UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q/A
Amendment No. 1
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
The Quarter Ended March 31, 1999
Commission File Number 0-4186
CONSOLIDATED TECHNOLOGY GROUP LTD.
(Exact name of registrant as specified in its charter)
New York 13-1948169
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
160 Broadway, New York, NY 10038
(Address of principal executive offices) (Zip Code)
(212) 233-4500
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No ____
Number of common shares outstanding as of May 14, 1999: 46,855,096
Purpose of Amendment:
In June of 1999 modifications were made to the vesting and
anti-dilution provisions of certain executives option agreements. Originally,
the options were to vest over a three year period subject to earlier vesting
when and if the Company's market capitalization reached certain levels. As
modified, the options vest when, and only if the market capitalization of the
Company equals or exceeds $25 million. Originally, certain of the options
contained anti-dilution provisions as to both the price per share and the number
of shares in the event of any reverse
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<PAGE>
stock split of the Company's common stock. As modified, all such options contain
anti-dilution provisions such that the number of shares issuable upon exercise
of the options will not be affected by any reverse split of the Company's common
stock, however, the exercise price will be adjusted to reflect any such reverse
split. As a result of these modifications, the disclosures in the footnotes to
the unaudited financial statements (Part I., Item 1.) have been modified as they
relate to the option agreements.
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Consolidated Technology Group Ltd. and Subsidiaries
Index
Page
----
Part I: - Financial Information:
Item 1. Financial Statements:
Condensed Consolidated Statements of Operations - Unaudited -
Three Months Ended March 31, 1999 and 1998 4
Condensed Consolidated Statements of Comprehensive Income
(Loss) - Unaudited - Three Months Ended March 31, 1999 and 1998 5
Condensed Consolidated Balance Sheets - March 31, 1999 and
December 31, 1998 6
Condensed Consolidated Statements of Cash Flows - Unaudited -
Three Months Ended March 31, 1999 and 1998 7
Notes to Unaudited Condensed Consolidated Financial Statements 8-16
Item 2. Management's Discussion and Analysis of the Financial
Condition and Results of Operations 17-20
Signatures 21
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Consolidated Technology Group Ltd. And Subsidiaries
Condensed Consolidated Statements of Operations
Unaudited
Three Months Ended March 31,
1999 1998
---- ----
General and Administrative Expense:
Professional fees $ 481,000 $ 81,000
Salaries, payroll taxes and fringe benefits 146,000 354,000
Other general and administrative expenses 65,000 245,000
Consulting fees 8,000 58,000
Termination payments for executive contracts - 1,839,000
Related party bad debt expense - 49,000
--------- ---------
Loss from Operations (700,000) (2,626,000)
Other income, net 41,000 40,000
--------- ---------
Loss from Continuing Operations Before
Minority Interest and Share of Loss of
Unconsolidated Affiliate (659,000) (2,586,000)
Minority Interest in (Income) Loss of
Subsidiaries (127,000) 34,000
Share of Loss of Unconsolidated Affiliates - (98,000)
---------- ----------
Loss from Continuing Operations (786,000) (2,650,000)
Discontinued Operations:
Income (loss) from operations of
discontinued segment 318,000 (847,000)
Gain from disposal of segment - 1,900,000
----------- -----------
Net Loss $ (468,000) $(1,597,000)
=========== ===========
Basic and Diluted Loss per Common Share:
Loss from Continuing Operations $ (0.02) $ (0.05)
Income (loss) from operations of
discontinued segment 0.01 (0.02)
Gain from disposal of segment - 0.04
---- ----
Net Loss $ (0.01) $ (0.03)
=========== ===========
Weighted average number of common shares 47,055,845 49,910,996
========== ==========
See notes to unaudited condensed consolidated financial statements.
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<PAGE>
Consolidated Technology Group Ltd. And Subsidiaries
Condensed Consolidated Statements of Comprehensive Loss
Unaudited
<TABLE>
<CAPTION>
Three Months Ended March 31,
1999 1998
---- ----
<S> <C> <C>
Net Loss $ (468,000) $ (1,597,000)
Other Comprehensive Income (Expense):
Unrealized holding gains on available for sale securities 35,000 44,000
Reclassification for realized gains on available for sale securities
(20,000) -
------------ --------------
Comprehensive Loss $ (453,000) $ (1,553,000)
============ ==============
</TABLE>
See notes to unaudited condensed consolidated financial statements.
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<PAGE>
Consolidated Technology Group Ltd. and Subsidiaries
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
March 31,
1999 December 31,
Unaudited 1998
--------- ----
<S> <C> <C>
Assets:
Cash and cash equivalents $ 125,000 $ 179,000
Marketable securities 3,220,000 5,092,000
Net current assets of discontinued segment 844,000 926,000
Other current assets 19,000 17,000
----------- ------------
Current assets 4,208,000 6,214,000
Net assets of discontinued segments 4,379,000 3,979,000
Other assets 1,181,000 1,182,000
----------- ------------
Total Assets $ 9,768,000 $ 11,375,000
============ ============
Liabilities and Shareholders' Deficit:
Liabilities:
Net current liabilities of discontinued segments $ 3,853,000 $ 4,194,000
Accrued litigation settlement costs 8,000 843,000
Other current liabilities 637,000 638,000
----------- ------------
Current liabilities 4,498,000 5,675,000
----------- ------------
Minority interest 6,494,000 6,367,000
----------- ------------
Shareholders' deficit:
Preferred stock 3,000 3,000
Common stock (50,000,000 shares authorized, 49,053,996 shares issued and
46,855,096 shares outstanding as of March 31, 1999 and 49,053,996 shares
issued and 47,867,496 outstanding as of December 31, 1998) 491,000 491,000
Additional paid-in-capital, common stock 57,713,000 57,713,000
Accumulated other comprehensive income 67,000 52,000
Accumulated deficit (59,276,000) (58,808,000)
Less common stock in treasury (222,000) (118,000)
----------- ------------
Total shareholders' deficit (1,224,000) (667,000)
----------- ------------
Total Liabilities and Shareholders' Deficit $ 9,768,000 $ 11,375,000
=========== ============
</TABLE>
See notes to unaudited condensed consolidated financial statements.
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<PAGE>
Consolidated Technology Group Ltd. And Subsidiaries
Condensed Consolidated Statements of Cash Flows
Unaudited
<TABLE>
<CAPTION>
Three Months Ended March 31,
1999 1998
---- ----
<S> <C> <C>
Net cash used in continuing operations $ (1,526,000) $ (61,000)
Net cash (used in) provided by discontinued operations (341,000) 48,000
----------- -----------
Net cash used in operating activities (1,867,000) 13,000
----------- -----------
Cash Flows from Investing Activities:
Proceeds from sale of marketable securities 1,916,000 -
(Increase) decrease in other assets 1,000 (1,000)
Cash of affiliate converted to an equity method investment - (855,000)
----------- -----------
Net cash provided by (used in) investing activities 1,917,000 (856,000)
----------- -----------
Cash Flows from Financing Activities:
Purchase treasury stock (104,000) -
Net cash used in financing activities (104,000) -
----------- -----------
Net decrease in cash and cash equivalents (54,000) (869,000)
Cash and cash equivalents at beginning of period 179,000 871,000
----------- -----------
Cash and cash equivalents at end of period $ 125,000 $ 2,000
=========== ===========
Supplemental Disclosures of Cash Flow Information:
Cash paid for:
Interest $ - $ -
=========== ===========
Income taxes $ 10,000 $ -
=========== ===========
</TABLE>
See notes to unaudited condensed consolidated financial statements.
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Consolidated Technology Group Ltd. and Subsidiaries
Footnotes to Unaudited Condensed Consolidated Financial Statements
- --------------------------------------------------------------------------------
(1) Basis of Presentation - In the opinion of the Company, the accompanying
unaudited financial statements contain all adjustments (consisting of only
normal, recurring accruals) necessary to present fairly the financial position
of Consolidated Technology Group Ltd. and Subsidiaries (the "Company") as of
March 31, 1999 and December 31, 1998, the statement of operations, the statement
of comprehensive income (loss) and the statement of cash flows for the three
months ended March 31, 1999 and 1998.
(2) Nature of Operations - During the three months ended March 31, 1999, the
Company entered into transactions whereby the operations of Trans Global
Services, Inc. ("Trans Global") and Arc Networks, Inc. ("Arc Networks") are
presented as discontinued for accounting purposes and has disposed of a
significant portion of its ownership in Netsmart Technologies, Inc.
("Netsmart"), an unconsolidated affiliate. As a result of these transactions,
the Company has no operating segments.
(a) Trans Global Transaction
Trans Global is a publicly owned company whose stock is traded on the NASDAQ
stock market under the ticker symbol "TGSI". On February 25, 1999, the Company,
SIS Capital Corp. ("SISC") and Trans Global entered into an agreement, pursuant
to which on May 3, 1999, SISC, a wholly owned subsidiary of the Company,
transferred to Trans Global 1,150,000 shares of Trans Global common stock then
owned by SISC, in satisfaction of (i) the Company's obligations to pay the
redemption price of $2.1 million payable with respect to its Series G 2%
Cumulative Redeemable Preferred Stock then owned by Trans Global, together with
accrued dividends of approximately $140,000 and (ii) the Company's obligations
to pay Trans Global $326,000. Trans Global returned the Series G 2% Cumulative
Redeemable Preferred Stock. As a result of this transaction, the Company's
ownership in Trans Global decreased from 40% to 14% and Trans Global is
presented as a discontinued segment in the accompanying financial statements.
(b) Arc Networks Transaction
Arc Networks is a privately owned company. On March 23, 1999, the Company and
SISC entered into an agreement with Arc Networks and Technology Acquisitions,
Ltd., a Bermuda corporation, ("TAL"), pursuant to which SISC sold all of its
equity interest in Arc Networks for $850,000. The proceeds of the sale and the
shares of Arc Networks are being held in escrow, pending receipt of the consent
of the New York Public Service Commission to the sale of the shares to TAL. TAL
is a privately owned company, which on April 20, 1999 acquired a controlling
interest in the Company (see footnote 3a). As a result of the sale, Arc Networks
is presented as a discontinued segment in the accompanying financial statements.
(c) Netsmart Transaction
On March 25, 1999, the Company and SISC entered into an agreement with Netsmart
and a group of purchasers, consisting principally of Netsmart's management and
directors, including
-8-
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Consolidated Technology Group Ltd. and Subsidiaries
Footnotes to Unaudited Condensed Consolidated Financial Statements
- --------------------------------------------------------------------------------
Edward D. Bright (Chairman of the Board and a director of both the Company and
Netsmart at the time of the transaction) (the "Management Investors"), whereby
SISC agreed to sell an aggregate of 496,312 shares of Netsmart's common stock
for an aggregate price of $1 million. The agreement also gave the Management
Investors the right to buy up to between 296,312 and 496,312 additional shares
of Netsmart at the same purchase price per share. In addition, SISC agreed to
transfer to Netsmart, all of its shares of Netsmart's preferred stock and
warrants to purchase shares of Netsmart's common stock, in exchange for which
Netsmart issued 100,000 shares of its common stock to the Company. During April
1999, SISC completed the sale of 585,750 of such shares for approximately $1.2
million in the aggregate. Additionally, the Company notified Netsmart that it
was exercising its option to not sell 200,000 additional shares of Netsmart's
common stock to the Management Investors. As a result, the maximum number of
shares of Netsmart's common stock which may be purchased from SISC, in addition
to the 585,750 shares already purchased from SISC, is 206,874 shares. SISC's
sale of the Netsmart common stock and the issuance by Netsmart of the above
mentioned 100,000 shares of its common stock to SISC, resulted in a reduction of
the Company's ownership in Netsmart from 36% to approximately 18%. As a result
of the reduction in the Company's ownership in Netsmart, subsequent to March 31,
1999, the Company's investment in Netsmart will no longer be accounted for under
the equity method of accounting, which required the Company to recognize its
share of Netsmart's income or loss. As of March 31, 1999 and December 31, 1998,
the Company's investment in Netsmart, under the equity method of accounting
amounted to $760,000 and the Company's share of Netsmart's loss for the three
months ended March 31, 1998 was $98,000.
Subsequent to March 31, 1999, the Company's remaining investment in Trans
Global's and Netsmart's common stock will be accounted for as available for sale
securities whereby such securities will be recorded at their respective fair
market values and any difference between the Company's costs basis in such
investments and their fair market values will be recorded as a separate
component of equity.
(3) Change in Control and Management of the Company
(a) Change in Control
On April 20, 1999, TAL purchased, from certain of the Company's shareholders,
8,000,000 shares, or approximately 17% of the Company's outstanding common
stock, in a private transaction at a purchase price of $0.25 per share, or
approximately $2 million in aggregate. Contemporaneously with the purchase,
certain of the Company's shareholders granted TAL options to purchase an
aggregate of 7,999,785 shares of the Company's outstanding common stock for
$0.35 per share, or approximately $2.8 million in aggregate. The options may be
exercised at any time during the thirteen-month period commencing March 23,
1999. The shareholders who granted the options have the right to require TAL to
exercise the options at $0.35 per share within twenty days after TAL's receipt
of notice that the Company's common stock has traded at an average share price
in excess of $0.45 for a period of ten consecutive trading days. As long as the
options are outstanding, TAL has the right to vote the 7,999,785
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<PAGE>
Consolidated Technology Group Ltd. and Subsidiaries
Footnotes to Unaudited Condensed Consolidated Financial Statements
- --------------------------------------------------------------------------------
shares of common stock, representing an additional 17% of the Company's
outstanding common stock. As a result of the purchase of the 8,000,000 shares
and the grant of the voting rights with respect to the 7,999,785shares of common
stock subject to the options, TAL has voting rights with respect to
approximately 34% of the Company's common stock and may be deemed to be a
control person with respect to the Company.
(b) Change in Directors and Officers
On April 19, 1999, in anticipation of TAL's purchase of 8,000,000 shares of
common stock of the Company and the grant to TAL of options to purchase
7,999,785 additional shares of common stock of the Company, the board of
directors elected Mr. Frank DeLape as a director.
On April 20, 1999, Seymour Richter resigned as the Company's president and chief
executive officer. Simultaneously with his resignation, Mr. Richter entered into
a nine-month consulting agreement with the Company pursuant to which he will
receive an aggregate of $56,250.
On April 22, 1999, the board of directors elected Mr. Richard Young as a
director and chief operating officer of the Company and Mr. DeLape as chairman
of the board of the Company and Messrs. Richter, Bright and Chaifetz resigned as
directors of the Company and Mr. Bright resigned as chairman of the board.
On April 22, 1999, the board of directors also approved three-year employment
agreements between the Company and Messrs. DeLape and Young pursuant to which
they will receive annual salaries of $250,000 and $135,000, respectively. The
agreements require Mr. DeLape to devote such time as is necessary to perform his
duties as chairman of the board and chief executive officer of the Company and
Mr. Young to devote his full time to the performance of his duties as president
and chief operating officer of the Company. The agreements provide for annual
cash bonuses, annual equity incentive awards including grants of restricted
stock and stock options, certain fringe benefits and severance compensation.
Subsequent to April 22, 1999, the new board also elected Mr. DeLape as chief
executive officer and Mr. Young as president of the Company in addition to their
respective positions as chairman of the board and chief operating officer. Mr.
DeLape is also a director and president of TAL and Mr. Young is also a director
of TAL.
(c) Issuance of Stock Options and Warrants
Pursuant to their respective employment agreements, the Company granted Messrs.
DeLape and Young options to purchase 400,000 and 250,000 shares of the
common stock of the Company, respectively, at $0.14 per share, being the closing
price of the Company's common stock on April 20, 1999. Both of such options
become exercisable only upon the Company's aggregate market capitalization
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Consolidated Technology Group Ltd. and Subsidiaries
Footnotes to Unaudited Condensed Consolidated Financial Statements
- --------------------------------------------------------------------------------
being at least $25 million. The options provide the holders with stock
appreciation rights, which can be exercised to the extent that the options are
exercisable. Additionally, the employment agreements provide Messrs. DeLape and
Young with the right to purchase from the Company, on the last day of each
fiscal year during the term thereof, an additional option with respect to
250,000 and 100,000 shares, respectively, of common stock of the Company,
exercisable at the closing price of the Company's commonstock on the day
immediately prior to the date of purchase, any such options being subject to
performance objectives to be agreed upon by the board and such persons for each
such year. Mr. DeLape's and Mr. Young's options contain anti-dilution provisions
as to the number of shares in the event of any reverse stock split of the
Company's common stock effected on the basis of up to 1 for 30 shares. All of
such options are subject to shareholder approval.
In connection with Mr. Bright's resignation as chairman of the board, the board
of directors approved the issuance to Mr. Bright of a three-year warrant to
purchase 100,000 shares of the common stock of the Company at $0.15 per share,
being the closing price of the Company's common stock on such date.
(4) 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, 1998 Form 10-K.
(5) Interim Results - The results of operations for the three months ended
March 31, 1999 and 1998 are not necessarily indicative of the results to be
expected for the full year.
(6) Loss Per Share -Basic loss per share reflects the amount of loss for the
period available to each share of common stock outstanding during the reporting
period. Diluted loss per share reflects basic loss per share, 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.
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 loss 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. As of March 31, 1999, the Company does not have any dilutive items and
therefore, a dual presentation of earnings per share is not presented. A warrant
to purchase 1,000,000 shares of common stock at $0.75 per share was outstanding
for the three
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Consolidated Technology Group Ltd. and Subsidiaries
Footnotes to Unaudited Condensed Consolidated Financial Statements
- --------------------------------------------------------------------------------
months ended March 31, 1999 and 1998 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 March 31, 1999.
(7) Treasury Stock - In October 1998, the Board of Directors authorized the
Company to repurchase its common stock in unsolicited open market transactions
in amounts of up to $500,000. As of March 31, 1999, the Company had repurchased
2,198,900 shares in transactions with an aggregate purchase price of
approximately $222,000.
(8) Contingencies
(a) Intercompany Debt Obligations - As of March 31, 1999, Arc Networks owes
Trans Global approximately $1.2 million for advances made to Arc Networks by
Trans Global. During 1998, the Company confirmed its guarantee of the
outstanding indebtedness of Arc Networks to Trans Global. In September of 1998,
the Company provided Arc Networks with a $2 million line of credit
collateralized by all of the assets of Arc Networks and bearing interest at
prime plus 2%. During the three months ended March 31, 1999, the Company
increased the line of credit and advanced Arc Networks an additional $400,000.
As of the date of this report, the line of credit owed to the Company by Arc
Networks is in default and the February 1999 through April 1999 interest
payments have not been made. With respect to the line of credit that Arc
Networks owes to the Company, TAL has guaranteed $150,000 of such amount under
certain circumstances. All of the aforementioned intercompany debt obligations
are eliminated in consolidation.
(b) Debt Guarantee - In addition to the Trans Global intercompany debt
guarantee noted in 8(a) above, during 1998, the Company guaranteed $550,000 of
indebtedness that Arc Networks has outstanding under a promissory note.
(9) Discontinued Operations - As of March 31, 1999 the Company has no
operating segments and all of the operations and net assets and liabilities of
its subsidiaries are presented as discontinued. Effective December 31, 1998, the
Company is accounting for Trans Global and Arc Networks, formerly the Contract
Engineering Services and Telecommunications segments, as discontinued segments.
During 1997, the Company discontinued 3D Holdings International, Inc., formerly
the Three Dimensional Products and Services segment, International Magnetic
Imaging, Inc. ("IMI"), formerly the Medical Diagnostics segment, SpecTec, Inc.
and its subsidiaries, Televend and FMX Corp., collectively the former
Electro-Optical and Electro-Mechanical Products Manufacturing segment and The
Trinity Group, Inc., formerly the Business Consulting Services segment. The
following table summarizes the financial statement information of the
discontinued segments.
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Consolidated Technology Group Ltd. and Subsidiaries
Footnotes to Unaudited Condensed Consolidated Financial Statements
- --------------------------------------------------------------------------------
Three Months Ended March 31,
1999 1998
---- ----
Income (Loss) from Discontinued Operations:
Contract Engineering Services $ 318,000 $ (85,000)
Telecommunications (57,000) (454,000)
Medical Diagnostics - (353,000)
Intercompany Transactions 57,000 45,000
----------- -----------
$ 318,000 $ (847,000)
=========== ===========
Gain (Loss) on Disposal of Segments:
Three Dimensional Products and Services $ - $ 1,932,000
Electro-Optical and Electro-Mechanical
Products Manufacturing - (31,000)
Business Consulting Services - (1,000)
----------- -----------
$ - $ 1,900,000
=========== ===========
March 31, December 31,
1999 1998
---- ----
Net Current Assets of Discontinued Segments:
Contract Engineering Services $ 844,000 $ 926,000
----------- -----------
$ 844,000 $ 926,000
=========== ===========
Net Long-term Assets of Discontinued Segments:
Contract Engineering Services $ 4,191,000 $ 3,791,000
Telecommunications 188,000 188,000
------------ -----------
$ 4,379,000 $ 3,979,000
============ ===========
Net Current Liabilities of Discontinued Segments:
Telecommunications $ 3,100,000 $ 3,463,000
Three Dimensional Products and Services 504,000 482,000
Medical Diagnostics 249,000 249,000
------------ -----------
$ 3,853,000 $ 4,194,000
============ ===========
(a) Contract Engineering Services - The Company and Trans Global entered
into an agreement whereby in May 1999, SISC transferred 1,150,000 shares of
Trans Global common stock owned by it to Trans Global and Trans Global
transferred all of the Series G 2% Cumulative Redeemable Preferred Stock of
Consolidated that it owned to the Company and cancelled accrued dividends of
approximately $140,000 and intercompany debt obligations of approximately
$326,000 owed by the Company to Tans Global. As a result of the foregoing
transaction between the Company and Trans Global, Trans Global is presented as a
discontinued segment as of March 31, 1999 and December 31, 1998 [See footnote
(2a) Trans Global Transaction]. The Company anticipates that the Trans Global
transaction will result in a gain on
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Consolidated Technology Group Ltd. and Subsidiaries
Footnotes to Unaudited Condensed Consolidated Financial Statements
- --------------------------------------------------------------------------------
disposal that will be recorded during the three months ended June 30, 1999. The
Company's estimate of its share of Trans Global's net loss from January 1, 1999
through the anticipated date of disposal was estimated to be $128,000 and was
accrued as of December 31, 1998. The revenues of the Contract Engineering
Services segment approximated $18.5 for the three months ended March 31, 1998
and the operations of the Contract Engineering Services segment are classified
as income (loss) from the operations of discontinued segments. As of March 31,
1999 and December 31, 1998, the assets and liabilities of the Contract
Engineering Services segment included in the Company's consolidated balance
sheet consisted of the following:
March 31, December 31,
1999 1998
---- ----
Cash $ 235,000 $ 35,000
Accounts receivable, net 3,923,000 3,923,000
Loans receivable 5,000 5,000
Prepaid expenses and other current assets 440,000 474,000
Property, plant and equipment 171,000 170,000
Goodwill 727,000 727,000
Customer lists, net 2,389,000 2,389,000
Deferred offering costs 236,000 236,000
Receivable, related parties 50,000 50,000
Other assets 619,000 219,000
----------- -----------
Total assets 8,795,000 8,228,000
----------- -----------
Accrued estimated losses through disposal date 128,000 128,000
Accounts payable and accrued expenses 316,000 267,000
Accrued payroll and related expenses 529,000 529,000
Income taxes payable 13,000 13,000
Current debt obligations 2,774,000 2,574,000
----------- -----------
Total liabilities 3,760,000 3,511,000
----------- -----------
Net assets to be disposed of $ 5,035,000 $ 4,717,000
=========== ===========
Presented in the balance sheet as follows:
Net current assets of discontinued segment $ 844,000 $ 926,000
Net long-term assets of discontinued segment 4,191,000 3,791,000
----------- -----------
Net assets to be disposed of $ 5,035,000 $ 4,717,000
=========== ===========
(b) Telecommunications - The Company entered into an agreement with Arc
Networks and Technology Acquisitions, Ltd. ("TAL"), pursuant to which the
Company will sell all of its equity interest in Arc Networks for $850,000. As a
result of the sale, Arc Networks is presented as a discontinued segment as of
March 31, 1999 and December 31, 1998 [See footnote (2b) Arc Networks
Transaction]. The Company anticipates that the discontinuation of Arc Networks
will result in a gain on disposal that will not be recorded until the date of
disposal in 1999. The Company's share of Arc Networks' net losses from January
1, 1999 through the anticipated date
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<PAGE>
Consolidated Technology Group Ltd. and Subsidiaries
Footnotes to Unaudited Condensed Consolidated Financial Statements
- --------------------------------------------------------------------------------
of disposal were estimated to be approximately $800,000 and such amount was
accrued as of December 31, 1998. The revenues of the Telecommunications segment
approximated $3.5 million for the three months ended March 31, 1998 and the
operations of the Telecommunications segment are classified as income (loss)
from the operations of discontinued segments. As of March 31, 1999 and December
31, 1998, the assets and liabilities of the Telecommunications segment included
in the Company's consolidated balance sheet consisted of the following:
March 31, December 31,
1999 1998
---- ----
Cash $ 193,000 $ 193,000
Accounts receivable, net 2,992,000 2,992,000
Excess of accumulated costs over related billings 159,000 159,000
Prepaid expenses and other current assets 98,000 98,000
Property, plant and equipment 125,000 125,000
Goodwill 240,000 240,000
Customer lists, net 53,000 53,000
Deferred loan costs 249,000 249,000
Other assets 86,000 86,000
----------- -----------
Total assets 4,195,000 4,195,000
----------- -----------
Accrued estimated losses through expected
disposal date 800,000 800,000
Accounts payable and accrued expenses 4,957,000 5,320,000
Excess of accumulated billings over related costs 463,000 463,000
Current debt obligations 250,000 250,000
Current portion of capitalized lease obligations 20,000 20,000
Notes payable, related parties 52,000 52,000
Long-term debt 550,000 550,000
Capitalized lease obligations 15,000 15,000
----------- -----------
Total liabilities 7,107,000 7,470,000
----------- -----------
Net liabilities to be disposed of $ (2,912,000) $ (3,275,000)
=========== ===========
Presented in the balance sheet as follows:
Net long-term assets of discontinued segment $ 188,000 $ 188,000
Net current liabilities of discontinued segment 3,100,000 3,463,000
----------- -----------
Net liabilities to be disposed of $ (2,912,000) $ (3,275,000)
=========== ===========
(c) Three Dimensional Products and Services - In 1997, the Company
formulated a plan to discontinue the operations of all of the subsidiaries
operating in the Three Dimensional Products and Services segment. As a result of
the plan, the Company sold one of the subsidiaries operating in the segment and
wrote-off all of the segment's remaining assets and reclassified the remaining
liabilities as net current liabilities of a discontinued segment. During 1998,
the Company recorded an approximate $1.9 million gain on the disposal of the
segment resulting
-15-
<PAGE>
Consolidated Technology Group Ltd. and Subsidiaries
Footnotes to Unaudited Condensed Consolidated Financial Statements
- --------------------------------------------------------------------------------
from the write-off of liabilities that the Company believes it will not be
obligated to pay. As of March 31, 1999 and December 31, 1998 the liabilities of
the Three Dimensional Products and Services segment included in the Company's
consolidated balance sheet consisted of the following:
March 31, December 31,
1999 1998
---- ----
Accounts payable and accrued expenses $ 152,000 $ 130,000
Accrued payroll and related expenses 98,000 98,000
Accrued interest 24,000 24,000
Notes payable, related parties 95,000 95,000
Current portion of long-term debt 135,000 135,000
----------- -----------
Net current liabilities of discontinued segment $ 504,000 $ 482,000
=========== ===========
(d) Medical Diagnostics - 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
that was recorded in the second quarter of 1998. The revenues of the Medical
Diagnostics segment approximated $6.8 million for the three months ended March
31, 1998 and the operations of the Medical Diagnostics segment are classified as
income (loss) from the operations of discontinued segments. As of March 31, 1999
and December 31, 1998 the remaining net current liabilities of the Medical
Diagnostic segment consisted of income taxes of $249,000.
(e) Electro-Optical and Electro-Mechanical Products Manufacturing - During
1998, the Company sold the Electro-Optical and Electro-Mechanical Products
Manufacturing segment resulting in a loss on disposal of a segment of
approximately $31,000.
(f) Business Consulting Services - During 1998 the Company sold the Business
Consulting Services segment resulting in a loss on the disposal of a segment of
approximately $1,000.
.............................
-16-
<PAGE>
Item 2. Management's Discussions 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 and in other documents filed by the Company with the Securities and
Exchange Commission.
Recent Developments Relating to Control
TAL owns approximately 17% of the Company's outstanding common shares
and has an options to purchase an additional 17% of the outstanding common
shares and as long as such options are outstanding has the right to vote such
common shares. As a result of the above, TAL has voting rights with respect to
34% of the Company's common shares and may be deemed a control person with
respect to the Company. Prior to purchasing the shares of the Company's common
stock, TAL purchased the Company's 67% interest in Arc Networks. The proceeds of
the purchase price for such interest and the shares of such common stock are
currently held in escrow pending receipt of approval of the sale from the New
York State Public Service Commission. As of the date of this report, Arc
Networks owes the Company approximately $2.4 million under a line of credit
agreement which is currently in default. Subject to the approval of the
aforementioned sale of Arc Networks, TAL has guaranteed the repayment of
$150,000 of such indebtedness. As more fully described in the footnote 3 to the
attached unaudited condensed financial statements, these circumstances give rise
to a potential conflict of interest whereby TAL may have the power to determine
the terms of any agreement between the Company and Arc Networks.
Restatements
The following discussion, as it relates to the three months ended March
31, 1998 (the "1998 1st Quarter"), has been restated from the prior years
discussion to reflect the discontinuation of Trans Global (the former Contract
Engineering Services segment) and Arc Networks (the former Telecommunications
segment).
Financial Condition - Liquidity and Capital Resources
As of March 31, 1999, ("March 1999"), the Company had cash of $125,000
and marketable securities of $3.2 million in US Treasury Bills. The following
table calculates the working capital that the Company has available for use in
its operations as of March 1999 and December 31, 1998 ("December 1998").
-17-
<PAGE>
March 31, December 31,
1999 1998
---- ----
Current assets $ 4,208,000 $ 6,214,000
Current liabilities 4,498,000 5,675,000
---------- ----------
Working capital (deficiency) (290,000) 539,000
Plus total net current liabilities of
discontinued segments 3,853,000 4,194,000
Less:
Portion of total current liabilities of
discontinued segments that the Company
may be obligated to pay (753,000) (731,000)
Net current assets of discontinued segments
not available to Consolidated (844,000) (926,000)
---------- ----------
Working capital available for the Company's
operations $ 1,966,000 $ 3,076,000
========== ==========
During the three months ended March 31, 1999 (the "1999 1st Quarter"),
the Company's available working capital decreased by $1.1 million. Uses of
working capital during the 1999 1st Quarter included legal fees of $411,000,
advances to Arc Networks under a line of credit of $400,000, salaries, payroll
taxes and fringe benefits of $146,000, purchases of treasury stock of $104,000,
auditing and accounting fees of $70,000 and other operating expenses of $73,000.
Sources of working capital during the 1999 1st Quarter included interest and
loan maintenance fees from Arc Networks of $36,000 and a gain on marketable
securities of $29,000. As of the date of this report the Company does not have
definitive plans for the use of its existing working capital.
As of March 1999, the Company had guaranteed $1.2 million of
indebtedness that Arc Networks has outstanding to Trans Global and $550,000 of
indebtedness that Arc Networks has outstanding under a promissory note.
Results of Operations
Loss from Operations
During 1997 and 1998, the Company discontinued all of its operating
segments and as of March 1999, has no operating revenue or gross margin. As a
result, all of the Company's loss from operations for the 1999 and 1998 1st
Quarters consisted of general and administrative expenses. The Company's loss
from operations for the 1999 and 1998 1st Quarters was $700,000 and $2.6
million, respectively, a decrease of $1.9 million, or 73%. The 1998 1st Quarter
loss from operations included $1.8 million of expense related to termination
payments for executive contracts and the 1999 1st Quarter included no such
amounts. Professional fees increased $400,000, or 494%, when comparing the 1999
and 1998 1st Quarters of which $233,000 represents legal fees incurred in
connection with the disposal of Arc Networks, Trans Global and the Netsmart
shares, $101,000 represents legal fees incurred for litigation settlements and
other
-18-
<PAGE>
general matters and $66,000 consists of audit and accounting fees. The remaining
operating expenses decreased $487,000, or 69%, when comparing the 1999 and 1998
1st Quarters, including a reduction in salaries, payroll taxes and fringe
benefits of $208,000, or 59%.
Loss from Continuing Operations
The Company's consolidated loss from continuing operations for the
respective 1999 and 1998 1st Quarters was $786,000, or $0.02 per share, and $2.7
million, or $0.05 per share, representing a decreased loss of $1.9 million. The
decrease in loss from continuing operations is the result of the decrease in
general and administrative expenses which were discussed in the preceding
paragraph. Other components of loss from continuing operations remained
relatively unchanged in the aggregate when comparing the 1999 and 1998 1st
Quarters
Discontinued Operations
The Company's income (loss) from operations of discontinued segments
and gain or (loss) on disposal of segments are presented in the following table.
Three Months Ended March 31,
1999 1998
---- ----
Income (Loss) from Discontinued Operations:
Contract Engineering Services $ 318,000 $ (85,000)
Telecommunications (57,000) (454,000)
Medical Diagnostics - (353,000)
Intercompany Transactions 57,000 45,000
----------- -----------
$ 318,000 $ (847,000)
=========== ===========
Gain (Loss) on Disposal of Segments:
Three Dimensional Products and Services $ - $ 1,932,000
Electro-Optical and Electro-Mechanical
Products Manufacturing - (31,000)
Business Consulting Services - (1,000)
----------- -----------
$ - $ 1,900,000
=========== ===========
Net Loss
As a result of the foregoing, the Company incurred a net loss during
the 1999 1st Quarter of $468,000, or $0.01 per common share, compared to $1.6
million, or $0.03 per common share, for the 1st Quarter of 1998.
-19-
<PAGE>
Future Operations of Consolidated
As of the date of this report the Company does not have any
consolidated operating subsidiaries that are not classified as discontinued
segments. As a result, the Company will have no operating revenues, direct costs
or gross profit until such time, if ever, that other subsidiaries are acquired
and currently the Company has no definitive plans for any acquisitions. The
future operating losses of the Company will be comprised of its general and
administrative expenses, which currently consist primarily of salaries and
related taxes and fringe benefits, professional fees and other general and
administrative costs. Effective April 21, 1999, the Company has five employees
with annual base salaries aggregating approximately $730,000, excluding payroll
taxes and fringe benefits. Professional fees will vary depending on the level of
future litigation, acquisition and other activity. The current sources of income
for the Company are those earned on the US Treasury Bill investments and the
Company's money market account, which in the aggregate are expected to be
significantly less than the Company's operating costs. As a result, it is
estimated that the Company will incur operating losses at least until such time,
if ever, that acquisitions of new subsidiaries are made. During the three months
ended June 30, 1999, the Company anticipates that it will recognize a gain on
the disposal of Trans Global and a gain on the sale of the Netsmart shares.
Additionally, the Company anticipates that if the Arc Networks sale is
consummated, the Company will recognize a gain on such disposal. The anticipated
gain recognition on the aforementioned transactions may offset the operating
losses of the Company for 1999. Such estimate assumes that the level of
operating costs remains the same as for the 1999 1st Quarter and no assurances
can be given that operating costs will not increase significantly for the
remainder of 1999.
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 (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.
-20-
<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 June 28, 1999
Frank DeLape (Principal Executive Officer)
/S/ President and Chief Operating Officer June 28, 1999
Richard Young (Principal Financial and
Accounting Officer)
-21-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND THE CONSOLIDATED STATEMENT OF OPERATIONS
FILED AS PART OF THE QUARTERLY REPORT ON FORM 10-Q AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH QUARTERLY REPORT ON FORM 10-Q.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 125,000
<SECURITIES> 3,220,000
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 4,208,000
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 9,768,000
<CURRENT-LIABILITIES> 4,498,000
<BONDS> 0
<COMMON> 491,000
0
3,000
<OTHER-SE> (1,718,000)
<TOTAL-LIABILITY-AND-EQUITY> 9,768,000
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 700,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,000
<INCOME-PRETAX> (786,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (786,000)
<DISCONTINUED> 318,000
<EXTRAORDINARY> 0
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<NET-INCOME> (468,000)
<EPS-BASIC> (.01)
<EPS-DILUTED> (.01)
</TABLE>
