on capital lease obligations ( 7,000) ( 26,000)
------------ -------------
Net cash provided by financing activities 49,000 621,000
------------ -------------
Net Decrease in Cash and Cash Equivalents ( 691,000) ( 619,000)
Cash and Cash Equivalents at Beginning of Period 1,268,000 1,185,000
--------- ---------
Cash and Cash Equivalents at End of Period $ 577,000 $ 566,000
============ =============
Supplemental Disclosures of Cash Flow Information:
Cash paid for:
Interest $ 493,000 $ 1,129,000
============ =========
Income taxes $ 76,000 --
============
(concluded)
</TABLE>
Supplemental Disclosures of Non Cash Investing and Financing Activities:
During the six months ended June 30, 1997 the Company acquired equipment under
capital lease obligations with a net present value of $18,000.
See notes to consolidated financial statements
8
<PAGE>
Consolidated Technology Group Ltd. and Subsidiaries
Unaudited Consolidated Statements of Shareholders' Deficit
Six Months Ended June 30, 1998
<TABLE>
<CAPTION>
Accumulated
Other
Convert Affiliate Comprehensive
Balance at to an Equity Cancellation of Income-
December 31, Method Common Stock Unrealized Balance at
1997 Investment (footnote 9) Net Income Holding Gains June 30, 1998
---- ---------- ------------ ---------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Preferred stock, $1.00 par value,
$ 3.50 and $0.10, Series B and E,
8,000 shares authorized each:
Shares 262 -- -- -- 262
Amount $ 1,000 -- -- -- -- $ 1,000
Preferred stock, $1.00 par value,
$8.00 subordinated Series F, 6,000
shares authorized:
Shares 2,700 -- -- -- -- 2,700
Amount $ 2,000 -- -- -- -- $ 2,000
----- -----
Total preferred stock $ 3,000 -- -- -- -- $ 3,000
Common stock, $0.01 par value,
50,000,000 shares authorized:
Shares 49,910,996 -- ( 1,190,000) -- 48,720,996
Amount $ 499,000 -- ($ 11,000) -- $ 488,000
Additional paid-in capital $ 52,152,000 $ 5,696,000 $ 11,000 -- $ 57,859,000
Unrealized loss on marketable
securities ($ 116,000) -- -- $ 160,000 $ 44,000
Accumulated deficit ($ 62,883,000) -- -- 2,221,000 -- ($ 60,662,000)
---------- --------- --------- --------- ------- ---------
Total shareholders' deficit ($ 10,345,000) $ 5,696,000 -- $ 2,221,000 $ 160,000 ($ 2,268,000)
========== ========= ========= ========= ======= =========
</TABLE>
See notes to consolidated financial statements
9
<PAGE>
Consolidated Technology Group Ltd. and Subsidiaries
Unaudited Footnotes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(1) Basis of Presentation - In the opinion of the Company, the accompanying
unaudited financial statements contain all adjustments (consisting of only
normal recurring accruals) necessary to present fairly the financial position of
Consolidated Technology Group Ltd. and Subsidiaries (the "Company"), as of June
30, 1998 and December 31, 1997, the statement of changes in shareholders'
deficit for the six months ended June 30, 1998 and the results of its operations
and changes in cash flows for the six months ended June 30, 1998 and 1997. At
June 30, 1998 and December 31, 1997, the Company owned approximately 40% of the
outstanding common stock of Trans Global Services, Inc. ("Trans Global"), a
public company. At December 31, 1997, the Company and Trans Global shared a
common chief executive officer ("CEO") and chairman of the board, who owned
approximately 4% of Trans Global's common stock and held warrants to purchase
additional shares of Trans Global's common stock. During 1998, the former CEO
and chairman of the board of the Company and Trans Global resigned as an officer
and director of both companies. As of the date of this report, the Company and
Trans Global do not have a common CEO, however, because of the Company's
ownership interest in Trans Global and because the three present directors of
the Company are three of the five directors of Trans Global, Trans Global is
treated as a consolidated subsidiary as of June 30, 1998. See footnote 11 in
connection with obligations and potential obligations the Company has to Trans
Global.
(2) Accounting Policies - The accounting policies followed by the Company are
set forth in Note 1 to the Company's financial statements in the December 31,
1997 Form 10-K except as disclosed herein in footnotes 1 and 5.
(3) Interim Results - The results of operations for the three and six months
ended June 30, 1998 and 1997 are not necessarily indicative of the results to be
expected for the full year.
(4) Earnings (Loss) Per Share
The following reconciles the numerators and denominators of the basic and
diluted earnings (loss) per share computations for loss from continuing
operations.
<TABLE>
<CAPTION>
Loss Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ------
<S> <C> <C> <C>
Six Months Ended June 30, 1998:
Loss from continuing operations ($ 4,104,000)
Less: Preferred stock dividends
--
Basic Loss per Common Share:
Loss available to common stockholders ($ 4,104,000) 49,532,894 ($0.09)
====
Effect of Dilutive Securities:
Warrants *
-- --
Diluted Loss per Common Share:
Loss available to common stockholders, plus assumed
conversions ($ 4,104,000) 49,532,894 ($0.09)
========= ========== ====
Six Months Ended June 30, 1997:
Loss from continuing operations ($ 2,909,000)
Less: Preferred stock dividends
--
Basic Loss per Common Share:
Loss available to common stockholders ( 2,909,000) 45,376,336 ($0.06)
====
Effect of Dilutive Securities:
Warrants *
-- --
Diluted Loss per Common Share:
Loss available to common stockholders, plus assumed
conversions ($ 2,909,000) 45,376,336 ($0.06)
========= ========== ====
(4) Earnings (Loss) Per Share (continued):
</TABLE>
10
<PAGE>
Consolidated Technology Group Ltd. and Subsidiaries
Unaudited Footnotes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Loss Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ------
<S> <C> <C> <C>
Three Months Ended June 30, 1998:
Loss from continuing operations ($ 959,000)
Less: Preferred stock dividends
--
Basic Loss per Common Share:
Loss available to common stockholders ( 959,000) 49,071,228 ($0.02)
====
Effect of Dilutive Securities:
Warrants *
-- --
Diluted Loss per Common Share:
Loss available to common stockholders, plus assumed
conversions ($ 959,000) 49,071,228 ($0.02)
======= ========== ====
Three Months Ended June 30, 1997:
Loss from continuing operations ($ 1,710,000)
Less: Preferred stock dividends
--
Basic Loss per Common Share:
Loss available to common stockholders ( 1,710,000) 45,376,336 ($0.04)
====
Effect of Dilutive Securities:
Warrants *
-- --
Diluted Loss per Common Share:
Loss available to common stockholders, plus assumed
conversions ($ 1,710,000) 45,376,336 ($0.04)
========= ========== ====
</TABLE>
*- A warrant to purchase 1,000,000 shares of common stock at $0.75 per share was
outstanding for all of the above periods but was not included in the computation
of diluted loss per common share because the warrant's exercise price was
greater than the average market price of the common shares. The warrant, which
expires October 1, 1999, was outstanding at June 30, 1998.
On August 13, 1998, the Company issued 333,000 shares of common stock as part of
an agreement to settle certain subordinated promissory notes of the Medical
Diagnostics segment (see footnote 12). Such shares will increase the weighted
average number of common shares outstanding for future periods.
(5) Unconsolidated Affiliated Companies - As of December 31, 1997 and June 30,
1998, the Company owned approximately 36% of the common stock of Netsmart
Technologies, Inc. ("Netsmart"), a publicly held company. As of December 31,
1997, the Company and Netsmart shared two common directors and the same CEO and
chairman of the board, which resulted in the Company having significant
influence over the operations and decisions of Netsmart. Furthermore, the former
CEO and chairman of the board of the Company owned a large block of Netsmart
common stock. Accordingly, as of December 31, 1997, Netsmart was considered a
consolidated affiliate for accounting purposes. During 1998, the former CEO and
chairman of the board of both the Company and Netsmart resigned from both
positions and the two common board directors of both the Company and Netsmart
resigned. Due to the above change in effective control, Netsmart, for the three
and six months ended June 30, 1998 is presented in the financial statements as
an unconsolidated affiliate. The investment in Netsmart, accounted for under the
equity method, amounted to $586,000 as of June 30, 1998 and the Company's share
of Netsmart's loss amounted to $36,000 and $134,000 for the three and six
months, respectively. The results of operations and financial position of
Netsmart is summarized as follows:
11
<PAGE>
Consolidated Technology Group Ltd. and Subsidiaries
Unaudited Footnotes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(5) Unconsolidated Affiliated Companies (continued):
Condensed Statement of Operations Information:
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net revenues $ 2,800,000 $ 1,690,000 $ 5,341,000 $ 3,131,000
========= ========= ========= =========
Gross profit $ 1,025,000 $ 546,000 $ 2,096,000 $ 829,000
========= ======= ========= =======
Net loss ($ 82,000) ($ 587,000) ($ 357,000) ($ 1,240,000)
====== ======= ======= =========
</TABLE>
Condensed Balance Sheet Information:
June 30, December
1998 31, 1997
---- --------
Current assets 4,080,000 $ 3,664,000
========= ==========
Non-current assets $ 3,471,000 $ 3,676,000
========== ==========
Current liabilities $ 4,768,000 $ 4,200,000
========== ==========
Shareholders' equity $ 2,783,000 $ 3,140,000
========== ==========
(6) Industry Segments - During 1997, the Company discontinued the Medical
Diagnostics, Electro-Mechanical and Electro-Optical Products Manufacturing,
Audio Products Manufacturing, Three Dimensional Products and Services and
Business Consulting Services segments. Additionally, effective January 1, 1998,
Netsmart, an affiliate which represented the Medical Information Services
segment, is no longer a consolidated affiliate and instead is an equity method
investment (see footnote 5). As a result, the Company currently classifies its
operations into two business segments: (i) Contract Engineering Services, which
consists of Trans Global, a subsidiary that provide engineers, designers and
technical personnel on a temporary basis pursuant to contracts with major
corporations and (ii) Telecommunications, which consists of ARC Networks, Inc.
("ARC Networks"), a subsidiary that installs telephonic network systems and buys
and resells local and long-distance telephone service. Corporate and Other
consists of the operating activities of the Company and SISC Capital Corp.
("SISC"), a wholly owned holding company. During 1997, the business segments
also include Medical Information Services since during 1997, Netsmart was still
a consolidated affiliate. Inter segment sales are eliminated and sales outside
the United States are not material. Information concerning the Company's
business segments is as follows:
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Contract Engineering $ 18,682,000 $ 19,641,000 $ 37,171,000 $ 38,890,000
Medical Information -- 1,741,000 -- 3,313,000
Telecommunications 3,197,000 2,288,000 6,659,000 4,266,000
---------- ---------- ---------- ----------
$ 21,879,000 $ 23,670,000 $ 43,830,000 $ 46,469,000
========== ========== ========== ==========
Gross Profit:
Contract Engineering $ 1,632,000 $ 1,604,000 $ 3,096,000 $ 3,021,000
Medical Information -- 265,000 -- 422,000
Telecommunications 535,000 195,000 968,000 409,000
--------- --------- --------- ---------
$ 2,167,000 $ 2,064,000 $ 4,064,000 $ 3,852,000
========= ========= ========= =========
Operating Income (Loss):
Contract Engineering $ 395,000 $ 424,000 $ 478,000 $ 479,000
Medical Information -- ( 458,000) -- ( 985,000)
Telecommunications ( 127,000) ( 281,000) ( 449,000) ( 646,000)
Corporate and Other ( 1,034,000) ( 575,000) ( 3,661,000) ( 1,009,000)
Intercompany Transactions 45,000 75,000 90,000 150,000
----------- ----------- --------- ---------
($ 721,000) ($ 815,000) ($ 3,542,000) ($ 2,011,000)
=========== =========== ========= =========
</TABLE>
12
<PAGE>
Consolidated Technology Group Ltd. and Subsidiaries
Unaudited Footnotes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(6) Industry Segments (continued)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest Expense:
Contract Engineering $ 150,000 $ 197,000 $ 334,000 $ 383,000
Medical Information -- 82,000 -- 151,000
Telecommunications 22,000 66,000 148,000 136,000
Corporate and Other -- -- 5,000 2,000
Intercompany Transactions -- ( 10,000) -- ( 22,000)
---------- ---------- ---------- ----------
$ 172,000 $ 335,000 $ 487,000 $ 650,000
========== ========== ========== ==========
Other Income (Expense):
Contract Engineering $ 3,000 $ 29,000 $ 19,000 $ 63,000
Medical Information -- ( 46,000) -- ( 104,000)
Telecommunications 6,000 ( 2,000) -- ( 2,000)
Corporate and Other 148,000 ( 628,000) 238,000 ( 520,000)
Intercompany Transactions ( 45,000) ( 101,000) ( 90,000) ( 192,000)
---------- ---------- ---------- ----------
$ 112,000 ($ 748,000) $ 167,000 ($ 755,000)
========== ========== ========== ==========
Net Income (Loss):
Contract Engineering $ 248,000 $ 255,000 $ 163,000 $ 158,000
Medical Information -- ( 586,000 ) -- ( 1,240,000)
Telecommunications ( 143,000) ( 348,000 ) ( 597,000) ( 783,000)
Corporate and Other ( 896,000) ( 1,219,000 ) ( 3,438,000) ( 1,551,000)
Minority Interest in
(Income) Loss Of
Subsidiaries ( 132,000 188,000 ( 98,000) 507,000
Share of Loss of
Unconsolidated Affiliate ( 36,000) -- ( 134,000) --
Income (Loss) from
Operations of Discontinued
segments ( 104,000) 324,000 ( 458,000) ( 785,000)
Gain (Loss) on Disposal of
Segments 4,883,000 ( 396,000) 6,783,000 ( 396,000)
--------- --------- --------- ---------
$ 3,820,000 ($ 1,782,000) $ 2,221,000 ($ 4,090,000)
========= ========= ========= =========
Depreciation and
Amortization:
Contract Engineering $ 87,000 $ 95,000 $ 174,000 $ 218,000
Medical Information -- 150,000 -- 278,000
Telecommunications 10,000 16,000 165,000 37,000
Corporate and Other 4,000 3,000 8,000 8,000
---------- ---------- ---------- ----------
$ 101,000 $ 264,000 $ 347,000 $ 541,000
========== ========== ========== ==========
Capital Expenditures:
Contract Engineering $ 28,000 $ 86,000 $ 43,000 $ 105,000
Medical Information -- 35,000 -- 83,000
Telecommunications 15,000 -- 33,000 --
--
Corporate and Other 1,000 1,000 5,000
-------- ---------- --------- ----------
$ 44,000 $ 121,000 $ 77,000 $ 193,000
======== ========== ========= ==========
</TABLE>
13
<PAGE>
Consolidated Technology Group Ltd. and Subsidiaries
Unaudited Footnotes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(6) Industry Segments (continued)
June 30, December
Identifiable Assets: 1998 31, 1997
---- --------
Contract Engineering $ 14,542,000 $ 13,943,000
Medical Information -- 7,340,000
Telecommunications 4,047,000 2,793,000
Corporate and Other 23,178,000 23,234,000
Discontinued Segments -- 20,015,000
Intercompany Balances ( 17,492,000) ( 29,654,000)
------------- -------------
$ 24,275,000 $ 37,671,000
============= =============
(7) Concentrations of Credit Risk - The Company's segments extend credit to
customers which result in accounts receivable arising from their normal business
activities and do not require its customers to collateralize their payables to
the segments. The Company's segments routinely assess the financial strength of
its customers and believe that their accounts receivable credit risk exposure is
limited. Such estimate of the financial strength of such customers may be
subject to change in the near future. Trans Global, operating in the Contract
Engineering Services segment, has five clients, which when combined, account for
approximately 84% and 81% of the total revenues of the segment for the three
months ended June 30, 1998 and 1997. These same clients account for
approximately 65% of the outstanding accounts receivable of Trans Global. On a
consolidated basis these five customers represent approximately 72% of the
Company's consolidated revenue for the three months ended June 30, 1998 and
approximately 44% of the Company's consolidated accounts receivable balance at
June 30, 1998.
(8) Discontinued Operations - During 1997, the Company discontinued the Audio
Products Manufacturing, Three Dimensional Products and Services, Medical
Diagnostics, Electro-Optical and Electro-Mechanical Products Manufacturing and
Business Consulting Services segments.
(a) Audio Products Manufacturing - In May 1997, the Company sold all of the
issued and outstanding capital stock of WWR Technology, Inc., ("WWR"), the
subsidiary in which all of the operations of the Audio Products Manufacturing
segment operating activities were conducted, for $100,000. As a result of the
sale, the Company received net proceeds of approximately $62,000 and recorded a
gain of approximately $129,000 on the disposal in the second quarter of 1997.
The revenues of the Audio Products Manufacturing segment were approximately
$510,000 and $1.2 million for the three and six months June 30, 1997,
respectively. The operations of WWR up to the date of the disposal are
classified as loss from the operations of a discontinued segment.
(b) Three Dimensional Products and Services - Effective June 30, 1997, (the "3D
Measurement Date"), the Company formulated a plan to discontinue the operations
of all of the subsidiaries operating in the Three-Dimensional Products and
Services segment. As of the 3D Measurement Date, the Company accrued an estimate
of $250,000 for anticipated losses from the 3D Measurement Date until the date
the disposal is completed, which is expected to be completed during 1998. The
Company has written-off all assets of the Three-Dimensional Products and
Services subsidiaries, consisting primarily of capitalized product development
costs and property, plant and equipment. As of the 3D Measurement Date, it was
not known which liabilities the Company would be obligated to pay on behalf of
the discontinued segment and as of December 31, 1997 all of the segment's
remaining liabilities were recorded as net liabilities of a discontinued
segment. As of June 30, 1998, management estimates that the Company will be
obligated to pay approximately $511,000 of the segment's liabilities and has
written-off the remaining $1.1 million of liabilities. As of December 31, 1997
the estimated loss on disposal was approximately $649,000 and as of June 30,
1998 the Company estimates a gain on disposal of approximately $1.3 million as a
result of the Company's belief that it will not have to pay certain obligations
of the segment. However, because an estimated loss was recorded in 1997, the
actual gain recorded by the Company for the disposal during the six months ended
June 30, 1998 approximates $1.9 million. The revenues of the Three-Dimensional
Products and Services segment were approximately $147,000 and $160,000 for the
three and six months June 30, 1997, respectively. The operations of the Three
Dimensional Products and Services segment are classified as loss from the
operations of a discontinued segment.
14
<PAGE>
Consolidated Technology Group Ltd. and Subsidiaries
Unaudited Footnotes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(8) Discontinued Operations (continued)
As of June 30, 1998 and December 31, 1997 the liabilities of the
Three-Dimensional Products and Services segment included in the Company's
consolidated balance sheet consisted of the following.
June 30, December
1998 31, 1997
---- --------
Accounts payable and accrued expenses $ 159,000 $ 1,882,000
Accrued payroll and related expenses 98,000 246,000
Accrued interest 24,000 24,000
Notes payable, related parties 95,000 278,000
Current portion of long-term debt 135,000 175,000
------- -------
Net current liabilities of discontinued segment $ 511,000 $ 2,605,000
======== =========
(c) Medical Diagnostics - Effective September 1, 1997, the Company formulated a
plan to discontinue the operations of all of the subsidiaries operating in the
Medical Diagnostics segment. Pursuant to such plan, on April 2, 1998, the
Company consummated the sale of substantially all of the assets of International
Magnetic Imaging, Inc. ("IMI"). Such sale resulted in a gain on disposal of
approximately $4.9 million as follows:
Proceeds from Sale of Assets:
Cash $ 19,950,000
Assumption of liabilities 24,904,000
Direct expenses of sale ( 3,188,000)
--------------
Net proceeds from sale of assets 41,666,000
Net Book Value of Assets Sold 21,636,000
----------
Gain on Sale of Assets 20,030,000
Write-off Intangible Assets not Sold 13,380,000
----------
Gain on Sale after Write-off of Intangible Assets 6,650,000
Portion of Gain Attributable to Minority Interest Holders 1,767,000
---------
Gain on Disposal of Segment 4,883,000
=========
The remaining net current liabilities of the Medical Diagnostic segment as of
June 30, 1998, consist primarily of subordinated debt obligations and related
accrued interest which on August 13, 1998 was settled for total consideration of
$1.9 million (see footnote 12). The revenues of the Medical Diagnostics segment
approximated $6.8 million for the six months June 30, 1998 and approximated $7.4
million and $15.1 million for three and six months June 30, 1997, respectively.
The operations of the Medical Diagnostics segment are classified as loss from
the operations of a discontinued segment.
15
<PAGE>
Consolidated Technology Group Ltd. and Subsidiaries
Unaudited Footnotes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(8) Discontinued Operations (continued)
As of June 30, 1998 and December 31, 1997 the assets and liabilities of the
Medical Diagnostics segment included in the Company's consolidated balance sheet
consisted of the following.
June 30, December
1998 31, 1997
---- --------
Cash $ 1,833,000 $ 1,813,000
Accounts receivable, net -- 9,803,000
Loans receivable 325,000 325,000
Property, plant and equipment -- 9,738,000
Goodwill -- 9,181,000
Customer lists, net -- 4,430,000
Receivable, long-term -- 1,271,000
Other assets -- 735,000
---------- -----------
Total assets 2,158,000 37,296,000
--------- ----------
Accounts payable and accrued expenses -- 3,978,000
Accrued interest -- 814,000
Income taxes payable 249,000 249,000
Subordinated debt related parties 924,000 924,000
Current portion of long-term debt -- 10,932,000
Current portion of subordinated debt 5,711,000 5,721,000
Current portion of capitalized lease obligations -- 1,240,000
Deferred interest 1,014,000 498,000
Long-term debt -- 7,710,000
Capitalized lease obligations -- 1,702,000
Subordinated debt -- 8,000
---------- -----------
Total liabilities 7,898,000 33,776,000
---------- -----------
Net assets (liabilities) to be disposed of ($ 5,740,000) $ 3,520,000
========= =========
Presented in the balance sheet as follows:
Net current liabilities of discontinued segment ($ 5,740,000) ($ 11,916,000)
Net long-term assets of discontinued segment -- 15,436,000
---------- ----------
Net assets (liabilities) to be disposed of ($ 5,740,000) $ 3,520,000
========== ===========
16
<PAGE>
Consolidated Technology Group Ltd. and Subsidiaries
Unaudited Footnotes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(8) Discontinued Operations (continued)
(d) Electro-Optical and Electro-Mechanical Products Manufacturing - Effective
December 31, 1997, the Company entered into an agreement to sell the
Electro-Optical and Electro-Mechanical Products Manufacturing segment. The loss
on the disposal of the segment approximates $31,000. The revenues of the
electro-optical and electro-mechanical products manufacturing segment were
$818,000 and $1.5 million for the three and six months June 30, 1997,
respectively. The operations of the Electro-Optical and Electro-Mechanical
Products Manufacturing segment are classified as loss from the operations of a
discontinued segment.
As of December 31, 1997 the assets and liabilities of the Electro-Optical and
Electro-Mechanical Products Manufacturing segment included in the Company's
consolidated balance sheet consisted of the following.
December
31, 1997
--------
Cash $ 29,000
Accounts receivable, net 304,000
Inventories 1,820,000
Prepaid and other current assets 4,000
Property, plant and equipment 161,000
Other assets 20,000
----------
Total assets 2,338,000
----------
Accounts payable and accrued expenses 778,000
Accrued payroll and related obligations 34,000
Notes payable, related parties 34,000
Current portion of long-term debt 303,000
Current portion of capitalized lease obligations 54,000
----------
Total liabilities 1,203,000
----------
Net assets to be disposed of $ 1,135,000
==========
Presented in the balance sheet as follows:
Net current assets of discontinued segment $ 1,044,000
Net current liabilities of discontinued segment ( 90,000)
Net long-term assets of discontinued segment 181,000
----------
Net assets to be disposed of $ 1,135,000
==========
(e) Business Consulting Services - Effective December 31, 1997, the Company
entered into an agreement to sell the Business Consulting Services segment. The
loss on the disposal of the segment approximates $1,000. The revenues of the
Business Consulting Services segment were $127,000 and $254,000 for the three
and six months June 30, 1997, respectively. The operations of the Business
Consulting Services segment are classified as loss from the operations of a
discontinued segment. As of December 31, 1997 assets of the Business Consulting
Services segment consisted of $1,000 of net property, plant and equipment
presented in the balance sheet as net long-term assets of discontinued segment.
17
<PAGE>
Consolidated Technology Group Ltd. and Subsidiaries
Unaudited Footnotes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(9) Resignation of Registrant's Directors, Chief Executive Officer and Corporate
Secretary
On March 30, 1998, the Company and its wholly-owned subsidiary, SISC, entered
into a series of agreements with Lewis S. Schiller ("Schiller"), Grazyna B. Wnuk
("Wnuk"), E. Gerald Kay ("Kay") and Norman J. Hoskin ("Hoskin"). Pursuant to the
agreements:
a) Schiller, Wnuk, Kay and Hoskin resigned as directors and officers of
the Company and its subsidiaries contemporaneously with the closing of
the sale by IMI of substantially all of its assets pursuant to an asset
purchase agreement dated as of January 28, 1998 between IMI and
Comprehensive Medical Imaging, Inc. IMI is a subsidiary of the Company,
which operated in the Medical Diagnostics segment. The sale by IMI is
referred to as the "IMI Sale" (see footnote 8(c)).
b) In consideration for payments of approximately $4.0 million to
Schiller and Wnuk, the Company purchased from Schiller and Wnuk all of
their rights under their respective employment agreements with the
Company and their stock interest in IMI. Such payments represent a
significant discount from the amounts due under their respective
employment agreements. $1.6 million of the above $4 million settlement
relates to Schiller's and Wnuk's stock interest in the IMI sale. The
remainder of $2.4 million relates to obligations of the Company, of
which approximately $600,000 has been previously accrued in the
financial statements, resulting in increased expense of approximately
$1.8 million during 1998.
c) During April 1998, Schiller transferred to the Company 1,190,000
shares of the Company's Common Stock owned by him.
d) The Company transferred to Schiller or his designees for nominal
consideration, certain subsidiaries of the Company. Such subsidiaries
operated at a loss and had, in the aggregate, either a negative or zero
net worth (see footnotes 8(d) and 8(e)).
e) Schiller entered into a three-year consulting agreement with the
Company, for which he will receive annual compensation of $100,000.
Such consulting fees started accruing in April 1998.
f) The Company, its subsidiaries and Schiller, Wnuk, Kay and Hoskin
executed mutual releases and the Company provided Schiller, Wnuk, Kay
and Hoskin with certain indemnification rights.
The negotiations, with respect to these agreements, were conducted with
representatives of shareholders who are not affiliated with the prior management
or with the plaintiffs in certain recent litigation against the Company.
Immediately prior to the completion of the IMI Sale, Schiller, Wnuk, Kay and
Hoskin elected as their successors as directors three individuals who were
designated by the representative of the shareholders.
In April 1998, Schiller notified the Company of his claim that the
aforementioned three year consulting agreement had been breached by the Company
and that the balance of the payments due thereunder were accelerated and
immediately due and payable. The Company has disputed Schiller's contentions
with respect to such claimed breach.
18
<PAGE>
Consolidated Technology Group Ltd. and Subsidiaries
Unaudited Footnotes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(10) Renegotiated Contract with Chief Financial Officer
On April 14, 1998, Mr. George W. Mahoney, the Company's Chief Financial Officer
("CFO"), gave the Company notice that he was exercising his right under his
employment agreement with the Company (the "Original Agreement") to terminate
his employment on ninety days notice. At that time, Mr. Mahoney also advised the
Company that, in his view, the agreement required the Company, as a consequence
of the April 1998 change of control of the Company's management, to pay him a
lump sum equal to his salary for the balance of the term of the agreement, which
was approximately $2.4 million. The Company's board of directors informed Mr.
Mahoney at that time that it was evaluating the Company's and Mr. Mahoney's
respective rights under the Original Agreement.
Shortly thereafter, the Company's board of directors and Mr. Mahoney entered
into a series of discussions regarding the modification of the terms of Mr.
Mahoney's employment with the Company. On June 16, 1998, such discussions
culminated in the execution by Mr. Mahoney and the Company of an Amended and
Restated Employment Agreement (the "Amended Agreement"), whereby Mr. Mahoney
continues to serve the Company as its CFO for a term that commenced on June 1,
1998 and will expire on May 31, 1999.
The material provisions of the Amended Agreement include the payment to Mr.
Mahoney of an annual salary of $202,000, and the payment by the Company of
$350,000 in settlement of his claims for change of control compensation under
the Original Agreement. The payment was made to Mr. Mahoney on June 19, 1998.
The Company also delivered a general release to Mr. Mahoney simultaneously with
the execution of the Amended Agreement. By its terms, the general release
extinguishes any claims that the Company might have had against Mr. Mahoney,
whether known or unknown, arising from or in conjunction with Mr. Mahoney's
services by, or on behalf of, the Company as an officer, director or
shareholder, or otherwise, prior to and including April 3, 1998.
(11) Contingencies
Series G Preferred Stock - During 1995, the Company issued to Trans Global 1,000
shares of Series G 2% cumulative, convertible, preferred stock, which
automatically converts on September 30, 2000 into such number of shares of the
Company's common stock as shall have a value equaling $2.1 million. The
preferred shares were issued in order to satisfy an intercompany payable that
was owed to Trans Global by WWR, a discontinued subsidiary of the Company. In
March 1998, the Company amended its certificate of incorporation, with the
consent of Trans Global as the sole holder of the Series G Preferred Stock, to
change the rights, preferences and privileges of the holders of the Series G
Preferred Stock. As a result of such amendment, the conversion provisions were
terminated and the Series G Preferred Stock became subject to redemption at the
option of either the Company or the holders of the Series G Preferred Stock at
an aggregate redemption price of $2.1 million. Because Trans Global is a
consolidated subsidiary of the Company, the Series G Preferred Stock is
eliminated in consolidation against Trans Global's investment in the Series G
Preferred Stock. If Trans Global were to become an unconsolidated affiliate, the
Series G Preferred Stock would be classified as an obligation of the Company.
Furthermore, upon the redemption of the Series G Preferred Stock, the Company is
obligated to pay $2.1 million to Trans Global.
Intercompany Debt Obligations - As of June 30, 1998, the Company owes Trans
Global approximately $293,000 in consideration of amounts that were owed to
Trans Global by a discontinued subsidiary of the Company. Additionally, ARC
Networks owes Trans Global approximately $1.2 million for advances made to ARC
Networks by Trans Global. Because Trans Global is a consolidated subsidiary of
the Company, such intercompany obligations are eliminated in consolidation. If
Trans Global were to become an unconsolidated affiliate, the amounts would be
classified as debt obligations. On March 13, 1998, the Company agreed to
guarantee the outstanding indebtedness of ARC Networks to Trans Global and on
June 16, 1998, ARC Networks gave Trans Global a first security interest in all
of its assets.
19
<PAGE>
Consolidated Technology Group Ltd. and Subsidiaries
Unaudited Footnotes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(12) Subsequent Events
On August 13, 1998, IMI consummated a settlement with the holders of certain
subordinated promissory notes, which were issued by IMI in 1994 in connection
with the acquisition of the Medical Diagnostics segment. The Company paid
approximately $1.9 million, of which approximately $1.6 million was paid in cash
and approximately $324,000 was applied in payment of certain promissory notes
due to IMI by one of the holders of the subordinated promissory notes, in full
settlement and satisfaction of the approximate $7.7 million outstanding balance
of such notes as of June 30, 1998. In connection with the settlement, the
Company issued 333,000 shares of its common stock to the holders of the
subordinated promissory notes in satisfaction of IMI's contractual obligations
under the agreements relating to the 1994 acquisition of the Medical Diagnostics
segment. The Company will recognize an extraordinary gain on debt extinguishment
of approximately $5.6 million in the third quarter of 1998.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
20
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
- --------------------------------------------------------------------------------
Forward Looking Statements
Statements in this Form 10-Q that are not descriptions of historical facts may
be forward-looking statements that are subject to risks and uncertainties.
Actual results could differ materially from those currently anticipated due to a
number of factors, including those identified in this Form 10-Q, the Company's
Annual Report on Form 10-K for the year ended December 31, 1997 and in other
documents filed by the Company with the Securities and Exchange Commission.
Financial Condition - Liquidity and Capital Resources
For the three and six months ended June 30, 1998, (the "1998 2nd Quarter" and
the "1998 Six Month Period"), the Company generated net income of $3.8 million
and $2.2 million, respectively, however, $4.9 million and $6.8 million,
respectively, was generated from gains on disposal of segments. During the three
months ended March 31, 1998, (the "1998 1st Quarter") the Company recorded a
$1.9 million gain on disposal of the Three Dimensional Products and Services
segment and during the 1998 2nd Quarter recorded a $4.9 million gain on disposal
of the Medical Diagnostics segment. During the 1998 2nd Quarter and the 1998 Six
Month Period the Company had loss from operations of the discontinued Medical
Diagnostics segment of $104,000 and $458,000, respectively. Excluding the
aforementioned nonrecurring gains on disposal, the Company's loss from
continuing operations for the 1998 2nd Quarter and the 1998 Six Month Period
approximated $959,000 and $4.1 million, respectively. Additionally, the
accumulated deficit as of June 30, 1998 approximated $60.7 million and total
shareholders' deficit approximated $2.3 million. Furthermore, at June 30, 1998,
the Company had negative working capital of $1.9 million. Furthermore, the
Company has historically, had operating cash flow shortfalls in all of its
segments other than the Contract Engineering Services and the Medical
Diagnostics segment. These conditions raise substantial doubt about the
Company's ability to continue as a going concern.
During the past year, the Company has made significant progress in increasing
the Company's ability to continue as a going concern. Effective December 31,
1997, the Company discontinued three of its unprofitable segments (including the
aforementioned disposal of the Three Dimensional Products and Services segment)
for nominal consideration. Such segments had combined accumulated losses of
$15.6 million through the date of the disposals and had required cash infusions
from the Company in excess of $11 million. Additionally, the aforementioned
disposal of the Medical Diagnostics segment provided the Company with
approximately $15 million in net cash and disposed of $13.4 million in
intangible assets, $20 million in debt and capital lease obligations and $5
million in accounts payable and accrued expenses. Approximately $2.2 million of
the net proceeds was used for termination payments on executive contracts, $2.5
million was used to pay existing obligations of the Company, $1.8 million was
set aside in an escrow account to satisfy remaining obligations of the Medical
Diagnostics segment and approximately $700,000 was used for ongoing operations
of the Company during the 1998 2nd Quarter, leaving approximately $8 million for
future investment and working capital. On July 17, 1998, the Company loaned
approximately $200,000 to the Telecommunications segment. As of the date of this
report, the Company does not have any definitive plan for the use, other than
working capital, of any substantial portion of the remaining net proceeds from
the sale of the Medical Diagnostics segment and as of June 30, 1998, the Company
invested $8 million in treasury bills. However, as disclosed under the caption
"Contingencies" that follows, the Company has contingent obligations, which
represent a significant portion of such proceeds.
Effective 1998, the Company no longer reports Netsmart as a consolidated
affiliate and instead reports its investment in Netsmart under the equity method
whereby only the Company's proportionate share of income or loss of Netsmart is
reported. See footnote 5 to the financial statements. Future losses on the
Company's investment in Netsmart are limited to the level of investment in
Netsmart, which is currently $586,000. As a result of the foregoing factors, the
Company's ability to continue as a going concern is dependent upon the success
of the Company's remaining two operating segments -- Contract Engineering
Services and Telecommunications.
21
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
- --------------------------------------------------------------------------------
The Contract Engineering Services segment is represented by Trans Global, a
public company in which the Company has a 40% equity interest. Trans Global
reported income in 1997 for the first time since it was acquired by the Company
in 1994, and reported $163,000 of net income for the 1998 Six Month Period.
However, to the extent that Trans Global generates cash flow, such cash flow is
not available to the Company to fund its operations and furthermore, the Company
has significant contingent obligations to Trans Global as discussed under the
caption "Contingencies" that follows.
The Telecommunications segment is represented by ARC Networks, a company in
which the Company has a 63% equity interest. ARC Networks has operated at
significant losses and recent attempts to fund the segment through both public
and private financings have not succeeded. In February 1997, this segment
received net proceeds of $495,000 through the issuance of notes in the principal
amount of $550,000 and warrants. The notes matured on April 1, 1998. ARC
Networks is in default on the notes together with interest of approximately
$50,000, and the holders of the notes have commenced an action seeking payment
of the notes. The Company does not anticipate that ARC Networks can operate
profitably without significant additional funding nor can any assurances be made
that ARC Networks will operate profitably if significant funding sources are
found.
Management is currently evaluating its investment in its remaining operating
segments in order to determine whether to provide additional investment or
whether to divest from its existing affiliates and as a result of the foregoing
uncertainties it is at least possible that the Company could be forced to cease
operations in its current segments.
Working Capital Condition
As of December 31, 1997, the Company had negative working capital of $18.9
million. As of June 30, 1998, the Company has negative working capital of $1.9
million, representing a decrease in negative working capital of $17 million.
Approximately $6.3 million of the negative working capital relates to the net
current liabilities of discontinued segments, which includes approximately $7.7
million of subordinated debt that was settled in full for total consideration of
$1.9 million (see footnote 12 of the financial statements). Excluding net
current liabilities of discontinued segments, the Company has approximately $5.8
million in positive working capital for continuing operations. The Company's
principal working capital consists of cash and cash equivalents and current
marketable securities, consisting of treasury bills, which in the aggregate were
$1.3 million at December 31, 1997 and $8.7 million at June 30, 1998. For the
1998 Six Month Period, cash used in discontinued operations amounted to $1.9
million and net cash provided by (used in) continuing operations was as follows:
Contract Engineering Services ($ 124,000)
Telecommunications 451,000
Corporate and Other ( 5,165,000)
---------
Net Cash Used in Continuing Operations ($ 4,838,000)
=========
Any cash generated by the Contract Engineering Services segment is generated by
Trans Global, a publicly held company, and as such is not necessarily available
to other subsidiaries of the Company. As of June 30, 1998, Trans Global is owed
approximately $1.2 million from advances made to ARC Networks. The cash used in
the operations of corporate and other includes $2.2 million in termination
payments for executive contracts, $2.3 million in payment of accounts payable
and accrued expense obligations that were incurred in prior periods and $665,000
was used for current operations.
22
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
- --------------------------------------------------------------------------------
Other Sources and Uses of Cash
Significant sources of cash other than from operations includes $14.9 million
from the disposal of the Medical Diagnostics segment, $194,000 in net advances
from asset based lendors and $122,0000 from the repayment of loans receivable.
Significant uses of cash other than in operations includes $8 million for
investment in marketable securities, $413,000 for the acquisition of a customer
list, $77,000 for capital expenditures and $145,000 for debt and capital lease
payments.
Changes in Other Working Capital Assets and Liabilities
Other significant changes in working capital, other than cash and marketable
securities, includes an increase in accounts receivable of $1.4 million, a
decrease in accounts payable and accrued expenses of approximately $1.1 million
and an increase in interim billings in excess of costs and estimated profits of
$1.1 million. Of the increase in accounts receivable, $672,000 relates to
Contract Engineering Services and $556,000 relates to Telecommunications. The
decrease in accounts payable and accrued expenses is due primarily to payments
made by the Company with the proceeds from the disposal of the Medical
Diagnostics segment which was partially offset by a $567,000 build up of
payables in the Telecommunications segment. The increase in interim billings in
excess of costs and estimated profits is related to contracts of the
Telecommunications segment whereby billing schedules differ from revenue
recognition on projects in progress.
Contingencies
Trans Global has the right to require the Company to redeem $2.1 million of the
Company's Series G Preferred Stock which it holds. Furthermore, the Company's
consolidated subsidiary, ARC Networks, owes Trans Global approximately $1.2
million. See footnote 11 of the financial statements. The three present
directors of the Company are three of the five directors of Trans Global and as
of the date of this report the redemption provision of the Series G Preferred
Stock has not been invoked. On March 13, 1998, the Company agreed to guarantee
the outstanding indebtedness of ARC Networks to Trans Global and on June 16,
1998, ARC Networks gave Trans Global a first security interest in all of its
assets. If the Series G Preferred Stock is redeemed and the Company is required
to pay the amount that ARC Networks owes Trans Global, the Company would use
approximately $3.3 million, or 40%, of the cash and marketable securities of the
Company.
In April 1998, Lewis S. Schiller, the former CEO of the Company, notified the
Company of his claim that the three year consulting agreement between Schiller
and the Company (see footnote 9 of the financial statements) had been breached
by the Company and that the balance of the payments due thereunder
(approximately $300,000) were accellerated and immediately due and payable. The
Company has disputed Schiller's contention with respect to such claimed breach.
Year 2000 Issues
Many existing computer programs use only two digits to identify a year in a date
field. These programs were designed and developed without considering the impact
of the upcoming change in the century. If not corrected, many computer
applications could fail or create erroneous results by or at the year 2000. This
issue is referred to as the "Year 2000 Issue". All of the computer applications
used by the holding companies (i.e. Consolidated and SIS Capital Corp.) are year
2000 compliant. The Company's affiliates have a significant portion of computer
software, particularly the software relating to payroll and other employee
records, that is managed for the affiliates by an outside service company. Such
service company has advised the affiliates that it will be year 2000 compliant.
The Company is in the process of evaluating the potential cost to it in
addressing the year 2000 Issue with respect to its other software and the
potential consequences of an incomplete or untimely resolution of the Year 2000
issue. Although the Company believes it will not incur significant expenses for
its affiliates to become Year 2000 compliant, no assurance can be given that the
Company will not incur significant cost in addressing the Year 2000 Issue or
that the failure to adequately address the Year 2000 Issue will not have a
material adverse effect upon the Company.
23
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
- --------------------------------------------------------------------------------
Effect of Loan Defaults
The Company is currently in default on loans approximating $8.2 million.
$550,000 of such amount relates to the Telecommunications segment as previously
discussed. The remaining debt that is in default relates to the discontinued
Medical Diagnostics segment and on August 13, 1998, the Company settled the
obligations for approximately $1.9 million of which $1.6 million was paid in
cash and $324,000 was applied in payment of certain promissory notes due to IMI
by one of the note holders (see footnote 12 to the financial statements).
Results of Operations
During 1997, the Company discontinued five of its operating segments,
Three-Dimensional Products and Services, Medical Diagnostics, Electro-Mechanical
and Electro-Optical Products Manufacturing, Business Consulting Services and
Audio Products Manufacturing segments. Additionally, as of 1998, the Medical
Information Services segment is no longer included in the consolidated results
of operations and instead is reported as an equity method investment, whereby
the Company only reports its proportionate share of income or loss. As a result
of the above, the prior period data has been reclassified to conform to the
above changes in segment reporting.
Loss from Operations of Continuing Segments
Comparing the 1998 2nd Quarter to the three months ended June 30, 1997 (the
"1997 2nd Quarter"), the aggregate decrease in loss from operations consisted of
the following:
<TABLE>
<CAPTION>
Income (Loss) from Operations
-----------------------------
1998 1997
2nd 2nd
Quarter Quarter Variance
------- ------- --------
<S> <C> <C> <C>
Contract Engineering Services $ 395,000 $ 424,000 ($ 29,000)
Medical Information Services -- ( 458,000) 458,000
Telecommunications ( 127,000) ( 281,000) 154,000
Corporate and Other ( 1,034,000) ( 575,000) ( 459,000)
Intercompany Transactions 45,000 75,000 ( 30,000)
------------ ------------ ------------
Loss from Operations ($ 721,000) ($ 815,000) ($ 94,000)
============ ============ ============
</TABLE>
During the 1998 2nd Quarter, corporate and other loss includes $350,000 of
expense to terminate the Company's CFO's original employment agreement (see
footnote 10 to the financial statements). The other segments income (loss) from
operations remained relatively level.
Comparing the 1998 Six Month Period to the six months ended June 30, 1997 (the
"1997 Six Month Period"), the aggregate increase in loss from operations
consisted of the following:
<TABLE>
<CAPTION>
Income (Loss) from Operations
-----------------------------
1998 1997
2nd 2nd
Quarter Quarter Variance
------- ------- --------
<S> <C> <C> <C>
Contract Engineering Services $ 478,000 $ 479,000 ($ 1,000)
Medical Information Services -- ( 985,000) 985,000
Telecommunications ( 449,000) ( 646,000) 197,000
Corporate and Other ( 3,661,000) ( 1,009,000) ( 2,652,000)
Intercompany Transactions 90,000 150,000 ( 60,000)
--------- --------- ---------
Loss from Operations ($ 3,542,000) ($ 2,011,000) ($ 1,531,000)
========= ========= =========
</TABLE>
24
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
- --------------------------------------------------------------------------------
During the 1998 six month period, corporate and other loss includes
approximately $1.8 million of expense to accrue for the buy out of the former
CEO's employment agreement (see footnote 9 to the financial statements) and
$350,000 of expense to terminate the Company's CFO's original employment
agreement (see footnote 10 to the financial statements). The other segments
income (loss) from operations remained relatively level.
Non Operating Components of Continuing Income (Loss)
Interest expense decreased $163,000 when comparing both the 1998 and 1997 2nd
Quarters and the 1998 and 1997 Six Month Periods. The decrease is due primarily
to the fact that Netsmart's interest is not included in the 1998 totals. The
interest expense for both the 1998 and 1997 periods was primarily paid to asset
based lendors of the Contract Engineering and Telecommunication segments.
Other expense during the 1997 2nd Quarter and the 1997 Six Month Period
approximated $748,000 and $755,000, respectively. In December 1996, the Company
acquired Lafayette Industries, Inc. ("Lafayette") and during 1997 it was
determined that certain misrepresentations were made by the management of
Lafayette during the course of the acquisition. As a result, the Company
incurred significant costs in order to formulate a settlement agreement whereby
the acquisition was effectively reversed. Other income (expense) items were not
significant during the 1998 periods.
During 1998, minority interest in income of subsidiaries represents the minority
share of Trans Global's income, which amounted to $132,000 and $98,000,
respectively for the 1998 2nd Quarter and the 1998 Six Month Period. During
1997, minority interest in loss of subsidiaries represents the minority share of
both Trans Global's and Netsmart's income (loss) which in the aggregate amounted
to $188,000 and $507,000, respectively for the 1997 2nd Quarter and the 1997 Six
Month Period.
The share of loss of unconsolidated affiliate represents the Company's
proportionate share of Netsmart's net loss, which amounted to $36,000 and
$134,000, respectively, for the 1998 2nd Quarter and the 1998 Six Month Period.
Changes in minority interest and the share of loss of unconsolidated affiliates
are a result of the inherent changes in the net income and loss of the related
affiliates from period to period.
Discontinued Operations
<TABLE>
<CAPTION>
The aggregate losses from discontinued operations consists of the following:
1998 1997 1998 1997
2nd 2nd Six Month Six Month
Quarter Quarter Period Period
------- ------- ------ ------
<S> <C> <C> <C> <C>
Medical Diagnostics ($ 104,000 ) $ 810,000 ($ 458,000 ) $ 916,000
Audio Products -- ( 98,000) -- ( 292,000)
Electro-Mechanical -- 64,000 -- ( 463,000)
Business Consulting -- 53,000 -- 44,000
Three Dimensional ( 505,000) -- ( 990,000)
------------ ------------ ------------ -------------
($ 104,000) $ 324,000 ($ 458,000 ) ($ 785,000)
============ ============ ============ ============
</TABLE>
The above discontinued segments will not have operating income or loss beyond
the 1998 Six Month Period shown above for future reporting periods. The gain on
disposal of segments during 1998 includes a $1.9 million gain on the disposal of
the Three-Dimensional Products and Services segment recorded in the 1998 1st
Quarter and a $4.9 million gain on the disposal the Medical Diagnostics segment
recorded in the 1998 2nd Quarter. The loss on disposal recorded in the 1997 2nd
Quarter for $396,000 is comprised of the original estimate of the loss to be
incurred on the disposal of the Three Dimensional Products and Services segment
of $525,000 offset by a gain on the disposal of the Audio Products segment of
$129,000.
25
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
- --------------------------------------------------------------------------------
Consolidated Net Loss
As a result of the foregoing, the Company incurred net income of $3.8 million
and basic earnings per common share of $0.08 for the 1998 2nd Quarter and net
loss of $1.8 million and basic loss per common share of $0.04 for the 1997 2nd
Quarter. The Company incurred net income of $2.2 million and basic earnings per
common share of $0.04 for the 1998 Six Month Period and net loss of $4.1 million
and basic loss per common share of $0.09 for the 1997 Six Month Period.
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
-------------------
1998 1997
1998 1997 Six Six
2nd 2nd Month Month
Quarter Quarter Period Period
------- ------- ------ ------
<S> <C> <C> <C> <C>
Revenues:
Contract Engineering Services 85% 83% 85% 84%
Medical Information Services -- 7% -- 7%
Telecommunications 15% 10% 15% 9%
Gross Profit:
Contract Engineering Services 75% 78% 76% 78%
Medical Information Services -- 13% -- 11%
Telecommunications 25% 9% 24% 11%
Selling, General & Administrative Expense:
Contract Engineering Services 43% 41% 34% 43%
Medical Information Services -- 25% -- 24%
Telecommunications 23% 17% 19% 18%
Corporate and Other 36% 20% 48% 17%
Intercompany Transactions (2%) (3%) (1%) (2%)
</TABLE>
Contract Engineering Services
The contract engineering services segment reflects the operations of Trans
Global and its two subsidiaries, Avionics Research Holdings, Inc., ("Avionics"),
and Resource Management International, Inc., ("RMI"). Trans Global is engaged in
the business of providing engineers, designers and technical personnel on a
temporary basis to major corporations.
Revenue from technical temporary staffing services is based on the hourly cost
of payroll plus a percentage. The success of Trans Global's business will be
dependent upon its ability to generate sufficient revenues to enable it to cover
its fixed costs and other operating expenses, and to reduce its variable costs,
principally its interest. Under its agreements with its clients, Trans Global is
required to pay its employees and pay all applicable Federal and State
withholding and payroll taxes prior to receipt of payment from the clients.
Furthermore, Trans Global's payments from its clients are based upon the hourly
rate paid to the employee, without regard to when payroll taxes are payable with
respect to the employee. Accordingly, Trans Global's cost of services is greater
during the first part of the year, when Federal Social Security taxes and state
unemployment and related taxes, which are based on a specific level of
compensation, are due. Thus, until Trans Global satisfies its payroll tax
obligations, it will have
26
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
- --------------------------------------------------------------------------------
a lower gross margin than after such obligations are satisfied. Furthermore, to
the extent that Trans Global experiences turnover in employees, its gross margin
will be adversely affected. For example, in 1998, Social Security taxes are
payable on the first $68,400 of compensation. Once that level of compensation is
paid with respect to any employee, there is no further requirement for Trans
Global to pay Social Security tax for such employees. Since most of Trans
Global's employees receive compensation in excess of that amount, Trans Global's
costs with respect to any employee are significantly higher during the period
when it is required to pay Social Security taxes than it is after such taxes
have been paid.
Trans Global had revenues of $18.7 million for the 1998 2nd Quarter, which
reflects a decrease of 5% from $19.6 million for the 1997 2nd Quarter and had
revenues of $37.2 million for the 1998 Six Month Period, which reflects a
decrease of 4% from $38.9 million for the 1997 Six Month Period. However, gross
margins, as measured in direct dollars and percentages, increased from 8.2% to
8.7% when comparing the 1998 and 1997 2nd Quarters and increased from 7.8% to
8.3% when comparing the 1998 and 1997 Six Month Periods. This represents Trans
Global's continued efforts to trim sales that generate lower gross margins.
During the 1998 and 1997 2nd Quarters, approximately 84% and 81% of the revenue
was generated from its five largest customers; Boeing Corp., Northrup-Gruman,
Lockheed-Martin, Bell Helicopter and Gulfstream Aerospace. These same clients
accounted for 65% and 78% of the total outstanding accounts receivable as of
June 30, 1998 and December 31, 1997.
Selling, general and administrative expenses remained relatively level for the
1998 and 1997 2nd Quarters at $1.2 million and $1.6 million, respectively, and
for the 1998 and 1997 Six Month Periods at $2.6 million and $2.5 million,
respectively.
On April 23, 1998, Trans Global entered into a two year revolving credit
agreement with Citizens Business Credit Company, a division of Citizen's Leasing
Corporation, ("Citizens"). Pursuant to the credit agreement, the Company can
borrow up to 85% of its qualified accounts receivable at an interest rate of
prime plus 3/4% with a maximum availability of $7.5 million. Trans Global
terminated its lending agreement with its previous lendor wherein terms required
interest of 2% in excess of prime plus a 0.03% of the face amount of invoices
financed. Trans Global anticipates that the credit agreement with Citizens will
enable it to significantly reduce its interest costs. Interest costs for the
1998 and 1997 Quarters was $150,000 and $197,000, respectively, and for the 1998
and 1997 Six Month Periods was $334,000 and $383,000, respectively.
As a result of the foregoing, Trans Global earned $248,000 and $255,000,
respectively for the 1998 and 1997 2nd Quarter and $163,000 and $158,000,
respectively, for the 1998 and 1997 Six Month Periods.
Medical Information Services
The medical information services segment consists of the activity of two
companies, Netsmart and its subsidiary, Creative Socio Medics, Inc. ("CSM"). For
purposes herein, references to Netsmart relate to the operations of both
Netsmart and CSM unless indicated otherwise. Netsmart is engaged in developing,
marketing and supporting computer software designed to enable health service as
well as financial related organizations to provide a range of services in a
network-computing environment. Netsmart has developed proprietary network
technology utilizing smart cards in financial and health care network systems.
Effective 1998, the Company's investment in Netsmart is reported under the
equity method, whereby, only the Company's proportionate share of Netsmart's
loss is included in a single financial statement line item. Accordingly, the
following only discusses 1997 periods in which the revenues and expenses of
Netsmart were included in the Company's consolidated statement of operations.
Netsmart's revenue for the 1997 2nd Quarter was $1.7 million and for the 1997
Six Month Period was $3.3 million. Revenue from Netsmart's health information
systems represented the principal source of revenue accounting for 97% and 95%
of total revenue, respectively, for the 1997 2nd Quarter and 1997 Six Month
Period. The largest component of health information systems revenue in the 1997
2nd Quarter and 1997 Six Month Period was data center (service bureau) revenue
of $535,000 and $1 million. During the 1997 2nd Quarter and 1997 Six Month
27
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
- --------------------------------------------------------------------------------
Period, the turnkey systems labor revenue was $462,000 and $812,000,
respectively, maintenance revenue was $342,000 and $666,000, respectively, third
party hardware and software amounted to $276,000 and $489,000, respectively, and
license revenue was only $75,000 and $145,000, respectively. Revenue from
contracts with government agencies represented 32% of total revenue for the 1997
2nd Quarter and 1997 Six Month Period. Gross profits amounted to $265,000 for
the 1997 2nd Quarter or 15% of revenues and amounted to $422,000 or 13% of
revenues for the 1997 Six Month Period. Selling, general and administrative
expenses were $723,000 and $1.4 million, respectively during the 1997 2nd
Quarter and 1997 Six Month Period. Interest expense, payable to Netsmart's asset
based lendor was $82,000 for the 1997 2nd Quarter and $151,000 for the 1997 Six
Month Period. Other expense represents the recognition of a 50% share of
Netsmart's loss on a joint venture, which amounted to $46,000 for the 1997 2nd
Quarter and $104,000 for the 1997 Six Month Period. As a result of the foregoing
factors, Netsmart incurred a net loss of $586,000 in the 1997 2nd Quarter and
$1.2 million in the 1997 Six Month Period.
Telecommunications
The telecommunications segment consists of the operations of ARC Networks, which
is engaged in the business of marketing a wide range of telecommunications
services including the resale of local exchange services through Competitive
Access Providers ("CAPs"), the design and installation of end-user networks in
addition to its newly formed debit card services and domestic and international
long distance services.
Revenues for the 1998 2nd Quarter were $3.2 million and $2.3 million for the
1997 2nd Quarter, reflecting an increase of 40%, or $909,000. Revenues for the
1998 Six Month Period were $6.7 million and $4.3 million for the 1997 Six Month
Period, reflecting an increase of 56% or $2.4 million. The following table sets
forth the revenues and percentage of revenues during the 1998 and 1997 Periods
from each of its lines of business.
<TABLE>
<CAPTION>
1998 2nd Quarter 1997 2nd Quarter
---------------- ----------------
Revenue Percent Revenue Percent
------- ------- ------- -------
<S> <C> <C> <C> <C>
Telephone services $2,343,000 73% $1,528,000 67%
Data cabling installation
Services 854,000 27% 760,000 33%
--------- ---------
Total Sales $3,197,000 $2,288,000
========= =========
1998 Six Month Period 1997 Six Month Period
--------------------- ---------------------
Revenue Percent Revenue Percent
------- ------- ------- -------
Telephone services $4,684,000 70% $3,013,000 71%
Data cabling installation
Services 1,975,000 30% 1,253,000 29%
--------- ---------
Total Sales $6,659,000 $4,266,000
========= =========
</TABLE>
The increase in telephone services revenue is a result of ARC Networks'
continued market penetration into the local telephone market, principally New
York City ("NYC"), which began in the second quarter of 1997. Revenues from the
resale of local telephone services increased to $1.6 million for the 1998 2nd
Quarter from $1.2 million in the 1997 2nd Quarter. Long-distance revenues
increased to $403,000 for the 1998 2nd Quarter compared to $63,000 for the 1997
2nd quarter. During the 1998 Six Month Period local and long-distance telephone
services amounted to $3.7 million, an increase of $1.2 million from the 1997 Six
Month Period of $2.5 million. On June 1, 1998, ARC Networks purchased the long
distance customer base formerly owned by Pricellular, which increased revenues
in the 1998 2nd Quarter and 1998 Six Month Period by $130,000. Revenue
attributed to the sale of telephone debit calling cards amounted to $382,000 and
$241,000, respectively, for the 1998 and 1997 2nd Quarters and amounted to $1
million and $487,000 in the 1998 and 1997 Six Month Periods. Although revenues
have increased significantly for telephone debit calling cards during both
comparable periods, ARC Networks is restructuring this portion of its business
and anticipates a decline in revenues in future periods from this product.
28
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
- --------------------------------------------------------------------------------
Data cabling installation revenues increased by $94,000 for the 1998 2nd Quarter
due primarily to $75,000 of commission income and increased by $722,000 for the
1998 Six Month Period due principally from additional work performed for the
state of New York.
Direct costs for the 1998 and 1997 2nd Quarters were $2.7 million and $2
million, respectively, and for the 1998 and 1997 Six Month Periods were $5.7
million and $3.9 million, respectively. Gross profit for all product lines in
the aggregate, as a percent of revenue, increased from 8.5% for the 1997 2nd
Quarter to 16.7% for the 1998 2nd Quarter and increased from 9.6% for the 1997
Six Month Period to 14.5% for the 1998 Six Month Period.
Gross profit percentages in the telephone services line were 6.4% and 4%,
respectively, for the 1998 and 1997 2nd Quarters and were 4.9% and 4%,
respectively for the 1998 and 1997 Six Month Periods. The primary reason for the
increased margins during the 1998 2nd Quarter was the increase in long distance
service, which typically carry margins of 20% - 25%. The long distance customer
base purchased from Pricellular is initially being sourced through Cable &
Wireless. Because ARC Networks does not receive a lower buying rate from Cable &
Wireless, this traffic will be sourced through Frontier beginning in the 1998
3rd Quarter. Gross margins on this customer base for the 1998 2nd Quarter was
16.3% and margins for similar services sourced through Frontier were 22.6%. It
is ARC Networks' intention to also provide local service to this customer base.
ARC Networks' initial focus in the telephone services segment has been to build
its customer base and market share. In this regard, ARC Networks has absorbed
certain costs and charges relating to signing up new customers, such as waiving
installation charges and acquiring certain equipment needed to make the
connection to the customer. Such costs are being expensed immediately without a
corresponding increase in revenue and would result in lower margins in the
initial phase of the service cycle.
Gross profit for ARC Networks' data cabling installation service were 45.5% and
18.3%, respectively, for the 1998 and 1997 2nd Quarters and were 37.6% and
22.7%, respectively, for the 1998 and 1997 Six Month Periods. During the 1998
2nd Quarter ARC Networks managed 75 different jobs and continues to benefit from
its contracts with Mitel to provide data and voice cabling for certain NYC
schools. The increased margins in the 1998 2nd Quarter and 1998 Six Month Period
resulted from $75,000 of commission income received with no associated cost and
additional revenue from change orders made to existing projects at higher than
normal markups.
Selling, general and administrative expenses for the 1998 2nd Quarter were
$662,000, or 21% of total revenues, compared to $476,000, or 21% of total
revenues for the 1997 2nd Quarter. Selling, general and administrative expenses
for the 1998 Six Month Period were $1.4 million, or 21% of total revenues,
compared to $1 million, or 25% of total revenues for the 1997 Six Month Period.
The most significant portion of selling, general and administrative expenses is
personnel costs, which for the respective 1998 and 1997 2nd Quarters
approximated $388,000 and $340,000 and for the respective 1998 and 1997 Six
Month Periods approximated $721,000 and $611,000. Depreciation and amortization
for the 1998 and 1997 2nd Quarters amounted to $10,000 and $16,000, and for the
1998 and 1997 Six Month periods amounted to $165,000 and $37,000. In February
1997, ARC Networks, in connection with obtaining a $550,000 bridge financing,
issued warrants to purchase 1,000,000 shares of common stock at $1.00 per share
and warrants to purchase 500,000 shares of common stock at $5.00 per share,
which were valued at $485,000. Currently, ARC Networks is in default on the
loan, which was due April 1, 1998, and as a result the 1998 Six Month Period
includes $150,000 of expense to amortize the remaining balance of the warrant
value.
ARC Networks incurred interest expense of $22,000 and $66,000 for the 1998 and
1997 2nd Quarters, respectively, and $148,000 and $136,000, respectively for the
1998 and 1997 Six Month Periods. The interest expense incurred by ARC Networks
was generated by an 8%, $550,000 loan it obtained in February 1997, an equipment
loan obtained in 1996 with a June 30, 1998 balance of $186,000 and bearing
interest at prime plus 12%, a 12%, $250,000 short term demand loan, net advances
on receivables financing of $337,000 from an asset based lendor bearing interest
at approximately 10.25 % and related party interest charges on intercompany
debt. Additionally, ARC Networks incurs interest expense from the amortization
of capital lease obligations.
29
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
- --------------------------------------------------------------------------------
As a result of the foregoing, ARC Networks reported a loss of $143,000 and
$348,000, respectively for the 1998 and 1997 2nd Quarters and $597,000 and
$783,000, respectively for the 1998 and 1997 Six Month Periods.
Corporate and Other
Selling, General and Administrative Expense
Corporate selling, general and administrative expenses increased by $109,000,
from $575,000 for the 1997 2nd Quarter to $684,000 million for the 1998 2nd
Quarter and increased $458,000 from $1 million for the 1997 Six Month Period to
$1.5 million for the 1998 Six Month Period. Such increase is due primarily to
legal fees incurred to settle negotiations with the former CEO who resigned in
1998 (see footnote 9 of the financial statements) and payments made to terminate
certain consulting agreements. Additionally, during the 1998 1st Quarter, the
salaries paid to the former CEO and the former Corporate Secretary were higher
than the amounts paid during the 1997 1st Quarter which accounts for a portion
of the increased expense for the 1998 Six Month Period.
Termination payments for executive contracts amounted to $350,000 for the 1998
2nd Quarter and $2.2 million for the 1998 Six Month Period of which $1.8 million
relates to the former CEO (see footnote 9 of the financial statements) and
$350,000 relates to the Company's CFO (see footnote 10 of the financial
statements).
Impact of Inflation
The Company is subject to normal inflationary trends and anticipates that any
increased costs would be passed on to its customers.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
30
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 - CFO's employment agreement.(1)
10.2 - Asset purchase agreement dated as of January 28, 1998, by and among
Comprehensive Medical Imaging, Inc., International Magnetic
Imaging, Inc. and certain of its subsidiaries, including exhibits
and schedules thereto.(2)
27.1 - Financial Data Schedule.(3)
99.1 - Agreement dated as of March 30, 1998, by and among the Company, SISC
and Lewis S. Schiller.(4)
99.2 - Agreement dated as of March 30, 1998, by and among the Company, SISC
and Grazyna B. Wnuk.(4)
99.3 - Agreement dated as of March 30, 1998, by and among the Company, SISC
and E. Gerald Kay and Norman J. Hoskin.(4)
99.4 - Agreement dated as of March 30, 1998, by and among the Company,
SISC and Lewis S. Schiller, Grazyna B. Wnuk, E. Gerald Kay and
Norman J. Hoskin.(4)
- -------------
(1) Incorporated by reference to the June 19, 1998 Form 8-K.
(2) Incorporated by reference to the January 28, 1998 Form 8-K.
(3) Filed only in electronic format with the Securities and Exchange
Commission.
(4) Incorporated by reference to the April 3, 1998 Form 8-K.
(b) Reports on Form 8-K
1. - Filed an 8-K with an earliest date of event of April 3, 1998, reporting
the election of a new board of directors and the appointment of a new
acting chief executive officer and president.
2. - Filed an 8-K with an earliest date of event of June 19, 1998, reporting
the termination of the chief financial officer's original employment
agreement and related termination payment, and the execution of the
chief financial officer's new employment agreement.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
31
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CONSOLIDATED TECHNOLOGY GROUP, LTD.
/S/________________ Chief Executive Officer and Director August 24, 1998
Seymour Richter (Principal Executive Officer)
/S/________________ Chief Financial Officer August 24, 1998
George W. Mahoney (Principal Financial and
Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND THE CONSOLIDATED STATEMENT OF OPERATIONS
FILED AS PART OF THE QUARTERLY REPORT ON FORM 10-Q AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH QUARTERLY REPORT ON FORM 10-Q.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 577,000
<SECURITIES> 8,093,000
<RECEIVABLES> 9,253,000
<ALLOWANCES> 168,000
<INVENTORY> 0
<CURRENT-ASSETS> 18,609,000
<PP&E> 928,000
<DEPRECIATION> 580,000
<TOTAL-ASSETS> 24,275,000
<CURRENT-LIABILITIES> 20,476,000
<BONDS> 0
<COMMON> 488,000
0
3,000
<OTHER-SE> (2,759,000)
<TOTAL-LIABILITY-AND-EQUITY> 24,275,000
<SALES> 0
<TOTAL-REVENUES> 43,830,000
<CGS> 0
<TOTAL-COSTS> 390,766,000
<OTHER-EXPENSES> 7,416,000
<LOSS-PROVISION> 190,000
<INTEREST-EXPENSE> 487,000
<INCOME-PRETAX> (4,104,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,104,000)
<DISCONTINUED> 6,325,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,221,000
<EPS-PRIMARY> .04
<EPS-DILUTED> .04
</TABLE>
