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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED];
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 Number)
747 Third Avenue, 10017
New York, New York (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (212) 750-3772
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
$.01 par value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed 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 reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this form 10-K. Yes ___ No ___
The aggregate market value of the voting stock held by non-affiliates of
the Registrant as of April 19, 1998 was approximately $11,003,750 (based on the
average between the closing bid and asked prices of Common Stock on such date),
which value, solely for the purposes of this calculation, excludes shares held
by Registrant's officers and directors. Such exclusion should not be deemed a
determination by Registrant that all such individuals are, in fact, affiliates
of the Registrant.
As of April 10, 1998 there were outstanding 7,952,345 shares of the
Registrant's common stock, par value $.01 per share (the "Common Stock").
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PART I
Item 1. Business
General
Global Intellicom, Inc. (together with its subsidiaries, "Global" or the
"Company") provides system integration and information technology services and
assembles and supplies build-to-suit computer equipment for a wide range of
customers, including corporate clients, governmental entities, institutions,
professional users and resellers.
The Company's subsidiaries and operations have been organized into two
distinct groups, a systems integration division consolidated under the Company's
Vircom Technologies Group, Inc. subsidiary ("Vircom TG"), and a production
division which assembles and markets custom-built servers, workstations and
personal computers.
Vircom TG is a value-added reseller which provides a range of information
technology consulting services, including cabling, systems integration, internal
and external linking of networks, installation of new applications, assistance
with non-compatible operating systems and architectures, and design and support
services for enterprise-wide client server computer systems. The Company's
production division ("Global-lnSync") assembles, supplies and supports
state-of-the-art, custom-built network products, including servers, workstations
and personal computers, and markets them primarily to U.S. government, state
educational and school system customers and to value-added resellers.
Company History
Global was incorporated in September, 1994, and became a publicly-owned
company through a distribution of its shares under a registration statement
declared effective by the Securities and Exchange Commission on September 1,
1995. The Company's shares were listed for trading on the Nasdaq SmallCap Market
in May, 1996.
The Company has grown both through acquisitions, including Nevcor (1994),
Natcom (1995), Global In-Sync and Speech Solutions (1996) and ASDI (1997), and
through internal expansion. The aggregator operations of the Company's Nevcor
subsidiary were discontinued in 1997, but the Company's distribution of
brand-name products as a value-added reseller continues in Vircom TG. The
consolidation of Global's operations into two divisions recognizes that a
narrower focus in products, services and markets is a necessary basis for an
increase in sales and profit margins, and is expected to prove more beneficial
to the Company in the long term than pursuing the wholesale distribution of
computer products at every market level.
Vircom TG
Vircom TG offers a wide range of systems integration services, including
state-of-the-art cabling installation for both local and wide area networks.
Vircom TG provides analysis of needs, system configuration, installation of
fiber optic, wireless or conventional network circuitry, network integration,
software loading, testing of system components, training of network personnel
and system maintenance. As a value-added reseller, Vircom TG also supplies
computer hardware and software and other peripheral equipment to basic computer
system components furnished for the corporate, government, education, and
professional end-user, and can offer products from major brand-name suppliers
such as Compaq, IBM, Digital, Hewlett Packard, NCR, Sun MicroSystems, Microsoft
and Novell under distributor or reseller agreements.
2
By furnishing such a range of services, the Company believes it can combine
the elements needed to offer a complete system or, in the Company's view, a
"total solution" to meet client needs. Global's management believes that selling
complete systems rather than separate components can generate repeat business
and more loyal customers, and is more likely to yield higher margins. Moreover,
the ability to provide cabling installation and diversified systems integration
services is expected to position the Company to meet additional information
system needs of larger multi-divisional organizations.
Vircom TG has a professional service placement bureau that has developed,
from its client base and various professional contacts, a database of potential
information technology candidates for full and part-time placement. The Company
intends to offer its clients fee-based access to this database.
Vircom TG's information technology, systems integration and cabling
services are sold to a diversified customer base which includes large corporate
and governmental users of such services, such as Lockheed Martin, Lucent
Technologies, PNC Bank, Smith Barney, Westinghouse, IKEA, Saturn, Widener
University, Avis and the U.S. Coast Guard.
Global-InSync
Through Global-lnSync, the Company assembles and markets its own
state-of-the art, Pentium(R)-class, customized servers, workstations and
personal computers, built to individual customer specifications in the Company's
facilities in Springfield, Virginia. Custom-built Global-InSync products are
particularly suited for situations where standard models of name-brand equipment
are either not cost-effective, are not flexible enough to fill a particular
client need, or are not available in quantity on an agreed delivery schedule.
The Company's workstations are configured on either Pentium(R) or
Pentium-Pro(R) processors, and file servers are based on both Pentium Pro and
multi-processor components. InSync product offerings include ISA, EISA and PCI
architecture, desk-top, mid-tower or full-tower cases, enhanced IDE and SCSI
hard drive platforms, CD-Rom drives, RAID array subsystems and Energy Star
compliant monitors. Global-InSync's workstations and file-servers are certified
for use with Novell network software, Windows 95 and Windows NT, and
Global-InSync is a certified build-to-order supplier of workstation products for
the General Services Administration.
Global-lnSync products and associated warranty and repair services are
distributed primarily through third-party value-added resellers and systems
integrators who, in turn, sell the products and various services to commercial
enterprises and governmental users. Sales to government resellers (particularly
Lockheed Martin) are generally on a per order basis. Once the order is placed,
such order is generally not subject to renegotiation or termination. While the
Company believes its relationships with its resellers are good, there can be no
assurance that they will continue to place substantial orders with Global
Intellicom.
In connection with consolidating operations of its various units and
seeking to increase overall profit margins, the Company is considering various
alternatives for expanding production capacity and improving operating margins
at Global-InSync, including the possible outsourcing and subcontracting of
certain production runs where cost-effectiveness is established.
Marketing, Sales and Customers
Global markets products and services to approximately 1,000 customers,
including corporations, government agencies, educational and other institutions,
professional users, value-added resellers
3
and value-added dealers. Although products and services are marketed
nationwide, the majority of sales are to customers located in the eastern half
of the United States.
A major customer of the Company, particularly of its Global-InSync
division, is Lockheed Martin, sales to which accounted for more than 20.8% of
the Company's revenues in 1996 and 22.0% of revenues from continuing operations
in 1997. A significant reduction in sales to Lockheed Martin or a loss of the
customer account would have a materially adverse effect on the Company's
business and results of operations, unless the Company were able to replace such
sales and account, as to which there can be no assurance.
At the end of 1997, the Company had a purchase order backlog, reasonably
believed to be firm, of approximately $1.7 million.
The Company's marketing and sales staff consisted of approximately 75
employees as of March 31, 1998. Marketing and sales efforts emphasize product
quality and diversity, prompt delivery, competitive pricing and a high level of
product support, for which Global's technical support staff is utilized.
Training of sales personnel includes product seminars conducted by manufacturers
and certification by certain manufacturers of individual sales representatives
as being qualified to market specific equipment.
In addition to servicing and furnishing post-sale support to existing
customers, the Company's sales force solicits new business by pursuing leads
from manufacturers with whom Global has distribution relationships, by
contacting prospects identified through other industry sources, by direct mail,
by telephone campaigns, by participation in trade shows, and by advertising in
trade publications.
Supply of Products of Other Manufacturers
Except for equipment produced by the Company's Global-InSync division, the
Company purchases products directly from distributors or manufacturers. In
seeking suppliers, the Company considers product demand, availability and
performance, technical sophistication and profit margin potential.
Until the Company discontinued its aggregator business in the summer of
1997, the Company purchased, and carried in inventory, a substantial amount of
computer products and accessories directly from various manufacturers such as
NEC and NCR, under a number of vendor agreements containing customary industry
terms and conditions, such as minimum purchase requirements, stock rotation,
price protection and product updating and obsolescence provisions. Since
discontinuing the aggregator business, the Company has purchased much of its
product inventory from distributors, although it continues to have reduced
vendor relationships with certain manufacturers.
While computer information system equipment is generally available on a
continuous basis, the demand for certain products sold by the Company
occasionally exceeds the supply available from a specific distributor or
manufacturer. In such cases, the distributor or manufacturer may attempt to
allocate the affected product equitably among their customers, including the
Company. Global's management is aware that the Company's ability to compete
effectively has been and may be periodically affected by such occasional product
shortages, and management accordingly seeks constantly to expand the base of
distributors and other vendors from whom it obtains products.
The Company receives quarterly credits on the purchase of certain vendors'
products. The amount of each vendor's credits depends upon the quantity of
products purchased or the Company's cost of products shipped. Such credits are
reflected in the Company's financial statements as a
4
reduction of product inventory cost when earned.
Competition
Competition in the integration of computer systems and the supply of
computer system equipment remains intense. The Company's competitors in systems
integration services include national, regional and local distributors,
resellers and integrators, most of which are privately held, and, accordingly,
information on their size and business is not readily available although the
Company believes there are a significant number of competitors having
substantially greater resources than Global. Competitors of Global-InSync in the
production of custom-built servers, workstations and personal computers include
Compaq, Comp USA, Dell, Gateway and Hewlett Packard, all of which are vastly
larger than the Company in revenues and in financial, sales and other resources.
Key competitive factors in the supply of systems integration services and
computer network workstations and accessories include availability of technical
support personnel, competence in and familiarity with a variety of computer
equipment and software, prompt response times, product selection and price.
While a number of national and regional integrators and suppliers of computer
systems have substantially greater financial resources and larger staffs than
the Company, the Company views its emphasis on service and technical support,
and its offering of total systems and total solutions for customers, as a
competitive strength.
Floorplan Financing Arrangements
In addition to selling products against immediate payment, Global extends
payment terms to customers with approved credit, based upon their financial
profile and credit history, and to purchasers who have qualified for certain
floorplan financing when available. During 1997, to facilitate sales to certain
customers, the Company had floorplanning agreements with certain financial
institutions. Such floorplanning agreements transfer responsibility for payment
from a Global customer to the floorplan finance company, which pays Global,
generally within 3 to 15 days of shipment. The Company is typically required to
pay the finance company a range of floorplan "points" based on the invoice price
of the products purchased.
Until September, 1997, the Company had an active floorplan financing
arrangement with an industry floorplanner, which was used primarily for
purchasing inventory for the Company's aggregator operations. As previously
reported, the Company has discontinued such operations and has not been using
the floorplanning facility. Balances owed to the floorplanner are being reduced
on a periodic basis.
Financing of Accounts Receivable; Customer Credit
The Company has a factoring facility with a financial institution (the
"Lender"), under which the Lender purchases receivables from the Company on a
recourse basis. Global views its relationship with the Lender to be important
and beneficial, and the loss of such relationship, if not replaced, could have a
materially adverse effect on the Company's business, financial condition and
results of operations. While the Company believes it could obtain a replacement
factoring facility if necessary, there is no assurance it will be able to do so
within a specific time period or on terms which would be satisfactory.
The Company uses a Credit Committee composed of Global officers and
employees to monitor and control its credit exposure on customer receivables.
The Credit Committee undertakes
5
background credit checks for all proposed customers. Assuming credit is
acceptable, the Credit Committee establishes limits on the amount of
outstanding receivables which a customer can incur. Orders in excess of this
limit may only be authorized by the Credit Committee. Customers who fail to
adhere to agreed credit terms are contacted, and the Company ordinarily
discontinues shipments until acceptable credit standing is reestablished.
Recent Equity Financing
As of February 20, 1998, the Company had completed the sale of 2,200 shares
of Series 6 Convertible Preferred Stock of which 1,200 shares were sold in 1997
and 1,425 shares of Series 7 Convertible Preferred Stock to investors in private
placement transactions, receiving aggregate net proceeds of $3,255,500 from the
financing. Such financing proceeds have been used for the carrying of inventory
and receivables and for reduction of accounts payable, increasing the Company's
working capital base.
As provided in the Certificates of Designation for the Series 6 and Series
7 Convertible Preferred Stock, such shares have a liquidation preference of
$1,000 each, are non-voting, and carry a dividend of $50.00 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 6 and Series 7
Preferred Stock are convertible into Common Stock at a conversion price equal to
75% of the five-day average closing bid price per share of Common Stock
immediately prior to conversion. The Company may call such shares for redemption
at a price equal to 133% of the liquidation preference of the shares. The
Company is obligated to register for public sale the shares of Common Stock
issuable to holders of Series 6 and Series 7 Convertible Preferred Stock, and
has filed with the Securities and Exchange Commission a pending registration
statement in which such shares, along with other securities, are included.
The Company has filed a Certificate of Designation authorizing the future
private sale of up to 1,500 shares of Series 8 Convertible Preferred Stock,
which, at a price of $1,000 per share, could generate gross proceeds of up to
$1,500,000 for the Company. To date, the Company has received subscriptions for
the purchase of 325 shares.
Series 8 Preferred shares are non-voting, have a liquidation preference of
$1,000 each, and will carry a 5% dividend payable in cash or in shares of Common
Stock at the election of the Company. Shares of Series 8 Preferred Stock are
convertible into Common Stock at a 25% discount to the five-day average closing
bid price per share. Series 8 shares are callable at the option of the Company
at a redemption price equal to 133% of their liquidation preference. Holders of
Series 8 Preferred shares will have registration rights similar to those granted
to holders of Series 6 and Series 7 Convertible Preferred Stock.
Employees
As of December 31, 1997, the Company had 204 full-time employees, including
75 persons employed in sales and marketing functions, 66 persons in production
and assembly, nine persons involved in technical support roles, ten persons
involved in purchasing and warehouse functions, and 44 persons involved in
executive, administrative, and finance functions. Global considers its relations
with its employees to be good.
CERTAIN TRANSACTIONS
In January, 1998, the Company's Board of Directors voted $676,382.80
additional compensation to the Company's Chairman and Chief Executive Officer N.
Norman Muller attributable to 1997. Of
6
that additional compensation, $359,216.03 was in consideration for Mr. Muller
extending his personal guarantee for some of the Company's indebtedness. The
additional compensation was offset against loans owed by Mr. Muller to the
Company.
The Company's Executive Vice-President, Howard Maidenbaum, has also
extended personal guarantees of all the same indebtedness of the Company as
that guaranteed by Mr. Muller. Both Mr. Muller and Mr. Maidenbaum are also
directors of the Company. Another of the Company's directors, Thomas W.
Smith, has personally guaranteed one of the obligations also guaranteed by
Mr. Muller and Mr. Maidenbaum. The Company's Board of Directors has not as
yet determined what consideration, if any, will be given to Mr. Maidenbaum and
Mr. Smith for their guarantees.
Additionally, Mr. Muller has informed the Company that he has become the
Manager of a limited liability corporation (the "LLC") formed for the purpose of
acquiring control of a public corporation other than the Company. The target of
the LLC's efforts is in an industry different from and unrelated to the
Company's business. The LLC has acquired greater than 5% of the voting stock of
its target, and has commenced litigation against the management of its target.
Item 2. Properties
Company Facilities
The Company's facility for the assembly of the network products of
Global-InSync consists of a 52,000 square foot plant in Springfield, Virginia,
and is occupied under a lease expiring in 2001. As a result of a change to
just-in-time inventory, management of the InSync subsidiary is considering
replacing its current premises with a smaller facility. InSync is currently in
arrears on its rental payments and has commenced negotiations to resolve these
lease issues. Vircom TG's principal office and warehouse is located in Exton,
Pennsylvania, under a lease expiring in 2004, and the Company also maintains
office facilities in Florida, Indiana, New Jersey and New York. The Company's
corporate and executive offices are at 747 Third Avenue, New York, New York
10017, and are occupied under a lease expiring in 2005.
Item 3. Legal Proceedings.
The Company is involved in the following legal proceedings:
1. An action pending in the Supreme Court of the State of New York,
entitled Suncoast Capital Corp. v. Global Intellicom, Inc., et al., commenced on
or about September 18, 1997 against the Company and three of its officers and
directors by a holder of a warrant issued by the Company for claimed damages of
$1,000,000, alleging that the Company breached the terms of the warrant by
failing to register for public sale shares of Common Stock issuable on exercise
of the warrant. The Company has included these shares in its presently pending
registration statement on Form S-3, has asserted as an affirmative defense that
the transaction in connection with which the warrant was issued was void under
New York's usury law, and has counterclaimed for $29,666.57. The Company has
moved for summary judgment dismissing the complaint and intends to continue to
defend the action vigorously. Although there can be no guarantee thereof, the
Company believes the SunCoast claim is overstated and does not anticipate a
significant loss in this matter.
2. An action pending in the Pennsylvania Court of Common Pleas, Delaware
County, entitled Scott Arch and Ellen Arch v. AmCom Business Centers Corp., et
al., commenced on or about October 30, 1996 by the former owners of the
Company's Nevcor subsidiary against the subsidiary and two of the Company's
directors as guarantors, claiming $93,449 in tax reimbursements alleged to be
due under the Nevcor acquisition agreement and a subsequent modification
thereof. The
7
Company believes that Plaintiffs' calculations are in error and
that Plaintiffs have been paid in full. The Company has provided Plaintiffs with
accounting computations supporting the Company's position and is awaiting
Plaintiffs' response thereto. Although there can be no guarantee thereof, the
Company does not anticipate a loss in this matter.
3. An action pending in the Pennsylvania Court of Common Pleas, Delaware
County, entitled Grove Avenue Corp. f/k/a AmCom Business Centers Corp. v. Global
Intellicom, et al., commenced on or about September 30, 1997 by the corporate
entity which sold the assets from which the Nevcor and Vircom subsidiaries were
created, against the Company and certain of its subsidiaries for unspecified
damages claimed to be in excess of $50,000, for payments alleged to be due
pursuant to the acquisition agreement and a subsequent modification thereof.
Required payments were to be calculated as a percentage of the gross sales of
AmCom and Vircom. The complaint alleges that payments based on actual AmCom and
Vircom sales are due and owing, and that the Company diverted sales from AmCom
and Vircom to other subsidiaries to avoid payment. The Company vigorously
disputes that any sales were diverted, and, although conceding that some
payments are due, disputes the amounts claimed by Plaintiff. While there can be
no assurance thereof, the Company estimates its exposure to be in the range of
$100,000, for which it has accrued, and it is actively attempting to resolve
this dispute.
4. An action pending in the Pennsylvania Court of Common Pleas, Montgomery
County, entitled Lawrence Fox v. Global lntellicom, Inc., et al., commenced on
or about August 21, 1997 for unspecified damages in excess of $50,000 for
alleged breach of a brokerage contract for a corporate acquisition, as well as
claims for unspecified further actual and punitive damages for fraud and other
allegedly tortious conduct. The Company filed preliminary objections to all
except the breach of contract claims, and the Company's preliminary objections
were sustained so that all claims except for the alleged breach of contract were
dismissed. The Company contends that the corporate acquisition in question was
never consummated so that no brokerage commission is owed. Although there can be
no assurance thereof, the Company does not anticipate a loss in this matter and
it is vigorously defending the action.
5. An action pending in the United States District Court for the District
of New Jersey, entitled Green Tree Vendor v. Global Intellicom, Inc. et al.,
commenced on or about April 14, 1998, alleging payments due in the amount of
approximately $260,000 for leased equipment. Company counsel has not yet
reviewed the complaint in this action, but has been advised by Global that the
claimed amount is not due and that Global's records reflect that the amount
owed, if any, is far less than the amount demanded. Although there can be no
assurance thereof, the Company does not expect a loss in excess of $50,000,
which is reflected in the Company's accounts payable balance. The Company
intends to defend this action vigorously.
6. An action pending in the Supreme Court of the State of New York, County
of New York, entitled Fawcette Technical Publications Co. d/b/a Visual Basic
Programmer's Journal v. Global lntellicom Inc., et al., claiming $48,599.90 due
for printing services rendered for one of the Company's subsidiaries which has
discontinued its operations. The debt to Fawcette, if any, was incurred by the
Company's former subsidiary, Speech Solutions. The Company denies that any
amount is due from the Company. The Company is vigorously defending this
action.
7. On or about April 15, 1998, Bell Micro Products, a supplier of the
Company's Global-InSync subsidiary, commenced an action in the United States
District Court for the Eastern District of Virginia against the Company and
Global-InSync, alleging payments due to Bell Micro in the amount of $784,556.43.
While the Company has not yet had the opportunity to evaluate the merits of Bell
Micro's claim, it believes that the true amount owed is at least $150,000 less
and, while there
8
can be no assurance thereof, it anticipates a favorable settlement. The full
amount due is reflected in the Company's accounts payable balance
In addition to the foregoing, 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. Two claims within
the scope of ComEnt's indemnification obligation have been asserted against
certain of the Indemnitees, but 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 has paid certain legal fees and
related expenses in connection with the defense of such claims. The pending
claims against certain of the Indemnitees, and the status thereof, are:
A. An action in the United States District Court for the Central
District of California 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 action has been
dismissed by the District Court, and an appeal to the United
States Court of Appeals for the Ninth Circuit from the
dismissal is presently pending.
B. An action pending in the California Superior Court, Los
Angeles County, entitled Krishna Shah v. N. Norman Muller,
et al. The Company has been advised that a tentative
settlement agreement has been reached and the parties are in
the process of preparing the necessary documentation.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters.
The Common Stock of Global is listed on the NASDAQ Small Cap Market under
the symbol GBIT. The following table sets forth the high and low bid prices of
Common Stock as reported on NASDAQ for each calendar quarter during the year
ended December 31, 1997 and for the period from May 16, 1996 (when Global's
Common Stock was first listed on NASDAQ) to December 31, 1996:
Bid
-------------
1997................................................. High Low
- ---- ---- ---
January 1 through March 31 .......................... $3.25 $1.81
April 1 through June 30 ............................. 2.88 1.72
July 1 through September 30 ......................... 3.13 2.16
October 1 through December 31 ....................... 2.69 1.41
Bid
-------------
1997................................................. High Low
- ---- ---- ---
January 1 through March 31 .......................... $3.25 $1.81
May 16 to June 30, 1996 ............................. 6.88 4.00
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July 1 to September 30, 1996......................... 6.00 2.75
October 1 to December 31, 1996 ...................... 6.00 1.88
From November 13, 1995 to May 16, 1996, Global's Common Stock was listed on
the OTC Bulletin Board under the symbol "GBIT." The high and low bid quotations
for the Common Stock from November 13 to December 31, 1995, as reported on the
OTC Bulletin Board, were $3.25 and $1.00, respectively. The high and low bid
quotations on the OTC Bulletin Board for the first quarter of 1996 were $7.38
and $3.00, respectively.
The bid quotations represent inter-dealer prices and do not include retail
mark-ups, mark-downs or commissions and may not necessarily represent actual
transactions.
No dividends have been declared or paid with respect to the Common Stock.
As of April 10, 1998, there were approximately 3,657 record holders of the
Company's Common Stock and 7,952,345 shares of Common Stock outstanding.
Issuance of Securities Not Registered under the Securities Act of 1933, as
Amended
The following unregistered securities were issued by the Company in 1997:
(a) In January, 1997, the Company issued an aggregate of 589,439 shares
of Common Stock in conversion of shares of Series 1 and Series 4
Convertible Preferred Stock previously sold by the Company in 1996 private
placement financing transactions under Regulation S. The Regulation S
financing transactions were described in quarterly reports filed by the
Company in 1996.
(b) In May, 1997, the Company issued an aggregate of 24,326 shares of
Common Stock to Avonwood Capital Corp. in lieu of payment of consulting
fees in the amount of $60,000 and in consideration of the early termination
of a consulting agreement.
(c) In September, 1997, in connection with the Company's acquisition by
merger of the shares of Automated Systems Development of Indiana, Inc.
("ASDI"), the Company issued a total of 785 shares of Series 5 Convertible
Preferred Stock, having a liquidation preference of $1,000 per share and
convertible into Common Stock at a ratio of one share of Common Stock for
each $10.00 of liquidation value. The Series 5 Convertible Preferred shares
were issued in payment of a portion of the purchase price paid for ASDI.
(d) In September, 1997, the Company issued an aggregate of 15,000
shares of Common Stock to nine former stockholders of Natcom in lieu of a
payment of $48,000 due under the terms of the Company's September, 1995
acquisition of Natcom.
(e) In December, 1997, the Company issued a total of 1,200 shares of
Series 6 Convertible Preferred Stock to two institutional investors in
connection with a private placement financing. See "Recent Equity
Financing" in Item 1, above.
All of the securities described in paragraphs (b) through (e) above were
issued with standard restrictive legends, and stop transfer instructions were
filed with the Company's transfer agent in connection therewith. Such issuances
represented rivate transactions, and nounderwriter or public offering was
involved. By reason of the foregoing facts, the Company claims exemption for
such issuances as private transactions pursuant to Section 4(2) of the
Securities Act of 1933, as amended.
10
With respect to the issuances of shares of Common Stock upon conversion
of Series 1 and Series 4 Convertible Preferred Stock referred to in
paragraph (a) above, such shares were issued without restrictive legend
pursuant to the provisions of Regulation S and after (i) the expiration of
holding periods required by Regulation S and (ii) the receipt of legal opinions
from attorneys for the purchasers of Series 1 and 4 Preferred Stock.
11
Item 6. Selected Financial Data
Consolidated Statement of Operations Data
Company Predecessor Company
-------------------------------------------- ----------------------------
Year Year Year January 1 Year
Ended Ended Ended 1994 to Ended
December 31 December 31 December 31 December 31 December 31
1997 1997 1997 1994(1) 1993
----------- ----------- ---------- ------------ ----------
Net sales.......................... $51,235,126 $28,054,341 $8,769,599 6,411.975 7,462,184
Income (loss) from
Continuing operations....... (2,302,808) (706,493) 203.332 97,943 225,343
Discontinued operations..... (7,133,152) (378,895) 66,851 251,854 611,059
Income (loss) per share from
Continuing operations...... (0.34) (0.22) 0.07 N/A N/A
Discontinued operations... (0.95) (0.11) 0.02 N/A N/A
Pro forma net income (2).... N/A N/A N/A 58,825 135,633
Pro forms net income per share.. N/A N/A N/A N/A N/A
Shares used in computing net
income (loss) per share... 7,481,307 3,527,053 2,927,170 N/A N/A
Consolidated Balance Sheet Data
December 31 December 31 December 31
1997 1996 1995
----------- ----------- ----------- ---------- ----------
Working capital (deficit) $ (6,783,555) $ 3,930,788 $(1,106,451) 516,965 765,762
Total assets 18,934,967 22,822,892 11,313,831 5,988,568 5,936,352
Due to financial institutions 3,269.418 1.711,429 4,994,135 4,546,657 4,793,856
Long-Term Liabilities 1,632,115 2,298,490 750,228
Stockholders' equity 1,892,299 9.625,172 2,329,524 903,199 853,402
- ---------
(1) The Company was incorporated on September 1, 1994. The Company
purchased the net assets of the Predecessor Company on December 8,
1994 and commenced operations on that date.
(2) Pro forma net income has been presented to show results of operations
assuming the Predecessor Company filed its income tax return as a C
corporation.
(3) See Notes 2 and 20 of Notes to the Consolidated Financial Statements
for an explanation of the calculation of shares used in computing net
income (loss) per share.
(4) The Predecessor Company's continuing operations for 1994 and 1993
represent its non-aggregator activities.
12
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operation
Background
In December, 1994, Global acquired the assets and business of a predecessor
company. Effective September 1, 1995, pursuant to a registration statement filed
with the Securities and Exchange Commission, a public distribution of 850,000
shares of Global's Common Stock was made to shareholders of another publicly
held entity, as a result of which Global became a reporting public company.
On September 28, 1995, the Company acquired Natcom, and, effective
September 1, 1996, the Company purchased the business now operated through
Global- InSync.
Effective July 1, 1997, the Company discontinued its Nevcor aggregator
operations as a result of a decision by NEC, which accounted for more than 90%
of Nevcor's business, to cease distributions through the aggregator channel.
Effective August 1, 1997, the Company discontinued its Speech Solutions
operations as a result of management's decision that the ratio of capital
requirements' to revenue for a software developer such as Speech Solutions was
incompatible with the overall focus of the Company and its subsidiaries.
With respect to the Company's continuing operations, the following
discussion and analysis compares: (i) the operating results of the Company for
the year ended December 31, 1997 with the operating results of the Company for
1996 (which includes the operating results of Global InSync from September 1,
1996 to December 31, 1996); (ii) the Company's operating results for 1996 as
compared with the operating results of the Company for 1995 and; (iii) due to
discontinued operation of Nevcor, no comparison is possible with the operating
results of the Company for the year 1995 with the operating results of the
Company for the period from Global's inception on September 1, 1994 through
December 31, 1994. All comparison information reflects restatement of financials
as a result of the discontinued operations.
Also included is a discussion and analysis of the Company's financial
condition and liquidity as of December 31, 1997. The following text should be
read in conjunction with the Company's Consolidated Financial Statements
contained in this report.
Results For The Year Ended December 31, 1997 As Compared With Results For the
Year Ended December 31, 1996
Net Sales
Net Sales increased to $51,235,126 for the year ended 1997 from $28,054,341
for the year ended 1996, an 83% increase. The increase in net sales resulted
from the following circumstances. Global-InSync, the production company, was
purchased in October 1996, and the sales for the partial year were $13,985,710.
In 1997, there was a full year of business and the sales amounted to $24,910.892
or a $10,925, 182 increase. In addition, the implementation of the systems
integration business at Vircom TG resulted in an increase in sales of
$11,925,330. The purchase of ASDI as of July, 1997 added another $330,273 to
the increase.
13
Gross Profit
As a result of increased sales, the Company's gross profit for 1997 rose to
$6,567,644 from $4,275,166 for 1996, an increase of $2,292,475. Overall gross
profit for the two years as a percentage of sales amounted to 12.8% in 1997 and
15.2% in 1996. The decrease in gross profit percentages is mainly as a result of
increased sales at the InSync subsidiary, which traditionally sells at lower
margins.
Operating Expenses
Operating expenses for 1997 rose significantly to $7,822,729 from 1996's
level of $5,202,193, a 50% increase. The increase was primarily due to the
inclusion of Global-InSync, the production company's expense of $2,970,889 for
twelve months in 1997 against three months or $903,119 in 1996 for an increase
of $2,067,770. The acquisition of ASDI added expenses of $326,908 and the
systems integration business, Vircom TG, added another $242,597.00.
Other Expenses
Other expenses rose to $1,557,852 for 1997 from $238,803 for 1996, a
$1,319,049 increase. The increase was primarily due to a reserve being carried
as a result of an indemnitor refusing to honor an indemnification agreement for
which the Company has agreed to act as secondary indemnitor. See discussion
under Item 3, "Legal proceedings."
Provision for Income Tax Credits
The 1997 benefit for income taxes was $510,129, compared with a benefit
of $459,337 for 1996. The deferred tax benefits are based on deferred tax
assets.
Income (Loss) from Continuing and Discontinued Operations
For 1997 the Company generated a loss of ($2,302,808) after operating and other
expenses, compared to loss of ($706,493) after operating and other expenses in
1996. The increase in the loss was caused primarily by a decrease in the gross
profit margins and an increase in expenses as mentioned above. In 1997, the
Company discontinued the Nevcor and Speech Solutions businesses. Of the
Company's aggregate 1997 loss of $9,435,960, the loss from discontinued
businesses was $7,133,152. The loss from these discontinued businesses was
$378,895 in 1996 and $111,418 in 1995. The losses of the discontinued businesses
as reflected in the income statement are the actual losses of the businesses
that were eliminated. No material disposal expenditure charges such as loss or
sale of fixed assets, severance pay or lease termination charges were incurred.
The Nevcor business was discontinued because the main supplier, NEC, decided to
change its method of distribution. This left a busines with high costs, and no
sales.
Net Income (Loss) Per Share
As a result of the factors discussed above, the net loss for 1997 was
($9,435,960) and the net loss per share was ($1.29), as compared to a net loss
of ($1,085,388) and a net loss per share of ($.33) in 1996. The per share
calculation is based on the weighted average number of shares outstanding.
14
Year Ended December 31, 1996 as Compared With Year Ended December 31, 1995
(Continuing Operations)
Net Sales
Net sales increased to $28,054,341 for the year ended 1996 from $8,769,599
for the year ended 1995, a 220% increase. Net sales of InSync from the effective
date of its acquisition on September 1, 1996 to December 31, 1996 were
$13,985,710. Net sales of NATCOM for the full 1996 year were $5,315,711 compared
to $2,356,670 from the date of its acquisition on September 28, 1995 to December
31, 1995. The increase in Global's aggregate net sales for 1996 were primarily
due to the InSync and NATCOM acquisitions.
Gross Profit
The Company's gross profit for 1996 rose to $4,275,166 from $680,215 for
1995, with the gain of $3,594,951 representing contributions from a full year of
operations of NATCOM and four months of operations of InSync in 1996. Overall
gross profit for the two years as a percentage of net sales amounted to 15.2% in
1996 and 7.7% in 1995, although these amounts are not representative of a
comparison based on consistent full-year results because of the timing of the
NATCOM and InSync acquisitions.
Operating Expenses
Operating expenses for 1996 rose substantially, to $5,202,193 from 1995's
level of $720,969, a 622% increase. Of the $4,481,224 increase, $2,338,916
represents incremental operating expense resulting from the inclusion of a full
year of operations of NATCOM and four months of operations of InSync in 1996,
and the remaining $2,142,308 represents additional investment in sales,
marketing and administrative personnel, along with expenditures in integrating
acquired operations.
Other Expenses
Other expenses, principally interest expense, rose to $238,803 for 1996
from other income of $13,778 for 1995, or a $252,581 increase. The increase in
1996 interest expense was primarily due to higher costs associated with
short-term bridge loans earlier in the year, as well as to an increase in
indebtedness to the Company's factor and financial institution because of higher
operating levels.
Income (Loss) Before Provision for Income Tax Credits
For 1996, the Company generated a loss of ($1,165,830) after operating and
other expenses, compared to a loss before tax credits of ($26,976) in 1995, as
the gains in gross profit from the full-year of operations of NATCOM and from
the four-month contribution of InSync were more than offset by the increases in
such expenses as noted above.
Provision for Income Tax Credits
The 1996 benefit for income taxes was $459,337 compared with a benefit
of $230,308 for 1995. The deferred tax benefits are based on deferred tax
assets which are considered realizable.
Net Income (Loss) Per Share
As a result of the factors discussed above, the net loss for 1996 was
($1,085,388) and net loss per
15
share was ($.33), as compared to net income of
$270,183 and net income per share of $.09 for 1995. The per share calculation is
based on the weighted average number of shares outstanding.
Financial Condition and Liquidity
The Company's cash balance at year-end was $138,469 and it had a working
capital deficit of ($6,783,555), compared to cash of $1,516,072 and working
capital of $3,930,788 at the end of 1996. Cash used in operations was
$2,970,785, compared to a cash flow of $1,048,307 in 1996.
The company had a working capital deficit of $6,784,000 as of December 31, 1997,
due to a loss of $9,435,960 during 1997. Accounts Payable increased
significantly at year end, because the operating loss restricted the Company's
ability to make current payments to its vendors. The main sources of financing
during 1997 were the sale of preferred stock and additional borrowings from
financial institutions.
The Company has a factoring agreement under which it factors trade
receivables. The maximum aggregate amount available under the factoring facility
is $9,000,000, receivables are handled on a recourse basis. The Company's
obligations under the factoring arrangement are personally guaranteed by two of
the Company's directors.
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's
net sales which was due quarterly during 1996, and monthly after January 1, 1997
thereafter. The Company believes that no payments are required subsequent to the
discontinuance of NEVCOR.
The acquisition and related employment agreements pursuant to which the
Company acquired Natcom in 1995 required the Company to make various installment
payments. Effective as of December 31, 1997, the Company negotiated the
termination of such agreements and accepted the resignation of Natcom's
President. The termination arrangements provide for a total payment to the
former Natcom shareholders of $177,000, which payment may be made by the
issuance of an aggregate of 85,500 shares of the Company's Common Stock. The
Company may also issue an aggregate of 150,000 shares of Common Stock to certain
former Natcom officers in consideration of such officer's entering into binding
non-compete agreements. The non-compete shares vest over a two-year period and
the non-competition agreements expire December 31, 1999. After considering and
evaluating a possible discontinuance of certain Natcom operations, the Company
has determined that Natcom's operations should not be discontinued and should
instead be organized and consolidated in the Virom TG division.
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 June 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 ending June 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
16
commence until the earlier of December 31, 2001, or upon payment in full of
the First Note.
The Company experienced a loss of approximately $9,435,960, of which
$7,133,152 was from discontinued operations. The Company has a working capital
deficit of $6,784,000 at December 31, 1997. These matters, among others, have
caused the Company's auditors to doubt the Company's ability to continue as a
going concern (see Note 1 to Financial Statement). Subsequent to the going
concern opinion, 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 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 and is
attempting to raise capital through a pending offering. In order to increase its
working capital and to sustain present operating levels, the Company will
require financing in addition to recent equity financing (see "Recent Equity
Financing" above). The Company also anticipates converting debts to several
creditors to an equity position. No assurance can be given that such financing
will be available on commercially acceptable terms. All of the above represent
the Company's efforts to achieve profitable operations and continuation of the
business, which is dependent on the Company's ability to achieve sufficient cash
flow and to meet its current obligations.
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.
Item 8. Financial Statements and Supplementary Data
The response to this item is submitted as a separate section of this report
commencing on page F-1.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
PART III
Pursuant to General Instruction G-3, and in response 'to the items
contained in this Part III, the Registrant is incorporating by reference the
information which will be included in Registrant's definitive proxy statement to
be filed within 120 days after December 31, 1997.
PART IV
Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K.
(a) The following documents are filed as a part of this report:
1. Financial Statements
The response to this portion of Item 14 is submitted as a
separate section of this report commencing on page F-1.
17
2. Financial Statements Schedules
The Financial Statement Schedules are appended following the
Financial Statements.
3. Exhibits
The following is a description of exhibits required to be filed with this
report (item numbers are those assigned in the Exhibits Table of Item 601,
Regulation S-K), and the incorporation-by-reference codes following each item
are explained at the end of the listing:
(3.1) Restated Articles of Incorporation and Certificate of Change.(*)
(3.2) Amended and Restated By-Laws.(*)
(3.3) Form of Certificate of Designation for Series 6 Convertible
Preferred Stock.
(3.4) Form of Certificate of Designation for Series 7 Convertible
Preferred Stock.
(3.5) Form of Certificate of Designation for Series 8 Convertible
Preferred Stock.
(4.1) Form of Common Stock Certificate.(*)
(4.2) Escrow Agreement, dated as of February 24, 1995, among Communications
and Entertainment Corp., Continental Stock Transfer & Trust Company
and Global Intellicom, Inc. ("Global")(*)
(4.3) Lock-Up Agreement dated May 26, 1995.(*)
(4.4) Form of Regulation S Securities Subscription Agreement, pursuant to
which the Company sold 330,000 shares of Series 1 Convertible
Preferred Stock.(++)
(4.5) Form of Offshore Securities Subscription Agreement, pursuant to which
the sold 825 shares of Series 2 Convertible Preferred Stock.( ++)
(4.6) Form of Regulation S Securities Subscription Agreement, pursuant to
which the Company sold 25,000 shares of Series 4 Convertible Preferred
Stock.( ++)
(5) Form of Opinion of Goodkind Labaton Rudoff & Sucharow LLP.(**)
(10.1) Asset Purchase Agreement, dated as of October 28, 1994, between
Tech Acquisition Corp. and AMCom Business Centers Corp. (*)
(10.2) Assignment and Assumption dated as of December 8, 1994 between Tech
Acquisition Corp. and Global.(*)
(10.3) Global Stock Option Plan.(*)
(10.4) Additional Benefit Plan of Global.(*)
(10.5) Employment Agreement, dated as of January 1, 1995, between Global and
Anthony R. Cucchi.(*)
18
(10.6) Loan and Security Agreement, dated December 8, 1994, among Finova
Capital Corporation ("Financial Institution") (f/k/a Greyhound
Financial Corporation) and Global's subsidiaries.(*)
(10.7) First Amendment to Loan and Security Agreement dated May 26, 1995,
among the Financial Institution, Global's subsidiaries and certain
guarantors.(*)
(10.8) Floorplan Credit Line Replacement Note, dated May 26, 1995, payable
to the Financial Institution by Global's subsidiaries.(*)
(10.9) Letter Agreement dated May 26, 1995 between Vircom, Inc. ("VIRCOM")
and Century Business Credit Corporation. ("Century")(*)
(10.10) Letter Agreement, dated May 26, 1995, between AMCom Business Centers
Corp. ("AMCOM") and Century.(*)
(10.11) Corporate Guaranty Unlimited executed by Global to Century, dated May
26, 1995, with respect to AMCOM.(*)
(10.12) Intercreditor Agreement, dated May 26, 1995, among AMCOM, VIRCOM, the
Financial Institution and Century.(*)
(10.13) Distribution Agreement, dated April 11, 1991, between Claren, Inc.
and Texas Instruments, Inc. and Assignment Agreement from Claren,
Inc. to AMCOM.(*)
(10.14) Nectech Authorized Major Reseller Agreement dated April 12, 1990.(*)
(10.15) Dealer Agreement, dated December 1995, between AT&T Global
Information Solutions (f/k/a NCR Corporation) and AMCOM.(*)
(10.16) Lease Agreement, dated March 20, 1995, between AMCOM and Warehouse
Associates for Global's West Chester, Pennsylvania facilities.(*)
(10.17) Stock Purchase Agreement dated September 28, 1995 by and between
Global and the Sellers named therein(***)
(10.18) Warrant Agreement dated March 20, 1996 by and between Global and N.
Norman Muller, Howard Maidenbaum, Anthony R. Cucchi, Thomas W. Smith,
Wayne M. Rogers and David A. Mortman (each a Director)(++++)
(10.19) Letter Agreement dated as of January 1, 1995 between Global and Perry
Schemer.(++++)
(10.20) Letter Agreement dated January 1, 1996 between Global and Wayne M.
Rogers.(++++)
(10.21) Warrant Agreement dated March 5, 1996 by and between Global and
Pacific Consulting Group.(++++)
(10.22) Warrant Agreement dated March 20, 1996 by and between Global and
Wharton Associates.(++++)
(10.23) Warrant Agreement dated March 5, 1996 by and between Global and
MWW/Strategic Communications, Inc.(++++)
19
(10.24) Letter Agreement dated as March 27, 1996 by and between Global, AMCOM
and Warehouse Associates. (++++)
(10.25) Amendment Agreement dated as of March 28, 1996 by and between Global
and the Sellers named therein. (++++)
(10.26) Employment Agreement dated September 28, 1995. between National
Computer Resources, Inc. ("NATCOM"), Global as guarantor and
Frederick Smith. (++++)
(10.27) Employment Agreement dated September 28, 1995 between NATCOM, Global
as guarantor and Richard Dilts. (++++)
(10.28) Consulting Agreement dated September 28, 1995 between NATCOM, Global
as guarantor and Stephen T. Barry. (++++)
(10.29) Letter Agreement dated December 31, 1995 by and between Global and
Messrs. Maidenbaum and Muller. (++++)
(10.30) Warrant Agreement dated March 20, 1996 by and between Global and
Perry Scheer. (++++)
(10.31) Settlement Agreement and Mutual Release dated March 28, 1996 by and
between Grove Avenue Corp. and AMCOM, VIRCOM and Global. (++++)
(10.32) Assignment & Assumption Agreement dated December 8, 1994 between Tech
Acquisition Corp. and AMCom Business Centers Corp.(**)
(10.33) Employment Agreement, dated January 1, 1994 between Thomas Vetterani
and AMCom.(**)
(10.34) Stock Purchase Agreement by and between Global Intellicom, Inc. and
the Sellers named therein.(***)
(10.35) Asset Purchase Agreement dated as of September 16, 1996, pursuant to
which the Company's wholly owned subsidiary Global-InSync, Inc.
purchased substantially all of the assets of ManTech Solutions
Corporation ("MSOE"), by and between the Company, InSync, MSOL, and
MSOL's parent, ManTech International Corporation ("ManTech").(+)
(10.36) Asset Purchase Agreement dated as of October 18, 1996 by and between
Pro Notes Acquisition Corporation and the Company on the one hand and
Pro Notes Inc. and Alan Costilo on the other, by which the Company
purchased the assets of Pro Notes, Inc.( ++)
(10.37) Agreement dated January 22, 1997 between Global and Century Business
Credit Corporation.(++++)
(10.38) Promissory Note dated February 1, 1996 between Global as borrower and
Triangle Bridge Group, LE.(++++)
(10.39) Extension Agreement dated November 22, 1996 between Global and
Triangle Bridge Group, LP.(++++)
(10.40) Letter Agreement dated February 16, 1996 between Global and Goodkind
Labaton Rudoff & Sucharow LLP.(++++)
20
(10.41) Stock Purchase Agreement dated February 16, 1996 between Goodkind
Labaton Rudoff & Sucharow LLP and various Purchasers.(++++)
(10.42) Letter Agreement dated August 21, 1996 between Global and World
Capital Funding, Inc.(++++)
(10.43) Lead/Corporate Relations Agreement dated August 15, 1996 between
Global and Corporate Relations Group, Inc.(++++)
(11) Statement re: Computation of Per Share Earnings, attached as Exhibit
11 to the Financial Statements.
(21) List of the Company's Subsidiaries.
(27) Financial Data Schedule
(b) Reports on Form 8-K
On October 1, 1996, the Company filed a current report on Form 8-K,
describing the Company's purchase of substantially all the assets of ManTech
Solutions Corporation, followed by an amendment containing the required
financial statements.
(c) See (a)(3) above.
(d) See Schedule II included at the end of the Financial Statements.
- -------------
(*) Designates document incorporated herein by reference to Global's
Registration Statement on Form S-I, File No. 33-93098.
(**) Designates document incorporated by reference to Amendment No. 1 to
Global's Registration Statement on Form S-l, File No. 33-93098.
(***) Designates document incorporated herein by reference to Global's Report
on Form 8-K dated October 12, 1995, File No. 0-26684, as amended by
Amendment No.1 to Report on Form 8-K dated December 8, 1995.
(+) Designates document incorporated herein by reference to Global's
Report on Form 8-K dated September 16, 1996, File No. 0-26684.
(++) Designates document incorporated herein by reference to Global's
Report on Form 10-Q dated June 30, 1996, File No. 0-26684.
(++) Designates document incorporated herein by reference to Global's
Report on Form 10-Q dated September 30, 1996, File No. 0-26684.
(++++) Designates document incorporated herein by reference to Global's Report
on Form 10-K dated March 30, 1996.
(++++) Designates document incorporated herein by reference to Global's Report
on Form 10-K dated March 31, 1997.
21
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
GLOBAL INTELLICOM, INC.
Dated: April , 1998
By: /s/ N. NORMAN MULLER
--------------------
N. Norman Muller
(Chief Executive Officer)
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Howard Maidenbaum and David Mortman his true and
lawful attorney-in-fact, each acting alone, with full power of substitution and
resubstitution for him and in his name, place and stead, in any and all
capacities to sign any and all amendments to this report, and to file the same,
with all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that
said attorneys-in-fact or their substitutes, each acting alone, may lawfully do
or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signatures Title Date
---------- ----- ----
/s/ N. NORMAN MULLER Chairman of the Board and Chief April , 1998
-------------------- Executive Officer (Class III Director)
N. Norman Muller
/s/ DAVID A. MORTMAN President and Chief Operating Officer April , 1998
-------------------- and Class I Director
David A. Mortman
/s/ HOWARD MAIDENBAUM Executive Vice President and Class III April , 1998
--------------------- Director
Howard Maidenbaum
/s/ THOMAS W. SMITH Class I Director April , 1998
-------------------
Thomas W. Smith
/s/ WAYNE M. ROGERS Class II Director April , 1998
-------------------
Wayne M. Rogers
/s/ ROBERT L. OLSON Vice President Finance April , 1998
------------------- Chief Accounting Officer
Robert L. Olson
22
GLOBAL INTELLICOM, INC. AND SUBSIDIARIES
REPORT ON CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
F-1
GLOBAL INTELLICOM, INC. AND SUBSIDIARIES
REPORT ON CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
CONTENTS
PAGE
------------
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS F-3
CONSOLIDATED BALANCE SHEETS F-4 - F-5
CONSOLIDATED STATEMENTS OF OPERATIONS F-6
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY F-7 - F-8
CONSOLIDATED STATEMENTS OF CASH FLOWS F-9 - F-10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-11 - F-46
F-2
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
Global Intellicom, Inc.
New York, New York
We have audited the accompanying consolidated balance sheets of Global
Intellicom, Inc. and Subsidiaries (the "Company") as of December 31, 1997 and
1996, and the related consolidated statements of operations, changes in
stockholders' equity and cash flows for the years ended December 31, 1997, 1996
and 1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements of the Company referred to
above present fairly, in all material respects, the financial position as of
December 31, 1997 and 1996 and the results of their operations and their cash
flows for the periods presented in conformity with generally accepted accounting
principles.
The accompanying consolidated financial statements as at and for the year ended
December 31, 1997 have been prepared assuming that the Company will continue as
a going concern. As discussed in Note 1, the Company has suffered recurring
losses from operations and has a working capital deficiency. These conditions
raise substantial doubt about the Company's ability to continue as a going
concern. Management's plan in regard to these matters are also described in Note
1. The consolidated financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
We have also audited Exhibit 11 of the Company for the years ended December 31,
1997 and 1996 included in the 1997 annual report of the Company on Form 10-K. In
our opinion, Exhibit 11 presents fairly the information required to be set forth
therein.
MILLER, ELLIN & COMPANY, LLP
CERTIFIED PUBLIC ACCOUNTANTS
April 14, 1998
New York, New York
F-3
GLOBAL INTELLICOM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
DECEMBER 31,
1997 1996
---------- -----------
CURRENT ASSETS:
Cash $ 138,469 $ 1,516,072
Accounts receivable - trade, less allowance for
doubtful accounts of $24,392 and $40,000,
respectively 3,684,106 4,337,942
Accounts receivable - non-trade 268,815 262,688
Other receivables 206,770 250,409
Inventories 3,001,519 3,275,166
Notes receivable - officer and stockholder - 457,979
Note and loans receivable - other 40,113 61,788
Prepaid expenses and other current assets 624,322 148,797
Deferred income taxes 630,000 690,476
Current assets of discontinued operations 32,884 3,828,701
------------- -------------
Total current assets 8,626,998 14,830,018
------------- -------------
PROPERTY AND EQUIPMENT - net of accumulated
depreciation and amortization 1,326,058 723,999
------------- -------------
INTANGIBLE ASSETS - net of accumulated
amortization 5,542,385 3,281,440
------------- -------------
OTHER ASSETS:
Deferred income taxes 2,645,000 493,832
Deferred costs 707,106 25,465
Other assets 34,058 11,113
Other assets of discontinued operations 53,362 3,395,014
Software development costs - 62,011
------------- -------------
3,439,526 3,987,435
$ 18,934,967 $ 22,822,892
============= =============
The accompanying notes are an integral part of the consolidated financial
statements
F-4
GLOBAL INTELLICOM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY
DECEMBER 31,
1997 1996
------------ -------------
CURRENT LIABILITIES:
Due to financial institution $ 3,269,418 $ 1,711,429
Due to factor 884,227 236,432
Note payable - bank 50,000 -
Accounts payable - trade 7,883,413 3,837,898
Accounts and note payable - related party - 81,778
Customer deposits 21,578 881,100
Notes payable - officers and stockholders 132,677 216,076
Acquisition indebtedness - current portion 581,823 693,942
Capital lease obligations - current portion 147,615 5,182
Income taxes payable 238,534 240,901
Accrued expenses and other current liabilities 1,976,510 1,307,016
Current liabilities of discontinued operations 224,758 1,687,476
------------ -------------
Total current liabilities 15,410,553 10,899,230
------------ -------------
LONG-TERM LIABILITIES:
Acquisition indebtedness - net of current portion 1,545,261 2,109,886
Capital lease obligations 86,854 11,831
Other liabilities of discontinued operations - 176,773
------------ -------------
1,632,115 2,298,490
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock - $.01 par value
(liquidating value ranging from $10 to
$1,000 per share amounting to $5,546,250
and $4,386,250, respectively
including dividends in arrears):
Authorized - 10,000,000 shares
Issued and
outstanding - 351,985 shares - 1997
- 378,500 shares - 1996 3,520 3,785
Common stock - $.01 par value:
Authorized - 20,000,000 shares
Issued - 7,497,345 shares - 1997
- 6,880,830 shares - 1996 74,973 68,808
Common stock to be issued 417,188 95,873
Additional paid-in capital 15,779,898 13,815,353
Accumulated deficit (14,374,396) (4,349,763)
Treasury stock, at cost (8,884) (8,884)
------------ -------------
Total stockholders' equity 1,892,299 9,625,172
------------ -------------
$ 18,934,967 $ 22,822,892
============ =============
The accompanying notes are an integral part of the consolidated financial
statements
F-5
GLOBAL INTELLICOM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
-------------------------------------------------------------
1997 1996 1995
------------------ ------------------ -----------------
NET SALES $ 51,235,126 $ 28,054,341 $ 8,769,599
COST OF GOODS SOLD 44,667,482 23,779,175 8,089,384
-------------- ------------- -------------
GROSS PROFIT 6,567,644 4,275,166 680,215
-------------- ------------- -------------
OPERATING EXPENSES:
Selling, shipping and general and
administrative expenses 7,261,496 4,966,644 682,413
Depreciation and amortization 250,231 78,465 16,965
Amortization of intangibles 311,002 157,084 21,591
-------------- ------------- -------------
7,822,729 5,202,193 720,969
-------------- ------------- -------------
OPERATING LOSS (1,255,085) (927,027) (40,754)
OTHER INCOME (EXPENSES) (includes interest
expense to related parties of $12,091,
$34,391 and $-0-, respectively (1,557,852) (238,803) 13,778
-------------- ------------- -------------
LOSS BEFORE PROVISION
FOR INCOME TAX CREDITS (2,812,937) (1,165,830) (26,976)
PROVISION FOR INCOME TAX
CREDITS (510,129) (459,337) (230,308)
-------------- ------------- -------------
INCOME (LOSS) FROM
CONTINUING OPERATIONS (2,302,808) (706,493) 203,332
DISCONTINUED OPERATIONS:
Income (loss) from discontinued operations,
net of income taxes (tax benefits) of
$(1,580,563), $(247,202) and $44,567 (7,133,152) (378,895) 66,851
-------------- ------------- -------------
NET INCOME (LOSS) $ (9,435,960) $ (1,085,388) $ 270,183
============== ============= =============
BASIC INCOME (LOSS) PER
COMMON SHARE:
Income (loss) from continuing operations $ (.40) $ (1.17) $ .07
Discontinued operations (.95) (.11) .02
-------------- ------------- -------------
$ (1.35) $ (1.28) $ .09
============== ============= =============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 7,481,307 3,527,053 2,927,170
============== ============= =============
DIVIDENDS:
Dividends paid $ 188,673 $ - $ -
Dividends deemed from beneficial
conversion features of preferred stock 400,000 3,376,374 -
-------------- ------------- -------------
$ 588,673 $ 3,376,374 $ -
============== ============= =============
The accompanying notes are an integral part of the consolidated financial
statements
F-6
GLOBAL INTELLICOM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
THREE YEARS ENDED DECEMBER 31, 1997
PREFERRED STOCK COMMON STOCK
------------------------ ------------------------
SHARES AMOUNT SHARES AMOUNT
----------- ----------- ----------- -----------
BALANCE AT DECEMBER 31, 1994 - $ - 5,000,000 $50,000
Reverse stock split - - (2,500,000) (25,000)
Capital contributions - - 643,203 6,432
Deferred offering costs in connection
with registration of common stock - - - -
Common stock to be issued for services
rendered or to be rendered - - - -
Repurchase of fractional shares - - - -
Net income for the year ended December 31, 1995 - - - -
------- ------ --------- -------
BALANCE AT DECEMBER 31, 1995 - - 3,143,203 31,432
Sale of securities under RegulationS 355,825 3,558 140,000 1,400
Offering costs in connection with sale of securities - - - -
Preferred and common stock issued in connection with
acquisition of net assets of ManTech Solutions Corp. 350,000 3,500 72,001 720
Common stock issued for services rendered - - 69,504 695
Common stock to be issued for services rendered - - - -
Reversal of shares authorized in 1995
for services rendered - - - -
Conversion of preferred stock into common stock (327,325) (3,273) 3,456,122 34,561
Dividends deemed from beneficial conversion
features of preferred stock - - - -
Net loss for the year ended December 31, 1996 - - - -
------- ------ --------- -------
BALANCE AT DECEMBER 31, 1996 378,500 3,785 6,880,830 68,808
Sale of securities 1,200 12 - -
Offering costs in connection with sale of securities- - - - -
Preferred stock issued in connection with merger of
Automated Systems Development of Indiana, Inc. 785 8 - -
Common stock issued for services rendered - - 39,326 393
Common stock to be issued for services rendered - - - -
Conversion of preferred stock into common stock (28,500) (285) 589,439 5,894
Other adjustments - - (12,250) (122)
Dividends - - - -
Dividends deemed from beneficial conversion
features of preferred stock - - - -
Net loss for year ended December 31, 1997 - - - -
------- ------ --------- -------
BALANCE AT DECEMBER 31, 1997 351,985 $3,520 7,497,345 $74,973
======= ====== ========= =======
COMMON RETAINED
STOCK ADDITIONAL EARNINGS TOTAL
TO BE PAID-IN (ACCUMULATED TREASURY STOCKHOLDERS'
ISSUED CAPITAL DEFICIT) STOCK EQUITY
----------- ----------- --------------- ----------- -----------
BALANCE AT DECEMBER 31, 1994 $ - $1,850,000 $ (158,184) $ - $1,741,816
Reverse stock split - 25,000 - - -
Capital contributions 337,068 - - 343,500
Deferred offering costs in connection
with registration of common stock - (198,844) - - (198,844)
Common stock to be issued for services
rendered or to be rendered 181,753 - - - 181,753
Repurchase of fractional shares - - - (8,884) (8,884)
Net income for the year ended December 31, 1995 - - - 270,183 270,183
------- ---------- --------- --------- -----------
BALANCE AT DECEMBER 31, 1995 181,753 2,013,224 111,999 (8,884) 2,329,524
Sale of securities under Regulation - 6,966,542 - - 6,971,500
Offering costs in connection with sale of securities- - (2,677,371) - - (2,677,371)
Preferred and common stock issued in connection with
acquisition of net assets of ManTech Solutions Corp. - 3,900,780 - - 3,905,000
Common stock issued for services rendered (45,000) 267,092 - - 222,787
Common stock to be issued for services rendered 95,873 - - - 95,873
Reversal of shares authorized in 1995
for services rendered (136,753) - - - (136,753)
Conversion of preferred stock into common stock - (31,288) - - -
Dividends deemed from beneficial conversion
features of preferred stock - 3,376,374 (3,376,374) - -
Net loss for the year ended December 31, 1996 - - (1,085,388) - (1,085,388)
------- ---------- --------- --------- -----------
BALANCE AT DECEMBER 31, 1996 95,873 13,815,353 (4,349,763) (8,884) 9,625,172
Sale of securities - 1,199,988 - - 1,200,000
Offering costs in connection with sale of securities- - (510,428) - - (510,428)
Preferred stock issued in connection with merger of
Automated Systems Development of Indiana, Inc. - 784,992 - - 785,000
Common stock issued for services rendered (95,873) 95,480 - - -
Common stock to be issued for services rendered 417,188 - - - 417,188
Conversion of preferred stock into common stock (5,609) - - -
Other adjustments - 122 - -
Dividends - - (188,673) - (188,673)
Dividends deemed from beneficial conversion
features of preferred stock - 400,000 (400,000) - -
Net loss for year ended December 31, 1997 - - (9,435,960) - (9,435,960)
--------- ---------- --------- --------- -----------
BALANCE AT DECEMBER 31, 1997 $417,188 $15,779,898 $(14,374,396) $(8,884) $1,892,299
========= =========== ============ ========= ===========
The accompanying notes are an integral part of the consolidated
financial statements
F-7
GLOBAL INTELLICOM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
------------------------------------------------
1997 1996 1995
-------------- -------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (9,435,960) $ (1,085,388) $ 270,183
Adjustments to reconcile net income (loss) to net
cash provided by continuing operations:
Loss (income) from discontinued operations 7,133,152 378,895 (203,332)
Depreciation and amortization 250,231 78,465 16,965
Amortization of intangibles 311,002 157,084 21,591
Deferred income taxes (510,129) (488,129) (224,567)
Imputed interest on ManTech acquisition 29,340 58,683 -
Write-off of intangible assets 895,388 - -
Reversal of shares authorized - (136,753) -
Loss on disposition of property and equipment - - 5,983
Changes in assets and liabilities:
Accounts receivable - trade 703,520 (1,037,342) 294,391
Accounts receivable - non-trade (6,127) (252,140) (10,548)
Inventories 273,647 (222,396) (40,865)
Other receivables 43,639 (157,471) (92,938)
Notes and loan receivable - other 21,675 (50,056) (11,148)
Prepaid expenses and other (358,336) (63,403) (50,136)
Other assets (22,554) 37,023 220
Accounts payable - trade 4,014,805 2,020,383 (354,830)
Accounts and note payable - related party (81,778) (363,922) (66,392)
Customer deposits (859,522) 797,303 -
Income taxes payable (2,367) 98,398 142,503
Accrued expenses and other 653,378 464,072 264,340
------------ ------------ ------------
NET CASH PROVIDED BY
CONTINUING OPERATIONS 3,053,004 233,306 38,580
------------ ------------ ------------
Net cash provided by (used in) discontinued operations:
Income (loss) from discontinued operations (7,133,152) (378,895) 203,332
Depreciation and amortization 82,549 182,914 91,456
Amortization of intangibles 144,301 144,786 187,763
Deferred income taxes (1,580,563) (247,202) 44,567
Discontinued operations - net 2,463,076 1,113,398 508,688
------------ ------------ ------------
(6,023,789) 815,001 1,035,806
------------ ------------ ------------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES (2,970,785) 1,048,307 997,226
------------ ------------ ------------
The accompanying notes are an integral part of the consolidated
financial statements
F-8
GLOBAL INTELLICOM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
YEARS ENDED DECEMBER 31,
-------------------------------------------
1997 1996 1995
-------------- -------------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Receipt of cash from asset purchase $ 11,732 $ - $ 482,012
Purchases of assets pursuant to agreement (20,000) - (100,000)
Reductions in note receivable - officer and stockholder 457,979 177,601 -
Other intangibles (838,411) (333,712) (484,649)
Purchases of property and equipment (407,916) (144,000) (182,796)
Software development costs 62,011 (62,011) -
Other deferred costs (681,641) (25,465) (29,103)
Discontinued operations - net 510,865 (1,047,124) (743,899)
Loans to stockholders - (215,900) (419,680)
---------- ----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (905,381) (1,650,611) (1,478,115)
---------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital contributions 1,200,000 6,971,500 368,500
Deferred offering costs (510,428) (2,281,195) (324,233)
Due from factor 647,795 466,299 (229,867)
Due to financial institutions - net 1,557,989 (3,282,706) 1,036,278
Proceeds from (payments to) notes payable -
officers and stockholders (83,399) 216,076 -
Payments on capitalized lease obligations (110,971) (4,270) (436)
Payments on due on acquisitions - (338,017) -
Purchases of treasury stock - - (8,884)
Proceeds from note payable - bank 5,000
Discontinued operations - net (18,750) (125,933) 99,886
Dividends (188,673) - -
---------- ----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 2,498,563 1,621,754 941,244
---------- ----------- -----------
NET CHANGE IN CASH (1,377,603) 1,019,450 460,355
CASH - beginning 1,516,072 496,622 36,267
---------- ----------- -----------
CASH - ending $ 138,469 $ 1,516,072 $ 496,622
========== =========== ===========
The accompanying notes are an integral part of the consolidated
financial statements
F-9
GLOBAL INTELLICOM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
YEARS ENDED DECEMBER 31,
----------------------------------------------
1997 1996 1995
-------------- -------------- -------------
SCHEDULES OF NON-CASH ACTIVITIES:
Dividends deemed from beneficial conversion
features of preferred stock $ 400,000 $ 3,376,374 $ -
============== ============== ===========
Acquisition $ 785,000 $ 5,681,000 $ -
============== ============== ===========
Settlement of acquisition debt $ 706,084 $ - $ -
============== ============== ===========
Common stock to be issued for
non-competition agreement $ 300,000 $ - $ -
============== ============== ===========
Common stock to be issued for services
rendered $ 117,188 $ 47,873 $ -
============== ============== ===========
Purchase of property and equipment by
capital leases $ 40,427 $ 19,319 $ 338,033
============== ============== ===========
Deferred offering costs $ - $ 125,389 $ -
============== ============== ===========
Issuance of note to vendor $ - $ 665,950 $ -
============== ============== ===========
Increase in Natcom purchase price $ - $ 359,435 $ -
============== ============== ===========
Offset of note receivable from purchase
of business $ - $ - $ 36,748
============== ============== ===========
Common stock to be issued for services to be
rendered $ - $ - $ 156,753
============== ============== ===========
Payments due on purchase of business $ - $ - $ 850,310
============== ============== ===========
Issuance of note to related party as part of
settlement of accounts payable $ - $ - $ 295,700
============== ============== ===========
Reverse stock split $ - $ - $ 25,000
============== ============== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid for interest $ 968,052 $ 640,082 $ 334,327
Cash paid for income taxes - 5,259 6,540
The accompanying notes are an integral part of the consolidated financial
statements
F-10
GLOBAL INTELLICOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 1 - GOING CONCERN
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. The Company
experienced a loss of approximately $9,436,000 and has a working capital
deficit of approximately $6,784,000 at December 31, 1997. These matters,
among others, raise substantial doubt about the Company's ability to
continue as a going concern.
Management's plan includes the restructuring of its operations including
the discontinuance of unprofitable businesses including the aggregator
portion of the NEVCOR business and the SPEECH SOLUTION business. Both
businesses accounted for losses totalling approximately $7,133,000 in 1997
and $379,000 in 1996. The Company is in the process of reducing its
overhead by eliminating sales and administrative positions at VIRCOM TG,
INSYNC and at its corporate headquarters. The Company is outsourcing its
manufacturing operating so that its manufacturing payroll will be
eliminated. Rent has been reduced at its VIRCOM TG facility and will be
reduced at its INSYNC facility. The Company is also putting into place a
program to reduce the cost of its various employee benefit programs. The
Company is also changing its product mix so that gross profits will be
higher in the future. The sales emphasis has been changed from low margin
hardware sales to higher margin system integration and cabling sales.
In the first quarter of 1998, the Company raised additional capital. The
Company raised approximately $2,200,000 from the sale of Series 6 and 7
preferred stock. The unaudited proforma effect of the sale of preferred
stock is presented in Note 27. The Company also has plans to enter into an
agreement to secure a $4,000,000 equity line of credit utilizing
subordinated convertible debentures. However, continuation of the business
thereafter is dependent on the Company's ability to achieve profitable
operations and sufficient cash flow to meet its current obligations.
The accompanying consolidated financial statements do not include any
adjustments relating to the recoverability and classification of assets and
liabilities that might be necessary should the Company be unable to
continue as a going concern.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Global Intellicom, Inc. (the "Company") was incorporated in the state of Nevada
on September 1, 1994.
Business
The Company, through its wholly-owned subsidiaries listed below, conducts
the following business:
1. VIRCOM TECHNOLOGIES GROUP, INC. ("VIRCOM TG") - Value-added reseller
and provides a wide range of information technology services, including
systems integration, applications, internal and external network
testing and support services. VIRCOM TG began operations on July 2,
1997. Cable Co., Inc. a wholly-owned subsidiary of Vircom TG, was
incorporated on March 9, 1998 to provide cable and fiber optic wiring
services.
2. NEVCOR TECHNOLOGIES GROUP, INC. ("NEVCOR") (formerly known as AMCOM) -
aggregator/distributor of computers, wireless communications products,
peripherals and software, and sells to customers throughout the United
States. On July 1, 1997 the Company discontinued its aggregator portion
of its NEVCOR business.
F-11
GLOBAL INTELLICOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Business (Continued)
3. VIRCOM, INC. ("VIRCOM") - reseller of microcomputers, peripherals,
software and wireless communication products, and sells to corporate
and other professional end-users throughout the United States.
4. NATIONAL COMPUTER RESOURCES, INC. ("NATCOM") - Value-added reseller of
computer systems consisting primarily of high-end servers and
distributes to corporations, school districts and state governmental
agencies throughout the United States.
5. GLOBAL-INSYNC, INC. ("INSYNC") - Manufacturer of made-to-order computer
servers and workstations and serves customers in the United States.
6. SPEECH SOLUTIONS, INC. ("SPEECH SOLUTIONS") - Provider of voice
recognition tools and interfaces for speech-activated computer programs
and sells to customers in the United States. SPEECH SOLUTIONS was
discontinued on August 1, 1997.
7. NATCOM AUTOMATED SOLUTIONS, INC. ("NASI") - a wholly-owned subsidiary
of NATCOM, is a ful service integrator, providing modular products
(hardware and software) that can be customized under a building block
concept according to its customers' needs. In addition to
installation, NASI provides full product support, training and
maintenance.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
Use of Estimates in the Preparation of Financial Statements
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 and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from these
estimates.
Revenue Recognition
Revenue is recognized upon the shipment of products or performance of
services.
Service revenue is recognized only when all significant obligations have
been performed.
F-12
GLOBAL INTELLICOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Sales Returns and Warranties
The Company does not provide an accrual for sales returns on damaged
merchandise as such costs are borne by the Company's vendors. The Company
provides for an amount it estimates will be needed to cover future warranty
obligations.
Sales Incentive Program
Sales incentive program rebates are amounts received from vendors for
promotional programs, price protection programs and cooperative advertising
programs, and are recognized in the period earned. Amounts receivable from
vendors under such programs are classified either as accounts receivable -
non-cash or have been offset against amounts due from financial
institutions.
Amounts received under such programs is as follows:
1997 1996 1995
------------- ------------- -------------
Continuing operations:
Price protection $ 115,637 $ 3,280 $ -
========== ============ ============
Promotional programs $ 41,721 $ 18,075 $ -
Cooperative advertising 19,608 18,249 -
---------- ------------ ------------
$ 61,329 $ 36,324 $ -
========== ============ ============
Discontinued operations:
Price protection $ 115,637 $ 823,333 $ 893,100
========== ============ ============
Promotional programs $ 15,989 $ 132,491 $ 207,162
Cooperative advertising 19,608 60,141 156,170
---------- ------------ ------------
$ 151,234 $ 1,015,965 $ 1,256,432
========== ============ ============
Concentrations of Credit Risk
Accounts Receivable - Trade
Accounts receivable consist of open trade accounts with various
companies. The Company performs ongoing credit evaluations of its
customers and believes that adequate allowances for any uncollectible
receivables are maintained.
In 1995, NEVCOR, VIRCOM and NATCOM entered into factoring agreements
with Century Business Credit Corp. ("Century"). INSYNC entered into a
factoring agreement with Century in January 1997.
At December 31, 1997, there were no major accounts receivable. One
customer accounted for 42% of accounts receivable at December 31, 1996.
One customer accounted for 22%, 21% and 11% of net sales for 1997, 1996
and 1995, respectively.
F-13
GLOBAL INTELLICOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Concentrations of Credit Risk (Continued)
Cash
The Company maintains cash balances in its banks which at times may
exceed the limits of the Federal Deposit Insurance Corp.
Inventories
INSYNC values its inventory on an identified cost basis at the lower of
cost or market. The other subsidiaries value their inventory at the lower
of cost (first-in, first-out) or market.
Property and Equipment
Property and equipment is stated at cost. Depreciation is provided using
the straight-line method over the estimated useful lives of the assets as
follows:
Machinery and equipment - 2 - 5 years
Furniture and fixtures - 2 - 7 years
Vehicles - 2 years
Leasehold improvements - Life of lease
Expenditures for repairs and maintenance are charged to expense as
incurred.
Intangible Assets
The excess of the purchase cost over the fair value of net assets acquired
in the acquisitions is included in intangible assets and is being amortized
over fifteen years on a straight-line basis. In accordance with Statement
of Financial Accounting Standards No. 121 (SFAS No. 121), "Accounting for
the Impairment of Long-lived Assets and For Long-lived Assets to Be
Disposed Of," the Company periodically reviews goodwill to assess
recoverability based upon undiscounted expected future cash flows for each
subsidiary. Testing for such recoverability in each reporting period may
not be cost effective or even possible and in such cases, the Company will
test assets for impairment if a triggering event occurs (events or changes
in circumstances such that the carrying amount of the assets may not be
recoverable). Impairments would be recognized if a permanent diminution in
value were to occur.
In 1997, the Company discontinued its NEVCOR and SPEECH SOLUTIONS
businesses and $895,388 of goodwill were charged to discontinued
operations.
Computer Software
The costs incurred for the development of computer software that will be
sold, leased or otherwise marketed were capitalized when technological
feasibility was established. These capitalized costs were subject to an
ongoing assessment of recoverability based upon anticipated future revenues
and changes in hardware and software technologies. Costs that were
capitalized included labor and related overhead.
Amortization of capitalized software development costs began in March 1997
when the product was available for general release. Amortization was
provided on a product-by-product basis using the straight-line method over
three years.
F-14
GLOBAL INTELLICOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Computer Software (Continued)
At December 31, 1996, unamortized capitalized software development costs
were $220,347.
In 1997, the Company discontinued its SPEECH SOLUTIONS business and all
remaining unamortized software costs totalling $457,316 were charged to
discontinued operations.
Income Taxes
The Company adopted SFAS No. 109, "Accounting for Income Taxes," which
requires the use of the liability method of accounting for income taxes.
The liability method measures deferred income taxes by applying enacted
statutory rates in effect at the balance sheet date to the differences
between the tax bases of assets and liabilities and their reported amounts
in the financial statements. The resulting deferred tax assets or
liabilities are adjusted to reflect changes in tax laws as they occur.
Advertising Costs
Advertising costs are charged to operations when incurred.
Earnings Per Share
The Company adopted SFAS No. 128, "Earnings Per Share" which establishes
new standards for computing and presenting earnings per share. The
statement also requires restatement of all prior period earnings per share
data presented.
Net loss per common share is based on the weighted average number of common
shares outstanding during the period. Common stock equivalents have not
been included as their effect would be antidilutive.
Recently Issued Pronouncements
SFAS No. 130, "Reporting Comprehensive Income," requires an entity to
report comprehensive income and its components in a full set of financial
statements and is effective for fiscal years beginning after December 15,
1997. Comprehensive income is the change in equity of a business enterprise
during a period from transactions and other events and circumstances from
nonowner sources. The Company has elected to adopt SFAS No. 130 in 1998.
American Institute of Certified Public Accountants Statement of Position
No. 96-1, "Environmental Remediation Liabilities," establishes specific
criteria for the recognition and measurement of environmental remediation
liabilities. The adoption of the statement in 1997 did not have a
significant effect on the Company's financial condition or results of
operations.
F-15
GLOBAL INTELLICOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 3 - ACQUISITIONS
AMCOM Business Centers Corp.
On October 28, 1994, the Company purchased certain net assets of AMCOM
subject to certain liabilities and obligations. This transaction was
accounted for as a purchase. On December 8, 1994, AMCOM began operations as
a wholly-owned subsidiary of the Company. In March 1997, AMCOM changed its
name to NEVCOR.
The total purchase price of the net assets originally consisted of the
following:
1. $300,000 upon execution of the agreement.
2. $1,924,000 at closing.
3. A contingent payment of $3,056,000 based upon the following:
a. 1% of gross sales (as defined below) of AMCOM from January 1,
1994 to December 7, 1994.
b. During the next twelve months, 1% of NEVCOR's gross sales, if
achieved, payable quarterly.
c. Thereafter, until fully paid, 1% of NEVCOR's gross sales, if
achieved, payable monthly.
In March 1996, a Settlement Agreement and Mutual Release ("Agreement") was
signed amending the amount and payment terms of the contingent payment as
follows:
1. The balance of the contingent payment was deemed to be $2,549,877 at
March 31, 1996.
2. The balance owed on the note issued by the Sellers in conjunction with
the asset purchase ($36,748)was deemed to be repaid and intangible
assets adjusted accordingly.
3. The contingent payment would be paid as follows:
a. No payments due from January 1, 1995 through March 31, 1996.
b. From April 1, 1996 through December 31, 1996, 1/2% of NEVCOR's
gross sales (as defined below), if achieved, payable quarterly.
c. Thereafter, until fully paid, 1/2% of NEVCOR's gross sales, if
achieved, payable monthly.
In addition, the Agreement called for the following to be performed on or
before April 19, 1996:
1. The Company paid to a corporation related to the prior AMCOM
stockholders ("Sellers") rent owed in the amount of $21,512.
2. The Company paid to the Sellers $120,000 representing the estimated
income tax reimbursement per the asset purchase agreement (see below).
3. The Sellers forgave $65,168, representing amounts owed by the Company.
F-16
GLOBAL INTELLICOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 3 - ACQUISITIONS
AMCOM Business Centers Corp. (Continued)
Gross sales, as defined in the asset purchase agreement, is total revenue
from sales after deductions for trade discounts and allowances,
uncollectible accounts, sales taxes, duties, shipping and insurance and
sales returns.
NEVCOR's business was discontinued on July 1, 1997 and as such no
contingent payments were accrued subsequent to July 1, 1997.
The asset purchase agreement required the Company to reimburse the Sellers
for all income taxes incurred by them with respect to their distributive
share of AMCOM's taxable income for the period January 1, 1994 through the
closing date. Management estimated that the aggregate amount of this
obligation was $120,000 at December 8, 1994. This amount was reflected in
goodwill. A non-competition agreement for a period of three years ending
December 8, 1997 was entered into between the Sellers and the Company, and
$10,000 of the purchase price was allocated to the covenant.
NEVCOR's business was discontinued on July 1, 1997.
National Computer Resources, Inc.
On September 28, 1995, the Company purchased all of the issued and
outstanding stock of NATCOM. The transaction was pursuant to a stock
purchase agreement between the Company and the individual stockholders of
NATCOM and was accounted for as a purchase. The total purchase price was
$933,000.
On December 31, 1997, the stock purchase agreement as well as the
employment and consulting agreements with NATCOM's former officers were
terminated. The Company agreed to pay $171,000 in full consideration of all
obligations accrued under the above stated agreements ("NATCOM Settlement
Agreement). The amount will be paid in six monthly installments in 1998 and
can be made either in cash or by the issuance of the Company's common stock
to be valued at the closing bid price of such shares on the dates prior to
the payment. In addition, the Company agreed to issue 150,000 shares of
common stock to the former officers in consideration for the continuation
of their respective non-competition agreements. The shares vest over a two
year period and the non-competition agreements expire on December 31, 1999.
ManTech Solutions Corp.
On September 16, 1996, INSYNC entered into a contract with ManTech
Solutions Corp. ("MSOL"), a wholly-owned subsidiary of ManTech
International Corp. (ManTech) to purchase substantially all of its assets,
subject to certain liabilities. The acquisition was effective on September
1, 1996 and was accounted for as a purchase.
F-17
GLOBAL INTELLICOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 3 - ACQUISITIONS (CONTINUED)
ManTech Solutions Corp. (Continued)
The purchase price was $5,736,084 and was paid as follows:
1. The issuance of 350,000 shares of Series 3 Cumulative Preferred Stock,
with a 6% annual dividend, convertible at a value of $10 per share to
restricted shares of common stock. Such preferred stock was valued at
$3,500,000.
2. The issuance of a 9% promissory note for $1,486,084.
3. The issuance of a 9% promissory note for $470,000.
4. The issuance of 49,778 restricted shares of common stock, valued at
$280,000.
The following condensed balance sheet reflects the purchase of the net
assets of MSOL on September 16, 1996:
Current assets $ 6,242,898
Property and equipment 468,448
Excess cost of acquisition over
net tangible assets acquired 1,637,996
Other assets 19,761
Liabilities assumed (2,633,019)
----------
$ 5,736,084
----------
----------
Pro Notes, Inc.
On October 18, 1996, SPEECH SOLUTIONS entered into a contract with Pro
Notes, Inc. ("Pro Notes") to purchase certain of its assets. This
transaction was accounted for as a purchase.
The purchase price consists of the following:
1. $200,000 paid at closing.
2. Four quarterly payments of $31,250 on January 15, 1997, April 15, 1997,
July 15, 1997 and October 15, 1997. At December 31, 1997, $95,000 is
owed.
The following condensed balance sheet reflects the purchase of the certain
assets of Pro Notes, Inc. on October 18, 1996:
Intangible assets, including excess
cost of acquisition over net tangible
assets acquired $ 365,000
==========
SPEECH SOLUTIONS' business was discontinued on August 1, 1997 and the
intangible assets were charged to discontinued operations.
F-18
GLOBAL INTELLICOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 3 - ACQUISITIONS (CONTINUED)
Automated Systems Development of Indiana, Inc.
On July 1, 1997, Automated Systems Development of Indiana, Inc. (ASDI)
merged into the Company's NASI subsidiary. The merger was accounted for
as a purchase.
The total purchase price of $805,000 consists of:
1. $20,000 in cash at closing.
2. The issuance of 785 shares of Series 5 Cumulative Preferred Stock, with
a 6% annual dividend, convertible at a value of $10.00 per common
share. Such preferred stock was valued at its liquidation preference of
$1,000 per share for a total of $785,000.
Under the merger agreement, for the five years ended July 1, 2002, NASI is
to make semi-annual contingent payments to the former shareholder of ASDI
based on its gross profit (as defined in the plan of merger) as follows:
4% of the gross profit on the first $1.5 million of sales 3%
of the gross profit on the next $1.5 million of sales 2% of
the gross profit on sales in excess of $3 million
Such payments will be limited to aggregate earnings before interest and
taxes (EBIT). As such, if the making of a payment reduces EBIT to zero or
below, the payment will be limited only to that portion which would bring
EBIT to zero and the balance would be deferred until the date of the next
payment. In the event that the aggregate amount of payments is less than
$600,000, the term of the agreement would be extended up to the earlier of
three years or to the time that the payments would equal the sum of
$600,000. At December 31, 1997, the contingent payment owed to the
stockholders of ASDI was deemed not material and is not reflected in the
financial statements.
The following condensed balance sheet reflects the merger of ASDI on July
1, 1997:
Current assets $ 61,417
Property and equipment 561
Excess cost of aqcuisition over net
tangible assets acquired 834,457
Other assets 390
Liabilities assumed (91,825)
---------
$ 805,000
---------
---------
F-19
GLOBAL INTELLICOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 3 - ACQUISITIONS (CONTINUED)
Acquisition Indebtedness
Acquisition indebtedness at December 31, consists of the following:
1997 1996
------------- -----------
9% promissory note for $1,486,084 payable to MSOL
("First Note"). The note is guaranteed by the Company. Interest
began accruing on March 16, 1997. Interest was imputed at 9%
for the period September 16, 1996 (date of issuance) to March 15,
1997. Payments are to be made forty-five days after each fiscal
quarter, commencing with the quarter ended June 30, 1997. The
payments are calculated as follows:
1. 2% of net sales (gross sales less sales discounts,
returns and allowances) of INSYNC.
2. If at the end of four quarters ended June 30th
(commencing in 1998), the sum of the quarterly payments is less
than the interest accrued over the previous four quarters plus ten
percent (10%) of the original principal of the note ($148,608), an
adjustment payment will be made to cover
such shortfall. $ 1,486,084(1) $ 1,463,794
9% promissory note for $470,000 payable to MSOL with
substantially the same terms as the First Note, except that payments do
not commence until the earlier of December 31, 2001 or upon the payment
of the First Note. Interest began accruing on March 16, 1997. Interest
was imputed at 9% for the period September 16, 1996 (date of issuance)
to March 15, 1997. The note is guaranteed by the Company. 470,000 462,950
NATCOM Settlement Agreement 171,000 -
Installment payments due to prior NATCOM
stockholders with interest imputed at 10% - 877,084
------------ ------------
2,127,084 2,803,828
Less: Current portion 581,823 693,942
------------ ------------
$ 1,545,261 $ 2,109,886
============ ============
(1) Amounts owed for the quarters ended June 30, 1997, September 30, 1997
and December 31, 1997 totalling $262,215 will be paid as follows:
April 3, 1998 $ 25,000
April 17, 1998 25,000
April 30, 1998 25,000
On or before April 30, 1998 187,215
----------
$ 262,215
----------
----------
F-20
GLOBAL INTELLICOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 3 - ACQUISITIONS (CONTINUED)
Acquisition Indebtedness (Continued)
Future minimum maturities of notes payable - acquisition are as follows:
1998 $ 581,823
1999 148,608
2000 148,608
2001 778,045
2002 47,000
Thereafter 423,000
------------
$ 2,127,084
------------
------------
Imputed interest on the MSOL notes and NATCOM installment payments amounted
to $29,340 and $143,168 in 1997 and 1996, respectively.
NOTE 4 - DUE FROM FACTOR
VIRCOM, NATCOM and INSYNC collectively entered into factoring agreements
whereby the companies sell their trade receivables without recourse if a
customer's credit is approved. Certain dollar limitations may be
established for a customer. Receivables sold without credit approval or in
excess of a specified credit limit are subject to recourse in the event of
non-payment by the customer.
On April 1, 1997, VIRCOM, NATCOM and INSYNC collectively signed an
amendment to the factoring agreements whereby the companies sell their
trade receivables with recourse.
Other terms of these amended agreements are as follows:
1. The aggregate amount of advances shall not exceed the lesser of -
a. $9,000,000 or
b. 90% of the eligible receivables of NEVCOR, VIRCOM and NATCOM plus
85% of the eligibl ereceivables of INSYNC less any reserves deemed
proper and necessary by the factor.
2. Factoring commissions are four tenths of one percent (.4%) of sales.
Interest on advances will be charged at 1% above prime.
3. The factor has been granted a first priority security interest in, a
general lien on and/or a right of set-off of trade receivables and
general intangibles of VIRCOM, NATCOM and INSYNC. In addition, the
factor has received a security interest in inventory and tangible
assets of the Company's subsidiaries. Such additional security interest
will be subordinate to the one granted to the financial institution
with which the Company's subsidiaries have loan and security
agreements.
F-21
GLOBAL INTELLICOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 4 - DUE FROM FACTOR (CONTINUED)
4. The factor has received cross-corporate guarantees of the Company and
VIRCOM, NATCOM and INSYNC as well as the personal guarantees of certain
officers and directors of the Company.
5. The agreement may be terminated by either party on sixty days notice.
VIRCOM TG also sells its receivables to the factor under the same terms and
conditions as described above.
In addition, the Company granted the factor options to purchase 100,000
shares of the Company's common stock at an option price of $3.00 per share.
The options expire in April 2000.
Due from/(to) factor at December 31, is comprised of the following:
1997 1996
-------------- --------
Outstanding receivables $ 6,925,833 $ 2,376,953
Less: Advances from factor (7,810,060) (2,613,385)
------------- ------------
Due from/(to) factor $ (844,227) $ (236,432)
============= ============
At December 31, 1997 and 1996, the financial statements reflect a provision
for customers' open credits and chargebacks subsequent to the balance sheet
date in the amount of $110,495 and $-0-, respectively. These amounts have
been reflected as an increase in the amounts due to factor.
In 1997 and 1996, the Company factored $60,863,117 and $14,852,730 of its
sales, respectively.
The Companies have a tri-party agreement with the factor and a financial
institution wherein Century, on behalf of the Companies, can wire funds to
the financial institution for payment of vendors' invoices relating to
floorplanned inventory.
NOTE 5 - INVENTORIES
Inventories at December 31, consist of the following:
1997 1996
------------- ---------
Finished goods $ 2,010,616 $ 1,288,313
Work-in-process 328,881 500,858
Raw materials 662,022 1,485,995
------------ ------------
$ 3,001,519 $ 3,275,166
============ ============
F-22
GLOBAL INTELLICOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 6 - NOTES RECEIVABLE - OFFICER AND STOCKHOLDER
Notes receivable - officer and stockholder at December 31, consists of the
following:
1997 1996
----------- -----------
Note receivable from an officer/
stockholder bearing interest at
1% over prime, principal and
accrued interest to be paid on
December 31, 1997. $ - $ 457,979
----------- -----------
$ - $ 457,979
=========== ===========
In 1997, the note was not repaid and the officer/stockholder borrowed an
additional $218,404.
In January 1998, the Company granted the officer/stockholder payments for
1997 totalling $676,383 as follows: additional salaries of $317,167 as well
as compensation of $359,216 for the officer's personal guarantee of the
inventory floorplanning credit line of NEVCOR (a discontinued operation)
for the last three years. Such amounts were offset against the balance owed
by the officer at December 31, 1997. $359,216 of such balance was charged
to discontinued operations. Two other officers and/or directors of the
Company also gave personal guarantees for the same indebtedness. The
Company's Board of Directors has not as yet determined what consideration,
if any, will be given to such officers and/or directors.
Interest income amounted to $-0-, $43,492 and $-0- for 1997, 1996 and 1995,
respectively.
NOTE 7 - OTHER RECEIVABLES
The Company has indemnified certain of its officers and directors (the
"Indemnitees") who were previously officers, stockholders, and/or directors
of the Company's former parent, Communication and Entertainment Corp.
("ComEnt") from actions against the Indemnitees arising out of their prior
service to ComEnt. The Company's indemnification provides that, in the
event ComEnt fails to honor its indemnification obligation, the Company
will indemnify such Indemnitees. ComEnt has declined to honor its
obligations under its indemnification. As such, the Company has paid
certain legal fees and related expenses in the amount of approximately
$828,000 in connection with the defense of such claims. The Company intends
to seek reimbursement from ComEnt for the sums it has paid to the
Indemnitees. Such amount has been included in other receivables, net of an
indemnification charge of $621,000.
In 1998, the Company expects to incur additional legal fees in the range of
$150,000 to $200,000.
F-23
GLOBAL INTELLICOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 8 - PROPERTY AND EQUIPMENT
Property and equipment at December 31, consists of the following:
1997 1996
------------- ----------
Machinery and equipment $ 1,075,565 $ 337,862
Furniture and fixtures 485,448 394,604
Vehicles 13,773 -
Leasehold improvements 157,006 76,017
Property and equipment 217,645 19,319
under capital lease ------------ ----------
1,949,437 827,802
Less: Accumulated 697,236 103,803
under capital lease ------------ ----------
depreciation and amortization $ 1,252,201 $ 723,999
============ ==========
Increases and decreases of property and equipment reflect purchases,
increases due to the acquisition of ASDI, as well as reclassifications as
required to properly reflect discontinued operations.
Depreciation and amortization amounted to $250,231, $78,465 and $16,965 for
1997, 1996 and 1995, respectively.
NOTE 9 - INTANGIBLE ASSETS
Intangible assets at December 31, consist of the following:
1997 1996
------------ ------------
Goodwill $ 6,818,863 $ 3,459,388
Non-compete agreement 300,000 -
------------ ------------
7,118,863 3,459,388
Less: Accumulated amortization 787,955 177,948
------------ ------------
$ 6,330,908 $ 3,281,440
============ ============
Increases and decreases of intangible assets reflect the acquisition of
ASDI as well as the charges and reclassifications required to properly
reflect discontinued operations.
Amortization amounted to $311,002, $157,084 and $20,863 for 1997, 1996 and
1995, respectively.
F-24
GLOBAL INTELLICOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 10 - DUE TO FINANCIAL INSTITUTIONS
The Company has a loan and security agreement with a financial institution
providing for an inventory floorplanning credit line of $8,000,000
including its discontinued NEVCOR business. The line is collateralized by
the assets of VIRCOM TG, VIRCOM, NATCOM and INSYNC. The agreement expires
on December 8, 1998 and is automatically renewed from year to year unless
terminated by either party. The financial institution has received the
personal guarantees of certain officers and directors of the Company.
In 1998, the Company entered into a financing agreement with a financial
institution providing for an inventory credit line of $250,000. The
agreement is collateralized by the assets of VIRCOM TG. The financial
institution has received the personal guarantees of certain officers and
directors of the Company.
At December 31, the line of credit included the following:
1997 1996
------------ ------------
Due to financial institution $ 4,441,673 $ 3,061,728
Less: Claims receivable from
vendors for credits due 1,172,255 1,350,299
------------ ------------
$ 3,269,418 $ 1,711,429
============ ============
NOTE 11 - OBLIGATIONS UNDER CAPITALIZED LEASES
Minimum future lease payments under capitalized leases at December 31, 1997
are as follows:
Year Ending December 31
-------------------------
1998 $ 191,548
1999 44,708
2000 27,329
2001 1,283
----------
Total minimum lease payments 264,868
Less: Interest (30,399)
----------
Present value of net minimum
lease payments $ 234,469
==========
The capitalized leases have effective interest rates of 9.2% to 15.3%.
Interest expense amounted to $34,286, $2,914 and $-0- for 1997, 1996 and
1995, respectively.
F-25
GLOBAL INTELLICOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 12 - ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities at December 31, consist of:
1997 1996
------------ ----------
Sales taxes payable $ 610,186 $ 415,531
Accrued payroll 271,739 135,666
Accrued professional fees 205,773 132,388
Other accrued expenses 228,335 45,483
Deferred revenue 275,432 11,718
Other 385,045 566,230
------------ ----------
$ 1,976,510 $1,307,016
============ ==========
NOTE 13 - NOTES PAYABLE
In June 1996, the Company borrowed $500,000 through the issuance of a
convertible subordinated promissory note bearing interest at 24% per annum.
Interest on the note totalled $29,667 in 1996. The note was
repaid in September 1996.
As a result of the merger with ASDI, the Company has a $50,000 line of
credit with a bank. The note taken under the line is due on demand and
bears interest at 2% above prime. Interest on the note amounted to $2,924
in 1997.
NOTE 14 - NOTES PAYABLE - OFFICERS AND STOCKHOLDERS
Notes payable - officers and stockholders at December 31, consists of the
following:
1997 1996
---------- ----------
Note payable to an officer/stockholder bearing
interest at 1% over prime, principal and accrued
interest to be paid on December 31, 1998. $ 67,677 $ -
Note payable to an officer/stockholder bearing
interest at 1% over prime, principal and accrued
interest to be paid on December 31, 1997. The
balance owed at December 31, 1997 was rolled
into a new note (see above). - 126,076
10% promissory notes payable to two directors
and one stockholder to be paid as follows: $65,000
in April 1997 and $25,000 in May 1997. The
balance owed at December 31, 1997 is now
due on demand. 65,000 90,000
---------- ----------
$ 132,677 $ 216,076
========== ==========
Interest amounted to $12,091 and $16,319 in 1997 and 1996, respectively.
Accrued interest on three-year notes amounted to $18,309 and $6,218 at
December 31, 1997 and 1996, respectively.
F-26
GLOBAL INTELLICOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 15 - INCOME TAXES
1997 1996 1995
------------- ------------- ------------
The components of the provision
for income tax credits by taxing
jurisdiction are as follows:
Federal:
Current $ - $ - $ -
Deferred (413,204) (395,152) (181,792)
------------- ----------- -----------
(413,204) (395,152) (181,792)
------------- ----------- -----------
States:
Current - 28,792 (5,741)
Deferred (96,925) (92,977) (42,775)
------------- ----------- -----------
(96,925) (64,185) (48,516)
------------- ----------- -----------
Net tax (benefit) to discontinued operations (1,580,563) (247,202) 44,567
------------- ----------- -----------
$ (2,090,692) $ (706,539) $ (185,741)
============= =========== ===========
The major components of deferred tax assets at December 31, are as follows:
1997 1996
------------- ------------
Net operating loss carryforwards $ 5,985,568 $ 988,641
Allowance for doubtful accounts 317,472 61,637
Inventory reserve 246,960 91,030
Warranty reserve - 43,000
Valuation allowance (3,275,000) -
------------ -------------
$ 3,275,000 $ 1,184,308
============ =============
At December 31, 1997 and 1996, the current portion of deferred taxes
amounted to $630,000 and $690,476, respectively. The long-term portion of
deferred taxes at December 31, 1997 and 1996 amounted to $2,645,000 and
$493,832, respectively.
At December 31, 1997, a 50% valuation allowance is provided as it is
uncertain if the deferred tax assets will be fully utilized.
F-27
GLOBAL INTELLICOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 15 - INCOME TAXES (CONTINUED)
A reconciliation of the Company's income tax expense computed at the U.S.
federal statutory tax rate of 34% and the provision for income taxes are as
follows:
1997 1996 1995
------------- ------------- ------------
Income tax expense at statutory rate $ (3,931,000) $ (609,255) $ 29,555
Net operating loss carryforwards 3,931,000 609,255 -
State income taxes (tax credits) - 28,792 (5,741)
Deferred income tax credits (2,090,692) (735,331) (180,000)
Financial/tax adjustments - NATCOM - cash basis - - (29,555)
------------- ----------- -----------
Provision for income tax credits $ (2,090,692) $ (706,539) $ (185,741)
============= =========== ===========
At December 31, 1997, for income tax purposes, the Company has unused net
operating loss carryforwards of approximately $14,200,000 expiring in 2009
and 2012.
Income taxes payable include NATCOM's 1995 federal and New Jersey
liabilities, including penalties and interest, are as follows:
Federal $ 201,953
New Jersey 38,948
----------
$ 240,901
----------
----------
NOTE 16 - ECONOMIC DEPENDENCE
At December 31, 1997, the Company is no longer dependent on any one vendor.
In 1996 and 1995, the Company purchased 53% and 84%, respectively of its
inventory from two vendors.
NOTE 17 - OTHER INCOME (EXPENSES)
Other income (expenses) consist of the following:
1997 1996 1995
------------- ----------- ----------
Interest expense $ (957,207) $ (211,633) $ (6,606)
Interest income 20,355 62,424 20,384
Deferred financing costs - (89,594) -
Indemnification charge (621,000) - -
------------- ----------- ---------
$ (1,557,852) $ (238,803) $ 13,778
============= =========== =========
F-28
GLOBAL INTELLICOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 18 - COMMITMENTS AND CONTINGENCIES
Leases
The Company rents real property under leases expiring through August 2005.
Certain of the leases stipulate payments of operating expenses.
Future minimum rental payments required are as follows:
Year Ending December 31,
------------------------
1998 $ 787,387
1999 782,083
2000 777,786
2001 464,746
2002 368,918
Thereafter 765,699
----------
$3,946,619
==========
The Company has deposited with a landlord, pursuant to the terms of its
lease, a stand-by letter of credit for $100,000 (issued by the Company's
bank) in addition to a security deposit. The terms of the lease require the
posting of an additional $100,000, which the landlord has requested.
Rent expense amounted to $865,026, $314,142 and $61,591 for 1997, 1996 and
1995, respectively.
Purchase Commitments
The Company had outstanding purchase commitments to its major vendors which
were guaranteed under its floorplanning credit line by one of the financing
companies. Such commitments represented approved orders for the purchase of
inventory and were not in excess of normal business requirements. Such
commitments amounted to approximately $-0- and $2,510,000 at December 31,
1997 and 1996, respectively.
F-29
GLOBAL INTELLICOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 18 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
Employment Agreements
Company
In January 1994, the Company entered into an employment contract with
one of its officers for the period January 1, 1995 through December 31,
1997. Compensation under the agreement is as follows:
1995 $ 175,000
1996 190,000
1997 210,000
In addition, the agreement provides for perquisites including various
insurance coverages, an automobile, expense reimbursements, etc.
Compensation under the agreement amounted to $194,000, $190,000 and
$173,872 for 1997, 1996 and 1995, respectively.
Nevcor
In May 1995, the Company entered into an employment agreement with
another of its officers for calendar year 1995 at a salary of $137,000.
Compensation under this agreement amounted to $137,000 for 1995.
Natcom
In conjunction with the purchase of the stock of NATCOM, the Company
entered into employment agreements with two of NATCOM's key employees
and a consulting agreement with a former key employee of NATCOM. The
agreements were terminated in 1997. Compensation amounted to $329,166
for 1996.
F-30
GLOBAL INTELLICOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 18 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
Speech Solutions
In conjunction with the purchase of certain assets of Pro Notes, Inc.
the Company entered into an employment agreement with a key employee of
SPEECH SOLUTIONS for the period October 18, 1996 to October 17, 2001.
Compensation under the agreement is as follows:
Year
----
1 $ 100,000
2 110,000
3 120,000
4 130,000
5 140,000
In addition, for the five years ended December 31, 2001, SPEECH
SOLUTIONS is to make quarterly contingent payments equal to 2% of its
gross sales. Such payments will be limited to ACIBIT as well as by the
contingent payments to Pro Notes, Inc.
The individual is entitled to receive minimum payments totalling
$130,000 by the end of the fifth year. In the event that the aggregate
amount of payments is less than $130,000, such deficiency must be paid.
In addition, if the total amount of the contingent payments is less
than $950,000, SPEECH SOLUTIONS shall continue to make contingent
payments for an additional period, not to exceed five years, until such
time as the payments total $950,000. Such contingent payments are
subject to the same limitations as described above.
In connection with the discontinuance of Speech Solutions, the Company
is negotiating a settlement with the individual. Management expects the
settlement to be in the range of $25,000 to $50,000.
Consulting Agreement
In January 1996, the Company entered into a letter agreement with one of
its board members whereby such board member would provide consulting
services to the Company for the period January 1, 1996 through December 31,
1999. Consulting fees under the agreement are $60,000 per year. Such fee
had been waived by the board member in 1996.
In 1998, the Company issued 100,000 shares of common stock to the board
member for consulting services provided in 1996 and 1997. The shares vest
over a two year period in eight equal installments of 12,500 shares per
quarter.
Additional Benefit Plan
In 1995, the Company entered into an Additional Benefit Plan (the "Plan")
providing cash and stock benefits for certain key employees
("Participants"). Such benefits were based solely on the consolidated
financial performance of NEVCOR and VIRCOM during the period from January
1, 1995 to December 31, 1997. The Plan was not renewed in 1998.
No shares were issued under the Plan in 1997, 1996 and 1995.
F-31
GLOBAL INTELLICOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 18 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
Legal Proceedings
An action pending in the Supreme Court of the State of New York commenced
on or about September 18, 1997 against the Company and three of its
officers and directors by a holder of a warrant issued by the Company for
claimed damages of $1,000,000, alleging that the Company breached the terms
of the warrant by failing to register for public sale shares of common
stock issuable on exercise of the warrant. The Company has included these
shares in its presently pending registration sttement on Form S-3, has
asserted as an affirmative defense that the transaction in connection with
which the warrant was issued was void under New York's usury law, and has
counterclaimed for $29,667. The Company has moved for summary judgment
dismissing the complaint an intends to continue to vigorously defend the
action.
The Company is a defendant is an action brought by the Sellers of AMCOM
("Sellers") seeking an additional $93,449 of income taxes incurred by them
with respect to their distributive share of AMCOM's taxable income for the
period January 1, 1994 through the closing date. The Sellers are also
seeking interest and costs. The Company has indicated that the tax
obligation to the Sellers has been paid in full. This matter is in the
discovery stage and the Company intends to vigorously defend this matter.
An action pending in the United States District Court for the District of
New Jersey commenced on or about April 14, 1998, alleging payments due in
the amount of approximately $260,000 for leased equipment. Company counsel
have not yet reviewed the complaint in this action, but have been advised
by the Company that the claimed amount is not due an that the Company's
records reflect that the amount owed, if any, is far less than the amount
demanded. The Company intends to defend this action vigorously.
In April, 1998, a supplier the Company's Global-InSync subsidiary commenced
an action in the United States District Court for the Eastern District of
Virginia against the Company and Global-InSync, alleging payments due to
the Supplier in the amount of $784,556. The Company has not yet had the
opportunity to evaluate the merits of the Supplier's claim.
The Company is involved in various other claims and actions incidental to
the business.
Indemnification
The Company has indemnified certain of its officers and directors (the
"Indemnitees") who were previously officers, stockholders and/or directors
of another corporation for actions against the Indemnitees arising out of
their service to that corporation. In the event that the corporation fails
to honor its obligation it undertook to indemnify the Indemnitees on such
claims, the Company would then indemnify such Indemnitees. The corporation
has declined to honor its obligations under its indemnification. As such,
the Company has paid certain legal fees and related expenses in the amount
of approximately $828,000 in connection with the defense of such claims.
Such amount has been included in other receivables, net of an
indemnification charge of $621,000.
F-32
GLOBAL INTELLICOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 19 - RELATED PARTY TRANSACTIONS
Company
The Company's outside corporate counsel was a stockholder of the Company.
In 1995, the Company incurred legal fees of approximately $804,000. On
February 16, 1996, the Company signed a letter agreement agreeing to pay
$464,000 in full satisfaction of outstanding legal fees, unbilled time
charges and disbursements as follows:
1. $150,000 upon the signing of the agreement.
2. A $314,000 promissory note payable in four installments as follows:
$75,000 on May 25, 1996, August 25, 1996 and November 25, 1996 and
$89,000 on December 31, 1996. As the promissory note did not bear
interest, an interest rate of 10% was imputed. At December 31, 1997 and
1996, the Company owed $-0- and $81,778, respectively.
A partner of the former outside law firm, who later became an officer,
provided outside legal services in 1996. Fees incurred totalled $179,844.
In 1995, the Company purchased, from the Chairman of the Board, property
and equipment based upon an independent appraisal in the amount of $73,850.
NOTE 20 - STOCKHOLDERS' EQUITY
Preferred Stock
On May 30, 1995, the Company authorized the issuance of 10,000,000 shares
of preferred stock, $.01 par value. Preferred stock consists of the
following:
Series 1 Convertible Preferred Stock (Series 1 Preferred)
Series 1 Preferred stockholders have a liquidation preference of $10
per share. Beginning on October 12, 1996, Series 1 Preferred is
convertible into common stock at the election of the stockholder at a
per share conversion rate equal to the liquidation preference ($10)
divided by the lower of seventy percent (70%) of the market price of
common stock on the day of conversion of $3.50. Series 1 Preferred has
no voting rights.
Pursuant to a subscription agreement in July 1996, 330,000 Series 1
Preferred shares were issued in connection with the sale of securities
under an exemption pursuant to Regulation S promulgated under the
Securities Act of 1933. In 1996, 307,500 shares of Series 1 Preferred
were converted into 1,836,777 shares of common stock. The balance of
the Series 1 Preferred shares were converted in 1997 into 163,580
shares of common stock.
F-33
GLOBAL INTELLICOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 20 - STOCKHOLDERS' EQUITY (CONTINUED)
Preferred Stock (Continued)
Series 2 Convertible Preferred Stock (Series 2 Preferred)
Series 2 Preferred stockholders have a liquidation preference of $1,000
per share. Beginning on October 14, 1996, Series 2 Preferred is
convertible into common stock at the election of the stockholder at a
per share conversion rate equal to the liquidation preference ($1,000)
divided by the lower of sixty-five percent (65%) of the market price on
the day of conversion or $4.03125. Series 2 Preferred has no voting
rights.
In August 1996, 825 Series 2 Preferred shares were issued in connection
with the sale of securities under an exemption pursuant to Regulation
S. In 1996, all of the shares of Series 2 Preferred were converted into
382,743 shares of common stock.
Series 3 Convertible Preferred Stock (Series 3 Preferred)
The Series 3 Preferred stockholders have a liquidation preference of
$10 per share and are entitled to receive, when declared by the board
of directors, cumulative dividends at an annual rate of 6% of the
liquidation preference ($.60 per share). Such dividends shall be
payable on a semi-annual basis commencing on June 30, 1997 and shall
have preference to dividends on any other class of common or preferred
stock. Series 3 Preferred has no voting rights except as described
below:
1. On each second Dividend Payment Date that quarterly dividends on
Series 3 Preferred Stock shall not have been paid in full as
required herein (a "Dividend Default"), then and in each such
event, the holder of shares of Series 3 Preferred shall be
entitled to elect such number of directors ("Special Directors")
as set forth below, hereof, at the next annual meeting of
stockholders of the Company. The holders of all shares otherwise
entitled to vote for directors, voting separately as a class,
shall be entitled to elect the remaining members of the Board of
Directors. Such special voting right of the holders of shares of
Series 3 Preferred may be exercised until all dividends in
default on the Series 3 Preferred shall have been paid in full or
declared and funds sufficient therefor set aside, and when so
paid or provided for together with one additional Dividend
Payment Date shall have passed without a Dividend Default, such
special voting right of the holders of shares of Series 3
Preferred shall cease and any Special Directors appointed or
elected shall resign, but subject always to the same provisions
for the vesting of such special voting rights in the event of any
such future Dividend Default.
F-34
GLOBAL INTELLICOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 20 - STOCKHOLDERS' EQUITY (CONTINUED)
Preferred Stock (Continued)
Series 3 Convertible Preferred Stock (Series 3 Preferred) (Continued)
2. On September 30, 1997, in the event that by such date there has
been a Dividend Default relating to the dividend due on June 30,
1997, the holders of Series 3 Preferred shall be entitled to
elect a number of directors sufficient to constitute 15% of the
total number of directors of the Company. On the second
subsequent Dividend Payment Date on which there has been a
Dividend Default, the holders of the Series 3 Preferred Stock
shall be entitled to elect a number of directors sufficient to
constitute an additional 15% of the total number of directors of
the Company, and, thereafter, after each second subsequent
Dividend Payment Date on which there has been a Dividend Default,
the holders of the Series 3 Preferred Stock shall be entitled to
elect a number of directors constituting an additional 15% of the
Board of Directors. In the event that the size of the Board of
Directors is increased at any time during which any Special
Director is serving thereon, such vacancies shall be filled first
by Special Directors elected by the holders of the Series 3
Preferred Stock until the appropriate number of Special Directors
shall have been so elected.
Beginning on the date of issuance, Series 3 Preferred is convertible at
the election of the stockholder at a conversion rate per share equal
to $10 plus all accrued but unpaid dividends divided by the conversion
price ($10).
The Company has the option to call all or part of the Series 3
Preferred at an exercise price equal to the liquidation preference ($10
per share). The Company is required to provide notice of not less than
five trading days (as defined) and such exercise will be payable within
three business days after the expiration of the five trading day call
period.
In September 1996, 350,000 Series 3 Preferred shares were issued to
ManTech in connection with the acquisition of MSOL. For the period July
1, 1997 to December 31, 1997, cumulative undeclared dividends amounted
to $61,250.
Series 4 Convertible Preferred Stock (Series 4 Preferred)
Series 4 Preferred stockholders have a liquidation preference of $100
per share. Beginning on November 12, 1996, Series 4 Preferred is
convertible into common stock at the election of the stockholder at a
per share conversion rate equal to the liquidation preference ($100)
divided by the lower of seventy percent (70%) of the market price on
the day of conversion or $3.50. Series 4 Preferred has no voting
rights.
In September 1996, 25,000 Series 4 Preferred shares were issued in
connection with the sale of securities under an exemption pursuant to
Regulation S. In 1996, 19,000 shares of Series 4 Preferred were
converted into 1,236,602 shares of common stock. In 1997, the balance
of the Series 4 Preferred shares were converted into 425,859 shares of
common stock.
F-35
GLOBAL INTELLICOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 20 - STOCKHOLDERS' EQUITY (CONTINUED)
Preferred Stock (Continued)
Series 5 Convertible Preferred Stock (Series 5 Preferred)
The Series 5 Preferred stockholders have a liquidation preference of
$1,000 per share and are entitled to receive cumulative dividends
payable in cash at an annual rate of 6% of the liquidation preference
($60 per share). Such dividends shall be payable on a semi-annual basis
commencing on December 31, 1997 and shall have preference to dividends
on any other class of common or preferred stock. Series 5 Preferred has
no voting rights.
Series 5 Preferred is convertible at the election of the stockholders
at a conversion rate equal to $10 per share and can be converted at any
time after the earlier of:
1. One year from the date of issuance, or
2. The date of any notice of redemption of such shares.
Beginning at any time after July 1, 1998, the Company may, at its sole
option, redeem the outstanding shares of Series 5 Preferred at any
time, in whole or in part, upon notice duly given to all stockholders.
The redemption price shall be equal to the liquidation preference
($1,000 per share) plus all unpaid dividends accrued through the
redemption date.
In July 1997, 785 Series 5 Preferred shares were issued to the
stockholders of ASDI in connection with the merger of the business.
Series 6 Convertible Preferred Stock (Series 6 Preferred)
The Series 6 Preferred stockholders have a liquidation preference of
$1,000 per share and are entitled to receive dividends at an annual
rate of 5% of the liquidation preference ($50 per share) payable as
follows:
1. In cash.
2. At the election of the Company, in shares of common stock valued
at the average closing bid prices for the five days on which the
common stock was traded immediately prior to the record date for
the payment of such dividend.
Such dividends shall be payable on a semi-annual basis commencing on
July 1, 1998 and shall have preference to dividends on any other class
of common or preferred stock. Series 6 Preferred has no voting rights.
Beginning on the sixtieth (60) day after the issuance of the Series 6
Preferred, such shares are convertible at the election of the
stockholders at a conversion rate equal to the quotient obtained by
dividing the liquidation preference by an amount equal to 75% of the
five day average closing bid price per share of common stock
immediately prior to the date of conversion.
F-36
GLOBAL INTELLICOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 20 - STOCKHOLDERS' EQUITY (CONTINUED)
Preferred Stock (Continued)
Series 6 Convertible Preferred Stock (Series 6 Preferred) (Continued)
Beginning on the sixtieth (60) day after the issuance of the Series 6
Preferred, the Company may, at its sole option, redeem the outstanding
shares of Series 6 Preferred at any time, in whole or in part, upon
notice duly given to all stockholders. The redemption price shall be
equal to 133% of the liquidation preference.
In December 1997, 1,200 Series 6 Preferred shares were issued in
connection with the sale of securities. In 1998, the Company issued an
additional 1,000 shares.
Series 7 Convertible Preferred Stock (Series 7 Preferred) (issued in
1998)
The Series 7 Preferred stockholders have a liquidation preference of
$1,000 per share and are entitled to receive dividends at an annual
rate of 5% of the liquidation preference ($50 per share) payable as
follows:
1. In cash.
2. At the election of the Company, in shares of common stock valued
at the average closing bid prices for the five days on which the
common stock was traded immediately prior to the record date for
the payment of such dividend.
Such dividends shall be payable on a semi-annual basis commencing on
July 1, 1998 and shall have preference to dividends on any other class
of common or preferred stock. Series 7 Preferred has no voting rights.
Beginning on the sixtieth (60) day after the issuance of the Series 7
Preferred, such shares are convertible at the election of the
stockholders at a conversion rate equal to the quotient obtained by
dividing the liquidation preference by an amount equal to 75% of the
five day average closing bid price per share of common stock
immediately to the date of conversion.
Beginning on the sixtieth (60) day after the issuance of the Series 7
Preferred, the Company may, at its sole option, redeem the outstanding
shares of Series 7 Preferred at any time, in whole or in part, upon
notice duly given to all stockholders. The redemption price shall be
equal to 133% of the liquidation preference.
F-37
GLOBAL INTELLICOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 20 - STOCKHOLDERS' EQUITY (CONTINUED)
Series 8 Convertible Preferred Stock (Series 8 Preferred) (issued in
1998)
The Series 8 Preferred stockholders have a liquidation preference of
$1,000 per shae and are entitled to receive dividends at an annual rate
of 5% of the liquidation preference ($50 per share) payable as follows:
1. In cash.
2. At the election of the Company, in shares of common stock valued
at the average closing bid prices for the five days on which the
common stock was traded immediately prior to the record date for
the payment of such dividend.
Such dividends shall be payable on a semi-annual basis commencing on
July 1, 1998 and shall have preference to dividends on any other class
of common or prefrred stock, other class of common or preferred stock.
Series 8 Preferred has no voting rights.
Beginning on the sixtieth (60) day after the issuance of the Series 8
Preferred, such shares are convertible at the election of the
stockholders at a conversion rate equal to the quotient obtained by
dividing the liquidation preference by an amount equal to 75% of the
five day average closing bid price per share of common stock
immediately to the date of conversion.
Beginning on the sixtieth (60) day after the issuance of the Series 8
Preferred, the Company may, at its sole option, redeem the outstanding
shares of Series 7 Preferred at any time, in whole or in part, upon
notice duly given to all stockholders. The redemption price shall be
equal to 133% of the liquidation preference.
Liquidation Preference and Dividends in Arrears
The value of the liquidation preferences and dividends in arrears is as
follows:
Number Liquidation Total Dividend
of Preference Liquidation in Total
Shares Per Share Preference Arrears Value
-------- ----------- ------------ ---------- ---------
December 31, 1997
Series 1 - $ - $ - $ - $ -
Series 2 - - - - -
Series 3 350,000 10 3,500,000 61,250 3,561,250
Series 4 - - - - -
Series 5 785 1,000 785,000 - 785,000
Series 6 1,200 1,000 1,200,000 - 1,200,000
------------ --------- ------------
$ 5,485,000 $ 61,250 $ 5,546,250
============ ========= ============
December 31, 1996
Series 1 22,500 $ 10 $ 225,000 $ - $ 225,000
Series 2 - - - - -
Series 3 350,000 10 3,500,000 61,250 3,561,250
Series 4 6,000 100 600,000 - 600,000
------------ --------- ------------
$ 4,325,000 $ 61,250 $ 4,386,250
============ ========= ============
F-38
GLOBAL INTELLICOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 20 - STOCKHOLDERS' EQUITY (CONTINUED)
Dividends Paid
In 1997, the Company declared and paid the following dividends:
Number Total
of Dividend Dividend
Shares Per Share Paid
--------- -------- ----------
Series 3 350,000 $ .47 $ 165,123
Series 5 785 30.00 23,550
----------
$ 188,673
Deemed Dividends
The Company recognized dividends deemed from the beneficial conversion
features of certain series of preferred stock in the amount of $400,000 in
1997 and $3,376,374 in 1996.
Common Stock
On May 26, 1995, the Company filed Restated Articles of Incorporation with
the Nevada Secretary of State pursuant to which the Company increased its
authorized common stock from 20,000,000 pre-split shares, par value $.01
per share to 40,000,000 shares, par value $.01 per share. In addition, in
July 1995, the board of directors declared a one-for-two reverse split of
its common stock. All share data and per share amounts have been adjusted
to reflect the reverse stock split on a retroactive basis.
In 1997, the Company authorized the issuance of 200,000 shares of common
stock as follows:
1. 50,000 shares at a price of $2.34 per share to a corporation for
consulting fees for the period October 14, 1997 through October 14,
1999. The shares will be issued in 1998.
2. 150,000 shares at $2.00 per share to the former officers of NATCOM in
consideration for the continuation of their respective non-competition
agreements. The shares will be issued in 1998.
In 1996, the Company authorized the issuance of 39,000 shares of common
stock as follows:
1. 24,000 shares at a price of $2.00 per share to a corporation in
connection with the sale of securities. Such amount has been offset
against additional paid-in capital in the consolidated statements of
stockholders' equity. The shares were issued in 1997.
2. 15,000 shares at a price of $3.19 per share to three prior NATCOM
stockholders relating to the payment of a portion of the purchase
price per the stock purchase agreement. The shares were issued
in 1997.
F-39
GLOBAL INTELLICOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 20 - STOCKHOLDERS' EQUITY (CONTINUED)
In December 1995, the Company authorized the issuance of 37,792 shares of
common stock as follows:
1. 22,792 shares at a price of $6.00 per share totalling $136,753 to the
lessor of the Company's Pennsylvania warehouse facility to prepay the
rent for the period February 1996 through October 1996. Such amount has
been included as prepaid expenses and other current assets in the
consolidated balance sheets. At December 31, 1995, such shares had not
been issued and the transaction was reversed in 1996.
2. 8,333 shares at a price of $3.00 per share totalling $25,000 to two
board members in payment of director fees. Such amount was included
in operating expenses in the consolidated statements of operations.
Such shares were issued in 1996.
3. 6,667 shares at a price of $3.00 per share totalling $20,000 to two
board members to prepay 1996 director fees. Such amount was included as
prepaid expenses and other current assets in the consolidated balance
sheets at December 31, 1995. The shares were issued in 1996 and the
amount is included in operating expenses in the consolidated statements
of operations in 1996.
Sale of Securities
In 1996, the Company sold shares of preferred and common stock under an
exemption pursuant to Regulation S. The Company raised a total of
$4,294,129, which was net of offering costs totalling $2,677,371.
NOTE 21 - STOCK OPTIONS
The Company adopted the 1995 Stock Option Plan which provides, among other
things, for the Company's board of directors to grant options to officers
and other key employees of the Company and its subsidiaries for the
purchase of up to 250,000 shares of the Company's common stock at prices,
and over exercise periods, to be determined by the board of directors at
the time the options are granted.
In January 1996, the Company granted seven-year options to various officers
and employees to purchase 107,900 shares of common stock at $3.25 per
share. The options vest 25% per year on each of the first four
anniversaries of the date thereof. If the optionee ceases to be an
employee, the option shall terminate immediately if such cessation is for
cause or without consent, one year following such cessation if such
cessation is due to the optionee's death or disability, and three months
following such cessation in all other cases, but not after the date the
option would otherwise expire. No compensation expense was recognized as
the exercise price was greater than the fair market value of the underlying
common stock at the date of grant.
F-40
GLOBAL INTELLICOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 21 - STOCK OPTIONS (CONTINUED)
In April 1997, the Company granted the factor options to purchase 100,000
shares of common stock at $3.00 per share. The options expire in April
2000. No expense was recognized as it was deemed to be immaterial.
No options were exercised in 1996 and 1997. A summary of option activity is
as follows:
1997 1996 1995
----------- ----------- -------
Beginning balance 107,600 - -
Options issued 100,000 107,600 -
Options exercised or expired (70,600) - -
---------- -------- ------
Ending balance 137,000 107,600 -
========== ======== ======
NOTE 22 - WARRANTS
The Company authorized the issuance of warrants with terms of one to five
years to various corporations and individuals in connection with the sales
of securities, loan agreements and consulting agreements. Exercise prices
range from $1.75 to $6.75 per warrant. The warrants expire at various times
from August 15, 1998 through November 14, 2002.
No warrants were exercised in 1996 and 1997. A summary of warrant activity
is as follows:
1997 1996 1995
------------- ------------- ---------
Beginning balance 936,583 - -
Warrants issued 1,218,750 936,583 -
Warrants exercised or expired (100,000) - -
------------ ---------- ------
Ending balance 2,055,333 936,583 -
============ ========== ======
F-41
GLOBAL INTELLICOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 23 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The amounts at which cash, due from factor, accounts receivable, accounts
payable, due to financial institution, notes payable and accrued expenses
and other current liabilities are presented in the balance sheets
approximate their fair value due to their short maturities. The following
table presents the carrying amount and fair value at December 31, for due
on acquisitions.
1997 1996
---------------------------- ---------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------- ------------ ------------ ------------
Due on acquisitions $ 2,127,084 $ 1,571,835 $ 2,957,058 $ 2,223,747
============ ============ ============ ============
The fair value of due on acquisitions has been determined based on
discounted cash flow using a market rate of interest at the balance sheet
date as applicable to comparable debt.
NOTE 24 - ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation," but applies Accounting
Principles Board Opinion No. 25 and related interpretations in accounting
for the stock options and warrants granted. No expense was recognized in
1997 and 1996. If the Company had elected to recognize expense for the
stock options and warrants granted based on the fair value at the date of
grant consistent with the method prescribed by SFAS No. 123, net loss and
loss per share would have been changed to the pro forma amounts indicated
below:
1997 1996
---------------------------- --------------------------
As Pro As Pro
Reported Forma Reported Forma
------------- ------------ ------------ ------------
Net loss $ (9,435,960) $ (9,489,611) $ (1,085,388) $ (1,127,178)
Loss per share (1.29) (1.30) (.33) (.34)
The fair value of the stock options and warrants used to compute pro forma
net loss and loss per share disclosures is the estimated present value at
grant date using the Black-Scholes option-pricing model with the following
weighted average assumptions: expected volatility of 4% (1996-47%); various
risk free interest rates of 5.8% to 6.3%; and expected holding periods of
one to four years.
F-42
GLOBAL INTELLICOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 25 - DISCONTINUED OPERATIONS
In 1997, the Company discontinued its aggregator portion of the NEVCOR
business as its major vendor decided to cease distributions through the
aggregator channel. The Company also discontinued its SPEECH SOLUTIONS
businesses as management concluded that the ratio of capital requirements
to revenue for a software developer were incompatible with the overall
operations of the Company's integration, sales and manufacturing
businesses. Summarized results of the businesses for the years ended
December 31, are as follows:
1997 1996 1995
-------------- ------------- ------------
Net sales $ 9,230,131 $ 14,084,691 $ 21,677,868
============== ============= =============
Income (loss) from operations before
income taxes (tax benefits) $ (8,713,715) $ (626,097) $ 111,418
Income taxes (tax benefits) (1,580,563) (247,202) 44,567
-------------- ------------- -------------
Total income (loss) from
discontinued operations $ (7,133,152) $ (378,895) $ 66,851
============== ============= =============
The net assets of the discontinued businesses are summarized as follows:
1997* 1996 1995
-------------- ------------- ------------
Current assets $ 32,885 $ 3,828,701 $ 5,490,375
Property and equipment 53,362 403,385 373,578
Other assets - 2,382,033 2,177,012
Current liabilities (224,758) (3,554,452) (6,563,937)
Long-term liabilities - (176,773) (302,706)
------------- ------------ ------------
$ (138,511) $ 2,882,894 $ 1,174,322
============= ============ ============
* In 1997, certain assets were transferred to VIRCOM TG and are not
reflected in discontinued operations.
F-43
GLOBAL INTELLICOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 26 - REGISTRATION FOR SELLING STOCKHOLDERS
In March 1998, the Company filed a registration statement on Form S-3 under
the Securities Act of 1933, as amended, for the purpose of meeting an
obligation to registering certain securities for public sale on behalf of
certain selling stockholders. Included in such registration statement are
the following:
Series 6 Preferred and Series 7 Preferred
Certain warrants at exercise prices ranging generally from $1.99 to
$8.75 per share
In addition, 742,000 shares are being registered for sale. Certain shares
being registered will vest over various periods up to two years. The
Company will not receive proceeds from the sale of any of these shares.
The Company intends to include Series 8 preferred through a post-effective
amendment.
The offering is currently being reviewed by the Securities and Exchange
Commission.
NOTE 27 - UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
The following unaudited pro forma, condensed, consolidated balance sheet
assumes the completion of the sale of Series 6 Preferred and the sale of
Series 7 Preferred. As of December 31, 1997 (received in 1998). The
financial information presented herein does not proport to be indicative of
what would have occurred had both transactions actually been made as of
such date or of results which may occur in the future.
The unaudited pro forma condensed consolidated balance sheet of the Company
at December 31, 1997 assumes the following:
1. The sale of the balance of Series 6 Preferred net of offering costs.
2. The sale of Series 7 Preferred net of offering costs.
F-44
GLOBAL INTELLICOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 27 - UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
(CONTINUED)
Company
As Pro Forma
Reported Adjustments Pro Forma
------------- ------------ -------------
(Historical) (Unaudited) (Unaudited)
Current assets $ 8,626,998 (1) $ 900,000 $ 10,800,998
(2) 1,274,000
Property and equipment 1,326,058 - 1,326,058
Other assets 8,981,911 8,981,911
------------- ------------ -------------
$ 18,934,967 $ 2,174,000 $ 21,108,967
============= ============ =============
Current liabilities $ 15,410,553 $ - $ 15,410,553
Long-term debt 1,632,115 - 1,632,115
Stockholders' equity 1,892,299 (1) 900,000 4,066,299
(2) 1,274,000
$ 18,934,967 $ 2,174,000 $ 21,108,967
============= ============ =============
(1) To record the sale of 1,000 shares of Series 6 Preferred net of
estimated offering costs of $100,000. (1,200 shares sold in 1997).
(2) To record the sale of 1,425 shares of Series 7 Preferred net of
estimated offering costs of $151,000.
NOTE 28 - BUSINESS SEGMENT DATA
The Company's operations are conducted through two business segments,
Systems Integration and Production. The Production division was acquired in
September 1996 and as such, divisional information is not shown for 1995.
Years Ended
December 31,
----------------------------
1997 1996
------------- -------------
Net Sales by Division:
Systems Integration $ 26,324,234 $ 14,068,631
Production 24,910,892 13,985,710
------------- -------------
$ 51,235,126 $ 28,054,341
============= =============
F-45
GLOBAL INTELLICOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 28 - BUSINESS SEGMENT DATA (CONTINUED)
Operating loss of each division is as follows:
Years Ended
December 31,
----------------------------
1997 1996
------------- -------------
Systems Integration $ 1,098,802 $ (989,462)
Production (2,353,887) 62,435
Other income (expense) (1,557,852) (238,803)
Income tax benefit 510,129 459,337
Discontinued operations (7,133,152) (378,895)
------------- -------------
Net loss $ (9,435,960) $ (1,085,388)
============= =============
Identifiable assets of each division are as follows:
Years Ended
December 31,
----------------------------
1997 1996
------------- -------------
Systems Integration $ 9,727,087 $ 8,931,706
Production 4,958,063 10,554,422
General corporate assets 4,249,817 3,336,764
------------- -------------
Total assets $ 18,934,967 $ 22,822,892
============= =============
Identifiable assets by division are those assets that are used in the
operation of each division. General corporate assets consist primarily of
property and equipment, intangible assets and deferred income taxes.
F-46