U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 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 quarterly period ended September 30, 1998
|_| Transition report under Section 13 or 15(d) of the Exchange Act.
For the transition period from ______________ to ______________
Commission file no. 33-21443
MICROCAP FINANCIAL SERVICES, INC.
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(Exact name of small business issuer as specified in its charter)
Delaware 06-1489574
- -------------------------------- -----------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
7280 W. Palmetto Park Road, Suite 202, Boca Raton, FL 33433
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(Address of principal executive offices) (Zip Code)
(561) 417-8053
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Issuer's telephone number, including area code
Capital Growth Holdings, Ltd, 660 Steamboat Road, Greenwich, CT 06830
- -------------------------------------------------------------------------------
(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 November 16, 1998 was as follows: 18,798,496 shares of
common stock and 16,431,000 shares of class B common stock.
Transitional Small Business Disclosure Format (check one):
YES NO X
---- ----
<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
Overview
MicroCap Financial Services, Inc., formerly Capital Growth Holdings,
Ltd., ("MFSI" or the "Company") provides a variety of financial and information
services to the investment community and MicroCap companies.
Through its operating subsidiary, MicroCap1000.com, Ltd., MFSI provides
internet based comprehensive electronic publishing and investor relations
services to the MicroCap sector and interested investors as well as maintaining
its proprietary MicroCap1000 Index, a real time index following the stock
performance of 1000 companies with market capitalization between $25 and $400
million.
The Company's web-site, www.microcap1000.com, is designed to be the "#1
Internet Source of Information for MicroCaps". Electronic publishing products
and services include the Index, prices, graphs and charts, financial and
business data on Index and other MicroCap companies, original market commentary
by well-known analysts and money managers, investor relations sites highlighting
selected publicly traded MicroCap company clients and a model MicroCap
investment portfolio.
MFSI is also pursuing the acquisition and development of additional
internet based information and communications technologies as well as offering
investment banking services to its MicroCap1000 and other MicroCap clients
through its wholly-owned subsidiary International Capital Growth, Ltd. ("ICG").
In order to fund the launch of MicroCap1000, the Company raised
$1,947,500 prior to September 30, 1998 and an additional $297,200 since that
date. To date, approximately $500,000 of the proceeds of this offering have been
used for the organization and initial operations of MicroCap1000. The remainder
of the proceeds are being held for additional investment in MicroCap1000 and for
working capital for the Company. Additional capital resources may be needed to
fund the operation of MicroCap1000 although the Company believes it currently
has adequate resources for approximately the next 12 months. The Company is
continually exploring alternatives to raise additional capital. There is no
assurance however, that any additional capital will be raised.
The Company's net loss for the nine months ended September 30, 1998 of
approximately $1,206,422 resulted primarily from the Company's investment
banking activities, which are currently being de-emphasized, including the
write-down of its securities portfolio as well as due
2
<PAGE>
diligence expenses in connection with an aborted merger as well as a low level
of private placement activity. The write-down of its securities portfolio 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 $.03 per share at September 30, 1998. As of October 6, 1998, First American
Railways, Inc. has filed for liquidation under the bankruptcy code.
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 ability to attract subscribers and investor relations
clients to its web site, (iii) the successful completion of securities offerings
anticipated to be consummated through ICG, (iv) the maintenance of market
conditions affecting the Company's services, and (v) 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.
3
<PAGE>
Results of Operations
The Company has limited operating history upon which an evaluation of
its performance and prospects can be made, particularly in light of the fact
that MicroCap1000.com, Ltd. was founded in August, 1998.
Comparison of Three Months Ended September 30, 1998 to
Three Months Ended September 30, 1997
Net Loss
The Company's net income for the three months ended September 30, 1998
decreased by $897,074 from a net income of $209,583 for the three months ended
September 30, 1997 to a net loss of ($687,491) for the three months ended
September 30, 1998. This decrease resulted primarily from a reduction in
placement fees and from a decline in the value of its portfolio of securities
which had appreciated during the comparable quarter in 1997, together with the
due diligence expense the Company incurred in connection with an acquisition
which was not consummated.
Revenues
Total revenues decreased by $1,191,050, to ($37,128) during the three
months ended September 30, 1998 as compared to $1,153,922 during the three
months ended September 30, 1997. Revenues generated from consulting fees
increased by $104,130 to $111,630 from $7,500 during the comparable quarter in
1997. Revenues generated from the net realized and unrealized loss on marketable
and not readily marketable securities decreased by ($1,238,030) to a loss of
($267,537) as compared to a gain of $866,636 during the comparable quarter in
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 consist of cash and
securities earned in private placements in which ICG acts as placement agent
decreased by $148,935 from $259,020 during the three months ended September 30,
1997 to $110,085 during the three months ended September 30, 1998. Interest
income decreased by $12,072 to $8,694 as compared to $20,766 during the same
quarter in 1997.
Operating Expenses
Total operating expenses decreased by $219,720, to $724,619 as compared
to $944,339 during the comparable quarter in 1997. This decrease is due
primarily to the significant steps the Company has taken to reduce its expenses
for the Fiscal 1998. Commission expenses decreased by $21,746 to $11,486 as
compared to $33,232 during the comparable quarter in 1997. General and
administrative expenses decreased by $281,263 to $619,844 as compared to
$901,107 during the comparable quarter in 1997.
4
<PAGE>
Comparison of Nine Months Ended September 30, 1998
to Nine Months Ended September 30, 1997
Net Loss
The Company's net income for the nine months ended September 30, 1998
decreased by $2,379,240 to a net loss of ($1,206,422) from a net income of
$1,172,818 during the comparable period in 1997. This decrease resulted
primarily from a reduction in placement fees and a loss rather than a gain on
the Company's portfolio of securities. During the nine months ended September
30, 1997, the Company purchased a portfolio of securities at below market
generating a gain of approximately $1.8 million. During the nine months ended
September 30, 1998 the value of the Company's portfolio of securities declined
dramatically together with a due diligence expense the Company incurred in
connection with an acquisition with was not consummated .
Revenues
Total revenues decreased by $3,647,557, to $775,929 during the nine
months ended September 30, 1998 from $4,423,486 during the comparable period in
1997. Revenues generated from consulting fees decreased by $54,762 to $349,028
from $294,266 during the comparable period in 1997. Revenues generated from the
net realized and unrealized loss on marketable and not readily marketable
securities decreased by $3,015,985 to a loss of ($502,211) as compared to a gain
of $2,513,774 during the comparable period in 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 decreased by $593,056 from
$1,501,786 during the nine months ended September 30, 1997 to $908,730 during
the comparable period in 1998. Interest income during the nine months ended
September 30, 1998 decreased by $53,474 to $20,382 compared to $73,856 for the
comparable period in 1997.
Operating Expenses
Total operating expenses decreased by $1,268,317, to $1,982,351 as
compared to $3,250,668 during the comparable period of 1997. This decrease is
due primarily to the reduction in commission expense and the significant steps
the Company has taken to reduce its expenses for Fiscal 1998 such as eliminating
salaried personnel and reducing salaries paid to Management. General and
administrative expenses decreased by $497,914 to $1,893,875 as compared to
$2,391,789 during the comparable period in 1997. The equity in the loss of an
unconsolidated affiliate and write-down of advances has increased by $61,068
from $0 for the nine months ended September 30, 1997 to $61,068 for the nine
months ended September 30, 1998 as a result of the write-off of the Company's
investment in CGE.
Year 2000 Compliance
The Company believes the cost of administrating its Year 2000 Compliance program
will not have a material adverse impact on future earnings. However, the
potential costs and uncertainties associated with any Year 2000 Compliance
program will depend on a number of factors, including
5
<PAGE>
software, hardware and the nature of the industry in which the Company, its
subsidiaries, suppliers and customers operate. In addition, companies must
coordinate with other entities with which they electronically interact, such as
customers, suppliers, financial institutions, etc. The Company estimates that
potential costs will not be significant.
Liquidity and Capital Resources
Capital for the Company has been provided by the investments made by
the initial stockholder group and through private placements of the Company's
securities. In March 1997, the Company raised net proceeds of approximately
$900,000 in a private placement of 549,496 shares of its Common Stock. In
August, 1998 the Company raised net proceeds of approximately $1,945,389 in a
private placement of 15,530,000 shares. To date approximately $500,000 of the
proceeds of this offering have been used for the organization and initial
operations of MicroCap1000.com, Ltd. The remainder of the proceeds are being
held for additional investment in MicroCap1000.com, Ltd. and for working capital
for the Company. The placement is still ongoing.
The holders of Common Stock are entitled to receive dividends when and
if declared by the Board of Directors out of funds legally available therefore
(the "Common Stock Dividend"). 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. On 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 Company determined not to make the $.05625 per
share common stock dividend payments due on June 30, 1998 as well as September
30, 1998 to retain capital for operations. The Company does not anticipate
making its final declared dividend payment due in cash at December 31, 1998. The
Company anticipates offering its stockholders the opportunity to accept common
stock in lieu of cash as payment for the Common Stock Dividend. There is no
assurance, however, that this offer will be accepted.
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 18,798,496 shares of Common Stock and 16,431,000 shares of Class B
Common Stock currently outstanding.
In the fourth quarter of 1997 and the throughout 1998, 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 $530,399 at September 30, 1998.
This was predominantly the result of the decline in the per share bid price of
6
<PAGE>
the Company's common stock of First American Railways, Inc., from an average
cost of $1.06 per share to a $0.03 per share bid price at September 30, 1998.
Subsequently, First American Railways, Inc. filed bankruptcy on October 6, 1998.
In addition, in an effort to raise funds for operating expenses, the Company
sold a portion of its portfolio securities.
The Company has no material capital commitments other than annual
salaries to its executive officers and employees of approximately $870,000 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 the next twelve months. The
company will continue to explore the possibility of generating further income
acting as placement agent in private financings.
Variability of Results
The Company anticipates that its future financial results will vary
dramatically. This is the result of the start-up nature of MicroCap1000.com,
Ltd. as well as the cyclical nature of the Investment Banking business.
PART II
OTHER INFORMATION
Item 3. Defaults Upon Senior Securities.
On October 12, 1997, all 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 on a one-for-one basis into shares 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 from October 12, 1996 through October 12, 1997 and were due and 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
The Company did not file any reports on Form 8-K during the quarter for
which this report was filed.
7
<PAGE>
MICROCAP FINANCIAL SERVICES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
A S S E T S
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
------------------ -----------------
Assets: (unaudited)
<S> <C> <C>
Cash and cash equivalents ................................ 2,339,363 810,659
Due from broker .......................................... 44,930 273,131
Securities owned at market value ......................... 28,899 634,058
Securities not readily marketable, at fair value ......... 501,500 627,498
Note receivable and accrued interest from affiliate ...... 0 209,000
Restricted cash .......................................... 104,193 102,334
Furniture, fixtures, equipment, and leasehold improvements 176,970 197,503
Customer list ............................................ 50,000 80,000
Investment in and advance to unconsolidated affiliate ... 0 65,000
Other Assets ............................................. 156 2,000
---------- ----------
TOTAL ASSETS .............................................. $3,246,011 $3,001,183
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
<S> <C> <C>
Accounts payable and accrued expenses.................... $ 65,967 $ 179,251
Dividends payable - preferred stockholders............... 38,154 38,154
Dividends payable - common stockholders.................. 384,071 191,165
Deferred revenue......................................... 23,557 74,038
----------- ----------
Total Liabilities........................................ 511,749 482,608
Stockholders' equity:
Preferred Stock - $.001 par value; 20,000,000 shares
authorized, none issued..............................
Common Stock - $.001 par value, 100,000,000 shares authorized;
15,580,000 issued; 3,398,496 issued and
outstanding as of 9/30/98 and 12/31/97 respectively.. 18,978 3,398
Class B Common Stock - $.001 par value, 25,000,000 shares
authorized; 16,431,000 shares issued and outstanding. 16,431 16,431
Additional Paid in Capital.................................... 7,037,739 5,107,930
Accumulated Deficit........................................... (4,308,886) (2,525,584)
Subscription Receivables...................................... 0 (53,600)
Treasury Stock (15,000 Shares)................................ (30,000) (30,000)
---------- -----------
Total stockholders' equity............................... 2,734,262 2,518,575
----------- ---------
T O T A L................................................ $ 3,246,011 $ 3,001,183
=========== ============
</TABLE>
F-1
<PAGE>
MicroCap Financial Services, Inc.
Condensed Consolidated
Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
Sept. 30, 1998 Sept. 30, 1997 Sept. 30, 1998 Sept. 30, 1997
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Revenues:
Consulting fees $111,630 7,500 349,028 294,266
Private placement fees 110,085 259,020 908,730 1,501,786
Net realized and unrealized gain(loss) on marketable
and not readily marketable securities (267,537) 866,636 (502,211) 2,513,774
Gain debt settlement 39,804
Interest income 8,694 20,766 20,382 73,856
---------- ---------- ------- ---------
Total revenue $(37,128) $1,153,922 775,929 4,423,486
---------- ---------- ------- ---------
Operating expenses
Commission 11,486 33,232 27,408 772,764
General and administrative 713,133 901,107 1,893,875 2,391,789
Equity in loss of unconsolidated affiliate 0 10,000 61,068 0
Write-down of Advances to unconsolidated affiliate 0 0 0 86,115
---------- ---------- ------- ---------
Total operating expenses 724,619 944,339 1,982,351 3,250,668
Net Income (loss) before taxes (687,491) 209,583 (1,206,422) 1,172,818
Provision for taxes 0 50,000 0 300,000
Net income (loss) $(687,491) $159,583 $(1,206,422) $772,818
=========== ======== ============ =======
Less cumulative preferred dividend of former stockholders (9,241) 0 (9,131)
Net income (loss) attributable to
Common stockholders $(687,491) $150,342 $(1,206,422) $763,687
========= ======= =========== =======
Basic (loss) income per share $(0.01) $0.003 $(0.02) $0.05
====== ====== ======= =====
Diluted (loss) income per share $(0.01) $0.003 $(0.02) $0.04
======= ====== ======= =====
Weighted average common shares outstanding - basic income
per share 23,142,216 14,740,662 19,814,496 14,464,601
Effect of Potential Common Stock 0 5,218,751 0 5,168,345
Weighted average common shares outstanding - diluted
income per share 23,142,216 19,959,413 19,814,496 19,548,196
---------- ---------- ---------- ----------
</TABLE>
F-2
<PAGE>
MicroCap Financial Services, Inc.
Consolidated Statement of Cash Flows
<TABLE>
<CAPTION>
Nine Months Nine Months
Ended Ended
Sept. 30, 1998 Sept. 30, 1997
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) (1,206,422) 772,818
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization 53,888 31,394
Equity In loss of unconsolidated affiliate and write-down of advances 65,000 86,115
Valuation of warrants for consulting 0 35,417
Deferred tax expense 0 400,000
Gain on debt settlement (39,804)
Gain on Sale of CGE (3,932) 0
Receipt of securities in payment of fees (187,500)
Net realized and unrealized gain (loss) on marketable and not 0
readily marketable securities 502,211 (699,252)
Changes in:
Due from broker 228,201
Other assets 1,844 (30,943)
Accounts payable and accrued expenses (113,284) (10,000)
Deferred revenues (50,481) 108,750
-------- --------
Net cash (used in) operating activities (710,475) 1,434,892
--------- ---------
Cash flows from investing activities:
Additions to fixed assets (3,355) (220,200)
Exercise of warrants (60,000) 0
Proceeds from sale of securities 476,446 0
Proceeds from sale of CGE 3,932
Advances/repayment to unconsolidated affiliate 209,000 (200,000)
Investment in securities 0 (2,285,368)
Investment in restricted cash (1,859) 0
Net cash used in investing activities 624,164 (2,705,568)
------- -----------
Cash flows from financing activities:
Proceeds from the issuance of common stock and preferred stock 1,945,389 957,948
Dividends paid (383,974) 0
Collection of Subscriptions Receivable 53,600 0
Purchase of treasury stock 0 (30,000)
--------- --------
`
Net cash provided by (used in) financing activities 1,615,015 927,948
--------- -------
Net (decrease) in cash and cash equivalents 1,528,704 (342,728)
Cash at beginning of period 810,659 3,060,255
------- ---------
Cash and cash equivalents at end of period 2,339,363 2,717,527
========= =========
</TABLE>
F-3
<PAGE>
MICROCAP FINANCIAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
September 30, 1998
(Unaudited)
(1) Financial Statement Presentation
The unaudited financial statements of MicroCap Financial Services, Inc. (the
"Company" or "MFSI") 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
Effective November 5, 1998, Capital Growth Holdings, Ltd., formerly Galt
Financial Corporation, changed it's name to MicroCap Financial Services, Inc.
Galt Financial Corporation was incorporated in the State of Colorado on June 15,
1987. On March 14, 1997, Capital Growth Holdings, Ltd., ("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 3 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. 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 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
<PAGE>
warrants exercisable 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 one public company which constitute a
significant portion of the Company's total assets. The company is subject to the
reporting requirements of the U.S. Securities and Exchange Commission.
The carrying amount of such investments at September 30, 1998 are as follows:
World's Inc. 415,000
Unaudited summarized financial information for the aforementioned investment is
as follows:
Worlds, Inc.
(a development stage enterprise)
(unaudited)
Balance Sheet Data:
September 30, 1998
------------------
Current Assets 2,407,869
Non-Current Assets 88,030
Current Liabilities 1,598,410
Non-Current Liabilities 1,937,500
<PAGE>
Income Statement Data:
For the Nine
Months Ended
September 30, 1998
------------------
Net Revenues 16,132
Gross profit (2,888,395)
Operating loss before extraordinary item (2,881,346)
Net loss (2,708,799)
(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. The
company has determined not to make the $.05625 per share common stock dividend
payment on June 30, 1998 as well as September 30, 1998 due to the Company's
current limited cash resources, although the Company had previously declared
such dividend. The Company anticipates offering its shareholders the opportunity
to accept common stock in lieu of cash as payment for the Common Stock Dividend.
There is no assurance, however, that this offer will be accepted. The Company
does not expect to make its last declared dividend on December 31, 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.
(8) 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 effect would be antidilutive.
(9) 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.
<PAGE>
(10) 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 nine months ended September 30,
1998 and September 30, 1997.
(11) 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 September 30, ICG had net capital of $790,720 which was $785,085 in excess of
its required net capital.
(12) 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).
(13) 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.
(14) 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 will not have a significant effect on the information presented
in the financial statements.
(15) 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 June 30, 1998 and June 30,
1997.
(16) Restatement
The Company has restated the condensed consolidated statement of operations for
the three months ended September 30, 1998 to reflect its security portfolio at
market value without provision for discounts at September 30, 1997.
<PAGE>
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: By:
------------------------- -------------------------------------
Ronald B. Koenig
President and Chief Executive Officer
(Principal Executive Officer)
Dated: By:
------------------------ -------------------------------------
Michael S. Jacobs
Senior Vice President
(Chief Accounting Officer)
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<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 9-mos
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1
<CASH> 2,339,363
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0
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<INCOME-PRETAX> (1,026,422)
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