================================================================================
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB/A
AMENDMENT NO. 1
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2000.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period from _________ to _________.
COMMISSION FILE NO. 0-25668
GLOBAL TECHNOLOGIES, LTD.
(Name of Small Business Issuer in Its Charter)
DELAWARE 86-0970492
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
1811 CHESTNUT STREET, SUITE 120
PHILADELPHIA, PENNSYLVANIA 19103
(Address of Principal Executive Offices)
(215) 972-8191
(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Exchange Act: None Securities
registered under Section 12(g) of the Exchange Act:
Name of Each Exchange
Title of Each Class on Which Registered
------------------- -------------------
Class A Common Stock, Nasdaq National Market
$0.01 par value per share
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 [ ]
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-K contained in this form, and no disclosure will be
contained, to the best of the Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
The Issuer's revenues for the fiscal year ended June 30, 2000 were
$7,396,996.
The aggregate market value of the voting and non-voting common equity held
by non-affiliates of the Registrant on September 25, 2000 was approximately
$41.7 million, based on the closing sales price of the Class A Common Stock on
such date as reported by the Nasdaq National Market.
The number of shares outstanding of the Registrant's Class A Common Stock,
$0.01 par value, on September 25, 2000 was 10,725,489.
Transitional Small Business Disclosure Format: Yes [ ] No [X]
DOCUMENTS INCORPORATED BY REFERENCE
None
================================================================================
<PAGE>
GLOBAL TECHNOLOGIES, LTD.
ANNUAL REPORT ON FORM 10-KSB/A
TABLE OF CONTENTS
Page
----
PART I.......................................................................1
ITEM 1 -- DESCRIPTION OF BUSINESS.........................................1
ITEM 2 -- DESCRIPTION OF PROPERTY........................................18
ITEM 3 -- LEGAL PROCEEDINGS..............................................18
ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............20
PART II.....................................................................21
ITEM 5 -- MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.......21
ITEM 6 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN
OF OPERATION...................................................22
RISK FACTORS...................................................28
ITEM 7 -- FINANCIAL STATEMENTS...........................................42
ITEM 8 -- CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE............................42
PART III....................................................................43
ITEM 9 -- DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT..............43
ITEM 10 -- EXECUTIVE COMPENSATION.........................................45
ITEM 11 -- SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.....................................................48
ITEM 12 -- CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................50
ITEM 13 -- EXHIBITS AND REPORTS ON FORM 8-K...............................52
SIGNATURES..................................................................59
Throughout this Annual Report on Form 10-KSB, "Global Technologies, Ltd.",
"Global Technologies", "Global", "we", "us", and "our", and other possessive and
other derivations thereof, refer to Global Technologies, Ltd. and its
consolidated subsidiaries, unless the context otherwise requires. All trademarks
and trade names appearing in this prospectus are the property of Global, unless
otherwise indicated. In addition, "The Network Connection" or "TNCi" and
possessive derivations thereof refer to The Network Connection, Inc. and its
consolidated subsidiary, and "U.S. Wireless" or "USWC" and possessive
derivations thereof refer to U.S. Wireless Corporation, unless the context
otherwise requires.
<PAGE>
PART I
ITEM 1 -- DESCRIPTION OF BUSINESS
INTRODUCTION
SUMMARY OF OUR CURRENT OPERATIONS
Global Technologies, Ltd. is a technology incubator that invests in,
develops and manages emerging growth companies in the networking solutions,
interactive information and entertainment systems, e-commerce,
telecommunications and gaming industries.
We currently hold common stock and convertible preferred stock representing
approximately 79% of the outstanding common stock of The Network Connection,
Inc. on a fully converted basis. The Network Connection is publicly traded on
the Nasdaq SmallCap Market under the ticker symbol "TNCX."
The Network Connection is a pioneer and leading provider of broadband
entertainment, information and e-commerce systems for the "away-from-home"
marketplace (e.g., hotels, cruise ships, long-haul passenger trains and
schools). TNCi's fully-interactive, all-digital systems are designed to provide
consumers and students with a personalized, high-speed entertainment platform
where they can access services such as on-demand films, music videos,
reservation and tour information, IP telephony, e-mail, Internet, video games,
casino gaming, courseware, lectures, and other Internet-based content and
commerce applications through the privacy of their hotel room, cruise cabin,
passenger seat or classroom. Through TNCi's CruiseView(TM), ProjecTRAINbow(TM)
(a.k.a. TrainView(R)), InnView(TM) and EduView(R) services, "away-from-home"
industries can provide guests with 21st century entertainment and information
technology to meet the demands of an ever-growing marketplace.
We also hold 3,000,000 shares of common stock representing approximately
14.2% of the outstanding common stock of U.S. Wireless Corporation, based on the
number of outstanding shares of U.S. Wireless common stock on June 30, 2000.
U.S. Wireless is publicly traded on the Nasdaq National Market under the ticker
symbol "USWC". U.S. Wireless provides mobile location and traffic-related
information to wireless carriers, Internet providers, public safety and
transportation/telematics companies.
U.S. Wireless is building a national location network and has announced
plans to roll out traffic and transportation services in San Diego, CA,
Washington, D.C., Hampton Roads, VA, and the Greater San Francisco, CA, bay
area. The company's network is based on its award-winning RadioCamera(TM)
pattern matching positioning technology that pinpoints the location of cellular
callers to enable the delivery of mobile services that rely on location,
including life saving emergency 911 caller location, live traffic and traveler
information, navigation assistance, localized directory assistance, and vehicle
and asset tracking.
We also own an operating center and network of approximately 2,000
installed remote terminals through which GTL Management Limited, one of our
wholly owned United Kingdom subsidiaries, operates lotteries on behalf of
charities in Great Britain. Inter Lotto (UK) Limited maintains the license to
operate these lotteries. Prior to August 18, 2000, we owned 27.5% of Inter
Lotto, but have terminated our relationship with that entity. In connection with
the termination, we received approximately (pound)750,000, transferred our
shares of Inter Lotto to three of its other shareholders and entered into an
arrangement pursuant to which we and Inter Lotto will continue to run the
lotteries through December 31, 2000. We are currently pursuing alternative
operating strategies for the lottery infrastructure. Such strategies include
utilizing the network for operating pools, lotteries and betting for established
gaming companies, and developing a national linked bingo game in partnership
with proprietary private clubs throughout the UK. We intend to have implemented
an alternative operating strategy by December 31, 2000, however, no assurance
can be given that we will be successful in doing so.
We also hold an approximately 4% equity interest in Shop4Cash.com, Inc., a
privately held, cash-incentive, Internet shopping portal with a growing base of
approximately 250 affiliated merchants. Shop4Cash has recently determined to
expand the scope of its existing business model to offer merchants on-line
credit card processing and transaction services in addition to the existing
services of the Shop4Cash website. Shop4Cash expects that these additional
<PAGE>
services will create additional value for both consumers and businesses by
facilitating the flow of consumers from the Shop4Cash website to the merchants'
virtual storefronts.
OUR HISTORY
We are a Delaware corporation and the successor by merger to Interactive
Flight Technologies, Inc. Prior to the merger, Interactive Flight was engaged in
the business of developing, assembling, installing and operating computer-based,
in-flight entertainment networks in aircraft and installed these networks on 19
Swissair aircraft, two Debonair Airlines aircraft and three Alitalia aircraft.
In May 1998, management of Interactive Flight determined to exit the
entertainment network business and redirect the company's resources into the dry
cleaning industry. On September 2, 1998, Swissair Flight 111 crashed near
Halifax, Nova Scotia. To date, the causes of the accident have not been
determined. An Interactive Flight entertainment network had been installed on
the aircraft that crashed. The crash has led to many lawsuits in which we,
together with Swissair, Boeing and DuPont, among others, have been named as
defendants.
Later in September 1998, former management and the Board of Directors of
Interactive Flight resigned and our current Board of Directors was elected to
lead the company. Our new Board instated our current management team, which
immediately began evaluating whether Interactive Flight's in-flight
entertainment technology was adaptable to alternative markets and how to
redeploy its capital to exploit technology-related business opportunities.
Ultimately, new management developed a strategic plan to take advantage of the
opportunities associated with Interactive Flight's technologies and management
resources. New management pursued a sale to or a strategic alliance with other
entities in the travel and entertainment business to maximize the potential of
the entertainment network technology and began to evaluate other
technology-related business opportunities.
Consistent with this vision, through a series of acquisitions, investments
and divestitures, Interactive Flight's new leadership reorganized the company as
a technology incubator with interests in emerging growth companies in the
networking solutions, interactive information and entertainment systems,
e-commerce, telecommunications and gaming industries. In connection with the
reorganization, Interactive Flight changed its fiscal year-end from October 31
to June 30.
On September 30, 1999, the stockholders of Interactive Flight approved a
reincorporation proposal pursuant to which Interactive Flight merged with and
into Global Technologies, Ltd. Prior to the merger, Global was a non-operating,
wholly owned subsidiary of Interactive Flight formed for the purpose of
completing the merger.
OUR BUSINESS STRATEGY
In connection with our reorganization, we have developed a business
strategy to identify companies capable of being market leaders in the networking
solutions, telecommunications, e-commerce or gaming industries and which are at
a stage of development that would benefit from our management support, financing
and market knowledge. We generally seek to acquire a large enough stake in an
affiliate company to enable us to have significant influence over the management
and policies of the company and to realize a large enough return to compensate
us for our investment of management time and effort, as well as capital.
In assessing the advisability of making an investment in a business in one
of these industries, we focus on four major criteria: (1) the size of the market
opportunity, (2) proprietary aspects of the business that offer strong and
sustainable competitive advantages, (3) the quality of the current management
team and (4) our ability to create extra value with strategic planning and
access to capital.
We gain exposure to emerging companies through management's reputation as
successful developers and operators of technology and telecommunications
companies, referrals from the investment community, management's relationship
with venture capital and private equity funds, and the participation of Global's
directors, officers and employees in various non-profit and charitable
organizations. We consider our access to potential affiliate companies to be
good.
-2-
<PAGE>
We have capital and managerial resources to provide financing, as well as
strategic, managerial and operational support, to certain emerging companies.
The corporate staff of Global provides hands-on assistance to the managers of
its affiliate companies in the areas of management, financial, marketing, tax,
risk management, human resources, legal and technical services, based on the
affiliate's needs. We seek to assist affiliate companies by providing or
locating and structuring financing, identifying and implementing strategic
initiatives, providing marketing assistance, identifying and recruiting
executives and directors, assisting in the development of equity incentive
arrangements for executives and employees, and providing assistance in
structuring, negotiating, documenting, financing, implementing and integrating
mergers and acquisitions.
Our goal is to maximize the value of our affiliate companies for Global's
stockholders.
OUR AFFILIATE COMPANIES
THE NETWORK CONNECTION, INC.
GENERAL
The Network Connection is a pioneer in bringing broadband, all-digital
entertainment and information solutions to the "away-from-home" marketplace.
Their solutions are designed to deliver customized interactive services such as
digital movies, video-on-demand, e-commerce, Internet/Intranet access, laptop
connectivity, video-based training, advertising, Internet protocol (IP)
telephony, and other IP-based services. TNCi's platform is based on the same
standards that power the Internet today, providing the ability to scale and
expand their solutions along with industry advancements. Each installation is
based on the same advanced system architecture, allowing the company to easily
upgrade and expand the services available over time.
TNCi is a leader in developing and deploying these all-digital solutions,
and their technology has been selected and installed in hotels, cruise ships,
educational facilities, and in a railway simulator car in Europe.
The company has had the following recent developments:
* EXECUTIVE MANAGEMENT - In March 2000, TNCi announced the appointment
of a new executive management team, including Robert S. Pringle,
President and Chief Operating Officer, Dr. Jay R. Rosan, Executive
Vice President, and Richard E. Genzer, Chief Technology Officer. These
well-regarded Internet executives have broad experience in building
branded Internet portals, creating successful e-commerce solutions,
and aggregating information and entertainment content.
* SYSTEM DEPLOYMENT - In September 2000, the company announced a
relationship with Comdisco (NYSE:CDO), enhancing their capability to
manage system installation, monitoring and deployment on a global
basis.
* CONTENT DIVISION - In March 2000, TNCi formed a new division to focus
on creating long-term business models for content, commerce, community
and connectivity. This division will create an enhanced
"away-from-home" experience where people can access and customize
content and data. Richard Gallagher was hired in August 2000 to lead
this division.
* HOTEL & HOSPITALITY DIVISION - TNCi's technology is currently
installed in approximately 800 guest rooms, and the company has signed
contracts to install the technology in over 2,500 additional guest
rooms. The InnView(TM) system has been well received in the
marketplace, and the company expects progress in this marketplace to
continue to accelerate given the initial successful implementations.
* CRUISE SHIP DIVISION - TNCi has developed an enhanced version of the
CruiseView(TM)technology platform, increasing its performance and
capabilities, and is in advanced discussions with several major cruise
companies, including Carnival Cruise Lines, about installing this
interactive system. The company has terminated the prior contract with
Carnival through a mutual release that allows TNCi to retain its
inventory and retain up to $1.6 million in cash advances. TNCi
-3-
<PAGE>
continues to operate the CruiseView(TM)system on one 1,040-cabin
Carnival ship while it negotiates the terms of a potential
forward-looking agreement to deploy the latest CruiseView(TM)solution.
* EDUCATION & CORPORATE TRAINING DIVISION - In September 1999, TNCi
completed delivery and installation of 195 Cheetah(R) video servers to
Georgia schools in connection with the Georgia Metropolitan Regional
Education Services Agency Net 2000 project. The company received
payment of $5.4 million in connection with the project. TNCi has
subsequently developed a national network of leading technology
integrators for the educational marketplace, and has submitted several
significant proposals for new business in this area.
* PASSENGER RAIL DIVISION - In September 1999, TNCi hired Stephen J.
Ollier to lead the division. The company has submitted pricing
proposals to two of the world's largest train operators for new and
retrofit installations of ProjecTRAINbow(TM) systems. In June 2000,
the company launched its ProjecTRAINbow(TM) demonstration showroom and
full-scale system simulator in the United Kingdom. The company has
entered into advanced discussions with leading train operators in the
UK to outfit the system on their fleets.
Guest Services available through the CruiseView(TM) and InnView(TM) Systems
include:
* On-demand films, short video features and music videos;
* Free-to-guest television programs;
* Concierge information and reservations;
* In-room guest messaging and bulletin boards; and
* In-room folio review, express check-out and guest surveys.
Eventually, TNCi also plans to include the following guest services through
the systems:
* High-speed Internet access and e-mail;
* Voice-over IP (i.e., long distance telephone calls over the Internet);
* E-commerce services, such as interactive shopping;
* Interactive games and casino-style gambling where permitted by law;
and
* Interactive advertising and promotion of customer events, shops and
restaurants.
TNCI'S BUSINESS STRATEGY
TNCi's primary objective is to be a leading provider of broadband solutions
for the "away-from-home" marketplace. To this end, the company has developed the
following strategies:
* DEPLOY, OWN AND OPERATE BROADBAND NETWORKS ACROSS MULTIPLE SEGMENTS OF
THE "AWAY-FROM-HOME" MARKETPLACE. TNCi provides both infrastructure
and programming, retaining the long-term rights to deliver services
over its broadband networks. Its business model balances shared
up-front capital investment with shared long-term revenue streams.
* BE RECOGNIZED AS A TOTAL SOLUTION PROVIDER. TNCi will continue to
develop the content division, which will acquire, package and monitor
a broad range of compelling multimedia content tailored to appeal to
the typical end-users in each of its market segments. The company
believes this is necessary so that it can be viewed by its customers
not as a system infrastructure provider, but rather as a total
solution provider.
-4-
<PAGE>
* LEVERAGE ITS CORE TECHNOLOGY ACROSS MARKET SEGMENTS. TNCi will pursue
new markets and applications for its systems, products and
technologies.
* NURTURE KEY BUSINESS PARTNERS AND STRATEGIC ALLIANCES. TNCi will
nurture existing business relationships, and develop new ones with
partners that have strong national and international presences. The
company will use these business relationships to further penetrate the
targeted markets.
* DEVELOP THE NEWLY CREATED DIVISIONS AND PENETRATE FURTHER THE MARKETS
SERVED. TNCi continues to invest in its newly created divisions and
staff them with the skilled professionals necessary to effectively and
efficiently maximize order generation for the systems, products and
services in the markets they serve.
* INVEST IN CORE COMPETENCIES. TNCi will continue to attract and retain
highly skilled professionals in these critical disciplines: industry
specific marketing and sales; multimedia content development,
acquisition and management; systems and software engineering; supplier
management; finance; contracts administration; and program management
applied to large-scale systems.
PRODUCTS AND SERVICES
TECHNOLOGY
The hardware for TNCi's interactive systems consists of high speed
Cheetah(R) servers, multiple disk drives, networking infrastructure, set-top
personal computers, and televisions or other electronic displays that serve as
monitors for the systems. TNCi's TransPORTAL(TM) system software is based on
standardized Web browser component technology. The systems provide a variety of
informative, entertainment and interactive content which may be accessed and
viewed on demand. The systems are 100% digital and offer customers flexibility
in adding new content to the system, as well as the ability to customize and
brand their marketing vision via the "look and feel" of the underlying graphical
user interface.
Dual, fault-tolerant Cheetah(R) servers serve as the heart of the systems.
One Cheetah(R) server operates as the local area network backbone and can
provide up to 100 megabit connectivity to each user on the system. The scaleable
architecture of TNCi's server is based on Intel processors and Microsoft
operating systems. The systems interface with a variety of color flat panel
computer monitors and television displays.
The design for the interactive information and entertainment systems is
proprietary to TNCi, as are the Cheetah(R) video servers and TransPORTAL(TM)
software tools. However, other hardware and components used in the systems are
predominantly commercial, off-the-shelf hardware, based on non-proprietary or
open-system computer and IP network standards. TNCi believes that this use of
available commercial hardware allows it to outsource component product
manufacturing to suppliers without compromising overall product quality and
reliability. The company believes that it also allows it to focus operations
resources on supplier management, final assembly and testing.
Each of the video servers can scale to serve up to 300 simultaneous users.
The company can install multiple video servers where required.
TURNKEY INTERACTIVE INFORMATION AND ENTERTAINMENT SYSTEMS
TNCi currently markets three customized turnkey systems. Each of these
systems is built on the Cheetah(R) servers and TransPORTAL(TM) software package.
The company customizes the content available through the systems to provide the
best total solution for respective market purchasers:
* ProjecTRAINbow(TM) is the newest system solution for long-haul and
cross country passenger trains. TNCi anticipates that the
ProjecTRAINbow(TM) system will provide interactive entertainment and
other content to be determined in conjunction with future customers,
if any. A ProjecTRAINbow(TM) prototype has been developed and is
currently being marketed to train operators in Europe and Asia.
-5-
<PAGE>
* InnView(TM) is the system solution for the hotel and time-share
market. Generally, TNCi expects to provide interactive and
entertainment content for use by the hotel guests. The system is also
designed to provide Internet access over the television, voice over
IP, and concierge and other guest services. Some of the content can be
available free of charge, some can be advertising supported, and some
can be available on a pay-per-use basis. The company will share
revenues from advertising and pay-per-use with the hotels on a
negotiated percentage basis.
* CruiseView(TM) is the system solution for the cruise ship market. The
system is designed to provide information, entertainment, gaming,
shore excursions and free-to-guest services. The system is also
designed to provide Internet access over the television, voice over
IP, and concierge and other guest services. Some of the content can be
available free of charge, some can be advertising supported, and some
can be available on a pay-per-use basis. The company will share
revenues from advertising and pay-per-use with the cruise lines on a
negotiated percentage basis.
SERVER SALES
TNCi's current business strategy is to offer and sell complete, turnkey
interactive information and entertainment systems. However, a substantial
portion of the revenues generated since June 30, 1999 have come from the sale of
the Cheetah(R) video servers which have been part of a system designed and
installed by others, primarily in the education market. Although it will
continue to offer and sell the servers as stand-alone, high-end, video servers,
the company is endeavoring to be known as a total system solution provider in
the education market as well as in the other markets it serves.
CONTENT
TNCi obtains the content that is shown on the systems in several different
ways. Movies are obtained by licensing products from industry suppliers. Other
content is purchased or licensed from other providers.
The company expects to expand all of its systems to include additional
content and features, such as Internet access, on-line shopping and local
entertainment guides. The content division is currently being developed to
oversee this development. The division is also looking to provide a total
solution system for the education and corporate training markets.
TNCI'S HISTORY
TNCi was incorporated in Georgia in 1985. The company's common stock is
listed on the Nasdaq SmallCap Market under the ticker symbol "TNCX." TNCi's
primary focus under prior management from inception to 1995 was providing video
products and services to the educational market. After an initial public
offering in 1995, prior management began to market interactive information and
entertainment systems to the commercial airline and passenger cruise ship
industries.
TNCi's AirView product was installed on two Fairlines Airlines aircraft. In
addition, the in-flight entertainment system developed by the interactive
entertainment division it acquired from Global Technologies was installed on 19
Swissair aircraft, two Debonair Airlines aircraft and three Alitalia aircraft.
The heavily regulated nature of the airline market prohibitively increased the
company's costs. Fairlines filed for bankruptcy protection and TNCi was never
able to collect the amounts owed. These facts, together with the Swissair
litigation, led TNCi and Global Technologies to stop pursuing this market in
1998.
In addition, prior management entered into agreements with Carnival Cruise
Lines and Star Cruises to install TNCi's interactive systems on several of their
cruise ships. Operational problems on the Star cruise ship led Star to cancel
its agreement, and the company was unable to recover its investment. Prior
management also negotiated a fixed price agreement with Carnival Cruise Lines
-6-
<PAGE>
and installed a system on one Carnival ship. TNCi has now terminated the
Carnival agreement through a mutual release, which allows the company to retain
its inventory and recognize previously deferred revenue of $1.4 million. The
company continues to operate the CruiseView(TM) system on one 1,040-cabin
Carnival ship while the terms of a potential forward-looking agreement to deploy
the latest CruiseView(TM) solution are negotiated.
Early in 1999, prior management's inability to collect receivables and
other administrative problems left the company struggling financially and in
need of capital. In May 1999, Global Technologies acquired majority control of
TNCi by exchanging the assets of our interactive entertainment division and
approximately $4.25 million in cash for 1,055,745 shares of TNCi's common stock
and 2,495,400 shares of TNCi's Series D Convertible Preferred Stock. Through a
series of additional transactions, Global Technologies acquired additional
shares of the company's common stock and shares of the Series B 8% Convertible
Preferred Stock so that, on a fully converted basis, it now owns approximately
79% of TNCi's outstanding common equity. The transaction brought together
synergistic technologies, and the engineering and program management
capabilities of two companies experienced in the field of developing,
manufacturing, marketing and installing interactive information and
entertainment systems.
In connection with the acquisition, Global Technologies elected a new board
of directors, which put in place the current management team. The Board of
Directors was re-elected, with the exception that Robert Pringle was elected to
take the place of Morris C. Aaron, at the 2000 annual meeting of shareholders
held on May 11, 2000 in New York City.
TNCi believes that the recent developments outlined above in the section
headed "GENERAL" will serve as a solid foundation on which the company can build
its anticipated future success, although it gives no assurances to that effect.
TNCi is in the early phases of implementing a new business strategy. Its
recently formed divisions and the projects they are pursuing, as highlighted
above, are in their infancy. As such, most of the projects discussed above are
not expected to generate significant revenue in the near-term, yet they require
further funding to develop. TNCi estimates that its cash and financing needs for
its current business through June 2001 will be met by equipment financing that
is currently being pursued, and private placements of equity currently being
sought from various sources for working capital purposes. Toward this end, TNCi
has closed on approximately $3.1 million of equity financing in the last three
months. Despite these infusions, TNCi's audit report for the fiscal year ended
June 30, 2000 contains a "going concern" qualification, as it has been
determined that the company's current sources of cash do not meet its needs for
the ensuing fiscal year. TNCi is confident that it will obtain the financing
necessary to meet its needs over the course of the coming fiscal year and to
fully implement its business plan, but no assurances can be made that it will be
able to do so. Failure to do so would have a material adverse effect on TNCi's
financial condition, which, in turn, would have a material adverse effect on our
financial condition.
TNCI'S DIVISIONS AND MARKETS
Under new management, TNCi has identified four primary markets for its
products and services. The company believes that these markets represent
opportunities to achieve substantial market share and profitability. These
markets are: (1) hotels and time-share properties, (2) cruise ships, (3)
educational institutions and corporate training, and (4) long-haul passenger
trains. In an effort to capitalize on opportunities in these markets, TNCi has
formed separate sales and marketing divisions, and has recently hired
experienced executives to lead each of the four divisions.
HOTELS AND TIME-SHARE PROPERTIES
TNCi has begun to market its InnView(TM) system and content services to
hotels and time-share properties throughout North America. In addition, the
company is in the process of developing sales and marketing strategies for
hotels and time-share properties in Europe, Asia and South America. Initially,
the company is focusing its efforts on hotels with 100 or more rooms.
TNCi formed a Hotel & Hospitality Division in December 1999. Company
management believes there are approximately 3.6 million rooms in the domestic
hotel market, approximately 1.9 million of which do not have in-room information
and entertainment systems. TNCi's management also believes that there are almost
0.5 million time-share properties, which also do not have installed information
-7-
<PAGE>
and entertainment systems. Of the unserved hotel rooms, the company estimates
that approximately 0.8 million would meet the economic criteria for installation
of the InnView(TM) systems. In addition, it is estimated that contracts covering
approximately 1.7 million domestic hotel rooms currently served by a
competitor's system will come up for renewal over the next five years.
Since forming this division, TNCi has retained several national and
international sales executives. To date, the company has entered into agreements
for the InnView(TM) system for over 2,500 rooms, and has live, operational
installations in over 800 rooms.
Generally, TNCi expects the InnView(TM) systems to become operational
within four months after entering into an agreement with a particular hotel. The
company has not installed InnView(TM) in any time-share properties. The systems
are provided at no cost to the hotel in exchange for a revenue share agreement
in which TNCi retains the majority of such revenues or shares in the up-front
installation costs and shares the revenues on a commensurate basis.
PASSENGER RAIL
There are currently 11 operators of long-haul passenger trains in the
world. TNCi believes that each of these operators is a potential customer for
the ProjecTRAINbow(TM) system over the next several years. The fleets operated
by these companies contain an aggregate of almost 1.0 million seats that could
be fitted with the ProjecTRAINbow(TM) systems. However, to date, no trains have
been fitted with an interactive information and entertainment system comparable
to the ProjecTRAINbow(TM) system offered by TNCi.
In September 1999, TNCi formed a Passenger Rail Division to promote its
interactive information and entertainment systems for installation at individual
seats on long-haul and cross-country passenger trains in the U.S., European and
Asian markets. This system is called "ProjecTRAINbow(TM)". The company announced
the appointment of Stephen J. Ollier, the former General Manager of ALSTOM
Railway Maintenance Services, Ltd., as President of the division. TNCi believes
that Mr. Ollier is uniquely qualified for the position, offering both the
technical and industry experience necessary to bring ProjecTRAINbow(TM) to the
international rail market.
In May 1999, ALSTOM Transport Ltd., a unit of ALSTOM SA, which is one of
the largest train manufacturers in the world, contracted with TNCi to engineer
ProjecTRAINbow(TM) into ALSTOM's high-speed train design. The company was paid
in connection with the contract but expects no further business from ALSTOM as
it has become aware that ALSTOM is in the process of creating a subsidiary to
compete with TNCi in the passenger rail market.
Under the direction of Mr. Ollier, TNCi has submitted pricing proposals to
two train operators in the United Kingdom for installation of ProjecTRAINbow(TM)
systems. To date, the company has not installed ProjecTRAINbow(TM) on any
passenger trains.
CRUISE SHIPS
Management estimates that there are currently more than 70 cruise ships in
revenue service with 500 or more guest cabins. TNCi estimates that the current
construction schedules for ships of this size show more than 30 new ships
entering service between now and the end of 2004. In total, the company
estimates the market operates over 10 million passenger cruises annually, the
vast majority of which are hosted by one of a handful of leading cruise
operators. TNCi believes that only about ten ships to date have had interactive
entertainment and information systems installed.
Historically, the cruise line industry has not embraced the installation of
interactive systems in individual cabins like their hotel counterparts. The
major reason for this reluctance is not related to a lack of demand. Only
recently has the technology of interactive guest systems progressed to levels
that enable them to profitably and logistically contribute to cruise line
profits and the vacation experience. In fact, the most significant hurdles have
been adapting the system to the compact configuration and harsh environment of
cruise ships, while maintaining adequate levels of price and performance.
TNCi has had over a year's experience with its systems aboard Carnival
Cruise Lines, and has recently developed an enhanced version of the
CruiseView(TM) technology platform, increasing its performance and capabilities.
The company is in discussions with several major cruise companies about
installing this interactive system, including Carnival.
-8-
<PAGE>
EDUCATION AND CORPORATE TRAINING
TNCi continues to manufacture its Cheetah(R) family of multimedia servers
for the interactive education and corporate training markets. Sales of servers
have historically been a core business for the company, with over 2,000
Cheetah(R) video servers sold worldwide.
In August 1999, the company sold multimedia servers in connection with the
first phase of the Georgia school system's Net 2000 project. TNCi supplied its
Cheetah(R) video servers as the central backbone of 193 Georgia schools'
multimedia networks. Two other Cheetah(R) servers were delivered in connection
with the order and installed at the Georgia schools' network operating center.
Using these servers, students and teachers are able to access, on-demand,
hundreds of hours of digitally stored multimedia content, access the Internet
and build interactive courses. The total value of orders received under the
program was $5.4 million. The company believes that this installation is the
largest of its kind in the country and that it may well be a model for the
expansion of this type of program. TNCi's sales in connection with this project
were limited to its Cheetah(R) video servers. In the future, the company hopes
to be able to sell entire interactive systems, called "EduView(R)", to school
related purchasers.
In 1999, the Federal government instituted the E-Rate Program, which has a
primary goal of bringing the Internet and various forms of multimedia content
directly to elementary and secondary classrooms. The program makes $2.25 billion
available to schools to obtain the technology necessary to achieve this goal. To
obtain these funds, a school district must make application and pay a portion of
the equipment cost. A significant amount of the funding for the delivery of 195
Cheetah(R) video servers to Georgia schools in connection with the Net 2000
project came from the E-Rate Program.
TNCi formed the Education & Corporate Training Division in December 1999 to
promote its interactive products and services to educational institutions and
corporate training departments. In addition, the company hired James D. Oots and
Farley Barge as leaders of this division. The team brings a great deal of
experience in the corporate training and education markets.
ACQUISITION, PACKAGING AND MONITORING OF BROADBAND, MULTIMEDIA CONTENT
In an effort to capitalize on what is believed to be the advantages of its
system architecture and technology, TNCi is developing a division to acquire,
package and monitor a broad range of compelling multimedia content tailored to
appeal to the typical end-users in each of its market segments. The company
believes that the provision of compelling content through the systems will
encourage user interaction with the system, which, in turn, should maximize
pay-for-use revenue generation for both TNCi and its vertical market partners.
The company believes that the content division will be integral to its
success. The revenue generated from content can be long-term and should span the
life-cycle of the systems. In addition, because it is generally industry
practice in the markets TNCi serves to share the cost of system hardware, and in
the hotel market that TNCi serves to install the hardware at its cost, content
revenue will be an essential revenue source.
SALES AND MARKETING
TNCi currently markets its systems, products and services worldwide through
the efforts of its sales people in each operating division. The company also
plans to market its systems through value-added resellers, distributors and
alliance partners. System installation and on-site customer support are provided
through internal customer engineering personnel and may, in the future, be
provided through the efforts of value-added resellers and alliance partners.
The sales arrangements for the systems depend upon various factors, such as
the size and type of hotel, time-share property, ship or train, and the system
features and other requested customization. There is generally a long
sales-cycle for the systems because of the need to design the system
configuration for the particular environment in which the system will be
installed, to test each installed system and to negotiate any necessary
agreements with other providers. The sales cycle is also dependent upon a number
-9-
<PAGE>
of factors beyond the company's control, such as the financial condition of the
customer, safety and maintenance concerns, regulatory issues, and purchasing
patterns of particular operators and the industry generally. This is expected to
result in long and unpredictable buying patterns for the systems.
COMPETITION
TNCi faces substantial competition in each of its markets. Some general
factors that are believed to influence whether the company will succeed include:
* The ability to deliver "total" system solutions for customers,
including, system hardware and software, as well as ongoing content
acquisition and management.
* Demonstration of system quality, reliability and performance.
* Product hardware and software that can be easily upgraded as needed
throughout the product's life cycle.
* Market-driven pricing of the systems, products and services.
* Functionality that enables the system to effectively deliver new
sources of revenue generation for customers.
There are three major providers of interactive guest services systems in
the hotel and hospitality market. On Command Corporation (NASDAQ:ONCO) has the
greatest market share with approximately one million rooms, followed by LodgeNet
Entertainment Corporation (NASDAQ:LNET) with approximately 780,000 rooms, and
UK-headquartered Quadriga. On Command and LodgeNet focus their sales and
marketing efforts on North American properties, whereas Quadriga markets its
products primarily to European hotels and to a much lesser extent Middle Eastern
and African hotels. All of these competitors employ a technology that is
different from TNCi's. TNCi believes that its system designs are superior to
those of its competitors because the scalability of TNCi servers permits it to
provide the content at each site such that all selections are always available.
By contrast, competitors' systems are often compelled to temporarily reduce or
omit content choices due to the limited number of users that can view a
particular content title at the same time. In addition, TNCi believes that its
system designs are superior based on the content and features offered, such as
Internet connectivity and voice-over IP, that can be made available through the
systems. TNCi's two primary competitors in the cruise ship market are Allin
Interactive, a subsidiary of Allin Corporation (NASDAQ: ALLN), and a division of
Siemens AG. The company estimates that Allin currently has installed systems on
two Royal Caribbean cruise ships while Siemens has a system installed on one.
Although the company has an opportunity to be first-to-market in providing
train operators with interactive multimedia information and entertainment system
solutions, SmartWorld(TM), a UK-based company, has announced its intention to
develop and offer a limited video-on-demand system for the passenger rail
market. Matsushita, a leading provider of in-flight entertainment systems in the
long-haul commercial airplane market, is considering an entry into this market.
In addition, the company is aware that ALSTOM and Adtranz are creating
subsidiaries in an effort to compete in this market.
TNCi's Cheetah(R) video servers apply hardware control of video streaming
to achieve high-integrity, MPEG-2 quality images and pause, fast-forward, and
rewind capabilities. These servers are scaleable to provide up to 300
simultaneous video streams. Competitor video server products in this market,
such as those provided by Dell, Gateway, Silicon Graphics, Compaq and Hewlett
Packard, are high-speed, general-purpose servers, with software control of
limited video streams (typically less than 10 to 15). nCube has high end video
servers which may also compete with TNCi's product.
All of these companies have greater financial, technical and marketing
resources than TNCi. Moreover, competitors have developed goodwill and name
recognition among the hospitality operators whom the company calls on to solicit
sales, and also among end users who have grown accustomed to their offerings. In
addition, TNCi expects that to the extent that the market for its systems,
services and products develops, competition will intensify and new competitors
will enter its designated target markets. The company may not be able to compete
successfully against existing and new competitors as the market for its systems,
products and services evolves and the level of competition increases. A failure
to compete successfully against existing and new competitors would have a
materially adverse effect on TNCi's business and results of operations.
-10-
<PAGE>
MANUFACTURING AND SUPPLIERS
Contract manufacturers assemble TNCi's proprietary systems in the United
States. Final assembly, integration, burn-in and functional testing are
conducted at the company's facilities in Phoenix, Arizona or at supplier or
customer locations.
TNCi obtains electronic components and finished sub-assemblies for its
system components "off-the-shelf" from a number of qualified suppliers. It has
established a testing protocol in an effort to ensure that components and
sub-assemblies meet defined specifications and standards before final assembly
and integration. The company elected to procure off-the-shelf component parts
and sub-assemblies from suppliers in an effort to ensure better quality control
and pricing. To date, some interruptions in the supply of component parts and
sub-assemblies have been experienced due to the lack of availability of certain
electronic components. In response, the company is identifying additional
qualified suppliers. The inability of current suppliers to provide component
parts, coupled with an inability to find alternative sources, would adversely
affect TNCi's operations.
PRODUCT DEVELOPMENT
The market for TNCi's systems and products is characterized by rapid
technological change and evolving industry standards, and it is highly
competitive with respect to timely product innovation. The introduction of
products embodying new technology and the emergence of new industry standards
can render existing products obsolete and unmarketable. TNCi believes that its
future success will depend upon an ability to develop, manufacture and market
new systems and products, as well as enhancements to existing systems and
products, on a cost-effective and timely basis. The system architecture for the
interactive information and entertainment systems has been designed to permit
hardware and software upgrades over time. Moreover, the company believes that
the current architecture presents no known limits on a customer's ability to
offer compelling content to the user in a rapid and reliable manner. Therefore,
a major focus of TNCi's research and development efforts is to reduce the cost
of network and client hardware and to enhance the core software of the system to
permit even easier integration of new content.
If TNCi is unable, for technological or other reasons, to develop new
systems and products in a timely manner in response to changes in the industry,
or if systems and products, or system and product enhancements, that it develops
do not achieve market acceptance, the business will be materially adversely
affected. There can be no assurance that technical or other difficulties in the
future will not delay the introduction of new systems, products or enhancements.
PROTECTING TNCI'S INTELLECTUAL PROPERTY
TNCi relies on a combination of trade secret and other intellectual
property law, nondisclosure agreements with most of its employees and other
protective measures to establish and protect the company's proprietary rights in
its systems and products. The company believes that because of the rapid pace of
technological change in the open systems networking industry, legal protection
of proprietary information is less significant to its competitive position than
factors such as the company's strategy, knowledge, ability and experience of its
personnel, new system and product development and enhancement, market
recognition and ongoing product maintenance and support. Without legal
protection, however, it may be possible for third parties to copy aspects of
TNCi's systems and products or technology, or to obtain and use information that
is regarded as proprietary. In addition, the laws of some foreign countries do
not protect proprietary rights in products and technology to the same extent as
the laws of the United States. Although TNCi continues to implement protective
measures and intends to defend its proprietary rights vigorously, it can give no
assurance that these efforts will be successful. The failure or inability to
effectively protect its proprietary rights could have an adverse affect on
business.
-11-
<PAGE>
EMPLOYEES
TNCi employs 77 full-time staff at its various locations and sales offices
and is adding skilled personnel in the following fields: content procurement and
development; software, systems and hardware engineering; program management;
contracts administration; supplier management; customer engineering; and sales
and marketing.
The company has formed separate vertical sales and marketing divisions for
each of its four target markets. These divisions are anchored by the recent
hiring of experienced executives from within each of these markets. TNCi
anticipates that these executives will be able to leverage the company's core
technology in broadband, multimedia content distribution and IP network
solutions to increase sales of the systems, products and services. The company
has recognized the need to create an additional internal operating division to
provide customers with the personalized programming necessary to bring users a
broad range of content options, and is in the process of hiring personnel to
anchor this new division.
WARRANTIES
TNCi provides a warranty regarding its products for periods ranging from
one to three years, depending on the requirements of customers. To date, the
company has not experienced significant claims under warranties, and its ability
to meet the full demands of having a significant number of units sold to
customers who require such service has not been tested. The company also passes
through to end users the warranties that it receives from vendors on any
separate hardware, software or component parts that it sells independently of
full systems.
U.S. WIRELESS CORPORATION
U.S. Wireless Corporation, a Delaware corporation (NASDAQ: USWC), has
developed a geographic location system designed to pinpoint the location of
wireless telephone subscribers within a wireless network. Using a network-based
patented technology called RadioCamera(TM), the system recognizes the pattern of
the radio waves emanating from a subscriber's handset and then uses the unique
"signature" of that pattern to determine the subscriber's approximate physical
location. The RadioCamera(TM) system is compatible with existing wireless
network infrastructures, integrates easily and requires no modifications to
either the wireless carrier base station or subscriber handsets. Currently, the
company plans to deploy a nationwide location network based on its proprietary
RadioCamera(TM) technology and operate the network as a service bureau that will
offer various location information services and applications to multiple
wireless carriers. Initially, US Wireless is focusing on providing E-911
(emergency) wireless location information to carriers and intelligent
transportation systems applications to governmental agencies to assist in the
managing of roadway congestion. In addition to providing these enhanced 911 and
intelligent transportation systems services, U.S. Wireless anticipates using its
nationwide network to provide a range of additional "location-based information"
applications including live roadside navigation assistance, enhanced 411
(E-411), asset and vehicle tracking, and carrier network management systems.
US Wireless' activities to date have consisted primarily of research,
development and testing of the wireless location technology and the financing of
operations. The company has not yet begun commercial operations in any market,
and therefore, has limited revenues. There is a history and future expectation
of losses and negative cash flow, and the company will require additional
financing to build out and operate the planned wireless location network.
Today, there are over 100 million wireless telephone subscribers in the
United States, and that number is projected to grow to 187.6 million by the year
2004 (Cahners In-Stat Group). There are hundreds of millions more wireless
telephone subscribers located outside of the United States. Wireless carriers
aggressively competing for this rapidly growing subscriber base are exploring
new ways to differentiate their services and increase average revenue per unit.
Enhanced wireless service offerings (such as location-based applications) are
expected to offer sought-after service differentiation, and more importantly,
are projected to provide significant new revenue opportunities for these
wireless carriers. In addition, wireless subscribers are now demanding access
to, and are willing to pay carriers for, the same data available to wired
telephone users, and increasingly Internet users. A 1999 Strategis Group Report
estimates that there is a $4.0 billion market for wireless location services,
excluding E-911 applications, such as roadside assistance, location-sensitive
billing, E-411 and traffic management/intelligent transportation services. The
report estimates that 47 million subscribers will be using these wireless
location services by 2004. U.S. Wireless therefore believes that the market for
value-added services based on location represents a sizeable new opportunity for
wireless carriers to enhance current and future revenue streams. As a result,
most carriers are evaluating various wireless location-based service offerings
and/or technologies in an effort to capture a share of this emerging market.
-12-
<PAGE>
In addition, as the number of wireless subscribers, and the demand for
enhanced wireless services, increases, so will the need for location-based
safety and emergency services like wireless E-911. According to the Yankee Group
(Boston), more than one quarter of all new wireless customers purchase their
phones for security reasons. In 1999, over 43 million cellular calls were placed
to 911 emergency call centers across the United States (Cellular
Telecommunications Industry Association). Yet, unlike calls placed from wireline
telephones, calls are not traceable when a caller uses a wireless phone to call
for emergency assistance (the emergency operator does not automatically know the
location of the caller). As a result of the numerous safety issues and concerns
arising from these wireless emergency calls, the wireless industry, the Public
Safety Answering Points (PSAPs) (a network of regional emergency call centers),
members of the E-911 community and the U.S. Federal Communications Commission
(FCC), began joint efforts in mid-1994 to solve the technological and policy
hurdles in providing location information for wireless 911 calls. In response,
the FCC has issued several mandates requiring wireless service providers to
implement the technology necessary to locate wireless calls for emergency
assistance within certain parameters and time schedules. In June 1996, the FCC
issued a Report and Order in Docket #94-102, formalizing certain performance
requirements, and implementing a schedule for wireless service providers to
establish "geolocation" capabilities. In so doing, the FCC ordered that the
deployment and integration of wireless E-911 features and functions be
accomplished in two phases.
Phase I requires wireless service providers to report the callback number
and originating cell site and/or sector of a 911 call to PSAP operators.
Pursuant to the mandate, beginning in October 1997, service providers have been
required to provide such information to qualified requesting PSAPs within six
months of a PSAP's request. Service providers have commenced the implementation
of products in order to meet this requirement.
Phase II requires wireless service providers to pinpoint and report to the
PSAPs the location of all wireless 911 callers to an accuracy, for network-based
solutions, of within 100 meters for at least 67% of calls and within 300 meters
for 95% of calls. For handset-based solutions the carriers must be able to
identify the caller's location to an accuracy of 50 meters or less for 67% of
calls, and within 150 meters for 95% of calls. The FCC has mandated completion
of these Phase II requirements by October 1, 2001. Wireless carriers have
further been required to file a report with the FCC by November 9, 2000
(recently extended form the original filing date of October 1, 2000) describing
their plans for achieving Phase II E-911 compliance, including their choice of
technology and implementation plan. In December 1998, however, the FCC's
Wireless Telecommunications Bureau released a public notice outlining a filing
schedule for requests for waivers of the Phase II E-911 requirements. Various
wireless carriers have submitted requests for waivers, and various other parties
have subsequently filed comments with the FCC regarding the question of waivers.
The issue of waivers and/or modifications of the E-911 Phase II requirements is
being reviewed by the FCC in an ongoing public forum. Nonetheless, the FCC has
not yet made any major modifications to the requirements of the mandate.
U.S. Wireless' patented RadioCamera(TM) technology provides wireless
services solutions for wireless carriers by offering E-911 location capabilities
in compliance with current FCC mandates, as well as a wide range of value-added
wireless location based applications. Although there is intense competition
within the wireless location market, U.S. Wireless believes that its system has
several advantages over competing technologies. Companies competing for market
share in the wireless caller location industry are typically divided into two
categories: those that employ handset-based solutions and those that employ
network-based solutions.
Handset-based solutions rely on the integration of Global Positioning
System (GPS) receivers into the wireless handsets. The internal GPS receiver
triangulates the location of a caller using multiple orbiting satellites.
Although this enables GPS to function with a high degree of accuracy in rural
and suburban areas where a clear view exists, it limits the ability to operate
successfully in densely populated metropolitan areas or indoors, where tall
buildings and "urban canyons" prevent clear lines of sight to the satellites.
Adding a GPS receiver to new handsets will likely create larger, heavier, more
expensive telephones with shorter battery life. Furthermore, implementing a GPS
solution would require retrofitting or replacing the existing wireless phones
currently owned by over 100 million wireless subscribers (US alone), making GPS
an unlikely near-term solution to the FCC's E-911 Mandate.
Network-based technology solutions do not rely on the addition of any
dedicated equipment to the handset, but operate entirely from the wireless
network infrastructure. US Wireless' RadioCamera(TM) system falls into the
category of network-based solutions. Competing network-based systems rely on
triangulation techniques such as Angle of Arrival (AOA) and Time Difference of
-13-
<PAGE>
Arrival (TDOA). The RadioCamera(TM) system architecture does not rely on
triangulation. Both AOA and TDOA systems require multiple base stations or
points of reference from which to triangulate based on either the "angle" or
"time difference" of the signal arrival. As a result, both systems are at a
disadvantage in urban environments where there are rarely direct lines of sight
between a wireless caller and multiple base stations. Due to the lack of line of
sight, subscribers' wireless transmissions bounce off of buildings and other
obstacles, reaching the base station antennas via multiple paths, and hence
degrading the accuracy of the signals. These solutions are also at a
disadvantage in sparsely populated areas where it is difficult for signals to
reach the two or more base stations needed to triangulate.
U.S. Wireless believes that when compared to the competing
GPS/handset-based and triangulation/network-based location solutions listed
above, its RadioCamera(TM) technology has several distinct advantages.
* IMMUNE TO LACK OF LINE OF SIGHT. RadioCamera(TM) performs very well in
densely populated urban areas where line of sight to cell sites is
often obstructed, making it difficult to triangulate a caller's
location.
* PERFORMS WELL IN RURAL ENVIRONMENTS. U.S. Wireless' technology
requires only a single site to identify the location of a call making
it well-suited to rural environments where cell stations are not close
to one another.
* CONTINUOUS TRACKING. RadioCamera(TM) provides continuous location
tracking capabilities as well as initial location. Unlike other
network-based solutions and handset solutions that use the control
channel to transmit one-time location information, the system works on
a voice channel that is active throughout the call.
* MINIMAL INFRASTRUCTURE ADAPTATION. The system adapts to current
cellular infrastructure, and unlike GPS, does not require alteration
of either the base station infrastructure or subscriber handsets. In
addition, compared to TDOA and AOA, the RadioCamera(TM) system
requires minimal data back-haul.
* LESS STRINGENT CALIBRATION REQUIREMENTS. Unlike AOA and TDOA systems
that require strict timing calibration and the use of calibrated
antenna arrays, RadioCamera(TM) requires only periodic drive tests to
update location databases and associated signal patterns.
Going forward, U.S. Wireless anticipates that it will continue to build
upon the promising results of numerous completed and ongoing field trials that
have evaluated the functionality and reliability of RadioCamera(TM) technology.
The U.S. Wireless technology has proven effective in all of the field trials to
date, providing location information that exceeds the FCC's accuracy
requirements, as indicated in the following chart:
<TABLE>
<CAPTION>
ANNAPOLIS
LOCATION OAKLAND, CA BILLINGS, MT JUNCTION, MD BALTIMORE, MD
-------- ----------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
DATES OF TRIAL 1997-Present 1997-1999 1998-Present 1998-Present
TERRAIN Dense Urban Rural & Light Urban Suburban Dense Urban
67% ACCURACY (1) 69 meters 84 meters 78 meters 81 meters
CARRIER TECHNOLOGY AMPS, CDMA, iDen AMPS AMPS AMPS, CDMA
PARTICIPANTS GTE Wireless, Nextel US WEST, XYPOINT, Verizon Verizon
Nortel Networks,
Western Wireless,
Williams Communications,
Billings 911 Center,
& Montana 911 program
</TABLE>
----------
(1) The FCC requires accuracy within 100 meters on 67% of calls and 300 meters
on 95% of calls.
-14-
<PAGE>
In building out the nationwide network and tailoring its service package,
US Wireless intends to work with wireless carriers, information content
providers, and equipment vendors on a nationwide and international basis. Where
appropriate, the company will leverage the core competencies of strategic
relationship partners to provide the networking and data processing tools
necessary to create a turnkey solution. The company has already formed a number
of strategic partnerships within the industry in an effort to accelerate
deployment of the wireless location network and to enhance overall marketing
efforts. For example, on May 17, 2000, U.S. Wireless announced the formation of
a strategic alliance with American Tower Corporation, an owner and operator of
broadcast transmission towers in the United States. The alliance was formed to
facilitate U.S. Wireless' network deployment, and as part of the agreement US
Wireless signed a co-location agreement under which it will lease 1,000 to 2,500
American Tower facilities during a three-year term and will receive network
build-out services, including radio frequency design and site construction and
installment management. In addition to agreeing to support the company's
marketing efforts with wireless carriers, American Tower also agreed to invest
$22.5 million in US Wireless' Series C Convertible Preferred Stock. Most
recently, on September 19, 2000, Hewlett-Packard Company announced that it had
agreed to invest up to $52.0 million in US Wireless. It is anticipated that
Hewlett-Packard will provide $7.0 million in up-front financing and up to $45
million conditionally to create network operating and data processing centers
for U.S. Wireless' network. In addition, Hewlett-Packard will provide the
Internet infrastructure and hardware products necessary to support the future
growth of the network.
The company began building out its wireless location network to provide
intelligent transportation systems in early 2000. Two initial trial intelligent
transportation systems projects are underway for both the Maryland and Virginia
Departments of Transportation to provide highway and traffic information for
selected roadways in these states. More recently, U.S. Wireless announced, on
August 1, 2000, that it is deploying its RadioCamera(TM) wireless location
network in San Diego County, California. The network will be part of the San
Diego Regional Advanced Traveler Information System and Corridor-wide Commercial
Vehicle Operations Project, planned by the San Diego Association of Governments.
This was followed on September 11, 2000, by the announcement that the company
will also be implementing its RadioCamera(TM) wireless location network in the
greater San Francisco Bay Area to provide live traffic and congestion
information for motorists, as part of the Metropolitan Transportation
Commission's TRAVINFO program. As U.S. Wireless enters the deployment phase of
operations, ongoing research and development efforts are primarily focusing on
optimizing the cost, accuracy and reliability of the RadioCamera(TM) location
technology. Additionally, having now completed development of the
RadioCamera(TM) system for compatibility with all US-based cellular/PCS
protocols, the company is currently developing a GSM version of the system to
service European and other foreign markets.
In March 1999, we invested $3.0 million in U.S. Wireless in exchange for
30,000 shares of U.S. Wireless Series B Preferred Stock. In March and April
2000, we converted our U.S. Wireless Series B Preferred Stock into 3,000,000
shares of U.S. Wireless common stock. Our shares of U.S. Wireless common stock
represent 14.2% of the outstanding common stock of U.S. Wireless as of June 30,
2000. The fair market value of our investment in U.S. Wireless at June 30, 2000
was approximately $64.1 million. The corresponding market value as of September
25, 2000 was approximately $50.4 million.
DONATIVOS
Donativos S.A. de C.V. is a Mexican entity that was formed for the purpose
of operating an entertainment center in Monterrey, Nuevo Leon, Mexico. The
primary entertainment the center offers is slot machines, through which
customers may win lottery tickets for the Loteria Nacional (the National Lottery
of Mexico) or obtain rights usable for future play at the center.
In May 1999, Global, through its wholly owned subsidiary, Interactive
Flight Technologies (Gibraltar) Limited, a Gibraltar company, loaned
approximately $1.6 million to Donativos and acquired a 24.5% equity interest in
the venture. The loan bore interest at an annual rate equal to the prime rate
plus 3% and was to mature on April 30, 2001. We had also provided a letter of
credit in the amount of $913,445 to secure payment of the purchase price of the
slot machines acquired by our Gibraltar subsidiary and leased to Donativos for
use at the center.
-15-
<PAGE>
In the quarter ended December 31, 1999, we determined that the value of our
investment in Donativos had been permanently impaired. Since the opening of the
entertainment center, Donativos had not generated sufficient profits to meet its
obligations to us under the loan and equipment lease agreements and, therefore,
its ability to continue as a "going concern" was in doubt. At that time, we
wrote the equity investment off and reserved for the full amount of the loan and
subsequent advances to Donativos. These actions resulted in a charge to income
of $1.5 million.
On April 14, 2000, we entered into an agreement pursuant to which on May
10, 2000 we received $2.0 million from Donativos in return for cancellation of
the debt owed by Donativos to Global and the transfer of the equity that Global
held in Donativos to its majority shareholder. The transaction resulted in a net
loss of approximately $335,000, including the reversal of $1.2 million of the
previous charge of $1.5 million for the equity write-off and loan reserve
discussed above. The transaction also involved an exchange of general releases
and transfer of title to the equipment in the center from our Gibraltar
subsidiary to Donativos.
UNITED KINGDOM LOTTERY OPERATIONS
In April 1999, Global and certain of its wholly-owned United Kingdom
subsidiaries entered into an arrangement with Inter Lotto (UK) Limited, a UK
company licensed, pursuant to an External Lottery Manager's Certificate issued
by the Gaming Board for Great Britain, to operate lotteries on behalf of
charities in Great Britain. Under this arrangement GlobalTech Holdings Limited,
a wholly owned UK subsidiary of Global, purchased 27.5% of the outstanding
capital stock of Inter Lotto and GTL Management Limited, an indirect wholly
owned UK subsidiary of Global, entered into an Operating Agreement with Inter
Lotto to run that corporation's lotteries and gaming activities. Simultaneously,
GTL Leasing Limited, another indirect wholly owned UK subsidiary of Global,
purchased computer equipment, which it leased to GTL Management for use in such
lottery and gaming operations. GTL Management entered into a further operating
agreement with Inter Lotto on January 13, 2000. The lottery and gaming business
under these agreements began with an official "launch" on April 4, 2000.
On August 18, 2000, Global, GlobalTech and GTL Management entered into a
"Deed" with Inter Lotto and certain of its principals which, in substance,
constituted a settlement agreement providing for the disengagement of Global and
its subsidiaries from Inter Lotto and its operations by (i) transferring back to
the other principals of Inter Lotto all of the GlobalTech capital stock in Inter
Lotto; (ii) payment by Inter Lotto to GTL Management of an amount equal to the
value added tax rebate to Inter Lotto, plus interest, less an amount to be
retained by Inter Lotto for salaries; (iii) termination of the operating
agreement between GTL Management and Inter Lotto, (iv) cooperative arrangements
for Global and its subsidiaries to assist in the operation of Inter Lotto
through December 31, 2000; and (v) waiver of all claims and releases.
The August 18, 2000 "Deed" effectively terminates the April 1999 and
January 2000 arrangements and provides for a total separation of Inter Lotto and
Global and its subsidiaries by the end of the calendar year 2000. Under the
"Deed", GlobalTech transferred all of its stock in Inter Lotto to the other
principals of Inter Lotto, with certificates to have been delivered on or about
August 22, 2000. The "Deed" terminates the operating agreement and provides that
Inter Lotto and GTL Management will together do whatever is necessary to manage
the lottery operations through December 31, 2000, including the maintenance of
Inter Lotto's license during such period. In consideration for the transfer of
stock in Inter Lotto by GlobalTech, Inter Lotto and its principals have agreed
not to engage in the business of any three- or four-digit lottery game within
the UK for a period of two years following August 18, 2000. Based upon the
transfer of our stock in Inter Lotto, we wrote-off our remaining investment in
Inter Lotto of approximately $700,000.
The financial terms of the August 18, 2000 "Deed" provide for the
allocation of approximately (pound)970,000 in value added tax rebates, with
Inter Lotto retaining (pound)220,000 (for the payment of back salaries which
were the subject of disputes between Global and certain other principals of
Inter Lotto) and payment to GTL Management of the balance of approximately
(pound)750,000. GTL Management will be paid all revenues from Inter Lotto
lottery operations through December 31, 2000, after payment for prizes,
charities and sales commission. Additionally, there are provisions for the
resolution of certain other outstanding debts and obligations.
The August 18, 2000 "Deed" also operates as a general settlement agreement
and includes waivers of all claims and releases, including the withdrawal of a
"winding up petition" calling for the dissolution of Inter Lotto, filed in court
by one of the other principals of Inter Lotto.
-16-
<PAGE>
GTL Leasing retains ownership of the computer networking hardware,
software, terminals and other equipment, which serve as the infrastructure of
the lottery operations conducted by Inter Lotto and managed by GTL Management.
Such lottery equipment is leased by GTL Leasing to GTL Management. In addition,
GTL Management remains obligated under the agreement with International Lottery
and Totalizator Systems, Inc. for certain facilities management services and
technological support in connection with such lottery equipment, which Global,
through GTL Leasing, purchased from them. This agreement requires that GTL
Management pay International Lottery $72,000 per week, plus additional amounts
based on any terminals in excess of 3,500 which are installed and a percentage
of average daily sales. This agreement expires in September 2007, and we are
currently negotiating its termination. There is no assurance that we will be
successful in these negotiations or that, if terminated, the terms thereof will
be favorable to us. Failure to negotiate a termination of this agreement and to
do so on terms favorable to us could have a material adverse effect on our
results of operations and financial condition.
We are currently investigating alternative operating strategies for
GlobalTech, GTL Management and GTL Leasing, and the use of the lottery equipment
and network operating center following termination of the Inter Lotto lottery
operations on or before December 31, 2000. Such strategies include utilizing the
network for operating pools, lotteries and betting for established gaming
companies, and developing a national linked bingo game in partnership with
proprietary private clubs throughout the United Kingdom. We intend to implement
an alternative operating strategy, however, no assurance can be given that we
will be successful in doing so. If we are unable to successfully implement an
alternative operating strategy, GTL Leasing's lottery equipment assets could be
deemed impaired under generally accepted accounting principals, as the carrying
value of such assets may not be fully recoverable in such event. Any "write
down" of the value of such assets due to such impairment could have a material
adverse effect on our financial condition.
SHOP4CASH.COM, INC.
On November 23, 1999 we acquired 500,000 shares, or approximately 4% of
Shop4Cash.com, Inc., at a price of $2.00 per share. Shop4Cash is a privately
held, cash incentive-based, Internet shopping portal. We have registration
rights in connection with these shares. The investment is being recorded at
cost.
Recently, Shop4Cash determined to implement certain modifications of its
existing business model in order to create additional value for its merchant
base. Shop4Cash recently signed a letter of intent for the purpose of merging
with an on-line credit card services provider. This anticipated merger would
create an e-commerce platform servicing both consumers and the Shop4Cash
merchant base. The post-merger entity would offer merchants on-line credit card
processing and transaction services in addition to the existing services of the
Shop4Cash website. Shop4Cash expects that these additional services will create
additional value for both consumers and businesses by facilitating the flow of
consumers from the Shop4Cash website to the merchants' virtual storefronts.
Contemporaneously with the proposed merger, Shop4Cash is seeking additional
financing for working capital purposes of $300,000 from a group of its current
stockholders, which includes us. It plans to raise these additional funds
through the sale of common stock and has accepted subscription agreements for
the full $300,000. We determined it necessary to write-down our investment in
Shop4Cash by $925,000 as of June 30 (which does not include the shares purchased
by us in the recent financing round) to $75,000 to reflect a permanent
impairment of our previous investment. This write-down is reflective of the
lower price per share at which Shop4Cash shares were sold in the recent
financing.
EMPLOYEES
As of September 25, 2000, Global employed 13 people on a full-time basis.
In addition, Global's consolidated subsidiaries, employ the following numbers of
people: TNCI employs 77 people and GTL Management employs 10 people. No employee
is covered by a collective bargaining agreement. We consider our relations with
our employees to be good.
-17-
<PAGE>
ITEM 2 -- DESCRIPTION OF PROPERTY
We and our consolidated subsidiaries lease the following properties:
* Our principal executive offices, located in Philadelphia,
Pennsylvania, consisting of approximately 1,500 square feet of office
space. The space is leased to Ocean Castle Partners, LLC and, pursuant
to an agreement between Ocean Castle and us, we pay the rent and
related expenses. Irwin L. Gross, the Chief Executive Officer and
Chairman of the Board of Directors of Global, is a principal of Ocean
Castle.
* We also lease approximately 5,000 square feet of executive office
space in New York, New York.
* GTL Management Limited, a wholly owned United Kingdom subsidiary,
leases approximately 12,700 square feet of office space in Bracknell,
England which serves as the network operating center and principal
administrative offices for our lottery operations.
* GTL Management also leases approximately 2,570 square feet of office
space in London, England, which serves as the principal executive
office for the lottery operations.
* GTL Management also leases approximately 2,000 square feet of
warehouse space for lottery equipment storage in Manchester, England.
* TNCi leases office space, and assembly and warehouse facilities, in
Phoenix, Arizona. This space contains approximately 17,500 square
feet.
* TNCi also leases approximately 1,500 square feet of office space
located in Philadelphia, Pennsylvania, which serves as TNCi's
principal executive offices.
* TNCi also leases approximately 16,000 square feet of office space in
Conshohocken, Pennsylvania. TNCi has not yet moved into this space but
plans to use it for administrative purposes and the operations of the
Content Division.
* TNCi UK Limited leases approximately 1,000 square feet of space in
Derby, England, which serves as the principal executive offices of
TNCi's Passenger Rail Division.
We have no policy regarding investments in real estate or interests in real
estate, real estate mortgages or securities of persons primarily engaged in real
estate activities. We currently hold no such investments.
ITEM 3 -- LEGAL PROCEEDINGS
Swissair/MDL-1269, IN REGARDS TO AN AIR CRASH NEAR PEGGY'S COVE, NOVA
SCOTIA. This multi-district litigation, which is being overseen by the United
States District Court for the Eastern Division of Pennsylvania, relates to the
crash of Swissair Flight No. 111 on September 2, 1998. The Swissair MD-11
aircraft involved in the crash was equipped with an entertainment network system
that had been sold to Swissair by our predecessor company, Interactive Flight
Technologies, Inc. Estates of the victims of the crash have filed lawsuits
throughout the United States against Swissair, Boeing, Dupont and various other
parties, including us and TNCi, which has been named in some of the lawsuits
filed on a successor liability theory. TNCi and we deny all liability for the
crash. TNCi and we are being defended by our aviation insurer.
On September 1, 1999, SAir Group invited us to participate in a
conciliation hearing before the Justice of the Peace in Kloten, Switzerland,
which is the customary manner in which civil litigation is initiated in
Switzerland. The document informing us of the proceeding states that the request
has been filed in connection with the crash of Swissair Flight 111 primarily in
order to avoid the expiration of any applicable statutes of limitations and to
reserve the right to pursue further claims. The document states that the relief
-18-
<PAGE>
sought is "possibly the equivalent of CHF 342,000,000 - in a currency to be
designated by the court; each plus 5% interest with effect from September 3,
1998; legal costs and a participation to the legal fees (of the plaintiff) to be
paid by the defendant."
FIDELITY AND GUARANTY INSURANCE COMPANY V. INTERACTIVE FLIGHT TECHNOLOGIES,
INC., United States District Court for the District of Minnesota, CV No. 99-410.
This is a reformation action in which our insurer is seeking to reform an
umbrella policy in the amount of $10.0 million to include an exclusion for
completed products for policies issued for years 1997-98 and 1998-99. Such
exclusion would preclude claims made by the estates of victims of the crash of
Swissair Flight No. 111 on September 2, 1998. Plaintiffs, the insurer, recently
filed a motion for summary judgment, which was heard before the United States
District Court for the District of Minnesota on September 12, 2000. The Court
has not yet ruled on the summary judgment motion.
On May 6, 1999, a complaint captioned INTERACTIVE FLIGHT TECHNOLOGIES, INC.
V. SWISSAIR TRANSPORT COMPANY, LTD., et al., No. Civ. 99-0936PHXSMM, was filed
in the United States District Court for the District of Arizona. In this suit,
we are seeking payment by Swissair of $6,773,906 for sums owed by Swissair and
SR Technics to us for equipment and warranty contracts. We have also asserted
claims for business torts arising from the unjustified deactivation of the
entertainment network systems following the crash of Swissair Flight 111 in this
action. Swissair filed motions to dismiss the action alleging that the claims
asserted in our complaint are subject to resolution by arbitration. The motions
to dismiss were granted on March 31, 2000. We requested the District Court to
reconsider its ruling on the motions and such request was denied by the District
Court on May 25, 2000. We appealed both the March 31 and May 25 District Court
Orders to the United States Court of Appeals for the Ninth Circuit. Swissair
filed a motion to dismiss the appeal for lack of jurisdiction, which was granted
on September 18, 2000. We will proceed to arbitrate these claims in Switzerland.
GLOBAL TECHNOLOGIES, LTD. V. XCEL CAPITAL, LLC, United States District
Court for the Eastern District of Pennsylvania, Case No. 00-CV-505. On January
27, 2000, we filed an action against XCEL Capital, LLC for specific performance
and breach of contract. In the action, we sought to compel XCEL to tender 75,000
shares of Global Class A Common Stock to us at $4.75 per share in accordance
with XCEL's obligations pursuant to a put/call agreement entered into between
the parties on August 12, 1999. XCEL filed counterclaims. On September 14, 2000,
we settled the action by agreeing to issue an additional 25,000 shares to XCEL
and to register such shares for resale (subject to certain restrictions on the
volume and timing of sales) by October 31, 2000. No money is being paid to XCEL.
In September of 1999, we filed a lawsuit against Barington Capital Group,
L. P. in Maricopa County Superior Court, Arizona, seeking a declaratory judgment
that no sums were owed to Barington pursuant to a one-year Financial Advisory
Service Agreement dated October 21, 1998. In October 1999, Barington filed a
lawsuit on the same contract in the Supreme Court of the State of New York,
County of New York, Index No. 99-6041606, captioned BARINGTON CAPITAL GROUP,
L.P. V. INTERACTIVE FLIGHT TECHNOLOGIES, INC., alleging that Barington is owed
$1,750,471 in connection with services alleged to have been performed pursuant
to the Financial Advisory Service Agreement. Barington's New York suit has been
stayed pending resolution of the Arizona action. We deny all liability and that
any sums are owed to Barington.
A suit captioned LODGENET ENTERTAINMENT CORPORATION V. THE NETWORK
CONNECTION, INC. was filed April 5, 2000 in the Circuit Court for the Second
Judicial Circuit of the State of South Dakota. The action arose out of TNCi's
hiring of Theodore P. Racz, a former LodgeNet Entertainment Corporation
employee, as its Senior Vice President of the Hotels & Hospitality division.
LodgeNet alleged tortious interference with contract and tortious interference
with business relationships. LodgeNet sought to prohibit Mr. Racz from being
employed by TNCi, as well as damages, and fees and costs. This case was
voluntarily dismissed without prejudice by LodgeNet because there was no
jurisdiction in South Dakota.
BRYAN R. CARR V. THE NETWORK CONNECTION, INC. AND GLOBAL TECHNOLOGIES,
LTD., Superior Court of Georgia, Civil Action No. 99-CV-1307. Bryan R. Carr,
TNCi's former Chief Operating and Financial Officer and a former Director, filed
a claim on November 24, 1999 alleging a breach of his employment agreement with
TNCi. Mr. Carr claims that he is entitled to the present value of his base
salary through October 31, 2001, a share of any "bonus pool," the value of his
stock options and accrued vacation time. TNCi and we filed a motion to compel
arbitration of the claims pursuant to an arbitration provision in the employment
agreement and to stay the State Court action pending the arbitration proceeding.
-19-
<PAGE>
Our motion was granted on August 9, 2000. As of this date, Mr. Carr has not
filed an arbitration claim against TNCi or us, but on September 20, 2000, sent a
letter to our outside counsel in the matter stating his demands in hopes of
settlement.
A suit captioned AVNET, INC. V. THE NETWORK CONNECTION, INC., was filed May
17, 2000 in Maricopa County Superior Court, CV2000-009416. The suit relates to
invoices for inventory purchased by TNCi in late 1998 and early 1999. Avnet,
Inc. seeks payment of the invoices, interest and legal fees. TNCi has not paid
for the inventory purchased primarily for the following reasons: (i) the
inventory purchased did not meet specifications and thus was not accepted by
TNCi's customer, and (ii) TNCi is currently pursuing a separate warranty claim
against Avnet regarding certain other inventory purchased from Avnet.
The company may be subject to other lawsuits and claims arising in the
ordinary course of its business. In the company's opinion, as of June 30, 2000,
the effect of such matters will not have a material adverse effect on the
company's results of operations or financial condition.
ITEM 4 -- SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
We held an Annual Meeting of Stockholders on May 11, 2000. At the meeting,
the following matters were submitted to a vote of the stockholders and the
results of each vote are set out below, as well:
* The election of five directors to hold office as follows: two Class I
directors to serve until the 2001 annual meeting, two Class II
directors to serve until the 2002 annual meeting and one Class III
director to serve until the 2003 annual meeting, and each until their
respective successors have been duly elected and qualified.
NAME AND VOTES BROKER
CLASS OF DIRECTOR VOTES FOR AGAINST ABSTENTIONS NON-VOTES
----------------- --------- ------- ----------- ---------
James W. Fox, Class I 8,583,308 111,779 -- --
M. Moshe Porat, Class I 8,583,308 111,779 -- --
Charles T. Condy, Class II 8,583,308 111,779 -- --
Stephen Schachman, Class II 8,583,308 111,779 -- --
Irwin L. Gross, Class III 8,583,308 111,779 -- --
* A proposal to ratify the grant of options to purchase 1,500,000 shares
of our Class A Common Stock to Irwin L. Gross, Chairman of the Board
and Chief Executive Officer of Global.
VOTES FOR VOTES AGAINST ABSTENTIONS BROKER NON-VOTES
--------- ------------- ----------- ----------------
3,155,473 320,416 19,886 5,199,312
* A proposal to ratify the appointment of KPMG LLP, certified public
accountants, as our independent auditors for the fiscal year ending
June 30, 2000.
VOTES FOR VOTES AGAINST ABSTENTIONS BROKER NON-VOTES
--------- ------------- ----------- ----------------
8,672,356 12,387 10,344 --
-20-
<PAGE>
PART II
ITEM 5 -- MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The following table sets forth the high and low last sale prices for our
Class A Common Stock for each quarter within our last two fiscal years, and for
the quarter ended September 30, 2000 (through September 25, 2000), as reported
by the Nasdaq National Market.
CLASS A COMMON STOCK HIGH LOW
-------------------- ------ ------
July 1, 1998 through September 30, 1998 $2.000 $1.375
October 1, 1998 through December 31, 1998 1.813 0.875
January 1, 1999 through March 31, 1999 2.875 1.333
April 1, 1999 through June 30, 1999 3.250 1.208
July 1, 1999 through September 30,1999 3.083 2.000
October 1, 1999 through December 31, 1999 6.500 1.583
January 1, 2000 through March 31, 2000 21.000 5.500
April 1, 2000 through June 30, 2000 15.000 3.750
July 1, 2000 through September 30, 2000 (through September 25) 6.375 3.250
The closing sales price of the Class A Common Stock on September 25, 2000,
as reported by the Nasdaq National Market, was $5.00 per share.
As of September 25, 2000, there were approximately 104 record holders and
approximately 4,250 beneficial owners of Class A Common Stock.
On January 5, 2000, the Board of Directors approved a three-for-two stock
split to be effected by way of a stock dividend of one share for each two shares
of Class A Common Stock held by stockholders of record as of the close of
business February 15, 2000. The dividend was paid on February 29, 2000;
fractional shares were paid out in cash. All references to the number of common
shares, per share amounts and stock option data elsewhere in the consolidated
financial statements and related footnotes have been restated as appropriate to
reflect the effect of the stock dividend for all periods presented prior to the
stock dividend.
We have not paid any dividends on our Class A Common Stock during the last
two fiscal years and do not intend to do so in the foreseeable future.
UNREGISTERED ISSUANCES
On May 16, 2000, we issued 1,250 shares of our Class A Common Stock to a
stockholder in a transaction exempt from the registration provisions of the
Securities Act of 1933, as amended, pursuant to Section 4(2) thereof. The shares
were issued in settlement of certain disputed claims.
On June 8, 2000, Advantage Fund II Ltd. and Koch Investment Group Ltd.
purchased an aggregate of $4.0 million of secured convertible notes from us in a
private placement transaction exempt from the registration provisions of the
Securities Act pursuant to Section 4(2) thereof. Advantage and Koch received two
notes each, which may be converted into our Class A Common Stock at a conversion
price of $2.00 per share, subject to customary anti-dilution adjustments. The
notes mature on December 7, 2001 and bear interest at 6% per annum payable at
maturity or on conversion in cash or stock. The notes are redeemable by us at
any time and from time to time, for a premium that increases with the length of
time that the notes are outstanding, and the issuance of warrants or stock, also
based on how long the notes are outstanding. We are obligated to register resale
of the shares of our Class A Common Stock issuable upon any conversion,
redemption or payment of the notes, as well as the shares underlying the
warrants issued in connection with the redemption.
In connection with the June issuance of the secured convertible notes,
designees of Reedland Capital Partners received four-year warrants to purchase
an aggregate of 20,000 shares of our Class A Common Stock at an exercise price
of $5.8125 per share for Reedland Capital Partners' role as sales agent. The
20,000 shares underlying these warrants have been registered for resale. These
warrants were issued in a transaction exempt from the registration provisions of
the Securities Act pursuant to Section 4(2) thereof.
-21-
<PAGE>
ITEM 6 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion should be read in conjunction with, and is
qualified in its entirety by, our Consolidated Financial Statements and the
Notes thereto appearing elsewhere herein. Historical results are not necessarily
indicative of trends in operating results for any future period.
RESULTS OF OPERATIONS
We changed our fiscal year-end from October 31 to June 30. Accordingly, the
eight-month period resulting from this change, November 1, 1998 through June 30,
1999, is referred to as the "Transition Period."
Our financial statements included in this Annual Report on Form 10-KSB
contain the results of operations for our fiscal year ended October 31, 1998,
for the eight-month Transition Period ended June 30, 1999 and for our fiscal
year ended June 30, 2000. For purposes of this management's discussion and
analysis, for comparative purposes only, we will refer to the pro forma
unaudited results of operations for the twelve-month period ended June 30, 1999.
In some instances, where we compare results for the pro forma twelve months
ended June 30, 1999 with the fiscal year ended October 31, 1998, please note
that there is a four month overlap between such periods.
The pro forma unaudited results of operations for the twelve months ended
June 30, 1999 are as follows (the audited results of operations for the fiscal
year ended June 30, 2000 are included in the table below for comparative
purposes):
Pro Forma
Twelve Months
Year Ended Ended
June 30, 2000 June 30, 1999
------------ ------------
(Audited) (Unaudited)
Revenues:
Equipment sales $ 6,983,787 $ 980,533
Service income 413,209 1,361,530
------------ ------------
7,396,996 2,342,063
------------ ------------
Costs and Expenses:
Cost of equipment sales 4,867,519 1,801,037
Cost of service income 148,221 665,214
General and administrative expenses 19,261,352 14,054,249
Non-cash compensation expenses 1,905,419
Expenses associated with investments 1,944,743 550,000
Reversal of warranty maintenance &
commission accrual -- (7,151,393)
Special charges 2,156,205 2,295,660
Amortization of intangibles 912,553 74,981
------------ ------------
31,196,012 12,289,748
------------ ------------
Operating loss (23,799,016) (9,947,685)
-22-
<PAGE>
Pro Forma
Twelve Months
Year Ended Ended
June 30, 2000 June 30, 1999
------------ ------------
(Audited) (Unaudited)
Other:
Interest expense (5,948,347) (86,373)
Interest income 655,194 1,829,877
Equity in losses of affiliates (10,345,210) (195,704)
Gain on sale of assets -- 133,396
Other expense (14,339) (498,606)
------------ ------------
Net loss (39,451,718) (8,765,095)
Minority interest 1,612,529 (376,705)
Cumulative dividend on preferred stock (187,415) (33,333)
Redemption of preferred stock 509,183 --
------------ ------------
Net loss attributable to common stockholders $ 37,517,421 $ (9,175,133)
============ ============
Revenues for the year ended June 30, 2000 were $7,396,996, an increase of
$5,054,933 or 216% compared to revenues of $2,342,063 (pro forma unaudited) for
the corresponding period ended June 30, 1999. Revenues for the year ended June
30, 2000 consisted of equipment sales of $6,983,787 and service income of
$413,209. Revenues for the year ended June 30, 1999 consisted of equipment sales
of $980,533 and service income of $1,361,530. The increase in equipment sales of
$6,003,254 is principally the result of the sale of 195 Cheetah(R) Multimedia
servers to the Georgia Metropolitan Regional Education Services Agency (MRESA)
Net 2000 Project of $5,408,744 and the sale of networking equipment of
$1,368,066 pursuant to a master settlement agreement with Carnival. The decrease
in service income is due to lower service income from the dry cleaning business
(acquired by prior management, but sold in May 1999), offset by service income
of $305,336 from our United Kingdom lottery operation launched in April 2000.
Revenues for the twelve-month period ended June 30, 1999 were $2,342,063
(pro forma unaudited), a decrease of $16,800,898 (or 88%) compared to revenue of
$19,142,961 for the year ended October 31, 1998. Revenues for the twelve months
ended June 30, 1999 consisted of equipment sales of $980,533 (pro forma
unaudited) and service income of $1,361,530 (pro forma unaudited). The decline
in revenue is the result of Swissair's refusal to take delivery of additional
entertainment networks and a lack of new customer orders. The equipment sales
were generated from payments received from Swissair for one of four
entertainment networks billed per the April 1998 contract between Swissair and
our predecessor company. The service income was principally generated from the
dry cleaning business, which was sold in May 1999. Revenues for the year ended
October 31, 1998 consisted of equipment sales of $18,038,619 and service income
of $1,104,342. The equipment sales were principally generated from the
installation of the entertainment networks in ten business class cabins and 18
first-class cabins of Swissair aircraft. The service income was generated from
the dry cleaning business acquired in July 1998, services provided to Swissair
pursuant to the media programming services agreement, our share of gaming
profits generated by the Swissair systems and revenue earned from Swissair to
extend its warranty.
Cost of equipment sales for the year ended June 30, 2000 was $4,867,519, an
increase of $3,066,482, (or 170%) compared to cost of equipment sales of
$1,801,037 (pro forma unaudited) for the corresponding twelve-month period ended
June 30, 1999. Cost of equipment sales includes materials and estimated warranty
costs associated with the sale of the Cheetah(R) servers to MRESA of $3,444,474
and the cost of installing network equipment onboard two Carnival cruise ships
of $1,368,066. For the corresponding twelve month period ended June 30, 1999,
cost of equipment sales represents material costs for four entertainment
networks sold to Swissair. Cost of service income for the year ended June 30,
2000 was $148,221, a decrease of $516,993 (or 78%) compared to cost of service
income of $665,214 (pro forma unaudited) for the twelve-month period ended June
30, 1999. Cost of service income for the year ended June 30, 2000 is primarily
related to video content costs for revenue sharing arrangements with Carnival of
$61,978 and direct costs associated with lottery ticket sales of $86,243. The
cost of service income for the corresponding twelve month period ended June 30,
1999 is primarily related to the dry cleaning operation, which was sold in May
1999.
Cost of equipment sales for the twelve months ended June 30, 1999 was
$1,801,037 (pro forma unaudited), a decrease of $13,722,245 (or 88%) compared to
cost of equipment sales of $15,523,282 for the year ended October 31, 1998. Cost
of equipment sales includes materials, installation and maintenance costs, as
well as estimated warranty costs and costs of upgrades related to installations
of entertainment networks on Swissair aircraft. For the year ended October 31,
1998, cost of sales resulted from the installation of equipment in ten business
-23-
<PAGE>
class cabins and 18 first-class cabins of Swissair aircraft, whereas the
decreased cost of sales in the twelve months ended June 30, 1999 resulted from
material costs for only four Swissair aircraft. Cost of service income for the
twelve months ended June 30, 1999 was $665,214 (pro forma unaudited), an
increase of $426,377 (or 179%) compared to cost of service income of $238,837
for the year ended October 31, 1998. Cost of service income for the twelve
months ended June 30, 1999 and the year ended October 31, 1998 is primarily
related to the dry cleaning operations, which were acquired in July 1998 and
sold in May 1999.
General and administrative expenses for the year ended June 30, 2000 were
$19,261,352, an increase of $5,207,103 (or 37%) over expenses of $14,054,249
(pro forma unaudited) for the twelve-month period ended June 30, 1999.
Significant components of general and administrative expenses include costs of
personnel, legal and professional fees, advertising and marketing expenses, rent
and other facilities costs and depreciation expense. Significant components
attributable to the increase in general and administrative expenses from 1999 to
2000 include the hiring of new management and expansion of operations at TNCi,
and the launch of the lottery operation in the UK, offset by write-offs of $1.6
million for consulting agreements deemed to have no future value, which were
recorded in the twelve-month period ended June 30, 1999.
General and administrative expenses for the twelve months ended June 30,
1999 were $14,054,249 (pro forma unaudited), an increase of $2,656,508 (or 23%)
over expenses of $11,397,741 for the year ended October 31, 1998. Significant
components of general and administrative expenses include costs of personnel,
legal and professional fees and corporate insurance costs. Significant
components attributable to the increase in general and administrative expenses
from 1998 to 1999 include legal and professional fees related to the Donativos
S.A. de C.V. and Inter Lotto (UK) Limited investments, legal fees related to the
investment in TNCi and a write-off of approximately $1.6 million related to
certain consulting agreements determined, in the twelve months ended June 30,
1999, to have no future value, offset by severance payments totaling $3.1
million to three former employees in the year ended October 31, 1998.
There were no research and development expenses for the year ended June 30,
2000, nor the twelve-month period ended June 30, 1999 (pro forma unaudited).
Research and development expenses were $1,092,316 for the year ended October 31,
1998. The decrease in the research and development expenses reflects our prior
decision not to develop the next generation of the entertainment network and the
resulting reduction in staff and professional fees.
Non-cash compensation expense of $1,905,419 for the year ended June 30,
2000 is comprised of an $85,000 expense for a former employee as part of a
severance package, charges of $193,318 for modifications of stock option awards
for three former employees and charges totaling $1,627,101 related to the
issuance of common stock purchase warrants and common stock for financial
advisory services.
Expenses associated with investments of $1,944,743 for the fiscal year
ended June 30, 2000 represent the net loss on our sale of our equity interest in
Donativos of $335,058, the loss on the transfer of our 27.5% equity interest in
Inter Lotto of $684,685 and the write-down of $925,000 of our investment in
Shop4Cash.com, Inc. Expenses associated with investments of $550,000 (pro forma
unaudited) for the twelve-month period ended June 30, 1999 represent $400,000 of
write-offs of investments deemed to have no value and a $150,000 standstill fee
related to the Inter Lotto acquisition.
For the twelve months ended June 30, 1999, we recorded warranty,
maintenance, commission and support cost accrual adjustments of $5,117,704 (pro
forma unaudited), $504,409 (pro forma unaudited), $303,321 (pro forma unaudited)
and $1,225,959 (pro forma unaudited), respectively. Such adjustments to prior
period estimates, which totaled $7,151,393 (pro forma unaudited), resulted from
an evaluation of specific contractual obligations and discussions between our
new management and other parties related to such contracts. Based on the results
of our findings during the twelve months ended June 30, 1999, such accruals were
no longer considered necessary.
Special charges for the year ended June 30, 2000 were $2,156,205, compared
to $2,295,660 (pro forma unaudited) for the twelve-month period ended June 30,
1999. Special charges for the year ended June 30, 2000 represent inventory
write-offs and accruals for rework costs for future redeployment of equipment
and estimated de-installation obligations associated with the termination of the
Carnival contract pursuant to a master settlement agreement between us and
Carnival. Special charges for the twelve-month period ended June 30, 1999
resulted from a $521,590 net write-off of accounts receivable and deposits due
from Swissair, offset by deferred revenue under the Swissair extended warranty
contract, and expenses for the settlement of litigation matters with First
Lawrence Capital Corp. and FortuNet, Inc. of $1,843,750 and $120,320,
respectively. Special charges for the twelve-month period ended June 30, 1999
were offset by a $190,000 recovery of a prior period special charge related to
the number of entertainment networks requiring maintenance.
-24-
<PAGE>
Special charges for the twelve-month period ended June 30, 1999 were
$2,295,660 (pro forma unaudited) compared to $400,024 for the year ended October
31, 1998. For the twelve-month period ended June 30, 1999, special charges
resulted from a $521,590 (pro forma unaudited) write-off of accounts receivable
and deposits due from Swissair, offset by deferred revenue under the Swissair
extended warranty contract. Swissair's actions, as described above, have
rendered our accounts receivable and deposits from Swissair worthless as of June
30, 1999 and, accordingly, we wrote-off such assets. Also included in special
charges are expenses of $1,843,750 (pro forma unaudited) and $120,320 (pro forma
unaudited) for the settlement of litigation matters with First Lawrence Capital
Corp. and FortuNet, Inc., respectively. Special charges for the year ended
October 31, 1998 primarily resulted from equipment write-offs of $1,006,532
offset by $606,508 in recoveries of special charges from the prior fiscal year.
Amortization of intangibles for the year ended June 30, 2000 was $912,553
compared to $74,981 (pro forma unaudited) for the twelve-month period ended June
30, 1999. The increase is attributable to a full twelve months of amortization
of intangibles as a result of our May 1999 acquisition of TNCi and our revision
of the estimated useful life for determining amortization from ten years to five
years effective May 1, 2000.
Interest expense for the year ended June 30, 2000 was $5,948,347 compared
to $86,373 (pro forma unaudited) for the twelve-month period ended June 30,
1999. The increase in interest expense is attributable principally to a $4.0
million non-cash charge related to a beneficial conversion feature embedded in
the 6% Secured Convertible Notes issued on June 8, 2000 and a $1.5 million
non-cash interest charge related to warrants we granted to a related party in
conjunction with pledges of collateral to cover maintenance calls on our loan
from Merrill Lynch. In addition, we entered into several new debt obligations
during the current year versus the comparable twelve-month period ended June 30,
1999.
Interest expense was $86,373 (pro forma unaudited) for the twelve-month
period ended June 30, 1999, compared to $11,954 for the year ended October 31,
1998. The 1999 expense is attributable principally to long-term debt
obligations, whereas the expense for 1998 is attributable to our capital leases
for furniture that expired in September 1999.
Interest income for the year ended June 30, 2000 was $655,194, a decrease
of $1,174,683 (or 64%) compared to income of $1,829,877 (pro forma unaudited)
for the corresponding period ending June 30, 1999. The interest arose
principally out of short-term investments of working capital. The decrease in
interest income is due to the lower average cash balance during 2000 compared to
1999.
Interest income for the twelve-month period ended June 30, 1999 was
$1,829,877 (pro forma unaudited), a decrease of $421,178 (or 19%) compared to
income of $2,251,055 for the year ended October 31, 1998. The interest arose
principally out of short-term investments of working capital. The decrease in
income is due to the lower average cash balance during 1999 compared to 1998.
For the year ended June 30, 2000, we recorded our proportionate share of
our equity interest in losses of affiliates in the amount of $10,345,210
compared to $195,704 in the corresponding period ended June 30, 1999. The
increase is attributable to higher losses at Inter Lotto related to the April
2000 launch of the lottery operations in the UK and higher losses at Donativos
related to the launch of the entertainment center in Monterrey, Mexico. In
addition, we determined that we retain the majority of the financial risk
related to Inter Lotto and, accordingly, recorded against our investment 100% of
the loss incurred by Inter Lotto for the year ended June 30, 2000. For the
corresponding period ended June 30, 1999, the equity interest in losses of
affiliates represented our 27.5% portion of the losses of Inter Lotto only.
For the twelve-month period ended June 30, 1999, we recorded our
proportionate share of our equity interest in losses of Inter Lotto in the
amount of $195,704 (pro forma unaudited). There were no affiliates for the year
ended October 31, 1998.
For the twelve-month period ended June 30, 1999, we recorded a gain of
$133,396 (pro forma unaudited) on the sale of the dry cleaning operation. The
dry cleaning operation was sold in May 1999.
Other expense for the year ended June 30, 2000 was $14,339 compared to
other expense of $498,606 (pro forma unaudited) for the corresponding
-25-
<PAGE>
twelve-month period ended June 30, 1999. Other expense in 2000 consists of net
losses on sales of equipment and two buildings and losses associated with the
buyout of furniture and vehicle leases. Other expense in 1999 principally
resulted from furniture and equipment write-offs in October 1998.
Other expense for the twelve-month period ended June 30, 1999 was $498,606
(unaudited), compared to other income of $10,179 for the year ended October 31,
1998 Other expense in 1999 principally resulted from furniture and equipment
write-offs in October 1998, whereas other income in fiscal 1998 represents
proceeds from the sale of equipment and scrapped inventory.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2000, we had cash, cash equivalents, and short-term investments
of approximately $67.9 million. Prior to June 30, 1999, our primary source of
funding had historically been through equity offerings and the sale of
entertainment networks to Swissair. Subsequent to June 30, 1999, Global, through
its majority owned subsidiary, TNCi, has also generated funds through the sale
of its Cheetah(R) multimedia servers to MRESA of $5.4 million and from sale and
installation of interactive entertainment systems under the agreement with
Carnival of $1.4 million. Through its wholly owned subsidiaries in the United
Kingdom, Global also generated $0.3 million from the sale of lottery tickets
since the UK lottery operation was launched in April 2000.
During the year ended June 30, 2000, we used $9.3 million of cash for
operating activities, an increase of $4.1 million from the $5.2 million of cash
used by operating activities for the Transition Period ended June 30, 1999. Cash
utilized in operations during the year ended June 30, 2000 resulted primarily
from our net loss of $37.5 million, predominantly offset by $11.6 million of
non-cash charges, including $2.1 million of depreciation and amortization, $5.7
million of non-cash interest expenses primarily related to charges for a
beneficial conversion feature of convertible notes and the estimated fair value
of warrants issued in connection with related party borrowings and collateral
pledges, $1.9 million of compensation expenses related to the issuances of
common stock or stock purchase warrants for financial advisory services, and
$1.9 million of expenses associated with investments related to the write-off or
write down of affiliate investments. Cash utilized for operating activities was
offset by an increase in accounts payable of $7.8 million during the period. In
addition, cash utilized in operating activities excludes $10.3 million of equity
in loss of affiliates related to the losses of Donativos and Inter Lotto, which
are shown as investments in non-consolidated affiliates in cash utilized from
financing activities. The cash utilized primarily relates to our funding of 100%
of the losses of Inter Lotto related to the launch of the lottery operations in
the UK. The cash used in operations during the Transition Period ended June 30,
1999 was primarily a result of general and administrative expenses and
reductions of accounts payable.
During the year ended June 30, 2000, restricted cash decreased by $645,988
as a result of the release of $913,445 of cash collateral posted by us to secure
our contingent obligation under a letter of credit posted in connection with the
Donativos S.A. de C.V. transaction, offset by the deposit of $290,833 of cash
collateral for another letter of credit issued to secure a lease for our offices
in New York. The Donativos letter of credit was terminated upon a corresponding
payment for gaming equipment purchased for Donativos.
Cash flows used in investing activities were $21.8 million during the year
ended June 30, 2000. Cash utilized resulted primarily from purchases of property
and equipment of $18.3 million, including $9.4 million of gaming network
equipment for the lottery operations, $2.5 million of networking equipment
installed at hotels for guest pay interactive entertainment systems and $0.4
million of equipment for a train entertainment system simulator, and our
investment in Inter Lotto of $10.0 million to fund their losses related to the
launch of the lottery. Cash utilized in investing activities also resulted from
our investment of $1.0 million in Shop4Cash.com, Inc. Cash utilized was offset
by net proceeds of $4.6 million from the sale of available-for-sale investment
securities, $1.2 million from the sale of our 24.5% equity interest in
Donativos, and $0.7 million from the sale of the gaming equipment leased to
Donativos. Cash used in investing activities during the Transition Period ended
June 30, 1999 was $7.7 million, consisting primarily of our investments in U.S.
Wireless, Donativos and Inter Lotto.
Cash provided from financing activities during the year ended June 30, 2000
of $20.6 million resulted primarily from the issuance of the Series C 5%
Convertible Preferred Stock for net proceeds of $9.7 million, net borrowings
under a secured credit facility with Merrill Lynch of $6.3 million, the issuance
of $4.0 million of 6% Secured Convertible Notes due December 7, 2001, issuances
of our Class A Common Stock to certain related parties totaling $2.7 million and
issuances of our Class A Common Stock totaling $2.1 million through the exercise
of Unit Purchase Options issued in connection with our Initial Public Offering
in 1995. Cash utilized was offset by the redemption of our Series A 8%
Convertible Preferred Stock for $3.6 million and payments totaling $1.4 million
we made to exercise call options to repurchase shares of our Class A Common
Stock issued to holders of TNCi notes in connection with the extinguishment of
those notes as part of our acquisition by merger of TNCi. Cash provided from
financing activities during the Transition Period was $0.6 million, which we
received from the issuance of Series A Preferred. In connection with such
issuance, we also received 1,500 shares of TNCi Series B 8% Convertible
Preferred Stock.
-26-
<PAGE>
On February 16, 2000, we issued 1,000 shares of our Series C Preferred and
callable warrants in return for net proceeds of $9.7 million. The preferred
stock has a stated value of $10,000 per share and carries a 5% cumulative
dividend payable quarterly in cash or in kind. As of June 30, 2000, cumulative
dividends totaling $187,415 have been recorded, and have been paid in kind. The
preferred stock converts into Class A Common Stock at a conversion price of
$15.21 per share, representing 120% of the average closing bid prices thereof
over the five trading days beginning March 1, 2000 (the "Fixed Conversion
Price"), as adjusted for certain dilutive events. Nine months after funding, and
every three months thereafter, the conversion price resets to the lesser of the
Fixed Conversion Price or 100% of the average of the four low trading prices
over the course of the preceding 20 trading days. We may redeem the Series C
Preferred at prices ranging from 110% to 120% of stated value, plus accrued and
unpaid dividends at any time after issuance and prior to maturity on February
16, 2003. If the Series C Preferred is not redeemed or converted into shares of
our Class A Common Stock by such date, the remaining shares of Series C
Preferred automatically convert into shares of our Class A Common Stock at the
then current conversion price.
On April 5, 2000, we entered into a line of credit facility with Merrill
Lynch in which Merrill Lynch agreed to advance up to $10.0 million based upon a
percentage of the value of securities pledged as collateral to secure amounts
drawn under the line of credit. Principal amounts borrowed under the line,
together with accrued interest at an annual rate equal to the London Inter-bank
Offer Rate (7.214% at June 30, 2000) plus 1.25%, are payable upon demand by
Merrill Lynch. As of June 30, 2000, approximately $6.3 million was outstanding
under this secured credit facility. To secure such borrowing, we have pledged to
Merrill Lynch 1,000,000 shares of common stock of U.S. Wireless held by us.
If the amount owed under the Merrill Lynch secured credit facility at any
time exceeds 35% of the market value of the shares of US Wireless pledged to
Merrill Lynch, we will be subject to a maintenance call which would require us
to pledge additional securities which are acceptable to Merrill Lynch as
collateral or require us to reduce the outstanding balance owed under the
facility through payment in cash. On May 2, 2000, Merrill Lynch issued a
maintenance call for approximately $1.4 million. This maintenance call was
waived until May 12, 2000, when we reduced the outstanding balance by $1.9
million from the proceeds of the sale of our equity interest in Donativos.
Beginning on May 24, 2000, Merrill Lynch issued a series of maintenance calls
requiring a reduction in the balance owed of over $900,000. The final
maintenance calls were subsequently satisfied by a pledge by Irwin L. Gross, our
Chairman and Chief Executive Officer, of additional collateral with a market
value of approximately $1.6 million. As of June 30, 2000, the market value of
the U.S. Wireless shares was sufficient to maintain the outstanding balance owed
under the Secured Credit Facility, and Mr. Gross's collateral was released.
In July and August 2000, Merrill Lynch issued a series of maintenance calls
requiring a reduction in the balance owed of over $1.2 million. The maintenance
calls were subsequently secured by pledges of additional collateral, with a
total market value of approximately $2.7 million, by Mr. Gross. As of September
25, 2000, the outstanding balance of the Merrill Lynch facility was
approximately $7.0 million, and Mr. Gross's collateral remains pledged to
Merrill Lynch to secure the credit facility.
On June 8, 2000, we issued $4.0 million of secured convertible notes to
Advantage Fund II Ltd. and Koch Investment Group, Ltd. The notes bear interest
at 6% per annum and mature on December 7, 2001. The notes are convertible into
shares of the Company's Class A Common Stock at a conversion price of $2.00 per
share, subject to customary adjustments. To secure such borrowing, we pledged
1,000,000 shares of common stock of U.S. Wireless to the holders of the notes.
On July 7, 2000, we redeemed $2.0 million of the principal amount of these notes
for $2.2 million in cash plus the issuance to each of Advantage and Koch of
four-year warrants to purchase 62,500 shares of our Class A Common Stock at an
exercise price of $4.00 per share. In connection with this redemption, 500,000
shares U.S. Wireless common stock previously held as collateral were released to
us.
On October 3, 2000, we issued an additional $7.0 million of secured
convertible notes to Advantage and Koch. The notes bear interest at 8% per annum
and are convertible after 120 days into shares of our Class A Common Stock at a
20% discount to market (we are obligated to register the resale of these
shares), and after 150 days into shares of U.S. Wireless common stock also at a
20% discount to market. In connection with this issuance, on October 5, 2000, we
-27-
<PAGE>
redeemed another $1.0 million of the principal amount of the notes issued
on June 8, 2000 for a total redemption cost of $1.2 million and the issuance of
62,500 shares of our Class A Common Stock. This redemption resulted in the
release to us of another 250,000 shares of our US Wireless common stock
previously pledged as collateral for the June notes. To secure the October
issuance of convertible notes and permit the conversion of principal amounts
thereof into shares of U.S. Wireless common stock (possible only in the event
that we have not redeemed before 150 days after issuance), we have repledged the
750,000 shares of US Wireless common stock that had been released to us in
connection with redemptions of the June notes, and pledged an additional 116,538
shares of U.S. Wireless common stock, to Advantage and Koch. We are permitted to
redeem the October notes at any time for a premium.
In May and June 2000, The Gross Charitable Unit Trust and The Gross
Charitable Annuity Trust, advanced a total of $800,000 to TNCi for working
capital purposes. An additional $250,000 was advanced to TNCi in July 2000. On
September 12, 2000, the advances to TNCi were converted into two promissory
notes, each in the amount of $525,000, issued to each trust by TNCi. The notes
mature on December 31, 2000 and bear interest at 9.0%. These trusts are
controlled by our Chairman and Chief Executive Officer, Irwin L. Gross.
In August and September 2000 the trusts advanced a total of $800,000 to us
for working capital purposes. On September 22, 2000, the advances were converted
into two promissory notes, each in the amount of $400,000, issued to each trust
by us. The notes mature on December 31, 2000 and bear interest at 9.0%.
In August 1999, our Board of Directors approved a $5.0 million secured
revolving credit facility in favor of TNCi. This revolving credit facility
provides that TNCi may borrow up to $5.0 million for working capital and general
corporate purposes at an annual interest rate equal to the prime rate plus 3%.
The facility matures in September 2001. TNCi paid an origination fee of $50,000
to us and will pay an unused line fee of 0.5% per annum. The facility is secured
by all of the assets of TNCi and is convertible, at our option, into shares of
TNCi common stock. As of June 30, 2000, we had loaned $4.2 million under the
facility and converted $1.85 million of this loan into 1,233,333 shares of TNCi
common stock.
In August 1999, Global and two of our officers entered into a release and
settlement agreement with First Lawrence Capital Corp., whereby we issued
375,000 shares of our Class A Common Stock to First Lawrence and agreed that our
wholly-owned subsidiary, GlobalTech Holdings Limited, will pay First Lawrence 24
consecutive monthly payments of $41,667 each beginning April 1, 2000. In
exchange, First Lawrence will be available to perform management consulting
services to GlobalTech Holdings. As of June 30, 2000, $875,000 remains to be
paid under the Agreement.
In September 1999, GTL Leasing Limited entered into an agreement to
purchase $12.3 million of lottery systems from International Lottery &
Toltalizator Systems, Inc. in connection with the lottery operation in the
United Kingdom. Approximately $2.9 million remains outstanding on this
commitment. GTL Management Limited also entered into a facilities management
agreement for servicing of the lottery systems. Under this agreement, GTL
Management is required to make weekly payments to International Lottery of
$72,000, plus additional amounts based on the number of installed terminals in
excess of 3,500 and plus a percentage of the average daily sales. We have
guaranteed payment of these obligations.
As a result of these obligations and guarantees, we may be required to
commit additional funds to our subsidiary companies, TNCi, GlobalTech Holdings,
GTL Leasing and GTL Management, which would come from our existing working
capital. Such additional funds, if required, could have a material adverse
effect on our financial position and liquidity and our ability to acquire new
operating companies or make new investments.
RISK FACTORS
You should be aware of the following risk factors and should review
carefully the financial and other information about us provided in this Report.
-28-
<PAGE>
RISKS PARTICULAR TO US
WE PLAN TO SELL OR FURTHER BORROW AGAINST SOME OF OUR INVESTMENTS TO MEET OUR
FINANCIAL OBLIGATIONS OVER THE NEXT 90 DAYS AND THERE IS RISK THAT WE MAY NOT BE
ABLE TO DO SO AT TIMES OR PRICES NECESSARY TO MEET THESE OBLIGATIONS.
As of September 25, 2000, we had an obligation of approximately $2.9
million in connection with the purchase of the hardware and software that serves
as the network operating center of the on-line lottery system that we have
deployed in the United Kingdom, and the terminals through which lottery players
purchase lottery tickets. In addition, we currently anticipate that the lottery
project will require approximately $3.0 million in the three-month period ending
December 31, 2000 to continue operations.
We are also obligated to lend The Network Connection up to $5.0 million
pursuant to a revolving credit facility agreement. As of September 25, 2000, The
Network Connection had drawn $4.3 million against this line of credit, of which
we converted $1.85 million of the outstanding balance under the facility into
1,233,333 shares of The Network Connection common stock, leaving an outstanding
balance of $2.45 million. The Network Connection has recently received orders to
install its InnView(TM) interactive information and entertainment system in 10
hotels. The Network Connection recently sold an aggregate of $1.1 million of
common stock to an investor pursuant to a $12.0 million equity purchase
agreement. In addition, The Network Connection's Executive Vice President
purchased $1.0 million of newly issued TNCi common stock in July 2000 and an
investor group purchased $1.0 million of TNCi Series E Preferred Stock in August
2000. The Network Connection requires further financing to support its
operations and in the event that it does not obtain any such financings, it will
likely continue to draw on the credit facility with us to finance the production
of some or all of the equipment necessary for these InnView(TM) installations,
as well as to cover other commitments and operating expenses. The lottery
equipment purchase and outstanding service obligations and losses that we expect
to fund, together with projected draws under The Network Connection credit
facility and other operating expenses, exceed the sum of our currently available
cash, cash equivalents and currently remaining available credit under the line
of credit with Merrill Lynch, which sum totaled $ 0.2 million as of September
25, 2000.
Although we recently obtained $10.0 million in equity financing from the
issuance of our Series C Convertible Preferred Stock, obtained a $10 million
line of credit facility with Merrill Lynch, which has been secured with a pledge
of 1,000,000 of our shares of common stock of U.S. Wireless, and obtained $11.0
million from the issuance of convertible notes secured by the pledge of an
additional 1,866,538 shares of common stock of U.S. Wireless ($3.0 million of
these secured convertible notes have been redeemed in connection with which
750,000 shares of U.S. Wireless common stock have been released to us), we plan
to sell or further borrow against some of our investments to cover our financial
obligations and to continue to execute on our business strategy of investing in,
developing and managing emerging growth companies in the e-commerce, Internet,
networking solutions, information and entertainment systems, telecommunications
and gaming industries. We provide no assurance that we will be able to sell or
borrow against any of our assets at planned times or for prices necessary to
meet our financial obligations or to take advantage of investment or acquisition
opportunities consistent with our business strategy. Failure to do so may
prevent or delay further development of our business and/or cause us to default
under the credit facility to The Network Connection. Such failure, delay and/or
default would have a material adverse effect on the growth of our business, The
Network Connection's and our financial condition, and may subject us to legal
liability.
ONE MILLION OF OUR SHARES OF COMMON STOCK OF U.S. Wireless CORPORATION, WHICH WE
HAVE PLEDGED TO SECURE THE MERRILL LYNCH CREDIT FACILITY, MAY BE LIQUIDATED TO
SATISFY OUR OBLIGATIONS TO MERRILL LYNCH.
On April 5, 2000, we entered into a line of credit facility with Merrill
Lynch in which Merrill Lynch agreed to advance up to $10.0 million based upon a
percentage of the value of securities pledged as collateral to secure amounts
drawn under the line of credit. Principal amounts borrowed under the line,
together with accrued interest at an annual rate equal to the London Inter-bank
Offer Rate plus 1.25%, are payable upon demand by Merrill Lynch. As of September
25, 2000, we had an outstanding balance of approximately $7.0 million under the
Merrill Lynch line of credit facility. To secure such borrowing, we have pledged
1,000,000 of our shares of common stock of U.S. Wireless to Merrill Lynch.
If the amount owed under the Merrill Lynch credit facility at any time
exceeds 35% of the market value of the shares of U.S. Wireless pledged to
Merrill Lynch, we will be subject to a maintenance call which would require us
to pledge additional securities which are acceptable to Merrill Lynch as
collateral or require us to reduce the outstanding balance owed under the
Merrill Lynch credit facility through payment in cash. We provide no assurance
that we would have sufficient additional collateral or funds necessary to pay
outstanding amounts owed under the Merrill Lynch credit facility in the event of
a maintenance call or upon demand for payment by Merrill Lynch, the failure of
either of which would result in the liquidation of our shares of U.S. Wireless
-29-
<PAGE>
pledged to Merrill Lynch to satisfy outstanding obligations under the Merrill
Lynch credit facility and a material adverse effect on our financial condition.
In May and June 2000, we received maintenance calls for an aggregate of
approximately $0.9 million under the Merrill Lynch credit facility. In order to
satisfy such maintenance calls, Irwin L. Gross, our Chairman and Chief Executive
Officer, pledged personal assets to Merrill Lynch. This collateral was released
to Mr. Gross on June 27, 2000. In July and August 2000, we received a series of
maintenance calls for approximately $1.2 million. Again, Mr. Gross pledged
personal assets in order to satisfy these calls.
ANOTHER 866,538 OF OUR SHARES OF COMMON STOCK OF U.S. WIRELESS CORPORATION,
WHICH WE HAVE PLEDGED TO SECURE A NEW ISSUANCE OF SECURED CONVERTIBLE NOTES, MAY
BE LIQUIDATED TO SATISFY OUR OBLIGATIONS TO THE HOLDERS OF THE NOTES.
On June 8, 2000, we issued $4.0 million of secured convertible notes to
Advantage Fund II Ltd. and Koch Investment Group, Ltd. The notes are convertible
into shares of our Class A Common Stock at a conversion rate of $2.00 per share,
subject to customary adjustments, and are secured by a pledge of 1,000,000 of
our shares of common stock of US Wireless. On July 7, 2000, we redeemed $2.0
million of the principal amount of these notes. In connection with this
redemption, 500,000 shares of US Wireless common stock previously held as
collateral were released to us, and we issued warrants for 62,500 shares of our
Class A Common Stock to each of Advantage and Koch. These warrants have a
four-year term and an exercise price of $4.00 per share.
On October 3, 2000, we issued an additional $7.0 million of secured
convertible notes to Advantage and Koch. The notes bear interest at 8% per annum
and are convertible after 120 days into shares of our Class A Common Stock at a
20% discount to market (we are obligated to register the resale of these
shares), and after 150 days into shares of U.S. Wireless common stock also at a
20% discount to market. In connection with this issuance, we redeemed another
$1.0 million of the principal amount of the notes issued on June 8, 2000 for a
total redemption cost of $1.2 million and the issuance of 62,500 shares of our
Class A Common Stock. This redemption resulted in the release to us of another
250,000 shares of our U.S. Wireless common stock previously pledged as
collateral for the June notes.
To secure the October issuance of convertible notes and permit the
conversion of principal amounts thereof into shares of U.S. Wireless common
stock, we have repledged the 750,000 shares of U.S. Wireless common stock that
had been released to us in connection with redemptions of the June notes, and
pledged an additional 116,538 shares of U.S. Wireless common stock, to Advantage
and Koch. We are permitted to redeem the October notes at any time for a
premium. In the event that we do not redeem these notes prior to 150 days after
the issuance thereof, or we were to default on any of the terms of the documents
executed in connection with issuance of these notes, the shares of our U.S.
Wireless common stock serving as collateral for the notes could be liquidated.
OUR PARTNER COMPANIES ARE GROWING RAPIDLY AND WE MAY HAVE DIFFICULTY ASSISTING
THEM MANAGE THEIR GROWTH.
Our partner companies have grown, and we expect them to continue to grow
rapidly. This growth requires our partner companies to:
* hire new employees;
* aggressively advertise and promote their products and services;
* modify and expand the current array of products and services offered;
and
* push product into new markets where we believe that significant market
share and profitability may be achieved.
Such growth is placing a strain on the limited resources of our partner
companies and the limited resources we can allocate to assist them. The funds
required to support this growth may require us to forego acquisition
opportunities that would otherwise be consistent with our business strategy of
-30-
<PAGE>
investing in, developing and managing emerging growth companies in the
e-commerce, Internet, networking solutions, information and entertainment
systems, telecommunications and gaming industries.
WE ARE A DEFENDANT IN A MULTI-DISTRICT CLASS ACTION LAWSUIT THAT IF DECIDED
ADVERSELY TO US COULD RESULT IN A LOSS OF OUR ASSETS.
The business strategy under former management was the development,
assembly, installation and operation of computer-based, in-flight entertainment
networks that provided passengers the opportunity to view movies, play computer
games and gamble, where legally permissible, through an in-seat video
touch-screen. The main contract with respect to these entertainment networks was
with Swissair. On September 2, 1998, Swissair Flight 111 crashed. The aircraft
involved in the crash was a McDonnell Douglas MD-11 equipped with the
entertainment network developed by former management. A large number of claims
have been filed by the families of the victims of the crash. These claims have
been consolidated into a multi-district class action litigation in which we,
together with Swissair, Boeing, DuPont and a number of other companies, are
defendants. Our aviation insurer is defending us in the action. We have $10.0
million in insurance coverage related to the action. We also have an umbrella
policy for an additional $10.0 million in coverage; however, we are currently
litigating the applicability of this policy to the action. If we do not settle
the multi-district litigation within our policy limits, or if we are found
liable for an amount in excess of these limits, our business would be adversely
affected. If found liable for an amount substantially in excess of the limits of
our coverage, we could lose all of our assets.
WE HAVE A LIMITED OPERATING HISTORY ON WHICH YOU MAY EVALUATE US.
We were formed in February 1994. Until May 1998, we were engaged in the
business of development, assembly, installation and operation of computer-based,
in-flight entertainment networks, at which time former management decided to
exit that business and to pursue opportunities in the dry-cleaning industry. In
September 1998, the former board of directors of Global resigned from office and
was replaced by our current board. The current board then appointed a new
management team and put together our current business strategy of investing in,
developing and managing emerging growth companies in the e-commerce, Internet,
networking solutions, information and entertainment systems, telecommunications
and gaming industries.
We have a limited operating history under our new business strategy and new
management on which you will be able to evaluate our business and prospects.
Each of our partner companies is in the early stage of its development. Our
business and prospects must be considered in light of the risk, expense and
difficulties frequently encountered by companies in early stages of development,
particularly companies in new and rapidly evolving markets such as e-commerce,
Internet, networking solutions and telecommunications. If we are unable to
effectively allocate our resources and help grow existing partner companies, we
may be unable to execute our business strategy and our stock price may be
adversely affected.
OUR BUSINESS DEPENDS ENTIRELY ON THE PERFORMANCE OF OUR PARTNER COMPANIES, WHICH
IS UNCERTAIN.
We own interests in and help our partner companies operate their respective
businesses. Each of our partner companies is engaged in a different operating
business, and consequently is subject to a set of risks particular to its
business. Material risks relating to our partner companies are set forth below
under "Risks Particular to our Partner Companies." If our partner companies do
not succeed, the value of our investments in such companies and our stock price
could decline.
Our $121.7 million in total assets as of June 30, 2000 included
approximately $94.3 million of assets of our consolidated subsidiaries and
investments in our other partner companies. The carrying value of our partner
company ownership interests includes our original acquisition cost and the
effect of accounting for certain of our partner companies under the equity
method of accounting. The carrying value of our partner companies will be
impaired and decrease if one or more of our partner companies do not succeed.
Also, the carrying value of our investment in U.S. Wireless is marked to market,
and, therefore, a decline in its market price will impact our financial
position. Our other publicly traded investment, The Network Connection, is not
marked to market, and, as such, a decline in the market value of that company
will not impact our financial position. However, such a decline would likely
affect our stock price.
-31-
<PAGE>
The Network Connection is a development stage company in the early phases
of implementing a new business strategy. Its recently formed divisions and the
projects they are pursuing are in their infancy. As such, most of these projects
are not expected to generate significant revenue in the near-term, yet they
require funding to develop. TNCi estimates that its cash and financing needs for
its current business through June 2001 will be met by equipment financing that
is currently being pursued, and private placements of equity currently being
sought from various sources for working capital purposes. Toward this end, TNCi
has closed on approximately $3.1 million of equity financing in the last three
months. Despite these infusions, TNCi's audit report for the fiscal year ended
June 30, 2000 contains a "going concern" qualification, as it has been
determined that the company's current sources of income do not meet its needs
for the ensuing fiscal year. We are striving to obtain the financing necessary
to meet TNCi's needs over the course of the coming fiscal year and to fully
implement its business plan, but no assurances can be made that we will be able
to do so. Failure to do so would have a material adverse effect on TNCi's
financial condition, which, in turn, would have a material adverse effect on our
financial condition.
WE HAVE A HISTORY OF LOSSES AND EXPECT CONTINUED LOSSES IN THE FORESEEABLE
FUTURE.
For the year ended June 30, 2000, we lost approximately $37.5 million,
including the profit from the approximately $5.4 million sale by The Network
Connection of 195 Cheetah(R) multimedia video servers to schools in Georgia.
Without the effect of this income on our net results we would have incurred
greater losses for the year. In 1999, we changed our fiscal year end from
October 31 to June 30. For the eight-month transition period ended June 30, 1999
we lost $2.4 million. In addition, under prior management, we incurred net
losses of $7.3 million in 1998 and $51.0 million in 1997. Excluding the effect
of any future non-operating gains, we expect to continue to incur losses for the
foreseeable future and, if we ever have profits, we may not be able to sustain
them.
We expect to have a significant net loss for the year ended June 30, 2001.
Our expenses will increase as we continue to implement our business model.
Specifically, expenses will increase:
* in the event we hire additional employees and lease more office space
to broaden our partner company support capabilities;
* in connection with the operation of our UK lottery project, which will
require significant expenditures for progress payments under the
purchase agreement for the equipment that comprises the infrastructure
of the lottery, and for payments to the company that manages and
maintains the infrastructure;
* with respect to The Network Connection, in the event that it continues
to draw on the credit facility for funds to hire additional management
personnel, to develop its "away-from-home" experience content, to
finance production and installation of the systems through which it
runs its content and other operating expenses;
* as we explore acquisition opportunities and alliances with other
companies; and
* as we facilitate business arrangements among our partner companies.
Expenses are also expected to increase due to the potential effect of
goodwill amortization and other charges resulting from potential future
acquisitions. If any of these and other expenses are not accompanied by
increased revenue, our losses will be greater than we anticipate.
OUR REVENUES ARE SUBSTANTIALLY DEPENDENT ON OUR OPERATING SUBSIDIARIES.
Our consolidated financial statements include our accounts and the accounts
of our wholly owned subsidiaries:
* GlobalTech Holdings Limited
-32-
<PAGE>
* GTL Management Limited
* Interactive Flight Technologies (Gibraltar) Limited
* GTL Lottoco, Inc.
* GTL Subco, Inc.
* GTL Investments
* GTL Leasing Limited
* Lottery Sales Company Limited
* MTJ Corp.
* GlobalTec Networks, LLC
and our majority-owned and controlled subsidiary, The Network Connection, and
its wholly-owned subsidiary TNCi UK Limited. The ownership interest of minority
shareholders in The Network Connection are recorded as "minority interest" on
our condensed consolidated financial statements. We generally would not
consolidate with our results of operations the results of operations of a
partner company in which we held less than a 50% voting interest and otherwise
did not maintain management control.
For the year ended June 30, 2000, the revenues of The Network Connection
represented 96% of our total revenues, and for the eight-month transition period
ended June 30, 1999, revenues from The Network Connection represented
approximately 61% of our revenues.
At September 25, 2000, we owned approximately 79% of the aggregate voting
interests of The Network Connection. If our voting ownership of any of our
operating subsidiaries, particularly The Network Connection, were to decrease
below 50% and we did not maintain management control, we would most likely not
continue to consolidate their results of operations with our results of
operations. While this would affect our earnings per share only to the extent of
our ownership change, the presentation of our consolidated statement of
operations and balance sheet would change dramatically. In addition,
fluctuations and decreases in the revenues of any of our subsidiaries,
particularly The Network Connection, will have a correlative effect on our
revenues.
WE MAY NOT HAVE OPPORTUNITIES TO ACQUIRE INTERESTS IN ADDITIONAL COMPANIES.
We may be unable to identify companies that complement our strategy. Even
if we identify a company that complements our strategy, we may be unable to
acquire an interest in the company for many reasons, including:
* failure to agree on the terms of the acquisition;
* incompatibility between our management and management of the company;
* competition from other potential acquirers; and
* lack of capital resources needed to acquire an interest in the
company.
If we cannot acquire interests in additional companies, our strategy to
build a network of technology partner companies that will enhance stockholder
value may not succeed.
-33-
<PAGE>
WE MAY BE UNABLE TO MANAGE NEWLY ACQUIRED PARTNER COMPANIES.
We plan to continue to acquire interests in e-commerce, Internet,
telecommunications, networking solutions and gaming companies to complement our
business strategy. Any additional acquisitions will likely place strain on our
limited resources and our ability to manage our partner companies. Risks related
to future acquisitions include:
* disruption in our ongoing support of our partner companies,
distracting our management and other resources and making it difficult
to maintain our standards, controls and procedures;
* acquisition of interests in companies in markets in which we have
little experience; and
* increased debt or issuance of equity securities to fund future
acquisitions, which may be dilutive to existing stockholders.
OUR SUCCESS DEPENDS UPON OUR SENIOR MANAGEMENT AND THE KEY PERSONNEL OF OUR
PARTNER COMPANIES.
Our success depends upon the continued employment of and performance by our
senior management, particularly our Chairman and Chief Executive Officer, Irwin
L. Gross, and the key personnel of our partner companies. It could have a
material adverse effect on us if our senior management team do not continue
their relationships with us, or if our partner companies are unable to hire and
retain a sufficient number of qualified management, professional, technical and
marketing personnel.
THE MARKET PRICE FOR OUR STOCK IS AND WILL LIKELY CONTINUE TO BE VOLATILE.
The market price for our stock has been volatile and has fluctuated
significantly to date. The trading price of our stock is likely to continue to
be highly volatile. In addition, the stock market in general and the market for
technology companies in particular, have experienced extreme price and volume
fluctuations. These broad market and industry factors may materially and
adversely affect the market price of our common stock, regardless of our actual
operating performance. In the past, following periods of volatility in the
market price of a company's securities, securities class-action litigation has
often been instituted against such companies. Such litigation, if instituted,
could result in substantial costs and a diversion of management's attention and
resources, which would have a material adverse effect on our business, financial
condition and results of operations.
FLUCTUATIONS IN OUR QUARTERLY RESULTS WILL LIKELY CAUSE FLUCTUATIONS IN OUR
STOCK PRICE.
We expect that our quarterly results will fluctuate significantly due to
many factors, including:
* the operating results of our operating subsidiaries;
* changes in equity, losses or income and amortization of goodwill
related to the acquisition or divestiture of interests in partner
companies;
* changes in our methods of accounting for our partner company
interests, which may result from changes in our ownership percentages
of our partner companies;
* changes in the market price of our investment in U.S. Wireless, which
is marked to market;
* sales of equity securities by our partner companies, which could cause
us to recognize gains or losses under applicable accounting rules;
* the pace of development or a decline in growth of the markets in which
our partner companies operate and competition with respect to the
technologies, products and services offered by our partner companies;
* exchange rate fluctuations, to the extent that we generate revenues
from foreign operations;
-34-
<PAGE>
* intense competition from other potential acquirers of prospective
partner companies, which could increase our cost of acquiring
interests in additional companies; and
* our ability to effectively manage our growth and the growth of our
partner companies.
If our operating results in one or more quarters do not meet securities
analysts' or your expectations, the price of our stock could decrease. In
addition, we expect that the price of our common stock will fluctuate in
response to announcements by us or our competitors with respect to acquisitions,
divestitures and other corporate developments.
WE MAY HAVE TO BUY, SELL OR RETAIN ASSETS WHEN WE WOULD OTHERWISE NOT WISH TO IN
ORDER TO AVOID REGISTRATION UNDER THE INVESTMENT COMPANY ACT OF 1940.
Generally, a company may be required to register under the Investment
Company Act and comply with significant restrictions if its investment
securities exceed 40% of the company's total assets, or if it holds itself out
as being primarily engaged in the business of investing, reinvesting or trading
in securities. A company is generally not required to register under the
Investment Company Act if less than 45% of its total assets consist of, and less
than 45% of its net income is derived from, securities other than government
securities and securities of majority-owned subsidiaries and companies primarily
controlled by it.
We believe that we are not an investment company, as that term is defined
under the Investment Company Act, because our interests in partner companies
that are not majority owned or primarily controlled by us make up less than 45%
of our total assets and net income. It is not feasible for us to register as an
investment company because the Investment Company Act regulations are
inconsistent with our strategy of acquiring interests in, developing, operating
and managing our partner companies. As the values of our currently held
investment and non-investment securities change, and if we acquire additional
investment securities, it is possible that we could be subject to regulation
under the Investment Company Act. If that were to happen, we could ask for
exemptive relief from the Securities and Exchange Commission. We are also able
to rely once every three years on a one-year temporary exemption from the
registration requirements of the Investment Company Act. If we were not able to
obtain exemptive relief and the one-year temporary exemption were no longer
available, we might need to take certain actions to avoid regulation under the
Investment Company Act. We might be compelled to acquire additional income or
loss generating assets that we might not otherwise have acquired, be forced to
forego opportunities to acquire interests in companies that would be important
to our strategy or be forced to forego the sale of minority interests we would
otherwise want to sell. In addition, we might need to sell some assets
considered to be investment securities, including interests in partner
companies. Any of these actions could adversely affect our business.
WE MAY BE UNABLE TO OBTAIN MAXIMUM VALUE FOR OUR PARTNER COMPANY INTERESTS.
We have significant positions in our partner companies. While we do not
anticipate selling significant portions of our investments in our partner
companies in the foreseeable future, if we were to divest all or part of an
investment in a partner company, we may not receive maximum value for this
position. For partner companies with publicly traded stock, we may be unable to
sell our interest, or portions thereof, at then-quoted market prices.
Furthermore, for those partner companies that do not have publicly traded stock,
the realizable value of our interests may ultimately prove to be lower than the
carrying value currently reflected in our consolidated financial statements.
OUR GLOBAL PRESENCE EXPOSES US TO CULTURAL DIFFERENCES, CURRENCY FLUCTUATIONS
AND POLITICAL INSTABILITY.
We have invested in foreign operations and may consider additional projects
outside the United States. Our international presence exposes us to several
risks, including the following:
* CULTURAL DIFFERENCES. In transacting business in foreign countries, we
seek to partner with entities from those countries and to hire
professional consultants to help us determine whether products and
services we propose to offer will be accepted by the people who live
there. This process does not, however, ensure acceptance. Our failure
to choose acceptable products and services to offer abroad will have
an adverse effect on our business.
-35-
<PAGE>
* CURRENCY FLUCTUATIONS. When we purchase interests in non-United States
partner companies for cash, we will likely have to pay for the
interests using the currency of the country where the prospective
partner company is located. Similarly, although it is our intention to
act as a long-term partner to our partner companies, if we sold an
interest in a non-United States partner company we might receive
foreign currency. To the extent that we transact in foreign
currencies, fluctuations in the relative value of these currencies and
the United States dollar may adversely impact our financial results.
* COMPLIANCE WITH LAWS. We are subject to the laws of the UK, with
respect to our lottery project, and may become subject to the laws and
regulations of other foreign countries in the future. These laws are
different than those of the United States and we are less familiar
with them. We must go to the expense of hiring legal counsel in each
foreign country in which we operate to comply with their laws and
regulations. The laws of these foreign countries may change at any
time, which would likely require us to incur additional legal expenses
to comply with such changes, or could even force us to discontinue
operations.
* POLITICAL INSTABILITY. We have, and may in the future purchase,
interests in foreign partner companies that are located, or transact
business in, parts of the world that experience political instability.
Political instability may have an adverse impact on the subject
country's economy, and may limit or eliminate a partner company's
ability to conduct business.
IF WE DO NOT HAVE ENOUGH SHARES AUTHORIZED OR DO NOT OBTAIN STOCKHOLDER APPROVAL
FOR THE ISSUANCE OF CLASS A COMMON STOCK UPON CONVERSION OF OUR SERIES C
CONVERTIBLE PREFERRED STOCK AND/OR SECURED CONVERTIBLE NOTES IN EXCESS OF
19.999% OF OUR OUTSTANDING CLASS A COMMON STOCK, WE MAY BE FORCED TO REDEEM THE
SERIES C CONVERTIBLE PREFERRED STOCK AND/OR THE SECURED CONVERTIBLE NOTES FROM
THE HOLDERS.
Pursuant to the terms of the convertible preferred stock purchase agreement
that we entered to with Advantage Fund II Ltd. and Koch Investment Group Ltd. on
February 16, 2000, in the event of a "triggering event," as defined in the
Certificate of Designations, relating to the Series C Convertible Preferred
Stock, such as if we do not have enough shares of Class A Common Stock
authorized for issuance upon conversion of the Preferred Stock or do not obtain
stockholder approval for the issuance of Class A Common Stock upon conversion of
our Series C Convertible Preferred Stock held by these investors in excess of
19.999% of the outstanding shares of Class A Common Stock immediately prior to
consummation of the sale of the Series C Convertible Preferred Stock as required
under the Nasdaq listing rules and regulations, we may be forced to redeem the
Series C Convertible Preferred Stock from them. We may not have the resources
available to do so. As of September 25, 2000 the Series C Convertible Preferred
Stock represented approximately 6.2% of our Class A Common Stock on a fully
converted basis. If we were required to redeem the Series C Convertible
Preferred Stock, it could have a material adverse effect on our business. The
same risks are present in the event that we default on our obligations under the
private placement purchase agreement that we entered into with, or the secured
convertible notes that we issued to, Advantage and Koch on June 8, 2000. As of
September 25, 2000, after the redemption of $2.0 million of the secured
convertible notes, the remaining secured convertible notes represented
approximately 9.3% of our Class A Common Stock on a fully converted basis.
WE FACE GENERAL RISKS RELATED TO DOING BUSINESS THAT ARE BEYOND OUR CONTROL.
Our success will depend in part on certain factors that are beyond our
control and that cannot clearly be predicted at this time. These factors include
general economic conditions, both nationally and internationally, changes in tax
laws, fluctuating operating expenses, changes in governmental regulations,
changes in technology and trade laws.
-36-
<PAGE>
RISKS PARTICULAR TO OUR PARTNER COMPANIES
FLUCTUATION IN THE PRICE OF THE COMMON STOCK OF OUR PUBLICLY TRADED PARTNER
COMPANIES COULD AFFECT THE PRICE OF OUR STOCK.
The Network Connection and U.S. Wireless are our two publicly traded
partner companies. The price of their common stock has been highly volatile. The
market value of our holdings in these partner companies changes with these
fluctuations. Fluctuations in the price of The Network Connection's and US
Wireless' common stock are likely to affect the price of our Class A Common
Stock.
THE NETWORK CONNECTION. The price of The Network Connection's common stock
may fluctuate in response to announcements by it or its competitors regarding
sales of products and services, product enhancements and other corporate
developments. The Network Connection's results of operations, and accordingly
the price of its common stock, may be adversely affected by the following
factors:
* the company's ability to implement its new business strategy, which
requires obtaining and expending a great deal of capital to develop
compelling content and new applications for its interactive
entertainment and information technologies, and to penetrate new
markets;
* the company's ability to integrate, retain and manage the new
management team that it has put in place to lead it in the
implementation of its new business strategy;
* the company's ability to generate revenues from the markets in which
it is currently operating, and to do so on a profitable basis;
* the company's ability to procure and provide desirable content through
its interactive entertainment and information systems; and
* the outcome of discussions with Carnival Cruise Lines with respect to
a new agreement between the company and Carnival which would cover the
installation of the company's latest CruiseView(TM) technology on a
Carnival ship and contractual terms more favorable to the company than
the previous agreement with Carnival, including a longer-term and
multiple ship arrangement. While the company is optimistic about the
discussions, there is no assurance that it will be successful in
securing a new, more favorable long-term contract with Carnival.
U.S. Wireless. U.S. Wireless currently has no revenues because it is in the
process of developing networks to support its proprietary wireless location
technology, RadioCamera(TM), which is designed to enable wireless carriers and
others to provide their customers with location-based services and applications.
U.S. Wireless developed its RadioCamera(TM) technology to capitalize on the
market that it expects to develop in response to the Federal Communication
Commission's mandate, which requires geolocation of mobile phone subscribers
dialing 911. The price of U.S. Wireless' common stock may be adversely affected
by the following factors:
* additional mandates or other legislation or regulation negatively
affecting the FCC mandate;
* the development of the market for wireless location technologies,
which currently is almost completely dependent upon the FCC mandate;
* results of the testing of its RadioCamera(TM)wireless
location-technology;
* U.S. Wireless' ability to build out a nationwide network to allow for
use of the RadioCamera (TM) system on a nationwide basis, which will
require substantial capital commitment, and developing additional
applications and offerings of value-added services in connection with
the RadioCamera(TM) technology;
-37-
<PAGE>
* the level of acceptance of U.S. Wireless' RadioCamera(TM) technology
as a solution to the FCC mandate and of any additional services the
company develops for use in connection with that technology;
* announcements by U.S. Wireless or its competitors with respect to
system and service enhancements, strategic and other agreements, and
other corporate developments;
* competitors' abilities to develop and implement their systems in
response to the FCC mandate, and the level of acceptance of
competitors' systems, in the event that any are developed and
implemented; and
* U.S. Wireless' ability to obtain the financing necessary for it to
carry out its business plan.
An additional factor that may affect the volatility of the stock price of
either of our publicly traded partner companies is the extent to which there are
outstanding shares available for resale and derivative securities outstanding
that could convert to shares available for resale. The sale of a significant
number of shares of either of our publicly traded partner companies into the
market could cause a decrease in the price per share of that partner company.
THE NETWORK CONNECTION HAS A HISTORY OF LOSSES AND EXPECTS CONTINUED LOSSES.
The Network Connection generated revenues of $18.8 million for the fiscal
year ended October 31, 1998, and realized a net loss for that year of $7.2
million. For the eight-month transition period ended June 30, 1999, The Network
Connection generated revenues of $0.9 million, and realized net income of $2.3
million. This net income was due entirely to reversal of prior accruals. For the
year ended June 30, 2000, The Network Connection generated revenues of $7.1
million on which it realized a net loss of $16.4 million. A majority of the
revenues generated in the year ended June 30, 2000 came from the sale of 195
Cheetah(R) video servers in connection with the Georgia Metropolitan Regional
Education Services Agency Net 2000 project. Without these sales, The Network
Connection would have had a loss of $18.4 million for that period. As of June
30, 2000, The Network Connection's accumulated deficit was $99.3 million and
working capital deficit was $6.8 million.
Prior management of The Network Connection entered into an agreement with
Carnival Cruise Lines, which obligated The Network Connection to install
CruiseView(TM) systems on all ships designated by Carnival through December
2002. Since the installation of the CruiseView(TM) system on two Carnival cruise
ships, and beginning in the year ended June 30, 2000, the Network Connection
experienced costs in excess of those recoverable under the Carnival agreement.
Given these costs, and ongoing technical issues, The Network Connection notified
Carnival of its desire to renegotiate their agreement. During these discussions,
Carnival notified The Network Connection in a letter dated April 24, 2000 that
it sought to terminate the agreement and sought to assert certain remedies
thereunder. On September 25, 2000, The Network Connection and Carnival entered
into an agreement settling their claims against one another. The settlement
involves the termination of the Carnival agreement and the issuance to Carnival
by The Network Connection of a $550,000 principal amount convertible note that
bears interest at 8% and matures in one year. In addition, The Network
Connection and Carnival continue to discuss a new agreement that would cover the
installation of the latest CruiseView(TM) technology on a Carnival ship, and
contain contractual terms more favorable to The Network Connection than the
previous agreement, including a longer term and multiple ship arrangement. While
The Network Connection is optimistic about the discussions, there is no
assurance that it will be successful in securing a new, more favorable long-term
contract with Carnival.
The Network Connection has executed contracts to install its InnView (TM)
system in only 10 hotels.
We do not believe that The Network Connection's sales to date are
sufficient to determine whether there is meaningful demand for its products. The
Network Connection intends to continue to devote significant resources to its
sales and marketing efforts in an effort to promote interest in its products.
There is no assurance that The Network Connection will be successful with these
efforts or that significant market demand for its products will ever develop.
-38-
<PAGE>
The Network Connection is in the early phases of implementing a new
business strategy. Its recently formed divisions and the projects they are
pursuing are in their infancy. As such, most of these projects are not expected
to generate significant revenue in the near-term, yet they require funding to
develop. TNCi estimates that its cash and financing needs for its current
business through June 2001 will be met by equipment financing that is currently
being pursued, and private placements of equity currently being sought from
various sources for working capital purposes. Toward this end, TNCi has closed
on approximately $3.1 million of equity financing in the last three months.
Despite these infusions, TNCi's audit report for the fiscal year ended June 30,
2000 contains a "going concern" qualification, as it has been determined that
the company's current sources of cash do not meet its needs for the ensuing
fiscal year. We are striving to obtain the financing necessary to meet TNCi's
needs over the course of the coming fiscal year and to fully implement its
business plan, but no assurances can be made that we will be able to do so.
Failure to do so would have a material adverse effect on TNCi's financial
condition, which, in turn, would have a material adverse effect on our financial
condition.
DELISTING OF THE COMMON STOCK OF THE NETWORK CONNECTION FROM TRADING ON THE
NASDAQ SMALLCAP MARKET WOULD REDUCE THE MARKETABILITY OF OUR HOLDINGS IN THE
NETWORK CONNECTION.
The Network Connection common stock is listed for trading on the Nasdaq
SmallCap Market under the symbol "TNCX." A listed company may be delisted if it
fails to maintain minimum levels of stockholders' equity, shares publicly held,
bid price, number of stockholders or aggregate market value, or if it violates
other aspects of its listing agreement. At June 30, 2000 The Network Connection
did not satisfy the minimum level of net tangible assets required to be listed
($2.0 million), nor did The Network Connection have sufficient non-affiliate
market capitalization ($35.0 million) or net income ($500,000 for two of the
past three years). The Network Connection is seeking additional capital and
attempting to effect other equity transactions to, among other things, increase
its net tangible assets to at least the minimum level required. There can be no
assurance that it will be able to raise this additional capital, or if it is
able to raise additional capital, that such capital will be on terms
satisfactory to it, or to effect other equity transactions currently under
consideration. If The Network Connection fails to satisfy the criteria for
continued listing, its common stock may be delisted.
If The Network Connection common stock is delisted, public trading, if any,
would thereafter be conducted in the over-the-counter market in the so-called
"pink sheets," or on the NASD's "Electronic Bulletin Board." In this event, it
may be more difficult to dispose of, or even to obtain quotations as to the
price of, The Network Connection common stock and the price, if any, offered for
its common stock may be substantially reduced. A decline in the market value of
The Network Connection will not impact our financial position. However, such a
decline would likely affect our stock price.
MANY OF OUR PARTNER COMPANIES OPERATE IN MARKETS CHARACTERIZED BY RAPID
TECHNOLOGICAL CHANGE.
The markets in which many of our partner companies operate are
characterized by rapid technological change, frequent new product and service
introductions and evolving industry standards. Significant technological changes
could render their existing technologies, products and services obsolete. Growth
and intense competition in the networking solutions, telecommunications and
e-commerce markets exacerbate these conditions. If our technology-oriented
partner companies are unable to successfully respond to these developments or do
not respond in a cost-effective way, our business, financial condition and
operating results could be adversely affected. To be successful, these partner
companies must adapt to their rapidly changing markets by continually improving
the responsiveness, services and features of their products and services and by
developing new features to meet the needs of their customers. Our success will
depend, in part, on the abilities of our partner companies to enhance their
existing products and services and develop new offerings and technology that
address the needs of their customers. Our technology-oriented partner companies
will also need to respond to technological advances and emerging industry
standards in a cost-effective and timely manner.
-39-
<PAGE>
OUR TECHNOLOGY ORIENTED PARTNER COMPANIES' PRODUCTS COULD EXPERIENCE TECHNICAL
DIFFICULTIES.
The products of our technology-oriented partner companies are highly
specialized and involve intricate technologies and electronic components that
may be subject to technical difficulties. These technical difficulties could
occur at any time as a result of component malfunction or some other reason.
Although our technology oriented partner companies generally utilize quality
control procedures and test products before marketing them, there is no
assurance that all defects will be identified. We believe that reliability will
be an important consideration for customers of our partner companies. Failure to
detect and prevent defects and design flaws in the products of these partner
companies could adversely affect our business, financial condition and operating
results.
THE SUCCESS OF OUR TECHNOLOGY-ORIENTED PARTNER COMPANIES IS DEPENDENT TO A LARGE
DEGREE ON THE ACCEPTANCE OF E-COMMERCE AS A MEANS OF DOING BUSINESS.
The success of our technology-oriented partner companies is dependent on
the continued growth of intranets and the Internet as media for commercial
transactions. The development of the e-commerce market is in its early stages.
If widespread commercial acceptance of e-commerce and use of the Internet does
not continue to develop, or if intranets and the Internet do not develop as
effective media for providing products and services, our technology-oriented
partner companies may not succeed. A number of factors could impede acceptance
of e-commerce and the Internet as a medium for doing business, including:
* the unwillingness of businesses to shift from traditional processes to
intranet-based and/or Internet-based processes;
* the failure to continue the development of the necessary network
infrastructure for substantial growth in usage of the Internet;
* increased government regulation or taxation may adversely affect the
viability of intranets and the Internet as media for commercial
transactions; and
* the growth in bandwidth may not keep pace with the growth in on-line
traffic, which could result in slower response times for the users of
intranet-based and Internet-based commercial transactions.
THE UK LOTTERY PROJECT HAS NOT GENERATED SUFFICIENT CASH FLOW TO PAY A LARGE
WEEKLY CONTRACTUAL OBLIGATION, AND WE MAY NOT SUCCEED IN IMPLEMENTING AN
ALTERNATIVE OPERATING STRATEGY FOR THE NETWORK OPERATING CENTER AND TERMINALS
UTILIZED IN THE PROJECT, WHICH WE EXPECT TO DISCONTINUE BY DECEMBER 31, 2000.
Our UK lottery project began operations on March 27, 2000, and was
officially launched on April 4, 2000 in conjunction with the start of a media
campaign. The project has generated insignificant revenues to date. As discussed
above, we have divested our interest in Inter Lotto, the company whose External
Lottery Management Certificate we rely on to run the lottery, and have separated
from Inter Lotto in all other respects, other than an arrangement with Inter
Lotto to manage the lottery under the authority of the Certificate until
December 31, 2000.
GTL Management Limited, a UK subsidiary of ours, entered into an agreement
with International Lottery and Totalizator Systems, Inc. pursuant to which
International Lottery provides certain facilities management services and
technological support in connection with the networking hardware, software and
terminals that we, through another UK subsidiary, purchased from them and that
serves as the infrastructure of the lottery. This agreement has a seven-year
term and requires that we pay them $72,000 per week, plus additional amounts
based on any terminals in excess of 3,500 being installed (there are only
approximately 2,000 terminals installed at this time) and a percentage of
average daily sales. We guaranteed performance of this agreement.
The obligations under the facilities management agreement commenced on
March 27, 2000 with the sale of the first ticket in connection with the lottery.
Including the weekly payments required under this agreement, we currently
anticipate that the lottery enterprise will require funding of approximately
$3.0 million in the three-month period ending December 31, 2000 to continue
-40-
<PAGE>
operations. After December 31, 2000, we will still be obligated to make payments
under this agreement. We are currently negotiating its termination. There is no
assurance that we will be successful in these negotiations or that, if
terminated, the terms thereof will be favorable to us. Failure to negotiate a
termination of this agreement and to do so on terms favorable to us could have a
material adverse effect on our results of operations and financial condition.
We are currently investigating alternative operating strategies for the use
of the lottery equipment and network operating center following termination of
the Inter Lotto lottery operations on or before December 31, 2000. Such
strategies include utilizing the network for operating pools, lotteries and
betting for established gaming companies, and to develop a national linked bingo
game in partnership with proprietary private clubs throughout the UK. We intend
to implement an alternative operating strategy, however, no assurance can be
given that we will be successful in doing so. If we are unable to successfully
implement an alternative operating strategy, the lottery equipment assets could
be deemed impaired under generally accepted accounting principals, as the
carrying value of such assets may not be fully recoverable in such event. Any
"write down" of the value of such assets due to such impairment could have a
material adverse effect on our financial condition.
ALL OF OUR PARTNER COMPANIES COULD BE ADVERSELY AFFECTED BY COMPETITION IN THE
MARKETS IN WHICH THEY OPERATE.
The markets in which our partner companies operate are highly competitive.
Many of the competitors of our partner companies have longer operating histories
and significantly greater financial, technical, marketing and other resources
than they do. These competitors are therefore able to respond more quickly and
efficiently to new or changing opportunities, technologies and customer
requirements. If our partner companies' products and services do not achieve a
significant level of acceptance in the marketplace, or their competitors develop
products and services rendering theirs obsolete, our partner companies, and, in
turn, we, would be adversely affected.
INTELLECTUAL PROPERTY ISSUES, GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES THAT
COULD AFFECT OUR PARTNER COMPANIES.
INTELLECTUAL PROPERTY. Our partner companies utilize certain proprietary
technologies and other intellectual property that are valuable to them. They
protect this intellectual property in a variety of ways, such as through patent,
trademark and copyright law. U.S. Wireless has filed 18 patent applications with
the Patent & Trademark Office and has received three issued patents and has
received notices of allowance for another four of these applications. There is
no assurance that any of the remaining patents will be granted. In addition, our
partner companies rely on confidentiality agreements with key employees to
prevent disclosure of important intellectual property to third parties. There is
no assurance that any of these protections will prove sufficient to prevent
third parties from using our partner companies' intellectual property either
through legal or illegal means. Use by third parties of intellectual property of
one of our partner companies could adversely affect that partner company's
business. In addition, we give no assurance that any particular aspect of any of
our partner companies' intellectual property will not be claimed to infringe the
intellectual property rights of a third party. Intellectual property
infringement litigation for or against any of our partner companies would likely
have an adverse effect on that partner company's business.
GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES. Our partner companies are
subject, both directly and indirectly, to various laws and governmental
regulations relating to their businesses. Our partner companies that operate
abroad are subject to the laws and regulations of foreign countries with which
we are not familiar. We believe that our partner companies maintain compliance
with these laws and regulations, and that, while there is expense incurred in
doing so, these laws and regulations do not have a material impact on the
operations of our partner companies; however, as a result of rapid technology
growth and other related factors, laws and regulations may be adopted which
significantly impact our partner companies' businesses, and, in turn, our
business.
INFLATION AND SEASONALITY
We do not believe we are significantly impacted by inflation or that our
operations are seasonal in nature.
-41-
<PAGE>
RISKS ASSOCIATED WITH YEAR 2000
Many currently installed computer systems and software products were coded
to accept only two digit year entries in the date code field. Consequently,
subsequent to December 31, 1999, many of these systems became subject to failure
or malfunction. Although we are not aware of any material Year 2000 issues at
this time, Year 2000 problems may occur or be made known to us in the future.
Year 2000 issues may possibly affect software solutions developed by our
affiliate companies or third-party software incorporated into our solutions. Our
affiliate companies generally do not guarantee that the software licensed from
third-parties by their clients is Year 2000 compliant, but they sometimes
warrant that solutions developed by them are Year 2000 compliant.
FORWARD-LOOKING INFORMATION
This Annual Report on Form 10-K includes "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995. This
act provides a "safe harbor" for forward-looking statements to encourage
companies to provide prospective information about themselves so long as they
identify these statements as forward-looking and provide meaningful cautionary
statements identifying important factors that could cause actual results to
differ from the projected results.
All statements other than statements of historical fact we make in this
Report are forward-looking. In particular, the statements herein regarding our
future results of operations or financial position are forward-looking
statements. In some cases, you can identify forward-looking statements by
terminology such as "may," "will," "should," "expect," "plan," "anticipate,"
"believe," "estimate," "predict," "potential," or "continue" or the negative of
such terms or other comparable terminology.
Forward-looking statements reflect our current expectations and are
inherently uncertain. For these statements, we claim the protection of the safe
harbor for forward-looking statements contained in the Private Securities
Litigation Reform Act of 1995. You should understand that future events, in
addition to those discussed elsewhere in this Report, particularly under "Risk
Factors," and also in other filings made by us with the Securities and Exchange
Commission, could affect our future operations and cause our results to differ
materially from those expressed in our forward-looking statements. The
cautionary statements made in this Report should be read as being applicable to
all related forward-looking statements contained herein.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivatives and Similar Financial Instruments and for Hedging
Activities", to establish accounting and reporting standards for derivative
instruments and for hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities on the balance sheet and measure
those instruments at fair value. This new standard, as amended by related SFAS
Nos. 137 and 138, will be effective for Global for its fiscal year ending June
30, 2001. We are currently evaluating the impact of SFAS No. 133.
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, Accounting for Certain Transactions Involving Stock
Compensation (an interpretation of APB 25). This interpretation clarifies the
application of APB No. 25 by clarifying the definition of an employee, the
determination of non-compensatory plans and the effect of modifications to stock
options. This interpretation is effective July 1, 2000 and is not expected to
have a material effect on Global's consolidated financial statements.
ITEM 7 -- FINANCIAL STATEMENTS
Our audited consolidated financial statements the fiscal year ended June
30, 2000 are located beginning at page F-1 of this Annual Report.
ITEM 8 -- CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
There are no items or circumstances to be disclosed under this Item 8.
-42-
<PAGE>
PART III
ITEM 9 -- DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The following sets forth biographical information about each of our
directors and executive officers as of June 30, 2000:
NAME AGE POSITION/OFFICE
---- --- ---------------
Irwin L. Gross 55 Chief Executive Officer and Chairman of the Board
James W. Fox 49 President, Chief Operating Officer and Director
Patrick J. Fodale 37 Vice President and Chief Financial Officer
David N. Shevrin 37 Vice President - Business Development
S. Lance Silver 31 Vice President and General Counsel
M. Moshe Porat 52 Director
Charles T. Condy 59 Director
Stephen Schachman 55 Director
Irwin L. Gross has been Chairman of Global's Board of Directors and its
Chief Executive Officer since September 1998 and Chairman of the Board of
Directors and Chief Executive Officer of The Network Connection since May 18,
1999. Mr. Gross also currently sits on the Board of Directors of U.S. Wireless
Corporation, a publicly held company listed on the Nasdaq National Market. Mr.
Gross is a founder of Rare Medium, Inc., a publicly held company listed on the
Nasdaq National Market, and was Chairman and a Director of Rare Medium from 1984
to 1998. In addition, Mr. Gross served as the Chief Executive Officer of
Engelhard/ICC, a joint venture between Rare Medium and Engelhard. Mr. Gross has
served as a consultant to, investor in and director of, numerous publicly held
and private companies and serves on the board of directors of several charitable
organizations. Mr. Gross has a Bachelor of Science degree in Accounting from
Temple University and a Juris Doctor degree from Villanova University.
James W. Fox has been a Director of Global since September 1998. Mr. Fox
has also served as Global's President and Chief Operating Officer since January
1, 1999. He was formerly the Managing Partner of First Lawrence Capital Corp.,
and was responsible for the firm's management and the growth of its mergers and
acquisitions advisory and principal investment activities. From 1989 to 1996,
Mr. Fox was a director with national practice development and management
responsibility with Coopers & Lybrand in New York, with primary responsibility
for mergers and acquisitions activities. He has held senior mergers and
acquisitions positions with General Foods Corp., Arthur Young and W.R. Grace Co.
Mr. Fox has a Bachelor of Arts degree in Mathematics and History from Amherst
College and an M.B.A. in Finance from the University of Pennsylvania's Wharton
School.
Patrick J. Fodale has been Vice President and Chief Financial Officer of
Global since December 15, 1999. Prior to his employment by Global, Mr. Fodale
was a workout specialist recruited by companies in or contemplating bankruptcy
under Chapter 11 of the United States Bankruptcy Code. In his capacity as a
workout specialist, Mr. Fodale, from March 1998 to September 1999, served as
Chief Financial Officer of HomePlace, Inc., a privately held national retailer
of housewares and home furnishings, which was then operating under Chapter 11.
Also, in his capacity as workout specialist, from November 1995 to February
1998, Mr. Fodale was Chief Financial Officer of Color Tile, Inc., a privately
held national retailer of floor covering products also operating under Chapter
11. From 1985 to October 1995, Mr. Fodale was with the firm of Arthur Andersen,
LLC in the corporate restructuring group. Mr. Fodale holds a Masters Degree in
Accounting from the University of Michigan and was a Certified Public Accountant
in the State of Michigan. We did not hire Mr. Fodale, and he does not serve us,
in his capacity as a workout specialist.
David N. Shevrin has served as Vice President - Business Development of
Global since September 15, 1998, with primary responsibility for new business
development, analysis and strategy. Prior thereto, from July 1998, Mr. Shevrin
was Vice President of Ocean Castle Investments, LLC. His responsibilities there
-43-
<PAGE>
were also in the areas of business development and analysis. From November 1994
to July 1998, Mr. Shevrin was Assistant to the Chairman and Chief Executive
Officer of ICC Technologies. Before then, Mr. Shevrin served as a Product
Manager with Kraft General Foods. Mr. Shevrin received his M.B.A. degree from
Duke University's Fuqua School of Business and Bachelor of Arts degree in
Economics from Emory University.
S. Lance Silver has served as Vice President and General Counsel of Global
since September 7, 1999. Prior thereto, from September 1994, Mr. Silver was an
associate in the Corporate Department of Wolf, Block, Schorr and Solis-Cohen,
LLP, where his practice focused on securities law, mergers and acquisitions, and
venture financing. Mr. Silver received his Juris Doctor (MAGNA CUM LAUDE) from
Temple University School of Law and a Bachelor of Science degree in Finance from
the Pennsylvania State University. Mr. Silver is licensed to practice law in
Pennsylvania and New Jersey.
M. Moshe Porat has been a Director of Global since September 1998 and a
Director of The Network Connection since May 18, 1999. Since September 1996, Dr.
Porat has served as the Dean of the School of Business and Management at Temple
University. From 1988 to 1996 he was Chairman of the Risk Management, Insurance
and Actuarial Science Department at Temple University. Dr. Porat received his
undergraduate degree in economics and statistics (with distinction) from Tel
Aviv University, his M.B.A. (MAGNA CUM LAUDE) from the Recanati Graduate School
of Management at Tel Aviv University, and completed his doctoral work at Temple
University. Dr. Porat holds the Chair of the Joseph E. Boettner Professorship in
Risk Management and Insurance and has won several awards in the insurance field.
Prior to his academic work, Dr. Porat served as deputy general manager of a
large international insurance company. He holds the CPCU professional
designation and is a member of ARIA (American Risk and Insurance Association),
IIS (International Insurance Society), RIMS (Risk and Insurance Management
Society) and Society of CPCU. Dr. Porat has authored several monographs on
captive insurance companies and their use in risk management, has published
numerous articles on captive insurance companies, self-insurance and other
financial and risk topics.
Charles T. Condy has been a Director of Global since September 1998. Mr.
Condy was a director of Rare Medium, Inc., a publicly traded company listed on
the Nasdaq National Market, from 1996 to 1999. Mr. Condy is the founder,
chairman and chief executive officer of Next Century Restaurants, Inc., a
private company that owns Aqua, and Charles of Nob Hill, both of which are in
San Francisco, and Aqua of Las Vegas. He is founder and has been Chairman and
Chief Executive Officer of Proven Alternatives, Inc., a privately held
international energy management company, since 1991. Mr. Condy was chairman and
chief executive officer of California Energy Company, Inc., a geothermal energy
company, which he founded in 1971, and which become the largest geothermal
energy company in the world. Prior to founding California Energy Company, Mr.
Condy was Executive Vice President - Western Region of John Nuveen and Company,
members of the New York Stock Exchange. In the public policy area, Mr. Condy
helped found and has served as a board member of the Business Council for a
Sustainable Energy Future and the Coalition for Energy Efficiency and Renewable
Technologies. Mr. Condy currently advises the U.S. Department of Energy, the
U.S. Agency for International Development, and the U.S. Asian Environmental
Partnership on energy efficiency technology transfer and related funding to
developing economies.
Stephen Schachman has been a Director of Global since September 1998 and a
Director of The Network Connection since May 18, 1999. Since 1995, Mr. Schachman
has been the owner of his own consulting firm, Public Affairs Management. From
1992 to 1995, Mr. Schachman was an executive officer and consultant to Penn Fuel
Gas Company, a supplier of natural gas products. Prior thereto, he was an
attorney with the Philadelphia law firm Dilworth, Paxson, Kalish & Kaufman. Mr.
Schachman was also an Executive Vice President of Bell Atlantic Mobile Systems
and prior thereto, President of the Philadelphia Gas Works, the largest
municipally owned gas company in the United States. Mr. Schachman has a Bachelor
of Arts degree from the University of Pennsylvania and Juris Doctor degree from
the Georgetown University Law School.
Officers serve at the discretion of the Board of Directors, subject to
rights, if any, under contracts of employment.
-44-
<PAGE>
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
The SEC has comprehensive rules relating to the reporting of securities
transactions by directors, officers and stockholders who beneficially own more
than 10% of Global's Class A Common Stock. These rules are complex and difficult
to interpret. Based solely on a review of Section 16 reports received by Global
from Section 16 reporting persons, Global believes that no reporting person has
failed to file a Section 16 report on a timely basis during the most recent or
any prior fiscal year, except as follows: Irwin L. Gross (one grant in fiscal
year 2000), James W. Fox (one grant in fiscal year 1999 and two in fiscal year
2000), Morris C. Aaron (one grant in fiscal year 1999), David N. Shevrin (one
grant in fiscal year 1999 and two in fiscal year 2000), S. Lance Silver (one
grant in fiscal year 2000), Charles T. Condy (one grant in fiscal year 1999 and
one in fiscal year 2000), M. Moshe Porat (one grant in fiscal year 1999 and one
in fiscal year 2000) and Stephen Schachman (one grant in fiscal year 1999 and
one in fiscal year 2000) did not timely file Form 5s regarding certain option
grants in fiscal years 1999 and 2000.
ITEM 10 -- EXECUTIVE COMPENSATION
The summary compensation table below sets forth the aggregate compensation
paid or accrued by Global for the fiscal year ended June 30, 2000, the
Transition Period ended June 30, 1999 and Global's preceding fiscal year ended
October 31, 1998 to (i) the Chief Executive Officer, (ii) Global's most highly
paid executive officers other than the CEO who were serving as executive
officers at the end of the last completed fiscal year and whose total annual
salary and bonus exceeded $100,000, and (iii) one individual who would have been
included in the table but for the fact that he was not serving as an executive
officer of Global at the end of the most recently completed fiscal year
(collectively, the "Named Executives").
<TABLE>
<CAPTION>
Long-term
Compensation
Annual Compensation Securities
------------------------------- Underlying
Name and Principal Position Fiscal Year Salary($) Bonus($) Other($) Options(#)
--------------------------- ----------- --------- -------- -------- ----------
<S> <C> <C> <C> <C> <C>
Irwin L. Gross, 2000 190,846 250,000 -- 1,500,000
Chief Executive Officer 1999 -- -- -- --
1998 -- -- -- --
James W. Fox, President 2000 242,046 45,000 -- 25,000
1999 104,718 -- -- 105,000
1998 -- -- -- 45,000
Patrick J. Fodale, 2000 104,708 -- 39,766 (1) 75,000
Chief Financial Officer (2) 1999 -- -- -- --
1998 -- -- -- --
Morris C. Aaron, 2000 90,400 17,200 -- --
Chief Financial Officer (2) 1999 130,289 -- -- 75,000
1998 18,590 -- -- --
David N. Shevrin, 2000 115,670 22,000 -- 25,000
Vice President - 1999 71,924 -- -- 75,000
Business Development 1998 8,462 -- -- --
</TABLE>
----------
(1) Represents reimbursement of moving expenses incurred by Mr. Fodale in his
relocation to New York City, where he works out of our New York office.
(2) On December 15, 1999, Mr. Fodale replaced Mr. Aaron as Global's Chief
Financial Officer. Mr. Aaron is currently Vice President and Chief
Financial Officer of The Network Connection. Mr. Aaron had been Chief
Financial Officer of Global since September 25, 1998.
-45-
<PAGE>
OPTION GRANTS IN FISCAL YEAR
The following table sets forth the stock option grants made during the
fiscal year ended June 30, 2000 to the Named Executives:
<TABLE>
<CAPTION>
Number of Percent of Total
Securities Options Granted to
Underlying Options Employees in Exercise Price
Name Granted(#) Fiscal Year(1) ($/Share) Expiration Date
---- ---------- -------------- --------- ---------------
<S> <C> <C> <C> <C>
Irwin L. Gross (2) 1,500,000 72.29% 1.83 10/08/09
James W. Fox (3) 25,000 1.20% 16.38 3/16/10
Patrick J. Fodale (4) 75,000 3.61% 4.59 12/15/09
Morris C. Aaron -- -- -- --
David N. Shevrin (5)(6) 15,000 0.72% 1.83 10/08/09
10,000 0.48% 16.38 3/16/10
</TABLE>
----------
(1) Based on a total of 2,075,000 options granted to employees during the 2000
fiscal year.
(2) One quarter of these options vest on the date of grant, another quarter
vests in three equal annual increments beginning on the first anniversary
of the date of grant, and the remaining half vest on the sixth anniversary
of the date of grant, subject to acceleration to a three-year vesting
schedule in the event that certain performance milestones are achieved.
(3) These option vest in four equal annual increments beginning on the first
anniversary of the date of grant.
(4) These options vest in five equal annual increments beginning on the date of
grant.
(5) The options for 15,000 shares vest as follows: one third vest on the
anniversary of the date of grant and the remaining two thirds vest in 24
equal monthly increments.
(6) The options for 10,000 shares vest in four equal annual increments
beginning on the first anniversary of the date of grant.
OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END VALUES
The following table sets forth the stock options exercises made during the
fiscal year ended June 30, 2000 by the Named Executives, as well as the value of
their unexercised stock options as of the end of the Transition Period:
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised
Shares Options At In-the-money Options At
Acquired On Value June 30, 2000 June 30, 2000
Name Exercise(#) Realized($) Exercisable/unexercisable(1) Exercisable/unexercisable($)
---- ----------- ----------- ---------------------------- ----------------------------
<S> <C> <C> <C> <C>
Irwin L. Gross -- -- 375,000/1,125,000 1,609,039/4,827,094
James W. Fox -- -- 72,000/103,000 333,465/353,948
Patrick J. Fodale -- -- 15,000/60,000 23,091/92,363
Morris C. Aaron 15,000 44,000 15,000/45,000 74,987/224,960
David N. Shevrin -- -- 25,000/75,000 124,978/314,316
</TABLE>
----------
(1) All of these options had an exercise price less than the closing bid price
per share of Global's Class A Common Stock on the Nasdaq National Market of
$6.125 at June 30, 2000.
-46-
<PAGE>
DIRECTOR COMPENSATION
Outside directors receive $1,000 for each meeting of the Board of
Directors, and $500 for each committee meeting, attended in person or by
telephone. In addition, all directors are reimbursed for expenses actually
incurred in connection with each meeting of the Board of Directors or any
Committee thereof attended.
Global's 1994 Stock Option Plan provides for the automatic grant of
non-qualified stock options to directors of Global who are not employees or
principal stockholders ("Eligible Directors") to purchase shares of common
stock. On the date an Eligible Director becomes a director of Global, he or she
is to be granted options to purchase 10,000 shares of Global's Class A Common
Stock (the "Initial Director Options"). On the day immediately following the
date of the annual meeting of stockholders for Global for each fiscal year, each
Eligible Director, other than directors who received Initial Director Options
since Global's prior annual meeting, is to be granted options to purchase 1,000
shares of Global's Class A Common Stock (each an "Automatic Grant"), as long as
such director is a member of the Board of Directors on such day. The exercise
price for each share subject to these options is to be equal to the fair market
value of the Class A Common Stock on the date of grant, except for directors who
receive incentive options and who own more than 10% of the voting power, in
which case the exercise price is to be not less than 110% of the fair market
value on the date of grant. These options are to be exercisable in four equal
annual installments, commencing one year from the date of grant, and are to
expire the earlier of ten years after the date of grant or 90 days after the
termination of the director's service on the Board of Directors.
None of the members of the present Board of Directors has received
Automatic Grants. They have otherwise been granted options under Global's 1994
and 1997 Stock Option Plans, each of which allows for grants to directors in
addition to or in lieu of the Initial Director Option and Automatic Grant
mechanisms. Messrs. Fox, Condy, Porat and Schachman were each granted options to
purchase 90,000 shares of our Class A Common Stock pursuant to the 1997 Plan in
fiscal year 2000. Also in fiscal year 2000, Irwin L. Gross, our Chairman and
Chief Executive Officer, received a grant of options to purchase up to 1,500,000
shares of our Class A Common Stock pursuant to a Stock Option Plan (approved by
the stockholders on May 11, 2000) separate from the 1994 and 1997 Plans.
In fiscal year 2000, Mr. Gross received grants of options to purchase up to
800,000 shares of TNCi common stock, each of Messrs. Porat and Schachman was
granted options to purchase 50,000 shares of TNCi common Stock, and each of
Messrs. Fox and Condy was granted options to purchase 40,000 shares of common
stock of TNCi. During fiscal year 2000, each of Messrs. Gross, Fox, Condy, Porat
and Schachman was also granted options to purchase equity in GTL Management
Limited, one of our UK subsidiaries, at fair market value on the date of grant.
Mr. Gross' options are for 7% of GTL Management, each of Messrs. Fox and Condy's
options are for 1% of GTL Management, and each of Messrs. Porat and Schachman's
options are for 0.5% of GTL Management.
EMPLOYMENT AND SEVERANCE AGREEMENTS
Irwin L. Gross serves as Global's Chief Executive Officer pursuant to the
terms of an employment agreement that terminates on September 30, 2002. Mr.
Gross receives a minimum annual base salary of $250,000 and, subject to the
achievement of assigned goals, bonuses of not less than 20% of his annual
salary. Mr. Gross also received 1,500,000 ten-year options, 25% of which vested
immediately, 25% of which vest, subject to certain conditions, in three annual
increments beginning on October 8, 2000, and the balance of which vest on the
sixth anniversary of the date of grant, subject to accelerated vesting pursuant
to a three-year vesting schedule in the event of the achievement of certain
performance milestones and other conditions. The employment agreement provides
for a severance payment in the event that Global terminates Mr. Gross other than
for "cause" as defined in the employment agreement. The severance payment would
be equal to two times the remaining balance of his base salary for the remainder
of the then current term. The employment agreement also provides a payment in
the event Global terminates Mr. Gross due to a termination of its business as
-47-
<PAGE>
defined in the employment agreement. In the event of the termination of Global's
business, Mr. Gross would receive an amount equal to two times his remaining
base salary for the then current term, but not less than his annual base salary
for one year. The employment agreement also provides that Global may pay other
incentive compensation as may be set by the Board of Directors from time to
time, and for such other fringe benefits as are paid to other executive
officers. Such fringe benefits take the form of medical and dental coverage and
an automobile allowance of $1,000 per month.
James W. Fox serves as Global's President and Chief Operating Officer
pursuant to the terms of an employment agreement that terminates on December 31,
2000. Mr. Fox receives a minimum annual base salary of $225,000 and, subject to
the achievement of assigned goals, bonuses of not less than 20% of his annual
salary. Mr. Fox also received 105,000 10-year options under Global's 1997 Stock
Option Plan, which vest in increments of 21,000 options per year pursuant to the
terms of the employment agreement. The employment agreement provides for a
severance payment in the event that Global terminates Mr. Fox other than for
"cause" as defined in the employment agreement. The severance payment would be
equal to two times the remaining balance of his base salary for the remainder of
the then current term. The employment agreement also provides a payment in the
event Global terminates Mr. Fox due to a termination of its business as defined
in the employment agreement. In the event of the termination of Global's
business, Mr. Fox would receive an amount equal to two times his remaining base
salary for the then current term, but not less than his annual base salary for
one year. The employment agreement also provides that the Global may pay other
incentive compensation as may be set by the Board of Directors from time to
time, and for such other fringe benefits as are paid to other executive
officers. Such fringe benefits take the form of medical and dental coverage and
an automobile allowance of $450 per month.
Patrick J. Fodale received a letter regarding his employment from Global on
December 3, 1999. It provides for a start date of December 15, 1999 and salary
of $200,000 per year. The letter also provides for a target bonus of 25% of
salary and a grant of options to purchase 75,000 shares of Global Class A Common
Stock, vesting in five equal annual increments beginning with the date of grant.
Mr. Fodale also receives a $400 per month car allowance and medical and dental
coverage. In the event of a termination without "cause" or termination of
Global's business, Mr. Fodale would be entitled to six months base salary. Mr.
Fodale was also reimbursed for moving expenses of $39,766.
Morris C. Aaron currently serves as Chief Financial Officer of TNCi
pursuant to the terms of an employment agreement that terminates on June 10,
2001. During a portion of fiscal year 2000, Mr. Aaron served as Chief Financial
Officer of both TNCi and Global. TNCi paid Mr. Aaron's salary during this period
of time, and Global reimbursed TNCi for 40% of his salary. Mr. Aaron's
employment agreement with TNCi provides for a minimum annual base salary of
$215,000 and for the grant of ten-year options to purchase up to 75,000 shares
of TNCi common stock, which vest in increments of 15,000 options per year
beginning with his start date. The employment agreement provides for a severance
payment in the event that TNCi terminates Mr. Aaron other than for "cause." The
severance payment would be equal to two times the remaining balance of his base
salary for the remainder of the then current term. The employment agreement also
provides for a payment in the event TNCi terminates Mr. Aaron due to a
termination of its business. The amount of this payment would equal two times
his remaining base salary for the then current term, but not less than his
annual base salary for one year. The employment agreement also provides that
TNCi may pay other incentive compensation as may be set by the Board of
Directors from time to time, and for such other fringe benefits as are paid to
other executive officers of TNCi. Such fringe benefits take the form of medical
and dental coverage and an automobile allowance of $500 per month.
ITEM 11 -- SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of September 25, 2000
regarding the ownership of Global's Class A Common Stock and Series C Preferred
Stock and of TNCi's common stock by (i) each person known by Global to own
beneficially more than five percent of any class of Global's voting securities,
(ii) each director of Global, (iii) the Named Executives and (iv) all executive
officers and directors of Global as a group:
-48-
<PAGE>
<TABLE>
<CAPTION>
Class a Tnci
Common Stock Common Stock
------------------------- ----------------------------
Name and Address of Number of Percent of Number Percent
Beneficial Owner (1) Shares Class (2) of Shares of Class (2)
-------------------- ------ --------- --------- ------------
<S> <C> <C> <C> <C>
Irwin L. Gross 3,440,151(3) 28.1% 851,430(11) 4.2%
Charles T. Condy 77,025(4) * -- --
Stephen Schachman 71,400(5) * 10,000(12) *
M. Moshe Porat 446,400(6) 4.1% 10,000(13) *
David N. Shevrin 32,667(7) * -- --
Morris C. Aaron 24,148(8) * 20,000(14) *
James W. Fox 78,600(9) * -- --
Patrick J. Fodale 20,000(10) * -- --
All executive officers and 4,220,474(3)(4)(5) 858,430(11)(12)
directors as a group (9 persons) (6)(7)(8)(9)(10) 33.6% (13)(14) 4.3%
</TABLE>
----------
* Less than 1%.
(1) Unless otherwise noted, all persons named in the table have sole voting and
investment power with respect to all shares beneficially owned by them.
Except as otherwise indicated below, the address of each beneficial owner
is c/o Global Technologies, Ltd., The Belgravia, 1811 Chestnut Street,
Suite 120, Philadelphia, Pennsylvania 19103.
(2) For Global, these percentages are based on 10,725,489 shares of Global's
Class A Common Stock outstanding as of September 25, 2000, except that
shares underlying options and warrants to purchase Class A Common Stock
exercisable within 60 days are deemed to be outstanding for purposes of
calculating the percentage owned by the holder(s) of such options and
warrants. For TNCi, these percentages are based on 19,973,117 shares of
TNCi common stock outstanding as of September 25, 2000, except that shares
underlying options and warrants to purchase TNCi common stock exercisable
within 60 days are deemed to be outstanding for purposes of calculating the
percentage owned by the holder(s) of such options and warrants.
(3) Includes 4,498 shares owned jointly by Mr. Gross and his wife, and 149,309
shares owned by Ocean Castle Partners, LLC, an entity controlled by Mr.
Gross. Includes 50,948 shares owned by trusts for the benefit of Mr. Gross'
children, and 9,000 shares held in custodial accounts for the benefit of
Mr. Gross' children of which Mr. Gross' wife serves as custodian, as to all
of which shares Mr. Gross disclaims beneficial ownership. Also includes
39,750 shares held in trusts of which Mr. Gross is a trustee. Also includes
375,000 shares issuable to Mr. Gross upon exercise of currently exercisable
options, and 375,000 shares issuable upon exercise of options exercisable
within 60 days. Also includes 553,978 shares and 198,318 shares issuable to
Mr. Gross and to trusts of which Mr. Gross is a trustee, respectively, upon
exercise of currently exercisable warrants.
(4) Includes 15,000 shares issuable to Mr. Condy upon exercise of currently
exercisable options, and 45,000 shares issuable to Mr. Condy upon exercise
of options exercisable within 60 days.
(5) Includes 15,000 shares issuable to Mr. Schachman upon exercise of currently
exercisable options, and 45,000 shares issuable to Mr. Schachman upon
exercise of options exercisable within 60 days.
(6) Includes 375,000 shares owned by First Lawrence Capital Corp. over which
Dr. Porat retains voting power pursuant to a proxy agreement until January
1, 2002. Also includes 15,000 shares issuable to Dr. Porat upon exercise of
currently exercisable options, and 45,000 shares issuable to Dr. Porat upon
exercise of options exercisable within 60 days.
-49-
<PAGE>
(7) Includes 25,000 shares issuable to Mr. Shevrin upon exercise of currently
exercisable options, and 5,417 shares issuable to Mr. Shevrin upon exercise
of options exercisable within 60 days.
(8) Includes 15,000 shares issuable to Mr. Aaron upon exercise of currently
exercisable options.
(9) Includes 72,000 shares issuable to Mr. Fox upon exercise of currently
exercisable options.
(10) Includes 15,000 shares issuable to Mr. Fodale upon the exercise of
currently exercisable options.
(11) Includes 190,200 shares held by trusts of which Mr. Gross is a trustee and
66,667 shares held by Gross Investment Company, LP, an entity controlled by
Mr. Gross. Also includes 125,000 shares issuable to Mr. Gross upon exercise
of currently exercisable options, and 125,001 shares issuable to Mr. Gross
upon exercise of options exercisable within 60 days. Also includes 311,562
shares issuable to trusts of which Mr. Gross is a trustee upon exercise of
currently exercisable warrants.
(12) Consists of 10,000 shares issuable to Mr. Schachman upon exercise of
currently exercisable options.
(13) Consists of 10,000 shares issuable to Dr. Porat upon exercise of currently
exercisable options.
(14) Consists of 20,000 shares issuable to Mr. Aaron upon the exercise of
currently exercisable options.
ITEM 12 -- CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CONSULTING ARRANGEMENTS
Irwin L. Gross, our Chairman and Chief Executive Officer, is a principal of
Ocean Castle Partners, LLC, which maintains the principal executive offices for
Global. On September 30, 1998, Ocean Castle executed consulting agreements with
two principal stockholders and former executive officers of Global, Don Goldman
and Yuri Itkis. The rights and obligations of Ocean Castle under the agreements
were assumed by The Network Connection in connection with the merger of our
predecessor company's interactive entertainment division with The Network
Connection. The consulting agreements require payments aggregating $1,000,000 to
each of the consultants through December 2003 in exchange for advisory services.
Each of the consultants also received stock options to purchase 50,000 shares of
our Class A Common Stock at an exercise price of $3.00 per share. As of June 30,
1999, The Network Connection determined that the consulting agreements had no
future value due to The Network Connection's shift out of in-flight
entertainment into markets such as hotel and hospitality, leisure cruise and
passenger rail transport. Only limited services were provided in 1999 and no
future services will by utilized. Accordingly, The Network Connection recorded a
charge to general and administrative expenses in the transition period ended
June 30, 1999 of $1.6 million representing the balance due under such contracts.
On July 31, 2000, we entered into separate termination and settlement
agreements between us, The Network Connection, Ocean Castle Partners LLC, Mr.
Gross, and each of Messrs. Itkis and Goldman terminating each of their
consulting agreements with Ocean Castle Partners and providing for the release
of any and all potential claims which may have been asserted by Messrs. Itkis
and Goldman under their respective consulting agreements. In connection with
termination of these agreements, we issued 139,514 shares to each of Messrs.
Itkis and Goldman (96,083 of which we registered for resale). The Network
Connection, whose liability the agreements were, will reimburse us for these
payments by issuing to us 411,146 shares of TNCi common stock.
We entered into a consulting agreement with First Lawrence Capital Corp. to
perform various financial advisory services related to ongoing business
development and management. The former managing director of First Lawrence is
also a director of Global. Global retained, on a full time basis as President
and Chief Operating Officer, the services of the former managing director of
-50-
<PAGE>
First Lawrence effective December 12, 1998. We have entered into an employment
contract with such individual. During the year ended October 31, 1998, we paid
$11,846 under the First Lawrence consulting agreement. We also entered into a
consulting agreement with Whitestone Group, LLC, a shareholder of First
Lawrence. Pursuant to this agreement, we paid $250,000 for consulting services
received during fiscal 1998.
On September 15, 1998, we entered into consulting agreements with Messrs.
Michail Itkis, Thomas M. Metzler and John W. Alderfer, former executive officers
of our predecessor company, in connection with our predecessor company's
agreements with Swissair. In consideration for such services, Mr. Itkis was paid
$200,000, Mr. Metzler $300,000 and Mr. Alderfer $235,000. No further payments
are to be made under these agreements.
STOCKHOLDERS' AGREEMENT
In October 1994, our predecessor company entered into a stockholders'
agreement with Yuri Itkis, Michail Itkis, Boris Itkis, Steven M. Fieldman,
Donald H. Goldman and Lance Fieldman. In connection with the May 1996 and
November 1996 resignations of Messrs. Goldman, Steven Fieldman and Lance
Fieldman, and in connection with the execution of a strategic alliance agreement
with Hyatt, the parties to the stockholders' agreement entered into agreements
which terminated the stockholders' agreement as to Messrs. Goldman, Steven
Fieldman and Lance Fieldman, added Hyatt as a stockholder under the
stockholders' agreement, and amended certain terms of the stockholders'
agreement. On November 10, 1997 with the termination of the alliance agreement
with Hyatt, the stockholders' agreement was amended again to terminate Hyatt's
rights.
As amended, the stockholders' agreement provided that Michail Itkis and
Yuri Itkis shall each be entitled to designate one nominee to our predecessor
company's Board of Directors. No other parties had any continuing right under
the stockholders' agreement to nominate a director. Each stockholder who was a
party to the stockholders' agreement agreed to vote all the shares of common
stock owned by him for the election of the directors so nominated and not to
take any action to remove any director so elected (except for the director(s)
nominated by such stockholder). The stockholders' agreement was terminated on
September 15, 1998.
PURCHASE OF SHARES
Pursuant to the settlement of various lawsuits and other claims instituted
by Barington Capital Group, L.P. against us, Ocean Castle and others, Ocean
Castle purchased from Barington 149,313 shares of our Class A Common Stock at
$3.00 per share on October 21, 1998. We temporarily loaned the funds to Ocean
Castle to effectuate such purchase and Ocean Castle has subsequently repaid such
loan.
BHG FLIGHTS, L.L.C.
We reimburse BHG Flights, L.L.C. for costs and expenses associated with our
use for corporate purposes of an airplane owned by BHG. Mr. Gross owns 50% of
the interests in BHG. To date, we have reimbursed BHG approximately $106,085.
LOANS TO GLOBAL
On August 31 and September 7, 2000, each of the Gross Charitable Annuity
Trust and the Gross Charitable Unit Trust advanced $100,000 and $300,000 to us,
respectively. These advances have been aggregated into notes, dated September
22, 2000, for each of the trusts. Each note is in the principal amount of
$400,000, matures on December 31, 2000 and bears interest at 9% per annum. In
connection with the advances, each trust was issued five-year warrants to
purchase that number of shares of our Class A Common Stock equal to the amount
of each advance made divided by the last sale price per share on the day of each
such advance. Each trust was therefore issued two tranches of warrants - one for
28,571 (exercise price of $3.50) shares and the other for 70,588 shares
(exercise price of $4.25). Irwin L. Gross, Chairman and Chief Executive Officer
of Global, is trustee of each of these trusts.
-51-
<PAGE>
PLEDGE OF COLLATERAL FOR MERRILL LYNCH CREDIT FACILITY
In response to a demand by Merrill Lynch that additional collateral be
deposited with Merrill Lynch in connection with our margin loan from Merrill
Lynch against 1,000,000 shares of U.S. Wireless Corporation common stock, Mr.
Gross, for the benefit of Global, deposited certain collateral with Merrill
Lynch on two separate dates - May 31 ($653,671 of collateral) and June 6, 2000
($956,238 of collateral) - all of which collateral was subsequently released to
Mr. Gross on June 27, 2000. Merrill Lynch demanded that additional collateral be
deposited in connection with the margin loan again, and, on July 24, 2000, Mr.
Gross redeposited the collateral released to him on June 27, 2000. Merrill
Lynch, on a third occasion, demanded that additional collateral be deposited in
connection with the margin loan, and, on July 27, 2000, Mr. Gross deposited an
additional $1,129,002 of collateral with Merrill Lynch. In connection with Mr.
Gross' pledge of these amounts of collateral on our behalf, he has been issued
warrants to purchase that number of shares of our Class A Common Stock equal to
the fair market value of the aggregate amount of collateral deposited as
described above with Merrill Lynch (accounting for the amount of collateral
released on June 27, 2000 and redeposited on July 24, 2000 only once) divided by
the last sale price of a share of our Class A Common Stock on the day on which
the deposit was made (using, for purposes of the redeposited collateral, the
last sale prices per share for the days on which the deposits were first made).
Mr. Gross was therefore issued three tranches of five-year warrants - one to
purchase 174,312 shares (exercise price of $3.75 per share, the last sale price
per share on May 31, 2000), the second to purchase 159,373 shares (exercise
price of $6.00 per share, the last sale price per share on June 6, 2000), and
the third to purchase 220,293 shares (exercise price of $5.125 per share, the
last sale price per share on July 27, 2000).
LEASE OF OFFICE SPACE
Mr. Gross is a principal of Ocean Castle Partners, LLC. Ocean Castle leases
the approximately 1,500 square feet of office space in which our principal
executive offices are located. Pursuant to an agreement between Ocean Castle and
us, we pay the landlord for the amount of rent attributable to this space. To
date, we have paid a total of $62,570 pursuant to this agreement.
EMPLOYMENT MATTERS
We have employment agreements with certain of our executive officers and
have granted such officers options to purchase shares of Class A Common Stock.
ITEM 13 -- EXHIBITS AND REPORTS ON FORM 8-K
The following Index to Exhibits lists the Exhibits filed as part of this
Annual Report on Form 10-KSB. Where so indicated, Exhibits which were previously
filed are incorporated by reference. Documents filed herewith are denoted with
an asterisk (*).
Exhibit
Number Description
------ -----------
2.01 - Asset Purchase and Sale Agreement dated as of April 29, 1999
between the Registrant and TNCi. (8)
2.02 - First Amendment to Asset Purchase and Sale Agreement dated as of
May 14, 1999 between the Registrant and TNCi. (8)
2.03 - Agreement and Plan of Merger by and between Interactive Flight
Technologies, Inc. and Global Technologies, Ltd., dated as of
August 16, 1999. (12)
-52-
<PAGE>
Exhibit
Number Description
------ -----------
2.04 - Deed, dated August 18, 2000, relating to the transfer of stock in
Inter Lotto (UK) Limited and the termination of the Operating
Agreements, by and among Inter Lotto (UK) Limited, GTL Management
Limited, Global Technologies, Ltd., GlobalTech Holdings Limited,
The Right Honourable The Lord Mancroft, Roy Fisher, and Douglas
Smith. (20)
3.01 - Certificate of Ownership and Merger. (1)
3.02 - Amended and Restated Certificate of Incorporation of the
Registrant. (1)
3.03 - By-laws of the Registrant. (1)
3.04 - Certificate of Amendment of Amended and Restated Certificate of
Incorporation of Registrant dated November 2, 1998. (9)
3.05 - Certificate of Designations, Preferences, and Rights of Series A
Convertible Preferred Stock of the Registrant. (9)
3.06 - Certificate of Designations, Preferences, and Rights of Series B
Convertible Preferred Stock of the Registrant. (9)
3.07 - Amended and Restated Certificate of Incorporation of Global
Technologies, Ltd., filed with the Secretary of State of the
State of Delaware on August 13, 1999. (12)
3.08 - Amended and Restated By-Laws of Global Technologies, Ltd. (12)
4.01 - Warrant Agreement, dated as of March 7, 1995 among the
Registrant, D. H. Blair Investment Banking Corp. and American
Stock Transfer & Trust Company. (1)
4.02 - Form of Underwriter's Unit Purchase Option. (1)
4.03 - Amendment to March 7, 1995 Warrant Agreement, among the
Registrant, D. H. Blair Investment Banking Corp. and American
Stock Transfer & Trust Company. (4)
4.04 - Warrant Agreement dated as of October 24, 1996 among the
Registrant, D. H. Blair Investment Banking Corp. and American
Stock Transfer & Trust Company. (4)
4.05 - Amendment to October 24, 1996 Warrant Agreement, among the
Registrant, D. H. Blair Investment Banking Corp., and American
Stock Transfer & Trust Company. (4)
4.06 - Stock Purchase Warrant dated as of November 7, 1996 issued to
FortuNet, Inc. (4)
4.07 - Stock Purchase Warrant dated as of November 12, 1996 issued to
Houlihan Lokey Howard & Zukin. (4)
4.08 - Form of Warrant issued to The Shaar Fund Ltd. dated May 10, 1999.
(11)
4.09 - Registration Rights Agreement dated May 6, 1999 between the
Registrant and The Shaar Fund Ltd. (11)
4.10 - Certificate of Designations, Rights, Preferences and Limitations
of Series A 8% Convertible Preferred Stock of Global
Technologies, Ltd. (12)
-53-
<PAGE>
Exhibit
Number Description
------ -----------
4.11 - Certificate of Designations, Rights, Preferences and Limitations
of Series B 8% Convertible Preferred Stock of Global
Technologies, Ltd. (12)
4.12 - Certificate of Designations, Rights, Preferences and Limitations
of Series C Convertible Preferred Stock of Global Technologies,
Ltd. (14)
4.13 - Form of Callable Warrant issued to holders of Series C
Convertible Preferred Stock of Global Technologies, Ltd. (14)
4.14 - Registration Rights Agreement dated February 16, 2000 between the
Registrant and the investors signatory thereto. (15)
4.15 - Private Placement Purchase Agreement among Registrant and the
Investors signatory thereto, dated as of June 8, 2000. (18)
4.16 - Form of Secured Convertible Note issued to Investors. (18)
4.17 - Form of Warrant to be issued to holders of Secured Convertible
Notes in the event of certain redemptions. (18)
10.01 - Amended and Restated 1994 Stock Option Plan. (3)
10.02 - Amended and Restated Shareholders' Agreement dated October 6,
1994 by Yuri Itkis, Michail Itkis, Boris Itkis, Steven M.
Fieldman, Donald H. Goldman, Lance Fieldman and Registrant. (l)
10.03 - Amended and Restated Escrow Agreement between the Registrant,
American Stock Transfer & Trust Company, Yuri Itkis, Michail
Itkis, Boris Itkis, Steven M. Fieldman, Donald H. Goldman and
Lance Fieldman. (1)
10.04 - Employment Agreement between the Registrant and Michail Itkis
dated as of October 31, 1994. (l)
10.05 - Form of Indemnification Agreement. (1)
10.06 - Employment Agreement between the Registrant and John Alderfer
dated as of October 2, 1996. (4)
10.07 - Severance Agreement between the Registrant and Lance Fieldman
dated as of November 4, 1996. (4)
10.08 - Amended and Restated Intellectual Property License and Support
Services Agreement dated as of November 7, 1996 between FortuNet,
Inc. and Registrant. (4)
10.09 - Sublease and Consent dated July 16, 1996 between the Registrant
and AGF 4041 Limited Partnership. (4)
10.10 - Office Lease dated July 15, 1996 between the Registrant and AGF
4041 Limited Partnership. (4)
10.11 - Standard Industrial/Commercial Single-Tenant Lease-Net, dated as
of June 27, 1996, between the Registrant and 44th Street and Van
Buren Limited Partnership. (4)
10.12 - Strategic Alliance Agreement dated as of November 12, 1996
between the Registrant and Hyatt Ventures, Inc. (4)
-54-
<PAGE>
Exhibit
Number Description
------ -----------
10.13 - Registration Rights Agreement dated as of November 12, 1996
between the Registrant and Hyatt Ventures, Inc. (4)
10.14 - Amendment No. 2 to Amended and Restated Shareholders' Agreement
dated as of November 12, 1996. (4)
10.15 - Employment Agreement between the Registrant and Thomas Metzler
dated as of November 18, 1996. (5)
10.16 - Lease Surrender Agreement dated as of May 12, 1998. (6)
10.17 - Amendment to Severance Compensation Agreement dated as of August
28, 1998 between the Registrant and Michail Itkis. (7)
10.18 - Second Amendment to Employment Agreement dated as of August 28,
1998 between the Registrant and John Alderfer. (7)
10.19 - Second Amendment to Employment Agreement dated as of August 28,
1998 between the Registrant and Thomas Metzler. (7)
10.20 - Securities Purchase Agreement dated as of May 10, 1999 between
the Registrant and The Shaar Fund, Ltd. (9)
10.21 - Termination Agreement dated November 10, 1997 between the
Registrant and Hyatt Ventures, Inc. (10)
10.22 - Office Lease dated as of September 10, 1999 between the
Registrant and 135 East 57th Street LLC. (11)
10.23 - Assignment dated May 10, 1999 of rights under the Securities
Purchase Agreement and the Registration Rights Agreement, both
dated October 23, 1998 between TNCi and the Shaar Fund Ltd. to
the Registrant. (11)
10.24 - Amendment dated May 10, 1999 to Registration Rights Agreement
dated October 23, 1998 between Registrant and TNCi. (11)
10.25 - Securities Purchase Agreement dated as of May 10, 1999 between
TNCi and the Registrant for TNCi Series C Convertible Preferred
Stock. (11)
10.26 - Form of Securities Purchase Agreement dated as of June 25, 1999.
(11)
10.27 - Registration Rights Agreement dated July 1999 respecting shares
issued pursuant to the Securities Purchase Agreement dated as of
June 25, 1999, for the purchase of TNCi Series A and Series E
Notes. (11)
10.28 - Form of Put/Call Agreement dated July 1999. (11)
10.29 - Securities Purchase Agreement dated August 9, 1999 for the
purchase of TNCi Series D Notes. (11)
10.30 - Form of Warrant Purchase Agreement dated August 9, 1999 between
Registrant and certain TNCi Warrant holders. (11)
-55-
<PAGE>
Exhibit
Number Description
------ -----------
10.31 - Registration Rights Agreement dated August 12, 1999 among the
Registrant, XCEL Capital, LLC and Elaine Martin. (11)
10.32 - Registration Rights Agreement dated August 12, 1999 among the
Registrant, Robert E. Benninger, Jr., Sara Anne Benninger, Will
Brantley and Elaine Martin. (11)
10.33 - Form of Put/Call Agreement dated August 12, 1999 respecting
shares issued pursuant to the Warrant Purchase Agreement between
the Registrant and certain TNCi Warrant holders. (11)
10.34 - Employment Agreement between the Registrant and James W. Fox.
(11)
10.35 - Employment Agreement between Global Technologies, Ltd. and Irwin
L. Gross, dated October 1, 1999. (12)
10.36 - Purchase Agreement between IFT Leasing Limited and International
Lottery and Totalizator Systems, Inc. regarding purchase of ILTS
Datatrak On-Line Turnkey Lottery System, dated September 8, 1999.
(12)
10.37 - Facilities Management Agreement between IFT Management Limited
and International Lottery and Totalizator Systems, Inc. regarding
operational and technical support management of ILTS Datatrak
On-Line Turnkey Lottery System, dated September 8, 1999. (12)
10.38 - Guarantee by Global Technologies, Ltd. of the obligations of IFT
Leasing Limited and IFT Management Limited under the Purchase
Agreement and Facilities Management Agreement, respectively. (12)
10.39 - Option Agreement between Global Technologies, Ltd. and Irwin L.
Gross, dated October 8, 1999. (13)
10.40 - Convertible Preferred Stock Purchase Agreement among Global
Technologies, Ltd. and the Investors Signatory thereto, dated as
of February 16, 2000. (14)
10.41 - Employment Agreement between Robert Pringle and The Network
Connection, Inc., dated March 6, 2000. (17)
10.42 - Option Agreement between Robert Pringle and The Network
Connection, Inc., dated March 6, 2000. (17)
10.43 - Registration Rights Agreement between The Network Connection,
Inc. and Robert Pringle, Jay Rosan, and Richard Genzer, dated
March 6, 2000. (17)
23.00 - Consent of KPMG. (*)
27.00 - Financial Data Schedule. (*)
99.01 - Certificate of Designations of Series B Convertible Preferred
Stock of TNCi dated October 23, 1998. (8)
99.02 - Amendment dated as of April 29, 1999 to Certificate of
Designations of Series B Convertible Preferred Stock of TNCi. (8)
-56-
<PAGE>
Exhibit
Number Description
------ -----------
99.03 - Certificate of Designations of Series C Convertible Preferred
Stock of TNCi dated as of April 30, 1999. (8)
99.04 - Certificate of Designations of Series D Convertible Preferred
Stock of TNCi dated as of May 5, 1999. (8)
99.05 - Agreement for the Sale and Purchase of Shares in Inter Lotto (UK)
Limited dated April 29, 1999 between Crown Leisure Sales Limited
and IFT Holdings Limited. (11)
99.06 - Shareholders Agreement dated April 29, 1999 by and between Norman
Feinstein & Others and IFT Holdings Limited and Inter Lotto (UK)
Limited. (11)
99.07 - Operating Agreement dated April 29, 1999 between Inter Lotto (UK)
Limited and IFT Management Limited. (11)
99.08 - Secured Promissory Note dated January 29, 1999 made by TNCi and
payable to the order of the Company. (8)
99.09 - Allonge to Secured Promissory Note dated January 29, 1999. (8)
99.10 - Second Allonge to Secured Promissory Note dated March 19, 1999.
(8)
99.11 - Third Allonge to Secured Promissory Note dated March 24, 1999.
(8)
99.12 - Fourth Allonge to Secured Promissory Note dated May 10, 1999. (8)
99.13 - Opinion of ValueMetrics, Inc. addressed to TNCi dated May 14,
1999. (8)
99.14 - Fifth Allonge to Secured Promissory Note dated July 16, 1999.
(11)
99.15 - Sixth Allonge to Secured Promissory Note dated August 9, 1999.
(11)
99.16 - Seventh Allonge to Secured Promissory Note dated August 24, 1999.
(11)
99.17 - Form of Termination and Settlement Agreement with Yuri Itkis.
(19)
99.18 - Form of Termination and Settlement Agreement with Donald Goldman.
(19)
----------
(1) Incorporated by reference from the Registrant's Registration Statement on
Form SB-2, Registration No. 33-86928.
(2) Incorporated by reference from the Registrant's Quarterly Report on Form
10-QSB for the fiscal period ended July 31, 1996, filed with the Securities
and Exchange Commission on September 16, 1996, File No. 0-25668.
(3) Incorporated by reference from the Registrant's Registration Statement on
Form SB-2, Registration No. 333-02044.
(4) Incorporated by reference from the Registrant's Registration Statement on
Form S-3, Registration No. 333-14013.
(5) Incorporated by reference from the Registrant's Quarterly Report on Form
10-QSB for the fiscal quarter ended January 31, 1997, filed with the
Securities and Exchange Commission on March 17, 1997, File No. 0-25668.
-57-
<PAGE>
(6) Incorporated by reference from the Registrant's Quarterly Report on Form
10-QSB for the fiscal quarter ended April 30, 1998, filed with the
Securities and Exchange Commission on June 5, 1998, File No. 0-25668.
(7) Incorporated by reference from the Registrant's Quarterly Report on Form
10-QSB for the fiscal quarter ended July 31, 1998, filed with the
Securities and Exchange Commission on September 15, 1998, File No. 0-25668.
(8) Incorporated by reference from the Registrant's Current Report on Form 8-K
dated May 17, 1999, filed with the Securities and Exchange Commission on
June 1, 1999, File No. 0-25668.
(9) Incorporated by reference from the Registrant's Quarterly Report on Form
10-QSB for the fiscal quarter ended April 30, 1999, filed with the
Securities and Exchange Commission on June 14, 1999, File No. 0-25668.
(10) Incorporated by reference from the Registrant's Annual Report on Form 10-K
for the fiscal year ended October 31, 1998, filed with the Securities and
Exchange Commission on January 20, 1999, File No. 0-25668.
(11) Incorporated by reference from the Registrant's Annual Report on Form
10-KSB for the transition period ended June 30, 1999 filed with the
Securities and Exchange Commission on October 28, 1999, File No. 0-25668.
(12) Incorporated by reference from the Registrant's Quarterly Report on Form
10-QSB for the fiscal quarter ended September 30, 1999, filed with the
Securities and Exchange Commission on November 15, 1999, File No. 0-25668.
(13) Incorporated by reference from the Registrant's Quarterly Report on Form
10-QSB for the fiscal quarter ended December 31, 1999, filed with the
Securities and Exchange Commission on February 14, 2000, File No. 0-25668.
(14) Incorporated by reference from the Registrant's Current Report on Form 8-K
dated February 16, 2000, filed with the Securities and Exchange Commission
on February 28, 2000, File No. 0-25668.
(15) Incorporated by reference from the Registrant's Registration Statement on
Form S-3 filed with the Securities and Exchange Commission on March 17,
2000, File No. 0-25668.
(16) Incorporated by reference from the Registrant's Registration Statement on
Form S-3/A filed with the Securities and Exchange Commission on April 14,
2000, File No. 0-25668.
(17) Incorporated by reference from the Registrant's Quarterly Report on Form
10-QSB for the fiscal quarter ended March 31, 2000, filed with the
Securities and Exchange Commission on May 13, 2000, File No. 0-25668.
(18) Incorporated by reference from the Registrant's Registration Statement on
Form S-3 filed with the Securities and Exchange Commission on July 10,
2000, File No. 0-25668.
(19) Incorporated by reference from the Registrant's Registration Statement on
Form S-3/A filed with the Securities and Exchange Commission on August 15,
2000, File No. 0-25668.
(20) Incorporated by reference from the Registrant's Current Report on Form 8-K
for the period ended August 18, 2000, filed with the Securities and
Exchange Commission on September 5, 2000, File No. 0-25668.
REPORTS ON FORM 8-K
On September 5, 2000, Global filed a report on Form 8-K regarding the
transfer of its interest in Inter Lotto (UK) Limited and termination of existing
Operating Agreements between Global or its wholly-owned subsidiaries and Inter
Lotto (UK) Limited to operate lotteries on behalf of charities in the Great
Britain under Inter Lotto's External Lottery Manager's Certificate.
-58-
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
has caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
GLOBAL TECHNOLOGIES, LTD.
Dated: October 6, 2000 By: /s/ IRWIN L. GROSS
------------------------------------
Irwin L. Gross
CHIEF EXECUTIVE OFFICER
In accordance with the Exchange Act, this report has been signed by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ IRWIN L. GROSS Chief Executive Officer October 6, 2000
--------------------------- and Director
Irwin L. Gross
/s/ JAMES W. FOX President and Director October 6, 2000
---------------------------
James W. Fox
/s/ PATRICK J. FODALE Chief Financial Officer October 6, 2000
--------------------------- (Principal Financial Officer)
Patrick J. Fodale
/s/ CHARLES T. CONDY Director October 6, 2000
---------------------------
Charles T. Condy
/s/ STEPHEN SCHACHMAN Director October 6, 2000
---------------------------
Stephen Schachman
/s/ M. MOSHE PORAT Director October 6, 2000
---------------------------
M. Moshe Porat
-59-
<PAGE>
GLOBAL TECHNOLOGIES, LTD.
AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Independent Auditors' Report.............................................F-2
Consolidated Balance Sheets as of June 30, 2000 and 1999.................F-3
Consolidated Statements of Operations for the Year Ended
June 30, 2000, the Transition Period Ended June 30, 1999 and
the Year Ended October 31, 1998 ........................................F-4
Consolidated Statements of Stockholders' Equity and Comprehensive
Income for the Year Ended June 30, the Transition Period Ended
June 30, 1999 and the Year Ended October 31, 1998 ......................F-5
Consolidated Statements of Cash Flows for the Year Ended
June 30, 2000, the Transition Period Ended June 30, 1999 and
the Year Ended October 31, 1998.........................................F-6
Notes to Consolidated Financial Statements...........................F-7 to F-40
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Stockholders and Board of Directors
Global Technologies, Ltd. and subsidiaries:
We have audited the accompanying consolidated balance sheets of Global
Technologies, Ltd. and subsidiaries as of June 30, 2000 and 1999 and the related
consolidated statements of operations, stockholders' equity and comprehensive
income and cash flows for the year ended June 30, 2000, the Transition Period
ended June 30, 1999 and the year ended October 31, 1998. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above, present
fairly, in all material respects, the financial position of Global Technologies,
Ltd. and subsidiaries as of June 30, 2000 and 1999 and the results of their
operations and their cash flows for the year ended June 30, 2000, the Transition
Period ended June 30, 1999 and the year ended October 31, 1998, in conformity
with accounting principles generally accepted in the United States of America.
/s/ KPMG LLP
Phoenix, Arizona
September 27, 2000, except for Note 20(f)
to the consolidated financial statements
which is as of October 4, 2000
F-2
<PAGE>
GLOBAL TECHNOLOGIES, LTD.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
2000 1999
------------- -------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 3,761,301 $ 15,521,275
Restricted cash 766,748 1,412,736
Investment securities 64,125,000 4,594,751
Accounts receivable 55,951 128,489
Notes receivable from related parties -- 98,932
Inventories -- 1,400,000
Prepaid expenses 846,957 607,900
Assets held for sale -- 800,000
Deferred tax asset 24,439,131 --
Other current assets 2,204,803 470,273
------------- -------------
Total current assets 96,199,891 25,034,356
Investments 75,000 5,752,599
Note receivable from related party 117,612 75,000
Property and equipment, net 17,222,957 1,369,392
Intangibles, net 6,697,955 7,119,806
Other assets 1,412,516 61,468
------------- -------------
Total assets $ 121,725,931 $ 39,412,621
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 9,956,182 $ 2,530,675
Accrued liabilities 3,516,012 2,292,609
Deferred revenue -- 365,851
Accrued product warranties 141,796 --
Notes payable 6,314,129 24,391
Notes payable to related parties 800,000 68,836
------------- -------------
Total current liabilities 20,728,119 5,282,362
Notes payable 4,000,000 3,467,045
Accrued litigation settlement 875,000 1,843,750
------------- -------------
Total liabilities 25,603,119 10,593,157
------------- -------------
Minority interest -- 1,165,098
Stockholders' equity:
Series A 8% Convertible preferred stock, 3,000 shares designated,
zero and 3,000 shares issued and outstanding, respectively
(liquidation preference of $3,600,000) -- 30
Series C 5% Convertible preferred stock, 1,000 shares designated,
1,000 and zero shares issued and outstanding, respectively
(liquidation preference of $10,187,415) 10 --
Class A common stock, one vote per share, par value $0.01 per share,
40,000,000 shares authorized; 10,395,075 and 8,151,965 shares
issued and outstanding, respectively 103,952 81,521
Additional paid-in capital 135,358,848 113,435,479
Accumulated other comprehensive income 84,157,758 (10,107)
Accumulated deficit (123,497,756) (85,658,567)
Treasury stock, at cost -- (193,990)
------------- -------------
Total stockholders' equity 96,122,812 27,654,366
------------- -------------
Total liabilities and stockholders' equity $ 121,725,931 $ 39,412,621
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
GLOBAL TECHNOLOGIES, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
TRANSITION
YEAR ENDED PERIOD ENDED YEAR ENDED
JUNE 30, JUNE 30, OCTOBER 31,
2000 1999 1998
------------ ------------ ------------
<S> <C> <C> <C>
Revenue:
Equipment sales $ 6,983,787 $ 875,957 $ 18,038,619
Service income 413,209 706,504 1,104,342
------------ ------------ ------------
7,396,996 1,582,461 19,142,961
------------ ------------ ------------
Costs and expenses:
Cost of equipment sales 4,867,519 1,517,323 15,523,282
Cost of service income 148,221 445,585 238,837
General and administrative expenses 19,261,352 6,643,924 11,397,741
Research and development expenses -- -- 1,092,316
Non-cash compensation expense 1,905,419 -- --
Expenses associated with investments 1,944,743 550,000 --
Reversal of warranty, maintenance & commission accrual -- (7,151,393) --
Special charges 2,156,205 2,485,660 400,024
Amortization of intangibles 912,553 74,981 --
------------ ------------ ------------
31,196,012 4,566,080 28,652,200
------------ ------------ ------------
Operating loss (23,799,016) (2,983,619) (9,509,239)
Other:
Interest expense (5,948,347) (74,684) (11,954)
Interest income 655,194 1,060,229 2,251,055
Equity in loss of nonconsolidated affiliates (10,345,210) (195,704) --
Gain on sale of assets -- 133,396 --
Other income (expense) (14,339) 61,252 10,179
------------ ------------ ------------
Net loss before minority interest (39,451,718) (1,999,130) (7,259,959)
Minority interest 1,612,529 (376,705) --
------------ ------------ ------------
Net loss $(37,839,189) $ (2,375,835) $ (7,259,959)
Cumulative dividend on preferred stock (187,415) (33,333) --
Redemption of preferred stock 509,183 -- --
------------ ------------ ------------
Net loss attributable to common shareholders $(37,517,421) $ (2,409,168) $ (7,259,959)
============ ============ ============
Net loss per share: basic and diluted $ (3.81) $ (0.30) $ (0.82)
============ ============ ============
Weighted average shares outstanding: basic and diluted 9,842,392 8,124,186 8,899,506
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
GLOBAL TECHNOLOGIES, LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
CLASS A CLASS B SERIES A SERIES C
COMMON STOCK COMMON STOCK PREFERRED STOCK PREFERRED STOCK
-------------------- ------------------- --------------- ----------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance as of October 31, 1997 9,056,009 $ 90,561 1,244,445 $ 12,445 -- $ -- -- $ --
Issuance of common stock pursuant to
bonus plan 93,864 939 -- -- -- -- -- --
Treasury stock purchases (844,667 shares) -- -- -- -- -- -- -- --
Comprehensive income (loss): --
Unrealized gains on available for sale
securities -- -- -- -- -- -- -- --
Net loss -- -- -- -- -- -- -- --
---------- -------- ---------- -------- ------ ---- ----- ----
Balance as of October 31, 1998 9,149,873 $ 91,500 1,244,445 $ 12,445 -- $ -- -- $ --
Contribute to capital Class B shares held
in escrow -- -- (1,066,667) (10,667) -- -- -- --
Voluntary conversion of Class B shares to
Class A shares 266,667 2,667 (177,778) (1,778) -- -- -- --
Exercise of stock options 2,426 24 -- -- -- -- -- --
Treasury stock purchases (78,600 shares) -- -- -- -- -- -- -- --
Issue of Series A preferred stock -- -- -- -- 3,000 30 -- --
Issue of Class A warrants -- -- -- -- -- -- -- --
Compensation expense -- -- -- -- -- -- -- --
Unearned compensation, net -- -- -- -- -- -- -- --
Equity attributable to minority interest -- -- -- -- -- -- -- --
Retirement of Treasury Stock (1,267,001) (12,670) -- -- -- -- -- --
Comprehensive income (loss): --
Unrealized loss on available for sale
securities -- -- -- -- -- -- -- --
Net loss -- -- -- -- -- -- -- --
---------- -------- ---------- -------- ------ ---- ----- ----
Balance as of June 30, 1999 8,151,965 $ 81,521 -- $ -- 3,000 $ 30 -- $ --
Exercise of stock options 132,306 1,323 -- -- -- -- -- --
Issuance of stock for purchase of Series Notes 581,415 5,814 -- -- -- -- -- --
Issuance of stock to officers and directors 1,544,250 15,443 -- -- -- -- -- --
Issuance of warrants and stock to third parties
for services and in connection with financing 22,500 225 -- -- -- -- -- --
Treasury stock purchases -- -- -- -- -- -- -- --
Issuance of Series C preferred stock -- -- -- -- -- -- 1,000 10
Redemption of Series A preferred stock -- -- -- -- (3,000) (30) -- --
Conversion of Note Payable to TNCi common stock -- -- -- -- -- -- -- --
Unit purchase options 168,897 1,689 -- -- -- -- -- --
TNCi purchase of outstanding warrants -- -- -- -- -- -- -- --
Advance under equity purchase agreement -- -- -- -- -- -- -- --
Net issuance of TNCi commitment shares associated
with equity purchase agreement -- -- -- -- -- -- -- --
Beneficial conversion on convertible notes -- -- -- -- -- -- -- --
Compensation expense related to stock option
modifications -- -- -- -- -- -- -- --
Issuance of warrants to related party -- -- -- -- -- -- -- --
Fractional shares paid for stock dividend (38) -- -- -- -- -- -- --
Retirement of treasury stock (582,530) (5,825) -- -- -- -- -- --
Issuance of stock in legal settlements 376,250 3,762 -- -- -- -- -- --
Equity attributable to minority interest -- -- -- -- -- -- -- --
Comprehensive income (loss):
Gain/Loss on foreign currency translation -- -- -- -- -- -- -- --
Net unrealized gain on investments -- -- -- -- -- -- -- --
Unrealized tax benefit of NOL carryforward -- -- -- -- -- -- -- --
Net loss -- -- -- -- -- -- -- --
---------- -------- ---------- -------- ------ ---- ----- ----
Balance as of June 30, 2000 10,395,015 $103,952 -- $ -- -- $ -- 1,000 $ 10
========== ======== ========== ======== ====== ==== ===== ====
ACCUMULATED
ADDITIONAL OTHER TOTAL
PAID-IN COMPREHENSIVE ACCUMULATED TREASURY STOCKHOLDERS'
CAPITAL INCOME DEFICIT STOCK EQUITY
------- ------ ------- ----- ------
Balance as of October 31, 1997 $112,154,110 $ -- $ (76,022,773) $ -- $ 36,234,343
Issuance of common stock pursuant to
bonus plan 186,790 -- -- -- 187,729
Treasury stock purchases (844,667 shares) -- -- -- (2,315,983) (2,315,983)
Comprehensive income (loss):
Unrealized gains on available for sale securities -- 6,754 -- -- 6,754
Net loss -- -- (7,259,959) -- (7,259,959)
------------ ----------- ------------- ----------- ------------
Balance as of October 31, 1998 $112,340,900 $ 6,754 $ (83,282,732) $(2,315,983) $ 26,852,884
Contribute to capital Class B shares held
in escrow 10,667 -- -- -- --
Voluntary conversion of Class B shares to
Class A shares (889) -- -- -- --
Exercise of stock options 4,220 -- -- -- 4,244
Treasury stock purchases (78,600 shares) -- -- -- (193,990) (193,990)
Issue of Series A preferred stock 4,079,970 -- -- -- 4,080,000
Issue of Class A warrants 391,802 -- -- -- 391,802
Compensation expense 120,320 -- -- -- 120,320
Unearned compensation, net (73,449) -- -- -- (73,449)
Equity attributable to minority interest (1,134,749) -- -- -- (1,134,749)
Retirement of Treasury Stock (2,303,313) -- -- 2,315,983 --
Comprehensive income (loss):
Unrealized loss on available for sale securities -- (16,861) -- -- (16,861)
Net loss -- -- (2,375,835) -- (2,375,835)
------------ ----------- ------------- ----------- ------------
Balance as of June 30, 1999 $113,435,479 $ (10,107) $ (85,658,567) $ (193,990) $ 27,654,366
Exercise of stock options 563,386 -- -- -- 564,709
Issuance of stock for purchase of Series Notes 1,647,812 -- -- -- 1,653,626
Issuance of stock to officers and directors 2,669,495 -- -- -- 2,684,938
Issuance of warrants and stock to third parties
for services and in connection with financing 1,949,223 -- -- -- 1,949,448
Treasury stock purchases -- -- -- (1,394,960) (1,394,960)
Issuance of Series C preferred stock 9,847,405 -- -- -- 9,847,415
Redemption of Series A preferred stock (3,570,787) -- -- -- (3,570,817)
Conversion of Note Payable to TNCi common stock 399,800 -- -- -- 399,800
Unit purchase options 2,109,430 -- -- -- 2,111,119
TNCi purchase of outstanding warrants (296,036) -- -- -- (296,036)
Advance under equity purchase agreement 447,544 -- -- -- 447,544
Net issuance of TNCi commitment shares associated
with equity purchase agreement 606,133 -- -- -- 606,133
Beneficial conversion on convertible notes 4,000,000 -- -- -- 4,000,000
Compensation expense related to stock option
modifications 278,318 -- -- -- 278,318
Issuance of warrants to related party 2,324,195 -- -- -- 2,324,195
Fractional shares paid for stock dividend (519) -- -- -- (519)
Retirement of treasury stock (1,583,125) -- -- 1,588,950 --
Issuance of stock in legal settlements 972,409 -- -- -- 976,171
Equity attributable to minority interest (441,314) -- -- -- (441,314)
Comprehensive income (loss):
Gain/Loss on foreign currency translation -- (1,369,104) -- -- (1,369,104)
Net unrealized gain on investments -- 61,097,838 -- -- 61,097,838
Unrealized tax benefit of NOL carryforward -- 24,439,131 -- -- 24,439,131
Net loss -- -- (37,839,189) -- (37,839,189)
------------ ----------- ------------- ----------- ------------
Balance as of June 30, 2000 $135,358,848 $84,157,758 $(123,497,756) $ -- $ 96,122,812
============ =========== ============= =========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
GLOBAL TECHNOLOGIES, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
TRANSITION
YEAR ENDED PERIOD ENDED YEAR ENDED
JUNE 30, JUNE 30, OCTOBER 31,
2000 1999 1998
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(37,839,189) $ (2,375,835) $ (7,259,959)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 2,080,472 394,317 1,338,017
Provision for doubtful accounts -- 30,092 9,869
Change in inventory valuation allowance -- (892,010) --
Equity in loss of nonconsolidated affiliate 10,345,210 195,704 --
Non-cash expenses associated with investments 1,944,743 550,000 --
Loss applicable to minority interest (1,612,529) 376,705 --
Special charges 2,156,205 2,365,340 (606,507)
Gain on sale of Johnny Valet, Inc. -- (133,396) --
Loss on sale of assets held for sale 37,893 -- --
Loss on sale of furniture 44,300 -- --
Non-cash compensation expense 1,905,419 139,649 --
Non-cash expenses 5,729,936 -- --
Loss on disposals of property and equipment -- -- 1,006,531
Reversal of warranty, maintenance and commission accruals -- (7,151,393) --
Changes in assets and liabilities, net of acquisition:
(Increase) decrease in accounts receivable 72,538 (560,439) 4,505,074
(Increase) decrease in inventories (957,625) 1,897,437 5,105,334
Increase in note receivable -- -- (447,939)
Increase in prepaid expenses, other current assets and other assets (1,907,400) (152,919) (532,338)
Increase (decrease) in accounts payable 7,763,641 (1,218,791) (4,284,167)
Increase (decrease) in accrued liabilities 531,826 153,682 (892,345)
Increase in deferred revenue 374,234 1,138,048 (1,930,882)
Increase (decrease) in accrued product warranties 141,796 -- 758,321
Decrease in accrued litigation settlement (125,000)
------------ ------------ ------------
Net cash used in operating activities $ (9,313,531) $ (5,243,809) $ (3,230,991)
------------ ------------ ------------
Cash flows (for) from investing activities:
Maturities of investment securities 1,450,079 1,049,995 2,468,880
Purchases of investment securities (1,839,643) (3,891,176) (4,015,616)
Sales of investment securities 4,994,422 1,913,768 --
Investments in consolidated affiliates (10,988,268) (7,572,409) --
Payments received on related party note receivable 42,381 509,391 --
Issuance of related party note receivable -- (75,000) --
Purchases of property and equipment (18,254,276) (56,255) (77,013)
Proceeds from sale of equipment 799,638 7,200 3,620
Proceeds from sale of Donativos 1,216,155 -- --
Proceeds from sale of assets held for sale 762,107 -- --
Decrease (Increase) in restricted cash 645,988 (373,425) (1,039,311)
Purchase of Johnny Valet, Inc. -- -- (688,736)
Proceeds from sale of Johnny Valet, Inc. -- 750,000 --
Payments to purchase Series A, D and E notes (610,000) -- --
------------ ------------ ------------
Net cash used in investing activities $(21,781,417) $ (7,737,911) $ (3,348,176)
------------ ------------ ------------
Cash flows from financing activities:
Issuance of Series C Preferred Stock 9,660,000 -- --
Redemption of Series A Preferred Stock (3,570,817) -- --
Net convertible debt borrowings 3,985,000 -- --
Exercise of unit purchase options 2,111,119 -- --
Purchase of treasury stock (1,394,960) (193,990) (2,315,983)
Payments on capital lease obligations -- -- (80,753)
Payments on notes payable (790,092) (201,840) --
Net borrowings under Secured Credit Facility 6,327,730 -- --
Issuance of stock to directors and officers 2,684,938 -- --
Advances under equity purchase agreement 500,000 -- --
Re-purchase of outstanding warrants (296,040) -- --
Advances from related party 800,000
Proceeds from issuance of common stock -- 4,244 --
Employee stock option purchases 564,710 -- --
Proceeds from sale of series A 8% Convertible preferred stock, net -- 980,030 --
------------ ------------ ------------
Net cash provided by (used in) financing activities $ 20,581,588 $ 588,444 $ (2,396,736)
------------ ------------ ------------
Effect of exchange rate on cash and cash equivalents (1,246,614) -- --
------------ ------------ ------------
Net decrease in cash and cash equivalents (11,759,974) (12,393,276) (8,975,903)
Cash and cash equivalents at beginning of period 15,521,275 27,914,551 36,890,454
------------ ------------ ------------
Cash and cash equivalents at end of period $ 3,761,301 $ 15,521,275 $ 27,914,551
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
GLOBAL TECHNOLOGIES, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES
(a) DESCRIPTION OF BUSINESS
Global Technologies, Ltd. (formerly known as Interactive Flight
Technologies, Inc.), and subsidiaries (the "Company" or "Global" or "GTL") is a
diversified technology-oriented operating company that develops and operates
investments in the areas of networking solutions, e-commerce, interactive
entertainment, telecommunications and gaming. The most significant of the
Company's subsidiaries is The Network Connection, Inc. ("TNCi"). TNCi designs,
manufactures, installs and maintains advanced, high-end, high-performance
computer servers and interactive, broad-band information and entertainment
systems, and procures and provides the content available through the systems.
TNCi's targeted markets for its products are hotels and time-share properties,
cruise ships, educational institutions and corporate training and passenger
trains. TNCi was acquired by the Company effective May 18, 1999. (May 1, 1999
for accounting purposes). Prior to the Transaction with TNCi, the consolidated
financial statements for all periods presented included the results of
operations of the Company's Interactive Entertainment Division ("IED"), which
was the primary business of the Company.
(b) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Global
Technologies, Ltd. and its wholly-owned subsidiaries: GTL Subco, Inc., GTL
Lottoco, Inc., GTL Investments, GlobalTech Holdings Limited, GTL Management
Limited, GTL Leasing Limited, Lottery Sales Company Limited, Interactive Flight
Technologies (Gibraltar) Limited, and MTJ Corp.; and the majority-owned and
controlled subsidiary TNCi. The ownership interest of minority shareholders in
TNCi is recorded as "minority interest" on the accompanying consolidated
financial statements. All significant intercompany accounts and transactions
have been eliminated.
The equity method of accounting is used for the Company's 50% or less owned
affiliates over which the Company has the ability to exercise significant
influence. The amount by which the Company's carrying value exceeds its share of
the underlying net assets of equity affiliates ("Equity Goodwill") is amortized
over five years on a straight-line basis which adjusts the Company's share of
the affiliates earnings or losses.
The equity method of accounting requires that when it is determined that
only one party in an investment has any tangible assets at risk, 100% of the
equity loss should be recorded by that party without regard to the percent
ownership in the investment. The Company determined during the quarter ended
December 31,1999 that it retained the majority of the financial risk related to
Inter Lotto (UK) Limited ("Inter Lotto") and, accordingly, has recorded against
its investment, 100% of the loss incurred by Inter Lotto for the fiscal year
ended June 30, 2000.
All other investments for which the Company does not have the ability to
exercise significant influence are accounted for under the cost method of
accounting.
The Company continually evaluates investments for indications of impairment
based on the market value of each investment relative to cost, financial
condition, near-term prospects of the investment, and other relative factors. If
impairment is determined the carrying value is adjusted to fair value.
(c) USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
F-7
<PAGE>
GLOBAL TECHNOLOGIES, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
financial statements. Additionally, such estimates and assumptions affect the
reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
(d) CHANGE IN FISCAL YEAR END
As of June 30, 1999, the Company has changed its fiscal year end from
October 31 to June 30. Accordingly, the eight-month period resulting from this
change, November 1, 1998 through June 30, 1999, is referred to as the
"Transition Period".
(e) STOCK SPLITS AND STOCK DIVIDENDS
On January 5, 2000, the Board of Directors approved a three-for-two stock
split to be effected by way of a stock dividend of one share for each two shares
of the Company's Class A Common Stock held by stockholders of record as of the
close of business February 15, 2000. The dividend was paid on February 29, 2000;
fractional shares have been paid out in cash.
On October 30, 1998, the stockholders of the Company approved a
one-for-three reverse stock split on the Company's Class A Common Stock and
Class B Common Stock. One share was issued for each three shares of Common Stock
held by stockholders of record as of the close of business on November 2, 1998.
All references to the number of common shares, per share amounts and stock
option data elsewhere in the consolidated financial statements and related
footnotes have been restated as appropriate to reflect the effect of the stock
split and dividend for all periods presented prior to the splits.
(f) CASH EQUIVALENTS
The Company considers all highly liquid investments with original
maturities at the date of purchase of three months or less to be cash
equivalents.
(g) INVESTMENT SECURITIES
Investment securities consist of corporate equity securities and debt
securities with a maturity greater than three months at the time of purchase. In
accordance with Statement of Financial Accounting Standards ("SFAS") No. 115,
"Accounting for Certain Investments in Debt and Equity Securities", the equity
and debt securities are classified as available-for-sale and carried at fair
value, based on quoted market prices. The net unrealized gains or losses on
these investments are reported in stockholders' equity. The specific
identification method is used to compute the realized gains and losses on the
investment securities.
(h) INVENTORIES
Inventories consisting principally of entertainment network components are
stated at the lower of cost (first-in, first-out method) or market. As of June
30, 1999, inventories consisted of $1.4 million of finished goods.
(i) INTANGIBLES
Intangibles consist of goodwill and trademarks. Goodwill represents the
excess of the purchase price over the fair value of the net assets acquired and
is amortized over five years using the straight-line method. Effective May 1,
2000, the Company revised its estimate of the remaining useful life of its
goodwill from ten years to five years as a result of economic events which
occurred during the period. (See Note 20(e)). Goodwill amortization expense was
$896,287 and $73,986 in the year ended June 30, 2000 and the Transition period
ended June 30, 1999, respectively. Had the Company assumed a five-year life for
goodwill amortization at the Transition date, additional expense of
approximately $593,000 (unaudited) would have been recorded for the year-ended
June 30, 2000, and approximately $712,000 (unaudited) for each of the remaining
years.
F-8
<PAGE>
GLOBAL TECHNOLOGIES, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Trademarks are stated at fair market value at the date of acquisition and
are amortized over ten years using the straight-line method.
The company continually evaluates whether events and circumstances have
occurred that indicate the remaining estimated useful lives of intangibles may
warrant revision or that the remaining balances may not be recoverable. When
factors indicate that assets should be evaluated for possible impairment, the
Company uses an estimate of the undiscounted net cash flows over the remaining
life of assets in measuring whether an asset is recoverable. In cases where
undiscounted expected future cash flows are less than the carrying value, an
impairment loss is recognized to reduce the carrying value of the intangible to
its estimated fair value.
(j) PROPERTY AND EQUIPMENT
Property and equipment are stated at the lower of cost or net realizable
value. Depreciation and amortization expense is calculated using the
straight-line method over the estimated useful lives of the assets ranging from
three to seven years. Leasehold improvements are amortized using the
straight-line method over the shorter of the underlying lease term or asset
life. Guest pay interactive systems consist of equipment and related costs of
installation. Construction in progress consists of purchased and manufactured
parts of partially installed guest pay interactive systems.
(k) REVENUE RECOGNITION
The Company's revenue derived from sales and installation of equipment is
recognized upon installation and acceptance by the customer. Fees derived from
servicing installed systems are recognized when earned, according to the terms
of the service contract. Revenue pursuant to contracts that provide for revenue
sharing with customers and/or others is recognized in the period the services
are purchased by the systems' end users (i.e., a hotel guest). Revenue earned
pursuant to extended warranty agreements is recognized ratably over the warranty
period.
(l) DEFERRED REVENUE
Deferred revenue represents cash received on advance billings of equipment
sales as allowed under installation and extended warranty contracts.
(m) RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred except for
development costs required by a customer contract. Development costs incurred
pursuant to contractual obligations are allocated to deliverable units. These
development costs are expensed as cost of equipment sales upon installation of
the complete product and acceptance by the customer.
(n) WARRANTY COSTS
The Company provides, by a current charge to income, an amount it estimates
will be needed to cover future warranty obligations for products sold with an
initial warranty period. Revenue and expenses under extended warranty agreements
are recognized ratably over the term of the extended warranty.
(o) IMPAIRMENT OF LONG-LIVED ASSETS
The Company evaluates the potential impairment of long-lived assets in
accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of." In cases where undiscounted
expected future cash flows are less than the carrying value, an impairment loss
is recognized to reduce the carrying value of the asset to its estimated fair
value.
F-9
<PAGE>
GLOBAL TECHNOLOGIES, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(p) INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
(q) NET LOSS PER SHARE
Basic net loss per share is computed by dividing loss attributable to
common stockholders, by the weighted average number of common shares outstanding
for the period. Weighted shares for purposes of the loss per share calculation
do not include 1,500,000 shares of common stock issuable upon the conversion of
Series A 8% Convertible Preferred Stock ("Series A Stock") at June 30, 1999 due
to their subsequent redemption, nor 1,600,000 shares placed in escrow at October
31, 1998 due to their contingent issuance and subsequent cancellation. All stock
options and warrants outstanding at June 30, 2000, June 30, 1999 and October 31,
1998 have been excluded from the weighted average number of common shares
outstanding because their inclusion would have been anti-dilutive.
In November 1999, the Company redeemed the Series A Stock valued at
$4,080,000 for cash of $3,520,000, plus payment of $50,817 for legal fees
related to the transaction. The resulting $509,183 discount represents the
excess carrying value amount of the preferred stock over the fair value of
consideration transferred to the holders of the preferred stock, and must be
added back to net loss to arrive at net loss available to common shareholders
for determining basic net loss per share. If the Company had recorded this
adjustment in previous quarters, basic and diluted net loss per share would have
been $(.61) (unaudited) for the three months ended December 31, 1999 and $(.83)
(unaudited) for the three months ended March 31, 2000.
(r) STOCK-BASED COMPENSATION
In accordance with the provisions of Accounting Principals Board Opinion
No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), the Company
measures stock-based compensation expense as the excess of the market price at
the grant date over the amount the employee must pay for the stock. The
Company's policy is to generally grant stock options at fair market value at the
date of grant; accordingly, no compensation expense is recognized. SFAS No. 123
"Accounting for Stock Based Compensation" established accounting and disclosure
requirements using fair value based methods of accounting for stock based
employee compensation plans. As permitted, the Company has elected to adopt the
pro forma disclosure provisions only of SFAS No. 123.
(s) RECLASSIFICATIONS
Certain reclassifications have been made to the 1998 and 1999 consolidated
financial statements to conform to the 2000 presentation.
(t) RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivatives and Similar Financial Instruments and for Hedging
Activities", to establish accounting and reporting standards for derivative
instruments and for hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities on the balance sheet and measure
those instruments at fair value. This new standard, as amended by related SFAS
Nos. 137 and 138, will be effective for the Company for its fiscal year ending
June 30, 2001. The Company is currently evaluating the impact of SFAS No. 133.
F-10
<PAGE>
GLOBAL TECHNOLOGIES, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, Accounting for Certain Transactions Involving Stock
Compensation (an interpretation of APB No. 25). This interpretation clarifies
the application of APB No. 25 by clarifying the definition of an employee, the
determination of non-compensatory plans and the effect of modifications to stock
options. This interpretation is effective July 1, 2000 and is not expected to
have a material effect on the Company's consolidated financial statements.
(u) FOREIGN CURRENCY TRANSLATION
The financial statements of the Company's United Kingdom ("UK")
subsidiaries are translated into U.S. dollars in accordance with SFAS No. 52,
"Foreign Currency Translation". Assets and liabilities of the subsidiaries are
translated into U.S. dollars at current exchange rates. Income and expense items
are translated at the average exchange rate for the year. The resulting
translation adjustments are recorded directly as a separate component of
stockholders' equity. All transaction gains or losses are recorded in the
consolidated statement of operations. For the year ended June 30, 2000, the
Company recognized a foreign currency transaction loss of $246,938 in general
and administrative expenses related to a U.S. dollar denominated obligation of
its UK subsidiary, GTL Leasing, Ltd.
(v) CONCENTRATION OF CREDIT RISK
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist principally of cash, investment
securities and accounts receivable. The Company's investment securities consist
primarily of 3,000,000 shares of U.S. Wireless Corporation Common Stock, which
trades on the Nasdaq National Market. Concentrations of credit risk with respect
to accounts receivable result from the Company's current exposure to a limited
customer base.
(w) MINORITY INTEREST
Minority interest in consolidated subsidiaries represents the minority
shareholders' proportionate share of the equity in TNCi. Net loss is allocated
to minority interest based on the weighted average minority shareholders'
percentage ownership until the minority shareholders' equity capital is
eliminated, after which the Company records 100% of the losses of the
consolidated subsidiary. Equity is allocated based on the ownership percentage
at year-end. Any difference is recorded as a reallocation of minority interest
in the Consolidated Statements of Stockholders' Equity and Comprehensive Income.
(x) COMPREHENSIVE INCOME
The Company reports comprehensive income and its components in its full set
of financial statements in accordance with SFAS No. 130, "Reporting
Comprehensive Income." Comprehensive income consists of net income, unrealized
gains on investment securities, and foreign currency translations, and is
presented in the Consolidated Statement of Stockholders' Equity and
Comprehensive Income; it does not affect the Company's financial position or
results of operations.
(2) ACQUISITION OF THE NETWORK CONNECTION, INC.
On May 11, 1999, the Company acquired from The Shaar Fund, Ltd. ("Shaar")
1,500 shares of Series B 8% Convertible Preferred Stock of TNCi, par value $.01
per share, stated value $1,000 per share (the "TNCi Series B Shares") and cash
in the amount of $980,000 (net of $50,000 of legal fees) in exchange for (a)
3,000 shares of the Company's Series A 8% Convertible Preferred Stock, par value
$.01 per share, stated value $1,000 per share with an estimated fair value of
$4,080,000 and (b) warrants to purchase 131,250 shares of the Company's Class A
F-11
<PAGE>
GLOBAL TECHNOLOGIES, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Common Stock, par value $.01 per share, at an exercise price of $2.00 per share.
In connection with this acquisition, the Company also received an assignment of
(a) certain registration rights under a Registration Rights Agreement dated
October 23, 1998 between TNCi and Shaar (the "Registration Rights Agreement")
and (b) certain rights of first refusal held by Shaar with respect to future
TNCi financings.
Also on May 11, 1999, the Company acquired directly from TNCi 800 shares of
Series C 8% Convertible Preferred Stock of TNCi, par value $.01 per share,
stated value $1,000 per share (the "TNCi Series C Shares") in consideration for
the Company's waiver of all prior TNCi defaults and arrearages arising out of or
related to the TNCi Series B Shares.
In connection with the forgoing acquisitions of the TNCi Series B Shares
and TNCi Series C Shares, the Company also acquired the right to convert a
Secured Promissory Note (the "Secured Promissory Note") made by TNCi in January
1999, payable to the order of the Company, into additional TNCi Series C Shares
at the rate of $1,000 per TNCi Series C Share. The original principal amount of
the Secured Promissory Note was $500,000.
On May 18, 1999, the Company received from TNCi 1,055,745 shares of its
common stock and 2,495,400 shares of its Series D Convertible Preferred Stock in
exchange for $4,250,000 in cash and substantially all the assets and certain
liabilities of the Interactive Entertainment Division, as defined in the Asset
Purchase and Sale agreement dated April 30, 1999, as amended (the
"Transaction").
On May 9, 2000, pursuant to the indemnification provisions of the Asset
Purchase and Sale Agreement, Global notified TNCi of several violations of
representation and warranties contained in the Agreement, including undisclosed
liabilities. Accordingly, previously recognized fixed assets and unrecorded
liabilities were recorded with an adjustment to goodwill of $490,702. These
violations require additional shares be issued to Global as compensation. On
September 27, 2000 TNCi agreed to issue an additional 270,081 unregistered
shares to Global in consideration of the indemnification provisions.
The Company has consolidated the results of operations of TNCi from the
date of acquisition. TNCi is a majority-owned subsidiary of the Company whose
ownership, through a combination of the Transaction described above and the
Company's purchase of TNCi's Series B Shares and 110,000 shares of TNCi's common
stock from third party investors, approximates 79% of TNCi on an if-converted
common stock basis.
The Transaction has been accounted for by the purchase method of accounting
and, accordingly, the purchase price has been allocated to the assets acquired
and the liabilities assumed based upon estimated fair values at the date of
acquisition as follows (as adjusted):
F-12
<PAGE>
GLOBAL TECHNOLOGIES, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Purchase Price:
Cash $ 4,250,000
Net liabilities of IED contributed (4,012,430)
-----------
Total 237,570
-----------
Assets acquired and liabilities assumed:
Historical book value of net liabilities (2,457,723)
Fair value adjustments:
Inventory (1,280,847)
Property (1,246,146)
Other Assets (430,567)
Liabilities (672,506)
-----------
Total fair value of liabilities assumed (6,087,789)
-----------
Excess of fair value of TNCi Series B
8% Preferred Stock and Series C
8% Preferred Stock over its recorded value (1,501,000)
Purchase of Common Stock of TNCi (254,658)
-----------
Excess of purchase price over fair value of net
Liabilities assumed (goodwill) $ 7,605,877
===========
The excess of fair value of TNCi Series B Shares and Series C Shares is the
result of the Company's acquisition of such shares based on the fair value of
the Company's Series A 8% Convertible Preferred Stock amounting to $4,080,000,
less $980,000 (net of $50,000 of legal fees) cash received and the historical
value of $1,549,000 of the Series B 8% Preferred Stock.
Purchase of 110,000 shares of Common Stock of TNCi from a third party was
valued based on the cash consideration paid by the Company for the shares.
The Pro forma unaudited operations data assuming the TNCi acquisition had
taken place on November 1, 1997 is as follows:
TRANSITION
PERIOD ENDED YEAR ENDED
JUNE 30, 1999 OCTOBER 31, 1998
------------- ----------------
Revenue $ 1,566,000 $24,146,000
Net loss $11,578,000 $17,590,000
Net loss per share $ 1.43 $ 1.97
(3) INVESTMENT SECURITIES
Investments are classified according to the applicable accounting method at
June 30, 2000 and 1999. Market value reflects the price of publicly traded
securities at the close of business at the respective date. Unrealized gain
(loss) reflects the excess (deficit) of market value over carrying value of
publicly traded securities classified as available for sale.
F-13
<PAGE>
GLOBAL TECHNOLOGIES, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following summarizes the Company's current portion of investments by
type at:
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED
AMORTIZED HOLDING HOLDING FAIR
COST GAINS LOSSES VALUE
----------- ----------- --------- -----------
<S> <C> <C> <C> <C>
JUNE 30, 2000
Available-for-sale:
Corporate equity securities $ 3,037,269 $61,087,731 $ -- $64,125,000
=========== =========== ========= ===========
JUNE 30, 1999
Available-for-sale:
Corporate debt securities $ 4,604,858 $ -- $ (10,107) $ 4,594,751
=========== =========== ========= ===========
</TABLE>
Corporate equity securities consist of 3,000,000 shares of U.S. Wireless
Corporation Common Stock. Corporate debt securities consist of corporate bonds
with a maturity greater than three months at the time of purchase.
The following summarizes the Company's non-current investments at:
JUNE 30,
-----------------------------
2000 1999
---------- ----------
Equity Affiliates (Approx. ownership %)
Inter Lotto (UK) Ltd. (27.5%) $ -- $1,050,775
Donativos S.A. de C.V. (24.5%) -- 1,664,555
---------- ----------
$ -- $2,715,330
Cost Affiliates
U.S. Wireless Corporation $ -- $3,037,269
Shop4cash.com $ 75,000 $ --
---------- ----------
Total Non-Current Investments $ 75,000 $5,752,599
========== ==========
(a) U.S. WIRELESS CORPORATION
U.S. Wireless Corporation, a Delaware Corporation ("U.S. Wireless")
(NASDAQ: USWC), has developed a geographic location system designed to pinpoint
the location of wireless telephone subscribers within a wireless network. The
system uses proprietary technology developed by U.S. Wireless.
In March 1999, the Company invested $3 million in U.S. Wireless in exchange
for 30,000 shares of Series B Preferred Stock. In March and April 2000, the
Company converted its Series B Preferred Stock of U.S. Wireless Corporation into
3,000,000 shares of U.S. Wireless Common Stock. The common stock has not been
registered under the Securities Act of 1934 and any sales by the Company are
subject to the limitations of Rule 144.
Due to the expiration of the one-year holding period, the Company can sell
its shares of U.S. Wireless Common Stock under Rule 144. As the Company intends
to sell all or a portion of these shares, the Company changed its method of
accounting for this investment from the cost method to classifying the
investment as available-for-sale carried at fair market value as of March 31,
2000. Unrealized gains on this investment are reflected as a separate component
of stockholders' equity. At June 30, 2000 the market price of U.S. Wireless
Common Stock was $21.375 per share, resulting in a total fair market value of
$64,125,000. Changes in the market price of U.S. Wireless Common Stock will
result in future adjustments to unrealized gains or losses on this investment.
As of September 25, 2000, the market price per common share of U.S. Wireless
Common Stock was $16.81, resulting in a fair market value of $50.4 million.
F-14
<PAGE>
GLOBAL TECHNOLOGIES, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(b) INTER LOTTO (UK) LIMITED
In May 1999, the Company completed the acquisition of a 27.5% equity
interest in Inter Lotto through its wholly-owned subsidiary, GlobalTech Holdings
Limited, a UK company ("GlobalTech Holdings"). The Company accounts for this
investment under the equity method. The balance of the shares of Inter Lotto are
owned by seven shareholders.
Inter Lotto has a license granted by the Gaming Board for Great Britain to
operate daily lotteries on behalf of charities throughout the UK. Through an
Operating Agreement between Inter Lotto and GTL Management Limited, a UK company
and wholly-owned subsidiary of GlobalTech Holdings ("GTL Management"), GTL
Management manages the operations of the lotteries and Inter Lotto retains
responsibility for regulatory issues, charity recruiting and certain other
functions as required under the gaming laws. GTL Management developed and
installed a network of gaming terminals and a central operating center to
operate the lotteries and markets and operates the lottery, including selecting
the game and managing the network. In exchange, GTL Management retains a portion
of the revenues generated from lottery ticket sales.
In December 1999, the Company determined that it retains the majority of
the financial risk related to Inter Lotto and, accordingly, has recorded against
its investment, 100% of the loss incurred by Inter Lotto for the fiscal year
ended June 30, 2000.
On August 18, 2000 the Company transferred its equity interest in Inter
Lotto back to existing shareholders of Inter Lotto in exchange for a nominal
amount, the termination of the existing Operating Agreement with GTL Management,
the continued use of the Inter Lotto lottery license through December 31, 2000
and the repayment of certain Value Added Tax rebates owed to GTL Management. As
such, the Company wrote off its investment as of June 30, 2000 in Inter Lotto of
$684,685, consisting of working capital advances, notes receivable and
capitalized acquisition costs. (See Note 6.)
During the year ended June 30, 2000 and the Transition Period ended June
30, 1999, the Company recorded its proportionate share of losses of Inter Lotto
and Equity Goodwill amortization of $10,204,125 and $167,493 respectively, which
have been recorded as equity in loss of non-consolidated affiliates in the
consolidated statements of operations.
(c) DONATIVOS S.A. DE C.V.
Donativos S.A. de C.V. ("Donativos") is a Mexican corporation formed for
the purpose of operating a gaming and entertainment center in Monterrey, Nuevo
Leon, Mexico.
In May 1999, the Company, through its wholly-owned subsidiary, Interactive
Flight Technologies (Gibraltar) Limited, a Gibraltar company ("IFT Gibraltar"),
loaned $1,632,000 to Donativos in exchange for a 24.5% interest in the venture.
The Company accounted for this investment under the equity method. In addition
to IFT Gibraltar, other partners in the venture included Regal Gaming and
Entertainment, Inc., a Minnesota corporation ("Regal Gaming"), which also had a
24.5% interest, and a Mexican national, who had a 51% interest. The IFT
Gibraltar loan had an annual interest rate equal to the Prime Rate plus three
percent (3%) and a maturity date of April 30, 2001. The Company had also
provided a letter of credit in the amount of $913,445 to secure repayment of the
purchase price of certain gaming equipment acquired by IFT Gibraltar and leased
to Donativos. In addition to its 24.5% equity interest in Donativos, in
consideration for making the loan and providing the letter of credit, the
Company was to receive 25% of all of the profits generated by Donativos.
In the quarter ended December 31, 1999, the Company determined that the
value of its investment in Donativos had been permanently impaired. Donativos
was not generating sufficient profits to meet its obligations to the Company
under the loan and equipment financing agreements and, therefore, its ability to
continue as a "going concern" was in doubt. At that time the equity investment
F-15
<PAGE>
GLOBAL TECHNOLOGIES, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
was written off and a reserve for the full amount of the loans and subsequent
advances to Donativos was recorded, resulting in a charge to income of $1.5
million. On April 14, 2000, the Company entered into an agreement pursuant to
which on May 10, 2000 the Company received $2.0 million from Donativos in return
for cancellation of the debt owed by Donativos to IFT Gibraltar and the transfer
of the equity that Global and Regal Gaming held in Donativos to the majority
shareholder of Donativos. The transaction also involved an exchange of general
releases and transfer of title to the equipment in the gaming center in
Monterrey, Mexico from IFT Gibraltar to Donativos. The Company reversed $1.2
million of the prior loan reserve. In addition, in February 2000, the Company
paid the gaming equipment purchase obligation in full and cancelled the letter
of credit.
During the year ended June 30, 2000 and the Transition Period ended June
30, 1999, the Company recorded its proportionate share of losses of Donativos
and Equity Goodwill amortization of $141,085 and $28,211, respectively, which
have been recorded as equity in loss of non-consolidated affiliates in the
consolidated statements of operations.
(d) SHOP4CASH.COM, INC.
On November 23, 1999 the Company acquired 500,000 shares, or approximately
4% of Shop4Cash.com, Inc. ("Shop4Cash") at a price of $2.00 per share. Shop4Cash
is a privately held, cash incentive based, Internet shopping portal. Global has
registration rights in connection with these shares. The investment is being
recorded at cost.
In July 2000, Shop4Cash decided to implement certain changes to its
existing business model in order to create additional value for its merchant
base. In September 2000, Shop4Cash signed a letter of intent for the purpose of
merging with an on-line credit card services provider. This anticipated merger
would create an e-commerce platform servicing both consumers and the Shop4Cash
merchant base. The post-merger entity would offer merchants on-line credit card
processing and transaction services in addition to the existing services of the
Shop4Cash website.
Concurrently with the proposed merger, Shop4Cash is seeking additional
financing for working capital purposes of $300,000 from a group of its current
stockholders, which includes the Company. It plans to raise these additional
funds through the sale of common stock and has accepted subscription agreements
for the full $300,000. The Company determined it necessary to write-down its
investment in Shop4Cash by $925,000 as of June 30, 2000, (which does not include
the shares to be purchased in the recent financing round) to $75,000 to reflect
a permanent impairment of its previous investment.
(4) RESTRICTED CASH
At June 30, 2000 and 1999, the Company held restricted cash of $766,748 and
$1,412,736, respectively. The Company held $475,915 and $446,679 as of June 30,
2000 and 1999, respectively, in a trust fund for payments, which may be required
under severance agreements with one former executive of the Company. At June 30,
2000 restricted cash also included $290,833 held in a certificate of deposit
with a commercial bank as collateral for a letter of credit issued to secure a
lease for the Company's offices in New York. At June 30, 1999, restricted cash
also included $52,612 held in trust for severance payments to three former
executives of the Company and $913,445 held in a certificate of deposit with a
commercial bank as collateral for a letter of credit issued to secure repayment
of gaming equipment purchased by IFT Gibraltar and leased to Donativos. In
February 2000, the Company paid for the equipment purchases in full, cancelled
the letter of credit and had the restricted cash returned to the Company.
F-16
<PAGE>
GLOBAL TECHNOLOGIES, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(5) ASSETS HELD FOR SALE
In connection with the acquisition of TNCi, the Company relocated the
corporate offices and production capabilities of TNCi to its Phoenix, Arizona
offices. Accordingly, as of June 30, 1999, certain assets were recorded at their
net realizable value and classified as assets held for sale. In September 1999,
TNCi sold one of its two buildings in Alpharetta, Georgia. The net proceeds of
approximately $390,000 from the sale, plus additional cash of approximately
$80,000, was used by the Company to repay a note payable due April 2001, in the
principal amount of $470,000. The sale of the second building occurred in
November 1999. The net proceeds of approximately $367,000 from the sale were
used to retire a note payable due 2009 in the principal amount of $220,508.
(6) PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
JUNE 30,
--------------------------------
2000 1999
------------ ------------
Leasehold improvements $ 831,388 $ 261,668
Purchased software 188,476 149,703
Furniture 414,890 173,460
Equipment 15,090,614 1,700,462
Guest Pay Interactive Systems:
Installed 467,885 --
Construction in progress:
System components 967,215 --
Work in progress 1,009,907 --
------------ ------------
18,970,375 2,285,293
Less accumulated depreciation
and amortization (1,747,418) (915,901)
------------ ------------
$ 17,222,957 $ 1,369,392
============ ============
On August 18, 2000, the Company transferred its equity interest in Inter
Lotto back to the existing shareholders of Inter Lotto and terminated the
Operating Agreements between GTL Management and Inter Lotto. The Company has
continued use of the Inter Lotto lottery license through December 31, 2000, and
is currently evaluating strategic alternatives for the use of the lottery
network. The network consists of a central computer system and approximately
3,000 gaming terminals placed with third party retailers remotely connected to
the central system via wireless equipment. The base cost of the system was
approximately $12.3 million, of which approximately $2.9 million has yet to be
paid as of June 30, 2000. The balance outstanding is accruing interest at a rate
of one and one-half percent per month. Pending its review of its strategic
alternatives for the network, the Company is evaluating the carrying value of
the network equipment. During the fiscal first quarter ending September 30,
2000, the Company may be required to record an impairment loss and adjust the
carrying value of the equipment to fair value. The impairment loss may have a
material effect on the financial statements.
During the year ended October 31, 1998, the Company recorded equipment
write-offs of $1,006,532, which are included in special charges on the
consolidated statement of operations. The write-offs are principally related to
excess computers, furniture and other equipment that the Company is not
utilizing.
F-17
<PAGE>
GLOBAL TECHNOLOGIES, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(7) INTANGIBLES
Intangibles consist of the following:
JUNE 30,
--------------------------------
2000 1999
------------ ------------
Goodwill $ 7,605,876 $ 7,115,174
Trademarks 79,613 79,613
----------- -----------
7,685,489 7,194,787
Less accumulated amortization (987,534) (74,981)
----------- -----------
$ 6,697,955 $ 7,119,806
=========== ===========
(8) ACCRUED LIABILITIES
Accrued liabilities consist of the following:
JUNE 30,
--------------------------------
2000 1999
------------ ------------
Due to related parties (See Note 15) $1,419,716 $1,891,123
Other accrued expenses 2,096,296 401,486
---------- ----------
$3,516,012 $2,292,609
========== ==========
F-18
<PAGE>
GLOBAL TECHNOLOGIES, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(9) NOTES PAYABLE
Notes payable consists of the following:
<TABLE>
<CAPTION>
JUNE 30,
---------------------------
2000 1999
----------- -----------
<S> <C> <C> <C>
Secured Credit Facility due on demand, interest
at LIBOR plus 1.25% $ 6,309,385 $ --
Secured Convertible Notes due December 7, 2001, interest
at 6%, convertible into common stock of the Company 4,000,000 --
Series A, D and E Notes -- 2,386,048
Note payable due September 5, 1999, interest at 7%, convertible into
TNCi common stock at the option of the Company -- 400,000
Note payable due in varying installments through 2009, interest at
Prime plus 2%, collateralized by certain certain commercial property
and personally guaranteed by two shareholders -- 220,508
Note payable due and payable April 19, 2001, interest at 16% payable
monthly, collateralized by certain commercial property -- 470,000
Notes payable due in varying installments through 2000, interest ranging
from 6.9% to 11% collateralized by vehicles 4,744 14,880
----------- -----------
Total 10,314,129 3,491,436
Less current portion 6,314,129 24,391
----------- -----------
$ 4,000,000 $ 3,467,045
=========== ===========
</TABLE>
Aggregate maturities of notes payable as of June 30, 2000 are as follows:
2001 $ 6,314,129
2002 4,000,000
-----------
$10,314,129
===========
(a) SECURED CREDIT FACILITY
On April 5, 2000, the Company entered into a line of credit facility with
Merrill Lynch in which Merrill Lynch agreed to advance up to $10.0 million based
upon a percentage of the value of securities pledged as collateral to secure
amounts drawn under the line of credit (the "Secured Credit Facility").
Principal amounts borrowed under the line, together with accrued interest at an
annual rate equal to the London Inter-bank Offer Rate (LIBOR) (7.214% at June
30, 2000) plus 1.25%, are payable upon demand by Merrill Lynch. As of June 30,
2000, approximately $6.3 million was outstanding under the Secured Credit
Facility. To secure such borrowing, the Company has pledged to Merrill Lynch
1,000,000 shares of common stock of U.S. Wireless held by the Company.
If the amount owed under the Secured Credit Facility at any time exceeds
35% of the market value of the shares of common stock of U.S. Wireless pledged
to Merrill Lynch, the Company will be subject to a maintenance call which would
require the Company to pledge additional securities which are acceptable to
Merrill Lynch as collateral or require the Company to reduce the outstanding
balance owed under the Secured Credit Facility through payment in cash. On May
2, 2000, Merrill Lynch issued a maintenance call for approximately $1.4 million
to the Company. This maintenance call was waived until May 12, 2000, when the
Company reduced the outstanding balance by $1.9 million from the proceeds of the
sale of its equity interest in Donativos and the gaming equipment leased to
Donativos. Beginning on May 24, 2000, Merrill Lynch issued a series of
maintenance calls requiring a reduction in the balance owed of approximately
$900,000. The final maintenance calls were subsequently satisfied by a pledge of
F-19
<PAGE>
GLOBAL TECHNOLOGIES, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
additional collateral with a market value of approximately $1.6 million, pledged
by Irwin L. Gross, the Company's Chairman and Chief Executive Officer. As of
June 30, 2000, the market value of the shares of common stock of U.S. Wireless
was sufficient to maintain the outstanding balance owed under the Secured Credit
Facility, and Mr. Gross' collateral was released.
In July and August 2000, Merrill Lynch issued a series of maintenance calls
requiring a reduction in the balance owed of approximately $1.2 million. The
maintenance calls were subsequently secured by pledges of additional collateral
with a total market value of approximately $2.7 million, pledged by Mr. Gross.
As of September 25, 2000, the outstanding balance of the Secured Credit Facility
was approximately $7.0 million, and Mr. Gross' collateral remains pledged to
Merrill Lynch to secure the credit facility.
In connection with the pledges of his collateral to meet the maintenance
calls, Mr. Gross was granted warrants to purchase 553,978 shares of the
Company's Class A Common Stock based upon the amount of collateral pledged and
the closing market price of the stock on the date of each pledge. The Company
recorded non-cash interest expense of $1,526,527 for the year ended June 30,
2000, related to the estimated fair value of the warrants granted for the
collateral pledged as of June 30, 2000.
(b) SECURED CONVERTIBLE NOTES
On June 8, 2000, the Company issued $4.0 million of secured convertible
notes to Advantage Fund II Ltd. and Koch Investment Group, Ltd. (the "Secured
Convertible Notes"). The notes bear interest at 6% per annum and mature on
December 7, 2001. The notes are convertible into shares of the Company's Class A
Common Stock at a conversion price of $2 per share, subject to customary
adjustments. To secure such borrowing, the Company pledged 1,000,000 shares of
common stock of U.S. Wireless to the holders of the notes. An event of default
under the notes occurs if U.S. Wireless common stock trades at less than $5.00
per share at any time during each of five trading days (which need not be
consecutive) within any consecutive 30-day period and certain other conditions
are met. A default under the notes would allow the holders to accelerate
repayment of the notes. The failure to repay on an accelerated basis in a
default situation could result in the liquidation of the pledged shares of U.S.
Wireless Common Stock.
At the date of issuance, the conversion rate of the Secured Convertible
Notes was lower than the market price of the Company's stock at issuance, and as
such the notes have an embedded beneficial conversion feature. The Secured
Convertible Notes can be converted at any time prior to redemption. Therefore,
the Company recorded interest expense of $4.0 million related to the beneficial
conversion feature.
On July 7, 2000, the Company redeemed $2.0 million of the principal amount
of the Secured Convertible Notes. In connection with this redemption, the
lenders released to the Company 500,000 shares of U.S. Wireless common stock
previously held as collateral. The notes require that in connection with such
redemption the Company issue warrants for 125,000 shares, in the aggregate, of
its Class A Common Stock to the holders of the notes. These warrants have a
four-year term and an exercise price of $4.00 per share.
F-20
<PAGE>
GLOBAL TECHNOLOGIES, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(c) SERIES NOTES
The Series A, D and E Notes ("Series Notes") were issued by TNCi in 1998
prior to the Transaction. The Series Notes all had original maturities of
approximately 135 days with interest at approximately 7% to 8% per annum. TNCi
could choose to repay such Notes in cash subject to a payment charge equal to
approximately 7% of the face amount of the Note or TNCi could elect to convert
the Series Notes into TNCi preferred stock which is convertible into common
stock at various discounts. In July and August 1999, the Company purchased all
of the Series A and E Notes and the Series D Notes respectively, from the
holders of such notes. Concurrent with such purchase by the Company, TNCi
executed several allonges to the Secured Promissory Note, which cancelled such
Series Notes and rolled the principal balance, plus accrued interest, penalties
and redemption premiums on the Series Notes into the principal balance of the
Secured Promissory Note. Subsequent to May 18, 1999, Global had also advanced
working capital to TNCi in the form of intercompany advances. In August 1999,
TNCi executed an allonge to the Secured Promissory Note which rolled the
intercompany advances into the principal balance of the Secured Promissory Note
and granted Global the ability to convert the Secured Promissory Note directly
into shares of TNCi's Common Stock, without first converting to TNCi Series C
share, as an administrative convenience.
On August 24, 1999, the Board of Directors approved the conversion of the
Secured Promissory Note into shares of the TNCi's Common Stock at a 33% discount
to the market price of the common stock. Such conversion, to the extent it
exceeded approximately one million shares of the TNCi's Common Stock on August
24, 1999, was contingent upon receiving shareholder approval to increase the
authorized share capital of the TNCi. This increase in authorized share capital
was subsequently approved at the September 17, 1999 Special Meeting of TNCi's
shareholders. Accordingly, in December 1999, TNCi issued 4,802,377 shares of its
Common Stock to Global based on the conversion date of August 24, 1999.
(d) OTHER NOTES PAYABLE
In October 1999, the convertible note payable due September 5, 1999 was
converted into 200,000 shares of TNCi's common stock at $2 per share.
In September 1999, TNCi sold one of its two buildings in Alpharetta,
Georgia. The net proceeds of approximately $390,000 from the sale, plus
additional cash of approximately $80,000, was used by the Company to repay the
note payable due April 2001, in the principal amount of $470,000. The sale of
the second building occurred in November 1999. The net proceeds of approximately
$367,000 from the sale were used to retire the note payable due 2009 in the
principal amount of $220,508.
(10) NOTES PAYABLE TO RELATED PARTY
In May and June 2000, The Gross Charitable Unit Trust and The Gross
Charitable Annuity Trust (together the "Trusts"), advanced a total of $800,000
to TNCi for working capital purposes. An additional $250,000 was advanced to
TNCi in July 2000. On September 12, 2000, the advances to TNCi were converted
into two promissory notes, each in the amount of $525,000, issued to each Trust
by TNCi. The notes mature on December 31, 2000 and bear interest at 9.0%. The
Trusts are controlled by the Company's Chairman and Chief Executive Officer,
Irwin L. Gross.
In August and September 2000 the Trusts also advanced a total of $800,000
to Global for working capital purposes. On September 22, 2000, the advances were
converted into two promissory notes, each in the amount of $400,000, issued to
each Trust by Global. The notes mature on December 31, 2000 and bear interest at
9.0%.
In connection with the execution of the promissory notes, each Trust was
granted warrants to purchase 99,159 shares of the Company's Class A Common Stock
and 155,780 shares of TNCi Common Stock based upon the amount advanced and the
closing market price of each stock on the date of each advance. The Company
recorded deferred financing cost of $797,668, of which $136,743 was amortized
into interest expense for the year ended June 30, 2000.
F-21
<PAGE>
GLOBAL TECHNOLOGIES, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(11) STOCK OPTION PLANS
In October 1994, the Company adopted a Stock Option Plan (the 1994 Plan),
which provides for the issuance of both incentive and nonqualified stock options
to acquire up to 300,000 shares of the Company's Class A Common Stock. In
November 1996, the Company amended and restated the 1994 Plan to increase the
maximum shares that may be issued and sold under the plan to 1,200,000. The
Company has granted options to purchase stock to various parties. All options
were issued at a price equal to or greater than the market price of the
Company's common stock at the date immediately prior to the grant and have a
term of ten years. Options generally become exercisable after one to four years
at the discretion of the Board of Directors. During fiscal 2000, the Board of
Directors resumed authorizing stock option grants from the 1994 Plan, and
530,000 stock options with up to a four-year vesting period were granted at
exercise prices ranging from $1.833 to $16.375. As of June 30, 2000, 338,875
stock options under the 1994 Plan remained available for grant. During fiscal
1999 no stock options were granted under the Plan.
In June 1997, the Company established the 1997 Stock Option Plan (the 1997
Plan). Options exercisable for a total of 750,000 shares of the Company's Class
A common stock are issuable under the 1997 Plan. The 1997 Plan is administered
by the Board of Directors of the Company (or a committee of the Board), which
determines the terms of options granted under the 1997 Plan, including the
exercise price and the number of shares subject to the option. The 1997 Plan
provides the Board of Directors with the discretion to determine when options
granted thereunder shall become exercisable. During fiscal 2000, no stock
options were granted under the 1997 Plan. As of June 30, 2000, 108,313 stock
options under the 1997 Plan remained available for grant. During fiscal 1999,
316,047 stock options with up to a four-year vesting period were granted at
exercise prices ranging from $1.125 to $1.917.
On February 10, 1998, the Company adopted a plan to reduce the exercise
price on the stock options under the Company's 1994 and 1997 Plans on specified
dates to $1.75 provided the holder was still an active employee on the repricing
date. The exercise price on one-half of each outstanding option was reduced to
$1.75 on October 10, 1998 pursuant to the plan. A similar reduction in the
exercise price for the remaining half of the options occurred on April 10, 1999,
provided the option holder was still employed by the Company at that time.
In September 1999, the Company reduced the exercise price per share of
45,000 stock options granted to a former director of the Company under the 1994
Plan to $3.00 per share and extended the exercise period to the expiration date
of the stock options pursuant to the settlement of a technology licensing
agreement with Fortunet, Inc. (See Note 15.)
On October 8, 1999, the Compensation Committee of the Board of Directors of
the Company recommended, and the Board approved, an option grant to purchase up
to 1,500,000 shares of Global's Class A Common Stock to Mr. Irwin L. Gross,
Chairman and Chief Executive Officer of the Company. One quarter of these
options vested immediately and one quarter vest over each of the next three
years. The remaining half vest on the sixth anniversary of the date of grant,
subject to acceleration to a three-year schedule in the event of the achievement
of certain performance goals. The exercise price of the options is equal to the
closing market price of the Company's Common Stock on the day prior to grant.
The options expire in October 2009.
In accordance with the provisions of APB 25, the Company measures
stock-based compensation expense as the excess of the market price at the grant
date over the amount the employee must pay for the stock. The Company's policy
is to generally grant stock options at fair market value at the date of grant,
so no compensation expense is recognized. As permitted, the Company has elected
to adopt the disclosure provisions only of SFAS No. 123.
Had compensation cost for the Company's stock-based compensation plans been
determined consistent with SFAS No. 123, the Company's net loss and net loss per
share would have been increased to the pro forma amounts indicated below:
F-22
<PAGE>
GLOBAL TECHNOLOGIES, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
TRANSITION
YEAR ENDED PERIOD ENDED YEAR ENDED
JUNE 30, JUNE 30, OCTOBER 31,
2000 1999 1998
------------ ----------- -----------
<S> <C> <C> <C>
Net loss:
As reported $(37,517,421) $(2,409,168) $(7,259,959)
============ =========== ===========
Pro forma (unaudited) $(39,977,402) $(2,880,868) $(7,666,463)
============ =========== ===========
Basic and diluted net loss per share:
As reported $ (3.81) $ (0.30) $ (0.82)
============ =========== ===========
Pro forma (unaudited) $ (4.06) $ (0.35) $ (0.86)
============ =========== ===========
</TABLE>
Pro forma net losses reflect only options granted during the fiscal year
ended 2000, the Transition Period ended 1999, and in fiscal years ended 1998,
1997, and 1996. Therefore, the full impact of calculating compensation cost for
stock options under SFAS No. 123 is not reflected in the pro forma net loss
amounts presented above because compensation cost is reflected over the options'
vesting period and compensation cost for options granted prior to November 1995
are not considered under SFAS No. 123.
For purposes of the SFAS No. 123 pro forma net loss and net loss per share
calculations, the fair value of each option grant is estimated on the date of
grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in the year ended June 30, 2000,
the Transition Period ended June 30, 1999 and the year ended October 31, 1998:
TRANSITION
YEAR ENDED PERIOD ENDED YEAR ENDED
JUNE 30, JUNE 30, OCTOBER 31,
2000 1999 1998
------------ ----------- -----------
Dividend yield 0% 0% 0%
Expected volatility 169.7% 100.0% 71.6%
Risk free interest rate 6.02% 5.67% 5.65%
Expected lives (years) 5.0 5.0 5.0
Activity related to the stock option plans is summarized below:
<TABLE>
<CAPTION>
TRANSITION
YEAR ENDED PERIOD ENDED YEAR ENDED
JUNE 30, 2000 JUNE 30, 1999 OCTOBER 31, 1998
-------------------- -------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED
NUMBER AVERAGE NUMBER AVERAGE NUMBER AVERAGE
OF EXERCISE OF EXERCISE OF EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Balance at the beginning of year period 1,123,719 $ 8.49 1,028,415 $11.61 1,066,076 $16.10
Granted 2,075,000 2.26 316,046 1.29 360,748 2.01
Exercised (132,306) 2.49 (2,425) 1.75 -- --
Cancelled/Forfeited (264,953) 14.28 (218,317) 14.79 (398,409) 14.62
---------- ---------- ----------
Balance at the end of year 2,801,460 3.45 1,123,719 8.49 1,028,415 11.61
========== ========== ==========
Exercisable at the end of year 788,725 6.60 539,210 15.35 639,467 16.47
========== ========== ==========
Weighted-average fair value of option
granted during the period $ 2.15 $ .93 $ 1.27
========== ========== ==========
</TABLE>
F-23
<PAGE>
GLOBAL TECHNOLOGIES, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes the status of outstanding stock options as
of June 30, 2000:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------- ----------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
NUMBER OF REMAINING AVERAGE NUMBER OF AVERAGE
RANGE OF OPTIONS CONTRACTUAL EXERCISE OPTIONS EXERCISE
EXERCISE PRICES OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE
--------------- ----------- ------------ ----- ----------- -----
<S> <C> <C> <C> <C> <C>
$ 1.13 - $ 4.58 2,567,460 8.67 $ 2.13 589,725 $ 2.04
$11.00 - $16.38 35,500 9.71 16.30 500 11.00
$19.75 150,000 6.17 19.75 150,000 19.75
$22.00 - $28.75 48,500 5.63 22.84 48,500 22.84
--------- --------
2,801,460 788,725
========= ========
</TABLE>
At the discretion of the Board of Directors, the Company may allow
optionees to elect to receive shares equal to the market value of the option, in
lieu of delivery of the exercise price in cash. The market value of the shares
issued is charged to compensation expense. There were no cashless exercises of
options during the year ended June 30, 2000.
(12) BENEFIT PLAN
The Company has adopted a defined contribution benefit plan (the "Plan")
that complies with section 401(k) of the Internal Revenue Code and provides for
discretionary Company contributions. Employees who complete three months of
service are eligible to participate in the Plan. The Company did not make any
contributions to the Plan for the year ended June 30, 2000, the Transition
Period ended June 30, 1999, nor the year ended October 31, 1998.
(13) STOCKHOLDERS' EQUITY
The Company's capital stock consists of Class A and Class B common stock.
Holders of Class A common stock have one vote per share and holders of Class B
common stock have six votes per share. Shares of Class B Common Stock are
automatically convertible into an equivalent number of shares of Class A Common
Stock upon the sale or transfer of such shares to a non-holder of Class B Common
Stock.
(a) COMMON STOCK
In November 1999, the Company issued 1,544,250 shares of its Class A Common
Stock at $1.74 per share for total proceeds of approximately $2,685,000 in a
private placement transaction with several employees, officers and directors of
the Company. The price per share was based upon the closing market price of the
Company's Common Stock on the date the Board of Directors approved the sale. The
shares of common stock have not been registered under the Securities Act of 1933
and no registration rights were granted.
In February 2000, the Company repurchased 464,630 shares of its Class A
Common Stock issued to former noteholders of TNCI's Series Notes for $1,394,960.
The shares of the common stock were issued in connection with the purchase of
the Series Notes. Pursuant to the purchase agreement, the Company exercised a
call option for the shares of common stock at prices averaging $3.00 per share.
The repurchased shares were retired from treasury stock.
In connection with a stock repurchase program authorized by the Board of
Directors on December 17, 1997, the Company purchased a total of 1,267,000
shares of the Company's Class A Common Stock in open market activities at a
total cost of $2,315,983 through October 31, 1998. On October 30, 1998, the
Board of Directors authorized another repurchase program whereby the Company may
repurchase up to 1,000,000 shares of its Class A Common Stock on the open
market. On January 11, 1999, the Company retired all 1,267,000 shares of Class A
Common Stock described above. As of June 30, 1999, the Company had repurchased
F-24
<PAGE>
GLOBAL TECHNOLOGIES, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
an additional 117,900 shares at prices ranging from $0.99 to $1.96 per share for
a total cost of $193,990. On March 16, 2000, the Company retired all 117,900 of
these shares from Treasury Stock.
(b) PREFERRED STOCK
On May 10, 1999, the Company issued 3,000 shares of Series A Stock; stated
value $1,000 per share and liquidation value of 120% of stated value. The holder
of Series A Stock is entitled to receive, when, as and if declared by the Board
of Directors, an annual cumulative dividend of $80 per share payable quarterly
in cash or common stock. At the option of the Holder, beginning 180 days after
the issue date, each share of Series A Stock is convertible into common stock at
a price equal to $2.00 per share. The Company may redeem the Series A Stock at
prices ranging from 105% to 120% of stated value, plus accrued and unpaid
dividends beginning from 180 days and ending 360 days from the issue date. On
November 16, 1999, the Company redeemed the Series A Stock for approximately
$3.57 million, consisting of its stated value of $3 million, plus accrued and
unpaid dividends of approximately $120,000 and a redemption premium of
approximately $450,000.
Series B 8% Convertible Preferred Stock ("Series B Stock"); stated value
$1,000 per share is entitled to one vote for each share of common stock into
which it may convert. The Series B Stock is entitled to the same dividends as
the Series A Stock. Each share of Series B Stock is generally convertible into
Common Stock at an amount equal to the lower of; i) 82% of the Market Price, as
defined in the Certificate of Designation; ii) $3.00 per common share, or; iii)
118% of the closing bid price on NASDAQ as defined. There are no shares of
Series B Stock issued or outstanding.
On February 16, 2000, Global issued 1,000 shares of Series C 5% Convertible
Preferred Stock ("Series C Stock") and callable warrants in return for net
proceeds of $9.7 million. The preferred stock has a stated value of $10,000 per
share and carries a 5% cumulative dividend payable quarterly in cash or in kind.
As of June 30, 2000, cumulative dividends totaling $187,415, and have been paid
in kind. The preferred stock converts into Class A Common Stock at a conversion
price of $15.21 per share, representing 120% of the average closing bid prices
thereof over the five trading days beginning March 1, 2000 (the "Fixed
Conversion Price") as adjusted for certain dilutive events. Nine months after
funding, and every three months thereafter, the conversion price resets to the
lesser of the Fixed Conversion Price or 100% of the average of the four low
trading prices over the course of the preceding 20 trading days. On April 14,
2000 the Company registered the Class A Common Stock into which the preferred
stock and warrants are convertible or exercisable, as the case may be.
Additionally, the Company may redeem the preferred stock for a premium under
certain circumstances. As of September 25, 2000 the Series C Stock represented
approximately 6.2% of the common stock of the Company on a fully converted
basis.
(c) ESCROW SHARES
As a condition of the Company's initial public offering in March 1995, the
underwriter required that an aggregate of 1,600,000 shares of the Company's
Class B common stock be designated as escrow shares. The escrow shares are not
assignable or transferable until certain earnings or market price criteria have
been met. As of January 31, 1999, such criteria had not been met and the shares
were cancelled.
(d) UNIT PURCHASE OPTIONS
In connection with the Company's March 6, 1995 public offering, the Company
issued 140,000 Unit Purchase Options to designees of D. H. Blair Investment
Banking Corporation for their role as underwriters of the offering. Each Unit
Purchase Option was exercisable into one share of Class A Common Stock, One
Class A Warrant and One Class B Warrant at an exercise price of $12.00 per
share. Each Class A Warrant was exercisable into one share of Class A Common
Stock and one additional Class B Warrant at an exercise price of $13.71 per
share (as adjusted for certain dilutive events). Each Class B Warrant was
exercisable into one share of Class A Common Stock at an exercise price of
$19.10 per share (as adjusted for certain dilutive events). At the option of the
holders of the Unit Purchase Options, the holder could elect to receive shares
equal to the market value of the option in lieu of delivery of the exercise
price in cash ("cashless exercise"). The options and underlying warrants were
set to expire March 6, 2000.
F-25
<PAGE>
GLOBAL TECHNOLOGIES, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Prior to March 6, 2000 all Unit Purchase Options were exercised. As a
result of certain holders electing cashless exercise, 104,458 shares of Class A
Common Stock, 104,458 Class A Warrants and 104,458 Class B Warrants were issued
upon the exercise of the Unit Purchase Options. An additional 64,439 shares of
Class A Common Stock and 64,439 Class B Warrants were issued as a result of the
exercise of Class A Warrants. No Class B Warrants were exercised. All remaining
warrants have expired. The Company received proceeds of $2,111,119.
(e) WARRANTS
The following table summarizes warrant activity for the year ended June 30,
2000 and the Transition Period ended June 30, 1999:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS D CLASS E
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Outstanding as of October 31, 1998 -- -- 82,500 82,500 100,000
Issued in connection with consulting services 75,000 -- -- -- --
Issued in connection with The Transaction 131,250 -- -- -- --
------------ --------- --------- ------- -----------
Outstanding as of June 30, 1999 206,250 -- 82,500 82,500 100,000
Issued in connection with Series C Stock 150,925 -- -- -- --
Issued in connection with Secured
Convertible Notes 20,000
Issued in connection with consulting services 75,000 -- -- -- --
Issued in connection with Unit Purchase Options 104,458 168,897 -- -- --
Exercised during the year (64,439)
Expired during the year (40,019) (168,897) (82,500) (82,500) --
------------ --------- --------- ------- -----------
Outstanding as of June 30, 2000 452,175 -- -- -- 100,000
============ ========= ========= ======= ===========
Exercise price $1.92-17.835 $ -- $ -- $ -- $3.00-16.00
============ ========= ========= ======= ===========
</TABLE>
Class A, Class C, Class D and Class E warrants entitle the holder to one
share of Class A common stock. With the exception of the 75,000 Class A warrants
issued in connection with consulting services that vest over a 24-month period
ending in April 2001, all outstanding warrants are exercisable as of June 30,
2000.
In connection with the June 7, 2000 issuance of the Secured Convertible
Notes noted above, designees of Reedland Capital Partners, a division of
Financial West Group, received warrants to purchase an aggregate of 20,000
shares of the Company's Class A Common Stock at $5.8125 per share for Reedland
Capital Partners' role as sales agent. The warrants expire in June 2004. The
Company recorded deferred financing costs of $146,702, of which $8,150 was
amortized into interest expense for the year ended June 30, 2000.
In March 2000, the Company issued 104,458 Class A and 168,897 Class B
warrants in connection with the exercise of certain Unit Purchase Options
discussed above. Of these, 64,439 Class A warrants were exercised. All of the
unexercised warrants expired March 6, 2000.
In connection with the February 16, 2000 Series C Preferred Stock issuance
noted above, the Company issued warrants to purchase 100,925 shares of Global's
Class A Common Stock to the holders of the preferred stock. These warrants are
exercisable at a price of $15.21 per share (as adjusted for certain dilutive
events) and expire in February 2005.
F-26
<PAGE>
GLOBAL TECHNOLOGIES, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In connection with the February 16, 2000 Series C Preferred Stock issuance
noted above, designees of Reedland Capital Partners, a division of Financial
West Group, received warrants to purchase an aggregate of 50,000 shares of the
Company's Class A Common Stock at $17.835 per share for Reedland Capital
Partners' role as sales agent. The exercise period of the warrants expires in
February 2005.
In December 1999, the Company retained the services of two financial
relations firms. In connection with the consulting services to be provided, the
Company issued stock purchase warrants to purchase 37,500 shares of the
Company's Class A common stock at $5.25 per share to each firm. The warrants
vested immediately and have an exercise period that expires in December 2004.
The Company recorded $356,082 as compensation expense for the year ended June
30, 2000.
In May 1999, the Company issued stock purchase warrants to purchase 131,250
shares of Class A common stock at $2.00 per share to the Shaar Fund, Ltd. in
connection with the issuance of its Series A Preferred. The exercise period of
the warrants expires in May 2004.
In April 1999, the Company retained the services of a financial relations
firm. In connection with the consulting services to be provided, the Company
issued stock purchase warrants to purchase 75,000 shares of the Company's Class
A common stock at $1.92 per share. The exercise period of the warrants expires
in April 2002, and the warrants vest ratably over a 24-month period from the
date of issuance. The Company recorded $359,362 and $19,328 as compensation
expense for the years ended June 30, 2000 and 1999, respectively.
In November 1996, the Company issued Class E Stock Purchase Warrants to
purchase 25,000 shares of Class A common stock at $21.50 per share in connection
with the amendment and restatement of a License Agreement with FortuNet. In
January 1997, the Company lowered the exercise price of the stock purchase
warrants to $16.00 per share, such price being the trading price of the Class A
Common Stock at the close of the previous business day. In September 1999, the
Company lowered the exercise price on the stock purchase warrants to $3.00 per
share, such price representing a premium to the then trading price of the Class
A Common Stock which was $2.46. The Company also extended the expiration date
from November 2001 to September 2002. The Company recorded a special charge of
$120,320 during the Transition Period for this repricing. (See Note 15.)
(f) PROCEEDS FROM EXERCISE OF COMMON STOCK OPTIONS
During the year ended June 30, 2000 and the Transition Period ended June
30, 1999, current and former employees and directors exercised common stock
options for the purchase of 132,306 and 2,426 respectively, resulting in
proceeds of $564,710 and $4,244, respectively.
(14) INCOME TAXES
Income tax benefit differed from the amounts computed by applying the U.S.
Federal corporate income tax rate of 34% to net loss as a result of the
following:
<TABLE>
<CAPTION>
2000 1999 1998
------------ --------- -----------
<S> <C> <C> <C>
Computed expected tax benefit $(12,865,324) $ 807,784 $ 2,468,386
Change in federal valuation Allowance (13,007,270) (687,890) (2,127,293)
Non-deductible payments 1,433,463 (119,894) (416,498)
Other -- -- 75,405
------------ --------- -----------
$(24,439,131) $ -- $ --
============ ========= ===========
</TABLE>
F-27
<PAGE>
GLOBAL TECHNOLOGIES, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Total income taxes for the year ending June 30, 2000 were as follows:
Total
-------------
To loss from continuing operations --
To stockholders' equity $(24,439,131)
------------
$(24,439,131)
============
The tax effects of temporary differences that give rise to significant
portions of the net deferred tax asset are presented below:
2000 1999
------------ ------------
Deferred tax assets:
Net operating loss carryforward $ 39,581,215 $ 29,108,815
Property and equipment 939,514 843,204
Deferred start-up costs 170,784 568,973
Issuance of stock options and warrants 1,157,963 819,219
Allowance for bad debts 4,135,431 1,517,086
Provision for inventory valuation 3,336,316 3,092,828
Accrued liabilities 1,141,754 829,398
Deferred revenue -- 146,398
Other 512,334 906,293
------------ ------------
50,975,311 37,832,214
Less:
Valuation allowance (26,536,180) (28,628,714)
Valuation allowance related to the
TNCi acquisition -- (9,203,500)
------------ ------------
$ 24,439,131 $ --
============ ============
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Prior to this fiscal year,
Management had provided a valuation allowance for 100% of the deferred tax
assets, as the likelihood of realization could not be determined. In March 2000,
Management determined that the realization of a portion of the deferred tax
asset was likely given the realizable gains on its investments in U.S. Wireless
and TNCi.
As of June 30, 2000, the Company has a net operating loss (NOL)
carryforward for federal income tax purposes of approximately $104,521,723,
which begins to expire in 2009, and a research and experimentation tax credit of
approximately $247,000. The Company likely underwent a change in ownership in
accordance with Internal Revenue Code Section 382, the effect of which has not
yet been determined by the Company. This change would affect the timing of the
utilization of the NOL, as well as the amount of the NOL, which may ultimately
be utilized, though it is not expected to materially affect the amount of the
NOL carryforward.
(15) RELATED PARTY TRANSACTIONS
Prior to the Transaction, TNCi entered into a Secured Promissory Note with
Global in the principal amount of $750,000, bearing interest at a rate of 9.5%
per annum, and a related security agreement granting Global a security interest
in its assets. The Secured Promissory Note was convertible into shares of TNCi's
Series C 8% Preferred Stock at the discretion of Global.
F-28
<PAGE>
GLOBAL TECHNOLOGIES, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In July and August 1999, Global purchased all of the Series A and E notes
and the Series D notes issued by TNCi (collectively, the "Series Notes"),
respectively from the holders of such notes. Concurrent with such purchases,
TNCi executed allonges to the Secured Promissory Note, which cancelled the
Series Notes and rolled the principal balance, plus accrued interest, penalties
and redemption premiums of the Series Notes into the principal balance of the
Secured Promissory Note.
In August 1999, TNCi executed another allonge to the Secured Promissory
Note which rolled approximately $1.2 million of prior intercompany advances from
Global into the Secured Promissory Note and granted Global the ability to
convert the Secured Promissory Note directly into shares of TNCi's Common Stock
as an administrative convenience.
On August 24, 1999, the Board of Directors of Global approved the
conversion of the Secured Promissory Note into approximately 4.8 million shares
of TNCi's Common Stock. Such conversion was contingent upon receiving
shareholder approval to increase the authorized share capital of TNCi. This
increase in authorized share capital was approved on September 17, 1999, and the
shares were subsequently issued in December 1999 based as on the August 24, 1999
conversion date.
On August 24, 1999, the Company's Board of Directors approved a $5,000,000
secured revolving credit facility by and between TNCi and Global (the
"Facility"). The Facility provides that TNCi may borrow up to $5,000,000 for
working capital and general corporate purposes at the Prime Rate of interest
(9.5% at June 30, 2000) plus 3%. The Facility matures in September 2001. TNCi
paid an origination fee of $50,000 to Global and will pay an unused line fee of
0.5% per annum. The Facility is secured by all of the assets of TNCi and is
convertible into shares of TNCi's Common Stock at a price of $1.50 per share as
defined in the Facility agreement.
During the year ended June 30, 2000, TNCi borrowed $4,200,000 under the
Facility. On June 29, 2000 the Company exercised its right to convert of
$1,850,000 of the Facility into 1,233,333 shares of TNCi Common Stock. At June
30, 2000 the balance on the Facility was $2,350,000. The outstanding balance on
the Facility and the related interest income earned are eliminated in
consolidation.
The Facility and any other intercompany balances have been eliminated in
consolidation at June 30, 2000. The Secured Promissory Note and any other
intercompany balances were eliminated in consolidation of June 30, 1999.
The Company's Chief Executive Officer is a principal of Ocean Castle
Investments, LLC ("Ocean Castle") which maintains administrative offices for the
Company's Chief Executive Officer, and certain other employees of the Company
for which the Company pays rent and other administrative expenses pursuant to an
agreement. During the year ended October 31, 1998, Ocean Castle executed
consulting agreements with two principal stockholders of the Company. The rights
and obligations of Ocean Castle under the agreements were assumed by TNCi in
connection with the Transaction. The consulting agreements require payments
aggregating $1,000,000 to each of the consultants through December 2003 in
exchange for advisory services. Each of the consultants also received stock
options to purchase 50,000 shares of Class A Common Stock of the Company at an
exercise price of $3.00. As of June 30, 1999, TNCi determined that the
consulting agreements had no future value due to TNCi's shift away from
in-flight entertainment into alternative markets such as leisure cruise and
passenger rail transport. Only limited services were provided in 1999 and no
future services will by utilized. Accordingly, TNCi recorded a charge to general
and administrative expenses in the Transition Period of $1.6 million
representing the balance due under such contracts. As of June 30, 2000, the
outstanding balance was approximately $1.3 million. In August 2000, Global, on
behalf of TNCi, settled the outstanding obligation with the principal
stockholders of Global for a total of 279,028 shares of Class A Common Stock.
TNCi will issue 411,146 shares of its common stock as reimbursement to Global
for such settlement.
In November 1999, the Company issued 1,544,250 shares of its Class A Common
Stock at $1.74 per share for total proceeds of approximately $2,685,000 in a
private placement transaction with several employees, officers and directors of
the Company. The price per share was based upon the closing market price of the
F-29
<PAGE>
GLOBAL TECHNOLOGIES, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Company's Common Stock on the date the Board of Directors approved the sale. The
shares of common stock have not been registered under the Securities Act of 1933
and no registration rights were granted.
In April 2000, the Directors of the Company were granted options to
purchase equities in GTL Management totaling 10% of the fair market value of GTL
Management based upon the fair market value at the date of grant. The fair
market value has not yet been determined and the options have not yet been
issued.
In May and June 2000, The Gross Charitable Unit Trust and The Gross
Charitable Annuity Trust (together the "Trusts"), advanced a total of $800,000
to TNCi for working capital purposes. An additional $250,000 was advanced to
TNCi in July 2000. On September 12, 2000, the advances to TNCi were converted
into two promissory notes, each in the amount of $525,000, issued to each Trust
by TNCi. The notes mature on December 31, 2000 and bear interest at 9.0%. The
Trusts are controlled by the Company's Chairman and Chief Executive Officer,
Irwin L. Gross.
In August and September 2000 the Trusts advanced a total of $800,000 to
Global for working capital purposes. On September 22, 2000, the advances were
converted into two promissory notes, each in the amount of $400,000, issued to
each Trust by Global. The notes mature on December 31, 2000 and bear interest at
9.0%.
In connection with the execution of the promissory notes, each Trust was
granted warrants to purchase 99,159 shares of the Company's Class A Common Stock
and 155,781 shares of TNCi Common Stock based upon the amount advanced and the
closing market price of each stock on the date of each advance. The Company
recorded deferred financing cost of $797,668, of which $136,743 was amortized
into interest expense for the year ended June 30, 2000.
Beginning on May 24, 2000, Merrill Lynch issued a series of maintenance
calls requiring a reduction in the balance owed of approximately $900,000. The
final maintenance calls were subsequently satisfied by a pledge of additional
collateral with a market value of approximately $1.6 million, pledged by Irwin
L. Gross, the Company's Chairman and Chief Executive Officer. As of June 30,
2000, the market value of the shares of common stock of U.S. Wireless shares was
sufficient to maintain the outstanding balance owed under the Secured Credit
Facility, and Mr. Gross' collateral was released.
In July and August 2000, Merrill Lynch issued a series of maintenance calls
requiring a reduction in the balance owed of approximately $1.2 million. The
maintenance calls were subsequently secured by pledges of additional collateral
with a total market value of approximately $2.7 million, pledged by Mr. Gross.
As of September 25, 2000, the outstanding balance of the Secured Credit Facility
was approximately $7.0 million, and Mr. Gross' collateral remains pledged to
Merrill Lynch to secure the credit facility.
In connection with the pledges of his collateral to meet the maintenance
calls, Mr. Gross was granted warrants to purchase 553,978 shares of the
Company's Class A Common Stock based upon the amount of collateral pledged and
the closing market price of the stock on the date of each pledge. The Company
recorded non-cash interest expense of $1,526,527 for the year ended June 30,
2000, related to the estimated fair value of the warrants granted for the
collateral pledged as of June 30, 2000.
F-30
<PAGE>
GLOBAL TECHNOLOGIES, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company has agreed to reimburse BHG Flights, L.L.C. ("BHG") for costs
and expenses associated with the use for corporate purposes of an airplane owned
by BHG. Irwin L. Gross, Chairman of the Board and Chief Executive Officer, owns
a 50% interest in BHG. To date, the Company has incurred approximately $106,085
for such costs and expenses.
In August 1999, the Company executed a separation and release agreement
with a shareholder and former officer of TNCi, pursuant to which the Company
paid approximately $85,000 in the form of unregistered shares of the Company's
Common Stock.
In June 1999, the Company loaned to a vice president of TNCi $75,000 for
the purpose of assisting in a corporate relocation to the Company's headquarters
in Phoenix, Arizona. TNCi also added other outstanding advances totaling $42,000
to the principal amount of the note. Such loan is secured by assets of the
employee. The note matures in August 2009 and bears an interest rate of
approximately 5%.
The Company had an Intellectual Property License and Support Services
Agreement (the "License Agreement") for certain technology with FortuNet, Inc.
("FortuNet"). FortuNet is owned by a principal stockholder and former director
of the Company. The License Agreement provides for an annual license fee of
$100,000 commencing in October 1994 and continuing through November 2002. The
Company paid FortuNet $100,000 during each of the years ended October 31, 1998
and 1997. As of October 31, 1998, the remaining commitment of $400,000 was
included in accrued liabilities in the consolidated balance sheet. TNCi assumed
this liability in connection with the Transaction. In September 1999, TNCi
agreed to a termination of this agreement and paid Fortunet $100,000 plus legal
fees. In addition, Global agreed to reprice and extend the exercise period of
certain warrants and options held by FortuNet and its principal shareholder, a
former director of the Company. The Company recorded a special charge of
$120,320 during the Transition Period for such repricing. During the Transition
Period, TNCi had revised its estimated accrual to $200,000, which is included in
accrued liabilities at June 30, 1999. During the year ended June 30, 2000,
actual costs associated with this settlement were $43,150 less than the
estimate. Accordingly, TNCi reversed the liability and reduced administrative
expense.
During the year ended October 31, 1998, the Company extended by one year a
consulting agreement with a former officer of the Company pursuant to which the
Company will pay $55,000 for services received during the period November 1999
through October 2000. TNCi assumed the liability for the consulting agreement in
the amount of $55,000 in connection with the Transaction. As of June 30, 2000,
$18,000 remained to be paid, and is included in accrued liabilities in the
consolidated balance sheet.
In October 1998, the Company entered into a consulting agreement with First
Lawrence Capital Corp. (First Lawrence) to perform various financial advisory
services related to ongoing business development and management. The former
managing director of First Lawrence is also a director of the Company. The
Company retained, on a full time basis as President and Chief Operating Officer,
the services of the former managing director of First Lawrence effective
December 12, 1998. Accordingly, the Company entered into an employment contract
with such individual. During the year ended October 31, 1998, the Company paid
$11,846 under the First Lawrence consulting agreement. The Company also executed
a consulting agreement with the Whitestone Group, LLC, a shareholder of First
Lawrence, and pursuant to the agreement, the Company paid $250,000 for
consulting services received during fiscal 1998. During the Transition Period
ended June 30, 1999, the Company also paid $35,803 for office expenses and rent
of First Lawrence under the terms of the agreement during the Transition Period.
During the year ended June 30, 2000, the Company paid $43,064 for these
expenses.
During the year ended October 31, 1998, the Company executed severance and
consulting agreements with three former officers pursuant to which the Company
paid the former officers and set aside restricted funds in the amounts of
$3,053,642 and $735,000, respectively. The consulting agreements all expired in
September 1999. Payments totaling $735,000 were made from restricted cash of the
Company through September 1999. Expenses associated with these agreements were
charged to general and administrative expenses in the year ended October 31,
1998.
F-31
<PAGE>
GLOBAL TECHNOLOGIES, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(16) COMMITMENTS AND CONTINGENCIES
(a) LITIGATION
FIDELITY AND GUARANTY INSURANCE COMPANY V. INTERACTIVE FLIGHT TECHNOLOGIES,
INC., United States District Court for the District of Minnesota, CV No. 99-410.
This is a reformation action in which the Company's insurer is seeking to reform
an umbrella policy in the amount of $10.0 million to include an exclusion for
completed products for policies issued for years 1997-98 and 1998-99. Such
exclusion would preclude claims made by the estates of victims of the crash of
Swissair Flight No. 111 on September 2, 1998. Plaintiffs recently filed a motion
for summary judgment, which was heard before the United States District Court
for the District of Minnesota on September 12, 2000. The Court has not yet ruled
on the summary judgment motion.
Swissair/MDL-1269, IN REGARDS TO AN AIR CRASH NEAR PEGGY'S COVE, NOVA
SCOTIA. This multi-district litigation, which is being overseen by the United
States District Court for the Eastern Division of Pennsylvania, relates to the
crash of Swissair Flight No. 111 on September 2, 1998. The Swissair MD-11
aircraft involved in the crash was equipped with an entertainment network system
that had been sold to Swissair by Global's predecessor company, Interactive
Flight Technologies, Inc. Estates of the victims of the crash have filed
lawsuits throughout the United States against Swissair, Boeing, Dupont and
various other parties, including Global and TNCi, which has been named in some
of the lawsuits filed on a successor liability theory. TNCi and Global deny all
liability for the crash. TNCi and Global are being defended by our aviation
insurer.
On September 1, 1999, SAir Group invited the Company to participate in a
conciliation hearing before the Justice of the Peace in Kloten, Switzerland,
which is the customary manner in which civil litigation is initiated in
Switzerland. The document informing us of the proceeding states that the request
has been filed in connection with the crash of Swissair Flight 111 primarily in
order to avoid the expiration of any applicable statutes of limitations and to
reserve the right to pursue further claims. The document states that the relief
sought is "possibly the equivalent of CHF 342,000,000 - in a currency to be
designated by the court; each plus 5% interest with effect from September 3,
1998; legal costs and a participation to the legal fees (of the plaintiff) to be
paid by the defendant."
BRYAN R. CARR V. THE NETWORK CONNECTION, INC. AND GLOBAL TECHNOLOGIES,
LTD., Superior Court of Georgia, Civil Action No. 99-CV-1307. Bryan R. Carr,
TNCi's former Chief Operating and Financial Officer and a former Director, filed
a claim on November 24, 1999 alleging a breach of his employment agreement with
TNCi. Mr. Carr claims that he is entitled to the present value of his base
salary through October 31, 2001, a share of any "bonus pool," the value of his
stock options and accrued vacation time. TNCi and we filed a motion to compel
arbitration of the claims pursuant to an arbitration provision in the employment
agreement and to stay the State Court action pending the arbitration proceeding.
The Company's motion was granted on August 9, 2000. As of this date, Mr. Carr
has not filed an arbitration claim against TNCi or Global, but on September 20,
2000, Mr. Carr sent a letter to the Company stating his demands in hopes of
settlement.
In September of 1999, the Company filed a lawsuit against Barington Capital
Group, L. P. in Maricopa County Superior Court, Arizona, seeking a declaratory
judgment that no sums were owed to Barington pursuant to a one-year Financial
Advisory Service Agreement dated October 21, 1998. In October 1999, Barington
filed a lawsuit on the same contract in the Supreme Court of the State of New
York, County of New York, Index No. 99-6041606, captioned BARINGTON CAPITAL
GROUP, L.P. V. INTERACTIVE FLIGHT TECHNOLOGIES, INC., alleging that Barington is
owed $1,750,471 in connection with services alleged to have been performed
pursuant to the Financial Advisory Service Agreement. Barington's New York suit
has been stayed pending resolution of the Arizona action. The Company denies all
liability and that any sums are owed to Barington.
GLOBAL TECHNOLOGIES, LTD. V. XCEL CAPITAL, LLC, United States District
Court for the Eastern District of Pennsylvania, Case No. 00-CV-505. On January
27, 2000, the Company filed an action against XCEL Capital, LLC ("XCEL") for
F-32
<PAGE>
GLOBAL TECHNOLOGIES, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
specific performance and breach of contract. In the action, the Company sought
to compel XCEL to tender 112,500 shares of Global Class A Common Stock to the
Company at $3.17 per share in accordance with XCEL's obligations pursuant to a
put/call agreement entered into between the parties on August 12, 1999. XCEL
filed counterclaims. On September 14, 2000, the Company settled the action by
agreeing to issue an additional 25,000 shares to XCEL and to register such
shares for resale (subject to certain restrictions on the volume and timing of
sales) by October 31, 2000. No money is being paid to XCEL.
A suit captioned LODGENET ENTERTAINMENT CORPORATION V. THE NETWORK
CONNECTION, INC. was filed April 5, 2000 in the Circuit Court for the Second
Judicial Circuit of the State of South Dakota. The action arose out of TNCi's
hiring of Theodore P. Racz, a former LodgeNet Entertainment Corporation
employee, as its Senior Vice President of the Hotels & Hospitality division.
LodgeNet alleged tortious interference with contract and tortious interference
with business relationships. LodgeNet sought to prohibit Mr. Racz from being
employed by TNCi, as well as damages, and fees and costs. This case was
voluntarily dismissed without prejudice by LodgeNet because there was no
jurisdiction in South Dakota.
FIRST LAWRENCE CAPITAL CORP. V. JAMES FOX, IRWIN GROSS AND INTERACTIVE
FLIGHT TECHNOLOGIES, INC., Supreme Court of the State of New York, No. 7196/99.
This is a claim made against the Company arising from the hiring by the Company
of James Fox, a former First Lawrence employee. First Lawrence asserts that
business opportunities of First Lawrence were diverted to the Company by James
Fox and the Company. This case has been settled for 375,000 shares of the
Company's common stock. Additionally, in connection with the settlement, the
Company entered into a two year consulting agreement with First Lawrence
beginning February 1, 2000 whereby the Company is paying $41,667 per month and
in exchange, First Lawrence will be available to perform management consulting
services to GTL Holdings, Ltd. (UK). The Company accrued $1.8 million as a
special charge for this settlement during the Transition Period.
A suit captioned AVNET, INC. V. THE NETWORK CONNECTION, INC., was filed May
17, 2000 in Maricopa County Superior Court, CV2000-009416. The suit relates to
invoices for inventory purchased by TNCi in late 1998 and early 1999. Avnet,
Inc. seeks payment of the invoices, interest and legal fees. TNCi has not paid
for the inventory purchased primarily for the following reasons: (i) the
inventory purchased did not meet specifications and thus was not accepted by
TNCi's customer, and (ii) TNCi is currently pursuing a separate warranty claim
against Avnet regarding certain other inventory purchased from Avnet.
The Company is subject to other lawsuits and claims arising in the ordinary
course of its business. In the Company's opinion, as of June 30, 2000, the
effect of such matters will not have a material adverse effect on the Company's
results of operations and financial position.
(b) LEASE OBLIGATIONS
The Company leases office space and furniture under operating leases that
expire at various dates through March 2010. The future minimum lease commitments
under these leases are as follows:
YEAR ENDING OPERATING
JUNE 30, LEASES
----------- ---------
2001 1,563,571
2002 1,668,694
2003 1,561,779
2004 1,523,994
2005 1,493,249
Thereafter 4,441,619
-----------
$12,252,906
===========
Rental expense under operating leases totaled $616,081, $338,082 and
$960,745 for the year ended June 30, 2000, the Transition Period ended June 30,
1999, and the year ended October 31, 1998, respectively.
F-33
<PAGE>
GLOBAL TECHNOLOGIES, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(c) SPECIAL CHARGES AND REVERSAL OF WARRANTY, MAINTENANCE AND COMMISSION
ACCRUALS
The Company had previously entered into sales contracts with three
airlines, Schweizerische Luftverker AG ("Swissair"), Debonair Airways, Ltd.
("Debonair") and Alitalia Airlines, S.p.A. ("Alitalia") for the manufacture and
installation of its in-flight entertainment network, and to provide hardware and
software upgrades, as defined in the agreements. In connection with the
Transaction, TNCi assumed all rights and obligations of the above contracts.
Pursuant to the October 1997 agreement with Swissair, Swissair purchased
shipsets for the first and business class sections of sixteen aircraft for an
average of $1.7 million per aircraft. Included in the purchase price were
material, installation, maintenance through September 1998, one-year warranty
and upgrade costs for the sixteen aircraft. As of October 31, 1998, the Company
had completed installations of the entertainment network on all of these
aircraft. The agreement also required the Company to install the entertainment
network in the first, business and economy class sections of three additional
aircraft, at no charge to Swissair. The Company was responsible for all costs
including entertainment network components, installation and maintenance through
September 1998 for the three aircraft. As of October 31, 1998, the Company had
completed installations of the entertainment network on all of these aircraft
and title to each of these three shipsets had been transferred to Swissair.
During the fiscal year ended October 31, 1998, the Company recognized a recovery
of special charges of $606,508 which resulted from a reduction in the number of
entertainment networks requiring maintenance in the economy class sections of
the Swissair aircraft and a reduction in development expenses.
In April 1998 and October 1998, the Company entered into additional
contracts with Swissair. The first letter of intent related to a $4.7 million
order for first and business class installations on four Swissair MD-11 aircraft
that were being added to the Swissair fleet. Swissair had made payments of
$1,450,000 on the $4.7 million order through February 1999. No payments have
been received since February. The second contract was to extend the warranty on
all installed systems for a second and third year at a price of $3,975,000.
Through February 1999, the Company had been paid $707,500 under this contract.
No subsequent payments have been received from Swissair.
On October 29, 1998, the Company was notified by Swissair of its decision
to deactivate the entertainment networks on all Swissair aircraft. However, by
April 1999, discussions between the Company and Swissair regarding outstanding
financial matters related to current accounts receivable, inventory, purchase
commitments and extended warranty obligations, as well as planning discussions
for an October 1999 reactivation ceased to be productive. On May 6, 1999, the
Company filed a lawsuit against Swissair in the United States District Court for
the District of Arizona seeking damages for Swissair's failure to honor its
obligations for payment and reactivation of the Company's Entertainment Network.
The Swissair agreements are not assignable to third parties under the terms
of such agreements. However, in connection with the Transaction, the Company has
agreed to pay to TNCi any net proceeds, if any, received from Swissair as a
result of the above litigation or otherwise. Further, TNCi, as a subcontractor
to the Company, will assume any operational responsibilities of the Swissair
agreement in the event that such requirement arises.
As a result of the above events, management concluded that its only source
of future payment, if any, will be through the litigation process. In addition,
with the deactivation of the entertainment system and Swissair's breach of its
agreements, the Company believes it will not be called upon by Swissair to
perform any ongoing warranty, maintenance or development services. Swissair's
actions have rendered the Company's accounts receivable, inventory and deposits
worthless as of June 30, 1999. Accordingly, for the Transition Period, the
Company recognized revenue on equipment sales to the extent of cash received of
$876,000; charged off inventory to cost of equipment sales in the amount of
$1,517,000; wrote off deposits of $655,000 to special charges; and reversed all
warranty and maintenance accruals totaling $5,164,000.
F-34
<PAGE>
GLOBAL TECHNOLOGIES, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Pursuant to an agreement with Debonair, the Company was to manufacture,
install, operate, and maintain the entertainment network on six Debonair
aircraft for a period of eight years from installation. In February 1998, the
Company and Debonair signed a Termination Agreement. Pursuant to the Termination
Agreement, Debonair removed the entertainment network from its aircraft and the
Company paid Debonair $134,235 as full and final settlement of all of its
obligations with Debonair.
In connection with these agreements with Swissair and Debonair and the
absence of any new entertainment network orders, the Company recorded property
and equipment write-downs of $1,006,532 during fiscal 1998, which are included
in special charges on the consolidated statement of operations.
Pursuant to an agreement with Alitalia, the Company delivered five first
generation shipsets for installation on Alitalia aircraft during fiscal 1996.
Subsequently, Alitalia notified the Company that it did not intend to continue
operation of the shipsets, and the Company indicated that it would not support
the shipsets.
For the Transition Period ended June 30, 1999 the Company recorded
warranty, maintenance and commission accrual adjustments of $5,117,704,
$1,730,368 and $303,321, respectively, related to the Swissair and Alitalia
matters. Such adjustments to prior period estimates, which totaled $7,151,393
resulted from an evaluation of specific contractual obligations and discussions
between the new management of the Company and other parties related to such
contracts. Based on the results of the Company's findings during this period,
such accruals were no longer considered necessary.
(d) LETTERS OF CREDIT
In June 1999, the Company granted a letter of credit in the amount of
$913,445 as security for the payment of certain equipment purchases made by an
affiliate of the Company. To secure this letter of credit, the Company was
required to provide cash collateral with a commercial bank. In February 2000,
the Company paid for the equipment purchases in full, cancelled the letter of
credit and had the cash collateral returned to the Company.
In September 1999, the Company granted a letter of credit in the amount of
$290,833 as a security deposit for a lease for the Company's office in New York.
To secure this letter of credit, the Company was required to provide cash
collateral with a commercial bank.
(e) PURCHASE COMMITMENTS
In September 1999, GTL Leasing Limited entered into an agreement with
International Lottery & Totalizator Systems, Inc., a California corporation
("ILTS"), to purchase an on-line lottery system for the operation of the Inter
Lotto lotteries. The base value of the lottery system being purchased from ILTS
is $12.3 million, of which approximately $2.9 million has yet to be paid as of
June 30, 2000. The balance remains outstanding and is accruing interest at a
rate of one and one-half percent per month. In addition, in September 1999, GTL
Management entered into an eight-year facilities management agreement with ILTS
to provide operational and technology support for the system. Under this
agreement, GTL Management is required, beginning April 1, 2000, to make weekly
payments of $72,000, plus additional amounts based on the number of installed
terminals and sales volumes, upon the commencement of ticket sales through the
system. Global has guaranteed the obligations of GTL Leasing Limited and GTL
Management Limited under these agreements.
(17) FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107 "Disclosure about Fair
Value of Financial Instruments" requires that the Company disclose estimated
fair values for its financial instruments. The following summary presents a
description of the methodologies and assumptions used to determine such amounts.
F-35
<PAGE>
GLOBAL TECHNOLOGIES, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fair value estimates are made at a specific point in time and are based on
relevant market information and information about the financial instrument; they
are subjective in nature and involve uncertainties, matters of judgment and,
therefore, cannot be determined with precision. These estimates do not reflect
any premium or discount that could result from offering for sale, at one time,
the Company's entire holdings of a particular instrument. Changes in assumptions
could significantly affect these estimates.
Since the fair value is estimated as of June 30, 2000, the amounts that
will actually be realized or paid at settlement or maturity of the instruments
could be significantly different.
The carrying amount of cash, cash equivalents and restricted cash
approximates fair value because their maturity is generally less than three
months. The fair value of current investments is $64,125,000, and represents the
market value of U.S. Wireless Common Stock. The fair value of the Company's
non-current investments is $75,000, and represents the carrying cost of its
investment in Shop4cash.com. (See Note 3.) The carrying amount of accounts
receivable, accounts payable and accrued liabilities approximate fair value as
they are expected to be collected or paid within ninety days of year-end. The
fair value of notes receivable and notes payable approximate the terms in the
marketplace at which they could be replaced. Therefore, the fair value
approximates the carrying value of these financial instruments.
(18) SUPPLEMENTAL FINANCIAL INFORMATION
Supplemental disclosure of cash flow information is as follows:
<TABLE>
<CAPTION>
TRANSITION
YEAR ENDED PERIOD ENDED YEAR ENDED
JUNE 30, 2000 JUNE 30, 1999 OCTOBER 31, 1998
------------- ------------- ----------------
<S> <C> <C> <C>
Cash paid for interest $ 75,126 $ 35,624 $ 11,954
Non-cash investing and financing activities:
Acquisition:
Fair value of assets (liabilities) acquired -- $ (314,658) $813,736
Fair value of preferred stock issued -- $4,080,000 $ --
Note payable -- $3,467,045 $125,000
Modifications to stock option awards $ 278,318 $ -- $ --
Issuance of warrants to related party for collateral pledges $2,324,195 $ -- $ --
Issuance of warrants for services and in connection with
financing $1,949,448 $ -- $ --
Issuance of stock for services $ -- $ -- $187,729
Issuance of stock for legal settlements $ 976,171 $ -- $ --
Conversion of note payable to TNCi common stock $ 400,000 $ -- $ --
Beneficial conversion on Secured Convertible Note $4,000,000 $ -- $ --
Stock issued in connection with purchase of Series Notes $1,647,812 $ -- $ --
Net issuance of commitment shares associated with equity
purchase agreement $ 553,677 $ -- $ --
</TABLE>
(19) OPERATING SEGMENT
In 1998, the Company adopted SFAS 131, which requires the reporting of
operating segments using the "management approach" versus the "industry
approach" previously required. The Company's reportable segments consist of TNCi
and general corporate operations. TNCi designs, manufactures, installs and
maintains advanced, high-end, high-performance computer servers and interactive,
broad-band information and entertainment systems, and procures and provides the
content available through the systems. TNCi's systems provide users access to
information, entertainment and a wide array of service options such as movies on
demand, music videos, shopping for goods and services, computer games and
Internet access. General corporate operations consist of developing and
operating affiliate companies, most of which are engaged in telecommunications,
e-commerce, networking solutions and gaming.
F-36
<PAGE>
GLOBAL TECHNOLOGIES, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Sales of entertainment networks by the Company are typically made to a
relatively few number of customers. This concentration of business among a few
customers exposes the Company to significant risk. For the year ended June 30,
2000, one customer accounted for 72% of the Company's sales. For the Transition
Period ended June 30, 1999 and the year ended October 31, 1998, a different
customer accounted for 91% and 98% of the Company's sales, respectively.
Outstanding receivables from each of the customers were zero at June 30, 2000
and June 30, 1999.
The following summarizes information related to the Company's segments. All
significant intersegment activity has been eliminated. Assets are the owned or
allocated assets used by each operating segment.
<TABLE>
<CAPTION>
TRANSITION
YEAR ENDED PERIOD ENDED YEAR ENDED
JUNE 30, 2000 JUNE 30, 1999 OCTOBER 31, 1998
------------- ------------- ----------------
<S> <C> <C> <C>
Revenue
TNCi $ 7,091,660 $ 958,607 $ 18,816,962
Other 305,336 623,854 325,999
------------- ------------- -------------
7,396,996 1,582,461 19,142,961
Gross profit (loss)(a)
TNCi 2,162,163 (559,196) 3,279,891
Other 219,093 178,748 100,951
------------- ------------- -------------
2,381,256 (380,448) 3,380,842
Operating income (loss)
TNCi (11,739,631) 2,338,326 (7,232,321)
Other (12,059,385) (5,321,945) (2,276,918)
------------- ------------- -------------
(23,799,016) (2,983,619) (9,509,239)
General corporate operations
Gain on sale of assets -- 133,396 --
Equity in loss of non-consolidated
affiliate (10,345,210) (195,704) --
Net interest (5,293,153) 985,545 2,239,101
Other income (expenses) (14,339) 61,252 10,179
Minority interest 1,612,529 (376,705) --
------------- ------------- -------------
(14,040,173) 607,784 2,249,280
------------- ------------- -------------
Net loss $ (37,839,189) $ (2,375,835) $ (7,259,959)
============= ============= =============
Total assets
TNCi 13,468,699 14,752,462 4,238,030
General corporate 108,257,232 24,660,159 34,026,172
------------- ------------- -------------
Total Assets $ 121,725,931 $ 39,412,621 $ 38,264,202
============= ============= =============
</TABLE>
----------
(a) Gross profit (loss) is the difference between Revenue and Cost of Revenue
in the consolidated statement of operations.
As of June 30, 2000, the Company had significant long-lived assets in
both North America and Europe (UK). Long-lived assets located in North America
include net property plant and equipment and intangibles totaling $10,272,236.
Long-lived assets located in Europe include net property plant and equipment of
$13,648,676. As of June 30, 1999 and October 31, 1998 all long-lived assets were
located in North America.
F-37
<PAGE>
GLOBAL TECHNOLOGIES, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(20) SUBSEQUENT EVENTS
(a) CONVERSION TNCI SERIES D PREFERRED STOCK
On August 2, 2000 the Board of Directors of the Company approved the
conversion of 826,447 shares of Series D Preferred Stock of TNCi owned by the
Company into 5,000,000 shares of common stock of TNCi based upon an adjusted
conversion rate of 6.05 common shares per preferred share.
(b) ISSUANCES OF NOTES PAYABLE AND WARRANTS
On September 22, 2000, the Board of Directors authorized the issuance of
common stock purchase warrants to purchase 198,318 shares of the Company's
Common Stock which have been divided equally between two trusts controlled by
Irwin L. Gross, the Chairman and Chief Executive Officer of the Company as
compensation for various working capital advances made to the Company from
August and September 2000 totaling $800,000. On September 22, 2000, the
Company's Board of Directors also approved the conversion of these advances into
promissory notes from the Company. The number of warrants issued for each
advance was based upon the amount advanced divided by the closing market price
of the Company's Common Stock on the date of each advance. The warrants have an
exercise price based upon the closing market price of the Company's Common Stock
on the date of the advance and a term of five years from such date.
On September 22, 2000 the Board of Directors authorized the issuance of
warrants to purchase 553,978 shares of Class A Common Stock of the Company to
Irwin L. Gross, the Chairman and Chief Executive Officer of the Company as
compensation for pledging additional collateral to secure various maintenance
calls by Merrill Lynch on the Secured Credit Facility. The number of warrants
issued for each pledge is based upon the amount advanced divided by the closing
market price of the Company's Common Stock on the date of each advance. The
warrants have an exercise price based upon the closing market price of the
Company's Common Stock on the date of the advance and a term of five years from
such date. The Company recorded non-cash interest expense of $1,526,527 for the
year ended June 30, 2000, related to the estimated fair value of the warrants
granted for the collateral pledged as of June 30, 2000.
On September 12, 2000, the Board of Directors authorized the issuance of
common stock purchase warrants to purchase 311,560 shares of TNCi's Common Stock
which have been divided equally between two trusts controlled by Irwin L. Gross,
the Chairman and Chief Executive Officer of the Company as compensation for
various working capital advances made to TNCi from May 2000 through July 2000.
As of June 30, 2000, advances totaled $800,000 and additional advances of
$250,000 have been made subsequent to year end. On September 12, 2000, TNCi's
Board of Directors also approved the conversion of these advances into
promissory notes from TNCi. The number of warrants issued for each advance was
based upon the amount advanced divided by the closing market price of TNCi's
Common Stock on the date of each advance. The warrants have an exercise price
based upon the closing market price of TNCi's Common Stock on the date of the
advance and a term of five years from such date. The Company recorded deferred
financing cost of $797,668, of which $136,743 was amortized into interest
expense for the year ended June 30, 2000.
(c) INTER LOTTO EQUITY TRANSFER
On August 18, 2000 the Company transferred its equity interest in Inter
Lotto back to the other existing shareholders of Inter Lotto in exchange for a
nominal amount, the termination of the existing Operating Agreement with GTL
Management, the continued use of the Inter Lotto lottery license through
December 31, 2000 and the repayment of certain Value Added Tax rebates owed to
GTL Management. As such, the Company wrote off its investment as of June 30,
2000 in Inter Lotto of $684,685, consisting of working capital advances, notes
receivable and capitalized acquisition costs. (See Note 3(b).)
F-38
<PAGE>
GLOBAL TECHNOLOGIES, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(d) ISSUANCES OF COMMON STOCK
In August 2000, the Company, on behalf of TNCi, issued 279,028 shares of
Class A Common Stock to settle an outstanding obligation with two principal
stockholders of the Company related to consulting agreements originally executed
by Ocean Castle during the year ended October 31, 1998. TNCi had assumed the
rights and obligations of Ocean Castle under the agreements in connection with
the Transaction. As of June 30, 1999, TNCi determined that the consulting
agreements had no future value due to TNCi's shift away from in-flight
entertainment into alternative markets such as leisure cruise and passenger rail
transport, and accordingly, recorded a charge to general and administrative
expenses in the Transition Period of $1.6 million representing the balance due
under such contracts. As of June 30, 2000 the outstanding obligation was
approximately $1.3 million. TNCi will issue 411,146 shares of its common stock
as reimbursement to Global for such settlement.
On September 14, 2000, the Company settled a specific performance and
breach of contract action it filed against XCEL Capital, LLC ("XCEL") by
agreeing to issue an additional 25,000 shares to XCEL and to register such
shares for resale (subject to certain restrictions on the volume and timing of
sales) by October 31, 2000. No money is being paid to XCEL. The Company recorded
non-cash compensation expense of $125,000 for the year ended June 30, 2000 for
the issuance of the shares.
(e) CARNIVAL AGREEMENT
In September 1998, the Company entered into a Turnkey Agreement (the
"Carnival Agreement") with Carnival Corporation ("Carnival") for the purchase,
installation and maintenance of its advanced cabin entertainment and management
system for the cruise industry ("CruiseView(TM)") on a minimum of one Carnival
Cruise Lines ship. During the four-year period commencing on the date of the
Carnival Agreement, Carnival had the right to designate an unspecified number of
additional ships for the installation of CruiseView(TM). The cost per cabin for
CruiseView(TM) purchase and installation on each ship was provided for in the
Carnival Agreement. In December 1998, Carnival ordered the installation of
CruiseView(TM) on one Carnival Cruise Lines "Fantasy" class ship, which has been
in operational use since August 1999. In August 1999, Carnival ordered the
installation of CruiseView(TM) on one Carnival Cruise Lines "Destiny" class ship
which was in operational use from October 1999 through March 2000. Under the
terms of the agreement, the Company was to receive payment for 50% of the sales
price of the system in installments through commencement of operation of the
system. Recovery of the remaining sales price of the system was to be achieved
through the receipt of the Company's 50 % share of net profits, as defined in
the Carnival Agreement, generated by the system over future periods.
The terms of the Carnival Agreement provided that Carnival may return the
CruiseView(TM) system within the acceptance period, as defined in the Carnival
Agreement, or for breach of warranty. The acceptance period for the Fantasy and
Destiny class ships are twelve months and three months, respectively, from
completion of installation and testing, which occurred in February 1999 and
October 1999, respectively. The initial warranty period for these systems was
three years. As of March 31, 2000, the Company had recorded deferred revenue of
approximately $2.1 million related to the two Carnival ships.
Since the installation of the CruiseView(TM) system on two Carnival cruise
ships, and beginning in the quarter ended March 31, 2000, the Company had
experienced costs in excess of those recoverable under the Carnival Agreement.
Given these costs, and ongoing technical issues, the Company notified Carnival
of its desire to renegotiate the Carnival Agreement. During these discussions,
Carnival notified the Company in a letter dated April 24, 2000 that it sought to
terminate the Carnival Agreement and sought to assert certain remedies
thereunder. On September 25, 2000, the Company entered into a Master Settlement
Agreement and Mutual Release with Carnival (the "Settlement Agreement"). The
Settlement Agreement specifies that the Company and Carnival agree: (i) to
F-39
<PAGE>
GLOBAL TECHNOLOGIES, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
terminate the Carnival Agreement; (ii) to negotiate in good faith to enter into
a New Agreement; (iii) that the Company will issue to Carnival a one-year
convertible note payable in the principal amount of $550,000; (iv) to mutually
release each party from any prior claims; and (v) that Carnival shall purchase
from the Company all networking equipment aboard the two ships and the Company
shall retain ownership of all other equipment.
Based on the above, the Company recorded revenue of $1.4 million for the
value of networking equipment purchased by Carnival, and cost of revenue in an
equal amount by applying the cost recovery method of accounting. The Company
also recorded a special charge reflecting the write-off of: (i) all remaining
inventory associated with Carnival (including the reversal of warranty reserve)
as substantial uncertainty exists regarding its realizability (approximately
$2.1 million); (ii) all costs associated with the deinstallation and removal of
equipment from the two ships (approximately $85,000) and (iii) all costs
associated with the refurbishment of certain equipment such that the equipment
may be re-deployed to other customers ($157,000). Special charges were offset by
the reversal of deferred revenue of $190,000, which the Company was not required
to return to Carnival for warranty accruals for which the Company has no
continuing obligation. Certain in-cabin equipment removed from Carnival which
may be re-deployed to other customers has been reclassified into
Construction-In-Progress at June 30, 2000 (approximately $681,000).
Pursuant to the Settlement Agreement, the Company and Carnival continue
discussions with respect to a New Agreement which would cover the installation
of the Company's latest CruiseView(TM) technology on the "Fantasy" class ship
discussed above, and contractual terms more favorable to the Company than the
Carnival Agreement, including a longer-term and multiple ship arrangement. The
Company believes its new technology improves the Company's ability to create
multiple new content and commerce-based revenue streams, and to establish a
business relationship providing appropriate returns to each partner. However,
while the Company is optimistic about the discussions, there is no assurance
that the Company will be successful in reaching a mutually satisfactory
resolution of the Carnival Agreement and in securing a new, more favorable
long-term contract with Carnival. Notwithstanding the above, the Company
continues to operate its CruiseView(TM) system aboard one Carnival Fantasy class
ship on a month-to-month basis and will continue to do so as long as the
economics are beneficial to the Company and Carnival.
(f) ISSUANCE OF SECURED CONVERTIBLE NOTES
On October 3, 2000, The Company issued an additional $7.0 million of
secured convertible notes to Advantage Fund II Ltd. and Koch Investment Group,
Ltd. The notes bear interest at 8% per annum and are convertible after 120 days
into shares of our Class A Common Stock at a 20% discount to market, and after
150 days into shares of U.S. Wireless common stock also at a 20% discount to
market. The Company is obligated to register its shares of common stock. To
secure such borrowing, the Company pledged 866,538 shares of U.S. Wireless
common stock to the holders of the notes. The Company can redeem the secured
convertible notes at any time for a premium.
In connection with this issuance, on October 5, 2000, the Company redeemed
$1.0 million of the principal amount of the Secured Convertible Notes issued on
June 8, 2000, for cash of $1.2 million plus the issuance of 62,500 shares of the
Company's Class A Common Stock, as required under the notes. As a result of the
redemption, the note holders released to the Company 250,000 shares of U.S.
Wireless common stock previously held as collateral.
F-40
