AXIA GROUP INC/UT (AXIA.OB)
Quarterly Report (SEC form 10QSB)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General The Company operates in two primary areas of business: the Company acquires, leases and sells real estate; and, the Company provide financial consulting
services. The following discussion examines the Company's financial condition as a result of operations for the second quarter and year-to-date, 2001, and compares
those results with comparable periods from last year.
Real Estate Operations The Company's objective, with respect to real estate operations, is to acquire, through subsidiaries, properties which management believes to be
undervalued and which the Company is able to acquire with limited cash outlays. The Company will consider properties within the continental United States. The
Company attempts to acquire such properties by assuming existing favorable financing and paying the balance of the purchase price with nominal cash payments or
through the issuance of shares of common stock. Once such properties are acquired, the Company leases them to primarily commercial tenants. The Company also
makes limited investments to improve the properties with the objective of increasing occupancy and cash flows. Management believes that, with limited improvements
and effective management, properties can be sold at a profit within a relatively short period of time.
The Company recorded rental revenues of $186,201 for the quarter ended June 30, 2001, as compared to $197,722 for the same quarter, 2000. This decline in rental
revenues was due to declines in occupancy.
Currently, the Company has negative cash flows from real estate operations of $126,118 for the quarter ended June 30, 2001, compared to a negative cash flow of
$19,111 for the same quarter, 2000. This is attributable to commissions paid upon refinancing properties, fees associated with purchases of properties, and a decrease
in occupancy rates in conjunction with an increase in repair costs associated with the commercial spaces.
The Company will continue efforts to improve profitability and cash flow by working to increase occupancy and rental income from those properties which have a high
vacancy rate as well as focusing on properties with the highest per square foot rental rates. The Company also intends to continue to purchase real estate primarily for
appreciation purposes. Accordingly, the Company hopes to not only minimize any real estate cash flow deficit, but also generate sufficient cash to record a substantial
profit upon property disposition.
Consulting Operations The Company, through its majority owned Hudson Consulting Group, Inc., provides a variety of financial consulting services to a wide range of
clients. The primary service performed by the Company involves assisting clients in structuring mergers and acquisitions. This includes locating entities suitable to be
merged with or acquired by the Company's clients, as well as providing general advice related to the structuring of mergers or acquisitions. The Company also assists
clients in restructuring their capital formation, advises with respect to general corporate problem solving and provides shareholder relations services designed to expose
its clients to the investment community.
The Company's consulting subsidiary generates revenues through consulting fees payable in the client's equity securities, cash, other assets or some combination of the
three. The primary form of compensation
received is the equity securities of clients. When payment is made in the form of equity, the number of shares to be paid is usually dependent upon the price of the
client's common stock (if such price is available) and the extent of consulting services to be provided. The typical value used to determine the number of shares to be
paid is one-half or less of the stock's bid price, which accounts for the fact that most of the equity received as payment by the Company is restricted as to resale. The
Company accepts equity with the expectation that its services will assist in the stock's appreciation, thus allowing the Company to be compensated and to make a return
on the payments for its services.
The Company generates cash flow, in part, by liquidating non-cash assets (equity securities) received as fees for consulting services. As most fees are paid in the form
of equity, the revenues and cash flows realized by the Company are somewhat tied to the price of its clients' securities and the Company's ability to sell such securities.
A decline in the market price of a client's stock can affect the total asset value of the Company's balance sheet and can result in the Company incurring substantial
losses on its income statement. The Company generally books securities that it accepts as payment at a 25% to 75% discount of the current market value at the time the
Company accepts the securities due to illiquidity of the securities because of restrictions on resale.
The Company's portfolio consists primarily of restricted and unrestricted shares of common stock in micro to small cap publicly traded companies. This portfolio
currently consists of shares of common stock in over 60 different companies whose operations range from that of high-tech Internet operations to oil and gas
companies. The Company believes that the diversity of its current holdings is such that the overall volatility of its portfolio is significantly less than in prior years of
operation. Nonetheless, the Company's portfolio is considered extremely volatile.
Revenues from the Company's financial consulting operations decreased for the quarter ended June 30, 2001, as compared to the same quarter in 2000. The Company
recorded $330,981 in revenues for the quarter ended June 30, 2001, from its financial consulting operations as compared to $348,978 for the same period of 2000.
This decrease was due to a slow down in consulting activities, due in part to adverse conditions in the marketplace. The company anticipates that revenues in this area
will rebound as current projects in the pipeline come to fruition.
During the quarter ended June 30, 2001, the Company sold investment securities owned by the Company and its subsidiaries. The bulk of the securities sold were
securities that the Company and its majority owned subsidiaries acquired in past years for services rendered to clients by the Company's consulting subsidiaries.
During the quarter ended June 30, 2001, the Company and its subsidiaries sold $87,755 in investment securities. The Company's basis in the securities was
approximately $128,789. The company continued to liquidate securities it felt would not rebound to prevent future losses and to provide needed working capital.
Company Operations as a Whole
Revenues Gross revenues for the three month periods ended June 30, 2001 were $517,182, as compared to $592,142 for the same period in 2000. Gross revenues for
the quarter ended June 30, 2001, decreased 13% from June 30, 2000. The decrease in revenues is due to a $45,442 decrease in additional gain recognition, a $17,997
decrease in consulting revenues, and a $11,521 decrease in rental revenues.
Gross revenues for the six month periods ended June 30, 2001 were $919,963, as compared to $1,664,807 for the same period in 2000. The decrease in revenues is
due to a $62,235 decrease in additional gain recognition, a $656,418 decrease in consulting revenues, and a $26,791 decrease in rental revenues.
Profits The Company recorded an operating loss of $179,246 for the three months ended June 30, 2001, compared to an operating loss of $378,931 for the
comparable period in the year 2000. The Company recorded a net loss of $322,474 for the three months ended June 30, 2001, compared to a net profit of $630,569 for
the comparable period in 2000. The Company's decrease in net profitability for the three month period ended June 30, 2001, as compared to the same period in 2000,
was due to the lack of gains from the sale of investment securities.
The Company's operating loss of $229,554 for the six months ended June 30, 2001, is substantially less than an operating loss of $308,713 for the comparable period
in the year 2000. The Company recorded a net loss of $753,988 for the six months ended June 30, 2001, compared to a net profit of $2,434,533 for the comparable
period in 2000. The Company's decrease in net profitability for the six month period ended June 30, 2001, as compared to the same period in 2000, was due to the lack
of gains from the sale of investment securities as well as a $265,000 reduction in interest income.
The Company is uncertain as to whether it will operate at a profit through fiscal 2001. Since the Company's activities are closely tied to the securities markets, future
profitability or its revenue growth tends to follow changes in the market place. There can be no guarantee that profitability or revenue growth can be sustained in the
future.
Expenses General and administrative expenses for the three months ended June 30, 2001, were $180,890 compared to $397,036 for the same period in 2000. General
and administrative expenses for the six months ended June 30, 2001, were $281,780 compared to $700,672 for the same period in 2000. The reason for the decrease is
continued efforts to streamline operations and to eliminate non-performing assets and their associated administrative expenses.
Depreciation and amortization expenses for the three months ended June 30, 2001, and June 30, 2000, were $93,768 and $155,060, respectively. The decrease was due
to a disposition of assets during 2000 as well as some assets being fully depreciated and not yet replaced.
Capital Resources and Liquidity On June 30, 2001, the Company had current assets of $4,980,181 and $13,369,671 in total assets compared to $2,918,238 of current
assets and $11,467,275 in total assets at the year ended December 31, 2000. The Company had net working capital of $3,967,947 on June 30, 2001, compared to net
working capital of $1,684,645 on December 31, 2000. The increase in total assets is attributable to unrealized gains on securities available for sale for the quarter. The
major contributing factor to the change in working capital is the receipt of securities for consulting services which have appreciated in value since their receipt.
Total stockholders' equity in the Company was $6,429,696 as of June 30, 2001, compared to $4,719,212 as of December 31, 2000 and $5,841,140 on March 31, 2001.
This increase is also attributable to the receipt of securities and their respective increase in value mentioned above.
Net Cash flow used in operating activities was $345,331 for the six months ended
June 30, 2001, compared to cash flow used in operating activities of $1,754,903 for the six months ended June 30, 2000. Cash flows used in operating activities for the
six months ended June 30, 2001, are primarily attributable to loss on the sale of investments and changes in net current assets and liabilities.
Cash flow used by investing activities was $246,630 for the six months ended June 30, 2001, compared to cash flow provided by investing activities of $1,816,287 for
the same period in 2000. The decrease is largely due to the purchase of investment securities coupled with a large reduction in the proceeds from the sale of investment
securities.
Cash flow provided by financing activities was $597,932 for the six months ended June 30, 2001, compared to cash flows provided by financing activities of $665,519
for the six months ended June 30, 2000. The decrease was largely due to financing through sale of common stock rather than financing through debt issuances.
Due to the Company's debt service on real estate holdings, willingness to acquire properties with negative cash flow shortages and acceptance of non-cash assets for
consulting services, the Company may experience occasional cash flow shortages.
Impact of Inflation The Company believes that inflation has had a negligible effect on operations over the past three years. The Company believes that it can offset
inflationary increases in the cost of materials and labor by increasing sales and improving operating efficiencies.
Known Trends, Events, or Uncertainties
General Real Estate Investment Risks The Company's investments are subject to varying degrees of risk generally incident to the ownership of real property. Real
estate values and income from the Company's current properties may be adversely affected by changes in national or local economic conditions and neighborhood
characteristics, changes in interest rates and in the availability, cost and terms of mortgage funds, the impact of present or future environmental legislation and
compliance with environmental laws, the ongoing need for capital improvements, changes in governmental rules and fiscal policies, civil unrest, acts of God, including
earthquakes and other natural disasters which may result in uninsured losses, acts of war, adverse changes in zoning laws and other factors which are beyond the
control of the Company.
Value and Illiquidity of Real Estate Real estate investments are relatively illiquid. The ability of the Company to vary its ownership of real estate property in response to
changes in economic and other conditions is limited. If the Company must sell an investment, there can be no assurance that the Company will be able to dispose of it
in the time period it desires or that the sales price of any investment will recoup the amount of the Company's investment.
Property Taxes The Company's real property is subject to real property taxes. The real property taxes on this property may increase or decrease as property tax rates
change and as the property is assessed or reassessed by taxing authorities. If property taxes increase, the Company's operations could be adversely affected.
Forward Looking Statements The information herein contains certain forward looking statements within the meaning of Section 27A of the Securities Act of 1933, as
amended and Section 21E of the Securities Exchange Act of 1934, as amended, which are intended to be covered by the safe harbors created thereby. Investors are
cautioned that all forward looking statements involve risks and uncertainty, including, without limitation, the ability of the Company to continue its expansion strategy,
changes in the real estate markets, labor and employee benefits, as well as general market conditions, competition, and pricing. Although the Company believes that the
assumptions underlying the forward looking statements contained herein are reasonable, any of the assumptions could be inaccurate, and therefore, there can be no
assurance that the forward looking statements included in the Form 10QSB will prove to be accurate. In view of the significant uncertainties inherent in the forward
looking statements included herein, the inclusion of such information should not be regarded as a representation by the Company or any other person that the
objectives and plans of the Company will be achieved |
