-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LMVbB2gBiaZKwLNIDVW/NqZCAc88QfbAN/DIl9X7Hcrsj98HFgeTqAbf4GAE8YlR 70AGEl6aRG6QGIYznfkTwg== 0000912057-02-020526.txt : 20020515 0000912057-02-020526.hdr.sgml : 20020515 20020515121149 ACCESSION NUMBER: 0000912057-02-020526 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20020331 FILED AS OF DATE: 20020515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HTTP TECHNOLOGY INC CENTRAL INDEX KEY: 0001001601 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 133758042 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-26888 FILM NUMBER: 02649615 BUSINESS ADDRESS: STREET 1: 46 BERKELEY SQUARE CITY: LONDON UNITED KINGDO ZIP: W1Y 7FF BUSINESS PHONE: 2124064700 MAIL ADDRESS: STREET 1: C/O LAW OFFICE OF BECKMAN MILLMAN & SAND STREET 2: 116 JOHN STREET CITY: NEW YORKMELVILLE STATE: NY ZIP: 10038 FORMER COMPANY: FORMER CONFORMED NAME: INTERNET HOLDINGS INC DATE OF NAME CHANGE: 19980520 FORMER COMPANY: FORMER CONFORMED NAME: CHINA BIOMEDICAL GROUP INC DATE OF NAME CHANGE: 19951003 10-Q 1 a2079939z10-q.txt FORM 10-Q OMB APPROVAL OMB Number 3235-0416 Expires: April 30, 2003 Estimated average burden hours per response: 9708.0 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 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 March 31, 2002 / / 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 0-26886 HTTP TECHNOLOGY, INC. ------------------------------------------------------ (Exact name of registrant as specified in its charter) Delaware 13-4148725 ------------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 46 Berkeley Square, London, W1J 5AT, UNITED KINGDOM ------------------------------------------------------------ (Address of principal executive offices, including zip code) (011) 44-20-7598-4070 ---------------------------------------------------- (Registrant's telephone number, including area code) --------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check 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 --- --- APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS Indicate by check mark whether the registrant filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by court. Yes No --- --- APPLICABLE ONLY TO CORPORATE ISSUERS Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: AS OF MAY 10, 2002: 57,868,083 SHARES OF COMMON STOCK, PAR VALUE $0.001 PER SHARE. PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS HTTP Technology, Inc. and its subsidiaries are collectively referred to in this Report as the "Company" or "HTTP". For purposes of the discussion contained herein, all financial information is reported on a consolidated basis. The financial statements for the Company's fiscal quarter ended March 31, 2002 are attached to this Report, commencing at page F-1. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Except for historical information, the material contained in this Management's Discussion and Analysis or Plan of Operation is forward-looking. For the purposes of the safe harbor protection for forward-looking statements provided by the Private Securities Litigation Reform Act of 1995, readers are urged to review the list of certain important factors set forth in "Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the Private Securities Litigation Reform Act of 1995" contained in the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 2001 ("Fiscal 2001"), which may cause actual results to differ materially from those described. These risks and uncertainties include the rate of market development and acceptance of positioning technology, the unpredictability of the Company's sales cycle, the limited revenues and significant operating losses generated to date, and the possibility of significant ongoing capital requirements. For the purposes of the safe harbor protection for forward-looking statements provided by the Private Securities Litigation Reform Act of 1995, readers are urged to review the list of certain important factors set forth in "Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the Private Securities Litigation Reform Act of 1995". These forward-looking statements are subject to risks, uncertainties and assumptions about the Company, including, among other things: - Our ability to commercialize our technology; - Our business and prospects must be considered in light of the risks, uncertainties, expenses and difficulties frequently encountered by companies in their early stages of development, particularly companies in new and rapidly evolving markets; - Our ability to attract and retain customers; - Our ability to secure financing as and when necessary; - Our ability to achieve adequate levels of revenue to recover our investment in capitalized software development costs and acquired technology; - Our ability to retain the services of our key management, and to attract new members of the management team; - The likelihood of significant ongoing capital requirements; and - Our ability to effect and retain appropriate patent, copyright and trademark protection of our products. - We have recently restructured our business to focus more closely on the medical imaging applications derived from our original core technology. We have concluded the process of incorporating all research, software development, management and marketing activities related to our medical imaging initiatives into our subsidiary, Medicsight PLC ("Medicsight"). Assets have been transferred and costs incurred on the development of the Medicsight system have been reimbursed and assigned by way of a loan note from Medicsight. The amount -2- of the loan note to HTTP Technology, Inc. was L3,659,104, and this loan note has been converted into 58,868,582 ordinary shares of Medicsight issued to the Company and 15,000,000 ordinary shares of Medicsight issued to Nightingale Technologies Limited ("Nightingale). The Medicsight system analyzes digital data from medical scanners, such as MRIs and CT scans, and then alerts the clinician to any areas of possible abnormality. We believe the Medicsight system will be capable of reliably detecting cancer cells, calcification of the arteries and other abnormalities indicative of disease at earlier stages in the disease than current medical tools are able to detect. The potential advantage of the Medicsight system is that it does not rely on the human eye or human interpretation to detect possible abnormalities, thereby resulting in significant cost savings. After the system uses its technology to identify possible abnormalities, the clinician will then apply his/her education, training and experience to determine the next steps in medical diagnosis and treatment. The Medicsight system is capable of processing unprecedented volumes of images. It is now widely accepted that the most effective way to achieve early detection of these leading deadly diseases is through large scale screening. Such screening would allow national healthcare bodies to provide society with the best protection against premature death. Medicsight will offer an early diagnosis solution previously not thought possible because: - The proprietary technology enables Medicsight to automate accurately and reliably the process of scan analysis. - The service will be significantly cheaper than at present as it does not rely on radiologists as first readers who in current practice account for a significant proportion of the scan cost. - Significant patient volume can be achieved as the analysis is fully automated; screening volumes are not constrained by the finite number of radiologists. - The business model is unique as we intend to establish broad penetration through a series of cost-effective, efficient, screening services. Primary target markets include 16 countries across Europe (Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland and the United Kingdom). These primary targets were selected on the basis of their demographics and attractiveness for implementing screening systems. Other principal markets such as the United States and Japan will be targeted in conjunction with the European launch. The total population within the 16 selected European countries is almost 400 million (source: United Nations Statistics Division). The primary target population is based on individuals at risk of developing coronary heart disease, lung or colon cancer. These 140 million people are aged between 45 and 75, of whom it is estimated that a minimum of 60 million could be clearly defined as being at significantly higher risk. The base plan forecasts a volume of 1.8 million scans per annum in 2006. This represents 1.3% of the at risk population aged 45-75 and 3% of those at significantly higher risk. Currently the Medicsight system is undergoing systematic testing to ensure our objectives are met. This is expected to be completed in 2002 when we intend to open two or three operational pilot units, and the first Medicsight centers are expected to be on stream by mid-2003. The initial units will be used to gain regulatory approval and acquire market and clinical data. Operational and development costs for Fiscal 2002 are estimated at approximately $5.5 million. Medicsight is attempting to raise approximately $8.7 million by way of a private placing of 6 million shares. This is in addition to the Asia IT Capital Investments Limited ("Asia IT") facility of L10,000,000 ($14.5 million) that expires in November 2004. Medicsight expects to incur further operational and development costs in 2003 of approximately $6.5 million before Medicsight is financially self sufficient in 2004. Our expansion strategy across Europe calls for several business models. Besides the Company-operated Medicsight scanning centers, we will operate partnerships with industry leaders to achieve rapid market penetration across our target regions. Revenue streams will include: scan analysis fees, service charges, franchise license fees and franchise royalties based on revenues. -3- The marketing strategy will initially target all healthcare providers and insurance companies that can direct large numbers of individuals in the higher risk categories to Medicsight centers. In addition to professional referrals it is anticipated that individuals will self-refer to the centers. As with dental plans, we expect corporations and healthcare institutions to begin supporting individuals' screening plans in the near future. Higher risk individuals applying for life insurance or renewing their policies could automatically be enrolled in screening programs and would visit a service center for scans as a matter of routine. This concept will be marketed simultaneously to hospitals and institutions to ensure widespread credibility and acceptance. Medicsight services will be publicized through a series of marketing campaigns. We have yet to derive any revenue from the Medicsight system. We cannot assure you that Medicsight will be successful in commercializing the Medicsight system, or if such system is commercialized, that its use will be profitable to Medicsight. We face many obstacles in commercializing our core technology. Current constraints in medical image analysis which prevent large-scale population screening include: - Cost Constraints: - Prohibitive cost of skilled radiologists - Human Constraints: - Shortage of qualified radiologists available to analyze the large increase in the number of images - Limitations of image analysis conducted by the human eye (e.g. fatigue, limited attention span, poor eyesight) - Technical Challenges: - Difficulty in differentiating normal from diseased tissues (i.e. high number of "false positives") - Inability correctly to identify disease types - Industry Supply Constraints: - Lack of affordable preventive healthcare programs We are not aware of any direct competition with the Medicsight system. There are computer-aided diagnostic systems and other screening businesses which work in the field, but, in our view, such existing systems are overly dependent on human resources to carry out the analysis, as none have automated diagnosis capability, and are therefore unable to achieve large economies of scale. The Company has had only a limited operating history upon which an evaluation of the Company's prospects can be made. The Company's prospects must be considered keeping in mind the risks, expenses, and difficulties frequently encountered in the establishment of a new business in an ever changing industry. There can be no assurance that the Company will be able to achieve profitable operations. BACKGROUND HTTP Technology, Inc. was originally incorporated as a Utah corporation in 1977. On December 19, 2000, the Company entered into an Agreement and Plan of Merger with its wholly-owned subsidiary HTTP Technology, Inc., a Delaware corporation, and thereby effected a re-incorporation of the Company from Utah to Delaware. All references in this Report to "HTTP" or "the Company" refer to HTTP Technology, Inc., the -4- Delaware corporation, if the event occurred on or after December 19, 2000 or to HTTP Technology, Inc., the Utah corporation, if the event occurred prior to December 19, 2000. HTTP maintains its corporate offices at 46 Berkeley Square, London, W1J 5AT, United Kingdom, telephone +44 (0) 207-598-4070, facsimile: +44 (0) 207-598-4071, Internet address: http://www.http-tech.com. BUSINESS STRATEGY We are a developer of software technology. We have three principal operating subsidiaries, HTTP Software PLC ("Software"), HTTP Insights Limited ("Insights"), and Medicsight PLC ("Medicsight"). SOFTWARE. Over the last four years, Software has generated revenue from its systems integration business together with maintenance of its in-house developed systems integration and network software products. In 2001, we decided to focus Software's resources towards working with Insights to assist in development of the core technology of the Stochastic Perception Engine. The majority of the Software staff are now employed full-time by Medicsight. The current maintenance contracts with Software will be honored. Current contracts between Software and existing customers may be extended but Software is not actively seeking new customers. INSIGHTS. The research and development team at Insights conceived and continues to develop our core proprietary technologies. Our principal technology is a Stochastic Perception Engine that processes and classifies unstructured data into meaningful outputs, enabling it to be viewed, interpreted or further manipulated by the user of the application. This type of technology sits at the core of many of today's major software applications. Our Stochastic Perception Engine is comprised of four principal capabilities: cluster analysis, statistical modeling, classification and prediction. The Insights team is based in our head office in central London, where they work closely with our management in scoping, defining, planning and developing specific solutions for applications identified through our strategic market research team. All of the Insights team is currently focused on the Medicsight system and is now employed directly by Medicsight (as described below). Insights currently owns the Stochastic Perception Engine and the patent applications associated with the technology. Commercialization of the Stochastic Perception Engine is anticipated to occur through joint ventures and in-house development according to the optimum market entry strategy. The technology is designed to be deployed in the form of software modules or utility libraries, or embedded within microchips. In addition to the Medicsight system (described below), we are also working on developing other applications for our core technology. One area being explored is a computer vision system for the examination of baggage and packages being carried by airplanes. MEDICSIGHT. Our majority-owned subsidiary, Medicsight, is currently engaged in efforts to commercialize a state-of-the-art digital disease detection software system called the Medicsight system through the use of our core technology. At March 31, 2001, HTTP owned 58,868,582 ordinary shares in Medicsight, constituting approximately 79.0% of the outstanding shares. Nightingale owned 7,920,000 ordinary shares of Medicsight and Asia IT owned 6,238,672 ordinary shares of Medicsight, constituting approximately 10.6% and 8.4% respectively of the outstanding shares. Medicsight is currently undertaking a private offering of an additional 6,000,000 shares, and at March31, 2002 610,000 shares had been issued. If such offering is fully subscribed and sold, HTTP will own approximately 73.7% of Medicsight's outstanding shares. The Medicsight system analyzes digital data from medical scanners, such as MRIs and CT scans, and then alerts the clinician to any areas of possible abnormality. We believe the Medicsight system will be capable of reliably detecting cancer cells, calcification of the arteries and other abnormalities indicative of disease at earlier stages in the disease than current medical tools are able to detect. The potential advantage of the Medicsight system is that it does not rely on the human eye or human interpretation to detect possible abnormalities, thereby resulting in significant cost savings. After the system uses its technology to identify possible abnormalities, the clinician will then apply his/her education, training and experience to determine the next steps in medical diagnosis and treatment. The Medicsight system is capable of processing unprecedented volumes of images. It is now widely accepted that -5- the most effective way to achieve early detection of these leading deadly diseases is through large scale screening. Such screening would allow national healthcare bodies to provide society with the best protection against premature death. RESULTS OF OPERATIONS QUARTER ENDED MARCH 31, 2002 VS. QUARTER ENDED MARCH 31, 2001 REVENUES. For the quarter ended March 31, 2002 (the "Current Quarter"), the Company's gross revenues from operations were approximately $16,000. For the quarter ended March 31, 2001 (the "Comparable Quarter"), the Company's gross revenues from operations were approximately $74,000. The Company's revenue in the Current Quarter and the Comparable Quarter was primarily derived from the Company's consulting and support activities provided by Software. During the Current Quarter, the Company had one customer, Commonwealth Secretariat, which accounted for 100% of its revenues. During the Comparable Quarter, the Company had two customers who represented a significant portion of its revenues. The customers were Commonwealth Secretariat, which accounted for approximately 53% of sales, and Eidos PLC, which accounted for approximately 38% of sales. RESEARCH AND DEVELOPMENT. The Company's research and development expenses were approximately $199,000 for the Current Quarter, compared to approximately $390,000 in the Comparable Quarter. The Company's research and development costs were comprised of staff and consultancy costs expensed on the Medicsight application. The reduction is due to changes in the number of staff and consultants working on the development. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. The Company's selling, general and administrative expenses were approximately $2,368,000 for the Current Quarter, compared to approximately $1,407,000 in the Comparable Quarter. Professional fees were approximately $243,000 in the Current Quarter and approximately $315,000 in the Comparable Quarter. Also included in the Current Quarter and the Comparable Quarter were salaries and directors' compensation of approximately $370,000 and $225,000, respectively, service charges and rates for property leasing of approximately $82,000 and $276,000, respectively, and rent of approximately $87,000 and $147,000, respectively. The primary components of the increased selling, general and administrative expenses in the Current Quarter was an increase in amortization of intangibles from approximately $42,000 in the Comparable Quarter to approximately $1,124,000 in the Current Quarter. This relates to the separate identification of the technology acquired from Nightingale for $22,470,000, which was classified as goodwill in the Comparable Quarter. Other components are reductions in professional fees, rent and service charges. The reduction in rent is due to the Company having sold its lease on its Curzon St. offices in June 2001. Management expects selling, general and administrative expenses to continue at a similar level in the near future as the Company continues to devote resources to the expansion of the Company. DEPRECIATION AND AMORTIZATION EXPENSE. Effective January 1, 2002 with the adoption of SFAS No. 142, goodwill will no longer be amortized. Prior to January 1, 2002, goodwill was amortized on a straight-line basis over 5 years. The amortization charge for the Comparable Quarter was approximately $3,020,000. The Company acquired an intangible from Nightingale of technology valued at $22,470,000 during Fiscal 2000. Under SFAS No.142, this is considered an intangible asset with a definite life of 5 years. Therefore the value of the asset is amortized on a straight-line basis over this period. The amortization charge was approximately $1,124,000 in the Current Quarter and approximately $44,000 in the Comparable Quarter. The Company evaluates the carrying value of long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company's assessment for impairment of an asset involves estimating the undiscounted cash flows expected to result from use of the asset and its eventual disposition. An impairment loss recognized is measured as the amount by which the carrying amount of the asset exceeds the fair value of the asset. Impairment of intangibles was nil in the Current Quarter. IMPAIRMENT OF EXCESS OF PURCHASE PRICE OVER NET ASSETS ACQUIRED. In the Current Quarter, the Company had excess of purchase price over net assets acquired of approximately $88,918,000 from its acquisition -6- of Insights. In the Comparable Quarter, the Company had excess of purchase price over net assets acquired of approximately $108,830,000, associated with the acquisition of Insights and Software. As stated above, the Company adopted SFAS No. 142 on January 1, 2002. Under this standard, goodwill will no longer be amortized over its estimated useful life, but instead will be tested for impairment on an annual basis and whenever indicators of impairment arise. The Company will complete the first impairment test by June 30, 2002 and will record any resulting impairment by the end of Fiscal 2002. Prior to January 1, 2002, goodwill was tested for impairment in a manner consistent with property, plant and equipment and intangible assets with a definite life. IMPAIRMENT LOSS ON INVESTMENTS. In the Comparable Quarter, impairment loss on investments of $1,211,000 related to the impairment in the carrying value of one of the Company's minority investments, Compaer AG. Based on the financial status of Compaer AG, the investment was permanently impaired, and the Company has recorded an impairment for the entire carrying value of this investment. In the Current Quarter, no investments were impaired. NET LOSS AND NET LOSS PER SHARE. Net loss was approximately $2,299,000 for the Current Quarter, compared to a net loss of approximately $5,846,000 for the Comparable Quarter. Loss per share was $(0.04) for the Current Quarter based on weighted average shares outstanding of 57,868,083, and $(0.12) for the Comparable Quarter, based on weighted average shares outstanding of 49,103,159. LIQUIDITY AND CAPITAL RESOURCES WORKING CAPITAL. At March 31, 2002, the Company had approximately $560,000 in current assets. Cash and cash equivalents amounted to approximately $99,000. Current liabilities were approximately $6,272,000 at March 31, 2002. At December 31, 2001, the Company had approximately $657,000 in current assets and cash and cash equivalents amounted to approximately $203,000. Current liabilities were approximately $5,862,000 at December 31, 2001. Working capital deficit at the end of the Current Quarter was approximately $(5,712,000), as compared to approximately $(5,205,000) at December 31, 2001. The ratio of current assets to current liabilities was 0.09 to 1.0 at the end of the Current Quarter as compared to 0.11 to 1.0 at December 31, 2001. NET DECREASE IN CASH AND CASH EQUIVALENTS. During the Current Quarter, the Company's cash and cash equivalents decreased by approximately $104,000. This decrease was primarily the result of net cash used for operations offset by cash flows received from shares issued by Medicsight and increase in short term debt. The Company used net cash of approximately $1,084,000 in operations. The Company received net cash of approximately $1,007,000 in financing activities and used approximately $35,000 in investing activities. NET CASH USED IN OPERATIONS. The use of cash in operations in the Current Quarter of approximately $1,084,000 was attributable to the Company's relatively low revenues at the same time that the Company incurred significant operating costs. These significant costs included professional fees, salaries and director compensation, and service charges associated with rental property and rent. The Company used cash in operations for in the Comparable Quarter of approximately $1,476,000. NET CASH USED IN INVESTMENT ACTIVITIES. For the Current Quarter, the Company had a net cash outflow from investment activities of approximately $35,000. The Company used the funds to purchase additional fixed assets. In the Comparable Quarter, the Company had a net cash inflow from investment activities of approximately $1,620,000. Such funds were received in the Comparable Quarter from the sale of the Company's shareholding in MDA Group PLC. The Company does not currently have any commitments for material capital expenditures. NET CASH PROVIDED BY FINANCING ACTIVITIES. In the Current Quarter, the Company had a net cash inflow from financing activities of approximately $1,007,000. The funds received in the current quarter arose from drawdowns on the Asia IT facilities plus funds received from the private placement of Medicsight stock. For the Comparable Quarter, the Company had a net cash outflow from financing activities of approximately $1,101,000. These funds were used in reducing overdraft and short-term debt. -7- STOCKHOLDERS' EQUITY. The Company's stockholders' equity at March 31, 2002 was approximately $100,232,000, including an accumulated deficit of approximately $(56,758,000), as compared to approximately $101,853,000 at December 31, 2001, including an accumulated deficit of approximately $(54,459,000). Additional paid-in capital was approximately $166,952,000 and $166,299,000, at March 31, 2002 and December 31, 2001 respectively. The reduction in stockholders' equity was a result of an increase in accumulated deficit of approximately $2,299,000 offset by an increase in additional paid-in capital of approximately $842,000 and less minority interest of approximately $189,000 due to the placement of Medicsight stock (par value approximately $0.07 per share) at a premium of approximately $1.38 per share. ADDITIONAL CAPITAL. The Company will require additional capital during its fiscal year ending December 31, 2002 to implement its business strategies, including cash for (i) payment of increased operating expenses such as salaries for additional employees; and (ii) further implementation of those business strategies. Such additional capital may be raised through additional public or private financing, as well as borrowings and other resources. Currently, the Company has two available lines of credit. On December 15, 2000, the Company entered into an unsecured credit facility with Asia IT Capital Investments Limited ("Asia IT"), which provides a $20,000,000 line of credit. Such line of credit originally expired on December 31, 2001, but has been extended until June 30, 2003. Interest on advances under the credit facility accrues at 2% above US LIBOR. The Company can draw down on this credit facility for its financing requirements, upon approval by the Company's Board of Directors and subject to approval by Asia IT (such approval not to be unreasonably withheld). The Company is restricted from borrowing funds, directly or indirectly, other than through the credit facility with Asia IT, without the consent of Asia IT. The availability of the credit facility reduces upon the Company's sale of any of its investment assets. On November 20, 2001, Asia IT entered into a L10,000,000 ($14,500,000) credit facility with Medicsight. Such facility matures in November 2004 and is secured by a lien on all assets of Medicsight. Interest on outstanding amounts accrues at 2% above GBP LIBOR. Pursuant to such credit facility, Medicsight had covenanted to undertake a public offering of its ordinary shares in an amount not less than L25,000,000 not later than March 2002. However, there are no ramifications for the Company or Medicsight if such public offering is not made, and the credit facility nevertheless will remain in place. The loan is convertible into ordinary shares in Medicsight upon announcement of an Offer to Subscribe, Placing or other public offering of its ordinary shares at the same price per share as the offering price. Due to the private offering currently being undertaken by Medicsight, the loan is currently convertible. In addition, Asia IT acquired 7,080,000 Medicsight shares from the 15 million shares issued to Nightingale Technologies as part of the Insights acquisition. At March 31, 2002, the Company had drawn down approximately $1,338,000 under the $20 million facility with Asia IT, and Medicsight had drawn down approximately $107,000 under its L10,000,000 ($14,500,000) facility with Asia IT. During March 2002, Medicsight allotted 6,000,000 shares at L1.00 ($1.45) per share (par value L0.05) of which approximately 3,000,000 shares have been placed. Asia IT is underwriting the issue. As of April 29, 2002, Medicsight had received approximately $1,218,000 from the proceeds of such offering. To the extent that additional capital is raised through the sale of equity or equity-related securities, the issuance of such securities could result in dilution to the Company's stockholders. No assurance can be given, however, that the Company will have access to the capital markets in the future, or that financing will be available on acceptable terms to satisfy the Company's cash requirements to implement its business strategies. If we are unable to access the capital markets or obtain acceptable financing, our results of operations and financial conditions could be materially and adversely affected. We may be required to raise substantial additional funds through other means. The products derived from our proprietary software, including the Medicsight system, are expected to account for substantially all of our revenues from operations in the foreseeable future. Our technology has not yet been fully commercialized, and we have not begun to receive any revenues from commercial operations. We cannot assure our stockholders that our technology and products will be commercialized successfully, or that if so commercialized, that revenues will be sufficient to fund our operations. If adequate funds are not available to us, we may be required to curtail operations significantly or to obtain funds through entering into arrangements with -8- collaborative partners or others that may require us to relinquish rights to certain of our technologies or products that we would not otherwise relinquish. CRITICAL ACCOUNTING POLICIES. In December 2001 and January 2002, the Securities and Exchange Commission requested that all registrants list their three to five most "critical accounting policies" in the Management's Discussion and Analyses of Financial Condition and Results of Operations. The Securities and Exchange Commission indicated a "critical accounting policy" is one which is both important to the portrayal of the company's financial condition and results and requires management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. We believe that the following accounting policies fit the definition of critical accounting policies. Impairment of long-lived assets and long-lived assets to be disposed of--The Company evaluates the carrying value of long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company's assessment for impairment of an asset involves estimating the undiscounted cash flows expected to result from use of the asset and its eventual disposition. An impairment loss recognized is measured as the amount by which the carrying amount of the asset exceeds the fair value of the asset. Impairment of Excess of Purchase Price Over Net Assets Acquired--The Company adopted SFAS No. 142 on January 1, 2002. Under this standard, goodwill will no longer be amortized over its estimated useful life, but will be tested for impairment on an annual basis and whenever indicators of impairment arise. Under the provisions of SFAS No. 142, any impairment loss identified upon adoption of this standard is recognized as a cumulative effect of a change in accounting principle. Any impairment loss incurred subsequent to the initial adoption of SFAS No 142 is recorded as a charge to current period earnings. Under the transitional provisions of SFAS No. 142, the Company's goodwill will be tested for impairment as of January 1, 2002. By June 30, 2002, the Company's reporting unit will be tested for impairment by comparing the fair value of the reporting unit with its carrying value. Any resulting impairment will be measured by comparing the implied fair value of recorded goodwill to its carrying value and recorded by December 31, 2002. Research and development--Costs incurred in connection with the development of software products that are intended for sale are accounted for in accordance with Statement of Financial Accounting Standards No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed". Costs incurred prior to technological feasibility being established for the product are expensed as incurred. Technological feasibility is established upon completion of a detail program design or, in its absence, completion of a working model. Thereafter, all software production costs are capitalized and subsequently reported at the lower of unamortized cost or net realizable value. Capitalized costs are amortized based on current and future revenue for each product with an annual minimum equal to the straight-line amortization over the remaining estimated economic life of the product. Amortization commences when the product is available for general release to customers. RECENT ACCOUNTING PRONOUNCEMENTS. In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 143, Accounting for Asset Retirement Obligations. SFAS No. 143 requires the fair value of a liability for asset retirement obligations be recognized in the period in which it is incurred if a reasonable estimate of the fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the related long-lived asset. SFAS No. 143 is effective for financial statements issued for fiscal years beginning after June 15, 2002. The Company has not yet assessed the potential impact of the adoption of SFAS No. 143. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK INTEREST RATE RISK The Company's exposure to market risk associated with changes in interest rates relates to its debt obligations. The Company has the following debt facilities all repayable on demand: -9-
Debt Holder Facility Balance Interest Rate At March 31 - ----------- -------- ------- ------------- ----------- Nightingale Technologies Ltd $10,000,000 $3,250,000 US Libor + 2% 5.006% Asia IT Capital Investments Ltd $20,000,000 $1,338,000 US Libor + 2% 5.006% Asia IT Capital Investments Ltd $14,500,000 $ 107,000 GBP Libor + 2% 6.854%
A hypothetical 100 point adverse movement in interest rates would increase interest cost by approximately $50,000 per annum assuming no further drawdowns or repayments are made. FOREIGN EXCHANGE RISK The Company's exposure to market risk associated with changes in exchange rates relate to its debt facility with Nightingale Technologies Ltd. The facility is held in GBP by Insights and is therefore exposed to fluctuations between GBP and USD rates. A hypothetical 100 point adverse movement ($1.45 to $1.44 to GBP1.00) would increase the principal to repaid by approximately $16,000. The Company holds limited cash balances in GBP so any adverse movements in the exchange rates are considered immaterial. -10- PART II ITEM 1. LEGAL PROCEEDINGS On January 23, 2002, Chess Ventures LLC ("Chess") commenced a lawsuit against us in the Chancery Court of Delaware, seeking an order to compel us to remove restrictive legends from share certificates owned by Chess so that Chess could sell the shares represented by the certificates under Rule 144 of the Securities Act ("Rule 144"). Chess has also claimed money damages due to our failure to remove the legends. We have filed a defense and counterclaim to this claim and have subsequently instructed our transfer agent to remove the restrictive legends on all applicable certificates (including those held by Chess) should proper requests be made by the holders thereof in accordance with Rule 144. The matter currently remains in the pre-trial discovery stage. The Company believes that no material loss is expected. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS (a) None. (b) None. (c) None. (d) Not applicable. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits None. (b) Reports on Form 8-K None. -11- HTTP TECHNOLOGY, INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) AS OF AND FOR THE QUARTER ENDED MARCH 31, 2002 Consolidated Balance Sheets as of March 31, 2002 (Unaudited) and December 31, 2001 (Audited)................................................... F-2 Consolidated Statements of Operations for the Quarter Ended March 31, 2002 (Unaudited) and Quarter Ended March 31, 2001 (Unaudited)........... F-3 Consolidated Statement of Cash Flows for the Quarter Ended March 31, 2002 (Unaudited) and Quarter Ended March 31, 2001 (Unaudited)........... F-4 Notes to Consolidated Financial Statements........................................ F-5
F-1 HTTP TECHNOLOGY, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
March 31, 2002 December 31, 2001 (unaudited) (audited) -------------- ----------------- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 98,851 $ 202,662 Accounts receivable (net of allowance for doubtful debts of $72,000 and $74,000, respectively) 46,894 93,398 Other receivables 175,801 182,661 Prepaid expenses 137,361 117,605 Sales tax receivable 101,241 60,676 -------------- ----------------- Total current assets 560,148 657,002 PROPERTY AND EQUIPMENT, at cost, net of accumulated depreciation of $373,000 and $315,000, respectively 336,702 358,874 INVESTMENTS, at cost 700,100 700,100 SECURITY DEPOSITS 49,577 50,119 INTANGIBLE ASSET, at cost, net of accumulated amortization of $5,618,000 and $4,494,000, respectively 16,852,500 17,976,000 EXCESS OF PURCHASE PRICE OVER NET ASSETS ACQUIRED, net of accumulated amortization of $16,645,000 at both dates 88,918,408 88,918,408 -------------- ----------------- Total assets $ 107,417,435 $ 108,660,503 ============== ================= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable 781,880 641,087 Accrued expenses 665,444 436,849 Accrued professional expenses 130,353 208,906 Short-term debt 4,694,750 4,574,852 -------------- ----------------- Total current liabilities 6,272,427 5,861,694 CAPITAL LEASE 16,901 18,856 -------------- ----------------- Total liabilities 6,289,328 5,880,550 -------------- ----------------- STOCKHOLDERS' EQUITY: Common stock, $.001 par value, 100,000,000 shares authorized, 57,868,083 and 57,868,582 shares issued and outstanding, respectively 57,868 57,869 Additional paid-in capital 166,951,791 166,298,623 Vendor guarantee (10,000,000) (10,000,000) Cumulative foreign currency translation adjustment (19,601) (44,269) Accumulated deficit (56,757,968) (54,458,798) -------------- ----------------- Total stockholders' equity 100,232,090 101,853,425 -------------- ----------------- MINORITY INTEREST 896,017 926,528 -------------- ----------------- 101,128,107 102,779,953 Total liabilities and stockholders' equity $ 107,417,435 $ 108,660,503 ============== =================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS. F-2 HTTP TECHNOLOGY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Three Months Ended Ended March 31, 2002 March 31, 2001 (unaudited) (unaudited) -------------- ----------------- REVENUES $ 16,021 $ 73,907 EXPENSES: Selling, general and administrative charges 2,368,121 1,407,406 Research and development cost 199,158 389,649 Impairment of investment -- 1,211,246 Amortization of goodwill -- 3,020,190 -------------- ----------------- 2,567,279 6,028,491 Operating loss (2,551,258) (5,954,584) OTHER INCOME: Interest and other income 111 67,465 Net foreign exchange gains -- 39,857 -------------- ----------------- 111 107,322 Net Loss before minority interest (2,551,147) (5,847,262) MINORITY INTEREST 251,977 1,675 -------------- ----------------- Net loss $ (2,299,170) $ (5,845,587) ============== ================= PER SHARE DATA: Basic and diluted loss per share $ (0.04) $ (0.12) ============== ================= Weighted average number of common shares outstanding 57,868,083 49,103,159 ============== =================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS. F-3 HTTP TECHNOLOGY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOW
Three Months Three Months Ended Ended March 31, 2002 March 31, 2001 (unaudited) (unaudited) -------------- ----------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (2,299,170) $ (5,845,587) Adjustments to reconcile net loss to net cash used in operating activities Depreciation 57,480 42,078 Amortization of intangible assets 1,123,500 43,841 Amortization of goodwill -- 3,020,190 Provision for doubtful accounts -- 2,307 Write down of investment -- 1,211,246 Minority interest in net earnings of subsidiary (251,977) (1,675) Changes in operating assets and liabilities, net of effects from acquisitions of businesses Decrease in accounts receivable 48,332 12,980 (Increase)/decrease in prepaid expenses and other (12,895) 74,682 current assets (Increase)/decrease in sales tax receivable (40,565) 28,998 Decrease/(increase) in security deposits 542 (14,345) Increase/(decrease) in accounts payable 140,793 (160,641) Increase in accrued expenses 228,595 198,273 Decrease in accrued professional expenses (78,553) (88,792) -------------- ----------------- Net cash used in operating activities (1,083,918) (1,476,445) -------------- ----------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of fixed assets (35,308) (38,451) Capitalized software development costs -- (5,008) Sale of investments -- 1,663,420 -------------- ----------------- Net cash (used in)/provided by investing activities (35,308) 1,619,961 -------------- ----------------- CASH FLOWS FROM FINANCING ACTIVITIES: Decrease in capitalized lease (4,477) (1,298) Decrease in bank overdraft -- (93,748) Increase/(repayment) of debt 142,984 (1,006,024) Shares in Medicsight issued for cash 868,701 -- -------------- ----------------- Net cash provided by/(used in) financing activities 1,007,208 (1,101,070) -------------- ----------------- Effects of exchange rates on cash and cash equivalent 8,207 (12,187) NET DECREASE IN CASH (103,811) (969,741) ============== ================= CASH & CASH EQUIVALENTS, BEGINNING OF PERIOD 202,662 6,226,280 -------------- ----------------- CASH & CASH EQUIVALENTS, END OF PERIOD $ 98,851 $ 5,256,539 ============== ================= NON CASH FINANCING ACTIVITIES Issuance of shares associated with acquisitions -- $ 93,117,120
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS. F-4 HTTP TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) FORMATION AND BUSINESS OF THE COMPANY HTTP Technology, Inc. and its subsidiaries (the "Company") is a developer of sophisticated software technology. The Company's business objective is to conceive, develop and commercialize innovative products based around the Company's core technology. In April 2000, the Company acquired Radical Technology PLC (now known as HTTP Software PLC) which provided the Company with a business dedicated to systems integration and software development. In December 2000, the Company acquired Nightingale Technologies Limited (now known as HTTP Insights Ltd.), the principal technology of which is a Stochastic Perception Engine, formerly known as the Data Classification Engine. A Stochastic Perception Engine, processes and classifies unstructured data into meaningful outputs, enabling it to be viewed, interpreted or further manipulated by the user of the application. Similar technologies sit at the core of many of today's major software applications. HTTP's Stochastic Perception Engine is comprised of four principal modules: cluster analysis, statistical modeling, classification and prediction. This technology offers unsurpassed processing speed, accuracy and comprehensiveness of results when compared to existing data classification or neural network based technologies. The Company is concentrating on the development and commercialization of the Medicsight system and as such has effectively merged the Insights scientific department and the Software development department into Medicsight PLC. Software's own core technology has not been further developed since acquisition. Software will complete current software maintenance contracts with existing suppliers. Insights retains the Stochastic Perception Engine. The Company is the successor consolidated entity formed by the reverse acquisition on December 22, 1999 by Fairfax Equity, Ltd. of Internet Holdings, Inc. a publicly-held company originally incorporated in Utah in 1977, under the name, Trolley Enterprises, Inc. Fairfax Equity, Ltd. ("Fairfax") which was treated as the accounting acquirer in the transaction, was incorporated in the United Kingdom on October 18, 1999. On October 12, 2000, the Company changed its name from Internet Holdings, Inc. to HTTP Technology, Inc. Prior to its reverse acquisition by Fairfax, control of the former Internet Holdings, Inc., as well as the corporate name, had changed many times. All prior operations had previously been discontinued and all claims and counterclaims were settled, the last of which settlements occurred in November 1999. On December 19, 2000, HTTP Technology, Inc. entered into an Agreement and Plan of Merger with its wholly-owned subsidiary HTTP Technology, Inc., a Delaware corporation and thereby effected a reincorporation of the Company from Utah to Delaware. (2) BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements of the Company have been prepared pursuant to the rules of the Securities and Exchange Commission (the "SEC"). Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States have been condensed or omitted pursuant to such rules and regulations. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 2001, filed on April 19, 2002. In the opinion of management, the accompanying unaudited consolidated financial statements reflect all adjustments, which F-5 are of a normal recurring nature, necessary for a fair presentation of the results for the periods presented. All significant intercompany transactions have been eliminated in consolidation. Certain reclassifications have been made in prior period financial statements to conform to the current presentation. The results of operations presented for the three months and quarter ended March 31, 2002, are not necessarily indicative of the results to be expected for any other interim period or any future fiscal year. (3) LINES OF CREDIT On December 15, 2000, the Company entered into an unsecured credit facility with Asia IT Capital Investments Limited ("Asia IT"), which provides a $20,000,000 line of credit. Such line of credit originally expired on December 31, 2001, but has been extended until June 30, 2003. Interest on advances under the credit facility accrues at 2% above US LIBOR. The Company can draw down on this credit facility for its financing requirements, upon approval by the Company's Board of Directors and subject to approval by Asia IT (such approval not to be unreasonably withheld). The Company is restricted from borrowing funds, directly or indirectly, other than through the credit facility with Asia IT, without the consent of Asia IT. The availability of the credit facility reduces upon the Company's sale of any of its investment assets. On November 20, 2001, Asia IT entered into a L10,000,000 ($14,500,000) credit facility with Medicsight. Such facility matures in November 2004 and is secured by a lien on all assets of Medicsight. Interest on outstanding amounts accrues at 2% above GBP LIBOR. Pursuant to such credit facility, Medicsight had covenanted to undertake a public offering of its ordinary shares in an amount not less than L25,000,000 not later than March 2002. However, there are no ramifications for the Company if Medicsight does not comply with this covenant, and the credit facility nevertheless will remain in place. The loan is convertible into ordinary shares in Medicsight upon announcement of an Offer to Subscribe, Placing or other public offering of its ordinary shares at the same price per share as the offering price. Due to the private offering currently being undertaken by Medicsight, the loan is currently convertible. In addition, Asia IT acquired 7,080,000 Medicsight shares from the 15 million shares issued to Nightingale Technologies as part of the Insights acquisition. At March 31, 2002, the Company had drawn down approximately $1,338,000 under the $20 million facility with Asia IT, and Medicsight had drawn down approximately $107,000 under its L10,000,000 ($14,500,000) facility with Asia IT. (4) SHORT-TERM DEBT The Company acquired Insights in December 2000. At the time of such acquisition, Insights had outstanding $6,006,000 of long-term debt. This debt is part of the original loan of $10,000,000 that Insights owed to its parent company relating to the acquisition of patent applications for its Stochastic Perception Engine technology. The loan bears interest at 2% above US LIBOR and is unsecured. The principal of the loan and accrued interest does not mature until October 5, 2003. The debt is treated as short-term because the terms of the loan note include a provision whereby the lender can require repayment within one business day of giving notice of demand, in the event Insights ceases to be a wholly-owned subsidiary of its former parent. No notice had been given as of March 31, 2002 and management does not expect the notice to be given. As of March 31, 2002, the balance of this loan was $3,250,000. As of March 31, 2001, the outstanding balance of this loan was $5,000,000. (5) STOCKHOLDERS' EQUITY On February 5, 2001, the Company effected a 2-for-1 split (the "Split") of its Common Stock. As such, all share and per share information in the accompanying financial statements have been restated to reflect the Split. F-6 (6) GOODWILL AND OTHER INTANGIBLE ASSETS Goodwill The Company adopted SFAS No. 142 effective January 1, 2002. Under this standard, goodwill will no longer be amortized over its estimated useful life, but will be tested for impairment on an annual basis and whenever indicators of impairment arise. The Company will complete the first impairment test by June 30, 2002 and will record any resulting impairment by the end of Fiscal 2002. Prior to January 1, 2002, goodwill was amortized on a straight-line basis over 5 years. The amortization charge for the quarter ended March 31, 2001 was approximately $3,020,000. Adjusted results for March 31, 2001 assuming the discontinuation of amortization would be as follows:
Total Per Share Loss as reported $(5,845,587) $ (0.12) Amortisation of goodwill $ 3,020,190 $ 0.06 Pro forma loss $(2,825,397) $ (0.06) ----------- ---------
Other Intangible Assets The Company acquired an intangible from Insights of Technology valued at $22,470,000 during Fiscal 2000. Under SFAS No.142, this is considered an intangible asset with a definite life of 5 years. Therefore the value of the asset will be amortized on a straight-line basis over this period. The carrying amount and accumulated amortization of acquired intangible assets follows:
Jan 1, 2002 Mar. 31, 2002 Technology $22,470,000 $ 22,470,000 Accumulated amortization (4,494,000) (5,617,500) Total intangible assets, net $17,976,000 $ 16,852,500
The table below shows expected amortization expense for acquired intangible assets recorded as of January 1, 2002.
($ Thousands) 2002 2003 2004 2005 Amortization expense 4,494 4,494 4,494 4,494
The above amortization expense forecast is an estimate. Actual amounts of amortization expense may differ from estimated amounts due to additional intangible asset acquisitions, impairment of intangible assets, accelerated amortization of intangible assets, and other events. (7) MAJOR CUSTOMERS During the Current Quarter, the Company had one customer, Commonwealth Secretariat, which accounted for 100% of its revenues. During the Comparable Quarter, the Company had two customers who F-7 represented a significant portion of its revenues. The customers were Commonwealth Secretariat, which accounted for approximately 53% of sales, and Eidos PLC, which accounted for approximately 38% of sales. (8) COMPREHENSIVE INCOME As of March 31, 2002 and March 31, 2001, respectively, and for the three months then ended, comprehensive income was comprised of a net loss from operations and the net effect of foreign currency translation adjustments. This comprised a net loss of $2,299,170 for the quarter ended March 31, 2002, and $5,845,587 for the quarter ended March 31, 2001, and foreign currency translation adjustments of $(24,668) and $12,187, respectively, resulting in comprehensive loss of $2,274,502 and $5,857,774 respectively. F-8 SIGNATURE In accordance with 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. HTTP TECHNOLOGY, INC. By: /s/ STEFAN ALLESCH-TAYLOR ------------------------- Stefan Allesch-Taylor Chairman and Chief Executive Officer and Chief Financial Officer Date: May 15, 2002 -----END PRIVACY-ENHANCED MESSAGE-----