U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB
[ X ] QUARTERLY REPORT UNDER SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: March 31, 2004
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE EXCHANGE ACT
For the transition period from: to:
Commission file number: 000-26361
GLOBAL DIGITAL SOLUTIONS, INC.
(formerly Creative Beauty Supply, Inc.)
(Exact name of Small Business Issuer in its charter)
NEW JERSEY 22-3392051
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
Global Digital Solutions, Inc.
777 South Flagler Drive
West Tower, Suite 800
West Palm Beach, FL 33401
(Address of principal executive offices) (Zip Code)
Registrant's Telephone number, including area code: 561-515-6027
Check mark whether the Issuer (1) has filed all reports required by
Section 13 or 15(d) of the Exchange Act 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 the filing requirements for
at least the past 90 days. YES: X NO:
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING
THE PREVIOUS FIVE YEARS
Check whether the registrant filed all documents and reports required
to be filed by Section 12, 13, or 15(d) of the Exchange Act after the
distribution of securities under a plan confirmed by the court.
YES: NO:
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes
of common stock, as of the last practicable date: 27,374,467
Transitional Small Business Disclosure Format. YES: NO: X
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GLOBAL DIGITAL SOLUTIONS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
Assets
Successor Predecessor
Company Company
March 31, June 30,
2004 2003
---------- ----------
<s> <c> <c>
Current Assets
Cash $ 226,208 $ -
Contract and accounts receivable, net allowance
of $118,888 in 2004 and $110,000 in 2003 2,067,140 3,476,732
Inventory 230,570 207,597
Costs and estimated earnings in excess of billings
on uncompleted contracts 321,888 1,411,121
Prepaid expenses and other current assets 128,911 122,252
---------- ----------
Total Current Assets 2,974,717 5,217,702
Equipment And Leasehold Improvements 221,012 365,137
Goodwill and Intangible Assets 1,745,743 213,943
Other Assets 106,298 29,076
---------- ----------
$5,047,770 $5,825,858
========== ==========
Liabilities And Stockholders' Equity
Current Liabilities
Cash overdraft - per books $ - $ 4,117
Line of credit - 1,547,211
Borrowing under receivables factoring arrangement 891,574 -
Current portion of notes payable 300,000 150,000
Current obligations under capital leases 25,723 26,853
Accounts payable 1,847,355 2,636,548
Accrued expenses 763,210 551,362
Billings in excess of costs and estimated earnings
on uncompleted contracts 764,615 161,158
Due to Jetcom, Inc. 81,500 350,614
---------- ----------
Total Current Liabilities 4,673,977 5,427,863
---------- ----------
Notes Payable 116,879 266,879
---------- ----------
Obligations Under Capital Leases 17,912 32,806
---------- ----------
Stockholders Equity
Common stock: Authorized 1,000,000 shares; no par
value; issued and outstanding 100 shares - 585,391
Preferred stock: Authorized 10,000,000 shares: .001
par value; issued and outstanding 0 shares - -
3
Common stock: Authorized 100,000,000 shares: .001 par
value; issued and outstanding 27,374,467 shares 27,375 -
Stock warrants 160,800 -
Paid in capital 1,681,426 122,000
Retained earnings (deficit) (1,630,599) (609,081)
---------- ----------
Total Stockholders' Equity 239,002 98,310
---------- ----------
$5,047,770 $5,825,858
========== ==========
See the accompanying notes to condensed consolidated financial
statements.
4
GLOBAL DIGITAL SOLUTIONS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Successor Predecessor Predecessor Predecessor
Company For Company For Company For Company For
The Three The Three The Six The Nine
Months Ended Months Ended Months Ended Months Ended
March 31, March 31, December 31, March 31,
2004 2003 2003 2003
------------ ------------ ------------ ------------
<s> <c> <c> <c> <c>
Revenues $ 1,520,391 $ 3,719,278 $ 5,989,760 $ 10,618,706
Cost of Sales 2,081,099 3,140,332 5,467,861 8,592,425
------------ ------------ ------------ ------------
Gross Profit (Loss) (560,708) 578,946 521,899 2,026,281
General and
Administrative Expenses 1,017,879 550,667 1,498,633 1,898,824
Interest Expense 28,085 22,468 140,758 99,367
------------ ------------ ------------ ------------
Income (Loss) From Operations (1,606,672) 5,811 (1,117,492) 28,090
Credit for Income Taxes -- -- -- --
------------ ------------ ------------ ------------
Net income (Loss) $ (1,606,672) $ 5,811 $ (1,117,492) $ 28,090
============ ============ ============ ============
Income (loss) per common
share - basic and diluted (0.059) 0.001 (0.041) 0.001
============ =========== =========== ===========
Weighted average number of
common shares outstanding -
basic and diluted 27,288,731 27,183,467 27,183,467 27,183,467
============ =========== ============ ===========
See the accompanying notes to condensed consolidated financial
statements.
5
GLOBAL DIGITAL SOLUTIONS, INC. AND SUBSIDIARY
PREDECESSOR COMPANY CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For The Six Months Ended December 31, 2003
(Unaudited)
Additional Retained Total
Common Stock Paid-In Earnings Stockholders'
Shares Amount Capital (Deficit) Equity
---------- ---------- ---------- ---------- ----------
<s> <c> <c> <c> <c> <c>
Balance -
June 30, 2003 100 $ 585,391 $ 122,000 $ (609,081) $ 98,310
Capital Contribution
From Jetcom, Inc. - - 629,813 - 629,813
Net Loss - - - (1,117,492) (1,117,492)
---------- ---------- ---------- ---------- ----------
Balance -
December 31, 2003 100 $ 585,391 $ 751,813 $(1,726,573) $ (389,369)
========== ========== ========== ========== ==========
See the accompanying notes to condensed consolidated financial
statements.
GLOBAL DIGITAL SOLUTIONS, INC. AND SUBSIDIARY
SUCCESSOR COMPANY CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For The Three Months Ended March 31, 2004
(Unaudited)
Additional Retained Total
Common Stock Stock Paid-In Earnings Stockholders'
Shares Amount Warrants Capital (Deficit) Equity
---------- ---------- ---------- ---------- ---------- ----------
<s> <c> <c> <c> <c> <c> <c>
Balance -
December 31,
2003-Predecessor
Company 100 $ 585,391 $ - $ 751,813 $(1,726,573) $(389,369)
Adjustment to
reflect purchase
by Global Digital
Solutions, Inc.
23,688,717 (585,154) - 766,001 1,702,646 1,883,493
Issuance of
common stock 191,000 2 - 190,748 - 190,750
Issuance of
stock warrants - - 160,800 - - 160,800
Net Loss - - - - (1,606,672) (1,606,672)
Merger consideration
-Creative Beauty
Supply, Inc.(1) 3,494,650 27,136 - (27,136) - -
---------- --------- ------- --------- --------- ---------
Balance -
March 31, 2004 27,374,467 $ 27,375 $160,800 $1,681,426 $(1,630,599) $ 239,002
========== ========= ======== ========== ========== =========
(1)Represents shares of Creative Beauty Supply, Inc. outstanding prior
to the merger, and an adjustment to the par value of common stock from
$0.00001 to $0.001.
See the accompanying notes to condensed consolidated financial
statements.
6
GLOBAL DIGITAL SOLUTIONS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(Unaudited)
Successor Predecessor Predecessor
Company For Company For Company For
The Three The Six The Nine
Months Ended Months Ended Months Ended
March 31, December 31, March 31,
2004 2003 2003
------------ ------------ ------------
<s> <c> <c> <c>
Cash Flows From Operating Activities
Net Income (loss) $ (1,606,672) $ (1,117,492) $ 28,090
Adjustment to reconcile net income
(loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization 223,861 59,580 99,955
Issuance of stock warrants 160,800 - -
Change in assets and liabilities:
Contracts and accounts receivable 259,874 1,149,718 (712,586)
Inventory (10,149) (12,824) (413,874)
Refundable income taxes - - 440,482
Costs and estimated earnings in excess
on billings on uncompleted contracts 282,763 806,470 (722,106)
Prepaid expenses and other current assets 8,288 (14,947) 101,379
Deposits (46,817) (25,991) (49,370)
Accounts payable and accrued expenses (176,114) (462,294) 1,484,015
Billing in excess of costs and estimated
earnings on uncompleted contracts 346,356 257,101 22,933
------------ ------------ ------------
Net Cash Provided by (Used In) Operating
Activities (557,810) 639,321 278,918
------------ ------------ ------------
Cash Flows From Investing Activities
Purchase of equipment and leasehold
improvements (20,528) (5,116) (50,702)
Cash acquired in business acquisitions 136,343 - 1,000
------------ ------------ ------------
New Cash Provided by (Used In) Investing 115,815 (5,116) (49,702)
Activities ------------ ------------ ------------
Cash Flows From Financing Activities
Decrease in bank overdraft - (4,117) (225,538)
Repayments on line of credit - (1,547,211) (105,268)
Borrowings under receivables factoring
arrangement 178,887 712,687 -
Payments on long-term debt and capital lease
obligations (14,398) (1,626) (15,502)
Repayments to Jetcom, Inc. (15,000) (124,301) (70,397)
Issuance of common shares 190,750 - -
Capital contribution by Jetcom, Inc. - 500,000 222,000
------------ ------------ ------------
7
Net Cash Provided by (Used In) Financing
Activities 340,239 (464,568) (194,705)
------------ ------------ ------------
Change in Cash (101,756) 169,637 34,511
Cash - Beginning of Period 327,964 - -
------------ ------------ ------------
Cash - End of Period $ 226,208 $ 169,637 $ 34,511
============ ============ ============
See the accompanying notes to condensed consolidated financial
statements.
8
GLOBAL DIGITAL SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Organization And Summary Of Significant Accounting Policies
Basis Of Presentation
The accompanying unaudited condensed consolidated financial statements
of Global Digital Solutions, Inc. and its subsidiary ("the Company" or
"Global") as of March 31, 2004 and for the three months ended March 31,
2004, and the Company's predecessor, Pacific Comtel, Inc. and
subsidiary for six months ended December 31, 2003, and the three and
nine months ended March 31, 2003 have been prepared in accordance with
accounting principles generally accepted in the United States of
America for interim financial information. Accordingly, they do not
include all of the information and footnotes required by accounting
principles generally accepted in the United States of America for
complete financial statements. The June 30, 2003 financial information
included herein has been extracted from Pacific Comtel, Inc.'s audited
financial statements. In the opinion of Global Digital Solutions,
Inc.'s management, all adjustments (consisting of only normal recurring
adjustments) considered necessary to present fairly the condensed
consolidated financial statements have been made.
The condensed consolidated statements of operations for the three
months ended March 31, 2004 and six months ended December 31, 2003 are
not necessarily indicative of the results that may be expected for the
entire year. These statements should be read in conjunction with
Pacific Comtel, Inc.'s audited June 30, 2003 consolidated financial
statements, which are presented in the Company's Form 8-K filed with
the Securities and Exchange Commission on March 8, 2004.
Pacific Comtel, Inc. (formerly Intersect Solutions, Inc.) was organized
in 1995 to purchase the assets of an existing installation contractor
of communications systems, cable and wiring for commercial and
industrial buildings. On November 1, 2002, Pacific Comtel, Inc.
purchased 100 percent of the common stock of a business engaged in
cable and wiring services, as well as computer network and telephone
integration sales and service. This subsidiary is named Pacific Comtel
Monterey, Inc.
On November 1, 2002, Jetcom, Inc. purchased 100 percent of the common
stock of Pacific Comtel, Inc. Pacific Comtel, Inc. applied the "push
down" accounting rules to this transaction, and, as such, a new basis
of accounting was created on that date. Operations of Pacific Comtel,
Inc. prior to November 1, 2002 have not been segregated in these
condensed consolidated financial statements from those of Pacific
Comtel, Inc. prior to its purchase by Jetcom, Inc. due to the fact that
no substantive changes in operations have occurred due to this outside
change in control. This business, through December 31, 2003, is
presented in these condensed consolidated financial statements as that
of the "Predecessor Company".
9
Effective January 8, 2004, Global Digital Solutions, Inc. purchased 100
percent of the common stock of Pacific Comtel, Inc. Global Digital
Solutions, Inc. was the surviving entity in the merger. Global applied
the "push down" accounting rules to this transaction, and, as such, a
new basis of accounting was created on that date. Global Digital
Solutions, Inc. was formed in October 2003 to acquire Pacific Comtel,
Inc. Global had no substantive operations prior to its acquisition of
Pacific Comtel, Inc. As such, no financial results for Global have
been presented prior to January 8, 2004.
Operations of Global subsequent to December 31, 2003 are presented in
these condensed consolidated financial statements as those of the
"Successor Company".
See Note 2 for more information regarding these transactions.
Effective March 25, 2004, Creative Beauty Supply, Inc. ("CBS")
purchased Global Digital Solutions, Inc. CBS issued 23,879,817 shares
of its common stock in a 1 for 1 exchange with the shareholders of
Global. Upon completion of this transaction, the shareholders of
Global owned approximately 87 percent of the outstanding stock of CBS.
Additionally, CBS issued 2,100,000 Series A warrants and 370,000 Series
B warrants to the existing warrant holders of Global in exchange for
their previously held warrants.
Given Global's ownership in CBS upon completion of the merger, and the
fact that CBS was not considered a "business" for accounting purposes,
the merger is treated as a recapitalization of Global, and not a
business combination. Although CBS will be the legal acquiror, the
historic financial statements presented will be those of Global (and
its accounting predecessor, Pacific Comtel, Inc.).
Plan Of Operation
The Company has generated significant losses from operations, and has
experienced declining revenues and profit margins. Additionally, the
Company has negative tangible net worth at March 31, 2004. The
Company has been unable to bid on certain contracts because they have
been unable to obtain the required bonding, which is unavailable due to
the Company's poor financial position.
During the three months ended March 31, 2004 and after the completion
of the merger with Pacific Comtel, Inc., the company re-engineered its
revenue generation plan and geared it toward the government contract
marketplace. The implementation of this plan was hindered primarily
by the Company's lack of a bonding facility resulting in its inability
to bid on government related contracts. This caused a significant
drop in sales from $3.7 million in the three months ended March 31,
2003 to $1.5 million for the three months ended march 31, 2004. The
company also embarked on an expense reduction plan during the period.
While significant cuts were made, they did not keep pace with the
reduction in revenue, resulting in a decline in the gross profit and an
increase in general and administrative expenses for the three months
ended March 31, 2004. The effectiveness of the expense and cost
reductions were offset by increases in accounting, consulting, interest
10
and legal expenses primarily associated with the mergers effected
during the quarter. Severance and labor cost reductions that were
implemented were delayed to some extent by the requirements of
California labor laws.
The Company is currently working with an investment banking firm to
raise a significant amount of capital. The raising of this capital
would allow for the Company to improve its material costs by better
purchasing, reduce financing costs by obtaining more attractive
borrowing rates and financially position the balance sheet in order to
obtain a bonding line for the government contracting work.
Impediments to the raising of the capital are the poor financial
condition of the Company, the lack of liquidity in its stock, the
availability of investors to invest in the Company and the fact that
Company's stock is not listed on a major stock exchange.
There can be no assurance, however, that the Company's cost reduction
and equity financing plans will be successful, or if successful, will
allow the Company to achieve profitability or continue as a going
concern.
Principles Of Consolidation
The condensed consolidated financial statements include Global Digital
Solutions, Inc. and its wholly owned subsidiary. All significant
intercompany accounts and transactions have been eliminated upon
consolidation.
Estimates And Assumptions
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America 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 revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Earnings Per Share
Basic earnings (loss) per share is computed on the basis of the
weighted average number of common shares outstanding. Diluted
earnings per share is computed on the basis of the weighted average
number of common shares outstanding plus the effect of all dilutive
potential common shares that were outstanding during the period.
Weighted average shares of the predecessor company have been
retroactively restated to reflect the number of shares outstanding
immediately following the purchase of Pacific Comtel, inc. by Global
Digital Solutions, Inc. plus the Creative Beauty Supply, Inc. shares
outstanding immediately prior to the merger with Global Digital
Solutions, Inc. Dilutive shares of 1,304,313 were not included in the
computation of diluted loss per share for the three months ended March
31, 2004 because to do so would have anti-dilutive.
11
2. Business Acquisitions
On November 1, 2002, Jetcom, Inc. purchased 100 percent of the common
stock of Pacific Comtel, Inc. Jetcom, Inc. is a holding company formed
for the purpose of acquiring information technology and
telecommunications service companies. Jetcom, Inc. had no substantive
operations prior to the purchase of Pacific Comtel, Inc. The purchase
price amounted to $1,002,270. The purchase price is comprised of notes
payable to selling shareholders totaling $416,879, Jetcom, Inc. Series
A Preferred Stock with a value of $313,000 and direct acquisition costs
of $272,391. The value of the preferred stock was determined based on
that stock's stated liquidation preference.
Because the acquisition resulted in a 100 percent change in control of
Pacific Comtel, Inc., the Company applied the "push down" accounting
rules. This resulted in a new accounting basis for the assets and
liabilities of Pacific Comtel, Inc.
The notes payable to the selling shareholders are to be funded from the
operations of Pacific Comtel, Inc. Additionally, shares of Pacific
Comtel, Inc. are pledged as collateral on the notes payable. As such,
this liability had been reflected on the balance sheet of Pacific
Comtel, Inc. as a push down accounting adjustment. Additionally,
interest expense on these notes of $10,257 and $18,659 has been
reflected in the financial statements of the Company for the six months
ended December 31, 2003 and nine months ended March 31, 2003. In
January 2004, these note agreements were amended, whereby Pacific
Comtel, Inc. assumed these notes payable, and received an extension of
the first payment date to June 30, 2004. See Note 3 regarding other
terms of these notes payable.
The following table summarizes the fair value of the assets acquired
and liabilities assumed at the date of acquisition:
Cash $ 238,360
Contract receivables 2,494,045
Inventory 207,831
Net costs and estimated earnings in excess of
billings on uncompleted contracts 114,404
Other current assets 500,000
Equipment and leasehold improvements 430,524
Goodwill 213,943
Other assets 19,766
----------
Total assets acquired 4,218,873
Accounts payable and accrued expense assumed 1,498,676
Line of credit and capital lease obligations 1,717,927
----------
Net assets acquired $1,002,270
==========
Of the $213,943 allocated to goodwill, none is expected to be
deductible for tax purposes.
12
On November 1, 2002, Pacific Comtel, Inc. purchased 100 percent of the
common stock of ADS Monterey, and renamed it Pacific Comtel Monterey,
Inc. Pacific Comtel Monterey, Inc. is engaged in the business of cable
and wiring services, as well as computer network and telephone
integration sales and service, and was purchased to expand the
Company's capabilities and geographic presence. The purchase price
amounted to $205,572, consisting of a cash payment of $175,000 and
direct acquisition costs of $30,572. Jetcom, Inc. paid the entire
purchase price and direct acquisition costs, on behalf of the Company.
The results of operations of Pacific Comtel Monterey, Inc. are included
in the consolidated financial statements from the date of acquisition.
The following table summarizes the fair value of the assets acquired
and liabilities assumed at the date of acquisition:
Accounts receivable $ 177,369
Inventory 79,617
Other current assets 1,865
----------
Total assets acquired 258,851
Accounts payable and accrued expense assumed 53,279
----------
Net assets acquired $ 205,572
==========
Effective January 8, 2004, Global Digital Solutions, Inc. purchased 100
percent of the common stock of Pacific Comtel, Inc. Global is a
holding company formed for the purpose of acquiring companies in the
government contract marketplace. Global had no substantive operations
prior to the purchase of Pacific Comtel, Inc. The purchase price
amounted to $1,257,000. The purchase price is comprised of 6,961,000
shares common stock with a value of $1,200,000 and direct acquisition
costs of $57,000. Additionally, Series B warrants to purchase 370,000
common shares at $1.00 per share were issued to Jetcom's existing
Series B warrant holders, in exchange for their previously held
warrants. The value of the common stock was determined based on an
independent appraisal of the net assets of Pacific Comtel, Inc. Based
on the Black-Scholes pricing model, no value was assigned to the
warrants. In considering the benefits of the Pacific Comtel, Inc.
acquisition, management of Global Digital Solutions, Inc. believes it
is acquiring a company in a sector of the economy poised for growth
fueled by the financial opportunities in the commercial and
governmental marketplaces and an experienced management team capable of
controlling its growth. In addition, the company is intended to be the
core subsidiary in a segment critical to the overall business strategy
of Global.
Because the acquisition resulted in a 100 percent change in control of
Pacific Comtel, Inc., the Company applied the "push down" accounting
rules. This resulted in a new accounting basis for the assets and
liabilities of Pacific Comtel, Inc. Additionally, in conjunction with
the purchase, Pacific Comtel, Inc. changed its name to Global Digital
Solutions, Inc.
13
The following table summarizes the fair value of the assets acquired
and liabilities assumed at the date of acquisition:
Cash $ 169,637
Contract receivables 2,327,014
Inventory 220,421
Net costs and estimated earnings in excess of
billings on uncompleted contracts 186,392
Other current assets 137,199
Equipment and leasehold improvements 211,846
Goodwill 1,108,243
Intangible assets 850,000
Other assets 55,963
----------
Total assets acquired 5,266,715
Accounts payable and accrued expense assumed 2,822,116
Notes payable, borrowings under receivables factoring
arrangement and capital lease obligations 1,187,599
----------
Net assets acquired $1,257,000
==========
Of the $850,000 of acquired intangible assets, $650,000 has been
allocated to acquired contract backlog, and $200,000 has been allocated
to customer master service contracts. These intangibles have a useful
life of one year and will be amortized over that period. Of the
$1,109,139 allocated to goodwill, none is expected to be deductible for
tax purposes.
The change in carrying value of goodwill is as follows:
Balance - June 30, 2003 $ 213,943
Adjustment to reflect purchase of Pacific Comtel, Inc.
by Global Digital Solutions 894,300
----------
Balance - March 31, 2004 $1,108,243
==========
Amortizable intangible assets at March 31, 2004 consist of the
following:
Weighted
Average
Accumulated Amortization
Cost Amortization Net Period
-------------------------------------------------
Acquired contract
Backlog $650,000 $(162,500) $487,500 1 year
Customer master
Service contracts 200,000 (50,000) 150,000 1 year
--------------------------------
$850,000 $(212,500) $637,500
================================
14
3. Financing Agreements
The Company maintained a revolving credit arrangement with a bank,
which provided for borrowings up to 80 percent of eligible contract
receivables, not to exceed $2,000,000. The line of credit initially
required interest payments at the bank prime rate. The balance was
payable in full on January 31, 2003. The credit agreement contained
standard terms and covenants. The Company had been in violation of
certain of these covenants since June 30, 2002. The credit agreement
was amended in September 2002 to raise the interest rate to the prime
rate plus 3.5 percent, and amended again in November 2002 to raise the
interest rate to the prime rate plus 4.5 percent. In August 2002, the
bank capped the Company's line of credit balance at $1,597,211. In
November 2002, the bank began charging interest at the default rate of
the prime rate plus 9.5 percent. The balance outstanding at June 30,
2003 was $1,547,211.
On October 9, 2003, the Company entered into an accounts receivable
factoring agreement with a finance company. Under this agreement, the
Company will sell, with recourse, 80 percent of its eligible accounts
receivable balances, up to $2,500,000. Interest is charged at an
annual rate of 18 percent. The agreement is effective for one year,
and is secured by a pledge of all of the Company's assets, and
guarantees by Jetcom, Inc. and its principal stockholder. The Company
used this source of financing to pay off its previous revolving credit
agreement and to provide working capital needs. The balance
outstanding at March 31, 2004 was $891,574. Unused availability at
March 31, 2004 was approximately $500,000.
Notes Payable and the current portion totaling $416,879 is comprised of
notes payable to the Sellers of Pacific Comtel, Inc. stock as discussed
in the first paragraph of Note 2. The notes require payments of
$500,000 in the aggregate and have no stated interest rate. These
obligations have been discounted using an interest rate of 8%. The
notes initially had scheduled payments of $150,000 at December 31,
2003, $150,000 at December 31, 2004, and $200,000 at December 31, 2005.
The Company entered into a subsequent agreement with the note holders
dated January 12, 2004. This agreement granted an extension to the
payment of the first installment due until June 30, 2004. In
accordance with the original terms of the note, additional interest of
8% per annum is being charged on the face amount of $500,000 beginning
January 1, 2004, since the required installment was not made.
4. Related Party Transactions
The Company was previously a wholly owned subsidiary of Jetcom, Inc.
Jetcom's president provides management services for the Company.
Jetcom charged the Company $8,750 for these services for the six months
ended December 31, 2003. Additionally, Jetcom advanced funds to the
Company from time to time. The balance due to Jetcom at March 31, 2004
and June 30, 2003 amounted to $81,500 and $350,614, respectively.
These advances are non-interest bearing, and are due on demand. Jetcom
is not under any obligation to advance any further funds to the
15
Company. In January 2004, Jetcom contributed $129,813 of the amounts
it was owed at December 31, 2003 to capital. Additionally, in August
2003, Jetcom contributed $500,000 to the Company as additional paid in
capital.
The Company has entered into an agreement with a brokerage firm to
provide investment banking services. A shareholder of the Company is
an officer of the brokerage firm.
5. Subsequent Event
On April 19, 2004, the company entered into a loan agreement with the
CEO/ President of the Company. The amount owed to the CEO/President
from the company as of the issuance of these statements is $50,000.
The funds were used for working capital. The promissory note is
unsecured and payable upon demand. The note bears interest at a rate
of 2 percent over Prime Rate as announced from time to time from Bank
of America, N.A.
On April 21, 2004, the company entered into a loan agreement with
Solutions, Inc. Solutions, Inc. is a private corporation primarily
owned by Richard J. Sullivan, Chairman of the Board of the Company.
The amount owed to Solutions, Inc. from the Company as of the issuance
of these statements is $200,000. The funds were used for working
capital. The promissory note is unsecured and payable upon demand.
The note bears interest at a rate of 2 percent over Prime Rate as
announced from time to time from Bank of America, N.A.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Prior to the merger with Pacific Comtel,Inc. on January 8,2004, Global
Digital Solutons,Inc. had no significant operations and had no control
over the operations of Pacific Comtel,Inc. Prior to the merger with
Creative Beauty Supply, Inc. on March 19, 2004, Global Digital
Solutions, Inc., a Delaware company was incorporated in October 2003.
In conjunction with the merger in March 2004, the fiscal year end of
the registrant was changed to June 30, to conform to Global's fiscal
year end. Until the merger with Creative Beauty Supply,Inc., was
completed, Global Digital Solutions Inc. had no control over the
operations of Creative Beauty Supply, Inc.
Trends and Uncertainties. Demand for Global Digital's products and
services will be dependent on, among other things, general economic
conditions, which are cyclical in nature. Inasmuch as a major portion of
Global Digital's activities will be the receipt of revenues from
government contracts and installation of broadband network cabling and
equipment, Global Digital's business operations may be adversely affected
by Global Digital's competitors, prolonged recessionary periods, as well
as the flow of the government's budgetary process.
Capital and Source of Liquidity. Global Digital requires additional
capital in order to meet its ongoing corporate obligations and in order to
continue and expand its current and strategic business plans.
16
Global Digital has generated significant losses from operations, and
has experienced declining revenues and profit margins. Additionally,
Global Digital has negative tangible net worth at March 31, 2004.
Global Digital has been unable to bid on certain contracts because they
have been unable to obtain the required bonding, which is unavailable
due to Global Digital's poor financial position.
During the three months ended March 31, 2004 and after the completion
of the merger with Pacific Comtel, Inc., Global Digital re-engineered
its revenue generation plan and geared it toward the government
contract marketplace. The implementation of this plan was hindered
primarily by Global Digital's lack of a bonding facility resulting in
its inability to bid on government related contracts. This caused a
significant drop in sales from $3.7 million in the three months ended
March 31, 2003 to $1.5 million for the three months ended March 31,
2004. Global Digital also embarked on an expense reduction plan
during the period. While significant cuts were made, they did not
keep pace with the reduction in revenue, resulting in a decline in the
gross profit and an increase in general and administrative expenses for
the three months ended March 31, 2004. The effectiveness of the
expense and cost reductions were offset by increases in accounting,
consulting, interest and legal expenses primarily associated with the
mergers effected during the quarter. Severance and labor cost
reductions that were implemented were delayed to some extent by the
requirements of California labor laws. Global Digital's president,
Jerome C. Artigliere is currently not taking a salary in order to save
on operating costs.
Global Digital is currently working with an investment banking firm to
raise a significant amount of capital. The raising of this capital
would allow for Global Digital to improve its material costs by better
purchasing, reduce financing costs by obtaining more attractive
borrowing rates and financially position the balance sheet in order to
obtain a bonding line for the government contracting work.
Impediments to the raising of the capital are the poor financial
condition of Global Digital, the lack of liquidity in its stock, the
availability of investors to invest in Global Digital and the fact that
Global Digital's stock is not listed on a major stock exchange.
There can be no assurance, however, that Global Digital's cost
reduction and equity financing plans will be successful, or if
successful, will allow Global Digital to achieve profitability or
continue as a going concern.
Subsequent to the end of the quarter, Global Digital has purchased the
license for an SAP software operating system. The cost of the license
was $80,000. It is also in negotiations on a contract with a software
vendor to design, install, implement and provide consulting services
for the system, the terms of which have not been finalized. This
contract will cost Global Digital approximately $184,000 and be payable
over a six to ten month period. The ongoing consulting portion will
cost Global Digital approximately $6,000 - $8,000 a month once the
system is up and running. The consulting services portion of the
arrangement can be cancelled within 30 days by either party. This
17
outlay was decided upon by management to improve the existing reporting
processes of Global Digital as a result of it becoming a public entity,
assist in the improving and monitoring of current operations and to
monitor and control the expected internal and external growth.
For the three months ended March 31, 2004, Global Digital purchased
equipment and leasehold improvements of $20,528 and acquired cash in
business acquisitions of $136,343. As a result, Global Digital had net
cash provided by investing activities of $115,815 for the three months
ended March 31, 2004.
For the nine months ended March 31, 2003, Global Digital purchased
equipment and leasehold improvements of $50,702 and acquired cash in
business acquisitions of $1,000. As a result, Global Digital had net
cash provided by investing activities of $49,702 for the nine months ended
March 31, 2003.
For the six months ended December 31, 2003, Global Digital purchased
equipment and leasehold improvements of $5,116 resulting in net cash used
in investing activities of $5,116.
For the three months ended March 31, 2004, Global Digital borrowed
$178,887 under its receivables factoring arrangement, made payments on
long-term debt and capital lease obligations of $14,398 and made
repayments to Jetcom, Inc. of $15,000. For the three months ended March
31, 2004, Global Digital issued common stock valued at $190,750. As a
result, Global Digital had net cash provided by financing activities of
$340,239 for the three months ended march 31, 2004.
For the nine months ended March 31, 2003, Global Digital had a decrease in
bank overdraft of $225,538 and repaid borrowings on line of credit of
$105,268. For the same period, Global Digital made payments on long-term
debt and capital lease obligations of $15,502 and made repayments to
Jetcom, Inc. of $70,397. Additionally, Global Digital received a capital
contribution of $222,000 from Jetcom, Inc. As a result, Global Digital
had net cash used in financing activities of $194,705 for the nine months
ended March 31, 2003.
For the six months ended December 31, 2003, Global Digital had a decrease
in bank overdraft of $4,117, made payments on the line of credit of
$1,547,211, had borrowings under receivables factoring arrangement of
$712,687 and made payments on long-term debt and capital lease obligations
of $1,626. Additionally, Global Digital paid back advances from Jetcom,
Inc. of $124,301 and received capital contributions by Jetcom, Inc. of
$500,000. As a result, Global Digital had net cash used in financing
activities of $464,568 for the six months ended December 31, 2003
On a long-term basis, liquidity is dependent on establishment of
operations and receipt of revenues, additional infusions of capital and
debt financing. Although Global Digital has raised $518,817 in a recent
private placement, Global Digital believes that additional capital and
18
debt financing in the short term will be need to allow Global Digital to
pursue its business plan and acquisitions. However, there can be no
assurance that Global Digital will be able to obtain additional equity or
debt financing in the future, if at all.
Results of Operations. For the three months ended March 31, 2004, Global
Digital had revenues of $1,520,391 and cost of sales of $2,081,099. Net
loss for the three months ended March 31, 2004 was $1,606,672. General
and administrative expenses were $1,017,879 for the three months ended
March 31, 2004.
For the three months ended March 31, 2003, Global Digital had revenues of
$3,719,278 and cost of sales of $3,140,332. Net loss for the three
months ended March 31, 2003 was $5,811. General and administrative
expenses were $550,667 for the three months ended March 31, 2003.
Gross Margin decreased from 15.6% for the three months ended March 31,
2003 to a negative 36.9% for the three months ended March 31, 2004. The
main factors effecting the negative change in gross margin from 2003 to
2004 were the revenue dropped at a rate which the Company could not keep
pace on its reduction in expenses. Revenues are historically slow during
the quarter ended March 31, 2004 but the Company's transition to the
government contract marketplace and its inability to obtain a bonding
facility to support revenues in that area significantly contributed to the
revenue reduction. There were also increases in material costs as a
percentage of sales due to commodity price increases which could not be
passed on because of contract commitments and material purchases were done
at prices which did not take advantage of any discounts because of the
Company's working capital position.
General and administrative expenses increased from $550,667 for the three
months ended March 31, 2003 to $1,017,879 for the three months ended March
31, 2004. The areas of the major expense increases between the quarters
are as follows:
- Consulting services increased from $587 to $168,800. This
increase was to due to warrants issued in connection with an investment
banking contract.
- Depreciation and amortization expense increased from $29,790 to
$223,861. In this quarter $212,500 of this expense was the amortization of
intangible assets associated with the Pacific Comtel, Inc. merger.
- Accounting and auditing expense increased from $1,500 to $95,823
with the majority of the expense going towards the mergers with Pacific
Comtel, Inc. and Creative Beauty Supply, Inc.
- Legal expense increased from $832 to $37,185 primarily as a result
of the mergers with Pacific Comtel, Inc. and Creative Beauty Supply, Inc.
For the six months ended December 31, 2003, Global Digital had revenues of
$5,989,760 and cost of sales of $5,467,861. Net loss for the six months
ended December 31, 2003 was $1,117,492. General and administrative
expenses were $1,498,633 for the six months ended December 31, 2003.
19
Item 3. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this quarterly report on Form
10-QSB, our management, under the supervision and with the
participation of our chief executive officer and chief financial
officer, conducted an evaluation of our "disclosure controls and
procedures" (as defined in Securities Exchange Act of 1934 (the
"Exchange Act") Rules 13a-14(c)). Based on their evaluation, our chief
executive officer and chief financial officer have concluded that our
disclosure controls and procedures are effective to ensure that all
material information required to be filed in this quarterly report on
Form 10-QSB has been made known to them in a timely fashion.
Changes in Internal Controls
There have been no significant changes (including corrective actions
with regard to significant deficiencies or material weaknesses) in our
internal controls or in other factors that could significantly affect
these controls.
20
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
We are subject to general commercial litigation and other litigation
claims as part of our operations, and we could incur litigation
expenses in defending these claims and could be subject to damages or
other remedies. Litigation in general can be expensive and disruptive
to normal business operations. Moreover, the results of legal
proceedings are difficult to predict. Where Global Digital believes it
has defenses to the cases set forth below we will vigorously defend
those matters. None of the litigation directly arises out of the
business operations of Global Digital, rather, Global Digital assumed
these liabilities through merger.
Super 8 Motel Ridgecrest v. Pacific Comtel, Inc., Superior Court of
California, County of Kern, Civil Case No. R-1502-CI-08127-Suit for
breach of contract was filed on July 22, 2003, seeking damages in the
amount of $15,828.60. Plaintiff Super 8 Motels-Ridgecrest is a hotel
operator that alleged defendant, Pacific Comtel, Inc., failed to pay
lodging charges incurred by Pacific Comtel's personnel. Default
judgment was entered on November 24, 2003, in the amount of $15,828.60.
Tomarco Contractor Specialties, Inc. v. Pacific Comtel, Inc., San Diego
County Small Claims Case No. SN02399-Suit for breach of contract was
filed on August 1, 2003, seeking relief in the amount $5,000,
attorney's fees, and costs. Plaintiff Tomarco Contractors Specialties,
Inc. is a construction supplier that alleged defendant, Pacific Comtel,
Inc. failed to pay for goods/services provided. Default judgment was
entered on September 9, 2003, in the amount of $5,052.
Channel Island Inn, LP v. Pacific Comtel, Inc., Superior Court of
California, County of Ventura, Civil Case No. CIV223527-Breach of
contract action was filed on or about November 6, 2003, seeking damages
in the amount of $34,048.63. Plaintiff Channel Island Inn, LP is a
hotel operator that alleged defendant, Pacific Comtel, Inc., failed to
pay lodging charges incurred by Pacific Comtel's personnel. Default
judgment was entered on April 19, 2004 in the amount of $34,048.63.
Creditors Adjustment Bureau v. Pacific Comtel, Inc., Superior Court of
California, County of San Diego Superior Court Case No. IN033788-Suit
for breach of contract was filed on November 5, 2003 seeking damages in
the amount of 7840.03, attorney's fees, and costs. Plaintiff is a
collection agency suing to collect an unpaid debt. Defendants are
Pacific Comtel, Inc., and Daniel E. Peters (a Pacific Comtel employee
who was named personally). Default judgment was granted on February 2,
2004. Entry of Default Judgment was filed on March 19, 2004 in the
amount $10,086.00.
Gray Cary Ware & Friedienrich, LLP v. Delgado et al., Superior Court of
California, County of Sacramento, Case No. 03AS06069-Suit for breach of
contract seeking damages in the amount of $70,900, attorney's fees, and
costs. Gray Cary Ware & Friedienrich, LLP, is a law firm. Defendants
21
JetCom, Inc. and William J. Delgado were acquired by Pacific Comtel,
Inc., by merger. This is a dispute arising out of Gray Cary's legal
services rendered. The parties are currently waiting appointment of an
arbitrator.
Davis v. Pacific Comtel, Inc., Workers Compensation Case No. 39019259-
This claim has been tendered to our Workman's Compensation carrier for
litigation. The amount in controversy is undetermined.
Moore v. Pacific Comtel, Inc., Workers Compensation Case No. 39016318-
This claim has been tendered to our Workman's Compensation carrier for
litigation. The amount in controversy is undetermined.
Accu-Tech Corporation v. Pacific Comtel, Inc., Superior Court of
California, County of San Diego, North County Division, Civil Case No.
IN035755-Complaint was filed on March 5, 2004, seeking damages in the
amount of $14,776.55, attorney's fees, and costs. Plaintiff Accu-Tech
Corporation is a supplier seeking damages for an Open Book Account and
Account Stated. Defendant is Pacific Comtel, Inc.
Walters Wholesale Electric v. Pacific Comtel, Inc., Superior Court of
California County of Los Angeles, South District, Civil Case No.
04C02028-The complaint was filed April 12, 2004, seeking damages in the
amount of $22,749.57, attorney's fees, and costs. Plaintiff Walters
Wholesale Electric is seeking relief for Common Counts arising out of
services, products, and goods sold to defendant Pacific Comtel, Inc.
ITEM 2. CHANGES IN SECURITIES.
Effective March 25, 2004, Creative Beauty Supply, Inc. purchased Global
Digital Solutions, Inc. CBS issued 23,879,817 shares of its common
stock in a 1 for 1 exchange with the shareholders of Global Digital.
Upon completion of this transaction, the shareholders of Global Digital
owned approximately 87 percent of the outstanding stock of CBS.
Additionally, CBS issued 2,100,000 Series A warrants and 370,000 Series
B warrants to the existing warrant holders of Global in exchange for
their previously held warrants.
These securities were issued to sophisticated investors pursuant to an
exemption from registration under Rule 4(2) of the Securities Act of
1933.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS.
On March 5, 2004, at an annual meeting of the shareholders, the
following matters were submitted to a vote.
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1. Proposed Acquisition of Global Digital Solutions, Inc.
For 3,385,133 Against 0 Withheld 0
2. Approval of the name change of the Company to Global Digital
Solutions, Inc.
For 3,385,133 Against 0 Withheld 0
3. Election of Directors
The following individuals were elected to the Board of
Directors:
Richard J. Sullivan For 3,385,133 Against 0 Withheld 0
Jerome C. Artigliere For 3,385,133 Against 0 Withheld 0
Garrett A. Sullivan For 3,385,133 Against 0 Withheld 0
Arthur F. Noterman For 3,385,133 Against 0 Withheld 0
4. Approval of Rubin, Brown, Gornstein & Co. LLP as Independent
Certified Accountants for fiscal year ending June 30, 2004.
For 3,385,133 Against 0 Withheld 0
ITEM 5. OTHER INFORMATION.
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibit 2 Agreement and Plan of
Reorganization incorporated by reference to
Form 8-K filed on March 25, 2004
Exhibit 31 302 Certification
Exhibit 32 906 Certification
(b) Form 8-K filed on March 8, 2004, Items
1,2,5 and 7 reported
Form 8-K filed on March 25, 2004, Item
4 reported
23
SIGNATURES
Pursuant to the requirements 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 Digital Solutions, Inc.
(Registrant)
Dated: May 17, 2004
By: /s/ Jerome C. Artigliere
----------------------------
Jerome C. Artigliere, President