Edgar Filing: CHANGE TECHNOLOGY PARTNERS INC

CHANGE TECHNOLOGY PARTNERS, INC.
AND SUBSIDIARIES

Notes to Unaudited Interim Condensed Consolidated Financial Statements
March 31, 2001

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 quarter ended March 31, 2001

[_] 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: 0-13347

CHANGE TECHNOLOGY PARTNERS, INC.
(Exact name of registrant as specified in its charter)

DELAWARE 06-1582875
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)

537 STEAMBOAT ROAD, GREENWICH, CONNECTICUT 06830
(Address of principal executive offices) (Zip Code)

(203) 661-6942
(Issuer's telephone number, including area code)

N/A
--------------
(Former names, former address and former fiscal year,
if changed since last report)

Check whether the issuer (1) filed all reports required to be filed by section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ].

The number of shares of the issuer's common stock outstanding on May 11, 2001
was approximately 128,542,639.

TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION

ITEM 1 - CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

Condensed Consolidated Balance Sheets as of March 31, 2001 (unaudited)
and December 31, 2000 .............................................. 2

Condensed Consolidated Statements of Operations for the three
months ended March 31, 2001 (unaudited) and 2000 ................... 3

Consolidated Statements of Stockholders' Equity for the three
months ended March 31, 2001 (unaudited)............................. 4

Condensed Consolidated Statements of Cash Flows for the three
months ended March 31, 2001 (unaudited) and 2000.................... 5

Notes to Unaudited Interim Condensed Consolidated Financial
Statements ......................................................... 6

ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS............................. 12

ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ......... 16

PART II - OTHER INFORMATION

ITEM 1 - LEGAL PROCEEDINGS................................................... 17

ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS........................... 17

ITEM 3 - DEFAULTS UPON SENIOR SECURITIES..................................... 17

ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................. 17

ITEM 5 - OTHER INFORMATION................................................... 17

ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K.................................... 17

ITEM 7 - SIGNATURES.......................................................... 20

PART I. - FINANCIAL INFORMATION

ITEM 1 - CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS:

CHANGE TECHNOLOGY PARTNERS, INC.
AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(in thousands except share and per share amounts)

MARCH 31, DECEMBER 31,
2001 2000
--------------- ---------------
(Unaudited)
ASSETS

Cash and cash equivalents................................... $ 24,549 30,333
Accounts receivable, net of allowances of $133 and $62
at March 31, 2001 and December 31, 2000, respectively... 1,120 839
Unbilled receivables........................................ 181 --
Prepaid expenses and other current assets................... 617 219
----------- ----------
Total current assets...................... 26,467 31,391

Investments in unconsolidated subsidiaries.................. 4,080 4,893
Property and equipment, net................................. 1,649 510
Purchased intangible assets, net............................ 10,533 1,531
Other assets................................................ 541 251
----------- ----------
Total assets.............................. $ 43,270 38,576
=========== ==========

LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable............................................ $ 441 347
Accrued expenses............................................ 1,434 917
Deferred revenues........................................... 55 79
Loan payable................................................ 36 36
Capital lease obligation.................................... 54 --
----------- ----------
Total current liabilities................ 2,020 1,379

Long term portion of loan payable........................... 15 15
Capital lease obligation, less current portion.............. 104 --
----------- ----------
Total liabilities......................... 2,139 1,394

Stockholders' equity:
Preferred stock:
Series A - $.06 per share cumulative, convertible
share-for-share into common stock; $.10 par value;
500,000 shares authorized, 645 and 3,000 shares
issued and outstanding at March 31, 2001 and
December 31, 2000, respectively, with an aggregate
liquidation preference of $1 at March 31, 2001....... -- --

Series B - convertible into common on a 1:40 basis;
$.10 par value; 4,000,000 shares authorized, 1,655,600
and 3,000,000 shares issued and outstanding at March 31,
2001 and December 31, 2000, respectively, with an aggregate
liquidation preference of $16,556 at March 31, 2001.. 166 300

Common stock - $.01 par value; 500,000,000 shares authorized,
109,037,368 and 44,959,000 shares issued and outstanding at
March 31, 2001 and December 31, 2000, respectively...... 1,090 449

Additional paid-in capital............................... 96,140 86,821
Deferred compensation.................................... (1,623) (1,787)
Accumulated deficit...................................... (54,642) (48,601)
----------- ----------
Total stockholders' equity................. 41,131 37,182
----------- ----------
Total liabilities and stockholders' equity. $ 43,270 38,576
=========== ==========

See accompanying notes to unaudited condensed consolidated financial statements.

CHANGE TECHNOLOGY PARTNERS, INC.
AND SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Operations
(in thousands except share and per share amounts)

THREE MONTHS ENDED
MARCH 31,
-------------------------------------
2001 2000
---------------- ---------------

Revenues.................................................... $ 1,874 --
Cost of revenues, including amortization of purchased
intangibles of $315...................................... 2,052 --
------------ -----------
Gross loss................................ (178) --

Operating expenses:
Selling, general, and administrative expenses exclusive of
equity based compensation of $2,629 in 2001............ 2,784 4
Equity based compensation............................... 2,629 --
------------ -----------
Total operating expenses.................. 5,413 4

Loss from operations...................... (5,591) (4)

Other income (expense):
Interest and dividend income............................ 366 --
Interest expense........................................ (3) --
Equity in losses of unconsolidated affiliate............ (813) --
------------ -----------
Net loss................................. (6,041) (4)

Deemed dividend attributable to issuance of Series B
convertible preferred stock............................
-- (40,000)
------------ -----------

Net loss attributable to
common stockholders.................
$ (6,041) (40,004)
============ ===========

Weighted average common shares outstanding,
basic, and diluted..................................... 52,793,361 6,276,681
============ ===========

Basic and diluted net loss per common share................. $ (0.11) (6.37)
============ ===========

See accompanying notes to unaudited condensed consolidated financial statements.

CHANGE TECHNOLOGY PARTNERS, INC.
AND SUBSIDIARIES

Unaudited Consolidated Statements of Stockholders' Equity
Three Months Ended March 31, 2001
(Dollars in thousands)

SERIES A SERIES B ADDITIONAL
PREFERRED STOCK PREFERRED STOCK COMMON STOCK PAID-IN
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL
------ ------ ------ ------ ------ ------ -------

Balance at December 31, 2000 ... 3,000 $ -- 3,000,000 $ 300 44,959,000 $ 449 $ 86,821

Amortization of deferred
compensation .............. -- -- -- -- -- -- --

Acquisition of Iguana
Studios, Inc. ................ -- -- -- -- 5,000,000 50 4,631

Settlement of stock award to
CEO of eHotHouse, Inc. ....... -- -- -- -- 3,144,494 31 2,434

Acquisition of outstanding
minority interest of
eHotHouse, Inc. ............ -- -- -- -- 2,155,519 22 2,658

Conversion of series A
preferred shares to common ... (2,355) -- -- -- 2,355 -- --
Conversion of series B
preferred shares to common ... -- -- (1,344,400) (134) 53,776,000 538 (404)

Net loss ....................... -- -- -- -- -- -- --
-----------------------------------------------------------------------------------------

Balance at March 31, 2001 ...... 645 $ -- 1,655,600 $ 166 109,037,368 $ 1,090 $ 96,140

TOTAL
DEFERRED ACCUMULATED STOCKHOLDERS'
COMPENSATION DEFICIT EQUITY
------------ ------- ------

Balance at December 31, 2000 .. $ (1,787) $ (48,601) $ 37,182

Amortization of deferred
compensation ............. 164 -- 164

Acquisition of Iguana
Studios, Inc. ................. -- -- 4,681

Settlement of stock award to
CEO of eHotHouse, Inc. ...... -- -- 2,465

Acquisition of outstanding
minority interest of
eHotHouse, Inc. ........... -- -- 2,680

Conversion of series A
preferred shares to common .... -- -- --
Conversion of series B
preferred shares to common .... -- -- --

Net loss ...................... -- (6,041) (6,041)
-------------------------------------------

Balance at March 31, 2001 ..... $ (1,623) $ (54,642) $ 41,131

See accompanying notes to unaudited condensed consolidated financial statements.

CHANGE TECHNOLOGY PARTNERS, INC.
AND SUBSIDIARIES

Notes to Unaudited Interim Condensed Consolidated Financial Statements
March 31, 2001

CHANGE TECHNOLOGY PARTNERS, INC.
AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Cash Flows
(Dollars in thousands)

THREE MONTHS ENDED
MARCH 31,
-------------------------------------
2001 2000
---------------- ---------------

Cash flows from operating activities:
Net loss............................................... $ (6,041) (4)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization...................... 580 --
Provision for doubtful accounts.................... 56
Equity based compensation.......................... 2,629 --
Equity in losses of unconsolidated subsidiary...... 813 --
Changes in operating assets and liabilities,
net of acquisitions:
Accounts receivable.............................. 304 1
Unbilled receivables............................. (79) --
Prepaid expenses and other assets................ (335) --
Deferred revenue................................. (171) --
Accounts payable and accrued liabilities......... (4) 557
------------ -----------
Net cash (used in) provided by operating
activities ............................. (2,248) 554

Cash flows from investing activities:
Purchase of property and equipment................... (560) --
Cash paid for acquisitions, net of cash acquired..... (2,973) --
------------ -----------
Net cash used in investing activities..... (3,533) --

Cash flows from financing activities:
Principal payments under capital leases.............. (3) --
Issuance of Series B preferred stock and warrants,
net of offering costs........................... -- 39,450
------------ -----------
Net cash provided by (used in)
financing activities ................... (3) 39,450

Net increase (decrease) in cash and
cash equivalents ....................... (5,784) 40,004

Cash and cash equivalents at beginning of period............ $ 30,333 133
------------ -----------

Cash and cash equivalents at end of period.................. $ 24,549 40,137
============ ===========

See accompanying notes to unaudited condensed consolidated financial statements.

CHANGE TECHNOLOGY PARTNERS, INC.
AND SUBSIDIARIES

Notes to Unaudited Interim Condensed Consolidated Financial Statements
March 31, 2001

CHANGE TECHNOLOGY PARTNERS, INC.
AND SUBSIDIARIES

Notes to Unaudited Interim Condensed Consolidated Financial Statements
March 31, 2001

(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Change Technology Partners, Inc. and its subsidiaries (collectively, the
"Company") is the provider of a broad range of professional consulting services,
including e-services and technology strategy, online branding, web architecture
and design, systems integration, systems architecture and outsourcing. The
Company services clients throughout the United States with offices in New York,
Connecticut, Maryland and New Jersey.

Arinco Computer Systems, Inc., the predecessor to the Company was incorporated
on March 31, 1978. However, the Company formally commenced implementation of its
business plan on June 15, 2000.

At March 31, 2001, the Company's consolidated subsidiaries are as follows:

o InSys Technology, Inc.
o RAND Interactive Corporation
o Iguana Studios, Inc.
o eHotHouse, Inc.

INTERIM RESULTS

The accompanying unaudited condensed consolidated balance sheet as of March 31,
2001 and the accompanying unaudited consolidated statements of operations, cash
flows and stockholders' equity for the periods ended March 31, 2001 and 2000
have been prepared by the Company. In the opinion of management, the
accompanying condensed consolidated financial statements have been prepared on
the same basis as the annual audited financial statements and contain all
adjustments, which include only normal recurring adjustments, considered
necessary for a fair presentation of the Company's financial position, results
of operations and cash flows at the dates and for the periods presented in
conformity with accounting principles generally accepted in the United States
applicable to interim periods.

While the Company believes that the disclosures presented are adequate to make
the information not misleading, these condensed consolidated financial
statements should be read in conjunction with the audited financial statements
and related notes for the year ended December 31, 2000, which are contained in
the Company's Annual Report on Form 10-K. The results for the three month period
ended March 31, 2001 are not necessarily indicative of the results to be
expected for the full fiscal year or for any future periods.

PRINCIPLES OF CONSOLIDATION

The accompanying unaudited consolidated financial statements include the
accounts of Change Technology Partners, Inc. and its majority-owned and
controlled subsidiaries from the date of acquisition (see note 3). All
significant intercompany transactions and balances have been eliminated in
consolidation. Investments in less than majority-owned entities over which the
Company has significant influence are accounted for using the equity method.

CHANGE TECHNOLOGY PARTNERS, INC.
AND SUBSIDIARIES

Notes to Unaudited Interim Condensed Consolidated Financial Statements
March 31, 2001

Since the Company was the only contributor of capital to a majority owned
subsidiary, eHotHouse, Inc., ("eHotHouse") and the minority interest holders had
no obligation to provide additional capital, 100% of those losses were included
in the Company's results for the period prior to the Company's acquisition of
the outstanding minority interest in February, 2001.

REVENUE RECOGNITION

Revenues are recognized for fixed price arrangements in the period services are
rendered using the percentage-of-completion method, based on the percentage of
costs incurred to date to total estimated projects costs, provided collection of
the resulting receivable is probable and no significant obligations remain. The
cumulative impact of any revision in estimates of the cost to complete and
losses on projects in process are reflected in the period in which they become
known and, if necessary, the Company accrues for losses on specific projects in
the period determined.

Revenues are recognized for time and materials based arrangements in the period
when the underlying services are rendered, provided collection of the resulting
receivable is probable and no significant obligations remain.

The Company generally enters into short-term, project specific contracts with
its clients who are generally billed in the same period in which services are
rendered. If services are rendered in advance of billings, the Company records
and presents the related amounts as unbilled revenue. If amounts are received in
advance of services being performed, the amounts are recorded and presented as
deferred revenues. Revenues exclude reimbursable expenses charged to customers.

COST OF REVENUES

Cost of revenues consists primarily of compensation of billable employees,
travel, subcontractor costs, and other costs directly incurred in the delivery
of services to clients. Billable employees are full time employees and
subcontractors whose time is spent servicing client projects. Also included in
Cost of Revenues on the Statement of Operations for the year ended December 31,
2000, is the amortization of purchased intangible assets, representing the value
of customer relationships and workforces acquired.

SIGNIFICANT CUSTOMERS AND CONCENTRATION OF CREDIT RISK

Financial instruments that subject the Company to credit risks consist primarily
of cash and cash equivalents, and trade accounts receivable. Cash and cash
equivalents consist of deposits, money market funds, and investments in short
term "AAA" rated debt instruments. The Company performs ongoing credit
evaluations, generally does not require collateral, and establishes an allowance
for doubtful accounts based upon factors surrounding the credit risk of
customers, historical trends, and other information. To date, such losses have
been within management's expectations.

CHANGE TECHNOLOGY PARTNERS, INC.
AND SUBSIDIARIES

Notes to Unaudited Interim Condensed Consolidated Financial Statements
March 31, 2001

BASIC AND DILUTED NET LOSS PER COMMON SHARE

Basic net loss per common share excludes the effect of potentially dilutive
securities and is computed by dividing net income or loss available to common
stockholders by the weighted average number of common shares outstanding for the
period. Diluted net loss per share adjusts for the effect of convertible
securities, warrants and other potentially dilutive financial instruments only
in the periods in which such effect would have been dilutive.

At March 31, 2001, outstanding warrants to purchase 41,250,000 shares of common
stock with a weighted average exercise price of $0.63 per share, and 6,281,888
outstanding options to purchase common stock with a weighted average exercise
price of $1.06 per share were not included in the computation of diluted net
loss per share because to do so would have had an antidilutive effect for the
periods presented. Similarly, the computation of diluted net loss per share
excludes the effect of 66,224,645 common shares issuable upon the conversion of
convertible preferred stock, since their inclusion would have had an
antidilutive effect. As a result, the basic and diluted net loss per share is
equal for all periods presented.

SEGMENT REPORTING

Although the Company offers, largely through its acquired businesses, a wide
variety of professional consulting services such as e-services, technology
services and systems integration, management does not manage its operations by
these product offerings, but instead views the Company as one operating segment
when making business decisions, with one operating decision maker, the Chief
Executive Officer. The Company manages its operations as a cross-disciplinary
integrated solutions provider, which attempts to bring forth a coordinated
service offering to its clients.

NEW ACCOUNTING PRONOUNCEMENTS

In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities, an Amendment of FASB Statement No.
133." SFAS No. 138 was issued to address a limited number of issues causing
implementation difficulties for entities that apply SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities," issued in June 1998. SFAS
No. 133 and SFAS No. 138 require that all derivatives be measured at fair value
and recognized as assets or liabilities on the balance sheet. Changes in the
fair value of derivatives should be recognized in either net income (loss) or
other comprehensive income (loss), depending on the designated purpose of the
derivative. The Company adopted SFAS No. 133 and SFAS No. 138 in the first
quarter of 2001. Adoption of these pronouncements did not have a material impact
on the Company's results of operations, cash flows or financial position.

(2) INVESTMENTS IN UNCONSOLIDATED SUBSIDIARIES

The following summarizes the Company's ownership interests in unconsolidated
subsidiaries accounted for under the equity method or cost method of accounting
as of March 31, 2001 (in thousands):

CHANGE TECHNOLOGY PARTNERS, INC.
AND SUBSIDIARIES

Notes to Unaudited Interim Condensed Consolidated Financial Statements
March 31, 2001

MARCH 31, 2001
-----------------------
CARRYING COST
VALUE BASIS
-------- ------

Investment in Broadstream, Inc. ........ $ 3,955 6,500
Investment in LiveSky, Inc. ............ 125 125
-------- ------
Total .............................. $ 4,080 6,625
======== ======

INVESTMENT IN BROADSTREAM, INC.

In June 2000, the Company purchased 7,626,165 shares of Series A Convertible
Redeemable Preferred Stock of Broadstream, Inc. ("Broadstream"), representing an
approximately 30% equity interest (calculated on a fully-diluted basis) and
approximately 47% voting interest, in exchange for $6.5 million. Broadstream is
a streaming media management services company that delivers fault tolerant
distribution services for streaming media content and data. The investment in
Broadstream is being accounted for under the equity method. The Company's
proportionate share of Broadstream's net loss, totaling $1,592,000 from the date
of investment through March 31, 2001, and the amortization of the excess of cost
over the Company's proportionate interest in the underlying equity, totaling
$953,000 from the date of investment through March 31, 2001, is included in
equity in losses of affiliate in the accompanying consolidated statement of
operations.

(3) ACQUISITIONS

ACQUISITION OF EHOTHOUSE

On September 15, 2000, the Company acquired majority voting control of eHotHouse
pursuant to a transaction where eHotHouse issued Series A Convertible
Participating Preferred Stock to the Company in exchange for $3 million in cash
and a covenant, by the Company, to issue 6,374,502 of its shares of common stock
as directed by eHotHouse. The operations of eHotHouse prior to acquisition were
deminimus, and the fair value of the identifiable net assets at the time of
acquisition approximated $0. Such transactions fully eliminate in consolidation
and do not impact the consolidated financial statements of the Company. No
consideration was provided to the existing shareholders of eHotHouse in the
transaction. Accordingly, this transaction effectively represented the initial
capitalization of eHotHouse and no goodwill was recorded. The business
combination was accounted for using the purchase method.

In February 2001, the Company acquired the chief executive officer's (of the
Company and eHotHouse) shares of eHotHouse common stock in exchange for
approximately $182,000 in cash and 3,144,494 shares of Company common stock.
This transaction was accounted for as the settlement of a prior stock award and,
accordingly, the Company recognized $2.6 million in related compensation
expense, representing the excess of the fair value of the cash and Company
shares issued as settlement over the fair value of the eHotHouse shares on the
original date of grant. Of this amount, $2.5 million, representing

CHANGE TECHNOLOGY PARTNERS, INC.
AND SUBSIDIARIES

Notes to Unaudited Interim Condensed Consolidated Financial Statements
March 31, 2001

the stock portion of the settlement, is included in equity based compensation in
the accompanying statement of operations for the three months ended March 31,
2001.

Also in February 2001, the Company acquired the remaining outstanding minority
interest of its subsidiary, eHotHouse, for 2,155,519 shares of the Company's
common stock valued at $2.7 million and approximately $218,000 in cash. The
acquisition was accounted for using the purchase method of accounting and
accordingly, the purchase price was allocated to the pro rata portion of
tangible and intangible assets acquired on the basis of their respective fair
values on the date of acquisition. Of the total purchase price, approximately
$2.9 million was allocated to identified intangible assets, primarily the
assembled workforce. The fair value of acquired intangible assets was
capitalized and is being amortized over the estimated useful life of three
years. Related amortization for the three months ended March 31, 2001 totaled
$162,000.

ACQUISITION OF INSYS TECHNOLOGIES, INC.

On October 18, 2000, eHotHouse acquired substantially all of the operating
assets and assumed certain liabilities of InSys Technology, Inc. ("InSys"), a
provider of systems integration services in exchange for $0.9 million in cash
including acquisition costs. The business combination was accounted for using
the purchase method.

ACQUISITION OF RAND INTERACTIVE CORPORATION

On November 30, 2000, eHotHouse acquired all of the issued and outstanding
common stock of RAND Interactive Corporation ("RAND"), a leading provider of
media and technical services in exchange for $0.7 million of eHotHouse common
stock and $0.7 million in cash including acquisition costs. The business
combination was accounted for using the purchase method.

ACQUISITION OF IGUANA STUDIOS, INC.

In March 2001, the Company acquired Iguana Studios, Inc. ("Iguana") a New York
City based interactive agency, for approximately $2.8 million in cash, including
acquisition costs, 5,000,000 shares of the Company's common stock valued at
approximately $3.7 million, and replacement options to purchase 1,681,888 shares
of Company common stock, which vested upon the change in control, valued at
approximately $1.0 million. The business combination was accounted for using the
purchase method.

The Company is in the process of finalizing its estimates that will be used in
the assignment of the Iguana purchase price to identified intangible and
tangible assets acquired and liabilities assumed. At March 31, 2001, these
estimates are not completed, and the entire Iguana excess purchase price has
been included within intangible assets in the accompanying unaudited condensed
balance sheet and has been amortized using an estimated useful life of three
years.

CHANGE TECHNOLOGY PARTNERS, INC.
AND SUBSIDIARIES

Notes to Unaudited Interim Condensed Consolidated Financial Statements
March 31, 2001

A one-year difference in the estimated useful life of the Iguana excess purchase
price would increase or decrease the annual amortization expense by
approximately $1.1 million or $0.5 million, respectively. Amortization expense
for the period from December 31, 2000 to March 31, 2001 was $183,000.

PRO FORMA FINANCIAL INFORMATION (UNAUDITED)

The following unaudited pro forma information is presented as if the Company had
completed the above acquisitions as of January 1, 2000 and includes amortization
of related intangible assets resulting from the acquisition. The unaudited pro
forma information is not necessarily indicative of what the results of
operations would have been had the acquisitions taken place at those dates or of
the future results of operations (in thousands).

THREE MONTHS ENDED MARCH 31,
----------------------------
2001 2000
----------------------------
(unaudited)

Revenues $ 2,361 $ 4,017
======== =========

Net loss $ (6,802) $ (726)
======== =========

Net loss attributable to common stockholders $ (6,802) $ (40,726)
======== =========

(4) RELATED PARTY TRANSACTIONS

During the period ended March 31, 2001, the Company incurred legal fees in
connection with certain transactions and other matters in the normal course of
business. A portion of these services were provided by a firm of which a member
of the Board of Directors of the Company is a Partner. Fees paid to this firm
totaled approximately $173,000 in the three months ended March 31, 2001.

Additionally, during the year ended March 31, 2001, the Company incurred
management and investment advisory service fees in connection with identifying,
evaluating, negotiating, and managing investment opportunities for the Company.
These services were provided by a firm of which a member of the Board of
Directors of the Company is affiliated. Fees paid to this firm totaled
approximately $195,000 in the three months ended March 31, 2001.

ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The following discussion should be read in conjunction with the unaudited
Condensed Consolidated Financial Statements and notes and with the Company's
audited Consolidated Financial Statements and accompanying notes for the fiscal
year ended December 31, 2000. Certain statements contained within this
discussion constitute forward-looking statements. See "Special Note Regarding
Forward Looking Statements."

OVERVIEW

The Company is a provider of a broad range of professional consulting services,
including e-services and technology strategy, online branding, web architecture
and design, systems integration, systems architecture and outsourcing. The
Company services clients throughout the United States with offices in New York,
Connecticut, Maryland and New Jersey.

The Company derives its revenues from services performed under one of two
pricing arrangements: time-and-materials and fixed price. The services performed
under either of these arrangements are substantially identical.

Revenues are recognized for fixed price arrangements as services are rendered
using the percentage-of-completion method, based on the percentage of costs
incurred to date to total estimated project costs, provided collection of the
resulting receivable is probable. The cumulative impact of any revision in
estimates of the costs to complete and losses on projects in process are
reflected in the period in which they become known and, if necessary, the
Company accrues for losses in the period determined.

Provisions for estimated project specific losses on both types of contracts are
made during the period in which such losses become probable and can be
estimated. To date, such losses have not been significant. The Company reports
revenue net of reimbursable expenses.

Agreements entered into in connection with time-and-materials projects are
generally terminable by the client upon 30-days' prior written notice, and
clients are required to pay the Company for all time, materials and expenses
incurred by the Company through the effective date of termination. Agreements
entered into in connection with fixed-fee projects are generally terminable by
the client upon payment for work performed and the next progress payment due. If
clients terminate existing agreements or if the Company is unable to enter into
new agreements, the Company's business, financial condition and results of
operations could be materially and adversely affected. In addition, because a
proportion of the Company's expenses are relatively fixed, a variation in the
number of client engagements can cause significant variations in operating
results from quarter to quarter.

The Company's projects vary in size and scope. Therefore, a client that accounts
for a significant portion of the Company's revenues in one period may not
generate a similar amount of revenue in subsequent periods. However, there is a
risk that the source of the Company's revenues may be generated from a small
number of clients and these clients may not retain the company in the future.
Any cancellation, deferral or significant reduction in work performed for these
principal clients or a significant number of

smaller clients could have a material adverse affect on the Company's business,
financial condition and results of operations.

The Company's costs consist primarily of compensation and related costs of
personnel dedicated to customer assignments. Project personnel costs also
include fees paid to subcontractors for work performed in connection with
projects and non-reimbursed travel expenses.

The Company's selling, general and administrative costs consist primarily of
compensation and related costs of the management and administrative functions,
including finance and accounting, marketing, human resources and internal
information technology, the costs of the Company's facilities and other general
corporate expenses.

The Company' equity based compensation expense is comprised of the deferred
compensation associated with the grant of stock options to the Company's Chief
Executive Officer and Board of Directors. Cost is measured as the difference
between the exercise price of options granted and the fair market value of the
underlying stock on the date of measurement. Such cost is being recognized as
expense over the vesting period of the options. Also included in equity based
compensation is the cost associated with 3,144,494 shares of Company common
stock issued as partial consideration in exchange for the Chief Executive
Officer's shares of eHotHouse common stock. Such cost is measured as the excess
of the fair value of the Company shares issued as settlement over the fair value
of the eHotHouse shares on the original date of grant. The Company incurred
approximately $2,629,000 in equity based compensation expense during the three
months ended March 31, 2001.

ACQUISITIONS

We believe our acquisitions have supported our ability to grow rapidly while
continually enhancing the quality of services we offer our clients. Our
acquisitions have allowed us to rapidly build our base of professionals in the
context of a tight labor market for experienced technical and creative people.

We evaluate acquisitions based on numerous quantitative and qualitative factors.
Quantitative factors include historical and projected revenues and
profitability, geographic coverage and backlog of projects under contract.
Qualitative factors include strategic and cultural fit, management skills,
customer relationships and technical proficiency.

EHOTHOUSE. On February 21, 2001, the Company acquired the remaining outstanding
interests in eHotHouse, and merged eHotHouse with a newly formed, wholly owned
subsidiary of the Company. The Company acquired this minority interest for
approximately 2.2 million shares of the Company, valued at approximately $2.7
million, and $0.2 million in cash. The acquisition was accounted for using the
purchase method of accounting.

IGUANA. On March 1, 2001, the Company acquired all outstanding shares of Iguana,
a leading provider of media and technical services, in exchange for
approximately $2.8 million in cash, including acquisition costs, 5,000,000
shares of Company common stock, valued at approximately $3.7 million, and
replacement options to purchase 1,681,888 shares of Company common stock valued
at approximately $1.0 million. The acquisition was accounted for using the
purchase method of accounting.

The Company is in the process of finalizing valuations that will be used in the
assignment of the Iguana purchase price to identified intangible and tangible
assets acquired and liabilities assumed, and to goodwill. At March 31, 2001,
this valuation was not completed, and the entire Iguana excess purchase price
has been included within intangible assets in the accompanying balance sheet.
The asset is being amortized using a useful life of three years, the estimated
blended useful life of the excess purchase price.

RESULTS OF OPERATIONS

THREE MONTHS ENDED MARCH 31, 2001 COMPARED TO THREE MONTHS ENDED MARCH 31, 2000

The Company commenced its new business strategy in the spring of 2000 and began
its primary operations in the fall of 2000 concurrent with its acquisition of
majority control of eHotHouse. To date, the Company has been engaged primarily
in establishing and organizing its new business.

REVENUES. Revenues increased from $0 in the three months ended March 31, 2000 to
$1,874,000 in the three months ended March 31, 2001. The increase is a result of
the contribution to revenues of acquired companies' revenue streams.
Additionally, revenues increased from $1,364,000 in the three-month period ended
December 31, 2000 to $1,874,000 in the three-month period ended March 31, 2001,
primarily because of the acquisition of Iguana.

COST OF REVENUES. Cost of revenues consists principally of costs directly
incurred in the delivery of services to clients, primarily consisting of
compensation of billable employees. Billable employees are full time employees
and sub-contractors whose time spent working on client projects is charged to
that client at agreed-upon rates. Billable employees are our primary source of
revenue. Such costs increased from $0 in the three months ended March 31, 2000
to $2,052,000 in the three months ended March 31, 2001, or 109% of revenues.
This increase is a result of the contribution to such costs of acquired
companies' direct personnel and related costs. Additionally, cost of revenues
increased from $1,119,000 in the three-month period ended December 31, 2000 to
$2,052,000 in the three-month period ended March 31, 2001.

In connection with our acquisition of InSys, RAND, and Iguana, the Company
recorded intangible assets representing the value ascribed to the customer lists
and assembled workforces of the acquired companies. The aggregate amortization
of these intangible assets, totaled $315,000 for the three months ended March
31, 2001 and is included in cost of revenues. The Company anticipates that
future amortization of intangibles will continue over their estimated useful
lives of three years until fully amortized. It is likely that the Company will
continue to expand its business through acquisitions and internal development.
Any additional acquisitions or impairment of purchase intangibles could result
in additional merger and acquisition related costs.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses consist primarily of compensation and related benefits,
professional services fees, facilities costs, and advertising and promotional
costs. Selling, general administrative expenses increased from $4,000 in the
three months ended March 31, 2000 to $2,784,000 in the three months ended March
31, 2001. The increase was primarily the result of increased compensation,
increased professional services fees and increases in other costs associated
with the growth of our business and operations. We expect selling, general and
administrative expenses to increase in absolute dollars as we hire additional
personnel.

EQUITY IN LOSSES OF UNCONSOLIDATED AFFILIATES. Equity in losses of
unconsolidated affiliates was $0 in the three months ended March 31, 2000 and
$813,000 in the three months ended March 31, 2001. Equity in losses of
unconsolidated affiliates resulting from the Company's minority ownership in
Broadstream has been accounted for under the equity method of accounting. Under
the equity method of accounting, the Company's proportionate share of
Broadstream's operating losses and amortization of the Company's net excess
investment over its equity in Broadstream's net assets is included in equity in
losses of unconsolidated affiliates.

INTEREST AND DIVIDEND INCOME. Interest and dividend income was $0 in the three
months ended March 31, 2000 and $366,000 in the three months ended March 31,
2001. The increase in interest income was

attributable to interest earned on cash and cash equivalents primarily from the
net proceeds from the Company's sale of Series B convertible preferred stock in
March 2000. Interest income in future periods may fluctuate as a result of the
average cash we maintain and changes in the market rates of our cash
equivalents, and we expect that the average cash balance may decrease as we
continue to grow.

INCOME TAXES. The Company has available estimated net operating loss
carryforwards for income tax purposes of approximately $8,750,000 through the
period ended March 31, 2001, which expire on various dates from 2001 through
2021. A valuation allowance has been established due to uncertainty whether the
Company will generate sufficient taxable earnings to utilize the available net
operating loss carryforwards. A portion of the Company's net operating loss
carryforwards may also be limited due to significant changes in ownership under
Section 382 of the Tax Reform Act of 1986.

LIQUIDITY AND CAPITAL RESOURCES

On March 28, 2000, an investor group led by Pangea Internet Advisors, LLC
purchased 4,000,000 shares of Series B convertible preferred stock for net
proceeds to the Company of approximately $39,450,000 in cash. Also on March 28,
2000, certain other investors purchased warrants to purchase 41,250,000 shares
of common stock for $100,000.

The Company had $24,549,000 in cash and cash equivalents available as of March
31, 2001. The Company used $5,784,000 to fund operations, finance acquisitions
and make strategic investments during the three months ended March 31, 2001.

The Company believes that existing capital resources will enable it to maintain
current and planned operations for at least the next 12 months. However,
operating and investing activities on a long-term basis may require the Company
to seek additional equity or debt financing. The Company expects that future
acquisitions of businesses and other strategic assets will require considerable
outlays of capital.

The Company invests predominantly in instruments that are highly liquid,
investing grade securities that have maturities of less than 45 days.

SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS

Certain statements in this report, including information appearing under the
caption "Management's Discussion and Analysis of Financial Condition and Results
of Operations" constitute "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995 (the "Reform Act"). The Company
desires to take advantage of certain "Safe Harbor" provisions of the Reform Act
and is including this special note to enable the Company to do so.
Forward-Looking Statements involve known and unknown risks, uncertainties, and
other factors, which could cause the Company's actual results, performance
(financial or operating) or achievements to differ materially from the future
results, performance (financial or operating) or achievements expressed or
implied by such Forward-Looking Statements. Such risks, uncertainties and other
factors include, among others:

o the Company's clients may not adopt an internet business
model;

o the Company is still in an early stage of development and may
not be able to implement its business strategy;

o the Company has a limited operating history so it will be
difficult to predict the Company's future performance;

o the Company is not currently profitable and expects to incur
future losses;

o the Company must successfully complete and integrate
acquisitions to continue its growth;

o the Company's success depends on its ability to retain its key
personnel;

o the Company does not have long-term contracts with clients and
needs to establish relationships with new clients;

o the Company operates in a highly competitive market with low
barriers to entry; and

o the Company's revenues could be harmed if growth in the use of
the internet does not occur.

As a result, no assurance can be given as to future results, levels of activity
or achievements.

ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

INTEREST RATE RISK

The primary objective of the Company's investment activities is to preserve
principal while at the same time maximizing yields without significantly
increasing risk. To achieve this objective, the Company maintains its portfolio
of cash, cash equivalents and money market funds.

As of March 31, 2001, the Company held cash and cash equivalents with an average
maturity of 45 days or less.

PART II. OTHER INFORMATION

ITEM 1 - LEGAL PROCEEDINGS

The Company is subject to certain legal claims and is involved in litigation
from time to time in the ordinary course of its business. It is the Company's
opinion that it either has adequate legal defenses to such claims or that any
liability that might be incurred due to such claims will not, in the aggregate,
exceed the limits of the Company's insurance policies or otherwise result in any
material adverse effect on the Company's operations or financial position.

ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS

None.

ITEM 3 - DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

ITEM 5 - OTHER INFORMATION

None.

ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K

(a) The following exhibits are incorporated by reference to other documents
previously filed with the Commission:

2.1 Agreement and Plan of Merger of CTPI Acquisition Corp. with and into
eHotHouse, Inc., dated February 5, 2001 (filed as an exhibit to the
Registrant's Annual Report on Form 10-K, dated March 27, 2001 and
incorporated herein by reference).

2.2 Agreement and Plan of Merger among Change Technology Partners, Inc.,
Iguana Studios I, Inc., and Iguana Studios, Inc., dated March 1, 2001
(filed as an exhibit to the Registrant's Report on Form 8-K dated March
14, 2001 and incorporated herein by reference).

3.1 Certificate of Incorporation of Change Technology Partners, Inc. (filed
as an exhibit to the Registrant's quarterly report on Form 10-Q for the
fiscal quarter ended September 30, 2000 and incorporated herein by
reference).

3.2 Bylaws of Change Technology Partners, Inc. (filed as an exhibit to the
Registrant's quarterly report on Form 10-Q for the fiscal quarter ended
September 30, 2000 and incorporated herein by reference).

4.1 Form of stock certificate for common stock (filed as an exhibit to the
Registrant's Annual Report on Form 10-K, dated March 27, 2001 and
incorporated herein by reference).

10.1 Securities Purchase Agreement, dated March 9, 2000, by and between
Arinco Computer Systems, Inc., Pangea Internet Advisors LLC and the
purchasers listed on Schedule I attached thereto (filed as an exhibit
to the Registrant's Report on Form 8-K dated March 28, 2000, and
incorporated herein by reference).

10.2 Business Opportunity Allocation and Miscellaneous Services Agreement by
and among Arinco Computer Systems Inc. and Pangea Internet Advisors
LLC, dated as of March 28, 2000 (filed as an exhibit to the
Registrant's Report on Form 8-K dated March 28, 2000, and incorporated
herein by reference).

10.3 Amended and Restated Business Opportunity Allocation and Miscellaneous
Services Agreement by and between Change Technology Partners, Inc., FG
II Ventures, LLC and Pangea Internet Advisors LLC, dated as of November
10, 2000 (filed as an exhibit to the Registrant's Annual Report on Form
10-K, dated March 27, 2001 and incorporated herein by reference).

10.4 Employment Agreement entered into by and between Arinco Computer
Systems Inc. and William Avery (filed as an exhibit to the Registrant's
Report on Form 8-K dated March 28, 2000, and incorporated herein by
reference).

10.5 Warrants for William Avery, Cary S. Fitchey, The Roberts Family
Revocable Trust U/D/T dated as of December 15, 1997, David M. Roberts
and Gail M. Simpson, Trustees, Roberts Children Irrevocable Trust U/D/T
dated October 21, 1996, Stephen H. Roberts, Trustee and Turtle Holdings
LLC (filed as an exhibit to the Registrant's Report on Form 8-K dated
March 28, 2000, and incorporated herein by reference).

10.6 Stock Purchase Agreement, dated June 29, 2000, by and between Arinco
Computer Systems Inc., Broadstream.com, Inc. and the purchasers listed
on Schedule I attached thereto (filed as an exhibit to the Registrant's
Report on Form 8-K dated June 29, 2000, and incorporated herein by
reference).

10.7 Employment Agreement entered into by and between Arinco Computer
Systems Inc. and Frank Gallagi dated as of June 12, 2000 (filed as an
exhibit to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 2000, and incorporated herein by reference).

10.8 Stock Purchase Agreement, dated September 15, 2000, by and between
Change Technology Partners, Inc. and eHotHouse, Inc. (filed as an
exhibit to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended September 15, 2000, and incorporated herein by
reference).

10.9 Agreement for Sale and Purchase of Business Assets among InSys
Technology Inc., ATC InSys Technology, Inc., and ATC Group Services
Inc., dated October 5, 2000 (filed as an exhibit to the Registrant's
Report on Form 8-K dated October 18, 2000, and incorporated herein by
reference).

10.10 Assumption Agreement among InSys Technology, Inc., ATC InSys Technology
Inc. and ATC Group Services Inc., dated October 18, 2000 (filed as an
exhibit to the Registrant's Report on Form 8-K dated October 18, 2000,
and incorporated herein by reference).

10.11 Employment Agreement entered into by and between Change Technology
Partners, Inc. and Kathleen Shepphird dated as of November 10, 2000
(filed as an exhibit to the Registrant's Annual Report on Form 10-K,
dated March 27, 2001 and incorporated herein by reference).

10.12 Employment Agreement entered into by and between Arinco Computer
Systems Inc. and Matthew Ryan dated as of August 21, 2000 (filed as an
exhibit to the Registrant Report on Form 8-K dated November 20, 2000,
and incorporated herein by reference).

10.13 Agreement and Plan of Merger among eHotHouse Inc., eHH Merger I, Inc.,
RAND Interactive Corporation, and Todd Burgess, David Kelley, John
Snow, Stephen Riddick and Brobeck, Phleger and Harrison LLP, dated
November 30, 2000 (filed as an exhibit to the Registrant's Report on
Form 8-K dated November 30, 2000, and incorporated herein by
reference).

10.14 Stockholders Agreement entered into by Change Technology Partners,
Inc., and Stockholders of Iguana, dated March 1, 2001 (filed as an
exhibit to the Registrant's Report on Form 8-K dated March 14, 2001,
and incorporated herein by reference).

10.15 Lock-Up Agreement among Change Technology Partners, Inc., Iguana
Studios I, Inc., Iguana Studios, Inc., and Stockholders of Iguana,
dated March 1, 2001 (filed as an exhibit to the Registrant's Report on
Form 8-K dated March 14, 2001, and incorporated herein by reference).

19.1 Change Technology Partners, Inc. Annual Report on Form 10-K, dated
March 27, 2001 (filed as an exhibit to the Registrant's Annual Report
on Form 10-K dated March 27, 2001, and incorporated herein by
reference).

(b) Reports on Form 8-K:

The Registrant filed a Current Report on Form 8-K on January 26, 2001
reporting matters under Item 9, Regulation FD Disclosure. The
Registrant also filed two Current Reports on Form 8-K on February 7,
2001 and one Current Report on Form 8-K on March 14, 2001 reporting
matters under Item 2, Acquisition or Disposition of Assets and Item 7,
Financial Statements and Exhibits. The Registrant also filed a Form 8-K
dated February 20, 2001 reporting matters under Item 7, Financial
Statements and Exhibits.

SIGNATURES

In accordance with the requirements of the Exchange Act, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.

Dated: May 14, 2001

CHANGE TECHNOLOGY PARTNERS, INC.

By: /s/ Robert Westerfield
----------------------------------
Robert Westerfield
Chief Operating Officer, Chief Financial
Officer, Treasurer and Executive Vice
President