U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB/A
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended March 31, 1998
[_] Transition report under Section 13 or 15(d) of the Exchange Act.
For the transition period from ______________ to ______________
Commission file no. 33-21443
CAPITAL GROWTH HOLDINGS, LTD.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 06-1489574
- -------------------------------------- ---------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
660 Steamboat Road, Greenwich, CT 06830
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(Address of principal executive offices) (Zip Code)
(203) 861-7750
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Issuer's telephone number, including area code
- --------------------------------------------------------------------------------
(Former name, former address and formal fiscal year,
if changed since last report)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
YES X NO
---- -----
The number of shares outstanding of each of the issuer's classes of common
equity as of April 16, 1998 was as follows: 3,383,496 shares of common stock and
16,431,000 shares of class B common stock.
Transitional Small Business Disclosure Format (check one):
YES NO X
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<PAGE>
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements.
The interim financial statements required by this Item are included in
this quarterly report on Form 10-QSB immediately following the signature page
hereto.
Item 2. Management's Discussion and Analysis.
General
Capital Growth Holdings, Ltd. ("CGH" or the "Company") is a financial
services firm concentrating in investment and merchant banking in the United
States and Europe. The Company, through its wholly-owned operating
subsidiary, International Capital Growth, Ltd. ("ICG"), provides growth
companies with access to capital on an agency or principal basis by using
creative financing approaches and tools.
ICG commenced formal operations in October, 1996 and through December,
1996 was in the development stage. Accordingly, the Company has limited
operating history upon which an evaluation of the Company's performance and
prospects can be made. ICG's business focus is to act as placement agent in
connection with the international private placement of securities of its client
companies through a world-wide network of sub-placement agents ("Sub-Placement
Agents"). In addition, Capital Growth (Europe) Limited ("CGE"), a London based
financial services firm, which is 50% owned by ICG, acts as a Sub-Placement
Agent for ICG in Europe and sources European investment banking transactions.
The Company also conducts merchant banking activities through ICG. In the
course of its business activities, ICG encounters investment opportunities that
are more appropriate for a direct principal investment due to the nature, size
or timing of a subject company's capital requirements. ICG has made direct
investments in, and anticipates to continue making direct investments in, such
opportunities.
The Board of Directors has decided not to expand the Company's operations
into the retail brokerage business. This decision was based on the Board of
Directors' belief that the current market level for equities in the U.S., the
increasing level of competition in the brokerage industry from Internet based
brokerage services and brokerage firms offering unlimited trading for a fixed
annual fee and the high volatility in the Microcap sector present significant
barriers to entry into the securities brokerage business for the Company.
Accordingly, the Company will concentrate on its core businesses, investment and
merchant banking.
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The Company has historically generated revenues primarily from ICG's
activities as a placement agent in private financings and as a consultant. The
Company's net loss for the fiscal three months ended March 31, 1998 of
approximately ($309,135) resulted primarily from insufficient consulting and
placement fees to cover general and administrative expenses. This decline was
predominantly the result of the decline in the carrying value of the common
stock of First American Railways, Inc., from an average cost of $1.06 per share
to a $0.50 per share bid price at December 31, 1997, approximately a 53%
decline. As of March 31, 1998 the per share bid price was $0.50. As of May 11,
1998, the per share bid price of such common stock had declined to $0.375. As of
March 31, 1998, the Company had an accumulated deficit of approximately $3.0
million.
The Company has taken significant steps to reduce its expenses for the
fiscal year 1998 such as eliminating salaried personnel and reducing salaries
paid to Management. Over the last six months, the Company has eliminated three
full-time employees, thereby reducing the Company's anticipated fiscal year 1998
payroll expenses by $169,583, a 16% reduction. The Company has also reduced the
annual base salaries of Management resulting in an additional $100,000 (10%)
anticipated reduction in the Company's annual payroll expenses for fiscal year
1998. In addition, in September 1998, the Company anticipates consolidating its
Greenwich, Connecticut office into its West Palm Beach, Florida office in an
effort to further reduce overhead and increase efficiency.
The Company believes its current resources will permit the Company to
continue operations through May 1999. To continue operations beyond such period,
the Company must generate placement income, sell a portion of its portfolio
securities and/or raise additional funds through the sale of its equity
securities. The Company is currently exploring each of these alternatives. There
can be no assurance, however, that the Company will be able to successfully
implement any of such alternatives to a degree that will satisfy its liquidity
needs for a significant period of time beyond May 1999. The Company currently
has no outside commitments for additional sources of liquidity.
Acquisition of International Capital Growth, Ltd.
In March, 1997, CGH, then an inactive company, acquired 100% of the
outstanding capital stock of ICG in a reverse acquisition consummated through a
share exchange transaction (the "Share Exchange"). The Share Exchange was
treated as a recapitalization. In connection therewith, ICG's historic capital
accounts were retroactively adjusted to reflect the equivalent number of shares
issued by CGH in the transaction while ICG's historical deficit accumulated
during the development stage is carried forward.
3
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Forward Looking Statements
This report contains certain forward-looking statements which represents
the Company's expectation or beliefs, including statements regarding, among
other things, (i) the Company's growth strategy or potential, (ii) anticipated
trends in the Company's businesses, (iii) the Company's ability to compete with
its competitors and (iv) the Company's profitability and projected financial
condition. Any statements contained in this Prospectus that are not statements
of historical fact may be deemed to be forward-looking statements. Without
limiting the foregoing, words such as "may," "will," "expect," "plan,"
"believe," "anticipate," "intent," "estimate" or "continue," the negative
statements are based upon Management's beliefs at the time they are made as well
as assumptions made by Management based upon information available to it. The
current assumptions regarding the Company's operations, performance, development
and results of its business include (i) the accuracy of estimates of anticipated
increases in the Company's expenses due to implementation of the Company's
business plan, (ii) the successful completion of securities offerings
anticipated to be consummated through ICG, (iii) the maintenance of market
conditions affecting the Company's services, and (iv) appropriate regulatory
approvals for certain corporate actions. Forward-looking statements are
inherently subject to various risks and uncertainties, including those described
above, as well as potential changes in economic or regulatory conditions that
are largely beyond the Company's control. Should one or more of these risks
materialize or changes occur, or should Management's assumptions prove to be
incorrect, the Company's actual results may materially vary from those
anticipated or projected.
Results of Operations
The Company had limited operating history upon which an evaluation of its
performance and prospects can be made.
Comparison of Three Months Ended March 31, 1998 to Three Months Ended
March 31, 1997
Net Loss
The Company's net income for the three months ended March 31, 1998
decreased by $894,219 or 153% to a net loss of ($310,087) from a net income of
$584,132 for the three months ended March 31, 1997. This decrease resulted
primarily from a reduction in consulting fees and placement fees that failed to
cover general and administrative expenses and a decline in the value of its
portfolio of securities.
Revenues
Total revenues decreased by $1,270,961, or 81%, to $284,746 during the
three months ended March 31, 1998 as compared to $1,555,507 during the three
months ended March 31, 1997. Revenues generated from consulting fees decreased
by $222,999 to $51,750 during the three months ended March 31, 1998 as compared
to $274,749 during the three months ended March 31, 1997. Revenues generated
from the net realized and unrealized loss on marketable and not readily
marketable securities decreased by $1,412,793 to a loss of ($200,319) during the
three months ended March 31, 1998 as compared to a
4
<PAGE>
gain of $1,212,474 during the three months ended March 31, 1997. The decrease is
primarily due to the decline in the carrying value of the Company's largest
portfolio position, common stock of First American Railways, Inc. Revenues
generated from private placement fees which consists of cash and securities
earned in private placements in which ICG acts as placement agent increased from
$0 during the three months ended March 31, 1997 to $427,074 during the three
months ended March 31, 1998. Interest income during the three months ended March
31, 1998 decreased by $22,239 to $6,241 compared to $28,480 for the three months
ended March 31, 1997.
Operating Expenses
Total operating expenses decreased by $176,542, or 23%, to $594,833 during
the three months ended March 31, 1998 as compared to $771,375 during the three
months ended March 31, 1997. This decrease is due primarily to the significant
steps the Company has taken to reduce its expenses for the fiscal year 1998 such
as eliminating salaried personnel and reducing salaries paid to Management. Over
the last six months, the Company has eliminated three full-time employees,
thereby reducing the Company's anticipated fiscal year 1998 payroll expenses by
$169,583, a 16% reduction. The Company has also reduced the annual base salaries
of Management resulting in an additional $100,000 (10%) anticipated reduction in
the Company's annual payroll expenses for fiscal year 1998. General and
administrative expenses decreased by $86,379 to $573,881 for the three months
ended March 31, 1998 as compared to $660,260 during the three months ended March
31, 1997. The equity in the loss of an unconsolidated affiliate and write-down
of advances has decreased by $66,115 from $86,115 for the three months ended
March 31, 1997 to $20,000 for the three months ended March 31, 1998.
Liquidity and Capital Resources
In the March 1997 Share Exchange, the Company effectively "issued" 297,094
shares of Common Stock to its historical shareholders through a reverse stock
split in exchange for approximately 98% control of the Company, a publicly held
company. As a result of the Share Exchange, ICG's shareholders gained control of
the Company and ICG became the wholly owned subsidiary of the Company.
Management of ICG chose to effect this reverse merger and thereby create a
publicly-held holding company for ICG as Management believed it would be less
expensive and less time-consuming than effecting an underwritten public offering
of ICG's or a holding company's securities. Further, a reverse merger eliminates
the risk associated with an initial public offering of ICG's or a holding
company's securities. Further, a reverse merger eliminates the risk associated
with an initial public offering (IPO). Many companies invest a substantial
amount of time and capital during the IPO process and are not able to effectuate
a successful transaction as a result of market conditions or poor performance of
the Underwriter. Management thus believed that a reverse merger was a better
approach than an IPO as a result of the reduced cost, risk and time. The
officers of the Company prior to the Share Exchange and officers of ICG
determined the number of shares of Common Stock to be issued to the historical
shareholders of the Company by negotiation. The value of such issuance was not
based on the Company's book value or any established valuation criteria. A
primary consideration in determining the number of shares to be issued to the
original shareholders was the offering of adequate consideration to gain control
by the shareholders of ICG of a publicly held company. See "The
Company-Acquisition of International Capital Growth, Ltd."
In connection with the Share Exchange, the Company issued an aggregate of
2,906 additional shares of Common Stock to certain stockholders and former
officers of the Company in exchange for the release by such individuals of
obligations owed to them from the Company in the aggregate of $46,343, thereby
converting such debt into equity. Such shares were valued at their fair value of
$6,539 ($2.25 per share) and the Company, in connection with such issuance,
recorded a gain of $39,804.
Capital for the Company has been provided by the investments made by the
initial shareholder group and through private placements of the Company's
securities. In March 1997, the Company raised net proceeds of approximately $0.9
million in a private placement of 549,496 shares of its Common Stock.
To date, the Company has used its capital for merchant banking (securities
investments), working capital and general corporate purposes. In addition, in
March, 1997, the Company loaned $200,000 to an entity controlled by Messrs.
Ronald B. Koenig and Stanley Hollander, two of the
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<PAGE>
Company's directors, officers and principal shareholders. The loan, which was
due on March 26, 1998, carried interest at the rate of 6% per annum and was
approved by a majority of disinterested directors of the Company. This loan was
repaid on April 9, 1998.
On July 1, 1997, the Company paid a $.1125 per share dividend to the
holders of its Common Stock which dividend totaled $382,332 in the aggregate.
The dividend represented payment for the six month period from January 1, 1997
through June 30, 1997 of a two year $.225 annual per share dividend (the "Common
Stock Dividend"). One each of September 30, 1997, December 31, 1997 and April 2,
1998, the Company paid a $.05625 per share dividend which in each case totaled
$191,165 in the aggregate, representing payment of the Common Stock Dividend for
the three month periods from July 1, 1997 through September 30, 1997, from
October 1, 1997 through December 31, 1997, and from January 1, 1998 through
March 31, 1998, respectively. The balance of the Common Stock Dividend is
anticipated to be paid on a quarterly basis at a rate of $.05625 per share
from June 30, 1998 through December 31, 1998.
On September 15, 1997, the Company loaned $25,000 to Capital Growth
International LLC, an affiliate of the Company. This loan was repaid on October
2, 1997 without interest.
On October 12, 1997, each share of the Company's 4,001,334 shares of
Series A Preferred Stock, par value $.001 per share (the "Series A Preferred
Stock"), and 1,080,000 shares of Series B Preferred Stock, par value $.001 per
share (the "Series B Preferred Stock"), converted into shares of Class B Common
Stock on a one-for-one basis, at which time the 5% per share annual dividend
that had accrued thereon ceased to accrue and became due and payable on October
24, 1997 out of funds legally available therefor. The dividend due and payable
to the holders of the Series A Preferred Stock and Series B Preferred Stock is
$38,154 in the aggregate. As a result of such conversion and the purchase by the
Company of 15,000 shares of Common Stock from a stockholder, the Company has a
total of 3,383,496 shares of Common Stock and 16,431,000 shares of Class B
Common Stock currently outstanding.
In the fourth quarter of 1997, the market price of certain of the Company
investments in equity securities declined significantly. The securities with a
carrying amount of approximately $2,900,000 at September 30, 1997 declined to
approximately $850,000 at December 31, 1997. This was predominantly the result
of the decline in the per share bid price of the Company's common stock of First
American Railways, Inc., from an average cost of $1.06 per share to a $0.50 per
share bid price at December 31, 1997, approximately a 53% decline. As of March
31, 1997 the per share bid price was $.50. As of May 11, 1998, the per share bid
price of such common stock was $0.375.
During the fiscal year ended December 31, 1997, the Company paid
consulting fees of $99,000 to Helix Investments Limited, a stockholder of CGH in
connection with the organization of road show presentations in London, England
relating to offerings made pursuant to Regulation S as promulgated under the
Securities Act of 1933, as amended, for which ICG acted as placement agent.
The Company has no material capital commitments other than annual salaries
to its executive officers and employees of approximately $700,000 and a letter
of credit in the amount of $100,000 to secure future rent payments at the
Company's London office. The Company believes that its current cash resources
will be adequate to satisfy its operations through at least May, 1999. To
continue operations beyond such period, the Company must generate placement
income, sell a portion of its portfolio securities and/or raise additional funds
through the sale of its equity securities. The Company
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<PAGE>
is currently exploring each of these alternatives. There can be no assurance,
however, that the Company will be able to successfully implement any of such
alternatives to a degree that will satisfy its liquidity needs for a significant
period of time beyond May, 1999. The Company currently has no outside
commitments for additional sources of liquidity.
The Company is currently seeking to increase its capital base by
generating revenues from ICG's investment banking activities and through a sale
of the Company's equity securities. Further, the Company has taken significant
steps to reduce its expenses for the fiscal year 1998 such as eliminating
salaried personnel and reducing salaries paid to Management. Over the last six
months, the company has eliminated three full-time employees, thereby reducing
the Company's anticipated fiscal year 1998 payroll expenses by $169,583, a 16%
reduction. The Company has also reduced the annual base salaries of Management
resulting in an additional $100,000 (10%) anticipated reduction in the Company's
annual payroll expenses for the fiscal year 1998. In addition, in September,
1998, the Company anticipates consolidating its Greenwich, Connecticut office
into its West Palm Beach, Florida office in an effort to further reduce overhead
and increase efficiency.
Variability of Results
The Company anticipates that a substantial portion of its future revenues
will originate from ICG's activities as placement agent in private financings.
When acting as placement agent, ICG is typically compensated upon the successful
closing of a financing. Agency financings typically take from 90 to 120 days to
consummate after ICG is retained as placement agent. Activities may be
undertaken and expenses incurred in one fiscal period although a fee may not be
earned until a subsequent period. As a result, the financial results of the
Company may vary dramatically from quarter to quarter. Further, the Company's
operating results will also vary as a result of the marking to market of its
portfolio of securities.
As of March 28, 1998, the Company's largest holding in its portfolio of
securities, First American Railways, Inc., common stock had declined 44% since
December 31, 1997. There are no other significant trends affecting the Company's
portfolio of securities.
PART II
OTHER INFORMATION
Item 3. Defaults Upon Senior Securities.
On October 12, 1997, each share of the Company's 4,001,334 shares of
Series A Preferred Stock and 1,080,000 shares of Series B Preferred Stock
automatically converted into one share of the Company's Class B Common Stock.
Pursuant to the terms of the Certificates of Designation of such preferred
stock, the former holders thereof are entitled to 5% per share annual cumulative
dividends prior to payment of dividends on any other class of capital stock of
the Company. The cumulative dividends on such preferred stock have accrued
unpaid since October 12, 1996 and were payable on a quarterly basis commencing
December 31, 1996 and on October 24, 1997, ten business days after the
conversion thereof. The aggregate amount of such arrearage owed by the Company
to the former holders of such preferred stock is $38,154 as of October 12, 1997
and as of the date hereof.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
11 Computation of Per Share Earnings
27 Financial Data Schedule
(b) Reports on Form 8-K
7
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The Company did not file any reports on Form 8-K during the quarter for
which this report was filed.
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.
CAPITAL GROWTH HOLDINGS, LTD.
Date: June 26, 1998 By:
----------------------- ----------------------------------
Ronald B. Koenig
President and Chief Executive Officer
(Principal Executive Officer)
Dated: June 26, 1998 By:
---------------------- ----------------------------------
Michael S. Jacobs
Senior Vice President
(Chief Accounting Officer)
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CAPITAL GROWTH HOLDINGS, LTD.
CONDENSED CONSOLIDATED BALANCE SHEETS
A S S E T S
<TABLE>
<CAPTION>
March 31, 1998 December 31, 1997
-------------- -----------------
Assets: (unaudited)
<S> <C> <C>
Cash and cash equivalents .................................... $ 573,790 $ 810,659
Due from broker .............................................. 136,144 273,131
Securities owned at market value ............................. 391,274 634,058
Securities not readily marketable, at fair value ............. 721,543 627,498
Note receivable and accrued interest from affiliate .......... 209,000 209,000
Restricted cash...................... ........................ 102,959 102,334
Furniture, fixtures, equipment, and leasehold improvements ... 192,574 197,503
Customer list................................................. 70,000 80,000
Investment in and advance to unconsolidated affiliate......... 45,000 65,000
Other assets ................................................. 0 2,000
---------- ----------
TOTAL......................................................... $2,442,284 $3,001,183
========== ==========
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Liabilities:
Accounts payable and accrued expenses ........................ $ 131,700 $ 179,251
Dividends payable - preferred stockholders ................... 38,154 38,154
Dividends payable - common stockholders ...................... 192,036 191,165
Deferred revenue ............................................. 63,942 74,038
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Total liabilities ............................................ 425,832 482,608
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Stockholders' equity:
Preferred Stock - $.001 par value; 20,000,000 shares
authorized, none issued .....................................
Common Stock - $.001 par value, 100,000,000
shares authorized; 3,398,496 issued. ........................ 3,398 3,398
Class B Common Stock - $.001 par value, 25,000,000 shares
authorized; 16,431,000 shares issued ........................ 16,431 16,431
Additional Paid in Capital ........................................ 5,107,930 5,107,930
Accumulated Deficit ............................................... (3,027,707) (2,525,584)
Subscriptions Receivable .......................................... (53,600) (53,600)
Treasury Stock (15,000 Shares) .................................... (30,000) (30,000)
---------- ----------
Total stockholders' equity ................................... 2,016,452 2,518,575
---------- ----------
T O T A L .................................................... $2,442,284 $3,001,183
========== =========
</TABLE>
<PAGE>
Capital Growth Holdings, Ltd.
Condensed Consolidated
Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended
--------------------------
March 31, 1998 March 31, 1997
-------------- --------------
Revenues:
<S> <C> <C>
Consulting fees $ 51,750 $ 274,749
Private placement fees 427,074 0
Net Realized and Unrealized gain (loss) on marketable
and not readily marketable securities (200,319) 1,212,474
Gain on debt settlement 39,804
Interest income 6,241 28,480
------------ ------------
Total revenue $ 284,746 $ 1,555,507
Operating expenses
Commission 0 25,000
General and administrative 574,833 660,260
Equity in loss of unconsolidated affiliate 0 86,115
Write-down of advances to unconsolidated affiliate 20,000 0
------------ ------------
Total operating expenses 594,833 771,375
Income (loss) before taxes $ (310,087) 784,132
Provision for taxes 0 200,000
------------ ------------
Income (loss) $ (310,087) $ 584,132
Less cumulative preferred dividend of former stockholders (9,131)
------------ ------------
Net income (loss) attributable to
Common stockholders $ (310,087) $ 575,001
============ ============
Basic (loss) income per share $ (.02) $ .04
============ ============
Diluted (loss) income per share $ (.02) $ .03
============ ============
Weighted average common shares outstanding - basic
income per share 19,814,496 14,018,824
Effect of potential common shares 0 5,714,297
------------ ------------
Weighted average common shares outstanding - diluted
income per share 19,814,496 19,733,121
============ ============
</TABLE>
<PAGE>
CAPITAL GROWTH HOLDINGS, LTD
Consolidated Statement of Cash Flows
<TABLE>
<CAPTION>
For the Three Months Ended
March 31, 1998 March 31, 1997
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $(310,087) $584,132
Adjustments to reconcile net income (loss) to net cash (used in)
operating activities:
Depreciation and amortization 14,929 15,665
Equity In loss of unconsolidated affiliate and write-down of advances 20,000 86,115
Valuation of warrants for consulting 35,417
Deferred tax expense 200,000
Gain on debt settlement (39,804)
Change in unrealized depreciation of securities 223,299 (1,212,474)
Realized gain on securities (22,980)
Gain on conversion of debt
Compensation paid with securities 25,000
Receipt of securities in payment of fees (187,500) (327,250)
Changes in:
Due from Broker 136,987
Other assets 2,000 (20,227)
Accounts payable and accrued expenses (47,551) 408,900
Deferred revenues (10,096) 120,000
--------- ---------
Net cash (used in) operating activities (180,999) (124,526)
--------- ---------
Cash flows from investing activities:
Additions to fixed assets (217,280)
Proceeds from sale of securities 135,970
Advances to unconsolidated affiliate (200,000)
Investment in securities (550,000)
Investment in restricted cash (675)
--------- ---------
Net cash used in investing activities (135,295) (967,280)
--------- ---------
Cash flows from financing activities:
Proceeds from the issuance of common stock and preferred stock 968,033
Dividends paid (191,165)
Purchase of treasury stock (5,000)
--------- ---------
Net cash provided by (used in) financing (191,165) 963,033
--------- ---------
Net (decrease) in cash and cash equivalents (236,869) (128,773)
Cash at beginning of period 810,659 3,060,255
--------- ---------
Cash and cash equivalents at end of period 573,790 2,931,482
========= =========
</TABLE>
<PAGE>
CAPITAL GROWTH HOLDINGS, LTD.
NOTES TO FINANCIAL STATEMENTS
March 31, 1998
(Unaudited)
(1) Financial Statement Presentation
The unaudited financial statements of Capital Growth Holdings, Ltd. (the
"Company" or "CGH") have been prepared pursuant to the rules and regulations of
the Securities and Exchange Commission ("SEC") and, in the opinion of
management, reflect all adjustments (consisting only of normal recurring
accruals) necessary to present fairly the results of operations for the interim
periods presented. Certain information and footnote disclosures normally
included in financial statements, prepared in accordance with generally accepted
accounting principles, have been condensed or omitted pursuant to such rules and
regulations. However, management believes that the disclosures are adequate to
make the information presented not misleading. The results for the interim
periods are not necessarily indicative of the results of the full fiscal year.
During the first quarter of 1997 the Company ceased being a development stage
company.
(2) The Corporation
Capital Growth Holdings, Ltd., formerly Galt Financial Corporation, was
incorporated in the State of Colorado on June 15, 1987. On March 14, 1997, CGH,
an inactive company, acquired 100% of the outstanding capital stock of
International Capital Growth, Ltd. ("ICG") (a company formed in February 1996),
a Delaware corporation and member of the National Association of Securities
Dealers, Inc. The acquisition was consummated through an exchange of shares that
resulted in the former ICG shareholders receiving control of CGH (see Note B for
further discussion). The transaction has been treated as a recapitalization. In
connection therewith, ICG's historic capital accounts were retroactively
adjusted to reflect the equivalent number of shares issued by CGH in the
transaction while ICG's historical accumulated deficit was carried forward. The
operations reflect those of ICG from inception. Through December 31, 1996 the
Company had been in the development stage and had conducted no revenue producing
activities. During the first quarter of 1997 the Company ceased being in the
development stage. The Company is developing a financial services firm to pursue
business opportunities in the United States and the United Kingdom. In June
1997, after the recapitalization, CGH, a Colorado corporation, was merged into a
Delaware corporation, Capital Growth Holdings, Ltd. This transaction resulted in
the exchange of no par shares for $.001 per value shares.
(3) Acquisition
As discussed in Note 2 above, the Company acquired 100% of the outstanding
capital stock of ICG in a reverse acquisition consummated through a share
exchange transaction (the "Share Exchange"). The transaction is a
recapitalization for accounting purposes. In accordance with the Share Exchange,
the Company issued 18,980,000 shares of its capital stock and 1,625,000
redeemable warrants to the shareholders of ICG in exchange for the outstanding
common and convertible preferred shares and warrants of ICG. In addition,
warrants to obtain 250,000 shares of Class B common stock issued by ICG to a
consultant were exchanged.
The 18,980,000 shares of capital stock of the Company that were issued in the
Share Exchange consisted of (1) 2,549,000 shares of common stock, (b) 11,349,666
shares of Class B common stock, (c) 4,001,334 shares of 5% cumulative
convertible Series A preferred stock and (d) 1,080,000 shares of 5% cumulative
convertible Series B preferred stock. The warrants consist of 1,625,000
redeemable warrants, each exercisable to purchase one share of common stock at
$4.00 per share (subject to adjustment) at any time until October 1999 and
250,000
<PAGE>
redeemable warrants, each exercisable to purchase one share of Class B common
stock at $2.00 per share (subject to adjustment) at any time, subject to a
vesting schedule, until November 1999. The issuance of warrants exerciseable at
$2.00 per share will result in a charge to operations based on their fair value
over the number of months that such consulting services are provided.
(4) Principle of consolidation
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiary, ICG. All significant intercompany transactions and
balances have been eliminated.
(5) Valuation of Securities
Securities owned, which are listed on a national securities exchange, are valued
at their last reported sales price. Securities which trade over-the-counter are
valued at the "bid" price. Securities which do not have a readily ascertainable
market value are valued at their estimated fair value as determined by the
management. Management considers fair value to be cost unless the value has
deteriorated or where later investments have been concluded by a significant
outside investor, then the investment is valued at the last per share sales
price paid unless circumstances dictate a lower valuation. The values of
securities owned by the Company can change substantially because of volatility
in the price for such securities, changes in the business prospects of the
issuer of the securities, specific events influencing the operations of the
issuer of the securities, and various other circumstances outside the security
issuer's control. Accordingly, the value of the securities could decline so that
a loss would be required to be recognized for the total carrying amount of such
securities. Related changes in unrealized appreciation or depreciation are
reflected in the statement of operations.
Included in securities owned at market value and securities not readily
marketable are the common shares of two public companies which constitute a
significant portion of the company's total assets. The companies are subject to
the reporting requirements of the U.S. Securities and Exchange Commission.
The carrying amount of such investments at March 31, 1998 are as follows:
First American Railways, Inc. $388,465
World's Inc. 415,000
Unaudited summarized financial information for the aforementioned investments
are as follows:
First American Railways, Inc.
(unaudited)
<TABLE>
<CAPTION>
Balance Sheet Data:
March 31, 1998
--------------
<S> <C>
Current assets ........................................ $ 3,401,436
Non-current assets .................................... 45,334,126
Current liabilities ................................... 7,952,842
Non-current liabilities ............................... 41,670,125
</TABLE>
<TABLE>
<CAPTION>
Income Statement Data:
For the Three Months Ended
March 31, 1998 March 31, 1997
-------------- --------------
<S> <C> <C>
Revenues .......................... $ 521,310 --
Gross profit (loss) ............... (2,649,698) --
Operating loss .................... (4,014,504) $(733,785)
Net loss .......................... (5,201,817) (823,048)
</TABLE>
<PAGE>
Worlds, Inc.
(a development stage enterprise)
(unaudited)
<TABLE>
<CAPTION>
Balance Sheet Data:
March 31, 1998
--------------
<S> <C>
Current assets ........................................ $2,868,910
Non-current assets .................................... 155,411
Current liabilities ................................... 1,690,805
Non-current liabilities ............................... 1,937,500
</TABLE>
<TABLE>
<CAPTION>
Income Statement Data: For the Three
Months Ended
March 31, 1998
--------------
<S> <C>
Net revenues .......................................... $ 4,002
Gross profit .......................................... 1,401
Operating loss before extraordinary item .............. (778,851)
Net loss .............................................. (621,715)
</TABLE>
(6) Dividend
In March 1997, the Board of Directors declared annual dividends of $.225 per
share of common stock, for the calendar years ended 1997 and 1998, accruing as
of January 1, 1997 payable commencing June 30, 1997 and on a quarterly basis
thereafter. The dividend will be paid after payment of any dividends due on all
classes of stock with priority over common stock (currently Series A and B
preferred stock), subject to any operating restrictions. In addition, the Board
of Directors determined that any dividend declared on Class B common stock will
be subject to a $.20 per share limitation on annual dividends in 1998.
(7) Revenue Recognition
Consulting fees and private placement fees are recorded when earned. In
addition, the Company earns fees in the form of securities. These securities are
valued at market on the date they are earned. Security transactions are recorded
on a trade date basis.
<PAGE>
(8) Investment in and Advances to an Unconsolidated Affiliate
The Company has a 50% equity interest in an unconsolidated affiliate Capital
Growth (Europe) Limited ("CGE"). The investment is recorded using the equity
method of accounting. The Company reviews the investment and advances for
impairment whenever events or changes in circumstances indicates that the
carrying amount of its investment or advances may not be recoverable. A loss in
value of the investment or advances is recorded if it is believed that such loss
is other than a temporary decline.
(9) Net Income (Loss) per Share of Common Stock
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
"Earnings Per Share". Statement No. 128 replaced the calculation of primary and
fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share exclude any dilutive
effects of options, warrants and convertible securities. Dilutive earnings per
share is very similar to the previously reported fully diluted earnings per
share. The Company adopted Statement No. 128 and has retroactively applied the
effects thereof for all periods presented. The impact on the per share amounts
previously reported was not significant. The effects of potential Common Shares
such as warrants, options and Convertible Preferred Stock have not been included
as the effect would be antidilutive.
(10) Preferred Stock
The former holders of Series A and B preferred stock were entitled to a
preferential cumulative dividend equal to $38,154 in the aggregate, which
accrued from October 12, 1996 through October 21, 1997.
(11) Related Party Transactions
Capital Growth International LLC ("CGI"), a company, owned by certain of the ICG
directors, utilizes space at the Company's offices without remuneration. Such
space was not considered significant for the three months ended March 31, 1998
and March 31, 1997.
In March 1997, an aggregate of $46,343 of notes and accrued interest due to
stockholders and former officers were exchanged for 2,906 shares of common
stock. The shares were valued at their fair value of $6,539 ($2.25 per share)
and again of $39,804 was recorded.
In March 1997, the Company loaned $200,000 to an entity controlled by Messrs.
Ronald B. Koenig and Stanley Hollander, two of the Company's directors, officers
and principal shareholders. The loan, which was due on March 26, 1998, carried
interest at the rate of 6% per annum and was approved by a majority of
disinterested directors of the Company. This loan was repaid on April 9, 1998.
(12) Net Capital Requirements
ICG is subject to the Securities and Exchange Commission Uniform Net Capital
Rule (Rule 15c3-1), which requires the maintenance of minimum net capital and
requires that the ratio of aggregate indebtedness to net capital, both as
defined, be at least the greater of 6 2/3 of aggregate indebtedness or $5,000.
At March 31, 1998 ICG had net capital of $823,529 which was $814,148 in
excess of its required net capital.
<PAGE>
(13) Exemption from Rule 15c3-3
ICG is exempt from the reserve requirement of the Securities and Exchange
Commission's Rule 15c3-3 pursuant to Section 15c3-3(k)(2)(ii).
(14) Commitments
The Company has issued a letter of credit in the amount of $100,000 to secure
future rent payments and leasehold improvements at the London office of CGE. The
letter of credit is secured by a money market account.
(15) Recently issued accounting pronouncements
The Financial Accounting Standards Board has recently issued Statements of
Financial Accounting Standards No. 129, "Disclosure of Information about Capital
Structure," No. 130, "Reporting Comprehensive Income," and No. 131, "Disclosures
about Segments of an Enterprise and Related Information." The above
pronouncements did not have a significant effect on the information presented
in the financial statements.
(16) Income Taxes
The Company estimates at the end of each interim period the effective rate to be
applicable for the full fiscal year. The rate so determined is used to provide
for its tax provision for the three months ended March 31, 1998 and March 31,
1997.
(17) Restatement
The Company has restated the condensed consolidated statement of operations for
the three months ended March 31, 1997 to reflect its security portfolio at
market value without provision for discounts at March 31, 1997.
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
----------- -----------
11 Computation of Per Share Earnings
27 Financial Data Schedule
EXHIBIT 11
Capital Growth Holdings, Ltd.
Computation of Net Income Per Common Share
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, 1998 March 31, 1997
------------------ ------------------
<S> <C> <C>
Primary:
Net Income (Loss) $ (310,087) $ 584,132
Less cumulative preferred dividend (9,131)
---------- ----------
Net income (loss) attributable to common
stockholder (310,087) 575,001
========== ==========
Basis (loss) income per share $(.02) $.04
===== ====
Diluted (loss) income per share $(.02) $.03
===== ====
Weighted average common shares outstanding -
basic income per share 19,814,496(1) 14,018,824
Effect of potential common shares 0 5,714,297
---------- ----------
Weighted average common shares outstanding - 19,814,496 19,733,121
diluted income per share
</TABLE>
- ----------------
(1) Net loss per common share is based on the weighted average number of common
shares and Class B common shares outstanding during the year. Common stock
equivalents representing options and warrants and convertible securities have
not been included where they would be antidilutive. Net loss attributable to
common stock was adjusted to reflect cumulative dividends on preferred shares
outstanding.
<TABLE> <S> <C>
<ARTICLE> BD
<CIK> 0000832324
<NAME> Capital Growth
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<EXCHANGE-RATE> 1
<CASH> 573,790
<RECEIVABLES> 136,144
<SECURITIES-RESALE> 0
<SECURITIES-BORROWED> 0
<INSTRUMENTS-OWNED> 1,112,817
<PP&E> 192,574
<TOTAL-ASSETS> 2,442,284
<SHORT-TERM> 0
<PAYABLES> 425,832
<REPOS-SOLD> 0
<SECURITIES-LOANED> 0
<INSTRUMENTS-SOLD> 0
<LONG-TERM> 0
0
0
<COMMON> 19,829
<OTHER-SE> 1,996,623
<TOTAL-LIABILITY-AND-EQUITY> 2,442,284
<TRADING-REVENUE> 0
<INTEREST-DIVIDENDS> 6,241
<COMMISSIONS> 0
<INVESTMENT-BANKING-REVENUES> 0
<FEE-REVENUE> 478,824
<INTEREST-EXPENSE> 0
<COMPENSATION> 0
<INCOME-PRETAX> (309,135)
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (309,135)
<EPS-PRIMARY> (0.02)
<EPS-DILUTED> (0.02)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> BD
<CIK> 0000832324
<NAME> Capital Growth
<RESTATED>
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<EXCHANGE-RATE> 1
<CASH> 2,931,482
<RECEIVABLES> 0
<SECURITIES-RESALE> 0
<SECURITIES-BORROWED> 0
<INSTRUMENTS-OWNED> 1,999,193
<PP&E> 212,787
<TOTAL-ASSETS> 5,572,995
<SHORT-TERM> 0
<PAYABLES> 669,641
<REPOS-SOLD> 0
<SECURITIES-LOANED> 0
<INSTRUMENTS-SOLD> 0
<LONG-TERM> 0
0
786,987
<COMMON> 4,389,109
<OTHER-SE> (472,742)
<TOTAL-LIABILITY-AND-EQUITY> 5,572,995
<TRADING-REVENUE> 0
<INTEREST-DIVIDENDS> 28,480
<COMMISSIONS> 0
<INVESTMENT-BANKING-REVENUES> 0
<FEE-REVENUE> 274,749
<INTEREST-EXPENSE> 0
<COMPENSATION> 0
<INCOME-PRETAX> 744,328
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 544,328
<EPS-PRIMARY> 0.04
<EPS-DILUTED> 0.03
</TABLE>
