<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities and
Exchange Act of 1934 for the quarterly period ended September 30, 2000 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities and
Exchange Act of 1934 for the transition period from _______ to _________
Commission file number 033-25779
CODESTREAM HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
NEVADA 84-1100609
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1771 INTERNATIONAL PARKWAY, SUITE 121
RICHARDSON, TEXAS 75081
(Address of principal executive offices) (Zip code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (469) 330-6700
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
As of October 31, 2000, 20,121,810 shares of the registrant's Common Stock,
$.001 par value per share, were outstanding.
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CODESTREAM HOLDINGS, INC.
(A DEVELOPMENT STAGE COMPANY)
INDEX
<TABLE>
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1 Financial Statements 3
Condensed Consolidated Balance Sheets - September 30, 2000
(unaudited) 4
Condensed Consolidated Statements of Operations - Three months
and nine months ended September 30, 1999 and 2000 (unaudited) 5
Condensed Consolidated Statements of Cash Flows - Nine months
ended September 30, 1999 and 2000 (unaudited) 6
Notes to Condensed Consolidated Financial Statements - September 30, 2000 7
Item 2 Management's Discussion and Analysis of Results of Operations
and Financial Condition 10
Item 3 Quantitative and Qualitative Disclosures about Market Risk 13
PART II. OTHER INFORMATION
Item 1 Legal Proceedings II-1
Item 2 Changes in Securities and Use of Proceeds II-1
Item 6 Exhibits and Reports on Form 8-K II-2
SIGNATURES II-3
</TABLE>
2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
3
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CODESTREAM HOLDINGS, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED BALANCE SHEETS
UNAUDITED
<TABLE>
<CAPTION>
SEPTEMBER 30,
2000
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ASSETS
<S> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 4,127,400
Prepaid expenses and other current assets 5,569
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Total current assets 4,132,969
PROPERTY AND EQUIPMENT, NET 874,397
OTHER NONCURRENT ASSETS 12,091
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TOTAL ASSETS $ 5,019,457
=============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 416,901
Accrued liabilities 244,439
Current portion of capital lease obligations 202,657
-------------
Total current liabilities 863,997
CAPITAL LEASE OBLIGATIONS, net of current portion 110,466
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Total liabilities 974,463
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COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, $.001 par value, 50,000,000 shares authorized, 20,122
7,424,266 and 20,121,810 shares issued and outstanding at
December 31, 1999 and September 30, 2000, respectively
Additional paid-in-capital 22,716,606
Retained earnings (18,691,734)
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Total shareholders' equity 4,044,994
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 5,019,457
=============
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
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CODESTREAM HOLDINGS, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED
<TABLE>
<CAPTION>
FROM
INCEPTION
THREE MONTHS ENDED NINE MONTHS ENDED JANUARY 17,
SEPTEMBER 30, SEPTEMBER 30, 1996 TO
--------------------------- -------------------------- SEPTEMBER 30,
1999 2000 1999 2000 2000
----------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
OPERATING EXPENSES:
Research and Development $ 13,718 $ 1,065,625 $ 1,072,715 $ 1,902,100 $ 5,710,113
General and Administrative 962,990 935,264 2,661,855 2,071,907 12,555,951
Depreciation and amortization 73,094 117,509 218,033 314,400 715,049
----------- ----------- ----------- ----------- ------------
OPERATING LOSS (1,049,802) (2,118,398) (3,952,603) (4,288,407) (18,981,113)
OTHER (INCOME) EXPENSE:
Interest expense 3,579 6,027 4,001 30,250 332,685
Other, net 15,718 (60,372) (110,164) (66,791) (622,063)
----------- ----------- ----------- ----------- ------------
Other (income) expense, net 19,297 (54,345) (106,163) (36,541) (289,378)
Loss before income taxes (1,069,099) (2,064,053) (3,846,440) (4,251,866) (18,691,735)
PROVISION FOR INCOME TAXES - - - - -
----------- ----------- ----------- ----------- ------------
NET LOSS $(1,069,099) $(2,064,053) $(3,846,440) $(4,251,866) $(18,691,735)
=========== =========== =========== ============ ============
NET LOSS PER COMMON SHARE,
BASIC AND DILUTED $ (0.27) $ (0.11) $ (1.00) $ (0.40) $ (4.51)
=========== =========== =========== ============ ============
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 4,023,188 19,627,747 3,860,870 10,677,203 4,144,518
=========== =========== =========== ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
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CODESTREAM HOLDINGS, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
<TABLE>
<CAPTION>
FROM
INCEPTION
NINE MONTHS ENDED ------------------
----------------------------- JANUARY 17,
SEPTEMBER 30, SEPTEMBER 30, 1996 TO
1999 2000 SEPTEMBER 30, 2000
------------ ------------ ------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (3,846,440) $ (4,251,866) $(18,691,735)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation and amortization 218,033 314,400 715,049
Warrants issued for settlement of payable - 66,587 66,587
Compensation for re-pricing and discounting of options - 27,827 172,669
Change in operating assets and liabilities:
Prepaid expenses and other assets 59,953 (4,593) (4,593)
Accounts payable and other current liabilities 591,668 (332,252) 648,173
------------ ------------ ------------
Net cash used in operating activities (2,976,786) (4,179,897) (17,093,850)
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of RDL Photonics Integrated Chip Corporation 642,856 - 642,856
Purchase of other assets - - (13,066)
Purchase of property and equipment (500,987) (270,014) (985,814)
------------ ------------ ------------
Net cash provided by (used in) investing activities 141,869 (270,014) (356,024)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock - 7,100,000 7,100,027
Proceeds from issuance of preferred stock - - 11,750,158
Proceeds from short-term note payable 324,754 1,400,000 5,591,121
Repayment of short-term note payable - - (2,600,000)
Exercise of employee stock options - 4,500 4,500
Advances from affiliates - - 542,144
Repayment of advances from affiliates - - (192,144)
Offering costs - - (377,070)
Repayment of capital lease and other debt - (115,918) (241,462)
------------ ------------ ------------
Net cash provided by financing activities 324,754 8,388,582 21,577,274
NET CHANGE IN CASH AND CASH EQUIVALENTS (2,510,163) 3,938,671 4,127,400
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,601,685 188,729 -
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 91,522 $ 4,127,400 $ 4,127,400
============ ============ ============
</TABLE>
Supplemental schedule of non-cash investing and financing activities:
During the nine months ended September 30, 1999 and 2000, the Company
entered into capital leases agreements for machinery and lab equipment
valued at $31,500 and $239,123, respectively.
The accompanying notes are an integral part of these financial statements.
6
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CODESTREAM HOLDINGS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION:
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB and Article 10 of
Regulation SB. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all the adjustments
(consisting of normal recurring adjustments) considered necessary for fair
presentation have been included. The results of operations for the three and
nine month periods ending September 30, 2000 are not necessarily indicative of
the results which may be achieved for the full fiscal year or for any future
period. The condensed consolidated financial statements included herein should
be read in conjunction with the consolidated financial statements and notes
thereto included in the Company's report on Form 8-K effective June 8, 2000.
Certain prior period amounts have been reclassified to make their presentation
consistent with the current period.
The Company is still in the development stage. Development stage companies
inherently possess risk and uncertainty about the success of their business
plan. If the Company is not successful in implementing its plan, operations
could be adversely impacted.
2. GOING CONCERN MATTERS
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles for interim financial information
and with the instructions to Form 10-QSB and Article 10 of Regulation S-B
which contemplate continuation of the Company as a going concern. However,
the Company incurred a net loss of $4,251,866 during the nine months ended
September 30, 2000, and had negative operating cash flows of $4,179,897 for
the same period. Furthermore, the Company has incurred net losses of
$18,691,735 since inception and is in a development stage as of September 30,
2000. These factors raise substantial doubt about the Company's ability to
continue as a going concern.
Recovery of the Company's assets is dependent upon future events, the outcome of
which are not determinable. Successful completion of the Company's development
program and its transition to the attainment of profitable operations is
dependent, among other things, upon the Company obtaining adequate financing to
fulfill its development activities and achieving a level of sales adequate to
support the Company's cost structure. In addition, realization of a major
portion of the assets in the accompanying balance sheet is dependent upon the
Company's ability to meet its financing requirements and the success of its
plans to develop and sell its products. The financial statements do not include
any adjustments relating to the recoverability and classification of recorded
asset amounts or amounts and classification of liabilities that might be
necessary should the Company be unable to continue in existence.
Management plans to raise additional equity capital in the near future and
continue to develop its products. See Item 2, Liquidity and Capital Resources.
7
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3. DESCRIPTION OF BUSINESS
CodeStream Holdings, Inc., ("CodeStream") formerly Bud Financial Group, Inc,
("BUD") was originally incorporated for the sole purpose of raising capital and
then seeking out, investigating, and acquiring any suitable assets or business
without regard to any specific business or industry. In 1991, BUD completed a
public offering of its common stock which raised a total of $9,500. The offering
was registered under the Securities Act pursuant to a Registration Statement on
Form S-18. In 1997, BUD completed a private placement of its common stock which
raised $7,500. BUD changed its state of incorporation from Colorado to Nevada in
March 1999.
CodeStream Technologies Corporation ("CTC") is a Delaware corporation that was
formed on January 17, 1996 to develop certain technologies acquired from a
government defense and aerospace contractor. Since its incorporation, CTC has
privately sold $12,000,000 of preferred stock to certain institutional
investors. In August 1999, CTC acquired the 975,000 issued and outstanding
shares of common stock of an affiliated company, RDL Photonic Integrated Chip
Corporation ("PIC"), a Delaware company. PIC owned certain intellectual property
for photonic integrated circuits for optical code division multiple access that
was complimentary to the technology being developed by CTC. CTC currently is a
development stage company that is developing technology intended to increase the
fiber optic network capacity of telecommunications traffic carriers.
On June 8, 2000, CodeStream entered into an Agreement and Plan of
Reorganization, whereby it acquired all the issued and outstanding shares of
common stock of CTC in exchange for an aggregate of 10,000,000 shares of newly
issued common stock of CodeStream. For accounting purposes, the transaction has
been treated as a recapitalization of CTC, with CTC as the accounting acquirer
(reverse acquisition), and has been accounted for in a manner similar to a
pooling of interests. To effect this transaction, CTC converted all of its
outstanding Series A, B, and C convertible preferred stock into 14,612,779
shares of common stock and converted notes payable totaling $1,091,121 into
9,444,447 shares of common stock. CTC then completed a reverse stock split of
the aggregate 31,481,492 shares common stock on a one-for-3.148149 basis so that
10,000,000 shares of common stock were issued and outstanding prior to the
reverse merger. The operations of BUD have been included with those of CTC from
the acquisition date.
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of CodeStream and its
wholly-owned subsidiary, CTC (collectively, the "Company"). All intercompany
accounts and transactions have been eliminated.
LOSS PER SHARE
The Company utilizes SFAS No. 128, "Earnings per Share." Basic loss per share is
computed by dividing the loss available to common shareholders by the
weighted-average number of common shares outstanding. Diluted loss per share is
computed similar to basic loss per share except that the denominator is
increased to include the number of additional common shares that would have been
outstanding if the potential common shares had been issued and if the additional
common shares were dilutive. Because the Company has incurred net losses, basic
and diluted loss per share are the same.
8
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5. PROPERTY AND EQUIPMENT
Property and equipment September 30, 2000 are as follows:
<TABLE>
<S> <C>
Machinery and equipment $ 1,292,261
Furniture and office equipment 162,470
Computer software 93,026
Leasehold improvements 41,689
-----------
Total cost $ 1,589,446
Less: Accumulated depreciation (715,049)
Property and equipment, net $ 874,397
==========
</TABLE>
6. SHORT-TERM LOANS
In February, March, April and May 2000, CTC borrowed $500,000, $500,000,
$200,000 and $200,000, respectively, from a third party to provide working
capital for the operations of its business. These borrowings were converted into
1,400,000 shares of CodeStream common stock on June 8, 2000 at the same time as
the reverse acquisition between CodeStream and CTC.
7. STOCKHOLDERS' EQUITY
During June and July of 2000, the Company sold 7,500,000 shares of common stock
at an offering price of $1.00 per share in a private placement for proceeds of
$7,450,000, net of offering costs of $50,000. In September 2000, the Company
sold an additional 602,410 shares of common stock at an offering price of $1.66
in a private placement for proceeds of $1,000,000.
During the nine month period ended September 30, 2000, 1,096,500 stock options
were granted to certain employees of the Company at a weighted average price of
$1.84. Certain non-qualified stock options granted in the third quarter were
granted below fair market value. The Company has recorded additional
compensation expense of $20,592 related to this discount. Additionally, in
August 2000, the Company granted 16,647 warrants to purchase common stock to a
vendor as settlement of account, in lieu of cash. These warrants are exercisable
at $4.00 per share.
During the year ended December 31, 1999, the Company re-priced an aggregate of
49,223 options issued to six employees under the Company's stock option plan
reducing the exercise price from $7.00 per share to $1.00 per share. In relation
to this re-pricing, the Company recorded compensation expense totaling $7,235
for the nine months ended September 30, 2000. In accordance with generally
accepted accounting principles, the employee stock option awards that were
re-priced will be accounted for as variable awards from the date of the
re-pricing to the date the options are exercised, forfeited or expire.
8. RELATED PARTY TRANSACTIONS
During the nine months ended September 30, 2000, the Company paid $196,740 to a
former officer/director of CTC for consulting services rendered pursuant to a
consulting agreement. This agreement was concluded in August 2000.
9
<PAGE>
9. LEGAL PROCEEDING
During May 1999, Research and Development Laboratories ("RDL"), the former
parent of CTC, was served with a subpoena duces tecum to produce documents
and to testify before the Grand Jury of the United States District Court,
Central District of California. The subpoena appeared to relate to
allegations of mischarging or improper billing with respect to federal
government contracts and was directed to RDL and, among others, all of its
then present and former officers and directors, together with its then
affiliates, including the Company (then named RDL Commercial Technologies
Corporation). At a meeting with the Assistant United States Attorney ("AUSA")
in charge of the investigation during July 1999, attorneys for the Company
were advised that the Company was a subject of the investigation. Subsequent
to this meeting, the Company produced to the AUSA all documents requested by
the subpoena and provided the AUSA with a copy of an analysis of cash
receipts and disbursements of the Company since its inception prepared by
PricewaterhouseCoopers LLP showing that the Company has never received funds
from the federal government under any government contracts. The Company also
offered to cooperate completely with the Grand Jury Investigation and on
November 30, 1999, the former CFO of the Company met with the AUSA and agents
of the FBI to answer their questions concerning RDL and the Company. At the
conclusion of this meeting, the AUSA indicated that she believed the CFO's
commentary to be truthful, and also indicated that, based upon the
government's investigation to date, the Company was no longer a subject of
the investigation. It should be noted that the AUSA has absolute discretion
as to who, if anyone, will be indicted and until this matter is completely
resolved, the Company remains as a possible target of the investigation.
Subsequent Events. In early October 2000, a third party threatened to file a
civil suit against RDL and RDL Commercial Technologies Corporation, a
predecessor company of CTC, to recover damages alleged to have been suffered by
the United States Government in connection with transactions that are the
subject of the previously disclosed criminal investigation discussed above.
Together with third parties who were also threatened to be named in such suit,
CodeStream entered into negotiations with the third party threatening suit and
representatives of the United States Government. These negotiations resulted in
a settlement on November 3, 2000. Among other things, pursuant to the terms of
this settlement, all potential claims by the United States Government against
CodeStream's intellectual property are to be waived and RDL will contribute to
the capital of CodeStream 829,470 shares of CodeStream's common stock. Shares of
common stock to be contributed by RDL to CodeStream will be treated as treasury
stock upon receipt. Although CodeStream incurred approximately $65,000 in legal
and travel expenses related to the settlement, no other expenses or liabilities
were incurred or are expected in the future.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
Information contained herein may include forward looking statements. Such
statements involve risks and uncertainties which could cause actual results to
differ materially from those set forth herein. Factors that could cause actual
results to differ include changes in technology, the Company' ability to raise
additional capital, and the ability to develop its products in accordance with
its plans. Readers are cautioned not to place undue reliance on these
forward-looking statements, which reflect management's analysis only as of the
date hereof based on information currently available to it. The Company
undertakes no obligation to publicly revise these forward-looking statements to
reflect events or circumstances that arise after the date hereof.
10
<PAGE>
OVERVIEW
The Company was incorporated in 1988 for the sole purpose of raising capital and
then seeking out, investigating, and acquiring any suitable assets or business
without regard to any specific business or industry. In 1991, the Company
completed a public offering of its common stock in which it raised a total of
$9,500. The public offering was registered with the Securities and Exchange
Commission under the Securities Act of 1933 pursuant to a Registration Statement
on Form S-18. Prior to the transactions described below, the Company had not
engaged in any significant business activities.
In accordance with its business purpose, on February 15, 2000 the Company, BFG
Subsidiary, Inc. and CTC, a Delaware corporation, entered into that certain
Agreement and Plan of Reorganization (the "Acquisition Agreement") pursuant to
which CTC agreed to merge with BFG Subsidiary, Inc., with CTC being the
surviving company. BFG Subsidiary, Inc. was a wholly-owned subsidiary of the
Company that the Company formed for the sole purpose of effecting the
acquisition of CTC (the "Acquisition"). As a result of the Acquisition, CTC
became, and is now, a wholly-owned subsidiary of the Company.
CTC is a development stage company that was formed in 1996 to develop certain
technologies it acquired from a government defense and aerospace contractor.
CTC is currently developing products based on a patented technology that is
intended to enable telecommunications network service providers to increase
the capacity of their new and existing fiber optic networks. CTC owns the
commercial intellectual property rights to a broadband optical networking
technology known as Optical Code Division Multiple Access ("OCDMA"). This
technology, in the opinion of CTC, can significantly increase the
transmission rate and the channel count of a fiber-optic telecommunications
network. The new optical transport system that CTC is developing utilizes a
proprietary, patented encoding scheme that enables hundreds of independent
channels to coexist on the same fiber optic pair. Based on the currently
estimated development schedule, the Company expects that the first product
using CTC's new technology can be released in 18 to 24 months. Since its
incorporation, CTC has been funded from the private sale to certain
institutional investors of $12,000,000 of preferred stock. In addition to the
foregoing funding, the United States Air Force has also provided funding for
research into the bulk optics and photonic integrated circuit technology now
being developed into a product line at CTC. As a result of the foregoing U.S.
governmental funding, the United States Air Force owns certain rights to
non-commercial applications of the technology. In August 1999, CTC merged
with RDL Photonic Integrated Chip Corporation, a private research firm that
owned certain intellectual property for photonic integrated circuits that was
complimentary to the technology being developed by CTC. (Unless otherwise
specified, all references herein to CTC shall refer to CodeStream
Technologies Corporation, formerly known as RDL Commercial Technologies
Corporation, and RDL Photonic Integrated Chip Corporation.)
Prior to the Acquisition, a total of 2,000,000 shares of $0.001 par value common
stock of the Company (the "Common Stock") were issued and outstanding. Of the
2,000,000 outstanding shares of Common Stock, 1,643,800 shares were owned by
Thomas Kimble. Mr. Kimble also was the sole officer and the sole director of the
Company. As a result, control of the Company resided with Mr. Kimble prior to
the Acquisition.
In connection with the merger by which the Acquisition was effected, and in
accordance with the Acquisition Agreement, all of the issued and outstanding
shares of CTC's common stock were converted into 10,000,000 shares of the
Company's Common Stock. In addition, all of the currently outstanding CTC
options that entitle CTC's employees and former employees to purchase a total of
784,171 shares of CTC common stock at an exercise price of $1.00 per share were
assumed by the Company and became options to purchase the Company's common stock
at an exercise price of $1.00 per share.
11
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The following discussion should be read in conjunction with the financial
statements of the Company and the related notes thereto appearing elsewhere in
this Report on Form 10-QSB. Additional information concerning factors that could
cause results to differ materially from those in the forward-looking statements
is contained under "Part II. Other Information."
RESULTS OF OPERATIONS
RESEARCH AND DEVELOPMENT
Research and development expenses increased by a factor of 78 times from $13,718
for the three months ended September 30, 1999 to $1,065,625 for the three months
ended September 30, 2000. For the nine months ended September 30, research and
development costs increased 77% from $1,072,715 for 1999 to $1,902,100 in 2000.
This increase is the result of an overall increase in research personnel and
activity primarily in the third quarter of 2000. The Company expenses all
research and development costs in the period incurred.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses decreased 3% from $962,990 for the three
months ended September 30, 1999 to $935,264 for the three months ended September
30, 2000. For the nine months ended September 30, general and administrative
expenses decreased 22% from $2,661,855 in 1999 to $2,071,907 in 2000. This
decease is primarily due to a reduction in administrative personnel and related
activity. However, the Company believes that general and administrative expenses
will increase over the next 12 months due to increased personnel and activity
overall.
OTHER INCOME AND EXPENSES
Other income and expense improved 382% from a net expense of $19,297 for the
three months ended September 30, 1999 to a net income of $54,345 for the three
months ended September 30, 2000. This increase is primarily due to interest
income earned in the third quarter of 2000 on cash received upon completion of
the reverse merger in June 2000. For the nine months ended September 30, other
income and expenses decreased 66% from a net income of $106,163 in 1999 to a net
income of $36,540 in 2000. This decrease is the result of higher interest
expense on borrowings outstanding during the first six months of 2000 compared
to the prior year and also due to lower interest income on the Company's cash
balance during the first six months of 2000 compared to 1999.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2000, the Company had $3.3 million of working capital and $4.1
million of cash. Cash flows used in operating activities for the nine months
ended September 30, 2000 were $4,179,897 and were impacted by normal operating
activity relating to the development of our products and systems. Net cash used
in investing activities was $270,014, and related exclusively to the purchase of
property and equipment. Net cash provided by financing activities was
$8,388,582, due primarily to the sale of shares of the Company's common stock.
During the nine months ended September 30, 1999, cash flows used in operating
activities were $2,976,786. Net cash provided by investing activities was
$141,869. Net cash provided by financing activities was $324,754.
As discussed in Note 2 to the Financial Statements, the Company will need to
seek additional financing in order to continue to develop its products. The
Company currently plans to secure an interim equity financing round during the
fourth quarter of 2000 and to seek a larger financing of approximately $30
million to $50 million through the sale of private equity in early 2001. There
can be no assurances that the Company can secure such financing if and when it
is needed or on terms that the Company deems acceptable.
12
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Pursuant to the General Instructions to Item 305 of Regulation S-K, the
quantitative and qualitative disclosures called for by Item 3 of Form 10-QSB
and by Item 305 of Regulation S-K do not require additional disclosure by the
Company at this time.
13
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
During May 1999, RDL was served with a subpoena duces tecum to produce documents
and to testify before the Grand Jury of the United States District Court,
Central District of California. The subpoena appeared to relate to allegations
of mischarging or improper billing with respect to federal government contracts
and was directed to RDL and, among others, all of its then present and former
officers and directors, together with its then affiliates, including the Company
(then named RDL Commercial Technologies Corporation). At a meeting with the
Assistant United States Attorney ("AUSA") in charge of the investigation during
July 1999, the attorneys for the Company were advised that the Company was a
subject of the investigation. Subsequent to this meeting, the Company produced
to the AUSA all documents requested by the subpoena and provided the AUSA with a
copy of an analysis of cash receipts and disbursements of the Company since its
inception prepared by PricewaterhouseCoopers LLP showing that the Company has
never received funds from the federal government under any government contracts.
The Company also offered to cooperate completely with the Grand Jury
investigation and on November 30, 1999, the CFO of the Company met with the AUSA
and agents of the FBI to answer their questions concerning RDL and the Company.
At the conclusion of this meeting, the AUSA indicated that she believed the
CFO's commentary to be truthful and also indicated that, based upon the
government's investigation to date, the Company was no longer a subject of the
investigation. It should be noted that the AUSA has absolute discretion as to
whom, if anyone, will be indicted and until this matter is completely resolved,
the Company remains as a possible target of the investigation.
Subsequent Events. In early October 2000, a third party threatened to file a
civil suit against RDL and RDL Commercial Technologies, a predecessor company of
CTC, to recover damages alleged to have been suffered by the United States
Government in connection with transactions that are the subject of previously
disclosed criminal investigation in Note 9 above. Together with third parties
who were also threatened to be named in such a suit, CodeStream entered into
negotiations with the third party threatening suit and representatives of the
United States Government. These negotiations resulted in a settlement on
November 3, 2000. Among other things, pursuant to the terms of this settlement,
all potential claims by the United States Government against CodeStream's
intellectual property are to be waived and RDL will contribute to the capital of
CodeStream 829,470 shares of CodeStream's common stock. Shares of common stock
to be contributed by RDL to CodeStream will be treated as treasury shares upon
receipt. Although CodeStream incurred approximately $65,000 in legal and travel
expenses related to the settlement, no other expenses or liabilities were
incurred or are expected in the future.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
During June and July of 2000, the Company sold 7,500,000 shares of common stock
in a private placement for proceeds of $7,450,000 at a price of $1.00 per share,
net of offering costs of $50,000. In September 2000, the Company sold an
additional 602,410 shares of common stock at $1.66 per share in a private
placement for proceeds of $1,000,000. The Company did not incur material
offering costs in its September private placement.
During the nine month period ended September 30, 2000, 1,096,500 stock options
were granted to certain employees of the Company at a weighted average price of
$1.84. Additionally, in August 2000, the Company granted 16,647 warrants to a
vendor as settlement of account, in lieu of cash.
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RISKS ASSOCIATED WITH FORWARD-LOOKING STATEMENTS
This filing contains certain forward-looking statements such as the Company's or
management's intentions, hopes, beliefs, expectations, strategies, predictions
or any other variation thereof or comparable phraseology of the Company's future
activities or other future events or conditions within the meaning of Section
27A of the Securities Act and Section 21E of the Securities Exchange Act of
1934, as amended, which are intended to be covered by the safe harbors created
thereby. Investors are cautioned that all forward-looking statements involve
risks and uncertainty, including, without limitation, the risks associated with
developing new technologies, variations in quarterly results, volatility of the
Company's stock price, development by competitors of new or superior products or
services, entry into the market of new competitors, fluctuating capital
expenditures, the sufficiency of the Company's working capital to attract and
retain management and qualified technical personnel, to implement its business
strategy, and to successfully defend itself against ongoing and future
litigation. Although the Company believes that the assumptions underlying the
forward-looking statements contained herein are reasonable, any of the
assumptions could be inaccurate, and, therefore, there can be no assurance that
the forward-looking statements included in this filing will prove to be
accurate. In light of the significant uncertainties inherent in the
forward-looking statements included herein, the inclusion of such information
should not be regarded as a representation by the Company or any other person
that the objectives and plans of the Company will be achieved.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K.
The Company filed a Current Report on Form 8-K/A with the Commission
on August 22, 2000, reporting under Item 7 - Financial Statements
and Exhibits, reporting financial statements of businesses acquired.
The Company filed a Current Report on Form 8-K with the Commission on
September 27, 2000, reporting under Item 4 - Changes in the
Registrant's Certifying Accountant, stating that Ernst & Young, LLP
had been appointed as the Company's auditor of record.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report on Form 10-QSB to be signed on its behalf
by the undersigned thereunto duly authorized.
CODESTREAM HOLDINGS, INC.
Date: November 13, 2000 By: /s/ D. Gordon Werner
-----------------------------------
D. Gordon Werner
President, Chief Executive Officer
and Chief Financial Officer
(Principal Accounting Officer)
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EXHIBITS
27.1 Financial Data Schedule
