UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For Quarter Ended: SEPTEMBER 30, 2003
Commission File Number: 000-26415
EVOLVE ONE, INC.
(Exact name of small business issuer as specified in its charter)
DELAWARE 13-3876100
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
6413 CONGRESS AVENUE, SUITE 230, BOCA RATON, FL 33487
(Address of principal executive office)
(561) 988-0819
(Issuer's telephone number)
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 [ ] No [X].
The number of shares outstanding of registrant's common stock, par value $.00001
per share, as of September 30, 2003 was 3,096,304.
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X].
EVOLVE ONE, INC. AND SUBSIDIARIES
INDEX
Page
No.
----
Part I. Financial Information (unaudited)
Item 1. Condensed Consolidated Financial Statements:
Balance Sheet - September 30, 2003 ........................... 3
Statements of Operations -
Three and Nine Months Ended September 30, 2003 and 2002 ...... 4
Statement of Stockholders' Equity -
Nine Months Ended September 30, 2003 ......................... 5
Statements of Cash Flows -
Nine Months Ended September 30, 2003 and 2002 ................ 6-7
Notes to Condensed Consolidated Financial Statements ......... 8-17
Item 2. Management's Discussion and Analysis or Plan of Operation ...... 18-21
Item 3. Controls and Procedures ........................................ 22
Part II. Other Information .............................................. 22
Item 1. Legal Proceedings .............................................. 22
Item 6. Exhibits and Reports on 8-K .................................... 23
Signatures .............................................................. 24
2
EVOLVE ONE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 2003
(UNAUDITED)
ASSETS
CURRENT ASSETS
Cash and cash equivalents ..................................... $ 192,314
Accounts receivable ........................................... 17,869
Marketable equity securities .................................. 68,117
Inventory ..................................................... 430,060
Loan Receivable - Onspan Networking, Inc. ..................... 684,433
Prepaid expenses .............................................. 9,166
-----------
TOTAL CURRENT ASSETS ........................................ 1,401,959
PROPERTY AND EQUIPMENT, NET ..................................... 226,765
MARKETABLE EQUITY SECURITIES .................................... 92,385
NOTE RECEIVABLE ................................................. 10,000
OTHER ASSETS .................................................... 10,763
-----------
TOTAL ASSETS ................................................ $ 1,741,872
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable .............................................. $ 49,401
Accrued salaries payable ...................................... 197,500
Accrued liabilities ........................................... 1,015
-----------
TOTAL CURRENT LIABILITIES ................................... 247,916
-----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Cumulative convertible preferred stock, $.0001 par value;
authorized 10,000,000 shares; outstanding -0- shares ........ -
Common stock, $.00001 par value. Authorized 1,000,000,000
shares; issued and outstanding 3,096,304 shares ............. 31
Paid-in capital ............................................... 6,730,343
Accumulated deficit ........................................... (4,977,414)
Accumulated other comprehensive (loss) ........................ (259,004)
-----------
Total stockholders' equity ...................................... 1,493,956
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY .................. $ 1,741,872
===========
See accompanying notes to condensed consolidated financial statements.
3
EVOLVE ONE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
2003 2002 2003 2002
---- ---- ---- ----
SALES AND REVENUES ........................................ $ 319,590 $ 364,257 $ 1,036,417 $ 954,307
COST OF SALES ............................................. 197,024 254,267 654,686 674,399
----------- ----------- ----------- -----------
GROSS PROFIT .............................................. 122,566 109,990 381,731 279,908
Selling, general and administrative expense ............... 332,792 393,564 1,033,150 1,089,278
----------- ----------- ----------- -----------
Loss from operations .................................... (210,226) (283,574) (651,419) (809,370)
----------- ----------- ----------- -----------
OTHER INCOME (EXPENSE):
Interest expense ........................................ - (1,625) (59) (3,825)
Gain (loss) from sale of marketable equity securities ... (448,944) (39,910) (476,444) (12,058)
Investment income ....................................... 9,446 3,804 11,139 12,283
Unrealized gain (loss) on marketable equity securities .. 1,206 (1,322) - (4,625)
----------- ----------- ----------- -----------
Total other income (expense) .......................... (438,292) (39,053) (465,364) (8,225)
----------- ----------- ----------- -----------
LOSS BEFORE INCOME TAXES .................................. (648,518) (322,627) (1,116,783) (817,595)
INCOME TAX EXPENSE ........................................ - (88,800) - 381,500
----------- ----------- ----------- -----------
NET LOSS .................................................. $ (648,518) $ (233,827) $(1,116,783) $(1,199,095)
=========== =========== =========== ===========
NET LOSS PER SHARE
BASIC ................................................... $ (0.21) $ (0.08) $ (0.36) $ (0.38)
=========== =========== =========== ===========
DILUTED ................................................. $ (0.21) $ (0.08) $ (0.36) $ (0.38)
=========== =========== =========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
BASIC ................................................... 3,096,304 3,115,833 3,096,304 3,140,995
=========== =========== =========== ===========
DILUTED .................................................. 3,096,304 3,115,833 3,096,304 3,140,995
=========== =========== =========== ===========
See accompanying notes to condensed consolidated financial statements.
4
EVOLVE ONE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 2003
(UNAUDITED)
Accumulated
Other
Common Stock Paid-in Accumulated Comprehensive
Shares Par Value Capital Deficit Income (loss) Total
--------- --------- ----------- ----------- ------------- -----------
BALANCE, January 1, 2003 .............. 3,096,304 $31 $6,730,343 $(3,860,631) $(372,148) $ 2,497,595
Comprehensive income (loss):
Unrealized gain on available-
for-sale securities, net ........ - - - - $ 113,144 113,144
Net loss .......................... - - - (1,116,783) - (1,116,783)
-----------
Total comprehensive income (loss) - - - - - (1,003,639)
--------- --- ---------- ----------- --------- -----------
BALANCE, September 30, 2003 ........... 3,096,304 $31 $6,730,343 $(4,977,414) $(259,004) $ 1,493,956
========= === ========== =========== ========= ===========
See accompanying notes to condensed consolidated financial statements.
5
EVOLVE ONE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(UNAUDITED)
2003 2002
---- ----
Cash flows from operating activities
Net (loss) ......................................... $(1,116,783) $(1,199,095)
Adjustments to reconcile net (loss) to net
cash (used in) operating activities:
Depreciation and amortization .................... 80,152 123,791
Loss on marketable equity securities ............. 476,444 12,058
Unrealized loss on marketable equity securities .. - 4,625
Deferred income taxes ............................ - 381,500
Decrease (increase) in assets:
Accounts receivable ............................ 22,886 14,112
Inventory ...................................... (94,453) (69,721)
Note receivable ................................ (10,000) -
Other assets ................................... 68,063 119,089
Increase (decrease) in liabilities:
Accounts payable ............................... (50,347) 8,777
Accrued liabilities and salaries ............... 95,907 70,614
----------- -----------
Net cash provided by (used in) operating activities (528,131) (534,250)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures ............................. (8,411) (5,180)
Loan receivable - Onspan Networking, Inc. ........ (675,000) -
Interest receivable - Onspan Networking,Inc ...... (9,433) -
Purchase of marketable equity securities ......... (900) -
Proceeds from sale of marketable equity securities 43,206 187,943
----------- -----------
Net cash provided by (used in) investing activities (650,538) 182,763
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Repurchase of treasury stock ..................... - (89,540)
Loan repayment ................................... - (115,729)
----------- -----------
Net cash (used in) financing activities ............ - (205,269)
----------- -----------
NET (DECREASE) IN CASH AND CASH EQUIVALENTS ........ (1,178,669) (556,756)
CASH AND CASH EQUIVALENTS, beginning of period ..... 1,370,983 2,169,262
----------- -----------
CASH AND CASH EQUIVALENTS, end of period ........... $ 192,314 $ 1,612,506
=========== ===========
Continued
See accompanying notes to condensed consolidated financial statements.
6
EVOLVE ONE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(UNAUDITED)
(CONTINUED)
2003 2002
---- ----
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for:
Interest ......................................... $ 59 $ 3,825
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Insurance Financing ................................ $ - $ 157,963
See accompanying notes to condensed consolidated financial statements.
7
EVOLVE ONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Evolve One, Inc. (the "Company" or "EONE") is a diversified holding company that
develops and operates Internet and direct retail marketing companies. The EONE
Group includes wholly owned subsidiaries, StogiesOnline.com, Inc. ("Stogies")
(www.CigarCigar.com), A1Discount Perfume, Inc. (www.A1DiscountPerfume.com), and
International Internet Venture I, LLC ("Ventures"). EONE, through its Venture
division, owns an equity interest in several companies, some of which are
classified as trading securities and some of which are classified as
available-for-sale securities. EONE was incorporated in Delaware on June 21,
1994.
Stogies became an online distributor and retailer of brand name premium cigars
within the United States on November 18, 1998. Stogies' products consist of
premium cigars, factory brand name seconds and mass market cigars, which are
distributed online to retail and wholesale customers.
On September 28, 2001, the Company created a new Subsidiary named
A1DiscountPerfume Inc. and in October 2001, launched a new e-commerce site
specializing in men's and women's fragrances. The site named
A1DiscountPerfume.com is located at http://www.A1DiscountPerfume.com. The site
is a competitor of other discount as well as full price online retailers of
Perfume and Cologne. The site employs the Microsoft / Great Plains eEnterprise
system the Company purchased last year and permits customers to benefit by
having direct access to up-to-the-minute information about inventory, pricing,
"hot deals" as well as order information. The eEnterprise system allows
A1DiscountPerfume.com to inexpensively reach customers anywhere, around the
clock.
The financial statements included in this report have been prepared by the
Company pursuant to the rules and regulations of the Securities and Exchange
Commission for interim reporting and include all adjustments (consisting only of
normal recurring adjustments) that are, in the opinion of management, necessary
for a fair presentation. These financial statements have not been audited.
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 for
interim reporting. The Company believes that the disclosures contained herein
are adequate to make the information presented not misleading. However, these
financial statements should be read in conjunction with the financial statements
and notes thereto included in the Company's Annual Report for the year ended
December 31, 2002, which is included in the Company's Form 10-KSB for the year
ended December 31, 2002. The financial data for the interim periods presented
may not necessarily reflect the results to be anticipated for the complete year.
Certain reclassifications of the amounts presented for the comparative period
have been made to conform to the current presentation.
8
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make certain estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
NET EARNINGS (LOSS) PER SHARE
Basic net earnings (loss) per share is computed by dividing net earnings (loss)
by the weighted-average number of shares outstanding. Diluted net earnings
(loss) per share includes the dilutive effect of stock options. The calculation
of diluted weighted average shares outstanding for the quarters ending September
30, 2003 and 2002 excludes 16,000 and 8,000 common shares respectively, issuable
pursuant to outstanding options. Theses shares were excluded because their
effect was anti-dilutive.
STOCK-BASED COMPENSATION
The Company granted stock options to directors and employees that are more fully
described in Note G. The Company accounts for its stock options using the
intrinsic value method under Accounting Principles Board Opinion ("APB") No. 25,
"ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES."
The proforma effect of the compensation expense would not be material in
computing the net (loss) and (loss) per share if the Company had applied the
fair value recognition provisions of Statements on Financial Accounting
Standards ("SFAS") No. 123, "ACCOUNTING FOR STOCK-BASED COMPENSATION," and SFAS
No. 148 "ACCOUNTING FOR STOCK-BASED COMPENSATION - TRANSITION AND DISCLOSURE."
STOCK SPLIT
On January 31, 2003, the Company issued a 250 to 1 reverse stock split. All
share and per share amounts have been retroactively restated to reflect the
reverse stock split.
B. MARKETABLE EQUITY SECURITIES
SFAS No. 115 "Accounting for Certain Investments in Debt and Equity Securities,"
requires that all applicable investments be classified as trading securities,
available-for-sale securities or held-to-maturity securities. The Company has
classified certain of its investments as trading securities which are reported
at fair value, which is defined to be the last closing price for the listed
securities. The unrealized gains and losses, which the Company recognizes from
its trading securities are included in earnings. The Company also has
investments classified as available-for-sale, which are also required to be
reported at fair value, with unrealized gains and losses excluded from earnings
and reported as a separate component of stockholders' equity (net of the effect
9
of income taxes). Fair value is also defined to be the last closing price for
the listed security. Due to the size of certain of the Company's investments and
their limited trading volume, there can be no assurance that the Company will
realize the value which is required to be used by SFAS No. 115.
The amortized cost of equity securities as shown in the accompanying balance
sheet and their estimated market value at September 30, 2003 are as follows:
2003
----
Trading securities:
Cost ................................................... $ 10,572
Unrealized (loss) ...................................... (8,920)
---------
1,652
---------
Available-for-sale securities:
Cost ................................................... 417,854
Unrealized (loss) ...................................... (259,004)
---------
158,850
---------
160,502
Marketable equity securities classified as current .............. 68,117
---------
Marketable equity securities classified as non-current .......... $ 92,385
=========
Gains (losses) from trading securities that were included in earnings for the
nine months ended September 30, 2003 and 2002 were as follows:
2003 2002
---- ----
Realized (loss) ......................... $ (476,444) $(12,058)
========== ========
Unrealized (loss) ....................... $ - $ (4,625)
========== ========
10
The change in unrealized gains (losses) from available-for-sale securities
included as a component of equity for the nine months ended September 30, 2003
and 2002 were as follows:
2003 2002
---- ----
Net unrealized gain (loss) ....................... $ 113,144 $(1,013,763)
Decrease in deferred tax asset ................... 42,500 381,500
Allowance deferred taxes ......................... (42,500) -
--------- -----------
Accumulated other comprehensive income (loss) .... $ 113,144 $ (632,263)
========= ===========
The Company's investment in available-for-sale securities includes 10,100,000
shares (10,000,000 of which are not registered) of SGD Holdings, Ltd., formerly
known as Goldonline International, Inc. ("SGD"), a holding company primarily
engaged in acquiring and developing jewelry related businesses, with a cost of
$108,854 and a closing value on September 30, 2003 of $151,500 ($.015 per
share). The Company's investment represents approximately 10.4% of the
outstanding stock of SGD and accordingly the Company is subject to certain
restrictions on the number of shares it can sell. There can be no assurance that
the company will realize the calculated carrying value of the securities. The
Company classifies 6,159,000 shares of SGD as non-current and 3,941,000 shares
of SGD as current, which is approximately the maximum number of shares it could
sell within the next twelve months.
During the latter part of 2002 the Company became aware, based upon Securities
and Exchange Commission (SEC) filings by SGD, that SGD had taken the position
that the Company was the holder of pre-split shares (SGD had a 6 for 1 reverse
split) and rather than the Company owning 10 Million shares of SGD the Company
was the holder of only 1,666,666 shares of SGD. It is the Company's position
that the number of shares that the Company held of SGD as of September 30, 2003
and 2002 is 10 Million. This is based upon purchase and sale arrangements
between the Company and SGD wherein the Company was sold, issued and receive 10
Million post split shares of SGD from SGD (formerly known as GoldOnline.com,
Inc.). The shares issued and delivered to the Company by SGD reflected the split
and the new split CUSIP change. On November 11, 2000, following the Company's
receipt of these shares, the Company filed a Form 13D, with the SEC, reflecting
the ownership of these shares. The Form 13D had been prepared by SGD's Counsel.
SGD filed quarterly and annual financial reports with the SEC reflecting the
ownership of 10 Million shares by the Company. Should it ultimately be
determined that the shares should be pre-split shares then our investment in
SGD, as of September 30, 2003, rather then being included in the accompanying
balance sheet as $151,500 (current $59,115; long-term $92,385) might be reduced
depending upon the impact of the share price differential on the market price of
the SGD shares and the reduced number of shares that the Company would be
considered as holding.
11
C. OTHER COMPREHENSIVE INCOME (LOSS)
The following represents a reconciliation of other comprehensive income (loss)
for the nine months ended September 30, 2003:
Accumulated other comprehensive income (loss) at 12/31/02: $(372,148)
Unrealized (loss) from marketable equity securities $(353,320)
Reclassification adjustment 466,464
---------
Net unrealized gain from marketable equity securities 113,144
---------
Net accumulated other comprehensive income (loss) $(259,004)
=========
D. INCOME TAXES
The components of income tax expense are as follows for the three months ended
September 30, 2003 and 2002:
2003 2002
---- ----
Current tax expense :
Federal ................................... $ - $ -
State ..................................... -
-------- --------
- -
Deferred tax expense ......................... - 381,500
-------- --------
Total income tax expense .................. $ - $381,500
======== ========
Total income tax expense (benefit) applicable to earnings (loss) before income
taxes is reconciled with the "normally expected" federal income tax expense
(benefit) as follows for the nine months ended September 30, 2003 and 2002:
2003 2002
---- ----
"Normally expected" income tax expense (benefit) ..... $(379,706) $(278,000)
Increase (decrease) in taxes resulting from:
State income taxes, net of Federal income
tax benefit ........................................ (15,704) (29,700)
Nondeductible meals and other ........................ 19,710 2,400
Change in valuation allowance ........................ 375,700 686,800
--------- ---------
$ - $ 381,500
========= =========
12
The deferred income tax liabilities (assets) at September 30, 2003 are comprised
of the following:
CURRENT NONCURRENT
------- ----------
Unrealized loss on trading securities .............. $ (4,000) $ -
Unrealized gain on available-for-sale securities ... (40,700) (56,700)
Officers Salaries .................................. (74,300) -
Net operating loss ................................. (1,865,400) -
Asset basis ........................................ - 1,600
----------- -----------
Total deferred income tax (assets) .............. (1,984,400) (55,100)
Valuation allowance ............................. 1,984,400 55,100
----------- -----------
Net deferred income tax (assets) ................... $ - $ -
=========== ===========
The Company has provided a valuation allowance on the deferred tax assets
because of uncertainty regarding its realization. The increase in the valuation
account during the nine months ended September 30, 2003 and 2002 was $375,700
and $686,800, respectively. Management utilizes tax planning strategies and
projected future taxable income in assessing these assets.
NOTE E. NOTE RECEIVABLE
The Company issued a demand line of credit with Onspan Networking, Inc. a
related party, totaling $1,000,000, under which Onspan Networking, Inc. may
borrow on an unsecured basis with interest at 5% annually. On June 19, 2003
Onspan Networking, Inc. borrowed $675,000 under this line of credit. The Company
has accrued $9,433 in interest on the note.
The terms of the demand line of credit state that Onspan Networking, Inc. must
issue options to the Company to purchase common stock equal to 10% of the dollar
amount of the loan advance at an exercise price of $0.10 per share, and options
to purchase common stock equal to 90% of the dollar amount of the loan advance
at the ten trading day average at the time of the draw ($0.30 at June 30, 2003).
On June 19, 2003 Onspan Networking, Inc. granted 67,500 stock options to Evolve
One, Inc. under the revolving note agreement. The options have an exercise price
of $.10 per share. Onspan Networking, Inc. also granted on June 19, 2003,
607,500 stock options to Evolve One, Inc. in the same note agreement. These
options have an exercise price of $.30 per share. The Company currently has
excluded these "options" on common stock from assets of the company as the
underlying stock due to market conditions, are not readily convertible to cash.
If conditions are satisfied and the underlying stock becomes marketable, the
"options" would be reclassified as a derivative and recorded at fair value as an
adjustment through current period results of operations.
On May 27, 2004 Onspan Networking, Inc. repaid the entire balance outstanding
under the line of credit, including accrued interest.
13
NOTE F. STOCK OPTIONS
In November 1999, the Board of Directors approved the establishment of Evolve
One, Inc. Stock Option Plan (the "Plan") to provide incentives to attract future
employees and retain existing key employees with the Company. The Company has
reserved 100,000 shares of common stock for the grant of qualified incentive
options or non-qualified options to employees and directors of the Company or
its parents or subsidiaries, and to non-employee directors, consultants and
advisors and other persons who may perform significant services for or on behalf
of the Company under the Plan. These options were granted in accordance with
employment agreements. Prices for incentive stock options must provide for an
exercise price of not less than 100% of the fair market value of the common
stock on the date the options are granted unless the eligible employee owns more
than 10% of the Company's common stock for which the exercise price must be at
least 110% of such fair market value. Non-statutory options must provide for an
exercise price of not less than 85% of the fair market value. The Plan was
approved by the shareholders at a meeting on November 11, 1999.
The Company applied Accounting Principles Board Opinion No. 25 and related
interpretations in accounting for its plans. Accordingly, no compensation cost
has been recognized for the incentive stock options granted to employees under
its stock option plan in its statements of operations. During 2002, the Company
granted nonqualified options to purchase 8,000 shares of common stock to
directors outside of the Plan. On January 3, 2003 the Company granted
nonqualified options to purchase an additional 8,000 shares of common stock to
directors outside of the Plan. These options were granted in accordance with
employment contracts. The additional stock options, expiring January 3, 2008,
have en exercise price of $.001 per share and vest immediately.
A summary of the status of the Company's stock options as of September 30, 2003
and the changes during the nine months ended September 30, 2003 and 2002 is
presented below:
WEIGHTED
AVERAGE
SHARES PRICE
------ -----
Beginning Balance, January 1, 2002 ........ - $ -
Options granted ........................... 8,000 .007
Options exercised ......................... - -
Options cancelled ......................... - -
------ -----
Ending Balance, September 30, 2002 ........ 8,000 $.007
------ -----
Options granted ........................... 8,000 $.001
Options exercised ......................... - -
Options cancelled ......................... - -
------ -----
Ending Balance, September 30, 2003 ........ 16,000 $.004
====== =====
14
The pro forma compensation expense of the stock options would not be material to
the accompanying financial statements for the current period, if the Company
would have elected SFAS No. 123. The Company used the Black-Scholes option
pricing model to determine the fair value of the grants. The assumptions were
applied as follows:
Risk Free Interest Rate ................................ 3.48%
Expected Dividend Yield ................................ 0%
Expected Option Life ................................... 5 years
Expected Stock Price Volatility ........................ 138%
NOTE G. STOCK REPURCHASE
The Company has been authorized and empowered to acquire in the open market up
to one million dollars of common stock of the Corporation upon such terms and
conditions as management shall determine consistent with applicable rules and
regulations of the Securities and Exchange Commission. Pursuant to a plan
approved by the board of directors the Company repurchased in the nine month
period ended September 30, 2002 a total of 48,881 shares of its common stock for
$89,540. The repurchased shares are held in treasury and have been treated as
constructively retired.
NOTE H. SEGMENT INFORMATION
The Company reports segments based upon the management approach, which
designates the internal reporting that is used by management for making
operating decisions and assessing performance.
For the six months ended September 30, 2003, the Company operated in the
following segments, none of which have inter-segment revenues:
A1DISCOUNT
VENTURES STOGIES CORPORATE PERFUME CONSOLIDATED
-------- ------- --------- ------- ------------
Revenue .... $ - $1,003,122 $ - $ 33,295 $ 1,036,417
Operating
Loss ....... (19,264) (153,554) (462,313) (16,288) (651,419)
Other income
(expense) .. (476,397) (59) 11,092 - (465,364)
Net (Loss) . (495,661) (153,613) (451,221) (16,288) (1,116,783)
Assets ..... $ 252,323 $ 664,729 $ 765,168 $ 59,652 $ 1,741,872
15
For the six months ended September 30, 2002, the Company operated in the
following segments, none of which have inter-segment revenues:
A1DISCOUNT
VENTURES STOGIES CORPORATE PERFUME CONSOLIDATED
-------- ------- --------- ------- ------------
Revenue .... $ - $ 927,512 $ - $ 26,795 $ 954,307
Operating
Loss ....... (45,278) (207,507) (552,664) (3,921) (809,370)
Other income
(expense) .. (15,760) - 7,535 - (8,225)
Net (Loss) . (59,338) (129,506) (1,007,830) (2,421) (1,199,095)
Assets ..... $1,233,348 $1,365,104 $ 874,343 $ 43,855 $ 3,516,650
The Ventures segment owns an equity interest in several companies, mainly with
Internet operations, and derives its revenue from the net gains and losses
recognized when the investments are sold. In addition, the Ventures segment
recognizes income or loss from the unrealized gains or losses associated with
its trading securities.
The Stogies segment is an online distributor and retailer of brand name premium
cigars within the United States. Stogies revenue includes wholesale sales to
cigar stores, as well as retail sales to internet customers.
The A1Discount segment is an online distributor and retailer of brand name
premium colognes, perfumes and exercise and yoga equipment within the United
States. A1Discount revenue includes retail sales to internet customers.
Corporate assets consist primarily of cash and a loan receivable from Onspan
Networking, Inc. a related party. Interest expense will be allocated to the
other segments to the extent it exceeds interest income.
NOTE H. LEGAL PROCEEDINGS
Lakewood Development(s) Corporation v. Gary Schultheis and Herbert Tabin and
Evolve One, Inc., Civil Action No. 4-03-CV-1224-A, in the United States District
Court of the Northern District of Texas, Ft. Worth Division (Complaint filed on
August 6, 2003). This action asserts claims for violation of Texas securities
law, fraud, breach of contract, and breach of fiduciary duties. The action
sought damages in the amount of $4,125,000, for the plaintiff, the plaintiffs'
attorneys' fees and costs, and certain other relief.
16
On April 6, 2004, United States District Judge John McBryde of the United States
District Court of the Northern District of Texas, Ft. Worth Division, entered a
final judgment in favor of Evolve One, Inc. and its officers Gary Schultheis and
Herbert Tabin dismissing the case with prejudice. The court also ordered
Lakewood to pay defendants' court costs.
NOTE I. SUBSEQUENT EVENTS
On August 6, 2004, the Company received a late filers notice from the Securities
And Exchange Commission. The letter dated July 29, 2004, stated: "IT APPEARS
THAT THE REGISTRANT ("EVOLVE ONE, INC."), IS NOT IN COMPLIANCE WITH ITS
REPORTING REQUIREMENTS UNDER SECTION 13(A) OF THE SECURITIES EXCHANGE ACT OF
1934. IF THE REGISTRANT IS IN COMPLIANCE WITH ITS REPORTING REQUIREMENTS, PLEASE
CONTACT US WITHIN FIFTEEN DAYS FROM THE DATE OF THIS LETTER SO WE CAN DISCUSS
THE REASONS WHY OUR RECORDS DO NOT INDICATE THAT COMPLIANCE. IF THE REGISTRANT
IS NOT IN COMPLIANCE WITH ITS REPORTING REQUIREMENTS, IT SHOULD FILE ALL
REQUIRED REPORTS WITHIN FIFTEEN DAYS FROM THE DATE OF THIS LETTER. IF THE
REGISTRANT HAS NOT FILED ALL REQUIRED REPORTS WITHIN FIFTEEN DAYS FROM THE DATE
OF THIS LETTER, PLEASE BE AWARE THAT THE REGISTRANT MAY BE SUBJECT, WITHOUT
FURTHER NOTICE, TO AN ADMINISTRATIVE PROCEEDING TO REVOKE ITS REGISTRATION UNDER
THE SECURITIES EXCHANGE ACT OF 1934. THIS ADMINISTRATIVE PROCEEDING WOULD BE
BROUGHT BY THE COMMISSION'S DIVISION OF ENFORCEMENT PURSUANT TO SECTION 12(J) OF
THE SECURITIES EXCHANGE ACT OF 1934. IF THE REGISTRANT'S STOCK IS TRADING, IT
ALSO MAY BE SUBJECT TO A TRADING SUSPENSION BY THE COMMISSION PURSUANT TO
SECTION 12(K) OF THE SECURITIES EXCHANGE ACT OF 1934. FINALLY, PLEASE CONSIDER
WHETHER THE REGISTRANT IS ELIGIBLE TO TERMINATE ITS REGISTRATION UNDER THE
SECURITIES EXCHANGE ACT OF 1934. IF THE REGISTRANT IS ELIGIBLE TO TERMINATE ITS
REGISTRATION, IT WOULD DO SO BY FILING A FORM 15 WITH THE COMMISSION. WHILE THE
FILING OF A FORM 15 MAY CEASE THE REGISTRANT'S ON-GOING REQUIREMENT TO FILE
PERIODIC AND CURRENT REPORTS, IT WOULD NOT REMOVE THE REGISTRANT'S OBLIGATION TO
FILE ALL REPORTS REQUIRED UNDER SECTION 13(A) OF THE SECURITIES EXCHANGES ACT OF
1934 THAT WERE DUE ON OR BEFORE THE DATE THE REGISTRANT FILED ITS FORM 15.
AGAIN, IF THE REGISTRANT IS ELIGIBLE TO TERMINATE ITS REGISTRATION UNDER THE
SECURITIES EXCHANGE ACT OF 1934, PLEASE NOTE THAT THE FILING OF A FORM 15 WOULD
NOT REMOVE THE REGISTRANT'S REQUIREMENT TO FILE DELINQUENT SECURITIES EXCHANGE
ACT OF 1934 REPORTS - THE REGISTRANT WOULD STILL BE REQUIRED TO FILE WITH THE
COMMISSION ALL PERIODIC REPORTS DUE ON OR BEFORE THE DATE ON WHICH THE
REGISTRANT FILED A FORM 15."
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CRITICAL ACCOUNTING POLICIES
We have identified the policies outlined below as critical to our business
operations and an understanding of our results of operations. The listing is not
intended to be a comprehensive list of all of our accounting policies. In many
cases, the accounting treatment of a particular transaction is specifically
dictated by accounting principles generally accepted in the United States, with
no need for management's judgment in their application. The impact and any
associated risks related to these policies on our business operations is
discussed throughout Management's Discussion and Analysis of Financial Condition
and Results of Operations where such policies affect our reported and expected
financial results. For a detailed discussion on the application of these and
other accounting policies, see the Notes to Condensed Consolidated Financial
Statements. Our preparation of the financial statements requires us to make
estimates and assumptions that affect the reported amount of assets and
liabilities, disclosure of contingent assets and liabilities at the date of our
financial statements, and the reported amounts of revenue and expenses during
the reporting period. There can be no assurance that actual results will not
differ from those estimates.
PROPERTY, PLANT AND EQUIPMENT
Property and equipment are stated at cost and depreciated on an accelerated
basis over the assets' estimated useful lives. Changes in circumstances such as
technological advances, changes to the Company's business model or changes in
the Company's capital strategy could result in the actual useful lives differing
from the Company's estimates. In those cases where the Company determines that
the useful life of property, plant and equipment should be shortened, the
Company would depreciate the net book value in excess of the estimated salvage
value over its revised remaining useful life.
DEFERRED TAX ASSETS
The Company records a valuation allowance to reduce the carrying value of its
deferred tax assets to an amount that is more likely than not to be realized.
While the Company has considered future taxable income and prudent and feasible
tax planning strategies in assessing the need for the valuation allowance,
should the Company determine that it would not be able to realize all or part of
its net deferred tax assets in the future, an adjustment to the carrying value
of the deferred tax assets would be charged to income in the period in which
such determination was made.
INVESTMENTS
Investments are classified as either available-for-sale or trading securities
and are held for resale in anticipation of short-term market movements or until
such securities are registered or are otherwise unrestricted. At September 30,
2003, investments consisted entirely of common stock held for resale. Trading
account assets, consisting of marketable equity securities, are stated at fair
value. Unrealized gains or losses on trading securities are recognized in the
18
statement of operations based on changes in the fair value of the security as
quoted on national or inter-dealer stock exchanges. There were no net unrealized
losses related to investments held for trading as of September 30, 2003.
Available-for-sale assets, which are also required to be reported at fair value,
with unrealized gains and losses excluded from earnings are reported as a
separate component of stockholders' equity (net of the effect of income taxes).
The Company's continuing operations consist of two Internet based businesses
within the United States. Stogies is an online distributor and retailer of brand
name premium cigars and accessories. A1Discount Perfume is an online retailer of
premium perfumes and colognes. Stogies became operational in November 1998 and
it accounts for substantially all of the sales revenue.
LIQUIDITY AND CAPITAL RESOURCES
The Company decreased its working capital from $1,880,028 at December 31, 2002
to $1,154,043 at September 30, 2003. The working capital decrease in the amount
of $725,985 consists primarily of decreases in cash in the amount of $1,178,669,
prepaid expenses - $67,766 and accounts payable of $50,347, less an increase in
inventory of $94,453, loan receivable -related party $684,433, accrued
liabilities of $95,907, and marketable securities in the amount of $189,990.
During the nine months ended September 30, 2003 stockholders' equity decreased
$1,003,639, which includes an increase in other comprehensive income in the
amount of $113,144, and the net loss for the year of $1,116,783.
(See Other Comprehensive Income below)
RESULTS OF OPERATIONS
SALES AND COST OF SALES
Consolidated sales increased 8.6% from $954,307 for the nine months ended
September 30, 2002 to $1,036,417 for the nine months ended September 30, 2003.
The increase in sales for the nine months ended September 30, 2003 compared to
the same period in 2002 is attributable to a number of factors, including
concentrating more on internet and retail sales and other product lines.
During the nine months ended September 30, 2003, Stogies sales increased 8.1%
from $927,512 for 2002 to $1,003,122 for the current period., Stogies increased
its gross profit percentage from 29.3% during the nine months ended September
30, 2002 to 36.7% for the current period. The increase in sales is attributed to
a number of factors, including the company's effort to expand its potential
customer market. The Company added Wine Accessories, (including Wine Books, Wine
Corkscrews, Wine Decanters and Wine Racks) and Cigar Accessories (including
Cigar Ashtrays, Cigar Books, Cigar Cutters, Cigar Humidors and Cigar Lighters)
to its list of products carried on its StogiesOnline.com, Inc. CigarCigar.com
(http://www.CigarCigar.com), website. The increase in gross profit percentage is
due to better purchasing of inventory, and increased efforts to sell more
accessories and humidors.
During the nine months ended September 30, 2003, A1DiscountPerfume Inc's sales
increased 24% from $26,795 for 2002 to $33,295 for the current period.
19
A1DiscountPerfume increased its gross profit percentage from 29.9% during the
nine months ended September 30, 2002 to 38.9% for the current period. This
increase is due to increased product lines. The site employs the Microsoft /
Great Plains eEnterprise system which permits customers to benefit by having
direct access to up-to-the-minute information about inventory, pricing, "hot
deals" as well as order information. The eEnterprise system allows
A1DiscountPerfume.com to inexpensively reach customers anywhere, around the
clock.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses decreased $56,128 from $1,089,278
in the nine months ended September 30, 2002 to $1,033,150 in the nine month
period ended September 30, 2003. The decrease in selling, general and
administrative expense for the nine months ended September 30, 2003 consists
primarily of decreases in: accounting - ($33,215); bad debt - ($29,515);
depreciation - ($42,281); insurance - ($60,365); and rent - ($6,583) and
increases in - software costs - $8,097 and salaries and wages - $16,174;
employee benefits - $14,829; advertising - $34,557; and consulting - $48,418.
Accounting decreased due to no audit or reviews being performed. Bad debt
decreased primarily due to the write off of the note receivable from IBD vending
($14,945), and the write off of uncollectible wholesale accounts receivable on
the Stogies division in 2002. Depreciation decreased due to assets being
depreciated on an accelerated basis over the assets' estimated useful lives.
Insurance decreased due to the cancellation of the D & O policy in 2003.
Advertising increased due to increased usage of internet search engines.
Consulting increased due use of an outside computer consultant in 2003 as
compare to internal position in 2002 and due to the move of computer servers due
to non-renewal of lease for Suite 240.
MARKETABLE EQUITY SECURITIES
The Company sold marketable equity securities and recognized a realized loss of
($448,944) during the three month period ended September 30, 2003 and realized a
loss of ($39,910) during the three month period ended September 30, 2002.
The Company sold marketable equity securities and recognized a realized loss of
($476,444) during the nine month period ended September 30, 2003 and realized a
loss of ($12,058) during the nine month period ended September 30, 2002.
The Company recorded unrealized gains in the amount of $1,206 during the three
month period ended September 30, 2003 and unrealized losses of ($1,322) during
the three month period ended September 30, 2002. Available-for-sale securities
are described in Other Comprehensive Income (below).
The Company recorded unrealized losses in the amount of ($4,625) during the nine
month period ended September 30, 2002. Available-for-sale securities are
described in Other Comprehensive Income (below).
20
INVESTMENT INCOME
The Company had income of $9,446 and $3,804 from interest and dividends in the
three month periods ended September 30, 2003 and 2002, respectively. The Company
had income of $11,139 and $12,283 from interest and dividends in the nine month
periods ended September 30, 2003 and 2002, respectively. The interest income for
2003 was mainly earned on the outstanding loan balance from Onspan Networking,
Inc.
INCOME TAXES
The Company's 2002 income tax expenses of $381,500 resulted primarily from a
change in the deferred tax valuation allowance. The Company recorded no income
tax expense for 2003.
OTHER COMPREHENSIVE INCOME (LOSS)
During the nine months ended September 30, 2003, the Company recorded an
increase in its net unrealized gain from available-for-sale securities in the
amount of $113,144. The increase consisted of a decline in market value of
$353,320 less a reclassification adjustment of ($466,464). Available-for-sale
securities consists primarily of SGD Limited Holdings (SGD) a holding company
principally engaged in acquiring and developing jewelry related businesses. Our
investment represents approximately 10.4% of the outstanding stock of SGD and
accordingly, the Company is subject to certain restrictions on the shares it can
sell. Of the 10,100,000 shares held by the Company 3,941,000 shares valued at
$59,115 have been classified as current. Due to the size of the Company's
investment and the limited trading volume of SGD as well as other
available-for-sale securities, there can be no assurance that the Company will
realize the value assigned, under Statement of Accounting Standards #115
(Accounting for Certain Investments in Debt and Equity Securities), to these
securities.
During the latter part of 2002 the Company became aware, based upon Securities
and Exchange Commission (SEC) filings by SGD, that SGD had taken the position
that the Company was the holder of pre-split shares (SGD had a 6 for 1 reverse
split) and rather than the Company owning 10 Million shares of SGD the Company
was the holder of only 1,666,666 shares of SGD. It is the Company's position
that the number of shares that the Company held of SGD as of September 30, 2003
and 2002 is 10 Million. This is based upon purchase and sale arrangements
between the Company and SGD wherein the Company was sold, issued and receive 10
Million post split shares of SGD from SGD (formerly known as GoldOnline.com,
Inc.). The shares issued and delivered to the Company by SGD reflected the split
and the new split CUSIP change. On November 11, 2000, following the Company's
receipt of these shares, the Company filed a Form 13D, with the SEC, reflecting
the ownership of these shares. The Form 13D had been prepared by SGD's Counsel.
SGD filed quarterly and annual financial reports with the SEC reflecting the
ownership of 10 Million shares by the Company. Should it ultimately be
determined that the shares should be pre-split shares then our investment in
SGD, as of September 30, 2003, rather then being included in the accompanying
balance sheet as $151,500 (current $59,115; long-term $92,385) might be reduced
depending upon the impact of the share price differential on the market price of
the SGD shares and the reduced number of shares that the Company would be
considered as holding.
21
ITEM 3. CONTROLS AND PROCEDURES
The Company's President and Principal Financial and Accounting Officer and
Controller have concluded, based on their evaluation within 90 days of the
filing date of this report, that the Company's disclosure controls and
procedures (as defined in Exchange Act Rules 13a -14(c) and 15d-14(c)) were
adequate and designed to ensure that material information relating to the
Company and its consolidated subsidiaries would be made known to them by others
within those entities. There have been no significant changes in our internal
controls or in other factors that could significantly affect these controls
subsequent to the date of the previously mentioned evaluation.
From time to time, the Company may publish forward-looking statements relative
to such matters as anticipated financial performance, business prospects,
technological developments and similar matters. The Private Securities
Litigation Reform Act of 1995 provides a safe harbor for forward-looking
statements. All statements other than statements of historical fact included in
this section or elsewhere in this report are, or may be deemed to be,
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Exchange Act of 1934. Important factors that
could cause actual results to differ materially from those discussed in such
forward-looking statements include: 1. General economic factors including, but
not limited to, changes in interest rates and trends in disposable income; 2.
Information and technological advances; 3. Cost of products sold; 4.
Competition; and 5. Success of marketing, advertising and promotional campaigns.
PART II - ITEM 1 LEGAL PROCEEDINGS
Lakewood Development(s) Corporation v. Gary Schultheis and Herbert Tabin and
Evolve One, Inc., Civil Action No. 4-03-CV-1224-A, in the United States District
Court of the Northern District of Texas, Ft. Worth Division (Complaint filed on
August 6, 2003). This action asserts claims for violation of Texas securities
law, fraud, breach of contract, and breach of fiduciary duties. The action
sought damages in the amount of $4,125,000, for the plaintiff, the plaintiffs'
attorneys' fees and costs, and certain other relief.
On April 6, 2004, United States District Judge John McBryde of the United States
District Court of the Northern District of Texas, Ft. Worth Division, entered a
final judgment in favor of Evolve One, Inc. and its officers Gary Schultheis and
Herbert Tabin dismissing the case with prejudice. The court also ordered
Lakewood to pay defendants' court costs.
PART II - ITEM 2 CHANGES IN SECURITIES AND USE OF PROCEEDS
NONE
PART II - ITEM 3 DEFAULTS UPON SENIOR SECURITIES
NONE
PART II - ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE
22
PART II - ITEM 5 OTHER INFORMATION
NONE
PART II - ITEM 6 EXHIBITS
(a) EXHIBITS
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
31.1 Section 302 Certification of President and
Principal Financial and Accounting Officer
32.1 Section 906 Certification of President and
Principal Financial and Accounting Officer
(b) REPORTS ON FORM 8-K
Employment Agreement with President and Principal Financial and
Accounting Officer, and Director of Marketing
23
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
EVOLVE ONE, INC.
Date: September 20, 2004 By: /s/ Gary Schultheis
-------------------
Gary Schultheis,
President and Principal
Financial and Accounting Officer
24