U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
|X| Quarterly report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended September 30, 2003.
|_| Transition report under Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the transition period from ____________ to _____________.
Commission file number: 0-27637
-------
Global Entertainment Holdings/Equities, Inc.
--------------------------------------------
(Name of small business issuer in its charter)
Colorado 47-0811483
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
703 Waterford Way, Suite 690, Miami, Florida 33126
-------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (305) 374-2036
--------------
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
As of November 13, 2003, there were 10,560,296 outstanding shares of the
issuer's common stock, par value $0.001.
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets - September 30, 2003 (Unaudited)
And December 31, 2002...............................................3
Consolidated Unaudited Statements of Operations - For the
Nine Months Ended September 30, 2003
and September 30, 2002..............................................4
Consolidated Unaudited Statements of Cash Flows - For the Three
and and Nine Months Ended September 30, 2003
and September 30, 2002..............................................5
Notes to Consolidated Unaudited Financial Statements..................6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION............10
ITEM 3. CONTROLS AND PROCEDURES..............................................17
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDING.....................................................18
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..................18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.....................................19
ITEM 7. SIGNATURES...........................................................21
CERTIFICATIONS.......................................Filed as Exhibits 31 and 32
2
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements.
GLOBAL ENTERTAINMENT HOLDINGS/EQUITIES, INC. & SUBSIDIARIES
Consolidated Balance Sheets
As of September 30, As of December 31,
2003 2002
(unaudited) (see Note 1)
--------------- -----------------
A S S E T S
Current Assets
Cash $ 135,144 $ 260,494
Accounts Receivable, net of
allowance for doubtful accounts 466,882 749,486
Notes Receivable 262,702 1,019,343
Other Receivables 11,604 16,031
Prepaid Expenses 53,651 84,588
--------------- -----------------
Total Current Assets 929,983 2,129,942
Property & Equipment
Office Improvements 31,634 33,297
Computer Equipment 2,079,017 1,846,739
Furniture & Fixtures 255,639 226,480
Other 177,398 201,799
--------------- -----------------
2,543,688 2,308,315
Less accumulated depreciation (1,536,692) (1,324,234)
--------------- -----------------
Total Property & Equipment 1,006,996 984,081
Other Assets
Software Developed for Licensing, net 755,986 1,148,063
Other Assets 71,282 60,866
--------------- -----------------
Total Other Assets 827,268 1,208,929
--------------- -----------------
Total Assets $ 2,764,247 $ 4,322,952
=============== =================
LIABILITIES & STOCKHOLDERS' EQUITY
Current Liabilities
Accounts Payable And Accrued Expenses $ 872,244 $ 692,515
Current Portion of Notes Payable 274,546 479,515
Deferred Revenue - 129,242
Income Taxes Payable 98,143 84,802
--------------- -----------------
Total Current Liabilities 1,244,933 1,386,074
--------------- -----------------
Long-term debt 196,172 -
Contingencies - -
Stockholders' Equity
Preferred Stock, 25,000,000 Shares Authorized,
None Issued - -
Common Stock, 100,000,000 Shares Authorized 10,561 10,376
Par Value of $.001; 10,560,296 and
10,375,776 Shares Issued
Paid in Capital 3,256,819 3,228,899
Retained Earnings(Deficit) (1,496,938) 144,903
Treasury Stock (183,533 shares), at Cost (447,300) (447,300)
--------------- -----------------
Net Stockholders' Equity 1,323,142 2,936,878
--------------- -----------------
Total Liabilities and
Stockholders' Equity $ 2,764,247 $ 4,322,952
=============== =================
See accompanying summary of accounting principles and notes to consolidated
financial statements.
3
GLOBAL ENTERTAINMENT HOLDINGS/EQUITIES, INC. & SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
For the Three Months Ended For the Nine Months Ended
September 30 September 30
-------------------------- --------------------------
2003 2002 2003 2002
------------ ----------- ------------ -----------
Total Revenues $ 804,792 $ 1,462,910 $ 3,118,463 $ 4,055,009
Cost of Sales 740,919 777,343 2,318,048 2,390,539
------------ ------------ ------------ ------------
Gross Profit 63,873 685,567 800,415 1,664,470
Expenses
Uncollectible Fees Written Off 15,400 - 15,400 76,074
Depreciation & Amortization 101,413 69,881 325,008 453,984
Rents 78,305 41,674 158,925 125,359
Professional Fees 149,904 107,809 397,687 246,687
Financial & Investor Relations 46,181 15,620 72,559 59,855
Administrative Expenses 160,265 41,265 313,760 251,078
Moving and Relocation Expenses 36,103 - 259,575 -
Advertising and Marketing 10,405 45,020 106,227 129,770
Wages and Salaries 427,035 339,642 782,293 602,480
------------ ------------ ------------ ------------
Total Expenses $ 1,025,011 $ 660,911 $ 2,431,434 $ 1,945,287
------------ ------------ ------------ ------------
Income (Loss) from Operations (961,138) 24,656 (1,631,019) (280,817)
Other Income(Expenses)
Interest(Expense) (18,387) (13,365) (38,423) (66,187)
Interest Income 12,367 102 41,047 1,279
------------ ------------ ------------ ------------
Total Other Income (Expenses) (6,020) (13,263) 2,624 (64,908)
------------ ------------ ------------ ------------
Income (Loss) Before Taxes (967,158) 11,393 (1,628,395) (345,725)
Provisions for Income Tax (5,108) (1,128) (13,448) (15,449)
------------ ------------ ------------ ------------
Net Income (Loss) $ (972,266) $ 10,265 $(1,641,843) $ (361,174)
============ ============ ============ ============
Basic and Diluted
Earnings (Loss) Per Share $ (0.09) $ 0.00 $ (0.16) $ (0.04)
Weighted Average Shares 10,560,296 10,375,776 10,488,228 10,375,776
See accompanying summary of accounting principles and notes to consolidated
financial statements.
4
GLOBAL ENTERTAINMENT HOLDINGS/EQUITIES, INC. & SUBSIDIARIES
Statements of Cash Flows
(Unaudited)
For the Nine Months Ended
September 30
-----------------------------
2003 2002
-------------- -------------
Cash Flows from Operating Activities
Net Loss $ (1,641,843) $ (361,174)
Adjustments to Reconcile Net (Loss) to
Net Cash Provided by Operating Activities:
Depreciation and Amortization 822,861 822,606
Uncollectible Fees Written Off 15,400 76,074
Stock Issued for Services 28,105 -
Loss on Assets Disposed 49,778 -
Change in Operating Assets & Liabilities
Decrease in Fees Receivable 282,604 858,203
(Increase) Decrease in Prepaid Expenses 28,818 (40,764)
Increase in Security Deposits (10,416) (18,127)
Decrease in Other Receivables 6,546 15,493
(Increase) Decrease in Notes Receivable 756,642 (601,099)
Increase (Decrease) in Accounts Payable (56,862) 80,234
Increase (Decrease) in Accrued Expenses 249,933 (4,542)
Increase (Decrease) in Deferred Revenue (129,242) 78,775
-------------- -------------
Net Cash Provided by Operating Activities 402,324 905,679
-------------- -------------
Cash Flows from Investing Activities
Purchase of Equipment And Software (406,441) (407,295)
Development of Software (112,438) (500,502)
Receipts on Long Term Note Receivable - 337,282
-------------- -------------
Net Cash Used in Investing Activities (518,879) (570,515)
-------------- -------------
Cash Flows from Financing Activities
Repayment of Current Notes Payable (196,710) -
Repayment of Long-Term Debt - (520,651)
Proceeds from Long-Term Debt 198,000 -
Other (10,085) 11,677
-------------- -------------
Net Cash Used in Financing Activities (8,795) (508,974)
-------------- -------------
Decrease in Cash & Cash Equivalents (125,350) (173,810)
Cash at Beginning of Period 260,494 189,091
-------------- -------------
Cash at End of Period $ 135,144 $ 15,281
============== =============
Supplemental Disclosures of Cash Flow Information
Interest Expense Paid $ 31,940 $ 64,908
Taxes Paid $ - $ -
See accompanying summary of accounting principles and notes to consolidated
financial statements.
5
GLOBAL ENTERTAINMENT HOLDINGS/EQUITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003 and 2002
(Unaudited)
NOTE 1 - GENERAL
The Company was incorporated on July 10, 1997, in Colorado as Masadi Resources,
Inc. On February 10, 1998, the name was changed to International Beverage
Corporation. On August 27, 1998, International Beverage Corporation merged with
Global Entertainment Holdings/Equities, Inc., and subsequently the surviving
corporation became known as Global Entertainment Holdings/Equities, Inc.
Principles of Consolidation
The Company currently has two wholly owned subsidiaries; IGW Software,
Inc.,(formerly Interactive Gaming and Wagering, N.V.), ("IGW"), a Netherlands
Antilles Corporation in Curacao, Netherlands Antilles, and Prevail Online, Inc.,
("Prevail"), a Colorado Corporation. IGW is engaged in the conception and
creation of computer software programs for the gaming and wagering industry.
Prevail was purchased in August of 1999 and it was engaged in the creation and
operation of websites. The accompanying consolidated financial statements
include the accounts of the company and its wholly-owned subsidiaries.
Inter-company transactions and balances have been eliminated in consolidation.
NOTE 2 - BASIS OF PRESENTATION
The unaudited financial statements included herein have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-QSB and Item 310(b) of
Regulation S-B. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the nine months ended September 30, 2003
are not necessarily indicative of the results that may be expected for the year
ended December 31, 2003. The December 31, 2002 balance sheet was derived from
audited financial statements, but does not include all disclosures required by
generally accepted accounting principles. Certain information and note
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations relating to interim consolidated
financial statements. For further information, the statements should be read in
conjunction with the financial statements and notes thereto included in the
Company's financial statements and notes included in Form 10-KSB, as amended,
for the year ended December 31, 2002.
Cash includes a certificate of deposit in the amount of $50,000 which is pledged
as security for a standby letter of credit.
6
Certain reclassifications were made to the period ended September 30, 2002,
financial statements, in order to conform to the 2003 presentation.
Recent accounting pronouncements
The financial Accounting Standards Board recently issued SFAS 149, "Amendment of
Statement 133 on Derivative Instruments and Hedging" and SFAS 150, "Accounting
for Certain Financial Instruments with Characteristics of Both Liabilities and
Equity." Management does not expect these pronouncements to have a material
impact on the Company's consolidated financial position or results of operation.
NOTE 3 - COMMITMENTS AND CONTINGENCIES
The Company and its subsidiaries are not directly involved in internet gaming.
However, the Company has entered into royalty agreements with licensees who are
involved in internet gaming. Some governmental jurisdictions have adopted or are
in the process of reviewing legislation to regulate or prohibit internet gaming.
The uncertainty surrounding the regulation or prohibition of internet gaming
could have a material adverse effect on the Company's business, revenues,
operating results and financial condition.
On July 1, 2003, we provided an irrevocable standby letter of credit to Teachers
Insurance and Annuity Association of America in fulfillment of our security
deposit for office space. The standby letter of credit guarantees performance of
our obligations to pay our lease commitment up to $48,253.52. The standby letter
of credit automatically renews each anniversary, but not beyond May 1, 2008. The
Standby letter of credit is secured by a certificate of deposit in the amount of
$50,000, bearing interest at 0.75% per year.
NOTE 4 ECONOMIC DEPENDENCE
Two licensees accounted for 85.6% of consolidated net revenues for the nine
months ended September 30, 2003. In the corresponding period of fiscal year
2002, 81.8% of consolidated revenues were accounted for by these two licensees.
The loss of one or both of these licensees would have a detrimental effect on
operating results.
7
NOTE 5 SEGMENT INFORMATION
The Company groups its business into two geographic segments; The United States
of America and Curacao, Netherlands Antilles.
Software
Management Development
and Marketing (Netherlands
Services (USA) Antilles) Total
-------------- ------------ -----------
Nine Months Ended September 30, 2003
Revenues $ - $ 3,118,463 $ 3,118,463
Operating Income(Loss) (1,768,593) 126,750 (1,641,843)
Total Assets 433,353 2,330,893 2,764,246
Depreciation and Amortization* 28,020 794,841 822,861
Nine Months Ended September 30, 2002
Revenues $ 53,450 $ 4,001,559 $ 4,055,009
Operating Income(Loss) (982,133) 620,959 (361,174)
Total Assets 106,863 3,531,262 3,638,125
Depreciation and Amortization* 196,831 625,774 822,606
Three Months Ended September 30, 2003
Revenues $ - $ 804,792 $ 804,792
Operating Income(Loss) (815,431) (156,935) (972,266)
Total Assets 433,353 2,330,893 2,764,246
Depreciation and Amortization* 251,248 9,256 260,504
Three Months Ended September 30, 2002
Revenues $ 53,450 $ 1,409,461 $ 1,462,911
Operating Income(Loss) (301,183) 311,448 10,265
Total Assets 106,863 3,531,262 3,638,125
Depreciation and Amortization* 173,345 35,019 208,365
*includes amounts charged to cost of sales
8
NOTE 6 STOCK OPTIONS
There were no stock options issued during the nine months ended September 30,
2003 and 2002.
The following information is presented with respect to the Company's stock
options:
Number of Average Remaining
Shares Under Exercise Contractual
Option Price Average Life
------------ -------- ------------
Outstanding at December 31, 2000 1,521,543 $1.28
Granted 478,800 .64 10
Expired (225,000) (.60)
---------
Outstanding at December 31, 2001 1,775,343 1.26
---------
Granted 243,250 .48 10
Re-pricing of options 160,125 .50 7
Re-pricing of options 222,525 .50 6
Expired or cancelled (475,500) 1.29
---------
Outstanding at December 31, 2002 1,764,618 .98
=========
NOTE 7 RELATED PARTY DEBT
Of the total $274,546 current portion of notes payable, $90,000 is due to a
relative of the Company's President and Chief Executive Officer and $1,000 is
due to the Company's President and Chief Executive Officer.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
As used herein, the term "Company," "we," "our," and "us" refers to Global
Entertainment Holdings/Equities, Inc., and its subsidiaries and predecessors,
unless otherwise indicated.
Forward-Looking Information
This report contains a number of forward-looking statements, which reflect the
Company's current views with respect to future events and financial performance
including statements regarding the Company's projections, and the interactive
gaming industry. These forward-looking statements are subject to certain risks
and uncertainties that could cause actual results to differ materially from
historical results or those anticipated. In this report, the words
"anticipates", "believes", "expects", "intends", "future", "plans", "targets"
and similar expressions identify forward-looking statements. Readers are
cautioned to not place undue reliance on the forward-looking statements
contained herein, which speak only as of the date hereof. The Company makes no
obligation to publicly revise these forward-looking statements, to reflect
events or circumstances that may arise after the date hereof.
Additionally, these statements are based on certain assumptions that may prove
to be erroneous and are subject to certain risks including, but not limited to,
the Company's dependence on limited cash resources, and its dependence on
certain key personnel within the Company. Accordingly, actual results may
differ, possibly materially, from the predictions contained herein.
Business Overview
- -----------------
We are in the business of providing entertainment based software and services.
Our licensees depend upon our software to improve their success in the online
gaming industry through effective management of the activities on their websites
and player ease of use and enjoyment. Our services are technology based only. We
do not engage in any gaming or wagering activity.
We generate our operating revenues exclusively from IGW Software, N.V., ("IGW")
our wholly owned subsidiary, a Netherlands Antilles corporation. IGW is engaged
in the development, licensing and hosting of proprietary Internet and telephone
based gaming software. Other services offered to licensees include custom
software development and professional services. IGW derives its revenues from
licensing fees, software royalties and consulting services.
Prevail Online, Inc., ("Prevail") our wholly owned subsidiary, a Colorado
corporation, provided information about the online gaming industry through four
website locations. During the nine months ended September 30, 2003, Prevail had
no revenues from advertising activities. On May 16, 2003, we transferred the
websites owned by Prevail in exchange for the buyer's release of Prevail's
obligation under a prepaid advertising contract to the buyer. The pre-payment
totaled $21,000 and is included as an offset to administrative expenses
associated with the disposition costs of those assets. Management is currently
re-evaluating Prevail's business activities.
10
We have created a suite of gaming software products to offer our licensees
better risk management, ease of use and a back office product that simplifies
player and gaming oversight. Our software offers a fully automated online
entertainment experience for the licensee's player. Our online Sportsbook,
Horsebook and Casino software systems are complemented by the player Loyalty
software, the Webmaster Affiliate software and the Call Center software. All
software products are integrated, enabling players to access all of an
operator's affiliated websites seamlessly, using a single account. This
integrated feature results in higher revenues for our licensees, as a result of
giving players easier access to a larger variety of activities.
During this reporting period, we completed the program to enhance the
reliability of our existing product suite, which primarily addressed concerns
and requested modifications to our products by our licensees. New development
had taken a back seat to the above focus until management felt that our
licensees' expectations and needs were met. We have completed our licensees
requests and have resumed development of new products. This re-prioritization
resulted in reduced resources employed in new products and version releases and
shifted to maintenance and enhancement of our existing software products. Costs
incurred in maintenance and enhancements are expensed as incurred, whereas new
products and releases are capitalized and amortized over three years. The
reduced capitalization has contributed to higher current period expenses which
significantly impacted our loss from operations.
Outlook
- -------
Overall revenues for 2003 are expected to be significantly lower than 2002
levels. The anticipated decline in revenue is attributable to various factors.
The primary reason results from the discontinuation of our Marketing Services
activities and the transfer of the four websites out of our Prevail subsidiary.
In 2002, Marketing Services and Prevail were not profitable, although together
they generated $835,151 in revenue during 2002. Additionally, our revenues are
seasonal. Historically, the second and third quarters have been lower revenue
periods in comparison to the first and fourth quarters. The market conditions
for our licensee's in the online gaming industry are not as attractive as they
have been historically. Specifically, online gamers who seek entertainment at
our licensees' websites have a more difficult situation in depositing funds
today. This constriction on Ecommerce invariably decreases the amount of revenue
produced by our licensees and is a significant factor in our diminished growth
for 2003; moreover, there is a possibility that anti-online gaming Ecommerce
legislation may pass in 2003 or in 2004 which could further curtail revenue.
Finally, under an agreement negotiated in 2002 with one of our major licensees,
our royalty rate was subject to a reduction that occurred in July 2003.
Management has taken steps to reduce costs, consolidate operations and adjust
activities to coincide with anticipated revenue levels. It is not anticipated
that these factors will materially influence our liquidity.
During the month of July 2003, we relocated both our Miami, Florida office and
our hosting facility in Curacao, Netherlands Antilles. The new offices house our
executive and administrative personnel, client support services and software
development activities. Client support and software development activities were
relocated from the former Curacao facility to Miami, leaving only hosting
services in Curacao. We anticipate considerable long term cost savings as a
11
result of these consolidating activities. This has resulted in a 20% reduction
in our workforce. As a result of these moves, we incurred moving costs, employee
relocation expenses and lease obligation settlement costs of $259,575.
Effective July 10, 2003, we have qualified for $180,000 in tax refund credits
under the state of Florida's Qualified Target Industry Tax Refund program. These
tax credits are available over the next four years based on achieving certain
employment targets and equipment purchases. No provision for this tax credit
refund has been made in our current financial statements, as the amount and
timing of the amounts under the agreement cannot be determined at this time.
In connection with our qualification for the target industry tax credit by
increasing economic activities in Miami-Dade County, we received the "Key to the
County" in a ceremony September 16, 2003. The engraved key was presented by
Mayor Alex Penelas.
We have been advised that we ranked number 455 on the 2003 Deloitte Technology
Fast 500, a ranking of the 500 fastest growing technology companies in North
America. Rankings are based on average percentage revenue growth over five
years, from 1998-2002.
Results of Operations
- ---------------------
Revenues for the three and nine months ended September 30, 2003 and 2002 were
composed of the following elements:
Three months ended 9/30 Nine months ended 9/30
2003 2002 2003 2002
---------- ---------- ---------- ----------
Royalty Income $ 687,247 $ 948,623 $2,700,143 $2,832,580
License Fees 19,100 114,500 91,600 209,500
Bandwidth Services 78,159 80,451 252,589 280,632
Other Revenue 20,286 319,336 74,131 732,297
---------- ---------- ---------- ----------
Total $ 804,792 $1,462,910 $3,118,463 $4,055,009
Royalty income decreased $132,437 for the nine months ended September 30, 2003
compared to 2002 and $261,376 for the three months ended September 30, 2003
compared to 2002. This decrease results from a lower level of activity and
earnings by our licensees. The decline in royalty revenue in the third quarter
offset the modest gain in revenue we experienced in the first and second quarter
of the year.
License fees are earned when a product is initially installed. There were fewer
new product installations in 2003 than in 2002, which resulted in lower license
fees. The decrease in other revenue represents the discontinuation of marketing
services and the absence of revenue by our Prevail subsidiary.
The majority of other revenue is from marketing services, which is a revenue
stream we are no longer pursuing.
12
The following amounts compose cost of sales for each period:
Three months ended 9/30 Nine months ended 9/30
2003 2002 2003 2002
----------------------- ---------------------
Amortization of
Proprietary Software $ 159,091 $138,483 $ 497,853 $ 368,622
Bandwidth 56,452 78,751 232,620 263,852
Software support and maintenance 37,765 700 680,872 283,002
Salaries 485,349 301,230 882,327 871,298
Marketing Services - 258,179 23,907 599,009
Sponsorship Projects 2,262 - 469 4,756
--------- --------- --------- ----------
Total $ 740,919 $777,343 $2,318,048 $2,390,539
Cost of sales decreased $72,491 for the nine months ended September 30, 2003
compared to 2002. Marketing services were discontinued at the end of 2002.
Removing the impact of marketing services, cost of goods increased $502,611 for
the nine months ended September 30, 2003 compared to 2002. This increase is
attributable to higher amortization of proprietary software and higher software
support and maintenance. Both of these items are directly linked to the change
in focus in the current year which resulted in less development efforts coupled
with more effort in product enhancements.
Bandwidth costs were substantially lower for the three months ended September
30, 2003 compared to the same period in 2002, due to a renegotiation with our
principal supplier to adjust the billing amount to our seasonal income periods.
Software support and maintenance was substantially higher in the three months
ended September 30, 2003 in comparison to 2002, due to a timing difference of
software licensing costs in 2002. The increase of $397,870 for the nine months
ended September 30, 2003 compared to the nine months ended September 30, 2002,
resulted from the focus on product improvement instead of development as
previously mentioned.
Operating Expenses for the three months ended September 30, 2003 compared to
September 30, 2002, increased $364,100, from $660,911 in 2002 to $1,025,011 in
2003, primarily due to higher administrative expenses and wage and salary
expenses as explained below.
Rent expense for the three months ended September 30, 2003 in comparison to the
same period in 2002, increased $36,631. This increased expense represents the
increase in rent resulting from the move to a larger office in Miami and the
duplication of rents in Curacao from retaining the old data center during the
period as a backup to the new data center.
Total expenses increased $486,147 to $2,431,434 compared to $1,945,287, for the
nine months ended September 30, 2003 and 2002 respectively. This increase is
attributable to the following categories:
Depreciation and Amortization (decrease) $(128,976)
Professional fees 151,000
Administrative expenses 62,682
Moving and Relocation costs 259,575
Wages and Salaries 179,813
Other (decrease) (37,947)
--------
Net Change $ 486,147
13
Depreciation and Amortization was lower due to the removal of assets disposed or
abandoned in the relocation process and the disposal of Prevail's website
addresses. Professional fees increased as a result of legal and accounting
services connected with the complaint we have filed against a former officer and
shareholder, as further described in Part II, Item 1, Legal Proceedings.
Wage and salaries expense is adjusted by the amount attributable to software
development or maintenance of our software. Software development amounts are
capitalized in proprietary software and maintenance is expensed in the cost of
sales category. Wages and salaries are composed of the following:
9/30/03 9/30/02 Variance
------- ------- --------
Wages paid $1,848,758 $1,805,941 $ 42,817
Wage related expenses 506,933 409,995 96,938
---------- ---------- --------
Total employment cost $2,355,691 $2,215,936 $139,755
Less Amounts attributable to:
Software Development (Capital Asset) (101,573) (475,962) (374,389)
Software Maintenance (Cost of sales) (1,471,823) (1,137,493) 334,330
---------- ---------- --------
Total to other categories 1,573,396 1,613,455 40,059
---------- ---------- --------
Net Wages and Salaries $ 782,293 $ 602,481 $179,812
Of the $96,938 increase in wage related expenses, $76,587 was attributable to
travel expenses. This increase in travel expenses resulted from travel by new
employees to Curacao in effecting the move of operations and transfer of
development activities to Miami.
Interest expense increased $5,022 to $18,387 from $13,365 for the three months
ended September 30, 2003 compared to 2002, and decreased $27,764, to $38,423
from $66,187 for the nine months ended September 30, 2003 compared to 2002. The
higher interest expense during the three month period ended September 30, 2003
compared to 2002 resulted from equipment leases acquired during that period. The
lower interest expense for the nine months ending September 30, 2003 compared to
2002 is due to the principal payments made on notes payable during the year 2002
and the six months ending June 30, 2003.
Interest income increased to $12,367 from $102 for the three months ended
September 30, 2003 compared to 2002 and to $41,047 from $1,279 for the nine
months ending September 30, 2003 versus 2002. The $12,265 and $39,768 increases
for those respective periods were earned on the conversion of an account
receivable to an interest bearing note receivable during 2002.
14
The net loss for both the three month and nine month period ended September 30,
2003 compared to the net income for the three month period and net loss for the
nine month period ended September 30, 2002, can be attributed four areas. These
are a decrease in sales, an increased wage and salary expense for higher
software maintenance, an increased legal and professional expenses and moving
costs. The majority of the increased expenses are one time obligations. We are
focusing efforts in our strategic planning to address the decline in sales and
anticipate correcting this over the next twelve to eighteen months.
Liquidity and Capital Resources
- -------------------------------
We do not have any material commitments for capital expenditures.
Our principal source of short term liquidity is operating cash flow. In the past
we have experienced dramatic fluctuations in cash flows, so we cannot be sure we
will be able to continue achieving sufficient cash flows to fund our operations.
A substantial decrease in revenues could impact the funds from operating cash
flow and jeopardize our ability to meet current obligations. If we are not able
to achieve cash flow from operations at a level sufficient to support our
business activities, we may require additional funds. We do not have a credit
line and have very limited alternatives for short term funding. Our current
financial condition and our financial performance could adversely affect our
ability to obtain financing and could make us more vulnerable to industry
downturns and competitive pressures. Additionally, we may only be able to raise
needed funds on terms that would result in significant dilution or otherwise be
unfavorable to existing shareholders. Our inability to secure additional funding
when needed, or generate adequate funds from operations, would adversely impact
our long-term viability.
During the next twelve months, $274,546 of notes payable will be due for
payment. We anticipate satisfying the balance of this debt from collections on
the notes receivable of $262,702.
Net cash provided from operating activities was $402,326 for the nine months
ended September 30, 2003 as compared to $905,679 for the nine months ended
September 30, 2002. During the current period, the primary source of cash from
operations was derived from collection on a note receivable, whereas for the
same period in 2002, the primary source was collection of fees receivable.
Net cash used in investing activities in the amount of $518,879 and $570,515 for
the nine months ended September 30, 2003 and 2002, respectively, represented
primarily the purchase of fixed assets in both periods and the capitalization of
software development costs offset by receipts on long term notes receivable in
the prior period. Capitalization of software for the nine months ending
September 30, 2003 amounted to $112,438 compared to $500,502 during the same
period in 2002, a decrease of $388,064.
Our office facility located in Miami, Florida, is occupied under an operating
lease that is scheduled to expire on June 30, 2008. Our data center located in
Curacao, Netherlands Antilles is occupied under an operating lease that is
scheduled to expire on July 15, 2006. Additionally, we currently rent computer
equipment through an operating lease agreement.
15
The following table summarizes the Company's contractual payments and
obligations by period (amounts are in thousands):
Contractual Obligations Payment Due by Period
Less Than After
Total 1 year 1-3 years 4 - 5 years 5 years
----- ------ --------- ----------- -------
Operating Leases 1,637 494 891 251 -
Total Contractual Cash Obligations $ 1,637 $ 494 $ 891 $ 251 $ -
Critical Accounting Policies and Estimates
- ------------------------------------------ Our significant accounting policies
are described in Note 1 to the consolidated financial statements included in our
annual report filed on form 10-KSB for the year ended December 31, 2002. The
accounting policies used in preparing our interim 2003 consolidated financial
statements are the same as those described in our annual report.
We believe the critical accounting policies listed below affect significant
judgments and estimates used in the preparation of our consolidated financial
statements, although they are not all inclusive.
Revenue Recognition. We recognize revenues in accordance with the provisions of
the American Institute of Certified Public Accountants' Statement of Position
(SOP) 97-2, "Software Revenue Recognition," as amended by SOP 98-4 and SOP 98-9,
as well as Technical Practice Aids issued from time to time by the American
Institute of Certified Public Accountants, and in accordance with the Securities
and Exchange Commission Staff Accounting Bulletin No. 101, "Revenue Recognition
in Financial Statements." We license software under non-cancelable royalty
agreements and provide related professional services, including consulting,
training, and implementation services, as well as ongoing customer support and
maintenance. Consulting and training services are not essential to the
functionality of our software products
Software Development Costs. Software development costs are expensed as incurred
until technological feasibility is established. Software development costs
incurred subsequent to establishing technological feasibility are capitalized
and amortized over their three year estimated useful lives. Management is
required to use professional judgment in determining whether development costs
meet the criteria for immediate expense or capitalization.
Allowance for Doubtful Accounts. We maintain allowances for doubtful accounts
for estimated losses resulting from the inability of our licensees to make
required payments. If the financial condition of our licensees were to
deteriorate, resulting in an impairment of their ability to make payments,
additional allowances may be required or revenue could be deferred until
collectibility becomes probable.
Contingencies. We are subject to the possibility of various loss contingencies
in the normal course of business. We accrue for loss contingencies when a loss
is estimable and probable.
16
ITEM 3. EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Within 90 days prior to the filing of this quarterly report, the Company's Chief
Executive Officer and its Chief Financial Officer evaluated the Company's
disclosure controls and procedures as required pursuant to Rule 13a-14 under the
Securities and Exchange Act of 1934, as amended. Under rules promulgated by the
SEC, disclosure controls and procedures are defined as those "controls or other
procedures of an issuer that are designed to ensure that information required to
be disclosed by the issuer in the reports filed or submitted by it under the
Exchange Act is recorded, processed, summarized and reported, within the time
periods specified in the Commission's rules and forms." Based on this
evaluation, the Chief Executive Officer and Chief Financial Officer determined
that such controls and procedures are effective in timely alerting them to
material information relating to the Company required to be included in the
Company's periodic SEC filings. There were no significant changes in internal
controls that could significantly affect the disclosure controls and procedures
since the date of the evaluation.
17
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
As previously reported, on November 27, 2002, we filed a complaint in the
Eleventh Circuit in Miami-Dade County, Florida, against a shareholder and former
officer, Mr. Steven Abboud for counts of breach of fiduciary duty, fraud,
conversion, business defamation, misappropriation, and declaratory relief. The
action also seeks a Temporary Restraining Order continuing the stop transfer
order on shares of the Company held by Masadi Financial, SSI or Steven Abboud
until the legitimacy of those shares can be determined; preventing and enjoining
Steven Abboud from further representations to any entity that he is authorized
to act on behalf of the Company; preventing and enjoining Steven Abboud from any
purported proxy solicitations that would be illegal under Florida statutes; and
preventing and enjoining Steven Abboud from misappropriation of Company trade
secret and confidential information pursuant to Florida statutes and agreement
of the parties.
Mr. Steven Abboud, in answer to our complaint, filed a cross complaint on
October 14, 2003, seeking compensatory damages at a minimum of $50,000 and other
damages and punitive damages in an amount to be determined at trial. Further,
the cross complaint requests a temporary restraining order to prohibit any
meetings of the Board of Directors along with other various activities and an
order declaring the Annual Meeting of Shareholders null and void, along with
other various requests.
It is our belief that the cross complaint is without merit and we intend to
defend vigorously against these actions. The outcome of our complaint and the
cross complaint are undeterminable at this time.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Reference is made to the Proxy Statement dated July 21, 2003. The Proxy
Statement was filed in connection with the Company's annual shareholders meeting
which was held on August 6, 2003. At such annual shareholder's meeting, the
following items were submitted to a vote of shareholders with the following
results as noted:
1.PROPOSAL NO. 1:
To elect the Board of Directors, each to serve until the next Annual Meeting of
the shareholders or until their respective successors are elected and qualify;
A total of 7,971,012.29 shares were represented with respect to this
matter, with voting on each specific nominee as follows:
BROKER
FOR AGAINST WITHHELD NON-VOTES
--- ------- -------- ---------
Board Nominees
- --------------
Bryan Abboud 4,740,978.29 3,127,265 102,769 -
Thomas Glaza 4,328,949.29 3,127,765 514,298 -
Dave Stein 4,328,949.29 3,127,265 514,798 -
James Doukas 4,739,478.29 3,128,265 103,269 -
Floor Nominees
- --------------
Don Lisa 3,082,864 4,466,908.29 421,240 -
Kerri Allender 3,082,864 4,466,908.29 421,240 -
Jason Abboud 3,082,864 4,466,908.29 421,240 -
Ron Abboud 3,082,864 4,466,908.29 421,240 -
David Abboud 3,082,864 4,466,908.29 421,240 -
18
2.PROPOSAL NO. 2:
To ratify and approve the selection by the Board of Directors of Mahoney Cohen &
Company, CPA, P.C. (formerly Kane, Hoffman and Danner, P. A.) as the Company's
independent accountants for the current year;
Approved by the shareholders. A total of 7,971,012.29 votes were represented
with a total of 4,742,278.29 shares voting for the proposal, 3,228,734 shares
voting against the proposal, and no broker non-votes or shares abstaining from
voting.
3.PROPOSAL NO. 3:
To consider and vote on a shareholder proposal to amend the Articles of
Incorporation and the bylaws to allow for cumulative voting of the Company's
common stock in the election of directors;
Not approved by the shareholders. The number of votes required for this proposal
to pass was 5,280,149. As the total number of votes cast for this proposal was
3,220,318, the proposal did not pass. A total of 4,749,694.29 voted against this
proposal, 1,000 votes were withheld and there were no broker non-votes.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) The following exhibits are included herewith:
EXHIBIT NO. DOCUMENT
----------- --------
14.1 Code of Business Conduct and Ethics
22.1 Proxy Statement on Schedule 14A filed on July 21, 2003 is
incorporated herein by reference.
Exhibit 31.1 Certification of the Chief Executive Officer required by
Rule
13a-14(a) or Rule 15d-14(a)
Exhibit 31.2 Certification of Chief Financial Officer required by Rule
13a-14(a) or Rule 15d-14(a)
Exhibit 32.1 Certification of Periodic Report by the Chief Executive
Officer as required by Rule 13a-14(b) or Rule 15d-14(b) and
Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C.
Section 1350
Exhibit 32.2 Certification of Periodic Report by the Chief Financial
Officer as required by Rule 13a-14(b) or Rule 15d-14(b) and
Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C.
Section 1350
(b) The Company filed the following reports on Form 8-K during the quarter for
which this form is filed:
None
19
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, as amended, the Registrant has duly caused this Quarterly Report on
Form 10-QSB to be executed on its behalf by the undersigned, hereunto duly
authorized.
Date: November 14, 2003
Global Entertainment Holdings/Equities, Inc.
/s/ Bryan P. Abboud
- --------------------
Bryan P. Abboud
President, Chief Executive Officer
and Director (Principal Executive Officer)
/s/ Clinton H. Snyder
- ---------------------
Clinton H. Snyder
Chief Financial Officer
(Principal Financial and Accounting Officer)
20