SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14A-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to ss.240.14a-11(c) or ss.240.14a-12
Consolidated Technology Group Ltd.
(Name of Registrant as Specified In Its Charter)
N.A.
(Name of Person(s) Filing Proxy Statement if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), 14a-6(i)(2) or
Item 22(a)(2) of Schedule 14A.
[ ] $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1) Title of each class of securities to which transaction applies:
...............................................................
2) Aggregate number of securities to which transaction applies:
...............................................................
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule O-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
...............................................................
4) Proposed maximum aggregate value of transaction:
...............................................................
5) Total fee paid:
...............................................................
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
1) Amount Previously Paid: ....................................
2) Form, Schedule or Registration Statement No.: ..............
3) Filing Party: ..............................................
4) Date Filed: ................................................
<PAGE>
Consolidated Technology Group Ltd.
700 Gemini Street
Houston, Texas 77058
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
July 22, 1999
NOTICE IS HEREBY GIVEN that the 1999 Annual Meeting of Shareholders (the
"Annual Meeting") of Consolidated Technology Group Ltd., a New York corporation
(the "Company"), will be held at South Shore Harbor Resort & Conference Center,
2500 South Shore Blvd., League City, Texas 77573 on July 22, 1999, at 9:00 A.M.
local time, for the purpose of considering and acting upon the following
matters:
1. The election of two (2) directors to serve until the 2000 Annual
Meeting of Shareholders and until their successors shall be elected and
qualified;
2. The approval of a one-for-30 reverse split of the Company's Common
Stock;
3. The approval of an amendment to the Company's Certificate of
Incorporation to change the number of authorized shares of Common Stock
to (a) 25,000,000 if the one-for-30 reverse split is approved by the
shareholders or (b) 150,000,000 if the one-for-30 reverse split is not
approved by the shareholders;
4. The approval of an amendment to the Company's Certificate of
Incorporation to change the Company's name to The Sagemark Companies
Ltd.
5. The approval of the Company's 1999 Long-Term Incentive Plan; and
6. The transaction of such other and further business as may properly come
before the meeting.
The Board of Directors of the Company has fixed the close of business on
June 21, 1999 as the record date (the "Record Date") for the determination of
shareholders entitled to notice of and to vote at the Annual Meeting.
The enclosed Proxy Statement contains information pertaining to the matters
to be voted on at the Annual Meeting. A copy of the Company's 1998 Annual Report
to Shareholders is being mailed with this Proxy Statement.
By Order of the Board of Directors
Matthew J. Finch, Secretary
Houston, Texas
June 28, 1999
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<PAGE>
THE MATTERS BEING VOTED ON AT THE ANNUAL MEETING ARE IMPORTANT TO THE COMPANY.
CERTAIN OF SUCH MATTERS REQUIRE THE APPROVAL OF THE HOLDERS OF A MAJORITY OF THE
OUTSTANDING SHARES OF COMMON STOCK. IN ORDER THAT YOUR VOTE IS COUNTED AT THE
ANNUAL MEETING, PLEASE EXECUTE, DATE AND PROMPTLY MAIL THE ENCLOSED PROXY CARD
IN THE ENCLOSED ENVELOPE, WHICH REQUIRES NO POSTAGE IF MAILED IN THE UNITED
STATES. THE GIVING OF A PROXY WILL NOT AFFECT YOUR RIGHT TO VOTE IN PERSON AT
THE ANNUAL MEETING IF THE PROXY IS REVOKED IN THE MANNER SET FORTH IN THE PROXY
STATEMENT.
------------------------------------------
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<PAGE>
PROXY STATEMENT
1999 Annual Meeting of Shareholders
GENERAL INFORMATION
The accompanying proxy and this Proxy Statement are furnished in
connection with the solicitation by the Board of Directors of Consolidated
Technology Group Ltd., a New York corporation (the "Company"), of proxies for
use at the Company's 1999 Annual Meeting of Shareholders (the "Annual Meeting")
to be held at South Shore Harbor Resort & Conference Center, 2500 South Shore
Blvd., League City, Texas 77573 on July 22, 1999 at 9:00 A.M. or at any
adjournment thereof. This Proxy Statement and the related proxy and the 1998
Annual Report to Shareholders (the "Annual Report") are being mailed to
shareholders of the Company on or about June 28, 1999.
At the Annual Meeting, shareholders will vote on (a) the election of
two (2) directors to serve until the 2000 Annual Meeting of Shareholders and
until their successors shall be elected and qualified, (b) the approval of a
one-for-30 reverse split of the Company's Common Stock (the "Reverse Split"),
(c) the approval of an amendment to the Company's Certificate of Incorporation
to change the number of authorized shares of Common Stock to (i) 25,000,000 if
the one-for-30 reverse split is approved by the shareholders or (ii) 150,000,000
if the one-for-30 reverse split is not approved by the shareholders; (d) the
approval of an amendment to the Company's Certificate of Incorporation to change
the name of the Company to The Sagemark Companies Ltd.; (e) the approval of the
Company's 1999 Long-Term Incentive Plan (the "Plan"); and (f) such other and
further business as may properly come before the meeting. The Board of Directors
does not know of any other matters which will be voted upon at the Annual
Meeting.
Shareholders are encouraged to review the detailed discussion
concerning the above proposals as presented in this Proxy Statement and either
return the completed and executed proxy or attend the Annual Meeting.
Record Date; Outstanding Shares; Voting Rights and Proxies
Shareholders of record at the close of business on June 21, 1999 (the
"Record Date"), are entitled to notice of and to vote at the Annual Meeting. As
of the close of business on the Record Date there were outstanding 46,855,096
shares of Common Stock of the Company (the "Common Stock"). The holders of the
Common Stock are entitled to one vote for each share owned of record on the
Record Date.
The presence in person or by proxy of holders of a majority of the
shares of Common Stock of the Company entitled to vote at the Annual Meeting
will constitute a quorum for the transaction of business at the Annual Meeting.
If a shareholder files a proxy or attends the Annual Meeting, his, her or its
shares will be counted as being present at the Annual Meeting for purposes of
determining whether there is a quorum, even if the shareholder abstains from
voting on all matters. The vote required for the election of directors and the
approval of the other proposals is set forth in the discussion of each proposal.
Each shareholder of the Company is requested to complete, sign, date
and return the enclosed proxy without delay in order to ensure that his, her or
its shares are voted at the Annual Meeting. The return of a signed proxy will
not affect a shareholder's right to attend the Annual Meeting and vote in
person. Any shareholder giving a proxy has the right to revoke it at any time
before it is exercised by executing and returning a proxy bearing a later date,
by giving a written notice of revocation to the Secretary of the Company, or by
attending the Annual Meeting and voting in person. There is no required form of
proxy revocation. All properly executed proxies that are not revoked will be
voted at the Annual Meeting in accordance with the instructions contained
therein.
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<PAGE>
If a proxy is signed and returned, but no specification is made with
respect to any or all of the proposals listed thereon, the shares represented by
such proxy will be voted for all the proposals, including the election of
directors. Abstentions and broker non-votes are not counted as votes "for" or
"against" a proposal, but where the affirmative vote on the subject matter is
required for approval, abstentions and broker non-votes are counted in
determining the number of shares present or represented.
Technology Acquisitions, Ltd. ("TAL") owns or has voting rights with
respect to 15,999,785 shares of Common Stock, representing more than 34% of the
outstanding Common Stock on the Record Date. TAL has advised the Company that it
will vote such shares in favor of the election of the Board of Director's
nominees for election and in favor of the other proposals set forth herein. See
"Beneficial Ownership of Securities and Security Holdings of Management."
Cost of Solicitation
Proxies for the Annual Meeting are being solicited by the Company. The
Company will bear the costs of soliciting such proxies. The Company will request
that brokers and other custodians, nominees and fiduciaries forward these proxy
materials to the beneficial holders of the Common Stock held of record by such
individuals, where appropriate, and will, upon request, reimburse such
individuals for their reasonable out-of-pocket expenses incurred in connection
therewith. The Company intends to engage American Stock Transfer & Trust Company
to assist it in the solicitation of proxies for the Annual Meeting. The fees for
such services are estimated at approximately $5,000.
BENEFICIAL OWNERSHIP OF SECURITIES AND
SECURITY HOLDINGS OF MANAGEMENT
Set forth below is information as of May 31, 1999, based on information
provided to the Company by the individuals named below, as to each person owning
of record or known by the Company to own beneficially, 5% or more of the
Company's Common Stock, each director and nominee for director and all officers
and directors as a group.
Name and Address(1) Shares Percent
------------------- ------ -------
Technology Acquisitions, Ltd. 15,999,785(2) 34.2%
700 Gemini Street
Houston, Texas 77058
Frank DeLape 15,999,785(3) 34.2%
700 Gemini Street
Houston, Texas 77058
Richard Young 0(4) ---
700 Gemini Street
Houston, Texas 77058
All directors and officers as a 15,999,785(3),(4),(5) 34.2%
group (three individuals)
(1) Unless otherwise indicated, each person or entity has the sole voting
and sole investment power and direct beneficial ownership of the
shares.
(2) Represents (a) 8,000,000 shares of Common Stock owned by TAL, and
(b) 7,999,785 shares of Common Stock for which TAL holds irrevocable
proxies.
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<PAGE>
(3) Represents shares owned by or subject to proxies held by TAL. Because
Mr. DeLape is the chief executive officer of TAL, he has the right to
vote the shares owned by TAL. Does not include 400,000 shares of Common
Stock which are the subject of an option held by Mr. DeLape. The
exercise price of such option, but not the number of shares issuable
upon exercise of such option, is subject to adjustment if the Reverse
Split is approved. The option does not become exercisable until the
Company's aggregate market capitalization, as defined in the option, is
at least $25,000,000. Because the grant of such option is subject to
shareholder approval and to such vesting contingency, it is not treated
as being presently exercisable. Assuming shareholder approval of such
option, the consummation of the Reverse Split and satisfaction of the
$25,000,000 aggregate market capitalization vesting contingency, the
shares which are the subject of such option will, assuming the full
exercise of such option, represent approximately 20% of the outstanding
shares of Common Stock. See "Executive Compensation - Transactions with
Related Parties," "Approval of One-for-30 Reverse Split" and "Approval
of the 1999 Long-Term Incentive Plan."
(4) Does not include 250,000 shares of Common Stock which are the subject
of an option held by Mr. Young. The exercise price of such option, but
not the number of shares issuable upon exercise of such option, is
subject to adjustment if the Reverse Split is approved. The option does
not become exercisable until the Company's aggregate market
capitalization is at least $25,000,000. Because the grant of such
option is subject to shareholder approval and to such vesting
contingency, it is not treated as being presently exercisable. Assuming
shareholder approval of such option, the consummation of the Reverse
Split and satisfaction of the $25,000,000 aggregate market
capitalization vesting contingency, the shares which are the subject of
such option will, assuming the full exercise of such option, represent
approximately 14% of the then outstanding shares of Common Stock. See
"Executive Compensation-Transactions with Related Parties," "Approval
of One-for-30 Reverse Split" and "Approval of the 1999 Long-Term
Incentive Plan."
(5) Does not include the 650,000 shares of Common Stock described in
footnotes 3 and 4 to this table or an additional 15,000 shares of
Common Stock which are the subject of an option held by another
officer. Such option is subject to the same vesting contingency and has
the same anti-dilution protection as the options described in footnotes
3 an 4 to this table. Because the grant of the option to such other
officer is subject to shareholder approval and to such vesting
contingency, it is not treated as being presently exercisable.
Accordingly, assuming shareholder approval of all of such options, the
consummation of the Reverse Split, and satisfaction of the $25,000,000
aggregate market capitalization vesting contingency, the shares which
are the subject of the options held by all officers and directors as a
group will, assuming the full exercise of such options, represent
approximately 30% of the then outstanding shares of Common Stock. See
"Executive Compensation-Transactions with Related Parties," "Approval
of One-for-30 Reverse Split" and "Approval of the 1999 Long-Term
Incentive Plan."
ELECTION OF DIRECTORS
Directors of the Company are to be elected annually by the shareholders
to serve until the next annual meeting of shareholders and until their
respective successors are duly elected. The Company has not held a meeting of
its shareholders since 1993. The by-laws of the Company provide that the number
of directors comprising the whole Board shall be determined from time to time by
the Board of Directors. The Board of Directors has established the size of the
Board for the ensuing year at two and is recommending that the two incumbent
directors of the Company be re-elected. If either of the nominees becomes
unavailable for any reason, a situation which is not anticipated, a substitute
nominee may be proposed by the Board of Directors and all shares represented by
proxies will be voted for such substitute nominee, unless the Board reduces the
number of directors.
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<PAGE>
The Board of Directors is presently comprised of Mr. Frank DeLape and
Mr. Richard Young, who were elected to the Board of Directors in April 1999 by
the then Board of Directors of the Company in connection with the April 1999
transaction pursuant to which TAL acquired ownership of and/or voting rights to
approximately 34% of the outstanding shares of Common Stock. See "Transactions
with Related Parties."
Prior to the election of Messrs. DeLape and Young to the Board of
Directors in April 1999, the Board of Directors was comprised of Messrs. Edward
D. Bright, Donald Chaifetz and Seymour Richter, who were elected to the Board in
April 1998 following the resignations of Messrs. Lewis S. Schiller, Norman
Hoskin and E. Gerald Kay and Ms. Grazyna B. Wnuk as directors of the Company.
Messrs. Bright, Chaifetz and Richter resigned from the Board in April 1999
immediately following the election to the Board of Messrs. DeLape and Young.
The following table sets forth certain information concerning the
nominees for director:
Name Age Position with the Company Director Since
- ---- --- ------------------------- --------------
Frank DeLape 45 Chairman of the Board and Chief April 1999
Executive Officer
Richard Young 31 President and Chief Operating April 1999
Officer
Mr. DeLape has been the Company's Chairman of the Board and Chief
Operating Officer since April 1999. He is also the president and a director of
Benchmark Equity Group ("Benchmark"), a Houston, Texas based merchant banking
firm, a position he has held since 1994, and is chief executive officer and a
director of TAL, a position he has held since the organization of TAL in March
1999. Mr. DeLape is also a director of I-Storm, Inc., which is engaged in the
electronic-commerce business.
Mr. Young has been the Company's President and Chief Operating Officer
since April 1999. From 1997 through 1999, Mr. Young served in various positions
with, and eventually as a principal of, Benchmark. From 1996 until 1997, Mr.
Young served as regional controller for IKON Office Solutions, Inc., which is
engaged in the office systems design and outsourcing business. During a part of
1996, Mr. Young was assistant to the president and chief executive officer of
Learmonth & Burchette Management Systems, Plc., an English company engaged in
the application development process software business. From 1992 to 1996, Mr.
Young was employed by Price Waterhouse, LLP in staff accounting positions,
eventually serving as a senior accountant. Mr. Young is a certified public
accountant.
The Company's by-laws give the Board of Directors the power to
determine the number of directors. The Board of Directors may, in its
discretion, increase the size of the Board and elect additional directors
subsequent to the Annual Meeting if qualified independent directors are selected
who are willing to serve. Any such directors will have a term which expires at
the 2000 Annual Meeting of Shareholders.
Meetings; Committees of the Board of Directors; Directors Compensation
and Filings under the Securities Exchange Act of 1934
The Board of Directors has no committees.
During 1998, the Board of Directors held six meetings, all of which
were attended by all of the then members of the Board of Directors. All other
action by the Board of Directors in 1998 was taken by unanimous written consents
in lieu of a meeting which were signed by all of such directors.
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<PAGE>
During 1998, neither of the present directors was subject to the
reporting requirements of Section 16 of the Securities Exchange Act of 1934, as
amended.
Vote Required
Provided that a quorum is present at the Annual Meeting, the two
directors receiving the most votes will be elected as directors for a term of
one year and until their successors are elected and qualified.
The Board of Directors recommends a vote FOR the election to the Board
of the nominees listed above.
EXECUTIVE OFFICERS
Set forth below are the executive officers of the Company and
information concerning the officer who is not also a director of the Company.
Name Position
- ---- ---------
Frank DeLape Chairman of the Board and Chief Executive Officer
Richard Young President and Chief Operating Officer
Matthew Finch Secretary
Mr. Finch has been Secretary of the Company since April 1999. He is
also General Counsel to Benchmark. Mr. Finch is a 1994 graduate of the
Georgetown University Law Center. From 1994 to 1996, Mr. Finch was an associate
with the law firm of Jenkens & Gilchrist, P.C., and in 1996 and 1997, Mr. Finch
was an associate with the law firm of Akin, Gump, Strauss, Hauer & Feld, LLP.
From 1997 to 1998, Mr. Finch was an associate with the law firm of Andrews &
Kurth in Houston, Texas and in 1998, Mr. Finch joined Benchmark as its General
Counsel.
EXECUTIVE COMPENSATION
Set forth in the table below is information with respect to
compensation paid or accrued by the Company and its subsidiaries in 1998, 1997
and 1996 to its chief executive officer and to each other officer whose annual
compensation for 1998 exceeded $100,000.
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<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
Name and Principal Year Salary Bonus(1) Other Annual Restricted Securities
- ------------------ ----- ------- ----- ------------ ---------- ----------
Position Compensation(2) Stock Underlying
- -------- ------------ ----- ----------
Awards Options,
(Dollars) SARs
(Number)
<S> <C> <C> <C> <C> <C> <C>
George W. Mahoney 1998 $202,000 $ 30,000 $ 953,000 --- ---
Chief Financial 1997 189,000 65,000 11,000 --- ---
Officer 1996 177,000 187,000 13,000 --- ---
Lewis S. Schiller, 1998 138,000 --- 3,503,000 --- ---
Chief Executive 1997 616,000 --- 358,000 --- ---
Officer through 1996 286,000 --- --- --- ---
March 1998
Seymour Richter, 1998 60,000 5,000 --- --- ---
Chief Executive
Officer from April
1998(3)
Grazyna B. Wnuk, 1998 53,000 --- 215,000 --- ---
Secretary through 1997 229,000 --- --- --- ---
March 1998 1996 98,000 --- --- --- ---
</TABLE>
(1) Mr. Mahoney received his bonuses pursuant to his employment agreement
with the Company. In 1996, his bonus included $140,000 related to
services performed for a subsidiary of the Company in connection with
obtaining various loans from its senior lender.
(2) Other annual compensation includes the following:
For Mr. Mahoney, other annual compensation for 1998 includes, (a) a
finders fee of $414,000 paid to him in connection with the sale of
International Magnetic Imaging, Inc. ("IMI"), a subsidiary of the
Company which was sold in April 1998, (b) $350,000 paid in settlement
of Mr. Mahoney's claims under his employment agreement which provided
for a lump sum payment in the event of a change of control, (c)
$186,000 for net proceeds received by him at the time of the sale of
IMI from certain IMI incentive stock options, and (d) $3,000 for
automobile and life insurance allowances. Other annual compensation for
1997 and 1996 represents automobile and life insurance allowances to
which he was entitled under his employment agreement.
For Mr. Schiller, other annual compensation for 1998 includes $1.2
million paid to Mr. Schiller and certain of his family members for his
10% ownership interest in IMI, $1.9 million for the purchase of his
contract rights by the Company in April 1998 and $350,000 of amounts
accrued in connection with a January 1999 settlement agreement between
the Company and Mr. Schiller, which was paid in February 1999. Other
annual compensation for 1997 consists of commissions that Mr. Schiller
earned on the Company's investment activities, a portion of which was
paid during 1998.
For Ms. Wnuk, other annual compensation for 1998 includes $135,000 paid
to Ms. Wnuk for her 1% ownership interest in IMI and $80,000 for the
purchase by the Company in April 1998 of her rights under her
employment agreement.
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<PAGE>
(3) Mr. Richter served as President and Chief Executive Officer of the
Company from April 1998 through April 1999.
Employment and Consulting Agreements
In March 1995, Mr. Mahoney entered into an employment agreement with
the Company pursuant to which he agreed to serve as the Chief Financial Officer
of the Company and IMI. The agreement, as subsequently amended, provided for a
term which expired in 2002, and provided for payments to him in the event of
termination of his employment, either by him or by the Company, in the event of
a change of control. In June 1998, following a claim by Mr. Mahoney that he was
entitled to the change of control compensation as provided in his employment
agreement, Mr. Mahoney and the Company amended and restated the terms of his
employment. Pursuant to such amended terms, Mr. Mahoney agreed to serve for a
term of one year, commencing June 1, 1998. In March 1999, the agreement was
further extended until August 31, 1999. In May 1999, following the change of
control in the Company's management resulting from the purchase by TAL of
8,000,000 shares of Common Stock and the grant to TAL of proxies to vote an
additional 7,999,785 shares of Common Stock, Mr. Mahoney's employment was
terminated by mutual consent, and the Company paid Mr. Mahoney $48,000 in
consideration of such early termination. Mr. Mahoney agreed to provide
consulting services to the Company through December 31, 1999, at an agreed upon
per diem rate.
Mr. Schiller and Ms. Wnuk were parties to employment agreements with
the Company. Such agreements were terminated in April 1998. In connection with
the termination of their employment agreements, the Company purchased from Mr.
Schiller and Ms. Wnuk all of their rights under their contracts. The
compensation paid to Mr. Schiller and Ms. Wnuk pursuant to their employment
agreements and to Mr. Schiller in connection with a certain settlement agreement
is reflected in the Summary Compensation Table.
Contemporaneously with Seymour Richter's resignation as an officer and
director of the Company in April 1999, Mr. Richter and the Company entered into
a consulting agreement for a nine month period expiring in December 1999.
Pursuant to such agreement, Mr. Richter receives a monthly consulting fee of
$6,250.
Effective April 21, 1999, the Company entered into three-year
employment agreements with Mr. Frank DeLape and Mr. Richard Young pursuant to
which such individuals will receive annual salaries of $250,000 and $135,000,
respectively. Pursuant to such agreements, Mr. DeLape serves as the Chairman of
the Board and Chief Executive Officer of the Company and Mr. Young serves as the
President and Chief Operating Officer of the Company. 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 the grant of stock options and restricted
stock grants, and certain fringe benefits, including life insurance, severance
compensation and an automobile allowance. The options granted to Messrs. DeLape
and Young, as described under "Approval of the 1999 Long-Term Incentive Plan"
were granted pursuant to their employment agreements. Their employment
agreements also provide for the grant to Mr. DeLape and Mr. Young of options to
purchase 250,000 and 100,000 shares of Common Stock, respectively, at the end of
each fiscal year during the term of their employment agreements. Such options
are to be granted pursuant to a plan approved by the Company's shareholders.
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<PAGE>
TRANSACTIONS WITH RELATED PARTIES
In April 1998, the Company entered into agreements with Messrs. Lewis
S. Schiller, E. Gerald Kay, Norman Hoskin and Grazyna Wnuk, who were then
officers and directors of the Company pursuant to which:
o Each of them resigned as a director and officer of the Company and its
subsidiaries contemporaneously with the closing of the sale of IMI;
o The Company paid an aggregate of approximately $4.0 million to Mr.
Schiller and his designees and Ms. Wnuk to purchase all of their rights
under their respective employment agreements with the Company and their
stock interests in IMI. Such payments represented a significant
discount from the amounts due under such employment agreements;
o Mr. Schiller transferred to the Company 1,190,000 shares of the
Company's Common Stock which he acquired in 1997 for $.03 per share,
representing a discount from the then current market price of $.06 per
share. Payment for the shares was made by Mr. Schiller by reducing the
amount then owed to him by the Company;
o The Company transferred to Mr. Schiller or his designees, for nominal
consideration, certain subsidiaries of the Company;
o Mr. Schiller agreed to enter into a three-year consulting agreement
with the Company for which he was to receive annual compensation of
$100,000. The Company's obligations to Mr. Schiller for such consulting
services were subject to a settlement agreement between Mr. Schiller
and the Company pursuant to which the Company paid him $350,000 in 1999
in respect of any claims Mr. Schiller had against the Company,
including his claim for consulting compensation; and
o The Company, its subsidiaries and Mr. Schiller, Ms. Wnuk and Mr. Kay
executed mutual releases, and the Company granted certain rights to
indemnification Messrs. Schiller, Kay and Hoskin and Ms. Wnuk.
In March 1999, the Company entered into an agreement with TAL, pursuant
to which the Company sold all of its 67% equity interest in Arc Networks, Inc.
to TAL for $850,000. The sale was completed in June 1999.
On April 20, 1999, TAL purchased 8,000,000 shares, or approximately
17.1% of the outstanding shares of Common Stock, from nine shareholders of the
Company in a private transaction, for an aggregate purchase price of $2,000,000
or $.25 per share. Contemporaneously with such purchase, TAL was also granted
options to purchase an aggregate of an additional 7,999,785 shares of the Common
Stock from six other shareholders of the Company, such options having a term of
13 months and providing for an aggregate exercise price of $2,799,925 or $.35
per share. TAL has proxies with respect to all of the shares covered by such
options during the 13 month term thereof. Accordingly, as a consequence of such
purchase and proxies, TAL owns and/or has the right to vote approximately 34% of
the outstanding shares of the Company's Common Stock.
Messrs. Edward D. Bright and Seymour Richter, who were directors of the
Company from April 1998 until April 1999, were also directors of Netsmart
Technologies, Inc. ("Netsmart") and Trans Global Services, Inc. ("Trans
Global"). The Company has equity interests in both Netsmart and Trans Global. As
non-employee directors of Netsmart and Trans Global, Messrs. Bright and Richter
received options granted under Netsmart's and Trans Global's long-term incentive
plans. See "Approval of the 1999 Long-Term
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<PAGE>
Incentive Plan" for information relating to certain options granted by the
Company to Mr. Edward D. Bright.
- 9 -
<PAGE>
In April and June 1999, the Company sold an aggregate of 792,624 shares
of the common stock of Netsmart owned by it to a group of investors, including
officers and directors of Netsmart, pursuant to a March 25, 1999 agreement
between the Company, Netsmart, and such investors. All of such shares were sold
at $2.014 per share. Mr. Edward D. Bright, who was then a director of the
Company, purchased 62,500 of such shares on the same terms as the other
investors.
See "Approval of the 1999 Long-Term Incentive Plan" for information
relating to certain options granted by the Company to its present officers and
directors, including options granted to Frank DeLape, Richard Young and another
officer of the Company, to purchase 400,000, 250,000 and 15,000 shares of Common
Stock, respectively, which options include certain significant anti-dilution
provisions.
PERFORMANCE GRAPH
The following graph, based on data provided by the Center for Research
in Security Prices, shows changes in the value of $100 invested at December 31,
1993, of: (a) shares of the Company's Common Stock; (b) the Nasdaq stock index
(US companies); and (c) an SIC peer group consisting of companies in the SIC
three-digit classification 671, which is the classification for holding
companies, which are principally bank holding companies. The lines represent
monthly index levels derived from compounded daily returns that include all
dividends. The indexes are reweighted daily, using the market capitalization on
the previous trading day. Total shareholder returns from each investment can be
calculated from the year-end investment values shown beneath the graph provided
below.
---------
Consolidated Technology Group Ltd.
Nasdaq Stock Market (US Companies)
Peer Group Index
<TABLE>
<CAPTION>
12/31/93(1) 12/31/94 12/31/95 12/31/96 12/31/97 12/31/98
----------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Consolidated Technology Group Ltd. 100.00 10.40 4.20 1.60 1.00 1.00
Nasdaq Market Index 99.60 97.30 137.60 169.30 207.30 292.20
Peer Group Index 100.90 100.70 149.50 197.30 334.10 338.80
</TABLE>
(1) The index level for all series was set to $100.00 on January 6, 1994.
The January 6, 1994 value is used for the Company at December 31, 1993.
- 10 -
<PAGE>
APPROVAL OF ONE-FOR-30 REVERSE SPLIT
The Board of Directors has approved, subject to shareholder approval, a
proposal for the one-for-30 Reverse Split. As a result of the Reverse Split,
each share of Common Stock outstanding on the effective date of the Reverse
Split, will, without any action on the part of the holder thereof, become
one-thirtieth of a share of Common Stock. The par value of the Common Stock will
not be affected by the Reverse Split. For purposes of this proposal, the Common
Stock, as presently constituted, is referred to as the "Old Common Stock" and
the Common Stock resulting from the Reverse Split is referred to as the "New
Common Stock."
The Reverse Split will become effective upon the filing with the
Secretary of State of New York of an amendment to the Company's Certificate of
Incorporation which will provide that, upon the filing of such Amendment, each
share of Common Stock then issued and outstanding will automatically become and
be converted into one-thirtieth of a share of Common Stock.
Principal Effects of the Reverse Split
The principal effects of the Reverse Split are the following:
1. Based upon the 46,855,096 shares of Old Common Stock outstanding on
the Record Date, the Reverse Split will decrease the outstanding shares of Old
Common Stock by 962/3%, and, upon the effectiveness of the Reverse Split,
approximately 1,561,836 shares of New Common Stock will be outstanding.
2. On the Record Date, there was outstanding a warrant to purchase
1,000,000 shares of Old Common Stock at $.75 per share, which was issued to the
principal lender of one of the Company's subsidiaries. As a result of the
Reverse Split, the number of shares of New Common Stock issuable upon exercise
of such warrant will be 33,333 and the exercise price of such warrant will be
$22.50 per share of New Common Stock.
3. On the Record Date, there were outstanding options held by officers,
directors and employees of the Company to purchase an aggregate of 670,000
shares of Old Common Stock, of which options to purchase 650,000 shares of Old
Common Stock were held by the Chief Executive Officer and President of the
Company. None of such options become exercisable unless the Company's aggregate
market capitalization is at least $25,000,000. Pursuant to the anti-dilution
provisions of such options, as a result of the Reverse Split, the number of
shares of New Common Stock issuable upon the exercise of all of such options
will be the same as the number of shares of Old Common Stock presently issuable
thereunder. These option grants are subject to shareholder approval of the 1999
Long-Term Incentive Plan. See "Beneficial Ownership of Securities and Security
Holdings of Management" and "Approval of the 1999 Long-Term Incentive Plan."
4. The Company has also granted options to purchase an aggregate of
250,000 shares of Common Stock to a former director of the Company at exercise
prices of $.15 and $.25 per share. As a result of the Reverse Split, the number
of shares of New Common Stock issuable upon the exercise of such options will be
8,333, and the exercise price per share of New Common Stock will be $4.50 and
$7.50.
- 11 -
<PAGE>
5. The directors have approved, subject to shareholder approval, the
1999 Long-Term Incentive Plan, pursuant to which options and other equity-based
incentives may be granted to purchase 2,490,000 shares of Common Stock. If the
Reverse Split is approved, the number of shares of Common Stock subject to such
plan will be 1,600,000, which will represent 102% of the number of shares of New
Common Stock to be outstanding upon the effectiveness of the Reverse Split. The
1,600,000 shares to be subject to the 1999 Long-Term Incentive Plan include the
options to purchase 670,000 shares of Common Stock described in Paragraph 3,
above.
The Company will obtain new CUSIP numbers for the New Common Stock
effective at the time of the Reverse Split. Following the effectiveness of the
Reverse Split, the Company will provide each record holder of Old Common Stock
with information to enable such holder to obtain new stock and warrant
certificates.
Subject to the provisions for elimination of fractional shares, as
described below, consummation of the Reverse Split will not result in a change
in the relative equity position or voting power of the holders of Old Common
Stock, except that, if the options to Messrs. DeLape, Young, Finch and another
employee of the Company are approved by the shareholders and the $25,000,000
aggregate market capitalization vesting contingency is satisfied, their
proportional interest in the total outstanding New Common Stock will, assuming
the full exercise of such options, increase substantially. While the 670,000
shares of Old Common Stock issuable upon the exercise of such options represents
approximately 1.5% of the 46,855,096 shares of New Common Stock presently
outstanding, after giving effect to the Reverse Split and the anti-dilution
provisions of such options, the 670,000 shares of New Common Stock issuable upon
the exercise of these options will, assuming the $25,000,000 aggregate market
capitalization vesting contingency relating to such options is satisfied,
represent approximately 30% of the 2,226,836 shares of New Common Stock
outstanding after the Reverse Split, giving effect to and assuming the full
exercise of such options.
Assuming the Reverse Split is approved and implemented, the Certificate
of Amendment amending the Company's Certificate of Incorporation will be filed
with the Secretary of State of New York as promptly as practicable thereafter.
The Reverse Split will become effective as of the date of such filing (the
"Effective Date").
Purposes of the Reverse Stock Split
The Reverse Split would decrease the number of shares of Old Common
Stock outstanding and presumably increase the per share market price for the New
Common Stock. Theoretically, the number of shares outstanding should not, by
itself, affect the marketability of the Common Stock, the type of investor who
acquires it, or the Company's reputation in the financial community, but in
practice this is not necessarily the case, as many investors look upon a stock
trading at less than $1.00 per share as unduly speculative in nature and, as a
matter of policy, avoid investments in such stocks.
Prior to January 1994, the Common Stock was traded on the
over-the-counter market. From January 1994 until August 13, 1997, the Common
Stock was traded on The Nasdaq SmallCap Market. Since August 14, 1997, the
Common Stock has been trading on the OTC Electronic Bulletin Board. The Common
Stock was delisted from The Nasdaq SmallCap Market because of the failure of the
Company to meet Nasdaq's capital and surplus and bid price requirements. The
approval and implementation of the Reverse Split are not expected to have any
immediate impact upon the ability of the Company to list its Common Stock on The
Nasdaq SmallCap Market. In order for the Company to have its Common Stock listed
on The Nasdaq
- 12 -
<PAGE>
SmallCap Market, it will be necessary for the Company to meet the initial
listing requirements for The Nasdaq SmallCap Market. Based upon its financial
position at March 31, 1999, the Company will not meet the tests for inclusion in
The Nasdaq SmallCap Market as a result of the Reverse Split. No assurance can be
given that the Common Stock will ever be listed on The Nasdaq SmallCap Market or
any exchange.
Many leading brokerage firms are reluctant to recommend lower-priced
securities to their clients and a variety of brokerage firm policies and
practices currently tend to discourage individual brokers within firms from
dealing in lower-priced stocks. Some of those policies and practices pertain to
the payment of brokers' commissions and to time consuming procedures that make
the handling of lower priced stocks unattractive to brokers from an economic
standpoint. In addition, the structure of trading commissions also tends to have
an adverse impact upon holders of lower priced stock because the brokerage
commission on a sale of a lower priced stock generally represents a higher
percentage of the sales price than the commission on a relatively higher priced
issue.
The Board of Directors, consisting of Messrs. DeLape and Young,
believes that the Reverse Split is in the best interest of the Company and its
shareholders. The price of the Old Common Stock during the period January 1
through June 18, 1999 ranged from a low closing price of $.09 to a high closing
price of $.185. On June 18, 1999, the closing price of the Old Common Stock was
$.15 per share. The Company may require additional capital for its operations
and does not believe that it will be able to raise capital unless the price of
the Common Stock is higher than the current Common Stock price levels. However,
no assurance can be given that the Reverse Split will result in any increase in
the Common Stock price or that the Company will be able to obtain any capital
following the Reverse Split. The anti-dilution protection contained in the
options held by Messrs. DeLape, Young, Finch and another employee of the Company
may have an adverse effect upon the market price of the Common Stock, even
though such options do not vest and become exercisable unless the Company's
aggregate market capitalization equals or exceeds $25,000,000. See "Approval of
the 1999 Long-Term Incentive Plan."
Exchange of Certificate and Elimination of Fractional Share Interests
On the Effective Date, each 30 shares of Old Common Stock will
automatically be combined and changed into one share of New Common Stock. No
additional action on the part of the Company or any shareholder will be required
in order to implement the Reverse Split. Shareholders will be requested to
exchange their certificates representing shares of Old Common Stock held prior
to the Reverse Split for new certificates representing shares of New Common
Stock. Shareholders will be furnished with the necessary materials and
instructions to effect such exchange promptly following the Effective Date.
Certificates representing shares of Old Common Stock subsequently presented for
transfer will not be transferred on the books and records of the Company but
will be returned to the tendering person for exchange. Shareholders should not
submit any certificates until requested to do so. In the event any certificate
representing shares of Old Common Stock is not presented for exchange upon
request by the Company, any dividends that may be declared after the Effective
Date of the Reverse Split with respect to the Common Stock represented by such
certificate will be withheld by the Company until such certificate has been
properly presented for exchange, at which time all such withheld dividends which
have not yet been paid to a public official pursuant to relevant abandoned
property laws will be paid to the holder thereof or his designee, without
interest.
No fractional shares of New Common Stock will be issued to any
shareholder. Accordingly, shareholders of record who would otherwise be entitled
to receive fractional shares of New Common Stock,
- 13 -
<PAGE>
will, upon surrender of their certificates representing shares of Old Common
Stock, receive a cash payment in lieu thereof equal to the fair value of such
fractional share. Holders of less than 30 shares of Old Common Stock as a result
of the Reverse Split will, on the Effective Date, no longer be shareholders of
the Company. The Board of Directors has determined that the fair value of the
Common Stock will be based on the closing price of the Common Stock on the OTC
Electronic Bulletin Board on the Effective Date (as adjusted to reflect the
Reverse Split) or, if there are no reported sales on such date, the average of
the last reported high bid and low asked price on such day shall be used.
Federal Income Tax Consequences of the Reverse Split
The combination of each 30 shares of Old Common Stock into one share of
New Common Stock should be a tax-free transaction under the Internal Revenue
Code of 1986, as amended, and the holding period and tax basis of the Old Common
Stock will be transferred to the New Common Stock received in exchange therefor.
Generally, cash received in lieu of fractional shares will be treated
as a sale of the fractional shares (although in unusual circumstances such cash
might possibly be deemed a dividend), and shareholders will likely recognize
gain or loss based upon the difference between the amount of cash received and
the basis in the surrendered fractional share.
This discussion should not be considered as tax or investment advice,
and the tax consequences of the Reverse Split may not be the same for all
shareholders. Shareholders should consult their own tax advisors to determine
their individual Federal, state, local and foreign tax consequences.
Financial Statements
The Company's audited consolidated financial statements for the year
ended December 31, 1998 and the unaudited consolidated financial statements for
the three months ended March 31, 1999, and "Management's Discussion and Analysis
of Financial Condition and Results of Operations" with respect to such financial
statements which are included in the Annual Report and the Company's Form 10-Q
for the quarter ended March 31, 1999, are incorporated by reference in this
Proxy Statement. See "Incorporation by Reference."
Vote Required
The Reverse Split requires the approval of the holders of a majority of
the outstanding shares of Common Stock.
The Board of Directors recommends a vote FOR the Reverse Split.
APPROVAL OF CHANGE IN AUTHORIZED CAPITAL STOCK
The Board of Directors has approved, subject to shareholder approval,
an amendment to the Company's Certificate of Incorporation which would change
the number of authorized shares of Common Stock, par value $.01 per share. If
the Reverse Split is approved, the number of authorized shares of Common Stock
would be decreased from 50,000,000 shares to 25,000,000 shares. If the Reverse
Split is not
- 14 -
<PAGE>
approved, the number of authorized shares would be increased from 50,000,000
shares to 150,000,000 shares.
The adoption of the amendment will not effect any change in the
Company's outstanding Common Stock.
Financial Statements
The Company's audited consolidated financial statements for the year
ended December 31, 1998 and the unaudited consolidated financial statements for
the three months ended March 31, 1999, and "Management's Discussion and Analysis
of Financial Condition and Results of Operations" with respect to such financial
statements which are included in the Annual Report and the Company's Form 10-Q
for the quarter ended March 31, 1999, are incorporated by reference in this
Proxy Statement. See "Incorporation by Reference."
Discussion of the Amendment
On the Record Date, there were outstanding 46,855,096 shares of Common
Stock. In addition, on such date there were 1,000,000 shares of Common Stock
issuable upon the exercise of warrants held by the principal lender to one of
the Company's presently inactive subsidiaries and 920,000 shares reserved for
issuance pursuant to other outstanding options and warrants, including options
and warrants issued to former and present officers and directors of the Company.
Accordingly, the Company does not have sufficient shares of Common
Stock available for issuance for the purpose of raising additional capital for
future acquisitions. However, if the Reverse Split is approved, the 25,000,000
shares of authorized Common Stock will exceed the reasonable requirements for
such shares, and the Board of Directors believes that a reduction in the number
of authorized shares of Common Stock is in the best interests of the
Corporation.
In the event that the Reverse Split is not approved, the Company will
not have sufficient shares of Common Stock available to enable it to issue any
significant number of additional shares of Common Stock, including shares
issuable for the purposes described herein. In such event, the Board of
Directors believes that the increased authorization to 150,000,000 shares of
Common Stock is necessary to provide the Company with sufficient shares in the
event that such shares are necessary. Except as set forth above, the Company has
no agreements or understandings at this time with respect to the issuance of
additional shares of Common Stock.
Under the Company's Certificate of Incorporation, the Board of
Directors of the Company has authority to issue authorized and unissued shares
of capital stock of any class without obtaining approval from the holders of the
Common Stock. The holders of the Company's Common Stock and Preferred Stock do
not have preemptive rights. The Company's Certificate of Incorporation gives the
Board of Directors broad authority to issue shares of preferred stock in one or
more series and to determine such matters as the dividend rate and preference,
voting rights, conversion privileges, redemption provisions, liquidation
preferences and other rights of each series. Each share of Common Stock is
entitled to one vote. The holders of any series of preferred stock issued in the
future will be entitled to such voting rights as may be specified by the Board
of Directors.
- 15 -
<PAGE>
Because of the broad powers granted to the Board of Directors to issue
shares of preferred stock and determine the rights, preferences and privileges
of the holders of such series, the Board has the power to issue shares of
preferred stock in a manner which could be used as a defensive measure against a
hostile takeover or to keep the Board of Directors in power. The Board of
Directors has no present plans to issue shares for such purpose.
The Board of Directors of the Company believes it will benefit the
shareholders to have additional unreserved shares available for issuance in
order that adequate shares may be available for the possible issuance of Common
Stock, convertible preferred stock or convertible debt securities in connection
with a possible financing of the Company's business or an acquisition. The
Company has no plans, arrangements, understandings or commitments at this time
with respect to the issuance of any such shares.
Vote Required
The amendment to the Certificate of Incorporation requires the approval
of the holders of a majority of the outstanding shares of Common Stock.
The Board of Directors recommends a vote FOR the proposed change to the
authorized capital stock of the Company.
APPROVAL OF CHANGE OF NAME
The Board of Directors has approved, subject to shareholder approval,
an amendment to the Company's Certificate of Incorporation to change the
Company's name from Consolidated Technology Group Ltd. to The Sagemark Companies
Ltd. The Board of Directors believes that a change of the Company's corporate
name is necessary as a result of the change in the Company's business. The
Company, through its majority owned subsidiaries, and its controlling interest
in other companies, was engaged in a range of different businesses. The
Company's current name reflects the prior activities and businesses engaged in
by the Company. During 1998 and 1999, the Company divested itself of its former
businesses and it now neither operates nor controls any operating businesses. In
view of the change in the Company's business, the Board of Directors believes
that the new name of The Sagemark Companies Ltd. is in the best interests of the
Company and its shareholders.
Vote required
The amendment to the Certificate of Incorporation requires the approval
of the holders of a majority of the outstanding shares of Common Stock.
The Board of Directors recommends a vote FOR the proposed change of the
Company's corporate name.
APPROVAL OF THE 1999 LONG-TERM INCENTIVE PLAN
The Board of Directors believes that in order for the Company and its
subsidiaries to attract and retain the services of executive and other key
employees, it is necessary for the Company to have the ability and flexibility
to provide a compensation package which compares favorably with those offered by
other companies. Accordingly, the Board of Directors adopted the 1999 Long-Term
Incentive Plan (the "Plan"),
- 16 -
<PAGE>
subject to shareholder approval, covering 2,490,000 shares of Common Stock. The
number of shares of Common Stock issuable pursuant to the Plan will be 1,600,000
shares if the Reverse Split becomes effective. Set forth below is a summary of
the Plan, which summary is qualified in its entirety by reference to the full
text of the Plan, a copy of which is attached as Appendix A to this Proxy
Statement.
The Plan is authorized for 2,490,000 shares of Common Stock (1,600,000
shares if the Reverse Split becomes effective). If shares subject to an option
or other right under the Plan cease to be subject to such option or right, or if
shares awarded under the Plan are forfeited, or otherwise terminate without a
payment being made to the participant in the form of stock, such shares will
again be available for future issuance under the Plan. The Plan does not have an
expiration date.
Awards under the Plan may be made to key employees, including officers
and directors of and consultants to the Company and its subsidiaries. Members of
the Committee are also eligible for options granted under the Plan. The Plan
imposes no limit on the number of officers and other key employees to whom
awards may be made.
The Plan will be administered by a committee of at least two
non-employee directors to be appointed by the Board (the "Committee"). The
Committee has broad discretion in determining the individuals to whom stock
options or other awards are to be granted, the terms and conditions of the
award, including the type of award, the exercise price and term, the vesting
provisions and the restrictions and forfeiture conditions. Members of the
Committee are eligible for the grant of options and other rights under the Plan.
If no Committee is appointed, the functions of the Committee shall be performed
by the Board of Directors. Since the Company only has two directors, the Board
of Directors presently serves as the Committee.
The Committee will have the authority to grant the following types of
awards under the Plan: incentive or non-qualified stock options; stock
appreciation rights; restricted stock; deferred stock; stock purchase rights
and/or other stock-based awards. The Plan is designed to provide the Committee
with broad discretion to grant incentive stock-based rights.
Pursuant to their employment agreements, Messrs. Frank DeLape and
Richard Young are entitled, on each December 31st during the term of their
agreements, to receive options to purchase 250,000 and 100,000 shares of Common
Stock, respectively, at the market price of the Common Stock on such dates,
provided that such individuals are employed by the Company at that time and that
certain performance objectives to be determined by the Committee have been met
at that time. Such options are to be granted pursuant to a plan approved by the
shareholders and may have stock appreciation rights. If there are sufficient
shares of Common Stock available for issuance pursuant to the Plan, the Company
anticipates that such options will be granted pursuant to the Plan.
The Committee also has the authority to determine, in its sole
discretion, the effect of any reverse split or other recapitalization upon the
number of shares subject to the Plan and the number of shares and option or base
price of all options or other equity-based incentives granted under the Plan and
to provide financial assistance to persons exercising options pursuant to the
Plan. Pursuant to such authority, the Board of Directors, acting as the
Committee, determined that, upon the effectiveness of the Reverse Split, the
number of shares of Common Stock subject to the Plan will be 1,600,000 shares.
The Plan also provides certain cashout rights in the event of a change of
control.
- 17 -
<PAGE>
The following table sets forth information concerning options granted
pursuant to the Plan as of May 31, 1999. None of the present officers and
directors and none of the individuals named in the Summary Compensation Table
held any options at December 31, 1998, the end of the Company's most recent
fiscal year. The options granted under the Plan to the Company's present
officers and employees have stock appreciation rights. The stock appreciation
right gives the holder the right to receive, in shares of Common Stock, the
appreciation in the value of the Common Stock from the exercise price of the
option. The number of shares to be issued with respect to each option to
purchase one share of Common Stock is determined by subtracting the exercise
price of the option from the fair market value of the Common Stock at the time
of exercise and dividing the result by such fair market value. The stock
appreciation rights were granted in tandem with the options. Thus, any exercise
of the option reduces the number of shares of Common Stock subject to the stock
appreciation right, and any exercise of the stock appreciation right reduces the
number of shares of Common Stock subject to the option. Except for the cashout
rights in the event of a change of control, the option holders have no right to
receive cash in respect of the stock appreciation rights.
Number of Shares Exercise Price
Name and Position Underlying Options Granted Per Share
----------------- -------------------------- ---------
Frank DeLape, chairman and chief 400,000 $.14
executive officer
Richard Young, president and chief 250,000 .14
operating officer
All current executive officers 665,000 .14
All other employees 5,000 .14
The following is a description of the options granted pursuant to the
Plan, all of which are subject to shareholder approval of the Plan.
Frank DeLape and Richard Young. Pursuant to employment agreements
between the Company and Messrs. DeLape and Young, the Company granted such
individuals five-year non-qualified stock options to purchase 400,000 and
250,000 shares of the Common Stock of the Company, respectively, at $.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 being at least $25,000,000. The options provide the holders with
stock appreciation rights, which can be exercised to the extent that the options
are exercisable.
The number of shares of Common Stock issuable upon exercise of Mr.
DeLape's and Mr. Young's options will not be affected by the Reverse Split.
However, the exercise price of all of such options will be adjusted to reflect
the Reverse Split. Accordingly, the $.14 per share exercise price of the
aforementioned options held by Messrs. DeLape and Young will be adjusted to
$4.20 per share upon the effectiveness of the Reverse Split. Thus, upon the
effectiveness of the Reverse Split, Messrs. DeLape and Young will have options
to purchase 400,000 and 250,000 shares of Common Stock, respectively, at $4.20
per share, and the related stock appreciation rights.
Other Options to Employees. In May 1999, the Company granted five-year
non-qualified stock options to Matthew J. Finch, Secretary of the Company, and
to another employee of the Company, to purchase 15,000 and 5,000 shares of
Common Stock, respectively at $.14 per share, the closing price of the Company's
Common Stock on the date of grant of such options. The options provide the
holders with stock
- 18 -
<PAGE>
appreciation rights, which can be exercised to the extent that the options are
exercisable. These options become exercisable when the Company has an aggregate
market capitalization of at least $25,000,000 and contain the same anti-dilution
provisions with respect to the number of shares covered by such options as are
contained in the options granted to Messrs. DeLape and Young. Accordingly, the
number of shares subject to such options will not be adjusted as a result of the
Reverse Split. However, the $.14 per share exercise price of such options will
be adjusted to $4.20 per share upon the effectiveness of the Reverse Split.
Thus, upon the effectiveness of the Reverse Split, Mr. Finch and such other
employee will have options to purchase 15,000 and 5,000 shares of Common Stock,
respectively, at $4.20 per share, with the related stock appreciation rights.
Edward D. Bright. In August 1998, the Company granted Edward D. Bright,
who was then the Chairman of the Board and a director of the Company, options to
purchase 150,000 shares of Common Stock. The options have a term of three years
and are exercisable at $.25 per share, the fair market value of the Common Stock
on July 7, 1998. This option was included in the Plan.
In April 1999, the Company granted Mr. Bright a three-year option to
purchase 100,000 shares of Common Stock at $.15 per share, the fair market value
of the Common Stock on April 22, 1999. Such option does not require shareholder
approval and is not included in the Plan. Accordingly, if the shareholders do
not approve the Plan, the option granted to Mr. Bright in April 1999 will
nevertheless remain in full force and effect.
Both the number of shares and the exercise price of the aforementioned
options held by Mr. Bright will be subject to adjustment upon the consummation
of the Reverse Split. Accordingly, the option to purchase 150,000 shares of
Common Stock at $.25 per share will be adjusted to 5,000 shares exercisable at
$7.50 per share and the option to purchase 100,000 shares of Common Stock at
$.15 per share will be adjusted to 3,333 shares exercisable at $4.50 per share.
The options granted to Mr. Bright do not have stock appreciation rights.
The options granted pursuant to the Plan were granted subject to
shareholder approval of the Plan. In the event that the Plan is not approved by
the shareholders, all of the options granted under the Plan will terminate.
Tax consequences of awards provided under the Plan are dependent upon
the type of award granted. The grant of an incentive or non-qualified stock
option does not result in any taxable income to the recipient or deduction to
the Company. Upon exercise of a non-qualified stock option, the recipient
recognizes income in the amount by which the fair market value on the date of
exercise exceeds the exercise price of the option, and the Company receives a
corresponding tax deduction. In the case of incentive stock options, no income
is recognized to the employee, and no deduction is available to the Company upon
the exercise of such options, if the stock issued upon exercise of the option is
not transferred within two years from the date of grant or one year from the
date of exercise, whichever occurs later. However, the exercise of an incentive
stock option may result in additional taxes through the application of the
alternative minimum tax. In the event of a sale or other disqualifying transfer
of stock issued upon exercise of an incentive stock option, the employee
realizes income, and the Company receives a tax deduction, equal to the amount
by which the lesser of the fair market value on the date of exercise or the
proceeds from the sale exceeds the exercise price. The issuance of stock upon
exercise of a stock appreciation right results in taxable income equal to the
value of the shares of Common Stock issued. The issuance of stock pursuant to a
stock grant results in taxable income to the recipient on the date the rights to
the stock become non-forfeitable, and the
- 19 -
<PAGE>
Company receives a deduction in such amount. However, if the recipient of the
award makes an election in accordance with the Internal Revenue Code of 1986, as
amended, the amount of his or her income is based on the fair market value on
the date of grant rather than the fair market value on the date the rights
become non-forfeitable. When compensation is to be recognized by the employee,
appropriate arrangements are to be made with respect to the payment of
withholding tax.
Under generally accepted accounting principles, the grant of stock
appreciation rights may result in a charge to income for each year that the
stock appreciation rights are outstanding. Such charge to income would be equal
to the appreciation in value of the common stock subject to the stock
appreciation rights from the later of the date the stock appreciation rights
were granted or the last day of the prior fiscal year to the last day of the
fiscal year for which the determination is being made. Since the options and the
related stock appreciation rights will not become exercisable until the
Company's market capitalization is at least $25 million, prior to the fiscal
year in which that market capitalization is attained, the charge to income for
the fiscal year, based on the year-end market price of the Common Stock, will be
recognized over such estimated number of years remaining to attain a $25 million
market capitalization. If the $25 million market capitalization is reached
without an increase in the outstanding Common Stock or a change in the options
with stock appreciation rights, the total charge to income could exceed $7.5
million.
Vote Required
The approval of the Plan requires the approval of a majority of the
shares present and voting at the meeting provided that a quorum is present.
The Board of Directors recommends a vote FOR the adoption of the Plan.
- 20 -
<PAGE>
INDEPENDENT ACCOUNTANTS
Moore Stephens, P.C. has been the independent certified public
accountants for the Company since 1985, and its report is included in the Annual
Report. At no time since their engagement has such firm had any direct or
indirect financial interest in or any connection with the Company or any of its
subsidiaries other than as independent auditors.
Representatives of Moore Stephens, P.C. are not expected to be present
at the Annual Meeting but will, however, be available by telephone to respond to
appropriate questions from shareholders. The Company does not have an audit
committee. The Board of Directors performs such functions.
INCORPORATION BY REFERENCE
The Company hereby incorporates by reference in this Proxy Statement,
its Annual Report on Form 10-K for the year ended December 31, 1998, which is
included in the Annual Report, and its Form 10-Q for the quarter ended March 31,
1999. The Form 10-K includes, among other information, a description of the
Company's business and its audited financial statements for the years ended
December 31, 1997 and 1998 and "Management's Discussion and Analysis of
Financial Condition and Results of Operations," and the Form 10-Q for the
quarter ended March 31, 1999, which includes unaudited financial statements for
the quarter ended March 31, 1999 and "Management's Discussion and Analysis of
Financial Condition and Results of Operations." A copy of the Annual Report is
being mailed to shareholders of record on the Record Date concurrently with the
mailing of this Proxy Statement. Additional copies of the Annual Report will be
provided by the Company without charge upon request. Copies of such Form 10-Q
will be provided without charge upon request.
OTHER MATTERS
Any proposal which a shareholder wishes to present at the 2000 Annual
Meeting of Shareholders must be received by the Company at its executive offices
at 700 Gemini Street, Suite 104, Houston, Texas 77058, not later than January
31, 2000.
Copies of the Company's Form 10-K for the year ended December 31, 1998
and Form 10-Q for the quarter ended March 31, 1999, without Exhibits, may be
obtained without charge by writing to Matthew J. Finch, Esq., Secretary,
Consolidated Technology Group Ltd., 700 Gemini Street, Suite 104, Houston, Texas
77058. Exhibits will be furnished upon request and upon payment of a handling
charge of $.25 per page, which represents the Company's reasonable cost of
furnishing such Exhibits.
The Board of Directors does not know of any other matters to be brought
before the Annual Meeting. If any other matters are properly brought before the
meeting, the individuals named in the enclosed proxy intend to vote such proxy
in accordance with their best judgment on such matters.
By Order of the Board of Directors
Frank DeLape
Chairman of the Board
June 28, 1999
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Appendix A
CONSOLIDATED TECHNOLOGY GROUP LTD.
1999 Long-Term Incentive Plan
1. Purpose; Definitions.
The purpose of the Consolidated Technology Group Ltd. 1999 Long Term
Incentive Plan (the "Plan") is to enable Consolidated Technology Group Ltd. (the
"Company") to attract, retain and reward key employees of the Company and its
Subsidiaries and Affiliates, and others who provide services to the Company and
its Subsidiaries and Affiliates, and strengthen the mutuality of interests
between such key employees and such other persons and the Company's
stockholders, by offering such key employees and such other persons incentives
and/or other equity interests or equity-based incentives in the Company, as well
as performance-based incentives payable in cash.
For purposes of the Plan, the following terms shall be defined as set
forth below:
(a) "Affiliate" means any corporation, partnership, limited liability
company, joint venture or other entity, other than the Company and its
Subsidiaries, that is designated by the Board as a participating employer under
the Plan, provided that the Company directly or indirectly owns at least 20% of
the combined voting power of all classes of stock of such entity or at least 20%
of the ownership interests in such entity.
(b) "Board" means the Board of Directors of the Company.
(c) "Book Value" means, as of any given date, on a per share basis (i)
the stockholders' equity in the Company as of the last day of the immediately
preceding fiscal year as reflected in the Company's consolidated balance sheet,
subject to such adjustments as the Committee shall specify at or after grant,
divided by (ii) the number of then outstanding shares of Stock as of such
year-end date, as adjusted by the Committee for subsequent events.
(d) "Code" means the Internal Revenue Code of 1986, as amended from
time to time, and any successor thereto.
(e) "Commission" means the Securities and Exchange Commission or any
successor thereto.
(f) "Committee" means the Committee referred to in Section 2 of the
Plan. If at any time no Committee shall be in office, then the functions of the
Committee specified in the Plan shall be exercised by the Board.
(g) "Company" means Consolidated Technology Group Ltd., a New York
corporation, or any successor corporation.
(h) "Common Stock" means the Common Stock, par value $.01 per share, of
the Company or any class of Common Stock into which such Common Stock may
hereafter be converted or for which such
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Common Stock may be exchanged pursuant to the Company's certificate of
incorporation or as part of a recapitalization, reorganization or similar
transaction.
(i) "Deferred Stock" means an award made pursuant to Section 8 of the
Plan of the right to receive Common Stock at the end of a specified deferral
period.
(j) "Disability" means disability as determined under procedures
established by the Committee for purposes of this Plan.
(k) "Early Retirement" means retirement, with the express consent for
purposes of this Plan of the Company at or before the time of such retirement,
from active employment with the Company and any Subsidiary or Affiliate pursuant
to the early retirement provisions of the applicable pension plan of such
entity.
(l) "Exchange Act" means the Securities Exchange Act of 1934, as
amended, from time to time, and any successor thereto.
(m) "Fair Market Value" means, as of any given date, the market price
of the Common Stock as determined by or in accordance with the policies
established by the Committee in good faith; provided, that, in the case of an
Incentive Stock Option, the Fair Market Value shall be determined in accordance
with the Code and the Treasury regulations under the Code.
(n) "Incentive Stock Option" means any Stock Option intended to be and
designated as an "Incentive Stock Option" within the meaning of Section 422 of
the Code.
(o) "Non-Employee Director" means a director of the Company who is not
otherwise employed or engaged as a consultant by the Company or any Subsidiary
or Affiliate.
(p) "Non-Qualified Stock Option" means any Stock Option that is not an
Incentive Stock Option.
(q) "Normal Retirement" means retirement from active employment with
the Company and any Subsidiary or Affiliate on or after age 65.
(r) "Other Stock-Based Award" means an award under Section 10 of the
Plan that is valued in whole or in part by reference to, or is otherwise based
on, Common Stock.
(s) "Plan" means this Consolidated Technology Group Ltd. 1999 Long Term
Incentive Plan, as hereinafter amended from time to time.
(t) "Restricted Stock" means an award of shares of Common Stock that is
subject to restrictions under Section 7 of the Plan.
(u) "Retirement" means Normal Retirement or Early Retirement.
(v) "Stock Appreciation Right" means the right pursuant to an award
granted under Section 6 of the Plan to surrender to the Company all (or a
portion) of a Stock Option in exchange for an amount equal
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to the difference between (i) the Fair Market Value, as of the date such award
or Stock Option (or such portion thereof) is surrendered, of the shares of
Common Stock covered by such Stock Option (or such portion thereof), subject,
where applicable, to the pricing provisions in Paragraph 6(b)(ii) of the Plan
and (ii) the aggregate exercise price of such Stock Option or base price with
respect to such award (or the portion thereof which is surrendered).
(w) "Stock Option" or "Option" means any option to purchase shares of
Common Stock (including Restricted Stock and Deferred Stock, if the Committee so
determines) granted pursuant to Section 5 of the Plan.
(x) "Stock Purchase Right" means the right to purchase Common Stock
pursuant to Section 9 of the Plan.
(y) "Subsidiary" means any corporation or other business association,
including a partnership or limited liability company (other than the Company) in
an unbroken chain of corporations or other business associations beginning with
the Company if each of the corporations or other business associations (other
than the last corporation in the unbroken chain) owns equity interests
(including stock or partnership interests) possessing 50% or more of the total
combined voting power of all classes of equity in one of the other corporations
or other business associations in the chain.
In addition, the terms "Change in Control," "Potential Change in
Control" and "Change in Control Price" shall have meanings set forth,
respectively, in Paragraphs 11(b), (c) and (d) of the Plan and the term "Cause"
shall have the meaning set forth in Paragraph 5(b)(viii) of the Plan.
2. Administration.
(a) The Plan shall be administered by a Committee of not less than two
Non-Employee Directors, who shall be appointed by the Board and who shall serve
at the pleasure of the Board. If and to the extent that no Committee exists
which has the authority to so administer the Plan, the functions of the
Committee specified in the Plan shall be exercised by the Board. Notwithstanding
the foregoing, in the event that the Company is not subject to the Exchange Act
or in the event that the administration of the Plan by a Committee of
Non-Employee Directors is not required in order for the Plan to meet the test of
Rule 16b-3 of the Commission under the Exchange Act, or any subsequent rule,
then the Committee need not be composed of Non-Employee Directors. As long as
said Rule 16b-3 requires, as a condition to the officers and directors obtaining
the benefit of such rule, that the Committee be composed of Non-Employee
Directors, each member or alternate member of the Committee shall not be
entitled to any grants under the Plan (except grants pursuant to Paragraph 4(b)
of the Plan) or under any other plans of the Corporation or its affiliates,
except to the extent that participation in a plan would not cause such person to
cease being a Non-Employee Directors for purposes of said Rule 16b-3.
(b) The Committee shall have full authority to grant, pursuant to the
terms of the Plan, to officers and other persons eligible under Section 4 of the
Plan: Stock Options, Stock Appreciation Rights, Restricted Stock, Deferred
Stock, Stock Purchase Rights and/or Other Stock-Based Awards. In particular, the
Committee shall have the authority:
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(i) to select the officers and other eligible persons to whom
Stock Options, Stock Appreciation Rights, Restricted Stock, Deferred Stock,
Stock Purchase Rights and/or Other Stock-Based Awards may from time to time be
granted pursuant to the Plan;
(ii) to determine whether and to what extent Incentive Stock
Options, Non-Qualified Stock Options, Stock Appreciation Rights, Restricted
Stock, Deferred Stock, Stock Purchase Rights and/or Other Stock-Based Awards, or
any combination thereof, are to be granted pursuant to the Plan, to one or more
eligible persons;
(iii) to determine the number of shares to be covered by each
such award granted pursuant to the Plan;
(iv) to determine the terms and conditions, not inconsistent
with the terms of the Plan, of any award granted under the Plan, including, but
not limited to, the share price or exercise price and any restriction or
limitation, or any vesting, acceleration or waiver of forfeiture restrictions
regarding any Stock Option or other award and/or the shares of Common Stock
relating thereto, based in each case on such factors as the Committee shall, in
its sole discretion, determine;
(v) to determine whether, to what extent and under what
circumstances a Stock Option may be settled in cash, Restricted Stock and/or
Deferred Stock under Paragraph 5(b)(x) or (xi) of the Plan, as applicable,
instead of Common Stock;
(vi) to determine whether, to what extent and under what
circumstances Option grants and/or other awards under the Plan and/or other cash
awards made by the Company are to be made, and operate, on a tandem basis with
other awards under the Plan and/or cash awards made outside of the Plan in a
manner whereby the exercise of one award precludes, in whole or in part, the
exercise of another award, or on an additive basis;
(vii) to determine whether, to what extent and under what
circumstances Common Stock and other amounts payable with respect to an award
under this Plan shall be deferred either automatically or at the election of the
participant, including any provision for any determination or method of
determination of the amount (if any) deemed to be earned on any deferred amount
during any deferral period;
(viii) to determine the terms and restrictions applicable to
Stock Purchase Rights and the Common Stock purchased by exercising such Rights;
and
(ix) to determine an aggregate number of awards and the type
of awards to be granted to eligible persons employed or engaged by the Company
and/or any specific Subsidiary, Affiliate or division and grant to management
the authority to grant such awards, provided that no awards to any person
subject to the reporting and short-swing profit provisions of Section 16 of the
Exchange Act may be granted awards except by the Committee.
(c) The Committee shall have the authority to adopt, alter and repeal
such rules, guidelines and practices governing the Plan as it shall, from time
to time, deem advisable; to interpret the terms and provisions of the Plan and
any award issued under the Plan and any agreements relating thereto, and
otherwise to supervise the administration of the Plan.
(d) All decisions made by the Committee pursuant to the provisions of
the Plan shall be made in the Committee's sole discretion and shall be final and
binding on all persons, including the Company and Plan participants.
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3. Stock Subject to Plan.
(a) The total number of shares of Common Stock reserved and available
for distribution under the Plan shall be two million four hundred ninety
thousand (2,490,000) shares of Common Stock. In the event that awards are
granted in tandem such that the exercise of one award precludes the exercise of
another award then, for the purpose of determining the number of shares of
Common Stock as to which awards shall have been granted, the maximum number of
shares of Common Stock issuable pursuant to such tandem awards shall be used.
(b) Subject to Paragraph 6(b)(v) of the Plan, if any shares of Common
Stock that have been optioned cease to be subject to a Stock Option, or if any
such shares of Common Stock that are subject to any Restricted Stock or Deferred
Stock award, Stock Purchase Right or Other Stock-Based Award granted under the
Plan are forfeited or any such award otherwise terminates without a payment
being made to the participant in the form of Common Stock, such shares shall
again be available for distribution in connection with future awards under the
Plan.
(c) In the event of any merger, reorganization, consolidation,
recapitalization, stock dividend, forward stock split, stock distribution,
reverse split, combination of shares or other change in corporate structure
affecting the Common Stock, such substitution or adjustment shall be made in the
aggregate number of shares reserved for issuance under the Plan, in the base
number of shares, in the number and option price of shares subject to
outstanding Options granted under the Plan, in the number and purchase price of
shares subject to outstanding Stock Purchase Rights under the Plan, and in the
number of shares subject to other outstanding awards granted under the Plan as
may be determined to be appropriate by the Committee, in its sole discretion,
provided that the number of shares subject to any award shall always be a whole
number. Such adjusted option price shall also be used to determine the amount
payable by the Company upon the exercise of any Stock Appreciation Right
associated with any Stock Option. The Committee, in its sole discretion, may
make additional antidilution adjustments to any Options issued under the Plan.
4. Eligibility.
Officers and other key employees of, and consultants and independent
contractors to, and directors or, the Company and its Subsidiaries and
Affiliates who are responsible for or contribute to the management, growth
and/or profitability of the business of the Company and/or its Subsidiaries and
Affiliates are eligible to be granted awards under the Plan. Members of the
Committee shall be eligible for options under the Plan.
5. Stock Options.
(a) Administration. Stock Options may be granted alone, in addition to
or in tandem with other awards granted under the Plan and/or cash awards made
outside of the Plan. Any Stock Option granted under the Plan shall be in such
form as the Committee may from time to time approve. Stock Options granted under
the Plan may be of two types: (i) Incentive Stock Options and (ii) Non-Qualified
Stock Options. The Committee shall have the authority to grant to any optionee
Incentive Stock Options, NonQualified Stock Options, or both types of Stock
Options (in each case with or without Stock Appreciation Rights).
(b) Option Grants. Options granted under the Plan shall be subject to
the following terms and conditions and shall contain such additional terms and
conditions, not inconsistent with the terms of the Plan, as the Committee, in
its sole discretion, shall deem desirable:
(i) Option Price. The option price per share of Common Stock
purchasable under a Stock Option shall be determined by the Committee at the
time of grant.
(ii) Option Term. The term of each Stock Option shall be fixed
by the Committee, but no Stock Option shall be exercisable more than twelve (12)
years after the date the Option is granted.
(iii) Exercisability. Stock Options shall be exercisable at
such time or times and subject to such terms and conditions as shall be
determined by the Committee at or after grant. If the Committee provides, in its
sole discretion, that any Stock Option is exercisable only in installments, the
Committee may waive such installment exercise provisions at any time at or after
grant in whole or in part, based on such factors as the Committee shall, in its
sole discretion, determine;
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(iv) Method of Exercise.
(A) Subject to whatever installment exercise
provisions apply under Paragraph 5(b)(iii) of the Plan, Stock Options may be
exercised in whole or in part at any time during the option period, by giving
written notice of exercise to the Company specifying the number of shares to be
purchased. Such notice shall be accompanied by payment in full of the purchase
price, either by check, note or such other instrument, securities or property as
the Committee may accept. A partial exercise of an Option shall not affect the
right of the Optionee to exercise the option from time to time, in accordance
with the Plan, as to the remaining number of shares subject to the Option.
Except as otherwise provided in this Plan. The purchase price of the shares
shall be in United States dollars, payable in cash or by certified bank check.
As and to the extent determined by the Committee, in its sole discretion, at or
after grant, payments in full or in part may also be made in the form of Common
Stock already owned by the optionee or, in the case of the exercise of a
Non-Qualified Stock Option, Restricted Stock, or Options to purchase Common
Stock of the Company owned by him (and having an aggregate fair market value at
least equal to the total exercise price) subject to an award hereunder (based,
in each case, on the Fair Market Value of the Common Stock on the date the
Option is exercised, as determined by the Committee). Notwithstanding the
foregoing, in lieu of cash, a non-director Optionee may, with the approval of
the Board or the Committee, exercise his Option by tendering to the Company
shares of the Common Stock of the Company. The fair market value of any shares
of Common Stock so surrendered shall be determined by the Board or the
Committee.
(B) If payment of the option exercise price of a
Non-Qualified Stock Option is made in whole or in part in the form of Restricted
Stock or Deferred Stock, the Common Stock issuable upon such exercise (and any
replacement shares relating thereto) shall remain (or be) restricted or
deferred, as the case may be, in accordance with the original terms of the
Restricted Stock award or Deferred Stock award in question, and any additional
Common Stock received upon the exercise shall be subject to the same forfeiture
restrictions or deferral limitations, unless otherwise determined by the
Committee, in its sole discretion, at or after grant.
(C) No shares of Common Stock shall be issued until
full payment therefor has been received by the Company. In the event of any
exercise by note or other instrument, the shares of Common Stock shall not be
issued until such note or other instrument shall have been paid in full, and the
exercising optionee shall have no rights as a stockholder until such payment is
made.
(D) Subject to Paragraph 5(b)(iv)(C) of the Plan, an
optionee shall generally have the rights to dividends or other rights of a
stockholder with respect to shares subject to the Option when the optionee has
given written notice of exercise, has paid in full for such shares, and, if
requested, has given the representation described in Paragraph 14(a) of the
Plan.
(v) Non-Transferability of Options. No Stock Option shall be
transferable by the optionee otherwise than by will or by the laws of descent
and distribution, and all Stock Options shall be exercisable, during the
optionee's lifetime, only by the optionee.
(vi) Termination by Death. Subject to Paragraph 5(b)(ix) of
the Plan with respect to Incentive Stock Options, if an optionee's employment by
the Company and any Subsidiary or Affiliate terminates by reason of death, any
Stock Option held by such optionee may thereafter be exercised, to the extent
such option was exercisable at the time of death or on such accelerated basis as
the Committee may determine at or after grant (or as may be determined in
accordance with procedures established by the Committee), by the legal
representative of the estate or by the legatee of the optionee under the will of
the optionee, for a period of one year (or such other period as the Committee
may specify at grant) from the date of such death or until the expiration of the
stated term of such Stock Option, whichever period is the shorter.
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(vii) Termination by Reason of Disability or Retirement.
Subject to Paragraph 5(b)(ix) of the Plan with respect to Incentive Stock
Options, if an optionee's employment by the Company and any Subsidiary or
Affiliate terminates by reason of a Disability or Normal or Early Retirement,
any Stock Option held by such optionee may thereafter be exercised by the
optionee, to the extent it was exercisable at the time of termination or on such
accelerated basis as the Committee may determine at or after grant (or as may be
determined in accordance with procedures established by the Committee), for a
period of one year (or such other period as the Committee may specify at grant)
from the date of such termination of employment or until the expiration of the
stated term of such Stock Option, whichever period is the shorter; provided,
however, that, if the optionee dies within such one-year period (or such other
period as the Committee shall specify at grant), any unexercised Stock Option
held by such optionee shall thereafter be exercisable to the extent to which it
was exercisable at the time of death for a period of one year from the date of
such death or until the expiration of the stated term of such Stock Option,
whichever period is the shorter. In the event of termination of employment by
reason of Disability or Normal or Early Retirement, if an Incentive Stock Option
is exercised after the expiration of the exercise periods that apply for
purposes of Section 422 of the Code, such Stock Option will thereafter be
treated as a Non-Qualified Stock Option.
(viii) Other Termination. Unless otherwise determined by the
Committee (or pursuant to procedures established by the Committee) at or after
grant, if an optionee's employment by the Company and any Subsidiary or
Affiliate terminates for any reason other than death, Disability or Normal or
Early Retirement, the Stock Option shall thereupon terminate; provided, however,
that if the optionee is involuntarily terminated by the Company or any
Subsidiary or Affiliate without Cause, including a termination resulting from
the Subsidiary, Affiliate or division in which the optionee is employed or
engaged, ceasing, for any reason, to be a Subsidiary, Affiliate or division of
the Company, such Stock Option may be exercised, to the extent otherwise
exercisable on the date of termination, for a period of three months (or seven
months in the case of a person subject to the reporting and short-swing profit
provisions of Section 16 of the Exchange Act) from the date of such termination
or until the expiration of the stated term of such Stock Option, whichever is
shorter. For purposes of this Plan, "Cause" means conviction of a participant of
any felony or of a misdemeanor involving theft or moral turpitude, or the
failure of a participant to contest prosecution for a felony or such
misdemeanor, or a participant's willful misconduct or dishonesty, or a
participant's failure to perform the duties for which the participant was
employed or engaged.
(ix) Incentive Stock Options.
(A) Anything in the Plan to the contrary
notwithstanding, no term of this Plan relating to Incentive Stock Options shall
be interpreted, amended or altered, nor shall any discretion or authority
granted under the Plan be so exercised, so as to disqualify the Plan under
Section 422 of the Code, or, without the consent of the optionee(s) affected, to
disqualify any Incentive Stock Option under such Section 422.
(B) To the extent required for "incentive stock
option" status under Section 422(d) of the Code (taking into account applicable
Treasury regulations and pronouncements), the Plan shall be deemed to provide
that the aggregate Fair Market Value (determined as of the time of grant) of the
Common Stock with respect to which Incentive Stock Options are exercisable for
the first time by the optionee during any calendar year under the Plan and/or
any other stock option plan of the Company or any Subsidiary or parent
corporation (within the meaning of Section 425 of the Code) shall not exceed
$100,000. If Section 422 is hereafter amended to delete the requirement now in
Section 422(d) that the plan text expressly provide for the $100,000 limitation
set forth in Section 422(d), then this Paragraph 5(b)(ix)(B) shall no longer be
operative and the Committee may accelerate the dates on which the incentive
stock option may be exercised.
(C) To the extent permitted under Section 422 of the
Code or the applicable regulations thereunder or any applicable Internal Revenue
Service pronouncement:
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(I) If (x) a participant's employment is
terminated by reason of death, Disability or Retirement and (y) the portion of
any Incentive Stock Option that is otherwise exercisable during the
post-termination period specified under Paragraphs 5(b)(vi) and (vii) of the
Plan, applied without regard to the $100,000 limitation contained in Section
422(d) of the Code, is greater than the portion of such option that is
immediately exercisable as an "incentive stock option" during such
post-termination period under Section 422, such excess shall be treated as a
Non-Qualified Stock Option; and
(II) if the exercise of an Incentive Stock
Option is accelerated by reason of a Change in Control, any portion of such
option that is not exercisable as an Incentive Stock Option by reason of the
$100,000 limitation contained in Section 422(d) of the Code shall be treated as
a Non-Qualified Stock Option.
(x) Buyout Provisions. The Committee may at any time offer to
buy out for a payment in cash, Common Stock, Deferred Stock or Restricted Stock
an option previously granted, based on such terms and conditions as the
Committee shall establish and communicate to the optionee at the time that such
offer is made.
(xi) Settlement Provisions. If the option agreement so
provides at grant or is amended after grant and prior to exercise to so provide
(with the optionee's consent), the Committee may require that all or part of the
shares to be issued with respect to the spread value of an exercised Option take
the form of Deferred or Restricted Stock which shall be valued on the date of
exercise on the basis of the Fair Market Value (as determined by the Committee)
of such Deferred or Restricted Stock determined without regard to the deferral
limitations and/or forfeiture restrictions involved.
6. Stock Appreciation Rights.
(a) Grant and Exercise.
(i) Stock Appreciation Rights may be granted in conjunction
with all or part of any Stock Option granted under the Plan. In the case of a
Non-Qualified Stock Option, such rights may be granted either at or after the
time of the grant of such Stock Option. In the case of an Incentive Stock
Option, such rights may be granted only at the time of the grant of such Stock
Option.
(ii) A Stock Appreciation Right or applicable portion thereof
granted with respect to a given Stock Option shall terminate and no longer be
exercisable upon the termination or exercise of the related Stock Option,
subject to such provisions as the Committee may specify at grant where a Stock
Appreciation Right is granted with respect to less than the full number of
shares covered by a related Stock Option.
(iii) A Stock Appreciation Right may be exercised by an
optionee, subject to Paragraph 6(b) of the Plan, in accordance with the
procedures established by the Committee for such purpose. Upon such exercise,
the optionee shall be entitled to receive an amount determined in the manner
prescribed in said Paragraph 6(b). Stock Options relating to exercised Stock
Appreciation Rights shall no longer be exercisable to the extent that the
related Stock Appreciation Rights have been exercised.
(b) Terms and Conditions. Stock Appreciation Rights shall be subject to
such terms and conditions, not inconsistent with the provisions of the Plan, as
shall be determined from time to time by the Committee, including the following:
(i) Stock Appreciation Rights shall be exercisable only at
such time or times and to the extent that the Stock Options to which they relate
shall be exercisable in accordance with the provisions of this Section 6 and
Section 5 of the Plan; provided, however, that any Stock Appreciation Right
granted to an optionee subject to Section 16(b) of the Exchange Act subsequent
to the grant of the related Stock Option shall not be exercisable during the
first six months of its term, except that this special limitation shall not
apply in the event of death or Disability of the optionee prior to the
expiration of the six-month period. The exercise of Stock Appreciation Rights
held by optionees who are subject to Section 16(b) of the Exchange Act shall
comply with Rule 16b-3 thereunder to the extent applicable.
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(ii) Upon the exercise of a Stock Appreciation Right, an
optionee shall be entitled to receive an amount in cash and/or shares of Common
Stock equal in value to the excess of the Fair Market Value of one share of
Common Stock over the option price per share specified in the related Stock
Option multiplied by the number of shares in respect of which the Stock
Appreciation Right shall have been exercised, with the Committee having the
right to determine the form of payment. When payment is to be made in shares of
Common Stock, the number of shares to be paid shall be calculated on the basis
of the Fair Market Value of the shares on the date of exercise. When payment is
to be made in cash, such amount shall be based upon the Fair Market Value of the
Common Stock on the date of exercise, determined in accordance with any
provisions of said Rule 16b-3 during the applicable period referred to in Rule
16b-3(e).
(iii) Stock Appreciation Rights shall be transferable only
when and to the extent that the underlying Stock Option would be transferable
under Paragraph 5(b)(v) of the Plan.
(iv) Upon the exercise of a Stock Appreciation Right, the
Stock Option or part thereof to which such Stock Appreciation Right is related
shall be deemed to have been exercised only to the extent of the number of
shares issued under the Stock Appreciation Right at the time of exercise based
on the value of the Stock Appreciation Right at such time.
(v) In its sole discretion, the Committee may grant Stock
Appreciation Rights that become exercisable only in the event of a Change in
Control and/or a Potential Change in Control, subject to such terms and
conditions as the Committee may specify at grant; provided that any such Stock
Appreciation Rights shall be settled solely in cash.
(vi) The Committee, in its sole discretion, may also provide
that, in the event of a Change in Control and/or a Potential Change in Control,
the amount to be paid upon the exercise of a Stock Appreciation Right shall be
based on the Change in Control Price, subject to such terms and conditions as
the Committee may specify at grant.
7. Restricted Stock.
(a) Administration. Shares of Restricted Stock may be issued either
alone, in addition to or in tandem with other awards granted under the Plan
and/or cash awards made outside of the Plan. The Committee shall determine the
eligible persons to whom, and the time or times at which, grants of Restricted
Stock will be made, the number of shares to be awarded, the price (if any) to be
paid by the recipient of Restricted Stock, subject to Paragraph 7(b) of the
Plan, the time or times within which such awards may be subject to forfeiture,
and all other terms and conditions of the awards. The Committee may condition
the grant of Restricted Stock upon the attainment of specified performance goals
or such other factors as the Committee may, in its sole discretion, determine.
The provisions of Restricted Stock awards need not be the same with respect to
each recipient.
(b) Awards and Certificates.
(i) The prospective recipient of a Restricted Stock award
shall not have any rights with respect to such award unless and until such
recipient has executed an agreement evidencing the award and has delivered a
fully executed copy thereof to the Company, and has otherwise complied with the
applicable terms and conditions of such award.
(ii) The purchase price for shares of Restricted Stock may be
equal to or less than their par value and may be zero.
(iii) Awards of Restricted Stock must be accepted within a
period of 60 days (or such shorter period as the Committee may specify at grant)
after the award date, by executing a Restricted Stock Award Agreement and paying
the price, if any, required under Paragraph 7(b)(ii).
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<PAGE>
(iv) Each participant receiving a Restricted Stock award shall
be issued a stock certificate in respect of such shares of Restricted Stock.
Such certificate shall be registered in the name of such participant, and shall
bear an appropriate legend referring to the terms, conditions, and restrictions
applicable to such award.
(v) The Committee shall require that (A) the stock
certificates evidencing shares of Restricted Stock be held in the custody of the
Company until the restrictions thereon shall have lapsed, and (B) as a condition
of any Restricted Stock award, the participant shall have delivered a stock
power, endorsed in blank, relating to the Restricted Stock covered by such
award.
(c) Restrictions and Conditions. The shares of Restricted Stock awarded
pursuant to this Section 7 shall be subject to the following restrictions and
conditions:
(i) Subject to the provisions of this Plan and the award
agreement, during a period set by the Committee commencing with the date of such
award (the "Restriction Period"), the participant shall not be permitted to
sell, transfer, pledge or assign shares of Restricted Stock awarded under the
Plan. Within these limits, the Committee, in its sole discretion, may provide
for the lapse of such restrictions in installments and may accelerate or waive
such restrictions in whole or in part, based on service, performance and/or such
other factors or criteria as the Committee may determine, in its sole
discretion.
(ii) Except as provided in this paragraph 7(c)(ii) and
Paragraph 7(c)(i) of the Plan, the participant shall have, with respect to the
shares of Restricted Stock, all of the rights of a stockholder of the Company,
including the right to vote the shares and the right to receive any regular cash
dividends paid out of current earnings. The Committee, in its sole discretion,
as determined at the time of award, may permit or require the payment of cash
dividends to be deferred and, if the Committee so determines, reinvested,
subject to Paragraph 14(e) of the Plan, in additional Restricted Stock to the
extent shares are available under Section 3 of the Plan, or otherwise
reinvested. Stock dividends, splits and distributions issued with respect to
Restricted Stock shall be treated as additional shares of Restricted Stock that
are subject to the same restrictions and other terms and conditions that apply
to the shares with respect to which such dividends are issued, and the Committee
may require the participant to deliver an additional stock power covering the
shares issuable pursuant to such stock dividend, split or distribution. Any
other dividends or property distributed with regard to Restricted Stock, other
than regular dividends payable and paid out of current earnings, shall be held
by the Company subject to the same restrictions as the Restricted Stock.
(iii) Subject to the applicable provisions of the award
agreement and this Section 7, upon termination of a participant's employment
with the Company and any Subsidiary or Affiliate for any reason during the
Restriction Period, all shares still subject to restriction will vest, or be
forfeited, in accordance with the terms and conditions established by the
Committee at or after grant.
(iv) If and when the Restriction Period expires without a
prior forfeiture of the Restricted Stock subject to such Restriction Period,
certificates for an appropriate number of unrestricted shares, and other
property held by the Company with respect to such Restricted Shares, shall be
delivered to the participant promptly.
(d) Minimum Value Provisions. In order to better ensure that award
payments actually reflect the performance of the Company and service of the
participant, the Committee may provide, in its sole
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<PAGE>
discretion, for a tandem Stock Option or performance-based or other award
designed to guarantee a minimum value, payable in cash or Common Stock to the
recipient of a Restricted Stock award, subject to such performance, future
service, deferral and other terms and conditions as may be specified by the
Committee.
8. Deferred Stock.
(a) Administration. Deferred Stock may be awarded either alone, in
addition to or in tandem with other awards granted under the Plan and/or cash
awards made outside of the Plan. The Committee shall determine the eligible
persons to whom and the time or times at which Deferred Stock shall be awarded,
the number of shares of Deferred Stock to be awarded to any person, the duration
of the period (the "Deferral Period") during which, and the conditions under
which, receipt of the Common Stock will be deferred, and the other terms and
conditions of the award in addition to those set forth in Paragraph 8(b). The
Committee may condition the grant of Deferred Stock upon the attainment of
specified performance goals or such other factors or criteria as the Committee
shall, in its sole discretion, determine. The provisions of Deferred Stock
awards need not be the same with respect to each recipient.
(b) Terms and Conditions. The shares of Deferred Stock awarded pursuant
to this Section 8 shall be subject to the following terms and conditions:
(i) Subject to the provisions of this Plan and the award
agreement referred to in Paragraph 8(b)(vi) of the Plan, Deferred Stock awards
may not be sold, assigned, transferred, pledged or otherwise encumbered during
the Deferral Period. At the expiration of the Deferral Period (or the Elective
Deferral Period referred to in Paragraph 8(b)(v) of the Plan, where applicable),
share certificates representing the shares covered by the Deferred Stock award
shall be delivered to the participant or his legal representative.
(ii) Unless otherwise determined by the Committee at grant,
amounts equal to any dividends declared during the Deferral Period with respect
to the number of shares covered by a Deferred Stock award will be paid to the
participant currently, or deferred and deemed to be reinvested in additional
Deferred Stock, or otherwise reinvested, all as determined at or after the time
of the award by the Committee, in its sole discretion.
(iii) Subject to the provisions of the award agreement and
this Section 8, upon termination of a participant's employment with the Company
and any Subsidiary or Affiliate for any reason during the Deferral Period for a
given award, the Deferred Stock in question will vest, or be forfeited, in
accordance with the terms and conditions established by the Committee at or
after grant.
(iv) Based on service, performance and/or such other factors
or criteria as the Committee may determine, the Committee may, at or after
grant, accelerate the vesting of all or any part of any Deferred Stock award
and/or waive the deferral limitations for all or any part of such award.
(v) A participant may elect to further defer receipt of an
award (or an installment of an award) for a specified period or until a
specified event (the "Elective Deferral Period"), subject in each case to the
Committee's approval and to such terms as are determined by the Committee, all
in its sole discretion. Subject to any exceptions adopted by the Committee, such
election must generally be made at least twelve months prior to completion of
the Deferral Period for such Deferred Stock award (or such installment).
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<PAGE>
(vi) Each award shall be confirmed by, and subject to the
terms of, a Deferred Stock agreement executed by the Company and the
participant.
(c) Minimum Value Provisions. In order to better ensure that award
payments actually reflect the performance of the Company and service of the
participant, the Committee may provide, in its sole discretion, for a tandem
Stock Option or performance-based or other award designed to guarantee a minimum
value, payable in cash or Common Stock to the recipient of a deferred stock
award, subject to such performance, future service, deferral and other terms and
conditions as may be specified by the Committee.
9. Stock Purchase Rights.
(a) Awards and Administration. The Committee may grant eligible
participants Stock Purchase Rights which shall enable such participants to
purchase Common Stock (including Deferred Stock and Restricted Stock):
(i) at its Fair Market Value on the date of grant;
(ii) at a percentage of such Fair Market Value on such date,
such percentage to be determined by the Committee in its sole discretion;
(iii) at an amount equal to Book Value on such date; or
(iv) at an amount equal to the par value of such Common Stock
on such date.
The Committee shall also impose such deferral, forfeiture and/or other
terms and conditions as it shall determine, in its sole discretion, on such
Stock Purchase Rights or the exercise thereof. The terms of Stock Purchase
Rights awards need not be the same with respect to each participant. Each Stock
Purchase Right award shall be confirmed by, and be subject to the terms of, a
Stock Purchase Rights Agreement.
(b) Exercisability. Stock Purchase Rights shall generally be
exercisable for such period after grant as is determined by the Committee not to
exceed sixty (60) days. However, the Committee may provide, in its sole
discretion, that the Stock Purchase Rights of persons potentially subject to
Section 16(b) of the Exchange Act shall not become exercisable until six months
and one day after the grant date, and shall then be exercisable for ten trading
days at the purchase price specified by the Committee in accordance with
Paragraph 9(a) of the Plan.
10. Other Stock-Based Awards.
(a) Administration.
(i) Other awards of Common Stock and other awards that are
valued in whole or in part by reference to, or are otherwise based on, Common
Stock ("Other Stock-Based Awards"), including, without limitation, performance
shares, convertible preferred stock (to the extent a series of preferred stock
has been or may be created by, or in accordance with a procedure set forth in,
the Company's certificate of incorporation), convertible debentures, warrants,
exchangeable securities and Common Stock awards or options valued by reference
to Fair Market Value, Book Value or performance of the Company or any
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<PAGE>
Subsidiary, Affiliate or division, may be granted either alone or in addition to
or in tandem with Stock Options, Stock Appreciation Rights, Restricted Stock,
Deferred Stock or Stock Purchase Rights granted under the Plan and/or cash
awards made outside of the Plan.
(ii) Subject to the provisions of the Plan, the Committee
shall have authority to determine the persons to whom and the time or times at
which such award shall be made, the number of shares of Common Stock to be
awarded pursuant to such awards, and all other conditions of the awards. The
Committee may also provide for the grant of Common Stock upon the completion of
a specified performance period. The provisions of Other Stock-Based Awards need
not be the same with respect to each recipient.
(b) Terms and Conditions. Other Stock-Based Awards made pursuant to
this Section 10 shall be subject to the following terms and conditions:
(i) Subject to the provisions of this Plan and the award
agreement referred to in Paragraph 10(b)(v) of the Plan, shares of Common Stock
subject to awards made under this Section 10 may not be sold, assigned,
transferred, pledged or otherwise encumbered prior to the date on which the
shares are issued, or, if later, the date on which any applicable restriction,
performance or deferral period lapses.
(ii) Subject to the provisions of this Plan and the award
agreement and unless otherwise determined by the Committee at grant, the
recipient of an award under this Section 10 shall be entitled to receive,
currently or on a deferred basis, interest or dividends or interest or dividend
equivalents with respect to the number of shares covered by the award, as
determined at the time of the award by the Committee, in its sole discretion,
and the Committee may provide that such amounts (if any) shall be deemed to have
been reinvested in additional Common Stock or otherwise reinvested.
(iii) Any award under Section 10 and any Common Stock covered
by any such award shall vest or be forfeited to the extent so provided in the
award agreement, as determined by the Committee, in its sole discretion.
(iv) In the event of the participant's Retirement, Disability
or death, or in cases of special circumstances, the Committee may, in its sole
discretion, waive in whole or in part any or all of the remaining limitations
(if any) imposed with respect to any or all of an award pursuant to this Section
10.
(v) Each award under this Section 10 shall be confirmed by,
and subject to the terms of, an agreement or other instrument by the Company and
by the participant.
(vi) Common Stock (including securities convertible into
Common Stock) issued on a bonus basis under this Section 10 may be issued for no
cash consideration.
11. Change in Control Provisions.
(a) Impact of Event. In the event of a "Change in Control," as defined
in Paragraph 11(b) of the Plan, or a "Potential Change in Control," as defined
in Paragraph 11(c) of the Plan, if and to the extent so determined by the
Committee or the Board at or after grant (subject to any right of approval
expressly reserved by the Committee or the Board at the time of such
determination), the following acceleration and valuation provisions shall apply:
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<PAGE>
(i) Any Stock Appreciation Rights outstanding for at least six
months and any Stock Options awarded under the Plan not previously exercisable
and vested shall become fully exercisable and vested.
(ii) The restrictions and deferral limitations applicable to
any Restricted Stock, Deferred Stock, Stock Purchase rights and Other
Stock-Based Awards, in each case to the extent not already vested under the
Plan, shall lapse and such shares and awards shall be deemed fully vested.
(iii) The value of all outstanding Stock Options, Stock
Appreciation Rights, Restricted Stock, Deferred Stock, Stock Purchase Rights and
Other Stock-Based Awards, in each case to the extent vested, shall unless
otherwise determined by the Committee in its sole discretion at or after grant
but prior to any Change in Control, be purchased by the Company ("cashout") in a
manner determined by the Committee, in its sole discretion, on the basis of the
"Change in Control Price" as defined in Paragraph 11(d) of the Plan as of the
date such Change in Control or such Potential Change in Control is determined to
have occurred or such other date as the Committee may determine prior to the
Change in Control.
(b) Definition of "Change in Control." For purposes of Paragraph 11(a)
of the Plan, a "Change in Control" means the happening of any of the following:
(i) When any "person" (as defined in Section 3(a)(9) of the
Exchange Act and as used in Sections 13(d) and 14(d) of the Exchange Act,
including a "group" as defined in Section 13(d) of the Exchange Act, but
excluding the Company and any Subsidiary and any employee benefit plan sponsored
or maintained by the Company or any Subsidiary and any trustee of such plan
acting as trustee) directly or indirectly becomes the "beneficial owner" (as
defined in Rule 13d-3 under the Exchange Act, as amended from time to time), of
securities of the Company representing twenty percent or more of the combined
voting power of the Company's then outstanding securities; provided, however,
that a Change of Control shall not arise if such acquisition is approved by the
board of directors or if the board of directors or the Committee determines that
such acquisition is not a Change of Control or if the board of directors
authorizes the issuance of the shares of Common Stock (or securities convertible
into Common Stock or upon the exercise of which shares of Common Stock may be
issued) to such persons; or
(ii) When, during any period of twenty-four consecutive months
during the existence of the Plan, the individuals who, at the beginning of such
period, constitute the Board (the "Incumbent Directors") cease for any reason
other than death, Disability or Retirement to constitute at least a majority
thereof, provided, however, that a director who was not a director at the
beginning of such 24-month period shall be deemed to have satisfied such
24-month requirement (and be an Incumbent Director) if such director was elected
by, or on the recommendation of, or with the approval of, at least two-thirds of
the directors who then qualified as Incumbent Directors either actually (because
they were directors at the beginning of such 24-month period) or by prior
operation of this Paragraph 11(b)(ii); or
(iii) The occurrence of a transaction requiring stockholder
approval for the acquisition of the Company by an entity other than the Company
or a Subsidiary through purchase of assets, or by merger, or otherwise.
(c) Definition of Potential Change in Control. For purposes of
Paragraph 11(a) of the Plan, a "Potential Change in Control" means the happening
of any one of the following:
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<PAGE>
(i) The approval by stockholders of an agreement by the
Company, the consummation of which would result in a Change in Control of the
Company as defined in Section 11(b) of the Plan; or
(ii) The acquisition of beneficial ownership, directly or
indirectly, by any entity, person or group (other than the Company or a
Subsidiary or any Company employee benefit plan or any trustee of such plan
acting as such trustee) of securities of the Company representing five percent
or more of the combined voting power of the Company's outstanding securities and
the adoption by the Board of Directors of a resolution to the effect that a
Potential Change in Control of the Company has occurred for purposes of this
Plan.
(d) Change in Control Price. For purposes of this Section 11, "Change
in Control Price" means the highest price per share paid in any transaction
reported on the principal stock exchange on which the Stock is traded or the
average of the highest bid and asked prices as reported by Nasdaq, or paid or
offered in any bona fide transaction related to a potential or actual Change in
Control of the Company at any time during the sixty-day period immediately
preceding the occurrence of the Change in Control (or, where applicable, the
occurrence of the Potential Change in Control event), in each case as determined
by the Committee except that, in the case of Incentive Stock Options and Stock
Appreciation Rights relating to Incentive Stock Options, such price shall be
based only on transactions reported for the date on which the optionee exercises
such Stock Appreciation Rights or, where applicable, the date on which a cashout
occurs under Paragraph 11(a)(iii).
12. Amendments and Termination.
(a) The Board may amend, alter, or discontinue the Plan, but no
amendment, alteration, or discontinuation shall be made which would impair the
rights of an optionee or participant under a Stock Option, Stock Appreciation
Right (or Limited Stock Appreciation Right), Restricted or Deferred Stock award,
Stock Purchase Right or Other Stock-Based Award theretofore granted, without the
optionee's or participant's consent, and no amendment will be made without
approval of the stockholders if such amendment requires stockholder approval
under state law or if stockholder approval is necessary in order that the Plan
comply with Rule 16b-3 of the Commission under the Exchange Act or any
substitute or successor rule or if stockholder approval is necessary in order to
enable the grant pursuant to the Plan of options or other awards intended to
confer tax benefits upon the recipients thereof.
(b) The Committee may amend the terms of any Stock Option or other
award theretofore granted, prospectively or retroactively, but no such amendment
shall impair the rights or any holder without the holder's consent. The
Committee may also substitute new Stock Options for previously granted Stock
Options (on a one for one or other basis), including previously granted Stock
Options having higher option exercise prices.
(c) Subject to the provisions of Paragraphs 12(a) and (b) of the Plan,
the Board shall have broad authority to amend the Plan to take into account
changes in applicable securities and tax laws and accounting rules, as well as
other developments, and, in particular, without limiting in any way the
generality of the foregoing, to eliminate any provisions which are not required
to included as a result of any amendment to Rule 16b-3 of the Commission
pursuant to the Exchange Act.
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<PAGE>
13. Unfunded Status of Plan.
The Plan is intended to constitute an "unfunded" plan for incentive and
deferred compensation. With respect to any payments not yet made to a
participant or optionee by the Company, nothing contained in this Plan shall
give any such participant or optionee any rights that are greater than those of
a general creditor of the Company. In its sole discretion, the Committee may
authorize the creation of trusts or other arrangements to meet the obligations
created under the Plan to deliver Common Stock or payments in lieu of or with
respect to awards under this Plan; provided, however, that, unless the Committee
otherwise determines with the consent of the affected participant, the existence
of such trusts or other arrangements shall be consistent with the "unfunded"
status of the Plan.
14. General Provision.
(a) The Committee may require each person purchasing shares pursuant to
a Stock Option or other award under the Plan to represent to and agree with the
Company in writing that the optionee or participant is acquiring the shares
without a view to distribution thereof. The certificates for such shares may
include any legend which the Committee deems appropriate to reflect any
restrictions on transfer. All certificates or shares of Common Stock or other
securities delivered under the Plan shall be subject to such stock-transfer
orders and other restrictions as the Committee may deem advisable under the
rules, regulations, and other requirements of the Commission, any stock exchange
upon which the Common Stock is then listed, and any applicable Federal or state
securities law, and the Committee may cause a legend or legends to be put on any
such certificates to make appropriate reference to such restrictions.
(b) Nothing contained in this Plan shall prevent the Board from
adopting other or additional compensation arrangements, subject to stockholder
approval if such approval is required; and such arrangements may be either
generally applicable or applicable only in specific cases.
(c) Neither the adoption of the Plan nor the grant of any award
pursuant to the Plan shall confer upon any employee of the Company or any
Subsidiary or Affiliate any right to continued employment with the Company or a
Subsidiary or Affiliate, as the case may be, nor shall it interfere in any way
with the right of the Company or a Subsidiary or Affiliate to terminate the
employment of any of its employees at any time.
(d) No later than the date as of which an amount first becomes
includible in the gross income of the participant for Federal income tax
purposes with respect to any award under the Plan, the participant shall pay to
the Company, or make arrangements satisfactory to the Committee regarding the
payment of, any Federal, state, or local taxes of any kind required by law to be
withheld with respect to such amount. Unless otherwise determined by the
Committee, withholding obligations may be settled with Common Stock, including
Common Stock that is part of the award that gives rise to the withholding
requirement. The obligations of the Company under the Plan shall be conditional
on such payment or arrangements and the Company and its Subsidiaries or
Affiliates shall, to the extent permitted by law, have the right to deduct any
such taxes from any payment of any kind otherwise due to the participant.
(e) The actual or deemed reinvestment of dividends or dividend
equivalents in additional Restricted Stock (or in Deferred Stock or other types
of Plan awards) at the time of any dividend payment shall only be permissible if
sufficient shares of Common Stock are available under Section 3 of this Plan for
such reinvestment (taking into account then outstanding Stock Options, Stock
Purchase Rights and other Plan awards).
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<PAGE>
(f) If (i) the listing, registration or qualification of any Restricted
Stock, Deferred Stock, Stock Purchase Rights and Other Stock-Based Award Other
Stock Awards or Options issued hereunder, or of any securities that may be
purchased upon exercise of such Options ( collectively the "Subject Securities")
upon any securities exchange or quotation system, or under federal or state law
is necessary as a condition of or in connection with the issuance of the Subject
Securities or the issuance or exercise of the Options, or (ii) the consent or
approval of any governmental regulatory body is necessary as a condition of or
in connection with the issuance of the Subject Securities or the issuance or
exercise of the Options, the Company shall not be obligated to deliver the
certificates representing the Subject Securities or to accept or to recognize an
Option exercise unless and until such listing, registration, qualification,
consent or approval shall have been effected or obtained. The Company will take
reasonable action to so list, register, or qualify the Options and the Subject
Securities, or effect or obtain such consent or approval, so as to allow for
their issuance in accordance with obligations, if any, set forth in Option or
Subject Securities Agreements with various key employees and others pursuant to
this Plan.
(g) The Company is vested with authority under this Plan to assist
any employee to whom a Subject Security right or Option is granted hereunder
(including any director or officer of the Company or any of its subsidiaries who
is also an employee) in the payment of the purchase price payable on exercise of
that Subject Security Right or Option, by lending the amount of such purchase
price to such employee on such terms and at such rates of interest and upon such
security (or unsecured) as shall have been authorized by or under authority of
the Board. Any such assistance shall comply with the requirements of Regulation
G promulgated by the Board of the Federal Reserve System, as amended from time
to time, and any other applicable law, rule or regulation.
15. Effective Date of Plan.
The Plan shall be effective as of the date the Plan is approved by the Board,
subject to the approval of the Plan by the votes of a majority of the holders of
the Company's Common Stock at the next annual or special meeting of
stockholders. Any grants made under the Plan prior to such approval shall be
effective when made (unless otherwise specified by the Committee at the time of
grant), but shall be conditioned on, and subject to, such approval of the Plan
by such stockholders.
16. Term of Plan.
Stock Option, Stock Appreciation Right, Restricted Stock awards,
Deferred Stock awards, Stock Purchase Rights or Other Stock-Based Award may be
granted pursuant to the Plan, until this Plan shall be terminated, but awards
granted prior to such termination may extend beyond that date. Notwithstanding
the foregoing, no Incentive Stock Option may be granted after the tenth (10th)
anniversary of the date this Plan was approved by the Board, although Incentive
Stock Options granted prior to such date may extend beyond such date.
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<PAGE>
PROXY
CONSOLIDATED TECHNOLOGY GROUP LTD.
Annual Meeting of Shareholders - July 22, 1999
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Frank DeLape and Richard Young and each of
them with full power of substitution or revocation, proxies for the undersigned,
to vote at the 1999 Annual Meeting of Shareholders of Consolidated Technology
Group Ltd. (the "Company"), to be held at 9:00 a.m., local time, on July 22,
1999, at South Shore Harbor Resort and Conference Center, 2500 South Shore
Boulevard, League City, Texas 77573 and at any adjournment or adjournments
thereof, upon all subjects that may properly come before the meeting, including
the matters discussed in the proxy statement furnished herewith, subject to any
items given on this Proxy form, according to the number of votes the undersigned
might cast and with all powers the undersigned would possess if personally
present.
(1) To elect the following two (2) directors:
Frank DeLape and Richard Young
[ ] FOR all nominees listed above (except as marked to the contrary below).
[ ] Withhold authority to vote for all nominees listed above.
INSTRUCTION: To withhold authority to vote for any individual nominee,
print that nominee's name below.
(2) To approve a one-for-30 reverse split of the Company's Common Stock;
FOR [ ] AGAINST [ ] ABSTAIN [ ]
(3) To approve an amendment to the Company's Certificate of Incorporation
to change the number of authorized shares of Common Stock to (a)
25,000,000 if the one-for-30 reverse spilt is approved by the
shareholders or (b) 150,000,000 if the one-for-30 reverse split is not
approved by the shareholders;
FOR [ ] AGAINST [ ] ABSTAIN [ ]
<PAGE>
(4) To approve an amendment to the Company's Certificate of Incorporation
to change the Company's name to The Sagemark Companies Ltd.;
FOR [ ] AGAINST [ ] ABSTAIN [ ]
(5) To approve the Company's 1999 Long-Term Incentive Plan;
FOR [ ] AGAINST [ ] ABSTAIN [ ]
(6) In their discretion, for the transaction of such other business as may
properly come before the meeting;
all as set forth in the Proxy Statement, dated June 28, 1999.
The shares represented by this proxy will be voted on Items 1, 2, 3, 4
and 5 as directed by the shareholder, but if no direction is indicated, will be
voted FOR Items 1, 2, 3, 4 and 5.
If you plan to attend the meeting please indicate below:
I plan to attend the meeting [ ]
Dated: , 1999
(Signature(s))
Please sign exactly as
name(s) appear hereon. When
signing as attorney,
executor, administrator,
trustee or guardian, please
give full title as such.
Please date, sign and mail
this proxy in the enclosed
envelope, which requires no
postage if mailed in the
United States.
Consolidated Technology Group Ltd.
1998 Annual Report
700 Gemini Street; Suite 104
Houston, Texas 77058
(281) 488-8484
<PAGE>
Consolidated Technology
Group, Ltd.
700 Gemini, Suite 104, Houston, TX 77058
281-488-8484 Facsimile: 281-488-8404
Dear Shareholder:
It is with great pleasure and enthusiasm that I address you today in the first
Annual Report since I became President of Consolidated Technology Group Ltd. in
April 1999.
There are thousands of words and all kinds of historical disclosures in this
Annual Report - but that is not what I want to focus on ... I want to focus on
the future. Therefore, I would ask that you remember these three words about
your Company. "Fresh - New - Opportunities".
During the past year and a half, the Company has cleared the path for "Fresh -
New - Opportunities" through:
o Selling International Magnetic Imaging, Inc., a medical diagnostic
imaging company.
o Satisfying a significant obligation to Trans Global Services, Inc.
through the transfer of a substantial portion of the Trans Global
stock owned by the Company to Trans Global, a contract engineering
staffing company.
o Selling the Company's interest in Arc Networks, Inc., a local and long
distance telephone company.
o Selling a substantial portion of the Company's interest in Netsmart
Technologies, Inc. interests, a healthcare information systems company.
Although this past year was filled with transition, we are working on a
strategy, which is designed principally to preserve and enhance shareholder
value. With our principal assets currently consisting of cash and cash
equivalents, we are seeking and evaluating a number of new business
opportunities that are focused on increasing our market capitalization. Our
future looks bright with a new senior management team in place and a clear path
to seek, capture and benefit from "Fresh - New - Opportunities".
Sincerely,
Richard Young
President and Chief Operating Officer
Consolidated Technology Group Ltd.
700 Gemini, Suite 104, Houston, TX 77058
281-488-8484 Facsimile: 281-488-8404
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the transition period from ______________ to _____________.
Commission file Number 0-4186
CONSOLIDATED TECHNOLOGY GROUP LTD.
(Exact name of registrant as specified in its charter)
New York 13-1948169
(State or other jurisdiction (I.R.S. Employer Identification Number)
of incorporation or organization)
160 Broadway, New York, NY 10038
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 233-4500
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of Each Class Outstanding shares as of April 14, 1999
------------------- --------------------------------------
Common Stock, par value 0.01 per share 46,855,096
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No ___
Indicate by a check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
State the aggregate market value of the voting and non-voting common
equity held by non-affiliates computed by reference to the price at which the
common equity was sold, or the average bid and asked price of such common
equity, as a specified date within the past 60 days.
As of April 14, 1999, the aggregate market value of the common equity
held by non-affiliates approximated $4.6 million.
DOCUMENTS INCORPORATED BY REFERENCE
None
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PART I
ITEM 1. BUSINESS
Forward Looking Statements
Statements in this Form 10-K that are not descriptions of historical
facts may be forward-looking statements that are subject to risks and
uncertainties. Actual results could differ materially from those currently
anticipated due to a number of factors, including those identified in this Form
10-K and in other documents filed by the Company with the Securities and
Exchange Commission.
General Development of Business and Financial Information
Consolidated Technology Group, Ltd., ("Consolidated", the "Company" or
the "Registrant"), (formerly Sequential Information Systems, Inc.) is a New York
corporation organized in 1961. Consolidated does not generate revenues but does
incur expenses including executive and administrative salaries and related
payroll taxes and benefits, consulting fees, legal and accounting fees, public
relations fees and other general and administrative fees. As of December 31,
1998 ("December 1998"), Consolidated has three employees that provide management
and administrative services for the Company and its subsidiaries, which
Consolidated indirectly controls through SIS Capital Corp., ("SISC"). SISC was
organized by Consolidated for the purpose of making investments in or advancing
funds to companies in which Consolidated has or proposes to obtain an equity
position. SISC holds the Company's equity and debt position in all of the
controlled subsidiaries.
During the year ended December 31, 1998 ("1998"), the Company's
consolidated net income approximated $4.1 million or $0.08 per common share.
Included in net income for 1998 is a net gain on the disposal of segments
approximating $6.8 million, an extraordinary gain on debt extinguishment
approximating $5.7 million and net losses from operations of discontinued
segments approximating $2.9 million. The Company's consolidated loss from
operations for 1998 approximated $5.5 million which primary components consisted
of $2 million for termination payments under executive employment agreements,
$1.2 million for professional fees, $735,000 for salaries, payroll taxes and
fringe benefits, $397,000 for litigation settlement costs, $329,000 for
consulting fees, $135,000 for related party bad debts and $736,000 for other
general and administrative expenses.
Comparatively, during the years ended December 31, 1997 and 1996
("1997" and "1996"), the Company's consolidated loss from operations
approximated $6.6 million and $8.4 million, respectively; however, such losses
included $4.8 million and $7.3 million respectively, from the operations of
Netsmart Technologies, Inc. ("Netsmart") and 1998's operations included no such
amounts related to Netsmart. The Company's consolidated net loss for 1997 and
1996 approximated $12.7 million or $0.27 per common share and $9.6 million or
$0.23 per common share, respectively. The 1997 and 1996 net loss included an add
back for the minority interest portion of the subsidiary's losses, which
approximated $2.4 million and $3.1 million, respectively, and includes losses
related to discontinued segments of $7.4 million and $4.6 million, respectively.
During 1998 and 1997, Consolidated discontinued seven of its eight
operating segments and effective January 1, 1998, Consolidated was required to
change its accounting treatment for its investment in Netsmart from a
consolidated subsidiary to an investment in an unconsolidated affiliate. As of
the date of this report, Consolidated has no operating segments and does not
have a definitive plan for making future investments in subsidiaries. As of the
date of this report, the Company has invested significantly all of its available
cash in US Treasury Bills. The following gives descriptions of the Company's
affiliates.
Investment in Unconsolidated Affiliate
Netsmart, through its wholly owned subsidiary, Creative Socio-Medics,
Corp. ("CSM"), is a supplier of enterprise wide software solutions for the
mental health and behavioral health market place. Netsmart is a publicly held
company, whose stock is traded on the NASDAQ stock market under the ticker
symbol "NTST" and as of December 1998, the Company owned approximately 36% of
the common stock of Netsmart. As of December 31, 1997 ("December 1997"), the
Company and Netsmart shared two common directors and the same Chief Executive
Officer ("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, up until December 1997,
Netsmart was considered a
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consolidated affiliate for accounting purposes. In April 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 is presented in
the financial statements as an unconsolidated affiliate for 1998 and is
accounted for under the equity method of accounting. The equity method of
accounting requires that Consolidated record the investment in Netsmart at
Consolidated's share of ownership in Netsmart's underlying equity ($760,000 as
of December 1998), but not in excess of the fair market value of the Netsmart
shares owned by Consolidated. For 1998, Netsmart's operatingactivity, which
included revenues of approximately $9.6 million and net income of approximately
$196,000, are not included in the Company's consolidated statement of operations
because under the equity method of accounting, Consolidated only records it's
share of Netsmart's income ($71,000 for 1998). Netsmart's revenues for 1997 and
1996 approximated $7.9 million and $8.5 million, respectively. Netsmart's net
loss during 1997 and 1996 approximated $3.5 million and $6.6 million,
respectively. For 1997 and 1996 the operating activity of Netsmart is included
in the Company's consolidated statement of operations. On March 25, 1999, the
Company entered into an agreement with Netsmart and a group of purchasers,
consisting principally of Netsmart's management and directors, including Edward
D. Bright, Chairman of the Board and a director of both the Company and
Netsmart, 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
gives the purchasers 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,
the Company agreed to transfer to Netsmart, shares of Netsmart preferred stock
and warrants to purchase shares of Netsmart's common stock, for which Netsmart
will issue 100,000 shares of its common stock to the Company.
Discontinued Business Segments
The 1998, 1997 and 1996 operating activity of the business segments
that were discontinued is classified as net income or loss from discontinued
segments in the Company's consolidated statement of operations. The assets and
liabilities of the business segments that were discontinued have been netted and
classified as net assets or liabilities of discontinued segments in the
Company's consolidated balance sheets for 1998 and 1997. Information regarding
the discontinued business segments follows:
Contract Engineering Services consists of Trans Global Services, Inc.
("Trans Global"), and its subsidiaries, Avionics-Research Holdings ("Avionics"),
and Resource Management International, Inc. ("RMI"), which provides engineers,
designers and technical personnel on a temporary basis pursuant to contracts
with major corporations. Trans Global is a publicly held company whose stock is
traded on the NASDAQ stock market under the ticker symbol "TGSI". As of December
1998, the Company owned approximately 40% of the outstanding common stock of
Trans Global. As of December 1997, the Company and Trans Global shared a common
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. In April 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 also three of the five
directors of Trans Global, Trans Global is treated as a consolidated subsidiary.
On February 25, 1999 the Company and Trans Global entered into an agreement
whereby it is expected that on April 30, 1999, SISC will transfer 1,150,000
shares of Trans Global common stock that it holds to Trans Global and Trans
Global will transfer the preferred shares of Consolidated that it holds to the
Company. Further, the agreement requires Trans Global to register the 379,994
remaining Trans Global shares that SISC holds. As a result of the agreement
between the Company and Trans Global, Trans Global is presented as a
discontinued segment as of December 1998. Trans Global's revenues for 1998, 1997
and 1996 approximated $67.2 million, $75.7 million and $62.6 million,
respectively. Trans Global's net income and (loss) during 1998, 1997 and 1996
approximated $222,000 (including $128,000 of accrued losses estimated to be
incurred from January 1, 1999 through the date of disposal), $1 million, and
($607,000), respectively. As of December 1998 Consolidated estimates that the
disposal of Trans Global will result in a gain, which will be recorded in the
period when the disposal takes place.
Telecommunications consists of Arc Networks, Inc. ("Arc Networks"), a
privately held company, which, among other things, installs telephonic network
systems and buys and resells local telephone service. As of December 1998, the
Company owned approximately 67% of Arc Networks and as such, Arc Networks is
treated as a consolidated subsidiary. On March 23, 1999, the Company entered
into an agreement to sell the Arc Network shares held by SISC for $850,000. The
proceeds of the sale and the Arc Networks shares are being held in escrow
pending receipt of consent of the New York Public Service Commission to such
transfers, on or before September
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30, 1999. As a result of the sale, Arc Networks is presented as a discontinued
segment as of December 1998. Arc Networks' revenues for 1998, 1997 and 1996
approximated $13.9 million, $9.6 million and $5.6 million, respectively. Arc
Networks' net loss during 1998, 1997 and 1996 approximated $2.7 million
(including $800,000 of accrued losses estimated to be incurred from January 1,
1999 through the date of disposal), $2.7 million and $1.6 million, respectively.
As of December 1998, Consolidated estimates that the disposal of Arc Networks'
will result in a gain, which will be recorded in the period when the disposal
takes place.
Medical Diagnostics consists of International Magnetic Imaging, Inc.
("IMI") which performs magnetic resonance imaging and other medical diagnostic
services. During 1997, Consolidated undertook a plan to sell all of the assets
of IMI and such sale was consummated on April 2, 1998. The sale of IMI's assets
resulted in a gain on disposal of approximately $4.9 million. Additionally, on
August 12, 1998, IMI consummated a settlement with the holders of certain of
IMI's subordinated promissory notes, which were issued by IMI in 1994 in
connection with the acquisition of the Medical Diagnostics segment. IMI 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. In connection with the settlement, Consolidated issued 333,000
shares of its common stock, valued at $80,000, 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. IMI recognized an extraordinary gain on debt extinguishment of
approximately $5.6 million for 1998, in connection with this settlement. For the
period from January 1, 1998 through April 2, 1998, IMI had revenues of $6.8
million and incurred a net loss of $577,000. For 1997 IMI had revenues of $29.4
million and incurred a net loss of approximately $1.2 million. For 1996 IMI had
revenues of approximately $31.1 million and net income of $1.5 million.
Electro-Mechanical and Electro-Optical Products Manufacturing consists
of Sequential Electronic Systems, Inc. ("SES"), and S-Tech, Inc. ("S-Tech")
which are subsidiaries of SES Holdings Inc. ("SESH") which is a wholly owned
subsidiary of SpecTec, Inc. ("SpecTec") and Televend, Inc. ("Televend"), and FMX
Corp. ("FMX"). This group of companies manufacture and sell products such as
devices that measure distance and velocity, instrumentation devices, debit card
vending machines, prepaid telephone calling cards and finger print
identification products. On April 2, 1998, Consolidated sold all of the
companies operating in the Electro-Mechanical and Electro-Optical Products
Manufacturing segment to Lewis S. Schiller ("Schiller"), the former CEO of
Consolidated, for nominal consideration and recorded a loss on disposal of
approximately $31,000. For 1997 and 1996, the Electro-Mechanical and
Electro-Optical Products Manufacturing segment had revenues approximating $3.1
million and $2.4 million, respectively, and incurred net losses approximating
$2.6 million and $2.2 million, respectively.
Three Dimensional Products and Services consists of 3D Holdings
International, Inc. ("3D"), and its subsidiaries, 3D Technology, Inc. ("3D
Tech"), 3D Imaging International, Inc. ("3DI"), and Vero International, Inc.
("Vero"), which are companies that provided three dimensional imaging services
that are used in a variety of applications, such as prototype building and
reverse engineering. In June 1997, Consolidated implemented a plan to dispose of
the companies operating in the Three Dimensional Products and Services segments.
In 1997 Consolidated sold Vero and wrote of the remaining assets and certain
liabilities of the remaining companies included in the Three Dimensional
Products and Services segment. In 1997 Consolidated recognized a gain of
$135,000 on the sale of Vero and estimated that a loss of $600,000 would be
incurred on the disposal of the remaining companies included in the Three
Dimensional Products and Services segment. In 1998, the Company recognized a
gain of $1.9 million on the disposal of the remaining companies included in the
Three Dimensional Products and Services segment which included the recapture of
the $600,000 estimated loss on disposal that was recorded in 1997. The change in
estimate on the gain (loss) of disposal resulted primarily from the write-off of
liabilities of the Three Dimensional Products and Services segment that
Consolidated believes it will not have to pay. During 1998 the Three Dimensional
Products and Services segment had no operating activity. For 1997 and 1996, the
Three Dimensional Products and Services segment had revenues approximating
$281,000 and $839,000, respectively, and incurred net losses approximating $1.6
million and $1.5 million, respectively.
Audio Products Manufacturing reflects the operations of WWR Acquisition
Corp. and its wholly owned subsidiary WWR Technology, Inc., collectively
referred to as "WWR". WWR was formed for the purpose of acquiring the
professional products business segment of the KlipschTM loudspeaker line from
Klipsch and Associates, Inc. On May 20, 1997, Consolidated sold all of its
ownership in WWR for $100,000 and was released as a guarantor on obligations
approximating $394,000. As a result of the sale, Consolidated received net
proceeds
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of $62,000 and recorded a gain of approximately $129,000 on the disposal. For
the period from January 1, 1997 through May 20, 1997, WWR had revenues
approximating $1.2 million and incurred a net loss approximating $293,000.
During 1996 WWR had revenues approximating $3.3 million and incurred a net loss
approximating $893,000.
Business Consulting Services reflects the activity of The Trinity
Group, Inc. ("Trinity"). Trinity provided management and related services both
to Consolidated's subsidiaries and an unconsolidated affiliate in which
Consolidated owned a minority interest. Trinity's management services include
management, finance, accounting, operations, marketing and other services, which
are typically rendered pursuant to a consulting agreement. Transactions between
Trinity and the subsidiaries are eliminated in consolidation. On April 2, 1998,
Consolidated sold Trinity to Schiller for nominal consideration and recorded a
loss on disposal of approximately $1,000. As a part of the sale of Trinity, the
consulting agreements with Netsmart and Trans Global were assigned to
Consolidated and during 1998, such consulting agreements were terminated. During
1997 and 1996 Trinity had revenues approximating $508,000 and $388,000,
respectively, and had net income approximating $221,000 and $264,000,
respectively.
Organization and Changes in Management of the Company
On April 2, 1998, all of the members of the Company's board of
directors resigned as officers and directors of the Company and its
subsidiaries. Schiller, who was Chairman of the Board, CEO and a director of
Consolidated and other subsidiaries of Consolidated, including its two public
subsidiaries, Trans Global and Netsmart, resigned as an officer and director of
Consolidated and such subsidiaries, including Trans Global and Netsmart. Ms.
Grazyana B. Wnuk, who was a director and Secretary of the Company and Secretary
of Trans Global, resigned from such positions. Mr. Norman J. Hoskin, who was a
director of the Company, Trans Global and Netsmart and Mr. E. Gerald Kay, who
was a director of the Company and Trans Global, resigned from such
positions. Contemporaneously with the effectiveness of such resignations,
Messrs. Edward D. Bright, Seymour Richter and Don Chaifetz were elected as
directors to fill the vacancies created by the resignation of Messrs. Schiller,
Hoskin and Kay and Ms. Wnuk. Messrs. Bright and Richter were also elected as
directors of Netsmart and Trans Global and Mr. Chaifetz was also elected as a
director of Trans Global.
On April 14, 1998, Mr. George W. Mahoney, the Company's Chief Financial
Officer ("CFO"), notified the Company 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. On June 16, 1998, Mr. Mahoney and the Company
executed 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 $350,000 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 connection 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.
ITEM 2. PROPERTIES
Consolidated and SISC lease approximately 6,000 square feet of office
space at 160 Broadway, New York, NY, at an annual rental of approximately
$100,000, which terminates in 2002. Approximately 1,500 square feet of such
space is used by current or former subsidiaries for which they are charged
approximately $32,000 on an annual basis. The Company's accounting offices are
located at 2424 North Federal Highway, Boca Raton, FL 33431, which it occupies
pursuant to a lease expiring February 2000. The current base rent for such
premises approximates $3,000 per month.
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ITEM 3. LEGAL PROCEEDINGS
(A) Holding Company:
(i) The Company is a defendant in a lawsuit filed in the Supreme Court
of the State of New York, Queens County entitled 5 Boro Beverage Distributors,
Inc. v. Consolidated Technology Group, Ltd. "Metro, 5" Absolute, et al. which
was initiated in 1995. The action was filed by the owners of a company that the
Company was contemplating acquiring in January 1995 for alleged unauthorized use
of proprietary information specific to the business which the Company
contemplated acquiring. The plaintiffs are seeking $1 million in damages and the
Company has filed a counter claim for $35,000 advanced to the plaintiff. There
has been no action by either side in this lawsuit for more than three years.
Counsel handling this case has advised the Company that it has meritorious
defenses.
(ii) The Company is a defendant in a lawsuit filed in the United States
District Court for the Southern District of New York captioned Naval Kapoor and
Dirk Esselens v. SIS Capital Corp. that was initiated in 1998, whereby certain
shareholders of 3D Tech, a subsidiary of the Company which has been
discontinued, filed a lawsuit against the Company in December 1997. The
complaint states that the Company wrongfully seized and transferred the assets
of 3D Tech for the benefit of the Company and to the detriment of the minority
shareholders of 3D Tech and seeks $3,000,000 in damages. During February 1999,
the Company reached a settlement with the plaintiffs for $150,000 plus an
additional $27,000 paid to indemnify one of the plaintiffs for liabilities he
incurred on behalf of 3D Tech. As of December 1998, the Company has accrued an
additional $23,000 for potential claims provided for in the settlement agreement
for which the Company would be required to indemnify the plaintiffs, if such
claims are asserted.
(iii) On February 23, 1998, an action was commenced in the United
States District Court for the Southern District of New York entitled Grino
Corporation, LLC and SMACS Holding Corp. ("SMACS"), individually and as
shareholders of and in the right of Consolidated Technology Group Ltd. v.
Consolidated Technology Group Ltd., SIS Capital Corp., Lewis S. Schiller, Norman
J. Hoskin, E. Gerald Kay and Grazyna B. Wnuk. The action sought to enjoin the
Company from (a) proceeding with its 1998 Annual Meeting of Stockholders
scheduled for March 26, 1998, and (b) making any payment to Mr. Schiller, Ms.
Wnuk and others from the proceeds of the sale of IMI. The complaint also alleged
that the directors breached their fiduciary duty with respect to, and sought to
have declared void, (i) employment agreements between the Company and Mr.
Schiller and Ms. Wnuk, (ii) agreements to issue stock or stock options of the
Company and/or its subsidiaries to Messrs. Schiller, Hoskin and Kay and Ms.
Wnuk, (iii) all completed transfers and issuances of stock and stock options by
the Company to Messrs. Schiller, Hoskin and Kay and Ms. Wnuk without fair and
adequate consideration by the Company, and (iv) all agreements to pay to Messrs.
Schiller, Hoskin and Kay and Ms. Wnuk or any other officer of the Company or any
of its subsidiaries, any bonus, finder's fee, stock or option liquidation
payment, consent fee, professional fee, or profit share or any other payment
arising out of or resulting from or based upon the sale or the profits from the
sale of IMI without fair consideration to the Company. The complaint also
alleged violations of Section 10(b) of the Securities Exchange Act of 1934, as
amended, and common law fraud based upon the same and similar allegations, and
sought monetary damages to be proved at trial. On February 24, 1998, the Court
granted a temporary restraining order. On March 9, 1998, the Court vacated the
temporary restraining order issued on February 24, 1998 because, inter alia, it
did not appear that the plaintiffs had a likelihood of success in the ultimate
action, particularly with respect to the alleged 10b-5 claim. On March 19, 1998,
the United States District Court for the Southern District of New York dismissed
the action.
(iv) One of the plaintiffs in the Federal Court action described above,
SMACS, and certain affiliates of SMACS are plaintiffs in an action commenced in
November 1997 in the Supreme Court of the State of New York, County of New York,
entitled Bridge Ventures, Inc. et al v. Lewis S. Schiller, et al. The action,
brought against Mr. Schiller, the Company, SIS Capital Corp. and IMI by SMACS,
certain affiliates of SMACS and others seeks, inter alia, monetary damages in
excess of $500,000 allegedly due pursuant to consulting agreements with the
Company, an alleged equity interest in IMI and punitive damages of at least $5
million. The Company believes that it has meritorious defenses to the claims
made in this action. In March 1998, the plaintiffs sought to amend the complaint
to assert claims of a derivative nature alleging claims similar to those in the
Federal Court action and obtained a temporary restraining order prohibiting
payments to Mr. Schiller and others from the proceeds of the IMI sale. The
temporary restraining order was subsequently vacated and, as of the date of this
Form 10-K, the complaint had not been amended. In February 1999, the Company
concluded a settlement agreement with the plaintiffs and paid them an aggregate
of $250,000, which is accrued as of December 1998.
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(v) "Vanguard Limited ("Vanguard"), on its own behalf or on behalf of
other persons who may be affiliated with Vanguard, based on a purported
agreement relating to the introduction of Consolidated to IMI and assistance in
the negotiation of the acquisition of IMI in 1994, has asserted a claim that it
has the right, among other things, to a 10% interest in the Common Stock of IMI
at or about the time of the acquisition for no cash consideration. In addition,
Vanguard has claimed that it is entitled to a $200,000 fee due at the time of
the acquisition of IMI, consulting fees of $240,000 per year for five years,
reimbursement of nonaccountable expenses and a 5% interest in any future medical
acquisition by the Company. No assurance can be given that any litigation which
may ensue would not seek damages exceeding or different from the claim described
above and, if decided unfavorably to the Company, would not have a material
adverse affect on the Company."
(vi) In January 1996, Drs. Ashley Kaye and James Sternberg, two former
stockholder-directors of the company that sold the diagnostic imaging centers to
IMI, and Dr. Sternberg's wife, threatened to commence an action against two
subsidiaries of IMI, Consolidated and Mr. Schiller, formerly Chairman of the
Board of Consolidated, for alleged violations of securities laws and common law
in connection with an asset purchase agreement which was executed in connection
with the acquisition of IMI in September 1994 and non-payment of $3,375,000 of
subordinated notes of two subsidiaries of IMI. In 1997 they, along with Dr.
Stephen Schulman, a holder of subordinated notes in the principal amount of
approximately $6.4 million issued by subsidiaries of IMI and was president and
chief executive officer of IMI, commenced involuntary bankruptcy proceedings
against certain subsidiaries of IMI. Such bankruptcy proceedings were dismissed
and in August 1998, IMI consummated a settlement with the holders of the
aforementioned subordinated promissory notes for a total of $1.9 million.
(vii) In 1994, the Company purchased the assets of IMI and its
partnerships for cash and stock of the Company. Certain of the limited partners
of one of the partnerships from which such assets were purchased, claimed that
there was an alleged oral guarantee that the common stock given as a part of the
purchase would have a value of $4 on the second anniversary following the
closing of the purchase. During 1998, IMI settled this claim and paid $408,000,
therefore.
(viii) On July 15, 1998, an action entitled "Ronald Feldstein vs.
Consolidated Technology Group Ltd." was commenced in the Circuit Court, Palm
Beach County, Florida. The complaint in such action seeks unspecified damages in
excess of $15,000 against the Company based upon an asserted breach of an
alleged consulting agreement between the Company and the plaintiff therein. The
Company believes it has meritorious defenses to such action and intends to
vigorously defend the action.
(ix) During 1997, a complaint was filed against the Company entitled
Klipsch, Inc, v. SIS/CTG Ltd., WWR Acquisition Corp., Consolidated Technology
Group, Ltd., Donald L. Shamsie, and WWR Technology, Inc. In 1998, the Company
settled the claim and paid $20,000 of which $10,000 had been accrued as of
December 1997 and $10,000 was expensed during 1998.
(B) Trans Global
(i) In November 1997, an action was commenced in the Supreme Court of
the State of New York, County of Suffolk, by Ralph Corace against RMI seeking
damages of approximately $1.1 million for an alleged breach of contract by Trans
Global. Mr. Corace was the president of Job Shop Technical Services, Inc., from
which RMI purchased assets in November 1994. The Company believes that the
action is without merit, will vigorously contest this matter and has filed
counterclaims against Mr. Corace.
(ii) On May 14, 1991, the U.S. Government Printing Office wrote Trans
Global asking to be reimbursed a total of $296,000 for "unauthorized time work"
on two programs. During 1998, Trans Global exchanged general releases with the
U.S. Government Printing Office whereby both parties released each other from
any and all claims, contractual or otherwise which they may have had or might
have in the future with no payments required.
(iii) Voluntary Settlement Agreement - As of December 1997 Trans Global
had a $150,000 obligation remaining under an agreement it entered into with the
United States Department of Labor and the independent trustee of the Job Shop
Technical Services, Inc. 401(k) Plan ("collectively "DOL"). The settlement
agreement required Trans Global to pay the DOL an aggregate of $300,000 in 18
monthly installments of $16,667. During 1998, Trans Global paid the remaining
$150,000 due under the settlement agreement.
8
<PAGE>
(C) Netsmart
In March 1997, an action was commenced against Netsmart and certain of
its officers, directors and stockholders by Onecard Health Services Corporation
in the Supreme Court of the State of New York, County of New York. The named
defendants include, in addition to Netsmart, Messrs. Lewis S. Schiller, formerly
chief executive officer and a director of Netsmart, Leonard M. Luttinger, former
vice president and a director of Netsmart, Thomas L. Evans, formerly a vice
president of Netsmart, Consolidated and certain of its subsidiaries, other
stockholders of Netsmart and other individuals who were or may have been
officers or directors of Onecard but who have no affiliation with Netsmart or
Consolidated. Mr. Luttinger and Mr. Evans were employees of Onecard prior to the
formation of Netsmart. Mr. Schiller was not an employee or director or,
consultant to, or otherwise affiliated with, Onecard. The complaint made broad
claims respecting alleged misappropriation of Onecard's trade secrets, corporate
assets and corporate opportunities, breach of fiduciary relationship, unfair
competition, fraud, breach of trust and other similar allegations, apparently
arising at the time of, or in connection with, the organization of Netsmart in
September 1992. The complaint sought injunctive relief and damages, including
punitive damages, of $130 million. During 1998, this action was dismissed.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
On August 15, 1997, the Company was delisted from the NASDAQ due to a
failure to meet the minimum bid and net tangible worth requirements. Since
August 15, 1997, Consolidated's common stock has been traded on the
Over-the-Counter ("OTC") Bulletin Board under the symbol COTG. As such, the
following table sets forth the reported high and low bid prices as reported by
the Nasdaq SmallCap Market for the quarters ended March 31, 1996 through June
30, 1997, the high and low bid prices as provided by the National Quotation
Bureau derived from the OTC Bulletin Board for the quarters ended September 30,
1997, December 31, 1997, March 31, 1998 and June 30, 1998 and the high and low
bid prices as provided by the NASDAQ Trading and Market Services derived from
the OTC Bulletin Board for the quarters ended September 30, 1998 and December
31, 1998. Such OTC bid quotations reflect interdealer prices, without retail
mark-up, markdown or commission and may not necessarily represent actual
transactions.
Quarter Ending High Bid Low Bid
- -------------- -------- -------
March 31, 1997 $0.06 $0.09
June 30, 1997 $0.06 $0.09
September 30, 1997 $0.17 $0.18
December 31, 1997 $0.16 $0.17
March 31, 1998 $0.06 $0.06
June 30, 1998 $0.23 $0.14
September 30, 1998 $0.26 $0.12
December 31, 1998 $0.14 $0.10
As of April 14, 1999, there were approximately 18,930 holders of record of the
Company's common stock.
No cash dividends were paid to the holders of the Common Stock during 1998, 1997
and 1996.
9
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Selected Statements of
Operations Data
Revenues -- $7,882,000 $8,541,000 $7,381,000 $9,482,000
========= ========= ========= =========
Loss from Operations ($5,481,000) ($6,545,000) ($8,387,000) ($8,620,000) ($6,968,000)
========= ========= ========= ========= =========
Loss from Continuing
Operations ($5,442,000) ($5,230,000) ($4,953,000) ($4,954,000) ($7,360,000)
Loss from Operations of
Discontinued Segments (2,929,000) (7,099,000) (4,617,000) (6,406,000) (4,068,000)
Gain (Loss) on Disposal
of Segments 6,792,000 (336,000) -- -- --
--------- ---------- --------- ---------- ----------
Loss Before Extraordinary Items (1,579,000) (12,665,000) (9,570,000) (11,360,000) (11,428,000)
Extraordinary Gain 5,676,000 -- -- -- --
--------- ---------- --------- ---------- ----------
Net Income (Loss) $4,097,000 ($12,665,000) ($9,570,000) ($11,360,000) ($11,428,000)
========= ========== ========= =========== ==========
Basic and Diluted Earnings (Loss)
per Common Share:
Loss from Continuing
Operations ($0.12) ($0.15) ($0.13) ($0.22) ($0.52)
Loss from Operations of
Discontinued Segments ($0.06) ($0.11) ($0.10) ($0.29) ($0.28)
Gain (Loss) on Disposals $0.14 ($0.01) -- -- --
Extraordinary Income $0.12 -- -- -- --
----- ------ ------- ------- -------
Net Income (Loss) $0.08 ($0.27) ($0.23) ($0.51) ($0.80)
==== ==== ==== ==== ====
Selected Balance Sheet Data
Total Assets $11,375,000 $28,983,000 $26,374,000 $26,305,000 $18,306,000
========== ========== ========== ========== ==========
Long-term Obligations:
Debt and Capital Lease
Obligations -- -- -- $ 33,000 $ 47,000
Subordinated Debt -- $ 139,000 -- -- --
---------- ---------- ----------
Total Long-term Obligations -- $ 139,000 -- $ 33,000 $ 47,000
========== ========== ==========
Dividends Declared per Common Share -- -- -- -- --
</TABLE>
(A) The financial data for periods prior to 1998 has been restated to reflect
the discontinuation of the contract engineering services, telecommunications,
medical diagnostics, three dimensional products and services, electro mechanical
and electro optical products manufacturing, business consulting services and
audio products manufacturing segments. Additionally, the financial data for 1996
has been restated to reflect the settlement agreement with Lafayette Industries,
Inc. See footnotes 15 and 17 to the financial statements in Part IV, Item 14)
(B) The following factors make the above selected financial data non-comparable
for the following indicated periods and reasons:
(1) Effective January 1, 1998, the Company converted Netsmart from a
consolidated subsidiary to an investment in unconsolidated affiliate
resulting in a decrease in total assets of approximately $6.4 million.
(2) 1998 includes expense for termination payments for executive contracts
approximating $2.2 million.
(3) 1995 includes expense of $3,869,000 from the issuance of stock options to
consultants.
(4) 1994 includes expense of $4,140,000 from the issuance of stock options to
consultants.
(5) In May 1995 the Company acquired Concept Technologies resulting in an
increase in loss from operations of discontinued segments and net loss of
approximately $553,000 for 1995.
(6) In December 1993, the Company acquired ARC Acquisition Group, Inc. and
ARC Networks, Inc. and in June 1994, the Company acquired Creative
Socio-Medics, Inc. Such acquisitions resulted in a net increase in loss
from operations of discontinued segments and net loss of approximately
$1,600,000 for 1994.
10
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Financial Condition - Liquidity and Capital Resources
Restatements
The following discussion, as it relates to periods prior to 1998, has
been restated from the prior years discussion to reflect the discontinuation of
Trans Global (Contract Engineering Services segment) and Arc Networks
(Telecommunications segment).
Working Capital Condition
During 1998 and 1997, the Company discontinued seven of its eight
operating segments and effective January 1, 1998, the Company was required to
change its accounting treatment for its investment in Netsmart from a
consolidated subsidiary to an investment in an unconsolidated affiliate. As of
the date of this report, the Company does not have a definitive plan for making
future investments in subsidiaries. From December 1995 through December 1997,
the ability of the Company to continue as a going concern has been in doubt.
During that period the Company made attempts at raising capital, or assisting
its subsidiaries in raising capital, at levels that would allow the subsidiaries
to operate profitably. Such efforts were unsuccessful for a majority of its
subsidiaries and the Company was unable to generate positive cash flow. In 1998
and 1997 the Company disposed of all of its operating entities including the
Medical Diagnostics segment.
The April 2, 1998, disposal of the Medical Diagnostics segment
generated approximately $15 million in net cash and disposed of approximately
$13.4 million in intangible assets, $20 million in debt and capital lease
obligations and $5 million in accounts payable and accrued expenses. At the
closing of the sale, approximately $2.2 million of the net proceeds was used for
termination payments under executive contracts, $2.5 million was used to pay
existing obligations of the Company, $2 million was loaned to the
Telecommunications segment and $1.6 million was used to extinguish the remaining
obligations of the Medical Diagnostic segment. Subsequent to the closing of the
sale through December 1998, approximately $137,000 was paid for litigation
settlement costs, $1 million for professional fees primarily related to the
negotiation of the settlements, $118,000 for the purchase of treasury shares and
approximately $421,000 was used for the ongoing operations of the Company.
As of December 1998, the Company had cash of $179,000 and marketable
securities approximating $5.1 million invested in US Treasury Bills. Excluding
the net current assets and liabilities of discontinued segments, the Company has
available working capital of approximately $3.1 million. As of the date of this
report the Company does not have definitive plans for the use of its existing
working capital, however, the Company believes that it has sufficient resources
to enable it to operate for a period greater than one year from December 1998.
The following table summarizes the working capital that the Company has
available for use in its operations as of December 1998 and 1997.
<TABLE>
<CAPTION>
December 31,
1998 1997
---- ----
<S> <C> <C>
Current assets $ 6,214,000 $ 4,940,000
Current liabilities 5,675,000 23,678,000
--------- ----------
Working capital (deficiency) 539,000 (18,738,000)
Plus total net current liabilities of discontinued segments 4,194,000 17,402,000
Less:
Portion of total current liabilities of discontinued segments that the
Company may be obligated to pay (731,000) (2,855,000)
Net current assets of discontinued segments not available to Consolidated (926,000) 1,254,000
------- ---------
Working capital (deficiency) available for the Company's operations $ 3,076,000 ($ 2,937,000)
========= =========
</TABLE>
The Company's principal working capital consists of cash and
investments in U.S. Treasury Bills, which in the aggregate approximated $5.3
million as of December 1998. As of December 1998, the Company had guaranteed
$1.2 million of indebtedness that Arc Networks has outstanding to Trans Global
and $550,000 of
11
<PAGE>
indebtedness that Arc Networks has outstanding under a promissory note.
Additionally, subsequent to December 1998, the Company advanced an additional
$400,000 to Arc Networks.
Changes in Other Working Capital Assets and Liabilities
Significant changes in working capital assets and liabilities, other
than cash and marketable securities and the components related to discontinued
segments, were the result of the conversion of Netsmart from a consolidated
affiliate to an equity method investment. The accounting for the conversion of
Netsmart is such that Netsmart's assets and liabilities are included in the
December 1997 balance sheet but not the December 1998 balance sheet. Netsmart's
balances included in the December 1997 balance sheet and not the December 1998
balance sheet include working capital assets of $84,000 of prepaid and other
current assets, $2.2 million of net receivables and $542,000 of excess of
accumulated costs over billings. Working capital liabilities of Netsmart
included in the December 1997 balance sheet and not the December 1998 balance
sheet include $2.1 million of accounts payable and accrued expense, $1.1 million
of interim billings in excess of costs and estimated profits, $955,000 of
current debt obligations and $23,000 of current capitalized lease obligations.
Results of Operations
During 1998, the Company's consolidated net income approximated $4.1
million or $0.08 per common share. Included in net income for 1998 is a net gain
on the disposal of segments approximating $6.8 million, an extraordinary gain on
debt extinguishment approximating $5.7 million and net losses from operations of
discontinued segments approximating $2.9 million. The Company's consolidated
loss from operations for 1998 approximated $5.5 million consisting entirely of
general and administrative expense. Comparatively, during 1997 and 1996, the
Company's consolidated loss from operations approximated $6.6 million and $8.4
million, respectively; however, such losses included $2.9 million and $5.8
million respectively, from the operations of Netsmart and 1998's operations
includes no such amounts related to Netsmart. The Company's consolidated net
loss for 1997 and 1996 approximated $12.7 million or $0.27 per common share and
$9.6 million or $0.23 per common share, respectively. The 1997 and 1996 net loss
include an add back for the minority interest portion of the subsidiary's
losses, which approximated $2.4 million and $3.1 million, respectively, and
includes losses related to the operations and disposal of discontinued segments
of $7.4 million and $4.6 million, respectively.
During 1998, the Company discontinued the Contract Engineering Services
and Telecommunications segments, and during 1997 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. As a result, the Company has no operating business segments as of
December 1998. For 1997 and 1996, the operating activity includes Netsmart as
well as Consolidated since during those periods, Netsmart was still a
consolidated affiliate. During 1997 and 1996 all of the Company's consolidated
revenues, direct costs and gross profit were generated by Netsmart. The
following table presents the separate operating expense and other income and
expense components of Consolidated and Netsmart.
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Selling, General and Administrative Expense:
Netsmart -- $ 4,590,000 $ 7,453,000
Consolidated $ 5,481,000 3,862,000 2,604,000
Intercompany Transactions -- (180,000) (60,000)
------------ ------------ ---------
$ 5,481,000 $ 8,272,000 $ 9,997,000
============ ============ =========
Operating Loss:
Netsmart -- ($ 2,863,000) ($ 5,843,000)
Consolidated ($ 5,481,000) (3,862,000) ( 2,604,000)
Intercompany Transactions -- 180,000 60,000
------------ ------------ -------------
($ 5,481,000) ($ 6,545,000) ($ 8,387,000)
============ ============ =============
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Other Income (Expense):
Netsmart -- ($ 287,000) ($ 264,000)
Consolidated $ 197,000 139,000 728,000
Intercompany Transactions (135,000) (292,000) (360,000)
------------ ----------- -------------
$ 62,000 ($ 440,000) $ 104,000
============ =========== =============
Interest Expense:
Netsmart -- $ 308,000 $ 473,000
Consolidated $ 8,000 12,000 98,000
Intercompany Transactions -- (29,000)
------------ ------------ -------------
$ 8,000 $ 320,000 $ 542,000
============ ============ =============
</TABLE>
The following discusses separately, the activity of Consolidated, Netsmart and
the discontinued operations.
Consolidated's General and Administrative Expense
Corporate Termination Payments for Executive Contracts
Expense related to termination payments for executive contracts
approximated $2 million for 1998. No such expense was incurred for 1997 or 1996.
On March 30, 1998, the Company entered into a series of agreements with
Lewis S. Schiller ("Schiller") and Grazyna B. Wnuk ("Wnuk"). Pursuant to the
agreements, Schiller and Wnuk resigned as directors and officers of the Company
and its subsidiaries. In consideration for payments of approximately $4 million
to Schiller and Wnuk and the return to the Company by Schiller of 1,190,000 of
Consolidated common stock he then held, 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. $1.6 million of the $4 million of such
payments 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 was accrued at December 1997, for commissions and
salaries payable to Schiller and Wnuk and $1.8 million relates to contract
termination expense for 1998. The $1.8 million of contract termination expense
was reduced by $223,000 which represents the value of the 1,190,000 shares of
Consolidated stock returned by Schiller to the Company, resulting in net
contract termination expense related to Schiller and Wnuk of approximately $1.6
million.
On April 14, 1998, Mr. George W. Mahoney, the Company's Chief Financial
Officer ("CFO"), notified the Company 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. On June 16, 1998, Mr. Mahoney and the Company
executed 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 $350,000 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 connection 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.
Corporate Professional Fees
Professional fees, which include the expense of legal fees and
accounting and auditing fees, approximated $1.2 million, $268,000 and $305,000
for 1998, 1997 and 1996, respectively. During 1998, the Company incurred
approximately $435,000 in legal fees related to the settlement of lawsuits
against Consolidated (see above, Part I, Item 3., "Legal Proceedings"),
preparation of loan documents for a line of credit provided to Arc Networks and
other general matters. Legal fees incurred on behalf of discontinued
subsidiaries during 1998 for such subsidiaries'
13
<PAGE>
lawsuits (see above, Part I, Item 3., "Legal Proceedings") and general matters
approximated $388,000. Legal fees related to settlement negotiations with
Schiller, the former CEO of the Company, approximated $157,000. Additionally,
during 1998, the Company paid approximately $50,000 to each of Edward D. Bright,
Chairman of the Board, Treasurer, Secretary and a director of Consolidated, and
Patterson Travis, a brokerage firm that represents certain shareholders of
Consolidated for reimbursement of legal expenses incurred by the two related
parties in connection with the Schiller termination. Auditing and accounting
fees for 1998 approximated $104,000. During 1997, the Company incurred legal
fees of $138,000 for general matters and accounting and auditing fees of
$130,000. During 1996, the Company incurred legal fees of $65,000 for general
matters and accounting and auditing fees of $240,000.
Corporate Salaries, Payroll Taxes and Fringe Benefits
Salaries, payroll taxes and fringe benefits approximated $735,000 for
1998 of which approximately $299,000 relates to five employees who were
terminated during 1998. Salaries, payroll taxes and fringe benefits for the
three current employees of the Company approximated $342,000 of which $232,000
was paid to officers, $68,000 was paid to a non officer employee, $20,000 was
paid for payroll taxes and $22,000 was paid for fringe benefits. Additionally,
during 1998, approximately $95,000 of salaries and payroll taxes of IMI was
allocated to the Company. During 1997, salaries, payroll taxes and fringe
benefits approximated $1.3 million of which $957,000 was paid to officers,
$322,000 was paid to accounting and administrative personnel, $48,000 was paid
for payroll taxes and $14,000 was paid for fringe benefits. During 1996,
salaries, payroll taxes and fringe benefits approximated $874,000 of which
$450,000 was paid to officers, $356,000 was paid to accounting and
administrative personnel, $42,000 was paid for payroll taxes and $26,000 was
paid for fringe benefits.
Corporate Settlement Costs
During 1998, settlement costs approximated $397,000 of which
approximately $230,000 related to litigation settlement agreements (see above,
Part I, Item 3., "Legal Proceedings") and $167,000 related to settlements with
former employees. During 1997 settlement costs approximated $723,000 of which
$221,000 relates to litigation settlement agreements (see above, Part I, Item
3., "Legal Proceedings") and $502,000 related to the Lafayette settlement
agreement. On December 20, 1996, the Company purchased Lafayette Industries,
Inc., ("Lafayette"). Lafayette's Form 10-KSB for 1996, included a disclaimer of
opinion by Lafayette's independent certified public accountants. This report
disclosed that there was substantial doubt with respect to Lafayette's ability
to continue as a going concern. In addition, Lafayette's accountants reported
that they were unable to obtain written representations from Lafayette's counsel
regarding litigation relating, among other things, to financial guarantees.
Because of material uncertainties on the part of the Company with respect to
Lafayette's guarantees, pending litigation, the accuracy of representations and
warranties made by Lafayette, the accuracy and completeness of Lafayette's
financial statements with respect to material liabilities, Lafayette's financial
condition and other matters, the Company's and Lafayette's respective boards of
directors determined that, in order to avoid costly and time consuming
litigation, Lafayette and the Company would enter into an agreement providing
for, among other things, the reversal of the acquisition and the payment by the
Company of approximately $502,000 of costs incurred by Lafayette during 1996.
Corporate Consulting Fees
During 1998, consulting fees approximated $329,000 of which $200,000
was paid to Schiller pursuant to a consulting agreement entered into on April 2,
1998 as a part of the Schiller resignation, $113,000 was paid to a consultant
for work performed to assist the Company in an acquisition for Trans Global
which was not consummated and $16,000 was paid for other consulting services.
During 1997 and 1996, consulting fees of approximately $128,000 and $474,000
were paid to consulting firms and individual consultants who performed work to
assist the Company in attempting to obtain equity financing for its
subsidiaries. During 1996, $45,000 of the $474,000 of consulting expense
reflects the value of 200,000 shares of the Company's common stock issued to
consultants.
Corporate Related Party Bad Debt Expense
During 1998 and 1997, related party bad debt expense approximated
$135,000 and $345,000 from the write-off of loans due from Companies affiliated
with Schiller and Wnuk, the Company's former CEO and Secretary. During 1998, the
Company wrote-off a $49,000 receivable due from Universal International, Inc.
14
<PAGE>
("Universal"), a company in which Wnuk owned 31% of the stock and an $87,000
receivable due from Televend, subsidiary of SESH, which was sold by the Company
to Schiller as of December 1997. During 1997, the Company wrote-off a $250,000
receivable due from Universal and a $95,000 receivable due from Fingermatrix, a
company for which Schiller was a board member.
Corporate Related Party Commissions
During 1997 the Company accrued $358,000 for commissions earned by
Schiller on the Company's investment activity pursuant to Schiller's employment
agreement that was in effect prior to his resignation in April 1998.
Consolidated's Other Income and Expense
Gain (Loss) on Marketable Securities
During 1998, the Company realized gains on sales of US Treasury Bills
of approximately $193,000 and recognized a loss of $80,000 for an estimated
permanent decline in equity securities held by the Company, resulting in a net
gain on marketable security activity of $113,000. During 1997, the Company
realized losses of $368,000 on the sale of securities of which $203,000 related
to the sale of Trans Global stock to the president of Trans Global and $165,000
related to the sale of Netsmart stock to executives of Netsmart. During 1996 the
Company realized an $823,000 gain on the sale of securities primarily from the
sale of Netsmart warrants held by the Company.
Corporate Other Income (Expense)
During 1998, other income approximated $62,000 of which $32,000
resulted from the agreement of certain subordinated debt holders to except less
than the original principal balance of their subordinated notes, $15,000 was
earned on dividend reinvestment of the Company's money market account and
$15,000 was received for consulting services. During 1997, other net expense
approximated $153,000 of which $240,000 of expense resulted from the write-off
of a joint venture investment, $51,000 of income was from interest earned on
receivables, $16,000 of income resulted from the sub-lease of an office and
$20,000 of income resulted from the write-off of old outstanding trade payables.
During 1996, other income approximated $368,000 of which $244,000 was interest
income earned on receivables that were issued and repaid during 1996 and
$124,000 reflects the recovery of receivables that were written-off prior to
December 1996.
Corporate Interest Expense
Interest expense approximated $8,000, $12,000 and $98,000,
respectively, for 1998, 1997 and 1996. The interest expense for 1998 and 1997 is
related to the subordinated debt of the Company, and the interest expense for
1996 reflects interest and financing fees paid for a loan that was obtained and
repaid in 1996.
Income Tax Provision
The Company's provision for income taxes was 0.4%, 0.0% and 0.6% of
income (loss) before taxes for 1998, 1997 and 1996, respectively. The Company
will have a net operating loss carryforward of approximately $15.3 million as of
December 1998. The net operating loss carryforward expires beginning in 1999
through 2012.
Minority Interest in (Income) Loss of Subsidiaries
For 1998, 1997 and 1995, the minority interest in (income) loss of
subsidiaries approximated ($179,000), $2.4 million and $3.1 million,
respectively. Changes in the minority interest in the income and loss of
subsidiaries are a result of the inherent differences in the net income and loss
of subsidiaries from period to period.
Share of Income of Unconsolidated Affiliate
The share of income of unconsolidated affiliate represents the Company's 36%
share of Netsmart's income, which approximated $71,000 for 1998.
15
<PAGE>
Extraordinary Gain on Extinguishment of Debt
On August 12, 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 in full settlement and satisfaction of the
approximate $7.7 million outstanding balance of such notes, 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 connection with the settlement, the
Company issued 333,000 shares of its common stock, valued at $80,000, 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 recognized an extraordinary gain on
debt extinguishment of approximately $5.6 million for 1998, in connection with
this settlement.
Future Operations of Consolidated
As of the date of this report the Company does not have any
consolidated subsidiaries that are not classified as discontinued segments. As a
result, the Company will have no 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.
Currently the Company has three employees with annual base salaries aggregating
approximately $389,000, 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 until such time when and if acquisitions of
new subsidiaries are made. During 1999 it is estimated that the anticipated
disposal of Trans Global and Arc Networks and the sale of the Netsmart shares
will result in gains that may offset the operating losses of the Company for
1999.
Netsmart:
For purposes herein, references to Netsmart relate to the operations of
both Netsmart and CSM unless indicated otherwise. The following only discusses
the operations of Netsmart for 1997 and 1996 since effective January 1, 1998,
Netsmart was converted to an equity method investment and is no longer a
consolidated subsidiary. During 1997 and 1996, Netsmart was 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's revenue for 1997 was $7.9 million, a decrease of
approximately $659,000, or 8%, from revenue of $8.5 million for 1996. This
decrease was the net result of a decrease in revenues from one contract with
IBN, Inc. (the "IBN Contract") of $1.8 million, which was partially offset by an
increase in other revenue sources of approximately $1.1 million. During 1996,
the IBN Contract generated $1.9 million of revenue, compared to $95,000 in 1997.
The IBN Contract represented Netsmart's most significant customer for 1996,
accounting for approximately 22% of revenue and during 1997, Netsmart completed
all ongoing services related to the IBN contract. Revenue from Netsmart's health
information systems continued to represent Netsmart's principal source of
revenue in 1997, accounting for $7.6 million or 97% of revenue. The largest
component of revenue in 1997 was data center (service bureau) revenue
approximating $2.2 million for both 1997 and 1996. Turnkey systems revenue
increased 24% to $2.1 million for 1997 from $1.7 million in 1996. Maintenance
revenue increased 8% to $1.3 million for 1997 from $1.2 million in 1996. Revenue
from third party hardware and software decreased 9% to $1 million for 1997 from
$1.1 million in 1996. License revenue increased to $737,000 in 1997 from
$329,000 in 1996, a 124% increase. License revenue is generated as part of a
sale of a turnkey system pursuant to a contract or purchase order that includes
development of a turnkey system and maintenance.
Gross profit increased to $1.7 million in 1997 from $1.6 million in
1996, a 7% increase. The increase in the gross profit was substantially the
result of a reduction of costs associated with the IBN Contract as well as the
increase in revenue from the health information systems mentioned above,
particularly the increase in license revenue which is highly margined.
16
<PAGE>
Selling, general and administrative expenses were $4.6 million in 1997,
a decrease of 38% from the $7.5 million in 1996. During 1996, Netsmart incurred
a non cash expense of $3.5 million arising out of the issuance by Netsmart of
warrants and options having exercise prices which were less than market value
and $1.7 million from the issuance of 500,000 common shares to certain note
holders and 25,000 common shares to Netsmart's asset based lender. During 1997,
Netsmart incurred a non cash expense of $300,000 from the issuance of 80,000
common shares for the purchase of certain assets, including the customer list,
of a competitor. During 1997 Netsmart wrote down, to net realizable value,
substantially all of the assets associated with its SmartCard division,
consisting of accounts receivable, costs and estimated profits in excess of
interim billings, computer equipment, capitalized software and its investment in
a joint venture, resulting in a charge to income in the amount of $1.5 million.
During 1997, Netsmart incurred research and development expenses in the amount
of $201,000, which were related to Netsmart's health information systems
products. In 1996, Netsmart incurred research and development expenses of
$278,000, which were related to the IBN Contract and the development of
SmartCard products.
Other expense of Netsmart for 1997 and 1996 approximated $287,000 and
$264,000, respectively, and consisted primarily of Netsmart's share of its loss
in a joint venture.
Interest expense was $308,000 in 1997, a decrease of $165,000, or 35%
from the interest expense of $473,000 in 1996. This was the result of a decrease
in average borrowings during 1997. The most significant component of interest
expense on an ongoing basis is the interest payable to Netsmart's asset-based
lender. Netsmart pays interest on such loans at a rate equal to prime plus
8-1/2% plus a fee of 5/8% of the face amount of the invoice.
As a result of the foregoing factors, Netsmart incurred a net loss of
$3.5 million in 1997 as compared with a net loss of $6.6 million in 1996.
Discontinued Operations
The operations of discontinued segments resulted in losses of $2.9
million, $7.1 million and $4.6 million for 1998, 1997 and 1996, respectively.
The gain (loss) on disposal of segments approximated $6.8 million and
($336,000), respectively for 1998 and 1997. The following tables summarize the
components of income and loss from discontinued segments and the gains and
losses realized on the disposals.
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Income (Loss) from Discontinued Operations
Contract Engineering Services $ 222,000 $ 1,023,000 ($ 607,000)
Telecommunications (2,709,000) (2,734,000) (1,635,000)
Audio Products Manufacturing -- (293,000) (893,000)
Three Dimensional Products and Services -- (1,636,000) (1,471,000)
Medical Diagnostics (577,000) (1,188,000) 1,446,000
Electro-Optical and Electro-Mechanical Products
Manufacturing -- (2,604,000) (2,164,000)
Business Consulting Services -- 221,000 263,000
Intercompany Transactions 135,000 112,000 444,000
------------ ------------ -------------
($ 2,929,000) ($ 7,099,000) ($ 4,617,000)
============ ============ =============
Gain (Loss) on Disposal of Segments:
Audio Products Manufacturing -- $ 129,000 --
Three Dimensional Products and Services $ 1,941,000 (465,000) --
Medical Diagnostics 4,883,000 -- --
Electro-Optical and Electro-Mechanical Products
Manufacturing (31,000) -- --
Business Consulting Services (1,000) -- --
------------ ------------
$ 6,792,000 ($ 336,000) --
============ ============
</TABLE>
The Contract Engineering Services segment's 1998 income included an
accrual of $128,000 for an estimated loss to be incurred from December 1998
until the disposal of the segment is completed. During 1998, the revenues and
net income of the Contract Engineering Services segment decreased significantly
due to the
17
<PAGE>
completion of several projects, delays in starting new projects with large
customers in Asia and the segment's continued efforts to trim sales that
generate lower margins. During the same period, the operating costs of the
segment increased due primarily to investments in information technology
marketing efforts. The Contract Engineering Services segment's loss for 1996
included the impact of a loss of one of its largest contracts in January of 1996
and the accrual of a $300,000 reserve in connection with a settlement with the
Department of Labor.
The Telecommunications segment's 1998 loss included an accrual of
$800,000 for an estimated loss to be incurred from December 1998 until the
disposal of the segment is completed and the loss for 1996 included $540,000 for
the write-off of impaired goodwill.
The Audio Products Manufacturing segment's 1997 loss includes the
operating activity through May 20, 1997, the date of disposal and for 1996
includes a full year's activity.
The Three Dimensional Products and Services segment's 1997 loss
included $250,000 for an estimated loss to be incurred from December 1997 until
the complete disposal of the segment.
The Medical Diagnostics segment's loss for 1998 included the operating
activity through April 2, 1998, the date of disposal. The Medical Diagnostics
segment's 1997 loss included the write-off of deferred offering costs of
approximately $750,000 from a terminated public offering, $408,000 for
settlement payments paid to former limited partners of one of the Medical
Diagnostics segment's imaging centers and increased legal and professional fees
of approximately $1 million. The increased legal fees resulted principally from
litigation that occurred during 1997. Additionally, the 1997 Medical Diagnostics
segment's loss included $250,000 for an estimate of losses anticipated to be
incurred from December 1997 until April 2, 1998.
The Electro-Mechanical and Electro-Optical Products Manufacturing
segment includes Televend and FMX, which did not start operations until 1996.
The operations of SpecTec, the holding company of two of the segment's operating
entities, is included in the results of operations for all three years reported.
The Business Consulting Services segment's only significant activity
was consulting fees charged to Netsmart, Trans Global and SES Holdings. Such
consulting fees are eliminated in consolidation and the portions of such
consulting fees charged to the other discontinued segments are included in the
intercompany transaction line of the above table.
Consolidated Net Loss
As a result of the foregoing, the Company incurred net income (loss) of
$4.1 million, ($12.7 million) and ($9.6 million) for 1998, 1997 and 1996,
respectively, and basic and fully diluted net income (loss) per common share of
$0.08, ($0.27) and ($0.23) for 1998, 1997 and 1996, respectively.
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.
Item 8. Financial Statements and Supplementary Data
The financial statements and supplementary data begin on page F-1 of
this Form 10-K.
18
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
Set forth below is information concerning the directors and executive officers
of the registrant as of December 1998.
<TABLE>
<CAPTION>
Name Age Position with the Company
- ---- --- -------------------------
<S> <C> <C>
Seymour H. Richter 62 President, Chief Executive Officer and director
George W. Mahoney 38 Chief Financial Officer
Edward D. Bright 62 Chairman of the Board, Treasurer, Secretary and director
Donald Caifetz 66 Director
</TABLE>
Mr. Seymour Richter has been the President and Chief Executive Officer ("CEO")
of the Company since April 1998. From July 1995 until April 1998, Mr. Richter
was employed by Patterson Travis Operating Account, Inc., a private company that
makes investments for its own account. For more than five years prior thereto,
he was the CEO of Touch Base Ltd., an independent selling organization in the
apparel industry. Mr. Richter is also a director of Trans Global and Netsmart.
Mr. George W. Mahoney has been Chief Financial Officer ("CFO") of the Company
since October 1994. From December 1991 until September 1994, Mr. Mahoney was CFO
of IMI and IMI's affiliated entities. Consolidated acquired the assets of IMI
and certain of its affiliated entities during 1994.
Mr. Edward D. Bright has been Chairman of the Board, Treasurer, Secretary and a
director since April 1998. From January 1996 until April 1998, Mr. Bright was an
executive officer of or advisor to CSM, a subsidiary of Netsmart, which was
acquired by Netsmart from Advanced Computer Techniques, Inc. ("ACT") in June
1994. From June 1994 until January 1996, he was chief executive officer of
Netsmart. He was a senior executive officer and a director of CSM and ACT for
more than two years prior to June 1994. He is also chairman of the board and a
director of Netsmart and is a director of Trans Global.
Mr. Donald Chaifetz has been a director of the Company since April 1998. Mr.
Chaifetz is a principal of Maldon Co., Inc., an importing company. Mr. Chaifetz
has been in the importing business for more than the past five years. He is also
a director of Trans Global.
Officers are elected by, and serve at the pleasure of, the board of directors.
Messrs. Richter, Bright and Chaifetz were elected to their positions following
the resignation of Lewis S. Schiller, Grazyna B. Wnuk, Norman J. Hoskin and E.
Gerald Kay.
Resignation of Registrant's Directors, Chief Executive Officer and Corporate
Secretary
On March 30, 1998, the Company and SISC entered into a series of
agreements with Lewis S. Schiller ("Mr. Schiller"), Grazyna B. Wnuk ("Ms.
Wnuk"), E. Gerald Kay ("Mr. Kay") and Norman J. Hoskin ("Mr. Hoskin"). Pursuant
to the agreements:
a) Mr. Schiller, Ms. Wnuk, Mr. Kay and Mr. 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.
The sale by IMI is referred to as the "IMI Sale".
b) In consideration for payments of approximately $4.0 million to
Mr. Schiller and Ms. Wnuk, the Company purchased from Mr. Schiller and
Ms. 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 payment relates to Mr. Schiller's and Ms. Wnuk's stock interest
in IMI. The remainder of $2.4 million relates to obligations of the
Company to Mr. Schiller and Ms. Wnuk, of which approximately $600,000
has been previously
19
<PAGE>
accrued in the financial statements, resulting in
increased expense, of approximately $1.8 million during 1998.
c) During April 1998, Mr. Schiller transferred to the Company
1,190,000 shares of the Company's common stock owned by him.
d) The Company transferred to Mr. Schiller or his designees for
nominal consideration, certain subsidiaries of the Company. Such
subsidiaries operated at a loss and in the aggregate had a negative net
worth.
e) Mr. Schiller entered into a three-year consulting agreement with
the Company, for which he was entitled to receive annual compensation
of $100,000. Subsequently, the consulting agreement was terminated.
f) The Company, its subsidiaries and Mr. Schiller, Ms. Wnuk, Mr.
Kay and Mr. Hoskin executed mutual releases and the Company provided
Mr. Schiller, Ms. Wnuk, Mr. Kay and Mr. Hoskin with certain
indemnification rights.
Schiller Settlement Agreement
On February 16, 1999, the Company consummated a settlement agreement
dated as of January 7, 1999, as amended (the "Schiller Settlement Agreement"),
by and between the Company and Schiller, the former CEO and Chairman of the
Board of the Company. The Schiller Settlement Agreement provided for, among
other things, payment of the sum of $350,000 to and on behalf of Schiller in
settlement of certain claims and disputes between Schiller and the Company, as
well as the termination of a consulting agreement between the Company and
Schiller. All amounts payable in accordance with the Schiller Settlement
Agreement have been accrued as of December 1998.
Item 11. Executive Compensation
Set forth below is information concerning the Company's Chief Executive Officer
and other executive officers who received or accrued compensation from the
Company and its subsidiaries in excess of $100,000 (on an annualized basis)
during 1998, 1997 and 1996.
<TABLE>
<CAPTION>
Long-term
Annual Compensation Compensation
------------------- ------------
Securities
Other Restricted Underlying
Annual Stock Options/
Compen- Awards SARs
Name and Principal Position Year Salary Bonus sation (Dollars) (Number)
- --------------------------- ---- ------ ----- ------ --------- --------
<S> <C> <C> <C> <C> <C> <C>
Seymour H. Richter, 1998 $60,000 $5,000 -- -- --
Chief Executive Officer (1) 1997 -- -- -- -- --
1996 -- -- -- -- --
George W. Mahoney, 1998 $202,000 $30,000 $953,000 -- --
Chief Financial Officer (2) 1997 $189,000 $65,000 $11,000 (5) (5)
1996 $177,000 $187,000 $13,000 (5) (5)
Lewis S. Schiller, 1998 $138,000 -- $3,503,000 -- --
Former Chief Executive Officer (3) 1997 $616,000 -- $358,000 (5) (5)
1996 $286,000 -- -- (5) (5)
Grazyna B. Wnuk, 1998 $53,000 -- $215,000 -- --
Former Secretary (4) 1997 $229,000 -- -- (5) (5)
1996 $98,000 -- -- (5) (5)
</TABLE>
20
<PAGE>
(1) Seymour H. Richter
From April 2, 1998 through December 1998, Mr. Richter was paid $60,000
which represents nine months of his annual salary of $78,000. Additionally, Mr.
Richter received a bonus of $5,000 for 1998. Mr. Richter does not have an
employment agreement with the Company.
(2) George W. Mahoney
On April 14, 1998, Mr. Mahoney, 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. On
June 16, 1998, Mr. Mahoney and the Company executed 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 material provisions of Mr. Mahoney's Original Agreement included a
term commencing October 1, 1994 and ending December 31, 2007 and an annual
salary for 1997 and 1996 of $189,000 and $177,000, respectivley. Pursuant to the
terms of the Original Agreement, Mr. Mahoney's annual salary increased to
$202,000 for 1998 and increased annually thereafter until 2007 when his annual
salary would have been $353,000. The agreement also provided for two annual
bonus payments. One bonus was equal to the greater of 2.5% of the Company's net
pre-tax profits or 2.5% of the Company's net cash flow and the second bonus was
equal to the greater of 2.5% of IMI's net pre-tax profits or 2.5% of IMI's net
cash flow. Additionally, Mr. Mahoney was entitled to an allowance for an
automobile and life insurance of $1 million on which he may designate a
beneficiary.
For 1998, Mr. Mahoney's bonus includes $28,000 that was paid by IMI and
$2,000 that was paid by Consolidated. Mr. Mahoney's "Other Annual Compensation"
for 1998 includes $414,000 for a finders fee paid to him for the sale of IMI,
$350,000 for the change of control compensation, $186,000 for net proceeds from
IMI options that he held and $3,000 for car and life insurance allowances. For
1997 and 1996, Mr. Mahoney was paid bonuses by IMI of $65,000 and $187,000,
respectively. The bonus paid in 1996 included an aggregate of $140,000 related
to services performed for IMI in connection with obtaining various loans from
its senior lender pursuant to amendments to his employment agreement. Mr.
Mahoney's "Other Annual Compensation" for 1997 and 1996 consists of car and life
insurance allowances.
(3) Mr. Lewis S. Schiller
From September 1, 1996 through March 30, 1998, the date of his
resignation, Mr. Schiller, as CEO and Chairman of the Board, was entitled to
receive an annual salary of $500,000 (subject to annual increases equal to the
greater of 5% of the current annual salary or the increase in the Cost of Living
Index), pursuant to a four year amended and restated employment agreement dated
as of January 1, 1997 (the "Schiller Restated Employment Agreement"). Other
material provisions of the Schiller Restated Employment Agreement included a
five year extension at the option of Mr. Schiller, an annual bonus equal to 10%
of the greater of the increase in the Company's consolidated net worth or net
cash flow in excess of $600,000, a profit sharing bonus equal to 20% of the
gross profit realized by the Company or any of its subsidiaries on the sale of
investment securities and the right to a 10% equity interest in all of the
Company's subsidiaries. Additionally, the Schiller Restated Employment Agreement
provided Mr. Schiller with a ten year retirement package consisting of salary
continuation in an amount equal to the greater of his annual salary for the year
in which retirement occurs or the average of his annual salary for the preceding
five years. Prior to the Schiller Restated Employment Agreement, the annual
salary payable by the Company to Mr. Schiller pursuant to prior employment
agreement with Consolidated was $250,000.
For 1998, 1997 and 1996, Mr. Schiller's respective employment
agreements entitled him to annualized salary, including accrued vacation and
sick pay, of $551,000, $616,000 and $286,000, respectively. During 1998, Mr.
Schiller was paid $138,000, which represents three months of his base salary and
was paid $370,000 for previously accrued salary and vacation and sick pay.
During 1997, Mr. Schiller was paid $390,000 of his total
21
<PAGE>
salary while $226,000, including salary, vacation and sick pay, was accrued. Mr.
Schiller's "Other Annual Compensation" for 1998 includes $1.2 million paid to
Mr. Schiller and his designated family members for his 10% ownership in IMI,
$1.9 million for the purchase of his contract rights by the Company and $350,000
of amounts accrued for the aforementioned Schiller Settlement Agreement, which
was paid in January of 1999. Mr. Schiller's "Other Annual Compensation" for 1997
consists of commissions that Mr. Schiller earned on the Company's investment
activity of which during 1997, $141,000 was paid in cash, $36,000 was paid with
the issuance to Mr. Schiller of 1,190,000 shares of the Company's common stock
and the remainder was accrued. The balance of Mr. Schiller's accrued commissions
of $181,000 was paid to him in 1998. In April 1998, in connection with his
resignation as an officer and director, Mr. Schiller returned the 1,190,000
shares of common stock owned by him to the Company.
(4) Ms. Wnuk
On June 30, 1997, the Company and Ms. Wnuk entered into an employment
agreement pursuant to which Ms. Wnuk was employed as the Company's Secretary
until December 31, 2002, subject to a five year extension at the option of Ms.
Wnuk. The material provisions of the employment agreement included an annual
base salary of $200,000 (subject to annual increases, commencing January 1,
1998, equal to the greater of 5% of the current annual salary or the increase in
the Cost of Living Index), an annual bonus equal to 0.5% of the greater of the
increase in the Company's consolidated net worth or cash flow in excess of
$600,000, a profit sharing bonus equal to 1% of the gross profit realized by the
Company or any of its subsidiaries on the sale of investment securities and the
right to a 1% equity interest in all of the Company's subsidiaries.
Additionally, the Ms. Wnuk's employment agreement provided her with a ten year
retirement package consisting of salary continuation in an amount equal to the
greater of her annual salary for the year in which retirement occurs or the
average of her annual salary for the preceding five years. Prior to June 30,
1997, Ms. Wnuk did not have an employment agreement with the Company.
For 1998 and 1997, Ms. Wnuk's employment agreement entitled her to an
annual salary, including accrued vacation and sick pay, of $210,000 and
$229,000, respectively. During 1998, Ms. Wnuk was paid $53,000, which represents
three months of her base salary. During 1997, Ms. Wnuk was paid $194,000 of her
total salary while $35,000, including accrued salary, vacation and sick pay, was
accrued. During 1996, Ms. Wnuk was paid $98,000, including salary and vacation
and sick pay. Ms. Wnuk's "Other Annual Compensation" for 1998 includes $135,000
paid to Ms. Wnuk for her 1% ownership in IMI and $80,000 for the purchase of her
contract rights by the Company. Ms. Wnuk's compensation, as disclosed for all
periods, does not include annual compensation of $25,000 that she received from
Universal International, Inc., a corporation in which the Company had an equity
method investment in through March 30, 1998.
(5) Management Stock Transactions, Warrants and Options
Issuance of the Company's Common Stock to Management
In July 1997, Mr. Schiller purchased 1,190,000 shares of common stock
from the Company at $0.03 per share, reflecting a discount from the bid price on
the date of the purchase, which was $0.06 per share. Payment of the purchase
price of such shares was effected by a reduction of the Company's obligation to
Mr. Schiller for accrued commissions he earned pursuant to the Schiller Restated
Employment Agreement. In April 1998, in connection with his resignation as an
officer and director, Mr. Schiller returned the 1,190,000 shares of common stock
to the Company. Additionally, in 1997 Mr. Schiller agreed to purchase, and the
Company agreed to sell to Mr. Schiller, an additional 5,000,000 shares of common
stock at $0.03 per share. Such shares were never issued, and the Company no
longer has any obligation to issue such shares.
Issuance of the Company's Subsidiaries' Stock and Stock Rights to the Company's
Management
Set forth below are the equity transactions between the Company's
management and Netsmart and Trans Global, both publicly held affiliates of the
Company. Until April 1998, Mr. Schiller was chief executive officer, chairman of
the board and a director of both Netsmart and Trans Global and Mr. Hoskin was a
director of both Netsmart and Trans Global. Until April 1998, Ms. Wnuk was
secretary of Trans Global and Mr. Kaye was a director of Trans Global.
22
<PAGE>
Netsmart
In January 1996, SISC transferred an aggregate of 112,500 shares of its
Netsmart common stock to Mr. Schiller and his designees. In February 1996,
Netsmart issued warrants to purchase 53,500 shares of Netsmart's common stock at
$5.00 per share to Mr. Schiller and SISC transferred warrants to purchase
206,250 shares of Netsmart's common stock at $2.00 per share to Mr. Schiller and
his designees. In July 1996, pursuant to a warrant exchange, the exercise price
of the $5.00 warrants issued in February 1996 was reduced to $4.00 per share and
one third of the warrants having an exercise price of $2.00 per share were
exchanged for $4.00 warrants to purchase 150% of the number of shares that were
to be originally to be issued upon exercise of the $2 warrants. Messrs. Hoskin,
Kaye and Mahoney and Ms. Wnuk received warrants to purchase an aggregate of
33,333, 66,667, 40,000 and 33,333 shares, respectively, of Netsmart's common
stock at $2.00 per share and 25,001, 50,000, 25,001 and 25,001 shares,
respectively, of Netsmart common stock at $4.00 per shares (such shares and
dollar amounts give effect to the previously described warrant exchange).
Trans Global
During 1996, Trans Global issued 100 shares of its series F preferred
stock to DLB, Inc. ("DLB"), in exchange for two other series of Trans Global
preferred stock owned by DLB. DLB is owned by Mr. Schiller's wife and Mr.
Schiller disclaims all beneficial interest in DLB or any securities owned by
DLB. During 1996, SISC transferred 1,000 shares of Trans Global series F
preferred stock to Mr. Schiller in exchange for two other series of Trans Global
preferred stock owned by Mr. Schiller. During October and December of 1996, the
series F preferred stock held by DLB and Mr. Schiller were converted into 16,667
and 166,667 shares, respectively, of Trans Global's common stock. In April 1996,
Trans Global issued to Messrs. Schiller, Hoskin and Kaye warrants to purchase
66,666, 50,000 and 50,000 shares, respectively, at $7.50 per share. In August
1997, SISC transferred to Mr. Schiller and his designees, Mr. Mahoney and Ms.
Wnuk, warrants to purchase 291,667, 33,333 and 50,000 shares, respectively, at
$7.50 per share.
Privately Held Subsidiaries
Messrs. Schiller, Mahoney, Hoskin and Kaye and Ms. Wnuk have been
issued stock and warrants and options to buy stock of certain of the Company's
privately held subsidiary's. In 1998, Mr. Schiller and Ms. Wnuk received
approximately $3.1 million and $135,000, respectively for their respective 10%
and 1% interests in IMI and in 1998 Mr. Mahoney received approximately $186,000
of net proceeds from the exercise of IMI incentive stock options that were
granted to him in 1997. During 1997, Mr. Schiller and his designees, DLB, Mr.
Mahoney, Mr. Hoskin, Mr. Kaye and Ms. Wnuk received 234,320, 50,000, 35,000,
50,000, 50,000 and 30,000 of Arc Networks common stock.
Item 12. Security Ownership of Certain Beneficial Owners and Management
No person or group known to the Company owns 5% or more of any of the Company's
voting securities as of April 14, 1999. Set forth below is information as of
April 14, 1999, based on information provided to the Company by the persons
named below, as to the stock ownership of each director of the Company, each
officer named in the summary compensation table and all officers and directors
as a group.
Name(1) Shares Percent
- ------- ------ -------
Seymour H. Richter -- --
George W. Mahoney -- --
Edward D. Bright 817,377 (2) 1.7%
Donald Caifetz -- --
All directors and officers as a group 817,377 (2) 1.7%
(1) Unless otherwise indicated, each person has the sole voting power and sole
investment power and direct beneficial ownership of the shares.
(2) Includes 800,000 shares owned by JEG, Inc. ("JEG"). Mr. Bright is president
and director of JEG, and, in such capacities, he has the sole right to vote and
dispose of the shares owned by JEG.
23
<PAGE>
Item 13. Certain relationships and Related Transactions
Advances to an Unconsolidated Subsidiary
The Company and its subsidiary, Trans Global, had made advances to
Universal, a company in which the Company's former Secretary is an owner. These
advances have no fixed due dates or terms and as of April 1998, all of such
advances have been written-off. The outstanding balances owed to the Company and
Trans Global from Universal were $187,000 and $517,000, respectively, as of
December 1997 and 1996 and the greatest amount outstanding to Universal during
1998, 1997 and 1996 was $600,000.
Common Stock Sold to former Chief Executive Officer
In July 1997, the Company's former CEO, purchased 1,190,000 shares of
common stock from the Company at $0.03 per share, reflecting a discount from the
bid price on the date of sale, which was $0.06 per share. Payment for the
purchase price of such shares was effected by a reduction of the Company's
obligation to the CEO for past accrued compensation. In April 1998, in
connection with the former CEO's resignation, these shares were returned to the
Company.
Sale of Subsidiary Stock to Subsidiary Employees
In 1997, SISC sold 258,333 shares of Trans Global's common stock to the
president of Trans Global at $1.67 per share, the fair market value of Trans
Global's common stock on the date of sale. The Company's book basis in such
shares approximated $622,000 resulting in a loss on the sale of approximately
$191,000 for 1997. Payment by the president of Trans Global is evidenced by a
non-interest bearing, non-recourse promissory note from the president of Trans
Global.
In 1997, SISC sold 151,920 shares of Netsmart's common stock to certain
employees of Netsmart at $0.23 per share. The Company's book basis in such
shares approximated $201,000 resulting in a loss on the sale of approximately
$165,000 for 1997.
Reimbursement of Legal Costs
During 1998, the Company paid approximately $50,000 to each of Edward
D. Bright, who is Chairman of the Board, Treasurer, Secretary and a director of
Consolidated, and Patterson Travis, a brokerage firm that represents certain
shareholders of Consolidated in reimbursement of legal expenses incurred by the
two related parties in connection with the Schiller termination.
24
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
1. Financial Statements
F-3 Report of Moore Stephens, P.C. Independent Certified
Accountants
F-4 - F-5 Consolidated Balance Sheets as of December 31, 1998 and 1997
F-6 Consolidated Statements of Operations for the Years Ended
December 31, 1998, 1997 and 1996
F-7 Consolidated Statements of Comprehensive Income (Loss) for the
Years Ended December 31, 1998, 1997 and 1996
F-8 - F-10 Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998, 1997 and 1996
F-11 - F-13 Consolidated Statements of Shareholders' Equity for the Years
Ended December 31, 1998, 1997 and 1996
F-14 Notes to Consolidated Financial Statements
2. Financial Statement Schedules
None
3. Reports on Form 8-K
None
4.Exhibits
(2.1) 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.(1)
(2.2) Agreement dated February 25, 1999 between the Company and
Trans Global.(11)
(2.3) Agreement dated March 23, 1999 among the Company, Arc Networks
and Technology Acquisition, Ltd.(12)
(2.4) Agreement dated March 25, 1999 among the Company, Netsmart and
Anthony Grisanti, as representative of the purchasers.(12)
(3) (I) Certificate of Incorporation.(2)
(3) (ii) By-laws.(2)
(10.1) Employment areement dated June 1, 1998, between the Registrant
and George W. Mahoney.(3)
(10.2) Employment agreement dated April 11, 1997, between the
Registrant and George W. Mahoney.(4)
(10.3) Employment agreement dated January 1, 1997, between the
Registrant and Lewis S. Schiller.(5)
(10.4) Agreement dated as of July 23, 1998 and Amendment No. 1 to
such agreement by and among IMI Acquisition of Boca Raton
Corp., IMI Acquisition of Pine Island Corp., IMI Acquisition
of North Miami Beach Corp., PODC Acquisition Corp., IMI
Acquisition of Orlando Corp., IMI Acquisition of Kansas
Liquidation Corp., MD Ltd. Partner Acq. Corp. and MD
Acquisition Corp., and Stephen A. Schulman and Stephanie S.
Schulman, James H. and Marsha Sternberg and Ashley Kaye.(7)
(10.5) Agreement dated as of March 30, 1998, by and among the
Company, SISC and Lewis S. Schiller.(8)
(10.6) Agreement dated as of March 30, 1998, by and among the
Company, SISC and Grazyna B. Wnuk.(8)
(10.7) Agreement dated as of March 30, 1998, by and among the
Company, SISC and E. Gerald Kay and Norman J. Hoskin.(8)
(10.8) 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.(8)
(10.9) Settlement agreement between SIS Capital and Lafayette
Industries, Inc.(9)
(10.10) Agreement dated December 20, 1996 relating to the acquisition
of Lafayette Industries, Inc.(8)
(10.11) Settlement agreement dated January 7, 1999 between the
Company and Lewis S. Schiller(11)
- -------
(1) Filed as an exhibit to the Company's report on Form 8-K dated January 28,
1998 and incorporated herein by reference.
(2) Filed as an exhibit to the Company's annual report on Form 10-K for the
fiscal year ended July 31, 1994 and incorporated herein by reference.
(3) Filed as an exhibit to the Company's report on Form 8-K dated June 19, 1998
and incorporated herein by reference.
(4) Filed as an exhibit to the Company's annual report on Form 10-K for the
year ended December 31, 1996 and incorporated herein by reference.
25
<PAGE>
(5) Filed as an exhibit to the Company's quarterly report on Form 10-Q for the
six months ended June 30, 1997 and incorporated herein by reference.
(6) Filed only to the SEC in electronic format.
(7) Incorporated by reference to the August 12, 1998 Form 8-K.
(8) Incorporated by reference to the April 3, 1998 Form 8-K.
(9) Filed as an exhibit to the Company's report on Form 8-K dated April 21,
1997, and incorporated herein by reference.
(10) Filed as an exhibit to the Company's report on Form 8-K dated December 20,
1996, and incorporated herein by reference.
(11) Filed as an exhibit to the Company's report on Form 8-K dated February 26,
1999, and incorporated herein by reference.
(12) Filed as an exhibit to the Company's report on Form 8-K dated March 23,
1999, and incorporated herein by reference.
26
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
CONSOLIDATED TECHNOLOGY GROUP, LTD.
Date: April 14, 1999 /s/________________________________
Seymour Richter
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following personal on behalf of the Registrant and
in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/________________ President and Chief Executive April 14, 1999
Seymour Richter Officer (Principal Executive
Officer)
/s/________________ Chief Financial Officer April 14, 1999
George W. Mahoney (Principal Financial and
Accounting Officer)
/s/________________ Director April 14, 1999
Edward D. Bright
/s/________________ Director April 14, 1999
Don Chaifetz
27
<PAGE>
CONSOLIDATED TECHNOLOGY GROUP LTD. AND SUBSIDIARIES
FINANCIAL STATEMENTS
DECEMBER 31, 1998
F-1
<PAGE>
Consolidated Technology Group Ltd. and Subsidiaries
Financial Statements
December 31, 1998
Index
Page
-----------
Independent Auditor's Report F-3
Consolidated Balance Sheets - December 31, 1998 and 1997 F-4 - F-5
Consolidated Statements of Operations - Years Ended December
31, 1998, 1997 and 1996 F-6
Consolidated Statements of Comprehensive Income (Loss) -
Years Ended December 31, 1998, 1997 and 1996 F-7
Consolidated Statements of Cash Flows - Years Ended
December 31, 1998, 1997 and 1996 F-8 - F-10
Consolidated Statements of Shareholders' Equity
(Deficit) - Years Ended December 31, 1998, 1997 and 1996 F-11 - F-13
Notes to Consolidated Financial Statements F-15 - F-42
F-2
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders of
Consolidated Technology Group Ltd.
New York, New York
We have audited the accompanying consolidated balance sheets of
Consolidated Technology Group Ltd. and its subsidiaries as of December 31, 1998
and 1997, and the related consolidated statements of operations, comprehensive
income (loss), shareholders' equity (deficit), and cash flows for each of the
three years in the period ended December 31, 1998. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Consolidated Technology Group Ltd. and its subsidiaries as of December 31, 1998
and 1997, and the consolidated results of their operations and their cash flows
for each of the three years in the period ended December 31, 1998, in conformity
with generally accepted accounting principles.
MOORE STEPHENS, P.C.
Certified Public Accountants,
Cranford, New Jersey
January 28, 1999
[Except for Note 23 as to which the
date is March 31, 1999]
F-3
<PAGE>
Consolidated Technology Group Ltd. and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31,
1998 1997
---- ----
<S> <C> <C>
Assets:
Current assets:
Cash and cash equivalents $ 179,000 $ 871,000
Marketable securities 5,092,000 --
Net current assets of discontinued segments 926,000 1,254,000
Prepaid expenses and other current assets 17,000 89,000
Receivables, net of allowances -- 2,184,000
Excess of accumulated costs over related billings -- 542,000
--------- ---------
Total current assets 6,214,000 4,940,000
--------- ---------
Property, plant and equipment, net -- 356,000
-------
Other assets:
Net assets of discontinued segments 3,979,000 19,865,000
Investment in unconsolidated affiliate 760,000 --
Receivables, related parties 420,000 420,000
Marketable securities 2,000 19,000
Customer lists, net -- 3,067,000
Capitalized software development costs -- 183,000
Other assets -- 133,000
--------- -----------
Total Other Assets 5,161,000 23,687,000
--------- ----------
Total Assets $ 11,375,000 $ 28,983,000
========== ==========
</TABLE>
See notes to consolidated financial statements
F-4
<PAGE>
Consolidated Technology Group Ltd. and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31,
1998 1997
---- ----
<S> <C> <C>
Liabilities and Shareholders' Deficit:
Current liabilities:
Net current liabilities of discontinued segments $ 4,194,000 $ 17,402,000
Accrued litigation settlement costs 843,000 316,000
Accounts payable 452,000 3,200,000
Other accrued expenses 123,000 276,000
Accrued payroll and related expenses 31,000 418,000
Current portion of subordinated debt 27,000 --
Accrued interest 5,000 9,000
Interim billings in excess of costs and estimated profits -- 1,069,000
Current debt obligations -- 955,000
Current portion of capitalized lease obligations -- 23,000
Notes payable, related parties -- 10,000
--------- ----------
Total current liabilities 5,675,000 23,678,000
--------- ----------
Long-term liabilities:
Subordinated debt -- 139,000
-------
Contingencies (footnote 22)
Minority interest 6,367,000 15,511,000
--------- ----------
Shareholders' deficit:
Preferred stock 3,000 3,000
Common stock (50,000,000 shares authorized, 49,053,996 and 49,910,996
shares issued and outstanding as of December 31, 1998 and 1997,
respectively) 491,000 499,000
Additional paid-in capital 57,713,000 52,152,000
Accumulated other comprehensive income (expense) 52,000 (116,000)
Accumulated deficit (58,808,000) (62,883,000)
Less common stock in treasury, at cost (1,186,500 shares at December 31,
1998) (118,000) --
------- ----------
Total shareholders' deficit (667,000) (10,345,000)
------- ----------
Total Liabilities and Shareholders' Deficit $ 11,375,000 $ 28,983,000
========== ==========
</TABLE>
See notes to consolidated financial statements
F-5
<PAGE>
Consolidated Technology Group Ltd. and Subsidiaries
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Subsidiary's Revenue -- $ 7,882,000 $ 8,541,000
Subsidiary's Direct Costs -- 6,155,000 6,931,000
--------- -- ---------
Subsidiary's Gross Profit -- 1,727,000 1,610,000
--------- -- ---------
Selling, General and Administrative Expense:
Corporate termination payments for executive contracts $ 1,970,000 -- --
Corporate professional fees 1,179,000 268,000 305,000
Corporate salaries, payroll and fringe benefits 735,000 1,340,000 874,000
Corporate other general and administrative expense 736,000 700,000 951,000
Corporate settlement costs 397,000 723,000 --
Corporate consulting fees 329,000 128,000 474,000
Corporate related party bad debt expense 135,000 345,000 --
Corporate related party commissions -- 358,000 --
Subsidiary's selling, general and administrative expense -- 4,110,000 2,221,000
Subsidiary's stock option expense -- 300,000 3,492,000
Subsidiary's issuance of stock in lieu of cash payment -- -- 1,680,000
--------- --------- ---------
Total selling, general and administrative expense 5,481,000 8,272,000 9,997,000
--------- --------- ---------
Loss from Operations (5,481,000) (6,545,000) (8,387,000)
--------- --------- ---------
Other Income (Expense):
Gain (loss) on sale of marketable securities 113,000 (368,000) 823,000
Corporate other income (expense), net 62,000 (153,000) 368,000
Corporate interest expense (8,000) (12,000) (98,000)
Subsidiary's other expense, net -- (287,000) (264,000)
Subsidiary's interest expense -- (308,000) (444,000)
------- --------- -------
Other income (expense), net 167,000 (1,128,000) 385,000
------- --------- -------
Loss from Continuing Operations Before Income Taxes,
Minority Interest and Share of Unconsolidated Affiliate's
Loss (5,314,000) (7,673,000) (8,002,000)
Income Tax Provision (20,000) -- (49,000)
Minority Interest in (Income) Loss of Subsidiaries (179,000) 2,443,000 3,098,000
Share of Income (Loss) of Unconsolidated Affiliate 71,000 -- --
--------- --------- ---------
Loss from Continuing Operations (5,442,000) (5,230,000) (4,953,000)
Discontinued Operations:
Income (loss) from operations of discontinued segments (2,929,000) (7,099,000) (4,617,000)
Gain (loss) on disposal of segments 6,792,000 (336,000) --
--------- ---------- ---------
Loss before Extraordinary Item (1,579,000) (12,665,000) (9,570,000)
Extraordinary Gain on Debt Extinguishment 5,676,000 -- --
--------- ---------- ---------
Net Income (Loss) $ 4,097,000 ($ 12,665,000) ($ 9,570,000)
========= ========== =========
Basic and Diluted Earnings (Loss) per Common Share:
Loss from continuing operations ($0.12) ($0.15) ($0.13)
Income (loss) from operations of discontinued segments (0.06) (0.11) (0.10)
Gain (loss) on disposal of segment 0.14 (0.01) --
Extraordinary income 0.12 -- --
---- ---- ----
Net income (loss) $0.08 ($0.27) ($0.23)
==== ==== ====
Weighted average number of common shares 49,154,754 47,161,799 41,639,293
========== ========== ==========
</TABLE>
See notes to consolidated financial statements
F-6
<PAGE>
Consolidated Technology Group Ltd. and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss)
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net Income (Loss) $ 4,097,000 ($ 12,665,000) ($ 9,570,000)
--------- ---------- ---------
Other Comprehensive Income (Loss):
Unrealized Investment Holdings Income (Expense):
Unrealized holding gain (loss) on available for sale 329,000 (132,000) (323,000)
securities
Reclassification for realized gain (loss) on available
for sale securities (161,000) -- 250,000
------- ------- -------
168,000 (132,000) (73,000)
Unrealized gain (loss) on Foreign Exchange Translation -- (86,000) 103,000
------- -------- -------
Other Comprehensive Income (Expense) 168,000 (218,000) 30,000
------- ------- ------
Comprehensive Income (Loss) $ 4,265,000 ($ 12,883,000) ($ 9,540,000)
========= ========== =========
</TABLE>
See notes to consolidated financial statements
F-7
<PAGE>
Consolidated Technology Group Ltd. and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Loss from continuing operations ($ 5,442,000) ($ 5,230,000) ($ 4,953,000)
Gain (loss) on disposal of segments 6,792,000 (336,000) --
Extraordinary Gain on Debt Extinguishment 5,676,000 -- --
--------- --------- ---------
7,026,000 (5,566,000) (4,953,000)
Adjustments to reconcile loss from continuing operations
to net cash used in continuing operations:
Gain (loss) on disposal of segments (6,792,000) 336,000 --
Extraordinary gain on debt extinguishment (5,676,000) -- --
Minority interest in net income (loss) of subsidiaries 179,000 (2,443,000) (3,098,000)
Bad debt expense 135,000 1,159,000 355,000
(Gain) loss on sale of marketable securities (113,000) 368,000 (823,000)
Share of income of unconsolidated affiliate (71,000) -- --
Value of stock issued in lieu of cash 80,000 73,000 45,000
Loss on disposal of fixed assets 40,000 138,000 --
Depreciation and amortization 9,000 619,000 534,000
Write-off deferred offering costs -- 480,000 --
Impaired asset write-offs -- 415,000 --
Noncash expense from subsidiaries issuance of stock
options -- 300,000 3,492,000
Equity method loss in subsidiaries joint venture -- 140,000 264,000
Value of subsidiaries stock issued in lieu of cash -- -- 1,680,000
Change in assets and liabilities:
(Increase) decrease in assets:
Prepaid expense and other current assets (12,000) 268,000 (7,000)
Receivables -- (711,000) (334,000)
Excess of accumulated costs over related billings -- (75,000) (65,000)
Increase (decrease) in liabilities:
Accrued payroll and related expenses (387,000) 418,000 (43,000)
Accounts payable and accrued expenses (330,000) 1,142,000 (609,000)
Accrued interest (4,000) (9,000) 85,000
Income taxes payable -- (168,000) 49,000
Interim billings in excess of costs and estimated
profits -- (121,000) (484,000)
--------- ------- -------
Net cash used in continuing operations (5,916,000) (3,237,000) (3,912,000)
--------- --------- ---------
Loss from discontinued operations (2,929,000) (7,099,000) (4,617,000)
Adjustments to reconcile loss from discontinued operations
to net cash used by discontinued operations:
Net change in assets and liabilities (1,290,000) (297,000) (6,020,000)
Depreciation and amortization 1,447,000 5,926,000 6,432,000
Bad debt expense 684,000 2,449,000 2,588,000
Loss on disposal of fixed assets -- 324,000 167,000
--------- --------- -------
Net cash provided by (used in) discontinued operations (2,088,000) 1,303,000 (1,450,000)
--------- --------- ---------
Net cash used in operating activities (8,004,000) (1,934,000) (5,362,000)
--------- --------- ---------
(continued)
</TABLE>
See notes to consolidated financial statements
F-8
<PAGE>
Consolidated Technology Group Ltd. and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash Flows from Investing Activities:
Net proceeds from disposal of segments 14,994,000 -- --
Investments in marketable securities (13,761,000) (20,000) (385,000)
Proceeds from sale of marketable securities 8,967,000 97,000 1,244,000
Cash of affiliate converted to an equity method investment (855,000) -- --
(Increase) decrease in other assets 99,000 (107,000) 196,000
Payments for loans made (49,000) (220,000) (3,133,000)
Capital expenditures (1,000) (239,000) (188,000)
Capitalized software development costs -- (462,000) (279,000)
Collections for repayment of loans made -- 342,000 3,449,000
--------- ------- ---------
Net cash provided by (used in) investing activities 9,394,000 (609,000) 904,000
--------- ------- -------
Cash Flows from Financing Activities:
Repayment of discontinued subsidiaries debt (1,620,000) -- --
Value of common stock returned as part of termination
payments for executive contracts (223,000) -- --
Purchase treasury stock (118,000) -- --
Repayment of subordinated debt (91,000) -- --
Debt repayments (30,000) (16,000) (3,390,000)
Proceeds from exercise of subsidiary's stock options -- 1,958,000 1,600,000
Net advances from (payments to) asset based lender -- 345,000 (117,000)
Proceeds from issuance of subordinated debt -- 139,000 --
Cost of subsidiaries issuance of common stock -- (75,000) (1,369,000)
Payments on capital lease obligations -- (33,000) (192,000)
Proceeds from issuance of debt -- 30,000 3,000,000
Issuance of subsidiaries common stock -- -- 5,175,000
Issuance of common stock -- -- 912,000
--------- --------- -------
Net cash provided by (used in) financing activities (2,082,000) 2,348,000 5,619,000
--------- --------- ---------
Net Increase (Decrease) in Cash and Cash Equivalents (692,000) (195,000) 1,161,000
Cash and Cash Equivalents (Overdraft) at Beginning of Period
871,000 1,066,000 (95,000)
------- --------- ------
Cash and Cash Equivalents at End of Period $ 179,000 $ 871,000 $ 1,066,000
======= ======= =========
Supplemental Disclosures of Cash Flow Information:
Cash paid for:
Interest $ 12,000 $ 295,000 $ 457,000
======= ======= =======
Income taxes -- -- $ 26,000
======
(concluded)
</TABLE>
See notes to consolidated financial statements
F-9
<PAGE>
Consolidated Technology Group Ltd. and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended December 31, 1998, 1997 and 1996
Supplemental Disclosures of Non Cash Investing and Financing Activities:
During the year ended December 31, 1998:
* In lieu of cash payment, the Company issued 333,000 shares of common stock
valued at $80,000.
* In connection with the termination of an executive's contract, received
1,190,000 shares of common stock previously issued to executive valued at
$223,000, which was recorded as a reduction of contract termination
expense.
* Effective January 1, 1999, the Company converted the Medical Information
Services segment from a consolidated subsidiary to an investment in
unconsolidated affiliate. As a result, the following balances that are
included in the December 31, 1997 balance sheet are not included for
1998: $84,000 of prepaid and other current assets, $2.2 million of net
receivables, $542,000 of excess of accumulated costs over billings,
$308,000 of property, plant and equipment, $3.1 million of customer
lists, $183,000 of capitalized software development costs, $13,000 of
other assets, $2.1 million of accounts payable and accrued expense, $1.1
million of interim billings in excess of costs and estimated profits,
$955,000 of current debt obligations, $23,000 of current capitalized
lease obligations and $8,150,000 of minority interest. When the segment
was converted to an investment in unconsolidated affiliate, the resulting
investment balance was in excess of the Company's ownership share in the
affiliate's equity by $5.7 million and such excess was credited to
additional paid-in capital. The Company's the investment in the
unconsolidated affiliate amounted to $689,000 at the date of the
conversion.
During the Year Ended December 31, 1997:
* In lieu of cash payment, the Company issued 1,223,225 shares of common stock
valued at $73,000.
* A subsidiary of the Company, operating in the medical information
services segment, incurred non-cash expense from the issuance of common
stock valued at $300,000 for the acquisition of certain assets.
During the Year Ended December 31, 1996:
* A subsidiary of the Company, operating in the medical information
services segment, incurred non-cash expense from the issuance of stock
options and warrants to purchase stock valued at $3.5 million.
* In lieu of cash payment, the Company issued 200,000 shares of common stock
valued at $45,000.
* A subsidiary of the Company operating in the medical information services
segments issued common stock valued at $1.7 million in lieu of cash
payments for services performed.
F-10
<PAGE>
Consolidated Technology Group, Ltd. and Subsidiaries
Consolidated Statement of Shareholders Equity
for the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Convert Affiliate
to an Equity Stock Issued in
Balance at Method Lieu of Cash Cancellation of
December 31, Investment Payment Common Stock
1997 (footnote 8) (footnote 12) (footnote 19)
---- ------------ ------------- -------------
<S> <C> <C> <C> <C>
Preferred stock, $1.00 par
value, $3.50 and $.10,
Series B and E, 8,000 shares
authorized each:
Shares 262 -- -- --
Amount $ 1,000 -- -- --
Preferred stock, $1.00 par
value, $8.00 subordinated
Series F, 6,000 shares
authorized:
Shares 2,700 -- -- --
Amount $ 2,000 -- -- --
----------- ----- ----- -----
Total Preferred stock $ 3,000 -- -- --
Common stock, $0.01 par
value, 50,000,000 shares
authorized:
Shares 49,910,996 -- 333,000 (1,190,000)
Amount $ 499,000 -- $ 3,000 ($11,000)
Additional paid-in capital $52,152,000 $ 5,696,000 $ 77,000 ($212,000)
Accumulated other
comprehensive income
(expense) ($116,000) -- -- --
Accumulated deficit ($62,883,000) -- -- --
Less common stock in
treasury, at cost:
Shares -- -- -- --
Amount -- -- -- --
--------- --------- ------ ------
Total shareholders' equity (deficit) ($10,345,000) $ 5,696,000 $ 80,000 $ (223,000)
========== ========= ====== ======
(continued)
</TABLE>
See notes to consolidated financial statements.
<PAGE>
Consolidated Technology Group, Ltd. and Subsidiaries
Consolidated Statement of Shareholders Equity
for the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Cost of
Unrealized Treasury
Investment Shares Balance at
Net Preferred Holding Gains Acquired December 31,
Income Dividends (footnote 5) (footnote 13) 1998
------ --------- ------------ ------------- ----
<S> <C> <C> <C> <C> <C>
Preferred stock, $1.00 par value,
$3.50 and $.10, Series B and E,
8,000 shares authorized each:
Shares -- -- -- -- 262
Amount -- -- -- -- $ 1,000
Preferred stock, $1.00 par value,
$8.00 subordinated Series F,
6,000 shares authorized:
Shares -- -- -- -- 2,700
Amount -- -- -- -- $ 2,000
----- ----- ----- ----- -----
Total Preferred stock -- -- -- -- $ 3,000
Common stock, $0.01 par value.
50,000,000 shares authorized
Shares -- -- -- -- 49,053,996
Amount -- -- -- -- $ 491,000
Additional paid-in capital -- -- -- -- $ 57,713,000
Accumulated other comprehensive
income (expense) -- -- $ 168,000 -- $ 52,000
Accumulated deficit $4,097,000 ($ 22,000) -- -- ($ 58,808,000)
Less common stock in treasury,
at cost:
Shares -- -- -- (1,186,500) (1,186,500)
Amount -- -- -- ($118,000) ($ 118,000)
--------- ------ ------- -------- ---------
Total shareholders' equity (deficit) $4,097,000 ($ 22,000) $ 168,000 ($118,000) ($ 667,000)
========= ====== ======= ======= ========
(concluded)
</TABLE>
See notes to consolidated financial statements.
F-11
<PAGE>
Consolidated Technology Group, Ltd. and Subsidiaries
Consolidated Statement of Shareholders Equity
for the Year Ended December 31, 1997
<TABLE>
<CAPTION>
Balance Conversion of Stock Issued in
at Series A Preferred Lieu of Cash
December 31, Stock Payment
1996 (footnote 12) (footnote 12) Net Loss
---- ------------- -------------- --------
<S> <C> <C> <C> <C>
Preferred stock $1.00 par value,
6% Series A, Authorized
77,713 shares:
Shares 22,891 (22,891) -- --
Amount $ 23,000 ($ 23,000) -- --
Preferred stock, $1.00 par value,
$3.50 and $.10, Series B and E,
8,000 shares authorized each:
Shares 262 -- -- --
Amount $ 1,000 -- -- --
Preferred stock, $1.00 par value,
$8.00 subordinated Series F,
6,000 shares authorized:
Shares 2,700 -- -- --
Amount $ 2,000 -- -- --
----------- ------ ----- -----
Total Preferred stock, par value $ 26,000 ($ 23,000) -- --
Additional paid-in capital
preferred stock $ 92,000 ($ 92,000) -- --
Common stock, $0.01 par value,
50,000,000 shares authorized
Shares 45,795,828 2,891,943 1,223,225 --
Amount $ 458,000 $ 29,000 $ 12,000 --
Additional paid-in capital $52,005,000 $ 86,000 $ 61,000 --
Accumulated other comprehensive
income (expense) $ 102,000 -- -- --
Accumulated deficit ($50,218,000) -- -- ($ 12,665,000)
----------- ---------- ------ ----------
Total shareholders' equity $ 2,465,000 $ -- $ 73,000 ($ 12,665,000)
=========== ========== ====== ==========
(continued)
</TABLE>
See notes to consolidated financial statements.
<PAGE>
Consolidated Technology Group, Ltd. and Subsidiaries
Consolidated Statement of Shareholders Equity
for the Year Ended December 31, 1997
<TABLE>
<CAPTION>
Unrealized Loss Unrealized
on Foreign Investment Balance at
Exchange Holding Losses December 31,
Translation (footnote 5) 1997
----------- ------------ ----
<S> <C> <C> <C>
Preferred stock $1.00 par value,
6% Series A, Authorized
77,713 shares:
Shares -- -- --
Amount -- -- --
Preferred stock, $1.00 par value,
$3.50 and $.10, Series B and E,
8,000 shares authorized each:
Shares -- -- 262
Amount -- -- $ 1,000
Preferred stock, $1.00 par value,
$8.00 subordinated Series F,
6,000 shares authorized:
Shares -- -- 2,700
Amount -- -- $ 2,000
----- ----- -----
Total Preferred stock, par value -- -- $ 3,000
Additional paid-in capital
preferred stock -- -- --
Common stock, $0.01 par value,
50,000,000 shares authorized
Shares -- -- 49,910,996
Amount -- -- $ 499,000
Additional paid-in capital -- -- $ 52,152,000
Accumulated other comprehensive
income (expense) ($ 86,000) ($ 132,000) ($ 116,000)
Accumulated deficit -- -- ($ 62,883,000)
------ -------- ----------
Total shareholders' equity ($ 86,000) ($ 132,000) ($ 10,345,000)
====== ======= ==========
(concluded)
</TABLE>
See notes to consolidated financial statements.
F-12
<PAGE>
Consolidated Technology Group, Ltd. and Subsidiaries
Consolidated Statement of Shareholders Equity
for the Year Ended December 31, 1996
<TABLE>
<CAPTION>
Conversion of Stock Issued in
Balance at Series A Preferred Lieu of Cash Stock Issued for
December 31, Stock Payment Offerings
1995 (footnote 12) (footnote 12) (footnote 12)
---- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Preferred stock $1.00 par value,
6% Series A, Authorized
77,713 shares:
Shares 66,596 (43,705) -- --
Amount $ 67,000 ($ 44,000) -- --
Preferred stock, $1.00 par value,
$3.50 and $.10, Series B and E,
8,000 shares authorized each:
Shares 262 -- -- --
Amount $ 1,000 -- -- --
Preferred stock, $1.00 par value,
$8.00 subordinated Series F,
6,000 shares authorized:
Shares 2,700 -- -- --
Amount $ 2,000 -- -- --
------ ------ ----- -----
Total Preferred stock, par value $ 70,000 ($ 44,000) -- --
Additional paid-in capital
preferred stock $ 266,000 ($ 174,000) -- --
Common stock, $0.01 par value,
50,000,000 shares authorized
Shares 26,655,071 5,690,757 200,000 13,250,000
Amount $ 267,000 $ 57,000 $ 2,000 $ 132,000
Additional paid-in capital $ 51,021,000 $ 161,000 $ 43,000 $ 780,000
Accumulated other comprehensive
income (expense) $ 72,000 -- -- --
Accumulated deficit ($ 40,648,000) -- -- --
---------- ----- ------ -------
Total shareholders' equity $ 11,048,000 $ -- $ 45,000 $ 912,000
========== ===== ====== =======
(continued)
</TABLE>
See notes to consolidated financial statements.
<PAGE>
Consolidated Technology Group, Ltd. and Subsidiaries
Consolidated Statement of Shareholders Equity
for the Year Ended December 31, 1996
<TABLE>
<CAPTION>
Unrealized Gain Unrealized
on Foreign Investment Balance at
Exchange Holding Losses December 31,
Net Loss Translation (footnote 5) 1996
---------- ----------- ------------ ----
<S> <C> <C> <C> <C>
Preferred stock $1.00 par value,
6% Series A, Authorized
77,713 shares:
Shares -- -- -- 22,891
Amount -- -- -- $ 23,000
Preferred stock, $1.00 par value,
$3.50 and $.10, Series B and E,
8,000 shares authorized each:
Shares -- -- -- 262
Amount -- -- -- $ 1,000
Preferred stock, $1.00 par value,
$8.00 subordinated Series F,
6,000 shares authorized:
Shares -- -- -- 2,700
Amount -- -- -- $ 2,000
----- ----- ----- -----------
Total Preferred stock, par value -- -- -- $ 26,000
Additional paid-in capital
preferred stock -- -- -- $ 92,000
Common stock, $0.01 par value.
50,000,000 shares authorized
Shares -- -- -- 45,795,828
Amount -- -- -- $ 458,000
Additional paid-in capital -- -- -- $ 52,005,000
Accumulated other comprehensive
income (expense) -- $ 103,000 ($ 73,000) $ 102,000
Accumulated deficit ($ 9,570,000) -- -- ($ 50,218,000)
----------- --------- -------- -----------
Total shareholders' equity ($ 9,570,000 $ 103,000 ($ 73,000) $ 2,465,000)
=========== ========= ======== ===========
(concluded)
</TABLE>
See notes to consolidated financial statements.
F-13
<PAGE>
Page is intentionally blank
F-14
<PAGE>
Consolidated Technology Group, Ltd. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(1) Summary of Significant Accounting Policies
Nature of Operations - Consolidated Technology Group, Ltd., (the "Company",
"Consolidated" or the "Registrant") is a publicly held holding company which
has, or has had, controlling interests, (either directly or indirectly through
its wholly owned subsidiary, SIS Capital Corp., ("SISC")), in its consolidated
subsidiaries which previously operated in various business segments throughout
the United States. During 1998 and 1997, the Company discontinued seven
operating segments and in 1998 its one remaining segment was required to be
converted to an unconsolidated equity method investment. As a result, as of
December 31, 1998, the Company has no operating segments.
(A) The unconsolidated affiliate of the Company as of December 31, 1998 is
as follows:
Netsmart Technologies, Inc., ("Netsmart"), through its wholly owned
subsidiary, Creative Socio-Medics, Corp., ("CSM") is a supplier of
enterprise wide software solutions for the mental health and behavioral
health market place. Netsmart is a publicly held company, whose stock
is traded on the NASDAQ stock market under the ticker symbol "NTST" and
as of December 31, 1998, the Company owned approximately 36%, or
992,624 shares, of the common stock of Netsmart. As of December 31,
1997, the Company and Netsmart shared two common directors and the same
Chief Executive Officer ("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, up until December 31, 1997, Netsmart was
considered a consolidated affiliate for accounting purposes. In April
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 is presented in the financial
statements as an unconsolidated affiliate for the year ended December
31, 1998. [See footnote (23) "Subsequent Events - Netsmart Stock
Sale".]
(B) The subsidiaries that were discontinued during 1998 are as follows (see
footnote 15):
(i) Trans Global Services, Inc., ("Trans Global"), and its subsidiaries,
Avionics-Research Holdings, ("Avionics"), and Resource Management
International, Inc., ("RMI"), which provide engineers, designers and
technical personnel on a temporary basis pursuant to contracts with
major corporations, was formerly the Contract Engineering Services
segment. Trans Global is a publicly held company whose stock is traded
on the NASDAQ stock market under the ticker symbol "TGSI". As of
December 31, 1998, the Company owned approximately 40%, or 1,529,994
shares, of the outstanding common stock of Trans Global. At December
31, 1997, the Company and Trans Global shared a common 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. In April 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. See
footnotes 12 and 21 in connection with obligations and potential
obligations the Company has to Trans Global. The Company and Trans
Global entered into an agreement whereby SISC currently intends to
transfer 1,150,000 shares of Trans Global common stock that it holds to
Trans Global and Trans Global will transfer the preferred shares of
Consolidated that it holds to the Company. As a result of the agreement
between the Company and Trans Global, Trans Global is presented as a
discontinued segment as of December 31, 1998. [See footnote (23)
"Subsequent Events - Trans Global Agreement".]
F-15
<PAGE>
Consolidated Technology Group, Ltd. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(ii) Arc Networks, Inc., ("Arc Networks"), a privately held company, which,
among other things, installs telephonic network systems and buys and
resells local telephone service, was formerly the Telecommunications
segment. As of December 31, 1998, the Company owned approximately 67%,
or 6,392,800 shares, of the outstanding common stock of Arc Networks
and as such, Arc Networks is treated as a consolidated subsidiary. 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
December 31, 1998. [See footnote (23) "Subsequent Events - Arc Networks
Stock Sale".]
(C) The subsidiaries that were discontinued during 1997 are as follows (see
footnote 15):
(i) International Magnetic Imaging, Inc., ("IMI") which performs magnetic
resonance imaging and other medical diagnostic services, was formerly
the Medical Diagnostics segment.
(ii) Sequential Electronic Systems, Inc. ("SES"), and S-Tech, Inc.
("S-Tech") which are subsidiaries of SES Holdings Inc., ("SESH") which
is a wholly owned subsidiary of SpecTec, Inc. ("SpecTec") and Televend,
Inc., ("Televend"), and FMX, Corp. ("FMX"). This group of companies
which manufacture and sell products such as devices that measure
distance and velocity, instrumentation devices, debit card vending
machines, prepaid telephone calling cards and finger print
identification products, were formerly, the Electro-Optical and
Electro-Mechanical Products Manufacturing segment.
(iii) 3D Holdings International, Inc., (3D"), and its subsidiaries, 3D
Technology, Inc., ("3D Tech"), 3D Imaging International, Inc., ("3DI"),
and Vero International, Inc., ("Vero"), are companies that provide
three dimensional imaging services that are used in a variety of
applications, such as prototype building and reverse engineering, were
formerly the Three Dimensional Products and Services segment.
(iv) WWR Technology, Inc., ("WWR"), a subsidiary of SESH which manufactures
and sells a professional line of loudspeakers, was formerly the Audio
Products Manufacturing segment.
(v) The Trinity Group, Inc. ("Trinity") which provides a variety of
financial and business related services, was formerly the Business
Consulting Services segment.
Principles of Consolidation - The accompanying consolidated financial statements
include the accounts of the Company and all of its majority-owned and voting
controlled subsidiaries. Investments in 20% to 50% owned companies in which the
Company does not have effective control are accounted for by the equity method.
All significant intercompany balances and transactions have been eliminated.
Cash and Cash Equivalents - The Company considers all highly liquid instruments
purchased with an original maturity of three months or less to be cash
equivalents.
Marketable Securities - All of the Company's investments have readily
determinable fair values, are categorized as available-for-sale and are recorded
at fair value. Unrealized gains and losses are recorded as a separate component
of stockholders' equity and are included in the statement of other comprehensive
income (loss). Additionally, available-for-sale investments that are deemed to
be permanently impaired are written down to fair market value and such write
down is charged to earnings as a realized loss. All of the marketable securities
that are classified as current assets consist of U.S. Treasury Bills that have a
maturity date of six months from the date of purchase.
F-16
<PAGE>
Consolidated Technology Group, Ltd. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Property, Plant and Equipment - Property, plant and equipment are carried at
cost less allowances for accumulated depreciation. The cost of furniture and
equipment held under capital leases is equal to the lower of the net present
value of the minimum lease payments or the fair value of the leased property at
the inception of the lease. Depreciation is computed generally by the
straight-line method at rates adequate to allocate the cost of applicable assets
over their expected useful lives which ranges from 2-7 years for furniture and
fixtures. Leasehold improvements and capitalized lease obligations are amortized
over periods not in excess of applicable lease terms. Amortization of
capitalized leases and leasehold improvements is included with depreciation
expense.
Research and Development - The Company had no research and development expense
for 1998. The Company's prior period research and product development activities
were conducted by Netsmart, which effective January 1, 1998 is accounted for as
an investment in an unconsolidated affiliate. Netsmart's research and
development expense for 1997 and 1996 approximated $217,000 and $278,000,
respectively. All of the Company's research and development activities were
company financed and were expensed as incurred.
Intangible Assets - Intangible assets consist of capitalized software
development costs and customer lists.
Capitalized Software Development Costs - The capitalized software development
costs as of December 31, 1997 are all attributed to Netsmart, which effective
January 1, 1998 is accounted for as an investment in an unconsolidated
affiliate. As of December 31, 1998, the Company does not have any capitalized
software development costs. Capitalization of computer software development
costs begins upon the establishment of technological feasibility. Technological
feasibility for the Company's computer software products is generally based upon
achievement of a detailed program design free of high risk development issues.
The establishment of technological feasibility and the ongoing assessment of
recoverability of capitalized computer software development costs requires
considerable judgment by management with respect to certain external factors,
including, but not limited to, technological feasibility, anticipated future
gross revenues, estimated economic life and changes in software and hardware
technology. Amortization of capitalized software development costs commences
when the related products become available for general release to customers.
Amortization is provided on a product by product basis using the straight-line
method over the estimated economic life of the product, estimated to be
approximately 2-5 years. Research and development costs incurred to establish
technological feasibility are expensed as incurred.
Customer Lists - The customer lists as of December 31, 1997 are all attributed
to Netsmart, which effective January 1, 1998 is accounted for as an investment
in an unconsolidated affiliate. As of December 31, 1998, the Company does not
have any customer lists. Customer lists are being amortized over twelve to
fifteen years on the straight-line basis.
Impairment - Certain long-term assets of the Company including the intangible
assets described above, are reviewed on a quarterly basis as to whether their
carrying value has become impaired. Management considers assets to be impaired
if the carrying value exceeds the future projected net cash flows from related
operations. If impairment is deemed to exist, the assets will be written-down to
fair value or projected net cash flows from related operations. Management also
re-evaluates the periods of amortization to determine whether subsequent events
and circumstances warrant revised estimates of useful lives. Impairment and the
method of projecting net cash flows (discounted or undiscounted and without
interest charges) is determined at the subsidiary level. Based on this
evaluation, as of December 31, 1998, the balances as reported in the
accompanying balance sheet are expected to be fully recoverable. However, it is
at least reasonably possible that management's estimate of future cash flows may
change in the near term, thus resulting in an acceleration in or complete
write-off of the unamortized balance of certain long lived assets. During 1997,
Netsmart wrote-off impaired assets approximating $415,000, which is included in
selling, general and administrative expense.
F-17
<PAGE>
Consolidated Technology Group, Ltd. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Deferred Offering Costs - Deferred offering costs represent amounts paid or
accrued for costs associated with stock offerings. During 1996, Netsmart
completed a public offering in which offering costs of $1.4 million were
incurred and offset against the total gross proceeds of the offering.
Minority Interest - For consolidated subsidiaries that are not wholly owned the
Company eliminates the minority interest portion of the related profits and
losses. The allocable losses of such minority interests is in excess of the
Company's investment in such subsidiaries by approximately $1.5 million and $2.7
million, respectively, at December 31, 1998 and 1997. For 1998, the minority
interest in excess of the Company's investment relates to Arc Networks and for
1997, $753,000 relates to Netsmart, which effective January 1, 1998 is accounted
for as an investment in an unconsolidated affiliate, $1 million relates to Arc
Networks, $644,000 relates to 3D Holdings, $291,000 relates to SESH and its
subsidiaries and $33,000 relates to IMI.
Revenue Recognition - All of the Company's revenue in 1997 and 1996 was
generated by Netsmart. Netsmart recognizes revenue principally from the
licensing of its software, and from consulting and maintenance services rendered
in connection with such licensing activity. Revenue from licensing is recognized
under the terms of the licenses. Consulting revenue is recognized when the
services are rendered. Revenues from fixed price software development contracts
and revenue under license agreements, which require significant modification of
the software package to the customer's specification, are recognized on the
estimated percentage-of-completion method. Using the units-of-work performed
method to measure progress towards completion, revisions in cost estimates and
recognition of losses on these contracts are reflected in the accounting period
in which the facts become known. Contract terms provide for billing schedules
that differ from revenue recognition and give rise to excess of accumulated
costs over related billings and interim billings in excess of costs and
estimated profits. It is reasonably possible that the excess of accumulated
costs over related billings and interim billings in excess of costs and
estimated profits may be subject to change in the near future. Revenue from the
software package license agreements without significant vendor obligation is
recognized upon delivery of the software. Information processing revenues are
recognized in the period in which the service is provided. Maintenance contract
revenue is recognized on a straight-line basis over the life of the respective
contract. Software development revenues from time-and-materials contracts are
recognized as services are performed.
Netsmart's costs, estimated profits, and billings on uncompleted contracts are
summarized as follows:
<TABLE>
<CAPTION>
December 31,
1998 1997
---- ----
<S> <C> <C>
Costs Incurred on Uncompleted Contracts -- $ 2,730,000
Estimated Profits -- 1,293,000
Less Billings to Date -- (4,550,000)
---------
Net -- ($ 527,000)
=======
Excess of Accumulated Costs Over Related Billings -- $ 542,000
Interim Billings in Excess of Costs and Estimated Profits -- (1,069,000)
---------
Net -- ($ 527,000)
=======
</TABLE>
The 1998 balances include no such amounts since effective January 1, 1998;
Netsmart is accounted for as an investment in an unconsolidated affiliate.
Earnings (Loss) Per Share -Basic earnings (loss) per share reflects the amount
of earnings or loss for the period available to each share of common stock
outstanding during the reporting period. Diluted earnings (loss) per share
reflects basic earnings (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. increasing
F-18
<PAGE>
Consolidated Technology Group, Ltd. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
earnings per share or reducing loss per share). The dilutive effect of
outstanding options and warrants and their equivalents are reflected in dilutive
earnings per share by the application of the treasury stock method which
recognizes the use of proceeds that could be obtained upon the exercise of
options and warrants in computing diluted earnings per share. It assumes that
any proceeds would be used to purchase common stock at the average market price
of the common stock during the period exceeds the exercise price of the options
or warrants. As of December 31, 1998, the Company does not have any dilutive
items and 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 all of 1998, 1997 and 1996 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 December 31, 1998.
Fair Value of Financial Instruments - Generally accepted accounting principles
require disclosing the fair value of financial instruments to the extent
practicable for financial instruments, which are recognized or unrecognized in
the balance sheet. The fair value of the financial instruments disclosed herein
is not necessarily representative of the amount that could be realized or
settled, nor does the fair value amount consider the tax consequences of
realization or settlement. In assessing the fair value of these financial
instruments, the Company used a variety of methods and assumptions, which were
based on estimates of market conditions and risks existing at that time. For
certain instruments, including cash and cash equivalents, trade receivables and
trade payables and officer advances, it was estimated that the carrying amount
approximated fair value for the majority of these instruments because of their
short maturities. For investment in marketable securities, fair value is
estimated based on current quoted market price. Management estimates that the
fair value of its long-term obligations is as follows:
<TABLE>
<CAPTION>
Carrying Amount Fair Value
December 31, December 31,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Debt maturing Within One Year $ 27,000 $ 965,000 $ 27,000 $ 965,000
====== ======= ====== =======
Long-term debt $ -- $ 139,000 $ -- $ 139,000
======= =======
</TABLE>
For 1997, approximately $935,000 of carrying amount and fair value relates to
Netsmart and 1998 includes no such amounts for Netsmart, which effective January
1, 1998 is accounted for as an investment in unconsolidated affiliate.
Concentration of Credit Risk - Financial instruments, which potentially subject
the Company to concentrations of credit risk, are cash and cash equivalents and
accounts receivable arising from normal business activities. The Company
routinely assesses the financial strength of its customers and based upon
factors surrounding the credit risk of its customers, establishes an allowance
for uncollectible accounts, and as a consequence, believes that its accounts
receivable credit risk exposure beyond such allowances is limited. The Company
does not require collateral or other security to support financial instruments
subject to credit risk. The Company places its cash and cash equivalents with
high credit quality financial institutions. The amount on deposit in any one
institution that exceeds federally insured limits is subject to credit risk. As
of December 31, 1998 the Company had no cash balances in excess of federally
insured limits and as of December 31, 1997 such amounts approximated $840,000.
For 1996 Netsmart received 22%, or $1.9 million of its revenue from one customer
and received $2.8 million and $2.6 million in revenue for 1997 and 1996,
respectively, from contracts with government agencies.
Stock Options and Similar Equity Instruments - On January 1, 1996, the Company
adopted the disclosure requirements of Statement of Financial Accounting
Standards ("SFAS") No. 123, "Accounting for Stock Based Compensation," for stock
options and similar equity instruments (collectively "Options") issued to
employees. SFAS No. 123 allows for the option of recording stock options to
employees using Accounting Principles Board ("APB") Opinion No. 25 "Accounting
for Stock Issued to Employees" while disclosing the effects, on a pro forma
basis, of using SFAS No. 123 in the footnotes to the financial statements. The
Company will continue to apply the intrinsic value based method of accounting
for options issued to employees prescribed by APB Opinion No. 25, rather than
the fair value based method of accounting prescribed by SFAS No. 123. SFAS No.
123 also applies to
F-19
<PAGE>
Consolidated Technology Group, Ltd. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
transactions in which an entity issues its equity instruments to acquire goods
or services from non-employees. Those transactions must be accounted for based
on the fair value of the consideration received or the fair value of the equity
instruments issued whichever is more reliably measurable.
Use of Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Reclassifications - Certain 1997 and 1996 items have been reclassified to
conform to the December 31, 1998 presentation.
(2) Going Concern
From December 31, 1995 through December 31, 1997, the ability of the Company to
continue as a going concern has been in doubt. During that period the Company
made attempts at raising capital, or assisting its subsidiaries in raising
capital, at levels that would allow the subsidiaries to operate at profitable
levels. Such efforts were unsuccessful for a majority of its subsidiaries and
the Company was unable to generate positive cash flow. In 1998 and 1997 the
Company disposed of all of its operating entities including IMI. The April 2,
1998, disposal of IMI generated approximately $15 million in net cash and
disposed of approximately $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, $2 million was loaned to Arc Networks and
$1.6 million was used to extinguish the remaining obligations of IMI. During
1998, approximately $137,000 was paid for litigation settlement costs and $1
million for professional fees primarily related to the negotiation of the
settlements and approximately $600,000 was used for the ongoing operations of
the Company. As of December 31, 1998, the Company had cash of $179,000 and
marketable securities approximating $5.1 million invested in US Treasury Bills.
Excluding the net current liabilities of discontinued segments, the Company had
positive working capital of approximately $3.8 million. As of the date of this
report the Company does not have definitive plans for the use of its existing
working capital, however, the Company believes that it has sufficient resources
to enable it to operate for a period greater than one year from December 31,
1998.
(3) Receivables, Net of Allowances
<TABLE>
<CAPTION>
December 31,
1998 1997
---- ----
<S> <C> <C>
Receivables -- $ 2,532,000
Less: Allowance for bad debts -- (348,000)
---------
Receivables, net of allowances -- $ 2,184,000
=========
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
<S> <C> <C> <C>
The changes in the allowance for bad debts are as follows: 1998 1997 1996
---- ---- ----
Balance at beginning of period -- $ 288,000 $ 146,000
Provision for the period -- 814,000 260,000
Write-offs for the period -- (754,000) (118,000)
------- -------
Balance at end of periods -- $ 348,000 $ 288,000
======= =======
</TABLE>
All of the above trade receivable activity relates to Netsmart which
effective January 1, 1998 is accounted for as an investment in an unconsolidated
affiliate.
F-20
<PAGE>
Consolidated Technology Group, Ltd. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(4) Receivables, Related Parties
In 1997, SISC sold 258,333 common shares of Trans Global to the president of
Trans Global at $1.67 per share, the fair market value of the Trans Global
common stock on the date of sale. Payment by the president of Trans Global for
such shares is evidenced by a $420,000, non-recourse, non-interest bearing,
promissory note from the president of Trans Global due 2002.
During 1998 and 1997, the Company wrote-off approximately $135,000 and $345,000,
respectively of amounts due from Universal International, Inc., a company
affiliated with the former CEO and Secretary of the Company. During 1996 the
Company wrote-off approximately $95,000 of amounts due from Fingermatrix a
company affiliated with the former CEO of the Company.
(5) Marketable Securities
<TABLE>
<CAPTION>
December 31,
1998 1997
---- ----
<S> <C> <C>
Current Marketable Securities
Cost Basis, U.S. Treasury Bills (due April 1, 1999) $ 5,040,000 --
Net Unrealized Holding Gain (Loss) on Marketable Securities 52,000 --
---------
Market Value 5,092,000 --
=========
Long-term Marketable Securities
Cost Basis, Stocks $ 2,000 $ 135,000
Net Unrealized Holding Gain (Loss) on Marketable Securities -- (116,000)
----- -------
Market Value $ 2,000 $ 19,000
===== ======
Change in Net Unrealized Holding Gain (Loss) on Marketable Securities:
Balance at the Beginning of the Period ($ 116,000) $ 16,000
Unrealized Holding Gain (Loss) 329,000 (132,000)
Reclassification for Realized Gain (Loss) on Sale of Securities (242,000) --
Recognize Permanent Decline in Value of Stocks 81,000 --
------ ------------
Balance at End of Period 52,000 ($ 116,000)
====== =======
</TABLE>
For purposes of determining gain or (loss) on the sale of securities, the cost
is based on the average cost of all shares of each such security held at the
date of sale. Gain or (Loss) on security sales is calculated as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Proceeds from Security Sales $ 8,968,000 $ 455,000 $ 1,244,000
Cost of Securities Sold 8,774,000 823,000 421,000
--------- ------- -------
Gain (Loss) on Sale of Marketable Securities 194,000 (368,000) 823,000
Permanent Decline in Marketable Securities (81,000) -- --
------- ------- -------
Net Gain (Loss) on Marketable Securities $ 113,000 ($ 368,000) 823,000
======= ======= =======
</TABLE>
F-21
<PAGE>
Consolidated Technology Group, Ltd. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(6) Property, Plant and Equipment
<TABLE>
<CAPTION>
December 31,
1998 1997
---- ----
<S> <C> <C>
Furniture and Office Equipment 1,000 642,000
Leasehold Improvements -- 182,000
----- -------
Cost 1,000 824,000
Less: Accumulated Depreciation and Amortization (1,000) (483,000)
----- -------
Net -- 341,000
----- -------
Equipment Held Under Capital Lease Obligations -- 50,000
Less: Accumulated Amortization ( --) (35,000)
-- ------
Net -- 15,000
----- -------
Property, Plant and Equipment, Net $ -- $ 356,000
== =======
</TABLE>
Depreciation expense charged to operations was $8,000, $187,000 and $162,000 for
1998, 1997 and 1996, respectively. All of the property, plant and equipment
serve as collateral for debt and capital lease obligations. The 1997 balances
includes net property, plant and equipment of $308,000 related to Netsmart and
no such amounts in 1998 for Netsmart, which effective January 1, 1998 is
accounted for as an investment in an unconsolidated affiliate. Additionally,
Netsmart's depreciation expense for 1997 and 1996 amounted to $170,000 and
$146,000, respectively. During 1998, the Company disposed of fixed assets having
a net book value of approximately $40,000 for no consideration.
(7) Intangible Assets
December 31,
1998 1997
---- ----
Capitalized Software Development Costs -- $ 326,000
Less: Accumulated Amortization -- (143,000)
-------
Capitalized Software Development Costs, Net -- $ 183,000
=======
Customer Lists -- $ 4,106,000
Less: Accumulated Amortization -- (1,039,000)
---------
Customer Lists, Net -- $ 3,067,000
=========
Amortization expense charged to operations was $431,000 and $377,000 for 1997
and 1996. During 1997, Netsmart wrote-off $415,000 of impaired capitalized
software development costs which is included in selling, general and
administrative expense. For 1997 all of the intangible assets relates to
Netsmart which effective January 1, 1998, Netsmart is accounted for as an
investment in an unconsolidated affiliate.
(8) Investment in Unconsolidated Affiliated Companies
Effective January 1, 1998, due to a change in effective control, the Company's
investment in Netsmart is accounted for as an investment in an unconsolidated
affiliate where as prior to 1998, Netsmart was accounted for as a consolidated
affiliate. On January 1, 1998, the cost basis of the Company's investment in
Netsmart differed from the underlying value of Netsmart's equity and such
difference was recorded as an increase in the additional paid-in capital of the
Company. The following calculates the amount applied to the Company's additional
paid-in capital.
F-22
<PAGE>
Consolidated Technology Group, Ltd. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Investment basis in Netsmart prior to converting Netsmart
to an equity method investment at January 1, 1998 $ 5,116,000
Company's share of Netsmart's losses while accounted for as
a consolidated affiliate prior to January 1, 1998 (10,122,000)
----------
(5,006,000)
Company's equity method share of Netsmart's equity at
January 1, 1998 690,000
-------
Adjustment to the Company's additional paid-in capital $ 5,696,000
=========
The Company's investment in Netsmart, under the equity method, amounted to
$760,000 as of December 31, 1998 and the Company's share of Netsmart's income
amounted to $71,000 for the year ended December 31, 1998. [See footnote (23)
"Subsequent Events - Netsmart Stock Sale".] The results of operations and
financial position of Netsmart is summarized as follows:
Year Ended December 31,
Condensed Statement of 1998 1997 1996
Operations Information: ---- ---- ----
Net revenues $ 9,569,000 $ 7,882,000 $ 8,541,000
========== ========== ==========
Gross profit $ 5,084,000 $ 1,727,000 $ 1,332,000
========== ========== ==========
Net income (loss) $ 196,000 ($ 3,459,000) ($ 6,599,000)
========== ========== ==========
December 31,
Condensed Balance Sheet Information: 1998 1997
---- ----
Current assets $ 6,958,000 $ 3,664,000
========= =========
Non-current assets $ 3,331,000 $ 3,676,000
========= =========
Current liabilities $ 6,948,000 $ 4,200,000
========= =========
Shareholders' equity $ 3,284,000 $ 3,140,000
========= =========
(9) Current and Long-term Debt Obligations
<TABLE>
<CAPTION>
December 31,
1998 1997
---- ----
<S> <C> <C>
Current Debt Obligations:
Asset-Based Lender - Accounts Receivable - Netsmart (a) -- $ 935,000
8% Promissory Note, due on demand (b) -- 20,000
-------
Total Current Debt Obligations -- $ 955,000
=======
Subordinated Debt:
15% Promissory Notes, interest and principle due July 1999 (c) $ 27,000 $ 139,000
Current Portion of Subordinated Debt 27,000 --
------ -------
Long-term Subordinated Debt $ -- $ 139,000
====== =======
Notes Payable, Related Parties:
Advances from the former CEO's wife (d) -- 10,000
======
Total Debt Obligations $ 27,000 $ 1,104,000
====== =========
</TABLE>
(a) Effective January 1, 1998 Netsmart is accounted for as an investment in an
unconsolidated affiliate (see footnote 8) and as such Netsmart's debt is not
included in the December 31, 1998 balance sheet. The following discusses the
debt of Netsmart as of December 31, 1997. In July 1997, Netsmart modified its
existing accounts receivable financing agreement with an asset-based lender,
whereby Netsmart can borrow up to 80% of eligible receivables and pays interest
at the prime rate plus 8.5% and a fee equal to 0.625% of the amount of the
invoice. All of the accounts receivable and property and equipment of Netsmart
collateralize this note. Netsmart's weighted average interest rate on this
short-term borrowing outstanding for 1997 was approximately 22%.
F-23
<PAGE>
Consolidated Technology Group, Ltd. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(b) In 1997, SISC received a $20,000 loan from an unrelated individual in order
to fund a development stage company. The development stage company had nominal
activity and in 1998 all further plans to fund the development stage company
were aborted and the loan was paid off in April 1998.
(c) In July 1997, the Company issued the 15% subordinated promissory notes. In
April 1998, the Company repaid $112,000 of such notes and the remainder is due
in July 1999.
(d) In 1997, the Company received a $10,000 advance from the wife of the former
CEO which was repaid in April 1998 without interest.
(10) Lease Obligations
Capitalized Lease Obligations - All of the capitalized lease obligations
included in the December 31, 1997 balance sheet relate to Netsmart, which
effective January 1, 1998 is classified as an investment in an unconsolidated
affiliate. The Company does not have any capitalized lease obligations as of
December 31, 1998
Operating Lease Obligations - The Company leases real estate for certain of its
operational and administrative facilities under noncancelable operating leases
expiring during the next fifteen years. The real estate leases contain clauses
which permit adjustments of lease payments based upon changes in the "Consumer
Price Index", options to renew the leases for periods up to an additional
fifteen years and additional payments for a proportionate share of real estate
taxes and common area operating expenses. The Company's present executive
offices are located at 160 Broadway, New York, NY 10038, which it occupies
pursuant to a lease expiring in February 2003 and its accounting offices are
located at 2424 North Federal Highway, Boca Raton, FL 33431, which it occupies
pursuant to a lease expiring in February 2000. The current base rent for such
premises approximates $10,000 per month.
Minimum future rental payments under noncancelable operating leases having a
remaining term in excess of one year are as follows:
1999 $ 89,000
2000 89,000
2001 89,000
2002 89,000
2003 89,000
-------
Total $ 445,000
=======
Rent expense for 1998, 1997 and 1996 approximated $81,000, $441,000 and,
$458,000, respectively. A portion of the Company's rent during 1998, 1997 and
1996 was charged to subsidiaries that have been discontinued. Additionally, rent
expense for 1997 and 1996 includes $341,000 and $358,000, respectively, of rent
expense related to Netsmart.
(11) Income Taxes
Under SFAS No. 109 "Accounting for Income Taxes", deferred income taxes reflect
the net tax effects of (a) temporary differences between the carrying amounts of
assets and liabilities for financial reporting purposes and the amounts used for
income tax purposes, and (b) operating loss and tax credit carryforwards. The
tax effects of significant items composing the Company's net deferred tax
liability as of December 31, 1998 and 1997 are as follows:
F-24
<PAGE>
Consolidated Technology Group, Ltd. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
December 31,
1998 1997
---- ----
Deferred Tax Assets:
Federal and State Net Operating Loss Carryforward $ 6,100,000 $ 7,900,000
Valuation Allowance ($ 6,100,000) ($ 7,900,000)
---------- ----------
Net Deferred Tax Asset -- --
========== ==========
The Company's deferred tax asset valuation allowance was $6.1 million and $7.9
million as of December 31, 1998 and 1997, respectively. The decrease in the
valuation allowance of $1.8 million for 1998 is comprised of the federal and
state net operating loss carryforwards.
The current and deferred income tax components of the (provision) benefit for
income taxes consist of the following:
Year Ended December 31,
1998 1997 1996
---- ---- ----
Current:
Federal -- -- --
State ($ 20,000) -- ($ 49,000)
------ ------
( 20,000) -- ( 49,000)
Deferred -- -- --
------ ------
Total ($ 20,000) -- ($ 49,000
====== == ======
The provision for income taxes varies from the amount computed by applying the
statutory rate for the reasons below:
Year Ended December 31,
1998 1997 1996
---- ---- ----
Provision Based on Statutory Rate 35.0% (35.0%) (35.0%)
Benefit of Graduated Rates (1.0%) 1.0% 1.0%
State Taxes (Net of Federal Benefit) 0.4% -- 0.5%
Increase in (Utilization) of Net
Operating Loss Carryforwards (34.0%) 34.0% 34.0%
---- ---- ----
0.4% 0.0% 0.5%
==== ==== ====
The Company's provision for income taxes is comprised of state income taxes for
1998 and 1996. The Company will have federal and state net operating loss
carryforwards of approximately $15.3 million. Pursuant to Section 382 of the
Internal Revenue Code, utilization of these losses may be limited if substantial
changes in Company ownership were to occur. The federal and state net operating
loss carryforwards expire in years 1999 through 2012 (the state expiration dates
vary based on individual state income tax laws).
(12) Capital Stock
Common Stock - As of December 31, 1998, the authorized number of shares of
common stock, par value $0.01 is 50,000,000 shares of which 49,053,996 shares
are issued, 47,867,496 shares are outstanding and 1,186,500 shares are held in
treasury. As of December 31, 1998 and 1997, 49,910,996 shares are issued and
outstanding.
Stock Issued in Lieu of Cash Payment - For 1998, 1997 and 1996 the Company
issued 333,333, 1,223,225 and 200,000 shares, respectively, in connection with
consulting and financing services valued at $80,000, $73,000 and $45,000,
respectively. The expense calculated was determined in accordance with Statement
of Financial Accounting Standards ("SFAS") No. 123.
F-25
<PAGE>
Consolidated Technology Group, Ltd. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Value of Common Stock Returned as Part of Termination Payments for Executive
Contracts - In connection with the termination of an executive's contract, the
Company received 1,190,000 shares of common stock previously issued to such
executive valued at $223,000, which was recorded as a reduction of contract
termination expense.
Regulation S Offerings - Pursuant to an offering in September 1996 made under
Regulation S of the Securities Act of 1933, as amended, the Company received net
proceeds of $912,000 in connection with the issuance of 13,250,000 shares of
common stock.
Conversion of Series A Preferred Stock - During 1997 and 1996, respectively, the
Company issued 2,891,943 and 5,690,757 shares of common stock upon the
conversion of 22,891 and 43,705 shares, respectively, of series A preferred
stock.
Preferred Stock - As of December 31, 1998, the authorized number of shares of
undesignated preferred stock, par value $1.00 per share, is 2,000,000 shares of
which 2,962 are issued and outstanding as of December 31, 1998 and 1997,
respectively.
Series A - The series A convertible preferred stock, which was all issued during
the period April 1993 through July 1993, bears a cumulative dividend of 6%, is
redeemable at any time at the option of the Company at a redemption price of $10
per share, and is convertible at the option of the holder at any time commencing
two years from the date of issuance, unless sooner called for redemption by the
Company at the rate of 130.208 (7,812.5 prior to 60:1 reverse split) shares of
common stock for each share of preferred stock. As of December 31, 1998, all of
the series A Preferred stock was converted.
Series B (170 shares issued and outstanding) - The Series B subordinated
preferred stock is redeemable at the option of the Company at the issue price of
$87.50 per share. The stock is entitled to a $3.50 annual dividend, which is
contingent upon after tax earnings in excess of $200,000. In the event of
involuntary liquidation, the holders may receive $87.50 per share and all
accrued dividends. Accrued dividends on the series B Preferred stock as of
December 31, 1998 approximated $595. No dividends were declared for 1998, 1997
and 1996.
Series E (92 shares issued and outstanding) - The Series E preferred stock is
entitled to an annual dividend of $.10 per share contingent upon after tax
earnings in excess of $200,000. Accrued dividends on the series E Preferred
stock as of December 31, 1998 approximated $9. No dividends were declared for
1998, 1997 and 1996.
Series F (2,700 shares issued and outstanding) - As consideration for granting
extensions on former debts, the Company issued, in 1984, 2,700 shares of
preferred stock at $1.00 per share. The nonvoting preferred stock, designated
series F, with a dividend rate of $8.00 per share, is redeemable at the option
of the Company after July 1993 for $1.00 per share. One share will be issued for
each $100 of principal indebtedness owed. The dividend is non-cumulative and is
payable within 100 days from the close of any year in which net income after tax
exceeds $500,000, and all dividends due on the series B preferred stock are paid
or provided for. Accrued dividends on the series F Preferred stock as of
December 31, 1998 approximated $22,000. No dividends were declared for 1998,
1997 and 1996.
Series G - The Company issued the Series G Preferred stock to Trans Global in
consideration for $2.1 million that another subsidiary of the Company owed to
Trans Global. Originally, the series G preferred stock converted automatically
on September 30, 1999 into such number of the Company's common stock as having a
value equaling $2.1 million. In March 1998, the Company amended its certificate
of incorporation, with the consent of Trans Global as the sole holder of the
series G preferred stock, to change the rights and preferences of such preferred
stock such that the conversion privileges were terminated and the series G
preferred stock became redeemable at an aggregate redemption price of $2.1
million. The series G preferred stock requires dividend payments at $42 per
share and are payable when declared by the Company's board of directors. No
dividends were declared during 1998 and accrued and unpaid dividends as of
December 31, 1998 approximated $137,000. Because the series G
F-26
<PAGE>
Consolidated Technology Group, Ltd. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Preferred stock is held solely by a consolidated subsidiary, all such amounts
eliminate in consolidation. The Company and Trans Global entered into an
agreement whereby SISC currently intends to transfer 1,150,000 shares of Trans
Global common stock that it holds to Trans Global and Trans Global will transfer
the preferred shares of Consolidated that it holds to the Company. [See footnote
(23) "Subsequent Events - Trans Global Agreement".]
(13) 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 December 31, 1998, the Company had repurchased 1,186,500 shares
in transactions with an aggregate value of $118,000. Treasury share changes for
the years ended December 31, 1998, 1997 and 1996 are as follows:
Year Ended December 31,
1998 1997 1996
---- ---- ----
Balance at beginning of year -- -- --
Stock purchases 1,186,500 -- --
Stock issuance activity -- -- --
---------
Balance at end of year 1,186,500 -- --
=========
(14) Series A Common Stock Purchase Warrant:
On September 30, 1994, in connection with the financing of the IMI acquisition,
the Company issued to a financing company, a warrant to purchase 1,000,000
shares of the Company's common stock at an exercise price of $0.75 per share.
This warrant is exercisable on or before September 30, 1999 and expires on
October 1, 1999. The number and kind of securities purchasable upon the exercise
of this warrant and the exercise price is subject to adjustment from time to
time upon the happening of (a) certain stock reclassification or consolidation
or merger events; (b) certain stock split transactions; or (c) certain dividend
declarations, such that the value of shares that would have been received upon
exercise of the warrant immediately prior to the above events is equivalent to
the value of shares receivable upon exercise of the warrant immediately
subsequent to the above events. The weighted average exercise price of such
warrants is $0.75 for each of 1998, 1997 and 1996 and the weighted average
remaining contractual life of such warrants as of December 31, 1998, 1997 and
1996 was 1 years, 2 years and 3 years, respectively.
(15) Discontinued Operations
During 1998, the Company discontinued the Contract Engineering Services and
Telecommunications segments, and during 1997, discontinued the Audio Products
Manufacturing, Three Dimensional Products and Services, Medical Diagnostics,
Electro-Optical and Electro-Mechanical Products Manufacturing and Business
Consulting Services segments. As a result, as of December 31, 1998, the Company
has no operating business segments. The following table summarizes the financial
statement information of the discontinued segments.
<TABLE>
<CAPTION>
December 31,
1998 1997
---- ----
<S> <C> <C>
Net Current Assets of Discontinued Segments:
Contract Engineering Services $ 926,000 $ 210,000
Electro-Optical and Electro-Mechanical Products Manufacturing
-- 1,044,000
------- ---------
$ 926,000 $ 1,254,000
======= =========
</TABLE>
F-27
<PAGE>
Consolidated Technology Group, Ltd. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31,
1998 1997
---- ----
<S> <C> <C>
Net Long-term Assets of Discontinued Segments:
Contract Engineering Services $ 3,791,000 4,200,000
Telecommunications 188,000 48,000
Medical Diagnostics -- 15,436,000
Electro-Optical and Electro-Mechanical Products Manufacturing
-- 180,000
Business Consulting Services -- 1,000
--------- ----------
$ 3,979,000 19,865,000
========= ==========
Net Current Liabilities of Discontinued Segments:
Telecommunications $ 3,463,000 2,790,000
Three Dimensional Products and Services 482,000 2,605,000
Medical Diagnostics 249,000 11,914,000
Electro-Optical and Electro-Mechanical Products Manufacturing -- 93,000
--------- ----------
$ 4,194,000 17,402,000
========= ==========
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Income (Loss) from Discontinued Operations
Contract Engineering Services $ 222,000 $ 1,023,000 ($ 607,000)
Telecommunications (2,709,000) (2,734,000) (1,635,000)
Audio Products Manufacturing -- (293,000) (893,000)
Three Dimensional Products and Services -- (1,636,000) (1,471,000)
Medical Diagnostics (577,000) (1,188,000) 1,446,000
Electro-Optical and Electro-Mechanical Products Manufacturing
-- (2,604,000) (2,164,000)
Business Consulting Services -- 221,000 263,000
Intercompany Transactions 135,000 112,000 444,000
--------- --------- ---------
($ 2,929,000) ($ 7,099,000) ($ 4,617,000)
========= ========= =========
Gain (Loss) on Disposal of Segments:
Audio Products Manufacturing -- $ 129,000 --
Three Dimensional Products and Services $ 1,941,000 (465,000) --
Medical Diagnostics 4,883,000 -- --
Electro-Optical and Electro-Mechanical Products Manufacturing
(31,000) -- --
Business Consulting Services 1,000 -- --
--------- -------
$ 6,792,000 ($ 336,000) --
========= =======
</TABLE>
(a) Contract Engineering Services - The Company and Trans Global entered into an
agreement whereby SISC currently intends to transfer 1,150,000 shares of Trans
Global common stock that it holds to Trans Global and Trans Global will transfer
the preferred shares of Consolidated that it holds to the Company. As a result
of the agreement between the Company and Trans Global, Trans Global is presented
as a discontinued segment as of December 31, 1998. [See footnote (23)
"Subsequent Events - Trans Global Agreement".] The Company anticipates that the
F-28
<PAGE>
Consolidated Technology Group, Ltd. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
discontinuation of Trans Global will result in a gain on disposal that would not
be recorded until the disposal occurs in 1999. The Company's share of Trans
Global's net losses from January 1, 1999 through the anticipated date of
disposal is estimated to be $128,000 and such amount is accrued as of December
31, 1998. The revenues of the Contract Engineering Services segment approximated
$67 million, $75.7 million and $63.6 million for the years ended December 31,
1998, 1997 and 1996, respectively. The operations of the Contract Engineering
Services segment are classified as income (loss) from the operations of a
discontinued segment. As of December 31, 1998 and 1997 the assets and
liabilities of the Contract Engineering Services segment included in the
Company's consolidated balance sheet consisted of the following. December 31,
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Cash $ 35,000 $ 328,000
Accounts receivable, net 3,923,000 5,472,000
Loans receivable 5,000 --
Prepaid expenses and other current assets 474,000 353,000
Property, plant and equipment 170,000 193,000
Goodwill 727,000 776,000
Customer lists, net 2,389,000 2,614,000
Deferred offering costs 236,000 --
Receivable, related parties 50,000 235,000
Other assets 219,000 382,000
--------- ----------
Total assets 8,228,000 10,353,000
--------- ----------
Accrued estimated losses through expected disposal date 128,000 --
Accounts payable and accrued expenses 267,000 742,000
Accrued payroll and related expenses 529,000 1,416,000
Income taxes payable 13,000 76,000
Current debt obligations 2,574,000 3,709,000
--------- ---------
Total liabilities 3,511,000 5,943,000
--------- ---------
Net assets to be disposed of $ 4,717,000 $ 4,410,000
========= =========
Presented in the balance sheet as follows:
Net current assets of discontinued segment $ 926,000 $ 210,000
Net long-term assets of discontinued segment 3,791,000 4,200,000
--------- ---------
Net assets to be disposed of $ 4,717,000 $ 4,410,000
=========== =========
</TABLE>
(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 December 31,
1998. [See footnote (23) "Subsequent Events - Arc Networks Stock Sale".] The
Company anticipates that the discontinuation of Arc Networks will result in a
gain on disposal that would 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 of disposal are estimated to be approximately $800,000 and such
amount is accrued as of December 31, 1998. The revenues of the
Telecommunications segment approximated $13.9 million, $9.6 million and $5.6
million for the years ended December 31, 1998, 1997 and 1996, respectively. The
operations of the Telecommunications segment are classified as income (loss)
from the operations of a discontinued segment. As of December 31, 1998 and 1997
the assets and liabilities of the Telecommunications segment included in the
Company's consolidated balance sheet consisted of the following.
F-29
<PAGE>
Consolidated Technology Group, Ltd. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31,
1998 1997
---- ----
<S> <C> <C>
Cash $ 193,000 $ 69,000
Accounts receivable, net 2,992,000 2,386,000
Excess of accumulated costs over related billings 159,000 100,000
Prepaid expenses and other current assets 98,000 33,000
Property, plant and equipment 125,000 85,000
Goodwill 240,000 --
Customer lists, net 53,000 --
Deferred offering costs 249,000 71,000
Other assets 86,000 50,000
--------- ---------
Total assets 4,195,000 2,794,000
--------- ---------
Accrued estimated losses through expected disposal date 800,000 --
Accounts payable and accrued expenses 5,320,000 3,099,000
Excess of accumulated billings over related costs 463,000 1,277,000
Current debt obligations 250,000 987,000
Current portion of capitalized lease obligations 20,000 15,000
Notes payable, related parties 52,000 --
Long-term debt 550,000 124,000
Capitalized lease obligations 15,000 34,000
--------- ---------
Total liabilities 7,470,000 5,536,000
--------- ---------
Net liabilities to be disposed of ($ 3,275,000) ($ 2,742,000)
========= =========
Presented in the balance sheet as follows:
Net long-term assets of discontinued segment $ 188,000 $ 48,000
Net current liabilities of discontinued segment (3,463,000) (2,790,000)
--------- ---------
Net liabilities to be disposed of ($ 3,275,000) ($ 2,742,000)
========= =========
</TABLE>
(c) 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 Audio Products Manufacturing segment's 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 through May 1997
approximated $1.2 million. The operations of WWR up to the date of the disposal
are classified as a loss from the operations of a discontinued segment.
(d) Three Dimensional Products and Services - Effective June 30, 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 for a gain of approximately $136,000 and wrote-off all of the
segment's remaining subsidiaries assets, consisting primarily of capitalized
product development costs and property, plant and equipment. The remaining
subsidiaries liabilities were reclassified as net current liabilities of a
discontinued segment and included an estimate of $250,000 for anticipated losses
from January 1, 1998 through March 31, 1998, the date that all operations of the
segment ceased and an estimated loss on disposal of the remaining subsidiaries
of approximately $601,000. During 1998, the Company revised its estimates and
determined that it may have to pay only $482,000 of the segment's remaining
liabilities and $1.1 million of liabilities that existed as of December 31, 1997
were written-off. During 1998, the Company recorded a $1.9 million gain on the
disposal of the segment which includes the recapture of the $601,000 estimated
loss on disposal that was recorded as of December 31, 1997. The revenues of the
Three-Dimensional Products and Services segment were approximately $92,000,
$281,000 and $839,000 for the years ended December 31, 1998, 1997 and 1996,
respectively. The operations of the Three Dimensional Products and Services
segment are
F-30
<PAGE>
Consolidated Technology Group, Ltd. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
classified as a loss from the operations of a discontinued segment. As of
December 31, 1998 and 1997 the liabilities of the Three-Dimensional Products and
Services segment included in the Company's consolidated balance sheet consisted
of the following.
<TABLE>
<CAPTION>
December 31,
1998 1997
---- ----
<S> <C> <C>
Accrued estimated losses through expected disposal date -- $ 250,000
Accrued estimated loss on disposal -- 601,000
Accounts payable and accrued expenses $ 130,000 1,031,000
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 ($ 482,000) ($ 2,605,000)
======= =========
</TABLE>
(e) 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
December 31, 1998, consisted of income taxes. The revenues of the Medical
Diagnostics segment approximated $6.8 million from January 1, 1998 through April
2, 1998 and approximated $29.4 million and $31.1 million for the years ended
December 31, 1997 and 1996, respectively. The operations of the Medical
Diagnostics segment are classified as income (loss) from the operations of a
discontinued segment. As of December 31, 1998 and 1997 the assets and
liabilities of the Medical Diagnostics segment included in the Company's
consolidated balance sheet consisted of the following.
December 31,
1998 1997
---- ----
Cash $ -- $ 1,813,000
Accounts receivable, net -- 9,802,000
Loans receivable -- 325,000
Prepaid expenses and other current assets -- 258,000
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 -- 736,000
----------
Total assets -- 37,554,000
----------
F-31
<PAGE>
Consolidated Technology Group, Ltd. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
December 31,
1998 1997
---- ----
Accrued estimated losses through expected disposal date -- 250,000
Accounts payable and accrued expenses -- 3,982,000
Accrued interest -- 814,000
Income taxes payable 249,000 249,000
Subordinated debt related parties -- 924,000
Current debt obligations -- 10,932,000
Current portion of subordinated debt -- 5,721,000
Current portion of capitalized lease obligations -- 1,240,000
Deferred interest -- 499,000
Long-term debt -- 7,711,000
Capitalized lease obligations -- 1,702,000
Subordinated debt -- 8,000
------- ----------
Total liabilities 249,000 34,032,000
------- ----------
Net assets (liabilities) to be disposed of ($ 249,000) $ 3,522,000
======= =========
Presented in the balance sheet as follows:
Net current liabilities of discontinued segment ($ 249,000) ($11,914,000)
Net long-term assets of discontinued segment -- 15,436,000
------- ---------
Net assets (liabilities) to be disposed of ($ 249,000) $ 3,522,000
======= =========
(f) 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 approximated $31,000. The revenues of the
Electro-Optical and Electro-Mechanical Products Manufacturing segment were $3.1
million and $2.4 million for the years ended December 31, 1997 and 1996,
respectively. The operations of the Electro-Optica and Electro-Mechanical
Products Manufacturing segment are classified as a 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 160,000
Other assets 20,000
---------
Total assets 2,337,000
---------
Accounts payable and accrued expenses 781,000
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 1,206,000
---------
Net assets to be disposed of $ 1,131,000
=========
F-32
<PAGE>
Consolidated Technology Group, Ltd. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
December 31,
1997
----
Presented in the balance sheet as follows:
Net current assets of discontinued segment $ 1,044,000
Net current liabilities of discontinued segment (93,000)
Net long-term assets of discontinued segment 180,000
-------
Net assets to be disposed of $ 1,131,000
=========
(g) 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 approximated $1,000. The revenues of the
Business Consulting Services segment were $508,000 and $388,000 for the years
ended December 31, 1997 and 1996, respectively. The operations of the Business
Consulting Services segment are classified as a loss from the operations of a
discontinued segment. As of December 31, 1997, the net 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 a
discontinued segment.
(16) Extraordinary Gain on Extinguishment of Debt
On August 12, 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 IMI. The Company paid approximately $1.9 million in full
settlement and satisfaction of the approximate $7.7 million outstanding balance
of such notes, 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 connection
with the settlement, the Company issued 333,000 shares of its common stock,
valued at $80,000, to the holders of the subordinated promissory notes in
satisfaction of IMI's contractual obligations under the agreements relating to
the 1994 acquisition of IMI. The Company recognized an extraordinary gain on
debt extinguishment of approximately $5.6 million for the year ended December
31, 1998 in connection with the debt settlement.
(17) Lafayette Settlement Agreement
On December 20, 1996, SISC entered into an agreement among SISC, DLB, Inc.
("DLB"), Lewis S. Schiller ("LSS"), and Lafayette Industries, Inc.
("Lafayette"), (the "Lafayette Purchase Agreement") pursuant to which SISC and
DLB transferred to Lafayette all of the issued and outstanding common stock of
SESH, in exchange for a controlling interest in Lafayette. The Company recorded
the transaction as a reverse acquisition. At the date of the Lafayette Purchase
Agreement, SESH was an 80% owned subsidiary of SISC. Lafayette issued to SISC
1,000 shares of Class A preferred stock which was convertible at a ratio that
would have given SISC a 65% ownership of Lafayette's fully diluted common stock
upon stockholder approval of an increase in the authorized number of common
shares of Lafayette. Contemporaneously with the reverse acquisition, Lafayette
issued 1,000 shares of Class B preferred stock which had a redemption value of
$6,750,000. The Series B preferred stock was issued as payment to SISC for
$4,000,000 of subordinated debt due to SISC and in exchange for the cancellation
of $2,750,000 of preferred stock of the underlying entities of SESH, which was
held by SISC. Lafayette's prior principal business, which was the manufacture
and sale of store fixtures, had been discontinued.
Lafayette's Form 10-KSB for the year ended December 31, 1996, filed April 15,
1997, included a disclaimer of opinion by Lafayette's independent certified
public accountants. This report disclosed that there was substantial doubt with
respect to Lafayette's ability to continue as a going concern. In addition,
Lafayette's accountants reported that they were unable to obtain written
representations from Lafayette's counsel regarding litigation relating, among
other things, to financial guarantees. Because of material uncertainties on the
part of the Company and SISC with respect to Lafayette's guarantees, pending
litigation, the accuracy of representations and warranties made by Lafayette in
the Lafayette Purchase Agreement, the accuracy and completeness of Lafayette's
financial
F-33
<PAGE>
Consolidated Technology Group, Ltd. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
statements with respect to material liabilities, Lafayette's financial condition
and other matters, all of which were brought to the attention of Lafayette by
SISC following the discovery thereof, SISC's and Lafayette's respective boards
of directors determined that, in order to avoid costly and time consuming
litigation, Lafayette and SISC would enter into an agreement providing for,
among other things, the following: (a) Lafayette's transfer to SPECTEC, Inc.,
("SPECTEC"), a majority owned subsidiary of SISC, and to DLB and LSS, as their
respective interests appeared, of all of Lafayette's interest in SESH acquired
by Lafayette pursuant to the Lafayette Purchase Agreement; (b) SISC's transfer
(or the transfer to Lafayette by any other holder) of all of the Class A
convertible preferred stock and series B redeemable preferred stock of Lafayette
issued by Lafayette in consideration of the purchase of the capital stock of
SESH under the Lafayette Purchase Agreement; (c) DLB's and LSS's waiver of their
respective rights, as provided for in the Lafayette Purchase Agreement, to
receive any shares of Lafayette Common Stock; (d) the cancellation of all
obligations for loans and/or advances by Lafayette to SESH or subsidiaries of
SESH and the treatment of the amount of any such loans and/or advances as
additional contributions to capital; (e) the indemnification by SPECTEC of
Lafayette, on a limited basis, from and against any losses or damages resulting
from claims by those investors who purchased from Lafayette 8,000,000 shares of
Lafayette's capital stock in private transactions between December 20, 1996 and
April 21, 1997; and (f) the delivery by SPECTEC to Lafayette of any of such
securities purchased by such investors which were delivered to such investors by
Lafayette. A Settlement Agreement containing the foregoing provisions was
consummated between Lafayette, SISC, DLB, LSS and SPECTEC as of April 21, 1997.
At the time of the reverse acquisition, Lafayette's prior operations were
discontinued and the Company's statement of operations for the years ended
December 31, 1997 and 1996 do not include any operating activity related to
Lafayette.
(18) Related Party Transactions
Advances to an Unconsolidated Subsidiary:
The Company and its subsidiary, Trans Global, had made advances to Universal
International, Inc., a company that the Company's former Secretary is an owner.
These advances had no fixed due dates or terms and as of April 1998, all of such
advances were written-off. The outstanding balances owed to the Company and
Trans Global from Universal International, Inc. was $187,000 and $517,000,
respectively, at December 31, 1997 and 1996 and the greatest amount outstanding
to Universal during the years ended December 31, 1998, 1997 and 1996 was
$600,000.
Common Stock Sold to former Chief Executive Officer:
In July 1997, the Company's former CEO, purchased 1,190,000 shares of common
stock from the Company at $0.03 per share, reflecting a discount from the bid
price on the date of sale, which was $0.06 per share. Payment for the purchase
price of such shares was effected by a reduction of the Company's obligation to
the CEO for accrued and unpaid compensation. In April 1998, in connection with
the former CEO's resignation, these shares were returned to the Company, (see
footnote 19).
Sale of Subsidiary Stock to Subsidiary Executive and Employees:
In 1997, SISC sold 258,333 common shares of Trans Global to the president of
Trans Global at $1.67 per share, the fair market value of the Trans Global
common stock on the date of sale. The Company's book basis in such shares
approximated $622,000 resulting in a loss on the sale of approximately $191,000
for the year ended December 31, 1997. Payment by the president of Trans Global
is evidenced by a non-interest bearing, non-recourse promissory note from the
president of Trans Global, due 2002.
In 1997, SISC sold 151,920 common shares of Netsmart to certain employees of
Netsmart at $0.23 per share. The Company's book basis in such shares
approximated $201,000 resulting in a loss on the sale of approximately
F-34
<PAGE>
Consolidated Technology Group, Ltd. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
$165,000 for the year ended December 31, 1997.
Reimbursement of Legal Costs
During 1998, the Company paid approximately $50,000 to each of Edward D. Bright,
who is Chairman of the Board, Teasurer, Secretary and a director of
Consolidated, and Patterson Travis, a brokerage firm that represents certain
shareholders of Consolidated for reimbursement of legal expenses incurred by the
two related parties in conjunction with the Schiller termination.
(19) Resignation of Registrant's Directors, Chief Executive Officer and
Corporate Secretary
On March 30, 1998, the Company and 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. The sale by IMI is referred to as
the "IMI Sale" (see footnote 15 (e)).
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. Of such amounts, $1.6 million relates to
Schiller's and Wnuk's stock interests in IMI. 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 in the aggregate had a negative net worth (see
footnotes 15(f) and 15(g)).
e) Schiller entered into a three-year consulting agreement with the
Company, for which he was entitled to receive annual compensation of
$100,000. (Subsequently, the consulting agreement was terminated (see
footnote 23 "Subsequent Events").
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 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.
F-35
<PAGE>
Consolidated Technology Group, Ltd. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(20) Renegotiated Contract with Chief Financial Officer
On April 14, 1998, Mr. George W. Mahoney, the Company's Chief Financial Officer
("CFO"), notified the Company 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. On June 16, 1998, Mr. Mahoney and the Company
executed 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 $350,000 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.
(21) Commitments and Contingencies
(I) Pending or Threatened Litigation - Although the Company is a party to
certain legal proceedings that have occurred in the ordinary course of business,
the Company does not believe such proceedings to be of a material nature with
the exception of the following. Due to uncertainties in the legal process, it is
at least reasonably possible that management's view of the outcome of the
following contingent liabilities will change in the near term and there exists
the possibility that there could be a material adverse impact on the operations
of the Company and its subsidiaries as a result of such legal proceedings.
(A) Holding Company:
(i) The Company is a defendant in a lawsuit filed in the Supreme Court of the
State of New York, Queens County entitled 5 Boro Beverage Distributors, Inc. v.
Consolidated Technology Group, Ltd. "Metro, 5" Absolute, et al. which was
initiated in 1995. The action was filed by the owners of a company that the
Company was contemplating acquiring in January 1995 for alleged unauthorized use
of proprietary information specific to the business which the Company
contemplated acquiring. The plaintiffs are seeking $1 million in damages and the
Company has filed a counter claim for $35,000 advanced to the plaintiff. There
has been no action by either side in this lawsuit for more than three years.
Counsel handling this case has advised the Company that it has meritorious
defenses.
(ii) The Company is a defendant in a lawsuit filed in the United States District
Court for the Southern District of New York captioned Naval Kapoor and Dirk
Esselens v. SIS Capital Corp. that was initiated in 1998, whereby certain
shareholders of 3D Tech, a subsidiary of the Company which has been
discontinued, filed a lawsuit against the Company in December 1997. The
complaint states that the Company wrongfully seized and transferred the assets
of 3D Tech for the benefit of the Company and to the detriment of the minority
shareholders of 3D Tech and seeks $3,000,000 in damages. During February 1999,
the Company reached a settlement with the plaintiffs for $150,000 plus an
additional $27,000 paid to indemnify one of the plaintiffs for liabilities he
incurred on behalf of 3D Tech. As of December 31, 1998, the Company has accrued
an additional $23,000 for potential claims provided for in the settlement
agreement for which the Company would be required to indemnify the plaintiffs,
if such claims are asserted.
(iii) On February 23, 1998, an action was commenced in the United States
District Court for the Southern District of New York entitled Grino Corporation,
LLC and SMACS Holding Corp. ("SMACS"), individually and as shareholders of and
in the right of Consolidated Technology Group Ltd. v. Consolidated Technology
Group Ltd.,
F-36
<PAGE>
Consolidated Technology Group, Ltd. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
SIS Capital Corp., Lewis S. Schiller, Norman J. Hoskin, E. Gerald Kay and
Grazyna B. Wnuk. The action sought to enjoin the Company from (a) proceeding
with its 1998 Annual Meeting of Stockholders scheduled for March 26, 1998, and
(b) making any payment to Mr. Schiller, Ms. Wnuk and others from the proceeds of
the sale of IMI. The complaint also alleged that the directors breached their
fiduciary duty with respect to, and sought to have declared void, (i) employment
agreements between the Company and Mr. Schiller and Ms. Wnuk, (ii) agreements to
issue stock or stock options of the Company and/or its subsidiaries to Messrs.
Schiller, Hoskin and Kay and Ms. Wnuk, (iii) all completed transfers and
issuance of stock and stock options by the Company to Messrs. Schiller, Hoskin
and Kay and Ms. Wnuk without fair and adequate consideration by the Company, and
(iv) all agreements to pay to Messrs. Schiller, Hoskin and Kay and Ms. Wnuk or
any other officer of the Company or any of its subsidiaries, any bonus, finder's
fee, stock or option liquidation payment, consent fee, professional fee, or
profit share or any other payment arising out of or resulting from or based upon
the sale or the profits from the sale of IMI without fair consideration to the
Company. The complaint also alleged violations of Section 10(b) of the
Securities Exchange Act of 1934, as amended, and common law fraud based upon the
same and similar allegations, and sought monetary damages to be proved at trial.
On February 24, 1998, the Court granted a temporary restraining order. On March
9, 1998, the Court vacated the temporary restraining order issued on February
24, 1998 because, inter alia, it did not appear that the plaintiffs had a
likelihood of success in the ultimate action, particularly with respect to the
alleged 10b-5 claim. On March 19, 1998, the United States District Court for the
Southern District of New York dismissed the action.
(iv) One of the plaintiffs in the Federal Court action described above, SMACS,
and certain affiliates of SMACS are plaintiffs in an action commenced in
November 1997 in the Supreme Court of the State of New York, County of New York,
entitled Bridge Ventures, Inc. et al v. Lewis S. Schiller, et al. The action,
brought against Mr. Schiller, the Company, SIS Capital Corp. and IMI by SMACS,
certain affiliates of SMACS and others seeks, inter alia, monetary damages in
excess of $500,000 allegedly due pursuant to consulting agreements with the
Company, an alleged equity interest in IMI and punitive damages of at least $5
million. The Company believes that it has meritorious defenses to the claims
made in this action. In March 1998, the plaintiffs sought to amend the complaint
to assert claims of a derivative nature alleging claims similar to those in the
Federal Court action and obtained a temporary restraining order prohibiting
payments to Mr. Schiller and others from the proceeds of the IMI sale. The
temporary restraining order was subsequently vacated and, as of the date of this
Form 10-K, the complaint had not been amended. In February 1999, the Company
concluded a settlement agreement with the plaintiffs and paid them an aggregate
of $250,000, which is accrued as of December 31, 1998.
(v) "Vanguard Limited ("Vanguard"), on its own behalf or on behalf of other
persons who may be affiliated with Vanguard, based on a purported agreement
relating to the introduction of Consolidated to IMI and assistance in the
negotiation of the acquisition of IMI in 1994, has asserted a claim that it has
the right, among other things, to a 10% interest in the Common Stock of IMI at
or about the time of the acquisition for no cash consideration. In addition,
Vanguard has claimed that it is entitled to a $200,000 fee due at the time of
the acquisition of IMI, consulting fees of $240,000 per year for five years,
reimbursement of nonaccountable expenses and a 5% interest in any future medical
acquisition by the Company. No assurance can be given that any litigation which
may ensue would not seek damages exceeding or different from the claim described
above and, if decided unfavorably to the Company, would not have a material
adverse affect on the Company."
(vi) In January 1996, Drs. Ashley Kaye and James Sternberg, two former
stockholder-directors of the company that sold the diagnostic imaging centers to
IMI, and Dr. Sternberg's wife, threatened to commence an action against two
subsidiaries of IMI, Consolidated and Mr. Schiller, formerly Chairman of the
Board of Consolidated, for alleged violations of securities laws and common law
in connection with an asset purchase agreement which was executed in connection
with the acquisition of IMI in September 1994 and non-payment of $3,375,000 of
subordinated notes of two subsidiaries of IMI. In 1997 they, along with Dr.
Stephen Schulman, a holder of subordinated notes in the principal amount of
approximately $6.4 million issued by subsidiaries of IMI and was president and
chief executive officer of IMI, commenced involuntary bankruptcy proceedings
against certain subsidiaries of IMI. Such
F-37
<PAGE>
Consolidated Technology Group, Ltd. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
bankruptcy proceedings were dismissed and in August 1998, IMI consummated a
settlement with the holders of the aforementioned subordinated promissory notes
for a total of $1.9 million.
(vii) In 1994, the Company purchased the assets of IMI and its partnerships for
cash and stock of the Company. Certain of the limited partners of one of the
partnerships from which such assets were purchased claimed that there was an
alleged oral guarantee that the common stock given as a part of the purchase
would have a value of $4 on the second anniversary following the closing of the
purchase. During 1998, IMI settled this claim and paid $408,000, therefore.
(viii) On July 15, 1998, an action entitled "Ronald Feldstein vs. Consolidated
Technology Group Ltd." was commenced in the Circuit Court, Palm Beach County,
Florida. The complaint in such action seeks unspecified damages in excess of
$15,000 against the Company based upon an asserted breach of an alleged
consulting agreement between the Company and the plaintiff therein. The Company
believes it has meritorious defenses to such action and intends to vigorously
defend the action.
(ix) During 1998, James Conway, an employee of a former subsidiary of the
Company, made a claim against the Company for payment of amounts due under his
employment agreement with the discontinued subsidiary. During December 1998, the
Company settled this claim for $100,000 of which $50,000 was paid in December of
1998 and the $50,000 balance paid in January 1999, is accrued as of December 31,
1998.
(x) During 1998, Ron Stanford, an employee of a former subsidiary of the Company
made a claim against the Company for indemnification of amounts brought against
him. As of December 31, 1998, the Company has accrued $10,000 for this claim.
(xi) During 1997, a complaint was filed against the Company captioned Klipsch,
Inc, v. SIS/CTG Ltd., WWR Acquisition Corp., Consolidated Technology Group,
Ltd., Donald L. Shamsie, and WWR Technology, Inc. In 1998, the Company settled
the claim for $20,000 of which $10,000 had been accrued as of December 31, 1997
and $10,000 was expensed during 1998.
(xii) During 1997, the Company received a request for payment of $56,000 on a
debt obligation of a former subsidiary of the Company that SISC had guaranteed.
During 1998, the Company paid the obligation, which was accrued as of December
31, 1997.
(B) Trans Global
(i) In November 1997, an action was commenced in the Supreme Court of the State
of New York, County of Suffolk, by Ralph Corace against RMI seeking damages of
approximately $1.1 million for an alleged breach of contract by Trans Global.
Mr. Corace was the president of Job Shop Technical Services, Inc., from which
RMI purchased assets in November 1994. The Company believes that the action is
without merit, will vigorously contest this matter and has filed counterclaims
against Mr. Corace.
(ii) On May 14, 1991, the U.S. Government Printing Office wrote Trans Global
asking to be reimbursed a total of $296,000 for "unauthorized time work" on two
programs. During 1998, Trans Global exchanged general releases with the U.S.
Government Printing Office whereby both parties release each other from any and
all claims, contractual or otherwise which they may have had or might have in
the future with no payments required.
(iii) Voluntary Settlement Agreement - As of December 31, 1997 Trans Global had
a $150,000 obligation remaining under an agreement it entered into with the
United States Department of Labor and the independent trustee of the Job Shop
Technical Services, Inc. 401(k) Plan ("collectively "DOL"). The settlement
agreement required Trans Global to pay the DOL an aggregate of $300,000 in 18
monthly installments of $16,667. During 1998, Trans Global paid the remaining
$150,000 due under the settlement agreement.
F-38
<PAGE>
Consolidated Technology Group, Ltd. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(C) Netsmart
In March 1997, an action was commenced against Netsmart and certain of its
officers, directors and stockholders by Onecard Health Services Corporation in
the Supreme Court of the State of New York, County of New York. The named
defendants include, in addition to Netsmart, Messrs. Lewis S. Schiller, formerly
chief executive officer and a director of Netsmart, Leonard M. Luttinger, former
vice president and a director of Netsmart, Thomas L. Evans, formerly a vice
president of Netsmart, Consolidated and certain of its subsidiaries, other
stockholders of Netsmart and other individuals who were or may have been
officers or directors of Onecard but who have no affiliation with Netsmart or
Consolidated. Mr. Luttinger and Mr. Evans were employees of Onecard prior to the
formation of Netsmart. Mr. Schiller was not an employee or director or,
consultant to, or otherwise affiliated with, Onecard. The complaint made broad
claims respecting alleged misappropriation of Onecard's trade secrets, corporate
assets and corporate opportunities, breach of fiduciary relationship, unfair
competition, fraud, breach of trust and other similar allegations, apparently
arising at the time of, or in connection with, the organization of Netsmart in
September 1992. The complaint sought injunctive relief and damages, including
punitive damages, of $130 million. During 1998, this action was dismissed.
(II) Other Contingent Liabilities:
(A) Series G Preferred Stock - During 1995, the Company issued to Trans Global
1,000 shares of Series G 2% cumulative, convertible, preferred stock, which was
then automatically convertible on September 30, 2000 into such number of shares
of the Company's common stock having 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 holder 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
elliminated in consolidation against Trans Global's investment in the series G
preferred stock. The Company and Trans Global entered into an agreement whereby
SISC currently intends to transfer 1,150,000 shares of Trans Global common stock
that it holds to Trans Global and Trans Global will transfer the preferred
shares of Consolidated that it holds to the Company. [See footnote (23)
"Subsequent Events - Trans Global Agreement".]
(B) Intercompany Debt Obligations - As of December 31, 1998, the Company owed
Trans Global approximately $325,000 in consideration of amounts that were owed
to Trans Global by a discontinued subsidiary of the Company, which formerly
operated in the Three Dimensional Products and Services segment. The Company and
Trans Global entered into an agreement whereby the $325,000 would be satisfied
as a part of the Company's transfer to Trans Global of the common shares that it
holds to Trans Global. The Company and Trans Global entered into an agreement
whereby SISC currently intends to transfer 1,150,000 shares of Trans Global
common stock that it holds to Trans Global and Trans Global will transfer the
preferred shares of Consolidated that it holds to the Company. [See footnote
(23) "Subsequent Events - Trans Global Agreement".] Additionally, Arc Networks
owes Trans Global approximately $1.2 million for advances made to Arc Networks
by Trans Global. On March 13, 1998, the Company agreed to guarantee 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 10%.
As of December 31, 1998, Arc Networks owed the Company approximately $2 million
for advances made under the line of credit. Subsequent to December 31, 1998, the
Company increased the line of credit and advanced Arc Networks an additional
$400,000. All of the aforementioned intercompany debt obligations are eliminated
in consolidation.
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<PAGE>
Consolidated Technology Group, Ltd. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(22) New Authoritative Pronouncements
The following describes certain new authoritative pronouncements that were
issued subsequent to December 31, 1997 that are expected to be applicable to the
accounting of the Company's operations:
In March 1998, the Accounting Standards Executive Committee ("AcSEC") of the
American Institute of Certified Public Accountants ("AICPA") issued Statement of
Position ("SOP") 98-1, "Accounting for the Costs of Computer Software Developed
or Obtained for Internal Use. Sop 98-1 is effective for fiscal years beginning
after December 15, 1998. SOP 98-1 provides guidance on accounting for the costs
of computer software developed or obtained for internal use. Computer software
costs that are incurred in the preliminary project stage should be expensed as
incurred. Once certain capitalization criteria have been met, external direct
costs of materials and services consumed in developing or obtaining internal-use
computer software; payroll and payroll-related costs for employees who are
directly associated with and who devote time to the internal-use computer
software project; and interest costs incurred when developing computer software
for internal use should be capitalized. Training costs and certain data
conversion costs should be expensed as incurred. Internal and external costs
incurred for maintenance and minor upgrades should be expensed as incurred. SOP
98-1 is not expected to have a material impact on the Company.
In March 1998, AcSEC issued SOP 98-4, "Deferral of the Effective Date of a
provision of SOP 97-2, Software Revenue Recognition" and later issued SOP 98-9,
"Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain
Transactions". SOP 98-4 deferred the application of certain portions of SOP 97-2
until fiscal years beginning after December 15, 1998. SOP 98-9 amended certain
portions of SOP 97-2 with regards to revenue recognition methods and deferred
the application of certain portions of SOP 97-2 until fiscal years beginning on
or after March 15, 1998 which were previously deferred by SOP 98-4 until fiscal
years beginning after December 15, 1998. SOP 98-4 and 98-9 are not expected to
have a material impact on the Company.
In April 1998, AcSEC issued SOP 98-5, "Reporting on the Costs of Start-Up
Activities". SOP 98-5 provides guidance on the financial reporting of start-up
costs and organization costs. It requires costs of start-up activities and
organization costs to be expensed as incurred. SOP 98-5 is not expected to have
a material impact on the Company.
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities". SFAS No. 133 is effective for fiscal years
beginning after June 15, 1999. SFAS No. 133 establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, (collectively referred to as derivatives) and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. If certain conditions are met, a derivative may
be specifically designated as (a) a hedge of the exposure to changes in the fair
value of a recognized asset or liability or an unrecognized firm commitment, (b)
a hedge of the exposure to variable cash flows of a forecasted transaction, or
(c) a hedge of a foreign currency exposure of a net investment in foreign
operation, an unrecognized firm commitment, an available-for-sale security or a
foreign-currency-denominated forecasted transaction. The accounting for changes
in the fair value of a derivative (that is, gains and losses) depends on the
intended use of the derivative and the resulting designation. SFAS No. 133 is
not expected to have a material impact on the Company.
The FASB has had on its agenda a project to address certain practice issues
regarding Accounting Principles Board ("APB") Opinion No. 25, "Accounting for
Stock Issued to Employees". The FASB plans to issue various interpretations of
APB No. 25 to address these practice issues. The proposed effective date of
these interpretations would be the issuance date of the final interpretation,
which is expected to be September 1999. If adopted, the Interpretation would be
applied prospectively but would be applied to plan modification and grants that
occur after December 15, 1998. The FASB's tentative interpretations are as
follows:
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<PAGE>
Consolidated Technology Group, Ltd. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
* APB No. 25 has been applied in practice to include in its definition of
employees, outside members of the board or directors and independent
contractors. The FASB's interpretation of APB No. 25 will limit the
definition of an employee to individuals who meet the common law
definition of an employee. Accordingly, the cost of issuing stock
options to outside board members and independent contractors not
meeting the common law definition of an employee will have to be
determined in accordance with FASB Statement No. 123 "Accounting for
Stock-Based Compensation", and usually recorded as an expense in the
period of the grant.
* Options (or other equity instruments) of a parent company issued to
employees of a subsidiary should be considered options, etc. issued by
the employer corporation in the consolidated financial statements, and,
accordingly, APB Opinion No. 25 should continue to be applied in such
situations. This interpretation would apply to subsidiary companies
only, it would not apply to equity method investees or joint ventures.
* If the terms of an option (originally accounted for as a fixed option)
are modified during the option term to directly change the exercise
price, the modified option should be accounted for as a variable
option. Variable grant accounting should be applied to the modified
option from the date of the modification until the date of the
exercise. Consequently, the final measurement of compensation expense
would occur at the date of exercise. The cancellation of an option and
the issuance of a new option with a lower exercise price shortly
thereafter (for example, within six months) to the same individual
should be considered in substance a modified (variable) option.
* Additional interpretations will address how to measure compensation
expense when a new measurement date is required.
The Company does not currently have any outstanding stock option plans and as
such, the proposed interpretations of APB No. 25 are not expected to have a
material impact on the Company.
(23) Subsequent Events
Schiller Settlement Agreement - On February 16, 1999, the Company consummated a
settlement agreement dated as of January 7, 1999, as amended (the "Schiller
Settlement Agreement"), by and between the Company and Schiller, the former CEO
and Chairman of the Board of the Company. The Schiller Settlement Agreement,
provided for, among other things, payment of the sum of $350,000 to and on
behalf of Schiller in settlement of certain claims and disputes between Schiller
and the Company, as well as the termination of a consulting agreement between
the Company and Schiller. All amounts payable in accordance with the Schiller
Settlement Agreement have been accrued as of December 31, 1998.
Trans Global Agreement - On February 25, 1999, the Company and Trans Global
entered into an agreement, pursuant to which SISC currently intends to transfer
to Trans Global 1,150,000 shares (the "Transferred Shares") of the Trans Global
common stock which are 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 owned by Trans Global
together with accrued dividends of approximately $140,000 and (ii) the Company's
obligations to pay Trans Global $326,000 (the "Consolidated Payable") in respect
of advances made by Trans Global to certain of the Company's former
subsidiaries. The agreement also provides the Company the right to retain the
Transferred Shares if it pays Trans Global the redemption price of $2.1 million
together with the accrued dividends and the Consolidated Payable by April 30,
1999. The Transferred Shares and the Series G Preferred Stock will be held in
escrow pending the election by the Company to make such payment. As of the date
of this report, it is the Company's intention to not make payment on the
redemption price and to transfer the Transferred Shares to Trans Global. As a
result of this decision, Trans Global is presented as a discontinued segment in
the December 31, 1998 financial statements.
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<PAGE>
Consolidated Technology Group, Ltd. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Arc Networks Stock Sale - On March 23, 1999, the Company entered into an
agreement with Arc Networks and Technology Acquisitions, Ltd. ("TAL"), pursuant
to which the Company 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. As a result of the sale, Arc
Networks is presented as a discontinued segment as of December 31, 1998.
Netsmart Stock Sale - On March 25, 1999, the Company entered into an agreement
with Netsmart and a group of purchasers, consisting principally of Netsmart's
management and directors, including Edward D. Bright, Chairman of the Board and
a director of both the Company and Netsmart, 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 gives the purchasers 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, the Company agreed to transfer to Netsmart, shares
of Netsmart preferred stock and warrants to purchase shares of Netsmart's common
stock, in exchange for which Netsmart will issue 100,000 shares of its common
stock to the Company. SISC completed the sale of 248,156 of such shares on April
9, 1999. Upon the sale of an additional 248,156 of such shares of Netsmart's
common stock and the issuance by Netsmart of the above mentioned 100,000 shares
of its common stock, the Company's ownership will be reduced from 36% to
approximately 21%.
Treasury Stock Transactions - From January 1, 1999 through March 31, 1999 the
Company purchased an additional 1,012,400 shares of its common stock in the open
market at a total cost of $104,000. Such shares are held in the Company's
treasury.
..............................
F-42
