================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For quarterly period ended September 30, 2000 Commission File Number 0-23123
NETGAIN DEVELOPMENT, INC.
(Exact name of small business issuer as specified in its charter)
Colorado 84-0856436
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
152 West 57th Street, 40th Floor, New York, NY 10019
(Address of principal executive offices)
The registrant's current telephone number, including area code: (212) 765-2914
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] NO [ ]
Indicate the number of shares outstanding of each class of the Registrant's
Common Stock.
The Registrant has only one class of Common Stock outstanding. As of Oct 31,
2000, there were 23,199,609 shares of the Registrant's Common Stock outstanding.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
================================================================================
<PAGE>
NETGAIN DEVELOPMENT, INC.
INDEX
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets September 30, 2000 and
December 31, 1999 .......................................... 3
Consolidated Statements of Loss--Three and Nine
Months ended September 30, 2000 and 1999 ................... 4
Consolidated Statements of Cash Flows--Nine Months
ended September 30, 2000 and 1999 .......................... 5
Notes to Interim Consolidated Financial Statements ........... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations .......................... 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................. 14
Item 2. Changes in Securities......................................... 14
Item 3. Subsequent Events............................................. 15
Item 4. Defaults Upon Senior Securities............................... 15
Item 5. Submission of Matters to a Vote of Security Holders........... 15
Item 6. Other Information............................................. 15
Item 7. Exhibits and Reports on Forms 8-K............................. 15
SIGNATURES................................................................. 16
2
<PAGE>
NETGAIN DEVELOPMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash & cash equivalents $ 121,319 $ 3,642,245
Accounts receivable, net 77,329 --
Receivable from Partner Companies 2,000,000 --
Marketable Securities (Note 3) 1,459,833 --
Inventory 282,159 --
Prepaid expenses 1,550 18,000
Due from related parties -- 33,000
------------ ------------
Total Current Assets 3,942,190 3,693,245
PROPERTY AND EQUIPMENT, NET 409,876 --
INVESTMENTS AT COST 9,523,950 7,620,000
GOODWILL AND OTHER INTANGIBLE ASSETS, NET (Note 4) 2,599,141 --
OTHER ASSETS 103,002 103,002
------------ ------------
$ 16,578,158 $ 11,416,247
============ ============
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,338,949 $ 53,006
Accrued expenses 335,925 46,174
Due to related parties 200,635 16,101
------------ ------------
Total Current Liabilities 1,875,509 115,281
LONG TERM DEBT -- --
COMMITMENTS & CONTINGENCIES -- --
STOCKHOLDERS' EQUITY:
Preferred Stock-- $0.0001 par value; 10,000,000
shares authorized; designated Series A 1 1
Common Stock-- $0.0001 par value; 100,000,000
shares authorized; 23,157,301 shares issued
and outstanding 2,316 1,717
Capital in excess of par -- Preferred 2,702,247 3,277,247
Capital in excess of par -- Common 24,678,522 9,534,634
Accumulated deficit (11,895,438) (959,477)
Stock subscriptions receivable (7,156) (7,156)
Treasury stock, at cost (420 shares of Preferred) (546,000) (546,000)
Accumulated other comprehensive income (Note 3) (231,842) --
------------ ------------
Total Stockholders' Equity 14,702,650 11,300,966
------------ ------------
$ 16,578,158 $ 11,416,247
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
NETGAIN DEVELOPMENT, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF LOSS
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
2000 1999 2000 1999
------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
Revenue, net $ 110,153 $ -- $ 290,217 $ --
Cost of Sales 9,723 -- 140,537 --
------------ ---------- ------------ -----------
Gross Profit 100,430 149,680
Selling, General & Administrative Expenses 881,519 180,698 2,034,526 242,033
Amortization of Intangibles 246,872 -- 917,904 --
Public Relations Consultancy Fee (Note 4) -- 3,423,600 --
Impairment of goodwill (Note 4) 3,900,361 -- 3,900,361 --
Lawsuit settlement 699,437 -- 699,437 --
------------ ---------- ------------ -----------
Operating Loss (5,627,759) (180,698) (10,826,148) (242,033)
Loss on investment (Note 4) (120,000) -- (120,000) --
Interest (expense) Income (1,217) -- 10,187 --
------------ ----------- ------------ -----------
Loss before income tax benefits $ (5,748,976) $ (180,698) $(10,935,961) $ (242,033)
Income tax benefits -- (96,800) -- (96,800)
============ =========== ============ ===========
Net loss after income tax benefits $ (5,748,976) $ (83,898) $(10,935,961) $ (145,233)
Basic Loss per Common Share $ (0.26) $ (0.01) $ (0.54) $ (0.01)
============ =========== ============ ===========
Weighted Average Number of Common Shares Outstanding 21,830,876 12,971,000 20,200,764 11,458,179
</TABLE>
NETGAIN DEVELOPMENT, INC. AND SUBSIDIARIES
UNAUDITED STATEMENT OF COMPREHENSIVE LOSS
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- -------------------------
2000 1999 2000 1999
------------ --------- ------------ ---------
<S> <C> <C> <C> <C>
NET LOSS $ (5,748,976) -- $(10,935,961) --
OTHER COMPREHENSIVE INCOME:
Unrealized gains (losses) on securities:
Unrealized gains 330,660 -- 330,660 --
Unrealized losses (562,502) -- (562,502) --
------------ ------------
Comprehensive loss $ (5,980,818) -- $(11,167,803) --
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
NETGAIN DEVELOPMENT, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOW
Nine Months Ended
September 30,
--------------------------
2000 1999
------------ -----------
CASH FLOWS (USED IN) FROM OPERATING ACTIVITIES:
Net Loss $(10,935,961) $ (145,233)
Non cash items:
Depreciation and amortization 973,571 --
Public relations consultancy fee paid with
common stock (Note 4) 3,423,600 --
Write off of goodwill (Note 4) 3,900,361
Loss on investment (Note 4) 120,000
Lawsuit settlement 699,437
Changes in operating assets & liabilities,
excluding effects from acquisitions of a
subsidiary
(Increase) decrease in:
Accounts receivable (63,056) --
Preferred stock subscriptions receivable (275,020)
Common stock subscription receivable (1,445)
Deferred tax receivable (96,800)
Inventory 124,127
Prepaid expenses 36,762
Due from related parties 192,534
Other (61,667)
Non-cash consideration for services 1,521
(Decrease) increase in:
Accounts payable and accrued expenses (269,315) 149,005
----------- -----------
Net cash flows used in operating activities (1,797,940) (429,639)
----------- -----------
CASH FLOWS (USED IN) FROM INVESTING ACTIVITIES:
Investments in Partner Companies (1,700,000) (2,250,000)
Investment in subsidiary (835,000) --
Investment in marketable securities (1,700,000) --
Proceeds from sale of marketable securities 8,325 --
Purchase of property and equipment (25,033) --
Receivable from a Partner Company (2,000,000) --
Cash acquired in acquisition of a subsidiary 3,056,223 --
----------- -----------
Net cash used in investing activities (3,195,485) (2,250,000)
----------- -----------
CASH FLOWS (USED IN) FROM FINANCING ACTIVITIES:
Repayment of long term debt (50,000) --
Proceeds from issuance of common stock 1,522,500 13,851
Proceeds from issuance of preferred stock -- 3,552,248
----------- -----------
Net cash flows from financing activities 1,472,500 3,566,099
----------- -----------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (3,520,925) 886,460
Cash and cash equivalents, beginning of period 3,642,245 48
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 121,319 $ 886,508
=========== ===========
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
NETGAIN DEVELOPMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - DESCRIPTION OF BUSINESS
NetGain Development, Inc., a Colorado corporation (the "Company"), was
incorporated in 1981 for the purposes of gas exploration. From 1981 until 1993,
the Company acted as an agent for oil and gas leaseholders. From 1993 until May
21, 1999, the Company was inactive. On May 21, 1999, a change of control and
corporate objectives occurred. In connection with the change of control, all of
the officers and directors resigned and new management and directors were
appointed. The new corporate objective is to become a major technology and
internet company (i) by operating our own subsidiaries, (ii) to a limited
extent, by taking minority positions in companies and (iii) by acting as an
incubator providing consulting services.
The consolidated financial statements include the accounts of the Company,
its wholly owned subsidiaries, CoolAudio.com, Inc. ("CoolAudio") and
forsalebyowner.com Corp. ("FSBO") for the three- and nine-month periods ended
September 30, 2000, each of which was consolidated since its date of
acquisition.
Although the Company refers to the companies in which it has acquired an
equity ownership interest as its "Partner Companies" and that it has a
partnership with these companies, it does not act as an agent or legal
representative for any of its Partner Companies, it does not have authority to
legally bind any of its Partner Companies and it does not have the types of
liabilities in relation to its Partner Companies that a general partner of a
partnership would have.
NOTE 2 - BASIS OF PRESENTATION
The accompanying financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions to Form 10-QSB and Regulation S-B. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, the accompanying consolidated financial statements reflect all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the Company's financial position, results of operations and
cash flows at the dates and for the periods indicated. While the Company
believes that the disclosures presented are adequate to make the information not
misleading, these consolidated financial statements should be read in
conjunction with the audited financial statements and related notes for the year
ended December 31, 1999 which are contained in the Company's 1999 Annual Report
on Form 10-KSB as filed with the Securities and Exchange Commission. The results
for the three-and nine-month periods ended September 30, 2000 are not
necessarily indicative of the results that may be expected for the full calendar
year ending December 31, 2000. Certain prior year amounts in the consolidated
financial statements have been reclassified in accordance with generally
accepted accounting principles to conform with the current year presentation.
6
<PAGE>
NETGAIN DEVELOPMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 3 - MARKETABLE SECURITIES
Companies are required to classify each of their investment into one of the
three categories, with different accounting for each category. At September 30,
2000, management has classified certain of their equity securities as
available-for-sale securities, which are reported at fair market value, with
unrealized gains and losses reported as other comprehensive income. Gains or
losses on the sale of securities are recognized on a specific identification
basis. The Company investment in marketable securities for the nine-month ended
September 30, 2000 is summarized as follows:
Unrealized Gain Fair Market
Amortized Cost (Loss) Value
---------- ---------- ----------
Balance June 30, 2000 $ -- $ -- $ --
Transfer to marketable securities
from investments at cost 1,691,675 -- 1,691,675
Unrealized loss during 3rd Quarter -- (231,842) (231,842)
---------- ---------- ----------
Balance as of September 30,2000 $1,691,675 $ (231,842) $1,459,833
========== ========== ==========
NOTE 4 - ACQUISITIONS AND INVESTMENTS IN PARTNER COMPANIES
Effective March 30, 2000, the Company completed its acquisition of
CoolAudio, a business-to-business e-tailing enabler and e-retailer of "best in
class" home entertainment products from around the world. The acquisition was
completed through an Agreement and Plan of Merger between NetGain, CoolAudio and
a wholly owned subsidiary of the Company pursuant to which each outstanding
share of CoolAudio was converted into .08 of a share of the Company. As a result
of the acquisition, CoolAudio.com has become a wholly owned operating subsidiary
of the Company. The total purchase price for CoolAudio was valued at
approximately $8.6 million consisting of 1,795,593 shares of the Company's
common stock valued at approximately $7.3 million and options and warrants to
purchase shares of the Company's common stock valued at approximately $1.3
million. The value of the Company's shares included in the purchase price was
recorded net of a 35% market value discount to reflect the restrictions on
transferability. The Company has accounted for this transaction under the
purchase method of accounting. The aggregate purchase price exceeded the fair
value of the net assets acquired by approximately $6.4 million. The Company has
allocated this to goodwill and other intangible assets which is being amortized
over a three (3) year period.
CoolAudio was acquired effective March 30, 2000 and therefore no revenue
and expense is reflected in the Company's Unaudited Consolidated Statement of
Loss for the period January 1 - March 31, 2000. The pro forma condensed
Statements of Loss below present the results of operations of the Company for
the Nine months ended September 30, 2000 assuming the acquisition of CoolAudio
occurred on January 1, 2000. The amounts presented for the Company have been
derived from the Company's historical financial statements for the Nine months
ended September 30, 2000. The amounts presented for CoolAudio are the historical
financial position and results of operations of CoolAudio. Had the acquisition
occurred on January 1, 2000, actual results of operations would likely have
differed from the amounts presented in these pro forma statements. These
unaudited pro forma condensed consolidated financial statements are not
necessarily indicative of the results of operations that would have been
attained had the acquisition actually taken place on the dates indicated and do
not purport to be indicative of the effects that may be expected to occur in the
future.
7
<PAGE>
NETGAIN DEVELOPMENT, INC
UNAUDITED PRO FORMA CONDENSED STATEMENTS OF LOSS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
Nine Months Ended Period Ended
September 30, 2000 January 1 -
Consolidated March 31, 2000 Pro Forma
Netgain Cool Audio Adjustments Pro Forma
------------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
Revenue $ 290,217 $ 58,520 $ 348,737
Cost of Goods Sold 140,537 56,532 197,069
Gross Profit 149,680 1,988 151,668
Operating Expenses 6,376,030 1,295,605 494,467 8,166,102
Operating Loss (6,226,350) (1,293,617) (494,467) (8,014,434)
Loss on investment (120,000) (120,000)
Lawsuit settlement (699,437) (699,437)
Write off of goodwill (3,900,361) (3,900,361)
Other income 0 1,213 1,213
Interest income 10,187 5,786 15,973
Net Loss $(10,935,961) $ (1,286,618) $ (494,467) $(12,717,046)
Basic Loss per Share $ (0.54) $ (0.60)
Weighted Average Common
Shares Outstanding 20,200,764 21,088,817
</TABLE>
Simultaneously with and in connection with the CoolAudio transaction,
NetGain entered into Consulting Agreements with Rajiv Bhatia, Ted Karkus and
Eric Schwartzman dated March 20, 2000. All of the agreements are for a term of
one year, provided that either party may terminate the agreement upon 30 days
prior written notice. The agreements may be extended for additional one-year
terms if not terminated. Two of the agreements were subsequently revised on June
12, 2000.
With respect to Rajiv Bhatia's agreement, Mr. Bhatia was paid $7,500 per
month,through July 31, 2000, plus ordinary and reasonable out of pocket
expenses. Mr. Bhatia was also granted, concurrently with the execution of the
Agreement, non-qualified stock options to purchase an aggregate of 350,000
shares of common stock at an exercise price of $1.75 per share. Such options
become exerciseable over a one-year period in equal quarterly installments and
expire ten years from the date of grant. The exercise price was amended from
$4.00 to $1.75 per share on June 12, 2000.
With respect to Ted Karkus' agreement, Mr. Karkus is entitled to
reimbursement of all ordinary and reasonable out of pocket expenses. Mr. Karkus
was also granted, concurrently with the execution of the Agreement,
non-qualified stock options to purchase an aggregate of 150,000 shares of common
stock at an exercise price of $1.75 per share. Such options become exerciseable
over a one-year period in equal quarterly installments and expire ten years from
the date of grant. The exercise price was amended from $5.00 to $1.75 per share
on June 12, 2000.
8
<PAGE>
NETGAIN DEVELOPMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - ACQUISITIONS AND INVESTMENTS IN PARTNER COMPANIES (CONTINUED)
With respect to Eric Schwartzman's agreement, Mr. Schwartzman is entitled
to reimbursement of all ordinary and reasonable out of pocket expenses. Mr.
Schwartzman was also granted, concurrently with the execution of the Agreement,
non-qualified stock options to purchase an aggregate of 50,000 shares of common
stock at an exercise price of $5.00 per share. Such options become exerciseable
over a one-year period in equal quarterly installments and expire ten years from
the date of grant.
In January 2000, the Company acquired the domain name,
www.forsalebyowner.com, together with a fully operational website, including
designs, programming, database and technology for $835,000 in cash. The assets
were purchased from the individual who owned the domain name and developed the
website. Subsequent to the purchase, the Company assigned, transferred and
delivered the assets to FSBO, a newly formed and wholly owned subsidiary of the
Company. The Company has accounted for this transaction under the purchase
method of accounting. The Company has allocated the entire purchase price to
intangible assets, which is being amortized using the straight-line method over
three years.
During the first quarter of fiscal year 2000, the Company increased its
aggregate investments by $1.4 million in certain of its Partner Companies
specifically, MicroCast, Perform.com and Orbit Networks. Also, during the first
quarter of fiscal year 2000, the Company made new minority investments
aggregating $2.5 million in the Linux Fund, eSaludo.com and Bascom. The Linux
Fund is a holding company/incubator of eight LINUX software companies, with a
large number of LINUX luminaries as founders, directors, and investors,
including Netscape founder and Browser inventor Marc Anderseen. eSaludo is a
Spanish electronic greeting card site which has an exclusive contract (for
Spanish greeting cards) with Paramount, a major greeting card manufacturer.
BASCOM is a LINUX-based middleware and plug-and-play network connectivity
software provider for hardware integrators and ISP's to provide LINUX
thin-server based easy and inexpensive Internet access by companies to ISP's
without concern about firewall and web catching implementations.
During the second quarter of fiscal year 2000, the Company increased its
aggregate investments by $1.2 million in certain of its Partner Companies
specifically, eSaludo.com and Bascom. Also during the second quarter of fiscal
year 2000, the Company made a new minority investment of $.25 million in College
Boardwalk.com. The $1 million investment in the Linux Fund was reclassified as a
receivable from a Partner Company, since Linux Fund will be paying the $1
million back to the company prior to December 31, 2000.
During the third quarter of fiscal year 2000, the company decreased its
aggregate investments by $6.2 million in certain of its partner companies as a
result of the following transactions. An additional $50,000 was invested in
eSaludo.com and an investment of $323,950 was made by stock issuance into
Lawstreet.com. establishing 20% ownership by the Company. The objective of
Lawstreet.com is to create an on-line community of legal professionals and
support personnel who will utilize one site as their virtual office and
centralized communication center. The $1 million investment in Orbit Networks
was reclassified as a receivable from a partner company, since the amount will
be paid back within one year. The $1.5 million investment in Fusion Networks was
reclassified as marketable securities, since Fusion Networks became a publicly
traded company in the third quarter. On July 12, 2000 AsiaNetCorp. Ltd., agreed
to be acquired by the Littauer Technologies Company Ltd. $200,000 of the
companies $1 million investment in Littauer Technologies was reclassified as
marketable securities, since 20% of the shares received by Netgain are free
trading and 80% are restricted. Approximately $3.9 million of the investment in
CoolAudio.com was written off due to the decrease of its value as a result of a
permanent impairment to the e-commerce marketplace and the decision by the
Company to redesign its strategy for CoolAudio.com. This amount represents
two-thirds of CoolAudio.com's goodwill. The remaining investment amounts are
considered realizable.
9
<PAGE>
NETGAIN DEVELOPMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - ACQUISITIONS AND INVESTMENTS IN PARTNER COMPANIES (CONTINUED)
The Company's $120,000 reserve for investments loss is a result of the
failure of Solutions Media.
NOTE 5 - PUBLIC RELATIONS CONSULTANCY FEE
On January 1, 2000, the Company issued 50,000 shares of common stock valued
at $171,000 to Access I Financial in connection with an agreement to obtain
various investor relations consulting services.
During June 2000, the Company issued 1,390,000 shares of common stock
valued at $3,252,600 to Liviakis Financial Communications, Inc in connection
with an agreement to obtain public relations consulting services.
10
<PAGE>
NETGAIN DEVELOPMENT, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
In addition to historical information, this Report contains forward-looking
statements regarding the Company and its Partner Companies, which represents the
Company's expectations or beliefs including, but not limited to, statements
concerning the Company's and our Partner Companies' operations, performance,
financial condition, business strategies and other information. For this
purpose, any statements contained in this Report that are not statements of
historical fact may be deemed to be forward-looking statements. Without limiting
the generality of the foregoing, words such as "may," "will," "expect,"
"believe," "anticipate," "intend," "could," "estimate" or "continue," or the
negative or other variations thereof or comparable terminology are intended to
identify forward-looking statements. The statements by their nature involve
substantial risk and uncertainties, certain of which are beyond the Company's
and Partner Companies' control, and actual results may differ materially
depending on a variety of important factors, including among other things:
* development of an e-commerce market,
* growth in demand for Internet products and services,
* our ability to identify trends in our markets and the markets of our
Partner Companies,
* our and our Partner Companies' ability to successfully execute our
business model,
* our ability to acquire interests in additional companies,
* our and our Partner Companies' ability to attract key executives, and
* our Partner Companies' ability to successfully compete against direct
and indirect competition.
The Company does not intend to engage primarily in the business of
investing, reinvesting or trading in securities so as to be an investment
company required to register as such under the Investment Company Act of 1940.
Nevertheless, the Company may be required to register as an investment company
as a consequence of investments that it has made subsequent to its change of
control to the extent that it presently holds "investment securities" (as
defined by the Investment Company Act) which constitute more than 40% of the
value of the Company's assets (exclusive of U.S. government securities and cash
items) on an unconsolidated basis, unless the Company restructures or reduces
its holdings of investment securities within a reasonable period of time.
Although it is the intention of the Company to take the actions necessary to
avoid investment company status, no assurance can be given that the Company will
be able to take such actions. The Investment Company Act of 1940 imposes a
comprehensive scheme of regulation which would require a substantial
restructuring of the operations of the Company to permit the Company to comply
with applicable regulations. Applicable regulations may also operate to impose
significant restrictions on the permissible activities and transactions of the
Company. If the Company cannot restructure its operations or reduce its holdings
of investment securities to avoid the need for investment company registration,
the Board of Directors will consider taking such actions as may be necessary or
appropriate under the circumstances.
BASIS OF PRESENTATION
Certain amounts for prior periods in the accompanying consolidated
financial statements, and in the discussion below have been reclassified to
conform with the current period presentations.
11
<PAGE>
NETGAIN DEVELOPMENT, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS
The Company's corporate objective is to become a major technology and
internet company (i) by operating our own subsidiaries, (ii) to a limited
extent, by taking minority positions in companies and (iii) by acting as an
incubator providing consulting services. In light of the change in control of
the Company and change in the Company's business focus, which was effective in
June 1999, an analysis of the Company's results of operations for the three- and
nine-month periods ended September 30, 2000, compared to September 30, 1999, is
not indicative of the results of operations in future periods.
The various interests that the Company acquires in its Partner Companies
are accounted for under three broad methods: consolidation, equity method and
cost method. The applicable method is generally, but not always, determined
based on the Company's voting interest in a Partner Company. As of September 30,
2000, we owned interests in 17 companies, which we refer to as our Partner
Companies. Of those 17, we consolidate two Partner Companies and the results of
operations from those Partner Companies have been included in the Consolidated
Statements of Loss from the date of acquisition. All intercompany accounts and
transactions are eliminated. The two companies that are publicly traded are
accounted for by recording the investments at the current market value. All
other Partner Companies have been recorded under the cost method of accounting
since they are privately traded. Under this method, the Company's share of the
earnings or losses of such Partner Companies is not included in the Unaudited
Consolidated Statements of Loss.
For the three months ended March 31, 2000, FSBO was consolidated and
accounted for all of our consolidated revenue and approximately .6% of our
consolidated selling, general and administrative expense. For the three months
ended June 30, 2000, FSBO accounted for 42 % of our consolidated revenue and
approximately 1% of our consolidated selling, general and administrative
expense. For the three months ended September 30, 2000, FSBO accounted for 73%
of our consolidated revenue and approximately 10% of our consolidated selling,
general and administrative expense. CoolAudio was acquired effective March 30,
2000 and therefore no revenue and expense is reflected in the Company's
Unaudited Consolidated Statements of Loss for period January 1, - March 31,
2000. For the three months ended June 30, 2000, CoolAudio was consolidated and
accounted for 50% of our consolidated revenue and approximately .07% of our
consolidated selling, general and administrative expense. For three months ended
September 30, 2000, CoolAudio accounted for 8% of our consolidated revenue and
approximately 17% our consolidated selling, general and administrative expense.
Selling, general and administrative expenses comprise mostly professional
fees, compensation and office services. The expenses are as a result of the
infrastructure and resources necessary to implement and support our strategy. We
expect certain of these expenses to increase as we continue our growth strategy.
Amortization expense increased substantially in the current quarterly
reporting period, as a result of our recent CoolAudio writedown. We anticipate
that amortization expense will increase in future periods as we continue to make
acquisitions.
Interest income is comprised of interest earned on cash balances.
12
<PAGE>
NETGAIN DEVELOPMENT, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
For the nine months ended September 30, 2000, we recorded a net loss of
$10,673,813. Excluding amortization and non-cash public relations consulting
fees the net loss was $6,594,457. The loss was primarily due to the factors
described above. Management expects these losses to continue and possibly
increase until the Company is able to successfully implement its business plan.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2000, the Company had cash and equivalents of $121,319.
In addition, as of September 30, 2000, the Company had accounts payable of
$1,338,949. These amounts are substantially a result of the acquisition of
CoolAudio. As of September 30, 2000, the Company had working capital of
approximately $2,066,681. Cash used in operations was $1,797,940 for the nine
months ended September 30, 2000 and resulted primarily from the net loss of
$10,673,813 offset by non-cash charges of $8,854,821.
Cash used in investing activities was $3,195,485 for the nine months ended
September 30, 2000. This was comprised of investment in Partner Companies of
$2,535,000, investment in marketable securities of $1,691,675, receivable from
Partner Companies of $2,000,000 and purchase of property and equipment of
$25,033 less cash acquired in our acquisition of CoolAudio. As discussed above,
the Company expects investments to increase as part of its on-going strategy.
Cash provided by financing for the nine months ended September 30, 2000 was
generated by the sale of 333,333 shares of the Company's common stock for $4.50
per share or $1,500,000 in the aggregate and the sale of 9,000 shares of the
Company's common stock for $2.50 per share or $22,500 in the aggregate.
On July 12, 2000 AsiaNetCorp. Ltd., one of the Company's Partner companies,
agreed to be acquired by Littauer Technologies Company Ltd., in a stock deal
valued at approximately $1.2 billion. Under the terms of the merger, seven
shares of AsiaNetCorp were exchanged for one share of Littauer Technologies. At
the time of the closing of that transaction, based on the stock price of
Littauer Technologies. The cost of the Company's investment in AsiaNet was $1
million. The stock price of Littauer is highly volatile and is currently
significantly lower than at the time of closing and there is no guarantee that
such a profit will be sustained by the time the Company sells its shares to
realize its profit. 20% of the shares received by NetGain are sellable now and
80% will be sellable in January 2001. Based on the sale of the Company's free
trading shares of Littauer stock the Company expects to generate cash proceeds
to increase its capital resources.
The Company intends to continue to fund existing and future Internet
efforts, acquire additional companies for cash, stock or other consideration.
The Company will require additional working capital to fund operations and
future acquisitions and opportunities. Therefore, management intends to raise
additional monies in order to enable it to continue to execute its strategy and
develop its business plan.
13
<PAGE>
NETGAIN DEVELOPMENT, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
During June 2000 the Company retained Liviakis Financial Communciations,
Inc. ("Liviakis") as financial public relations consultant to the Company for a
one (1) year period. Liviakis will: (1) present the Company's name to a wide
array of financial market professionals and financial media sources; (2) provide
access to financial media outlets that the Company otherwise could not easily
reach; and (3) consult and assist the Company in developing and implementing
appropriate plans and means for presenting the Company and its business plans,
strategy and personnel to the financial community, establishing an image for the
Company in the financial community, and creating the foundation for subsequent
financial public relations efforts. Liviakis' fee for its services is as
follows: (1) One Million Three Hundred Ninety Thousand (1,390,000) shares of the
Company's common stock; and (2) a monthly consultancy fee of One Thousand
(1,000) shares of the Company's common stock.
ITEM 1. LEGAL PROCEEDINGS.
A legal proceeding against the Company, for which the Company has
negotiated a settlement agreement with plaintiffs, was approved by the court
during the third quarter of Fiscal year 2000.This legal proceeding in which the
Company has been named as a defendant, is a lawsuit filed in federal court in
New Jersey by two individuals who, pursuant to a merger agreement, sold their
stock in a company named Conversion Services International, Inc. ("CSI") to
Elligent Consulting Group, Inc. ("Elligent"), a company for which Andreas
Typaldos acts as Chairman, CEO and President. The plaintiffs added to their
original complaint charges purportedly brought derivatively on behalf of
Elligent. Those added claims are to the effect that Typaldos and another NetGain
Board member diverted business opportunities of Elligent, namely the concept and
strategy of NetGain becoming an internet incubator company and the opportunity
of offering technology and consulting services to, and investing in, early stage
Internet companies. The Company is alleged to have been unjustly enriched by
being the recipient of those purported opportunities.
The agreed settlement of this proceeding included a non-cash payment of
475,000 shares of NetGain to Elligent and to plaintiff's attorneys of which
187,500 shares is returnable back to NetGain if the price of its stock remains
at a certain level one year after the date of settlement. The 475,000 shares
were issued on September 21, 2000 and were valued at $699,437.
On November 8, 2000, the company was served with a lawsuit by a former
employee, Jennifer Monahan, seeking $1.5 million and other unspecified damages
in connection with her termination on July 17, 2000. Such damages are not
alleged on the basis of discrimination of any kind. Ms. Monahan's employment was
at will and the Company believes that it was within its right to terminate her
employment. It further believes that the suit is without merit and intends to
defend itself vigorously.
ITEM 2. CHANGES IN SECURITIES.
On January 1, 2000, the Company issued 50,000 shares of common stock in
connection with an agreement to obtain various investor relations consulting
services.
Effective February 11, 2000, the Company sold 333,333 shares of the
Company's common stock for $4.50 per share or $1,500,000 in the aggregate. The
shares were sold in a transaction exempt from registration pursuant to
Regulation S promulgated under the Securities Act of 1933, as amended, to a
non-U.S. Person (as defined in Regulation S). No fees or commissions were paid
to brokers in connection with such transaction. The gross proceeds of $1,500,000
will be used for working capital and operations.
Effective March 30, 2000, the Company issued 1,795,593 shares of its common
stock in connection with the acquisition of all of the issued and outstanding
shares of CoolAudio.com, Inc. The shares were issued in a private transaction
exempt from registration. No commissions were paid to brokers in connection with
this transaction.
14
<PAGE>
NETGAIN DEVELOPMENT, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
Effective June 12, 2000, the Company sold 9,000 shares of the Company's
common stock for $2.50 per share or $22,500 in the aggregate. No fees or
commissions were paid to brokers in connection with such transaction. The gross
proceeds of $22,500 will be used for working capital and operations.
During the second quarter of 2000 a total of 1,659 shares of preferred
stock were converted to 831,924 shares of common stock.
During June 2000, the Company issued 1,390,000 shares of the Company's
common stock valued at $3,252,600 to Liviakis Financial Communications, Inc. in
exchange for public relations consultancy services to be performed.
During the third quarter of 2000 a total of 440,726 shares of preferred
stock were converted to 881,453 shares of common stock.
During September 2000, the company issued 220,000 shares of the company's
common stock valued at $323,950 in exchange for an investment in Lawstreet.com
and the company also issued 475,000 shares valued at $699,437 in settlement of
the Elligent Lawsuit.
ITEM 3. SUBSEQUENT EVENTS
Indigo, LLC has agreed to provide consulting services in the future to
Novix/Power Plantation, a web development-company, in exchange for Net Gain
shares.
ITEM 4. DEFAULTS UPON SENIOR SECURITIES.
None
ITEM 5. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
ITEM 6. OTHER INFORMATION
None
ITEM 7. EXHIBITS AND REPORTS ON FORM 8-K.
a) Exhibits
Exhibit 27-- Financial Data Schedule (SEC use only)
b) Reports on Form 8-K
Form 8-K dated March 31, 2000 and filed with the SEC on May 15, 2000
regarding the acquisition of Cool Audio.
15
<PAGE>
SIGNATURES
In accordance with Section 12 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.
Netgain Development, Inc.
Dated: November 14, 2000 By: /s/ Andreas Typaldos
------------------------------------
Andreas Typaldos
Chairman of the Board and
Chief Executive Officer
16
