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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarter ended December 31, 1999
[ ] 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.
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(Exact Name of Small Business Issuer as Specified in Its Charter)
Delaware 86-0970492
- ------------------------------- ----------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation of Organization) Identification Number)
1811 Chestnut Street, Suite 120
Philadelphia, Pennsylvania 19103
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(Address of Principal Executive Offices)
(215) 972-8191
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(Issuer's Telephone Number, Including Area Code)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes [X] No [ ]
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date.
Class Outstanding at February 10, 2000
----- --------------------------------
Class A Common Stock, $.01 par value 7,153,716 shares
Class B Common Stock, $.01 par value -0- shares
Transitional Small Business Disclosure Format
Yes [ ] No [X]
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<PAGE>
GLOBAL TECHNOLOGIES, LTD.
AND SUBSIDIARIES
INDEX
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of December 31, 1999
(unaudited) and June 30, 1999.........................................3
Condensed Consolidated Statements of Operations for the Three
Months and Six Months Ended December 31, 1999 and 1998 (unaudited)....4
Condensed Consolidated Statements of Cash Flows for the Six
Months Ended December 31, 1999 and 1998 (unaudited)...................5
Notes to Condensed Consolidated Financial Statements..................6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations..................................13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings....................................................23
Item 2. Changes in Securities................................................23
Item 6. Exhibits and Reports on Form 8-K.....................................24
SIGNATURES....................................................................25
2
<PAGE>
GLOBAL TECHNOLOGIES, LTD.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, June 30,
ASSETS 1999 1999
------------ ------------
(Unaudited)
Current assets:
Cash and cash equivalents $ 4,282,558 $ 15,521,275
Restricted cash 1,658,414 1,412,736
Investments 447,146 4,594,751
Accounts receivable 1,031,726 128,489
Notes receivable from related parties 78,932 98,932
Inventories, net of allowance of $7,837,595 3,751,153 1,400,000
Prepaid expenses 1,003,588 607,900
Assets held for sale -- 800,000
Other current assets 384,868 470,273
------------ ------------
Total current assets 12,638,385 25,034,356
Investments 4,937,360 5,752,599
Note receivable from related party 78,000 75,000
Property and equipment, net of accumulated
depreciation of $1,190,539 and $915,901,
respectively 2,965,142 1,369,392
Intangibles, net accumulated amortization
of $443,849 and $74,981, respectively 6,815,025 7,119,806
Other assets 5,183,917 61,468
------------ ------------
Total assets $ 32,617,829 $ 39,412,621
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,461,772 $ 2,530,675
Accrued liabilities 955,503 1,072,269
Deferred revenue 2,108,151 365,851
Accrued product warranties 144,750 --
Notes payable 9,121 24,391
Notes payable to related parties 44,694 68,836
------------ ------------
Total current liabilities 5,723,991 4,062,022
Notes payable -- 3,467,045
Other liabilities 1,037,289 1,220,340
Accrued litigation settlement 1,000,000 1,843,750
------------ ------------
Total liabilities 7,761,280 10,593,157
------------ ------------
Minority interest 995,917 1,165,098
Commitments and contingencies
Stockholders' equity:
Series A 8% Convertible preferred stock,
3,000 shares designated, zero and 3,000
shares issued and outstanding respectively
(liquidation preference of $1,200 per share) -- 30
Series B 8% Convertible preferred stock,
3,000 shares designated, zero
shares issued and outstanding -- --
Class A common stock, one vote per share,
par value $0.01 per share, 40,000,000 shares
authorized; 7,153,746 and 5,460,636 shares
issued and outstanding, respectively 71,537 54,606
Class B common stock, six votes per share,
par value $0.01 per share, 4,000,000 shares
authorized; zero shares issued and outstanding -- --
Additional paid-in capital 116,150,238 113,462,394
Accumulated other comprehensive income:
Net unrealized loss on investment securities (266) (10,107)
Accumulated deficit (91,969,070) (85,658,567)
Treasury stock, at cost; 78,600 shares (193,990) (193,990)
------------ ------------
Total stockholders' equity 23,860,632 27,654,366
------------ ------------
Total liabilities and stockholders' equity $ 32,617,829 $ 39,412,621
============ ============
See accompanying notes to consolidated financial statements.
3
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GLOBAL TECHNOLOGIES, LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
---------------------------- ----------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenue:
Equipment sales $ 46,759 $ -- $ 5,597,319 $ 89,028
Service income -- 438,071 59,827 903,475
------------ ------------ ------------ ------------
46,759 438,071 5,657,146 992,503
------------ ------------ ------------ ------------
Costs and expenses:
Cost of equipment sales 34,534 -- 3,454,915 283,714
Cost of service income 6,523 199,771 15,103 346,133
General and administrative expenses 3,472,509 3,030,811 6,434,775 7,868,209
Non-cash compensation expense 539,050 -- 624,050 --
Provision for doubtful accounts -- 28,647 -- 28,647
Expenses associated with investments 1,656,587 -- 1,656,587 --
Special charges -- -- -- (190,000)
Depreciation and amortization expense 327,500 212,383 652,565 552,903
------------ ------------ ------------ ------------
6,036,703 3,471,612 12,207,694 8,889,606
------------ ------------ ------------ ------------
Operating loss (5,989,944) (3,033,541) (6,550,548) (7,897,103)
Other:
Interest expense (39,624) (1,866) (48,275) (4,256)
Interest income 221,069 478,316 524,907 1,069,430
Equity in loss of nonconsolidated affiliates (562,875) -- (715,451) --
Other income (expense) (17,192) (564,689) (3,784) (567,317)
------------ ------------ ------------ ------------
Net loss before minority interest
and preferred dividends $ (6,388,566) $ (3,121,780) $ (6,793,151) $ (7,399,246)
------------ ------------ ------------ ------------
Minority interest 348,682 -- 254,163 --
------------ ------------ ------------ ------------
Net loss $ (6,039,874) $ (3,121,780) $ (6,538,988) $ (7,399,246)
============ ============ ============ ============
Basic and diluted net loss per share
of common stock $ (1.00) $ (2.96) $ (1.03) $ (7.01)
============ ============ ============ ============
Weighted average shares outstanding:
basic and diluted 6,013,788 1,055,745 6,319,119 1,055,745
============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
GLOBAL TECHNOLOGIES, LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Six Months
Ended Ended
December 31, December 31,
1999 1998
------------ ------------
Cash flows from operating activities:
Net loss $ (6,538,988) $ (7,399,246)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 652,365 552,903
Equity on loss of nonconsolidated affiliate 715,451 --
Non-cash expenses associated with investments 1,656,587 --
Loss applicable to minority interest (170,947) --
Special charges -- (190,000)
Loss on sale of assets held for sale 37,893 --
Non cash compensation expense 624,050 --
Loss on disposals of property and equipment -- 1,006,532
Changes in assets and liabilities, net of
acquisition:
Increase in accounts receivable (903,237) (4,867,319)
(Increase)Decrease in inventories (2,351,153) 107,959
Increase in prepaid expenses, other current
assets and other assets (313,315) (967,786)
Decrease in accounts payable (110,223) (383,888)
Decrease in accrued liabilities (278,311) (801,259)
Increase in deferred revenue 1,742,300 4,483,870
Increase (Decrease) in accrued product
warranties 144,750 (1,316,046)
------------ ------------
Net cash used in operating activities $ (5,101,578) $ (9,774,280)
------------ ------------
Cash flows from investing activities:
Maturities of investment securities 1,450,079 2,008,020
Purchases of investment securities (1,839,643) (2,826,252)
Sales of investment securities 4,545,961 --
Investments in affiliates (1,763,948) 784,239
Payments received on related party note
receivable 17,000 --
Deposits on property and equipment (5,119,417) --
Purchases of property and equipment (1,870,672) (51,680)
Proceeds from sale of equipment -- 11,786
Proceeds from sale of assets held for sale 762,107 --
Decrease (Increase) in restricted cash (245,678) (865,443)
Purchase of Johnny Valet, Inc. -- (688,736)
Payments to purchase Series A, D and E notes (555,000) --
------------ ------------
Net cash used in investing activities $ (4,619,211) $ (1,628,066)
------------ ------------
Cash flows from financing activities:
Redemption of Series A Preferred Stock (3,519,970) (42,074)
Payments on notes payable (719,901) --
Issuance of stock to directors and officers 2,702,438 (1,350,475)
Employee stock option purchases 19,505 --
------------ ------------
Net cash used in financing activities $ (1,517,928) $ (1,392,549)
------------ ------------
Net decrease in cash and cash equivalents (11,238,717) (12,794,895)
Cash and cash equivalents at beginning of period 15,521,275 38,961,896
------------ ------------
Cash and cash equivalents at end of period $ 4,282,558 $ 26,167,001
============ ============
See accompanying notes to consolidated financial statements.
5
<PAGE>
PART I. FINANCIAL INFORMATION
BASIS OF PRESENTATION
(1) PRINCIPLES OF CONSOLIDATION
The condensed consolidated financial statements include the accounts of
Global Technologies, Ltd. ("Global") and its wholly-owned subsidiaries:
GlobalTech Holdings Limited (formerly IFT Holdings, Limited), GTL Management
Limited (formerly IFT Management Limited), Interactive Flight Technologies
(Gibraltar) Limited, IFT Lottoco, Inc., IFT Subco, Inc., GTL Investments
(formerly IFT Investments), GTL Leasing Limited (formerly IFT Leasing Limited),
Lottery Sales Company Limited, and MTJ Corp; and the majority-owned and
controlled subsidiary, The Network Connection, Inc. and its wholly-owned
subsidiary TNCi UK Limited ("TNCi") (collectively, the "Company"). The ownership
interest of minority shareholders in TNCi are recorded as "minority interest" on
the accompanying condensed consolidated financial statements. TNCi was acquired
by Global effective May 1, 1999 for accounting purposes (the "Transaction"). 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 (Inter Lotto (UK) Limited and Donativos S.A. de C.V.) over which the
Company has the ability to exercise significant influence. The amount by which
the Company's carrying value in each such affiliate exceeds its share of the
underlying net assets of such equity affiliate is amortized over five years on a
straight-line basis from the date of acquisition which adjusts the Company's
share of such affiliate's earnings or losses. The Company's investments in US
Wireless Corp. and Shop4Cash.com, Inc. are accounted for at cost.
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.
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 has determined during the quarter ended
December 31, 1999 that it now retains the majority of the financial risk related
to InterLotto and, accordingly, has recorded against their investment 100% of
the loss incurred by Inter Lotto during this period before operations begin.
This accounting treatment will be revisited in future periods to insure accurate
presentation of this investment.
As of December 31, 1999, the Company has determined that the value of its
investment in Donativos S.A. de C.V. ("Donativos") has been permanently
impaired. Since the opening of its entertainment center, Donativos has not
generated 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" is in doubt. The equity investment has been written off and
a reserve for the full amount of the loans and subsequent advances to Donativos
has been recorded, resulting in a charge to income of $1.7 million.
The accompanying condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles, pursuant
to the rules and regulations of the Securities and Exchange Commission. In the
opinion of management, the accompanying condensed consolidated financial
statements reflect all adjustments (consisting of normal recurring accruals)
which are necessary for a fair presentation of the results for the interim
periods presented. Certain information and footnote disclosures normally
included in consolidated financial statements have been condensed or omitted
pursuant to such rules and regulations. It is suggested that these condensed
consolidated financial statements be read in conjunction with the consolidated
financial statements and notes thereto for the transition period ended June 30,
1999, included in the Company's Annual Report on Form 10-KSB.
The results of operations for the three months and six months ended
December 31, 1999 are not necessarily indicative of the results to be expected
for the entire fiscal year.
6
<PAGE>
(2) USE OF ESTIMATES
The preparation of 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 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.
(3) REVERSE STOCK SPLIT AND STOCK DIVIDEND
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 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 reverse split for
all periods presented prior to the reverse split.
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 Common Stock held by stockholders of record as of the close of business
February 15, 2000. The dividend is payable on February 29, 2000; fractional
shares will be paid out in cash. Amounts contained herein have not been adjusted
to reflect the effect of this stock dividend.
(4) NOTES RECEIVABLE
Prior to the Transaction, TNCi issued a secured promissory note to 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
TNCi's assets (the "Promissory Note"). The Promissory Note was convertible into
shares of TNCi's Series C 8% Convertible Preferred Stock ("TNCi Series C Stock")
at the discretion of Global. The Note had an original maturity of May 14, 1999
but had been extended until September 2001.
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 purchase by
Global, TNCi executed the allonges to the Promissory Note which cancelled such
Series Notes and rolled the principal balance, plus accrued but unpaid interest,
penalties and redemption premiums on the Series Notes, into the principal
balance of the Promissory Note. Subsequent to May 18, 1999, Global has also
advanced working capital to TNCi in the form of intercompany advances. In August
1999, TNCi executed an allonge to the Promissory Note which rolled the
intercompany advances into the principal balance of the Promissory Note and
granted Global the ability to convert the 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 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 subsequently approved at the September 17, 1999
Special Meeting of TNCi shareholders. Accordingly, TNCi has issued to Global
approximately 4.8 million shares of its Common Stock based on the conversion
date of August 24, 1999. Separately from the Promissory Note, TNCi issued
886,140 shares of its Common Stock to Global upon conversion of the TNCi Series
C Stock held by Global.
Also, on August 24, 1999, the Company's Board of Directors approved a $5
million secured revolving credit facility by and between TNCi and Global (the
"Facility"). The Facility provides that TNCi may borrow up to $5 million for
working capital and general corporate purposes at the prime rate of interest
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
7
<PAGE>
Facility is secured by all of the assets of TNCi and is convertible, at Global's
option, into shares of TNCi's Common Stock at a price equal to the lesser of
66.7% of the average five day low share price of the preceding 20 days, as
defined, or $1.50 per share, or any lesser amount at which shares of TNCi's
Common Stock have been issued to third parties.
Pursuant to Nasdaq rules, Global may not convert borrowings under the
Facility into shares of TNCi Common Stock in excess of 19.99% of the number of
shares of TNCi Common Stock outstanding as of August 24, 1999, without
stockholder approval. As of December 31, 1999, no amounts were outstanding under
the Facility. As of December 31, 1999, Global did not have sufficient cash for
TNCi to borrow the full $5 million under the Facility. Should TNCi draw on the
Facility, Global would have to obtain financing or sell assets to meet its
obligations under the Facility.
In September 1999, TNCi sold one of its two buildings in Alpharetta,
Georgia. The net proceeds of approximately $390,000 from the sale, plus 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
$217,000.
In October 1999, a convertible note payable of TNCi in the principal amount
of $400,000 due September 5, 1999 was converted into 200,000 shares of TNCi's
Common Stock.
(5) PREFERRED STOCK
On November 10, 1999, the Board of Directors of the Company approved the
redemption of the Company's Series A 8% Convertible Preferred Stock ("Series A
Stock") as of November 6, 1999 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. Such
amounts were paid on November 16, 1999 to the holder of the Series A Stock.
(6) WARRANTS
In December 1999, TNCi issued warrants to purchase 25,000 shares of TNCi
Common Stock at $6.50 per share and Global issued warrants to purchase 25,000
shares of Global Class A Common Stock at $7.88 per share to Emden Consulting
Corp. in exchange for certain financial advisory services. The warrants expire
in December 2004. Non-cash compensation expense of $269,525 was recorded in the
current period.
In December 1999, TNCi issued warrants to purchase 25,000 shares of TNCi
Common Stock at $6.50 per share and Global issued warrants to purchase 25,000
shares of Global Class A Common Stock at $7.88 per share to Waterton Group LLC
in exchange for certain financial advisory services. The warrants expire in
December 2004. Non-cash compensation expense of $269,525 was recorded in the
current period.
In December 1999, TNCi issued warrants to purchase 100,000 shares of TNCi
Common Stock at prices ranging from $6 to $10 per share to Continental Capital &
Equity Corp. in exchange for public relations and financial advisory services.
The warrants vest over a period of 270 days and expire in February 2002.
Non-cash compensation expense will be recognized over the 12 months of the
agreement.
(7) OPTION GRANTS
In October 1999, the Compensation Committee of the Board of Directors of
Global recommended, and the Board approved, option grants to purchase up to
1,000,000 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 three years. The remainder
vest on the sixth anniversary of the date of grant, subject to acceleration to a
three-year vesting schedule in the event of the achievement of certain
performance goals. Exercise price of the options is equal to the closing market
price of the Global's Class A Common Stock on the day prior to grant. The
options expire in October 2009.
8
<PAGE>
Additionally, in November 1999, the Compensation Committee of the Board of
Directors of TNCi recommended, and the Board approved, option grants to purchase
up to 500,000 shares of TNCi's Common Stock to Mr. Irwin L. Gross, Chairman and
Chief Executive Officer of TNCi. One quarter of these options vested immediately
and one quarter vest over three years. The remainder vest on the sixth
anniversary of the date of grant, subject to acceleration to a three-year
vesting schedule in the event of the achievement of certain performance goals.
Exercise price of the options is equal to the closing market price of TNCi's
Common Stock on the day prior to grant. The options expire in October 2009.
(8) PRO FORMA INFORMATION
Pro forma unaudited operations data assuming the TNCi acquisition had taken
place on July 1, 1998 is as follows:
Three Months Ended Six Months Ended
December 31, 1998 December 31, 1998
----------------- -----------------
Revenue................................ $ 6,096 $ 1,722,268
Net loss............................... $(8,142,119) $(15,666,423)
Net loss per share..................... $ (1.60) $ (3.06)
(9) COMMITMENTS AND CONTINGENCIES
(a) LAWSUIT
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 declaratory judgment action where the Company and its insurers are
seeking a declaration of the applicability of an excess liability policy to
claims made by the estates of victims of the crash of Swissair Flight No. 111 on
September 2, 1998.
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 the Company. Estates of the victims of the
crash have filed lawsuits throughout the United States against Swissair, Boeing,
Dupont and various other parties, including the Company. TNCi has been named in
some of the lawsuits filed by families of victims on a successor liability
theory. The Company and TNCi deny all liability for the crash. TNCi is being
defended by the aviation insurer for the Company.
FEDERAL EXPRESS CORPORATION V. THE NETWORK CONNECTION, INC., State Court of
Forsyth County, State of Georgia, Civil Action File No. 99-SC-0053. This lawsuit
was served on the Company on or about July 22, 1999 by Federal Express
Corporation and relates to charges incurred by prior management. The suit
alleges the Company owes Federal Express approximately $110,000 for past
services rendered. The Company is currently discussing settlement with Federal
Express.
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, the
Company's former Chief Operating and Chief Financial Officer and a former
Director, filed a claim on November 24, 1999 alleging a breach of his employment
agreement. 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. The Company is currently defending the
claim.
In September of 1999, Global filed a lawsuit against Barington Capital
Group, L.P. ("Barington") in Maricopa County Superior Court, Arizona, seeking a
declaratory judgment that no sums were owed to Barington pursuant to a Financial
Advisory Service Agreement dated in October of 1998. In October of 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. 99-604l606, 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. Global denies
all liability and denies 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 Global filed an action against XCEL Capital, LLC ("XCEL") for specific
performance and breach of contract. In the action, Global is seeking to compel
XCEL to tender 75,000 shares of Global Class A Common Stock to Global 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.
On October 25, 1999, Global filed a lawsuit against Regal Gaming (and its
principals and their spouses) in the United States District Court for the
Southern District of Florida seeking judgment in favor of Global on the $500,000
promissory note made by Regal Gaming (and guaranteed by its principals and their
spouses) to Global. The promissory note was made to secure Regal Gaming's
obligations to fund cost overruns in connection with the entertainment center
project undertaken by Donativos.
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The Company is subject to other lawsuits and claims arising in the ordinary
course of its business. In the Company's opinion, as of December 31, 1999, the
effect of such matters will not have a material adverse effect on the Company's
results of operations and financial position.
(b) 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 has 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 is 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 has been in operational use since October 1999. Under the terms of the
agreement, the Company receives payment for 50% of the sales price of the system
in installments through the commencement of operation of the system. Recovery of
the remaining sales price of the system is through the receipt of the Company's
50% share of revenues generated by the system over future periods.
The terms of the Carnival Agreement provide that Carnival may return the
CruiseView(TM) system within the acceptance period, as defined in the Carnival
Agreement. The acceptance periods for the "Fantasy" and "Destiny" class ships
are twelve months and three months, respectively. As of December 31, 1999, the
Company recorded deferred revenue of $2,108,151, reflecting amounts paid by
Carnival towards the purchase price of CruiseView(TM) aboard these ships. As of
December 31, 1999, the Company had not recognized any revenue in association
with the Carnival Agreement. In January 2000, the systems installed aboard the
Fantasy and Destiny class ships were accepted by Carnival.
The Company has concluded that the cost of building and installing
CruiseView(TM) systems in carnival ships pursuant to the agreement with Carnival
may exceed the revenue earned in connection therewith. Carnival's continuing to
exercise its option for building and installing CruiseView(TM) on additional
ships under the agreement may prove unprofitable and therefore have a negative
effect on the Company's working capital. The company is currently endeavoring to
renegotiate the terms of the agreement with Carnival.
(d) PURCHASE COMMITMENT
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 $7.7 million has yet to be paid as of
December 31, 1999. In addition, on the same date, GTL Management Limited 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 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.
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(10) COMPREHENSIVE INCOME
Comprehensive income encompasses net income and "other comprehensive
income", which includes all other non-owner transactions and events which change
stockholders' equity. The Company recognized comprehensive income (loss) for the
three months and six months ended December 31, 1999 and 1998 as follows:
Three Months Ended Six Months Ended
December 31, December 31,
------------------------- -------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
Net loss
Other comprehensive loss,
net of tax $(5,842,058) $(3,121,780) $(6,341,171) $(7,399,246)
Net unrealized loss on
Investment securities 1,149 -- 9,841 --
----------- ----------- ----------- -----------
Comprehensive loss $(5,840,909) $(3,121,780) $(6,331,330) $(7,399,246)
=========== =========== =========== ===========
(11) OPERATING SEGMENTS
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's operations include the design,
manufacture, installation and maintenance of advanced, high-end,
high-performance computer servers and interactive, broad-band information and
entertainment systems, and procuring and providing the content available through
these systems. These all-digital systems deliver an on-demand, multi-media
experience via high-speed, high-performance Internet protocol networks. The
systems are designed to provide users access to information, entertainment and a
wide array of service options such as movies, shopping for goods and services,
computer games, access to the World Wide Web and on-line gambling, where
permitted by applicable law. General corporate operations consist of investing
in, developing and operating or assisting in the management of affiliate
companies, most of which are engaged in telecommunications, e-commerce,
networking solutions and gaming.
The following summarizes information related to the Company's segments. All
significant inter-segment activity has been eliminated. Assets are the owned or
allocated assets used by each operating segment.
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<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
---------------------------- ----------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenue
TNCi $ 46,759 $ 143,740 $ 5,657,146 $ 478,065
Other -- 294,331 -- 514,438
------------ ------------ ------------ ------------
$ 46,759 $ 438,071 $ 5,657,146 $ 992,503
Gross profit(a)
TNCi $ 5,702 $ 143,260 $ 2,187,128 $ 193,615
Other -- 95,040 -- 169,041
------------ ------------ ------------ ------------
$ 5,702 $ 238,300 $ 2,187,128 $ 362,656
Operating income (loss)
TNCi $ (1,852,214) $ (1,358,377) $ (1,334,579) $ (6,047,349)
Other (4,137,730) (1,675,164) (5,215,969) (1,849,754)
------------ ------------ ------------ ------------
$ (5,989,944) $ (3,033,541) $ (6,550,548) $ (7,897,103)
General corporate operations
Equity in loss of non-
consolidated affiliate $ (562,875) $ -- $ (715,451) $ --
Net interest 181,445 476,450 476,632 1,065,174
Other income (expenses) 17,192 (564,689) (3,784) (567,317)
Minority interest 348,692 -- 254,163 --
------------ ------------ ------------ ------------
$ (49,930) $ (88,239) $ (11,560) $ 497,857
Net loss $ (6,039,874) $ (3,121,780) $ (6,538,983) $ (7,399,246)
Total assets
TNCi $ 14,630,592 $ 9,005,850 $ 14,630,592 $ 9,005,850
General corporate 17,987,237 31,811,603 17,987,237 31,811,603
------------ ------------ ------------ ------------
Total Assets $ 32,617,829 $ 40,817,453 $ 32,617,829 $ 40,817,453
============ ============ ============ ============
</TABLE>
(a) Gross profit is the difference between Revenue and Cost of Revenue in the
consolidated statement of operations.
(12) SUBSEQUENT EVENTS
(a) LETTER OF INTENT: ISSUANCE OF CONVERTIBLE SUBORDINATED DEBENTURE ON TNCi
In January 2000, TNCi entered into a Letter of Intent relating to the
issuance of a subordinated convertible debenture (the "Debenture") and warrants
to purchase shares of TNCi's Common Stock for net proceeds to TNCi of $5.8
million. The letter provides that over the 24-month term of the Debenture it
will accrue interest at an annual rate equal to the prime interest rate. Under
the terms of the letter, TNCi shall provide a Letter of Credit equal to 50% of
the outstanding principle balance of the Debenture and that TNCi shall register
the shares of Common Stock into which the Debenture and warrants are convertible
or exercisable, as the case may be. The letter of credit requirement shall be
reduced to 35% of the outstanding principal balance of the debenture 45 days
after the effective date of the registration statement.
Beginning on the funding date, the holder of the Debenture shall be
permitted each month to convert a pro rata portion (according to a 12-month term
payment schedule) of principal amount of the Debenture plus accrued interest
into shares of TNCi Common Stock at a conversion price equal to the lesser of
(i) 130% of the average closing price of TNCi Common Stock for the 10
consecutive trading days prior to the funding date, or (ii) 100% of the average
three low daily trades of TNCi Common Stock selected by the holder of the
Debenture for the 12 days prior to the submission of the conversion notice. The
letter also provides the Company with certain prepayment and forced conversion
rights.
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<PAGE>
Additionally, the holder of the Debenture is to receive 120,000 warrants to
purchase Common Stock of TNCi at a price equal to 130% of the average closing
price of TNCi Common Stock for the five consecutive trading days prior to the
funding date. The warrants are callable under certain circumstances and expire
five years from date of issue. Proceeds from this transaction will be used to
fund general operations of TNCi.
(b) LETTER OF INTENT: ISSUANCE OF PREFERRED STOCK OF GLOBAL
In February 2000, Global entered into a letter of intent relating to the
issuance of preferred stock and callable warrants in return for $10 million. The
preferred stock carries a 5% cumulative dividend payable quarterly in cash or in
kind. The preferred stock converts into Class A Common Stock at a conversion
price equal to the 120% of the average closing bid prices thereof over the five
trading days beginning March 1, 2000 (the "Fixed Conversion Price"). 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. The Company has
granted the purchaser of the preferred stock registration rights relating to 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.
(c) SHARE REPURCHASES
In August 1999 Global acquired from third parties Series Notes issued by
TNCi in November of 1998 for consideration consisting of cash and 387,610 shares
of Class A Common Stock. In connection with this transaction, Global entered
into put/call agreements with the various note holders which provided holders
with the right to require Global to purchase any or all of the shares for an
average price of $3.57 per share. Further, Global retained the right to purchase
these shares at an average price of $4.55 per share. Both the Company and the
former note holders would be entitled to exercise these put and call rights for
the period from January 1, 2000 to January 10, 2000.
In December 1999, Global determined to exercise its call rights effective
January 1, 2000 and provided proper notice to the parties that it had done so.
Accordingly, as of January 2000, Global had a payment obligation of
approximately $1.8 million due and payable on February 28, 2000. See description
of XCEL Capital, LLC litigation under "Legal Proceedings" below.
13
<PAGE>
ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with, and is
qualified in its entirety by, the Condensed 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.
DESCRIPTION OF BUSINESS
Global Technologies, Ltd. ("Global" and, collectively with its affiliate
companies, the "Company") is a technology incubator that invests in and assists
in the management of or operates emerging growth companies in the e-commerce,
networking solutions, telecommunications and gaming industries.
Global currently holds approximately 81% of the outstanding common stock of
The Network Connection, Inc. ("TNCi") on a fully converted basis. TNCi is
publicly traded on the Nasdaq SmallCap Market under the ticker symbol "TNCX."
TNCi is engaged in the business of designing, manufacturing, marketing,
installing and maintaining advanced, high-end, high-performance computer servers
and interactive, broad-band information and entertainment systems and providing
the content available through these systems. Global also holds approximately
11.15% of the outstanding common stock of U.S. Wireless Corporation ("US
Wireless") on a fully converted basis (this percentage increases to
approximately 15.25% on March5, 2000). US Wireless is publicly traded on the
Nasdaq SmallCap Market under the ticker symbol "USWC." US Wireless has developed
a proprietary, network-based wireless location technology and plans to build out
a nationwide network to support its technology. Global also holds 27.5% of
InterLotto (UK) Limited ("InterLotto") a company that is licensed to operate
lotteries on behalf of charities in the United Kingdom ("UK"). Global owns 100%
of GTL Management Limited, which has an exclusive contract with InterLotto to
provide it management services in connection with operation of lotteries. Global
holds approximately 4% of Shop4Cash.com, Inc. ("Shop4Cash"), a privately held,
cash-incentive, Internet shopping portal with a growing base of about 250
affiliated merchants. Lastly, Global owns 24.5% of Donativos S.A. de C.V.
("Donativos"), a company that has developed and is operating a gaming center in
Monterrey, Mexico.
RESULTS OF OPERATIONS
REVENUE.
Revenue for the quarter ended December 31, 1999 was $46,759, a decrease of
$391,312 (or 89%) compared to revenue of $438,071 for the corresponding period
of the previous fiscal year. Revenue for the six months ended December 31, 1999
was $5,657,146, an increase of $4,664,643 (or 470%) compared to revenue of
$992,503 for the corresponding period of the previous fiscal year. Equipment
sales generated during the three months and six months ended December 31, 1999
were principally from the sale of 195 of TNCi's Cheetah(TM) video servers in
connection with the Georgia Metropolitan Regional Education Services Agency
("MRESA") Net 2000 project. Equipment sales of $89,028 during the six months
ended December 31, 1998 were generated from the sale of spare parts needed for
the entertainment networks previously installed on three Swissair aircraft.
Service income of $59,827 generated during the six months ended December 31,
1999 was from system design services provided by TNCi to ALSTOM Transport LTD
("Alstom"). The Company provided these services to Alstom, but expects no
further business from Alstom as they plan to create a subsidiary that would
compete with the Company in the passenger rail market. Service income of
$438,071 and $903,475 was generated during the three months and six months ended
December 31, 1998, respectively. During the six months ended December 31, 1998,
service income of $389,037 was generated from programming services provided to
Swissair, the Company's share of gaming profits generated by the Swissair
systems and revenue earned under the Swissair extended warranty letter of
intent, as well as $514,438 generated by the Company's dry cleaning operations.
The dry cleaning operations were acquired by prior management of the Company and
disposed of by current management on May 13, 1999.
COST OF SALES.
Cost of equipment sales and service income for the quarter ended December
31, 1999 was $41,057, a decrease of $158,714 (or 79%) compared to cost of sales
of $199,771 for the corresponding quarter of the previous fiscal year. Cost of
equipment sales and service income for the six months ended December 31, 1999
14
<PAGE>
was $3,470,018, an increase of $2,840,171 (or 451%) over cost of sales of
$629,847 for the corresponding period of the previous fiscal year. Cost of
equipment sales for the three months and six months ended December 31, 1999 is
comprised principally of material costs and estimated warranty costs associated
with the 195 TNCi Cheetah(TM) video servers for the Georgia schools project.
Cost of sales for the corresponding period ended December 31, 1998 includes cost
of equipment sales comprised of material, installation and maintenance costs, as
well as estimated warranty costs and costs of upgrades to the entertainment
networks installed in Swissair aircraft; and cost of service income for
production costs related to the dry cleaning operations previously owned by the
Company.
GENERAL AND ADMINISTRATIVE.
General and administrative expenses for the quarter ended December 31, 1999
were $3,472,509, an increase of $441,698 (or 15%) compared to expenses of
$3,030,811 for the corresponding period ended December 31, 1998. General and
administrative expenses for the six months ended December 31, 1999 were
$5,804,474, a decrease of $2,063,735 (or 26%) compared to expenses of $7,868,209
for the corresponding period of the previous fiscal year. Significant components
attributable to the decrease in expenses in the current six-month period include
a $3.1 million severance expense recorded September 1998 for three former
executives of the Company, offset partially by current period legal and
consulting fees related to the Donativos and Inter Lotto investments.
NON-CASH COMPENSATION.
A non-cash charge of $539,048 of compensation expense related to the
issuance of warrants in exchange for services in the three and six months ended
December 31, 1999.
DEPRECIATION AND AMORTIZATION.
Depreciation and amortization expense for the quarter ended December 31,
1999 was $327,500, an increase of $115,117 (or 54%) compared to depreciation and
amortization expense of $212,383 for the corresponding period ended December 31,
1998. Depreciation and amortization expense for the quarter ended December 31,
1999 is comprised of property, plant and equipment depreciation of $135,259 and
intangible amortization of $192,241. Depreciation and amortization expense for
the corresponding period ended December 31, 1998 was comprised of property,
plant and equipment depreciation of $94,637 and intangible amortization of
$117,746. Depreciation and amortization expense for the six months ended
December 31, 1999 was $652,565, an increase of $99,662 (or 18%) compared to
depreciation and amortization expense of $552,903 for the corresponding period
ended December 31, 1998. Depreciation and amortization expense for the six
months ended December 31, 1999 is comprised of property, plant and equipment
depreciation of $274,921 and intangible amortization of $377,644. Depreciation
and amortization expense for the corresponding period ended December 31, 1998 is
comprised of property, plant and equipment depreciation of $424,937 and
intangible amortization of $127,966. The decrease in property, plant and
equipment depreciation in the current six-month period is a result of $1,006,532
of equipment written off during October 1998. Intangible amortization for the
current six-month period is principally attributed to goodwill related to the
merger with TNCi, whereas intangible amortization for the six-month period ended
December 31, 1998 is attributed to the dry cleaning operation.
SPECIAL CHARGES.
There were no special charges for the quarter ended December 31, 1999 or
for the corresponding period ended December 31, 1998. Special charges for the
six months ended December 31, 1999 were zero compared to a credit of $190,000
during the corresponding period ended December 31, 1998. A recovery of $190,000
was recognized during September 1998 as a result of a reduction in the number of
entertainment networks installed on Swissair aircraft requiring maintenance.
PROVISION FOR DOUBTFUL ACCOUNTS.
There were no provisions for doubtful accounts for the three and six months
ended December 31, 1999 compared to $28,647 for the corresponding periods of the
previous fiscal year. The provisions in the previous fiscal year related to the
Company's dry cleaning operations.
15
<PAGE>
INTEREST EXPENSE.
Interest expense was $9,065 and $17,715 for the three months and six months
ended December 31, 1999 compared to $1,866 and $4,256 for the three months and
six months ended December 31, 1998, respectively. Interest expense for the
six-month period of the current fiscal year is principally attributable to
long-term debt obligations and fees related to establishing a certificate of
deposit, whereas interest expense for the corresponding period of the previous
fiscal year is attributable to the Company's capital leases for furniture.
INTEREST INCOME.
Interest income was $221,069 and $524,907 for the three and six months
ended December 31, 1999 compared to $478,316 and $1,069,430 for the three and
six months ended December 31, 1998, respectively. Interest income for fiscal
1999 is attributed to short-term investments of working capital as well as
amortization on gains related to Globals purchase of the TNCi Series A, D and E
notes from the holders of such notes. Interest income for the corresponding
period of the previous fiscal year is attributed principally to short-term
investments of working capital. The decrease in income during the current
six-month period is due to the lower average cash balance during the six-month
period ended December 31, 1999 compared to the corresponding period ended
December 31, 1998, offset partially by the amortization on the gains from the
purchase of the TNCi Series A, D and E notes from their holders.
EQUITY INTERESTS.
For the quarter ended December 31, 1999 the Company recorded its
proportionate share of its equity interest in losses of Inter Lotto and
Donativos in the amount of $72,050 and $0, respectively. For the six-month
period ended December 31, 1999 the proportionate share of equity interest in
losses of Inter Lotto and Donativos was $139,975 and $84,651, respectively.
During the quarter the Company recognized 100% of the losses of Inter Lotto and
recorded an additional $490,825 loss for the period ended December 31, 1999.
EXPENSE ASSOCIATED WITH INVESTMENTS.
Expenses associated with investments of $1,656,587 for the three and six
months ended December 31, 1999 represent a reserve for the investment in
Donativos.
OTHER EXPENSE.
Other expense of $17,192 and $3,784 for the three and six months ended
December 31, 1999, respectively, consist principally of losses incurred on the
buyout of a capital lease for furniture as well as losses incurred on the sale
of two buildings located in Alpharetta, Georgia. Other expense of $564,689 and
$567,317 for the three and six-month period ended December 31, 1998,
respectively, resulted from furniture and equipment write-offs of $1,006,532
during October 1998, partially offset by the recovery of furniture and equipment
written off in fiscal 1997.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1999, the Company had cash and cash equivalents, and
short-term investments of approximately $4.7 million. As described below, the
Company has a purchase commitment related to Inter Lotto in the amount of $7.7
million ($12.3 million commitment less payments of $4.6 million to date). This
purchase commitment, together with Global's share repurchase obligation of
approximately $1.7 million arising from its exercise of certain call rights, and
other capital and operating obligations exceed currently available cash and
short-term investments.
In February 2000, Global entered into a letter of intent relating to the
issuance of preferred stock and callable warrants in return for $10 million. The
preferred stock carries a 5% cumulative dividend payable quarterly in cash or in
kind. The preferred stock converts into Class A Common Stock at a conversion
price equal to the 120% of the average closing bid prices thereof over the five
trading days beginning March 1, 2000 (the "Fixed Conversion Price"). Nine months
after funding, and every three months thereafter, the conversion price resets to
16
<PAGE>
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. The Company has
granted the purchaser of the preferred stock registration rights relating to 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.
The Company is seeking additional financing for the Inter Lotto obligation.
If one or both of these financings is obtained, the Company would be able to
continue to meet its other obligations in the ordinary course of business. In
the event that neither financing is obtained, the Company may need to delay the
Inter Lotto project until such financing, or alternative financing, is obtained.
Such a delay could have a material adverse effect on the project and on the
Company. Alternatively, the Company could seek to sell or borrow against a
pledge of, the unregistered shares it owns of US Wireless or its subsidiary,
TNCi, owned by the Company.
Prior to the last fiscal year, the Company's primary source of funding had
historically been through equity offerings. Subsequent to June 30, 1999, the
Company received orders consisting of a $5.3 million purchase order for the
manufacture, delivery and installation of 195 of the Company's Cheetah(TM)
multimedia video servers in connection with the Georgia MRESA Net 2000 project,
and a service order under for installation of a second CruiseView(TM) system. In
addition, in January 2000, the Company received two orders for installation of
InnView(TM) systems in hotels in California and Arizona. The Company has
received the full payment of $5.3 million in connection with the MRESA Net 2000
project. The Company received installment payments from Carnival in August 1999
for the two ships currently under contract which has been recorded as deferred
revenue (the aggregate amount of which was $2.1 million at December 31, 1999).
Excluding the benefit of the Georgia schools program, cash and cash equivalents,
and short-term investments will continue to decrease as the Company continues to
invest in inventory for orders under the agreement with Carnival and its two
hotel orders, invest in business development and cover overhead expenses,
contribute capital into affiliate companies and complete new transactions which
may not generate cash flow in the next twelve months. In addition, as described
above, the combination of the Company's share repurchase obligation and purchase
commitments with respect to Inter Lotto will greatly accelerate this decrease to
the extent that in the absence of financing, the Company will have depleted its
cash and cash equivalents, and short-term investment securities early in the
quarter ending March 31, 2000.
During the six months ended December 31, 1999, the Company used $5.1
million of cash for operating activities, a decrease of $4.7 million from the
$9.8 million of cash used by operating activities for the six months ended
December 31, 1998. Cash utilized in operations during the six months ended
December 31, 1999 resulted primarily from increases in accounts receivable,
inventories and prepaid expenses, along with increases in deferred revenues and
accrued product warranties. The cash used in operations during the six months
ended December 31, 1998 resulted primarily from general and administrative
expenses.
Restricted cash increased by $245,678 during the six months ended December
31, 1999 primarily due to deposits on leased facilities.
17
<PAGE>
Cash flows used in investing activities were $4.6 million during the six
months ended December 31, 1999. Deposits on equipment purchases for Inter Lotto
accounted for the majority of the use of cash. Purchases of investment
securities, offset by maturities of investment securities and proceeds from the
sale of assets held for sale, accounted for the balance of the change.
For the six months ended December 31, 1999, redemption of Series A
Preferred Stock, partially offset by sale of stock to directors and officers of
the Company cash used in financing activities of $1,517,928 resulted from the,
as well as payments made to repurchase Series A, D and E notes and payments made
on notes payable.
On November 10, 1999, the Board of Directors of the Company approved the
redemption of the Series A Stock as of November 6, 1999 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
$400,000.
At the November 10, 1999 meeting of the Board of Directors of the Company,
the Board approved the sale of approximately 1,035,000 shares of its Class A
Common Stock to certain of the Company's directors and officers at $2.625 per
share, the last sale price of a share of Class A Common Stock on November 10,
1999 as reported by the Nasdaq National Market. The Board determined the
transaction to be in the best interest of the Company in order to alleviate the
liquidity strain experienced in connection with redemption of its Series A 8%
Coonvertible Preferred Stock and to provide capital for the Company to pursue
its investment in Shop4Cash.com, Inc., a privately held e-commerce company. The
issuance was made in a private offering pursuant to Section 4(2) of the
Securities Act.
Global will be required to commit additional funds to its affiliate
companies, TNCi, Donativos and Inter Lotto, which would come from either
existing working capital of the Company, or proceeds from external financing by
Global or one of its subsidiaries. Global may also identify new business
opportunities that it would like to participate in, which may require financing.
Should additional funding, if required, exceed existing working capital, or
should the Company not be able to raise external financing to meet its capital
requirements, the Company's ability to financially support certain affiliate
companies or acquire new operating companies or make new investments would be
materially adversely affected.
As of September 8, 1999, GTL Leasing Limited entered into an agreement to
purchase $12.3 million of lottery systems in connection with its investment in
Inter Lotto. As of December 31, 1999, the Company had paid $4.6 million towards
the purchase price and expects to finance the balance of this commitment. No
assurances can be made that financing will be available to the Company. If the
Company is unable to obtain such financing, such inability would have a material
adverse effect on the Company's liquidity and may require the Company to
postpone, or even cancel, delivery of the lottery systems ordered pursuant to
the $12.3 million agreement. A delay of the Inter Lotto project could adversely
affect the project's viability. The Company also entered into a facilities
management agreement for servicing of the lottery systems. Under this agreement,
GTL Management Limited is required to make weekly payments to the provider of
the lottery systems of $72,000, plus additional amounts based on the number of
installed terminals in excess of 3,500 and a percentage of the average daily
sales. The obligations under the facilities management agreement do not begin
until March 2000. Global has guaranteed the obligations of GTL Leasing Limited
and GTL Management Limited under these agreements.
On August 13, 1999, the Company and two of its officers entered into a
Release and Settlement Agreement with First Lawrence Capital Corp. ("First
Lawrence") whereby the Company issued 250,000 shares of its Class A Common Stock
and agreed that its wholly-owned subsidiary, GlobalTech Holdings Limited, a UK
corporation ("GTL Holdings"), will pay First Lawrence 24 consecutive monthly
payments of $41,667 each, beginning February 1, 2000. In exchange, First
Lawrence will be available to perform management consulting services to GTL
Holdings.
18
<PAGE>
On August 24, 1999, Global's Board of Directors approved a $5 million
secured credit facility by and between TNCi and Global (the "Facility"). The
Facility provides that TNCi may borrow up to $5 million for working capital and
general corporate purposes at the prime rate of interest 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, at Global's option, into shares of TNCi's
Common Stock at a price equal to the lesser of 66.7% of the five day low average
share price of the preceeding 20 days, or $1.75 per share, or any lesser amount
at which shares of TNCi's Common Stock have been issued to hird parties.
Pursuant to Nasdaq rules, Global may not convert borrowings under the Facility
into shares of TNCi Common Stock in excess of 19.99% of the number of shares of
TNCi Common Stock outstanding as of August 24, 1999, without stockholder
approval. As of December 31, 1999, no amounts were outstanding under the
Facility. As of December 31, 1999, Global did not have sufficient cash for TNCi
to borrow the full $5 million under the Facility. Should TNCi draw on the
Facility, Global would have to obtain financing or sell assets to meet its
obligations under the Facility.
A note payable of TNCi due September 5, 1999 was converted into 200,000
shares of TNCi's Common Stock.
On November 23, 1999, Global 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, Internet shopping portal. Global has
registration rights in connection with these shares.
The terms of the agreement with Carnival (the "Carnival Agreement") provide
that Carnival may return the CruiseView(TM) system within the acceptance period,
as defined in the Carnival Agreement. The acceptance periods for the "Fantasy"
and "Destiny" class ships are twelve months and three months, respectively. As
of December 31, 1999, the Company recorded deferred revenue of $2,108,151,
reflecting amounts paid by Carnival towards the purchase price of CruiseView(TM)
aboard these ships. As of December 31, 1999, the Company had not recognized any
revenue in association with the Carnival Agreement. In January 2000, the systems
installed aboard the Fantasy and Destiny class ships were accepted by Carnival.
The Company has concluded that the cost of building and installing
CruiseView(TM) systems in carnival ships pursuant to the agreement with Carnival
may exceed the revenue earned in connection therewith. Carnival's continuing to
exercise its option for building and installing CruiseView(TM) on additional
ships under the agreement may prove unprofitable and therefore have a negative
effect on the Company's working capital. The company is currently endeavoring to
renegotiate the terms of the agreement with Carnival.
In January 2000, TNCi entered into a Letter of Intent relating to the
issuance of a subordinated convertible debenture (the "Debenture") and warrants
to purchase shares of TNCi's Common Stock for net proceeds to TNCi of $5.8
million. The letter provides that over the 24-month term of the Debenture it
will accrue interest at an annual rate equal to the prime interest rate. Under
the terms of the letter, TNCi shall provide a Letter of Credit equal to 50% of
the outstanding principle balance of the Debenture and that TNCi shall register
the shares of Common Stock into which the Debenture and warrants are convertible
or exercisable, as the case may be. The letter of credit requirement shall be
reduced to 35% of the outstanding principal balance of the debenture 45 days
after the effective date of the registration statement.
Beginning on the funding date, the holder of the Debenture shall be
permitted each month to convert a pro rata portion (according to a 12-month term
payment schedule) of principal amount of the Debenture plus accrued interest
into shares of TNCi Common Stock at a conversion price equal to the lesser of
(i) 130% of the average closing price of TNCi Common Stock for the 10
consecutive trading days prior to the funding date, or (ii) 100% of the average
three low daily trades of TNCi Common Stock selected by the holder of the
Debenture for the 12 days prior to the submission of the conversion notice. The
letter also provides the Company with certain prepayment and forced conversion
rights.
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Additionally, the holder of the Debenture is to receive 120,000 warrants to
purchase Common Stock of TNCi at a price equal to 130% of the average closing
price of TNCi Common Stock for the five consecutive trading days prior to the
funding date. The warrants are callable under certain circumstances and expire
five years from date of issue. Proceeds from this transaction will be used to
fund general operations of TNCi.
INFLATION AND SEASONALITY
The Company does not believe that it is significantly impacted by
inflation. The Company's operations are not seasonal in nature, except to the
extent fluctuations in quarterly operating results occur due to the cyclical
nature of government funding to be obtained in connection with education
programs with which the Company may be involved in the future, if any.
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 us or
third-party software incorporated into our solutions. We generally do not
guarantee that the software licensed from third-parties by our clients is Year
2000 compliant, but we sometimes do warrant that solutions developed by us are
Year 2000 compliant.
FORWARD-LOOKING INFORMATION
This Report contains certain forward-looking statements and information
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. The cautionary statements made in this
Report should be read as being applicable to all related forward-looking
statements wherever they appear in this Report. Forward-looking statements, by
their very nature, include risks and uncertainties. Accordingly, the Company's
actual results could differ materially from those discussed herein. A wide
variety of factors could cause or contribute to such differences and could
adversely impact revenues, profitability, cash flows and capital needs. Such
factors, many of which are beyond the control of the Company, include, without
limitation, the following: resolution of the Swissair-related litigation;
maintenance of the Donativos permit for operation of the Mexican entertainment
center; obtaining a secondary prize permit by Donativos for use at the Mexican
entertainment center; obtaining financing for general corporate purposes and for
the Inter Lotto gaming equipment; remedying or improving dramatically the cash
shortfall in Donativos' operations; the inability to cover the obligations to
the provider of the InterLotto lottery systems from the operations of a start-up
venture in an untried game in the UK market; the ability of the Company to
procure and provide compelling content for use through its systems; the
Company's success in obtaining new contracts for the sale of its Cheetah(TM)
Servers and/or interactive information and entertainment systems; the volume and
type of work orders that are received under such contracts; the accuracy of the
cost estimates for the projects; the Company's ability to complete its projects
on time and within budget; levels of, and ability to collect accounts
receivable; availability of trained personnel and utilization of the Company's
capacity to complete work; competition and competitive pressures on pricing; and
economic conditions in the United States and in other regions served by the
Company.
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PART II. OTHER INFORMATION
ITEM 1 -- LEGAL PROCEEDINGS
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, the
Company'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. 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. The Company is currently defending the
claim.
ERIC SCHINDLER V. INTERACTIVE FLIGHT TECHNOLOGIES, INC. ET AL., State Court
for Fulton County, Georgia, Case No. 99-V51560685. On August 18, 1999, Eric
Schindler served a lawsuit on Global, naming Global and TNCi as defendants. The
Complaint allege that TNCi and Global failed to pay severance pay pursuant to a
written employment contract following Schindler's resignation as an employee and
vice president of TNCi in May 1999. Specifically, the Complaint allege (1)
breach of contract (against TNCi), (2) conspiracy and interference with contract
rights (against TNCi and Global), and (3) interference with contract rights
(against Global). Mr. Schindler sought$85,000 in severance pay on the contract
claims, unspecified damages for loss of stock options, punitive damages of at
least $450,000, attorneys' fees and costs. TNCi and Mr. Schindler entered into a
settlement agreement in October 1999, whereby TNCi paid $50,000 to Mr. Schindler
and all claims have been dropped.
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 Global filed an action against XCEL Capital, LLC ("XCEL") for specific
performance and breach of contract. In the action, Global is seeking to compel
XCEL to tender 75,000 shares of Global Class A Common Stock to Global 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.
In September of 1999, Global filed a lawsuit against Barington Capital
Group, L.P. ("Barington") in Maricopa County Superior Court, Arizona, seeking a
declaratory judgment that no sums were owed to Barington pursuant to a Financial
Advisory Service Agreement dated in October of 1998. In October of 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. 99-604l606, 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. Global denies
all liability and denies that any sums are owed to Barington.
On October 25, 1999, Global filed a lawsuit against Regal Gaming (and its
principals and their spouses) in the United States District Court for the
Southern District of Florida seeking judgment in favor of Global on the $500,000
promissory note made by Regal Gaming (and guaranteed by its principals and their
spouses) to Global. The promissory note was made to secure Regal Gaming's
obligations to fund cost overruns in connection with the entertainment center
project undertaken by Donativos.
The Company is subject to other lawsuits and claims arising in the ordinary
course of its business. In the Company's opinion, as of December 31, 1999, the
effect of such matters will not have a material adverse effect on the Company's
results of operations or financial condition.
ITEM 2 -- CHANGES IN SECURITIES
UNREGISTERED ISSUANCES
In December 1999, Global issued stock purchase warrants to purchase 25,000
shares of Class A Common Stock at $7.88 per share to Emden Consulting Corp. in
exchange for certain financial advisory services. The exercise period of the
warrants expire in December 2004. This issuance is exempt from the registration
provisions of the Securities Act pursuant to Section 4(2) thereof.
In December 1999, Global issued stock purchase warrants to purchase 25,000
shares of Class A Common Stock at $7.88 per share to Waterton Group LLC in
exchange for certain financial advisory services. The exercise period of the
warrants expire in December 2004. This issuance is exempt from the registration
provisions of the Securities Act pursuant to Section 4(2) thereof.
On November 30, 1999, Global issued 15,000 shares of its Class A Common
Stock to Teamworks GmbH, a German investment banking firm, in consideration of
certain financial advisory services provided by that company. These shares were
granted in a transaction exempt from the registration provisions of the
Securities Act pursuant to Section 4(2) thereof.
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On October 8, 1999, Global granted Irwin L. Gross, its Chairman and Chief
Executive Officer, an option to purchase up to 1,000,000 shares of its Class A
Common Stock at an exercise price per share of $2.75, the closing price per
share as reported on the Nasdaq National Market for October 7, 1999. One quarter
of the options vested on the date of grant and one quarter vest in equal
installments on each of the first three anniversaries of the date of grant. The
remaining half of the options vest on the sixth anniversary of the date of
grant, subject to acceleration to a three-year vesting schedule in the event of
the achievement of certain performance milestones. These options were granted in
a transaction exempt from the registration provisions of the Securities Act
pursuant to Section 4(2) thereof.
At the November 10, 1999 meeting of the Board of Directors of Global, the
Board approved the sale of approximately 1,035,500 shares of its Class A Common
Stock to certain of the Company's directors and officers at $2.625 per share,
the last sale price of a share of Class A Common Stock on November 10, 1999 as
reported by the Nasdaq National Market. The Board determined the transaction to
be in the best interest of the Company in order to alleviate the liquidity
strain experienced in connection with redemption of its Series A Stock and to
provide capital for the Company to pursue an investment in an e-commerce
company. The issuance was made in a private offering pursuant to Section 4(2) of
the Securities Act.
ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K
The following Index to Exhibits lists the Exhibits filed as part of this
Quarterly Report on Form 10-QSB. Where so indicated, Exhibits which were
previously filed are incorporated by reference. Documents filed herewith are
denoted with an asterisk.
(a) EXHIBITS
EXHIBIT NO. DESCRIPTION
----------- -----------
10.39 Employment Agreement between Irwin L. Gross and
Global Technologies, Ltd., dated October 1, 1999.(1)
10.40 Option Agreement between Global Technologies,
Ltd. and Irwin L. Gross, dated October 8, 1999. *
27 Financial Data Schedule.*
- ----------
* Filed herewith.
(1) Incorporated by reference from Global Technologies, Ltd.'s Quarterly Report
on Form 10-QSB for the Quarter ended September 30, 1999, filed with the
Securities and Exchange Commission on November 15, 1999, File No. 0-25668.
(b) REPORTS ON FORM 8-K
The Company did not file any reports on Form 8-K during the quarter ended
December 31, 1999.
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SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934,
the Registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: February 14, 1999 GLOBAL TECHNOLOGIES, LTD.
By: /s/ Irwin L. Gross
------------------------------------
Irwin L. Gross
Chief Executive Officer
By: /s/ Patrick J. Fodale
------------------------------------
Patrick J. Fodale
Chief Financial Officer
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INDEX OF EXHIBITS
EXHIBIT NO. DESCRIPTION
- ----------- -----------
10.39 Employment Agreement between Irwin L. Gross and
Global Technologies, Ltd., dated October 1, 1999.(1)
10.40 Option Agreement between Global Technologies,
Ltd. and Irwin L. Gross, dated October 8, 1999.*
27 Financial Data Schedule.*
- ----------
* Filed herewith.
(1) Incorporated by reference from Global Technologies, Ltd.'s Quarterly Report
on Form 10-QSB for the Quarter ended September 30, 1999, filed with the
Securities and Exchange Commission on November 15, 1999, File No. 0-25668.
STOCK OPTION
This STOCK OPTION is granted as of the 8th day of October 1999, by Global
Technologies, Ltd., a Delaware corporation (f.k.a. Interactive Flight
Technologies, Inc.) (the "Company"), to Irwin L. Gross ("Grantee").
BACKGROUND
A. Grantee is the Chairman and Chief Executive Officer of Company.
B. Pursuant to the terms of an employment agreement entered into between
the Company and Grantee (the "Employment Agreement"), and in recognition and
consideration of the contributions that Grantee has made to the Company during
the period from September 15, 1998 to September 30, 1999 (the "Initial Period"),
during which period of time Grantee received no compensation from the Company,
and in order to incentivize Grantee with respect to the future success of the
Company and to encourage him to perform at increasing levels of effectiveness
and use his best efforts to promote the growth and profitability of the Company,
and in consideration of services to be performed, Company desires to afford
Grantee an opportunity to purchase shares of its common stock, par value $.01
per share ("Common Stock"), as hereinafter provided.
C. Any capitalized terms used but not defined herein shall have the
meanings attributed thereto in the Employment Agreement.
NOW, THEREFORE, in consideration of the mutual covenants hereinafter set
forth and for other good and valuable consideration, the parties hereto,
intending to be legally bound, agree as follows:
1. GRANT OF OPTION.
(a) In consideration of the contributions that Grantee has made to Company
during the Initial Period, the Company hereby irrevocably grants to Grantee the
right and option to purchase ("Option A") all or any part of an aggregate of
Two-Hundred Fifty Thousand (250,000) shares of Common Stock (the "A Option
Shares"), at an exercise price equal to the closing sale price (or closing bid
if no sales were reported) of a share of Common Stock as reported by the Nasdaq
National Market on October 7, 1999 (or the next trading day in the event there
is no trading on such date) (the "Option Price"), during the Option Period (as
defined below) and subject to the conditions hereinafter set forth.
(b) In order to incentivize Grantee with respect to the future success of
the Company and to encourage him to perform at increasing levels of
effectiveness and use his best efforts to promote the growth and profitability
of the Company, the Company hereby irrevocably grants to Grantee the right and
option to purchase ("Option B") all or any part of an aggregate of Two-Hundred
Fifty Thousand (250,000) shares of Common Stock (the "B Option Shares") at the
Option Price, during the Option Period (as defined below) and subject to the
conditions hereinafter set forth.
(c) In order to further incentivize Grantee with respect to the future
success of the Company and to further encourage him to perform at increasing
levels of effectiveness and use his best efforts to promote the growth and
profitability of the Company, the Company hereby irrevocably grants to Grantee
the right and option to purchase ("Option C") all or any part of an aggregate of
Five Hundred Thousand (500,000) shares of Common Stock (the "C Option Shares")
at the Option Price, during the Option Period (as defined below) and subject to
the conditions hereinafter set forth.
(d) Option A, Option B and Option C shall be referred to collectively
hereinafter as the "Option" and the A Option Shares, B Option Shares and C
Option Shares shall be referred to collectively hereinafter as the "Option
Shares."
2. OPTION PERIOD. The Option may be exercised in accordance with the
provisions of Paragraphs 4 and 5 hereof during the Option Period, which shall
begin on the date hereof and shall end on the Option Expiration Date defined in
Paragraph 3 hereof. All rights to exercise the Option shall terminate on the
Option Expiration Date.
3. OPTION EXPIRATION DATE. The Option Expiration Date shall be October 8,
2009.
4. EXERCISE OF OPTION.
(a) The Option shall vest, and shall be exercisable as set forth in the
following table, provided that any portion of this Option which is exercisable
in any year, but not exercised, may be carried forward and exercised in any
future year during the term hereof:
Option A:
From and after: Number of Shares Exercisable
--------------- ----------------------------
October 8, 1999 250,000
Option B:
From and after: Number of Shares Exercisable
--------------- ----------------------------
October 8, 2000 83,334
October 8, 2001 83,333
October 8, 2002 83,333
Option C:
Option C shall vest in full on the sixth anniversary of the date
hereof; provided, however, that vesting of Option C shall be
accelerated in accordance with the three-year vesting schedule set
forth below in the event that the performance milestones set forth
below are achieved.
From and after: Number of Shares Exercisable
--------------- ----------------------------
October 8, 2000 166,667
October 8, 2001 166,666
October 8, 2002 166,666
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(b) The number of shares exercisable on each of the accelerated vesting
dates set forth above with respect to Option C shall be adjusted as follows:
(i) On each accelerated vesting date, a percentage of the total number
of Options scheduled to vest shall actually vest. This percentage shall be
determined on the basis of a sliding scale as follows:
(A) 100% of the Options scheduled to vest on a particular
accelerated vesting date shall actually vest in the event that the
Comparison Price (as defined below) on such vesting date is greater
than the Base Price (as defined below) for the preceding calendar year
by 30% or more, and this percentage shall decrease gradually to 0% in
the event that the Comparison Price on such vesting date is equal to
or less than the Base Price for such calendar year. In addition,
Grantee shall not vest with respect to any Options scheduled to vest
on a particular accelerated vesting date unless the Comparison Price
on that vesting date is greater than the Base Price for the preceding
calendar year by at least 15%, at which point 50% of the Options
scheduled to vest shall actually vest. The following example is
illustrative - Grantee would vest with respect to 50% of the 166,666
Options scheduled to vest on October 8, 2001 (i.e. 83,333 Options), in
the event that the Comparison Price on such vesting date was 15%
greater than the Base Price for the preceding calendar year;
alternatively, Grantee would vest with respect to 75% of the 166,666
Options scheduled to vest on such vesting date (i.e. 124,999.5
Options) in the event that the Comparison Price on such vesting date
is 22.5% greater than the Base Price for the preceding calendar year.
Any fraction less than a half resulting from these calculations shall
be dropped and any fractions equal to or greater than a half resulting
from these calculations shall require rounding up to the next whole
number.
(B) The guidelines set forth in paragraph (A) above shall be
modified as follows for any of calendar years 2000, 2001 or 2002 in
the event that the S & P 500 Comparison Average (as defined below) for
any of such calendar years is less than the S & P 500 Comparison
Average for the preceding calendar year. In any calendar year in which
this occurs, vesting with respect to 50% of the aggregate number of
Options scheduled to vest in such calendar year shall be determined as
set forth in paragraph (A) above, and the balance of such Options
shall vest in the event that EVA (as defined below) is greater than
zero, or, in the event that EVA is less than or equal to zero, shall
not vest on an accelerated basis.
(ii) (A) "Base Price" means the average of the last sale prices of a
share of Common Stock (or the last bid on any such day on which there were no
sales) as reported by the Nasdaq National Market on each of the 31 days
consisting of the 15 trading days immediately preceding September 30, September
30 (regardless of whether or not it is a trading day), and the 15 trading days
immediately following September 30. "Comparison Price" means the last sale price
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<PAGE>
of a share of Common Stock as reported by the Nasdaq National Market on the
applicable vesting date (or the last bid if there were no sales on such date; or
the next trading day in the event that there was no trading on such date).
(B) "S & P 500 Comparison Average" means the average of the
Standard & Poor's 500 Composite Index as of the close of business on
each of the 31 days consisting of the 15 trading days immediately
preceding September 30, September 30 (regardless of whether or not it
is a trading day) and the 15 trading days immediately following
September 30. "EVA" means Economic Value Added of the Company for the
fiscal year ending June 30 of the calendar year for which the S & P
500 Comparison Average is being calculated, calculated in accordance
with the memorandum provided to the Company's Compensation Committee
by David N. Shevrin on November 19, 1999 (a copy of which is attached
hereto as Exhibit "A").
(iii) Notwithstanding anything to the contrary contained in this
subparagraph (b), the failure of the Comparison Price on any accelerated vesting
date to be greater than the Base Price for the preceding calendar year by 30% or
more (a "Shortfall") can be made up (i.e. any percentage of Options not vesting
on the relevant accelerated vesting date because of a Shortfall would vest on
the subsequent accelerated vesting date on which the following condition is met)
if the compounded annual growth rate in the price of a share of Common Stock was
such that the Comparison Price on the next accelerated vesting date (or the
accelerated vesting date after that one, depending on which accelerated vesting
date is the one on which the Shortfall occurred) is greater than the Base Price
for the calendar year preceding the accelerated vesting date on which the
Shortfall occurred by 30% or more. For example, if the Comparison Price on
October 8, 2000 is greater than the Base Price for 1999 by 20% (resulting in a
Shortfall, i.e. only 66.67% of the Options scheduled to vest on such accelerated
vesting date would actually vest) and the Comparison Price on October 8, 2001 is
greater than the Base Price for 1999 by at least 40.83%, then the Comparison
Price on October 8, 2001 would have increased with respect to the Base Price for
1999 at a compounded annual growth rate of 30%. In this scenario, on October 8,
2001, not only would 100% of the Options scheduled to vest on such date actually
vest, but also the 33.33% of the Options scheduled to vest on October 8, 2000
that did not so vest because of the Shortfall would actually vest.
(c) Notwithstanding anything to the contrary contained herein, Grantee may
purchase all or any portion of the unexercised balance of this Option
immediately prior to, or upon, the effective date of a Change of Control (as
defined in the following sentence). A "Change of Control" of the Company shall
mean any transaction or series of related transactions that results in a change
in the control of the Company, including, without limitation:
(i) a merger or consolidation of the Company into or with any other
entity when the Company is not the surviving entity of such merger or
consolidation;
(ii) the acquisition, directly or indirectly, by any individual,
entity or "group" (as defined in Section 13(d) of the Securities and Exchange
Act of 1934, as amended) (other than the Company, any subsidiary thereof, any
employee benefit plan of the Company or any subsidiary, or any entity holding
shares or other securities of the Company for or pursuant to the terms of such a
plan) (an "Acquirer"), of stock or options, or any combination thereof,
entitling the Acquirer to cast 25% or more of all votes (without consideration
of the rights of any class of stock to elect directors by a separate class vote)
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entitled to be cast by all stockholders of the Company in an election of the
Board of Directors of the Company;
(iii) the acquisition, directly or indirectly, by an Acquirer of a
majority of the total equity interest of the Company;
(iv) the sale or other disposition of all, or substantially all, of
the assets of the Company;
(v) the election to the Board of Directors of the Company of
individuals who would constitute a majority of the members of the Board elected
at any meeting of stockholders or by written consent (without consideration of
the rights of any class of stock to elect directors by a separate class vote),
where the election or the nomination for election by the Company's stockholders
of such directors was not approved by a vote of at least a majority of the
directors in office immediately prior to such election or nomination; or
(vi) the formation of a joint venture or partnership with the Company
for the purpose of effecting a transfer of control of, or a material interest
in, the Company (such merger, consolidation, sale or other transaction being
hereinafter referred to as a "Transaction").
There shall be excluded from the foregoing any Transaction as a result of
which (A) the holders of Common Stock prior to the Transaction retain or acquire
securities constituting a majority of the outstanding voting common stock of the
acquiring or surviving corporation or other entity in substantially the same
proportions that they owned Common Stock in the Company prior to the
Transaction, and (B) no single person or entity owns more than half of the
outstanding voting common stock of the acquiring or surviving corporation or
other entity. For purposes of this Paragraph 4, voting common stock of the
acquiring or surviving corporation or other entity that is issuable upon
conversion of convertible securities or upon exercise of warrants or options
shall be considered outstanding, and all securities that vote in the election of
directors (other than solely as the result of a default in the making of any
dividend or other payment) shall be deemed to constitute that number of shares
of voting common stock which is equivalent to the number of such votes that may
be cast by the holders of such securities.
5. MANNER OF EXERCISE. Exercise of the Option, or any portion thereof,
shall be by written notice to Company pursuant to Paragraph 11 hereof. The
notice shall be accompanied by payment in full in cash, stock of the Company, or
other property (including notes or other contractual obligations of Grantee to
make payment on a deferred basis, such as through "cashless exercise
arrangements," to the extent permitted by applicable law), or a combination
thereof, in an amount equal to the product obtained by multiplying the number of
Option Shares with respect to which the Option is then being exercised by the
Option Price. Upon receipt of such notice and payment, the Company shall deliver
a certificate or certificates representing the Option Shares purchased. The
certificate or certificates shall be delivered to or upon the written order of
the Grantee. Despite the fact that a certificate or certificates representing
the Option Shares purchased shall not have been issued, Grantee or his legal
representative, legatees or distributees, as the case may be, shall be deemed to
be a holder of any shares subject to this Option, provided that the written
notice and payment required by this Paragraph 5 have been delivered to Company.
The Option Shares that shall be purchased upon the exercise of the Option as
provided herein shall be fully paid and non-assessable.
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6. RIGHTS IN EVENT OF DEATH, DISABILITY OR TERMINATION OF EMPLOYMENT.
(a) DEATH. If Grantee dies while employed by the Company, then 50% of any
then unvested Options shall automatically vest (without any action on the part
of the Company) on the date of death. The 50% of the then unvested Options that
shall vest according to the preceding sentence shall be the 50% of the then
unvested Options that otherwise would have been the latest to vest of all then
unvested Options. The remainder of any then unvested Options shall continue to
vest according to the schedule set forth in Paragraph 4 above. Grantee's named
beneficiary shall have through the Option Expiration Date to exercise any
unexercised Options.
(b) DISABILITY. If Grantee is terminated from his employment with the
Company by reason of disability in accordance with the Employment Agreement,
then 50% of any then unvested Options shall automatically vest (without any
action on the part of the Company) on the date of such termination. The 50% of
the then unvested Options that shall vest according to the preceding sentence
shall be the 50% of the then unvested Options that otherwise would have been the
latest to vest of all then unvested Options. The remainder of any then unvested
Options shall continue to vest according to the schedule set forth in Paragraph
4 above. Grantee shall have through the Option Expiration Date to exercise any
unexercised Options.
(c) CAUSE OR RESIGNATION. If Grantee is terminated from his employment with
the Company for Cause (as defined in the Employment Agreement) in accordance
with the Employment Agreement or voluntarily leaves the employ of the Company
prior to expiration of the Employment Agreement, then all unvested Options shall
automatically terminate and be cancelled (without any action on the part of the
Company) on the effective date of termination. In addition, Grantee shall have
the opportunity on the date of such termination for Cause or Grantee's
voluntarily leaving the employ of the Company to exercise all vested but
unexercised Options. All vested Options not exercised on such date shall
thereafter automatically expire (without any action on the part of the Company).
(d) WITHOUT CAUSE. If Grantee is terminated from his employment without
Cause or terminates his employment with Company for Good Reason (as defined in
the Employment Agreement) in accordance with the Employment Agreement, then all
unvested Options shall automatically vest (without any action on the part of the
Company) immediately prior to the date of such termination. Grantee shall have
through the Option Expiration Date to exercise any unexercised Options.
7. OPTION SHARES TO BE PURCHASED FOR INVESTMENT. Unless Company has
notified Grantee pursuant to Paragraph 11 hereof that a registration statement
covering the Option Shares has become effective under the Securities Act of
1933, as amended (the "Act"), it shall be a condition to the exercise of the
Option that the Option Shares acquired upon such exercise be acquired for
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<PAGE>
investment and not with a view to distribution. If requested by the Company upon
advice of its counsel that the same is necessary or desirable, the Grantee
shall, at the time of purchase of the Option Shares, deliver to the Company
Grantee's written representation that Grantee (a) is purchasing the Option
Shares for his own account for investment, and not with a view to public
distribution or with any present intention of reselling any of the Option Shares
(other than a distribution or resale which, in the opinion of counsel
satisfactory to the Company, may be made without violating the registration
provisions of the Act); (b) has been advised and understands that (i) the Option
Shares have not been registered under the Act and are subject to restrictions on
transfer and (ii) the Company is under no obligation to register the Option
Shares under the Act or to take any action which would make available to the
Grantee any exemption from such registration; and (c) has been advised and
understands that such Option Shares may not be transferred without compliance
with all applicable federal and state securities laws.
8. CHANGES IN CAPITAL STRUCTURE. The number of Option Shares covered by
this Option and the Option Price shall be equitably adjusted in the event (the
"Event") of (i) the payment of any dividend payable in, or the making of any
distribution of, Common Stock to holders of record of Common Stock, which
increases the outstanding Common Stock; (ii) any stock split, combination of
shares, recapitalization or other similar change; (iii) the merger or
consolidation of the Company into or with any other entity; or (iv) the
reorganization, dissolution, liquidation or winding up of the Company. Grantee
shall be entitled, upon the exercise of the Option, to receive such new,
additional or other shares of stock of any class, or other property (including,
without limitation, cash and/or securities of any successor entity), as Grantee
would have been entitled to receive as a matter of law in connection with such
Event had Grantee held the Option Shares on the record date set for such Event.
The Company shall have the authority to determine the adjustments to be made
under this Paragraph 8 and any such determination shall be final, binding and
conclusive.
9. LEGAL REQUIREMENTS. If the listing, registration or qualification of the
Option Shares upon any securities exchange or under any federal or state law, or
the consent or approval of any governmental regulatory body is necessary as a
condition of or in connection with the purchase of the Option Shares, the
Company shall not be obligated to issue or deliver the certificates representing
the Option Shares as to which the Option has been exercised unless and until
such listing, registration, qualification, consent or approval shall have been
effected or obtained. This Option does not hereby impose on the Company a duty
to so list, register, qualify, or effect or obtain consent or approval. If
registration is considered unnecessary by the Company or its counsel, the
Company may cause a legend to be placed on the certificates for the Option
Shares being issued calling attention to the fact that they have been acquired
for investment and have not been registered, such legend to read as follows:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR
ANY STATE SECURITIES LAWS, AND MAY NOT BE OFFERED FOR SALE,
SOLD OR OTHERWISE TRANSFERRED UNLESS THERE IS A REGISTRATION
STATEMENT IN EFFECT COVERING SUCH SECURITIES OR THERE IS
AVAILABLE AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF
THE SECURITIES ACT OF 1933, AS AMENDED, AND APPLICABLE STATE
SECURITIES LAWS."
8
<PAGE>
10. NO OBLIGATION TO EXERCISE OPTION. The Grantee shall be under no
obligation to exercise the Option.
11. NOTICES. All notices required or permitted hereunder shall be in
writing and shall be deemed to be properly given when personally delivered to
the party entitled to receive the notice or when sent by certified or registered
mail, postage prepaid, properly addressed to the party entitled to receive such
notice at the address stated below; or when sent via facsimile transmission with
confirmation of transmission or via electronic mail, provided that in both of
the foregoing situations a copy of the notice so transmitted is sent to the
party entitled to receive such notice via first-class mail, postage prepaid at
the address stated below:
If to Company: Global Technologies, Ltd.
1811 Chestnut Street, Suite 120
Philadelphia, PA 19103
Attention: Chief Executive Officer and President
Facsimile: (215) 972-8183
E-mail: [email protected]
If to Grantee: Irwin L. Gross
722 Pine Street
Philadelphia, PA 19106
Either party hereto may change such party's address, facsimile number or
e-mail address by sending notice thereof to the other party by any of the
methods set out above, provided that such change shall not be deemed effective
as against the party to whom it is sent until the notice containing such change
is actually received by such party.
12. ADMINISTRATION. This Option has been granted pursuant to the Employment
Agreement and is subject to the terms and provisions thereof. All questions of
interpretation and application of this Option shall be determined by the
Company, and such determination shall be final, binding and conclusive.
13. NOT AN EMPLOYMENT OR SERVICE CONTRACT. Nothing in this Option shall be
construed as an agreement by the Company, express or implied, to employ Grantee
or contract for Grantee's services, to restrict the right of the Company to
discharge Grantee or cease contracting for Grantee's services or to modify,
extend or otherwise affect in any manner whatsoever, the terms of any employment
agreement or contract for services which may exist between the Grantee and the
Company.
14. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and inure
to the benefit of the parties hereto and their respective successors and
assigns.
9
<PAGE>
15. GOVERNING LAW. This Agreement shall be governed by and construed under
the laws of the State of Delaware without regard to conflicts of laws
principles.
16. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
17. AMENDMENT. This Agreement may not be amended except by an instrument in
writing signed by the parties.
10
<PAGE>
IN WITNESS WHEREOF, the undersigned have hereunto set their hands as of the
date first above written.
GLOBAL TECHNOLOGIES, LTD.
By: /s/ James W. Fox
----------------------------------
James W. Fox, President and COO
/s/ Irwin L. Gross
----------------------------------
Irwin L. Gross
11
<PAGE>
EXHIBIT "A"
See attached.
12
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEETS AND STATEMENTS OF OPERATIONS FOUND IN THE COMPANY'S 10-QSB FOR THE
YEAR-TO-DATE, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 4,282,558
<SECURITIES> 447,146
<RECEIVABLES> 1,031,726
<ALLOWANCES> 0
<INVENTORY> 3,751,153
<CURRENT-ASSETS> 12,638,385
<PP&E> 4,155,681
<DEPRECIATION> 1,190,539
<TOTAL-ASSETS> 32,617,829
<CURRENT-LIABILITIES> 5,723,991
<BONDS> 0
0
0
<COMMON> 107,306
<OTHER-SE> 24,201,993
<TOTAL-LIABILITY-AND-EQUITY> 32,617,829
<SALES> 5,597,319
<TOTAL-REVENUES> 5,657,146
<CGS> 3,454,915
<TOTAL-COSTS> 3,470,018
<OTHER-EXPENSES> 9,367,977
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 48,275
<INCOME-PRETAX> (6,538,988)
<INCOME-TAX> 0
<INCOME-CONTINUING> (6,538,988)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,538,988)
<EPS-BASIC> (1.13)
<EPS-DILUTED> (1.13)
</TABLE>
