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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, 2001
OR
[_] 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 0-13347
CHANGE TECHNOLOGY PARTNERS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 06-1582875
(State or jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
537 STEAMBOAT ROAD
GREENWICH, CONNECTICUT 06830
(Address of principal executive offices) (Zip Code)
(203) 661-6942
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, PAR VALUE $.01 PER SHARE
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 Registrant
was required to file such reports) and (2) has been subject to such filing
requirements for at least the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (ss. 229.405 of this chapter) 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. [_]
As of March 15, 2002, the aggregate market value of registrant's common
stock held by non-affiliates was approximately $9,135,655, based on the last
reported sale price of $0.07 per share on that date, and 182,462,546 shares of
registrant's common stock were outstanding.
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in this Annual Report on Form 10-K,
including information with respect to the Company's future business plans,
constitute "forward-looking statements" within the meaning of Section 27A of the
Securities Act and Section 21E of the Exchange Act. For this purpose, any
statements contained herein that are not statements of historical fact may be
deemed to be forward-looking statements, subject to a number of risks and
uncertainties that could cause actual results to differ significantly from those
described in this report. These forward-looking statements include statements
regarding, among other things, our business strategy and operations, future
expansion plans, future prospects, financial position, anticipated revenues or
losses and projected costs, and objectives of management. Without limiting the
foregoing, the words "may," "will," "should," "anticipates," "believes,"
"plans," "expects" and similar expressions are intended to identify
forward-looking statements. There are a number of important factors that could
cause the results of the Company to differ materially from those indicated by
such forward-looking statements. These factors include, but are not limited to,
those set forth in Part I, Item 1.A "Risk Factors."
TABLE OF CONTENTS
PAGE
----
PART I.........................................................................1
ITEM 1. BUSINESS...................................................1
ITEM 1A. RISK FACTORS...............................................8
ITEM 2. Properties................................................11
ITEM 3. Legal proceedings.........................................11
ITEM 4. Submission of Matters to a Vote of
Security Holders..........................................11
PART II.......................................................................12
ITEM 5. Market for Registrant's Common Equity and Related
Stockholder Matters.......................................12
ITEM 6. Selected Financial Data...................................12
ITEM 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................13
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK...............................................23
ITEM 8. Financial Statements and Supplementary Data...............23
ITEM 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.......................25
PART III......................................................................26
ITEM 10. Directors and Executive Officers of the Registrant........26
ITEM 11. Executive Compensation....................................27
ITEM 12. Security Ownership of Certain Beneficial Owners
and Management............................................31
ITEM 13. Certain Relationships and Related Party Transactions......33
PART IV.......................................................................34
ITEM 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K.......................................35
(i)
PART I
ITEM 1. BUSINESS
OVERVIEW AND RECENT DEVELOPMENTS
Change Technology Partners, Inc. currently has limited operations.
Since July 2001, the Company has focused on divesting its consulting businesses
and using its significant cash position to develop and acquire businesses in the
radio and media industries. Presently, its only operating business is Canned
Interactive, which designs and produces interactive media, primarily for the
entertainment industry.
Prior to July 2001, the Company provided a broad range of consulting
services, including e-services and technology strategy, online branding, web
architecture and design, systems integration, systems architecture and
outsourcing. However, in response to continued unfavorable market conditions for
such services, the Company embarked on a review of its operations with the goal
of formulating a course of action to minimize near-term losses, capital
expenditures and reduce cash outflows. As a result of such review, the Company's
board of directors voted to sell or wind down its existing operations, other
than Canned, and use its assets to invest in and develop new businesses.
In connection with this decision, the board of directors terminated the
employment of approximately 90% of its existing workforce, including its
President and Chief Executive Officer. As a result of these actions, the Company
incurred severance expenses of $1,326,000 ($493,000 of which were incurred in
connection with the termination of employment of its President and Chief
Executive Officer).
The board of directors then appointed William Avery, a member of the
board of directors, to serve as the Company's President and Chief Executive
Officer. He was charged with executing the board's divestiture and new business
development plan.
In August 2001, Mr. Avery was approached by Franklin Capital
Corporation, an American Stock Exchange listed business development company,
regarding the Company's interest in providing capital in connection with
Franklin Capital's acquisition of certain radio programming and services assets
from affiliates of Winstar Communications, Inc. and to explore further the
possibility of combining the Company and Franklin Capital.
In connection with the radio asset acquisition, the Company agreed to
provide Excelsior Radio Networks Inc., a majority owned subsidiary of Franklin
Capital, with a loan in the amount of $2,250,000. Pursuant to the terms of the
loan, if Franklin Capital and the Company had not mutually agreed to a term
sheet regarding a business combination on or before December 31, 2001, the
Company would have the right to accelerate the payment of all principal and
interest due on the loan. The Company also received a warrant to purchase
482,955 shares of common stock of Excelsior Radio Networks at an exercise price
of $1.125 per share.
On December 4, 2001, the Company and Franklin Capital entered into a
definitive agreement and plan of merger. See "-- Proposed Merger with Franklin
Capital Corporation."
Concurrently with the execution of the merger agreement, the parties
entered into a stock purchase agreement pursuant to which the Company agreed to
purchase 250,000 shares of common stock of Excelsior Radio Networks from
Franklin Capital for an aggregate purchase price of $250,000. In the event that
the merger between Franklin Capital and the Company is terminated pursuant to
the terms of the merger agreement, Franklin Capital shall be required to
repurchase all of such common stock from the Company at a repurchase price equal
to $250,000, plus interest thereon at a rate of 10% per annum from December 4,
2001 to the date of repurchase. Additionally, the note receivable will still be
due in September 2002.
The Company's principal executive offices are located at 537 Steamboat
Road, Greenwich, CT 06830. The Company also maintains offices in New York, NY
and Los Angeles, CA.
CORPORATE HISTORY
Until March 28, 2000, the Company was known as Arinco Computer Systems
Inc. and had no business operations. On March 28, 2000, an investor group
acquired control of Arinco Computer Systems through an investment of $40,000,000
in exchange for newly issued convertible preferred stock of Arinco Computer
Systems (which has since all been converted to Common Stock). Following this
investment, Arinco Computer Systems changed its name to Change Technology
Partners, Inc., redomesticated from New Mexico to Delaware, and commenced its
consulting business strategy.
SUBSIDIARIES
The Company's subsidiaries are:
o Iguana Studios, Inc.
o Papke Textor, Inc. d/b/a Canned Interactive.
Iguana Studios has no significant operations or assets and the Company
plans on dissolving Iguana Studios during 2002. The Company has no plans to sell
or divest Canned and is working with the management of Canned to improve its
performance. Canned was cash flow positive in the fourth quarter of 2001.
INVESTMENTS AND LOANS
The Company has made investments in and loans to media and technology
companies. The following table summarizes the Company's media and technology
investments and loans as of December 31, 2001:
COMPANY DESCRIPTION TYPE OF INVESTMENT INTEREST
- -------------------------------- ------------------------------------- ----------------------------------------
Excelsior Radio Networks, Inc. Produces, syndicates and distributes 250,000 shares of common stock,
radio programs warrant to purchase 482,955 shares of
common stock and $2,250,000 note
NetPro Holdings Inc. Streaming media management services 39.15% equity interest
company
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COMPANY DESCRIPTION TYPE OF INVESTMENT INTEREST
- -------------------------------- ------------------------------------- ----------------------------------------
Broadstream, Inc. No current operations 43% equity interest
Livesky, Inc. Wireless technology developer, 2% equity interest
including mobile telephone business
strategy and assessment as well as
mobile application design and
development
InSys LLC Provider of systems integration 49% equity interest and $100,000 note
services
ACQUISITIONS AND DIVESTITURES
EHOTHOUSE. On September 15, 2000, the Company acquired majority voting
control of eHotHouse Inc., an interdisciplinary e-services consulting firm, in a
transaction where eHotHouse issued Series A convertible participating preferred
stock to the Company in exchange for $3,000,000 and a covenant, by the Company,
to issue 6,374,502 shares of Common Stock as directed by eHotHouse. The
operations of eHotHouse prior to acquisition were de minimis. No consideration
was provided to the existing shareholders of eHotHouse in the transaction.
During the period from September 2000 through February 2001, eHotHouse completed
several business combinations. However, eHotHouse did not exercise its right
under the covenant referred to above to have the Company issue additional shares
of Common Stock.
In February 2001, the Company acquired the outstanding minority
interest of eHotHouse for 5,300,013 shares of Common Stock and approximately
$400,000 in cash.
Subsequent to February 2001, the Company merged eHotHouse with and into
the Company. As a result of the Company's divestiture plan, the Company does not
intend to develop the former business of eHotHouse.
IGUANA. In March 2001, the Company acquired Iguana Studios, Inc., a New
York City-based interactive consulting agency, for approximately $5,800,000,
including $2,800,000 in cash, 2,700,000 shares of Common Stock valued at
approximately $2,000,000, and replacement options to purchase 1,681,888 shares
of Common Stock, which vested upon the change in control, valued at
approximately $1,000,000. As a result of the Company's divestiture plan, the
operations of Iguana have been wound down. As of December 31, 2001, Iguana had
no significant operations or assets and the Company plans on dissolving Iguana
during 2002.
CANNED INTERACTIVE. In June, 2001, the Company acquired Papke-Textor,
Inc. d/b/a Canned Interactive for approximately $1,100,000 in cash, including
acquisition costs, and 6,436,552 shares of Common Stock valued at approximately
$1,000,000. Canned Interactive is based in Los Angeles, California and designs
and produces interactive media, primarily for the entertainment industry.
Entertainment companies, as well as consumer goods, sports and technology
companies, contract with Canned to produce interactive media, such as digital
video discs (DVD) and web site design. Work is usually contracted with a
purchase order and delivery of completed work is typically within one to three
months of receipt of the order.
3
Most theatrical films, including new and library releases, are now
released in DVD format. Canned designs interactive content for those titles,
enriching the viewer experience and creating value for Canned's clients. Canned
also uses its design and technology skills to create and enhance web sites with
interactive and streaming content.
Canned plans to exploit its ability to design, create and produce
interactive DVD applications in two ways. First, Canned plans to support and
marginally grow its business in the entertainment sector. Canned's service to
this business sector allowed it to develop top creative and technology skills.
It has significantly penetrated the sector and will opportunistically pursue new
business while ensuring sufficient resources are deployed to secure what has
become a relatively stable and predictable part of the business. Second, Canned
will use its understanding of the DVD medium to identify business opportunities
for its services in other market segments where it believes its creative and
technology skills can support its clients' business objectives. As the number of
DVD-enabled households increases, driven in large part by the theatrical
entertainment business' use of DVDs to distribute its product, the public's
familiarity with interactive DVDs increases and the cost of distribution
decreases. These factors open up potential new uses for Canned's services
outside its core entertainment business. Canned currently has targeted the
technology, consumer goods and communications businesses.
Canned's largest clients in 2001 were Disney Home Entertainment,
Columbia Tristar Home Entertainment and Warner Home Video. Other clients in 2001
were Cisco Systems, Nike and the United States Olympic Committee. Until
recently, most of Canned's business was by way of referral and capitalization on
the established contacts it has built in the entertainment sector. Canned has
now developed a quota-bearing sales approach to sign new revenue sources outside
the entertainment industry. Based on the success of these new initiatives,
Canned is organized to add to its sales team and support that effort with
appropriate public relations.
Competition for the development of interactive DVDs and web sites is
strong and varied. Companies that compete with Canned in the DVD market include
1k Studios, dzn, B.D. Fox and Zuma Digital. In the web site marketplace there
are numerous small, local competitors, as well as more established companies
such as Razorfish and dna studios.
In 1999, Congress passed legislation that regulates certain aspects of
the internet, including on-line content, copyright infringement, user privacy,
taxation, access charges, liability for third-party activities and jurisdiction.
In addition, federal, state, local and foreign governmental organizations also
are considering, and may consider in the future, other legislative and
regulatory proposals that would regulate the internet. The internet and
e-commerce sectors are still relatively new areas and it is not known how courts
will interpret or apply both existing and new laws. Therefore, Canned is
uncertain how new laws or the application of existing laws will affect its web
site design business.
BROADSTREAM AND NETPRO. In June 2000, the Company purchased 7,626,165
shares of Series A convertible redeemable preferred stock of Broadstream, Inc.,
a streaming media management services company (d/b/a Network Prophecy),
representing an approximate 30% equity interest and approximate 47% voting
interest in Broadstream in exchange for $6,500,000.
4
Following a recapitalization transaction in May 2001 in which the
Company paid no additional consideration to Broadstream, on August 15, 2001 the
Company purchased a secured convertible promissory note from Broadstream in
exchange for $600,000 in connection with an aggregate $1,600,000 bridge loan
financing consummated by Broadstream. The aggregate bridge loan financing was
secured by all of Broadstream's assets. The note also contained certain
conversion provisions in the event Broadstream closed a new round of financing
or entered into a change of control transaction.
On November 30, 2001 the Company assigned its note to a newly formed
entity, NetPro Holdings Inc., in exchange for 13,674,753 shares of NetPro Series
A-1 convertible redeemable participating preferred stock. No gain or loss was
recorded as a result of this exchange. Concurrent with this transaction, NetPro
foreclosed on the note and elected to take possession of all of Broadstream's
assets in full satisfaction of the note. Broadstream remains in existence but is
not conducting any business.
On December 24, 2001, the Company purchased 1,585,479 shares of NetPro
Series B-1 convertible redeemable participating preferred stock in exchange for
$200,000. As of December 31, 2001, the Company's interest in NetPro represents
approximately 39.15% of NetPro's outstanding equity. On January 10, 2002, the
Company invested an additional $100,000 in NetPro Series B-1 stock. On March 14,
2002, the board of directors of NetPro voted to suspend all of the company's
business operations and immediately terminate almost all of its employees due to
NetPro's inability to generate sufficient revenues. NetPro's board of directors
continues to evaluate alternatives to maximize the value of the Company's
remaining assets.
RAND. On November 30, 2000, eHotHouse acquired all of the issued and
outstanding common stock of RAND Interactive Corporation, a provider of media
and technical services, in exchange for $700,000 of eHotHouse common stock and
$700,000 in cash.
On November 2, 2001 the Company sold all of the issued and outstanding
shares of Rand to certain members of its management team in exchange for 375,039
shares of Common Stock, and a warrant to purchase such number of shares of
common stock of Rand that equals, at the time of exercise, 30% of the issued and
outstanding shares of Rand common stock on a fully diluted basis. The warrant
has a stated aggregate exercise price of $1.00, expires on November 3, 2013 and
is contingently exercisable upon the occurrence of certain prospective events.
INSYS. On October 18, 2000, eHotHouse acquired InSys Technology, Inc.,
a provider of systems integration services, in exchange for $900,000 in cash.
On November 8, 2001 the Company sold a 51% voting interest in InSys to
a member of InSys's management team in exchange for $50,000 and concurrently
forgave approximately $400,000 of advances to InSys. In addition, the Company
loaned InSys $100,000. The Company continues to evaluate its investment in InSys
and may decide to sell or hold such investment in the future.
5
PROPOSED MERGER WITH FRANKLIN CAPITAL CORPORATION
GENERAL. On December 4, 2001, the Company and Franklin Capital entered
into a definitive agreement and plan of merger. Pursuant to the merger
agreement, the Company will merge with and into Franklin Capital and Franklin
Capital will be the surviving corporation.
If the merger is completed, the Company's stockholders will receive one
share of Franklin Capital common stock for each 40.985 shares of Common Stock.
Each share of the Company's Series A preferred stock will be exchanged for one
share of Franklin Capital Series B preferred stock. Based upon the
capitalization of the Company and Franklin Capital, the common stockholders of
the Company will own in the aggregate approximately 80% of the outstanding
shares of Franklin Capital common stock following consummation of the merger.
The effect of the merger is to create a combined company that will focus
primarily on developing and acquiring assets in the media and advertising
business, provided that the combined company shall continue the Company's
historic business, or use a significance portion of the Company's historic
business assets in its business, to the extent required under applicable tax
regulations.
The merger between the Company and Franklin Capital is subject to the
receipt of the requisite approvals of the Franklin Capital common and Series A
preferred stockholders, the Company common and Series A preferred stockholders
and the satisfaction or waiver of the other conditions to the merger. The
Company can provide no assurance that all of the conditions will be satisfied or
waived by the party entitled to do so. Franklin Capital intends to file a
registration statement on Form N-14 with respect to the proposed merger, which
will include a proxy statement/prospectus. Each of the Company and Franklin
Capital plan to hold a stockholders' meeting in the second quarter of 2002 at
which stockholders will be asked to approve the merger agreement and merger. The
foregoing statements regarding the pending merger with Franklin Capital are
forward-looking statements subject to a number of risks and uncertainties,
including the factors set forth below in "Risk Factors - Risks Related to the
Merger." Upon consummation of the merger, Franklin Capital will change its name
to Excelsior Communications Corporation.
The parties intend to close the merger by filing a certificate of
merger with the Secretary of State of the State of Delaware as soon as
practicable after the stockholders meetings, assuming all other conditions to
the merger have been satisfied or waived. The parties are working to complete
the transaction by June 30, 2002.
BUSINESS OF THE MERGED COMPANY. Currently, Franklin Capital is a
business development company and provides private investment capital to private
companies and small public companies in a variety of industries throughout the
United States. Franklin Capital's lending and investment activity has been
focused principally on securities issued by companies involved in early stage
high technology sectors such as wireless communications, other
telecommunications services, internet software and information services.
Franklin Capital is headquartered in New York, New York, is listed on
the American Stock Exchange and trades under the symbol "FKL."
6
In August, 2001 Franklin Capital acquired certain assets from
affiliates of Winstar Communications, Inc., which are held in its majority owned
subsidiary, Excelsior Radio Networks, Inc. If the merger with the Company is
consummated, Franklin Capital will terminate its status as a business
development company and change the nature of its business to focus on developing
assets primarily in the media and advertising business. Franklin Capital, as the
surviving corporation, will also change its name to Excelsior Communications
Corporation. In order to develop its business, Excelsior Communications will
expand and grow the business of Excelsior Radio through acquisitions, joint
ventures and other efforts.
Excelsior Radio creates, produces, distributes and is a sales
representative for national radio programs while also offering other
miscellaneous services to the radio industry. Excelsior Radio offers radio
programs to the industry in exchange for commercial broadcast time, which
Excelsior Radio sells to national advertisers. Excelsior Radio currently offers
approximately 50 programs to over 2,000 radio stations across the country. The
group of radio stations who contract with Excelsior Radio to broadcast a
particular program constitutes a radio network. Excelsior Radio derives a
significant part of its revenue from selling the commercial broadcast time on
its radio networks to advertisers desiring national coverage.
Excelsior Radio also derives a portion of its revenues from its sales
representation division which operates under the name Global Media. The sales
representation division operates as a sales staff for other nationally
syndicated program producers who do not wish to sell their own product. The
sales representation division generates its revenues by selling network
advertising time for third party program producers and retaining a sales
commission on gross revenue.
REGULATORY
Prior to the consummation of the merger, the Company may own investment
securities having a value exceeding 40% of the value of its total assets
(exclusive of government securities and cash items) on an unconsolidated basis,
and may therefore meet the definition of an "investment company" under the
Investment Company Act of 1940. The board of directors believes that the Company
will not be deemed an "investment company" by virtue of the "primarily engaged"
exemption under Section 3(b)(1) of the Investment Company Act. This statutory
exemption provides that, even if a company owns investment securities having a
value exceeding 40% of its total assets, it may not be an investment company if
it in fact is directly or indirectly (through wholly owned subsidiaries)
"primarily engaged" in a non-investment company business. While the board of
directors believes the Company is primarily engaged in a business other than
owning securities, the applicability of the "primarily engaged" exclusion is
determined on a case-by-case basis, and it is possible that the Company may be
deemed by the Securities and Exchange Commission to be an investment company
subject to the Investment Company Act. In the event the SEC determines that the
Company cannot take advantage of the "primarily engaged" exclusion, the board of
directors believes that the Company could rely on Rule 3a-2 under the Investment
Company Act, which deems an issuer not to be subject to the registration
requirements of the Investment Company Act for up to one year if certain
conditions are met. The board of directors adopted a resolution on November 7,
2001 stating its intention to take steps necessary not to be deemed an
"investment company" under the Investment Company Act. If the SEC determines
that the safe harbor in Rule 3a-2 is unavailable to the Company, the
7
Company would be in violation of the registration requirements under the
Investment Company Act which could subject the Company to penalties and other
enforcement action by the SEC.
EMPLOYEES
As of December 31, 2001, the Company employed 28 full time employees.
Of the total number of employees, 20 were in professional services, four in
sales and marketing and four in finance and administration. None of the
Company's employees are represented by any collective bargaining unit, and the
Company has never experienced a work stoppage. The Company believes its
relations with its employees are good.
ITEM 1A. RISK FACTORS
You should carefully consider the following risks in your evaluation of
the Company. The risks and uncertainties described below are not the only ones
the Company faces. Additional risks and uncertainties may also adversely impact
and impair its business. If any of the following risks actually occur, the
Company's business, results of operations or financial condition would likely
suffer. See "Special Note Regarding Forward-Looking Statements."
RISKS RELATED TO THE COMPANY
FORECASTING THE COMPANY'S FUTURE RESULTS AND FINANCIAL CONDITION IS
DIFFICULT AND COULD AFFECT THE COMMON STOCK TRADING PRICE. As a result of the
Company's limited operating history and recent divestiture and new business
development plan, it believes that its historical financial information is not
indicative of the Company's future performance. As a result, it is difficult to
forecast the Company's future results. In addition, the nature of the markets in
which the Company competes makes it difficult to predict the growth of the
industry. The Company's future operations may be affected by a number of other
factors, many of which are outside the Company's control. If in some future
period the Company's results of operations were to fall below the expectations
of investors, the trading price of the Common Stock may decline.
THE COMPANY MAY MAKE STRATEGIC INVESTMENTS OR FORM AFFILIATIONS THAT DO
NOT PROVE USEFUL TO THE COMPANY AND THE COMPANY MAY LOSE ANY VALUE IT
CONTRIBUTES TO THESE INVESTMENTS OR AFFILIATIONS. The Company may form
affiliations with other businesses. These affiliations may not provide the
Company with a valuable return on its investment. The Company also may not
benefit from any strategic investment it makes if the business it invests in is
not successful. The Company has already suffered a loss on its investment in
Broadstream, Inc. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Acquisition and Divestitures."
THE COMPANY'S SUCCESS DEPENDS ON ITS ABILITY TO RETAIN ITS KEY
PERSONNEL. The Company's success depends largely on the skills of its key
management. Currently, the Company's key management consists of William Avery,
the Company's President and Chief Executive Officer. The Company cannot
guarantee that it will be able to replace this individual in the event his
services become unavailable.
8
CONCENTRATION OF OWNERSHIP WILL LIMIT YOUR ABILITY TO INFLUENCE
CORPORATE MATTERS. The present directors, executive officers and principal
stockholders of the Company beneficially own approximately 27% of the
outstanding Common Stock. As a result, these stockholders will be able to
continue to exert significant influence over all matters requiring stockholder
approval, including the election of directors and approval of significant
corporate transactions, including the proposed merger with Franklin Capital.
THE COMPANY MAY BE CONSIDERED AN INVESTMENT COMPANY UNDER THE
INVESTMENT COMPANY ACT OF 1940. The Company may own investment securities having
a value exceeding 40% of the value of its total assets (exclusive of government
securities and cash items) on an unconsolidated basis, and may therefore meet
the definition of an "investment company" under the Investment Company Act. The
board of directors believes that the Company will not be deemed an "investment
company" by virtue of the "primarily engaged" exemption under Section 3(b)(1) of
the Investment Company Act. This statutory exemption provides that, even if a
company owns investment securities having a value exceeding 40% of its total
assets, it may not be an investment company if it in fact is directly or
indirectly (through wholly owned subsidiaries) "primarily engaged" in a
non-investment company business. While the board of directors believes that the
Company is primarily engaged in a business other than owning securities, the
applicability of the "primarily engaged" exemption is determined on a
case-by-case basis, and it is possible that the Company may be deemed by the SEC
to be an investment company subject to the Investment Company Act. In the event
that the SEC determines that the Company cannot take advantage of the "primarily
engaged" exemption, the board of directors believes that the Company could rely
on Rule 3a-2 under the Investment Company Act, which deems an issuer otherwise
subject to the Investment Company Act not to be subject to the registration
requirements of the Investment Company Act for up to one year if certain
conditions are met. However, it is possible that the SEC may disagree with the
Company's conclusion that this safe harbor is available to the Company, thus
subjecting the Company to the risk that it should have registered as an
investment company and that therefore the Company may be in violation of the
Investment Company Act. Such a violation could lead to penalties and other
enforcement action by the SEC.
RISKS RELATED TO THE MERGER
THE PROPOSED MERGER MAY NOT OCCUR. If the merger agreement is
terminated or if the merger is not completed for any reason, the Company may not
be as well positioned to effectuate its developing business plan. The success of
the Company depends on its ability to effectuate such a plan subsequent to the
merger. If the merger is not consummated, the Company will be forced to reassess
its position and future business strategy.
If the merger is not completed for any reason, the Company may be
subject to a number of other risks, including:
o The Company may be required under certain circumstances to pay
Franklin Capital a termination fee of $750,000.
o The price of the Common Stock may decline.
9
o Transaction costs related to the merger, such as financial,
advisory, legal, accounting and printing fees must be paid even if
the merger is not completed. The amount of the transaction costs may
substantially exceed our estimates and, when combined with the
expenses incurred in connection with the Company's recent
divestitures and change in business plan, could have an adverse
effect on the business, financial condition and operating results of
the combined company.
o If the merger is terminated and the board of directors seeks another
merger or business combination, the Company's stockholders cannot be
certain that the Company will be able to find a partner willing to
pay an equivalent or more attractive price than the price to be paid
by Franklin Capital in the proposed merger.
THE MERGER AGREEMENT DOES NOT CONTAIN ANY PROVISIONS FOR ADJUSTMENT OF
THE EXCHANGE RATIO AND DOES NOT PROVIDE FOR RIGHTS OF TERMINATION BY EITHER
PARTY BASED UPON FLUCTUATIONS IN THE PER SHARE PRICE OF THE COMPANY'S OR
FRANKLIN CAPITAL'S COMMON STOCK. Because no adjustment will be made to the
exchange ratio, the value of consideration to be received by holders of Common
Stock in connection with the merger is not presently ascertainable and will vary
based upon the market price of Franklin Capital common stock at the time of the
merger. Such variations may be the result of changes in the business operations
or prospects of Franklin Capital, market assessments of the likelihood that the
merger will be consummated, the timing thereof, the prospects for the
post-merger operations of the combined company, general market and economic
conditions and other factors beyond the control of the Company and Franklin
Capital.
NO FAIRNESS OPINION WAS OBTAINED REGARDING THE MERGER. Because the
terms of the merger were negotiated at arm's length between the management of
the Company and Franklin Capital, and taking into consideration the time and
expense that would be incurred in obtaining an investment banker's opinion on
the fairness of the terms of the merger in light of the Company's lack of an
operating business, the Company has not sought or obtained such an opinion.
Accordingly, no unaffiliated third party expert has opined as to the fairness of
the merger from a financial point of view to the stockholders of the Company.
THE COMBINED COMPANY MAY BE UNABLE TO REALIZE THE BENEFITS ANTICIPATED
BY THE COMPANY AND FRANKLIN CAPITAL. The merger involves the integration of two
companies that have previously operated independently. There can be no
assurances that the companies will not encounter significant difficulties in
integrating their respective operations or that the benefits expected from such
integration will be realized. Incurring unexpected costs or delays in connection
with such integration could have a material adverse effect on the combined
company's business, financial condition or results of operations.
THE COMBINED COMPANY MAY EXPERIENCE ADVERSE EFFECTS FROM COMBINING
OPERATIONS OF THE COMPANY AND FRANKLIN CAPITAL. The boards of directors approved
the merger and the merger agreement with the expectation that the merger will
result in a number of benefits, including operating efficiencies, revenue
enhancements and other synergies. However, as a result of the merger, the
management of the combined company will be faced with unfamiliar business
issues. In addition, the current management of the Company, who will take
10
on management positions in Franklin Capital upon consummation of the merger,
have no experience with Franklin Capital's radio business.
ITEM 2. PROPERTIES
The Company leases approximately 10,900 square feet of office space at
537 Steamboat Road, Greenwich, Connecticut for use as executive offices. The
Company currently utilizes approximately 3,500 square feet and has sublet the
remaining 7,400 square feet to a related party. The current lease expires in
October 2003. The Company also leases office space at 16 West 19th Street, New
York, New York 10011, and 6834 Hollywood Boulevard, Hollywood, California 90028.
ITEM 3. LEGAL PROCEEDINGS
The Company is subject to legal claims from time to time and is
involved in litigation that has arisen in the ordinary course of its business.
It is the opinion of the Company's management that either it has adequate legal
defenses to these claims or that any liability that might be incurred due to
these claims will not, in the aggregate, exceed the limits of the Company's
insurance policies or otherwise result in any material adverse effect on the
Company's operations or financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the stockholders in the fourth
quarter of 2001.
11
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock is traded on the over-the-counter market and prices
are quoted on the OTC electronic bulletin board under the symbol "CTPI."
The following sets forth the range of high and low bid prices for the
Common Stock for the periods indicated as reported on the OTC electronic
bulletin board.
FISCAL YEAR ENDED DECEMBER 31, HIGH LOW
- --------------------------------------- ------ ------
2000
First quarter.......................... $ 5.50 $ .02
Second quarter......................... 4.00 1.12
Third quarter.......................... 3.75 1.25
Fourth quarter......................... 2.94 .37
2001
First quarter.......................... 2.00 .25
Second quarter......................... .31 .07
Third quarter.......................... .14 .02
Fourth quarter......................... .10 .03
As of March 15, 2002, there were 479 common stockholders of record and
182,462,546 shares of Common Stock outstanding. The last reported sale price for
the Common Stock on March 15, 2002 was $0.07.
The Company has never paid cash dividends and does not intend to pay
cash dividends in the foreseeable future. The Company intends to retain
earnings, if any, to finance the growth of its business.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data as of and for the years ended
December 31, 1999, 1998 and 1997 has been derived from the financial statements
of the Company and the notes accompanying the statements, which have been
audited by Grant Thornton LLP, the Company's predecessor independent
accountants. The selected financial data as of and for the years ended December
31, 2001 and 2000 has been derived from the Company's financial statements and
the accompanying notes, which have been audited by KPMG LLP, the Company's
current independent auditors. Note that historical results of operations are not
indicative of the Company's future performance because of the new business
strategy implemented in the spring of 2000 and the Company's recent decision to
divest its consulting businesses and use its significant cash position, in
combination with the proposed merger with Franklin Capital, to develop and
acquire businesses in the radio and media industries. You should read this
information in conjunction with the audited consolidated financial statements,
including the
12
notes to those statements, and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in this
report.
FISCAL YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------
2001 2000 1999 1998 1997
--------- --------- --------- --------- ---------
(in thousands, except per share amounts)
Statement of Operations Data:
Revenue ...................................................... $ 5,567 $ 1,370 $ -- $ -- $ --
Cost of revenues ............................................. 7,276 1,119 -- -- --
Gross profit (loss) .......................................... (1,709) 251 -- -- --
Operating expenses:
Selling, general and administrative .......................... 13,738 3,305 12 11 3
Equity based compensation .................................... 3,086 2,921 -- -- --
Severance .................................................... 1,326 -- -- -- --
Loss on disposal of subsidiaries ............................. 377 -- -- -- --
Impairment losses ............................................ 7,263 -- -- -- --
Total operating expenses ..................................... 25,790 6,226 12 11 3
Operating loss ............................................... (27,499) (5,975) (12) (11) (3)
Other income (expense) ....................................... (4,701) (263) 20 (42) (29)
Net income (loss) before extraordinary item .................. (32,200) (6,238) 8 (53) (32)
Extraordinary item ........................................... -- -- -- 666 --
Dividends .................................................... -- -- (14) (24) (24)
Deemed dividend attributable to issuance of
convertible preferred stock ............................... -- 40,000 -- -- --
Net income (loss) applicable to common stockholders .......... (32,200) (46,238) (6) 589,000 (56)
Net income (loss) per share--basic and diluted ............... (.23) (1.31) -- .13 (.01)
DECEMBER 31,
-----------------------------------------------------------------
2001 2000 1999 1998 1997
--------- --------- --------- --------- ---------
(in thousands)
Balance Sheet Data:
Cash, cash equivalents and marketable securities ............. 8,892 $ 30,333 $ 245 $ 173 $ 270
Working capital .............................................. 10,719 30,012 245 236 (377)
Total assets ................................................. 16,152 38,576 246 238 270
Accumulated deficit .......................................... (80,801) (48,601) (2,363) (2,371) (2,984)
Stockholders' equity (deficit) ............................... 14,660 37,182 245 236 (377)
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the
Company's audited consolidated financial statements and accompanying notes for
the fiscal year ended December 31, 2001. Certain statements contained within
this discussion constitute forward-looking statements. See "Special Note
Regarding Forward Looking Statements."
13
ACCOUNTING POLICIES
The preparation of the Company's financial statements in conformity
with generally accepted accounting principles in the United States requires the
Company to make estimates and assumptions that affect the reported amounts 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. The Company's estimates, judgments and
assumptions are continually evaluated based on available information and
experience. Because of the use of estimates inherent in the financial reporting
process, actual results could differ from those estimates.
The Company provides services under time-and-material or fixed-price
contracts which are generally short term. Under time-and-material and
fixed-price contracts costs are generally incurred in proportion with contracted
billing schedules and revenue is recognized when the services are rendered based
on the percentage of costs incurred to date to total estimated project costs.
Cumulative revenues recognized may be less or greater than cumulative costs and
profits billed at any point in time during a contract's term. The resulting
difference is recognized as unbilled or deferred revenue.
Any estimation process, including that used in preparing contract
accounting models, involves inherent risk. The Company reduces the inherent risk
relating to revenue and cost estimates in percentage-of-completion models
through corporate policy, approval and monitoring processes. Risks relating to
service delivery, productivity and other factors are considered in the
estimation process. For all client contracts, provisions for estimated losses on
individual contracts are made in the period in which the loss first becomes
apparent.
The Company maintains allowances for doubtful accounts for estimated
losses resulting from the inability of customers to make payments. If the
financial condition of the Company's customers deteriorate, resulting in the
customers' inability to make payments, additional allowances will be required.
The Company establishes the estimated useful lives of the Company's
intangibles based on a number of factors, which are in part based on the
Company's assessments of the expected revenues to be generated by the acquired
customer base, a specific evaluation of the capabilities and retention efforts
associated with the workforce acquired and other general economic trends. If the
Company experiences client turnover, employee turnover or deteriorating
operating performance, the estimated useful lives of the Company's intangibles
may require adjustment.
The Company has reduced its deferred tax assets to an amount that the
Company believes is more likely than not to be realized, $0 at December 31,
2001. In so doing, the Company has estimated future taxable losses in
determining the valuation allowance. In the event that actual results differ
from these estimates or these estimates are adjusted in future periods, the
Company may need to modify its valuation allowance which could materially affect
its financial position and results of operations.
14
OVERVIEW AND RECENT DEVELOPMENTS
Prior to commencement of the operational divestiture described in the
Company's Form 10-Q for the quarter ended September 30, 2001, the Company was a
provider of a broad range of professional consulting services, including
e-services and technology strategy, online branding, web architecture and design
systems integration, system architecture and outsourcing. The Company has served
clients throughout the United States with offices in New York, Connecticut,
Maryland, California and New Jersey.
On December 4, 2001 the Company entered into an agreement and plan of
merger with Franklin Capital Corporation, a Delaware corporation. Subject to the
terms of the agreement the Company will be merged with and into Franklin Capital
in a transaction intended to qualify as a tax-free reorganization. The merger is
subject to review by various government entities and to stockholder approval.
The companies anticipate closing the transaction in the second quarter of 2002.
The Company has made two investments in Excelsior Radio Networks, Inc.
(d/b/a eCom Capital, Inc.), a subsidiary of Franklin Capital, which produces,
syndicates and distributes radio programs and related services. The Company
purchased a promissory note and warrant for $2,250,000 from Excelsior in August
2001 and in December of 2001 purchased 250,000 shares of Excelsior from Franklin
Capital for $250,000.
Based on the Company's assessment of this investment and its review of
the opportunities in the radio business, the board of directors decided to merge
with Franklin Capital and jointly develop and acquire network radio programming
and sales and syndication businesses.
OTHER SIGNIFICANT DEVELOPMENTS
In July 2001, the board of directors terminated the employment of the
Company's President and Chief Executive Officer. The former executive had an
employment agreement dated August 21, 2000 that provided for severance benefits.
The Company will pay the former executive the severance he is entitled to under
his employment agreement and has incurred a charge totaling $493,000, which is
included in severance charges in the Statement of Operations for the year ended
December 31, 2001. Additionally, the Company has recorded an impairment loss in
the amount of $2,250,000, reflecting the impact of the executive's termination
upon the carrying value of certain intangible assets, and has reversed certain
deferred compensation related to unvested options that were forfeited in
connection with the termination. The impairment loss amount is included in the
"Impairment Losses" section of the accompanying Statement of Operations.
During the year ended December 31, 2001, in response to continued
unfavorable market conditions for its services, the Company embarked on a review
of all operations with the goal of formulating a course of action to minimize
near-term losses, capital expenditures and reduce cash outflows. As an initial
course of action, the Company terminated the employment of approximately 90% of
its existing workforce.
15
As a result of these terminations, coupled with historical, current and
projected operating and cash flow losses, the Company evaluated the
recoverability of its acquired intangible assets and goodwill by comparison of
the carrying value relative to future cash flows. As a result, the Company
recorded impairment charges totaling $5,013,000, which are included in the
"Impairment Losses" section of the accompanying Statement of Operations.
Also as a result of these actions, the Company incurred severance
charges of $1,326,000, which are included in the "Severance Charges" section of
the accompanying Statement of Operations. $895,000 of this amount has been paid
as of December 31, 2001.
On November 2, 2001, the Company executed a Share Purchase Agreement
pursuant to which the Company sold all of the issued and outstanding capital
stock of RAND to a member of its management team. Under the terms of the Share
Purchase Agreement, the Company received 375,039 shares of Common Stock and a
warrant to purchase 30%, on a fully diluted basis when exercised of RAND's
common stock, at an aggregate price of $1.00. The warrant, exercisable upon the
occurrence of certain events, expires on November 3, 2013.
On November 8, 2001, the Company sold a 51% voting interest in InSys to
a member of its management team in exchange for $50,000 and concurrently forgave
approximately $400,000 in advances to InSys. In addition, the Company loaned
Insys $100,000 evidenced by a promissory note. The note bears interest at a rate
equal to the London Interbank Offer Rate plus 2%.
OVERVIEW OF HISTORICAL OPERATIONS
The Company derives its revenues from services performed under one of
two pricing arrangements: time-and-materials and fixed price. The services
performed under either of these arrangements are substantially identical.
Revenues are recognized for fixed price arrangements as services are
rendered using the percentage-of-completion method, based on the percentage of
costs incurred to date to total estimated project costs, provided the Company
has the ability to produce reasonably dependable estimates, and collection of
the resulting receivable is probable. The cumulative impact of any revision in
estimates of the costs to complete and losses on projects are reflected in the
period in which they become known.
Revenues are recognized for time-and-materials based arrangements in
the period when the underlying services are rendered, provided collection of the
resulting receivable is probable and no significant obligations remain.
Provisions for estimated project specific losses on both types of
contracts are made during the period in which such losses become probable and
can be estimated. To date, such losses have not been significant. The Company
reports revenue net of reimbursable expenses.
Agreements entered into in connection with time-and-materials projects
are generally terminable by the client upon 30-days' prior written notice, and
clients are required to pay the Company for all time, materials and expenses
incurred by the Company through the effective date of termination. Agreements
entered into in connection with fixed-fee projects are generally
16
terminable by the client upon payment for work performed and the next progress
payment due. If clients terminate existing agreements or if the Company is
unable to enter into new agreements, the Company's business, financial condition
and results of operations could be materially and adversely affected. In
addition, because a significant portion of the Company's expenses are fixed, a
variation in the number of client engagements can cause significant variations
in operating results from quarter to quarter.
The Company's projects vary in size and source. Therefore, a client
that accounts for a significant portion of the Company's revenues in one period
may not generate a similar amount of revenue in subsequent periods. However,
there is a risk that the source of the Company's revenues may be generated from
a small number of clients and these clients may not retain the Company in the
future. Any cancellation, deferral or significant reduction in work performed
for these principal clients or a significant number of smaller clients could
have a material adverse affect on the Company's business, financial condition
and results of operations.
The Company's costs consist primarily of compensation and related costs
of personnel dedicated to customer assignments. Project personnel costs also
include fees paid to subcontractors for work performed in connection with
projects and non-reimbursed travel expenses.
The Company's selling, general and administrative costs consist
primarily of compensation and related costs of the management and administrative
functions, including finance and accounting, marketing, human resources and
internal information technology, the costs of the Company's facilities, and
other general corporate expenses.
The Company's equity based compensation expense is comprised of
amortization of the deferred compensation associated with the grant of stock
options to the board of directors and former President and Chief Executive
Officer. Such cost is measured as the difference between the exercise price of
options granted and the fair market value of the underlying stock on the date of
measurement, and is being recognized as expense over the vesting period of the
options. Also included in the equity based compensation during the year ended
December 31, 2001 is the cost associated with 3,144,494 shares of Common Stock
issued as partial consideration in exchange for the former President and Chief
Executive Officer's shares of eHotHouse, a subsidiary. Such cost is measured as
the difference between the fair value of the shares issued over that of the
eHotHouse shares on the original date of grant. The Company incurred
approximately $3,086,000 in equity based compensation expense during the year
ended December 31, 2001.
ACQUISITIONS AND DIVESTITURES
The Company evaluates acquisitions based on numerous quantitative and
qualitative factors. Quantitative factors include historical and projected
revenues and profitability, geographic coverage and backlog of projects under
contract. Qualitative factors include strategic and cultural fit, management
skills, customer relationships and technical proficiency.
EHOTHOUSE. On February 21, 2001, the Company acquired the remaining
outstanding interests in eHotHouse, and merged eHotHouse with a newly formed,
wholly owned subsidiary of the Company. The Company acquired this minority
interest for approximately 2,200,000
17
shares of Common Stock, valued at approximately $2,700,000, and $200,000 in
cash. The acquisition was accounted for using the purchase method of accounting.
On May 16, 2001, eHotHouse merged with and into the Company.
As a result of the aforementioned terminations, coupled with the
historical, current and projected operating and cash flow losses, the Company
evaluated recoverability of its acquired intangible assets acquired from
eHotHouse by comparison of the carrying value relative to future cash flows. As
a result, the Company recorded impairment charges totaling $2,250,000 which are
included in the "Impairment Charges" section of the accompanying Statement of
Operations.
INSYS. On October 18, 2000, eHotHouse acquired substantially all of the
operating assets and assumed certain liabilities of InSys, a provider of systems
integration services, in exchange for $900,000 in cash including acquisition
costs. The business combination was accounted for using the purchase method.
During the year ended December 31, 2001 as a result of the
aforementioned terminations, coupled with the historical, current and projected
operating and cash flow losses, the Company evaluated the recoverability of its
acquired intangible assets by comparison of the carrying value relative to
future cash flows. As a result, the Company recorded impairment charges totaling
$105,000 which are included in the "Impairment Charges" section of the
accompanying Statement of Operations.
As discussed above, on November 8, 2001 the Company sold a 51% voting
interest in InSys to a certain member of the management team in exchange for
$50,000 and concurrently forgave approximately $400,000 of advances to InSys. In
addition, the Company loaned InSys $100,000 evidenced by a promissory note.
RAND INTERACTIVE CORPORATION. On November 30, 2000, eHotHouse acquired
all of the issued and outstanding common stock of RAND Interactive Corporation,
a provider of media and technical services in exchange for $700,000 of eHotHouse
common stock and $700,000 in cash including acquisition costs. The business
combination was accounted for using the purchase method of accounting.
As a result of the aforementioned terminations, coupled with the
historical, current and projected operating and cash flow losses, the Company
evaluated the recoverability of its acquired intangible assets by comparison of
the carrying value relative to future cash flows. As a result, the Company
recorded impairment charges totaling $1,030,000 which are included in the
"Impairment Charges" section of the accompanying Statement of Operations.
As discussed above, on November 2, 2001 the Company sold all of the
issued and outstanding shares of RAND to certain members of the management team
in exchange for 375,039 shares of the Common Stock, and a warrant to purchase
such amount of shares of RAND common stock that equals, at the time of exercise,
30% of the issued and outstanding shares of RAND common stock on a fully diluted
basis.
IGUANA. On March 1, 2001, the Company acquired all outstanding shares
of Iguana Studios, Inc., a leading provider of media and technical services, in
exchange for approximately $2,800,000 in cash, including acquisition costs,
2,700,000 shares of Common Stock, valued at
18
approximately $2,000,000, and replacement options to purchase 1,681,888 shares
of Common Stock valued at approximately $1,000,000. The acquisition was
accounted for using the purchase method of accounting.
As a result of the terminations referred to above, coupled with the
historical, current and projected operating and cash flow losses, the Company
evaluated recoverability of its acquired intangible assets and goodwill acquired
from Iguana by comparison of the carrying value relative to future cash flows.
As a result, the Company recorded impairment charges totaling $3,878,000 which
are included in the "Impairment Charges" section of the accompanying Statement
of Operations.
CANNED. On June 12, 2001, the Company acquired Papke-Textor, Inc. d/b/a
Canned Interactive, a Los Angeles based media and entertainment interactive
agency, for approximately $1,100,000 in cash, including acquisition costs, and
6,436,552 shares of Common Stock, valued at approximately $1,000,000. The
business combination was accounted for using the purchase method of accounting.
BROADSTREAM AND NETPRO. In May 2001, Broadstream completed a
recapitalization whereby the holders of Series A Convertible Redeemable
Preferred Stock exchanged their Series A shares for shares of Series A-1
Convertible Redeemable Preferred Stock. The recapitalization modified the
conversion ratio, policies regarding dividends and voting rights for Series A-1
holders. No additional consideration was paid by the Company or any other
preferred shareholder in connection with this transaction. As a result of the
recapitalization the voting interest of common shareholders was reduced from 31%
to 13%.
Also in May 2001, in connection with the recapitalization, the Company
transferred 1,191,569 Series A-1 Convertible Redeemable Preferred shares to
Adelson Investors, LLC, another shareholder of Broadstream. This transfer is
accounted for as a contribution by the Company of such shares to Broadstream in
exchange for no consideration. In connection with this non-reciprocal transfer
of shares the Company recorded a charge of $1,016,000, equal to the Company's
cost basis in such shares, which has been included in the "Equity In Losses of
Unconsolidated Affiliates" section of the accompanying Statement of Operations.
Subsequent to the recapitalization, and non-reciprocal share transfer, the
Company owned 6,434,596 shares of Series A-1 convertible redeemable preferred
stock of Broadstream, representing an approximately 43% equity interest
(calculated on an as-if-converted basis) and 49% voting interest.
On August 15, 2001 the Company purchased a secured convertible
promissory note from Broadstream in exchange for $600,000 in connection with an
aggregate $1,600,000 bridge loan financing consummated by Broadstream. The
aggregate bridge loan financing was secured by all of Broadstream's assets. The
note also contained certain conversion provisions in the event Broadstream
closed a new round of financing or entered into a change of control transaction.
On November 30, 2001 the Company assigned its note to a newly formed
entity, NetPro Holdings Inc. in exchange for 13,674,753 shares of NetPro Series
A-1 convertible redeemable participating preferred stock. On November 30, 2001
as a result of the application of the equity method, the net book value of the
note approximated zero. No gain or loss was recorded as a
19
result of this exchange. Concurrent with this transaction, NetPro foreclosed on
the note and elected to take possession of all of Broadstream's assets in full
satisfaction of the notes. Broadstream remains in existence but is not
conducting any business.
On December 24, 2001, the Company purchased 1,585,479 shares of NetPro
Series B-1 convertible redeemable participating preferred stock in exchange for
$200,000 in connection with a larger ongoing financing effort by NetPro. On
January 10, 2002, the Company invested an additional $100,000 in NetPro Series B
1 stock. On March 14, 2002, the board of directors of NetPro voted to suspend
all of the company's business operations and immediately terminate almost all of
its employees due to NetPro's inability to generate sufficient revenues.
NetPro's board of directors continues to evaluate alternatives to maximize the
value of the company's remaining assets.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000
REVENUES. Revenues increased from $1,370,000 for the year ended
December 31, 2000 to $5,567,000 for the year ended December 31, 2001. This
increase is the result of the contribution to revenues of acquired companies'
revenues streams. As a result of the Company's divestitures and continued
unfavorable market conditions for its professional services, revenues from
historical service offerings decreased on a sequential basis during 2001 and are
expected to decline on a prospective basis.
COST OF REVENUES. Cost of revenues increased from $1,119,000 for the
year ended December 31, 2000 to $7,276,000 for the year ended December 31, 2001.
Cost of revenues consists primarily of compensation of billable employees,
travel, subcontractor costs and other costs directly incurred in the delivery of
services to clients. Billable employees are full time employees and
subcontractors whose time are spent servicing client projects. Also included in
Cost of Revenues is the amortization of certain purchased intangible assets,
representing the value of customer relationship and workforces acquired.
In connection with the acquisition of InSys, RAND, Iguana and Canned,
the Company recorded intangible assets representing the value ascribed to the
customer lists and assembled workforces of the acquired companies. The aggregate
amortization of these intangible assets totaled $50,000 and $2,588,000,
respectively, and is included in Cost of Revenues.
As a result of the Company's divestitures, terminations and unfavorable
market conditions, cost of revenues decreased on a sequential basis during 2001
and are expected to decline on a prospective basis.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses consist primarily of compensation and related benefits,
professional services fees, facilities costs and advertising and promotional
costs. Selling, general and administrative expenses increased from $3,305,000
for the year ended December 31, 2000 to $13,738,000 for the year ended December
31, 2001. These increases were primarily the result of increased compensation,
increased professional services fees, increased facility costs, and increases in
other costs associated with the growth of the Company's business and operations
over the prior
20
year. On a prospective basis, as a result of the operational modifications to
the Company, selling, general and administrative expenses are expected to
decrease in absolute dollars.
IMPAIRMENT LOSSES. As a result of the aforementioned terminations,
coupled with historical, current and projected operating and cash flow losses,
the Company evaluated the recoverability of its acquired intangible assets and
goodwill by comparison of the carrying value relative to future cash flows. As a
result, the Company recorded impairment charges totaling $7,263,000 which are
included in the "Impairment Losses" section of the accompanying Statement of
Operations.
SEVERANCE COSTS. Severance costs were $0 and $1,326,000 in the year
ended December 31, 2000 and 2001, respectively.
EQUITY IN LOSSES OF UNCONSOLIDATED AFFILIATES. Equity in losses of
unconsolidated affiliates was $1,732,000 and $5,546,000 for the years ended
December 31, 2000 and 2001, respectively. Equity in losses of unconsolidated
affiliates resulting from the Company's minority ownership in Broadstream,
NetPro and InSys have been accounted for under the equity method of accounting.
Under the equity method of accounting, the Company's proportionate share,
calculated on an as-if-converted basis, of the investee's operating losses and
amortization of the Company's net excess investment over its equity in the
investee's net assets is included in equity in losses of unconsolidated
affiliates.
INTEREST AND DIVIDEND INCOME. Interest and dividend income was
$1,469,000 and $845,000 for the years ended December 31, 2000 and 2001,
respectively. The decrease in interest income over the prior year was
attributable to a decrease in the Company's invested cash balance, as it has
funded its ongoing operations. Interest income in future periods may fluctuate
as a result of the average cash maintained and changes in the market rates of
the Company's cash equivalents, and the Company expects that the average cash
balance may continue to decrease as the Company continues to incur operating
losses.
INCOME TAXES. The Company has available estimated net operating loss
carryforwards for income tax purposes of approximately $20,000,000 as of
December 31, 2001, which expire on various dates from 2001 through 2021. A
valuation allowance has been established due to uncertainty whether the Company
will generate sufficient taxable earnings to utilize the available net operating
loss carryforwards. A portion of the Company's net operating loss carryforwards
may also be limited due to significant changes in ownership under Section 382 of
the Tax Reform Act of 1986.
YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999
The Company commenced its new business strategy in the spring of 2000
and began its primary operations in the fall of 2000 concurrent with its
acquisition of majority control of eHotHouse.
REVENUES. Revenues increased from $0 in 1999 to $1,370,000 in 2000. The
increase is a result of the contribution to revenues of acquired companies'
revenue streams.
21
COST OF REVENUES. Cost of revenues consists principally of costs
directly incurred in the delivery of services to clients, primarily consisting
of compensation of billable employees. Billable employees are full time
employees and sub-contractors whose time spent working on client projects is
charged to that client at agreed-upon rates. Billable employees are our primary
source of revenue. Such costs increased from $0 in 1999 to $1,119,000 in 2000,
or 82% of revenues. This increase is a result of the contribution to such costs
of acquired companies' direct personnel and related costs.
In connection with the Company's acquisitions of InSys and RAND,
accounted for under the purchase method of accounting, the Company recorded
intangible assets representing the value ascribed to the customer lists and
assembled workforces of the acquired companies. The aggregate amortization of
these intangibles totaled $50,000 for the year ended December 31, 2000 and is
included in cost of revenues.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses consist primarily of compensation and related benefits,
professional services fees, facilities costs and advertising and promotional
costs. Selling, general and administrative expenses increased from $12,000 in
1999 to $3,305,000 in 2000. The increase was primarily the result of increased
compensation, increased professional services fees and increases in other costs
associated with the growth of our business and operations.
EQUITY IN LOSSES OF UNCONSOLIDATED AFFILIATES. Equity in losses of
unconsolidated affiliates was $0 in 1999 and $1,732,000 in 2000. Equity in
losses of unconsolidated affiliates resulting from the Company's minority
ownership in Broadstream has been accounted for under the equity method of
accounting. Under the equity method of accounting, the Company's proportionate
share, calculated on an as-if-converted basis, of Broadstream's operating losses
and amortization of the Company's net excess investment over its equity in
Broadstream's net assets is included in equity in losses of unconsolidated
affiliates.
INTEREST AND DIVIDEND INCOME. Interest and dividend income was $5,000
in 1999 and $1,469,000 in 2000. The increase in interest income was attributable
to interest earned on cash and cash equivalents primarily from the net proceeds
from the Company's sale of Series B convertible preferred stock in March 2000.
INCOME TAXES. The Company has available estimated net operating loss
carryforwards for income tax purposes of approximately $4,066,000, which expires
on various dates from 2001 through 2020. A valuation allowance has been
established due to uncertainty whether the Company will generate sufficient
taxable earnings to utilize the available net operating loss carryforwards. A
portion of the Company's net operating loss carryforwards may also be limited
due to significant changes in ownership under Section 382 of the Tax Reform Act
of 1986.
LIQUIDITY AND CAPITAL RESOURCES
On March 28, 2000, an investor group led by Pangea Internet Advisors,
LLC purchased 4,000,000 shares of Series B convertible preferred stock for net
proceeds to the Company of approximately $39,450,000 in cash. Also on March 28,
2000, certain other investors purchased warrants to purchase 41,250,000 shares
of common stock for $100,000.
22
The Company had $8,892,000 in cash and cash equivalents available as of
December 31, 2001. The Company used $21,441,000 to fund operations, finance
acquisitions and make strategic investments during the year ended December 31,
2001. The Company has initiated a merger transaction with Franklin Capital
subject to certain terms, conditions and stockholder approvals, which would
require outlays of capital to complete the merger. Further, the Company is
continuously evaluating future acquisitions of businesses and other strategic
assets which may also require considerable outlays of capital. If a business
combination is consummated and the post combination operations require
significant cash outlays to fund operations, the Company may be required to seek
additional sources of financing.
However, beginning in the third quarter of 2001, in response to
continued unfavorable market conditions for its services, the Company embarked
on a review of its operations with the goal of formulating a course of action to
minimize near term losses, capital expenditures and reduce cash outflows. As of
December 31, 2001, the Company has a single operating subsidiary, a limited
number of employees and has significantly reduced fixed expenses.
During the year ended December 31, 2001, the Company incurred legal
fees in connection with certain transactions and other matters in the normal
course of business. A portion of these services was provided by a firm of which
a member of the board of directors is a partner. Fees incurred by this firm
totaled approximately $881,000 and $821,000 for the year ended December 31, 2001
and 2000, respectively.
Additionally, during the year ended December 31, 2001, the Company
incurred management and investment advisory service fees in connection with
identifying, evaluating, negotiating, and managing investment opportunities for
the Company. These services were provided by a firm of which the current
President and Chief Executive Officer of the Company was previously affiliated.
Fees incurred by the Company to this firm totaled $510,000 and $828,000 in 2001
and 2000, respectively. Additionally, this firm occupies a portion of the
Company's office space in Connecticut, for which it pays rent at an amount which
approximates fair market value. Such payments to the Company totaled $283,000
during the year ended December 31, 2001. Furthermore, the firm was indebted to
the Company in the amount of $204,000 at December 31, 2001 for its pro rata
share of certain leasehold improvements and rental payments due.
The Company invests predominantly in instruments that are highly
liquid, investment grade securities that have maturities of less than 45 days.
The Company's future contractual obligations at December 31, 2001 were
as follows:
2006 AND
----------
2002 2003 2004 2005 THEREAFTER
------- ------- ------- ------- ----------
(in thousands)
Operating leases...................... $ 980 $ 842 $ 332 $ 46 $ -
Capital Leases........................ 92 124 - - -
------- ------- ------- ------- -------
Involuntary termination............... 247 246 - - -
------- ------- ------- ------- -------
$ 1,227 $ 1,088 $ 332 $ 46 -
======= ======= ======= ======= =======
The Company intends to fund these obligations from its cash on hand at
December 31, 2001.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's primary objective in investing in securities and other
instruments is to preserve principal while at the same time maximizing yields
without significantly increasing risk. To achieve this objective, the Company
maintains a portfolio of cash and cash equivalents and money market funds. As of
December 31, 2001, the Company held cash and cash equivalents with an average
maturity of 45 days or less.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements begin on Page F-1 of this report.
23
QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following tables set forth unaudited quarterly statement of
operations data of the Company for each of the Company's seven most recent
quarters. The periods prior to April 2, 2000 have been omitted since the
operating activities of the Company were de minimis. In management's opinion,
this unaudited information has been prepared on the same basis as the audited
annual financial statements and includes all adjustments (consisting only of
normal recurring adjustments) necessary for fair presentation of the unaudited
information for the quarters presented. You should read this information in
conjunction with the consolidated financial statements, including the notes to
those statements, included elsewhere in this report. The results of operations
for a quarter are not necessarily indicative of results that the Company may
achieve for any subsequent periods and, because the Company commenced its
primary operations in fall 2000 and recently decided to divest its consulting
business and use its significant cash position, in combination with the proposed
merger with Franklin Capital, to develop and acquire businesses in the radio and
media industries, historical information may not be indicative of future
results.
THREE MONTHS ENDED
----------------------------------------------------------------------
DEC. 31, 2001 SEPT. 30, 2001 JUNE 30, 2001 MARCH 31, 2001
------------- -------------- ------------- --------------
Revenues ........................................... 423,000 1,740,000 1,530,000 1,874,000
Cost of revenues ................................... 385,000 2,527,000 2,312,000 2,052,000
Gross profit ....................................... 38,000 (787,000) (782,000) (178,000)
Selling, general and administrative ................ 2,950,000 2,967,000 5,037,000 2,784,000
Equity based compensation expense .................. 133,000 159,000 165,000 2,629,000
Impairment losses .................................. -- 7,263,000 -- --
Severance charges .................................. -- 1,326,000 -- --
Loss on disposal of subsidiaries ................... 377,000 -- -- --
Income (loss) from operations ...................... (3,422,000) (12,502,000) (5,984,000) (5,591,000)
Other income (loss), net ........................... (532,000) (1,698,000) (2,021,000) (450,000)
Income (loss) before income taxes .................. (3,954,000) (14,200,000) (8,005,000) (6,041,000)
Provision for income taxes ......................... -- -- -- --
Net income (loss) .................................. (3,954,000) (14,200,000) (8,005,000) (6,041,000)
THREE MONTHS ENDED
-----------------------------------------------------
DEC. 31, 2000 SEPT. 30, 2000 JUNE 30, 2000
------------- -------------- -------------
Revenues ...................................................... 1,364,000 6,000 --
Cost of revenues .............................................. 1,119,000 -- --
Gross profit .................................................. 245,000 6,000 --
Selling, general and administrative ........................... 1,842,000 988,000 471,000
Equity based compensation expense ............................. 2,857,000 64,000 --
Income (loss) from operations ................................. (4,454,000) (1,046,000) (471,000)
Other income (loss), net ...................................... (754,000) 37,000 454,000
Income (loss) before income taxes ............................. (5,208,000) (1,009,000) (17,000)
Provision for income taxes .................................... -- -- --
Net income (loss) ............................................. (5,208,000) (1,009,000) (17,000)
24
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
CHANGE IN ACCOUNTANTS
On July 13, 2000, the Company retained KPMG LLP as its independent
auditors to replace Grant Thornton LLP. The Company engaged KPMG LLP to audit
the books and accounts of the Company for the year ending December 31, 2000. The
board of directors and its audit committee previously had approved this decision
to change the Company's independent accountants.
The reports of Grant Thornton on the financial statements of the
Company for the year ended December 31, 1999 contain no adverse opinion or
disclaimer of opinion and were not qualified or modified as to any uncertainty,
audit scope or accounting principle. In connection with the audit for 1999 and
through July 13, 2000, there were no disagreements with Grant Thornton on any
matter of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure, which disagreements, if not resolved to the
satisfaction of Grant Thornton, would have caused the firm to make reference
thereto in their reports on the financial statements for such period.
During 1999 and through July 13, 2000, Grant Thornton had not advised
the Company of any reportable events (as defined in Item 304(a)(1)(v) of
Regulation S-K), and has not advised the Company of any such events since July
13, 2000. The Company had not consulted with KPMG on any matter prior to July
13, 2000.
The Company filed current reports on Form 8-K on July 19 and July 25,
2000 disclosing this change in its accountants.
DISAGREEMENTS WITH ACCOUNTANTS
None.
25
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
EXECUTIVE OFFICERS
The executive officer of the Company is as follows:
NAME AGE PRESENT POSITION WITH THE COMPANY
- ----------------------- ----- -----------------------------------------
William Avery.......... 52 President, Chief Executive Officer, Chief
Financial Officer, Secretary and Director
DIRECTORS
The directors of the Company are as follows:
WILLIAM AVERY. Mr. Avery has served as the Company's President and Chief
Executive Officer since July 2, 2001. From March 28, 2000 to March 16, 2001, Mr.
Avery served as a Managing Director of the Company. He has served as a director
since September 12, 2000. Mr. Avery also serves as the Chairman of the
Nominating Committee. Mr. Avery was a Managing Partner of FG II Ventures, LLC,
from October 1, 1999 to July 1, 2001. Prior to working with FG II, Mr. Avery was
Corporate Senior Vice President and President of the International Division of
CUC International Inc., which merged with Cendant Corporation. With CUC, Mr.
Avery developed its overseas memberships and Internet businesses. Mr. Avery is
52 years of age.
JAMES M. DUBIN. Mr. Dubin has served as a director of the Company since March
28, 2000. Mr. Dubin serves as a member of the Compensation Committee. Mr. Dubin
is also a Senior Partner and Co-chair of the Corporate Department of Paul,
Weiss, Rifkind, Wharton & Garrison, an international law firm headquartered in
New York City, where he has worked since 1974. Mr. Dubin serves on the board of
directors of Carnival Corporation, the world's largest cruise line operator, and
Conair Corporation, an international designer, manufacturer and marketer of
branded consumer products. Mr. Dubin is 55 years of age.
MICHAEL GLEASON. Mr. Gleason has been Chairman of the Board since March 28,
2000. Mr. Gleason serves as a member of the Audit and Compensation Committees.
He is also the Managing Partner of The Culmen Group, which has public and
private equity investments in media, fixed income securities, oil and gas
production and real estate, where he has worked since 1993. Mr. Gleason also
represents Seven Network Australia in the United States and serves as Vice
President of Seven Network (U.S.). Mr. Gleason also serves on the board of
directors of Metro-Goldwyn-Mayer Inc., a producer and distributor of television
programs and theatrical motion pictures. Mr. Gleason is 47 years of age.
WILLIAM E. LIPNER. Mr. Lipner has been a director of the Company since March 28,
2000. Mr. Lipner serves as the Chairman of the Compensation Committee and is a
member of the Nominating Committee. He is also Chairman and Chief Executive
Officer of NFO World Group, Inc., the world's third largest marketing
information/market research company. Mr. Lipner also serves on the board of
directors of Crane Co., a diversified aerospace engineering and manufacturing
company. Mr. Lipner is 54 years of age.
26
MICHAEL LEVITT. Mr. Levitt has been a director of the Company since November 7,
2001. He currently acts as a private investor. From 1996 until 2001 Mr. Levitt
was a partner at Hicks, Muse, Tate & Furst Incorporated. He was involved in
originating, structuring and monitoring Hicks Muse's investments, principally in
the media and branded food industries, and he served as the partner principally
responsible for the firm's relationships with investment banks and commercial
banking firms worldwide. Mr. Levitt also managed Hicks Muse's New York office.
Mr. Levitt also serves on the board of directors of IDT Corporation, a leading
provider of international and domestic long-distance telephone service, Internet
access and global Internet telephony services. Mr. Levitt is 43 years of age.
COMPENSATION OF DIRECTORS
Non-employee directors receive annual remuneration of $2,500 for
serving as directors of the Company, and are reimbursed for out-of-pocket
expenses incurred in connection with such service. Additionally, non-employee
directors have been granted options to purchase Common Stock under the Company's
2000 Stock Option Plan. See "Executive Compensation - Certain Relationships and
Related Party Transactions - Stock Options."
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires the Company's directors, executive officers, and persons who own more
than ten percent of the Common Stock, to file reports of ownership and changes
in ownership on Forms 3, 4 and 5 with the SEC. Directors, executive officers and
greater than ten percent stockholders are required by SEC regulations to furnish
the Company with copies of all Forms 3, 4 and 5 they file. The Company believes
that all its directors, executive officers, and greater than ten percent
beneficial owners complied with all filing requirements applicable to them in
2001 other than (i) Robert Westerfield, a former executive officer of the
Company, whose Form 3 filing was late, and (ii) Steven Carlin, a former
executive officer of the Company, whose Form 3 filing was late. However, neither
Mr. Westerfield nor Mr. Carlin failed to report a transaction on a timely basis.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY OF CASH AND OTHER COMPENSATION
The following Summary Compensation Table sets forth the compensation
awarded to, earned by or paid to the President and Chief Executive Officer and
certain former executive officers of the Company during the fiscal years ended
December 31, 2001 and 2000 for services rendered in all capacities to the
Company and its subsidiaries.
AWARDS OF ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY ($) OPTIONS/SARS COMPENSATION
- --------------------------------------------- ------ -------------- -------------- --------------
William Avery
CEO, CFO, President and Secretary............ 2001 128,723 (1) 9,000,000 (2) --
2000 92,307 (3) -- --
Matthew Ryan
Former CEO and President..................... 2001 125,950 (1) -- 122,836 (4)
2000 73,559 (3) 3,000,000 (5) --
Robert Westerfield
Former Chief Operating Officer, Chief
Financial Officer, Treasurer and
Executive Vice President.................. 2001 37,746 (1) -- --
2000 -- -- --
Kathleen E. Shepphird
Former Executive Vice President, Managing
Director of Marketing and Company
Secretary................................. 2001 99,167 (1) -- 61,666.50 (6)
- ----------
(1) Salaries listed have been prorated to reflect the amount of time each
officer was employed by the Company in 2001. The period covered for each
officer is as follows:
Mr. Avery: January 1, 2001 to March 16, 2001 as a Managing Director and
July 2, 2001 to December 31, 2001
27
- ----------
as the President and CEO.
Mr. Ryan: January 1, 2001 to July 2, 2001.
Mr. Westerfield: February 5, 2001 to June 20, 2001.
Ms. Shepphird: January 1, 2001 to August 1, 2001.
(2) Mr. Avery was granted options to purchase 9,000,000 shares of Common Stock
with an exercise price of $.03 per share. Options to purchase 3,000,000
shares of Common Stock were issued under the Company's 2000 Stock Option
Plan. Options to purchase 6,000,000 shares of Common Stock were issued
outside of the Plan and the Company intends to seek stockholder approval of
this grant at its next meeting of stockholders.
(3) Salaries listed have been prorated to reflect the amount of time each
officer was employed by the Company in 2000. The period covered for each
officer is as follows: Mr. Avery: March 28, 2000 to December 31, 2000. Mr.
Ryan: August 22, 2000 to December 31, 2000.
(4) Pursuant to his employment agreement, Mr. Ryan is entitled to receive
$493,000 as severance pay from the Company upon his termination of
employment of which $122,836 was paid in 2001.
(5) Mr. Ryan was granted options to purchase 3,000,000 shares of Common Stock
with an exercise price of $1.59 per share. These options expired,
unexercised, following the termination of Mr. Ryan's employment.
(6) Ms. Shepphird received $61,666.50 as severance pay from the Company upon
her termination of employment.
No compensation for services in any capacity to the Company was
awarded, earned by or paid during the fiscal year ended December 31, 1999.
OPTION/SAR GRANTS IN FISCAL YEAR 2001
The following awards were made in fiscal year 2001 to executives
pursuant to the 2000 Stock Option Plan and outside the 2000 Stock Option Plan.
POTENTIAL REALIZABLE
NUMBER OF % OF TOTAL OPTIONS VALUE AT ASSUMED ANNUAL
SECURITIES GRANTED TO EXERCISE RATES OF STOCK PRICE
GRANT UNDERLYING OPTIONS EMPLOYEES IN FISCAL PRICE EXPIRATION APPRECIATION FOR OPTION
NAME DATE GRANTED (#) YEAR ($/SH) DATE TERM (1)
- -------------- ------- ------------------ ------------------- -------- ---------- -----------------------
5% 10%
---------- ----------
William Avery 9/21/01 9,000,000 (2) 100% $.03 9/21/11 $169,200 $429,300
- ----------
(1) Potential realizable value assumes that the stock price increases from the
date of grant until the end of the option term (10 years) at the annual
rate specified (5% and 10%). The 5% and 10% assumed annual rates of
appreciation are mandated by SEC rules and do not represent the Company's
estimate or projection of the future price of the Common Stock. The Company
does not believe that this method accurately illustrates the potential
value of a stock option.
(2) Options to purchase 3,000,000 shares of Common Stock were issued under the
Company's 2000 Stock Option Plan. Options to purchase 6,000,000 shares of
Common Stock were issued outside of the Plan and the Company intends to
seek stockholder approval of this grant at its next meeting of
stockholders.
AGGREGATED OPTION EXERCISES IN FISCAL 2001 AND FISCAL YEAR END OPTION VALUES
The following table sets forth the number of shares covered by
exercisable and unexercisable stock options as of December 31, 2001, and the
value of the "in-the-money" options. The value of "in-the-money" options
represents the positive spread between the exercise price of any such option and
the fair market value of the Common Stock (the mean between the high and low
prices of the stock) on December 31, 2001. None of the named executive officers
exercised any stock options during 2001.
28
NUMBER OF SECURITIES UNDERLYING
UNEXERCISED OPTIONS AT FISCAL VALUE OF IN-THE-MONEY OPTIONS
NAME YEAR END AT FISCAL YEAR END
- -------------------------------- -------------------------------- -----------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- ------------- ----------- -------------
William Avery 0 9,000,000 $0 $180,000
EMPLOYMENT AGREEMENTS
MR. AVERY. On September 19, 2001, the Company entered into an
employment agreement with Mr. Avery. Mr. Avery's agreement will expire on
December 31, 2004. The employment agreement is automatically renewed from year
to year after the expiration date unless either the Company or Mr. Avery
provides written notice of an intention not to renew it at least 120 days prior
to December 31 of any year.
The employment agreement provides that the duties of Mr. Avery shall be
prescribed by the board of directors and that Mr. Avery shall devote
substantially all of his business time to performing his duties under the
employment agreement.
Compensation, bonuses, perquisites and other benefits are to be
provided to Mr. Avery subject to the approval of the compensation committee and
commensurate with compensation and benefits provided to other senior executives
of the Company. The initial base salary payable to Mr. Avery is $280,000. Mr.
Avery will be entitled to participate in any benefit plan available to senior
executives of the Company.
The employment agreement provides for the termination of Mr. Avery upon
the first to occur of (i) the expiration of the term of the employment
agreement; (ii) the death of Mr. Avery; (iii) the delivery of a notice from Mr.
Avery of a voluntary termination of the employment agreement; (iv) the delivery
of a notice to Mr. Avery of a termination of the employment agreement for cause
or disability of Mr. Avery; or (v) the delivery of a notice from Mr. Avery of a
resignation due to a change of control of the Company.
If Mr. Avery is terminated by the Company as a result of his
disability, the Company will pay Mr. Avery an amount equal to one-half of his
base salary. If the employment agreement is terminated because of Mr. Avery's
death, the Company will pay any base salary that is accrued but unpaid. If the
employment agreement is terminated for any reason described above other than for
death or disability, Mr. Avery will be paid any accrued but unpaid salary plus
any unpaid bonus amount from prior years.
If the employment agreement is terminated for any reason other than
those described in the above paragraph, the Company will pay to Mr. Avery a
severance amount equal to the sum of (i) accrued but unpaid salary; (ii) the
full base salary for the remainder of the term of the employment agreement;
(iii) any bonus for a prior year which has not been paid to Mr. Avery; and (iv)
any expenses of Mr. Avery incurred in connection with the collection of the
severance amount.
On September 19, 2001 the Company also entered into a severance
compensation agreement with Mr. Avery.
29
The severance compensation agreement provides that if Mr. Avery's
employment is terminated without "cause" within one year of a change of control,
he is entitled to (i) a lump sum equal to 1.5 times his average base salary for
the previous five years; (ii) a lump sum equal to any amounts forfeited under
any employee pension benefit plan; and (iii) continued coverage (until the later
of (x) the day Mr. Avery accepts new full-time employment or (y) three years
from the date of termination) under all employee welfare benefit plans.
A change of control is defined as the occurrence of any of the
following events:
o any person other than the Company or one of its subsidiaries becomes
the beneficial owner of 30% or more of the Company's then
outstanding equity securities, unless such acquisition has been
approved by not less than two-thirds of the board of directors prior
to such acquisition;
o individuals who constitute the board of directors on a given day
cease (for any reason other than death or resignation) to constitute
a majority of the board of directors on the following day, unless
any subsequent director was approved or nominated by not less than
three-quarters of the incumbent board of directors or two-thirds of
the nominating committee of the incumbent board of directors;
o the stockholders of the Company approve any reorganization, merger
or consolidation of the Company or any other transaction in which
the Company's existing securities are exchanged for securities of
another issuer or the Company issues new equity securities in excess
of 30% of the existing securities, unless such transaction was
recommended to the stockholders of the Company by not less than
two-thirds of the board in existence prior to the transaction;
o the approval by stockholders of the Company of a sale of all or
substantially all of the assets of the Company, unless such sale was
recommended to the stockholders by not less than two-thirds of the
board of directors;
o the dissolution or liquidation of the Company;
o the failure of nominees of the board of directors for election to
the board to be so elected other than by death or withdrawal of the
nominee; or
o a change in control required to be reported pursuant to Item 1(a) of
Form 8-K under the Securities Exchange Act of 1934 unless such
change in control was approved by not less than two-thirds of the
incumbent board of directors.
MR. RYAN. On August 21, 2000, the Company entered into a three-year
employment agreement with Mr. Ryan with automatic one-year extensions. Either
party was permitted to terminate the agreement with 120 days notice before the
expiration of the current term. The agreement provided for a base annual salary
of $225,000, as well as a discretionary bonus of up to 100% of Mr. Ryan's annual
salary. The agreement also provided for reimbursement of business expenses and a
$2 million life insurance policy for Mr. Ryan. Mr. Ryan also agreed to a
one-year non-competition and confidentiality clause upon termination or
resignation. On
30
July 2, 2001, the board of directors terminated Mr. Ryan's employment and he
became entitled to receive severance in the amount of $493,000, of which
$122,836 was paid in 2001.
MS. SHEPPHIRD. On November 10, 2001, the Company entered into an
at-will employment agreement with Ms. Shepphird. The agreement provided for a
$155,000 base salary, as well as reimbursement of out-of-pocket business
expenses and indemnification for any liabilities incurred as a result of Ms.
Shepphird's position with the Company. On August 1, 2001, Ms. Shepphird resigned
from the Company.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of March 15, 2002
regarding (i) each person known by the Company to be the beneficial owner of
more than 5% of the outstanding shares of Common Stock or Series A Preferred
Stock, (ii) each director of the Company, (iii) the current and former Chief
Executive Officer of the Company and certain of the Company's other former
executive officers and (iv) all executive officers and directors as a group.
Except as otherwise indicated, each person has sole voting and dispositive power
with respect to such shares. The address for all beneficial owners, unless
stated otherwise below, is c/o Change Technology Partners, Inc., 537 Steamboat
Road, Greenwich, CT 06830.
Each share of the Series A Preferred Stock is convertible into one
share of Common Stock.
Beneficial ownership includes shares for which a person, directly or
indirectly, has or shares voting or investment power, or both, and also includes
options and warrants which are exercisable within sixty days of March 15, 2002.
SERIES A
COMMON STOCK PREFERRED STOCK
PERCENT PERCENT
NAME OF BENEFICIAL OWNER SHARES OF CLASS SHARES OF CLASS
- -------------------------------------------- ---------- -------- ------ --------
Culmen Technology Partners, L.P............. 32,000,000 17.5% - -
201 Main Street, Suite 1955
Fort Worth, TX 76102
Walter A. Forbes............................ 10,810,625(1) 5.6 - -
c/o FG II Ventures, LLC
537 Steamboat Road
Greenwich, CT 06830
Cary S. Fitchey............................. 10,443,750(2) 5.5 - -
c/o FG II Ventures, LLC
537 Steamboat Road
Greenwich, CT 06830
William Avery .............................. 9,115,625(3) 4.8 - -
James M. Dubin.............................. 1,629,520(4) * - -
Michael Gleason............................. 33,316,520(5) 18.1 - -
Michael Levitt.............................. 5,800,000(6) 3.1
William E. Lipner........................... 2,091,520(7) 1.1 - -
31
SERIES A
COMMON STOCK PREFERRED STOCK
PERCENT PERCENT
NAME OF BENEFICIAL OWNER SHARES OF CLASS SHARES OF CLASS
- -------------------------------------------- ---------- -------- ------ --------
Matthew Ryan................................ 2,344,494 1.3 - -
313 Lake Street
Pleasantville, NY 10570
Kathleen Shepphird.......................... 1,546,875(8) * - -
65 Harding Road
Old Greenwich, CT 06870
Robert Westerfield.......................... - - - -
P.O. Box 654
Dobbs Ferry, NY 10522
Christopher H.B. Mills...................... 12,939,700(9) 7.1 - -
c/o J.O. Hambro Capital
Management Limited
Ryder Court, 14 Ryder St.
London SW1Y 6QB, England
Gordon Bryant............................... - - 645 100
9408 Avenido Del Oso NE
Albuquerque, NM 87111
All officers and directors
as a group (5 persons)**................. 51,953,185(10) 26.6 - -
- ----------
* Represents less than 1% of the outstanding shares, both in number and in
terms of voting power.
** Duplications eliminated.
(1) Represents 1,220,000 shares of Common Stock and warrants to purchase an
aggregate of 9,590,625 shares of Common Stock.
(2) Represents 2,400,000 shares of Common Stock and warrants to purchase an
aggregate of 8,043,750 shares of Common Stock.
(3) Represents 2,000,000 shares of Common Stock and warrants to purchase an
aggregate of 7,115,625 shares of Common Stock.
(4) Represents 338,000 shares of Common Stock and options to purchase an
aggregate of 1,291,520 shares of Common Stock.
(5) Represents 32,000,000 shares of Common Stock owned by Culmen Technology
Partners, L.P. Mr. Gleason is the President and sole director of CTP, Inc.,
the general partner of Culmen. As a result, he may be deemed to have
beneficial ownership over these shares. However, Mr. Gleason disclaims
beneficial ownership of 28,400,000 shares of Common Stock. Also includes
options to purchase an aggregate of 1,316,520 shares of Common Stock.
(6) Represents 3,800,000 shares of Common Stock and options to purchase an
aggregate of 2,000,000 shares of Common Stock.
(7) Represents 800,000 shares of Common Stock and options to purchase an
aggregate of 1,291,520 shares of Common Stock.
(8) Represents warrants to purchase an aggregate of 1,546,875 shares of Common
Stock.
(9) According to a Schedule 13G filed with the Securities and Exchange
Commission on July 19, 2001, Mr. Mills (i) shares voting and dispositive
power over such shares with J.O. Hambro Capital Management (Holdings)
Limited and J.O. Hambro Capital Management Limited, (ii) shares voting and
dispositive power over 1,280,000 such shares with American Opportunity
Trust plc, (iii) shares voting and dispositive power over 4,400,000 such
shares with Growth Financial Services and North Atlantic Smaller Companies
Investment Trust plc, (iv) shares voting and dispositive power over 640,000
such shares with Oryx International Growth Fund Limited and Consulta
(Channel Islands) Limited and (v) shares voting and dispositive power over
1,498,000 such shares with The Trident North Atlantic Fund.
(10) Represents 38,938,000 shares of Common Stock, warrants to purchase an
aggregate of 7,115,625 shares of Common Stock and options to purchase
5,899,560 shares of Common Stock. Includes 32,000,000 shares of Common
Stock owned by Culmen, which Mr. Gleason may be deemed to beneficially own.
32
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
BUSINESS OPPORTUNITY ALLOCATION AND MISCELLANEOUS SERVICES AGREEMENT
The Company entered into an Amended and Restated Business Opportunity
Allocation and Miscellaneous Services Agreement dated November 10, 2000, with FG
II Ventures, LLC and certain affiliates of FG II to address the allocation of
acquisition opportunities, given the responsibilities and management duties some
of the Company's current and former management team had with respect to various
entities affiliated with FG II. FG II on behalf of itself and its affiliates
will refer to the Company all opportunities (outside of Europe, the Middle East
and Africa) for the Company to acquire interests in its target businesses where
the Company's allocation is a minimum of $1,000,000 or where 50% of the amount
of such opportunity could be acquired for no less than $500,000 and such an
acquisition would give the Company primary control of the target business. If
the opportunity is appropriate for both the Company and for FG II or its other
affiliates, the opportunity will be allocated on an equitable basis which
recognizes the Company's objective of not being classified as an investment
company, but in any event, the Company will be allocated at least 50% of the
opportunity.
In addition, pursuant to the Business Opportunity Agreement, FG II
provides certain services to the Company. During the year ended December 31,
2001, the Company incurred management and investment advisory service fees in
connection with identifying, evaluating, negotiating and managing investment
opportunities for the Company. William Avery was a general partner of FG II
until he became the Company's President and Chief Executive Officer at which
time he resigned from FG II. Walter Forbes, a five percent beneficial owner of
the Common Stock, is a limited partner of FG II. Fees incurred by the Company to
FG II totaled $510,000 for the year ended December 31, 2001.
Additionally, FG II occupies a portion of the Company's principal
executive offices, for which it pays rent at approximately fair market value.
Such payments to the Company totaled $283,000 during the year ended December 31,
2001. Furthermore, FG II was indebted to the Company in the amount of $201,000
at December 31, 2001 for its pro rata share of certain leasehold improvements
and rental payments due.
PROFESSIONAL SERVICES
During the year ended December 31, 2001, the Company incurred legal
fees in connection with certain transactions and other matters in the normal
course of business. A portion of these services was provided by Paul, Weiss,
Rifkind, Wharton & Garrison, of which James M. Dubin, a member of the board of
directors and compensation committees of the Company, is a partner.
STOCK OPTIONS
The 2000 Stock Option Plan provides for the award of stock options to
the employees, directors and consultants of the Company. Grants under this plan
are intended to provide participants with the promise of longer-term rewards
that appreciate in value with favorable future performance of the Company. In
determining grants of stock options, the compensation committee reviews
individual performance and company performance. The criteria used to
33
evaluate company performance include sales and earnings figures and return on
equity. The compensation committee believes that all such criteria are accorded
equal weight. The 2000 Stock Option Plan authorizes the issuance of a maximum of
20,000,000 options, with a maximum of 3,000,000 options to be received each year
by any one participant.
On June 26, 2000, James M. Dubin, Michael Gleason and William Lipner
were each granted non-qualified stock options to purchase 400,000 shares of
Common Stock at an exercise price of $.50 per share. One-fourth of these stock
options vested on June 26, 2000, one-fourth of them vested on June 26, 2001 and
the remainder vest monthly from July 1, 2001 until June 1, 2003.
On May 22, 2001, Messers. Dubin and Gleason were each granted
non-qualified stock options to purchase 100,000 shares of Common Stock at an
exercise price of $.50 per share in consideration of their service on the audit
committee. One-fourth of these options vested on May 22, 2001, one-fourth of
them will vest on May 22, 2002, and the remainder will vest monthly from June 1,
2002 until May 1, 2004. Mr. Dubin's options expired, unexercised, when he
resigned from the audit committee in June 2001.
On September 19, 2001, William Avery was granted options to purchase
9,000,000 shares of Common Stock at an exercise price of $.03 per share. Options
to purchase 3,000,000 shares of Common Stock were issued under the Company's
2000 Stock Option Plan. Options to purchase 6,000,000 shares of Common Stock
were issued outside of the plan and the Company intends to seek stockholder
approval of this grant at its next meeting of stockholders. Each option vests
one-fourth on each of the first, second, third and fourth anniversaries of the
date of the grant.
On September 21, 2001, each of Messers. Dubin, Gleason and Lipner were
granted non-qualified stock options to purchase 1,000,000 shares of Common Stock
at an exercise price of $.03 per share. All of these options vested on September
21, 2001.
On November 7, 2001, Michael Levitt was granted non-qualified stock
options to purchase 2,000,000 shares of Common Stock at an exercise price of
$.06 per share. All of these options vested on November 7, 2001.
34
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) Financial Statements and Schedules
The financial statements and financial statement schedule included in
this report begin on page F-1.
(a)(2) The following exhibits are filed as part of this report unless
specifically stated to be incorporated herein by reference to other documents
previously filed with the SEC:
2.1 Agreement and Plan of Merger of Arinco Computer Systems Inc. with and
into Change Technology Partners, Inc. (d/b/a Pangea Internet, Inc.),
dated April 21, 2000 (filed as an exhibit to the Registrant's Report on
Form 8-K dated September 12, 2000 and incorporated herein by
reference).
2.2 Agreement and Plan of Merger of CTPI Acquisition Corp. with and into
eHotHouse, Inc., dated February 5, 2001 (filed as an exhibit to the
Registrant's Annual Report on Form 10-K dated March 27, 2001 and
incorporated herein by reference).
2.3 Agreement and Plan of Merger among Change Technology Partners, Inc. and
Franklin Capital Corporation, dated December 4, 2001 (filed as an
exhibit to the Registrant's Report on Form 8-K dated December 5, 2001
and incorporated herein by reference).
3.1 Certificate of Incorporation of Change Technology Partners, Inc. (filed
as an exhibit to the Registrant's quarterly report on Form 10-Q for the
fiscal quarter ended September 30, 2000 and incorporated herein by
reference).
3.2 Bylaws of Change Technology Partners, Inc. (filed as an exhibit to the
Registrant's quarterly report on Form 10-Q for the fiscal quarter ended
September 30, 2000 and incorporated herein by reference).
4.1 Form of stock certificate for common stock (filed as an exhibit to the
Registrant's Annual Report on Form 10-K dated March 27, 2001 and
incorporated herein by reference).
4.2 Registration Rights Agreement by and among Arinco Computer Systems
Inc., Pangea Internet Advisors LLC and the persons party to the
Securities Purchase Agreement, dated as of March 28, 2000 (filed as an
exhibit to the Registrant's Report on Form 8-K dated March 28, 2000 and
incorporated herein by reference).
10.1 Securities Purchase Agreement, dated March 9, 2000, by and between
Arinco Computer Systems Inc., Pangea Internet Advisors LLC and the
purchasers listed on Schedule I attached thereto (filed as an exhibit
to the Registrant's Report on Form 8-K dated March 28, 2000, and
incorporated herein by reference).
35
10.2 Amended and Restated Business Opportunity Allocation and Miscellaneous
Services Agreement by and between Change Technology Partners, Inc., FG
II Ventures, LLC and Pangea Internet Advisors LLC, dated as of November
10, 2000 (filed as an exhibit to the Registrant's Annual Report on Form
10-K dated March 27, 2001 and incorporated herein by reference).
10.3 Warrants for William Avery, Cary S. Fitchey, The Roberts Family
Revocable Trust U/D/T dated as of December 15, 1997, David M. Roberts
and Gail M. Simpson, Trustees, Roberts Children Irrevocable Trust U/D/T
dated October 21, 1996, Stephen H. Roberts, Trustee and Turtle Holdings
LLC (filed as an exhibit to the Registrant's Report on Form 8-K dated
March 28, 2000 and incorporated herein by reference).
10.4 Stock Purchase Agreement dated June 29, 2000 by and between Arinco
Computer Systems Inc., Broadstream.com, Inc. and the purchasers listed
on Schedule I attached thereto (filed as an exhibit to the Registrant's
Report on Form 8-K dated June 29, 2000 and incorporated herein by
reference).
10.5 Stock Purchase Agreement, dated September 15, 2000, by and between
Change Technology Partners, Inc. and eHotHouse, Inc. (filed as an
exhibit to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended September 15, 2000 and incorporated herein by reference).
10.6 Agreement for Sale and Purchase of Business Assets among InSys
Technology Inc., ATC InSys Technology, Inc., and ATC Group Services
Inc. dated October 5, 2000 (filed as an exhibit to the Registrant's
Report on Form 8-K dated October 18, 2000 and incorporated herein by
reference).
10.7 Assumption Agreement among InSys Technology, Inc., ATC InSys Technology
Inc. and ATC Group Services Inc. dated October 18, 2000 (filed as an
exhibit to the Registrant's Report on Form 8-K dated October 18, 2000
and incorporated herein by reference).
10.8 Employment Agreement entered into by and between Arinco Computer
Systems Inc. and Matthew Ryan dated as of August 21, 2000 (filed as an
exhibit to the Registrant's Report on Form 8-K dated November 20, 2000
and incorporated herein by reference).
10.9 Employment Agreement entered into by and between Change Technology
Partners, Inc. and Kathleen Shepphird dated as of November 10, 2000
(filed as an exhibit to the Registrant's Annual Report on Form 10-K
dated March 27, 2001 and incorporated herein by reference).
10.10 Agreement and Plan of Merger among eHotHouse Inc., eHH Merger I, Inc.,
RAND Interactive Corporation, and Todd Burgess, David Kelley, John
Snow, Stephen Riddick and Brobeck, Phleger and Harrison LLP dated
November 30, 2000 (filed as an exhibit to the Registrant's Report on
Form 8-K dated November 30, 2000 and incorporated herein by reference).
10.11 Agreement and Plan of Merger among Change Technology Partners, Inc.,
Iguana Studios I, Inc., and Iguana Studios, Inc., dated March 1, 2001
(filed as an exhibit to the Registrant's Report on Form 8-K dated March
14, 2001 and incorporated herein by reference).
36
10.12 Stockholders Agreement entered into by Change Technology Partners,
Inc., and Stockholders of Iguana dated March 1, 2001 (filed as an
exhibit to the Registrant's Report on Form 8-K dated March 14, 2001 and
incorporated herein by reference).
10.13 Agreement and Plan of Merger among Change Technology Partners, Inc.,
Canned Interactive, Inc., Papke-Textor, Inc., Textor Family Limited
Partnership, Papke Family Limited Partnership, Douglas Textor and Jay
Papke, dated June 12, 2001 (filed as an exhibit to the Registrant's
Report on Form 8-K dated June 12, 2001 and incorporated herein by
reference).
10.14 Employment Agreement effective as of September 19, 2001 by and between
Change Technology Partners, Inc. and William Avery.
10.15 Severance Compensation Agreement effective as of September 19, 2001 by
and between Change Technology Partners, Inc. and William Avery.
10.16 Stock Purchase Agreement by and among NetPro Holdings, Inc., Change
Technology Partners, Inc., and Adelson Investors LLC dated November 30,
2001.
10.17 Purchase and Sale Agreement by and between John J. Goodwin and Change
Technology Partners, Inc. dated November 8, 2001 (filed as an exhibit
to the Registrant's Report on Form 8-K dated November 8, 2001 and
incorporated herein by reference).
10.18 Promissory Note issued by InSys Technology LLC to Change Technology
Partners, Inc. dated November 8, 2001 (filed as an exhibit to the
Registrant's Report on Form 8-K dated November 8, 2001 and incorporated
herein by reference).
10.19 Share Purchase Agreement by and between Change Technology Partners,
Inc. and John Snow, dated November 2, 2001 (filed as an exhibit to the
Registrant's Report on Form 8-K dated November 2, 2001 and incorporated
herein by reference).
10.20 Warrant to Purchase Common Stock, issued by RAND Interactive
Corporation to Change Technology Partners, Inc. dated November 2, 2001
(filed as an exhibit to the Registrant's Report on Form 8-K dated
November 2, 2001 and incorporated herein by reference).
10.21 Promissory Note issued by eCom Capital, Inc. to Change Technology
Partners, Inc. dated August 28, 2001 (filed as an exhibit to the
Registrant's Report on Form 8-K dated August 28, 2001 and incorporated
herein by reference).
10.22 Security Agreement among eCom Capital, Inc., Franklin Capital
Corporation and Change Technology Partners, Inc. dated August 28, 2001
(filed as an exhibit to the Registrant's Report on Form 8-K dated
August 28, 2001 and incorporated herein by reference).
37
10.23 Warrant, issued by eCom Capital, Inc. to Change Technology Partners,
Inc. dated August 28, 2001 (filed as an exhibit to the Registrant's
Report on Form 8-K dated August 28, 2001 and incorporated herein by
reference).
10.24 Stock Purchase Agreement between Change Technology Partners, Inc. and
Franklin Capital Corporation dated December 4, 2001.
21.1 Subsidiaries.
(b) The following reports on Form 8-K were filed with the
Securities & Exchange Commission during the fourth quarter of 2001:
(i) On November 15, 2001 reporting matters under Item 5, Other
Events, and Item 7, Financial Statements and Exhibits.
(ii) On November 16, 2001 two Form 8-Ks reporting matters under
Item 5, Other Events, and Item 7, Financial Statements and
Exhibits.
(iii) On December 5, 2001 reporting matters under Item 5, Other
Events, and Item 7, Financial Statements and Exhibits.
38
CHANGE TECHNOLOGY PARTNERS, INC.
AND SUBSIDIARIES
INDEX
Page
Report of KPMG LLP, Independent Accountants................................ F-1
Report of Predecessor Independent Accountants.............................. F-2
Consolidated Balance Sheets as of December 31, 2001 and 2000............... F-3
Consolidated Statements of Operations for the years
ended December 31, 2001, 2000 and 1999................................... F-4
Consolidated Statements of Stockholders' Equity and Redeemable
Preferred Stock for the years ended December 31, 2001, 2000 and 1999..... F-5
Consolidated Statements of Cash Flows for the years ended December 31,
2001, 2000 and 1999...................................................... F-6
Notes to Consolidated Financial Statements................................. F-7
REPORT OF KPMG LLP, INDEPENDENT ACCOUNTANTS
The Board of Directors and Shareholders of Change Technology Partners, Inc.
We have audited the accompanying consolidated balance sheets of Change
Technology Partners, Inc. and subsidiaries (the "Company") (formerly known as
Arinco Computer Systems Inc.) as of December 31, 2001 and 2000, and the related
consolidated statements of operations, stockholders' equity and redeemable
preferred stock, and cash flows for the years then ended. 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. The accompanying statements of operations,
stockholders' equity and cash flows for the year ended December 31, 1999 were
audited by other auditors whose report, dated February 28, 2000 expressed an
unqualified opinion on those statements.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated balance sheets as of December 31, 2001 and 2000
and the related consolidated statements of operations, stockholders' equity and
redeemable preferred stock and cash flows for the years then ended referred to
above present fairly, in all material respects, the financial position of Change
Technology Partners, Inc. and subsidiaries as of December 31, 2001 and 2000, and
the results of their operations and cash flows for the years then ended in
conformity with accounting principles generally accepted in the United States of
America.
KPMG LLP
New York, New York
February 14, 2002
F-1
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Shareholders and Board of Directors of the Company:
We have audited the accompanying consolidated statements of operations,
stockholders' equity, and cash flows of Change Technology Partners, Inc.
(formerly known as Arinco Computer Systems, Inc.) and Subsidiaries for the year
ended December 31, 1999. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of operations and cash flows of
Change Technology Partners, Inc. and Subsidiaries for the year ended December
31, 1999, in conformity with generally accepted accounting principles.
GRANT THORNTON LLP
Oklahoma City, Oklahoma
February 28, 2000
F-2
CHANGE TECHNOLOGY PARTNERS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31,
--------------------------
2001 2000
-------- --------
ASSETS
Cash and cash equivalents ...................................................................... $ 8,892 $ 30,333
Accounts receivable, net of allowances of $62 at December 31, 2000 ............................. 147 839
Related party receivable ....................................................................... 204 --
Notes receivable ............................................................................... 2,393 --
Prepaid expenses and other current assets, including
restricted cash of $200 at December 31, 2001 ................................................ 442 219
-------- --------
Total current assets .................................................. $ 12,078 $ 1,391
Notes receivable, excluding current portion .................................................... 333 --
Investments in and loans to unconsolidated subsidiaries ........................................ 720 4,893
Property and equipment, net .................................................................... 786 510
Purchased intangible assets and goodwill, net .................................................. 1,568 1,531
Other assets ................................................................................... 667 251
-------- --------
Total assets ................................................................................ $ 16,152 $ 8,576
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable ............................................................................... $ 280 $ 347
Accrued expenses ............................................................................... 983 917
Deferred revenues .............................................................................. 4 79
Loan payable ................................................................................... -- 36
Capital lease obligation ....................................................................... 92 --
-------- --------
Total current liabilities ............................................. 1,359 1,379
Loan payable, excluding current portion ........................................................ -- 15
Capital lease obligation, less current portion ................................................. 124 --
Deferred rent .................................................................................. 9 --
-------- --------
Total liabilities ........................................................................... 1,492 1,394
Stockholders' equity:
Preferred stock:
Series A - $.06 per share cumulative, convertible share-for-share into common
stock; $.10 par value; 500,000 shares authorized, 645 and 3,000 shares
issued and outstanding at December 31, 2001 and 2000, respectively with an
aggregate liquidation preference of $1 per share ......................................... -- --
Series B - convertible into common on a 1:40 basis; $.10 par value; 4,000,000
shares authorized; 0 and 3,000,000 shares issued and outstanding at
December 31, 2001 and 2000, respectively .................................................. -- 300
Common stock:
$.01 par value; 500,000,000 shares authorized, 179,022,881 and 44,959,000
shares issued and outstanding at December 31, 2001 and 2000, respectively ................ 1,790 449
Additional paid-in capital ..................................................................... 94,637 86,821
Deferred compensation .......................................................................... (966) (1,787)
Accumulated deficit ............................................................................ (80,801) (48,601)
-------- --------
Total stockholders' equity .................................................................. 14,660 37,182
-------- --------
Total liabilities and stockholders' equity .................................................. $ 16,152 $ 38,576
======== ========
See accompanying notes to consolidated financial statements.
F-3
CHANGE TECHNOLOGY PARTNERS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
2001 2000 1999
------------- ------------- -------------
Revenues ............................................................... $ 5,567 $ 1,370 $ --
Cost of revenues including the amortization of purchased
intangibles of $1,044 and $50 in 2001 and 2000, respectively ........ 7,276 1,119 --
------------- ------------- -------------
Gross profit (loss) .................................................... (1,709) 251 --
Operating expenses:
Selling, general and administrative expenses, exclusive
of equity based compensation of $3,086 and $2,921 in
2001 and 2000, respectively ...................................... 13,738 3,305 12
Equity based compensation ........................................... 3,086 2,921 --
Severance ........................................................... 1,326 -- --
Loss on disposal of subsidiaries .................................... 377 -- --
Impairment losses ................................................... 7,263 -- --
------------- ------------- -------------
Total operating expenses ......................................... 25,790 6,226 12
------------- ------------- -------------
Loss from operations ................................................... (27,499) (5,975) (12)
Other income (expense):
Interest and dividend income, net ...................................... 845 1,469 5
Equity in losses of unconsolidated subsidiaries ....................... (5,546) (1,732) --
Realized loss on trading securities .................................... -- -- (1)
Unrealized gain on trading securities .................................. -- -- 16
------------- ------------- -------------
Net income (loss) ................................................ (32,200) (6,238) 8
Series A preferred stock dividend requirement .......................... -- -- 14
Deemed dividend attributable to issuance of Series B
convertible preferred stock ......................................... -- 40,000 --
Net loss attributable to common stockholders ..................... $ (32,200) $ (46,238) $ (6)
============= ============= =============
Basic and diluted net loss per common share ............................ $ (.23) $ (1.31) $ --
------------- ------------- -------------
Weighted average common shares outstanding, basic and diluted .......... 138,478,550 35,424,000 4,698,000
============= ============= =============
See accompanying notes to consolidated financial statements.
F-4
CHANGE TECHNOLOGY PARTNERS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND REDEEMABLE PREFERRED STOCK
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
|
SERIES B |
REDEEMABLE | SERIES A, SERIES B
PREFERRED STOCK | PREFERRED STOCK PREFERRED STOCK COMMON STOCK
--------------------- | -------------------- ----------------------- ----------------------
SHARES AMOUNT | SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
--------------------- | -------------------- ----------------------- ----------------------
Balance as of December 31, 1998... -- $ -- | 396,000 $ 40 -- $ -- 4,541,000 $ 45
Issuance of common stock.......... -- -- | -- -- -- -- 25,000 --
Conversion of Series A preferred |
stock.......................... -- -- | (393,000) (40) -- -- 393,000 4
Net income for the year ended |
December 31, 1999.............. -- -- | -- -- -- -- -- --
---------- --------- | --------- ------- ----------- -------- ----------- -------
Balance as of December 31, 1999... -- -- | 3,000 -- -- -- 4,959,000 49
Sale of warrants to purchase |
common stock................... -- -- | -- -- -- -- -- --
Issuance of Series B redeemable |
preferred stock, net of |
offering costs................. 4,000,000 40,000 | -- -- -- -- -- --
Beneficial conversion feature |
related to Series B redeemable |
convertible preferred stock.... -- (40,000) | -- -- -- -- -- --
Amortization of beneficial |
conversion feature............. -- 40,000 | -- -- -- -- -- --
Conversion of Series B preferred |
stock into common stock........ (1,000,000) (10,000) | -- -- -- -- 40,000,000 400
Nullification of redemption |
feature of Series B preferred |
stock.......................... (3,000,000) (30,000) | -- -- 3,000,000 300 -- --
Deferred compensation............. -- -- | -- -- -- -- -- --
Amortization of deferred |
compensation................... -- -- | -- -- -- -- -- --
Removal of restrictions on |
subsidiary stock to employee |
and independent contractors.... -- -- | -- -- -- -- -- --
Issuance of subsidiary stock for |
acquisition.................... -- -- | -- -- -- -- -- --
Net loss for the year ended |
December 31, 2000.............. -- -- | -- -- -- -- -- --
---------- --------- | --------- ------- ----------- -------- ----------- -------
Balance as of December 31, 2000... -- $ -- | 3,000 $ -- $ 3,000,000 $ 300 $44,959,000 $ 449
Amortization of deferred |
compensation................... -- -- | -- -- -- -- -- --
Forfeiture of unvested options.... -- -- | -- -- -- -- -- (320)
Options Granted to Executive |
(Note 8)....................... -- -- | -- -- -- -- -- --
Reacquisition of stock in |
connection with sale of RAND... -- -- | -- -- -- -- (375,039 ) (4)
Acquisition of Iguana Studios, |
Inc............................ -- -- | -- -- -- -- 2,700,000 27
Settlement of stock award to CEO |
and acquisition of outstanding |
minority interest of |
eHotHouse, Inc................. -- -- | -- -- -- -- 5,300,013 54
Acquisition of Canned |
Interactive, Inc............... -- -- | -- -- -- -- 6,436,552 64
Conversion of series A preferred |
shares to common............... -- -- | -- -- -- -- -- --
Conversion of preferred shares to |
common......................... -- -- | (2,355) -- (3,000,000) (300) 120,002,355 1,200
Net loss for the year ended |
December 31, 2001.............. -- -- | -- -- -- -- -- --
---------- --------- | --------- ------- ----------- -------- ----------- -------
Balance at December 31, 2001 -- $ -- | 645 $ -- -- $ -- 179,022,881 $ 1,790
========== ========= | ========= ======= =========== ======== =========== =======
SERIES B |
REDEEMABLE |
PREFERRED STOCK | ADDITIONAL TOTAL
---------------------- | PAID-IN DEFERRED ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT | CAPITAL COMPENSATION DEFICIT EQUITY
---------------------- | ---------- ------------ ------------ -------------
Balance as of December 31, 1998... -- $ -- | $ 2,522 $ -- $ (2,371) $ 236
Issuance of common stock.......... -- -- | 1 -- -- 1
Conversion of Series A preferred |
stock.......................... -- -- | 36 -- -- --
Net income for the year ended |
December 31, 1999.............. -- -- | -- -- 8 8
---------- ------- | --------- --------- ---------- ---------
Balance as of December 31, 1999... -- -- | 2,559 -- (2,363) 245
Sale of warrants to purchase |
common stock................... -- -- | 100 -- -- 100
Issuance of Series B redeemable |
preferred stock, net of |
offering costs................. 4,000,000 40,000 | (550) -- -- (550)
Beneficial conversion feature |
related to Series B redeemable |
convertible preferred stock.... -- (40,000) | 40,000 -- -- 40,000
Amortization of beneficial |
conversion feature............. -- 40,000 | -- -- (40,000) (40,000)
Conversion of Series B preferred |
stock into common stock........ (1,000,000) (10,000) | 9,600 -- -- 10,000
Nullification of redemption |
feature of Series B preferred |
stock.......................... (3,000,000) (30,000) | 29,700 -- -- 30,000
Deferred compensation............. -- -- | 2,480 (2,480) -- --
Amortization of deferred |
compensation................... -- -- | -- 693 -- 693
Removal of restrictions on |
subsidiary stock to employee |
and independent contractors.... -- -- | 2,228 -- -- 2,228
Issuance of subsidiary stock for |
acquisition.................... -- -- | 704 -- -- 704
Net loss for the year ended |
December 31, 2000.............. -- -- | -- -- (6,238) (6,238)
---------- ------- | --------- --------- ---------- ---------
Balance as of December 31, 2000... -- $ -- | $ 86,821 $ (1,787) (48,601) $ 37,182
Amortization of deferred |
compensation................... -- -- | -- 621 -- 621
Forfeiture of unvested options.... -- -- | 320 -- --
Options Granted to Executive |
(Note 8)....................... -- -- | 120 (120) -- --
Reacquisition of stock in |
connection with sale of RAND... -- -- | (22) -- -- (26)
Acquisition of Iguana Studios, |
Inc............................ -- -- | 2,958 -- -- 2,985
Settlement of stock award to CEO |
and acquisition of outstanding |
minority interest of |
eHotHouse, Inc................. -- -- | 5,091 -- -- 5,145
Acquisition of Canned |
Interactive, Inc............... -- -- | 889 -- -- 953
Conversion of series A preferred |
shares to common............... -- -- | -- -- -- --
Conversion of preferred shares to |
common......................... -- -- | (900) -- -- --
Net loss for the year ended |
December 31, 2001.............. -- -- | -- -- (32,200) (32,200)
---------- ------- | --------- --------- ---------- ---------
Balance at December 31, 2001 -- $ -- | $ 94,637 $ (966) $ (80,801) $ 14,660
========== ======= | ========= ========= ========== =========
See accompanying notes to consolidated financial statements.
F-5
CHANGE TECHNOLOGY PARTNERS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31,
--------------------------------------------
2001 2000 1999
-------- -------- --------
Cash flows from operating activities:
Net income (loss) .......................................................... $(32,200) $ (6,238) $ 8
Adjustments to reconcile net income (loss) to net cash in
operating activities:
Depreciation and amortization ....................................... 3,197 56 --
Impairment losses ................................................... 7,263 -- --
Decrease (increase) in trading activities ........................... -- 112 (63)
Equity based compensation ........................................... 3,086 2,921 --
Equity in losses of non-consolidated subsidiary ..................... 5,546 1,732 --
Accretion of loan discount .......................................... (36) -- --
Accrued interest on loans receivable ............................... (52) -- --
Provision for doubtful accounts ..................................... 111 -- --
Loss on disposal of property and equipment .......................... 537 -- --
Loss on disposal of subsidiaries, net of cash disposed .............. 141 -- --
Changes in operating assets and liabilities net of acquisitions:
Accounts receivable ................................................. 307 142 --
Prepaid expenses and other assets ................................... (109) (456) --
Deferred revenues ................................................... 215 8 --
Accounts payable and accrued liabilities ............................ (421) 904 1
-------- -------- --------
Net cash used in operating activities ...................... (12,415) (819) (54)
Cash flows from investing activities:
Investment in affiliates ............................................ (450) (6,625) --
Purchase of property and equipment .................................. (771) (336) --
Cash proceeds from sale of property and equipment ................... 35 -- --
Cash paid for acquisitions .......................................... (4,076) (1,542)
Advances on notes receivable ........................................ (3,450) -- (20)
Receipts on notes receivable ........................................ -- -- 36
-------- -------- --------
Net cash (used in) provided by investing activities ........ (8,712) (8,503) 16
Cash flows from financing activities:
Principal payments under capital leases ............................. (50) __ __
Payment of notes payable ............................................ (264) (28) __
Issuance of Series B preferred stock and warrants, net
of offering costs ............................................... -- 39,550 --
Change in bank overdraft ............................................ -- -- (2)
Net cash (used in) provided by financing activities .......................... (314) 39,522 (2)
-------- -------- --------
Net decrease (increase) in cash and cash equivalents ......................... (21,441) 30,200 (40)
Cash and cash equivalents at beginning of period ............................. 30,333 133 173
-------- -------- --------
Cash and cash equivalents at end of period ................................... $ 8,892 $ 30,333 $ 133
======== ======== ========
See accompanying notes to consolidated financial statements.
F-6
CHANGE TECHNOLOGY PARTNERS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001
(In thousands, except share and per share data)
(1) DESCRIPTION OF BUSINESS
Arinco Computer Systems Inc., the predecessor of the Company together with its
subsidiaries, (the "Company"), was incorporated on March 31, 1978; however, the
Company formally commenced implementation of its plan to provide professional
consulting services on June 15, 2000. The Company provided a broad range of
professional consulting services, including e-services and technology strategy,
online branding, web architecture and design, systems integration, systems
architecture and outsourcing. The Company has served clients throughout the
United States and, as of December 31, 2001, has offices in Connecticut, New York
and California. During the year ended December 31, 2001, the Board of Directors
voted to divest the Company of a majority of its existing operations.
Simultaneous with the divestiture, the Company is evaluating new strategic
business and investment opportunities.
At December 31, 2001, the Company's remaining consolidated subsidiaries are:
o Iguana Studios, Inc. (which has limited continuing operating
activities)
o Papke-Textor, Inc. d/b/a Canned Interactive ("Canned")
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) 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 amounts of assets and
liabilities, the 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. Significant estimates embedded in the
consolidated financial statements for the periods presented concern the
allowances for doubtful accounts, the estimates used in the percentage
of completion method, the fair value of purchased intangible assets,
and the estimated useful lives of purchased intangible assets.
(B) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and its majority-owned and controlled subsidiaries from the
date of acquisition through the date of disposition, if applicable. All
significant intercompany transactions and balances have been eliminated
in consolidation. Investments in
F-7
CHANGE TECHNOLOGY PARTNERS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001
(In thousands, except share and per share data)
less than majority-owned entities over which the Company has
significant influence are accounted for using the equity method.
Since the Company was the only contributor of capital to a
majority-owned subsidiary, eHotHouse, Inc., ("eHotHouse") and the
minority interest holders had no obligation to provide additional
capital, 100% of those losses were included in the Company's results
for the period prior to the Company's acquisition of the outstanding
minority interest in February, 2001. In May, 2001, eHotHouse merged
with and into the Company.
(C) REVENUE RECOGNITION
Revenues are recognized for fixed price arrangements in the period
services are rendered using the percentage-of-completion method, based
on the percentage of costs incurred to date to total estimated projects
costs, provided the Company has the ability to produce reasonably
dependable estimates, collection of the resulting receivable is
probable and no significant obligations remain. The cumulative impact
of any revision in estimates of the cost to complete and losses on
projects in process are reflected in the period in which they become
known.
Revenues are recognized for time-and-materials based arrangements in
the period when the underlying services are rendered, provided
collection of the resulting receivable is probable and no significant
obligations remain.
The Company generally enters into short-term, project specific
contracts with its clients who are generally billed in the same period
in which services are rendered. If services are rendered in advance of
billings, the Company records and presents the related amounts as
unbilled revenue. If amounts are received in advance of services being
performed, the amounts are recorded and presented as deferred revenues.
Revenues exclude reimbursable expenses charged to customers.
(D) COST OF REVENUES
Cost of revenues consists primarily of compensation of billable
employees, subcontractor costs, and other costs directly incurred in
the delivery of services to clients. Billable employees are full time
employees and subcontractors who spent time servicing client projects.
Also included in Cost of Revenues in the Statement of Operations is the
amortization of certain purchased intangible assets, representing the
value of customer relationships and workforces acquired.
F-8
CHANGE TECHNOLOGY PARTNERS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001
(In thousands, except share and per share data)
(E) CONCENTRATION OF CREDIT RISK
Financial instruments that subject the Company to credit risks consist
primarily of cash and cash equivalents, notes receivable, and trade
accounts receivable. Cash and cash equivalents consist of deposits,
money market funds, and investments in short term "AAA" rated debt
instruments. The Company performs ongoing credit evaluations, generally
does not require collateral, and establishes an allowance for doubtful
accounts based upon factors surrounding the credit risk of customers,
historical trends, and other information. To date, such losses have
been within management's expectations. Notes receivable are generally
collateralized and bear a market rate of interest commensurate with the
associated risks.
(F) CASH AND CASH EQUIVALENTS
Cash equivalents consists of highly liquid investments with original
maturities of less than three months.
(G) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, net of accumulated
depreciation and amortization. Leasehold improvements are amortized
utilizing the straight-line method over the lesser of the estimated
useful life of the asset or the respective lease term. The Company
provides for depreciation of other machinery and equipment over their
estimated useful lives, using the straight-line method, as follows:
ASSET CLASSIFICATION ESTIMATED USEFUL LIFE
----------------------------- -----------------------------
Computers and equipment 3 - 5 years
Furniture and fixtures 5 years
Leasehold improvements 5 - 10 years (lease term)
(H) PURCHASED INTANGIBLE ASSETS
At December 31, 2001, purchased intangible assets, primarily the
customer lists and the workforce acquired in connection with the
acquisition of Canned, are being amortized over a period of 3 years,
the estimated period of benefit considering the underlying contractual
relationships, the project oriented continuing revenue stream, and
analysis of the Company's retention efforts. The Company is in the
process of finalizing its estimates of the fair values of tangible and
intangible assets acquired and liabilities assumed in connection with
its acquisition of Canned.
F-9
CHANGE TECHNOLOGY PARTNERS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001
(In thousands, except share and per share data)
The Company accounts for long-lived assets in accordance with the
provisions of the Statement of Financial Accounting Standards ("SFAS")
No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of." This statement establishes
financial accounting and reporting standards for the impairment of
long-lived assets, including certain identifiable intangibles, and
goodwill related to those assets to be held and used, and for
long-lived assets and certain identifiable intangibles to be disposed
of. The Company's management performs on-going reviews of its
investments in long-lived assets, primarily intangible assets and,
based on quantitative and qualitative measures, assesses the need to
record impairment losses when impairment indicators are present. Among
other factors, when assessing evidence of impairment, management
considers the proximity of its investments to the date of evaluation,
the current period operating cash flow loss and projections that
demonstrate continuing losses. The Company's monitoring process will
continue on a prospective basis and the facts and circumstances
surrounding the relevant impairment factors evaluated by management may
change in subsequent periods given that the Company operates in a
volatile business environment. This could result in material impairment
charges in future periods. Recoverability of long-lived assets is
assessed by a comparison of the carrying amount of the asset to the
estimated future net cash flows expected to be generated by the asset.
If estimated future net undiscounted cash flows are less than the
carrying amount of the asset, the asset is considered impaired and an
expense is recorded in an amount required to reduce the carrying amount
of the asset to its fair value, as determined by either an appraisal or
a discounted cash flow analysis.
(I) EQUITY-BASED COMPENSATION
The Company accounts for its employee stock option plans in accordance
with the provisions of the Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees," and related
interpretations including Financial Accounting Standards Board
Interpretation No. 44. As such, compensation expense related to
employee stock options is recorded over the vesting period only if, on
the date of grant, the fair value of the underlying stock exceeds the
exercise price. All such deferred compensation is amortized on a
straight-line basis. The Company adopted the disclosure-only
requirements of SFAS No. 123 "Accounting for Stock-Based Compensation",
which allows entities to continue to apply the provisions of APB
Opinion No. 25 for transactions with employees and provide pro forma
net income (loss) and pro forma earnings (loss) per share disclosures
for employee stock grants made as if the fair value based method of
accounting in SFAS No. 123 had been applied to these transactions.
F-10
CHANGE TECHNOLOGY PARTNERS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001
(In thousands, except share and per share data)
(J) BASIC AND DILUTED NET LOSS PER COMMON SHARE
Basic net loss per common share excludes the effect of potentially
dilutive securities and is computed by dividing net income or loss
available to common stockholders by the weighted average number of
common shares outstanding for the period. Diluted net loss per share is
adjusted for the effect of convertible securities, warrants and other
potentially dilutive financial instruments only in the periods in which
such effect would have been dilutive.
The following securities were not included in the computation of
diluted net loss per share because to do so would have had an
antidilutive effect for the periods presented:
AT DECEMBER 31,
--------------------------------------
2001 2000 1999
---------- ---------- --------
Stock Options............................... 16,133,768 4,600,000 --
Warrants.................................... 41,250,000 41,250,000 --
Series A Convertible Preferred Stock........ 645 3,000 3,000
Series B Convertible Preferred Stock........ -- 3,000,000 --
As a result, the basic and diluted net loss per share is equal for all
periods presented.
(K) INCOME TAXES
The Company uses the asset and liability method of accounting for
income taxes. Under this method, deferred tax assets and liabilities
are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of
existing assets and liabilities and their tax bases and to operating
loss and tax credit carryforwards. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected
to be recovered or settled. The effect on deferred tax assets or
liabilities of a change in tax rates is recognized in the period that
the rate change occurs. A valuation allowance is provided for the
amount of deferred tax assets for which, based on available evidence,
realization is not assured.
(L) COMPREHENSIVE INCOME
The Company accounts for comprehensive income (loss) under SFAS No. 130
"Reporting Comprehensive Income." This statement established standards
for reporting and displaying comprehensive income and its components in
a financial statement that is displayed with the same prominence as
other financial
F-11
CHANGE TECHNOLOGY PARTNERS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001
(In thousands, except share and per share data)
statements. For all periods presented, comprehensive income (loss )
equals net income (loss) as reported.
(M) SEGMENT REPORTING
Although the Company has divested itself of certain of its operations,
and is evaluating other business opportunities, it has historically
offered, largely through its acquired businesses, a wide variety of
professional consulting services such as e-services, technology
services and systems integration. Management does not manage its
operations by these product offerings, but instead views the Company as
one operating segment when making business decisions, with one
operating decision maker, the Chief Executive Officer. The Company
manages its operations as a cross-disciplinary integrated solutions
provider, which attempts to bring forth a coordinated service offering
to its clients.
(N) NEW ACCOUNTING PRONOUNCEMENTS
In June 2000, the Financial Accounting Standards Board (FASB) issued
SFAS No. 138, "Accounting for Certain Derivative Instruments and
Certain Hedging Activities, an Amendment of FASB Statement No. 133."
SFAS No. 138 was issued to address a limited number of issues causing
implementation difficulties for entities that apply SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," issued
in June 1998. SFAS No. 133 and SFAS No. 138 require that all
derivatives be measured at fair value and recognized as assets or
liabilities on the balance sheet. Changes in the fair value of
derivatives should be recognized in either net income (loss) or other
comprehensive income (loss), depending on the designated purpose of the
derivative. The Company adopted SFAS No. 133 and SFAS No. 138 in the
first quarter of 2001. Adoption of these pronouncements did not have a
material impact on the Company's results of operations, cash flows or
financial position.
In July 2001 FASB issued SFAS No. 141 "Business Combinations" and SFAS
No. 142 "Goodwill and Other Intangible Assets." SFAS No. 141 requires
business combinations initiated after June 30, 2001 to be accounted for
using the purchase method of accounting, and broadens the criteria for
recording intangible assets separate from goodwill. Recorded goodwill
and intangibles will be evaluated against this new criteria and may
result in certain intangibles being subsumed into goodwill, or
alternatively, amounts initially recorded as goodwill may be separately
identified and recognized apart from goodwill. SFAS No. 142 requires
the use of a nonamortization approach to account for purchased goodwill
and certain intangibles. Under a nonamortization approach, goodwill and
certain intangibles will not be amortized into results of operations,
but instead would be
F-12
CHANGE TECHNOLOGY PARTNERS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001
(In thousands, except share and per share data)
reviewed for impairment and written down and charged to results of
operations only in the periods in which the recorded value of goodwill
and certain intangibles is more than its fair value. As the Company has
not yet consummated a business combination initiated subsequent to June
30, 2001 the provisions of SFAS 141 have had no impact on the
Consolidated Financial Statements of the Company. The provisions of
each statement which apply to goodwill and intangible assets acquired
prior to July 1, 2001 will be adopted by the Company on January 1,
2002. Because of the extensive effort needed to comply with adopting
statements 141 and 142, and because the Company has not finalized its
fair value allocation (APB No.16) in connection with its acquisition of
Canned, it is not practicable to reasonably estimate the impact of
adopting these statements on the Company's financial statements at the
date of this report, including whether any transitional impairment
losses will be required to be recognized as the cumulative effect of a
change in accounting principle.
In August 2001, the FASB issued FASB Statement No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets", which addresses
financial accounting and reporting for the impairment or disposal of
long-lived assets. Statement 144 requires an entity to test an asset
for recoverability whenever events or changes in circumstances indicate
that the entity may not be able to recover the asset's carrying amount.
Companies are required to adopt Statement 144 for fiscal years
beginning after December 15, 2001, therefore the Company plans to adopt
this statement on January 1, 2002. The adoption of SFAS No. 144 is not
expected to have a significant impact on the Company's financial
position or results of operations.
(3) SEVERANCE AND IMPAIRMENT CHARGES
In response to continued unfavorable market conditions for its services the
Company embarked on a review of all operations with the goal of formulating a
course of action to minimize near-term losses, capital expenditures, and reduce
cash outflows. As an initial course of action, primarily during July and August
2001, the Company terminated the employment of approximately 90% of its existing
workforce. As a result, the Company incurred severance charges of $1,326 which
are included in severance charges in the accompanying Statement of Operations
for the year ended December 31, 2001. $895 of the severance obligations have
been paid as of December 31, 2001.
(4) INVESTMENTS IN AND LOANS TO UNCONSOLIDATED SUBSIDIARIES
The following summarizes the Company's ownership interests in and loans to
unconsolidated subsidiaries accounted for under the equity method and
investments accounted for under the cost method of accounting:
F-13
CHANGE TECHNOLOGY PARTNERS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001
(In thousands, except share and per share data)
DECEMBER 31,
----------------------------------------------
2001 2000
-------------------- -------------------
CARRYING COST CARRYING COST
VALUE BASIS VALUE BASIS
-------- ----- -------- -----
Equity method investments:
Broadstream.com Inc. ("Broadstream") ....... $ -- $7,100 $4,768 $6,500
NetPro Holdings, Inc. ("NetPro") ........... 33 200 -- --
InSys LLC ("InSys") ........................ 312 323 -- --
Cost method investments:
Livesky, Inc. ("Livesky") .................. 125 125 125 125
Excelsior Radio Networks, Inc. .............
("Excelsior") ............................... 250 250 -- --
------ ------ ------ ------
Total investments: ............................. $ 720 $7,998 $4,893 $6,625
====== ====== ====== ======
INVESTMENTS IN BROADSTREAM AND NETPRO
In June 2000, the Company purchased 7,626,165 shares of Series A Convertible
Redeemable Preferred Stock ("Series A") of Broadstream, Inc. (d/b/a Network
Prophecy) ("Broadstream"), representing an approximately 30% equity interest
(calculated on an as-if-converted basis) and approximately 47% voting interest,
in exchange for $6,500.
Broadstream is a streaming media management services company that provides
software to measure, manage and monitor delivery of streaming media content and
data. The investment in Broadstream is being accounted for under the equity
method. Based upon the capital structure of, and the equity participation in,
the equity investee, the Company has assumed conversion of Series A shares in
computing its share of losses of this investee. The Company's proportionate
share of Broadstream's net loss was $3,177 and $1,097 in 2001 and 2000,
respectively, and the amortization of the excess of cost over the Company's
proportionate interest in the underlying equity was $1,175 and $635 for 2001 and
2000, respectively. These amounts are included in equity in losses of affiliate
in the accompanying Statement of Operations.
In May 2001, Broadstream completed a recapitalization whereby all of the holders
of Series A shares exchanged their Series A shares for shares of Series A-1
Convertible Redeemable Preferred Stock ("Series A-1"). The recapitalization
modified the conversion ratio, policies regarding dividends and voting rights
for Series A-1 holders. No additional consideration was paid by the Company or
any other Series A-1 shareholder in connection with this transaction. As a
result of the recapitalization the voting interest of common shareholders was
reduced from 31% to 13%.
F-14
CHANGE TECHNOLOGY PARTNERS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001
(In thousands, except share and per share data)
Also in May 2001, in connection with the recapitalization, the Company
transferred 1,191,569 Series A-1 shares to Adelson Investors, LLC ("Adelson"),
another shareholder of Broadstream, as payment for certain financing-related
services performed by Adelson on behalf of Broadstream. This transfer has been
accounted for as a contribution by the Company of such shares to Broadstream in
exchange for no consideration. As a result of this non-reciprocal transfer of
shares the Company recorded a charge of $1,016 equal to the Company's cost basis
in such shares, which approximated fair value, and has been included in equity
in losses of affiliate in the accompanying Statement of Operations for the year
ended December 31, 2001. Subsequent to the recapitalization and non-reciprocal
share transfer, the Company owned 6,434,596 shares of Series A-1 Convertible
Redeemable Preferred Stock of Broadstream, representing an approximately 43%
equity interest (calculated on an as-if-converted basis) and a 49% voting
interest.
On August 15, 2001 the Company purchased a secured convertible promissory note
from Broadstream in exchange for $600 in connection with an aggregate $1,600
bridge loan financing consummated by Broadstream. The aggregate bridge loan
financing was secured by all of Broadstream's assets. The note also contained
certain conversion provisions in the event Broadstream closes a new round of
financing or enters into certain transactions.
On November 30, 2001 the Company assigned its Broadstream promissory note to a
newly formed entity, NetPro Holdings Inc. ("NetPro") in exchange for 13,674,753
shares of NetPro Series A-1 Convertible Redeemable Participating Preferred
Stock. On November 30, 2001 as a result of the application of equity method, the
net book value of the note approximated zero and no gain or loss was recorded as
a result of this exchange. Concurrent with this transaction, NetPro foreclosed
on the note and elected to take possession of all of Broadstream's assets in
full satisfaction of the notes.
On December 15, 2001, the Company purchased 1,585,479 shares of NetPro Series
B-1 Convertible Redeemable Participating Preferred Stock in exchange for $200 in
connection with a larger ongoing financing arrangement.
As of December 31, the Company's interest in NetPro represents approximately 38%
of NetPro outstanding equity, and is being accounted for under the equity method
of accounting. The Company's proportionate share NetPro's net losses totaling
$167 from the date of investment through December 31, 2001, is included in
equity in losses of unconsolidated subsidiaries in the accompanying Statement of
Operations.
Condensed financial information for the Company's unconsolidated subsidiaries is
summarized as follows (unaudited).
F-15
CHANGE TECHNOLOGY PARTNERS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001
(In thousands, except share and per share data)
DECEMBER 31, 2001
---------------------------------------
BROADSTREAM INSYS NETPRO
----------- -------- --------
Current assets ...................................... $ -- $ 784 $ 86
Non-current assets .................................. -- 118 --
Current liabilities ................................. (291) (161) (48)
Non-current liabilities ............................. -- (100) --
Redeemable Preferred Stock .......................... (14,373) -- (1,289)
-------- -------- --------
Total stockholders' capital (deficit) ..... (14,664) 641 (1,251)
Other stockholders' share of capital ................ (8,368) 327 (776)
-------- -------- --------
Company's share of capital .......................... $ (6,306) $ 314 $ (475)
======== ======== ========
Carrying value of investment ........................ $ -- $ 312 $ 33
======== ======== ========
BROADSTREAM INSYS NETPRO
------------ ------------ ------------
2 MONTH 1 MONTH
YEAR ENDED PERIOD ENDED PERIOD ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2001 2001 2001
------------ ------------ ------------
Operating revenues ........................................... $ 122 $ 503 $ 17
Cost of revenues ............................................. (362) (266) (6)
Operating expenses ........................................... (8,794) (259) (1,261)
Other income(expense) net .................................... 906 -- --
------- ------- -------
Net loss ................................................ (8,128) (23) (1,250)
Other stockholders' share of net loss ........................ (4,284) (12) (1,417)
------- ------- -------
Company's share of net loss .................................. (3,844) (11) (167)
Amortization of excess of investment over net equity ......... (1,175) -- --
Non-reciprocal transfer of shares ............................ (1,016) -- --
------- ------- -------
Total share of net loss .................................. (6,035) (11) (167)
Less amount of loss in excess of investment .................. (667) -- --
------- ------- -------
Equity in losses of unconsolidated affiliate ................. (5,368) (11) (167)
======= ======= =======
INVESTMENT IN LIVESKY, INC.
On December 21, 2000, the Company purchased 625,001 shares of Series A
Convertible preferred stock, representing an approximate 2% equity interest of
LiveSky Solutions, Inc. ("LiveSky") in exchange for $125. LiveSky is a developer
of wireless technology, including mobile business strategy and assessment as
well as mobile application design and development. This investment is being
accounted for under the cost method of accounting.
F-16
CHANGE TECHNOLOGY PARTNERS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001
(In thousands, except share and per share data)
INVESTMENT IN AND NOTE RECEIVABLE FROM EXCELSIOR RADIO NETWORKS
On August 28, 2001 the Company purchased a promissory note and warrant from
Excelsior Radio Networks, Inc. (d/b/a eCom Capital, Inc.) ("Excelsior") for
$2,250. Excelsior, a subsidiary of Franklin Capital Corporation ("Franklin"),
recently purchased certain assets from affiliates of Winstar Communications,
Inc. which produce, syndicate and distribute radio programs and services. The
note earns interest at a rate of 8.5% per annum, matures on September 30, 2002
and is secured by all of Excelsior's assets.
The warrant to purchase 482,955 shares of Excelsior common stock at an exercise
price of $1.125 per share had an allocated fair value of approximately $112 and
represented 11% of Excelsior's fully-diluted capital stock as of the date of
issuance. The warrant is included in other assets in the accompanying Balance
Sheet.
The allocated fair value of the note receivable totaling $2,138 is included in
Notes Receivable in the accompanying Balance Sheet. Also included in notes
receivable is the periodic accretion of the note discount, totaling $36 for the
year ended December 31, 2001, which is included in interest income in the
accompanying Statement of Operations.
On December 4, 2001 the Company purchased from Franklin 250,000 shares of common
stock or an approximate 10% equity interest of Excelsior for $250. In August,
2001 Excelsior acquired certain assets from affiliates of Winstar
Communications, Inc. and, since that time, creates, produces, distributes and is
a sales representative for national radio programs.
On December 4, 2001 the Company initiated a business combination whereby the
Company will acquire all issued and outstanding common stock of Franklin Capital
Corporation in a stock-for-stock exchange. This business combination is
contingent upon certain terms and conditions and is subject to shareholder
approval. Franklin is a business development company and provides private
investment capital to private and public companies in a variety of industries
throughout the United States. Franklin's lending and investment activity has
been focused principally on securities issued by companies involved in early
stage high technology sectors such as wireless communications, other
telecommunications services, internet software and information services.
Franklin is listed on the American Stock Exchange and trades under the symbol
"FKL."
F-17
CHANGE TECHNOLOGY PARTNERS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001
(In thousands, except share and per share data)
(5) ACQUISITIONS AND DIVESTITURES
ACQUISITION OF EHOTHOUSE, INC.
On September 15, 2000, the Company acquired majority voting control of eHotHouse
pursuant to a transaction where eHotHouse issued Series A Convertible
Participating Preferred Stock to the Company in exchange for $3,000 in cash and
a covenant, by the Company, to issue 6,374,502 shares of the Company's common
stock as directed by eHotHouse. The operations of eHotHouse prior to acquisition
were DE minimus, and the fair value of the identifiable net assets at the time
of acquisition approximated $0. Such transactions fully eliminate in
consolidation and do not impact the consolidated financial statements of the
Company. No consideration was provided to the existing shareholders of eHotHouse
in the transaction. Accordingly, this transaction effectively represented the
initial capitalization of eHotHouse and no goodwill was recorded. During the
period from September 2000 through February 2001 eHotHouse completed several
business combinations. However, eHotHouse did not exercise its right under the
aforementioned covenant to have the Company issue additional shares of the
Company's common stock.
In February 2001, the Company acquired the former Chief Executive Officer's (of
the Company and eHotHouse) shares of eHotHouse common stock in exchange for
approximately $182 in cash and 3,144,494 shares of Company common stock. This
transaction was accounted for as the settlement of a prior stock award and,
accordingly, the Company recognized $2,600 in related compensation expense,
representing the excess of the fair value of the cash and Company shares issued
as settlement over the fair value of the eHotHouse shares on the original date
of grant. Of this amount, $2,500, representing the stock portion of the
settlement, was included in equity-based compensation in the Statement of
Operations for the year ended December 31, 2001.
Also in February 2001, the Company acquired from non-employee shareholders the
remaining outstanding minority interest of its subsidiary, eHotHouse, for
2,155,519 shares of the Company's common stock valued at $2,680 and
approximately $218 in cash. The acquisition was accounted for using the purchase
method of accounting and accordingly, the purchase price was allocated to the
pro rata portion of tangible and intangible assets acquired on the basis of
their respective fair values on the date of acquisition. Of the total purchase
price, approximately $2,898 was allocated to identified intangible assets,
including the assembled workforce. The fair value of acquired intangible assets
was capitalized and amortized over the estimated useful life of three years.
Related amortization for the year ended December 31, 2001 totaled $648.
Subsequent to the acquisition of the remaining outstanding minority interest,
eHotHouse was merged with and into the Company.
F-18
CHANGE TECHNOLOGY PARTNERS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001
(In thousands, except share and per share data)
In July 2001, the Board of Directors terminated the employment of the Company's
President and Chief Executive Officer. The former executive had an employment
agreement dated August 21, 2000 that provided for severance benefits. The
Company has paid, and will continue to pay, the former executive the severance
he is entitled to under his employment agreement and has incurred a charge
totaling $493 which is included in severance charges in the Statement of
Operations for the year ended December 31, 2001. Additionally, the Company has
recorded an impairment loss in the amount of $2,250 reflecting the impact of the
executive's termination upon the carrying value of certain acquired intangible
assets, and has reversed certain unamortized deferred compensation related to
unvested options that were forfeited in connection with the termination. This
impairment loss is included in impairment losses in the accompanying Statement
of Operations.
ACQUISITION AND DIVESTITURE OF INSYS TECHNOLOGIES, INC.
On October 18, 2000, eHotHouse acquired substantially all of the operating
assets and assumed certain liabilities of InSys Technology, Inc. ("InSys"), a
provider of systems integration services. The acquisition was accounted for
using the purchase method of accounting and accordingly, the purchase price was
allocated to the tangible and identified intangible assets acquired on the basis
of their respective fair values on the date of acquisition. The results of
operations of InSys and the estimated fair value of the assets acquired and
liabilities assumed are included in the Company's consolidated financial
statements from the date of acquisition. The fair value of the intangible assets
was determined based upon a combination of methods, including the income
approach for the customer list, and the replacement cost approach for the value
of the assembled workforce.
The total purchase price of $867 consisted of cash, including acquisition
related expenses consisting primarily of payments for legal and financial
advisory services. Of the total purchase price, approximately $700 was allocated
to net tangible assets and the remainder was allocated to identified intangible
assets, including the customer list and assembled workforce. The fair value of
acquired intangible assets was capitalized and is being amortized over their
estimated useful lives of three years. Related amortization for the years ended
December 31, 2001 and 2000 totaled $39 and $11, respectively.
The InSys acquisition is summarized as follows:
Fair value of tangible assets acquired................... $ 1,006
Fair value of identified intangible assets acquired...... 155
Liabilities assumed...................................... (294)
--------
$ 867
========
Cash paid, including acquisition costs of $200........... $ 867
Less cash acquired....................................... --
--------
Total transaction consideration ......................... $ 867
========
F-19
CHANGE TECHNOLOGY PARTNERS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001
(In thousands, except share and per share data)
During July 2001, as a result of the aforementioned terminations, coupled with
the historical, current and projected operating and cash flow losses, the
Company evaluated the recoverability of its acquired intangible assets by
comparison of the carrying value relative to future cash flows. As a result, the
Company recorded impairment charges totaling $105 which are included in
impairment charges in the accompanying Statement of Operations.
On November 8, 2001 the Company sold a 51% voting interest in InSys to a certain
member of the management team in exchange for $50 and concurrently forgave
approximately $400 of advances to InSys. After considering the net book value of
InSys, the level of retained ownership interest, and the value of the
consideration exchanged, the Company incurred a loss on the disposition of the
majority voting control totaling $183 which is included in loss on disposal of
subsidiaries in the accompanying Statement of Operations.
Concurrently the Company loaned InSys $100 evidenced by a promissory note. The
note bears interest at a rate equal to the London Interbank offer rate plus 2%,
until the principal amount of the note is paid in full. InSys is obligated to
pay, at a minimum, on an annual basis 50% of the excess of its annual earnings
before taxes.
The Company's retained equity interest and note receivable, net of the Company's
pro rata share of InSys' equity losses absorbed during the period from November
8, 2001 to December 31, 2001, totals $312 which included investments in and
loans to unconsolidated subsidiaries on the accompanying Balance Sheet.
ACQUISITION AND DIVESTITURE OF RAND INTERACTIVE CORPORATION
On November 30, 2000, eHotHouse acquired all of the issued and outstanding
common stock of RAND Interactive Corporation ("RAND"), a leading provider of
media and technical services. The acquisition was accounted for using the
purchase method of accounting and, accordingly, the total consideration was
allocated to the tangible and intangible net assets acquired and liabilities
assumed on the basis of their respective fair values on the date of acquisition.
The results of operations of RAND and the estimated fair value of the assets
acquired and liabilities assumed are included in the Company's consolidated
financial statements from the date of acquisition.
The total purchase price of approximately $1,400 consisted of $700 of eHotHouse
common stock (1,020,000 shares), $700 in cash including other acquisition
related expenses, consisting primarily of payments for legal and financial
advisory services. Of
F-20
CHANGE TECHNOLOGY PARTNERS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001
(In thousands, except share and per share data)
the total purchase price, $47 was allocated to net tangible liabilities assumed,
and the remainder was allocated to identified intangible assets, including
customer lists and the assembled workforce. The fair value of the identified
intangible assets was determined using the income approach for the customer
list, and the replacement cost approach for the value of the assembled
workforce. The purchased intangible assets are being amortized over their
estimated useful lives of three years. Related amortization for the years ended
December 31, 2001 and 2000 totaled $357 and $39 respectively.
The RAND acquisition is summarized as follows:
Fair value of tangible assets acquired..................... $ 169
Fair value of identified intangible assets acquired........ 1,426
Liabilities assumed........................................ (216)
--------
$ 1,379
========
Cash paid, including acquisition costs of $325............. $ 675
Less cash acquired......................................... --
--------
Net cash paid......................................... 675
eHotHouse common stock issued............................ 704
--------
Total transaction consideration ...................... $ 1,379
========
As a result of the aforementioned terminations, coupled with the historical and
projected operating and cash flow losses, the Company evaluated the
recoverability of its acquired intangible assets by comparison of the carrying
value relative to future cash flows. As a result, the Company recorded
impairment charges totaling $1,030 which are included in impairment charges in
the accompanying Statement of Operations.
On November 2, 2001 the Company sold all issued and outstanding shares of RAND
to certain members of management team in exchange for 375,039 shares of the
Company's common stock, and a warrant to purchase such amount of shares of
common stock that shall equal, at the time of exercise, 30% of the issued and
outstanding shares of RAND common stock on a fully diluted basis. Such warrants
have a stated exercise price of $1.00 in the aggregate, expire on November 3,
2013, and are contingently exercisable upon the occurrence of certain
prospective events, as defined. After considering the net book value of RAND,
the consideration received and the fair value of the warrants received, the
Company incurred a loss on the disposition of RAND totaling $194 which is
included in loss on disposal of subsidiaries on the consolidated Statement of
Operations.
ACQUISITION OF IGUANA STUDIOS, INC.
In March 2001, the Company acquired Iguana Studios, Inc. ("Iguana"), a New York
City-based interactive agency, for approximately $5,771, including $2,786 in
cash, 2,700,000 shares of the Company's common stock valued at approximately
$1,990, and
F-21
CHANGE TECHNOLOGY PARTNERS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001
(In thousands, except share and per share data)
replacement options to purchase 1,681,888 shares of Company common stock, which
vested upon the change in control, valued at approximately $995.
The business combination was accounted for using the purchase method of
accounting and, accordingly, the total consideration was allocated to the
tangible and intangible assets acquired and liabilities assumed on the basis of
their respective fair values on the date of acquisition. The results of
operations of Iguana, and the estimated fair value of the assets acquired and
liabilities assumed are included in the Company's consolidated financial
statements from the date of acquisition. Of the total purchase price,
approximately $1,815 was allocated to the net tangible assets acquired, $1,300
was allocated to identified intangible assets, including customer base and
assembled workforce, and the remainder was allocated to goodwill. The fair value
of the identified intangible assets was determined using the income approach for
the customer base, and the replacement cost approach for the assembled
workforce. The purchased intangible assets and goodwill were being amortized
over their estimated useful lives of three years. Related amortization for the
year ended December 31, 2001 totaled $935.
The Iguana acquisition is summarized as follows:
Fair value of tangible assets acquired...................... $ 1,815
Fair value of identified intangible assets acquired......... 4,813
Liabilities assumed......................................... (857)
--------
$ 5,771
========
Cash paid, including acquisition costs of $238.............. $ 2,817
Less cash acquired.......................................... 31
--------
Net cash paid.......................................... 2,786
Common stock of the Company issued........................ 1,990
Replacement Options ................................... 995
--------
$ 5,771
========
Also in connection with the acquisition of Iguana 2,300,000 shares of the
Company's common stock were placed in escrow (the "Escrow Shares") for a period
to end no later than June 2002. The then fair value of such shares will be
included in the aggregate purchase price if and when released from escrow,
pending the outcome of the contingency, as defined.
As a result of the aforementioned terminations, coupled with the historical cash
flow losses, the Company evaluated the recoverability of its acquired intangible
assets and goodwill by comparison of the carrying value relative to future cash
flows. As a result,
F-22
CHANGE TECHNOLOGY PARTNERS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001
(In thousands, except share and per share data)
the Company recorded impairment charges totaling $3,878 which are included in
impairment charges in the accompanying Statement of Operations.
As of December 31, 2001 all employees of Iguana had been terminated, and the
subsidiary's operating activities had ceased. The remaining net book value of
Iguana intangibles was $0. If and when the Escrow Shares are released from
escrow, the Company will record additional impairment charges representing the
then fair value of such shares.
ACQUISITION OF PAPKE-TEXTOR, INC.
In June 2001, the Company acquired Papke-Textor, Inc. d/b/a Canned Interactive
("Canned"), a Los Angeles-based media and entertainment interactive agency, for
approximately $1,100 in cash, including acquisition costs, and 6,436,552 shares
of the Company's common stock valued at approximately $1,000. The business
combination was accounted for using the purchase method of accounting.
The Company is in the process of finalizing its estimates that will be used in
the assignment of the purchase price to identified intangible and tangible
assets acquired and liabilities assumed. At December 31, 2001, these estimates
are not completed, and the entire Canned excess purchase price totaling $2,177
has been included within intangible assets in the accompanying consolidated
Balance Sheet and has been amortized using an estimated useful life of three
years. Related amortization for the year ended December 31, 2001 totaled $600.
Also in connection with the acquisition of Canned, $200 in cash, which is
presented as restricted cash on the consolidated Balance Sheet and is included
in other current assets, and 715,172 shares of the Company's common stock were
placed in escrow for a period ending December 12, 2002. The then fair value of
this contingent consideration will be included in the aggregate purchase price,
if and when released from escrow, pending the outcome of the contingency, as
defined.
PRO FORMA FINANCIAL INFORMATION (UNAUDITED)
The following unaudited pro forma information is presented as if the Company had
completed the above acquisitions and divestitures as of January 1, 2000 and
includes amortization of related intangible assets resulting from the
acquisitions. The unaudited pro forma information is not necessarily indicative
of what the results of operations would have been had the acquisitions taken
place at those dates or of the future results of operations.
F-23
CHANGE TECHNOLOGY PARTNERS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001
(In thousands, except share and per share data)
YEAR ENDED DECEMBER 31,
-------------------------------
2001 2000
------------- -------------
Revenues ..................................................... $ 2,923 $ 5,019
------------- -------------
Net loss ..................................................... $ (27,824) $ (10,084)
------------- -------------
Net loss attributable to common stockholders ................. $ (27,824) $ (50,084)
------------- -------------
Pro forma basic and diluted net loss per common share ........ $ (0.20) $ (1.12)
Pro forma weighted average common shares outstanding,
basic and diluted ......................................... 141,796,791 44,560,305
============= =============
(6) NOTE RECEIVABLE
In April 2001, the Company loaned two consultants an aggregate of $500. The full
recourse promissory notes, with initial principal amounts of $350 and $150,
respectively, accrue interest at the rate of 7.25% per annum. Payments are due
in various installments of principal plus accrued interest commencing on April
25, 2002 and continuing thereafter through April 25, 2006.
(7) COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company leases its facilities and equipment under operating and capital
lease agreements. The following are the future minimum lease payments under
non-cancelable operating leases as of December 31, 2001:
YEAR ENDED DECEMBER 31, OPERATING CAPITAL
------------------------------------ --------- -------
2002 ............................... $ 980 $ 110
2003 ............................... 842 110
2004 ............................... 332
2005 ............................... 46
2006 ............................... --
------- -------
Total lease obligation ............. $ 2,201 $ 220
=======
Amount representing interest ....... (4)
-------
216
Current Portion .................... 92
-------
Long Term Portion .................. $ 124
=======
Rent expense was approximately $963 and $75 for the year ended December 31, 2001
and 2000, respectively.
F-24
CHANGE TECHNOLOGY PARTNERS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001
(In thousands, except share and per share data)
As a result of the Company's divestiture of certain operations, employee
terminations and pending business combinations, the Company is evaluating its
numerous alternatives with respect to its contractual obligations concerning
leased facilities. As of December 31, 2001, the method and timing regarding
alternative prospective uses or potential disposition were uncertain and no
definite action had been taken.
The Company is involved in various legal actions arising in the ordinary course
of business. In the opinion of management, the ultimate disposition of these
matters will not have a material adverse effect on the Company's consolidated
financial position, results of operation or liquidity.
(8) STOCKHOLDERS' EQUITY
On March 28, 2000, Arinco Computer Systems Inc. (the predecessor to the Company,
see September 12, 2000 transaction below) was acquired by an investor group led
by Pangea Internet Advisors, LLC. Prior to this transaction, neither Arinco
Computer Systems Inc., a public shell, or Pangea Internet Advisors, LLC were
active or had substantive business operations. Investors purchased 4,000,000
shares of Series B Convertible Preferred Stock ("Series B Stock") for net
proceeds to the Company of $39,450. Each share of Series B stock is convertible
into 40 common shares, and the Series B stock, collectively, represents
approximately 97% of the voting interest of the Company. If by December 31, 2000
the Company's authorized common stock had not been increased to provide for the
conversion of all Series B shares, holders of 50% of the Series B stock could
require the Company to redeem all such Series B stock at $10 per share on
demand. Accordingly, Series B stock was classified as temporary equity until
shareholder approval was obtained to sufficiently increase the number of
authorized common shares. However, as the Series B shareholders effectively
controlled the Company, shareholder approval was perfunctory and, accordingly,
the full deemed dividend was recognized immediately.
Also on March 28, 2000, certain other investors purchased warrants ("warrants")
to purchase 41,250,000 shares of common stock for $100. Of these warrants, 20%
have an exercise price of $.25 per share, 30% have an exercise price of $.50 per
share, 30% have an exercise price of $.75 per share and 20% have an exercise
price of $1.00 per share. The warrants are exercisable at the election of the
holder for a period of five years.
The difference between the price of the Series B preferred stock on an as
converted basis of $0.25 and $4.88 (the fair value of common stock on the date
of issuance of the Series B Stock), or $4.63, multiplied by the number of shares
of Series B preferred stock on an as if converted basis, represents the
intrinsic value of the beneficial conversion feature, which totaled
approximately $741,000. However, as the intrinsic value of the beneficial
conversion feature is greater than the $40,000 in gross proceeds received from
the Series B preferred stock issuance, the amount of the discount attributed to
the beneficial
F-25
CHANGE TECHNOLOGY PARTNERS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001
(In thousands, except share and per share data)
conversion feature is limited to the $40,000 of gross proceeds received. The
beneficial conversion feature was recorded in the quarter ended March 31, 2000
as a non-cash preferred stock dividend because the Series B Stock is effectively
convertible at the option of the preferred stockholders. The $40,000 non-cash
dividend increased the Company's net loss attributable to common stockholders by
the same amount.
On March 28, 2000, 1,000,000 shares of Series B stock were converted into
40,000,000 shares of common stock.
On September 12, 2000, Arinco Computer Systems Inc. merged with and into the
Company (d/b/a Pangea Internet, Inc.), a wholly owned subsidiary. All
shareholders of Arinco Computer Systems Inc. became stockholders of the Company.
Pursuant to the terms of the merger agreement, each outstanding share of Arinco
Computer Systems Inc. common stock, Series A preferred stock and Series B
preferred stock and warrants was converted into one share of common stock,
Series A preferred stock, and Series B preferred stock and warrants,
respectively, of the Company. As a result of the merger, the total number of
shares of stock which the Company has authority to issue was increased to
505,000,000 shares, of which 500,000,000 are common stock, par value $0.01 per
share and 5,000,000 are preferred stock, par value $0.10 per share. This
transaction was accounted for as a transaction between companies under common
control and therefore there was no adjustment to the historical basis of the
assets and liabilities of Arinco Computer Systems Inc. Additionally, as a result
of this transaction and the resulting increase in the number of authorized
shares of common stock, the redemption feature on the Series B preferred shares
was nullified and, accordingly, the Series B Preferred Stock was reclassified to
stockholders equity.
The Company's Series A and Series B Preferred stock are convertible to common
stock on a 1 for 1 and 40 for 1 basis respectively, and have voting rights on an
as if converted basis. Series A Preferred stock accumulates $0.6 per share
cumulative dividends annually, payable each May 31st at the discretion of the
Board of Directors. Series A Preferred stockholders are not entitled to payment
of any accrued but unpaid dividends existing at the time of a voluntary
conversion of such stock to common stock.
(9) EQUITY BASED COMPENSATION
Under the terms of the Company's incentive stock option plans, employees,
directors, and consultants may be granted options to purchase the Company's
common stock at no less than 100% of the market price on the date the option is
granted (110% of fair market value for incentive stock options granted to
holders of more than 10% of the voting stock of the Company). Options generally
vest over three or four years and have a maximum term of 10 years.
F-26
CHANGE TECHNOLOGY PARTNERS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001
(In thousands, except share and per share data)
Information related to all CTPI stock options granted by the Company is as
follows:
NUMBER OF WEIGHTED AVERAGE
SHARES EXERCISE PRICE
------------- --------------
December 31, 1999................... -- --
Granted............................. 4,600,000 $ 1.21
----------- -------
December 31, 2000................... 4,600,000 $ 1.21
Granted............................. 14,200,000 0.04
Exercised........................... -- --
Options issued in connection with
acquisition...................... 1,658,638 1.05
Forfeited/Cancelled................. (4,324,870) 1.45
----------- -------
December 31, 2001................... 16,133,768 $ 0.10
=========== =======
The following table summarizes information about CTPI stock options outstanding
at December 31, 2001:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------------- -------------------------------
OUTSTANDING AT WEIGHTED AVERAGE
DECEMBER 31, CONTRACTUAL LIFE WEIGHTED AVERAGE NUMBER WEIGHTED AVERAGE
EXERCISE PRICES 2001 REMAINING EXERCISE PRICE EXERCISABLE EXERCISE PRICE
--------------- -------------- ------------------- ---------------- ----------- ----------------
0.03 12,000,000 9.71 0.03 3,000,000 0.03
0.06 2,000,000 9.83 0.06 2,000,000 0.06
0.29 581,413 2.45 0.29 581,413 0.29
0.32 15,000 9.00 0.32 15,000 0.32
0.41 15,000 8.83 0.41 15,000 0.41
0.50 1,300,000 8.75 0.50 667,000 0.50
0.67 39,000 2.85 0.67 39,000 0.67
0.83 4,500 0.04 0.83 4,500 0.83
1.00 152,605 4.01 1.00 152,605 1.00
1.50 18,000 0.08 1.50 18,000 1.50
2.00 5,250 0.08 2.00 5,250 2.00
2.75 3,000 0.04 2.75 3,000 2.75
--------------- -------------- ------------------- ---------------- ----------- ----------------
TOTAL 16,133,768 9.30 0.10 6,500,768 0.15
=============== ============== =================== ================ =========== ================
During 2000, the Company granted stock options to purchase 4,600,000 shares of
common stock to the Former Chief Executive Officer and members of the Board of
Directors at a weighted average exercise price of $1.21, all of which were
granted at less than the fair value of the common stock on the measurement date.
The Company recorded deferred compensation of approximately $2,480 in connection
with the grant of these options. This amount is presented as deferred
compensation within the accompanying balance sheet and is being amortized over
the related vesting period, of
F-27
CHANGE TECHNOLOGY PARTNERS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001
(In thousands, except share and per share data)
either three or four years. In July 2001, in connection with the termination of
the Chief Executive Officer, the Company reversed certain of this unamortized
deferred compensation related to unvested options forfeited as a result of the
termination. The Company amortized $615 and $693 of deferred compensation during
the years ended December 31, 2001 and 2000, respectively. The Company will
amortize the remaining deferred compensation of $846 over the remaining vesting
period of three and four years.
In September 2001, the Compensation Committee of the Board of Directors, granted
to the newly appointed Chief Executive Officer options to purchase 9,000,000
shares of the Company's common stock at an exercise price of $0.03 per share,
the then fair value of the underlying common stock. Of this grant, options to
purchase 6,000,000 shares of the Company's common stock are subject to
shareholder approval, which was not obtained as of December 31, 2001. At
December 31, 2001, the intrinsic value of these options totaled $120, and has
been included in deferred compensation in the accompanying balance sheet.
During the year ended December 31, 2001, the Compensation Committee of the Board
of Directors granted to certain members of the Board of Directors options to
purchase an aggregate of 3,000,000 and 200,000 shares of the Company's common
stock at an exercise price of $0.03 and $0.50 per share, respectively, the then
fair value of the underlying common stock.
On November 7, 2001, the Compensation Committee of the Board of Directors
granted to a new member of the Board of Directors options to purchase an
aggregate of 2,000,000 shares of the Company's common stock at an exercise price
of $0.06 per share, the then fair value of the underlying common stock.
The Company applies APB Opinion No. 25 and related interpretations. Accordingly,
compensation cost for option grants to employees has been measured based upon
the intrinsic value on the date of grant. Had compensation cost for these awards
been determined based on the fair value at the grant dates consistent with the
method prescribed by SFAS No. 123, the Company's net loss would have been
adjusted to the pro forma amounts indicated below:
YEAR ENDED DECEMBER 31,
-------------------------------------
2001 2000 1999
---------- -------- -------
Net income (loss) attributable to
common shareholders:
As reported................................... $ (32,200) (46,238) (6)
Compensation expense for stock options........ $ (713) (498) --
---------- -------- -------
Pro forma net income (loss)................... $ (32,913) (46,736) (6)
---------- -------- -------
Basic and diluted net income (loss) per
share as reported............................. $ (0.23) (1.31) --
========== ======== =======
Pro forma basic income (loss) per share....... $ (0.23) (1.32) --
========== ======== =======
F-28
CHANGE TECHNOLOGY PARTNERS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001
(In thousands, except share and per share data)
The Company has estimated the fair value of its stock option grants by using the
Black-Scholes option pricing model with the following weighted-average
assumptions:
Expected option term (years).......................... 10
Risk-free interest rate (%)........................... 5.78
Expected volatility (%)............................... 81.00
Dividend yield (%).................................... --
Weighted average fair value of options granted........ $ 1.41
(10) RELATED PARTY TRANSACTIONS
During the year ended December 31, 2001, the Company incurred legal fees in
connection with certain transactions and other matters in the normal course of
business. A portion of these services was provided by a firm of which a member
of the Board of Directors of the Company is a partner. Fees incurred by this
firm totaled approximately $881 and $821 for the year ended December 31, 2001
and 2000, respectively.
Additionally, during the year ended December 31, 2001, the Company incurred
management and investment advisory service fees in connection with identifying,
evaluating, negotiating, and managing investment opportunities for the Company.
These services were provided by a firm of which the current President and Chief
Executive Officer of the Company was previously affiliated. Fees incurred by the
Company to this firm totaled $510 and $828 in 2001 and 2000, respectively.
Additionally, this firm occupies a portion of the Company's office space in
Connecticut, for which it pays rent at an amount which approximates fair market
value. Such payments to the Company totaled $283 during the year ended December
31, 2001. Furthermore, the firm was indebted to the Company in the amount of
$204 at December 31, 2001 for its pro rata share of certain leasehold
improvements and rental payments due, which are reflected in the Related Party
Receivable in the accompanying Balance Sheet.
(11) PROPERTY & EQUIPMENT
Property and equipment consist of the following:
DECEMBER 31,
--------------------
2001 2000
-------- ------
Computer and office equipment...................... $ 660 589
Furniture and fixtures............................. 364 98
Leasehold improvements............................. 245 101
-------- ------
Total property and equipment....................... 1,269 788
Less accumulated depreciation and amortization..... 483 278
-------- ------
Property and equipment, net........................ $ 786 $ 510
======== ======
F-29
CHANGE TECHNOLOGY PARTNERS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001
(In thousands, except share and per share data)
At December 31, 2001 and 2000, the Company had approximately $220 and $330,
respectively, of equipment under capital leases included in computer and office
equipment and related accumulated amortization of approximately $120 and $10,
respectively. Amortization of these assets recorded under capital leases is
included in depreciation expense.
Depreciation and amortization aggregated $609, $10 and $0 for the years ended
December 31, 2001, 2000 and 1999, respectively.
(12) ACCRUED EXPENSES
Accrued expenses consist of the following:
DECEMBER 31,
-----------------------
2001 2000
------- -------
Accrued severance......................... $ 431 $ 287
Accrued professional fees................. 535 463
Accrued other............................. 17 167
------- -------
Total..................................... $ 983 $ 917
======= =======
(13) INCOME TAXES
The tax effects of temporary differences that give rise to a significant portion
of the net deferred income tax assets (liabilities) are as follows:
DECEMBER 31,
-------------------------
2001 2000
-------- --------
Net noncurrent deferred income
tax assets (liabilities):
Equity losses............................. $ 2,844 $ 693
Equity based compensation................. 541 277
Net operating loss........................ 8,024 1,689
Property and equipment.................... 40 (44)
Intangibles............................... (715) (570)
-------- --------
Total net deferred income tax assets...... 10,734 2,045
Valuation allowance....................... (10,734) (2,045)
-------- --------
Total net deferred income tax assets ..... $ -- $ --
======== ========
F-30
CHANGE TECHNOLOGY PARTNERS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001
(In thousands, except share and per share data)
For the year ended December 31, 2001, the benefit for income taxes differed from
the amounts computed by applying the federal income tax rate of 35% to pretax
loss as a result of the following:
RATE RECONCILIATION
--------------------------------------------------------------------------
2001 2000 1999
--------------------- ------------------- ------------------
$ % $ % $ %
-------- ------- ------- ------- ------- ------
Expected tax benefit ...................... 11,165 35.00% (2,121) 34.0% -- --
State and local tax benefit ............... (1,037) (3.25%) (364) 6.0% -- --
Non-deductible expenses ................... 3,023 9.48% -- -- -- --
Valuation allowance ....................... 8,689 27.24% 1,881 29.9% 9 --
Revision of prior year estimate ........... -- -- -- -- (12) --
Other ..................................... 490 1.54% 604 10.1% -- --
-------- ------- ------- ------- ------- ------
Tax expense ............................... $ -- 0.00% -- -- 3 --
======== ======= ======= ======= ======= ======
The Company has available net operating loss carryforwards for income tax
purposes of approximately $20 million, which expire on various dates from 2001
through 2021. A valuation allowance has been established due to uncertainty
whether the Company will generate sufficient taxable earnings to utilize the
available net operating loss carryforwards. A portion of the Company's net
operating loss carryforwards may also be limited due to significant changes in
ownership under Section 382 of the Tax Reform Act of 1986.
(14) SUPPLEMENTARY CASH FLOW INFORMATION
During 2001, 2000 and 1999, the Company paid interest of $30, $1 and $0,
respectively.
(15) VALUATION AND QUALIFYING ACCOUNTS
ADDITIONS ADDITIONS
BALANCE AT CHARGED TO INCLUDED IN DELETIONS BALANCE AT
BEGINNING OF COSTS AND ACQUIRED NET INCLUDED IN END OF
DESCRIPTION PERIOD EXPENSED ASSETS DISPOSALS PERIOD
- ----------------------------------------------- ------------ ---------- ------------ ----------- -----------
2001:
Allowances for doubtful accounts............... $ 62 $ -- $ 197 $ (259) $ --
2000:
Allowances for doubtful accounts............... $ -- $ -- $ 62 $ -- $ 62
1999:
Allowances for doubtful accounts............... $ -- $ -- -- $ -- $ --
F-31
BROADSTREAM, INC.
(A Company in Liquidation)
INDEX
Page
Report of KPMG LLP, Independent Accountants....................................1
Balance Sheets as of December 31, 2001 and 2000............................... 2
Statements of Operations for the year ended December 31, 2001
and the period ended December 31, 2000.........................................3
Statement of Stockholders' Deficit for the year
ended December 31, 2001 and the period ended December 31, 2000.................4
Statements of Cash Flows for the year ended December 31, 2001
and the period ended December 31, 2000.........................................5
Notes to Financial Statements..................................................7
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Broadstream, Inc.:
We have audited the accompanying balance sheets of Broadstream, Inc. (a company
in liquidation) as of December 31, 2001 and 2000 and the related statements of
operations, stockholders' deficit, and cash flows for the year ended December
31, 2001 and the period from January 7, 2000 (inception) through December 31,
2000. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
As described in note 1 to the financial statements, the assets of the Company
were foreclosed on by NetPro Holdings, Inc. on November 30, 2001 and the Company
commenced liquidation shortly thereafter. As a result, the Company has changed
its basis of accounting from the going-concern basis to a liquidation basis as
of December 31, 2001.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Broadstream, Inc. (a company in
liquidation) as of December 31, 2001 and 2000 and the results of its operations
and its cash flows for the year ended December 31, 2001 and the period from
January 7, 2000 (inception) through December 31, 2000 in conformity with
accounting principles generally accepted in the United States of America applied
on the bases described in the preceding paragraph.
As more fully described in note 1, the Company has liabilities remaining as of
December 31, 2001 and does not appear to have any sources of funding to settle
these obligations. The financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
February 14, 2002
Los Angeles, California
BROADSTREAM, INC.
(A Company in Liquidation)
BALANCE SHEETS
December 31, 2001 and 2000
YEAR ENDED DECEMBER 31,
--------------------------------
2001 2000
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents ............................................................. $ -- $ 4,495,080
Accounts receivable ................................................................... -- 13,553
Prepaid expenses and other current assets ............................................. -- 103,142
------------ ------------
Total current assets .............................................................. $ -- $ 4,611,775
Property and equipment, net ................................................................ -- --
Capitalized software development costs ..................................................... -- 1,119,571
-- 703,264
Other assets ............................................................................... -- 360,416
------------ ------------
$ -- $ 6,795,026
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued expenses ................................................. $ 290,737 $ 439,385
------------ ------------
Series A-1 convertible redeemable participating preferred stock, $0.001 par
value. Authorized 12,000,000 shares; issued and outstanding 11,207,136
shares at December 31, 2001. Liquidation preference and redemption
value of $10,950,119 (note 5) ......................................................... 14,373,119 --
Series A convertible redeemable participating preferred stock, $0.001 par
value. Authorized 12,000,000 shares; issued and outstanding 11,207,136
shares at December 31, 2000. Liquidation preference and redemption value
of $10,029,772 (note 5) ............................................................... -- 10,029,772
Stockholders' deficit (note 5):
Common stock, $0.001 par value. Authorized 130,000,000 shares; issued and
outstanding 11,444,634 shares at December 31, 2001 and 2000 ....................... 11,445 11,445
Additional paid-in capital ............................................................ 2,262,347 1,125,647
Unearned compensation ................................................................. -- (345,273)
Deficit accumulated during the development stage ...................................... (16,620,367) (4,148,669)
Stockholder notes receivable .......................................................... (317,281) (317,281)
------------ ------------
Total stockholders' deficit ....................................................... (14,663,856) (3,674,131)
Commitments and contingencies (note 7)
------------ ------------
$ -- $ 6,795,026
============ ============
See accompanying notes to financial statements.
2
BROADSTREAM, INC.
(A Company in Liquidation)
STATEMENT OF OPERATIONS
PERIOD FROM CUMULATIVE
JANUARY 7, FROM JANUARY 7,
2000 2000
(INCEPTION) (INCEPTION)
YEAR ENDED THROUGH THROUGH
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2001 2000 2001
------------- ------------- -------------
Revenues ............................................................... $ 122,075 $ 64,253 $ 186,328
Operating expenses:
Cost of revenues ................................................... 362,347 98,091 460,438
Engineering ........................................................ 1,480,103 -- 1,480,103
Sales and marketing ................................................ 1,425,207 78,771 1,503,978
General and administrative ......................................... 3,055,428 3,144,741 6,200,169
Stock-based compensation ........................................... 390,496 434,114 824,610
Depreciation and amortization ...................................... 435,966 179,725 615,691
Write-off of capitalized software costs (note 1) ................... 914,548 -- 914,548
Charge for transfer of shares between preferred
investors (note 6) ............................................... 1,091,477 -- 1,091,477
------------ ------------ ------------
Loss from operations ........................................... (9,033,497) (3,871,189) (12,904,686)
Interest income, net ................................................... 93,767 200,128 293,895
------------ ------------ ------------
Loss before taxes and extraordinary item ....................... (8,939,730) (3,671,061) (12,610,791)
Income tax benefit ..................................................... 324,552 -- 324,552
------------ ------------ ------------
Net loss before extraordinary item ............................. (8,615,178) (3,671,061) (12,286,239)
Extraordinary item - extinguishment of liabilities, net of
income tax of $324,552 (note 3) ..................................... 486,827 -- 486,827
------------ ------------ ------------
Net loss ....................................................... (8,128,351) (3,671,061) (11,799,412)
Deemed dividend on beneficial conversion feature
recognized for change in conversion ratio of Series A
convertible redeemable participating preferred shares ............... 3,423,000 -- 3,423,000
Preferred dividend upon conversion of notes payable into
Series A convertible redeemable participating preferred
shares .............................................................. -- 15,018 15,018
Accrual of dividends on Series A and A-1 convertible
redeemable participating preferred shares ........................... 920,347 477,608 1,397,955
------------ ------------ ------------
Net loss attributable to common stockholders ................... $(12,471,698) $ (4,163,687) $(16,635,385)
============ ============ ============
See accompanying notes to financial statements.
3
BROADSTREAM, INC.
(A Company in Liquidation)
STATEMENTS OF STOCKHOLDERS' DEFICIT
Year ended December 31, 2001 and the period from
January 7, 2000 (inception) through December 31, 2000
COMMON STOCK ADDITIONAL
-------------------------- PAID-IN UNEARNED
SHARES AMOUNT CAPITAL COMPENSATION
---------- ---------- ---------- ------------
Issuance of 10 million shares to founders on January
30, 2000 at $0.005 per share for total cash proceeds
of $52,773................................................. 10,000,000 $ 10,000 42,773 -
Issuance of warrants in conjunction with convertible
notes...................................................... - - 18,772 -
Preferred dividend upon conversion of convertible debt
into redeemable preferred shares........................... - - (15,018) -
Transfer of shares by founder................................. - - 75,000 (75,000)
Issuance of 835,214 shares to employees on June 28, 2000
at $0.01 per share for total proceeds of $8,352,
which consists of cash proceeds of $3,386 and
stockholder notes receivable of $4,966..................... 835,214 835 249,729 (242,212)
Sale of shares/issuance of stock by founder................... - - 456,162 (199,692)
Issuance of 674,383 shares to a member of the board of
directors on August 1, 2000 at $0.30 per share for
total proceeds of $202,315 in the form of a
stockholder note receivable................................ 674,383 675 201,640 -
Issuance of 200,000 shares to a nonemployee on
December 29, 2000 at $0.55 per share for total
proceeds of $ 110,000 in the form of a stockholder
note receivable............................................ 200,000 200 109,800 -
Issuance of warrants.......................................... - - 6,013 -
Amortization of unearned compensation......................... - - - 171,631
Cancellation of founder shares................................ (264,963) (265) (19,224) -
Accrual of redeemable preferred dividend...................... - - - -
Net loss...................................................... - - -
---------- ---------- ---------- ----------
Balance at December 31, 2000.................................. 11,444,634 11,445 1,125,647 (345,273)
Transfer of shares between preferred stockholders............. - - 1,091,477 -
Deemed dividend on beneficial conversion feature.............. - - - -
Accrual of redeemable preferred dividend...................... - - - -
Amortization of unearned compensation......................... - - - 345,273
Issuance of options warrants.................................. - - 45,223 -
Net loss...................................................... - - - -
Balance at December 31, 2001.................................. 11,444,634 $ 11,445 2,262,347 -
========== ========== ========== ==========
DEFICIT
ACCUMULATED
DURING THE STOCKHOLDER
DEVELOPMENT NOTES STOCKHOLDERS'
STAGE RECEIVABLE DEFICIT
------------ ----------- -------------
Issuance of 10 million shares to founders on January
30, 2000 at $0.005 per share for total cash proceeds
of $52,773................................................. - - 52,773
Issuance of warrants in conjunction with convertible
notes...................................................... - - 18,772
Preferred dividend upon conversion of convertible debt
into redeemable preferred shares........................... - - (15,018)
Transfer of shares by founder................................. - - -
Issuance of 835,214 shares to employees on June 28, 2000
at $0.01 per share for total proceeds of $8,352,
which consists of cash proceeds of $3,386 and
stockholder notes receivable of $4,966..................... - (4,966) 3,386
Sale of shares/issuance of stock by founder................... - - 256,470
Issuance of 674,383 shares to a member of the board of
directors on August 1, 2000 at $0.30 per share for
total proceeds of $202,315 in the form of a
stockholder note receivable................................ - (202,315) -
Issuance of 200,000 shares to a nonemployee on
December 29, 2000 at $0.55 per share for total
proceeds of $ 110,000 in the form of a stockholder
note receivable............................................ - (110,000) -
Issuance of warrants.......................................... - - 6,013
Amortization of unearned compensation......................... - - 171,631
Cancellation of founder shares................................ - - (19,489)
Accrual of redeemable preferred dividend...................... (477,608) - (477,608)
Net loss...................................................... (3,671,061) - (3,671,061)
------------ --------- -----------
Balance at December 31, 2000.................................. (4,148,669) (317,281) (3,674,131)
Transfer of shares between preferred stockholders............. - - 1,091,477
Deemed dividend on beneficial conversion feature.............. (3,423,000) - 3,423,000)
Accrual of redeemable preferred dividend...................... (920,347) - (920,347)
Amortization of unearned compensation......................... - - 345,273
Issuance of options warrants.................................. - - 45,223
Net loss...................................................... (8,128,351) - (8,128,351)
------------ --------- -----------
Balance at December 31, 2001.................................. (16,620,367) (317,281) (14,663,856)
============ ========= ===========
See accompanying notes to financial statements.
4
BROADSTREAM, INC.
(A Company in Liquidation)
STATEMENTS OF CASH FLOW
PERIOD FROM CUMULATIVE FROM
JANUARY 7, 2000 JANUARY 7, 2000
(INCEPTION) (INCEPTION)
YEAR ENDED THROUGH THROUGH
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2001 2000 2001
------------ ------------ ------------
Cash flows from operating activities:
Net loss ................................................................ $ (8,128,351) $ (3,671,061) $(11,799,412)
Adjustments to reconcile net loss to net cash used in
operating activities:
Gain on extinguishment of liabilities, net of tax .................... (486,827) -- (486,827)
Noncash charge for transfer of shares between preferred investors .... 1,091,477 1,091,477
Write-off of capitalized software costs .............................. 914,548 -- 914,548
Depreciation and amortization ........................................ 435,966 179,725 615,691
Stock-based compensation expense ..................................... 390,496 434,114 824,610
Warrants issued for interest expense in conjunction with
convertible notes .................................................. -- 3,754 3,754
Accrued interest converted to shares of Series A
convertible redeemable participating preferred stock ............... -- 2,164 2,164
Deferred taxes ....................................................... (324,552) -- (324,552)
Changes in operating assets and liabilities through the
date when the assets were seized:
Accounts receivable .............................................. (2,022) (13,553) (15,575)
Prepaid expenses and other current assets ........................ 103,142 (103,142) --
Other assets ..................................................... 360,156 (360,416) (260)
Accounts payable and accrued expenses ............................ (70,368) 439,385 369,017
------------ ------------ ------------
Net cash used in operating activities ......................... (5,716,335) (3,089,030) (8,805,365)
------------ ------------ ------------
Cash flows from investing activities:
Purchase of property and equipment ................................... (141,331) (1,299,296) (1,440,627)
Software development costs ........................................... (237,414) (703,264) (940,678)
------------ ------------ ------------
Net cash used in investing activities ......................... (378,745) (2,002,560) (2,381,305)
------------ ------------ ------------
Cash flows from financing activities:
------------ ------------ ------------
Proceeds from convertible notes payable ................................. 1,600,000 600,000 2,200,000
------------ ------------ ------------
Repayment of notes payable .............................................. -- (250,000) (250,000)
Proceeds from Series A convertible redeemable participating
preferred stock issuance ............................................. -- 9,200,000 9,200,000
Retirement of common stock .............................................. -- (19,489) (19,489)
Proceeds from sale of common stock ...................................... -- 56,159 56,159
Net cash provided by financing activities ..................... 1,600,000 9,586,670 11,186,670
Net (decrease) increase in cash and cash equivalents .......... (4,495,080) 4,495,080 --
------------ ------------ ------------
Cash and cash equivalents at beginning of period .......................... 4,495,080 -- --
============ ============ ============
Cash and cash equivalents at end of period ................................ $ -- 4,495,080 --
5
PERIOD FROM CUMULATIVE FROM
JANUARY 7, 2000 JANUARY 7, 2000
(INCEPTION) (INCEPTION)
YEAR ENDED THROUGH THROUGH
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2001 2000 2001
------------ ------------ ------------
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Income taxes ......................................................... $ -- -- --
Interest ............................................................. -- 8,274 8,274
Supplemental disclosure of noncash financing activities:
Conversion of notes payable and accrued interest into shares
of Series A redeemable participating preferred stock ................. $ -- $ 334,982 $ 334,982
Preferred dividend upon conversion of notes payable into
shares of Series A redeemable participating
preferred stock ...................................................... -- 15,018 15,018
Issuance of stockholder notes receivable upon issuance of
common stock ......................................................... -- 317,281 317,281
Accrual of dividends on Series A and A-1 convertible
redeemable participating preferred stock ............................. 920,347 477,608 1,397,955
Extinguishment of convertible notes payable and accrued
liabilities through the transfer of assets ........................... 1,678,280 -- 1,678,280
Deemed dividend on beneficial conversion feature recognized
for change in conversion ratio of Series A convertible
redeemable participating preferred shares ............................ 3,423,000 -- 3,423,000
See accompanying notes to financial statements.
6
BROADSTREAM, INC.
(A Company in Liquidation)
Notes to Financial Statements
December 31, 2001 and 2000
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) ORGANIZATION AND NATURE OF OPERATIONS
Broadstream.com, Inc. (the "Company") was incorporated in the
state of Delaware on January 7, 2000 (inception) and changed its
name to Broadstream, Inc. as of December 20, 2000. The Company is
developing technology that provides metrics and quality assurance
to customers that transmit streaming media over the Internet.
In August 2001, two preferred investors advanced the Company
$1,600,000 in exchange for convertible notes payable which were
secured by the assets of the Company. In November 2001, the two
preferred investors contributed the notes payable to NetPro
Holdings, Inc. ("NetPro"). The Company was in default on the notes
payable beginning in October 2001, and NetPro foreclosed on the
assets and assumed certain liabilities of the Company on November
30, 2001. The Company was not engaged in operations as of December
31, 2001 and is in liquidation.
(B) BASIS OF PRESENTATION
Through November 30, 2001, the accompanying financial statements
were presented in accordance with Statement of Financial
Accounting Standards (SFAS) No. 7, ACCOUNTING AND REPORTING BY
DEVELOPMENT STAGE ENTERPRISES. According to SFAS No. 7, an
enterprise shall be considered to be in the development stage if
it is devoting substantially all of its efforts to establishing a
new business and planned principal operations have not commenced.
As a development stage enterprise, the Company was devoting most
of its efforts to activities such as financial planning, raising
capital, research and development, acquiring property, plant,
equipment, recruiting and training personnel, developing markets,
and starting up production prior to the termination of its
operations.
The Company commenced liquidation after the foreclosure of its
assets on November 30, 2001. Consequently, the Company has changed
its basis of accounting from a going concern basis to a
liquidation basis as of December 31, 2001. The Company has no
assets as of December 31, 2001 and has liabilities of
approximately $291,000. The Company has no
7
BROADSTREAM, INC.
(A Company in Liquidation)
Notes to Financial Statements
December 31, 2001 and 2000
employees as of December 31, 2001. It does not appear that the
Company has any sources of funding to settle these obligations.
(C) CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with
original maturities of three months or less to be cash
equivalents.
(D) DEPRECIATION AND AMORTIZATION
Depreciation and amortization of property and equipment is
calculated using the straight-line method over the estimated
useful lives of the related assets, generally ranging from three
to five years.
(E) REVENUE RECOGNITION
The Company generates revenue from services provided in
conjunction with live Web events and from monthly data streaming
services. The Company recognizes revenue upon the completion of
the events and monthly services, and fulfillment of all
obligations related to the services.
(F) RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred.
(G) CAPITALIZED SOFTWARE DEVELOPMENT COSTS
The Company accounts for software development costs for internal
use in accordance with Statement of Position 98-1, ACCOUNTING FOR
THE COSTS OF COMPUTER SOFTWARE DEVELOPED OR OBTAINED FOR INTERNAL
USE. Accordingly, the Company expenses costs incurred in the
preliminary project stage and, thereafter, capitalizes costs
incurred in the developing or obtaining of internal use software.
Certain costs, such as maintenance and training, are expensed as
incurred. Capitalized costs are amortized over a period of three
years. The Company determined that the capitalized software costs
were impaired in 2001, and recorded a write-off of $914,548 for
the year ended December 31, 2001.
The Company recorded amortization of capitalized software costs in
the amount of $26,130 during the year ended December 31, 2001.
(H) INCOME TAXES
The Company accounts for income taxes under the asset and
liability method. Under this method, deferred tax assets and
liabilities are recognized for the future tax consequences
attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are
expected to be recovered or settled. The
8
BROADSTREAM, INC.
(A Company in Liquidation)
Notes to Financial Statements
December 31, 2001 and 2000
effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the
enactment date.
(I) STOCK-BASED COMPENSATION
The Company has adopted SFAS No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION, which permits entities to recognize as expense over
the vesting period the fair value of all stock-based awards on the
date of grant. Alternatively, SFAS No. 123 also allows entities to
apply the provisions of APB Opinion No. 25 and provide pro forma
net income disclosures for employee stock option grants made in
future years as if the fair-value-based method defined in SFAS No.
123 had been applied. The Company has elected to apply the
provisions of APB Opinion No. 25 and provide the pro forma
disclosure provisions of SFAS No. 123. Additionally, the Company
accounts for stock-based compensation in accordance with
Interpretation No. 44, ACCOUNTING FOR CERTAIN TRANSACTIONS
INVOLVING STOCK COMPENSATION, which is an interpretation of APB
Opinion No. 25. The Company accounts for stock options issued to
nonemployees in accordance with SFAS No. 123, which requires
entities to recognize as expense over the service period the fair
value of all stock-based awards on the date of grant and Emerging
Issues Task Force 96-18 (EITF 96-18), ACCOUNTING FOR EQUITY
INSTRUMENTS THAT ARE ISSUED TO OTHER THAN EMPLOYEES FOR ACQUIRING,
OR IN CONJUNCTION WITH SELLING, GOODS OR SERVICES, which addresses
the measurement date and recognition approach for such
transactions.
The Company records expense related to fixed stock-based awards
over the vesting period of the award.
(J) CONCENTRATIONS OF CREDIT RISK
The Company's financial instruments that are exposed to
concentrations of credit risk consist primarily of cash and cash
equivalents. The Company's cash and cash equivalents are
maintained in federally insured financial institutions and quality
financial institutions and issuers. The Company has not
experienced any losses on these accounts to date.
(K) IMPAIRMENT OF LONG-LIVED ASSETS
The Company's long-lived assets are reviewed for impairment
whenever events or changes in circumstances indicate that the net
carrying amount may not be recoverable. When these events occur,
the Company measures impairment by comparing the carrying value of
the long-lived assets to the estimated discounted future cash
flows expected to result from use of the assets and their eventual
disposition. If the sum of the expected discounted future cash
flows is less than the carrying amount of the assets, the Company
would recognize an impairment loss. The Company determined that,
in 2001 and 2000, there had been no impairment in the carrying
value of its long-lived assets, other than the capitalized
software.
9
BROADSTREAM, INC.
(A Company in Liquidation)
Notes to Financial Statements
December 31, 2001 and 2000
(L) FAIR VALUES OF FINANCIAL INSTRUMENT
The carrying amounts of financial instruments, which include
accounts payable and accrued expenses, do not likely approximate
fair value due to the Company being in liquidation.
(M) 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 amounts 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.
(N) COMPREHENSIVE LOSS
The Company has no significant components of other comprehensive
loss, and accordingly, the comprehensive loss is the same as the
net loss for the year ended December 31, 2001 and period ended
December 31, 2000.
(O) RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 2001, the FASB issued SFAS No. 141, BUSINESS COMBINATIONS
(SFAS No. 141), and SFAS No. 142, GOODWILL AND OTHER INTANGIBLE
ASSETS (SFAS No. 142). SFAS No. 141 requires that the purchase
method of accounting be used for all business combinations. SFAS
No. 141 specifies criteria that intangible assets acquired in a
business combination must meet to be recognized and reported
separately from goodwill. SFAS No. 142 will require that goodwill
and intangible assets with indefinite useful lives no longer be
amortized, but instead tested for impairment at least annually in
accordance with the provisions of SFAS No. 142. SFAS No. 142 also
requires that intangible assets with estimable useful lives be
amortized over their respective estimated useful lives to their
estimated residual values, and reviewed for impairment in
accordance with SFAS No. 121 and, subsequently, SFAS No. 144 after
its adoption.
The Company adopted the provisions of SFAS No. 141 as of July 1,
2001, and SFAS No. 142 is effective January 1, 2002. Goodwill and
intangible assets determined to have an indefinite useful life
acquired in a purchase business combination completed after June
30, 2001, but before SFAS No. 142 is adopted in full, are not
amortized.
The Company does not having any goodwill or intangibles as of
December 31, 2001.
10
BROADSTREAM, INC.
(A Company in Liquidation)
Notes to Financial Statements
December 31, 2001 and 2000
(2) PROPERTY AND EQUIPMENT
Property and equipment is stated at cost and is summarized as follows as
of December 31, 2001 and 2000:
YEAR ENDED DECEMBER 31,
-------------------------
2001 2000
---------- ----------
Computers and equipment.................... $ -- 1,290,044
Furniture and fixtures..................... -- 9,252
---------- ----------
-- 1,299,296
Accumulated depreciation and amortization.. -- (179,725)
---------- ----------
Property and equipment, net.. $ -- 1,119,571
========== ==========
(3) CONVERTIBLE NOTES PAYABLE
From March 2000 through June 2000, the Company issued convertible notes
payable in the amount of $600,000 to third parties. The notes bore
interest at 10% per annum and were due upon the closing of an equity
financing transaction. Upon the sale of the Series A convertible
redeemable participating preferred stock in June 2000, the Company repaid
$250,000 of the notes, and the remaining $334,982, net of the unamortized
value assigned to the warrants, as well as accrued interest of $2,164,
was converted into shares of the Series A convertible redeemable
participating preferred stock at $0.852 per share.
In conjunction with the issuance of the notes, the Company issued 93,860
warrants to purchase common stock which were valued at $18,772, of which
$3,754 was recorded as interest expense during the period ended December
31, 2000. The remaining $15,018 was recorded as a preferred dividend upon
the issuance of the Series A convertible redeemable participating
preferred stock in June 2000.
In August 2001, two preferred investors advanced the Company $1,600,000
in exchange for convertible promissory notes. The notes were convertible
into shares of stock to be issued in a subsequent financing round at the
price per share obtained in the financing round. The notes were secured
by the assets of the Company, bore interest at 8%, and were due on or
after October 16, 2001 at the option of the holders of the notes. The two
preferred investors contributed the notes into NetPro in November 2001,
which foreclosed on the assets of the Company as it was in default on the
notes. NetPro also assumed liabilities of the Company of approximately
$80,000. The liabilities assumed by NetPro represent primarily amounts
owed to vendors. The carrying amount of the assets foreclosed on by
NetPro was approximately $867,000, which approximated their fair value;
consequently, the carrying amount of the liabilities extinguished
exceeded the carrying amount of the assets foreclosed on by NetPro. The
resulting gain of approximately $487,000, net of income taxes of
approximately $324,000, is reflected as an extraordinary gain for the
year ended December 31, 2001 in the statement of operations.
11
BROADSTREAM, INC.
(A Company in Liquidation)
Notes to Financial Statements
December 31, 2001 and 2000
(4) INCOME TAXES
Income taxes for the year ended December 31, 2001 and the period ended
December 31, 2000 differ from the amount computed using the federal
income tax rate of 34% as a result of the following:
YEAR ENDED DECEMBER 31,
-----------------------------
2001 2000
----------- -----------
Computed expected tax benefit...................... $(3,039,508) $(1,248,161)
State and local taxes, net of federal benefit...... (450,351) (334,365)
Change for transfer of shares...................... 371,103 --
Meals and entertainment............................ 5,440 6,215
Other.............................................. 102,382 --
Change in valuation allowance...................... 2,686,382 1,576,311
----------- -----------
Total tax benefit from continuing operations... $ (324,552) --
=========== ===========
Total tax benefit is allocated as follows:
YEAR ENDED DECEMBER 31,
-----------------------------
2001 2000
----------- -----------
Loss from continuing operations.................... $ (324,552) --
Extraordinary gain................................. 324,552 --
----------- -----------
Total tax benefit.............................. -- --
=========== ===========
The Company's significant deferred tax assets and liabilities, as determined
under the provisions of SFAS No. 109, ACCOUNTING FOR INCOME TAXES, as of
December 31, 2001 and 2000 are as follows:
YEAR ENDED DECEMBER 31,
-----------------------------
2001 2000
----------- -----------
Deferred tax assets:
Net operating loss carryforwards................ $ 3,911,127 1,644,895
Depreciation.................................... -- 21,223
Amortization.................................... -- 716
Accrued vacation................................ 23,088 24,267
Stock compensation expense...................... 328,478 183,929
----------- -----------
Total deferred tax assets............. 4,262,693 1,875,030
Less valuation allowance........................ (4,262,693) (1,576,311)
----------- -----------
Net deferred tax assets............... -- 298,719
----------- -----------
Deferred tax liabilities:
Research and development expenses............... -- 298,719
----------- -----------
Total deferred tax liabilities........ -- 298,719
----------- -----------
Net deferred tax assets............... $ -- --
=========== ===========
12
BROADSTREAM, INC.
(A Company in Liquidation)
Notes to Financial Statements
December 31, 2001 and 2000
At December 31, 2001 and 2000, the Company had net operating loss
carryforwards totaling approximately $6,542,000 and $3,277,000,
respectively, for federal income tax purposes expiring beginning in 2020
and California state net operating losses of approximately $6,634,000 and
$3,184,000, respectively, expiring beginning in 2010. Due to the
uncertainty surrounding the realization of the benefits of its tax
attributes, including net operating loss carryforwards in future tax
returns, the Company has recorded a valuation allowance against its
deferred tax assets as of December 31, 2001 and 2000 of $4,262,693 and
$1,576,311, respectively.
The Internal Revenue Code of 1986 substantially restricts the ability of
a corporation to utilize existing net operating losses and credits in the
event of an "ownership change." Therefore, the Company's net operating
loss carryforwards for federal income tax purposes may be limited due to
changes in ownership.
In assessing the potential realization of deferred tax assets, management
considers whether it is more likely than not that some portion or all of
the deferred tax assets will be realized. The ultimate realization of
deferred tax assets is dependent upon the Company attaining future
taxable income during the periods in which those temporary differences
become deductible.
(5) STOCKHOLDERS' DEFICIT
(A) AUTHORIZED SHARES
The Company has authorized 130 million shares of common stock, 70
million shares of which are designated voting shares and 60
million shares of which are designated nonvoting shares, and 25
million shares of preferred stock, 12 million shares of which are
designated Series A and Series A-1 convertible redeemable
participating preferred shares.
(B) COMMON STOCK
In January 2000, the Company issued 10 million shares to the
founders of the Company for total proceeds of $52,773.
In June 2000, the Company issued 835,214 shares of common stock to
employees in exchange for cash of $3,386 and notes receivable of
$4,966. The notes receivable are secured by the shares of common
stock, are due on June 1, 2005, and bear interest at 7% per annum.
In August 2000, the Company issued 674,383 shares of common stock
to a board member in exchange for a note receivable of $202,315.
The note receivable is due July 31, 2005 and bears interest at 7%
per annum.
In December 2000, the Company issued 200,000 shares of common
stock to a nonemployee in exchange for a note receivable of
$110,000. The note receivable is due January 1, 2006 and bears
interest at 7% per annum.
13
BROADSTREAM, INC.
(A Company in Liquidation)
Notes to Financial Statements
December 31, 2001 and 2000
During 2000, the Company canceled 200,000 founder's shares and
repurchased 64,963 shares of common stock held by a founder for
$19,489.
Of the 11,444,634 shares of common stock outstanding as of
December 31, 2001, 5,609,420 of the shares have voting rights and
5,835,214 of the shares are nonvoting.
(C) SERIES A AND A-1 CONVERTIBLE REDEEMABLE PARTICIPATING PREFERRED
STOCK
In June 2000, the Company issued 11,207,136 shares of Series A
convertible redeemable participating preferred stock (Series A
Preferred) for total consideration of $9,552,164, which consisted
of cash proceeds of $9,200,000, the conversion of notes payable in
the amount of $334,982, a preferred dividend of $15,018 which
represented the unamortized value of warrants issued in connection
with the convertible debt, and accrued interest of $2,164.
The holders of the Series A Preferred received a 9% annual
dividend, which accrued whether or not declared. These dividends
were payable in preference to any dividends to common
stockholders. Such dividends were mandatorily payable upon a
liquidation of the Company or upon conversion of the Series A
Preferred shares into common shares. The holders of the Series A
Preferred also had the option, in the event of a majority vote of
the Series A Preferred holders, to redeem the shares on June 28,
2005. The redemption value was to be the price paid per share plus
a 10% cumulative return. The Company had accrued $477,608 for the
10% return on the Series A Preferred shares for the period ended
December 31, 2000, resulting in a carrying amount and redemption
value of $10,029,772 as of December 31, 2000.
In the event of a liquidation of the Company as defined in the
Amended and Restated Articles of Incorporation, the holders of the
Series A Preferred shares were entitled to the amount paid per
share plus any accrued unpaid dividends. The holders of the Series
A Preferred shares had liquidation preference over the common
shares.
The holders of the Series A Preferred were able to convert their
shares into common shares at any time. The Series A Preferred
shares were to be converted into common shares automatically upon
an initial public offering. The initial conversion price was $0.86
per share, which was subject to adjustment based on the occurrence
of certain capital events, and represented a one-to-one conversion
ratio.
In May 2001, one preferred investor transferred 1,191,569 shares
of Series A Preferred shares to another preferred investor as
consideration for leading a subsequent round of financing. The
transaction was accounted for as a contribution to the Company for
no consideration. The financing round was never completed;
consequently, the Company charged to expense the liquidation
preference of the transferred Series A Preferred shares. The
resulting charge in the amount of $1,091,477 is reflected in the
statement of operations for the year ended December 31, 2001.
14
BROADSTREAM, INC.
(A Company in Liquidation)
Notes to Financial Statements
December 31, 2001 and 2000
In May 2001, the Company canceled and retired the Series A
Preferred shares and issued 11,207,136 shares of Series A-1
convertible redeemable participating preferred stock (Series A-1
Preferred) to the former holders of the Series A Preferred shares.
The Series A-1 Preferred shares have the same terms as the Series
A Preferred shares, except for the liquidation preference, which
was increased to $0.916 per share, and the conversion rate into
common shares. The increase in liquidation preference represented
accrued unpaid dividends on the Series A Preferred shares from the
date of issuance through the date of retirement. The Company
accrued $235,965 in dividends in 2001 through the date of the
retirement of the Series A Preferred shares. The initial
redemption amount for the Series A-1 Preferred shares was
$10,265,737. The Company accrued dividends of $684,382 on the
Series A-1 Preferred shares from the date of issuance through
December 31, 2001. The carrying amount and redemption value of the
Series A-1 Preferred shares is $10,950,119 as of December 31,
2001.
The Series A-1 Preferred shares are convertible into 3.18 common
shares per Series A-1 Preferred share. The beneficial conversion
feature has been accounted for as a preferred dividend in the
amount of $3,423,000, which is based on the fair value of the
additional shares of common stock into which the Series A-1
Preferred shares are convertible. The carrying amount of the
Series A-1 Preferred shares reflects the redemption amount of
$10,950,119 and the value assigned to the beneficial conversion
feature.
The Series A-1 Preferred shares have voting rights as if converted
into voting common shares.
(D) WARRANTS
In June 2000, the Company issued 93,860 warrants to purchase
common shares in conjunction with the issuance of convertible
notes payable which were convertible into equity. The warrants are
exercisable at $0.17 per share, expire May 2010 through June 2010,
and were valued at $18,772 using the Black-Scholes option pricing
model.
In December 2000, the Company issued 66,815 warrants to purchase
common shares in exchange for services. The warrants are
exercisable at $0.30 per share, expire in December 2005, and were
valued at approximately $6,013, using the Black-Scholes
option-pricing model. The Company recorded the fair value of
$6,013 as stock-based compensation during the period ended
December 31, 2000, as the services have been performed.
In January 2001, the Company issued 171,011 warrants to purchase
common shares in exchange for professional services. The warrants
are immediately exercisable at $0.30 per share, expire in January
2008, and were valued at approximately $7,079 using the
Black-Scholes option-pricing model. The Company recorded the fair
value of these warrants as stock-based
15
BROADSTREAM, INC.
(A Company in Liquidation)
Notes to Financial Statements
December 31, 2001 and 2000
compensation during the year ended December 31, 2001, as the
services had been performed.
In May 2001, the Company issued 204,759 warrants to the same party
to whom the warrants were issued in June 2000 in conjunction with
the convertible notes payable. The additional warrants were issued
in conjunction with the issuance of the Series A-1 Preferred
shares. The warrants are immediately exercisable at $0.17 per
share, expire May 2010 through June 2010, and were valued at
approximately $8,190 using the Black-Scholes option-pricing model.
The Company recorded the fair value of these warrants as
stock-based compensation during the year ended December 31, 2001.
In August through October 2001, the Company issued 174,375
warrants to purchase common stock in exchange for professional
services. The warrants vest as services are performed in
accordance with the warrant agreements, and expire five years from
the date of grant. Of the total warrants granted, 24,375 have an
exercise price of $0.30, and the remaining 150,000 warrants have
an exercise price of $0.85. The value of the warrants using the
Black-Scholes option-pricing model was not significant.
In August 2001, the Company issued 4,700 warrants to purchase
common stock in exchange for professional services. The warrants
are immediately exercisable at $0.85 per share and expire in
August 2006. The value of the warrants using the Black-Scholes
option-pricing model was not significant.
The following assumptions were used in estimating the fair value
of the warrants: (i) expected volatility of 10%, (ii) weighted
average risk-free rate of 5%, and (iii) an expected life which is
the contractual term of the warrant. No warrants were exercised
during 2001 or 2000. As of December 31, 2001, there were 715,520
warrants outstanding at a weighted average exercise price of
$0.36.
(6) STOCK OPTIONS AND STOCK-BASED AWARDS
The Company's 2000 Stock Option/Stock Issuance Plan (the Plan) provides
for the grant of up to 3,150,000 shares of nonvoting common stock or
options to purchase nonvoting common stock to employees, members of the
board of directors, and independent consultants of the Company. Options
and shares granted under the Plan generally vest over periods of up to
four years, and the options expire no later than ten years from the date
of grant. The Company accounts for grants to employees in accordance with
the provisions of APB Opinion No. 25, Interpretation No. 44, and related
interpretations. The Company accounts for grants to nonemployees in
accordance with SFAS No. 123 and EITF 96-18.
16
BROADSTREAM, INC.
(A Company in Liquidation)
Notes to Financial Statements
December 31, 2001 and 2000
A summary of stock option activity under the Plan for the year ended
December 31, 2001 is as follows:
OPTIONS OUTSTANDING
------------------------------
NUMBER OF WEIGHTED AVERAGE
SHARES EXERCISE PRICE
----------- ----------------
Granted................................ 2,269,383 $ 0.32
Exercised.............................. (874,383) 0.36
Canceled............................... (5,000) 0.30
----------
Outstanding options at
December 31, 2000................... 1,390,000 0.30
Granted................................ 8,282,084 0.19
Exercised.............................. -- --
Canceled............................... (7,087,037) 0.21
----------
Outstanding options at
December 31, 2001................... 2,585,047 0.19
==========
If the Company had elected to recognize compensation cost based on the
fair value at the date of grant, consistent with the method as prescribed
by SFAS No. 123, net loss for the year ended December 31, 2001 and period
ended December 31, 2000 would have changed to the pro forma amounts
indicated below.
YEAR ENDED DECEMBER 31,
-----------------------
2001 2000
---- ----
Net loss:
As reported...... $8,128,351 $3,671,061
Pro forma........ 8,200,000 3,680,000
The weighted average fair value of options granted under the Plan in 2001
and 2000 was $0.04 and $0.06 per option, respectively. The fair value was
determined using the minimum value pricing model with the following
assumptions: risk free interest rate of 5%, expected dividend yield of
0%, and an expected life of five years.
The following table summarizes options outstanding for the year ended
December 31, 2001:
OPTIONS OUTSTANDING AND EXERCISABLE
------------------------------------------
WEIGHTED
AVERAGE WEIGHTED
RANGE OF NUMBER OF REMAINING AVERAGE
EXERCISE OPTIONS CONTRACTUAL EXERCISE
PRICE OUTSTANDING LIFE PRICE
---------- ----------- ----------- --------
$ 0.14 1,738,119 9.34 $ 0.14
0.30 846,928 8.96 0.30
---------- ---------
$ .14 -.30 2,585,047 9.21 0.19
========== =========
17
BROADSTREAM, INC.
(A Company in Liquidation)
Notes to Financial Statements
December 31, 2001 and 2000
All of the options outstanding under the Plan are exercisable as of
December 31, 2001.
In June 2000, the founders of the Company transferred 250,000 shares of
common stock to an employee of the Company. The fair value of the shares
was $75,000, which is being recognized over the service period. The
Company recorded stock-based compensation expense related to these shares
of $40,323 and $34,677 during the year ended December 31, 2001 and period
ended December 31, 2000, respectively.
In June 2000, the Company issued 835,214 shares of common stock to
employees of the Company for total proceeds less than the fair value of
the shares. The excess of the fair value over the amount paid for the
shares was $242,212, which is being recognized over the service period.
The Company recorded stock-based compensation expense related to these
shares of $130,221 and $111,991 during the year ended December 31, 2001
and period ended December 31, 2000, respectively.
In June 2000, a founder of the Company sold 688,593 shares of his common
stock to a member of the board of directors for $20,000. The excess of
the fair value of the shares over the purchase price of $186,578 was
recorded as stock-based compensation expense during the period ended
December 31, 2000. Additionally, the founder granted an option to this
individual to purchase 2,065,781 of the founder's shares at an exercise
price of $0.01 per share. The options vest over periods of up to four
years. One-third of the options are related to services provided by the
individual as a member of the board of directors; consequently, these
grants are accounted for under APB 25. The fair value of these options
was $199,692, of which $24,963 was recorded as stock-based compensation
expense for the period ended December 31, 2000. The Company recorded the
remaining compensation of $174,729 in 2001 as the vesting of the options
was accelerated in April 2001. Another one-third of the options is
related to services as a nonemployee and, consequently, is accounted for
in accordance with SFAS No. 123 and EITF 96-18. Under EITF 96-18, a
measurement date has not occurred for these options; thus, they are being
treated as variable instruments and shall be marked-to-market up through
the measurement date. The fair value of these option grants is $99,846,
of which $29,954 and $69,892 was recorded as stock-based compensation
expense during the year ended December 31, 2001 and period ended December
31, 2000, respectively. Another one-third of the options is dependent on
the occurrence of specific events which have not yet occurred.
Consequently, there is no measurement date as of December 31, 2001 and no
expense has been recorded. As of December 31, 2001, 745,976 of these
options were vested, and the remaining contractual life of the options
was 3.6 years.
The options accounted for under SFAS No. 123 and EITF 96-18 were valued
using the Black-Scholes option-pricing model, using the following
assumptions: (i) expected volatility of 10%, (ii) weighted average
risk-free rate of 5%, and (iii) a contractual life which is the
contractual term of the option.
18
BROADSTREAM, INC.
(A Company in Liquidation)
Notes to Financial Statements
December 31, 2001 and 2000
In August 2000, the Company issued 200,000 shares of common stock for
consulting services to be provided. These share grants are being
accounted for in accordance with SFAS No. 123 and EITF 96-18. Under EITF
96-18, a measurement date has not occurred for these shares; thus, they
are being treated as variable instruments and shall be marked-to-market
up through the measurement date. The fair value did not exceed the
purchase price on the date of issuance or at December 31, 2001 and 2000.
Accordingly, there was no stock-based compensation expense recorded
during the year ended December 31, 2001 and period ended December 31,
2000.
(7) COMMITMENTS
The Company terminated the operating lease for its main facility in
December 2001.
Rent expense under operating leases for the years ended December 31, 2001
and 2000 were approximately $167,000 and $103,000, respectively.
19
NETPRO HOLDINGS, INC.
(A Development Stage Company)
INDEX
Page
Report of KPMG LLP, Independent Accountants....................................1
Balance Sheet as of December 31, 2001..........................................2
Statement of Operations for the period
ended December 31, 2001........................................................3
Statement of Stockholders' Deficit for the period
ended December 31, 2001........................................................4
Statement of Cash Flows for the period ended December 31, 2001.................5
Notes to Financial Statements..................................................6
INDEPENDENT AUDITORS' REPORT
The Board of Directors
NetPro Holdings, Inc.:
We have audited the accompanying balance sheet of NetPro Holdings, Inc. (a
development stage company) as of December 31, 2001 and the related statements of
operations, stockholders' deficit, and cash flows for the period from November
13, 2001 (inception) through December 31, 2001. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of NetPro Holdings, Inc. as of
December 31, 2001 and the results of its operations and its cash flows for the
period from November 13, 2001 (inception) through December 31, 2001 in
conformity with accounting principles generally accepted in the United States of
America.
The accompanying financial statements have been prepared assuming that NetPro
Holdings, Inc. will continue as a going concern. As more fully described in note
1, the Company suspended operations in March 2002. The Company is currently
evaluating alternatives with respect to its remaining assets. The Company has
written-off substantially all of its remaining assets due to the uncertainty
surrounding the realization of these assets, and has remaining liabilities as of
December 31, 2001. These conditions raise substantial doubt about the Company's
ability to continue as a going concern. The financial statements do not include
any adjustments for additional liabilities that might result from the suspension
of operations or the outcome of these uncertainties.
February 14, 2002, except as to note 1, which is as of March 22, 2002
Los Angeles, California
NETPRO HOLDINGS, INC.
(A Development Stage Company)
BALANCE SHEET
December 31, 2001
ASSETS
Current assets:
Cash and cash equivalents ................................................... $ 86,490
-----------
$ 86,490
===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued expenses ....................................... $ 48,194
-----------
Series A-1 convertible redeemable participating preferred stock,
$0.001 par value. Authorized, issued and outstanding 36,466,007
shares at December 31, 2001. Liquidation preference and
redemption value of $1,546,159 (note 4) ..................................... 788,621
Series B-1 convertible redeemable participating preferred stock,
$0.001 par value. Authorized 11,891,089 shares; issued and
outstanding 3,963,688 shares at December 31, 2001. Liquidation
preference and redemption value of $500,000 (note 4) ........................ 500,000
Stockholders' deficit: (note 4)
Common stock, $0.001 par value. Authorized 60,357,096 shares;
issued and outstanding one share at December 31, 2001 .................... --
Deficit accumulated during the development stage ............................ (1,250,325)
-----------
Total stockholders' deficit ..................................... (1,250,325)
Commitments and contingencies (note 6)
-----------
$ 86,490
===========
See accompanying notes to financial statements.
2
NETPRO HOLDINGS, INC.
(A Development Stage Company)
STATEMENT OF OPERATIONS
Period from November 13, 2001 (inception) through December 31, 2001
Revenues .................................................. $ 16,800
Operating expenses:
Cost of revenues ..................................... 6,054
Sales and marketing .................................. 60,164
General and administrative ........................... 349,841
Depreciation and amortization ........................ 49,000
Write-off of fixed assets (note 1) ................... 802,066
-----------
Net loss ................................. $(1,250,325)
===========
See accompanying notes to financial statements.
3
NETRPO HOLDINGS, INC.
(A Development Stage Company)
STATEMENT OF STOCKHOLDERS' DEFICIT Period
from November 13, 2001 (inception) through December 31, 2001
-------------------- ---------------- -------------
COMMON STOCK DEFICIT
-------------------- ACCUMULATED
DURING THE STOCKHOLDERS'
SHARES AMOUNT DEVELOPMENT STAGE DEFICIT
------ ------ ---------------- -------------
Issuance of one share to founder for no consideration.......... 1 $ -- -- --
Net loss....................................................... -- -- (1,250,325) (1,250,325)
Balance at December 31, 2001................................... 1 $ -- (1,250,325) (1,250,325)
See accompanying notes to financial statements.
4
NETPRO HOLDINGS, INC.
(A Development Stage Company)
STATEMENT OF CASH FLOWS
Period from November 13, 2001 (inception) through December 31, 2001
Cash flows from operating activities:
Net loss ................................................................................... $(1,250,325)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization ........................................................... 49,000
Write-off of accounts receivable, fixed assets and other assets ......................... 868,986
Changes in operating assets and liabilities, excluding the effect of assets
and liabilities transferred from Broadstream and the write-off of assets:
Accounts receivable ............................................................... (16,800)
Other assets ...................................................................... (34,285)
Accounts payable and accrued expenses ............................................. (30,086)
-----------
Net cash used in operating activities ....................................... (413,510)
Cash flows from financing activities:
Proceeds from convertible redeemable participating preferred stock issuance ................ 500,000
-----------
Net increase in cash and cash equivalents ................................... 86,490
Cash and cash equivalents at beginning of period ................................................ --
-----------
Cash and cash equivalents at end of period ...................................................... $ 86,490
===========
Supplemental disclosure of noncash financing activities:
Fair value of assets, net of liabilities assumed, contributed in exchange
for Series A-1 convertible redeemable participating preferred stock ..................... $ 788,621
See accompanying notes to financial statements.
5
NETPRO HOLDINGS, INC.
(A Development Stage Company)
Notes to Financial Statements
December 31, 2001
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) ORGANIZATION AND NATURE OF OPERATIONS
NetPro Holdings, Inc. (the "Company") was incorporated in the
state of Delaware on November 13, 2001 (inception). The Company is
developing technology that provides metrics and quality assurance
to customers that transmit streaming media over the Internet.
On November 30, 2001, two investors contributed $1,600,000 in
notes payable from Broadstream, Inc. ("Broadstream") to the
Company in exchange for preferred shares. The notes were secured
by the assets of Broadstream. Broadstream was in default on the
notes payable beginning in October 2001, and on November 30, 2001,
the Company foreclosed on the assets of the Broadstream with a
fair value of approximately $867,000 and assumed liabilities of
$78,280. The assets consisted of accounts receivable and fixed
assets with fair values of approximately $16,000 and $851,000,
respectively.
In March 2002, the Company suspended operations and terminated
most of its employees. The Company is currently evaluating the
alternatives with respect to its remaining assets. As a result of
the uncertainty regarding the realization of its remaining assets,
the Company has written-off its remaining assets, except for cash
and cash equivalents, as of December 31, 2001. The write-off of
assets include accounts receivable of $32,375, net fixed assets of
$802,066 and an operating lease deposit of $34,545. These asset
write-offs are reflected in the statement of operations for the
period ended December 31, 2001.
(B) BASIS OF PRESENTATION
The accompanying financial statements are presented in accordance
with Statement of Financial Accounting Standards (SFAS) No. 7,
ACCOUNTING AND REPORTING BY DEVELOPMENT STAGE ENTERPRISES.
According to SFAS No. 7, an enterprise shall be considered to be
in the development stage if it is devoting substantially all of
its efforts to establishing a new business and planned principal
operations have not commenced. As a development stage enterprise,
the Company was devoting most of its efforts to activities such as
financial planning, raising capital, research and development,
acquiring property, plant, equipment, recruiting and training
personnel, developing markets, and starting up production, prior
to the suspension of its operations in March 2002.
6
NETPRO HOLDINGS, INC.
(A Development Stage Company)
Notes to Financial Statements
December 31, 2001
(C) GOING CONCERN
The Company has financed its initial operations primarily through
the sale of preferred stock. The Company has experienced losses
and negative cash flows from operations since its inception. The
conditions described above regarding the suspension of operations
raise substantial doubt about the Company's ability to continue as
a going concern. The financial statements do not include any
adjustments for additional liabilities that might result from the
suspension of operations or the outcome of these uncertainties.
(D) CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with
original maturities of three months or less to be cash
equivalents.
(E) DEPRECIATION AND AMORTIZATION
Depreciation and amortization of property and equipment is
calculated using the straight-line method over the estimated
useful lives of the related assets, generally ranging from three
to five years.
(F) REVENUE RECOGNITION
The Company generates revenue from services provided in
conjunction with live Web events and from monthly data streaming
services. The Company recognizes revenue upon the completion of
the events and monthly services, and fulfillment of all
obligations related to the services.
(G) RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred.
(H) CAPITALIZED SOFTWARE DEVELOPMENT COSTS
The Company accounts for software development costs for internal
use in accordance with Statement of Position 98-1, ACCOUNTING FOR
THE COSTS OF COMPUTER SOFTWARE DEVELOPED OR OBTAINED FOR INTERNAL
USE. Accordingly, the Company expenses costs incurred in the
preliminary project stage and, thereafter, capitalizes costs
incurred in the developing or obtaining of internal use software.
Certain costs, such as maintenance and training, are expensed as
incurred.
(I) INCOME TAXES
The Company accounts for income taxes under the asset and
liability method. Under this method, deferred tax assets and
liabilities are recognized for the future tax consequences
attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are
expected to be recovered or settled. The
7
NETPRO HOLDINGS, INC.
(A Development Stage Company)
Notes to Financial Statements
December 31, 2001
effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the
enactment date.
(J) STOCK-BASED COMPENSATION
The Company has adopted SFAS No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION, which permits entities to recognize as expense over
the vesting period the fair value of all stock-based awards on the
date of grant. Alternatively, SFAS No. 123 also allows entities to
apply the provisions of APB Opinion No. 25 and provide pro forma
net income disclosures for employee stock option grants made in
future years as if the fair-value-based method defined in SFAS No.
123 had been applied. The Company has elected to apply the
provisions of APB Opinion No. 25 and provide the pro forma
disclosure provisions of SFAS No. 123. Additionally, the Company
accounts for stock-based compensation in accordance with
Interpretation No. 44, ACCOUNTING FOR CERTAIN TRANSACTIONS
INVOLVING STOCK COMPENSATION, which is an interpretation of APB
Opinion No. 25. The Company accounts for stock options issued to
nonemployees in accordance with SFAS No. 123, which requires
entities to recognize as expense over the service period the fair
value of all stock-based awards on the date of grant and Emerging
Issues Task Force 96-18 (EITF 96-18), ACCOUNTING FOR EQUITY
INSTRUMENTS THAT ARE ISSUED TO OTHER THAN EMPLOYEES FOR ACQUIRING,
OR IN CONJUNCTION WITH SELLING, GOODS, OR SERVICES, which
addresses the measurement date and recognition approach for such
transactions.
The Company records expense related to fixed stock-based awards
over the vesting period of the award.
(K) CONCENTRATIONS OF CREDIT RISK
The Company's financial instruments that are exposed to
concentrations of credit risk consist primarily of cash and cash
equivalents. The Company's cash and cash equivalents are
maintained in federally insured financial institutions and quality
financial institutions and issuers. The Company has not
experienced any losses on these accounts to date.
(L) IMPAIRMENT OF LONG-LIVED ASSETS
The Company's long-lived assets are reviewed for impairment
whenever events or changes in circumstances indicate that the net
carrying amount may not be recoverable. When these events occur,
the Company measures impairment by comparing the carrying value of
the long-lived assets to the estimated discounted future cash
flows expected to result from use of the assets and their eventual
disposition. If the sum of the expected discounted future cash
flows is less than the carrying amount of the assets, the Company
would recognize an impairment loss. The Company determined that,
as of December 31, 2001, its fixed assets were impaired as a
result of the suspension of operations in March 2002. The net
carrying amount of fixed assets of $802,066 was written-off as of
December 31, 2001.
8
NETPRO HOLDINGS, INC.
(A Development Stage Company)
Notes to Financial Statements
December 31, 2001
(M) FAIR VALUES OF FINANCIAL INSTRUMENT
The carrying amounts of financial instruments, which include cash
and cash equivalents and accounts payable and accrued expenses
approximate fair value because of the short maturity of these
instruments.
(N) 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 amounts 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.
(O) COMPREHENSIVE LOSS
The Company has no significant components of other comprehensive
loss, and accordingly, the comprehensive loss is the same as the
net loss for the period ended December 31, 2001.
(P) RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 2001, the FASB issued SFAS No. 141, BUSINESS COMBINATIONS,
(SFAS No. 141) and SFAS No. 142, GOODWILL AND OTHER INTANGIBLE
ASSETS (SFAS No. 142). SFAS No. 141 requires that the purchase
method of accounting be used for all business combinations. SFAS
No. 141 specifies criteria that intangible assets acquired in a
business combination must meet to be recognized and reported
separately from goodwill. SFAS No. 142 will require that goodwill
and intangible assets with indefinite useful lives no longer be
amortized, but instead tested for impairment at least annually in
accordance with the provisions of SFAS No. 142. SFAS No. 142 also
requires that intangible assets with estimable useful lives be
amortized over their respective estimated useful lives to their
estimated residual values, and reviewed for impairment in
accordance with SFAS No. 121 and subsequently, SFAS No. 144 after
its adoption.
The Company adopted the provisions of SFAS No. 141 at its
inception, and SFAS No. 142 is effective January 1, 2002. Goodwill
and intangible assets determined to have an indefinite useful life
acquired in a purchase business combination completed after June
30, 2001, but before SFAS No. 142 is adopted in full, are not
amortized.
The Company does not having any goodwill or intangibles as of
December 31, 2001.
In August 2001, the FASB issued SFAS No. 144, ACCOUNTING FOR THE
IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS (SFAS No. 144). SFAS
No. 144 addresses financial accounting and reporting for the
impairment or disposal of long-lived assets. This Statement
requires that long-lived assets be reviewed
9
NETPRO HOLDINGS, INC.
(A Development Stage Company)
Notes to Financial Statements
December 31, 2001
for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to
future net cash flows expected to be generated by the asset. If
the carrying amount of an asset exceeds its estimated future cash
flows, an impairment charge is recognized by the amount by which
the carrying amount of the asset exceeds the fair value of the
asset. SFAS No. 144 requires companies to separately report
discontinued operations and extends that reporting to a component
of an entity that either has been disposed of (by sale,
abandonment, or in a distribution to owners) or is classified as
held for sale. Assets to be disposed of are reported at the lower
of the carrying amount or fair value less costs to sell. The
Company is required to adopt SFAS No. 144 on January 1, 2002.
(2) PROPERTY AND EQUIPMENT
Property and equipment was stated at the assigned fair value at the time
the assets were foreclosed on and transferred from Broadstream, and is
summarized as follows prior to the write-off of such assets as of
December 31, 2001:
Computers and equipment.......................... $ 830,624
Furniture and fixtures........................... 20,442
----------
851,066
Accumulated depreciation and amortization........ (49,000)
----------
Property and equipment, net........ $ 802,066
==========
10
NETPRO HOLDINGS, INC.
(A Development Stage Company)
Notes to Financial Statements
December 31, 2001
(3) INCOME TAXES
Income taxes for the period ended December 31, 2001 differ from the
amount computed using the federal income tax rate of 34% as a result of
the following:
Computed expected tax benefit....................... $ (425,111)
State and local taxes, net of federal benefit....... (119,850)
Loss on notes receivable contributed by investors... (273,319)
Change in valuation allowance....................... 818,280
----------
Total tax benefit..................... $ --
==========
The Company's significant deferred tax assets and liabilities, as
determined under the provisions of SFAS No. 109, ACCOUNTING FOR INCOME
TAXES, as of December 31, 2001 are as follows:
Deferred tax assets:
Net operating loss carryforwards................. $ 471,559
Fixed assets..................................... 332,960
Lease deposit.................................... 13,761
----------
Total deferred tax assets.... 818,280
Less valuation allowance................... (818,280)
----------
Net deferred tax assets...... $ --
==========
At December 31, 2001, the Company had net operating loss carryforwards
totaling approximately $1,182,000 for federal income tax purposes
expiring in 2021 and California state net operating losses of
approximately $1,182,000 expiring in 2011. Due to the uncertainty
surrounding the realization of the benefits of its tax attributes,
including net operating loss carryforwards in future tax returns, the
Company has recorded a valuation allowance against its deferred tax
assets as of December 31, 2001 of $818,280.
The Internal Revenue Code of 1986 substantially restricts the ability of
a corporation to utilize existing net operating losses and credits in the
event of an "ownership change." Therefore, the Company's net operating
loss carryforwards for federal income tax purposes may be limited due to
changes in ownership.
In assessing the potential realization of deferred tax assets, management
considers whether it is more likely than not that some portion or all of
the deferred tax assets will be realized. The ultimate realization of
deferred tax assets is dependent upon the Company attaining future
taxable income during the periods in which those temporary differences
become deductible.
11
NETPRO HOLDINGS, INC.
(A Development Stage Company)
Notes to Financial Statements
December 31, 2001
(4) STOCKHOLDERS' DEFICIT
(A) AUTHORIZED SHARES
The Company has authorized 60,357,096 shares of common stock and
48,357,096 shares of preferred stock.
(B) COMMON STOCK
In November 2001, the Company issued one share of common stock for
no proceeds.
(C) SERIES A-1 AND B-1 CONVERTIBLE REDEEMABLE PARTICIPATING PREFERRED
STOCK
In November 2001, the Company issued 36,466,007 shares of Series
A-1 convertible redeemable participating preferred stock (Series
A-1 Preferred) in exchange for convertible notes with a face
amount of $1,600,000. The notes were secured by the assets of
Broadstream. The Company foreclosed on the assets of Broadstream
when the notes were in default. The carrying amount of the Series
A-1 Preferred shares is $788,621 as of December 31, 2001, which
represents the fair value of the foreclosed assets of Broadstream
of approximately $867,000, less liabilities of $78,280 assumed by
the Company on November 30, 2001.
In December 2001, the Company issued 3,963,688 shares of Series
B-1 convertible redeemable participating preferred stock (Series
B-1 Preferred) for total proceeds of $500,000.
The holders of the Series A-1 and B-1 Preferred shares receive a
9% annual dividend, which accrues whether or not declared. These
dividends are payable in preference to any dividends to common
stockholders. Such dividends are mandatorily payable upon a
liquidation of the Company or upon conversion of the Series A-1
and B-1 Preferred shares into common shares. The holders of the
Series A-1 and B-1 Preferred shares also have the option, in the
event of a majority vote of the Series A-1 and B-1 Preferred
holders, to redeem the shares on November 30, 2006. The redemption
value is $0.0424 and $0.1261 per share for the Series A-1
Preferred and Series B-1 Preferred shares, respectively, plus a
10% cumulative return.
In the event of a liquidation of the Company, as defined in the
Amended and Restated Articles of Incorporation, the holders of the
Series A-1 and B-1 Preferred shares are entitled to the amount
paid per share plus any accrued unpaid dividends. The holders of
the Series A-1 and B-1 Preferred shares have liquidation
preference over the common shares. In the event the liquidation
proceeds are less than the liquidation preferences of the Series
A-1 and B-1 Preferred shares, the proceeds shall be distributed
pro rata among the Series A-1 and B-1 Preferred holders.
The holders of the Series A-1 and B-1 Preferred shares are able to
convert their shares into common shares at any time. The Series
A-1 and B-1
12
NETPRO HOLDINGS, INC.
(A Development Stage Company)
Notes to Financial Statements
December 31, 2001
Preferred shares are to be converted into common shares
automatically upon an initial public offering. The initial
conversion prices were $0.0424 and $0.1261 per share for the
Series A-1 and B-1 Preferred shares, respectively, which are
subject to adjustment based on the occurrence of certain capital
events.
The Series A-1 and B-1 Preferred shares have voting rights as if
converted into voting common shares.
(5) STOCK OPTIONS AND STOCK-BASED AWARDS
The Company's 2001 Incentive Stock Plan (the Plan) provides for the grant
of up to 12,000,000 shares of common stock or options to purchase common
stock to employees, members of the board of directors, and consultants of
the Company. Options and shares granted under the Plan expire no later
than ten years from the date of grant. The Company accounts for grants to
employees in accordance with the provisions of APB Opinion No. 25,
Interpretation No. 44 and related interpretations. The Company accounts
for grants to nonemployees in accordance with SFAS No. 123 and EITF
96-18. The Company did not grant any shares of common stock or options
under the Plan in 2001.
(6) COMMITMENTS
Future commitments under the operating lease for the Company's main
facility are as follows as of December 31, 2001:
2002............................... $ 99,864
2003............................... 59,997
-----------
Total................ $ 159,861
===========
Rent expense under this operating lease for the period ended December 31,
2001 was approximately $3,000.
The Company paid a lease deposit of $34,545 in December 2001, and will
likely forfeit this deposit as a result of the suspension of operations
and likely abandonment of the leased facility. The Company has charged
this lease deposit to expense in 2001.
(7) SUBSEQUENT EVENT
In January 2002, the Company issued approximately 800,000 shares of
Series B-1 Preferred shares to an existing investor for total proceeds of
$100,000, and issued approximately 800,000 shares of Series B-1 Preferred
shares to a third party for total proceeds of $100,000.
13
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.
Date: March 26, 2002
THE COMPANY
By: /s/ William Avery
-------------------------------------
Name: William Avery
Title: 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 persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ William Avery Chief Executive Officer, President, March 26, 2002
- ------------------------------- Chief Financial Officer and Director
William Avery (Principal Executive Officer, Principal
Financial Officer and Principal
Accounting Officer)
/s/ Michael Gleason Chairman of the Board of Directors March 26, 2002
- -------------------------------
Michael Gleason
/s/ James Dubin Director March 26, 2002
- -------------------------------
James Dubin
/s/ Michael Levitt Director March 26, 2002
- -------------------------------
Michael Levitt
/s/ William Lipner Director March 26, 2002
- -------------------------------
William Lipner
EXHIBIT LIST
------------
(a)(1) Financial Statements and Schedules
The financial statements and financial statement schedule included in
this report begin on page F-1.
(a)(2) The following exhibits are filed as part of this report unless
specifically stated to be incorporated herein by reference to other documents
previously filed with the SEC:
2.1 Agreement and Plan of Merger of Arinco Computer Systems Inc. with and
into Change Technology Partners, Inc. (d/b/a Pangea Internet, Inc.),
dated April 21, 2000 (filed as an exhibit to the Registrant's Report on
Form 8-K dated September 12, 2000 and incorporated herein by
reference).
2.2 Agreement and Plan of Merger of CTPI Acquisition Corp. with and into
eHotHouse, Inc., dated February 5, 2001 (filed as an exhibit to the
Registrant's Annual Report on Form 10-K dated March 27, 2001 and
incorporated herein by reference).
2.3 Agreement and Plan of Merger among Change Technology Partners, Inc. and
Franklin Capital Corporation, dated December 4, 2001 (filed as an
exhibit to the Registrant's Report on Form 8-K dated December 5, 2001
and incorporated herein by reference).
3.1 Certificate of Incorporation of Change Technology Partners, Inc. (filed
as an exhibit to the Registrant's quarterly report on Form 10-Q for the
fiscal quarter ended September 30, 2000 and incorporated herein by
reference).
3.2 Bylaws of Change Technology Partners, Inc. (filed as an exhibit to the
Registrant's quarterly report on Form 10-Q for the fiscal quarter ended
September 30, 2000 and incorporated herein by reference).
4.1 Form of stock certificate for common stock (filed as an exhibit to the
Registrant's Annual Report on Form 10-K dated March 27, 2001 and
incorporated herein by reference).
4.2 Registration Rights Agreement by and among Arinco Computer Systems
Inc., Pangea Internet Advisors LLC and the persons party to the
Securities Purchase Agreement, dated as of March 28, 2000 (filed as an
exhibit to the Registrant's Report on Form 8-K dated March 28, 2000 and
incorporated herein by reference).
10.1 Securities Purchase Agreement, dated March 9, 2000, by and between
Arinco Computer Systems Inc., Pangea Internet Advisors LLC and the
purchasers listed on Schedule I attached thereto (filed as an exhibit
to the Registrant's Report on Form 8-K dated March 28, 2000, and
incorporated herein by reference).
10.2 Amended and Restated Business Opportunity Allocation and Miscellaneous
Services Agreement by and between Change Technology Partners, Inc., FG
II Ventures, LLC and Pangea Internet Advisors LLC, dated as of November
10, 2000 (filed as an exhibit to the Registrant's Annual Report on Form
10-K dated March 27, 2001 and incorporated herein by reference).
10.3 Warrants for William Avery, Cary S. Fitchey, The Roberts Family
Revocable Trust U/D/T dated as of December 15, 1997, David M. Roberts
and Gail M. Simpson, Trustees, Roberts Children Irrevocable Trust U/D/T
dated October 21, 1996, Stephen H. Roberts, Trustee and Turtle Holdings
LLC (filed as an exhibit to the Registrant's Report on Form 8-K dated
March 28, 2000 and incorporated herein by reference).
10.4 Stock Purchase Agreement dated June 29, 2000 by and between Arinco
Computer Systems Inc., Broadstream.com, Inc. and the purchasers listed
on Schedule I attached thereto (filed as an exhibit to the Registrant's
Report on Form 8-K dated June 29, 2000 and incorporated herein by
reference).
10.5 Stock Purchase Agreement, dated September 15, 2000, by and between
Change Technology Partners, Inc. and eHotHouse, Inc. (filed as an
exhibit to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended September 15, 2000 and incorporated herein by reference).
10.6 Agreement for Sale and Purchase of Business Assets among InSys
Technology Inc., ATC InSys Technology, Inc., and ATC Group Services
Inc. dated October 5, 2000 (filed as an exhibit to the Registrant's
Report on Form 8-K dated October 18, 2000 and incorporated herein by
reference).
10.7 Assumption Agreement among InSys Technology, Inc., ATC InSys Technology
Inc. and ATC Group Services Inc. dated October 18, 2000 (filed as an
exhibit to the Registrant's Report on Form 8-K dated October 18, 2000
and incorporated herein by reference).
10.8 Employment Agreement entered into by and between Arinco Computer
Systems Inc. and Matthew Ryan dated as of August 21, 2000 (filed as an
exhibit to the Registrant's Report on Form 8-K dated November 20, 2000
and incorporated herein by reference).
10.9 Employment Agreement entered into by and between Change Technology
Partners, Inc. and Kathleen Shepphird dated as of November 10, 2000
(filed as an exhibit to the Registrant's Annual Report on Form 10-K
dated March 27, 2001 and incorporated herein by reference).
10.10 Agreement and Plan of Merger among eHotHouse Inc., eHH Merger I, Inc.,
RAND Interactive Corporation, and Todd Burgess, David Kelley, John
Snow, Stephen Riddick and Brobeck, Phleger and Harrison LLP dated
November 30, 2000 (filed as an exhibit to the Registrant's Report on
Form 8-K dated November 30, 2000 and incorporated herein by reference).
10.11 Agreement and Plan of Merger among Change Technology Partners, Inc.,
Iguana Studios I, Inc., and Iguana Studios, Inc., dated March 1, 2001
(filed as an exhibit to the Registrant's Report on Form 8-K dated March
14, 2001 and incorporated herein by reference).
10.12 Stockholders Agreement entered into by Change Technology Partners,
Inc., and Stockholders of Iguana dated March 1, 2001 (filed as an
exhibit to the Registrant's Report on Form 8-K dated March 14, 2001 and
incorporated herein by reference).
10.13 Agreement and Plan of Merger among Change Technology Partners, Inc.,
Canned Interactive, Inc., Papke-Textor, Inc., Textor Family Limited
Partnership, Papke Family Limited Partnership, Douglas Textor and Jay
Papke, dated June 12, 2001 (filed as an exhibit to the Registrant's
Report on Form 8-K dated June 12, 2001 and incorporated herein by
reference).
10.14 Employment Agreement effective as of September 19, 2001 by and between
Change Technology Partners, Inc. and William Avery.
10.15 Severance Compensation Agreement effective as of September 19, 2001 by
and between Change Technology Partners, Inc. and William Avery.
10.16 Stock Purchase Agreement by and among NetPro Holdings, Inc., Change
Technology Partners, Inc., and Adelson Investors LLC dated November 30,
2001.
10.17 Purchase and Sale Agreement by and between John J. Goodwin and Change
Technology Partners, Inc. dated November 8, 2001 (filed as an exhibit
to the Registrant's Report on Form 8-K dated November 8, 2001 and
incorporated herein by reference).
10.18 Promissory Note issued by InSys Technology LLC to Change Technology
Partners, Inc. dated November 8, 2001 (filed as an exhibit to the
Registrant's Report on Form 8-K dated November 8, 2001 and incorporated
herein by reference).
10.19 Share Purchase Agreement by and between Change Technology Partners,
Inc. and John Snow, dated November 2, 2001 (filed as an exhibit to the
Registrant's Report on Form 8-K dated November 2, 2001 and incorporated
herein by reference).
10.20 Warrant to Purchase Common Stock, issued by RAND Interactive
Corporation to Change Technology Partners, Inc. dated November 2, 2001
(filed as an exhibit to the Registrant's Report on Form 8-K dated
November 2, 2001 and incorporated herein by reference).
10.21 Promissory Note issued by eCom Capital, Inc. to Change Technology
Partners, Inc. dated August 28, 2001 (filed as an exhibit to the
Registrant's Report on Form 8-K dated August 28, 2001 and incorporated
herein by reference).
10.22 Security Agreement among eCom Capital, Inc., Franklin Capital
Corporation and Change Technology Partners, Inc. dated August 28, 2001
(filed as an exhibit to the Registrant's Report on Form 8-K dated
August 28, 2001 and incorporated herein by reference).
10.23 Warrant, issued by eCom Capital, Inc. to Change Technology Partners,
Inc. dated August 28, 2001 (filed as an exhibit to the Registrant's
Report on Form 8-K dated August 28, 2001 and incorporated herein by
reference).
10.24 Stock Purchase Agreement between Change Technology Partners, Inc. and
Franklin Capital Corporation dated December 4, 2001.
21.1 Subsidiaries.
(b) The following reports on Form 8-K were filed with the Securities &
Exchange Commission during the fourth quarter of 2001:
(i) On November 15, 2001 reporting matters under Item 5, Other
Events, and Item 7, Financial Statements and Exhibits.
(ii) On November 16, 2001 two Form 8-Ks reporting matters under
Item 5, Other Events, and Item 7, Financial Statements and
Exhibits.
(iii) On December 5, 2001 reporting matters under Item 5, Other
Events, and Item 7, Financial Statements and Exhibits.