UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarter ended September 30, 2000
[ ] 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.
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(Name of small business issuer in its charter)
Delaware 06-1582875
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(State or other jurisdiction of (I.R.S.Employer
incorporation or organization) Identification no.)
20 Dayton Avenue, Greenwich, Connecticut 06830
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(Address of principal executive offices) (Zip Code)
(203)661-6942
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Issuer's telephone number, including area code
Arinco Computer Systems Inc.
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(Former names, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [ ] No [X].
The number of shares of the issuer's common stock outstanding at November 10,
2000 was approximately 44,958,000.
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
<PAGE>
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
ITEM 1 - CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets as of September 30, 2000
(unaudited) and December 31, 1999 ............................... 1
Unaudited Condensed Consolidated Statements of Operations for the three
and nine months ended September 30, 2000 and 1999 ............... 2
Unaudited Condensed Consolidated Statements of Cash Flows for the nine
months ended September 30, 2000 ................................. 3
Notes to Unaudited Interim Condensed Consolidated
Financial Statements ............................................ 4
ITEM 2 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ...... 9
ITEM 3 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS ........................................... 9
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS ............................................... 12
ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS ....................... 12
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES ................................. 13
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ............. 13
ITEM 5 - OTHER INFORMATION ............................................... 13
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K ................................ 14
ITEM 7 - SIGNATURES ...................................................... 15
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1 - CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS:
CHANGE TECHNOLOGY PARTNERS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 32,611,000 $ 133,000
Prepaid expenses and other current assets 255,000 113,000
------------ ------------
Total current assets 32,866,000 246,000
Equity investment 5,996,000 -
Property and equipment, net 113,000 -
Other assets 77,000 -
------------ ------------
Total Assets $ 39,052,000 $ 246,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued liabilities $ 236,000 $ 1,000
------------ ------------
Total current liabilities 236,000 1,000
STOCKHOLDERS' EQUITY
Preferred stock:
Series A - $.06 per share cumulative
convertible share-for-share into common
stock; $.10 par value; authorized,
500,000 shares; none issued and outstanding
- -
Series B - convertible into common
as defined; $.10 par value; authorized,
4,000,000 shares; issued and outstanding,
3,000,000 shares 300,000 -
Common stock - $.01 par value; authorized,
500,000,000 shares; issued and outstanding,
44,958,000 shares 449,000 49,000
Additional paid-in capital 84,952,000 2,559,000
Deferred compensation (3,395,000) -
Accumulated deficit (43,490,000) (2,363,000)
------------ ------------
Total stockholders' equity 38,816,000 245,000
------------ ------------
Total liabilities and stockholders' equity $ 39,052,000 $ 246,000
============ ============
</TABLE>
See accompanying notes to unaudited condensed financial statements
1
<PAGE>
CHANGE TECHNOLOGY PARTNERS, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
-------------- -------------- ------------- ------------
<S> <C> <C> <C> <C>
Revenues $ 6,000 $ - $ 6,000 $ -
General and administrative expenses 988,000 1,000 1,462,000 8,000
Equity based compensation 64,000 - 64,000 -
----------- ----------- ------------ -----------
Loss from operations (1,046,000) (1,000) (1,520,000) (8,000)
Other income (expense):
Interest income 541,000 1,000 997,000 4,000
Equity in losses of affiliate (504,000) - (504,000) -
Realized loss on trading securities - (2,000) - (1,000)
Unrealized (loss)/gain on
trading securities - (15,000) - 21,000
----------- ----------- ------------ -----------
37,000 (16,000) 493,000 24,000
----------- ----------- ------------ -----------
Net income (loss) (1,009,000) (17,000) (1,027,000) 16,000
Preferred stock dividend requirement - 6,000 (1,027,000) 18,000
Deemed dividend attributable to issuance
of convertible preferred stock and warrants - - (40,100,000) -
----------- ----------- ------------ -----------
Net income (loss) applicable to
common stockholders' $(1,009,000) $(11,000) $(41,127,000) $ 34,000
=========== =========== ============ ===========
Basic and diluted net earnings (loss)
per common share $ (0.02) $ (0.00) $ (1.27) $ (0.00)
=========== =========== ============ ===========
Weighted average common shares
outstanding, basic and diluted 44,958,000 4,541,000 32,258,000 4,541,000
=========== =========== ============ ===========
</TABLE>
See accompanying notes to unaudited condensed financial statements
2
<PAGE>
CHANGE TECHNOLOGY PARTNERS, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Nine Months Ended
September 30,
2000 1999
---- ----
Cash flows from operating activities:
Net income/(loss) $ (1,027,000) $ 16,000
Adjustments to reconcile net income
(loss) to net cash used in operating
activities
Decrease/(increase) in trading activities 112,000 (5,000)
Equity based compensation 64,000 -
Equity in losses of affiliate 504,000 -
Other 31,000 -
Changes in operating assets & liabilities
Prepaid expenses and other assets (331,000) (23,000)
Accounts payable and accrued liabilities 188,000 -
----------- -----------
Net cash used in operating activities (459,000) (12,000)
Cash flows from investing activities:
Purchase of equity investment (6,500,000) -
Purchase of other assets (113,000) -
Advances on related party note receivable - (20,000)
Receipts on related party note receivable - 36,000
----------- -----------
Net cash (used in) provided by
investing activities (6,613,000) 16,000
Cash flows from financing activities:
Issuance of Series B preferred stock
and warrants, net of offering costs 39,550,000 -
Payment of bank overdraft - (2,000)
----------- -----------
Net cash provided by (used in)
financing activities 39,550,000 (2,000)
Net Increase in cash and cash equivalents 32,478,000 2,000
Cash and cash equivalents at
beginning of period 133,000 173,000
Cash and cash equivalents at
end of period $32,611,000 $ 175,000
=========== ===========
See accompanying notes to unaudited condensed financial statements
3
<PAGE>
CHANGE TECHNOLOGY PARTNERS, INC.
NOTES TO UNAUDITED INTERIM CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
1. ORGANIZATION AND BASIS OF PRESENTATION
Interim Results
The accompanying unaudited condensed consolidated balance sheet as of September
30, 2000 and the accompanying unaudited consolidated statements of operations
and cash flows for the periods ended September 30, 2000 and 1999 have been
prepared by the Company. In the opinion of management, the accompanying
condensed consolidated financial statements have been prepared on the same basis
as the annual financial statements and contain all adjustments, which include
only normal recurring adjustments, considered necessary for a fair presentation
of the Company's financial position, results of operations and cash flows at the
dates and for the periods presented in conformity with generally accepted
accounting principles applicable to interim periods.
While the Company believes that the disclosures presented are adequate to make
the information not misleading, these condensed consolidated financial
statements should be read in conjunction with the audited financial statements
and related notes for the year ended December 31, 1999, which are contained in
the Company's Annual Report on Form 10-KSB. The results for the three- and
nine-month periods ended September 30, 2000 are not necessarily indicative of
the results to be expected for the full fiscal year or for any future periods.
Principles of Consolidation
The accompanying unaudited consolidated financial statements include the
accounts of Change Technology Partners, Inc. (the "Company" or "CTPI") and its
majority-owned and controlled subsidiary from the date of acquisition (see note
5). 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.
2. BASIC AND DILUTED NET LOSS PER COMMON SHARE
Basic net (loss)/income per common share excludes the effect of potentially
dilutive securities and is computed by dividing net income or loss available to
common shareholders by the weighted average number of common shares outstanding
for the period. Diluted net (loss)/income per share adjusts for the effect of
convertible securities, warrants and other potentially dilutive financial
instruments only in the periods in which such effect would have been dilutive.
At September 30, 2000, outstanding warrants to purchase 41,250,000 shares of
common stock 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.
4
<PAGE>
CHANGE TECHNOLOGY PARTNERS, INC.
NOTES TO UNAUDITED INTERIM CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
Similarly, the computation of diluted net loss per share excludes the effect of
120,000,000 shares issuable upon the conversion of convertible preferred stock,
since their inclusion would have had an antidilutive effect. As a result, the
basic and diluted net loss per share amounts are equal for all periods
presented.
3. CAPITALIZATION AND MERGER
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 in a reverse acquisition. Investors purchased
4,000,000 shares of Series B Convertible Preferred Stock ("Series B stock") for
net proceeds to the Company of $39,450,000 in cash. Each share of Series B stock
is convertible into 40 common shares, and the Series B stock, collectively,
represents approximately 77% of the voting interest of the Company on a fully
diluted basis. Separately, certain other investors purchased warrants
("Warrants") to purchase 41,250,000 shares of common stock for $100,000. 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. The difference between
the price of the Series B preferred stock on an as if converted basis of $0.25
and $4.88 (the fair value of common stock on the date of issuance), or $4.63,
multiplied by the number of shares of Series B preferred stock on an as if
converted basis, and the intrinsic value of the warrants, represents the
intrinsic value of the beneficial conversion feature, which totaled
approximately $335 million. However, as the intrinsic value of the beneficial
conversion feature is greater than the $40.1 million in gross proceeds received
from the Series B preferred stock issuance, the amount of the discount
attributed to the beneficial conversion feature is limited to the $40.1 million
of gross proceeds received. The beneficial conversion feature was recorded in
the quarter ended March 31, 2000 as a non-cash preferred stock dividend because
the Series B convertible preferred stock is immediately convertible at the
option of the preferred stockholders. The $40 million 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 Change
Technology Partners, Inc. ("CTPI") (f/k/a Pangea Internet, Inc.), a wholly owned
subsidiary. All shareholders of Arinco Computer Systems Inc. became stockholders
of CTPI. 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 CTPI. 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.
5
<PAGE>
CHANGE TECHNOLOGY PARTNERS, INC.
NOTES TO UNAUDITED INTERIM CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
4. EQUITY INVESTMENT
In June 2000, the Company purchased 7,626,165 shares of Series A Preferred stock
of Broadstream.com, Inc. ("Broadstream"), representing an approximate 30% equity
interest (calculated on a fully-diluted basis) and approximate 47% voting
interest, for $6,500,000 in cash. Broadstream is a streaming media management
services company that delivers fault tolerant distribution services for
streaming media content and data.
The investment in Broadstream is being accounted for under the equity method.
The Company's proportionate share of Broadstream's net income or loss and the
amortization of the excess of cost over the proportionate interest in the
underlying equity is included in equity losses of affiliate in the accompanying
consolidated statements of operations. The excess of cost over the proportionate
interest in the underlying equity is being amortized over a three year period.
5. ACQUISITION OF EHOTHOUSE
On September 15, 2000 the Company acquired a majority voting control of
eHotHouse, Inc. ("eHotHouse") pursuant to a transaction where eHotHouse issued
Series A Preferred Stock in exchange for $3 million in cash and a covenant, by
the Company, to issue 6,374,502 of its shares of common stock as directed by
eHotHouse. Such transactions fully eliminate in consolidation and do not impact
the consolidated financial statements of the Company. No consideration to the
other shareholders of eHotHouse was provided in the transaction and accordingly
no goodwill was recorded. The operations of eHotHouse prior to acquisition were
deminimus, and the fair value of the identifiable net assets at the time of
acquisition approximated $0.
In the event that eHotHouse raises additional investment fund through September
2001, as defined, the Company may be required to purchase from eHotHouse up to
$9 million of preferred stock at eHotHouse's then fair market value of which $2
million will be in the form of cash and $7 million in common stock of the
Company. In addition, in the event that eHotHouse does not consummate an
additional investment through September 2001, as defined, the Company can
require eHotHouse to issue such shares in accordance with the terms as defined
above.
Also, in connection with the eHotHouse transaction, the Company executed an
employment contract and Restricted Stock Agreement with its Chief Executive
Officer. Pursuant to these agreements, the Chief Executive Officer agreed to
have restrictions placed on 1,000,000 shares of common stock of eHotHouse. Such
shares are restricted as to their transferability or marketability and such
restrictions lapse, contingent upon continued employment for a three-year
period. Certain unvested shares were to be forfeited upon termination.
The Company has recorded $3,443,000 of deferred compensation attributable to
these shares and the corresponding unamortized deferred compensation is
presented on the Consolidated Balance Sheet as of September 30, 2000. The
Company recognized $48,000 of compensation expense during the period ended
September 30, 2000.
Also in connection with the transaction, the Company executed two consulting
arrangements with independent contractors. These individuals agreed to have
restrictions placed on 764,000 shares of common stock of eHotHouse in exchange
for their services over a 3-year period. Such shares are restricted as to their
transferability or marketability and such restrictions lapse, contingent upon
continued services for a three-year period.
6
<PAGE>
CHANGE TECHNOLOGY PARTNERS, INC.
NOTES TO UNAUDITED INTERIM CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
Certain unvested shares were to be forfeited upon termination. The Company will
recognize compensation expense based on the fair value, as determined on a
periodic basis.
On November 16, 2000, the Company amended the Restricted Stock Agreements
executed in conjunction with the acquisition of majority voting control of
eHotHouse. The amended stock agreements are fully vested. The Company will
recognize compensation expense relating to the full vesting of the stock issued
to the Chief Executive Officer and the consultants measured at the fair value of
the stock on the date the restrictions were removed.
6. CHANGE IN EQUITY
The following table represents changes to the Company's equity accounts for the
nine months ended September 30, 2000.
<TABLE>
<CAPTION>
SERIES B
REDEEMABLE
CONVERTIBLE SERIES B
(in 000'S) PREFERRED CONVERTIBLE SERIES A COMMON
STOCK PREFERRED STOCK PREFERRED STOCK STOCK
----- --------------- --------------- -----
<S> <C> <C> <C> <C>
Balance at January 1, 2000 $ - $ - $ - $ 49
Sale of warrants to
purchase common stock - - - -
Offering costs related
to preferred stock and warrants - - - -
Beneficial conversion feature
related to redeemable
convertible preferred
stock and warrants - - - -
Amortization of beneficial
conversion feature 40,000 - - -
Conversion of preferred
stock into common stock (10,000) - - 400
Nullification of redemption
of preferred stock (30,000) 300 - -
Deferred Compensation - - - -
Amortization of
deferred compensation - - - -
Net loss - - - -
----------------------------------------------------------------------
- 300 - 449
----------------------------------------------------------------------
</TABLE>
7
<PAGE>
CHANGE TECHNOLOGY PARTNERS, INC.
NOTES TO UNAUDITED INTERIM CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
TOTAL
DEFERRED ACCUMULATED STOCKHOLDERS'
(in 000'S) APIC COMPENSATION DEFICIT EQUITY
---- ------------ ------- ------
<S> <C> <C> <C> <C>
Balance at January 1, 2000 2,559 - (2,363) 245
Sale of warrants to
purchase common stock 100 - - 100
Offering costs related to
preferred stock and warrants (550) - - (550)
Beneficial conversion feature
related to redeemable
convertible preferred
stock and warrants 40,100 - - 40,000
Amortization of beneficial
conversion feature - - (40,100) (40,000)
Conversion of preferred
stock into common stock 9,600 - - 10,000
Nullification of redemption
of preferred stock 29,700 - - 30,000
Deferred Compensation 3,443 (3,443) - -
Amortization of
deferred compensation - 48 - 48
Net loss - - (1,027) (1,027)
--------------------------------------------------------------------------
84,952 (3,395) (43,490) 38,816
--------------------------------------------------------------------------
</TABLE>
7. RELATED PARTY TRANSACTIONS
During the period ended September 30, 2000 the Company incurred legal fees in
connection with certain transactions and other matters in the normal course of
business. These services were provided by a firm of which a member of the Board
of Directors of the Company is a partner. Fees paid to this firm totaled
approximately $675,000 in the nine month period ended September 30, 2000.
Additionally, during the period ended September 30, 2000 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 certain employees and members of
the Board of Directors of the Company are affiliated. Fees paid to this firm
totaled approximately $860,000 in the nine month period ended September 30,
2000.
8
<PAGE>
CHANGE TECHNOLOGY PARTNERS, INC.
NOTES TO UNAUDITED INTERIM CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
8. SUBSEQUENT EVENT
On October 5, 2000, the Company, through its majority-owned subsidiary,
eHotHouse, acquired certain tangible and intangible assets of INSYS Technology,
Inc. ("INSYS"), a New Jersey based web application designer. The Company
acquired the defined net assets for $667,000 in cash, subject to adjustment as
defined. In connection with this transaction, the Company provided additional
consideration in the form of restricted common stock of eHotHouse to certain
former shareholders of INSYS. Restrictions on the additional shares of eHotHouse
common stock lapse, on a straight-line basis, over three years, based on
continued employment of the former shareholders.
ITEM 2 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
The primary objective of our investment activities is to preserve principal
while at the same time maximizing yields without significantly increasing risk.
To achieve this objective, we maintain our portfolio of cash equivalents and
investments in government securities and money market funds.
As of September 30, 2000, we held cash and cash equivalents and investments in
marketable securities with average days to maturity of 30 days. We did not hold
derivative financial instruments as of September 30, 2000, and have never held
these instruments in the past.
ITEM 3 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE FOLLOWING DISCUSSION OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF
CTPI CONTAINS FORWARD-LOOKING STATEMENTS RELATING TO FUTURE EVENTS AND THE
FUTURE PERFORMANCE OF CTPI WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES
ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934,
AS AMENDED. STOCKHOLDERS ARE CAUTIONED THAT SUCH STATEMENTS INVOLVE RISKS AND
UNCERTAINTIES. CTPI'S ACTUAL RESULTS AND TIMING OF CERTAIN EVENTS COULD DIFFER
MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A
RESULT OF CERTAIN FACTORS AND ELSEWHERE IN THIS REPORT AND IN CTPI'S OTHER
PUBLIC FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION.
9
<PAGE>
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO
THREE MONTHS ENDED SEPTEMBER 30, 1999
The Company has not had significant revenues from operations in the periods
ended September 30, 2000 and 1999, respectively. The Company plans to commence
engaging in its primary activity, which will be the acquisition and operation of
enterprises that are, or propose to be, engaged in businesses relating primarily
to the Internet, e-commerce and related technologies. The Company has begun
acquiring interests in and actively managing companies that offer significant
potential for growth and profitability and value creation.
General and administrative expenses consist primarily of compensation and
related benefits, professional services fees and facilities costs paid to
related parties. General and administrative expenses increased to $988,000 for
the three months ended September 30, 2000 as compared to $1,000 for the three
months ended September 30, 1999. The increase was primarily the result of
increased compensation, increased professional services fees and increases in
other costs associated with the growth of our business and operations. We expect
general and administrative expenses to increase in absolute dollars as we hire
additional personnel, incur increased non-cash deferred compensation charges and
incur costs related to the growth of our business.
Equity in losses of affiliate was $504,000 for the three months ended September
30, 2000 and $0 for the three months ended September 30, 1999. Equity in losses
resulted from the Company's minority ownership in Broadstream that has been
accounted for under the equity method of accounting. Under the equity method of
accounting, the Company's proportionate share of Broadstream's operating losses
and amortization of the Company's net excess investment over its equity in
Broadstream's net assets is included in equity in losses of affiliate.
Interest income was $541,000 for the three months ended September 30, 2000 and
$1,000 for the three months ended September 30, 1999. The increase in interest
income was attributable to interest earned on cash and cash equivalents
primarily from the net proceeds from our Series B Preferred Stock offering in
March 2000. Interest income in future periods may fluctuate as a result of the
average cash we maintain and changes in the market rates of our cash
equivalents.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO
NINE MONTHS ENDED SEPTEMBER 30, 1999
The Company has not had significant revenues from operations in the periods
ended September 30, 2000 and 1999, respectively. The Company plans to commence
engaging in its primary activity, which will be the acquisition and operation of
enterprises that are, or propose to be, engaged in businesses relating primarily
to the Internet, e-commerce and related technologies. The Company has begun
acquiring interests in and actively managing companies that offer significant
potential for growth and profitability and value creation.
10
<PAGE>
General and administrative expenses consist primarily of compensation and
related benefits, professional services fees and facilities costs paid to
related parties. General and administrative expenses increased to $1,462,000 for
the nine months ended September 30, 2000 as compared to $8,000 for the nine
months ended September 30, 1999. The increase was primarily the result of
increased compensation, increased professional services fees and increases in
other costs associated with the growth of our business and operations. We expect
general and administrative expenses to increase in absolute dollars as we hire
additional personnel, incur increased non-cash deferred compensation charges and
incur costs related to the growth of our business.
Equity in losses of affiliate was $504,000 for the nine months ended September
30, 2000 and $0 for the nine months ended September 30, 1999. Equity in losses
resulted from the Company's minority ownership in Broadstream that has been
accounted for under the equity method of accounting. Under the equity method of
accounting, the Company's proportionate share of Broadstream's operating losses
and amortization of the Company's net excess investment over its equity in
Broadstream's net assets is included in equity in losses of affiliate.
Interest income was $997,000 for the nine months ended September 30, 2000 and
$4,000 for the nine months ended September 30, 1999. The increase in interest
income was attributable to interest earned on cash and cash equivalents
primarily from the net proceeds from our Series B Preferred Stock offering in
March 2000. Interest income in future periods may fluctuate as a result of the
average cash we maintain and changes in the market rates of our cash
equivalents.
LIQUIDITY AND CAPITAL RESOURCES
FINANCIAL CONDITION
We invest predominantly in instruments that are highly liquid, investment grade
securities and have maturities of less than 45 days. As of September 30, 2000,
CTPI had approximately $32.0 million of cash and cash equivalents.
Management anticipates that it will experience a substantial increase in its
capital expenditures and lease commitments consistent with its anticipated
growth in operations, infrastructure and personnel and possible acquisitions.
The Company currently anticipates that it will continue to experience
significant growth in its operating expenses for the foreseeable future and that
its operating expenses will be a material use of its cash resources. The Company
believes that its existing cash and cash equivalents and investments will be
sufficient to meet its anticipated cash needs for working capital and capital
expenditures for at least the next twelve months.
11
<PAGE>
PART II. OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
The Company is subject to certain legal claims from time to time and is involved
in litigation that has arisen in the ordinary course of its business. It is the
Company's opinion that it either has adequate legal defenses to such claims or
that any liability that might be incurred due to such claims will not, in the
aggregate, exceed the limits of the Company's insurance policies or otherwise
result in any material adverse effect on the Company's operations or financial
position.
ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS
On March 28, 2000, the Company sold (the "Offering") an aggregate of 4,000,000
shares of the Company's Series B Convertible Preferred Stock, par value $.10 per
share (the "Series B Preferred Stock"), and warrants (the "Warrants") to acquire
an aggregate of 41,250,000 shares of the Company's common stock, par value $.01
per share (the "Common Stock"), to principals of Pangea Internet Advisors LLC
("Pangea Advisors") and other investors (collectively with Pangea Advisors, the
"Investors") for an aggregate offering price of $40,100,000. The Company claimed
an exemption from registration under the Securities Act of 1933, as amended (the
"Securities Act"), for the Offering pursuant to Regulation D promulgated under
the Securities Act. Each share of Series B Preferred Stock is convertible into
Common Stock by the holder thereof at any time at a rate equal to $10.00 divided
by the conversion price in effect from time to time (the "Conversion Price").
The Conversion Price is initially $0.25 (resulting in an initial conversion rate
of 40 shares of Common Stock for each share of Series B Preferred Stock). The
Conversion Price is subject to adjustment in the event of stock dividends, stock
splits, or a reorganization, reclassification, consolidation or merger.
The Series B Preferred Stock will be automatically converted into Common Stock
at the then prevailing Conversion Price upon the occurrence of either (x) the
consummation of a public offering by the Company of its Common Stock resulting
in proceeds to the Company of at least $10,000,000 and where the per share
offering price is at least four times the then prevailing conversion price and
(y) the conversion into Common Stock of at least 60% of the number of shares of
Series B Preferred Stock originally issued. The Warrants expire in five years
and 20% of the Warrants have an exercise price of $.25 per share, 30% of the
Warrants have an exercise price of $.50 per share, 30% of the Warrants have an
exercise price of $.50 per share and 20% of the Warrants have an exercise price
of $1.00 per share.
In the event of a liquidation, dissolution or winding up of the Company, each
share of Series B Preferred Stock will be entitled to receive the greater of (i)
the sum of $10.00 plus any declared but unpaid dividends and
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(ii) the amount such share would be entitled to receive on an "as converted"
basis. After this preferential distribution has been made, all remaining assets
shall be distributed to the holders of shares of Common Stock.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its annual meeting of stockholders on September 12, 2000 (the
"Annual Meeting"). At the Annual Meeting William Avery, James Dubin, Michael
Gleason, William Lipner and Gary Wendt were elected by the stockholders as
Directors of the Company.
Also at the Annual Meeting, the stockholders approved the agreement and plan of
merger, dated April 21, 2000 by and between the Company and Change Technology
Partners, Inc. (the "Merger Agreement").
At the Annual Meeting, the stockholders ratified the appointment of KPMG LLP as
the Company's independent public accountants for the fiscal year 2000.
Finally, at the Annual Meeting, the stockholders approved the Company's 2000
stock option plan (the "Stock Option Plan").
Following are the vote results (1) for the election of directors, (2) for the
approval of the Merger Agreement, (3) for the ratification of KPMG LLP and (4)
for the approval of the Stock option Plan:
<TABLE>
<CAPTION>
FOR AGAINST ABSTAINING
ELECTION OF FIVE DIRECTORS OF THE COMPANY
<S> <C> <C> <C>
William Avery 140,218,637 0 14,100
James Dubin 140,218,637 0 14,100
Michael Gleason 140,218,637 0 14,100
William Lipner 140,218,637 0 14,100
Gary Wendt 140,218,637 0 14,100
APPROVAL OF MERGER AGREEMENT 138,331,180 10,000 2,000
RATIFICATION OF THE APPOINTMENT OF 140,223,237 7,500 2,000
KPMG LLP AS THE COMPANY'S INDEPENDENT
PUBLIC ACCOUNTANTS FOR THE FISCAL
YEAR 2000
APPROVAL OF STOCK OPTION PLAN 129,556,004 751,576 8,035,600
</TABLE>
ITEM 5 - OTHER INFORMATION
None
13
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ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed as part of this report:
2.1 Agreement and Plan of Merger of Arinco Computer Systems Inc. with and
into Change Technology Partners, Inc. (f/k/a Pangea Internet, Inc.),
dated April 12, 2000 (filed as an exhibit to the Registrant's Form 8-K
dated September 12, 2000, and incorporated herein by reference).
3.1 Conformed Copy of the Certificate of Incorporation of Change Technology
Partners, Inc.
3.2 Bylaws of Change Technology Partners, Inc.
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 Form 8-K dated March 28, 2000, and incorporated
herein by reference).
10.2 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 Form 8-K dated March 28, 2000, and
incorporated herein by reference).
10.3 Business Opportunity Allocation and Miscellaneous Services Agreement by
and among Arinco Computer Systems Inc. and Pangea Internet Advisors
LLC, dated as of March 28, 2000 (filed as an exhibit to the
Registrant's Form 8-K dated March 28, 2000 and incorporated herein by
reference).
10.4 Employment Agreements entered into by and between Arinco Computer
Systems Inc. and each of William Avery and David M. Roberts (filed as
an exhibit to the Registrant's Form 8-K dated March 28, 2000, and
incorporated herein by reference).
10.5 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 Form 8-K dated March 28,
2000, and incorporated herein by reference).
10.6 Stock Purchase Agreement, dated June 29, 2000, by and between Arinco
Computer Systems Inc., Broadstream.com, Inc. and the purchasers listed
on Schedule I attached thereto (filed as an exhibit to the Registrant's
form 8-K dated June 29, 2000, and incorporated herein by reference).
10.7 Employment Agreement entered into by and between Arinco Computer
Systems Inc. and Frank Gallagi dated as of June 12, 2000 (filed as an
exhibit to the Registrant's Form 10-QSB for the quarter ended June 30,
2000, and incorporated herein by reference).
10.8 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 Form 8-K dated September 15, 2000, and
incorporated herein by reference).
10.9 Employment Agreement entered into by and between Arinco Computer
Systems Inc. and Matthew Ryan dated as of August 21, 2000.
27.1 Financial Data Schedule (for SEC use only).
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(b) Reports on Form 8-K:
The Registrant filed a Form 8-K dated September 12, 2000 and a Form 8-K
dated September 15, 2000 during the quarter ended September 30, 2000
reporting matters under Item 5, Other Events.
There are no other exhibits specified in Item 601 of Regulation S-B to
be included with this filing.
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Dated: November 20, 2000
CHANGE TECHNOLOGY PARTNERS, INC.
By: /s/ Matthew Ryan
---------------------------------------
Matthew Ryan,
President and Chief Executive Officer
By: /s/ Frank Gallagi
---------------------------------------
Frank Gallagi,
Chief Financial Officer and Treasurer
15
