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 June 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
CAPITAL GROWTH HOLDINGS, LTD.
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(Exact name of small business issuer as specified in its charter)
Delaware 06-1489574
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(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
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The number of shares outstanding of each of the issuer's classes of common
equity as of July 30, 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 limited 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 was 50% owned by ICG, acts as a sub-placement
agent for ICG in Europe and sources European investment banking transactions. On
May 19, 1998, ICG sold to John Booth, a director of the Company at the time,
ICG's 50% interest in CGE for approximately $4,000, the sale price represented
approximately 50% of the value of CGE's cash accounts. Such transaction was
approved by a majority of the Company's disinterested directors. As a result of
such transaction, the Company has written-off approximately $65,000 as of June
30, 1998, representing ICG's net investment in CGE. John Booth resigned as a
director of the Company on June 1, 1998.
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 Company is currently exploring creating a Financial Public Relations
Internet Web-site. This site would be designed to feature microcap public
companies and expose them to the investment community via the World Wide Web.
The design and implementation of this site would require additional capital
resources. The Company is currently exploring alternatives to raise such
capital. There is no assurance however, that this capital will be raised or this
plan implemented.
2
<PAGE>
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.
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 six months ended June 30, 1998 of approximately
$445,449 resulted primarily from the write-down of its securities portfolio as
well as due diligence expenses in connection with an aborted merger and 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 .1875 at June 30, 1998. As of August 13, 1998, the per share bid price of
such common stock was $.25. As of June 30, 1998, the Company had an accumulated
deficit of approximately $3.3 million.
The Company has taken significant steps to reduce its expenses for the
fiscal year ended December 31, 1998 ("Fiscal 1998") such as eliminating salaried
personnel and reducing salaries paid to management. Over the last nine months,
the Company has eliminated three full-time employees, thereby reducing the
Company's anticipated Fiscal 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 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.
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<PAGE>
Forward Looking Statements
This report contains certain forward-looking statements which represent
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 has limited operating history upon which an evaluation of its
performance and prospects can be made.
Comparison of Three Months Ended June 30, 1998
to Three Months Ended June 30, 1997
Net Loss
The Company's net income for the three months ended June 30, 1998
decreased by $1,104,740 or 113% to a net loss of ($135,657) from a net income of
$969,083 for the three months ended June 30, 1997. This decrease resulted
primarily from a reduction in placement fees and from a decline in the value of
its portfolio of securities including 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 $2,185,728, or 80%, to $528,309 during the
three months ended June 30, 1998 as compared to $2,714,037 during the three
months ended June 30, 1997. Revenues generated from consulting fees increased by
$173,650 to $185,647 from $11,997 during the comparable quarter in 1997.
Revenues generated from the net realized and unrealized loss on marketable and
not readily marketable securities decreased by $400,309 to a loss of ($34,355)
as compared to a gain of $434,664 during the comparable quarter in 1997. The
decrease is primarily due
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<PAGE>
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 $1,871,195 from
$2,242,766 during the three months ended June 30, 1997 to $371,571 during the
three months ended June 30, 1998. Interest income decreased by $19,164 to $5,446
as compared to $24,610 during the same quarter in 1997.
Operating Expenses
Total operating expenses decreased by $880,958 or 47%, to $663,996 as
compared to $1,544,954 during the comparable quarter in 1997. This decrease is
due primarily to 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. A substantial due diligence expense incurred during
this quarter kept the expenses higher than expected. Over the last nine months,
the Company has eliminated three full-time employees, thereby reducing the
Company's anticipated Fiscal 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 1998. Commission expenses decreased by $698,610 to
$15,922 as compared to $714,532 during the comparable quarter in 1997. General
and administrative expenses decreased by $223,443 to $606,976 as compared to
$830,422 during the comparable quarter in 1997. The equity in the loss of an
unconsolidated affiliate and write-down of advances increased by $41,068 from $0
during the three months ended June 30, 1997 to $41,068 for the three months
ended June 30, 1998 as a result of the write-off of the Company's investment in
CGE.
Comparison of Six Months Ended June 30, 1998
to Six Months Ended June 30, 1997
Net Loss
The Company's net income for the six months ended June 30, 1998 decreased
by $1,998,664 or 128% to a net loss of ($445,449) from $1,553,215 during the
comparable period in 1997. This decrease resulted primarily from a reduction in
placement fees, a due diligence expense the Company incurred in connection with
an acquisition which was not consummated, and a loss rather than a gain on the
Company's portfolio of securities. During the six months ended June 30, 1997,
the Company purchased a portfolio of securities at below market generating a
gain of approximately $1.8 million. During the six months ended June 30, 1998
the value of the Company's portfolio of securities declined.
Revenues
Total revenues decreased by $3,455,949, or 81%, to $813,595 during the six
months ended June 30, 1998 from $4,269,544 during the comparable period in 1997.
Revenues generated from consulting fees decreased by $48,809 to $237,937 from
$286,746 during the comparable period in 1997. Revenues generated from the net
realized and unrealized loss on marketable and not readily marketable securities
decreased by $1,881,812 to a loss of ($234,674) as compared to a gain of
$1,647,138 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 $1,444,121 from
$2,242,766 during the six months ended June 30, 1997 to $798,645 during the
comparable period in 1998. Interest income during the six months ended June 30,
1998 decreased by $41,403 to $11,687 compared to $53,090 for the comparable
period in 1997.
5
<PAGE>
Operating Expenses
Total operating expenses decreased by $1,057,285 or 45%, to $1,259,044 as
compared to $2,316,329 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. Over the last nine
months, the Company has eliminated three full-time employees, thereby reducing
the Company's anticipated Fiscal 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 $308,629 to $1,182,053 as compared to $1,490,682 during
the comparable period in 1997. The equity in the loss of an unconsolidated
affiliate and write-down of advances has decreased by $25,046 from $86,115 for
the six months ended June 30, 1997 to $61,069 for the six months ended June 30,
1998 as a result of the write-off of the Company's investment in CGE.
Liquidity and Capital Resources
In the Share Exchange, the Company effectively "issued" 297,094 shares of
Common Stock to its historical stockholders 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 stockholders 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. 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 stockholders 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 stockholders was
the offering of adequate consideration to gain control by the stockholders of
ICG of a publicly held company. See "General-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 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.
6
<PAGE>
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 Company's directors, officers
and principal stockholders. 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.
The holders of Common Stock are entitled to receive dividends, as 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 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. The Company determined not to make the
$.05625 per share Common Stock Dividend payment on June 30, 1998 due to the
Company's current limited cash resources, although the Company had previously
declared such dividend. 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. The Company cannot predict at this time when its cash resources will
be sufficient in the Company's judgment to resume payment in cash of Common
Stock Dividends.
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 August 13, 1998, the per share
bid price of such common stock was $.25.
7
<PAGE>
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.
On May 19, 1998, ICG sold to John Booth, a director of the Company at the
time, ICG's 50% interest in CGE for approximately $4,000, the sale price
represented approximately 50% of the value of CGE's cash accounts. Such
transaction was approved by a majority of the Company's disinterested directors.
As a result of such transaction, the Company has written-off approximately
$41,000 as of June 30, 1998, representing ICG's net investment in CGE. John
Booth resigned as a director of the Company on June 1, 1998.
On June 5, 1998, the Company entered into a non binding Letter of Intent
and advanced $150,000 in connection with the acquisition of mineral deposits in
the republic Kazakhstan. The Company's Board of Directors has determined not to
pursue the acquisition. $75,000 of the deposit was spent in connection with due
diligence on the acquisition.
In May, 1998, International Capital Growth, Ltd. agreed with an
unaffiliated third party (the "Investor") to invest $50,000 in First American
Railways, Inc. as a precursor to the Investor's investment. ICG made the
investment on May 8, 1998. The Investor failed to make the investment and as a
result ICG's $50,000 was returned on July 7, 1998.
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 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 nine
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
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<PAGE>
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 August 13, 1998, the per share bid price of common stock of First
American Railways, Inc. fell to $0.25. 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, 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
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.
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<PAGE>
CAPITAL GROWTH HOLDINGS, LTD.
CONDENSED CONSOLIDATED BALANCE SHEETS
A S S E T S
<TABLE>
<CAPTION>
June 30, 1998 December 31, 1997
------------- -----------------
<S> <C> <C>
Assets: (unaudited)
Cash and cash equivalents ...................................... $ 736,708 810,659
Due from broker ................................................ 79,942 273,131
Securities owned at market value ............................... 143,426 634,058
Securities not readily marketable, at fair value ............... 666,500 627,498
Note receivable and accrued interest from affiliate ............ 0 209,000
Restricted cash ................................................ 103,572 102,334
Furniture, fixtures, equipment, and leasehold improvements ..... 187,720 197,503
Customer list .................................................. 60,000 80,000
Investment in and advance to unconsolidated affiliate ......... 0 65,000
Other Assets ................................................... 125,000 2,000
----------- -----------
TOTAL ASSETS ................................................... $ 2,102,868 $ 3,001,183
=========== ===========
</TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<S> <C> <C>
Liabilities:
Accounts payable and accrued expenses .......................... $ 76,178 $ 179,251
Dividends payable - preferred stockholders ..................... 38,154 38,154
Dividends payable - common stockholders ........................ 192,036 191,165
Deferred revenue ............................................... 53,846 74,038
----------- -----------
Total Liabilities .............................................. 360,214 482,608
Stockholders' equity:
Preferred Stock - $.001 par value; 20,000,000 shares
authorized, none issued
Common Stock - $.001 par value, 100,000,000
shares authorized; 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 and outstanding ..... 16,431 16,431
Additional Paid in Capital .......................................... 5,107,930 5,107,930
Accumulated Deficit ................................................. (3,355,104) (2,525,584)
Subscription Receivables ............................................ 0 (53,600)
Treasury Stock (15,000 Shares) ...................................... (30,000) (30,000)
----------- -----------
Total stockholders' equity ..................................... 1,742,655 2,518,575
----------- -----------
T O T A L ...................................................... $ 2,102,869 $ 3,001,183
=========== ===========
</TABLE>
F-1
<PAGE>
Capital Growth Holdings, Ltd.
Condensed Consolidated
Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended For the Six Months Ended
June 30, 1998 June 30, 1997 June 30, 1998 June 30, 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Consulting fees $185,647 11,997 237,937 286,746
Private placement fees 371,571 2,242,766 798,645 2,242,766
Net realized and unrealized gain(loss) on marketable
and not readily marketable securities (34,355) 434,664 (234,674) 1,647,138
Gain debt settlement 0 39,804
Interest income 5,446 24,610 11,687 53,090
---------- ---------- ---------- ----------
Total revenue $528,309 $2,714,037 813,595 4,269,544
========== ========== ========== ==========
Operating expenses
Commission 15,922 714,532 15,922 739,532
General and administrative 606,976 830,422 1,182,053 1,490,682
Equity in loss of unconsolidated affiliate 41,068 0 61,069 0
Write-down of Advances to unconsolidated affiliate 0 0 0 86,115
---------- ---------- ---------- ----------
Total operating expenses 663,966 1,544,954 1,259,044 2,316,329
Net Income (loss) before taxes (135,657) 1,169,083 (445,449) 1,953,215
========== ========== ========== ==========
Provision for taxes 0 200,000 0 400,000
Net income (loss) $(135,657) $969,083 $(445,449) $1,553,215
========== ========== ========== ==========
Less cumulative preferred dividend of former (9,131) (9,131)
stockholders
Net income (loss) attributable to
Common stockholders $ (135,657) $959,952 $(445,449) $1,544,084
========== ========== ========== ==========
Basic (loss) income per share $(0.01) $0.07 $(0.02) $0.11
========== ========== ========== ==========
Diluted (loss) income per share $(0.01) $0.05 $(0.02) $0.08
========== ========== ========== ==========
Weighted average common shares outstanding - basic
income per share 19,814,496 14,740,662 19,814,496 14,379,851
Effect of Potential Common Stock 0 5,218,751 0 5,168,345
Weighted average common shares outstanding - diluted
income per share 19,814,496 19,959,413 19,814,496 19,548,196
========== ========== ========== ==========
</TABLE>
F-2
<PAGE>
CAPITAL GROWTH HOLDINGS, LTD
Consolidated Statement of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Six Months Six Months
Ended Ended
June 30, 1998 June 30, 1997
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) (445,449) 1,553,215
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization 29,733 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)
Net Realized and unrealized gain (loss) on marketable and 0
Not readily marketable securities 47,174 (699,252)
Changes in:
Due from broker 193,189
Refundable deposits/short term investments (125,000) 0
Other assets 2,000 (30,943)
Accounts payable and accrued expenses (103,073) (10,000)
Deferred revenues (20,192) 108,750
---------- ----------
Net cash provided by (used in) operating activities (356,618) 1,434,892
Cash flows from investing activities:
Additions to fixed assets 0 (220,200)
Exercise of warrants (60,000) 0
Proceeds from sale of securities 460,574 0
Proceeds from sale of CGE 3,932
Advances to unconsolidated affiliate 0 (200,000)
Investment in securities 0 (2,285,368)
Investment in restricted cash (1,238) 0
Net cash provided by (used in) investing activities 403,268 (2,705,568)
Cash flows from financing activities:
Proceeds from the issuance of common stock and preferred stock 0 957,948
Dividends paid (383,201) 0
Repayment of loan to affiliate 209,000 0
Collection of Subscriptions Receivable 53,600 0
Purchase of treasury stock 0 (30,000)
---------- ----------
Net cash provided by (used in) financing activities (120,601) 927,948
---------- ----------
Net (decrease) in cash and cash equivalents (73,951) (342,728)
Cash at beginning of period 810,659 3,060,255
---------- ----------
Cash and cash equivalents at end of period 736,708 2,717,527
========== ==========
</TABLE>
F-3
<PAGE>
CAPITAL GROWTH HOLDINGS, LTD.
NOTES TO FINANCIAL STATEMENTS
June 30, 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 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. 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 stockholders 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
F-4
<PAGE>
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 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 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 June 30, 1998 are as follows:
<TABLE>
<S> <C>
First American Railways, Inc. $308,797
World's Inc. 415,000
</TABLE>
Unaudited summarized financial information for the aforementioned investments
are as follows:
First American Railways, Inc.
(unaudited)
Balance Sheet Data:
<TABLE>
<CAPTION>
June 30, 1998
-------------
<S> <C>
Current Assets $ 5,190,372
Non-Current Assets 15,195,942
Current Liabilities 8,506,643
Non-Current Liabilities 16,968,680
</TABLE>
F-5
<PAGE>
Income Statement Data:
<TABLE>
<CAPTION>
For the Three Months Ended
June 30, 1998 June 30, 1997
------------- -------------
<S> <C> <C>
Revenues 313,062 2,633,585
Gross Profit (Deficit) (1,848,218) 1,447,581
Operating Loss (2,431,794) (227,063)
Net loss (6,098,800) (872,909)
</TABLE>
Worlds, Inc.
(a development stage enterprise)
(unaudited)
Balance Sheet Data:
<TABLE>
<CAPTION>
June 30, 1998
-------------
<S> <C>
Current Assets 3,453,805
Non-Current Assets 115,869
Current Liabilities 1,688,608
Non-Current Liabilities 1,906,666
</TABLE>
Income Statement Data:
<TABLE>
<CAPTION>
For the Three
Months Ended
June 30, 1998
-------------
<S> <C>
Net Revenues 24,342
Gross profit (617,674)
Operating loss before extraordinary item (653,839)
Net loss (656,339)
</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 Common Stock 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 due to the Company's current
limited cash resources, although the Company had previously declared such
dividend. The Company anticipates offering its stockholders the opportunity to
accept common stock in lieu of cash as payment for the
F-6
<PAGE>
Common Stock Dividend. There is no assurance, however, that this offer will be
accepted. The Company cannot predict at this time when its cash resources will
be sufficient in the Company's judgment to resume payment in cash of Common
Stock Dividends.
(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) Investment in and Advances to an Unconsolidated Affiliate
On May 19, 1998, ICG sold to John Booth, a director of the Company at the time,
ICG's 50% interest in CGE for approximately $4,000, the sale price represented
approximately 50% of the value of CE's cash accounts. Such transaction was
approved by a majority of the Company's disinterested directors. As a result of
such transaction, the Company has written-off approximately $62,000 as of June
30, 1998, representing ICG's net investment in CGE. John Booth resigned as a
director of the Company on June 1, 1998.
(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 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 six months ended June 30, 1998 and
June 30, 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.
F-7
<PAGE>
(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 June 30, ICG had net capital of $784,894 which was $779,894 in excess of its
required net capital.
(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 will 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 June 30, 1998 and June 30,
1997.
(17) Restatement
The Company has restated the condensed consolidated statement of operations for
the three months and six ended June 30, 1997 to reflect its security portfolio
at market value without provision for discounts at June 30, 1997.
F-8
<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)
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> BD
<CIK> 0000832324
<NAME> Capital Growth Holdings, Ltd.
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<EXCHANGE-RATE> 1
<CASH> 736,708
<RECEIVABLES> 79,942
<SECURITIES-RESALE> 0
<SECURITIES-BORROWED> 0
<INSTRUMENTS-OWNED> 809,926
<PP&E> 187,720
<TOTAL-ASSETS> 2,102,868
<SHORT-TERM> 125,000
<PAYABLES> 360,214
<REPOS-SOLD> 0
<SECURITIES-LOANED> 0
<INSTRUMENTS-SOLD> 0
<LONG-TERM> 0
0
0
<COMMON> 19,829
<OTHER-SE> 1,722,826
<TOTAL-LIABILITY-AND-EQUITY> 2,102,839
<TRADING-REVENUE> 0
<INTEREST-DIVIDENDS> 11,687
<COMMISSIONS> 0
<INVESTMENT-BANKING-REVENUES> 0
<FEE-REVENUE> 1,036,582
<INTEREST-EXPENSE> 0
<COMPENSATION> 0
<INCOME-PRETAX> (445,449)
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (445,449)
<EPS-PRIMARY> (0.02)
<EPS-DILUTED> (0.02)
</TABLE>
