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 June 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 July 31,
2000, there were 21,691,314 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 June 30, 2000 and
December 31, 1999 .......................................... 3
Consolidated Statements of Loss-- Three and Six
Months ended June 30, ...................................... 4
Consolidated Statements of Cash Flows--Six Months
ended June 30, 2000 ........................................ 5
Notes to Interim Consolidated Financial Statements ........... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of ..................................... 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................. 13
Item 2. Changes in Securities......................................... 13
Item 3. Subsequent Events............................................. 14
Item 4. Defaults Upon Senior Securities............................... 14
Item 5. Submission of Matters to a Vote of Security Holders........... 14
Item 6. Other Information............................................. 14
Item 7. Exhibits and Reports on Forms 8-K............................. 14
SIGNATURES................................................................. 15
2
<PAGE>
NETGAIN DEVELOPMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, 2000 DECEMBER 31,
(UNAUDITED) 1999
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash & cash equivalents $ 322,086 $ 3,642,245
Accounts receivable, net 88,632 --
Receivable from a Partner Company 1,000,000 --
Inventory 292,084 --
Prepaid expenses 42,222 18,000
Due from related parties -- 33,000
------------ ------------
Total Current Assets 1,745,024 3,693,245
PROPERTY AND EQUIPMENT, NET 433,446 --
INVESTMENTS AT COST 11,970,000 7,620,000
GOODWILL AND OTHER INTANGIBLE ASSETS, NET (Note 3) 6,546,377 --
OTHER ASSETS 106,542 103,002
------------ ------------
$ 20,801,389 $ 11,416,247
============ ============
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 943,819 $ 53,006
Accrued expenses 188,855 46,174
Due to related parties 8,635 16,101
------------ ------------
Total Current Liabilities 1,141,309 115,281
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; shares issued and 2,158 1,717
Capital in excess of par -- Preferred 3,277,247 3,277,247
Capital in excess of par -- Common 23,080,292 9,534,634
Accumulated deficit (6,146,462) (959,477)
Stock subscriptions receivable (7,156) (7,156)
Treasury stock, at cost (420 shares of Preferred) (546,000) (546,000)
------------ ------------
Total Stockholders' Equity 19,660,080 11,300,966
------------ ------------
$ 20,801,389 $ 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 JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- ---------------------------
2000 1999 2000 1999
------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
Revenue, net $ 155,116 $ -- $ 180,064 $ --
Cost of Sales 130,814 130,814
------------ ------------
Gross Profit 24,302 49,250
Selling, General & Administrative Expenses 770,052 61,305 1,153,007 61,335
Amortization of Intangibles 601,450 -- 671,032 --
Public Relations Consultancy Fee (Note 4) 3,252,600 3,423,600
Operating Loss (4,599,800) (61,305) (5,198,389) (61,335)
Interest Income 1,233 -- 11,404 --
------------ ----------- ------------ -----------
Net Loss $ (4,598,567) $ (61,305) $ (5,186,985) $ (61,335)
============ =========== ============ ===========
Basic Loss per Common Share $ (.24) $ (0.01) $ (.28) $ (0.01)
============ =========== ============ ===========
Weighted Average Number of Common Shares Outstanding 19,564,927 9,521,507 18,484,146 9,521,507
</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
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
---------------------------
2000 1999
----------- -----------
<S> <C> <C>
CASH FLOWS (USED IN) FROM OPERATING ACTIVITIES:
Net Loss $(5,186,985) $ (61,335)
Non cash items:
Depreciation and amortization 697,267 --
Public relations consultancy fee paid with
common stock (Note 4) 3,423,600 --
Changes in operating assets & liabilities,
excluding effects from acquisitions of a
subsidiary
(Increase) decrease in:
Accounts receivable (74,359) --
Inventory 114,201
Prepaid expenses (3,910) (25,000)
Due from related parties 534 50,000
Other (3,540) 494,647
(Decrease) increase in:
Accounts payable and accrued expenses (611,518) 50,105
----------- -----------
Net cash flows (used in) from operating activities (1,644,710) 508,417
----------- -----------
CASH FLOWS (USED IN) FROM INVESTING ACTIVITIES:
Investments in Partner Companies (4,350,000) (2,250,000)
Investment in subsidiary (835,000)
Purchase of property and equipment (19,172) --
Receivable from a Partner Company (1,000,000) --
Cash acquired in acquisition of a subsidiary 3,056,223 --
----------- -----------
Net cash used in investing activities (3,147,949) (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 3,493,623
----------- -----------
Net cash flows from financing activities 1,472,500 3,493,623
----------- -----------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (3,320,159) 1,752,040
Cash and cash equivalents, beginning of period 3,642,245 48
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 322,086 $ 1,752,088
=========== ===========
</TABLE>
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 six- month periods ended
June 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 six-month periods ended June 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 - 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
allocate 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 six months ended June 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 six months
ended June 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.
NETGAIN DEVELOPMENT, INC
UNAUDITED PRO FORMA CONDENSED STATEMENTS OF LOSS
FOR THE SIX MONTHS ENDED JUNE 30, 2000
<TABLE>
<CAPTION>
SIX MONTHS ENDED PERIOD ENDED
JUNE 30, 2000 JANUARY 1 -
CONSOLIDATED MARCH 31, 2000 PRO FORMA
NETGAIN COOL AUDIO ADJUSTMENTS PRO FORMA
------- -------------- ----------- ---------
<S> <C> <C> <C>
Revenue $ 180,064 $ 58,520 $ 238,584
Cost of Goods Sold 130,814 56,532 187,346
Gross Profit 49,250 1,988 51,238
Operating Expenses 5,247,639 1,295,605 494,467(a) 7,037,711
Operating Loss (5,198,389) (1,293,617) (6,986,473)
Other income 0 1,213 1,213
Interest income 11,404 5,786 17,190
Net Loss $ (5,186,985) $ (1,286,618) $ (494,467)(a) $(6,968,070)
Basic Loss per Share $ (0.28) $ (0.36)
Weighted Average Common Shares
Outstanding 18,484,146 19,372,199
</TABLE>
----------
(a) Goodwill in the amount of $5,933,606 is being amortized over three years.
7
<PAGE>
NETGAIN DEVELOPMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - ACQUISITIONS AND INVESTMENTS IN PARTNER COMPANIES (CONTINUED)
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 either 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 is to be paid $7,500
per month, 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.
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.
8
<PAGE>
NETGAIN DEVELOPMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - ACQUISITIONS AND INVESTMENTS IN PARTNER COMPANIES (CONTINUED)
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 within the next 30 - 90 days.
NOTE 4 - 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.
9
<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.
10
<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
six-month periods ended June 30, 2000, compared to June 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 June 30,
2000, we owned interests in 18 companies, which we refer to as our Partner
Companies. Of those 18, 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. All other Partner Companies have been recorded
under the cost method of accounting. 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. 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.
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 acquisition. In addition,
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.
For the six months ended June 30, 2000, we recorded a net loss of
$5,186,985. Excluding amortization and non-cash public relations consulting fees
the net loss was $1,092,353. 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.
11
<PAGE>
NETGAIN DEVELOPMENT, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2000, the Company had cash and equivalents of $322,086. In
addition, as of June 30, 2000, the Company had accounts payable of $943,819.
These amounts are substantially a result of the acquisition of CoolAudio. As of
June 30, 2000, the Company had working capital of approximately $603,715. Cash
used in operations was $1,644,710 for the six months ended June 30, 2000 and
resulted primarily from the net loss of $5,186,985 offset by non-cash charges of
$4,120,867.
Cash used in investing activities was $3,147,949 for the six months ended
June 30, 2000. This was comprised of investment in Partner Companies of
$5,185,000, Receivable from a Partner Company of $1,000,000 and purchase of
property and equipment of $19,172 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 six months ended June 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.
The Company believes that additional liquidity and increased capital
resources, as well as increased profitability, will be developed as a result of
the two following transactions in the quarter ending Sept. 30, 2000.
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 will be 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 unrealized profit to the Company as a result of the
transaction was approximately $11 million. The cost of the Company's investment
in AsiaNet is $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. Twenty percent 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.
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.
On August 11, 2000, the Company agreed with certain of its current
shareholders, who had funded the Company with the same Series A Convertible
Preferred Stock financing in the past, to effect a private financing of Series A
Convertible Preferred Stock to "accredited investors" pursuant to Rule 506 of
Regulation D promulgated under the Securities Act of 1933, as amended, for the
sale of 1,000 shares of series A Convertible Preferred Stock at a price of
$1,000 per share, resulting in gross proceeds to us of $1,000,000. No fees or
commissions will be paid to brokers in connection with such transaction. We
intend to use these proceeds for operations, to acquire operating entities and
to purchase equity positions in a number of Internet private companies.
12
<PAGE>
NETGAIN DEVELOPMENT, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
There is one legal proceeding against the Company, for which the Company
has negotiated a settlement agreement with plaintiffs pending final court
approval of that settlement. 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.
While the Company believes that the claim against it is without merit and
has vigorously defended itself, it also believes that an amicable settlement is
in the best interest of the Company and its shareholders because of the cost of
continuing litigation in terms of legal costs and management distraction. The
agreed settlement of this proceeding includes 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, and $50,000 in cash for
legal fees.
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.
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 to Liviakis Financial Communications, Inc. in exchange for public
relations consultancy services to be performed.
13
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NETGAIN DEVELOPMENT, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 3. SUBSEQUENT EVENTS
None
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.
14
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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: August 11, 2000 By: /s/ Andreas Typaldos
------------------------------------
Andreas Typaldos
Chairman of the Board and
Chief Executive Officer
