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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(MARK ONE)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM______ TO______
COMMISSION FILE NUMBER 0-13347
CHANGE TECHNOLOGY PARTNERS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 06-1582875
(State or jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
537 STEAMBOAT ROAD
GREENWICH, CONNECTICUT 06830
(Address of principal executive offices) (Zip Code)
(203) 661-6942
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, PAR VALUE $.01 PER SHARE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that Registrant
was required to file such reports) and (2) has been subject to such filing
requirements for at least the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (ss. 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. [_]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act). Yes [X] No [_]
As of June 28, 2002, the aggregate market value of registrant's common
stock held by non-affiliates was approximately $4,406,985, based on the last
reported sale price of $0.03 on that date.
Registrant had 182,025,511 shares of common stock, par value $0.01 per
share, outstanding as of March 14, 2003.
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in this Annual Report on Form 10-K,
including information with respect to the Company's future business plans,
constitute "forward-looking statements" within the meaning of Section 27A of the
Securities Act and Section 21E of the Exchange Act. For this purpose, any
statements contained herein that are not statements of historical fact may be
deemed to be forward-looking statements, subject to a number of risks and
uncertainties that could cause actual results to differ significantly from those
described in this report. These forward-looking statements include statements
regarding, among other things, our business strategy and operations, future
plans, future prospects, financial position, anticipated revenues or losses and
projected costs, and objectives of management. Without limiting the foregoing,
the words "may," "will," "should," "anticipates," "believes," "plans," "expects"
and similar expressions are intended to identify forward-looking statements.
There are a number of important factors that could cause the results of the
Company to differ materially from those indicated by such forward-looking
statements. These factors include, but are not limited to, those set forth in
Part I, Item 1.A "Risk Factors."
TABLE OF CONTENTS
PAGE
----
PART I..............................................................................................................1
ITEM 1. BUSINESS.......................................................................................1
ITEM 1A. RISK FACTORS...................................................................................4
ITEM 2. Properties.....................................................................................6
ITEM 3. Legal proceedings..............................................................................6
ITEM 4. Submission of Matters to a Vote of Security Holders............................................6
PART II.............................................................................................................7
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters..........................7
ITEM 6. Selected Financial Data........................................................................8
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations..........9
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK....................................20
ITEM 8. Financial Statements and Supplementary Data...................................................21
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure..........22
PART III...........................................................................................................23
ITEM 10. Directors and Executive Officers of the Registrant............................................23
ITEM 11. Executive Compensation........................................................................24
ITEM 12. Security Ownership of Certain Beneficial Owners and Management................................27
ITEM 13. Certain Relationships and Related Party Transactions..........................................28
PART IV............................................................................................................30
ITEM 14. CONTROLS AND PROCEDURES.......................................................................30
ITEM 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K...............................30
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PART I
ITEM 1. BUSINESS
OVERVIEW AND RECENT DEVELOPMENTS
Change Technology Partners, Inc. (the "Company") currently has only one
operating business, Canned Interactive, which designs and produces interactive
media, primarily for the entertainment industry.
In 2001 the Company intended to use its significant cash position to
develop and acquire businesses in the radio and media industries through a
proposed merger with Franklin Capital Corporation pursuant to an agreement and
plan of merger dated December 4, 2001. In contemplation of the proposed merger,
on April 3, 2002, the Company purchased a promissory note from Excelsior Radio
Networks, Inc., a subsidiary of Franklin Capital, which produces, syndicates and
distributes radio programs and related services for $4,708,000 in conjunction
with the purchase by Excelsior of Dial Communications Group, Inc. and Dial
Communications Group LLC. The Company had previously purchased a promissory note
and warrant to purchase 482,955 shares of common stock of Excelsior (the
"Excelsior Warrant"), from Excelsior for $2,250,000 on August 28, 2001. The
$2,250,000 note was repaid in full, together with related accrued interest, on
October 1, 2002. Additionally, in connection with the merger, the Company
purchased 250,000 shares of common stock of Excelsior (the "Excelsior Shares")
from Franklin Capital on December 4, 2001. Franklin Capital terminated the
proposed merger on July 1, 2002. The $4,708,000 note was repaid in full,
together with related accrued interest, on January 21, 2003.
On September 30, 2002, the Board of Directors of the Company (the
"Board") announced the adoption of 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 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 it 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.
On January 15, 2003, the Company sold the Excelsior Shares and the
Excelsior Warrant to Sunshine III, LLC for total consideration of $648,000 in
cash.
The Company's principal executive offices are located at 537 Steamboat
Road, Greenwich, CT 06830. The Company also maintains an office in Los Angeles,
CA.
CORPORATE HISTORY
Until March 28, 2000, the Company was known as Arinco Computer Systems
Inc. and had no business operations. On March 28, 2000, an investor group
acquired control of Arinco
Computer Systems through an investment of $40,000,000 in exchange for newly
issued convertible preferred stock of Arinco Computer Systems (which has since
all been converted to Common Stock). Following this investment, Arinco Computer
Systems changed its name to Change Technology Partners, Inc., redomesticated
from New Mexico to Delaware, and commenced its new consulting business strategy.
Prior to July, 2001, the Company provided a broad range of consulting services,
including e-services and technology strategy, online branding, web architecture
and design, systems integration, systems architecture and outsourcing. However,
in response to continued unfavorable market conditions in 2001, the Board voted
to sell or wind down these operations, other than Canned Interactive, and use
its assets to invest in and develop new businesses.
SUBSIDIARIES
The Company's subsidiaries are:
o Iguana Studios, Inc. (substantially no operations).
o Papke-Textor, Inc. d/b/a Canned Interactive.
INVESTMENTS AND LOANS
The Company has made investments in, and loans to, media and technology
companies. The following table summarizes the Company's media and technology
investments and loans as of December 31, 2002:
COMPANY DESCRIPTION TYPE OF INVESTMENT INTEREST
------------------------------- ------------------------------------- ---------------------------------------
Alacra, Inc. Provider of business information 1% equity interest
services
Excelsior Radio Networks, Inc. Produces, syndicates and distributes 250,000 shares of common stock, a
radio programs warrant to purchase 482,955 shares of
common stock and a promissory note in
the aggregate principal amount of
$4,708,200. In January 2003, the shares
and the warrant were sold to Sunshine
III, LLC and the promissory note was
repaid.
InSys LLC Provider of systems integration 49% equity interest and $100,000 note
services
Rand Interactive Corporation Provider of media and technical Warrant to purchase 30% equity interest
services
CANNED INTERACTIVE
In June, 2001, the Company acquired Papke-Textor, Inc. d/b/a
Canned Interactive for approximately $1,100,000 in cash, including acquisition
costs, and 6,436,552 shares of common stock, par value $0.01 per share, of the
Company (the "Common Stock") valued at approximately $1,000,000. Canned
Interactive is based in Los Angeles, California and designs and produces
interactive media, primarily for the entertainment industry. Entertainment
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companies, as well as consumer goods, sports and technology companies, contract
with Canned to produce interactive media, such as digital video discs (DVD) and
web site design. Work is usually contracted with a purchase order and delivery
of completed work is typically within one to three months of receipt of the
order.
Most theatrical films, including new and library releases, are now
released in DVD format. Canned designs interactive content for those titles,
enriching the viewer experience and creating value for Canned's clients. Canned
also uses its design and technology skills to create and enhance web sites with
interactive and streaming content.
Canned exploits its ability to design, create and produce interactive
DVD applications in two ways. First, Canned supports its business in the
entertainment sector. Canned's service to this business sector allowed it to
develop top creative and technology skills. It has significantly penetrated the
sector and will opportunistically pursue new business while ensuring sufficient
resources are deployed to secure what has become a relatively stable and
predictable part of the business. Second, Canned uses its understanding of the
DVD medium to identify business opportunities for its services in other market
segments where it believes its creative and technology skills can support its
clients' business objectives. As the number of DVD-enabled households increases,
driven in large part by the theatrical entertainment business' use of DVDs to
distribute its product, the public's familiarity with interactive DVDs increases
and the cost of distribution decreases. These factors open up potential new uses
for Canned's services outside its core entertainment business. Canned currently
has targeted the technology, consumer goods and communications businesses.
Canned's largest clients in 2002 were Disney Home Entertainment,
Columbia Tristar Home Entertainment and Warner Home Video. Other clients in 2002
were Cisco Systems, Nike and the United States Olympic Committee. Mattel, Fox
Home Video and two game entertainment developers, eidos and Ubisoft, became new
clients of Canned in 2002. Disney Home Entertainment, Warner Home Video and
Columbia Tristar Home Entertainment each account for ten percent or more of the
Company's consolidated revenues. Until approximately one year ago, most of
Canned's business was by way of referral and capitalization on the established
contacts it has built in the entertainment sector. Canned has since developed a
quota-bearing sales approach to sign new revenue sources outside the
entertainment industry. Based on the success of these new initiatives, Canned is
organized to add to its sales team and support that effort with appropriate
public relations.
Competition for the development of interactive DVDs and web sites is
strong and varied. Companies that compete with Canned in the DVD market include
1k Studios, Technicolor and B.D. Fox. In the web site marketplace there are
numerous small, local competitors, as well as more established companies such as
dna studios.
In 1999, Congress passed legislation that regulates certain aspects of
the internet, including on-line content, copyright infringement, user privacy,
taxation, access charges, liability for third-party activities and jurisdiction.
In addition, federal, state, local and foreign governmental organizations also
are considering, and may consider in the future, other legislative and
regulatory proposals that would regulate the internet. The internet and
e-commerce sectors are still relatively new areas and it is not known how courts
will interpret or apply both existing
3
and new laws. Therefore, Canned is uncertain how new laws or the application of
existing laws will affect its web site design business.
EMPLOYEES
As of December 31, 2002, the Company employed 25 full time employees.
Of the total number of employees, 19 were in professional services, two were in
sales and marketing and four were in finance and administration. None of the
Company's employees are represented by any collective bargaining unit, and the
Company has never experienced a work stoppage. The Company believes its
relations with its employees are good.
ITEM 1A. RISK FACTORS
You should carefully consider the following risks in your evaluation of
the Company. The risks and uncertainties described below are not the only ones
the Company faces. Additional risks and uncertainties may also adversely impact
and impair its business. If any of the following risks actually occur, the
Company's business, results of operations or financial condition would likely
suffer. See "Special Note Regarding Forward-Looking Statements."
THE VIDEO AND HOME ENTERTAINMENT INDUSTRY IS HIGHLY COMPETITIVE AND
SOME OF CANNED'S COMPETITORS HAVE SUBSTANTIALLY GREATER RESOURCES THAN CANNED,
WHICH THEY MAY USE TO IMPLEMENT STRATEGIES THAT COULD ADVERSELY AFFECT CANNED'S
MARKET SHARE AND RESULTS OF OPERATIONS. The video and home entertainment
industry is highly competitive and there are few barriers to entry. Canned
competes with many other video and home entertainment producers. Some of
Canned's competitors have greater financial and marketing resources, market
share and name recognition than Canned, which may allow them to quickly develop
market presence in the market Canned serves or allow them to expand into new
markets that Canned intends to serve. There is no assurance that Canned will be
able to compete effectively with such competitors.
In addition, DVD competes with all leisure-time activities, such as
movie theaters, network and cable television, direct broadcast satellite
television, live theater, sporting events and family entertainment centers. In
the event the demand for DVDs declines, Canned's business and results of
operations will be affected.
THE DVDS THAT CANNED OFFERS ARE SUBJECT TO TECHNICAL OBSOLESCENCE,
WHICH COULD REDUCE THE DEMAND FOR CANNED'S PRODUCTS. DVDs compete with, among
others, pay-per-view cable television systems ("Pay-Per-View"), in which
subscribers pay a fee to see a movie that they select. Pay-Per-View presently
offers only a limited number of channels and movies in certain cable television
markets. However, recently developed technologies, referred to as "Video On
Demand" ("VOD"), permit certain cable companies, direct broadcast satellite
companies (such as DirecTV), telephone companies and other telecommunications
companies to transmit a much greater number of movies to homes throughout the
United States at frequent intervals throughout the day. Changes in the manner in
which movies are marketed, primarily related to an earlier release of movies in
the VOD format, could substantially decrease the demand for DVDs, which would
have an adverse effect on Canned's business. Currently,
4
movies are released to the video and home entertainment specialty store market
from 30 to 120 days before release to the Pay-Per-View and VOD distribution
channels.
CANNED'S CUSTOMER BASE IS HIGHLY CONCENTRATED, SO THE LOSS OF A MAJOR
CUSTOMER COULD ADVERSELY AFFECT CANNED'S BUSINESS. A substantial portion of
Canned's net revenues have increasingly been derived from sales to a small
number of Canned's customers. The reduction, delay or cancellation of orders
from one or more major customers or the loss of one or more major customers
could adversely affect Canned's business, financial condition and results of
operations.
THE COMPANY'S SUCCESS DEPENDS ON ITS ABILITY TO RETAIN ITS KEY
PERSONNEL. The Company's success depends largely on the skills of its key
management. Currently, the Company's key management consists of William Avery,
the Company's President and Chief Executive Officer. The Company cannot
guarantee that it will be able to replace this individual in the event his
services become unavailable.
CONCENTRATION OF OWNERSHIP WILL LIMIT YOUR ABILITY TO INFLUENCE
CORPORATE MATTERS. The present directors, executive officers and principal
stockholders of the Company beneficially own approximately 25% of the
outstanding Common Stock. As a result, these stockholders will be able to
continue to exert significant influence over all matters requiring stockholder
approval, including the election of directors and approval of significant
corporate transactions.
THE COMPANY'S BOARD HAS ADOPTED A PLAN OF LIQUIDATION AND DISSOLUTION.
On September 30, 2002 the Company's Board adopted a plan of liquidation and
dissolution to be voted on by the Company's stockholders at the Company's next
annual meeting of stockholders. Assuming the plan is approved by the Company's
stockholders, the Company intends to begin the process of winding up its
operations.
THE COMPANY WILL CONTINUE TO INCUR THE EXPENSES OF COMPLYING WITH
PUBLIC COMPANY REPORTING REQUIREMENTS. If the plan of liquidation and
dissolution adopted by the Board is approved by the Company's stockholders, the
Company will have a continuing obligation to comply with the applicable
reporting requirements of the Securities and Exchange Act of 1934, as amended
(the "Exchange Act"), even though compliance with such requirements is
economically burdensome. The Company is not able to predict at this time how
long it will continue to be subject to the reporting requirements of the
Exchange Act.
THE TIMING OF DISTRIBUTIONS TO THE COMPANY'S STOCKHOLDERS IN CONNECTION
WITH THE LIQUIDATION AND DISSOLUTION OF THE COMPANY IS NOT CERTAIN. If the plan
of liquidation and dissolution adopted by the Board is approved by the Company's
stockholders, the Board may determine that it is in the best interests of the
Company's stockholders that some assets be placed into a liquidating trust,
which could delay the receipt by the Company's stockholders of the final
proceeds of such a liquidation.
THE COMPANY'S STOCK WILL CONTINUE TO TRADE EVEN THOUGH IT MAY BE IN THE
PROCESS OF WINDING DOWN ITS OPERATIONS AND THE DISTRIBUTIONS, IF ANY, MAY BE
BELOW ANY TRADING PRICE. If the plan of liquidation and dissolution adopted by
the Board is approved by the
5
Company's stockholders, because of the difficulty in estimating the amount and
timing of the liquidating distributions, and due to the other risk factors
discussed herein, the Company's Common Stock may be subject to significant
volatility and may trade above the amount of any distribution that is made.
THE COMPANY MAY NOT BE ABLE TO NEGOTIATE SETTLEMENTS WITH RESPECT TO
ITS REMAINING LIABILITIES. 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 which will include, without limitation, building leases. 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.
ITEM 2. PROPERTIES
The Company leases approximately 10,900 square feet of office space at
537 Steamboat Road, Greenwich, Connecticut for use as executive offices. The
Company currently utilizes approximately 700 square feet and has sublet the
remaining 10,200 square feet. The current lease expires in October 2003. The
Company also leases office space at 16 West 19th Street, New York, New York
10011, which has been sublet in its entirety, and 6834 Hollywood Boulevard,
Hollywood, California 90028.
ITEM 3. LEGAL PROCEEDINGS
The Company is subject to legal claims from time to time and is
involved in litigation that has arisen in the ordinary course of its business.
It is the opinion of the Company's management that either it has adequate legal
defenses to these claims or that any liability that might be incurred due to
these claims will not, in the aggregate, exceed the limits of the Company's
insurance policies or otherwise result in any material adverse effect on the
Company's operations or financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the stockholders in the fourth
quarter of 2002.
6
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock is traded on the over-the-counter market and prices
are quoted on the OTC electronic bulletin board under the symbol "CTPI."
The following sets forth the range of high and low bid prices for the
Common Stock for the periods indicated as reported on the OTC electronic
bulletin board.
FISCAL YEAR ENDED DECEMBER 31, HIGH LOW
---------------------------------------------------- -------- -------
2001
First quarter....................................... $ 2.00 $ .25
Second quarter...................................... .31 .07
Third quarter....................................... .14 .02
Fourth quarter...................................... .10 .03
2002
First quarter....................................... .07 .04
Second quarter...................................... .07 .03
Third quarter....................................... .02 .01
Fourth quarter...................................... .03 .02
As of March 14, 2003, there were 473 common stockholders of record and
182,025,511 shares of Common Stock outstanding. The last reported sale price for
the Common Stock on March 14, 2003 was $0.02.
The Company has never paid cash dividends and does not intend to pay
cash dividends in the foreseeable future.
COMPANY EQUITY COMPENSATION PLANS
The following table sets forth information as of December 31, 2002
regarding (i) the number of securities to be issued upon exercise of outstanding
options, (ii) the weighted average exercise price of such outstanding options
and (iii) the number of securities remaining available for future issuance under
the Company's 2000 Stock Option Plan, which was approved by the Company's
security holders. The Company does not have any equity compensation plan that
has not been approved by the Company's security holders.
NUMBER OF NUMBER OF SECURITIES REMAINING
SECURITIES TO BE WEIGHTED-AVERAGE AVAILABLE FOR FUTURE ISSUANCE
ISSUED UPON EXERCISE PRICE UNDER EQUITY COMPENSATION PLANS
EXERCISE OF OF OUTSTANDING (EXCLUDING NUMBER OF SECURITIES
PLAN CATEGORY OUTSTANDING OPTIONS OPTIONS REFLECTED IN FIRST COLUMN)
------------- ------------------- ---------------- -------------------------------
Equity compensation plans approved by
security holders.......................... 14,585,747 $0.08 11,414,253
Equity compensation plans not approved by
by security holders....................... ---- ---- ----
----------- --------- ------------
Total................................. 14,585,747 $0.08 11,414,253
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ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data as of and for the years ended
December 31, 1999 and 1998 has been derived from the audited financial
statements of the Company and the notes accompanying the statements. The
selected financial data as of and for the years ended December 31, 2002, 2001
and 2000 has been derived from the Company's financial statements and the
accompanying notes, which have been audited by KPMG LLP, the Company's current
independent auditors. Note that historical results of operations are not
indicative of the Company's future performance because of the Company's
divestiture of its consulting business in 2001 and its recent adoption of the
plan of liquidation and dissolution, subject to shareholder approval. You should
read this information in conjunction with the audited consolidated financial
statements, including the notes to those statements, and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this report.
FISCAL YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------
2002 2001 2000 1999 1998
--------- --------- --------- --------- ---------
(in thousands, except per share amounts)
Statement of Operations Data:
Revenues ..................................................... $ 2,720 $ 5,567 $ 1,370 $ -- $ --
Cost of revenues ............................................. 1,432 7,276 1,119 -- --
--------- --------- --------- --------- ---------
Gross profit (loss) .......................................... 1,288 (1,709) 251 -- --
Operating expenses:
Selling, general and administrative .......................... 4,530 13,738 3,305 12 11
Equity based compensation .................................... 377 3,086 2,921 -- --
Severance .................................................... -- 1,326 -- -- --
Loss on disposal of subsidiaries ............................. -- 377 -- -- --
Impairment losses ............................................ 69 7,263 -- -- --
--------- --------- --------- --------- ---------
Total operating expenses ..................................... 4,976 25,790 6,226 12 11
Loss from operations ......................................... (3,688) (27,499) (5,975) (12) (11)
Other income (expense) ....................................... 187 (4,701) (263) 20 (42)
--------- --------- --------- --------- ---------
Net income (loss) before extraordinary item .................. (3,501) (32,200) (6,238) 8 (53)
Extraordinary item ........................................... -- -- -- -- 666
Dividends .................................................... -- -- -- (14) (24)
Deemed dividend attributable to issuance of
convertible preferred stock ............................... -- -- 40,000 -- --
--------- --------- --------- --------- ---------
Net income (loss) applicable to common stockholders .......... (3,501) (32,200) (46,238) (6) 589,000
Net income (loss) per share--basic and diluted ............... (.02) (.23) (1.31) -- .13
DECEMBER 31,
-----------------------------------------------------------------
2002 2001 2000 1999 1998
--------- --------- --------- --------- ---------
Balance Sheet Data:
Cash, cash equivalents and marketable securities ............. $ 3,465 $ 8,892 $ 30,333 $ 245 $ 173
Working capital .............................................. 8,880 10,719 30,012 245 236
Total assets ................................................. 12,733 16,152 38,576 246 238
Accumulated deficit .......................................... (84,302) (80,801) (48,601) (2,363) (2,371)
Stockholders' equity ......................................... 11,619 14,660 37,182 245 236
8
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
Company's audited consolidated financial statements and accompanying notes for
the fiscal year ended December 31, 2002. Certain statements contained within
this discussion constitute forward-looking statements. See "Special Note
Regarding Forward Looking Statements."
CRITICAL 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.
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
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
9
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.
As required by SFAS No. 142, "Goodwill and Intangible Assets," upon
adoption management identified reporting units based upon the Company's
reporting structure, and assigned goodwill at the date of adoption to reporting
units benefiting from the factors that gave rise to the goodwill. As a result of
this analysis, all goodwill was assigned to the Company's Canned reporting unit.
Also as required by SFAS No. 142, management performed both transitional
impairment testing during the first quarter of 2002 and annual impairment
testing of goodwill during the fourth quarter of 2002. The fair value of the
related reporting unit was estimated by management using a discounted cash flow
valuation model, incorporating discount rates commensurate with the risks
involved. The growth model was developed using both industry and company
historical results and forecasts. In the event that these estimates are adjusted
downward in future periods, the Company's analyses may result in an impairment
of goodwill, which could materially affect its financial position and results of
operations.
In accordance with SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," whenever events or changes in circumstances
indicate that the carrying value of an asset or asset group may not be
recoverable or the useful life has changed, impairment tests are performed.
Undiscounted future cash flows are used to calculate the fair value of
long-lived assets to determine if such assets are impaired. Where impairment is
identified, management determines fair values for assets using a discounted cash
flow valuation model, incorporating discount rates commensurate with the risks
involved for each group of assets. Growth models are developed using both
industry and company historical results and forecasts.
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 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.
10
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 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.
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 formulating a course of action to minimize
near-term losses and 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 incurred severance
charges in the third quarter of 2001 totaling $1,326,000. As of December 31,
2002, $1,145,000 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.
11
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 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. Also
included in the equity based compensation during 2001 is the cost, totaling
$2,500,000 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 $377,000 and
$3,086,000 in equity based compensation expense during the twelve months ended
December 31, 2002 and 2001, respectively.
12
ACQUISITIONS AND DIVESTITURES
The Company evaluates acquisitions based on numerous quantitative and
qualitative factors. Quantitative factors include historical and projected
revenues and profitability, geographic coverage and backlog of projects under
contract. Qualitative factors include strategic and cultural fit, management
skills, customer relationships and technical proficiency.
EHOTHOUSE. On February 21, 2001, the Company acquired the remaining
outstanding interests in eHotHouse, and merged eHotHouse with a newly formed,
wholly owned subsidiary of the Company. The Company acquired this minority
interest for approximately 2,200,000 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 $867,000 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
13
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.
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.
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 "Escrow
Shares"). The related contingency period 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
14
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
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001
REVENUES. Revenues decreased from $5,567,000 for the year ended
December 31, 2001 to $2,720,000 for the year ended December 31, 2002. This
decrease is a result of the Company's divestitures of operating businesses. In
2002, Canned Interactive is the Company's sole revenue generating subsidiary.
Revenues from this subsidiary were $971,000 for the period from acquisition in
June 2001 through December 31, 2001.
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 is spent working
15
directly on client projects. Billable employees are the Company's primary source
of revenue. Such costs decreased from $7,276,000, or 131% of revenues, for the
year ended December 31, 2001, to $1,432,000, or 53% of revenues, for the year
ended December 31, 2002. The decrease in cost, and improvement in gross margin,
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 $13,738,000
for the year ended December 31, 2001 to $4,530,000 for the year ended December
31, 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.
IMPAIRMENT LOSSES. As a result of the aforementioned terminations and
divestitures in 2001, coupled with historical and projected operating and cash
flow losses, the Company evaluated the recoverability of its acquired intangible
assets and goodwill by comparison of the carrying values relative to related
future cash flows. As a result of this analysis, the Company recorded impairment
charges totaling $7,263,000 and $69,000 in the years ended December 31, 2001 and
2002, respectively, which are included in the "Impairment Losses" in the
Statement of Operations.
SEVERANCE COSTS. Severance costs were incurred as a result of the
aforementioned terminations in 2001 and totaled $1,326,000 and $0 for the years
ended December 31, 2001 and 2002, respectively.
EQUITY IN LOSSES AND IMPAIRMENT OF INVESTMENTS IN UNCONSOLIDATED
AFFILIATES. Equity in losses of unconsolidated affiliates results from the
Company's minority ownership in Broadstream, NetPro and InSys which are
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. Equity in losses and impairment of
investments in unconsolidated affiliates was $5,546,000 for the year ended
December 31, 2001 and $549,000 for the year ended December 31, 2002.
INTEREST AND DIVIDEND INCOME. Interest and dividend income was $845,000
for the year ended December 31, 2001 and $736,000 for the year ended December
31, 2002. The decrease in interest and dividend income is attributable to a
decrease in the Company's invested cash balance as it has funded its ongoing
operations and investments, partially offset by interest income earned on notes
receivable. Interest income in future periods may fluctuate as a result of the
average cash the Company maintains and changes in the market rates of interest,
and
16
management expects that the average cash balance may continue to decrease as the
Company continues to incur operating losses.
INCOME TAXES. The Company has available estimated net operating loss
carry forwards 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 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.
YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000
REVENUES. Revenues increased from $1,370,000 for the year ended
December 31, 2000 to $5,567,000 for the year ended December 31, 2001. This
increase is the result of the contribution to revenues of acquired companies'
revenues streams. As a result of the Company's divestitures and continued
unfavorable market conditions for its professional services, revenues from
historical service offerings decreased on a sequential basis during 2001.
COST OF REVENUES. Cost of revenues increased from $1,119,000 for the
year ended December 31, 2000 to $7,276,000 for the year ended December 31, 2001.
Cost of revenues consists primarily of compensation of billable employees,
travel, subcontractor costs and other costs directly incurred in the delivery of
services to clients. Billable employees are full time employees and
subcontractors whose time are spent servicing client projects. Also included in
Cost of Revenues is the amortization of certain purchased intangible assets,
representing the value of customer relationship and workforces acquired.
In connection with certain acquisitions, including the acquisition of
Canned, the Company recorded intangible assets representing the value ascribed
to the customer lists and assembled workforces of the acquired companies. The
aggregate amortization of these intangible assets totaled $50,000 and
$2,588,000, respectively, and is included in Cost of Revenues.
As a result of the Company's divestitures, terminations and unfavorable
market conditions, cost of revenues decreased on a sequential basis during 2001.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses consist primarily of compensation and related benefits,
professional services fees, facilities costs and advertising and promotional
costs. Selling, general and administrative expenses increased from $3,305,000
for the year ended December 31, 2000 to $13,738,000 for the year ended December
31, 2001. These increases were primarily the result of increased compensation,
increased professional services fees, increased facility costs and increases in
other costs associated with the growth of the Company's business and operations
over the prior year.
IMPAIRMENT LOSSES. As a result of the aforementioned terminations,
coupled with historical, current and projected operating and cash flow losses,
the Company evaluated the recoverability of its acquired intangible assets and
goodwill by comparison of the carrying value relative to future cash flows. As a
result, the Company recorded impairment charges totaling
17
$7,263,000 which are included in the Impairment Losses section of the
accompanying Statement of Operations.
SEVERANCE COSTS. Severance costs were $0 and $1,326,000 in the years
ended December 31, 2000 and 2001, respectively.
EQUITY IN LOSSES OF UNCONSOLIDATED AFFILIATES. Equity in losses of
unconsolidated affiliates was $1,732,000 and $5,546,000 for the years ended
December 31, 2000 and 2001, respectively. Equity in losses of unconsolidated
affiliates resulting from the Company's minority ownership in Broadstream, Inc.,
NetPro Holdings, Inc. and InSys LLC have been accounted for under the equity
method of accounting. Under the equity method of accounting, the Company's
proportionate share, calculated on an as-if-converted basis, of the investee's
operating losses and amortization of the Company's net excess investment over
its equity in the investee's net assets is included in equity in losses of
unconsolidated affiliates.
INTEREST AND DIVIDEND INCOME. Interest and dividend income was
$1,469,000 and $845,000 for the years ended December 31, 2000 and 2001,
respectively. The decrease in interest income over the prior year was
attributable to a decrease in the Company's invested cash balance, as it has
funded its ongoing operations.
INCOME TAXES. The Company had available estimated net operating loss
carryforwards for income tax purposes of approximately $20,000,000 as of
December 31, 2001, which expire on various dates from 2001 through 2021. A
valuation allowance had been established due to uncertainty as to whether the
Company will generate sufficient taxable earnings to utilize the available net
operating loss carryforwards.
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 $3,465,000 in cash and cash equivalents available as of
December 31, 2002 invested predominantly in instruments that are highly liquid,
investment grade securities that have maturities of less than 45 days. The
Company used $3,082,000 to fund operating activities, and an additional
$2,278,000 to fund investing activities during the year ended December 31, 2002.
18
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 and capital expenditures and reduce cash outflows. As of
December 31, 2002, the Company has a single operating subsidiary, a limited
number of employees and has significantly reduced fixed expenses.
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 Company received full
prepayment of interest and principal on the $4,708,000 note from Excelsior.
Given the Company's current level of operations and subsequent
collection of the Excelsior note, 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 and 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.
The Company's future contractual obligations at December 31, 2002 were
as follows:
AMOUNTS DUE IN FISCAL YEAR ENDING DECEMBER 31,
-------------------------------------------------------------
2007 AND
2003 2004 2005 2006 THEREAFTER
------- ------- ------- ------- ----------
(in thousands)
Operating leases...................... $ 850 $ 184 $ 46 $ -- $ --
Capital leases........................ 114 31 4 -- --
Involuntary termination............... 181 -- -- -- --
------- ------- ------- ------- -------
$ 1,145 $ 215 $ 50 $ -- $ --
======= ======= ======= ======= =======
Total minimum operating lease payments have not been reduced for future
minimum sublease rentals totaling approximately $342,000.
The Company intends to fund these obligations from its cash on hand at
December 31, 2002 and the repayment by Excelsior Radio Networks of the note
issued by it to the Company.
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.
19
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's primary objective in investing in securities and other
instruments is to preserve principal while at the same time maximizing yields
without significantly increasing risk. To achieve this objective, the Company
maintains a portfolio of cash and cash equivalents and money market funds. As of
December 31, 2002, the Company held cash and cash equivalents with an average
maturity of 45 days or less.
20
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements begin on Page F-1 of this report.
QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following tables set forth unaudited quarterly statement of
operations data of the Company for each of the Company's eight most recent
quarters. In management's opinion, this unaudited information has been prepared
on the same basis as the audited annual financial statements and includes all
adjustments (consisting only of normal recurring adjustments) necessary for fair
presentation of the unaudited information for the quarters presented. You should
read this information in conjunction with the consolidated financial statements,
including the notes to those statements, included elsewhere in this report. The
results of operations for a quarter are not necessarily indicative of results
that the Company may achieve for any subsequent periods and, as a result of the
Company's adoption of a plan of liquidation and dissolution, historical
information may not be indicative of future results.
THREE MONTHS ENDED
------------------------------------------------------------------------
DEC. 31, 2002 SEPT. 30, 2002 JUNE 30, 2002 MARCH 31, 2002
------------- -------------- ------------- --------------
Revenues ........................................... 876,000 511,000 594,000 739,000
Cost of revenues ................................... 524,000 301,000 326,000 281,000
----------- ----------- ----------- -----------
Gross profit ....................................... 352,000 210,000 268,000 458,000
Selling, general and administrative ................ 906,000 1,068,000 1,486,000 1,070,000
Equity based compensation expense .................. (17,000) 131,000 132,000 131,000
Impairment losses .................................. -- -- 69,000 --
Severance charges .................................. -- -- -- --
Loss on disposal of subsidiaries ................... -- -- -- --
----------- ----------- ----------- -----------
Income (loss) from operations ...................... (537,000) (989,000) (1,419,000) (743,000)
Other income (loss), net ........................... 99,000 198,000 67,000 (177,000)
----------- ----------- ----------- -----------
Income (loss) before income taxes .................. (438,000) (791,000) (1,352,000) (920,000)
Provision for income taxes ......................... -- -- -- --
----------- ----------- ----------- -----------
Net income (loss) .................................. (438,000) (791,000) (1,352,000) (920,000)
THREE MONTHS ENDED
------------------------------------------------------------------------
DEC. 31, 2001 SEPT. 30, 2001 JUNE 30, 2001 MARCH 31, 2001
------------- -------------- ------------- --------------
Revenues ........................................... 423,000 1,740,000 1,530,000 1,874,000
Cost of revenues ................................... 385,000 2,527,000 2,312,000 2,052,000
----------- ----------- ----------- -----------
Gross profit ....................................... 38,000 (787,000) (782,000) (178,000)
Selling, general and administrative ................ 2,950,000 2,967,000 5,037,000 2,784,000
Equity based compensation expense .................. 133,000 159,000 165,000 2,629,000
Impairment losses .................................. -- 7,263,000 -- --
Severance charges .................................. -- 1,326,000 -- --
Loss on disposal of subsidiaries ................... 377,000 -- --
----------- ----------- -----------
Income (loss) from operations ...................... (3,422,000) (12,502,000) (5,984,000) (5,591,000)
Other income (loss), net ........................... (532,000) (1,698,000) (2,021,000) (450,000)
----------- ----------- ----------- -----------
Income (loss) before income taxes .................. (3,954,000) (14,200,000) (8,005,000) (6,041,000)
Provision for income taxes ......................... -- -- -- --
----------- ----------- ----------- -----------
Net income (loss) .................................. (3,954,000) (14,200,000) (8,005,000) (6,041,000)
21
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
CHANGE IN ACCOUNTANTS
None.
DISAGREEMENTS WITH ACCOUNTANTS
None.
22
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
EXECUTIVE OFFICERS
The executive officer of the Company is as follows:
NAME AGE PRESENT POSITION WITH THE COMPANY
----------------------------------- ------- ------------------------------------------------------
William Avery...................... 53 President, Chief Executive Officer, Chief Financial
Officer, Secretary and Director
DIRECTORS
The directors of the Company are as follows:
WILLIAM AVERY. Mr. Avery has served as the Company's President and Chief
Executive Officer since July 2, 2001. From March 28, 2000 to March 16, 2001, Mr.
Avery served as a Managing Director of the Company. He has served as a director
since September 12, 2000. Mr. Avery also serves as the Chairman of the
Nominating Committee. Mr. Avery was a Managing Partner of FG II Ventures, LLC,
from October 1, 1999 to July 1, 2001. Prior to working with FG II, Mr. Avery was
Corporate Senior Vice President and President of the International Division of
CUC International Inc., which merged with Cendant Corporation. With CUC, Mr.
Avery developed its overseas memberships and Internet businesses. Mr. Avery is
53 years of age.
JAMES M. DUBIN. Mr. Dubin has served as a director of the Company since March
28, 2000. Mr. Dubin serves as a member of the Compensation Committee. Mr. Dubin
is also a Senior Partner and Co-chair of the Corporate Department of Paul,
Weiss, Rifkind, Wharton & Garrison LLP, an international law firm headquartered
in New York City, where he has worked since 1974. Mr. Dubin serves on the board
of directors of Carnival Corporation, the world's largest cruise line operator,
and Conair Corporation, an international designer, manufacturer and marketer of
branded consumer products. Mr. Dubin is 56 years of age.
MICHAEL GLEASON. Mr. Gleason has been Chairman of the Board since March 28,
2000. Mr. Gleason serves as a member of the Audit and Compensation Committees.
He is also the President of Celsus Financial Corp., the General Partner of
Celsus Capital L.P., which has private equity investments in real estate and
various other entities. Mr. Gleason has been associated with Celsus and its
predecessors in interest since prior to 1997. Mr. Gleason also serves on the
board of directors of Metro-Goldwyn-Mayer Inc., a producer and distributor of
television programs and theatrical motion pictures, and Fresh, Inc., a Boston,
Massachusetts based beauty products company. Mr. Gleason is 48 years of age.
WILLIAM E. LIPNER. Mr. Lipner has been a director of the Company since March 28,
2000. Mr. Lipner serves as the Chairman of the Compensation Committee and is a
member of the Nominating Committee. He is also Chairman and Chief Executive
Officer of NFO World Group, Inc., the world's third largest marketing
information/market research company. Mr. Lipner also serves on the board of
directors of Crane Co., a diversified aerospace engineering and manufacturing
company. Mr. Lipner is 55 years of age.
23
COMPENSATION OF DIRECTORS
Non-employee directors are entitled to receive an annual remuneration
of $2,500 for serving as directors of the Company, and are reimbursed for
out-of-pocket expenses incurred in connection with such service. However, no
director received such annual remuneration during the year ended December 31,
2002. Additionally, non-employee directors have been granted options to purchase
Common Stock under the Company's 2000 Stock Option Plan. See "Executive
Compensation - Certain Relationships and Related Party Transactions - Stock
Options."
AUDIT COMMITTEE FINANCIAL EXPERT
The Board has determined that Michael Gleason, the sole member of the
Company's audit committee, satisfies the "audit committee financial expert"
criteria established by the Securities and Exchange Commission. Mr. Gleason is
"independent" as such term is used in Item 7(d)(3)(iv) of Schedule 14A under the
Securities Exchange Act of 1934, as amended.
CODE OF ETHICS
On February 28, 2003, the Board adopted a code of ethics applicable to
the Company's principal executive officer, principal financial officer or
persons performing similar functions.
A copy of the Company's code of ethics may be obtained, without charge,
upon written request to the Company at its principal executive offices located
at 537 Steamboat Road, Greenwich, CT 06830.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires the Company's directors,
executive officers and persons who own more than ten percent of the Common
Stock, to file reports of ownership and changes in ownership on Forms 3, 4 and 5
with the SEC. Directors, executive officers and greater than ten percent
stockholders are required by SEC regulations to furnish the Company with copies
of all Forms 3, 4 and 5 they file. The Company believes that all its directors,
executive officers and greater than ten percent beneficial owners complied with
all filing requirements applicable to them in 2002.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY OF CASH AND OTHER COMPENSATION
The following Summary Compensation Table sets forth the compensation
awarded to, earned by or paid to the President and Chief Executive Officer of
the Company during the fiscal years ended December 31, 2002, 2001 and 2000 for
services rendered in all capacities to the Company and its subsidiaries.
24
AWARDS OF ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY ($) OPTIONS/SARS COMPENSATION
--------------------------------------------- ------ -------------- -------------- ---------------
William Avery
CEO, CFO, President and Secretary............ 2002 280,000 -- --
2001 128,723 (1) 9,000,000 --
2000 92,307 (2) -- --
----------
(1) Salary listed has been prorated to reflect the amount of time Mr. Avery was
employed by the Company in 2001: January 1, 2001 to March 16, 2001 as a
Managing Director and July 2, 2001 to December 31, 2001 as the President
and CEO.
(2) Salary listed has been prorated to reflect the amount of time Mr. Avery was
employed by the Company in 2000: March 28, 2000 to December 31, 2000.
OPTION/SAR GRANTS IN FISCAL YEAR 2002
No awards were made in fiscal year 2002 to executives pursuant to the
2000 Stock Option Plan or outside the 2000 Stock Option Plan.......
AGGREGATED OPTION EXERCISES IN FISCAL 2002 AND FISCAL YEAR END OPTION VALUES
The following table sets forth the number of shares covered by
exercisable and unexercisable stock options as of December 31, 2002, and the
value of the "in-the-money" options. The value of "in-the-money" options
represents the positive spread between the exercise price of any such option and
the fair market value of the Common Stock (the mean between the high and low
prices of the stock) on December 31, 2002. None of the named executive officers
exercised any stock options during 2002.
NUMBER OF SECURITIES UNDERLYING VALUE OF IN-THE-MONEY OPTIONS
NAME UNEXERCISED OPTIONS AT FISCAL YEAR END AT FISCAL YEAR END
------------------------- -------------------------------------- ------------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- ------------- ----------- -------------
William Avery 2,250,000 6,750,000 $0 $0
EMPLOYMENT AGREEMENTS
MR. AVERY. On September 19, 2001, the Company entered into an
employment agreement with Mr. Avery. Mr. Avery's agreement will expire on
December 31, 2004. The employment agreement is automatically renewed from year
to year after the expiration date unless either the Company or Mr. Avery
provides written notice of an intention not to renew it at least 120 days prior
to December 31 of any year.
The employment agreement provides that the duties of Mr. Avery shall be
prescribed by the Board and that Mr. Avery shall devote substantially all of his
business time to performing his duties under the employment agreement.
Compensation, bonuses, perquisites and other benefits are to be
provided to Mr. Avery subject to the approval of the compensation committee and
commensurate with compensation and benefits provided to other senior executives
of the Company. The initial base salary payable
25
to Mr. Avery is $280,000. Mr. Avery will be entitled to participate in any
benefit plan available to senior executives of the Company.
The employment agreement provides for the termination of Mr. Avery upon
the first to occur of (i) the expiration of the term of the employment
agreement; (ii) the death of Mr. Avery; (iii) the delivery of a notice from Mr.
Avery of a voluntary termination of the employment agreement; (iv) the delivery
of a notice to Mr. Avery of a termination of the employment agreement for cause
or disability of Mr. Avery; or (v) the delivery of a notice from Mr. Avery of a
resignation due to a change of control of the Company.
If Mr. Avery is terminated by the Company as a result of his
disability, the Company will pay Mr. Avery an amount equal to one-half of his
base salary. If the employment agreement is terminated because of Mr. Avery's
death, the Company will pay any base salary that is accrued but unpaid. If the
employment agreement is terminated for any reason described above other than for
death or disability, Mr. Avery will be paid any accrued but unpaid salary plus
any unpaid bonus amount from prior years.
If the employment agreement is terminated for any reason other than
those described in the above paragraph, the Company will pay to Mr. Avery a
severance amount equal to the sum of (i) accrued but unpaid salary; (ii) the
full base salary for the remainder of the term of the employment agreement;
(iii) any bonus for a prior year which has not been paid to Mr. Avery; and (iv)
any expenses of Mr. Avery incurred in connection with the collection of the
severance amount.
On September 19, 2001 the Company also entered into a severance
compensation agreement with Mr. Avery.
The severance compensation agreement provides that if Mr. Avery's
employment is terminated without "cause" within one year of a change of control,
he is entitled to (i) a lump sum equal to 1.5 times his average base salary for
the previous five years; (ii) a lump sum equal to any amounts forfeited under
any employee pension benefit plan; and (iii) continued coverage (until the later
of (x) the day Mr. Avery accepts new full-time employment or (y) three years
from the date of termination) under all employee welfare benefit plans.
A change of control is defined as the occurrence of any of the
following events:
o any person other than the Company or one of its subsidiaries
becomes the beneficial owner of 30% or more of the Company's
then outstanding equity securities, unless such acquisition
has been approved by not less than two-thirds of the Board
prior to such acquisition;
o individuals who constitute the Board on a given day cease (for
any reason other than death or resignation) to constitute a
majority of the Board on the following day, unless any
subsequent director was approved or nominated by not less than
three-quarters of the incumbent Board or two-thirds of the
nominating committee of the incumbent Board;
26
o the stockholders of the Company approve any reorganization,
merger or consolidation of the Company or any other
transaction in which the Company's existing securities are
exchanged for securities of another issuer or the Company
issues new equity securities in excess of 30% of the existing
securities, unless such transaction was recommended to the
stockholders of the Company by not less than two-thirds of the
board in existence prior to the transaction;
o the approval by stockholders of the Company of a sale of all
or substantially all of the assets of the Company, unless such
sale was recommended to the stockholders by not less than
two-thirds of the Board;
o the dissolution or liquidation of the Company;
o the failure of nominees of the Board for election to the board
to be so elected other than by death or withdrawal of the
nominee; or
o a change in control required to be reported pursuant to Item
1(a) of Form 8-K under the Securities Exchange Act of 1934
unless such change in control was approved by not less than
two-thirds of the incumbent Board.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of March 14, 2003
regarding (i) each person known by the Company to be the beneficial owner of
more than 5% of the outstanding shares of Common Stock or Series A Preferred
Stock, (ii) each director of the Company, (iii) the current Chief Executive
Officer of the Company and (iv) all executive officers and directors as a group.
Except as otherwise indicated, each person has sole voting and dispositive power
with respect to such shares. The address for all beneficial owners, unless
stated otherwise below, is c/o Change Technology Partners, Inc., 537 Steamboat
Road, Greenwich, CT 06830.
Each share of the Series A Preferred Stock is convertible into one
share of Common Stock.
Beneficial ownership includes shares for which a person, directly or
indirectly, has or shares voting or investment power, or both, and also includes
options and warrants which are exercisable within sixty days of March 14, 2003.
27
SERIES A
COMMON STOCK PREFERRED STOCK
-------------------------------- ----------------------------
NAME OF BENEFICIAL OWNER SHARES PERCENT OF CLASS SHARES PERCENT OF CLASS
-------------------------------------------- ---------- ---------------- -------- ----------------
Culmen Technology Partners, L.P............. 32,000,000 17.6% -- --
201 Main Street, Suite 1955
Fort Worth, TX 76102
William Avery .............................. 7,807,813(1) 4.3 -- --
James M. Dubin.............................. 1,729,667(2) 1.0 -- --
Michael Gleason............................. 33,466,667(3) 18.4 -- --
William E. Lipner........................... 2,191,667(4) 1.2 -- --
Christopher H.B. Mills...................... 12,939,700(5) 7.1 -- --
c/o J.O. Hambro Capital
Management Limited
Ryder Court, 14 Ryder St.
London SW1Y 6QB, England
Gordon Bryant............................... -- -- 645 100
9408 Avenido Del Oso NE
Albuquerque, NM 87111
All officers and directors
as a group (4 persons)*.................. 45,195,814(6) 24.8 -- --
----------
* Duplications eliminated.
(1) Represents 2,000,000 shares of Common Stock, warrants to purchase an
aggregate of 3,557,813 shares of Common Stock and options to purchase an
aggregate of 2,250,000 shares of Common Stock.
(2) Represents 338,000 shares of Common Stock and options to purchase an
aggregate of 1,391,667 shares of Common Stock.
(3) Represents 32,000,000 shares of Common Stock owned by Culmen Technology
Partners, L.P. Mr. Gleason is the President and sole director of CTP, Inc.,
the general partner of Culmen. As a result, he may be deemed to have
beneficial ownership over these shares. However, Mr. Gleason disclaims
beneficial ownership of 30,200,000 shares of Common Stock. Also includes
options to purchase an aggregate of 1,466,667 shares of Common Stock.
(4) Represents 800,000 shares of Common Stock and options to purchase an
aggregate of 1,391,667 shares of Common Stock.
(5) According to a Schedule 13G filed with the Securities and Exchange
Commission on July 19, 2001, Mr. Mills (i) shares voting and dispositive
power over such shares with J.O. Hambro Capital Management (Holdings)
Limited and J.O. Hambro Capital Management Limited, (ii) shares voting and
dispositive power over 1,280,000 such shares with American Opportunity
Trust plc, (iii) shares voting and dispositive power over 4,400,000 such
shares with Growth Financial Services and North Atlantic Smaller Companies
Investment Trust plc, (iv) shares voting and dispositive power over 640,000
such shares with Oryx International Growth Fund Limited and Consulta
(Channel Islands) Limited and (v) shares voting and dispositive power over
1,498,000 such shares with The Trident North Atlantic Fund.
(6) Represents 35,138,000 shares of Common Stock, warrants to purchase an
aggregate of 3,557,813 shares of Common Stock and options to purchase
6,500,001 shares of Common Stock. Includes 32,000,000 shares of Common
Stock owned by Culmen, which Mr. Gleason may be deemed to beneficially own.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
PROFESSIONAL SERVICES
During the year ended December 31, 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 was provided by Paul, Weiss,
Rifkind, Wharton & Garrison LLP, of
28
which James M. Dubin, a member of the Board and the compensation committee, is a
partner. Fees incurred by this firm totaled approximately $387,000 and $881,000
for the years ended December 31, 2002 and 2001, respectively.
STOCK OPTIONS
The 2000 Stock Option Plan provides for the award of stock options to
the employees, directors and consultants of the Company. Grants under this plan
have been intended to provide participants with the promise of longer-term
rewards that appreciate in value with favorable future performance of the
Company. No options were issued during the year ended December 31, 2002. The
2000 Stock Option Plan authorizes the issuance of a maximum of 20,000,000
options, with a maximum of 3,000,000 options to be received each year by any one
participant.
On June 26, 2000, James M. Dubin, Michael Gleason and William Lipner
were each granted non-qualified stock options to purchase 400,000 shares of
Common Stock at an exercise price of $.50 per share. One-fourth of these stock
options vested on June 26, 2000, one-fourth of them vested on June 26, 2001 and
the remainder vest monthly from July 1, 2001 until June 1, 2003.
On May 22, 2001, Messrs. Dubin and Gleason were each granted
non-qualified stock options to purchase 100,000 shares of Common Stock at an
exercise price of $.50 per share in consideration of their service on the audit
committee. One-fourth of these options vested on May 22, 2001, one-fourth of
them vested on May 22, 2002, and the remainder will vest monthly from June 1,
2002 until May 1, 2004. Mr. Dubin's options expired, unexercised, when he
resigned from the audit committee in June 2001.
On September 19, 2001, William Avery was granted options to purchase
9,000,000 shares of Common Stock at an exercise price of $.03 per share. Options
to purchase 3,000,000 shares of Common Stock were issued under the Company's
2000 Stock Option Plan. Options to purchase 6,000,000 shares of Common Stock
were issued outside of the plan and such grant was approved by the Company's
stockholders at its 2002 annual meeting. Each option vests one-fourth on each of
the first, second, third and fourth anniversaries of the date of the grant.
On September 21, 2001, each of Messrs. Dubin, Gleason and Lipner were
granted non-qualified stock options to purchase 1,000,000 shares of Common Stock
at an exercise price of $.03 per share. All of these options vested on September
21, 2001.
On November 7, 2001, Michael Levitt was granted non-qualified stock
options to purchase 2,000,000 shares of Common Stock at an exercise price of
$.06 per share. All of these options vested on November 7, 2001. However, in
connection with Mr. Levitt's resignation from the Board on December 31, 2002, he
surrendered options to purchase 1,300,000 shares of Common Stock. Mr. Levitt
retained options to purchase the remaining 700,000 shares of Common Stock.
29
PART IV
ITEM 14. 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 annual report on Form
10-K for the fiscal year ended December 31, 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 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.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) Financial Statements and Schedules
The financial statements and financial statement schedule included in
this report begin on page F-1.
(a)(2) The following exhibits are filed as part of this report unless
specifically stated to be incorporated herein by reference to other documents
previously filed with the SEC:
2.1 Agreement and Plan of Merger of Arinco Computer Systems Inc. with and
into Change Technology Partners, Inc. (d/b/a Pangea Internet, Inc.),
dated April 21, 2000 (filed as an exhibit to the Registrant's Report on
Form 8-K dated September 12, 2000 and incorporated herein by
reference).
2.2 Agreement and Plan of Merger of CTPI Acquisition Corp. with and into
eHotHouse, Inc., dated February 5, 2001 (filed as an exhibit to the
Registrant's Annual Report on Form 10-K dated March 27, 2001 and
incorporated herein by reference).
2.3 Agreement and Plan of Merger among Change Technology Partners, Inc. and
Franklin Capital Corporation, dated December 4, 2001 (filed as an
exhibit to the Registrant's Report on Form 8-K dated December 5, 2001
and incorporated herein by reference).
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).
30
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).
31
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).
32
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).
21.1 Subsidiaries.
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 Securities
& Exchange Commission during the fourth quarter of 2002:
(i) On October 2, 2002 reporting matters under Item 5,
Other Events, and Item 7, Financial Statements and
Exhibits.
33
CHANGE TECHNOLOGY PARTNERS, INC.
AND SUBSIDIARIES
INDEX
Page
Report of KPMG LLP, Independent Accountants................................ F-1
Consolidated Balance Sheets as of December 31, 2002 and 2001............... F-2
Consolidated Statements of Operations for the years
ended December 31, 2002, 2001 and 2000................................ F-3
Consolidated Statements of Stockholders' Equity and
Redeemable Preferred Stock for the years ended
December 31, 2002, 2001 and 2000...................................... F-4
Consolidated Statements of Cash Flows for the years ended
December 31, 2002, 2001 and 2000...................................... F-5
Notes to Consolidated Financial Statements................................. F-6
REPORT OF KPMG LLP, INDEPENDENT ACCOUNTANTS
The Board of Directors and Stockholders of Change Technology Partners, Inc.
We have audited the accompanying consolidated balance sheets of Change
Technology Partners, Inc. and subsidiaries (the "Company") as of December 31,
2002 and 2001 and the related consolidated statements of operations,
stockholders' equity and redeemable preferred stock, and cash flows for each of
the years in the three-year period ended December 31, 2002. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Change Technology Partners,
Inc. and subsidiaries as of December 31, 2002 and 2001 and the results of its
operations and cash flows for each of the years in the three-year period ended
December 31, 2002 in conformity with accounting principles generally accepted in
the United States of America.
As discussed in Note 2 to the consolidated financial statements, in 2002 the
Company changed its method of accounting for goodwill and other intangible
assets.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company adopted a plan of liquidation and
dissolution that raises substantial doubt about its ability to continue as a
going concern. The Company's plans with regard to these matters are also
described in Note 1. The consolidated financial statements do not include any
adjustments that might arise from the outcome of this uncertainty.
KPMG LLP
New York, New York
March 27, 2003
CHANGE TECHNOLOGY PARTNERS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31,
-----------------------
ASSETS 2002 2001
-------- --------
Cash and cash equivalents .......................................................... $ 3,465 $ 8,892
Accounts receivable ................................................................ 218 147
Related party receivable ........................................................... 194 204
Notes receivable ................................................................... 4,926 2,393
Prepaid expenses and other current assets, including
restricted cash of $200 at December 31, 2001 .................................... 716 442
-------- --------
Total current assets ...................................... $ 9,944 $ 12,078
Notes receivable, excluding current portion ........................................ 424 333
Investments in and loans to unconsolidated subsidiaries ............................ 449 720
Property and equipment, net ........................................................ 436 786
Purchased intangible assets and Goodwill, net ...................................... 1,782 1,568
Other assets ....................................................................... 123 667
-------- --------
Total assets .................................................................... $ 12,733 $ 16,152
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable ................................................................... $ 128 $ 280
Accrued expenses ................................................................... 785 983
Deferred revenues .................................................................. 37 4
Capital lease obligation ........................................................... 114 92
-------- --------
Total current liabilities ................................. 1,064 1,359
Capital lease obligation, less current portion ..................................... 35 124
Deferred rent ...................................................................... 15 9
-------- --------
Total liabilities ............................................................... 1,114 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 issued and
outstanding at December 31, 2002 and 2001, with an aggregate
liquidation preference of $1 per share ....................................... -- --
Series B - Convertible into common on a 1:40 basis; $.10 par value; 400,000
shares authorized; 0 shares issued and outstanding at December 31, 2002
and 2001 ..................................................................... -- --
Common stock:
$.01 par value; 500,000,000 shares authorized, 182,003,920 and 179,022,881
issued and outstanding at December 31, 2002 and 2001, respectively ........... 1,820 1,790
Additional paid-in capital ......................................................... 94,369 94,637
Deferred compensation .............................................................. (268) (966)
Accumulated deficit ................................................................ (84,302) (80,801)
-------- --------
Total stockholders' equity ...................................................... 11,619 14,660
-------- --------
Total liabilities and stockholders' equity ...................................... $ 12,733 $ 16,152
======== ========
See accompanying notes to consolidated financial statements.
F-2
CHANGE TECHNOLOGY PARTNERS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
2002 2001 2000
------------- ------------- -------------
Revenues ............................................................. $ 2,720 $ 5,567 $ 1,370
Cost of revenues including the amortization of purchased
intangibles of $1,044 and $50 in 2001 and 2000,
respectively ...................................................... 1,432 7,276 1,119
------------- ------------- -------------
Gross profit (loss) .................................................. 1,288 (1,709) 251
Operating expenses:
Selling, general and administrative expenses, exclusive
of equity based compensation of $377, $3,086 and
$2,921 in 2002, 2001 and 2000, respectively .................... 4,530 13,738 3,305
Equity based compensation ......................................... 377 3,086 2,921
Severance ......................................................... -- 1,326 --
Loss on disposal of subsidiaries .................................. -- 377 --
Impairment ........................................................ 69 7,263 --
------------- ------------- -------------
Total operating expenses ....................................... 4,976 25,790 6,226
Loss from operations ................................................. (3,688) (27,499) (5,975)
Other income (expense):
Interest and dividend income, net .................................... 736 845 1,469
Equity in losses and impairment of investments in
unconsolidated subsidiaries ....................................... (549) (5,546) (1,732)
------------- ------------- -------------
Net loss ....................................................... (3,501) (32,200) (6,238)
Deemed dividend attributable to issuance of Series B
convertible preferred stock ....................................... -- -- 40,000
Net loss attributable to common stockholders ................... $ (3,501) $ (32,200) $ (46,238)
Basic and diluted net loss per common share .......................... $ (.02) $ (.23) $ (1.31)
------------- ------------- -------------
Weighted average common shares outstanding, basic and
diluted ........................................................... 180,251,646 138,478,550 35,424,000
============= ============= =============
See accompanying notes to consolidated financial statements.
F-3
CHANGE TECHNOLOGY PARTNERS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND REDEEMABLE PREFERRED STOCK
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
SERIES B |
REDEEMABLE PREFERRED | SERIES A, SERIES B
STOCK | PREFERRED STOCK PREFERRED STOCK COMMON STOCK
----------------------- | ------------------ ---------------------- ------------------
SHARES AMOUNT | SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
----------- -------- | -------- -------- ---------- -------- ---------- ------
Balance as of December 31, 1999... -- -- | 3,221 -- -- -- 4,958,234 49
Sale of warrants to purchase |
common stock................... -- -- | -- -- -- -- -- --
Issuance of Series B redeemable |
preferred stock, net of |
offering costs................. 4,000,000 40,000 | -- -- -- -- -- --
Beneficial conversion feature |
related to Series B redeemable |
convertible preferred stock.... -- (40,000)| -- -- -- -- -- --
Amortization of beneficial |
conversion feature............. -- 40,000 | -- -- -- -- -- --
Conversion of Series B preferred |
stock into common stock........ (1,000,000) (10,000)| -- -- -- -- 40,000,000 400
Nullification of redemption |
feature of Series B preferred |
stock.......................... (3,000,000) (30,000)| -- -- 3,000,000 300 -- --
Deferred compensation............. -- -- | -- -- -- -- -- --
Amortization of deferred |
compensation................... -- -- | -- -- -- -- -- --
Removal of restrictions on |
subsidiary stock to employee |
and independent contractors.... -- -- | -- -- -- -- -- --
Issuance of subsidiary stock for |
acquisition.................... -- -- | -- -- -- -- -- --
Net loss for the year ended |
December 31, 2000.............. -- -- | -- -- -- -- -- --
----------- --------- | ------ -------- ---------- -------- ----------- ------
Balance as of December 31, 2000... -- $ -- | 3,221 $ -- $3,000,000 $ 300 $44,958,234 $ 449
=========== ========= | ====== ======== ========== ======== =========== ======
Amortization of deferred |
compensation................... -- -- | -- -- -- -- -- --
Forfeiture of unvested options.... -- -- | -- -- -- -- -- (320)
Options Granted to Executive |
(Note 8)....................... -- -- | -- -- -- -- -- --
Reacquisition of stock in |
connection with sale of RAND... -- -- | -- -- -- -- (375,039) (4)
Acquisition of Iguana Studios, |
Inc............................ -- -- | -- -- -- -- 2,700,000 27
Settlement of stock award to CEO |
and acquisition of outstanding |
minority interest of |
eHotHouse, Inc................. -- -- | -- -- -- -- 5,300,013 54
Acquisition of Canned |
Interactive, Inc............... -- -- | -- -- -- -- 6,436,552 64
Conversion of series A preferred |
shares to common............... -- -- | -- -- -- -- -- --
Conversion of preferred shares to |
common......................... -- -- | (2,576) -- (3,000,000) (300) 120,002,576 1,200
Net loss for the year ended |
December 31, 2001.............. -- -- | -- -- -- -- -- --
----------- --------- | ------ -------- ---------- --------- ----------- ------
Balance at December 31, 2001 -- $ -- | 645 $ -- -- $ -- 179,022,336 $1,790
=========== ========= | ====== ======== ========== ========= =========== ======
Amortization of deferred |
compensation................... -- -- | -- -- -- -- -- --
Forfeiture of unvested |
options........................ -- -- | -- -- -- -- -- --
Release of shares from escrow in |
connection with the |
acquisition of Iguana Studios, |
Inc............................ -- -- | -- -- -- -- 2,300,000 23
Reacquisition of stock from |
shareholder.......... -- -- | -- -- -- -- (33,588) --
Release of shares from escrow in |
connection with the |
acquisition of Canned |
Interactive, Inc............... | 715,172 7
Net loss for the year ended |
December 31, 2002.............. -- -- | -- -- -- -- --
----------- --------- | ------ -------- ---------- --------- ----------- ------
Balance at December 31, 2002 -- $ -- | 645 $ -- -- $ -- 182,003,920 $1,820
=========== ========= | ====== ======== ========== ========= =========== ======
ADDITIONAL TOTAL
PAID-IN DEFERRED ACCUMULATED STOCKHOLDERS'
CAPITAL COMPENSATION DEFICIT EQUITY
---------- ------------ ----------- -------------
Balance as of December 31, 1999... 2,559 -- (2,363) 245
Sale of warrants to purchase
common stock................... 100 -- -- 100
Issuance of Series B redeemable
preferred stock, net of
offering costs................. (550) -- -- (550)
Beneficial conversion feature
related to Series B redeemable
convertible preferred stock.... 40,000 -- -- 40,000
Amortization of beneficial
conversion feature............. -- -- (40,000) (40,000)
Conversion of Series B preferred
stock into common stock........ 9,600 -- -- 10,000
Nullification of redemption
feature of Series B preferred
stock.......................... 29,700 -- -- 30,000
Deferred compensation............. 2,480 (2,480) -- --
Amortization of deferred
compensation................... -- 693 -- 693
Removal of restrictions on
subsidiary stock to employee
and independent contractors.... 2,228 -- -- 2,228
Issuance of subsidiary stock for
acquisition.................... 704 -- -- 704
Net loss for the year ended
December 31, 2000.............. -- -- (6,238) (6,238)
--------- --------- --------- ---------
Balance as of December 31, 2000... $ 86,821 $ (1,787) $ (48,601) $ 37,182
========= ========= ========= =========
Amortization of deferred
compensation................... -- 621 -- 621
Forfeiture of unvested options.... 320 -- --
Options Granted to Executive
(Note 8)....................... 120 (120) -- --
Reacquisition of stock in
connection with sale of RAND... (22) -- -- (26)
Acquisition of Iguana Studios,
Inc............................ 2,958 -- -- 2,985
Settlement of stock award to CEO
and acquisition of outstanding
minority interest of
eHotHouse, Inc................. 5,091 -- -- 5,145
Acquisition of Canned
Interactive, Inc............... 889 -- -- 953
Conversion of series A preferred
shares to common............... -- -- -- --
Conversion of preferred shares to
common......................... (900) -- -- --
Net loss for the year ended
December 31, 2001.............. -- -- (32,200) (32,200)
--------- --------- --------- ---------
Balance at December 31, 2001 $ 94,637 $ (966) $ (80,801) $ 14,660
========= ========= ========= =========
Amortization of deferred
compensation................... -- 377 -- 377
Forfeiture of unvested
options..................... (321) 321 -- --
Release of shares from escrow in
connection with the
acquisition of Iguana Studios,
Inc............................ 46 -- -- 69
Reacquisition of stock from
shareholder.......... -- -- -- --
Release of shares from escrow in
connection with the
acquisition of Canned
Interactive, Inc............... 7 14
Net loss for the year ended
December 31, 2002.............. -- -- (3,501) (3,501)
--------- --------- --------- ---------
Balance at December 31, 2002 $ 94,369 $ (268) $ (84,302) $ 11,619
========= ========= ========= =========
F-4
CHANGE TECHNOLOGY PARTNERS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31,
---------------------------------------
2002 2001 2000
-------- -------- --------
Cash flows from operating activities:
Net income (loss) ................................................. $ (3,501) $(32,200) $ (6,238)
Adjustments to reconcile net income (loss) to
net cash in operating activities:
Depreciation and amortization .............................. 423 3,197 56
Impairment losses .......................................... 69 7,263 --
Decrease (increase) in trading activities .................. -- -- 112
Equity based compensation .................................. 377 3,086 2,921
Equity in losses and impairment of
investments in unconsolidated affiliates ................ 549 5,546 1,732
Accretion of loan discount ................................. (72) (36) --
Accrued interest on loans receivable ....................... (625) (52) --
Provision for doubtful accounts ............................ -- 111 --
Loss on disposal of property and equipment ................. -- 537 --
Loss on disposal of subsidiaries, net of cash disposed ..... -- 141 --
Changes in operating assets and liabilities net of acquisitions:
Accounts receivable ........................................ (61) 307 142
Prepaid expenses and other assets .......................... 70 (109) (456)
Deferred revenues .......................................... 33 215 8
Accounts payable and accrued liabilities ................... (344) (421) 904
-------- -------- --------
Net cash used in operating activities ............. (3,082) (12,415) (819)
Cash flows from investing activities:
Investment in affiliates ................................... (278) (450) (6,625)
Purchase of property and equipment ......................... (73) (771) (336)
Cash proceeds from sale of property and equipment .......... -- 35 --
Cash paid for acquisitions ................................. -- (4,076) (1,542)
Advances on notes receivable ............................... (4,708) (3,450) --
Receipts on notes receivable ............................... 2,781 -- --
-------- -------- --------
Net cash used in investing activities ............. (2,278) (8,712) (8,503)
Cash flows from financing activities:
Principal payments under capital leases .................... (67) (50) --
Payment of notes payable ................................... -- (264) (28)
Issuance of Series B preferred stock and warrants, net
of offering costs ....................................... -- -- 39,550
-------- -------- --------
Net cash (used in) provided by financing activities ................. (67) (314) 39,522
Net (decrease) increase in cash and cash equivalents ................ (5,427) (21,441) 30,200
Cash and cash equivalents at beginning of period .................... 8,892 30,333 133
-------- -------- --------
Cash and cash equivalents at end of period .......................... $ 3,465 $ 8,892 $ 30,333
======== ======== ========
F-5
CHANGE TECHNOLOGY PARTNERS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002
(In thousands, except share and per share data)
(1) DESCRIPTION OF BUSINESS
Arinco Computer Systems Inc., the predecessor of the Company together with its
subsidiaries, (the "Company"), was incorporated on March 31, 1978; however, the
Company formally commenced implementation of its plan to provide professional
consulting services on June 15, 2000. The Company provided a broad range of
professional consulting services, including e-services and technology strategy,
online branding, web architecture and design, systems integration, systems
architecture and outsourcing. The Company has served clients throughout the
United States and, as of December 31, 2002, 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 December 31, 2002, the Company's remaining consolidated subsidiaries are:
o Iguana Studios, Inc. (which has limited continuing operating
activities)
o Papke-Textor, Inc. d/b/a Canned Interactive ("Canned")
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 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 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.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management
to make estimates and assumptions
F-6
CHANGE TECHNOLOGY PARTNERS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002
(In thousands, except share and per share data)
that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates. Significant estimates embedded in the consolidated financial
statements for the periods presented concern the allowances for
doubtful accounts, the estimates used in the percentage of completion
method, the fair value of purchased intangible assets, and the
estimated useful lives of purchased intangible assets.
(B) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and its majority-owned and controlled subsidiaries from the
date of acquisition through the date of disposition, if applicable. All
significant intercompany transactions and balances have been eliminated
in consolidation. Investments in less than majority-owned entities over
which the Company has significant influence are accounted for using the
equity method.
Since the Company was the only contributor of capital to a
majority-owned subsidiary, eHotHouse, Inc. ("eHotHouse"), and the
minority interest holders had no obligation to provide additional
capital, 100% of those losses were included in the Company's results
for the period prior to the Company's acquisition of the outstanding
minority interest in February, 2001. In May, 2001, eHotHouse merged
with and into the Company.
(C) REVENUE RECOGNITION
Revenues are recognized for fixed-price arrangements in the period
services are rendered using the percentage-of-completion method, based
on the percentage of costs incurred to date to total estimated projects
costs, provided the Company has the ability to produce reasonably
dependable estimates, collection of the resulting receivable is
probable and no significant obligations remain. The cumulative impact
of any revision in estimates of the cost to complete and losses on
projects in process are reflected in the period in which they become
known.
Revenues are recognized for time-and-materials based arrangements in
the period when the underlying services are rendered, provided
collection of the resulting receivable is probable and no significant
obligations remain.
The Company generally enters into short-term, project specific
contracts with its clients who are generally billed in the same period
in which services are rendered. If services are rendered in advance of
billings, the Company records and presents the related amounts as
unbilled revenue. If amounts are received in advance of
F-7
CHANGE TECHNOLOGY PARTNERS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002
(In thousands, except share and per share data)
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.
(D) 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 who spent time servicing client
projects. Also included in cost of revenues in the statement of
operations for the twelve months ended December 31, 2001 and 2000 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 and, accordingly, amortization of
the remaining acquired workforce ceased.
(E) CONCENTRATION OF CREDIT RISK
Financial instruments that subject the Company to credit risks consist
primarily of cash and cash equivalents, notes receivable, and trade
accounts receivable. Cash and cash equivalents consist of deposits,
money market funds, and investments in short term "AAA" rated debt
instruments. The Company performs ongoing credit evaluations, generally
does not require collateral, and establishes an allowance for doubtful
accounts based upon factors surrounding the credit risk of customers,
historical trends, and other information. To date, such losses have
been within management's expectations. Notes receivable are generally
collateralized and bear a market rate of interest commensurate with the
associated risks.
F-8
CHANGE TECHNOLOGY PARTNERS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002
(In thousands, except share and per share data)
Revenues from significant customers are as follows:
Twelve months ended December 31,
2002 2001 2000
---- ---- ----
Customer A......................................... 0% 0% 37%
Customer B......................................... 0% 0% 29%
Customer C......................................... 0% 0% 26%
Customer D......................................... 0% 0% 0%
Customer E......................................... 12% 15% 0%
Customer F......................................... 37% 47% 0%
Customer G......................................... 0% 0% 0%
Customer H......................................... 5% 0% 0%
Customer I......................................... 9% 0% 0%
Accounts receivable from significant customers are as follows:
December 31,
2002 2001 2000
---- ---- ----
Customer A......................................... 0% 0% 13%
Customer B......................................... 0% 0% 19%
Customer C......................................... 0% 0% 15%
Customer D......................................... 0% 0% 10%
Customer E......................................... 29% 1% 0%
Customer F......................................... 12% 0% 0%
Customer G......................................... 27% 0% 0%
Customer H......................................... 13% 0% 0%
Customer I......................................... 11% 0% 0%
(F) CASH AND CASH EQUIVALENTS
Cash equivalents consist of highly liquid investments with original
maturities of less than three months.
(G) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, net of accumulated
depreciation and amortization. Leasehold improvements are amortized
utilizing the straight-line method over the lesser of the estimated
useful life of the asset or the respective lease term. The Company
provides for depreciation of other machinery and equipment over their
estimated useful lives, using the straight-line method, as follows:
F-9
CHANGE TECHNOLOGY PARTNERS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002
(In thousands, except share and per share data)
ASSET CLASSIFICATION ESTIMATED USEFUL LIFE
------------------------ ---------------------------
Computers and equipment 3 - 5 years
Furniture and fixtures 5 years
Leasehold improvements 5 - 10 years (lease term)
(H) PURCHASED INTANGIBLE ASSETS
At December 31, 2001, purchased intangible assets, comprised primarily
of the customer lists and the workforce acquired in connection with the
acquisition of Canned, were being amortized over a period of 3 years,
the estimated period of benefit considering the underlying contractual
relationships, the project oriented continuing revenue stream, and
analysis of the Company's retention efforts.
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 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 impairment as of January 1, 2002.
F-10
CHANGE TECHNOLOGY PARTNERS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002
(In thousands, except share and per share data)
The following table reflects the reconciliation of reported net loss
and loss per share to amounts adjusted for the exclusion of goodwill
amortization:
TWELVE MONTHS ENDED DECEMBER 31,
-------------------------------------------
2002 2001 2000
-------- -------- --------
NET LOSS
Reported loss......................... $ (3,501) $ (32,200) $ (6,238)
Add back: Goodwill amortization....... -- 677 --
-------- --------- --------
Adjusted net loss..................... (3,501) $ (31,523) $ (6,238)
======== ========= ========
PER SHARE OF COMMON STOCK
Basic and Diluted:
Reported loss........................ $ (.02) $ (0.23) $ (1.31)
Add back: Goodwill amortization...... -- -- --
-------- --------- --------
Adjusted net loss.................... $ (.02) $ (0.23) $ (1.31)
======== ========= ========
(I) EQUITY-BASED COMPENSATION
The Company accounts for its employee stock option plans in accordance
with the provisions of the Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees," and related
interpretations including Financial Accounting Standards Board
Interpretation No. 44. As such, compensation expense related to
employee stock options is recorded 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.
F-11
CHANGE TECHNOLOGY PARTNERS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002
(In thousands, except share and per share data)
Had compensation cost for these awards been determined based on the
fair value at the grant dates consistent with the method prescribed by
SFAS No. 123, the Company's net loss would have been adjusted to the
pro forma amounts indicated below:
YEAR ENDED DECEMBER 31,
----------------------------------------
2002 2001 2000
-------- -------- --------
Net loss, as reported ....................................... $ (3,501) $(32,200) $(46,238)
Add back: compensation expense related
to stock options, as reported ............................ 377 621 693
Deduct: compensation expense related to
stock options under fair value based method .............. (514 (1,334) (1,191)
-------- -------- --------
Pro forma net loss .......................................... $ (3,638) $(32,913) $(46,736)
======== ======== ========
Basic and diluted net loss per share as reported ............ $ (.02) $ (0.23) $ (1.31)
======== ======== ========
Pro forma basic income loss per share ....................... $ (.02) $ (0.23) $ (1.32)
======== ======== ========
Each year the Company has estimated the fair value of stock option
grants made in that year by using the Black-Scholes option-pricing
model. Following are the weighted-average assumptions used:
2001 2002
---- ----
Expected option term (years)................. 10 10
Risk-free interest rate (%).................. 6.00% 5.78%
Expected volatility (%)...................... 81% 59%
Dividend yield (%)........................... 0% 0%
There were no options granted during the year ended December 31, 2002.
(J) BASIC AND DILUTED NET LOSS PER COMMON SHARE
Basic net loss per common share excludes the effect of potentially
dilutive securities and is computed by dividing net income or loss
available to common stockholders by the weighted average number of
common shares outstanding for the period. Diluted net income or loss
per share is adjusted for the effect of convertible securities,
warrants and other potentially dilutive financial instruments only in
the periods in which such effect would have been dilutive.
F-12
CHANGE TECHNOLOGY PARTNERS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002
(In thousands, except share and per share data)
The following securities were not included in the computation of
diluted net loss per share because to do so would have had an
antidilutive effect for the periods presented:
AT DECEMBER 31,
-----------------------------------------------
2002 2001 2000
---------- ---------- ----------
Stock Options.............................. 14,585,747 16,133,768 4,600,000
Warrants................................... 25,856,252 41,250,000 41,250,000
Series A Convertible Preferred Stock....... 645 645 3,221
Series B Convertible Preferred Stock....... -- -- 3,000,000
As a result, the basic and diluted net loss per share is equal for all
periods presented.
(K) INCOME TAXES
The Company uses the asset and liability method of accounting for
income taxes. Under this method, deferred tax assets and liabilities
are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of
existing assets and liabilities and their tax bases and to operating
loss and tax credit carry forwards. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected
to be recovered or settled. The effect on deferred tax assets or
liabilities of a change in tax rates is recognized in the period that
the rate change occurs. A valuation allowance is provided for the
amount of deferred tax assets for which, based on available evidence,
realization is not assured.
(L) COMPREHENSIVE INCOME
The Company accounts for comprehensive income (loss) under SFAS No. 130
"Reporting Comprehensive Income." This statement established standards
for reporting and displaying comprehensive income and its components in
a financial statement that is displayed with the same prominence as
other financial statements. For all periods presented, comprehensive
income (loss) equals net income (loss) as reported.
(M) SEGMENT REPORTING
Although the Company has divested itself of certain of its operations,
and is evaluating other business opportunities, it has historically
offered, largely through its acquired businesses, a wide variety of
professional consulting services such as e-services, technology
services and systems integration. Management does not manage its
operations by these product offerings, but instead views the Company as
one operating segment when making business decisions, with one
operating
F-13
CHANGE TECHNOLOGY PARTNERS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002
(In thousands, except share and per share data)
decision maker, the Chief Executive Officer. The Company manages its
operations as a cross-disciplinary integrated solutions provider, which
attempts to bring forth a coordinated service offering to its clients.
(N) NEW ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"),
establishes a single accounting model for the impairment or disposal of
long-lived assets, including discontinued operations. Effective January
1, 2002, the Company adopted SFAS 144. Adoption of SFAS 144 has not
resulted in an impairment charge.
Statement of Financial Accounting Standards No. 146, "Accounting for
Costs Associated with Exit or Disposal Activities" ("SFAS 146"),
requires that costs associated with exit or disposal activities be
measured initially at fair value, and recognized only when the
liability is incurred. SFAS 146 is effective for exit or disposal
activities that are initiated after December 31, 2002. The Company
plans to adopt SFAS 146 effective January 1, 2003. The impact of SFAS
146 on the Company's financial statements will depend on a variety of
factors, including interpretive guidance from the FASB. However, the
Company does not expect that the adoption will have a material impact
on its consolidated results of operations or financial position.
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 disclosure to be provided
on a quarterly basis. The Company plans to adopt the quarterly
disclosure requirement during the first quarter of 2003.
(3) SEVERANCE AND IMPAIRMENT CHARGES
In 2001, in response to continued unfavorable market conditions for its
services, the Company embarked on a review of all operations with the goal of
formulating a course of action to minimize near-term losses and capital
expenditures and reduce cash outflows. As an initial course of action, primarily
during July and August 2001, the Company
F-14
CHANGE TECHNOLOGY PARTNERS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002
(In thousands, except share and per share data)
terminated the employment of approximately 90% of its then existing
workforce. As a result, the Company incurred severance charges of
$1,326, which are included in severance charges in the accompanying
Statement of Operations for the year ended December 31, 2001. Of this
amount, $1,145 of the severance obligations have been paid as of
December 31, 2002.
(4) INVESTMENTS IN AND LOANS TO UNCONSOLIDATED SUBSIDIARIES
The following summarizes the Company's ownership interests in, and loans to,
unconsolidated subsidiaries accounted for under the equity method, and
investments accounted for under the cost method of accounting:
CARRYING VALUE
--------------
December 31,
2002 2001 COST BASIS
------ ------- ----------
Equity method investments:
Broadstream.com Inc. ("Broadstream").. $ -- $ -- $ 7,100
NetPro Holdings, Inc. ("NetPro")...... -- 33 400
InSys LLC ("InSys")................... 121 312 323
Cost method investments:
Livesky, Inc. ("Livesky")............. -- 125 125
Alacra, Inc. ("Alacra")............... 78 -- 78
Excelsior Radio Networks, Inc.
("Excelsior").......................... 250 250 250
------ ------- --------
Total investments: ...................... $ 449 $ 720 $ 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. The Company's proportionate
share of Broadstream's net loss was $3,177 and $1,097 in 2001 and 2000,
respectively, and the amortization of the excess of cost over the Company's
proportionate interest in the underlying equity was $1,175 and $635 for 2001
F-15
CHANGE TECHNOLOGY PARTNERS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002
(In thousands, except share and per share data)
and 2000, respectively. These amounts are included in equity in losses of
affiliate in the accompanying Statement of Operations.
In May 2001, Broadstream completed a recapitalization whereby all of the holders
of Series A shares exchanged their Series A shares for shares of Series A-1
Convertible Redeemable Preferred Stock ("Series A-1"). The recapitalization
modified the conversion ratio, policies regarding dividends and voting rights
for Series A-1 holders. No additional consideration was paid by the Company or
any other Series A-1 shareholder in connection with this transaction. As a
result of the recapitalization the voting interest of common shareholders was
reduced from 31% to 13%.
Also in May 2001, in connection with the recapitalization, the Company
transferred 1,191,569 Series A-1 shares to Adelson Investors, LLC ("Adelson"),
another shareholder of Broadstream, as payment for certain financing-related
services performed by Adelson on behalf of Broadstream. This transfer has been
accounted for as a contribution by the Company of such shares to Broadstream in
exchange for no consideration. As a result of this non-reciprocal transfer of
shares the Company recorded a charge of $1,016 equal to the Company's cost basis
in such shares, which approximated fair value, and has been included in equity
in losses of affiliate in the accompanying Statement of Operations for the year
ended December 31, 2001. Subsequent to the recapitalization and non-reciprocal
share transfer, the Company owned 6,434,596 shares of Series A-1 Convertible
Redeemable Preferred Stock of Broadstream, representing an approximately 43%
equity interest (calculated on an as-if-converted basis) and a 49% voting
interest.
On August 15, 2001 the Company purchased a secured convertible promissory note
from Broadstream in exchange for $600 in connection with an aggregate $1,600
bridge loan financing consummated by Broadstream. The aggregate bridge loan
financing was secured by all of Broadstream's assets. The note also contained
certain conversion provisions in the event Broadstream 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.
F-16
CHANGE TECHNOLOGY PARTNERS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002
(In thousands, except share and per share data)
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 totaling $167 from the date of investment through December
31, 2001, is included in equity in losses of unconsolidated subsidiaries in the
accompanying Statement of Operations.
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. In connection with 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
twelve months ended December 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
On December 4, 2001 the Company initiated a business combination whereby the
Company planned to acquire all issued and outstanding common stock of Franklin
Capital Corporation ("Franklin") in a stock-for-stock exchange. On July 1, 2002
the Company received a notice of termination from Franklin terminating the
proposed merger.
On August 28, 2001 the Company purchased a promissory note and warrant from
Excelsior Radio Networks, Inc. (d/b/a eCom Capital, Inc.) ("Excelsior") for
$2,250. Excelsior, a subsidiary of Franklin, concurrently purchased certain
assets from affiliates of Winstar Communications, Inc., which produce, syndicate
and distribute radio programs and services. Excelsior had substantially no
operations prior to this transaction.
The warrant to purchase 482,955 shares of Excelsior common stock at an exercise
price of $1.125 per share had an allocated fair value of approximately $112 and
represented 11% of Excelsior's fully diluted capital stock as of the date of
issuance. The warrant is included in other assets in the accompanying Balance
Sheet.
The allocated fair value at issuance of the note receivable, totaling $2,138, is
included in Notes Receivable in the accompanying Balance Sheet at December 31,
2001. Also included in notes receivable is the periodic accretion of the note
discount, totaling $76, and $36 for the years ended December 31, 2002 and 2001,
respectively, which is
F-17
CHANGE TECHNOLOGY PARTNERS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002
(In thousands, except share and per share data)
included in 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.
On January 15, 2003, the Company sold the 250,000 shares of Excelsior common
stock, and the Excelsior warrant to Sunshine III, LLC, a shareholder of
Excelsior, for total consideration of approximately $648 in cash.
On January 21, 2003 the Company received full prepayment of interest and
principal on the $4,708 note.
INVESTMENT IN LIVESKY, INC.
On December 21, 2000, the Company purchased 625,001 shares of Series A
Convertible preferred stock, representing an approximate 2% equity interest of
LiveSky Solutions, Inc. ("LiveSky") in exchange for $125. LiveSky is a developer
of wireless technology, including mobile business strategy and assessment as
well as mobile application design and development. This investment is being
accounted for under the cost method of accounting.
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. In
connection with 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 year ended December 31, 2002, is included in equity in
losses and impairment of investments in unconsolidated affiliates in the
accompanying Statement of Operations.
F-18
CHANGE TECHNOLOGY PARTNERS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002
(In thousands, except share and per share data)
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.
(5) 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 year ended
December 31, 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 $2,682 in related compensation expense,
representing the excess of the fair value of the cash and Company shares issued
as settlement over the fair value of the eHotHouse shares on the original date
of grant. Of this amount, $2,500, representing the stock portion of the
settlement, was included in equity-based compensation in the statement of
operations for the year ended December 31, 2001.
Subsequent to the acquisition of the remaining outstanding minority interest,
eHotHouse was merged with and into the Company.
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
F-19
CHANGE TECHNOLOGY PARTNERS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002
(In thousands, except share and per share data)
his employment agreement. The related obligation totaled $181 at December 31,
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, INC.
On October 18, 2000, eHotHouse acquired substantially all of the operating
assets and assumed certain liabilities of InSys Technology, Inc. ("InSys"), a
provider of systems integration services. The acquisition was accounted for
using the purchase method of accounting and accordingly, the purchase price was
allocated to the tangible and identified intangible assets acquired on the basis
of their respective fair values on the date of acquisition. The results of
operations of InSys and the estimated fair value of the assets acquired and
liabilities assumed are included in the Company's consolidated financial
statements from the date of acquisition. The fair value of the intangible assets
was determined based upon a combination of methods, including the income
approach for the customer list, and the replacement cost approach for the value
of the assembled workforce.
The total purchase price of $867 consisted of cash, including acquisition
related expenses consisting primarily of payments for legal and financial
advisory services. Of the total purchase price, approximately $700 was allocated
to net tangible assets and the remainder was allocated to identify intangible
assets, including the customer list and assembled workforce. The fair value of
acquired intangible assets was capitalized and is being amortized over their
estimated useful lives of three years. Related amortization for the years ended
December 31, 2001 and 2000 totaled $39 and $11, respectively.
The InSys acquisition is summarized as follows:
Fair value of tangible assets acquired................... $ 1,006
Fair value of identified intangible assets acquired...... 155
Liabilities assumed...................................... (294)
---------
$ 867
=========
Cash paid, including acquisition costs of $200........... $ 867
Less cash acquired....................................... --
---------
Total transaction consideration ......................... $ 867
=========
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
F-20
CHANGE TECHNOLOGY PARTNERS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002
(In thousands, except share and per share data)
losses, the Company evaluated the recoverability of its acquired intangible
assets by comparison of the carrying value relative to future cash flows. As a
result, the Company recorded impairment charges totaling $105, which 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. After considering the net book value of
InSys, the level of retained ownership interest, and the value of the
consideration exchanged, the Company incurred a loss on the disposition of the
majority voting control totaling $183 which is included in loss on disposal of
subsidiaries in the accompanying Statement of Operations.
Concurrently, the Company loaned InSys $100 evidenced by a promissory note. The
note bears interest at a rate equal to the London Interbank Offer Rate plus 2%,
until the principal amount of the note is paid in full. InSys is obligated to
pay, at a minimum, on an annual basis 50% of the excess of its annual earnings
before taxes. Such amount totaled $0 for the year ended December 31, 2002.
The Company's retained equity interest and note receivable, net of the Company's
pro rata share of InSys' equity losses absorbed during the period from November
8, 2001 to December 31, 2002, totals $121 and is included in investments in and
loans to unconsolidated subsidiaries on the accompanying Balance Sheet. The
Company's pro rata share of InSys' net loss for the year ended December 31, 2002
and for the period from November 8, 2001 to December 31, 2001 totaled $191 and
$11, respectively. This amount is included in equity in losses and impairment of
investments in unconsolidated affiliates in the accompanying Statement of
Operations.
F-21
CHANGE TECHNOLOGY PARTNERS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002
(In thousands, except share and per share data)
Condensed financial information for InSys is summarized as follows (unaudited).
INSYS
-----------------
DECEMBER 31, 2002
-----------------
Current assets................................. $ 311
Non-current assets............................. 153
Current liabilities............................ (121)
Non-current liabilities........................ (100)
-------
Total stockholders' capital (deficit).......... $ 244
Other stockholders' share of capital........... 124
-------
Company's share of capital..................... $ 120
-------
Carrying value of investment................... $ 121
-------
INSYS
YEAR ENDED
-----------------
DECEMBER 31, 2002
-----------------
Operating revenues............................. $ 2,174
Cost of revenues............................... (1,733)
Operating expenses............................. (827)
Other income(expense), net..................... (3)
--------
Net loss.................................. (389)
Other stockholders' share of net loss.......... (198)
--------
Equity in losses of affiliate.................. (191)
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 identify
intangible assets, including customer lists and the assembled workforce. The
fair value of the identified intangible assets was determined using the income
approach for the customer list, and the replacement cost approach for the value
of the assembled workforce. The purchased intangible assets are being
F-22
CHANGE TECHNOLOGY PARTNERS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002
(In thousands, except share and per share data)
amortized over their estimated useful lives of three years. Related amortization
for the years ended December 31, 2001 and 2000 totaled $357 and $39,
respectively.
The RAND acquisition is summarized as follows:
Fair value of tangible assets acquired...................... 169
Fair value of identified intangible assets acquired......... 1,426
Liabilities assumed......................................... (216)
--------
$ 1,379
========
Cash paid, including acquisition costs of $325.............. $ 675
Less cash acquired.......................................... --
--------
Net cash paid.......................................... 675
eHotHouse common stock issued............................. 704
========
Total transaction consideration ....................... $ 1,379
========
As a result of the aforementioned terminations during 2001, coupled with the
historical and projected operating and cash flow losses, the Company evaluated
the recoverability of its acquired intangible assets by comparison of the
carrying value relative to future cash flows. As a result, the Company recorded
impairment charges totaling $1,030, which are included in impairment charges in
the accompanying Statement of Operations for the year ended 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 warrant has a stated
exercise price of $1.00 in the aggregate, expires on November 3, 2013, and is
contingently exercisable upon the occurrence of certain prospective events, as
defined. After considering the net book value of RAND, the consideration
received and the fair value of the warrants received, the Company incurred a
loss on the disposition of RAND totaling $194 which is included in loss on
disposal of subsidiaries on the consolidated Statement of Operations for the
year ended December 31, 2001.
ACQUISITION OF IGUANA STUDIOS, INC.
In March 2001, the Company acquired Iguana Studios, Inc. ("Iguana"), a New York
City-based interactive agency, for approximately $5,771, including $2,786 in
cash, 2,700,000 shares of the Company's common stock valued at approximately
$1,990, and 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
F-23
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 identify intangible assets,
including customer base and assembled workforce, and the remainder was allocated
to goodwill. The fair value of the identified intangible assets was determined
using the income approach for the customer base, and the replacement cost
approach for the assembled workforce. The purchased intangible assets and
goodwill were being amortized over their estimated useful lives of three years.
Related amortization for the year ended December 31, 2001 totaled $935.
The Iguana acquisition is summarized as follows:
Fair value of tangible assets acquired....................... $ 1,815
Fair value of identified intangible assets acquired.......... 4,813
Liabilities assumed.......................................... (857)
--------
$ 5,771
========
Cash paid, including acquisition costs of $238............... $ 2,817
Less cash acquired........................................... 31
--------
Net cash paid........................................... 2,786
Common stock of the Company issued......................... 1,990
Replacement Options .................................... 995
--------
$ 5,771
========
As a result of the aforementioned terminations, coupled with the historical cash
flow losses, the Company evaluated the recoverability of its acquired intangible
assets and goodwill by comparison of the carrying value relative to future cash
flows. As a result, the Company recorded impairment charges totaling $3,878,
which 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, at which time 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. This amount is included in
Impairment Losses in the accompanying Statement of Operations for the year ended
December 31, 2002.
F-24
CHANGE TECHNOLOGY PARTNERS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002
(In thousands, except share and per share data)
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 $1,137 in cash, including acquisition costs, and 6,436,552 shares
of the Company's common stock valued at approximately $953.
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 December 31, 2002 is included
in goodwill in the accompanying balance sheet.
The Canned acquisition is summarized as follows:
Fair value of tangible assets acquired....................... $ 329
Fair value of identified intangible assets acquired.......... 2,177
Liabilities assumed.......................................... (433)
--------
$ 2,073
========
Cash paid, including acquisition costs of $250............... $ 1,137
Less cash acquired........................................... 17
--------
Net cash paid........................................... 1,120
Common stock of the Company issued...................... 953
--------
$ 2,073
========
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 "Escrow
Shares"). 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.
F-25
CHANGE TECHNOLOGY PARTNERS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002
(In thousands, except share and per share data)
(6) NOTE RECEIVABLE
In April 2001, the Company loaned two consultants an aggregate of $500. The full
recourse promissory notes, with initial principal amounts of $350 and $150,
respectively, accrue interest at the rate of 7.25% per annum. Payments are due
in various installments of principal plus accrued interest commencing on April
25, 2002 and continuing annually thereafter through April 25, 2006. In April
2002, the Company received the first such installment, totaling $61.
(7) COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company leases its facilities and equipment under operating and capital
lease agreements. The following are the future minimum lease payments under
non-cancelable operating leases as of December 31, 2002:
YEAR ENDED DECEMBER 31, OPERATING CAPITAL
------------------------------ --------- -------
2003......................... $ 850 $ 114
2004......................... 184 31
2005......................... 46 4
2006......................... -- --
2007......................... -- --
-------- -------
$ 1,080 $ 149
-------- -------
Total lease obligation.......
Amount representing
interest..................... (0)
-------
149
Current Portion.............. (114)
-------
Long Term Portion............ $ 35
=======
Total minimum lease payments have not been reduced for future minimum sublease
rentals totaling approximately $342.
As a result of the company's divestiture of certain operations, employee
terminations and terminated business combination, the Company has evaluated its
alternatives with respects to its contractual obligations concerning leased
facilities. As of June 30, 2002, the Company determined that certain facilities
have no substantive future use of benefit to the Company. The Company accrued
the remaining costs, net of sublease income, relating to these leases in the
second quarter. At December 31, 2002, $738 of this amount remained.
Rent expense was approximately $1,183 and $963 for the years ended December 31,
2002 and 2001, respectively.
F-26
CHANGE TECHNOLOGY PARTNERS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002
(In thousands, except share and per share data)
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.
(8) STOCKHOLDERS' EQUITY
On March 28, 2000, Arinco Computer Systems Inc. (the predecessor to the Company,
see September 12, 2000 transaction below) was acquired by an investor group led
by Pangea Internet Advisors, LLC. Prior to this transaction, neither Arinco
Computer Systems Inc., a public shell, or Pangea Internet Advisors, LLC were
active or had substantive business operations. Investors purchased 4,000,000
shares of Series B Convertible Preferred Stock ("Series B Stock") for net
proceeds to the Company of $39,450. Each share of Series B stock is convertible
into 40 common shares, and the Series B Stock, collectively, represents
approximately 97% of the voting interest of the Company. If by December 31, 2000
the Company's authorized common stock had not been increased to provide for the
conversion of all Series B Stock, holders of 50% of the Series B stock could
require the Company to redeem all such Series B Stock at $10 per share on
demand. Accordingly, Series B Stock was classified as temporary equity until
shareholder approval was obtained to sufficiently increase the number of
authorized common shares. However, as the Series B shareholders effectively
controlled the Company, shareholder approval was perfunctory and, accordingly,
the full deemed dividend was recognized immediately.
Also on March 28, 2000, certain other investors purchased warrants ("warrants")
to purchase 41,250,000 shares of common stock for $100. Of these warrants, 20%
have an exercise price of $.25 per share, 30% have an exercise price of $.50 per
share, 30% have an exercise price of $.75 per share and 20% have an exercise
price of $1.00 per share. The warrants are exercisable at the election of the
holder for a period of five years.
In April, 2002 the Company cancelled 15,468,748 of these outstanding warrants to
purchase common stock, with a weighted average exercise price of $0.85, in
exchange for no consideration.
The difference between the price of the Series B Stock on an as converted basis
of $0.25 and $4.88 (the fair value of common stock on the date of issuance of
the Series B Stock), or $4.63, multiplied by the number of shares of Series B
Stock on an as if converted basis, represents the intrinsic value of the
beneficial conversion feature, which totaled approximately $741,000. However, as
the intrinsic value of the beneficial conversion feature is greater than the
$40,000 in gross proceeds received from the Series B Stock issuance, the amount
of the discount attributed to the beneficial conversion feature is limited to
the $40,000 of gross proceeds received. The beneficial conversion feature was
F-27
CHANGE TECHNOLOGY PARTNERS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002
(In thousands, except share and per share data)
recorded in the quarter ended March 31, 2000 as a non-cash preferred stock
dividend because the Series B Stock is effectively convertible at the option of
the preferred stockholders. The $40,000 non-cash dividend increased the
Company's net loss attributable to common stockholders by the same amount.
On March 28, 2000, 1,000,000 shares of Series B Stock were converted into
40,000,000 shares of common stock.
On September 12, 2000, Arinco Computer Systems Inc. merged with and into the
Company (d/b/a Pangea Internet, Inc.), a wholly owned subsidiary. All
shareholders of Arinco Computer Systems Inc. became stockholders of the Company.
Pursuant to the terms of the merger agreement, each outstanding share of Arinco
Computer Systems Inc. common stock, Series A preferred stock and Series B
preferred stock and warrants was converted into one share of common stock,
Series A preferred stock, and Series B preferred stock and warrants,
respectively, of the Company. As a result of the merger, the total number of
shares of stock which the Company has authority to issue was increased to
505,000,000 shares, of which 500,000,000 are common stock, par value $0.01 per
share and 5,000,000 are preferred stock, par value $0.10 per share. This
transaction was accounted for as a transaction between companies under common
control and therefore there was no adjustment to the historical basis of the
assets and liabilities of Arinco Computer Systems Inc. Additionally, as a result
of this transaction and the resulting increase in the number of authorized
shares of common stock, the redemption feature on the Series B preferred shares
was nullified and, accordingly, the Series B Preferred Stock was reclassified to
stockholders equity.
In 2002, the Company purchased an aggregate of 33,588 shares of the Company's
common stock from certain stockholders in exchange for an amount which
approximated fair value.
The Company's Series A and Series B Preferred stock are convertible to common
stock on a 1 for 1 and 40 for 1 basis respectively, and have voting rights on an
as if converted basis. Series A Preferred stock accumulates $0.6 per share
cumulative dividends annually, payable each May 31st at the discretion of the
Board of Directors. Series A Preferred stockholders are not entitled to payment
of any accrued but unpaid dividends existing at the time of a voluntary
conversion of such stock to common stock.
(9) EQUITY BASED COMPENSATION
Under the terms of the Company's incentive stock option plans, employees,
directors, and consultants may be granted options to purchase the Company's
common stock at no less than 100% of the market price on the date the option is
granted (110% of fair market value for incentive stock options granted to
holders of more than 10% of the voting stock of the Company). Options generally
vest over three or four years and have a maximum term of 10 years.
F-28
CHANGE TECHNOLOGY PARTNERS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002
(In thousands, except share and per share data)
Information related to all CTPI stock options granted by the Company is as
follows:
WEIGHTED AVERAGE
NUMBER OF SHARES EXERCISE PRICE
---------------- --------------
December 31, 1999........................... -- --
Granted................................... 4,600,000 $ 1.21
------------ -------
December 31, 2000........................... 4,600,000 $ 1.21
------------ -------
Granted................................... 14,200,000 0.04
Exercised................................. -- --
Options issued in connection with
acquisition of Iguana.................. 1,658,638 1.05
Forfeited/Cancelled....................... (4,324,870) 1.45
------------ -------
December 31, 2001........................... 16,133,768 $ 0.10
------------ -------
Granted................................... -- --
Exercised................................. -- --
Forfeited/Cancelled....................... (1,548,021) .19
------------ -------
December 31, 2002........................... 14,585,747 $ .08
============ =======
The following table summarizes information about CTPI stock options outstanding
at December 31, 2002:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------------ -------------------------------
OUTSTANDING AT WEIGHTED AVERAGE
DECEMBER 31, CONTRACTUAL LIFE WEIGHTED AVERAGE NUMBER WEIGHTED AVERAGE
EXERCISE PRICES 2002 REMAINING EXERCISE PRICE EXERCISABLE EXERCISE PRICE
--------------- -------------- ------------------- ---------------- ----------- ----------------
0.03 12,000,000 8.71 0.03 5,250,000 0.03
0.06 700,000 8.83 0.06 700,000 0.06
0.29 540,747 1.43 0.29 540,747 0.29
0.32 15,000 8.00 0.32 15,000 0.32
0.41 15,000 7.83 0.41 15,000 0.41
0.50 1,300,000 7.75 0.50 1,148,732 0.50
0.67 15,000 1.85 0.67 15,000 0.67
------------ ------ ----------- ------
TOTAL 14,585,747 $ .08 7,684,479 $ .12
============ ====== =========== ======
During 2000, the Company granted stock options to purchase 4,600,000 shares of
common stock to the former Chief Executive Officer and members of the Board of
Directors at a weighted average exercise price of $1.21, all of which were
granted at less than the fair value of the common stock on the measurement date.
The Company recorded deferred compensation of approximately $2,480 in connection
with the grant of these options. This amount is presented as deferred
compensation within the accompanying balance sheet and is being amortized over
the related vesting period, of either three or four years. In 2001, in
connection with the termination of the former Chief Executive Officer, and in
2002, in connection with the voluntary departure of a member of the board of
directors, the Company reversed certain of this unamortized deferred
F-29
CHANGE TECHNOLOGY PARTNERS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002
(In thousands, except share and per share data)
compensation related to unvested options forfeited as a result of the
departures. The Company amortized $377, $615 and $693 of deferred compensation
during the years ended December 31, 2002, 2001 and 2000, respectively. The
Company will amortize the remaining deferred compensation of $268 over the
remaining vesting period of 21 months.
In September 2001, the Compensation Committee of the Board of Directors, granted
to the newly appointed Chief Executive Officer options to purchase 9,000,000
shares of the Company's common stock at an exercise price of $0.03 per share,
the then fair value of the underlying common stock. Of this grant, options to
purchase 6,000,000 shares of the Company's common stock were subject to
shareholder approval, which was obtained in August 2002 when the fair value of
the underlining stock was $0.02 per share.
During the year ended December 31, 2001, the Compensation Committee of the Board
of Directors granted to certain members of the Board of Directors options to
purchase an aggregate of 3,000,000 and 200,000 shares of the Company's common
stock at an exercise price of $0.03 and $0.50 per share, respectively, the then
fair value of the underlying common stock.
On November 7, 2001, the Compensation Committee of the Board of Directors
granted to a new member of the Board of Directors options to purchase an
aggregate of 2,000,000 shares of the Company's common stock at an exercise price
of $0.06 per share, the then fair value of the underlying common stock. However,
in connection with such new member of the Board of Directors' resignation on
December 31, 2002, he surrendered options to purchase 1,300,000 shares of the
Company's common stock. He retained options to purchase the remaining 700,000
shares of the Company's common stock.
(10) RELATED PARTY TRANSACTIONS
During the year ended December 31, 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 was provided by a firm of which a member
of the Board of Directors of the Company is a partner. Fees incurred by this
firm totaled approximately $387 and $881 for the years ended December 31, 2002
and 2001, respectively.
Additionally, during the year ended December 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 $135 and $510 in the years ended December 31, 2002
and 2001, respectively. Additionally, this firm occupies a portion of the
Company's office space in
F-30
CHANGE TECHNOLOGY PARTNERS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002
(In thousands, except share and per share data)
Connecticut, for which it pays rent at an amount, which approximates fair market
value. Such payments to the Company totaled $230 and $283 during the years ended
December 31, 2002 and 2001, respectively. Furthermore, the firm was indebted to
the Company in the amount of $194 at December 31, 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. As of
December 31, 2002, the Company is no longer utilizing this firm to perform any
services for the Company.
(11) PROPERTY & EQUIPMENT
Property and equipment consist of the following:
DECEMBER 31,
-------------------
2002 2001
------- -------
Computer and office equipment....................... $ 735 $ 660
Furniture and fixtures.............................. 362 364
Leasehold improvements.............................. 245 245
------- -------
Total property and equipment........................ 1,342 1,269
Less accumulated depreciation and amortization...... 906 483
------- -------
Property and equipment, net......................... $ 436 $ 786
======= =======
At December 31, 2002 and 2001, the Company had approximately $332 and $220,
respectively, of equipment under capital leases included in computer and office
equipment and related accumulated amortization of approximately $288 and $120,
respectively. Amortization of these assets recorded under capital leases is
included in depreciation expense.
Depreciation and amortization aggregated $423, $609 and $10 for the years ended
December 31, 2002, 2001 and 2000, respectively.
(12) ACCRUED EXPENSES
Accrued expenses consist of the following:
DECEMBER 31,
-------------------
2002 2001
------- -------
Accrued severance..................................... $ 181 $ 431
Accrued professional fees............................. 150 535
Accrued NY office leases.............................. 244 --
Accrued employee payroll & benefits................... 204 --
Accrued other......................................... 6 17
------- -------
Total................................................. $ 785 $ 983
======= =======
F-31
CHANGE TECHNOLOGY PARTNERS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002
(In thousands, except share and per share data)
(13) INCOME TAXES
The tax effects of temporary differences that give rise to a significant portion
of the net deferred income tax assets (liabilities) are as follows:
DECEMBER 31,
--------------------
2002 2001
-------- --------
Net deferred income tax assets (liabilities):
Equity losses....................................... $ 3,064 $ 2,844
Equity based compensation........................... 692 541
Net operating loss.................................. 8,783 8,024
Property and equipment.............................. (6) 40
Intangibles......................................... (627) (715)
Other............................................... 28 --
-------- --------
Total net deferred income tax assets................ 11,934 10,734
Valuation allowance................................. (11,934) (10,734)
-------- --------
Total net deferred income tax assets ............... $ -- --
======== ========
F-32
CHANGE TECHNOLOGY PARTNERS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002
(In thousands, except share and per share data)
The benefit for income taxes differed from the amounts computed by applying the
federal income tax rate of 35% to pretax losses as a result of the following:
RATE RECONCILIATION
-----------------------------------------------------------------------
2002 2001 2000
-------------------- --------------------- ------------------
$ % $ % $ %
------- ------- -------- ------- ------- -------
Expected tax benefit...................... (1,190) 33.99% (11,165) 35.00% (2,121) 34.00%
State and local tax benefit............... (119) 3.39% (1,037) 3.25% (364) 6.00%
Non-deductible expenses................... 20 0.57% 3,023 9.48% -- --
Valuation allowance....................... 1,200 34.28% 8,689 27.24% 1,881 29.90%
Other..................................... 89 2.53% 490 1.54% 604 10.10%
------- ------- -------- ------- ------- ------
Tax expense............................... $ -- 0.00% $ -- 0.00% -- 0.00%
======= ======= ======== ======= ======= ======
The Company has available estimated net operating loss carry forwards for income
tax purposes of approximately $22,000 which expire on various dates from 2002
through 2022. A 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 carry forwards. A portion of the Company's net
operating loss carry forwards may also be limited due to significant changes in
ownership under Section 382 of the Tax Reform Act of 1986.
(14) SUPPLEMENTARY CASH FLOW INFORMATION
During the years ended December 31, 2002, 2001 and 2000, the Company paid
interest of $15, $30 and $1, respectively.
(15) VALUATION AND QUALIFYING ACCOUNTS
ADDITIONS ADDITIONS
BALANCE AT CHARGED TO INCLUDED IN DELETIONS BALANCE AT
BEGINNING OF COSTS AND ACQUIRED NET INCLUDED IN END OF
PERIOD EXPENSED ASSETS DISPOSALS PERIOD
------------ ---------- ------------ ------------ ----------
DESCRIPTION
2002:
Allowances for doubtful
accounts............... $ -- $ -- $ -- $ -- $ --
2001:
Allowances for doubtful
accounts............... $ 62 $ -- $ 197 $ (259) $ --
2000:
Allowances for doubtful
accounts............... $ -- $ -- $ 62 $ -- $ 62
F-33
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: March 27, 2003
CHANGE TECHNOLOGY PARTNERS, INC.
By: /s/ william Avery
--------------------------------------
Name: William Avery
Title: President and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ William Avery Chief Executive Officer, President, March 27, 2003
------------------------------- Chief Financial Officer and Director
William Avery (Principal Executive Officer,
Principal Financial Officer and
Principal Accounting Officer)
/s/ Michael Gleason Chairman of the Board of Directors March 27, 2003
-------------------------------
Michael Gleason
/s/ James Dubin Director March 27, 2003
-------------------------------
James Dubin
/s/ William Lipner Director March 27, 2003
-------------------------------
William Lipner
F-34
CERTIFICATIONS
I, William Avery, certify that:
1. I have reviewed this annual report on Form 10-K of Change
Technology Partners, Inc.
2. Based on my knowledge, this annual 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
annual report.
3. Based on my knowledge, the financial statements, and other
financial information included in this annual 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 annual 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 annual report (the "Evaluation Date"); and
c) presented in this annual 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.
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: March 27, 2003
/s/ William Avery
-----------------------------
William Avery
Chief Executive Officer
I, William Avery, certify that:
1. I have reviewed this annual report on Form 10-K of Change
Technology Partners, Inc.
2. Based on my knowledge, this annual 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
annual report.
3. Based on my knowledge, the financial statements, and other
financial information included in this annual 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 annual 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 annual 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 annual report (the "Evaluation Date"); and
c) presented in this annual 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.
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: March 27, 2003
/s/ William Avery
-----------------------------
William Avery
Chief Financial Officer
EXHIBIT LIST
------------
(a)(1) Financial Statements and Schedules
The financial statements and financial statement schedule included in
this report begin on page F-1.
(a)(2) The following exhibits are filed as part of this report unless
specifically stated to be incorporated herein by reference to other documents
previously filed with the SEC:
2.1 Agreement and Plan of Merger of Arinco Computer Systems Inc. with and
into Change Technology Partners, Inc. (d/b/a Pangea Internet, Inc.),
dated April 21, 2000 (filed as an exhibit to the Registrant's Report on
Form 8-K dated September 12, 2000 and incorporated herein by
reference).
2.2 Agreement and Plan of Merger of CTPI Acquisition Corp. with and into
eHotHouse, Inc., dated February 5, 2001 (filed as an exhibit to the
Registrant's Annual Report on Form 10-K dated March 27, 2001 and
incorporated herein by reference).
2.3 Agreement and Plan of Merger among Change Technology Partners, Inc. and
Franklin Capital Corporation, dated December 4, 2001 (filed as an
exhibit to the Registrant's Report on Form 8-K dated December 5, 2001
and incorporated herein by reference).
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).
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).
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).
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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).
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).
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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).
21.1 Subsidiaries.
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 Securities
& Exchange Commission during the fourth quarter of 2002:
(i) On October 2, 2002 reporting matters under Item 5,
Other Events, and Item 7, Financial Statements and
Exhibits.