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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarter ended September 30, 2002
[_] 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 other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification no.)
537 STEAMBOAT ROAD, GREENWICH, CONNECTICUT 06830
(Address of principal executive offices) (Zip Code)
(203) 661-6942
(Issuer's telephone number, including area code)
N/A
(Former names, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ].
Check whether the issuer is an accelerated filer (as defined in Rule 12b-2 of
the Exchange Act). Yes [_] No [X].
The number of shares of the issuer's common stock outstanding on November 13,
2002 was approximately 182,037,507.
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
ITEM 1 - CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
Consolidated Balance Sheets as of September 30, 2002 (unaudited)
and December 31, 2001.......................................................................2
Consolidated Statements of Operations for the three
months ended September 30, 2002 and 2001 (unaudited)........................................3
Consolidated Statements of Operations for the nine
months ended September 30, 2002 and 2001 (unaudited)........................................4
Consolidated Statement of Stockholders' Equity for the nine
months ended September 30, 2002 (unaudited).................................................5
Consolidated Statements of Cash Flows for the nine
months ended September 30, 2002 and 2001 (unaudited)........................................6
Notes to Unaudited Interim Condensed Consolidated Financial Statements......................7
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS......................................................21
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ................................30
ITEM 4 - CONTROLS AND PROCEDURES ...................................................................30
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS..........................................................................32
ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS..................................................32
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES............................................................32
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........................................32
ITEM 5 - OTHER INFORMATION..........................................................................34
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K...........................................................34
ITEM 7 - SIGNATURES.................................................................................38
ITEM 8 - CERTIFICATIONS.............................................................................39
PART I. FINANCIAL INFORMATION
ITEM 1 - CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
CHANGE TECHNOLOGY PARTNERS, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands except share and per share amounts)
SEPTEMBER 30, DECEMBER 31,
2002 2001
(Unaudited)
------------- ------------
ASSETS
Cash and cash equivalents, excluding restricted cash of $200 ..................... $ 1,533 $ 8,892
Accounts receivable, net of allowance of $0 at September 30, 2002 and
December 31, 2001 ........................................................... 253 147
Related party receivable ......................................................... 185 204
Notes receivable ................................................................. 7,044 2,393
Prepaid expenses and other current assets, including restricted cash of
$200 at September 30, 2002 and December 31, 2001 .......................... 647 442
---------- ---------
Total current assets ........................................... 9,662 12,078
Notes receivable, excluding current portion ...................................... 405 333
Investments in and loans to unconsolidated subsidiaries .......................... 463 720
Property and equipment, net ...................................................... 508 786
Goodwill ......................................................................... 1,568 1,568
Other assets ..................................................................... 603 667
---------- ---------
Total assets ................................................... 13,209 16,152
========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable ................................................................. 221 280
Accrued expenses ................................................................. 646 983
Deferred revenues ................................................................ 152 4
Capital lease obligation ......................................................... 92 92
---------- ---------
Total current liabilities ...................................... 1,111 1,359
Capital lease obligation, less current portion ................................... 22 124
Deferred rent .................................................................... 16 9
---------- ---------
Total liabilities .............................................. 1,149 1,492
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 shares issued and outstanding at September
30, 2002 and December 31, 2001, with an aggregate
liquidation preference of $1 ................................................ -- --
Common stock:
$.01 par value; 500,000,000 shares authorized, 181,322,881
and 179,022,881 shares issued and outstanding at September
30, 2002 and December 31, 2001, respectively ................................ 1,813 1,790
Additional paid-in capital ....................................................... 94,683 94,637
Deferred compensation ............................................................ (572) (966)
Accumulated deficit .............................................................. (83,864) (80,801)
---------- ---------
Total stockholders' equity ..................................... 12,060 14,660
---------- ---------
Total liabilities and stockholders' equity ..................... $ 13,209 $ 16,152
========== =========
See accompanying notes to unaudited condensed consolidated interim
financial statements.
2
CHANGE TECHNOLOGY PARTNERS, INC.
AND SUBSIDIARIES
Unaudited Consolidated Statements of Operations
(in thousands except share and per share amounts)
THREE MONTHS ENDED
SEPTEMBER 30,
------------------------------
2002 2001
----------- -----------
Revenues .................................................................... 511 1,740
Cost of revenues, including amortization of purchased intangibles ...........
of $0 and $423, respectively ............................................. 301 2,527
----------- -----------
Gross profit (loss) ......................................... 210 (787)
Operating expenses:
Selling, general, and administrative expenses, exclusive of
equity based compensation of $131 and $159, respectively ................. 1,068 2,967
Equity based compensation ................................................... 131 159
Severance ................................................................... 0 1,326
----------- -----------
Total operating expenses .................................... 1,199 4,452
Loss from operations ........................................ (989) (5,239)
Other income (expense):
Interest and dividend income ............................................. 224 144
Interest expense ......................................................... (4) (4)
Equity in losses and impairment of investments in
unconsolidated affiliates .............................................. (22) (9,101)
----------- -----------
Net loss .................................................... (791) (14,200)
=========== ===========
Weighted average common shares outstanding,
basic and diluted ...................................................... 181,322,881 179,397,920
=========== ===========
Basic and diluted net loss per common share ................................. (0.00) (0.08)
=========== ===========
See accompanying notes to unaudited condensed consolidated interim
financial statements.
3
CHANGE TECHNOLOGY PARTNERS, INC.
AND SUBSIDIARIES
Unaudited Consolidated Statements of Operations
(in thousands except share and per share amounts)
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------------
2002 2001
------------ ------------
Revenues ........................................................................ $ 1,844 $ 5,144
Cost of revenues, including amortization of purchased
intangibles of $0 and $864, respectively .................................. 931 6,891
------------ ------------
Gross profit (loss) ............................................. 913 (1,747)
Operating expenses:
Selling, general, and administrative expenses, exclusive of equity based
compensation of $394 and $2,953, respectively .............................. 3,601 10,788
Equity based compensation ....................................................... 394 2,953
Severance ....................................................................... 0 1,326
------------ ------------
Total operating expenses ........................................ 3,995 15,067
Loss from operations ............................................ (3,082) (16,814)
Other income (expense):
Interest and dividend income ............................................... 636 754
Interest expense ........................................................... (13) (11)
Equity in losses and impairment of investments in
unconsolidated affiliates .............................................. (604) (12,175)
------------ ------------
Net loss ........................................................ (3,063) (28,246)
============ ============
Weighted average common shares outstanding,
basic and diluted .......................................................... 179,798,066 124,594,731
============ ============
Basic and diluted net loss per common share ..................................... (0.02) (0.23)
============ ============
See accompanying notes to unaudited condensed consolidated interim
financial statements.
4
CHANGE TECHNOLOGY PARTNERS, INC.
AND SUBSIDIARIES
Unaudited Consolidated Statement of Stockholders' Equity
Nine months ended September 30, 2002
(in thousands except share amounts)
SERIES A
PREFERRED STOCK COMMON STOCK ADDITIONAL PAID DEFERRED
SHARES AMOUNT SHARES AMOUNT IN CAPITAL COMPENSATION
-------------------- ------------------------ --------------- ------------
Balance at December 31, 2001................... 645 $ -- 179,022,881 $ 1,790 $ 94,637 $ (966)
Amortization of deferred compensation.......... -- -- -- -- -- 394
Release of shares from escrow in connection
with acquisition of Iguana Studios, Inc...... -- -- 2,300,000 23 46 --
Net loss....................................... -- -- -- -- -- --
------- ------- ----------- -------- --------- --------
Balance at September 30, 2002 (unaudited)...... 645 $ -- 181,322,881 $ 1,813 $ 94,683 $ (572)
======= ======= =========== ======== ========= ========
ACCUMULATED TOTAL STOCKHOLDERS'
DEFICIT EQUITY
----------- ------------------
Balance at December 31, 2001................... $ (80,801) $ 14,660
Amortization of deferred compensation.......... -- 394
Release of shares from escrow in connection
with acquisition of Iguana Studios, Inc...... -- 69
Net loss....................................... (3,063)
----------- --------
Balance at September 30, 2002 (unaudited)...... (83,864) $ 12,060
=========== ========
See accompanying notes to unaudited condensed consolidated interim
financial statements.
5
CHANGE TECHNOLOGY PARTNERS, INC.
AND SUBSIDIARIES
Unaudited Consolidated Statements of Cash Flows
(in thousands)
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
2002 2001
-------- --------
Cash flows from operating activities:
Net loss ...................................................................... $ (3,063) $(28,246)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization .............................................. 317 2,639
Provision for doubtful accounts ............................................ -- 212
Equity based compensation .................................................. 394 2,953
Equity in losses of unconsolidated subsidiary .............................. 177 4,912
Accretion of loan discount ................................................. (72) (9)
Impairment loss ............................................................ 427 7,263
Loss on disposal of equipment .............................................. -- 19
Accrued interest on notes receivable ....................................... (438) --
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable ..................................................... (106) 151
Unbilled receivables .................................................... -- (28)
Related party receivable ................................................ 19 (293)
Prepaid expenses and other assets ....................................... (141) (293)
Deferred revenue ........................................................ 148 (133)
Accounts payable and accrued liabilities ................................ (396) (44)
Deferred rent ........................................................... 7 9
-------- --------
Net cash used in operating activities ............................ (2,727) (10,888)
Cash flows from investing activities:
Purchase of property and equipment ............................................ (39) (662)
Sale of property and equipment ................................................ -- 4
Cash paid for notes receivable and warrant ................................... (4,708) (3,350
Principle and interest payments - received ................................... 495 --
Cash paid for cost method investments and acquisitions, net
of cash acquired .............................................................. (278) (4,076)
-------- --------
Net cash used in investing activities ............................ (4,530) (8,084)
Cash flows from financing activities:
Principal payments under capital leases ....................................... (102) (23)
Principle payments under loans payable ...................................... -- (259)
-------- --------
Net cash used in financing activities ............................ (102) (282)
Net decrease in cash and cash equivalents ........................ $ (7,359) $(19,254)
Cash and cash equivalents at beginning of period ................................... $ 8,892 $ 30,333
-------- --------
Cash and cash equivalents at end of period, excluding
restricted cash of $200 ....................................................... $ 1,533 $ 11,079
======== ========
See accompanying notes to unaudited condensed consolidated interim
financial statements.
6
CHANGE TECHNOLOGY PARTNERS, INC.
AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Interim Financial Statements
September 30, 2002
(in thousands, except share data)
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Arinco Computer Systems Inc., the predecessor of the Company and 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 September 30, 2002, 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 then existing
operations.
At September 30, 2002, the Company's consolidated subsidiaries are:
o Iguana Studios, Inc. (which has limited continuing operating activities)
o Papke-Textor, Inc. d/b/a Canned Interactive ("Canned")
Simultaneous with the divestiture, the Company is evaluating new strategic
business and investment opportunities.
Based on the Company's assessment of the opportunities in the radio business,
the Board of Directors decided to merge with Franklin Capital Corporation and
jointly develop and acquire network radio programming and sales and syndication
businesses. On December 4, 2001 the Company entered into an agreement and plan
of merger with Franklin Capital. On July 1, 2002, the Company received a notice
of termination from Franklin Capital terminating the proposed merger.
On September 30, 2002, the Board of Directors adopted a plan of liquidation and
dissolution in order to maximize shareholder value. In reaching its decision,
the Board of Directors considered principally the provisions of the Investment
Company Act of 1940, which would have required the Company to register as an
"investment company" in the absence of the adoption of the plan of liquidation.
The plan of liquidation and dissolution anticipates the continuation of the
Company's current business activities pending an orderly wind down of its
operations. Additionally, the plan provides that in the event the Board of
Directors determines that it would be in the best interests of the Company and
its stockholders to amend, modify or abandon the plan of liquidation and
dissolution, it may do so notwithstanding stockholder approval of the plan. The
Company intends to seek stockholder approval of the plan of liquidation and
dissolution at its next annual meeting, expected to be held in the spring of
2003. Subject to approval of the plan by holders of a majority of the Company's
outstanding shares, the Company plans to sell its assets, discharge its
liabilities and distribute the net proceeds to its stockholders.
7
CHANGE TECHNOLOGY PARTNERS, INC.
AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Interim Financial Statements
September 30, 2002
(in thousands, except share data)
INTERIM RESULTS
The accompanying unaudited consolidated balance sheet as of September 30, 2002,
the unaudited consolidated statements of operations and cash flows for the
periods ended September 30, 2002 and 2001, and the unaudited consolidated
statement of stockholders' equity as of September 30, 2002 have been prepared by
the Company. In the opinion of management, the accompanying condensed
consolidated financial statements have been prepared on the same basis as the
annual audited financial statements and contain all adjustments, which include
only normal recurring adjustments, considered necessary for a fair presentation
of the Company's financial position, results of operations and cash flows at the
dates and for the periods presented in conformity with accounting principles
generally accepted in the United States applicable to interim periods.
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 expense during the reporting period. Actual
results could differ from those estimates.
While the Company believes that the disclosures presented are adequate to make
the information not misleading, these condensed consolidated financial
statements should be read in conjunction with the audited financial statements
and related notes for the fiscal year ended December 31, 2001, which are
contained in the Company's Annual Report on Form 10-K. The results for the nine
month period ended September 30, 2002 are not necessarily indicative of the
results to be expected for the full fiscal year or for any future periods.
PRINCIPLES OF CONSOLIDATION
The accompanying unaudited condensed consolidated financial statements include
the accounts of Change Technology Partners, Inc. and its majority-owned and
controlled subsidiaries from the date of acquisition. All significant
intercompany transactions and balances have been eliminated in consolidation.
Investments in 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 Change Technology Partners, Inc.
8
CHANGE TECHNOLOGY PARTNERS, INC.
AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Interim Financial Statements
September 30, 2002
(in thousands, except share data)
REVENUE RECOGNITION
Revenues are recognized for fixed price arrangements in the period services are
rendered using the percentage-of-completion method, 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. For the nine months ended September 30, 2002 the Company's revenues were
recognized under the completed contract method of accounting as the Company does
not have reasonably dependable estimates with respect to projects at Canned.
Canned's projects are typically short term in nature, generally spanning less
than 90 days.
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.
In November 2001, the Emerging Issues Task Force ("EITF") concluded that
reimbursements for out-of-pocket-expenses incurred should be included in revenue
in the income statement and subsequently issued EITF 01-14, "Income Statement
Characterization of Reimbursements Received for `Out-of-Pocket' Expenses
Incurred" in January 2002. The Company adopted EITF 01-14 effective January 1,
2002 and has reclassified financial statements for prior periods to comply with
the guidance in this EITF. Reimbursable expenses were de minimus for all periods
presented.
COST OF REVENUES
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 in the statement of operations for the three and nine months
ended September 30, 2001 is the amortization of certain purchased intangible
assets, representing the value of customer relationships and workforces
acquired. In connection with the adoption of SFAS 142 on January 1, 2002,
acquired workforce was subsumed into goodwill, accordingly, and amortization of
the remaining acquired workforce ceased.
SIGNIFICANT CUSTOMERS AND 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
9
CHANGE TECHNOLOGY PARTNERS, INC.
AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Interim Financial Statements
September 30, 2002
(in thousands, except share data)
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.
The Company derived revenues from certain key customers during the three and
nine months ended September 30, 2002. Three customers accounted for 49%, 12% and
10% of total revenues during the nine months ended September 30, 2002 and four
customers accounted for 28%, 23%, 22% and 14% of total revenues during the three
months ended September 30, 2002. No other customer accounted for more than 10%
of the Company's revenues during the three and nine months ended September 30,
2002 or 2001.
At September 30, 2002, three of these customers comprised 24%, 20% and 11% of
accounts receivable. One other customer comprised 27% of total accounts
receivable at September 30, 2002. At December 31, 2001, these same customers
comprised 0%, 1% and 0% of total accounts receivable, and one other customer
comprised 55% of accounts receivable at December 31, 2001.
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 adjusts 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:
September 30, December 31,
2002 2001
------------- ------------
Stock Options.............................. 15,790,373 16,133,768
Warrants................................... 25,781,252 41,250,000
Series A Convertible Preferred Stock....... 645 645
As a result, the basic and diluted net loss per share is equal for all periods
presented.
PURCHASED INTANGIBLE ASSETS AND GOODWILL
Effective June 2001, the Company adopted Financial Accounting Standards Board
Statement of Accounting Standards (SFAS) 141, "Business Combinations". Effective
January 1, 2002, the Company adopted SFAS 142, "Goodwill and Intangible Assets"
and SFAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets."
SFAS 141 requires that acquisitions entered
10
CHANGE TECHNOLOGY PARTNERS, INC.
AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Interim Financial Statements
September 30, 2002
(in thousands, except share data)
into after June 30, 2001 be accounted for using the purchase method and
establishes criteria to be used in determining whether acquired intangible
assets are to be separated from goodwill. At January 1, 2002 the intangible
assets consisted of goodwill and the subsumed workforce acquired in connection
with the acquisition of Canned.
SFAS 142 sets forth the accounting for goodwill and intangible assets already
recorded. Commencing January 1, 2002, goodwill is no longer being amortized into
results of operations. Management conducted valuations of its reporting units in
order to test goodwill for impairment by comparing the asset's fair value to the
carrying value. This analysis did not indicate an impairment as of January 1,
2002.
The following table reflects the reconciliation of reported net loss and loss
per share to amounts adjusted for the exclusion of goodwill amortization.
Three months ended September 30, Nine months ended September 30,
-------------------------------- -------------------------------
2002 2001 2002 2001
-------------- -------------- --------------- ------------
NET LOSS
Reported loss ...................................... $ (791) $ (14,200) $ (3,063) (28,246)
Add back: Goodwill amortization .................... -- 933 -- 2,134
-------- ---------- ---------- ----------
Adjusted net loss .................................. $ (791) $ (13,267) $ (3,063) $ (26,112)
======== ========== ========== ==========
PER SHARE OF COMMON STOCK
Basic and Diluted:
Reported loss ..................................... $ (0.00) $ (0.08) (0.02) (0.23)
Add back: Goodwill amortization ................... -- 0.01 -- 0.02
-------- ---------- ---------- ----------
Adjusted net loss ................................. $ (0.00) $ (0.07) (0.02) (0.21)
======== ========== ========== ==========
11
CHANGE TECHNOLOGY PARTNERS, INC.
AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Interim Financial Statements
September 30, 2002
(in thousands, except share data)
(2) INVESTMENTS IN AND LOANS TO UNCONSOLIDATED SUBSIDIARIES
The following summarizes the Company's ownership interests in unconsolidated
subsidiaries accounted for under the equity method or cost method of accounting
(in thousands):
September 30, December 31,
2002 2001
---------------------- ----------------------
Carrying Cost Carrying Cost
Value Basis Value Basis
-------- -------- -------- --------
Equity method investments:
Broadstream.com Inc. ("Broadstream")................. $ -- $ 7,100 $ -- $ 7,100
NetPro Holdings, Inc. ("NetPro")..................... -- 400 33 200
InSys LLC ("InSys").................................. 135 323 312 323
Cost method investments:
Livesky, Inc. ("Livesky")............................ -- 125 125 125
Excelsior Radio Networks, Inc. ("Excelsior")......... 250 250 250 250
Alacra, Inc. ("Alacra").............................. 78 78 -- --
-------- -------- -------- --------
Total investments......................................... $ 463 $ 8,276 $ 720 $ 7,998
======== ======== ======== ========
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.
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%.
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
12
CHANGE TECHNOLOGY PARTNERS, INC.
AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Interim Financial Statements
September 30, 2002
(in thousands, except share data)
shares to Broadstream in exchange for no consideration. 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 were to close a new round
of financing or enter 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 the 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, 2001 the Company's interest in NetPro represented
approximately 38% of NetPro outstanding equity, and was being accounted for
under the equity method of accounting. The Company's proportionate share
NetPro's net losses totaled $167 from the date of investment through December
31, 2001.
On January 10, 2002, the Company invested an additional $100 in NetPro Series
B-1 stock, and on March 7, 2002 the Company invested a final $100 in NetPro
Series B-1 stock. On March 14, 2002, the board of directors of NetPro voted to
suspend all of NetPro's business operations and immediately terminate
substantially all of its employees due to NetPro's loss of significant clients
and associated revenues. The Company has no obligation to provide additional
funding to NetPro. As a result of this action, the Company evaluated the
recoverability of this investment by comparison of its carrying value relative
to estimated future cash flows. As a result of this analysis, the Company
recorded an impairment charge to reduce the remaining investment balance to $0.
The Company's proportionate share of net loss, and impairment charge, for the
three and nine months ended September 30, 2002, totaling $0 and $233,
respectively, is included in equity in losses and impairment of investments in
unconsolidated affiliates in the accompanying statement of operations.
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 Excelsior Capital, Inc.) ("Excelsior") for
$2,250. Excelsior, a
13
CHANGE TECHNOLOGY PARTNERS, INC.
AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Interim Financial Statements
September 30, 2002
(in thousands, except share data)
subsidiary of Franklin Capital Corporation ("Franklin"), concurrently purchased
certain assets from affiliates of Winstar Communications, Inc., which produces,
syndicates and distributes radio programs and services. Excelsior had
substantially no operations prior to this transaction. The note earns interest
at a rate of 8.5% per annum, matured on September 30, 2002 and is secured by all
of Excelsior's assets.
The warrant to purchase 482,955 shares of Excelsior's 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 $76 for the
nine months ended September 30, 2002, which is credited to interest income in
the accompanying statement of operations. On October 1, 2002 the Company
received full payment of interest and principal on this note receivable.
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. This
investment is being accounted for under the cost method of accounting.
On April 3, 2002, the Company loaned to Excelsior an aggregate principal amount
of approximately $4,708 for the purpose of funding a portion of the initial cash
purchase price of Excelsior's acquisition of certain assets of Dial
Communications Group, LLC and Dial Communications Group, Inc. The note earns
interest at a rate of 12% per annum, matures on April 3, 2003 and is secured by
substantially all of the assets of Excelsior pursuant to a Security Agreement
which was attached to the Company's Form 8-K filed with the Securities and
Exchange Commission on April 4, 2002.
On December 4, 2001 the Company initiated a business combination whereby the
Company planned to acquire all issued and outstanding common stock of Franklin
in a stock-for-stock exchange. On July 1, 2002 the Company received a notice of
termination from Franklin terminating the proposed merger.
The $4,708 note matures in April, 2003. From the date of issuance through
September 30, 2002 quarterly interest payments of $136 and $142 in the second
and third quarter, respectively, have been received in accordance with the terms
of the note.
INVESTMENT IN LIVESKY
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.
14
CHANGE TECHNOLOGY PARTNERS, INC.
AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Interim Financial Statements
September 30, 2002
(in thousands, except share data)
In June 2002, the Company received notice that the board of directors of LiveSky
had voted to liquidate LiveSky in the context of a Chapter 7 bankruptcy case.
The Company has no obligation to provide additional funding to LiveSky. As a
result of this action, the Company evaluated the recoverability of this
investment by comparison of its carrying value relative to future cash flows. As
a result of this analysis, the Company recorded an impairment charge in the
second quarter to reduce the remaining balance to $0. The impairment charge,
totaling $125 for the nine months ended September 30, 2002, is included in
equity in losses and impairment of investments in unconsolidated affiliates in
the accompanying statement of operations.
INVESTMENT IN ALACRA
On January 31, 2002, the Company purchased 38,840 shares of common stock,
representing less than 1% equity interest, of Alacra, Inc. ("Alacra") in
exchange for $78. The Company has no obligation to provide additional funding to
Alacra. Alacra provides a diverse portfolio of online and offline services that
allow users to quickly find, analyze, package and present mission-critical
business information. This investment is being accounted for under the cost
method of accounting.
(3) ACQUISITIONS AND DIVESTITURES
ACQUISITION OF EHOTHOUSE, INC.
In February 2001, the Company acquired the remaining outstanding minority
interest of its subsidiary, eHotHouse, for 2,155,519 shares of the Company's
common stock valued at $2,700 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 $2,900 was allocated to
identified intangible assets, including the assembled workforce. The fair value
of acquired intangible assets was capitalized and was being amortized over the
estimated useful life of three years. Related amortization for the nine months
ended September 30, 2001 totaled $648.
Also 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 nine months ended September 30, 2001.
Subsequent to the acquisition of the remaining outstanding minority interest,
eHotHouse was merged with and into the Company.
15
CHANGE TECHNOLOGY PARTNERS, INC.
AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Interim Financial Statements
September 30, 2002
(in thousands, except 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. The related obligation totaled
$232 at September 30, 2002 and is included in accrued expenses in the
accompanying balance sheet.
Additionally, the Company recorded an impairment loss reflecting the impact of
the executive's termination upon the carrying value of certain acquired
intangible assets, and reversed certain unamortized deferred compensation
related to unvested options that were forfeited in connection with the
termination. The impairment loss reduced the remaining carrying value of the
related intangibles to $0 as of December 31, 2001.
ACQUISITION AND DIVESTITURE OF INSYS TECHNOLOGIES, LLC
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 was being amortized over their
estimated useful lives of three years. Related amortization for the nine months
ended September 30, 2001 was $39.
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 which reduced the
remaining carrying value of the related intangibles to $0 as of December 31,
2001.
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. The Company has no obligation to
provide additional funding to InSys.
16
CHANGE TECHNOLOGY PARTNERS, INC.
AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Interim Financial Statements
September 30, 2002
(in thousands, except share data)
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, on an annual basis, at a minimum, 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' net losses absorbed during the period from November 8,
2001 to December 31, 2001, totaled $312 which is included investments in and
loans to unconsolidated subsidiaries on the accompanying balance sheet as of
December 31, 2001. The Company's pro rata share of InSys' net loss for the three
and nine months ended September 30, 2002 totaled $22 and $177, respectively,
which is included in equity in losses and impairment of investments in
unconsolidated affiliates in the accompanying statement of operations.
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 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 were being amortized
over their estimated useful lives of three years. Related amortization for the
nine months ended September 30, 2001 totaled $357.
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 that reduced the remaining carrying value of the related
intangibles to $0 as of December 31, 2001.
On November 2, 2001 the Company sold all issued and outstanding shares of RAND
to certain members of management 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
17
CHANGE TECHNOLOGY PARTNERS, INC.
AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Interim Financial Statements
September 30, 2002
(in thousands, except share data)
3, 2013, and are contingently exercisable upon the occurrence of certain
prospective events, as defined.
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 $1,990, and
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 an 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
nine months ended September 30, 2001 totaled $936.
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 and goodwill by comparison of
the carrying value relative to future cash flows. As a result, the Company
recorded impairment charges that reduced the remaining carrying value of the
related intangibles to $0 as of December 31, 2001.
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"). The related
contingency period expired in July 2002, and the fair value of such shares was
included in the aggregate purchase price. 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. Accordingly,
the Company has recorded additional impairment charges totaling $69 representing
the 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.
18
CHANGE TECHNOLOGY PARTNERS, INC.
AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Interim Financial Statements
September 30, 2002
(in thousands, except share data)
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 Canned, 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 $104 was allocated to the net tangible liabilities assumed, $2,177
was allocated to identified intangible assets, primarily assembled workforce,
and to goodwill. The fair value of the identified intangible assets was
determined using 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. On January 1, 2002, in connection with
the Company's adoption of SFAS 142, the value ascribed to the acquired workforce
was subsumed into goodwill, and amortization of these assets ceased. The
remaining unamortized amount, totaling $1,568 at September 30, 2002 is included
in goodwill in the accompanying balance sheet.
Also in connection with the acquisition of Canned, $200 in cash 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.
(4) NOTES 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 annually thereafter through April 25, 2006. In April
2002, the Company received the first such installment, totaling $60.
(5) COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company leases its facilities under operating lease agreements. The
following are the future minimum lease payments under non-cancelable leases as
of September 30, 2002:
Period Ended
December 31, Operating Capital
------------ --------- -------
2002................................... 252 35
2003................................... 850 83
2004................................... 184 --
2005................................... 46 --
-----------------------
Total Lease Obligation................ $ 1,332 118
Amount Representing Interest........... (4)
-------
114
Current Portion........................ (92)
-------
Long Term Portion...................... 22
19
CHANGE TECHNOLOGY PARTNERS, INC.
AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Interim Financial Statements
September 30, 2002
(in thousands, except share data)
Total minimum lease payments have not been reduced for future minimum sublease
rentals totaling approximately $461. As a result of the Company's divestiture of
certain operations, employee terminations and terminated business combination,
the Company has evaluated its numerous alternatives with respect to its
contractual obligations concerning leased facilities. As of June 30, 2002, the
Company determined that certain facilities have no substantive future use or
benefit to the Company. The Company accrued the remaining costs in the second
quarter, net of sublease income, relating to these leases. At September 30,
2002 $294 of this amount remained.
LEGAL PROCEEDINGS
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.
(6) STOCKHOLDER'S EQUITY
In April, 2002 the Company cancelled 15,468,748 outstanding warrants with a
weighted average exercise price of $0.85 in exchange for no consideration.
In August, 2002 the Company's shareholders approved the grant to the Chief
Executive Officer of an option to purchase 6,000,000 shares of the Company's
Common Stock.
(7) RELATED PARTY TRANSACTIONS
During the nine months ended September 30, 2002, the Company incurred legal fees
in connection with certain transactions and other matters in the normal course
of business. A portion of these services were 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 $91 and $329 in the three and nine months ended
September 30, 2002, respectively.
Additionally, during the six months ended June 30, 2002, 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
this firm totaled $135 the six months ended June 30, 2002. Beginning in July
2002, the Company ceased making payments to the firm and instead retained the
services of two employees of this firm, in a consulting capacity, to provide the
described services. Fees paid to these individuals totaled $45 from July 2002 to
September 30, 2002. Additionally, this firm occupies a portion of the Company's
office space in Connecticut, for which it pays rent at fair market value. Such
payments to the Company totaled $134 during the nine months ended September 30,
2002. Furthermore, the firm was indebted to the Company in the amount of $185 at
September 30, 2002 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.
20
ITEM 2 - 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."
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.
Additionally, the Company assesses the need for provisions for estimated
uncollectible amounts with respect to its loans receivable resulting from the
inability of an issuer to make payments when they become due. The Company bases
this estimate on the financial condition of the issuer, trends in their results
of operations or other changes in circumstances. If the financial condition of
an issuer deteriorates, resulting in their inability to fulfill their obligation
under the promissory note, additional allowances will be required.
The Company has reduced its deferred tax assets to an amount that the
Company believes is more likely than not to be realized, which was $0 at
December 31, 2001 and September 30, 2002. 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
21
adjusted in future periods, the Company may need to modify its valuation
allowance which could materially affect its financial position and results of
operations.
OVERVIEW AND RECENT DEVELOPMENTS
Prior to commencement of the operational divestiture described in the
Company's Form 10-K for the year ended December 31, 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. On July 1,
2002 the Company received a notice of termination from Franklin terminating the
proposed merger.
The Company made two investments in 2001 and one in the first quarter of 2002 in
Excelsior Radio Networks, Inc. (f/k/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 2001 purchased 250,000
common shares of Excelsior from Franklin Capital for $250,000. In April 2002 the
Company purchased an additional promissory note from Excelsior for $4,708,200 in
conjunction with the purchase by Excelsior of Dial Communication Group Inc. and
Dial Communications Group LLC. The $2,250,000 promissory note was paid in full,
together with related accrued interest, on October 1, 2002. The $4,708,200 note
matures in April 2003. From the date of issuance through September 30, 2002
quarterly interest payments of $136,000 and $142,000 in the second and third
quarter, respectively, have been received in accordance with the terms of this
note. The note is secured by substantially all of the assets of Excelsior.
On September 30, 2002, the Board of Directors adopted a plan of
liquidation and dissolution in order to maximize shareholder value. In reaching
its decision, the Board of Directors considered principally the provisions of
the Investment Company Act of 1940, which would have required the Company to
register as an "investment company" in the absence of the adoption of the plan
of liquidation. The plan of liquidation and dissolution anticipates the
continuation of the Company's current business activities pending an orderly
wind down of its operations. Additionally, the plan provides that in the event
the Board of Directors determines that it would be in the best interests of the
Company and its stockholders to amend, modify or abandon the plan of liquidation
and dissolution, it may do so notwithstanding stockholder approval of the plan.
The Company intends to seek stockholder approval of the plan of liquidation and
dissolution at its next annual meeting, expected to be held in the spring of
2003. Subject to approval of the plan by holders of a majority of the Company's
outstanding shares, the Company plans to sell its assets, discharge its
liabilities and distribute the net proceeds to its stockholders.
OTHER SIGNIFICANT DEVELOPMENTS
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
22
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.
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 in the third quarter of 2001, totaling $7,263,000,
which reduced the carrying value of certain intangibles to $0 as of December 31,
2001.
Also as a result of these actions, the Company also incurred severance charges
in the third quarter of 2001 totaling $1,326,000. As of September 30, 2002,
$1,094,000 of this amount has been paid.
OVERVIEW OF HISTORICAL OPERATIONS
Canned Interactive is currently the Company's sole revenue generating
subsidiary. Canned is based in Los Angeles, California and designs and produces
interactive media such as digital video discs (DVD) and web sites, primarily for
entertainment, consumer goods, sports and technology companies.
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.
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 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. For the nine months ended September 30, 2002 the
Company's revenues were recognized under the completed contract method of
accounting as the Company does not have reasonably dependable estimates with
respect to projects at Canned. Canned's projects are typically short term in
nature, generally spanning less than 90 days.
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.
23
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 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 is 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 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 nine months
ended September 30, 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 $394,000 and $2,794,000 in equity based compensation expense
during the nine months ended September 30, 2002 and 2001, respectively.
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.
24
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 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, which reduced the carrying
value of the eHothouse intangibles to $0 as of December 31, 2001.
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, which
reduced the carrying value of the Insys intangibles to $0 as of December 31,
2001.
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 of advances to InSys. In addition, the Company loaned
InSys $100,000 evidenced by a promissory note. This note bears interest at a
rate equal to the London Interbank Offer Rate plus 2%.
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, which reduced the carrying value of the RAND
intangibles to $0 as of December 31, 2001.
On November 2, 2001 the Company sold all of the issued and outstanding
shares of RAND to a member of its management team in exchange for 375,039 shares
of 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. The warrant has an
aggregate exercise price of $1.00, is exercisable upon the occurrence of certain
events and expires on November 3, 2013.
25
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 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 that reduced the carrying
value of the Iguana intangibles to $0 as of December 31, 2001.
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"). The related
contingency period expired in July 2002, and the fair value of such shares was
included in the aggregate purchase price. 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. Accordingly,
the Company has recorded additional impairment charges totaling $69,000
representing the fair value of such shares.
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. 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.
26
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 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, and on March 7, 2002 the Company invested a final $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
substantially all of its employees due to NetPro's loss of significant clients
and associated revenues
RESULTS OF OPERATIONS
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO THREE MONTHS
AND NINE MONTHS ENDED SEPTEMBER 30, 2002
REVENUES. Revenues decreased from $1,740,000 in the three months ended September
30, 2001 to $511,000 in the three months ended September 30, 2002 and from
$5,144,000 in the nine months ended September 30, 2001 to $1,844,000 in the nine
months ended September 30, 2002. This decrease is a result of the Company's
divestitures of operating businesses.
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 decreased from $2,527,000 in the three months ended
September 30, 2001 to $301,000 in the three months ended September 30, 2002, or
59% of revenues and from $6,891,000 in the nine months ended September 30, 2001
to $931,000 in the nine months ended September 30, 2002, or 50% of revenues. The
decrease is a result of the divestitures of InSys and RAND, and the downsizing
of Iguana's operations.
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 decreased from $2,967,000 in
the three months ended September 30, 2001 to $1,068,000 in the three months
ended September 30, 2002 and from $10,788,000 in the nine months ended September
30, 2001 to $3,601,000 in the nine months ended September 30, 2002. This
decrease was primarily a result of the decreased number of employees resulting
in decreased compensation, decreased professional services fees, and decreases
in other costs associated with the limited scope of operations over the prior
year.
27
EQUITY IN LOSSES AND IMPAIRMENT OF INVESTMENTS IN UNCONSOLIDATED AFFILIATES.
Equity in losses and Impairment of investments in unconsolidated affiliates was
$9,101,000 in the three months ended September 30, 2001 and $22,000 in the three
months ended September 30, 2002, and $12,175,000 in the nine months ended
September 30, 2001 and $604,000 in the nine months ended September 30, 2002.
Equity in losses of unconsolidated affiliates is a result of the Company's
minority ownership in Broadstream, NetPro and InSys that 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. Impairment of investments in unconsolidated
affiliates is a result of the cessation of NetPro's and LiveSky's operations in
2002. The Company evaluated the recoverability of its investments in light of
the carrying values relative to future cash flows. As a result of this analysis,
the Company recorded impairment charges that reduced the remaining investment
balances to $0.
INTEREST AND DIVIDEND INCOME. Interest and dividend income was $144,000 in the
three months ended September 30, 2001 and $224,000 in the three months ended
September 30, 2002, and $754,000 in the nine months ended September 30, 2001 and
$636,000 in the nine months ended September 30, 2002. The decrease in interest
and dividend income for the nine months ended September 30, 2002 was
attributable to a decrease in the Company's invested cash balance as it has
funded its ongoing operations, partially offset by interest income earned on
notes receivable. The increase in interest and dividend income for the three
months ended September 30, 2002 was attributable to increased interest income
earned on notes receivable as a result of the purchase of additional notes
receivable from Excelsior. Interest income in future periods may fluctuate as a
result of the average cash we maintain and changes in the market rates of our
cash equivalents, and we expect 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 carry
forwards for income tax purposes of approximately $22,014,723 through the period
ended September 30, 2002, 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.
LIQUIDITY AND CAPITAL RESOURCES
HISTORICAL SOURCE OF FUNDING
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.
28
WORKING CAPITAL AND RESULTS OF OPERATIONS
The Company had $1,533,000 in cash and cash equivalents available as of
September 30, 2002, invested predominantly in instruments that are highly
liquid, investment grade securities that have maturities of less than 45 days.
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 September 30, 2002,
the Company has a single operating subsidiary, a limited number of employees and
has significantly reduced fixed expenses. During the nine months ended September
30, 2002, the Company used $7,359,000 to fund operations and to make strategic
investments. Given the Company's current level of operations, if Excelsior Radio
Networks, Inc. fails to repay the aggregate principal amount of the note issued
by it to the Company when due, and the Company is unable to foreclose on its
security interest in Excelsior's assets, the Company's existing capital
resources may not be sufficient to meet anticipated cash needs for working
capital and capital expenditures and the Company may be required to seek
additional funding.
The Company's future contractual obligations at September 30, 2002 were as
follows:
Amounts Due in Fiscal Year Ending December 31,
- ------------------------------------------------------------------------------------------------------------------------
2006 and
2002 2003 2004 2005 Thereafter
------ ------ ------ ------ ----------
(in thousands)
Operating leases ............................. $ 252 $ 850 $ 184 $ 46 $ --
Capital Leases ............................... 35 83 -- -- --
Involuntary termination ...................... 63 169 -- -- --
------ ------ ------ ------ -------
$ 350 $1,102 $ 184 $ 46 $ --
====== ====== ====== ====== =======
The Company intends to fund these obligations from its cash on hand at
September 30, 2002 and the repayment by Excelsior Radio Networks of its note
issued by it to the Company.
29
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
Certain statements in this report, including information appearing under the
caption "Management's Discussion and Analysis of Financial Condition and Results
of Operations" constitute "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995 (the "Reform Act"). The Company
desires to take advantage of certain "Safe Harbor" provisions of the Reform Act
and is including this special note to enable the Company to do so.
Forward-Looking Statements involve known and unknown risks, uncertainties, and
other factors, which could cause the Company's actual results, performance
(financial or operating) or achievements to differ materially from the future
results, performance (financial or operating) or achievements expressed or
implied by such Forward-Looking Statements. Such risks, uncertainties and other
factors include, among others:
o the Company has a limited operating history so it will be
difficult to predict the Company's future performance;
o the Company is not currently profitable and expects to incur
future losses;
o the Company's success depends on its ability to retain its key
personnel;
o the Company does not have long-term contracts with clients and
needs to establish relationships with new clients; and
o the Company operates in a highly competitive market with low
barriers to entry
As a result, no assurance can be given as to future results, levels of activity
or achievements.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK INTEREST
RATE RISK
The primary objective of the Company's investment activities is to preserve
principal while at the same time maximizing yields without significantly
increasing risk. To achieve this objective, the Company maintains its portfolio
of cash, cash equivalents and money market funds.
As of September 30, 2002, the Company held cash and cash equivalents with an
average maturity of 45 days or less.
ITEM 4 - CONTROLS AND PROCEDURES
(a) The President, Chief Executive Officer and Chief Financial Officer
of the Company has concluded, based on his evaluation as of a date within 90
days prior to the date of the filing of this quarterly report on Form 10-Q for
the fiscal quarter ended September 30, 2002, that the Company's disclosure
controls and procedures are effective to ensure that information required to be
disclosed by the Company in the reports filed or submitted by it under the
Securities Exchange Act of 1934, as amended, is recorded, processed, summarized
and reported within the time periods specified in the Securities and Exchange
Commission's (the "SEC") rules and
30
forms, and include controls and procedures designed to ensure that information
required to be disclosed by the Company in such reports is accumulated and
communicated to the Company's management, including the President, Chief
Executive Officer and Chief Financial Officer of the Company, as appropriate, to
allow timely decisions regarding required disclosure.
(b) There were no significant changes in the Company's internal
controls or in other factors that could significantly affect these controls
subsequent to the date of such evaluation.
31
PART II. OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
The Company is subject to certain legal claims and is involved in litigation
from time to time in the ordinary course of its business. It is the Company's
opinion that it either has adequate legal defenses to such claims or that any
liability that might be incurred due to such 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 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On August 21, 2002, the Company held its annual meeting of stockholders
(the "Annual Meeting"). Three matters were voted upon at the Annual Meeting
including (1) the election of five directors to hold office until the Company's
next annual meeting or until their successors are duly elected and qualified,
(2) the ratification of the selection by the Board of Directors of KPMG LLP
("KPMG") as the Company's independent auditors for the fiscal year ending
December 31, 2002 and (3) the approval and ratification of the grant to William
Avery, the Company's President, Chief Executive Officer and Chief Financial
Officer of an option to purchase 6,000,000 shares of the Company's common stock,
par value $.01 per share ("Common Stock").
(i) ELECTION OF DIRECTORS.
Each of the following directors were elected at the
Annual Meeting to hold office until the Company's next annual
meeting or until their successors are duly elected and
qualified: William Avery, James M. Dubin, Michael Gleason,
Michael Levitt and William E. Lipner. The following table
provides information as to the number of votes cast for, cast
against or withheld, in addition to any broker non-votes
received, with respect to the election of each nominee.
FOR AGAINST WITHHELD BROKER NON-VOTES
William Avery 84,158,294 12,037,936 4,190,704 -0-
James M. Dubin 84,478,294 11,717,936 4,190,704 -0-
Michael Gleason 83,567,444 12,628,786 4,190,704 -0-
Michael Levitt 84,478,294 11,717,936 4,190,704 -0-
William E. Lipner 84,478,294 11,717,936 4,190,704 -0-
32
(ii) RATIFICATION OF KPMG AS THE COMPANY'S INDEPENDENT
AUDITORS.
The Board of Directors selected KPMG to serve as the
independent auditors of the Company for the fiscal year ending
December 31, 2002. KPMG has served as the Company's
independent auditors since July 13, 2000. A total of
92,665,094 votes were cast for, and a total of 5,873,490 votes
were cast against the ratification of the selection by the
Board of Directors of KPMG as the Company's independent
auditors for the fiscal year ending December 31, 2002. A total
of 1,848,350 abstentions and 0 broker non-votes were received
on such matter.
(iii) OPTION GRANT TO WILLIAM AVERY.
The Company's stockholders were asked to approve the
grant (the "Grant") to William Avery of an option to purchase
6,000,000 shares of the Company's Common Stock pursuant to the
terms and conditions of a Stock Option Agreement dated
September 21, 2001 between the Company and William Avery (the
"Stock Option Agreement"). Pursuant to the Stock Option
Agreement, the option to Mr. Avery was granted in accordance
with the terms and conditions of the Company's 2000 Stock
Option Plan, although the option was granted outside of such
plan. The option award was granted outside of the plan because
the terms of the plan would not allow a grant of this size.
Twenty-five percent (25%) of the option vests on each
of the first four anniversaries of the date of the option
grant. The option can be exercised for $0.03 per share, the
fair market value of a share of the Company's Common Stock on
the date of grant. Mr. Avery received this option grant in
connection with his appointment as Chief Executive Officer of
the Company as a retention and incentive mechanism. The option
expires on September 21, 2011. Pursuant to the Stock Option
Agreement, (i) if Mr. Avery ceases to be employed by the
Company as a result of his death or disability, vesting will
cease as of the date of termination and the option will remain
exercisable for a period of 365 days following such
termination, (ii) if Mr. Avery's employment is terminated by
the Company other than for cause, one-third of the then
unvested option shares will vest on the date of such
termination and the option will remain exercisable for a
period of ninety (90) days following such termination, (iii)
if Mr. Avery's employment is terminated by the Company for
cause, the option will expire on the date of such termination
and (iv) if Mr. Avery terminates his employment, vesting will
cease as of the date of termination and the option will remain
exercisable for a period of thirty (30) days following such
termination.
A total of 65,727,231 votes were cast for, and a
total of 30,628,903 votes were cast against the approval and
ratification of the Grant to Mr. Avery. A total of 4,030,800
abstentions and 0 broker non-votes were received on such
matter.
33
ITEM 5 - OTHER INFORMATION
None
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are 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).
2.4 Amendment No. 1 to Agreement and Plan of Merger by and between Change
Technology Partners, Inc. and Franklin Capital Corporation, dated April
3, 2002 (filed as an exhibit to the Registrant's Report on Form 8-K
dated April 3, 2002 and incorporated herein by reference).
2.5 Plan of Liquidation and Dissolution of Change Technology Partners,
Inc., dated September 30, 2002 (filed as an exhibit to the Registrant's
Report on Form 8-K dated October 2, 2002 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).
34
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
35
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 (filed as an exhibit
to the Registrant's Annual Report on Form 10-K dated March 26, 2002 and
incorporated herein by reference).
10.15 Severance Compensation Agreement effective as of September 19, 2001 by
and between Change Technology Partners, Inc. and William Avery (filed
as an exhibit to the Registrant's Annual Report on Form 10-K dated
March 26, 2002 and incorporated herein by reference).
10.16 Stock Purchase Agreement by and among NetPro Holdings, Inc., Change
Technology Partners, Inc., and Adelson Investors LLC dated November 30,
2001 (filed as an exhibit to the Registrant's Annual Report on Form
10-K dated March 26, 2002 and incorporated herein by reference).
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).
36
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 (filed as an
exhibit to the Registrant's Annual Report on Form 10-K dated March 26,
2002 and incorporated herein by reference).
10.25 Promissory Note issued by Excelsior Radio Networks, Inc. to Change
Technology Partners, Inc. dated April 3, 2002 (filed as an exhibit to
the Registrant's Report on Form 8-K dated April 3, 2002 and
incorporated herein by reference).
10.26 Security Agreement among Excelsior Radio Networks, Inc., Sunshine II,
LLC and Change Technology Partners, Inc. dated April 3 2002 (filed as
an exhibit to the Registrant's Report on Form 8-K dated April 3, 2002
and incorporated herein by reference).
99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) The following reports on Form 8-K were filed with the SEC during
the third quarter of 2002:
(i) On July 1, 2002 reporting matters under Item
5, Other Events, and Item 7, Financial
Statements and Exhibits.
(ii) On July 29, 2002 reporting matters under
Item 7, Financial Statements and Exhibits,
and Item 9, Regulation FD Disclosure.
37
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Dated: November 14, 2002
CHANGE TECHNOLOGY PARTNERS, INC.
By: /s/ William Avery
----------------------------------
William Avery
President, Chief Executive Officer
and Chief Financial Officer
38
CERTIFICATIONS
I, William Avery, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Change
Technology Partners, Inc.
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period covered by
this quarterly report.
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this quarterly
report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
(a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the registrant's auditors and
the audit committee of registrant's board of directors (or persons performing
the equivalent function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves
management or other employees who have significant role in the registrant's
internal controls.
39
6. The registrant's other certifying officers and I have indicated
in this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 14, 2002
/s/ William Avery
-----------------------------
William Avery
Chief Executive Officer
40
I, William Avery, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Change
Technology Partners, Inc.
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period covered by
this quarterly report.
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this quarterly
report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
(a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the registrant's auditors and
the audit committee of registrant's board of directors (or persons performing
the equivalent function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves
management or other employees who have significant role in the registrant's
internal controls.
41
6. The registrant's other certifying officers and I have indicated
in this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 14, 2002
/s/ William Avery
-----------------------------
William Avery
Chief Financial Officer
42