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 March 31, 2003
[_] 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 May 8, 2003 was
approximately 182,025,511.
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
ITEM 1 - CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
Consolidated Balance Sheets as of March 31, 2003 (unaudited)
and December 31, 2002................................................................2
Consolidated Statements of Operations for the three
months ended March 31, 2003 and 2002 (unaudited).....................................3
Consolidated Statement of Stockholders' Equity for the three
months ended March 31, 2003 (unaudited)..............................................4
Consolidated Statements of Cash Flows for the three
months ended March 31, 2003 and 2002 (unaudited).....................................5
Notes to Unaudited Interim Condensed Consolidated Financial Statements...............6
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS..............................................18
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ..............................25
ITEM 4 - CONTROLS AND PROCEDURES .................................................................25
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS........................................................................27
ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS................................................27
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES..........................................................27
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......................................27
ITEM 5 - OTHER INFORMATION........................................................................27
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K.........................................................27
ITEM 7 - SIGNATURES...............................................................................31
ITEM 8 - CERTIFICATIONS...........................................................................32
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)
MARCH 31, DECEMBER 31,
2003 2002
-------------------------------
(Unaudited)
ASSETS
Cash and cash equivalents ................................................ $ 8,484 $ 3,465
Accounts receivable ...................................................... 330 218
Unbilled receivables ..................................................... 79 27
Related party receivable ................................................. 128 194
Notes receivable ......................................................... 35 4,926
Prepaid expenses and other current assets ................................ 625 689
-------- --------
Total current assets ................................... 9,681 9,944
Notes receivable, excluding current portion .............................. -- 424
Investments in and loans to unconsolidated subsidiaries .................. 136 449
Property and equipment, net .............................................. 348 436
Goodwill ................................................................. 1,782 1,782
Other assets ............................................................. 13 123
-------- --------
Total assets ........................................... 11,960 12,733
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable ......................................................... 251 128
Accrued expenses ......................................................... 592 785
Deferred revenues ........................................................ 50 37
Capital lease obligation ................................................. 91 114
-------- --------
Total current liabilities .............................. 984 1,064
Capital lease obligation, less current portion ........................... 23 35
Deferred rent ............................................................ 16 15
-------- --------
Total liabilities ...................................... 1,023 1,114
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 March 31, 2003 and December 31,
2002, with an aggregate liquidation preference of $1 ................ -- --
Series B - Convertible into common on a 1:40
basis; $.10 par value; 4,000,000 shares
authorized; 0 shares issued and outstanding at
March 31, 2003 and December 31, 2002 ................................ -- --
Common stock:
$.01 par value; 500,000,000 shares authorized,
182,003,920 shares issued and outstanding at March
31, 2003 and December 31, 2002 ...................................... 1,820 1,820
Additional paid-in capital ............................................... 94,369 94,369
Deferred compensation .................................................... (178) (268)
Accumulated deficit ...................................................... (85,074) (84,302)
-------- --------
Total stockholders' equity ............................. 10,937 11,619
-------- --------
Total liabilities and stockholders' equity ............. $ 11,960 $ 12,733
======== ========
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
MARCH 31,
------------------------------
2003 2002
----------- -----------
Revenues ....................................................... $ 708 $ 739
Cost of revenues ............................................... 354 281
----------- -----------
Gross profit (loss) ............................ 354 458
Operating expenses:
Selling, general, and administrative expenses,
exclusive of equity based compensation of $90
and $131, respectively ...................................... 1,313 1,070
Equity based compensation ...................................... 90 131
----------- -----------
Total operating expenses ....................... 1,403 1,201
Loss from operations ........................... (1,049) (743)
Other income (expense):
Interest and dividend income ................................ 57 150
Interest expense ............................................ (3) (5)
Equity in losses and impairment of investments in
unconsolidated affiliates ................................. (63) (322)
Realized gain on sale of stock and warrant .................. 286 --
----------- -----------
Net loss ....................................... $ (772) $ (920)
=========== ===========
Weighted average common shares outstanding,
basic and diluted ......................................... 182,003,920 179,022,081
=========== ===========
Basic and diluted net loss per common share .................... $ (0.00) $ (0.01)
=========== ===========
See accompanying notes to unaudited condensed consolidated interim
financial statements.
3
CHANGE TECHNOLOGY PARTNERS, INC.
AND SUBSIDIARIES
Unaudited Consolidated Statement of Stockholders' Equity
Three months ended March 31, 2003
(in thousands except share amounts)
SERIES A
PREFERRED STOCK COMMON STOCK ADDITIONAL PAID DEFERRED ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT IN CAPITAL COMPENSATION DEFICIT EQUITY
------ ------ ------ ------ --------------- ------------ ----------- -------------
Balance at December 31, 2002..... 645 $ -- 182,003,920 $ 1,820 $ 94,369 $ (268) $ (84,302) $ 11,619
Amortization of deferred
compensation................. -- -- -- -- -- 90 -- 90
Net loss......................... -- -- -- -- -- -- (772) (772)
------ ------ ----------- ------- -------- ------- ---------- --------
Balance at March 31, 2003
(unaudited)................. 645 $ -- 182,003,920 $ 1,820 $ 94,369 $ (178) $ (85,074) $ 10,937
====== ====== =========== ======= ======== ======= ========== ========
See accompanying notes to unaudited condensed consolidated interim
financial statements.
4
CHANGE TECHNOLOGY PARTNERS, INC.
AND SUBSIDIARIES
Unaudited Consolidated Statements of Cash Flows
(in thousands)
THREE MONTHS ENDED
MARCH 31,
------------------------
2003 2002
------- -------
Cash flows from operating activities:
Net loss ........................................................... $ (772) $ (920)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation .................................................... 109 106
Equity based compensation ....................................... 90 131
Equity in losses of unconsolidated subsidiary ................... 63 89
Accretion of loan discount ...................................... -- (27)
Impairment of investment in unconsolidated subsidiary ........... -- 233
Accrued interest on notes receivable ............................ (8) (48)
Receipt of accrued interest on notes receivable ................. 142 --
Gain on sale of stock and warrant ............................... (286) --
Valuation allowance on notes receivable ......................... 473 --
Changes in operating assets and liabilities:
Accounts receivable .......................................... (112) 18
Unbilled receivables ......................................... (52) --
Related party receivable ..................................... 66 15
Prepaid expenses and other assets ............................ 62 (83)
Deferred revenue ............................................. 13 104
Accounts payable and accrued liabilities ..................... (70) (338)
Deferred rent ................................................ 1 6
------- -------
Net cash (used in) operating activities ............... (281) (714)
Cash flows from investing activities:
Purchase of property and equipment ................................. (21) --
Sale of Excelsior investment and warrant ........................... 648 --
Principle and interest payments - received ........................ 4,708 --
Cash paid for equity investments ................................... -- (278)
------- -------
Net cash provided by (used in) investing activities ... 5,335 (278)
Cash flows from financing activities:
Principal payments under capital leases ............................ (35) (36)
------- -------
Net cash used in financing activities ................. (35) (36)
Net decrease in cash and cash equivalents ............. $ 5,019 $(1,028)
Cash and cash equivalents at beginning of period ........................ $ 3,465 $ 8,892
------- -------
Cash and cash equivalents at end of period, March 31, 2002 .............. $ 8,484 $ 7,864
======= =======
See accompanying notes to unaudited condensed consolidated interim
financial statements.
5
CHANGE TECHNOLOGY PARTNERS, INC.
AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Interim Financial Statements
March 31, 2003
(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 March 31, 2003, has offices in Connecticut 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 March 31, 2003, 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")
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. The plan remains subject to stockholder approval, which the Company
intends to seek at its annual meeting. The plan anticipates the continuation of
the Company's business activities pending an orderly wind down of its
operations, but permits the Board of Directors to amend, modify or abandon the
plan, notwithstanding stockholder approval, if the Board determines that doing
so would be in the best interests of the Company and its stockholders. The
Company continues to review other alternatives to liquidation. However, if no
appropriate alternative can be found, the Company anticipates that it will
commence liquidation in 2003. The consolidated financial statements do not
include any adjustments to reflect the possible future effects on the
recoverability of assets or the amounts of liabilities that may result from the
outcome of this uncertainty.
6
CHANGE TECHNOLOGY PARTNERS, INC.
AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Interim Financial Statements
March 31, 2003
(in thousands, except share data)
INTERIM RESULTS
The accompanying unaudited consolidated balance sheet as of March 31, 2003, the
unaudited consolidated statements of operations and cash flows for the periods
ended March 31, 2003 and 2002, and the unaudited consolidated statement of
stockholders' equity as of March 31, 2003 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, 2002, which are
contained in the Company's Annual Report on Form 10-K. The results for the three
month period ended March 31, 2003 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.
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.
Through September 30, 2002 the Company's revenues were recognized under the
completed contract method of accounting as the Company did not have reasonably
dependable estimates with respect to projects at Canned. Beginning in the fourth
quarter of 2002, Canned's revenues are recognized using the percentage of
completion method. Canned's
7
CHANGE TECHNOLOGY PARTNERS, INC.
AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Interim Financial Statements
March 31, 2003
(in thousands, except share data)
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 enters into 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.
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.
EQUITY-BASED COMPENSATION
The Company accounts for its employee stock option plans in accordance with the
provisions of the Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations
including Financial Accounting Standards Board Interpretation No. 44. As such,
compensation expense related to employee stock options is recorded only if, on
the date of grant, the fair value of the underlying stock exceeds the exercise
price. All such deferred compensation is amortized over the related vesting
period on a straight-line basis. The Company adopted the disclosure-only
requirements of SFAS No. 123 "Accounting for Stock-Based Compensation," which
allows entities to continue to apply the provisions of APB Opinion No. 25 for
transactions with employees and provide pro forma net income (loss) and pro
forma earnings (loss) per share disclosures for employee stock grants made as if
the fair value based method of accounting in SFAS No. 123 had been applied to
these transactions.
Had compensation cost for these awards been determined based on the fair value
at the grant dates consistent with the method prescribed by SFAS No. 123, the
Company's net loss would have been adjusted to the pro forma amounts indicated
below:
8
CHANGE TECHNOLOGY PARTNERS, INC.
AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Interim Financial Statements
March 31, 2003
(in thousands, except share data)
THREE MONTHS ENDED
MARCH 31,
2003 2002
------ ------
Net loss, as reported .................................... $ (299) $ (920)
Add back: compensation expense related to stock
options, as reported .................................. 90 131
Deduct: compensation expense related to stock
options under fair value based method ................. (128) (136)
(128)
Pro forma net loss ....................................... (337) (925)
Basic and diluted net loss per share as reported ......... (0.00) (0.01)
Pro forma basic income loss per share .................... (0.00) (0.01)
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 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 months
ended March 31, 2003. Three customers accounted for 22%, 22% and 11% of total
revenues during the three months ended March 31, 2003. No other customer
accounted for more than 10% of the Company's revenues during the three months
ended March 31, 2003 or 2002.
At March 31, 2003, three of these customers comprised 17%, 14% and 13% of
accounts receivable. At December 31, 2002, these same customers comprised 12%,
0% and 1% of total accounts receivable.
9
CHANGE TECHNOLOGY PARTNERS, INC.
AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Interim Financial Statements
March 31, 2003
(in thousands, except share data)
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:
March 31, March 31,
2003 2002
------------ ------------
Stock Options.............................. 14,540,747 15,690,373
Warrants................................... 25,856,252 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.
GOODWILL
Effective January 1, 2002, the Company adopted SFAS 142, "Goodwill and
Intangible Assets." At January 1, 2002 the intangible assets consisted of
goodwill and the subsumed workforce acquired in connection with the acquisition
of Canned. Management reviews goodwill for impairment in the fourth quarter of
each year or earlier if indicators of potential impairment exist. If management
fails to further develop the business, or if market conditions fail to improve,
Canned's revenue and cost forecasts may not be achieved and the Company may
incur charges for impairment of goodwill.
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities". SFAS No. 146, which is effective
prospectively for exit or disposal activities initiated after December 31, 2002,
applies to costs associated with an exit activity, including restructurings, or
with a disposal of long-lived assets. Those activities can include eliminating
or reducing product lines, terminating employees and contracts and relocating
plant facilities or personnel. SFAS No. 146 requires that exit or disposal costs
are recorded as an operating expense when the liability is incurred and can be
measured at fair value. Commitment to an exit plan or a plan of disposal by
itself will not meet the requirement for recognizing a liability and the related
expense under SFAS No. 146. SFAS No. 146 grandfathers the accounting for
liabilities that were previously recorded under EITF Issue 94-3. Accordingly,
SFAS No. 146 will have no effect on the exit costs previously recorded by the
Company.
Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based
Compensation" ("SFAS 148"), is an amendment to Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation", and provides
alternative methods of transition for an entity that voluntarily changes from
the intrinsic value based method of accounting for stock-based employee
compensation prescribed in APB No. 25 to the fair value method prescribed in
SFAS 123. As permitted under SFAS 148, the Company has continued to apply the
accounting provisions of APB No. 25, and to provide the annual pro forma
disclosures of the effect of adopting the fair value method as required by SFAS
123. SFAS 148 also requires pro forma disclosures to be provided on a quarterly
basis. The Financial Accounting Standards Board recently indicated that they
will require stock-based employee compensation to be recorded as a charge to
earnings beginning in 2004. The Company will continue to monitor their progress
on the issuance of this standard as well as evaluate the Company's position with
respect to current guidance.
10
CHANGE TECHNOLOGY PARTNERS, INC.
AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Interim Financial Statements
March 31, 2003
(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):
Carrying Value
-------------------------
March 31, December 31, Cost
2003 2002 Basis
----------- ------------ --------
Equity method investments:
Broadstream.com Inc. ("Broadstream")............ $ -- $ -- $ 7,100
NetPro Holdings, Inc. ("NetPro")................ -- -- 400
InSys LLC ("InSys")............................. 58 121 323
Cost method investments:
Livesky, Inc. ("Livesky")....................... -- -- 125
Excelsior Radio Networks, Inc. ("Excelsior").... -- 250 250
Alacra, Inc. ("Alacra")......................... 78 78 78
------ ------- --------
Total investments.................................... $ 136 $ 449 $ 8,276
====== ======= ========
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 shares to Broadstream in
exchange for no consideration. Subsequent to the recapitalization and
11
CHANGE TECHNOLOGY PARTNERS, INC.
AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Interim Financial Statements
March 31, 2003
(in thousands, except share data)
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 of
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 months ended March 31, 2002, totaling $233, 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
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
12
CHANGE TECHNOLOGY PARTNERS, INC.
AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Interim Financial Statements
March 31, 2003
(in thousands, except share data)
purchased a promissory note and warrant for $2,250 from Excelsior in August 2001
and in December 2001 purchased 250,000 common shares of Excelsior from Franklin
Capital for $250. In April 2002 the Company purchased an additional promissory
note from Excelsior for $4,708 in conjunction with the purchase by Excelsior of
Dial Communication Group Inc. and Dial Communications Group LLC. The $2,250
promissory note was paid in full, together with related accrued interest, on
October 1, 2002. The $4,708 note was repaid in full, together with related
accrued interest, on January 21, 2003.
On January 15, 2003, the Company sold the Excelsior shares and the Excelsior
warrant to Sunshine III, LLC for total consideration of approximately $648 in
cash.
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.
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 totaling
$125 in the second quarter of 2002 to reduce the remaining balance to $0.
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
DIVESTITURE OF INSYS TECHNOLOGIES, LLC
On November 8, 2001 the Company sold a 51% voting interest in InSys Technology,
Inc. ("InSys"), a wholly-owned subsidiary, 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.
13
CHANGE TECHNOLOGY PARTNERS, INC.
AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Interim Financial Statements
March 31, 2003
(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. The Company's pro rata share of InSys'
net loss for the three months ended March 31, 2003 and 2002 totaled $63 and $89,
respectively, which is included in equity in losses and impairment of
investments in unconsolidated affiliates in the accompanying statement of
operations.
DIVESTITURE OF RAND INTERACTIVE CORPORATION
On November 2, 2001 the Company sold all issued and outstanding shares of RAND
Interactive Corporation ("RAND"), a wholly-owned subsidiary, 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 3, 2013, and are contingently
exercisable upon the occurrence of certain prospective events, as defined.
ACQUISITION OF IGUANA STUDIOS, INC.
In connection with the acquisition of Iguana Studios, Inc. ("Iguana"), in March
2001, 2,300,000 shares of the Company's common stock were placed in escrow. The
related contingency period expired in July 2002, and the fair value of such
shares was included in the aggregate purchase price at that time. 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 recorded additional impairment
charges in July 2002 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.
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
14
CHANGE TECHNOLOGY PARTNERS, INC.
AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Interim Financial Statements
March 31, 2003
(in thousands, except share data)
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. 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. 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. The related contingency period expired in
December 2002, at which time the cash and the then fair value of the shares,
totaling $214, was included in the aggregate purchase price.
The remaining goodwill amount, totaling $1,782 is included in goodwill in the
accompanying balance sheet.
(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
2003, the Company received an installment payment, totaling $35. This amount was
less than the $86 due on that date. As a result of this underpayment and
management's assessment of the likelihood of future collection, the Company
established a valuation allowance for the remaining principal amount of the
notes totaling $473.
(5) COMMITMENTS AND CONTINGENCIES
In July 2001, the Board of Directors terminated the employment of the Company's
then 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 $118 at March 31, 2003 and is included in accrued expenses in
the accompanying balance sheet.
15
CHANGE TECHNOLOGY PARTNERS, INC.
AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Interim Financial Statements
March 31, 2003
(in thousands, except share data)
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 March 31, 2003:
PERIOD ENDED
DECEMBER 31, OPERATING CAPITAL
------------ --------- -------
2003.............................. 598 79
2004.............................. 184 31
2005.............................. 46 4
2006.............................. -- --
2007.............................. -- --
--------------------------------
Total Lease Obligation........... $ 828 114
Amount Representing Interest...... (0)
---------
114
Current Portion................... (91)
---------
Long Term Portion................. 23
Total minimum lease payments have not been reduced for future minimum sublease
rentals totaling approximately $244. As a result of the Company's divestiture of
certain operations, employee terminations and terminated business combination,
the Company has evaluated its alternatives with respect to its contractual
obligations concerning leased facilities. As of June 30, 2002, the Company
determined that certain facilities had no substantive future use or benefit to
the Company. The Company accrued the remaining costs relating to these leases,
net of sublease income, in the second quarter of 2002. At March 31, 2003, $183
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 three months ended March 31, 2003, the Company incurred legal fees in
connection with certain transactions and other matters in the normal course of
business. A portion of these
16
CHANGE TECHNOLOGY PARTNERS, INC.
AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Interim Financial Statements
March 31, 2003
(in thousands, except share data)
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 $45
in the three months ended March 31, 2003.
During the three months ended March 31, 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 the
Company to this firm totaled $75 in the three months ended March 31, 2002. As of
June 30, 2002, the Company no longer utilizes this firm to perform any services
for the Company. Additionally, this firm occupies a portion of the Company's
office space in Connecticut, for which it pays rent at an amount, which
approximates fair market value. Such payments to the Company totaled $60 and $57
during the three months ended March 31, 2003 and 2002, respectively.
Furthermore, the firm was indebted to the Company in the amount of $128 and 194
at March 31, 2003 and December 31, 2002, respectively, 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.
17
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, 2002. 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 derives its revenues from services performed under one of
two pricing arrangements: time-and-materials or 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. Through September 30, 2002 the Company's revenues
were recognized under the completed contract method of accounting as the Company
did not have reasonably dependable estimates with respect to projects at Canned.
Beginning in the fourth quarter of 2002, Canned's revenues are recognized using
the percentage of completion method. 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.
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
18
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 its results of
operations or other changes in circumstances. If the financial condition of an
issuer deteriorates, resulting in such issuer's inability to fulfill its
obligation under the promissory note evidencing such a loan, 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, 2002 and March 31, 2003. In so doing, the Company has estimated
future taxable losses in determining the valuation allowance. In the event that
actual results differ from these estimates or these estimates are adjusted in
future periods, the Company may need to modify its valuation allowance which
could materially affect its financial position and results of operations.
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.
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 $4,708,000 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 $4,708,000 note was repaid in full, together with related
accrued interest, on January 21, 2003.
On January 15, 2003, the Company sold the Excelsior shares and the
Excelsior warrant to Sunshine III, LLC for total consideration of approximately
$648,000 in cash.
On September 30, 2002, the Board adopted a plan of liquidation and
dissolution in order to maximize shareholder value. In reaching its decision,
the Board considered principally the provisions of the Investment Company Act of
1940, which would have required the Company to
19
register as an "investment company" in the absence of the adoption of the plan
of liquidation. The plan remains subject to stockholder approval, which the
Company intends to seek at its next annual meeting. The plan anticipates the
continuation of the Company's business activities pending an orderly wind down
of its operations, but permits the Board to amend, modify or abandon the plan,
notwithstanding stockholder approval, if the Board determines that doing so
would be in the best interests of the Company and its stockholders. The Company
continues to review suitable business opportunities. However, if no appropriate
opportunity can be found, the Company anticipates that it will commence
liquidation in 2003.
OVERVIEW OF 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.
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-price 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 are fixed, a variation in the
number of client engagements can cause significant variations in operating
results from quarter to quarter.
The Company's projects vary in size and source. Therefore, a client
that accounts for a significant portion of the Company's revenues in one period
may not generate a similar amount of revenue in subsequent periods. However,
there is a risk that the source of the Company's revenues may be generated from
a small number of clients and these clients may not retain the Company in the
future. Any cancellation, deferral or significant reduction in work performed
for these principal clients or a significant number of smaller clients could
have a material adverse affect on the Company's business, financial condition
and results of operations.
The Company's costs consist primarily of compensation and related costs
of personnel dedicated to customer assignments. Project personnel costs also
include fees paid to subcontractors for work performed in connection with
projects and non-reimbursed travel expenses.
The Company's selling, general and administrative costs consist
primarily of compensation and related costs of the management and administrative
functions, including
20
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 and the former President and Chief Executive Officer. Such
cost is measured as the difference between the exercise price of options granted
and the fair market value of the underlying stock on the date of measurement,
and is being recognized as expense over the vesting period of the options. The
Company incurred approximately $90,000 and $131,000 in equity based compensation
expense during the three months ended March 31, 2003 and 2002, respectively.
ACQUISITIONS AND DIVESTITURES
The Company evaluated 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.
INSYS. On November 8, 2001 the Company sold a 51% voting interest in
InSys, a wholly-owned subsidiary, 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 2, 2001 the Company sold all
of the issued and outstanding shares of RAND, a wholly-owned subsidiary, 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.
IGUANA. In connection with the acquisition of Iguana in March 2001,
2,300,000 shares of the Company's common stock were placed in escrow. 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 recorded additional impairment charges in July 2002
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.
Also in connection with the acquisition of Canned, $200,000 in cash and
715,172 shares of the Company's common stock were placed in escrow. The related
contingency period
21
expired in December 2002, at which time the cash and the then fair value of the
shares, totaling $214,000, was included in the aggregate purchase price.
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.
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
22
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2002 COMPARED TO THREE MONTHS ENDED MARCH 31, 2003
REVENUES. Revenues decreased from $739,000 in the three months ended March 31,
2002 to $708,000 in the three months ended March 31, 2003. This decrease is a
result of unfavorable market conditions for the Company's services.
COST OF REVENUES. Cost of revenues consists principally of costs directly
incurred in the delivery of services to clients, primarily consisting of
compensation of billable employees. Billable employees are full time employees
and sub-contractors whose time spent working on client projects is charged to
that client at agreed-upon rates. Billable employees are our primary source of
revenue. Such costs increased from $281,000 in the three months ended March 31,
2002 to $354,000 in the three months ended March 31, 2003, or 50% of revenues.
The increase is a result of unfavorable market conditions for the Company's
services, which required the Company to accept lower margins in exchange for new
client opportunities.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses consist primarily of compensation and related benefits,
professional services fees, facilities costs, and advertising and promotional
costs. Selling, general and administrative expenses increased from $1,070,000 in
the three months ended March 31, 2002 to $1,313,000 in the three months ended
March 31, 2003. This increase was primarily a result of establishing a full
valuation allowance for the remaining principal balance of certain notes
receivable, totalling $473,000, as a result of management's reassessment of the
likelihood of future collection. The increase was partially offset by decreased
professional services fees over the prior period and a decreased number of
employees, resulting in decreased compensation.
EQUITY IN LOSSES AND IMPAIRMENT OF INVESTMENTS IN UNCONSOLIDATED AFFILIATES.
Equity in losses and impairment of investments in unconsolidated affiliates was
$322,000 in the three months ended March 31, 2002 and $63,000 in the three
months ended March 31, 2003. 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 and, as a result of this analysis, in 2002 the Company
recorded impairment charges that reduced the remaining NetPro and Livesky
investment balances to $0.
INTEREST AND DIVIDEND INCOME. Interest and dividend income was $150,000 in the
three months ended March 31, 2002 and $57,000 in the three months ended March
31, 2003. The decrease in interest and dividend income for the three months
ended March 31, 2003 was attributable to a decrease in the Company's notes
receivable as a result of repayment. Interest income in future periods may
fluctuate as a result of the average cash the Company maintains and changes in
the market rates of the Company's cash equivalents. The Company's average cash
balance may continue to decrease as the Company continues to incur operating
losses.
23
INCOME TAXES. The Company has available estimated net operating loss
carryforwards for income tax purposes of approximately $22,000,000 through the
period ended December 31, 2002, which expire on various dates from 2002 through
2022. A full valuation allowance has been established due to uncertainty as to
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.
WORKING CAPITAL AND RESULTS OF OPERATIONS
The Company had $8,484,000 in cash and cash equivalents available as of March
31, 2003, 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 March 31, 2003, the
Company has a single operating subsidiary, a limited number of employees and has
significantly reduced fixed expenses. During the three months ended March 31,
2003, the Company used $423,000 to fund operations.
The Company's future contractual obligations at March 31, 2003 were as follows:
Amounts Due in Fiscal Year Ending December 31,
2007 and
2003 2004 2005 2006 Thereafter
------ ------ ------ ------ ----------
(in thousands)
Operating leases............ $ 598 $ 184 $ 46 $ -- $ --
Capital Leases.............. 79 31 4 -- --
Involuntary termination..... 118 -- -- -- --
------ ------ ------ ------ -----
$ 795 $ 215 $ 50 $ -- $ --
====== ====== ====== ====== =====
The Company intends to fund these obligations from its cash on hand at
March 31, 2003.
In January, 2003, the Company sold its shares of Excelsior common stock and the
Excelsior warrant to Sunshine III, LLC for total consideration of approximately
$648,000 in cash. Also in January, 2003 the $4,708,000 note from Excelsior was
repaid in full, together with related accrued interest totaling $142,000.
24
Given the Company's current level of operations, the Company's capital
resources are sufficient to meet anticipated cash needs for working capital and
capital expenditures relating to existing operations for at least the next 12
months. However, the Company continues to review suitable business
opportunities. If a business is found, the plan of liquidation and dissolution
adopted by the Board is abandoned and the Company's operations require
significant cash outlays to fund operations, the Company may be required to seek
additional sources of financing or to sell certain assets.
If the plan of liquidation and dissolution adopted by the Board is
approved by the Company's stockholders, the Company will begin the process of
negotiating settlements with respect to its remaining obligations and
liabilities. In the event the Company is unable to negotiate successfully the
termination of these obligations, the Company may have less or no cash proceeds
to distribute to its stockholders.
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
Certain statements contained in this Quarterly Report on Form 10-Q,
including information with respect to the Company's future business plans,
constitute "forward-looking statements" within the meaning of Section 27A of the
Securities Act and Section 21E of the Exchange Act. For this purpose, any
statements contained herein that are not statements of historical fact may be
deemed to be forward-looking statements, subject to a number of risks and
uncertainties that could cause actual results to differ significantly from those
described in this report. These forward-looking statements include statements
regarding, among other things, the Company's business strategy and operations,
future plans, future prospects, financial position, anticipated revenues or
losses and projected costs, and objectives of management. Without limiting the
foregoing, the words "may," "will," "should," "anticipates," "believes,"
"plans," "expects" and similar expressions are intended to identify
forward-looking statements. There are a number of important factors that could
cause the results of the Company to differ materially from those indicated by
such forward-looking statements. These factors include, but are not limited to,
those set forth in the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 2002, under Part I, Item 1.A "Risk Factors."
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET 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 March 31, 2003, 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 March 31, 2003, 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
25
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 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.
26
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
None.
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 4, 2002 and incorporated herein by reference).
27
2.5 Plan of Liquidation and Dissolution of Change Technology Partners,
Inc., dated September 30, 2002 (filed as an exhibit to 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).
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 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).
10.5 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).
28
10.6 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).
10.7 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).
10.8 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).
10.9 Agreement and Plan of Merger among eHotHouse Inc., eHH Merger I, Inc.,
RAND Interactive Corporation, and Todd Burgess, David Kelley, John
Snow, Stephen Riddick and Brobeck, Phleger and Harrison LLP dated
November 30, 2000 (filed as an exhibit to the Registrant's Report on
Form 8-K dated November 30, 2000 and incorporated herein by reference).
10.10 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).
10.11 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).
10.12 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).
10.13 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).
10.14 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).
10.15 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).
29
10.16 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).
10.17 Warrant to Purchase Common Stock, issued by RAND Interactive
Corporation to Change Technology Partners, Inc. dated November 2, 2001
(filed as an exhibit to the Registrant's Report on Form 8-K dated
November 2, 2001 and incorporated herein by reference).
10.18 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).
10.19 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).
10.20 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).
10.21 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).
10.22 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 4, 2002 and
incorporated herein by reference).
10.23 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 4, 2002
and incorporated herein by reference).
10.24 Purchase Agreement between Sunshine III, LLC and Change Technology
Partners, Inc., dated January 15, 2003 (filed as an exhibit to the
Registrant's Report on Form 8-K dated January 17, 2003 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 report on Form 8-K was filed with the SEC during the
first quarter of 2003:
(i) On January 17, 2003 reporting matters under Item 5,
Other Events, and Item 7, Financial Statements and
Exhibits.
30
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: May 14, 2003
CHANGE TECHNOLOGY PARTNERS, INC.
By: /s/ William Avery
----------------------------------
William Avery
President, Chief Executive Officer
and Chief Financial Officer
31
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.
32
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: May 14, 2003
/s/ William Avery
-----------------------------
William Avery
Chief Executive Officer
33
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.
34
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: May 14, 2003
/s/ William Avery
-----------------------------
William Avery
Chief Financial Officer
35