SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
Form 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998.
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ....................... to....................
Commission file number 0-26684
GLOBAL INTELLICOM, INC.
(Exact name of registrant as specified in its charter)
Nevada 13-3797104
- ------------------------------ ----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
747 Third Avenue
New York, New York 10017
- ------------------ ------
(Address of principal executive offices) (Zip code)
(212) 750-3772
------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such report(s), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
As of October 27, 1998, there were outstanding 10,898,905 shares of
Global Intellicom, Inc.'s common stock, par value $0.01 per share (the "Common
Stock").
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PART I . FINANCIAL INFORMATION
Item Financial Statements
- ---- --------------------
1.
GLOBAL INTELLICOM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
----------------------------------- -------------------------------
1997 1998 1997 1998
<S> <C> <C> <C> <C>
NET SALES $ 16,123,908 $ 8,749,252 $ 34,622,862 $ 30,069,800
COST OF GOODS SOLD 13,630,611 6,131,699 30,121,945 22,151,663
------------- ------------- ------------- -----------
GROSS PROFIT 2,493,297 2,617,553 4,500,917 7,918,137
------------- ------------- ------------- -----------
OPERATING EXPENSES:
Selling, shipping
and general
and administrative 1,630,020 2,229,788 4,507,053 6,846,681
Depreciation and
amortization 26,000 86,438 61,504 253,689
Amortization of
intangibles 216,790 108,977 370,676 314,676
------------- ------------- ------------- -----------
1,872,810 2,425,203 4,939,233 7,415,046
------------- ------------- ------------- -----------
OPERATING INCOME (LOSS) 620,487 192,350 (438,316) 503,091
OTHER EXPENSES-INTEREST (332,491) (145,097) (570,190) (85,810)
------------- ------------- ------------- -----------
EARNINGS (LOSS) BEFORE
INCOME TAX
PROVISION (BENEFIT) 287,996 47,253 (1,008,506) 417,281
INCOME TAX
PROVISION (BENEFIT) 115,198 (681,099) (403,402) (1,611,188)
------------- ------------- ------------- -----------
EARNINGS (LOSS) FROM
CONTINUING OPERATIONS 172,798 728,352 (605,104) 2,028,469
------------- ------------- ------------- -----------
LOSS FROM DISCONTINUED
OPERATIONS (688,246) (3,381,470) (45,000)
------------- ------------- ------------- -----------
LOSS ON DISPOSAL
OF AGGREGATOR
(688,246) - (3,614,595) (45,000)
------------- ------------- ------------- -----------
NET INCOME (LOSS) $ (515,448) $ 728,352 $(4,219,699) $1,983,469
============= ============= ============= ===========
NET EARNINGS (LOSS)
PER COMMON SHARE
Earnings (loss) from
continuing
operations $ 0.02 0.07 (0.10) 0.22
Discontinued
operations (0.09) - (0.46) (0.01)
------------- ------------- ------------- -----------
$ (0.07) $ 0.07 $ (0.56) $ 0.21
============= ============= ============= ===========
WEIGHTED AVERAGE NUMBER
OF COMMON SHARES
OUTSTANDING 7,433,270 10,026,235 7,433,270 8,555,420
============= ============= ============= ===========
FULLY DILUTED
NET EARNINGS (LOSS)
PER COMMON SHARE
Earnings (loss) from
continuing operations $ 0.02 0.05 (0.10) 0.15
Discontinued operations (0.09) - (0.45) (0.00)
------------- ------------- ------------- -----------
$ (0.07) $ 0.05 $ (0.56) $ 0.15
============= ============= ============= ===========
FULLY DILUTED NUMBER OF
COMMON SHARES 7,433,270 14,846,748 7,433,270 13,455,705
============= ============= ============= ===========
</TABLE>
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GLOBAL INTELLICOM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
December 31, September 30,
1997 1998
------------------- -------------------
(a) (Unaudited)
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash $ 138,469 $ 153,482
Due from factor
Accounts receivable -- trade, less allowance for doubtful
accounts of $290,582 and $0, respectively 3,684,106 5,723,110
Accounts receivable -- non-trade 268,815 1,708,017
Other receivables 206,770 549,101
Inventories 3,001,519 3,679,347
Notes receivable -- officers and stockholders -
Note and loans receivable -- other 40,113 296,340
Prepaid expenses and other current assets 624,322 1,899,359
Deferred income taxes 630,000 1,778,100
Current Assets of discontinued operations 32,884 32,772
-------------- --------------
Total current assets 8,626,998 15,819,628
-------------- --------------
PROPERTY AND EQUIPMENT -- net of accumulated
depreciation and amortization 1,326,058 1,081,843
-------------- --------------
INTANGIBLE ASSETS -- net of accumulated amortization 5,542,385 4,282,353
-------------- --------------
OTHER ASSETS:
Deferred income taxes 2,645,000 3,275,000
Deferred costs 707,106 2,788,546
Other assets 34,058 387,934
Other assets discontinued operations 53,362 53,362
-------------- --------------
3,439,526 6,504,842
-------------- --------------
$ 18,934,967 $ 27,688,666
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Due to financial $ 4,153,645 $ 6,860,265
institution
Notes payable - bank 50,000 $ 50,000
Accounts payable -- trade 7,883,413 8,069,387
Accounts and note payable -- related party -
Customer deposits 21,578 883
Notes payable -- officers and stockholders 132,677 225,136
Acquisition indebtedness -- current portion 581,823 581,823
Current portion of capitalized lease obligations 147,615 140,015
Income taxes payable 238,534 166,912
Accrued expenses and other current liabilities 1,976,510 1,583,490
Current liabilities of discontinued operations 224,758 224,758
-------------- --------------
Total current liabilities 15,410,553 17,902,669
-------------- --------------
LONG-TERM LIABILITIES:
Acquisition indebetness -- net of current portion 1,545,261 1,439,768
Capitalized lease obligations --net of current portion 86,854 50,047
</TABLE>
3
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GLOBAL INTELLICOM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
December 31, September 30,
1997 1998
------------------- -------------------
(a) (Unaudited)
<S> <C> <C>
Convertible Debentures 2,000,000
-------------- --------------
1,632,115 3,489,815
-------------- --------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY :
Preferred Stock -- $.01 par value:
Authorized -- 10,000,000 shares
Issued and outstanding -- 351,985 shares - 1997 3,520
354,400 shares - 1998 - 3,544
Common stock -- $.01 par value:
Authorized -- 20,000,00 shares
Issued and outstanding -- 7,497,345 shares - 1997 74,973
10,026,235 shares - 1998 - 100,262
Common stock to be issued 417,188 417,188
Additional paid-in capital 12,003,524 14,398,625
Retained earnings (deficit) (10,598,022) (8,614,553)
Treasury stock, at cost (8,884) (8,884)
-------------- --------------
Total stockholders' equity 1,892,299 6,296,182
-------------- --------------
$ 18,934,967 $ 27,688,666
============== ==============
</TABLE>
4
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GLOBAL INTELLICOM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998
<TABLE>
<CAPTION>
Nine months ended
September 30,
-------------------------------------
1997 1998
----------------- -----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (loss):
$ (605,104) $ 2,028,469
Net loss from discontinued operations (3,614,595) (45,000)
Adjustments to reconcile net loss to net cash
provided by (used by) operating activities:
Depreciation and amortization 344,738 253,689
Amortization of intangibles 753,293 314,676
Deferred income taxes (2,362,239) (1,778,100)
Imputed interest on ManTech acquisition 44,011
Amortization of deferred costs 54,000
Changes in assets and liabilities:
Due from factor (18,962) -
Accounts receivable -- trade 4,106,699 (2,039,004)
Accounts receivable -- non-trade (913,296) (1,439,202)
Inventories (632,826) (677,828)
Other receivables 250,409 (342,331)
Notes and loan receivable -- other (520,613) (256,227)
Prepaid expenses and other (879,143) (1,275,037)
Other deferred costs (2,435,316)
Accounts payable trade 2,345,239 185,974
Accounts and note payable -- related party
Customer deposits (797,488) (20,695)
Accrued expenses and other (590,967) (393,020)
Income taxes payable 201,057 (71,622)
Discontinued operations - net (1,551,014) 112
----------- -----------
(4,386,801) (7,990,462)
----------- -----------
Loans to stockholders (178,552) 92,459
Payments (reduction) of other intangibles 930 934,134
Purchases of property and equipment (359,020) 1,748
----------- -----------
(536,642) 1,028,341
----------- -----------
Capital contributions (1,913) 2,420,414
Proceeds from convertible debentures 2,000,000
Deferred offering costs -
Due to financial institutions -- net 4,364,600 2,706,620
Payments on notes payable -- stockholders (52,899) -
Proceeds (payments) on notes payable - NCR (404,852) -
Proceeds (payments) on note payable - related party (81,778) -
Proceeds from note payable - Mantech -
Payment of dividends (165,124) -
Payments due on acquisitions (105,493)
Payments on capitalized lease obligations (84,992) (44,407)
----------- -----------
3,573,042 6,977,134
----------- -----------
(1,350,401) 15,013
1,516,072 138,469
=========== ===========
$ 165,671 $ 153,482
=========== ===========
The accompanying notes are an integral part of these condensed consolidated financial statements.
</TABLE>
5
<PAGE>
GLOBAL INTELLICOM, INC. AND SUBSIDIARIES NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
A. Basis of Presentation
The condensed consolidated balance sheet as of December 31,
1997 has been condensed from the audited consolidated balance sheet at that
date. The accompanying unaudited condensed consolidated financial statements of
Global Intellicom, Inc. (the "Company") have been prepared in accordance with
Rule 10-01 of Regulation S-X and, therefore, do not include all information and
footnotes necessary for a fair presentation of financial position, results of
operations and cash flows in conformity with generally accepted accounting
principles. In the opinion of the Company, however, the accompanying financial
statements contain all adjustments, which include normal recurring adjustments
and adjustments necessitated by the discontinuance of the operations of Speech
Solutions and the aggregator operations of the Company's Nevcor subsidiary,
necessary to present fairly the Company's financial position as of December 31,
1997 and September 30, 1998, its results of operations for the nine-month
periods ended September 30, 1998 and 1997 and cash flows for the nine-month
periods ended September 30, 1998 and 1997. The Company's interim results of
operations are not necessarily indicative of what may be expected for the full
year.
B. Capital Stock
During July, August and September 1998, the Company issued
2,523,532 shares of Common Stock as a result of the conversion of 2,075 shares
of the Series 6, 7, 8 and 9 Convertible Preferred Stock.
On August 7, 1998, the Company entered into a Lock-Up
Agreement (the "Lock-Up") with the holders of 2000 shares ($2 million) of the
Series 6 Stock. Under the terms of the Lock-Up, the Series 6 Stock ("Series 6
Holders") agreed not to convert 88.75% of their Series 6 Stock until November
15, 1998. In consideration for the Lock-Up, the Series 6 holders agreed to
subscribe for 600 shares of the Company's Series 11 Convertible Preferred Stock
("Series 11 Stock"). The Series 11 shares have a liquidation preference of
$1,000 each, are non-voting and carry a dividend of $50.00 per share per year,
payable semi-annually. At the election of the Company, dividends may be paid in
shares of Common Stock, priced at the five-day average closing bid price of
Common Stock prior to the dividend record date. Shares of Series 11 Stock are
convertible into Common Stock at market price, without discount. Fifty percent
(50%) of the Series 11 shares may not be converted until 30 days from the date
of issuance. The remaining 50% may not be converted until November 15, 1998. The
Company may require the holders of
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the Series 11 Stock to convert at any time
and may call such shares for redemption at a price equal to 133% of the
liquidation preference of the shares.
Simultaneously with the Lock-Up transaction, the Company also
concluded the sale of 1000 shares of a Series 10 Convertible Preferred Stock
("Series 10 Stock"). The Series 10 shares have a liquidation preference of
$1,000 each, are non-voting and carry a dividend of $50.00 per share per year,
payable semi-annually. At the election of the Company, dividends may be paid in
shares of Common Stock, priced at the five-day average closing bid price of
Common Stock prior to the dividend record date. Shares of Series 10 Stock are
convertible into Common Stock at 75% of the five-day average closing bid price
of Common Stock immediately prior to conversion. The Company may require the
holders of the Series 10 Stock to convert at any time and may call such shares
for redemption at a price equal to 133% of the liquidation preference of the
shares. The Company is employing the proceeds from the sale of the Series 10
Stock to redeem the remaining shares of Series 7 Stock and for working capital.
On November 6, 1998, upon advise of counsel, the Company gave
written notice to the holders of the Series 6, 10 and 11 Stock that based upon
the current conversion price of the Company's Common Stock and the number of
shares of Common Stock outstanding, each holder of record of the Preferred Stock
was a beneficial owner of more than 10% of the Company's Common Stock. It is the
Company's position that, as a 10% beneficial owner of the Company's Common Stock
the Series 6, 10 and 11 holders were subject to reporting requirements under
Sections 13(d) and 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), but filed no reports.
Accordingly, consistent with its fiduciary obligations to all
of its shareholders, the Company informed the Series 6, 10 and 11 holders that
it will not complete any conversions of Preferred Stock for any holder until
such holder shall have: (i) complied with the reporting requirements of Sections
13(d) and 16(a) of the Exchange Act; (ii) accounted to the Company for any
profits recoverable under Section 16(b) of the Exchange Act; and (iii) provided
the Company with reasonable evidence of its compliance with Section 16(c) of the
Exchange Act.
C. Subsequent Events
As previously reported, the NASDAQ Staff had recommended that
the Company be delisted from the NASDAQ stock market for failure to meet
NASDAQ's continued listing requirements. The recommendation was stayed pending a
hearing, which took place on August 13, 1998. On October 22, 1998, the NASDAQ
Stock Market, Inc. rejected the Company's plan for continued compliance with the
listing requirements and delisted the Company's stock. The Company has appealed
the delisting decision and has been notified that it has until January 15, 1999
to submit additional information upon which it intends to rely in arguing that
the delisting decision should be reversed. The NASDAQ Stock Market, Inc. has
informed the Company that it expects to make a decision regarding the company's
appeal at the March NASD Board meeting. While there can be no assurance thereof,
the Company believes that the delisting decision was in error and expects to be
able to convince the NASD Board to reverse the decision. The Company's stock is
currently traded on the NASD OTC Bulletin Board.
On November 4, 1998, the Company concluded a transaction
whereby the holder of the Company's convertible Debentures exchanged its
Debentures for 2,704 shares of a Series 12 convertible preferred stock (the
"Series 12 Stock"). The Series 12 Shares have a liquidation
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preference of $1,000 each, are non-voting and carry a dividend of $50.00 per
share per year, payable semi-annually. Shares of Series 10 Stock are convertible
into Common Stock at the lower of $1.1812, or 75% of the five-day average
closing bid price of Common Stock immediately prior to conversion.
As a result of ongoing disputes with the former shareholders,
who are currently officers, of the Company's ASDI subsidiary, the Company has
ceased doing business through ASDI and is exploring its legal remedies against
the former ASDI shareholders.
D. Discontinuance of Operations
The balance sheet as at December 31, 1997, the statement of
operations for the nine-month period ended September 30, 1997 (unaudited) and
the statement of cash flows for the nine months ended September 30, 1997
(unaudited) have been restated. Operating results of the discontinued operations
are shown separately in the accompanying statement of operations.
Net sales of discontinued operations for the nine months ended
September 30, 1998 and 1997 were $0 and $9,204,746 respectively (unaudited).
These amounts are not included in net sales in the accompanying statement of
operations.
ITEM 2
Management's Discussion and Analysis of Financial Condition and Results of
Operations
The following discussion and analysis compares the operating
results of the Company's continuing operations for the nine months ended
September 30, 1998 with the nine months ended September 30, 1997. Also included
is a discussion and analysis of the Company's financial condition and liquidity
as of September 30, 1998. The information and comparative data presented herein
reflect the elimination of Speech Solutions and of Nevcor's aggregator
operations in 1997.
The Quarter Ended September 30, 1998 (Unaudited) As Compared With The Quarter
Ended September 30, 1997 (Unaudited).
Net Sales. Net sales from continuing operations decreased by
$7,374,656 (45.7%) from $16,123,908 to $8,749,252 in the quarter ended September
30, 1998. This decrease resulted from a change in the business mix from hardware
sales to system integration, cabling and services.
Gross Profit. The Company's gross profit for the quarter ended
September 30, 1998 increased to $2,617,553 from 2,493,298, a 5.0% increase.
Overall gross profit as a percentage of net sales for the quarters ended
September 30, 1997 and September 30, 1998 increased from 15.4% to 29.9%. The
increase in gross profit was a result of the sales volume in the cabling and
services business.
Operating Expenses. Operating expenses for the quarter ended
September 30, 1998 rose to $2,425,203 from $1,872,810, a 29.5% increase. The
increase of $552,393 in
8
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operating expenses is attributable to the addition of the CableCo Business, and
the establishment of New Jersey and Pittsburgh sales offices.
Provision For Income Tax. Income tax benefit was $681,099 for
the quarter ended September 30, 1998, compared to a cost of $115,198 for the
same period in 1997. The Company has increased its deferred tax asset by
$700,000 as a result of the improved results in the third quarter.
Net Income (Loss) Per Common Share. As a result of the change
from hardware to systems integration, cabling and services discussed above, the
net income from continuing operations for the quarter ended September 30, 1998
was $728,352 and net income per share was $0.07 as compared to a net income of
$287,996 and net income per common share of $0.02 from continuing operations for
the same period in 1997.
The Nine Months Ended September 30, 1998 (Unaudited) As Compared with the Nine
Months Ended September 30, 1997 (Unaudited).
Net Sales. Net sales decreased by $4,553,062 (13.1%) from
$34,622,862 in the nine months ended September 30, 1997 to $30,069,800 in the
first nine months of 1998. This decrease was due to a change in the business
from hardware sales to system integration, cabling and services.
Gross Profit. The Company's gross profit for the first nine
months of 1998 increased to $7,918,137 from $4,500,917 in the nine months ended
September 30, 1997, a 75.9% increase. Overall gross profit as a percentage of
net sales for the first nine months ending September 30, 1998 and 1997 amounted
to 26.3% and 19% respectively. The increase in gross profit is due to the growth
of higher margin cabling service and system integration sales, and a
discontinuance of lower margin computer equipment sales.
Operating Expenses. Operating expenses for the first nine
months of 1998 rose to $7,415,046 from $4,939,233 for the same period in 1997, a
50.1% increase. The increase represents additional expenditures for the cabling
business and the new sales offices in Pittsburgh and New York.
Provision for Income Tax. The benefit for income taxes was
$1,611,188 for the first nine months of 1998, compared to a benefit of $403,402
for the same period in 1997. The Company has increased its deferred tax assets
by $1,778,100 as a result of the improved profits during the first nine months.
It is anticipated that the improved profits will provide income enough to
utilize its deferred tax asset.
Net Income (Loss) Per Common Share. As a result of the factors
discussed above, the net income from continuing operations for the first nine
months of 1998 was $2,028,469 and net income per share was $0.22, as compared to
a net loss of ($605,104) and a net loss per common share of ($0.10) from
continuing operations in the same period in 1997.
Liquidity and Capital Resources
The Company's cash balance as of September 30, 1998 was
$153,482 and its working capital amounted to ($2,083,041). Net cash used in
operating activities during the nine
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months ended September 30, 1998 was $7,990,462. The increase in the Company's
cash position and cash flow is a result of the nine month profit from continuing
operations of $2,028,469 and the loss for the same period from discontinued
operations in the amount of ($45,000).
The Company does not have significant commitments for capital
expenditures as of September 30, 1998 and no significant commitments are
anticipated for the remainder of the 1998 calendar year.
Since inception, the Company has been actively engaged in
making acquisitions of related businesses. Under existing acquisition
agreements, the Company has a variety of commitments, as described below.
In accordance with the agreements relating to the
acquisition of Nevcor, the Company is required to pay a contingent
payment based upon 1/2 % of Nevcor and Vircom, Inc.'s net sales,
quarterly during 1996, and monthly after January 1, 1997. The Company
believes that no payments are required subsequent to the discontinuance
of Nevcor and Vircom, Inc. (See "Legal Proceedings" in the Company's
1996 annual report filed on Form 10-K.)
Future commitments for the Company's acquisition of
the InSync business include a promissory note, guaranteed by the
Company, for $1,486,084 (the "First Note"), bearing interest at 9% per
annum and a second promissory note, guaranteed by the Company, for
$470,000 (the "Second Note"). Under the terms of the First Note,
interest starts to accrue on March 16, 1997. Payments under the First
Note are to be made 45 days after the close of each fiscal quarter,
commencing with the quarter ended September 30, 1997, in the amount of
2% of InSync's net sales. If, at the end of each subsequent 12-month
period beginning with the 12 months ended September 30, 1998, the sum
of the quarterly Note payments is less than the interest accrued over
the previous four quarters, plus 10% of the original principal amount,
an adjustment payment will be made to cover any shortfall. The Second
Note contains substantially the same terms as the First Note, except
that payments do not commence until the earlier of December 31, 2001,
or upon payment in full of the First Note. The Company is currently
negotiating payment arrangements for installments of the First Note and
dividends on the Series 3 convertible preferred stock.
During the first nine months of 1998, the Company instituted
various programs by which it reduced its operating expenses. One such program
includes outsourcing some of InSync's assembly work to third-party assemblers.
As a result of this arrangement and several other programs, the Company has
significantly reduced its work force. The Company has also relocated its Vircom
TG subsidiary from West Chester, PA to smaller more economical space in Exton,
PA and is negotiating the termination of its lease at the InSync premises and a
move to smaller, more economical space. In addition, the Company has
restructured its healthcare and benefit plans to allow its employees improved
coverage at more favorable rates to the Company.
The Company and its subsidiaries employ computer systems that
are Year 2000 compliant. Accordingly, the Company does not anticipate Year 2000
issues to pose significant problems for its operating systems. However, the
Company is exposed to the risk that one or more of its suppliers or vendors
could experience Year 2000 problems that could impact the
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ability of such suppliers or vendors to provide goods and services. Although
this risk is lessened by availability of alternative suppliers, the disruption
of certain services, such as utilities, could, depending upon the extent of the
disruption, potentially have a material adverse impact on the Company's
operations. During the fourth quarter, the Company will initiate discussions
with its significant suppliers, vendors and customers to ascertain that those
parties have appropriate plans to remediate Year 2000 issues.
Contingency plans will be developed if it appears that the
Company's suppliers and/or customers will not be Year 2000 compliant and that
such non-compliance could have a material adverse impact on the Company's
operations. These contingency plans will include identification and preparation
of backup systems, suppliers and vendors. The Company is as of yet unaware of
the extent of Year 2000 compliance by its customers and suppliers. Therefore,
the Company is currently unable to estimate its total cost of its Year 2000
initiative.
On November 13, 1998, the Company terminated the factoring
agreement with its factor. The termination is to be effective 90 days from
November 13, 1998. The Company is currently seeking replacement financing, other
than factoring. While the Company has various financing initiatives, there can
be no assurance that such replacement financing will be available.
The Company has filed its sales tax returns with the sales tax
authority in Pennsylvania, New Jersey and Florida and is negotiating a
resolution and payment of such returns.
Certain of the Company's subsidiaries are currently $550,000
in arrears in their withholding tax obligations. The Company is in the process
of bringing this amount current.
Effective as of June 1, 1998, the Company entered into an
agreement with Destler Financial Services, Inc. ("DSI"), whereby, in
consideration for 200,000 warrants (the "Destler Warrants"), and a $3,000
monthly payment, DSI agreed to continue to act as the Company's financial
consultant for an additional year. The Destler Warrants have a 3 year term and
are exercisable at $1.00 per share of the Company's common stock.
The Company has a consulting agreement with First American
Equities, whereby the latter consults the Company on a non-exclusive basis
regarding matters related to corporate financing, potential acquisitions and
marketing. In consideration for First American's services, the Company has
agreed to issue it 350,000 warrants to purchase the Company's stock. The
warrants have a 3 year term and are exercisable at $1.00 per share.
The Company has experienced reduced cash flow in 1997 due to
the losses from discontinued operations and certain non-recurring expenses. The
Company had positive cash flow during the first nine months of 1998. The report
of the Company's auditors on the Consolidated Financial Statements for the year
ended December 31, 1997, noted that the Company's recurring operating losses and
a working capital deficiency raised substantial doubt about the Company's
ability to continue as a going concern, and Note 1 to the Consolidated Financial
Statements indicated that the continuation of the Company's as a going concern
would be dependent on the realization of a management plan for the restructuring
of operations, the reduction of overhead, the obtaining of additional financing
and the achieving of profitable operations and sufficient cash flow to meet
current obligations. The Company has restructured its operations including
discontinuing unprofitable businesses and reducing overhead in the others.
Overhead reduction measures include: (a) the consolidation of the Natcom
operations under Vircom TG; (b) the closing of two of the Company's offices; (c)
a reduction in the Company's workforce of approximately 40 people; (d) the
relocation of the Vircom TG
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subsidiary to smaller and more cost effective space in Exton, PA: and (e) the
election of new health and life insurance benefits which will result in
significant savings to the Company. In addition, the Company has raised
additional capital through the sale of preferred stock. In order to increase its
working capital and to sustain present operating levels, the Company is also
actively exploring various financing alternatives. The Company also anticipates
converting debts to several creditors to an equity position. No assurance can be
given that the debt conversion proposals will close or that such financing will
be available on commercially acceptable terms.
Inflation. The impact of inflation on the Company's operations
has not been significant to date. There can be no assurance that a high rate of
inflation in the future would not have an adverse +effect on the Company's
operations.
PART II OTHER INFORMATION
Item 1 Legal Proceedings
The Company is involved in the following legal proceedings:
1. As previously disclosed, Bell Micro Products had commenced litigation against
the Company and Global-InSync for alleged payments due in the amount of
$784,556.43. The Company asserted that the true amount owed was $630,000. The
litigation was concluded by plaintiff agreeing to a judgment in the amount
asserted by the Company, which was entered on October 9,1998. The Company has
agreed to pay this amount, which is reflected in its accounts payable balance,
plus interest and fees, over a period of 15 months.
2. An action pending on the Massachusetts District Court for the District of
Lawrence entitled Seek Solutions v. Nevcor Technologies Group, Inc. et al. in
which the plaintiff alleges damages of approximately $40,000 as a result of
Nevcor's refusal to accept return of certain computer hard drives that had been
altered subsequent to delivery to plaintiff. While there can be no assurance
thereof, the Company believes the case to be meritless and does not anticipate a
significant loss. To date, the Company has made no accrual for any loss in
connection with this matter. The Company has asserted counterclaims and a third
party complaint against Seek Solutions' end user and intends to defend this
action vigorously.
3. An action pending in the Supreme Court for the State of New York, entitled
Cambridge Partners v. Global Intellicom, Inc. et al., in which the plaintiff
alleges that it is entitled to a minimum of $250,000 in commissions on
transactions consummated by the Company, without plaintiff's assistance. The
Company has asserted various affirmative defenses, including failure of
consideration and non-performance, which it believes will be dispositive of this
action. While there can be no assurance thereof, the Company does not believe
the action to be of merit and does not anticipate a significant loss. The
Company has filed an answer to the complaint and intends to defend this action
vigorously. To date, the Company has made no accrual for any loss in connection
with this matter.
4. The previously disclosed action entitled SunCoast Capital Corp. v. Global
Intellicom, Inc. et al., in which plaintiffs asserted $1,000,000 in damages, has
been settled for $35,000, which may be paid in stock or in cash.
5. An action pending in the Supreme Court for the State of New York entitled
Dennis
12
<PAGE>
Blewitt et al. v. Global Intellicom, Inc. et al., in which plaintiffs on
behalf of all similarly situated shareholders assert various causes of action
based on the Company's indemnification of its officers and directors for claims
related to their service as officers and directors of the Company's former
parent corporation. The Company has forwarded the complaint to its insurance
carrier and is retaining counsel. This action was filed at the end of October,
1998. As a result, while the Company believes the action to be of no merit, it
has not yet been able to evaluate fully the various causes of action and has not
yet been able to estimate the costs it will incur, if any. The Company intends
to defend the action vigorously.
6. An action pending in the Circuit Court, Fairfax County, Virginia, entitled
Data General Corp. v. Global-InSync, Inc. in which plaintiff alleges damages of
$23,583.45 and $1,429.26 plus costs and interest for goods sold and delivered.
The Company's is contesting the validity of the claim.
7. An action pending in the Circuit Court, Fairfax County of Virginia, entitled
Liusky International v. Global-InSync, Inc. in which plaintiff alleges $ 49,340
due from Global-InSync for services sold and delivered. The Company's accounts
payable balance reflects approximately $43,000 due to plaintiff, which may be
subject to offsets and defenses. The Company has retained local counsel and has
interposed an answer in the matter.
8. An action pending in the Circuit Court, Fairfax County, Virginia, entitled
Eastcom, Inc. v. Global-InSync et al. in which plaintiff alleges $73,000 due
from Global-InSync for goods sold and delivered. The Company's accounts payable
balance reflects $63,000 due to Eastcom, which may be subject to offsets and
defenses.
In addition to the foregoing, as previously disclosed, the
Company's Board of Directors previously voted to indemnify certain of the
Company's officers and directors ("the Indemnitees") who were former officers
and/or directors of Global's former parent company, Communications and
Entertainment Corp. ("ComEnt"), for claims against the Indemnitees arising out
of their prior service on behalf of ComEnt, in the event that ComEnt failed to
honor an obligation it previously undertook to indemnify the Indemnitees with
respect to any such claims. ComEnt has declined to honor its obligations under
its indemnification. Pursuant to the action of the Company's directors in
authorizing such indemnification, the Company anticipates incurring certain
legal fees and related expenses in connection with the defense of the following
claim:
An action in the California Superior Court, Los Angeles
County, entitled Diana Pfannebecker, Individually and on behalf of all
other similarly situated Plaintiffs v. N. Norman Muller, et al. From
information made available to the Company, it appears that this is an
attempt to reassert in state court action that had previously been
dismissed by the District Court and the United States Court of Appeals
for the Ninth Circuit.
This action was only recently interposed and the Company has
not yet been able to evaluate the defense costs to the Indemnitees.
For a description of other pending litigation reference is
made to the Company's prior 1998 quarterly reports and its annual report for the
year ended December 31, 1997 on Form
13
<PAGE>
10-K.
Items 2 through 5 are not applicable.
Item 6 Exhibits and Reports on Form 8-K:
- ------ --------------------------------
(A) Exhibits
(a) (11) Statement re computation of per share earnings
(a) (27) Financial Data Schedule
(SIGNATURES APPEAR ON THE NEXT PAGE)
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, as amended, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
Date: November 20, 1998
GLOBAL INTELLICOM, INC.
/s/ Robert L. Olson
By: ----------------------
Robert L. Olson
Vice President Finance, a
duly authorized officer and
principal financial officer
/s/ N. Norman Muller
-----------------------
N. Norman Muller
Chief Executive Officer
15
GLOBAL INTELLICOM, INC. AND SUBSIDIARIES
EXHIBIT 11
COMPUTATION OF INCOME PER COMMON SHARE
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
-------------------------------------------------------------------------------
1997 1998 1997 1998
----------------- ---------------- ------------------- ------------------
<S> <C> <C> <C> <C>
PRIMARY INCOME (LOSS) PER COMMON SHARE
Income (Loss) from continuing
operations $ 172,798 728,352 (605,104) 1,983,469
Less: Cumulative undeclared dividend on
Series 3 Convertible Preferred
Stock 52,500 52,500 157,500 157,500
------------- -------------- --------------- --------------
$ 120,298 $ 675,852 $ (762,604) $ 1,825,969
============= ============== =============== ==============
Loss from discontinued operations $ (688,246) 0 $ 3,614,595 (45,000)
============= ============== =============== ==============
SHARES:
Weighted average number of common
shares outstanding 7,433,270 10,026,235 7,433,270 8,555,420
============= ============== =============== ==============
NET INCOME (LOSS) PER COMMON SHARE
Income (Loss) from continuing
operations 0.02 0.07 (0.10) $ 0.22
Discontinued operations (0.09) 0 (0.46) (0.01)
------------- -------------- --------------- --------------
$ (0.07) $ 0.07 $ (0.56) 0.21
============= ============== =============== ==============
FULLY DILUTED INCOME (LOSS) PER COMMON SHARE
fully diluted shares 7,433,270 14,846,748 7,433,270 13,455,705
FULLY DILUTED INCOME (LOSS) PER COMMOM SHARE
Income (Loss) from continuing operations 0.02 0.05 (0.10) 0.15
Discontinued operations (0.09) 0.00 (0.46) (0.00)
------------- -------------- --------------- --------------
(0.07) 0.05 (0.56) 0.15
============= ============== =============== ==============
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
registrant's unaudited consolidated balance sheet as of September 30, 1998
and unaudited consolidated statement of operations for the nine months
then ended and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-mos
<FISCAL-YEAR-END> dec-31-1998
<PERIOD-START> jan-1-1998
<PERIOD-END> sep-30-1998
<CASH> 153,482
<SECURITIES> 0
<RECEIVABLES> 5,723,110
<ALLOWANCES> 0
<INVENTORY> 3,679,347
<CURRENT-ASSETS> 15,819,628
<PP&E> 2,030,300
<DEPRECIATION> 948,457
<TOTAL-ASSETS> 27,688,666
<CURRENT-LIABILITIES> 17,902,669
<BONDS> 2,000,000
0
3,544
<COMMON> 100,262
<OTHER-SE> 6,296,182
<TOTAL-LIABILITY-AND-EQUITY> 28,850,681
<SALES> 30,069,800
<TOTAL-REVENUES> 30,069,800
<CGS> 22,151,663
<TOTAL-COSTS> 22,151,663
<OTHER-EXPENSES> (85,810)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 467,065
<INCOME-PRETAX> 417,281
<INCOME-TAX> 1,611,188
<INCOME-CONTINUING> 2,028,469
<DISCONTINUED> (45,000)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,983,469
<EPS-PRIMARY> 0.21
<EPS-DILUTED> 0.15
</TABLE>
