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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission file number 000-21673
AGILITY CAPITAL, INC.
(Exact name of registrant as specified in its charter)
Texas 75-2487218
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1512 West 35th Street Cut-Off, Suite 310 78755
(Address of principal executive offices) (Zip Code)
(512) 436-7200
Registrant's telephone number, including area code
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 January 31, 2002 there were 5,962,561 shares of the registrant's Common
Stock, no par value, and 1,073,500 shares of registrant's 15% Preferred Stock,
no par value, outstanding
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Table of Contents
PART I- FINANCIAL INFORMATION............................................................................1
ITEM 1. FINANCIAL STATEMENTS..........................................................................1
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION.........13
PART II-OTHER INFORMATION...............................................................................19
ITEM 1. LEGAL PROCEEDINGS............................................................................19
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS....................................................19
ITEM 3. DEFAULTS UPON SENIOR SECURITIES..............................................................19
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..........................................19
ITEM 5. OTHER INFORMATION............................................................................19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.............................................................20
SIGNATURES..............................................................................................20
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PART I- FINANCIAL INFORMATION
ITEM 1. Financial Statements
AGILITY CAPITAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
2001 2001
(Unaudited)
----------------- ------------------
ASSETS
Cash and cash equivalents $ 3,308,105 $ 1,764,088
Deposits with broker 249,000
Investments 817,000 296,700
Notes receivable 600,000 2,019,791
Other assets 122,284 132,532
----------------- ------------------
Total assets $ 4,847,389 $ 4,462,111
================= ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Payables and accrued liabilities $ 506,523 $ 600,955
Securities sold, not yet purchased (proceeds received - $249,000) 251,988
----------------- ------------------
Total liabilities $ 506,523 $ 852,943
Commitments and Contingencies
Shareholders' equity:
Preferred stock, no par value; 5,000,000 shares authorized; 1,073,500 shares of
15% Series A cumulative preferred stock, $10 liquidation preference, issued
and outstanding, at December 31, 2001 (Dividends in arrears of
$4,830,751 at December 31, 2001) 10,341,000 10,341,000
Common stock, no par value; 25,000,000 shares authorized;
5,962,561 shares issued and outstanding 1,000 1,000
Capital in excess of stated capital 7,563,566 7,563,566
Due from shareholders (10,592) (10,592)
Accumulated deficit (13,554,108) (14,285,806)
----------------- ------------------
Total shareholders' equity 4,340,866 3,609,168
----------------- ------------------
Total liabilities and shareholders' equity $4,847,389 $ 4,462,111
================= ==================
The accompanying notes are an integral part of the consolidated
financial statements
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AGILITY CAPITAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
December 31,
2000 2001
Revenues:
Interest income $ 107,372 $ 42,124
Net investment income 37,364
Other income 15,009 4,050
-------------- --------------
Total revenues 122,381 83,538
-------------- --------------
Expenses:
Salaries and benefits 341,547 256,325
General and administrative 417,251 457,095
Loss on settlement of litigation 86,000
Other operating expenses 6,764 15,816
-------------- --------------
Total expenses 765,562 815,236
-------------- --------------
Loss before income taxes (643,181) (731,698)
Benefit for income taxes
-------------- --------------
Net loss (643,181) (731,698)
Income attributable to preferred shareholders 402,563 402,563
-------------- --------------
Net loss available to common shareholders $(1,045,744) $(1,134,261)
============== ==============
Weighted average number of common shares:
Basic and diluted 5,962,561 5,962,561
Loss per common share - basic and diluted $(0.18) $(0.19)
============== ==============
The accompanying notes are an integral part of the consolidated
financial statements
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AGILITY CAPITAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
Capital in
Preferred Common Excess of Due from Accumulated Total Shareholder
Stock Stock Stated Capital Shareholders Deficit Equity
-------------- --------- --------------- --------------- -------------- -----------------
October 1, 2001 $10,341,000 $1,000 $7,563,566 $(10,592) $(13,554,108) $4,340,866
Net Loss (731,698) (731,698)
------------- -------- ------------ ----------- -------------- -------------
December 31, 2001 $10,341,000 $1,000 $7,563,566 $(10,592) $(14,285,806) $3,609,168
============= ======== ============ =========== ============== =============
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AGILITY CAPITAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three months Ended December 31,
2000 2001
OPERATING ACTIVITIES:
Net Loss $ (643,181) $ (731,698)
Changes in operating assets and liabilities
Deposits with broker (249,000)
Other assets (12,200) (27,039)
Payables and accrued liabilities (74,485) 94,432
Securities sold, not yet purchased 251,988
------------------- ----------------
CASH USED BY OPERATIONS (729,866) (661,317)
------------------- ----------------
INVESTING ACTIVITIES:
Note receivable funded (500,000) (856,000)
Acquisition of business (25,000)
Purchase of investments (75,000) (1,700)
------------------- -----------------
CASH USED BY INVESTING (575,000) (882,700)
------------------- -----------------
DECREASE IN CASH (1,304,866) (1,544,017)
BEGINNING CASH BALANCE 7,050,088 3,308,105
------------------- -----------------
ENDING CASH BALANCE $ 5,745,222 $ 1,764,088
=================== =================
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITY -
Conversion of investment and accrued interest
into note receivable $ 563,791
The accompanying notes are an integral part of the consolidated
financial statements
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AGILITY CAPITAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation
The consolidated financial statements of Agility Capital, Inc. (the
"Company") included herein are unaudited and have been prepared in accordance
with generally accepted accounting principles ("GAAP") for interim financial
reporting and Securities and Exchange Commission ("SEC") regulations. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with GAAP have been condensed or omitted pursuant to
regulations. In the opinion of management, the financial statements reflect all
adjustments (consisting only of a normal and recurring nature) which are
necessary to present fairly the financial position, results of operations,
changes in shareholders' equity and cash flows for the interim periods. Results
for interim periods are not necessarily indicative of the results for a full
year. For further information, refer to the audited financial statements and
footnotes thereto included in the Company's Annual Report on Form 10-K for the
year ended September 30, 2001 (SEC File Number 000-21673). Certain data from the
prior periods have been reclassified to conform to the 2001 presentation.
2. Liquidity and capital resources
As of December 31, 2001, the Company had just over $1.76 million in
cash and no long-term indebtedness. Management believes the Company has
sufficient liquidity to meet its obligations (primarily employee/consultant fees
and expenses, rent and professional expenses) and to make selected investments
through 2002. Management hopes to generate additional liquidity and revenues
through the establishment of the Agility Capital Fund in the following ways: (i)
the sale to the Fund (at cost) of certain investments made by the Company on
behalf of the Fund, (ii) a management fee of up to 2.5% per annum of committed
funds, (iii) the pro rata share of realized investment gains on the Company's
investment in the Fund (expected to be 1% of the size of the Fund, or a maximum
of $1,000,000), and (iv) additional fees of up to 20% of the realized gains on
Fund investments (less amounts utilized for compensation arrangements for the
officers of the Fund Manager). There can be no assurance that the Fund will be
established or managed in a manner in which those revenue goals are met.
The inability of the Company to raise the Fund has left the Company with the
need to pursue other sources of revenue outside of interest income earned on
existing cash balances. If these sources of revenue are not sufficient to cover
the Company's operations and investment activities doubt may be raised about the
Company's ability to continue as a going concern.
3. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. All significant intercompany balances
and transactions have been eliminated in consolidation.
Pervasiveness of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and
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liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Cash and Cash Equivalents
The Company considers highly liquid investments with maturities of
three months or less when purchased to be cash equivalents.
Investments.
The Company records its investments at fair value. The fair value of
investments is determined based upon the Company's valuation policy.
Under the valuation policy of the Company, unrestricted securities are
valued at the average closing price for publicly held securities for the last
three days of the month. Investments in portfolio companies and restricted
securities, including securities of publicly owned companies which are subject
to restrictions on resale, are valued at cost at the date of acquisition until
there is a sustained basis for recognizing appreciation or depreciation in the
valuation. Estimated fair value is determined by the Board of Directors based on
a number of factors including, if available, significant subsequent equity
financings by unrelated new investors, secondary offerings, independent
valuations, comparable publicly traded securities as well as current and
projected operating performance and other analytical data relating to the
investment. The valuations do not necessarily represent amounts which will
ultimately be realized from the investments.
In addition, the Company searches for publicly traded companies that
appear to be overvalued and attempts to take advantage by establishing a short
position in the security. The Company deposits funds with the broker
approximating the value of the Company's position in the security.
Notes receivable.
The carrying value of notes receivable approximates the fair value,
which is based on cash flows discounted at current interest rates for similar
loans.
Income Taxes
The Company uses the liability method in accounting for income taxes.
Under this method, deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. Valuation
allowances are established, when necessary, to reduce deferred tax assets to the
amount expected to be realized. The provision for income taxes represents the
tax payable for the period and the change during the year in deferred tax assets
and liabilities. The Company files a consolidated federal income tax return.
Earnings per Share
Basic earnings per share excludes dilution and is computed by dividing
income available to common shareholders by the weighted-average number of common
shares outstanding for the period. Diluted earnings per share reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock or resulted in the
issuance of common stock that then shared in the earnings of the Company.
Interest Income
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The Company generally uses the simple interest method to determine
interest.
Recent Accounting Pronouncements
The Company adopted the provisions of SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities", as amended by SFAS Nos. 137 and
138, and as interpreted by the FASB and the Derivatives Implementation Group
through "Statement 133 Implementation Issues", as of October 1, 2000. At the
time of adoption, the Company was not engaged in any derivative instruments or
any embedded derivative instruments that required bifurcation. The Company has
not engaged in hedging activities.
The Financial Accounting Standards Board ("FASB") recently issued
Statement of Financial Accounting Standards No. 141 ("SFAS 141"), "Business
Combinations", Statement of Financial Accounting Standards No. 142 ("SFAS 142"),
"Goodwill and Other Intangible Assets", Statement of Financial Accounting
Standards No. 143 ("SFAS 143"), "Accounting for Asset Retirement Obligations"
and Statement of Financial Accounting Standards No. 144 ("SFAS 144"), Accounting
for the Impairment or Disposal of Long-Lived Assets. SFAS 141 requires the
purchase method of accounting for business combinations initiated after June 30,
2001 and eliminates the pooling-of-interests method. SFAS No. 142 requires
companies to cease amortizing goodwill that existed at June 30, 2001 and
establishes a new method of testing goodwill for impairment on an annual basis
or on an interim basis if an event occurs or circumstances change that would
reduce the fair value of a reporting unit below its carrying value. SFAS 143
addresses financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs and is effective for fiscal years beginning after June 15, 2002. SFAS 144
clarifies the accounting for disposals of long-lived assets and is effective for
fiscal years beginning after December 31, 2001. The Company does not believe
that the adoption of SFAS 141, SFAS 142, SFAS 143 and SFAS 144 will have a
significant impact on its financial statements.
4. Investments.
The following table provides a listing of investments at September 30,
2001 and December 31, 2001:
September 30, December 31,
2001 2001
-------------- -------------
Yehti $100,000 $100,000
Access Ventures 75,000 75,000
Tanisys Technology 120,000 120,000
Modelwire 522,000 -
Other 1,700
-------------- -------------
Total $817,000 $296,700
============== =================
During the quarter ended December 31, 2001, the Company exchanged its
investment of $522,000 in Modelwire into a series of notes bearing interest at
8% and 9%. See Notes Receivable
5. Note receivable
The following table provides a listing of notes receivable at September 30,
2001 and December 31, 2001:
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September 30, December 31,
2001 2001
------------------ -----------------
Modelwire 8% convertible note $500,000 $ -
Modelwire 9% note 1,041,791
Modelwire 8% senior convertible note 828,000
Yehti 8.5% convertible note 100,000 100,000
Yehti 10% convertible note 50,000
------------------ -----------------
Total $600,000 $2,019,791
================== =================
In October 2000, the Company purchased at par a $500,000 convertible
note bearing interest at 8%(the "8% Note") from Modelwire, Inc.("Modelwire").
The 8% Note was convertible at the option of the Company into shares of
securities being offered at the time of a Qualifying Financing. A Qualifying
Financing is defined as a private financing resulting in proceeds before
expenses of $5,000,000 or more to Modelwire. The number of shares was to be
computed by dividing (i) the outstanding principal amount of the 8% Note
together with accrued interest on such principal amount as of the date of
conversion by (ii) the lower of (x) $4.00 per common equivalent share or (y) the
price per share of the securities issued in such Qualifying Financing discounted
by 35% of such price.
The 8% Note was due and payable upon the earliest to occur of the
following:
(a) the second anniversary of the date issued; or
(b) upon sale of all or substantially all of its assets; or
(c) upon liquidation of Modelwire; or
(d) upon any merger involving Modelwire in which Modelwire is not
the resulting or surviving entity.
In October 2001, substantially all of the Company's investment in
Modelwire and the 8% Note (including accrued interest) was converted at par into
a secured promissory note bearing interest at 9%(the "9% Note") from Modelwire
in the principal amount of approximately $1,042,000. Subject to the Senior Note
(as defined below), the 9% Note is secured by all of the tangible and intangible
assets of Modelwire.
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The 9% Note is due and payable upon the earliest to occur of the
following:
(a) August 31, 2002; or
(b) upon the sale, license or lease by Modelwire of all or
substantially all of its assets; or
(c) upon the liquidation, dissolution or winding up of Modelwire;
or
(d) upon any merger involving Modelwire in which Modelwire is not
the resulting or surviving entity; or
(e) upon the occurrence of certain events of default by
Modelwire, such as any material breaches by Modelwire of any
covenants contained in the 9% Note.
In December 2001, the Company purchased at par a senior secured
convertible promissory note bearing interest at 8% (the "Senior Note") from
Modelwire in the principal amount of $828,000. The Company may purchase an
additional Senior Note in the principal amount of approximately $98,000, which
purchase, if consummated, is expected to occur by the end of January 2002. The
Senior Note is convertible at the option of the Company into shares of Series C
Convertible Preferred Stock, par value $0.01, of Modelwire (the "Series C
Stock"). The number of shares of Series C Stock to be issued to the Company upon
conversion is computed by dividing (i) the outstanding principal amount of the
Senior Note together with accrued interest on such principal amount as of the
date of conversion by (ii) $0.05. The Senior Note is secured by a first priority
lien on all of the tangible and intangible assets of Modelwire.
The Senior Note is due and payable upon the earliest to occur of the
following:
(a) September 15, 2002; or
(b) upon the occurrence of certain events of default by
Modelwire, such as the failure of Modelwire to make payment
of any amount due under the Senior Note or the default by
Modelwire under certain agreements.
In connection with the purchase of the 9% Note, the Company received
2,604,479 warrants to acquire common stock of Modelwire at $0.40 per share
subject to adjustments from time to time for: subdivisions, combinations, and
other issuances; reclassification, reorganization and consolidation; sale of
shares below exercise price.
In March 2001, the Company purchased at par a $100,000 convertible note
bearing interest at 8.5% from Yehti Corporation. The note is to be converted
into Series B Preferred Stock at the time of a Qualifying Financing. A
Qualifying Financing is defined as a financing resulting in proceeds before
expenses of at least $1,500,000 to Yehti Corporation. Upon the consummation of
the Qualified Financing, the unpaid principal on this Note shall be converted
into shares of Series B Preferred Stock, and the Lender shall receive that
number of shares of Series B Preferred Stock that is equal to the outstanding
principal balance due to the Lender divided by the lesser of (i) $0.50 per share
or (ii) the lowest per share purchase price of the Series B Preferred Stock
issued in the Qualified Financing, rounded to the nearest whole share with 0.5
rounded upward to avoid fractional share interests.
In December 2001, the Company purchased at par a $50,000 convertible
note bearing interest at 10% from Yehti Corporation. The note is to be converted
into Series B Preferred Stock at the time of a Qualifying Financing. A
Qualifying Financing is defined as a financing resulting in proceeds before
expenses of at least $1,500,000 to Yehti Corporation. Upon the consummation of
the Qualified Financing, the unpaid principal on this Note shall be converted
into shares of Series B Preferred Stock, and the Lender shall receive that
number of shares of Series B Preferred Stock that is equal to the outstanding
principal balance due to the Lender divided by the lesser of (i) $0.50 per share
or (ii) the lowest per share purchase price of the Series B Preferred
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Stock issued in the Qualified Financing, rounded to the nearest whole share with
0.5 rounded upward to avoid fractional share interests.
6. Other assets
The Company engaged an investment firm to raise the venture capital
fund and paid $125,000, of which $75,000 is reported as deferred offering costs
representing the fee that will be refunded if the securities do not get placed.
The Company accrued interest on its notes receivable of $29,501 and on
its interest bearing cash accounts of $3,031 which has been earned but not paid
as of December 31, 2001.
The Company acquired all of the outstanding common stock of Southcoast
Investment Group, Inc. ("Southcoast") for $25,000. With the exception of a
broker dealer license, Southcoast had no assets or liabilities. The Company
recorded the license as an intangible asset valued at the purchase price.
7. Earnings per Share
Basic earnings per share excludes potential dilution of potential
shares and is computed by dividing income available to common shareholders by
the weighted-average number of common shares outstanding for the period. Diluted
earnings per share reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that then shared
in the earnings of the Company unless such issuance would be anti-dilutive.
As the Company posted a net loss for the three months ended December
31, 2000 and 2001, the effects of stock options and contingently issuable shares
for those years were anti-dilutive and not included in the computation of
diluted loss per share.
8. Income taxes
Management has reduced the deferred tax asset by a valuation allowance
due to uncertainty of realizing certain tax loss carry-forwards and other
deferred tax assets. The increase in net deferred tax assets during the three
month period ended December 31, 2001 was offset by a corresponding increase in
the valuation allowance. Accordingly no tax benefit was recognized for the net
loss.
9. Stockholders' Equity
Preferred Stock
Pursuant to the Company's amended articles of incorporation; the
Company is authorized to issue from time to time up to 5,000,000 shares of
preferred stock, in one or more series. The Board of Directors is authorized to
fix the dividend rights, dividend rates, any conversion rights or right of
exchange, any voting right, any rights and terms of redemption (including
sinking fund provisions), the redemption rights or prices, the liquidation
preferences and any other rights, preferences, privileges and restrictions of
any series of preferred stock and the number of shares constituting such series
and the designation thereof.
In February 1998, the Company completed the underwritten public
offering of 1,125,000 shares of its 15% Series A Cumulative Preferred Stock (the
"Preferred Stock"), with a liquidation preference of $10 per share. The price to
the public was $10 per share, with net proceeds to the Company of approximately
$9,631,000. Dividends on the Preferred Stock are cumulative and payable
quarterly on the last day of March, June, September and December of each year,
commencing on June 30, 1998, at the rate of 15% per annum. After three years
from the date of
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issuance, the Company may, at its option, redeem one-sixth of the Preferred
Stock each year, in cash at the liquidation price per share (plus accrued and
unpaid dividends), or, if in common stock, that number of shares equal to $10
per share of Preferred Stock to be redeemed, divided by 85% of the average
closing sale price per share for the common stock for the 5 trading days prior
to the redemption date. The Preferred Stock is not redeemable at the option of
the holder and has no stated maturity. Cumulative unpaid dividends at December
31, 2001 were $4,830,751.
The Company has not paid the quarterly dividend on its Preferred Stock
since December 31, 1998. If dividends on the Preferred Stock are in arrears for
two quarterly dividend periods, holders of the Preferred Stock will have the
right to elect two additional directors to serve on the Company's Board until
such dividend arrearage is eliminated. Two of the Company's directors are
designated as representing the Preferred Stock holders. In addition, certain
changes that could materially affect the holders of Preferred Stock, such as a
merger of the Company, cannot be made without the affirmative vote of the
holders of two-thirds of the shares of Preferred Stock, voting as a separate
class. There have been no directors elected by the Preferred Shareholders. The
Preferred Stock ranks senior to the common stock with respect to the payment of
dividends and amounts upon liquidation, dissolution or winding up. In the event
of liquidation, dissolution or winding up of the Company, the amount required to
satisfy the preferred shareholders is $15.6 million at December 31, 2001.
10. Commitments and Contingencies
In 1998, the Company initiated suit in state court in Houston, Texas
against Progressive Northern Insurance Co. arising out of insurance policies
issued by Progressive affiliates to the Company. The policies provided
deficiency balance coverage and physical damage coverage on automobile loans
acquired by the Company and sold into certain securitizations. Progressive
contended that there was a cumulative limit on claims under the Deficiency
Balance Policy of 88% of the total premiums paid on that Policy, which was
contrary to the Company's position. On this point, the Company's position was
confirmed by the court. Progressive also contended that it had the right to
cancel the Policies, without any refund of the fully-paid premiums, at any time
pursuant to 30 days' notice and in fact did so in March 1998. The Company and
the securitization trustees disputed this termination as contrary to the terms
and understandings reached with Progressive and relied upon by the parties in
interest, including the securitization market. This issue was submitted by the
court to the jury. After a three week trial in January 2000, the Company failed
to win a verdict against Progressive. The Company filed a motion to set aside
the verdict based on various legal issues and the court denied this motion and
entered a take nothing judgment against the Company. The Company is currently
appealing this verdict.
In January 2002, Dresner Investment Services, Inc. brought suit against
the Company. This is a suit recently filed in the United States District Court
for the Northern District of Illinois Eastern District against the Company for
breach of contract. The complaint asserts that the Company entered into an
agreement whereby Dresner would consult with and advise the Company in raising
unsecured debt and approach investors and/or creditors on behalf of the Company,
and assist the Company in the course of negotiations concerning financings with
prospective investors and/or creditors. The complaint further asserts that the
parties agreed that Dresner would be paid a fee of 6% of the committed debt in
the event of a financing. Dresner alleges that the Company obtained a commitment
of $20 million from an introduction provided by Dresner, and that the Company
now owes Dresner a fee of $1.2 million and late fees of approximately $750,000.
The Company denies all allegations in the complaint. The Company intends to
vigorously defend this case.
The Company has made a capital commitment of $500,000 to an investment
fund that co-invests in private venture-stage companies with whom the principals
of the fund have business or professional relationships. $75,000 of the
commitment was paid in October 2000. The
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investment fund expects to send out a thirty-day notice for a capital call
within the next 30 - 60 days for 5% ($25,000) of the Company's capital
commitment.
The Company is the plaintiff or the defendant in several legal
proceedings that its management considers to be the normal kinds of actions to
which an enterprise of its size and nature might be subject, and are not
material to the Company's overall business or financial condition, results of
operations or cash flows. During the quarter ended December 31, 2001, the
Company settled two lawsuits resulting in payments totaling $86,000.
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ITEM 2. Management's Discussion And Analysis Of Financial Condition And Results
of Operation
The following analysis of the financial condition and results of operations of
the Company should be read in conjunction with the Company's Consolidated
Financial Statements and Notes thereto and the other financial data included
herein. Certain of the financial information set forth below has been rounded in
order to simplify its presentation. However, the ratios and percentages set
forth below are calculated using the detailed financial information contained in
the Financial Statements and the Notes thereto, and the financial data included
elsewhere in this Form 10-Q. For further information, refer to the audited
consolidated financial statements and footnotes thereto included in the
Company's Form 10-K for the year ended September 30, 2001 (SEC File Number
000-21673).
In December 2001, the Company acquired all of the outstanding common
stock of Southcoast Investment Group, Inc. ("Southcoast"). With the exception of
a broker dealer license, Southcoast had no assets or liabilities. The Company
recorded the license as an intangible asset valued at the purchase price.
The Company is in the process of raising, pursuant to a private
placement, a $100,000,000 venture capital investment fund with a projected
10-year term, to be called the Agility Capital Fund, LLC (the "Fund"). The Fund
will sell and issue membership interests to accredited and institutional
investors. The Company will invest in such interests and will also serve as the
managing member and the initial advisor to the Fund. The Fund will invest in
early stage, privately held companies operating in the e-commerce business
services/internet, information technology and services, new media, enterprise
and application software, and communications industries. On a select basis,
later stage companies in other industries may also be considered.
The Fund's business model is to invest in companies that can benefit
from the collective operating and financial experience of the Fund's managers
and its advisors. The management and advisory team's business and industry
experience and professional relationships will be relevant to the industries
targeted and will be used to help the Fund achieve significant and timely
venture capital rates of returns.
In addition to providing growth capital to a selected group of
companies, the Fund will provide these companies ("Portfolio Companies") with
access to a network of contacts to help them anticipate and address challenges
when they arise and help accelerate their path to profitability. The Fund can
also provide Portfolio Companies with access to technology strategy and software
development resources via its proposed relationship with a technological
consulting and development firm, as well as management recruiting services
through the Fund's proposed association with an executive recruitment firm.
Portfolio Companies will be provided with access to marketing, advertising, and
communication expertise to help them develop marketing strategies to build brand
awareness in the digital marketplace through the Fund's association with a
founder and former President of one of the largest advertising and
communications agencies in the US. Access to significant debt and equity funding
resources to help further portfolio company growth will be facilitated through
the Fund's management team's extensive contacts in the financial community.
Additionally, Portfolio Companies will have access to state of the art business,
technology and consumer market intelligence through the Fund's association with
a leading provider of business technology research, consumer and market
intelligence and decision making tools.
The Company's management is using its best efforts to raise the capital
necessary to establish the Fund as a viable venture. The Company has engaged a
securities broker/dealer to serve as placement agent, assembled an initial
advisory board and engaged the services of two consultants. However, market
conditions for private equity funds are challenging, competitive and volatile.
Accordingly, there can be no assurance that the Company will be successful in
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establishing the Fund. If the Fund cannot be established within a reasonable
timeframe, the Company's capital resources would eventually be strained and the
Company could be unable to monetize the investments currently made in
anticipation of their conveyance to the Fund.
Potential investors should be aware that an investment in the Fund
involves a significant degree of risk. There can be no assurance that the Fund's
investment objectives will be achieved or that investors will receive a return
of their capital.
REVENUES
The Company's current source of revenues consists of interest and
dividends on its cash and investments.
RESULTS OF OPERATIONS
Period-to-period comparisons of operating results may not be
meaningful, and results of operations from prior and current periods may not be
indicative of future results. The following discussion and analysis should be
read in conjunction with the Company's Consolidated Financial Statements and the
Notes thereto.
Three Months Ended December 31, 2001 Compared to Three Months Ended December 31,
2000
Net Loss
In the three months ended December 31, 2001, net loss increased $88,517
to a net loss of $731,698 from a net loss of $643,181 for the three months ended
December 31, 2000. The increase in net loss resulted primarily from the
settlement of two lawsuits pertaining to the Company's prior business in which
the Company paid $86,000.
Total Revenues
Total revenues decreased $38,843 to $83,538 for the three months ended
December 31, 2001 from $122,381 for the three months ended December 31, 2000.
The decrease was due to the declining cash balance of the Company.
Interest Income. Interest income decreased $65,248 to $42,124 from
$107,372. Interest during the three months ended December 31, 2001 was generated
from the Company's notes receivable and its money market fund. Interest during
the three months ended December 31, 2000 was generated from cash and cash
equivalents.
Net Investment Income. During the three months ended December 31, 2001,
net investment income resulted from securities sold short. The Company did not
have investment income during the three months ended December 31, 2000
Other Income. For the three months ended December 31, 2001 and 2000
other income was $4,050 and $15,009, respectively, and consisted primarily of
insurance settlement proceeds on auto finance contracts and dividends.
Total Expenses
Total expenses of the Company increased $49,674 to $815,236 for the
three months ended December 31, 2001 from $765,562 for the three months ended
December 31, 2000. The Company settled two lawsuits related to its previous
business for $86,000. The Company incurred higher than normal travel expenses
related to protecting its investment in one of its portfolio companies.
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Salaries and Benefits. Salaries and benefits decreased $85,222 to
$256,325 for the three months ended December 31, 2001 from $341,547. The Company
did not pay bonuses in the three months ended December 31, 2001 compared to
$127,200 paid during the three months ended December 31, 2000.
General and Administrative Expenses. General and administrative
expenses increased $39,844 to $457,095 for the three months ended December 31,
2001 from $417,251 for the three months ended December 31, 2000. During the
three months ended December 31, 2001 and 2000, the Company's general and
administrative expenses were primarily professional expenses including
accounting fees, corporate counsel fees, Progressive litigation fees, and fees
and expenses related to the pursuit of the Company's new business plan. Travel
along with meals and entertainment during the three months ended December 31,
2001 increased $109,619 because the Company made presentations of its business
plan to potential investors, and made several site visits to its portfolio
companies.
Other Operating Expenses. Other operating expenses increased $9,052 to
$15,816 for the three months ended December 31, 2001 from $6,764 for the three
months ended December 31, 2000. Insurance premiums for the Company increased
while communication expenses decreased.
FINANCIAL CONDITION
Cash and cash equivalents. Cash and cash equivalents decreased
$1,544,017 at December 31, 2001 from $3,308,105 at September 30, 2001. The
decrease in cash and cash equivalents was mainly the result of an operating loss
of $731,698, the funding of notes receivable of $856,000, and the purchase of a
company for $25,000.
Investments. The following table provides a listing of investments at
September 30, 2001 and December 31, 2001:
September 30, December 31,
2001 2001
------------- -------------
Yehti $100,000 $100,000
Access Ventures 75,000 75,000
Tanisys Technology 120,000 120,000
Modelwire 522,000 -
Other 1,700
------------- -------------
Total $817,000 $296,700
============= =============
Notes Receivable. The following table provides a listing of notes
receivable at September 30, 2001 and December 31, 2001:
September 30, December 31,
2001 2001
----------------- ----------------
Modelwire 8% convertible note $ 500,000 $ -
Modelwire 9% note 1,041,791
Modelwire 8% senior convertible note 828,000
Yehti 8.5% convertible note 100,000 100,000
Yehti 10% convertible note 50,000
----------------- ----------------
Total $ 600,000 $2,019,791
================= ================
Other Assets. The Company engaged an investment firm to raise the
venture capital fund and paid $125,000, of which $75,000 is reported as deferred
offering costs representing the fee that will be refunded if the securities do
not get placed.
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The Company accrued interest on its notes receivable of $29,501 and on
its interest bearing cash accounts of $3,031, which has been earned but not paid
as of December 31, 2001.
The Company acquired all of the outstanding common stock of Southcoast
Investment Group, Inc. ("Southcoast") for $25,000. With the exception of a
broker dealer license, Southcoast had no assets or liabilities. The Company
recorded the license as an intangible asset valued at the purchase price.
Accounts Payable and Accrued Liabilities. Accounts payable and accrued
liabilities increased $346,420 to $852,943 at December 31, 2001 from $506,523 at
September 30, 2001. Accounts payable and accrued liabilities consists primarily
of lease obligations, liability for mediated settlement, and professional fees.
Securities sold short amounted to $251,988 at December 31, 2001 as compared to
none at September 30, 2001. Management monitors these positions and covers short
positions when deemed appropriate. As of February 11, 2002 the stock price
continued to decline.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2001, the Company had just over $1.76 million in
cash and no long-term indebtedness. Management believes the Company has
sufficient liquidity to meet its obligations (primarily employee/consultant fees
and expenses, rent and professional expenses) and to make selected investments
through 2002. Management hopes to generate additional liquidity and revenues
through the establishment of the Agility Capital Fund in the following ways: (i)
the sale to the Fund (at cost) of certain investments made by the Company on
behalf of the Fund, (ii) a management fee of up to 2.5% per annum of committed
funds, (iii) the pro rata share of realized investment gains on the Company's
investment in the Fund (expected to be 1% of the size of the Fund, or a maximum
of $1,000,000), and (iv) additional fees of up to 20% of the realized gains on
Fund investments (less amounts utilized for compensation arrangements for the
officers of the Fund Manager). There can be no assurance that the Fund will be
established or managed in a manner in which those revenue goals are met.
The inability of the Company to raise the Fund has left the Company
with the need to pursue other sources of revenue outside of interest income
earned on existing cash balances. If these sources of revenue are not sufficient
to cover the Company's operations and investment activities doubt may be raised
about the Company's ability to continue as a going concern.
Cash Flows. Significant cash flows related to the Company's operating
activities include the use of cash to pay salaries, professional and consultant
fees. Net cash used by operating activities totaled $731,698 during the three
months ended December 31, 2001.
Significant cash flows used by investing activities consisted of the
acquisition of a business for $25,000 and the funding of notes receivable for
$856,000.
There were no cash flows from financing activities during the three
months ended December 31, 2001.
Equity Offerings. In February 1998, the Company completed the
underwritten public offering of 1,125,000 shares of its 15% Series A Cumulative
Preferred Stock (the "Preferred Stock"), with a liquidation preference of $10
per share. The price to the public was $10 per share, with net proceeds to the
Company of approximately $10,386,000. Such net proceeds have been utilized for
working capital purposes, including the funding of finance contracts. Dividends
on the Preferred Stock are cumulative and payable quarterly on the last day of
March, June, September and December of each year, commencing on June 30, 1998,
at the rate of 15% per annum. After three years from the date of issuance, the
Company may, at its option, redeem one-sixth of the Preferred Stock each year,
in cash at the liquidation price per share (plus accrued and unpaid
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dividends), or, if in Common Stock, that number of shares equal to $10 per share
of Preferred Stock to be redeemed, divided by 85% of the average closing sale
price per share for the Common Stock for the 5 trading days prior to the
redemption date. The Preferred Stock is not redeemable at the option of the
holder and has no stated maturity.
As dividends on the Preferred Stock are in arrears for at least two
quarterly dividend periods, holders of the Preferred Stock have exercised their
right to call a special meeting of the Preferred Stock holders for the purpose
of electing two additional directors to serve on the Company's Board of
Directors until such dividend arrearage is eliminated. Such meeting was held on
October 1, 1999; however, because a quorum of preferred shareholders did not
attend or provide proxies for the meeting, no additional directors were elected.
Two of the Company's directors have been designated by the board as representing
the Preferred Stock holders. In addition, certain changes that could materially
affect the holders of Preferred Stock, such as a merger of the Company, cannot
be made without the affirmative vote of the holders of two-thirds of the shares
of Preferred Stock, voting as a separate class. The Preferred Stock ranks senior
to the Common Stock with respect to the payment of dividends and amounts upon
liquidation, dissolution or winding up. Dividends have not been paid on the
Preferred Stock since 1998 and the Company at December 31, 2001 is $4,830,751 in
arrears in dividend payments.
IMPACT OF INFLATION AND CHANGING PRICES
The Company does not believe that inflation directly has a material
adverse effect on its financial condition or results of operations. Inflation
can adversely affect the Company's operating expenses, such as occupancy and
employee expenses.
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
The Company adopted the provisions of SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities", as amended by SFAS Nos. 137 and
138, and as interpreted by the FASB and the Derivatives Implementation Group
through "Statement 133 Implementation Issues", as of October 1, 2000. At the
time of adoption, the Company was not engaged in any derivative instruments or
any embedded derivative instruments that required bifurcation. The Company has
not engaged in hedging activities.
The Financial Accounting Standards Board ("FASB") recently issued
Statement of Financial Accounting Standards No. 141 ("SFAS 141"), "Business
Combinations", Statement of Financial Accounting Standards No. 142 ("SFAS 142"),
"Goodwill and Other Intangible Assets", Statement of Financial Accounting
Standards No. 143 ("SFAS 143"), "Accounting for Asset Retirement Obligations"
and Statement of Financial Accounting Standards No. 144 ("SFAS 144"),
"Accounting for the Impairment or Disposal of Long-Lived Assets". SFAS 141
requires the purchase method of accounting for business combinations initiated
after June 30, 2001 and eliminates the pooling-of-interests method. SFAS No. 142
requires companies to cease amortizing goodwill that existed at June 30, 2001
and establishes a new method of testing goodwill for impairment on an annual
basis or on an interim basis if an event occurs or circumstances change that
would reduce the fair value of a reporting unit below its carrying value. SFAS
143 addresses financial accounting and reporting for obligations associated with
the retirement of tangible long-lived assets and the associated asset retirement
costs and is effective for fiscal years beginning after June 15, 2002. SFAS 144
clarifies the accounting for disposals of long-lived assets and is effective for
fiscal years beginning after December 31, 2001. The Company does not believe
that the adoption of SFAS 141, SFAS 142, SFAS 143 and SFAS 144 will have a
significant impact on its financial statements.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk generally represents the risk of loss that may result from
the potential change in the value of a financial instrument as a result of
fluctuations in interest and currency exchange
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rates and in equity and commodity prices. Market risk is inherent to both
derivative and non-derivative financial instruments. The Company's market risk
management procedures include all market risk sensitive financial instruments.
The Company has no exposure to currency exchange rates nor commodity risk
exposure.
To the extent the Company maintains a short position in certain
securities, it is exposed to a further off-balance-sheet market risk, since the
Company's ultimate obligation may exceed the amount recognized in the financial
statements.
FORWARD LOOKING STATEMENTS
The statements contained in this document that are not historical facts
are forward looking statements. Actual results may differ from those projected
in the forward looking statements. These forward looking statements involve
risks and uncertainties, including but not limited to the following risks and
uncertainties: changes in the performance of the financial markets, in the
demand for and market acceptance of the Company's services, and in general
economic conditions, including interest rates, presence of competitors with
greater financial resources and the impact of competitive products and pricing;
the effect of the Company's policies; the ability of the Company to find
adequate funding sources, the ability of the Company to raise a venture capital
fund, and the ability of the Company to find suitable investments for the
venture capital fund that provide an ongoing revenue stream to the Company.
Investors also are directed to other risks discussed in documents filed by the
Company with the SEC.
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PART II-OTHER INFORMATION
ITEM 1. Legal Proceedings
In the course of its previous business as a specialty finance company,
the Company from time to time has been made a party to litigation involving
consumer-law claims. These claims typically allege improprieties on the part of
the originating dealer and name the Company and/or its assignees as subsequent
holders of the finance contracts. To date, none of these actions have been
certified as eligible for class-action status. The Company settled for $86,000
two of these lawsuits.
In 1998, the Company initiated suit in state court in Houston, Texas
against Progressive Northern Insurance Co. arising out of insurance policies
issued by Progressive affiliates to the Company. The policies provided
deficiency balance coverage and physical damage coverage on automobile loans
acquired by the Company and sold into certain securitizations. Progressive
contended that there was a cumulative limit on claims under the Deficiency
Balance Policy of 88% of the total premiums paid on that Policy, which was
contrary to the Company's position. On this point, the Company's position was
confirmed by the court. Progressive also contended that it had the right to
cancel the Policies, without any refund of the fully-paid premiums, at any time
pursuant to 30 days' notice and in fact did so in March 1998. The Company and
the securitization trustees disputed this termination as contrary to the terms
and understandings reached with Progressive and relied upon by the parties in
interest, including the securitization market. This issue was submitted by the
court to the jury. After a three week trial in January 2000, the Company failed
to win a verdict against Progressive. The Company filed a motion to set aside
the verdict based on various legal issues and the court denied this motion and
entered a take nothing judgment against the Company. The Company is currently
appealing this verdict.
In January 2002, Dresner Investment Services, Inc. brought suit against
the Company. This is a suit recently filed in the United States District Court
for the Northern District of Illinois Eastern District against the Company for
breach of contract. The complaint asserts that the Company entered into an
agreement whereby Dresner would consult with and advise the Company in raising
unsecured debt and approach investors and/or creditors on behalf of the Company,
and assist the Company in the course of negotiations concerning financings with
prospective investors and/or creditors. The complaint further asserts that the
parties agreed that Dresner would be paid a fee of 6% of the committed debt in
the event of a financing. Dresner alleges that the Company obtained a commitment
of $20 million from an introduction provided by Dresner, and that the Company
now owes Dresner a fee of $1.2 million and late fees of approximately $750,000.
The Company denies all allegations in the complaint. The Company denies all
allegations in the complaint. The Company intends to vigorously defend this
case.
ITEM 2. Changes in Securities and Use of Proceeds
None
ITEM 3. Defaults Upon Senior Securities
None
ITEM 4. Submission of Matters to a Vote of Security Holders
None
ITEM 5. Other Information
None
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ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ------------ -------------------------------------------------------------------
3.1 (1)..... Restated Articles of Incorporation of the Company
3.2 (1)..... Amended and restated Bylaws of the Company
4.1 (1)..... Specimen Common Stock Certificate
10.1 (1).... Employment Agreement effective as of May 1, 1996 between William O.
Winsauer and the Company
10.2 (2).... 2001 Stock Option Plan
(1) Incorporated by reference from the Company's Registration Statement on Form
S-1 (Registration No.333-05359).
(2) Incorporated by reference to the Company's annual report on form 10-K for
the period ended September 30, 2001
(b) Reports on Form 8 K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized on February 14, 2002.
AGILITY CAPITAL, INC.
By: /s/ WILLIAM O. WINSAUER
------------------------------------
William O. Winsauer,
Chairman of the Board
and Chief Executive Officer
By: /s/ A. Dale Henry
------------------------------------
A. Dale Henry,
Chief Financial Officer
and Principal Accounting Officer
20