U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30,2000
( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from _________________ to ______________
Commission file number 1-13478
GLOBAL iTECHNOLOGY, INC.
(Exact name of small business issuer as specified in its charter)
Delaware 13-3698386
-------------------------------- -------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
317 Madison Avenue, Suite 807, New York, New York 10017
-------------------------------------------------------
(Address of principal executive offices)
(212) 697-6131
--------------
(Issuer's telephone number including area code)
GLOBAL TELECOMMUNICATION SOLUTIONS, INC.
----------------------------------------
(Former name, 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 [ ]
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date. As of August 26, 2000, the issuer had
outstanding 16,771,841 shares of Common Stock, par value $.01 per share.
<PAGE>
GLOBAL iTECHNOLOGY, INC. AND SUBSIDIARIES
Part I. Financial Information
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets - June 30, 2000
(unaudited) and December 31, 1999 3
Condensed Consolidated Statements of Operations - Three
and six months ended June 30, 2000 and 1999 (unaudited) 4
Condensed Consolidated Statements of Cash Flows - Six
months ended June 30, 2000 and 1999 (unaudited) 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Part II. Other Information
Item 2. Changes in Securities and Use of Proceeds 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 15
The accompanying notes are an integral part of these condensed
consolidated financial statements
2
<PAGE>
<TABLE>
<CAPTION>
GLOBAL iTECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30, December 31,
2000 1999
--------------- ------------------
Assets
Current assets:
<S> <C> <C>
Cash $ 51,665 $ 302,067
Other assets 17,356 44,635
-------------- ------------------
Total current assets 69,021 346,702
Investment in and advances to affiliate 100,000 140,502
Equipment, net 6,211 26,640
Assets of liquidating subsidiaries 828,621 3,705,832
------- ---------
$1,003,853 $ 4,219,676
========== ===========
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Accounts payable $1,318,446 $ 1,053,612
Demand loans payable-related parties 200,000 -
Accrued license fee 1,221,979 1,221,979
Accrued earn-out to related party 1,200,000 1,200,000
Other accrued expenses 848,571 1,302,026
------- ---------
Total current liabilities 4,788,996 4,777,617
Other liabilities:
Notes payable to related party - 628,815
Liquidating subsidiaries' liabilities subject to compromise - third parties 20,256,357 23,716,888
---------- ----------
Total liabilities 25,045,353 29,123,320
---------- ----------
Commitments and Contingencies
Stockholders' Equity (Deficit)
Preferred stock - $.01 par value, authorized 1,000,000 shares;
none issued and outstanding - -
Common stock, $.01 par value, authorized 35,000,000 shares;
Issued 15,609,732 and 14,727,882 156,097 147,278
Additional paid-in capital 56,918,471 56,233,248
Accumulated deficit (81,069,290) (81,237,392)
Accumulated other comprehensive income 23,089 23,089
Less: Treasury stock, 47,891 shares (69,867) (69,867)
-------- --------
Total stockholders' equity (deficit) (24,041,500) (24,903,644)
------------ ------------
$ 1,003,853 $ 4,219,676
=========== ===========
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements
3
<PAGE>
<TABLE>
<CAPTION>
Global iTechnology, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
Three months ended Six months ended
June 30, June 30,
-------- --------
2000 1999 2000 1999
----------------- --------------- ----------------- ----------------
<S> <C> <C> <C> <C>
General and administrative expenses $ 116,504 $475,842 $316,032 $773,727
Depreciation and amortization 4,444 8,127
----------------- --------------- ----------------- ----------------
Operating loss (116,504) (480,286) (316,032) (881,854)
Equity in net loss from affiliate (79,390) - (105,419) -
----------------- --------------- ----------------- ----------------
Loss from continuing operations (195,894) (480,286) (421,451) (881,854)
----------------- --------------- ----------------- ----------------
Discontinued operations:
Loss from discontinued operations (1,508) (4,186,114) (1,019,253) (5,370,379)
Gain on disposal of discontinued operations - - 1,608,806 -
----------------- --------------- ----------------- ----------------
Income (loss) from discontinued operations (1,508) (4,186,114) 589,553 (5,370,379)
----------------- --------------- ----------------- ----------------
Income (loss) before extraordinary item (197,402) (4,666,400) 168,102 (6,252,233)
Extraordinary loss on conversion of debt - - - (1,420,172)
----------------- --------------- ----------------- ----------------
Net income (loss) $(197,402) $(4,666,400) $168,102 $ (7,672,405)
========== =========== ======== ============
Basic and diluted income (loss) per share:
Loss from continuing operations $ (.01) $ (.03) $ (.03) $ (.06)
Loss from discontinued operations - (.29) .04 (.38)
Extraordinary loss on conversion of debt - - - (.10)
----------------- --------------- ----------------- ----------------
Basic and diluted income (loss) per share $ (.01) $ (.32) $ .01 $ (.54)
======= ======= ====== ========
Weighted average shares outstanding-basic
and diluted 15,536,841 14,429,081 15,169,620 14,167,539
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements
4
<PAGE>
<TABLE>
<CAPTION>
GLOBAL iTECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six months ended
June 30,
--------------------------------------
2000 1999
----------------- -----------------
Operating activities:
<S> <C> <C>
Net income (loss) $168,102 $(7,672,405)
Adjustment to reconcile net loss to net cash used in operating activities:
Loss from discontinued operations 1,019,253 6,252,233
Depreciation and amortization - 8,127
Loss on debt conversion - 1,420,172
Issuance of stock for litigation settlements 24,689 -
Gain on disposal of discontinued operations (1,608,806) -
Loss from equity investment 105,409 -
Changes in operating assets and liabilities:
Other assets 60,152 99,446
Accounts payable and accrued expenses (188,621) 438,872
Accrued license fees - 296,428
Accrued note and earn-out to related party - (136,544)
----------------- -----------------
Cash provided (used) by continuing operating activities (419,822) 706,329
Cash (used) by discontinued operating activities - (683,753)
----------------- -----------------
Cash provided (used) by operating activities (419,822) 22,576
----------------- -----------------
Cash flows from investing activities:
Purchase of equipment 6,211 679,503
Advances to affiliate 64,907
----------------- -----------------
Net cash (used) by investing activities (71,118) (679,503)
----------------- -----------------
Cash flows from financing activities:
Proceeds from short term borrowings 200,000 450,000
Proceeds from exercise of stock options 40,538
----------------- -----------------
Net cash (used) by financing activities 240,538 450,000
----------------- -----------------
Net change in cash (250,402) (206,927)
Cash, beginning of period 302,067 1,604,166
----------------- -----------------
Cash, end of period $51,665 $1,397,239
================= =================
Supplemental disclosures:
Fair value of common stock issued upon note conversion - $3,944,992
================= =================
Conversion of note payable to related party into common stock $628,815 -
================= =================
Cash paid for interest - $25,197
================= =================
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements
5
<PAGE>
GLOBAL iTECHNOLOGY, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
June 30, 2000
(unaudited)
(1) Business and Basis of Presentation
Business
Global iTechnology, Inc., formerly known as Global Telecommunication
Solutions, Inc., (the "Company") was incorporated on December 23, 1992 and
historically, through certain subsidiaries, was engaged in the marketing and
distribution of prepaid phone cards. As a result of the Company's subsidiaries
long history of losses in the prepaid phone card business, coupled with an
increasingly competitive environment, the Company's Board of Directors adopted a
plan to discontinue and sell the prepaid phone card business. To facilitate the
possible sale of the phone card assets, these subsidiaries filed voluntary
petitions with the U.S. Bankruptcy Court for the District of Delaware ("Court")
under Chapter 11 of the U.S. Bankruptcy Code on October 28, 1999. The
subsidiaries of the Company that filed for Court protection are Global Link
Telecom Corporation, GTS Holding Corp., Inc., TelTime, Inc., Network Services
System, Inc., Network Services System, L.P., GTS Marketing, Inc., Global
Telecommunication Solutions, L.P., Networks Around the World, Inc. and
Centerpiece Communications, Inc. (collectively the "Debtors"). On January 31,
2000, the Debtors entered into an agreement to sell their fixed assets to J D
Services, Inc. ("J D Services") (See below.)
The Company's financial statements have been prepared in accordance
with the American Institute of Certified Public Accountants Statement of
Position 90-7, "Financial Reporting by Entities in Reorganization ("SOP 90-7.")"
The Debtors have been operating their business as debtors-in-possession subject
to the jurisdiction of the Court.
As a result of the Company's decision to sell its phone card business
and the subsequent voluntary filing by certain of the Company's subsidiaries
under Chapter 11 of the U.S. Bankruptcy Code, the operations of that business
are presented herein as discontinued operations and the assets and liabilities
of the filing subsidiaries have been aggregated in the accompanying balance
sheets.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-QSB and
Item 310(b) of Regulation S-B. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three and six months
ended June 30, 2000 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2000.
(2) Going Concern
At June 30, 2000 the Company, excluding the assets and liabilities
relating to the Debtors, had cash of $52,000 and a working capital deficit of
$4.7 million. Subsequent to June 30, 2000, the Company continues to generate
negative cash losses from operations.
At June 30, 2000 substantially all the Company's current liabilities
relate to indebtedness incurred in connection with the discontinued phone card
business. These liabilities were incurred by the Company rather than the
Debtors, and are due to less than 10 entities. The Company is currently
negotiating with the various parties in an effort to reach settlements regarding
the amounts due. The Company is attempting to settle these liabilities on
favorable terms to the Company.
6
<PAGE>
The Company's ability to continue in operation and execute its new
business plan is subject to various factors including, but not limited to,
resolving its aforementioned outstanding liabilities, and raising additional
capital. Management of the Company cannot presently predict the outcome of these
matters and there can be no assurance that the Company will be successful in any
of these endeavors.
The accompanying condensed consolidated financial statements have been
prepared on a going concern basis which contemplates the realization of assets
and the settlement of liabilities and commitments in the normal course of
business.
(3) Income (Loss) Per Share
For the three and six months ended June 30, 2000 and 1999 income (loss)
per share is computed by dividing the net income (loss) by the weighted average
number of shares of Common Stock. For the six months ended June 30, 2000 diluted
income (loss) per share has not been presented to include the effect of Common
Stock equivalents since the income relates to the disposal of the discontinued
operations. For the other periods presented, common stock equivalents are
excluded from the income (loss) per share calculation because the effect would
be antidilutive.
(4) Reclassifications
Certain reclassifications have been made to the 1999 condensed
consolidated financial statements to conform to the 2000 presentation.
(5) Debtors Sale of Assets and Discontinued Operations
On January 31, 2000, the Debtors entered into an agreement ("Purchase
Agreement") to sell substantially all of their assets to J D Services. The sale
transaction was consummated effective April 1, 2000 pursuant to an order of the
Court. Under the terms of the Purchase Agreement, J D Services paid an aggregate
of $2.1 million as follows: (i) forgiveness of $750,000 debtor-in-possession
financing previously provided to the Debtors and (ii) assumption of Debtor's
obligations to provide telecommunications services to previously activated phone
cards "Deferred Liability." The Purchase Agreement also provides that should the
Deferred Liability be less than $1.35 million, the Debtors shall be due the
difference ("True-up Amount".) As a result of this sale, the Debtors realized a
gain of $1,608,806. In addition, subsequent to June 30, 2000, the True-up amount
was determined to be $200,000.
A condition of the Purchase Agreement required that certain agreements,
including non-compete agreements among the Company, Debtors and Messrs. Cherkas
and Liguori be assigned to J D Services. These agreements with Messrs. Cherkas
and Liguori were entered into in connection with the Company's acquisition of
Networks Around the World, Inc. ("NATW") in February 1998. To accomplish this
assignment, defaults by the Company and the Debtors under the various agreements
had to be cured. With respect to Messrs. Cherkas and Liguori, the Company and
Debtors entered into an Agreement Regarding The Assignment of Contracts, Cure
Amounts and Related Matters on March 7, 2000, which was approved by the Court on
March 22, 2000 ("Assignment Agreement".) Under the terms of the Assignment
Agreement, the Company, on May 3, 2000, paid Mr. Liguori $15,000 in unpaid
bonuses due him and delivered to him 50,000 shares of Common Stock. Also on May
3, 2000, the Company paid Mr. Cherkas $94,000; $64,000 for accrued but unpaid
salary and $30,000 for reimbursement of legal fees. As provided by the
Assignment Agreement, the Debtors paid Mr. Liguori on May 3, 2000, $110,000 in
payment of the note, and related interest, issued in connection with the
acquisition of NATW.
With respect to approximately $1.2 million due Mr. Cherkas under an
earn-out agreement entered into in connection with the NATW acquisition ("Earn
Out"), under the Assignment Agreement he has agreed to release the Company and
Debtors if he receives a minimum payment of $700,000 by October 7, 2000, paid as
discussed below. To the extent he does not receive the minimum payment of
$700,000, the amount due
7
<PAGE>
him by the Company shall be $1.2 million, less any payments he receives under
the Assignment Agreement.
The Assignment Agreement provides that Mr. Cherkas shall receive the
following amounts, if any:
o The True-up Amount not to exceed $500,000 which amount has
been determined to be $200,000.
o 70% of the amount of the Debtors' available cash remaining
after deduction of amounts for unpaid accrued administrative
expenses.
o At the election of the Company, an amount equal to the
difference between $700,000 and the amounts otherwise paid him
under the Assignment Agreement.
It is impossible to predict the amount of cash, if any, Mr. Cherkas
will receive under the Assignment Agreement and accordingly the Company could be
liable to Mr. Cherkas up to $1.2 million if he does not receive a minimum of
$700,000 from the Debtors and/or the Company by October 7, 2000. While proceeds
from the sales of assets of the Debtors may satisfy the Earn Out, since the
Company remains liable should the Debtors not satisfy the debt the entire amount
due Mr. Cherkas of $1.2 million is reflected as a liability of the Company on
its balance sheet and not the Debtors.
The Debtors had exclusive right, until May 25, 2000, to file with the
Court a plan of liquidation ("Plan"), which they did file on a timely basis.
Subject to certain exceptions in the Bankruptcy Code, acceptance of a Plan
requires approval of the Court and the affirmative vote (i.e. more than 50% of
the number and at least 66 2/3% of the dollar amount, both with regard to claims
actually voted) of each class of creditors and equity holders of the Company,
whose claims are impaired by the Plan. If the Debtors fail to receive approval
of the Plan or a modification thereof by October 24, 2000, any creditor or
equity holder will be free to file a Plan with the Court and solicit acceptances
thereof. Until the Plan is approved, the impact on the Company of the Plan, if
any, cannot be predicted. In addition should the assets of the Debtors not be
sufficient to pay administrative priority claims, the Debtors would not be able
to confirm a Plan and a trustee would be appointed by the Court to administer
the Debtors' estate.
Operating results from the discontinued operations of the Debtors for
the six months ended June 30 is as follows:
2000 1999
------------------ -------------------
Net sales $ 3,259,959 $17,241,003
Cost of sales 3,242,223 16,360,977
------------------ -------------------
Gross Profit 17,736 880,026
Selling, general and
administrative expense 767,445 3,097,757
Depreciation and amortization 251,808 804,573
Goodwill impairment - 2,144,087
------------------ -------------------
Operating loss (1,019,253) (5,166,391)
Interest income - 24,240
Interest expense - (228,228)
------------------ -------------------
Net loss from discontinued
Operations $(1,019,253) $(5,370,379)
============ ============
8
<PAGE>
Summary balances sheets of the discontinued operations of the Debtors is as
follows:
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
----------------- -------------------
Current assets:
<S> <C> <C>
Cash $792,593 $ 594,143
Accounts receivable, net 36,028 1,102,229
Inventory - 251,776
----------------- -------------------
Total current assets 828,621 1,948,148
Property and equipment, net 1,707,684
Other assets, net 50,000
----------------- -------------------
Total assets of liquidating
subsidiaries $828,621 $ 3,705,832
================= ===================
Pre-petition current liabilities:
Accounts payable $8,899,793 $ 8,638,408
Accrued regulatory fees 5,836,021 5,836,021
Other accrued expenses - 430,967
Deferred revenues - 1,963,797
Estimated sales tax liability 5,402,446 5,429,514
Notes payable to related
party - 110,000
----------------- -------------------
20,138,260 22,408,707
Post-petition administrative
claims 118,097 1,308,181
----------------- -------------------
Total liquidating subsidiaries'
liabilities subject to compromise
- third parties $20,256,357 $23,716,888
================= ====================
</TABLE>
(6) Debt
In connection with the NATW acquisition, the Company issued notes in
the aggregate amount of $1 million of which $900,000 were payable to Mr.
Cherkas. In December 1998, Mr. Cherkas preliminarily agreed to convert his note
into Common Stock. The conversion of the note into 769,750 shares of Common
Stock occurred in March 2000 after deducting from the note $376,185, which
represents a reimbursement to the Company of amounts due it under an indemnity
contained in the NATW merger agreement.
In April 2000, the Company borrowed $125,000 from Mr. Shelly Finkel,
chairman and a principal shareholder of the Company at an interest rate of 8%
per annum on a demand basis. The Company also borrowed an aggregate of $75,000
from two shareholders of the Company under similar terms and conditions in June
2000.
(7) Investment in Affiliates
On February 1, 2000, the Company exchanged its investments in its
recently formed subsidiaries Imagine Telecom, Inc. and TalkToGo.com, Inc. for a
44% interest in Enticent.com, Inc. ("Enticent"), also a startup entity. As a
result of the transaction the Company will be the largest shareholder of
Enticent, owning 44% of the outstanding shares. Accordingly the Company's
investment in Enticent, with a cost basis of $205,000,
9
<PAGE>
is recorded on the equity basis.
(8) Litigation
On February 7, 2000, Star Telecommunications Inc. ("Star") obtained a
judgment against the Company in the total amount of $233,557. Star brought an
action against the Company for failure to pay Star for international
long-distance telecommunications services which Star provided to the Company's
operating subsidiaries under a Carrier Service Agreement entered into between
Star and the Company. The Company believes it has adequately accrued for this
liability.
On March 17, 1999, Gloria Diaz, Edward Ragar and Charles Ruggieri (all
former sales people for the Company's subsidiaries) commenced an action against
the Company in the Superior Court of New Jersey, Somerset County Law Division,
docket No. L-432-99 alleging that the Company owes them approximately $62,000 in
the aggregate for salary, commissions and reimbursement for business expenses.
The Company disputes these claims and is defending this matter. The Company
believes it has adequately accrued for this liability.
On December 3, 1999, MTS Communications, Inc. ("MTS") commenced an
action against the Company in the United States District for the District of New
Jersey. MTS claims that the Company owes it $368,697, together with interest, in
connection with operations of the Company's Canadian subsidiary. The Company
disputes MTS' claims and is defending this matter. The Company believes it has
adequately accrued for this liability.
The Company also is involved in litigation incidental to its business.
Such litigation can be expensive and time consuming to prosecute and defend. The
Company believes that these pending litigation matters, in the aggregate, could
have a material adverse effect on its operating results and financial condition
if resolved against the Company.
(9) Subsequent Event
In July 2000, the Company borrowed $175,000 from two shareholders of
the Company at an interest rate of 8% per annum on a demand basis. In August
2000, the Company borrowed an aggregate of an additional $330,000 from Mr.
Finkel and two other shareholders. These loans, plus the previous loans, were
converted into three term loans, each in the amount of $235,000 payable the
earlier of August 10, 2001 or upon the receipt by the Company of $1 million in
proceeds from a financing. These loans bear interest at 8% and are secured by
the Company's stock ownership in Certificate Express, Inc. ("CEI"). The proceeds
from the $330,000 in loans are for CEI's working capital needs. In addition the
Company issued to the lenders warrants, expiring in August 2003, to acquire an
aggregate of 66,000 shares of Common Stock at a price of $.1875 per share,
On August 11, 2000 the Company acquired all the outstanding shares of
CEI. The purchase price was 1.2 million shares of Common Stock issuable at
closing, and an additional 950,000 shares payable upon CEI attaining certain
performance goals. Pursuant to the Agreement, the Company is required to advance
up to $900,000 to fund CEI's operations, in the event the Company fails to make
required advances when due, the Company is required to transfer the assets of
CEI to the former CEI shareholders.
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
When used in this filing and in future filings by the Company with the
Securities and Exchange Commission, in the Company's press releases and in oral
statements made with the approval of an authorized executive officer of the
Company, the words or phrases "management believes," "the Company believes,"
"will likely result," "management expects" or "the Company expects," "will
continue," "is anticipated," "estimated" or similar expressions (including
confirmations by an authorized executive officer of the Company of any such
expressions made by a third party with respect to the Company) are intended to
identify "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Readers are cautioned not to place
undue reliance on any such forward-looking statements, each of which speak only
as of the date made. Such statements are subject to certain risks and
uncertainties that could cause actual results to differ materially from
historical earnings and those presently anticipated or projected. The Company
has no obligation to publicly release the results of any revisions which may be
made to any forward-looking statements to reflect anticipated or unanticipated
events or circumstances occurring after the date of such statements.
Results of Operations
Three Months Ended June 30, 2000 Compared to Three Months Ended June 30, 1999
Continuing Operations
The Company has no sales or cost of sales to report for the three
months ended June 30, 2000 and 1999 because of the discontinuance of the
Company's phone card business and because the results of operations of the
Company's investment in Enticent are reported on the equity method.
General and administrative expenses consist mainly of salaries and
professional fees. In the three months ended June 30, 2000 the Company reversed
accruals made in previous periods aggregating approximately $125,000. This was
done because these accruals are no longer deemed necessary resulting in a
reduction in general and administrative expenses by that amount. Salary expense
during the three months ended June 30, 2000 declined from that which was
reported in the similar period of 1999 as a result of the decline in the number
of employees. Salary expense in the three months ended June 30, 2000 was further
reduced as a result of the Debtors' reimbursing the Company for service
performed by the Company's employees on their behalf. Such reimbursement will
cease as the Debtors' operations wind-down. Professional fees during the year
2000 period also declined from that reported in 1999 as a result of a lower
level of activity.
Equity in net loss from affiliate for the three months ended June 30,
2000 reflects the Company's share of the net loss of Enticent for that period.
Enticent began operations effectively in late 1999. In as much as the Company
has not received financial statements from Enticent, as required by the
shareholder agreement between the two companies, for the three months ended June
30, 2000, the equity in net loss from affiliate was determined based upon
available information.
The per share loss from continuing operations declined in the three
months ended June 30, 2000 from that reported in the prior year as a result of
the aforementioned decline in general and administrative expenses.
Discontinued Operations
During the three months ended June 30, 2000 current operations consist
of the continued liquidation of that business under the bankruptcy statutes. The
loss from discontinued operations for the three months ended June 30, 2000
declined substantially from that reported in the similar period in the prior
year as a result of the Debtors ceasing operations on March 31, 2000.
Additionally, during the three months ended June 30, 2000
11
<PAGE>
the reserve for bad debts was reduced by approximately $215,000 resulting in a
similar decline in selling, general and administrative expenses.
The loss the Company recorded in the quarter ended December 31, 1999 of
$2,144,087 to reflect the impairment of goodwill related to the phone card
business, has been retroactively reflected in the loss from discontinued
operations for the three months ended June 30, 2000.
Six Months Ended June 30, 2000 Compared to Six Months Ended June 30, 1999
Continuing Operations
The Company has no sales or cost of sales to report for the six months
ended June 30, 2000 and 1999 because of the discontinuance of the Company's
phone card business and because the results of operations of the Company's
investment in Enticent are reported on the equity method.
General and administrative expenses consist mainly of salaries and
professional fees. Salary expense during the six months ended June 30, 2000
declined from that which was reported in the similar period of 1999 as a result
of the decline in the number of employees. Salary expense in the six months
ended June 30, 2000 was further reduced as a result of the Debtors' reimbursing
the Company for service performed by the Company's employees on their behalf.
Such reimbursement will cease as the Debtors' operations wind-down. Professional
fees during the year 2000 period also declined from that reported in 1999 as a
result of a lower level of activity. General and administrative expenses were
further reduced as a result of the aforementioned reversal of certain accruals.
Equity in net loss from affiliate for the six months ended June 30,
2000 reflects the Company's share of the net loss of Enticent for that period
calculated, as discussed above, based on management's estimates. Enticent began
operations effectively in late 1999.
The per share loss from continuing operations declined in the six
months ended June 30, 2000 from that reported in the prior year as a result of
the aforementioned decline in general and administrative expenses.
Discontinued Operations
The loss from discontinued operations for the six months ended June 30,
2000 declined substantially from that reported in the similar period in the
prior year as a result of the Debtors ceasing operations on March 31, 2000. The
gain on disposal of discontinued operations results from the sale of the
Debtors' fixed assets to J D Services effective March 31, 2000.
Extraordinary Item
During the six months ended June 30, 1999 the Company recorded non-cash
loss upon the conversion of outstanding debt into common stock.
Liquidity and Capital Resources
As a result of the Company's long history of losses in the prepaid
phone card business, coupled with an increasingly competitive environment, the
Company elected to exit the prepaid phone card business. To accomplish this, the
Debtors filed voluntary petitions with the Court for the District of Delaware
under Chapter 11 of the Bankruptcy Code on October 28, 1999. The Debtors have
sold their fixed assets and intend to liquidate the remaining assets of the
phone card operations with the proceeds of such sale and liquidation to be
distributed to the Debtors' creditors pursuant to a liquidating plan of
reorganization
At June 30, 2000, the Company, excluding the assets and liabilities
relating to the Debtors, had cash of $52,000 and a working capital deficit of
$4.7 million. At June 30, 2000 approximately $4.4 million of the Company's
current liabilities relate to indebtedness incurred in connection with the
discontinued phone card business. Because of contractual obligations, these
liabilities are the obligations of the Company rather than
12
<PAGE>
the Debtors, and are due to less than 10 creditors. The Company is currently
negotiating with those parties in an effort to settle the amounts due at less
than the amount recorded on the balance sheet.
In April 2000, the Company borrowed, on a demand basis $125,000 from
Mr. Shelly Finkel, chairman and a principal shareholder of the Company at an
interest rate of 8% per annum. In June and July 2000, the Company borrowed on a
demand basis an aggregate of $250,000 from two shareholders at an interest rate
of 8% per annum. In August 2000, the Company borrowed an aggregate of an
additional $330,000 from Mr. Finkel and two shareholders. These loans, plus the
previous loans, were converted into three term loans, each in the amount of
$235,000 payable the earlier of August 10, 2001 or upon the receipt by the
Company of $1 million in proceeds from a financing. These loans bear interest at
8% and are secured by the Company's stock ownership in CEI. The proceeds from
the $330,000 in loans are for CEI's working capital needs. . In addition the
Company issued to the lenders warrants, expiring in August 2003, to acquire an
aggregate of 66,000 shares of Common Stock at a price of $.1875 per share. In
connection with the Company's acquisition of CEI, the Company agreed to make up
to $900,000 available to CEI in the form of working capital loans. If the
Company fails to make required advances to CEI, the Company is required to
transfer the assets of CEI to its former shareholders.
The Company's ability to continue in operation and execute its new
business plan is subject to various factors including, but not limited to,
resolving its aforementioned outstanding liabilities, and raising additional
capital. Management of the Company cannot presently predict the outcome of these
matters and there can be no assurance that the Company will be successful in any
of these endeavors or that Mr. Finkel will provide additional financing to the
Company.
The Company's financial statements have been prepared on a going
concern basis which contemplates the realization of assets and the settlement of
liabilities and commitments in the normal course of business. However, absent
the Company's ability to execute its plans to reduce its outstanding liabilities
and raise additional capital, the Company may be unable to continue as a going
concern, which could significantly impact the liquidation or settlement value of
its assets and liabilities.
At December 31, 1999, the Company had net operating loss carryforwards
("NOLs") exceeding $38.9 million available to offset future taxable income.
Under Section 382 of the Internal Revenue Code of 1986, as amended, utilization
of prior NOLs is limited after an ownership change, as defined in this section,
to an amount equal to the value of the loss corporation's outstanding stock
immediately before the date of the ownership change, multiplied by the federal
long-term tax-exempt rate in effect during the month that the ownership change
occurred. The Company is subject to limitations on the use of its NOLs as
provided pursuant to Section 382. Accordingly, there can be no assurance that a
significant amount of existing NOLs will be utilized by the Company.
13
<PAGE>
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
(c) Recent Sales of Unregistered Securities
During the quarter ended June 30, 2000 the Company made the following sales
of unregistered securities.
<TABLE>
<CAPTION>
If Option, Warrant
Consideration Received and Exemption from or Convertible
Description of Underwriting Registration Security, Terms of
or Other Discounts to Market Claimed Exercise or
Date of Sale Title of Security Number Sold Price ------- Conversion
------------ ----------------- ----------- Afforded to Purchasers ----------
----------------------
<S> <C> <C> <C> <C>
May 3, 2000 Common Stock 50,000 Settlement of Possible 4(2)
Litigation
</TABLE>
Item 4. Submission of Matters to a Vote of Security Holders
On June 29, 2000, the Company held its annual meeting of stockholders,
at which the Company's considered the change in the Company's name, the election
of directors and the approval of an amendment to the Company's 1994 Performance
Equity Plan ("1994 Plan".)
Stockholders voted to change the Company's name to Global iTechnology,
Inc. 11,375,234 shares were voted for, 22,232 voted against and 5,516 abstained
from voting on the amendment.
Stockholders voted to elect Donald L. Ptalis and Alan W. Kaufman to
serve as directors for the ensuing two-year period until his respective
successor is elected and qualified and shareholders voted to elect Jack N. Tobin
for the for the ensuing three-year period until his respective successor is
elected and qualified. Messrs. Ptalis, Kaufman and Tobin received 11,364,321,
11,364,321 and 11,254,321 votes respectively for their election and 39,661,
39,661, and 39,661 votes respectively were withheld.
The stockholders also voted on the approval of an amendment to the 1994
Plan to increase the number of shares of Common Stock available for issuance
upon the exercise of options and other awards granted or which may be granted
thereunder from 1,500,000 to 3,500,000. 5,306,725 shares were voted for the
amendment to the 1994 Plan, 161,431 shares were voted against the amendment to
the 1994 Plan, 17,550 shares abstained from voting on the amendment to the 1994
Plan and 5,918,276 shares were not voted.
Item 5. Other Information
Pursuant to a Security Exchange Agreement dated as of August 4, 2000
("Agreement") and related closing agreements dated as of August 11,2000, the
Company acquired 100% of the outstanding capital stock of Certificate Express,
Inc., a Delaware corporation ("CEI") from the shareholders of CEI, a privately
held financial transaction technology company based in Bethesda, Maryland. The
consideration for the CEI shares was an aggregate 1,200,000 shares of the
Company's common stock and three year warrants to purchase an additional 225,000
shares of common stock for $2.00 per share. The former CEI shareholders may earn
up to an additional 950,000 shares if certain performance targets related to the
issuance of a patent for the technology developed by CEI is issued and a certain
number of transactions are processed by CEI, each within a specified period of
time. The number of shares of the Company's common stock received by the CEI
shareholders is further subject to adjustment to protect the former CEI
shareholders from dilutive issuances of common stock in the manner described in
the Agreement.
The description contained herein of the transaction is qualified in its
entirety by reference to the Securities
14
<PAGE>
Exchange Agreement dated as of August 4, 2000 and related documents which are
attached as Exhibits to this filing.
In July 2000, the Company borrowed $175,000 from two shareholders of
the Company at an interest rate of 8% per annum on a demand basis. In August
2000, the Company borrowed an aggregate of an additional $330,000 from Mr.
Finkel and two other shareholders. These loans, plus the previous loans, were
converted into three term loans, each in the amount of $235,000 payable the
earlier of August 10, 2001 or upon the receipt by the Company of $1 million in
proceeds from a financing. These loans bear interest at 8% and are secured by
the Company's stock ownership in CEI. The proceeds from the $330,000 in loans
are for CEI's working capital needs. In addition the Company issued to the
lenders warrants, expiring in August 2003, to acquire an aggregate of 66,000
shares of Common Stock at a price of $.1875 per share,
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3.1 Amendment to Certificate of Incorporation dated July 5, 2000
4.1 Form of Warrant exercisable at $.1875 expiring August 10, 2003
4.2 Form of Warrant exercisable at $2.00 expiring August 10, 2003
10.1 Securities Exchange Agreement dated as of August 4, 2000 by and
between Global iTechnology, Inc. and
the shareholders of Certificate Express, Inc.
10.2 Form of Letter Agreement with secured lenders dated
August 11, 2000
10.3 Form of 8% Secured Note due August 10, 2001 in the aggregate
principal amount of $705,000.
10.4 Form of Pledge, Escrow and Security Agreement dated as of
August 11, 2000
27 Financial Data Schedule
SIGNATURES
In accordance with requirements of the Exchange Act, the Registrant
caused this Report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Dated: August 31, 2000
GLOBAL iTECHNOLOGY, INC.
By: /s/ Lee R. Montellaro
-------------------------
Lee R. Montellaro, Vice President
and Principal Financial Officer
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