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, 2004.
[ ] 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
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Global Entertainment Holdings/Equities, Inc.
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(Name of small business issuer in its charter)
Colorado 47-0811483
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
703 Waterford Way, Suite 690, Miami, Florida 33126
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (305) 374-2036
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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 15, 2004, there were 7,759,477 outstanding shares of the issuer's
common stock, par value $0.001.
INDEX
Page No.
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets - September 30, 2004 (Unaudited)
And December 31, 2003...............................................3
Consolidated Unaudited Statements of Operations - For the
Nine Months Ended September 30, 2004
and September 30, 2003..............................................5
Consolidated Unaudited Statements of Cash Flows - For the
Three and Nine Months Ended September 30, 2004
and September 30, 2003..............................................6
Notes to Consolidated Unaudited Financial Statements..................7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION............11
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...........................................................20
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 As of
September 30, December 31,
2004 2003
(unaudited) (see Note 2)
----------- -----------
A S S E T S
Current Assets
Cash $ 237,246 $ 434,895
Restricted Cash 50,377 50,188
Accounts Receivable, net of
allowance for doubtful accounts 501,446 636,863
Prepaid Expenses 105,319 57,494
Other Current Assets 16,493 14,115
----------- -----------
Total Current Assets 910,881 1,193,555
Property & Equipment
Office Improvements 42,701 42,701
Computer Equipment 2,431,320 2,094,666
Furniture & Fixtures 261,678 255,425
Other 191,624 188,076
----------- -----------
2,927,323 2,580,868
Less accumulated depreciation (2,088,771) (1,667,342)
----------- -----------
Total Property & Equipment 838,552 913,526
Other Assets
Software Developed for Licensing, net 479,172 633,458
Other Assets 87,443 87,611
----------- -----------
Total Other Assets 566,615 721,069
----------- -----------
Total Assets $ 2,316,048 $ 2,828,150
=========== ===========
3
LIABILITIES & STOCKHOLDERS' EQUITY
Current Liabilities
Accounts Payable and Accrued Expenses $ 711,531 $ 766,820
Current Portion of long term debt 662,730 259,740
Current Portion of capital lease obligation 77,295 65,431
Income taxes payable 84,802 84,802
Deferred Rent 42,680 60,174
----------- -----------
Total Current Liabilities 1,579,038 1,236,967
----------- -----------
Capital Lease obligations, excluding current
Portion 79,211 108,252
Long-term debt 304,330 --
----------- -----------
Total Liabilities 1,962,579 1,345,219
Stockholders' Equity
Preferred Stock, 25,000,000 Shares Authorized,
None Issued -- --
Common Stock, 100,000,000 Shares Authorized 7,760 10,561
Par Value of $.001; 7,759,477 and
10,560,296 Shares Issued and
Outstanding Respectively
Paid in Capital 2,698,206 3,254,320
Accumulated Deficit (1,898,377) (1,334,650)
Treasury Stock at Cost (454,120) (447,300)
----------- -----------
Net Stockholders' Equity 353,469 1,482,931
----------- -----------
Total Liabilities and
Stockholders' Equity $ 2,316,048 $ 2,828,150
=========== ===========
See accompanying summary of accounting principles and
notes to consolidated financial statements.
4
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
------------------------------ ------------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
Total Revenues $ 942,684 $ 804,792 $ 3,161,334 $ 3,118,463
Cost of Sales 573,943 740,919 1,841,563 2,318,048
------------ ------------ ------------ ------------
Gross Profit 368,741 63,873 1,319,771 800,415
Expenses
Uncollectible Fees Written Off 13,372 15,400 43,372 15,400
Depreciation & Amortization 167,741 101,413 422,971 325,008
Rents 55,578 78,305 166,250 158,925
Professional Fees 48,077 149,904 217,287 397,687
Financial & Investor Relations 12,024 46,181 27,851 72,559
Administrative Expenses 48,996 160,265 144,807 313,760
Moving and Relocation Expenses (58,000) 36,103 (58,000) 259,575
Advertising and Marketing 34,012 10,405 88,894 106,227
Wages and Salaries 269,464 427,035 751,446 782,293
------------ ------------ ------------ ------------
Total Expenses $ 591,264 $ 1,025,011 $ 1,804,878 $ 2,431,434
------------ ------------ ------------ ------------
Loss from Operations (222,523) (961,138) (485,107) (1,631,019)
Other Income(Expenses)
Interest(Expense) (36,430) (18,387) (80,333) (38,423)
Interest Income 606 12,367 1,713 41,047
------------ ------------ ------------ ------------
Total Other Income (Expenses) (35,824) (6,020) (78,620) 2,624
------------ ------------ ------------ ------------
Loss Before Taxes (258,347) (967,158) (563,727) (1,628,395)
Provisions for Income Tax -- (5,108) -- (13,448)
------------ ------------ ------------ ------------
Net Loss $ (258,347) $ (972,266) $ (563,727) $ (1,641,843)
============ ============ ============ ============
Basic and Diluted
(Loss) Per Share $ (0.03) $ (0.09) $ (0.06) $ (0.16)
Basic and Diluted
Weighted Average Shares 7,759,477 10,560,296 9,324,493 10,488,228
See accompanying summary of accounting principles and
notes to consolidated financial statements.
5
GLOBAL ENTERTAINMENT HOLDINGS/EQUITIES, INC. & SUBSIDIARIES
Statements of Cash Flows
(Unaudited)
For the Nine Months Ended
September 30
-----------------------------
2004 2003
-------------- -------------
Cash Flows from Operating Activities
Net Loss $ (563,727) $ (1,641,843)
Adjustments to Reconcile Net Loss to
Net Cash Provided by Operating Activities:
Depreciation and Amortization 925,893 822,861
Uncollectible Fees Written Off 20,617 15,400
Interest Income (189) --
Stock Issued for Services -- 28,105
Loss on Assets Disposed -- 49,778
Change in Operating Assets & Liabilities
Accounts Receivable 114,800 282,604
Other Receivables -- 6,546
Prepaid Expenses (47,825) 28,818
Other Current Assets (2,378) (10,416)
Other Assets 168 --
Notes Receivable -- 756,642
Accounts Payable and Accrued Expenses (26,544) 193,071
Deferred Rent (17,494) (129,242)
------------- -----------
Net Cash Provided by Operating Activities 403,321 402,324
------------- -----------
Cash Flows from Investing Activities
Purchase of Equipment And Software (73,872) (406,441)
Development of Software (350,179) (112,438)
------------- ------------
Net Cash Used in Investing Activities (424,051) (518,879)
------------- ------------
Cash Flows from Financing Activities
Payments on capital lease obligations (55,179) (13,831)
Proceeds from Notes Payable 500,000 198,000
Payments on Notes Payable (421,740) (182,879)
Acquisition of Treasury Stock (200,000) --
Other -- (10,085)
------------- -----------
Net Cash Used in Financing Activities (176,919) (8,795)
------------- -----------
Decrease in Cash & Cash Equivalents (197,649) (125,350)
Cash at Beginning of Period 434,895 260,494
-------------- -------------
Cash at End of Period $ 237,246 $ 135,144
============== =============
Disclosures from Operating Activities:
Interest Expense Paid $ 80,333 $ 31,940
Schedule of Noncash Investing and Financing Transactions
During the nine months ended September 30, 2004, the Company settled a lawsuit
with a former shareholder. The settlement resulted in the Company acquiring the
outstanding shares of the former shareholder in exchange for cash in the amount
of $200,000 and notes payable amounting to $400,911.
During the nine months ended September 30, 2004, the Company acquired computer
equipment through long-term debt in the amount of $234,580.
During the nine months ended September 30, 2004, the Company entered into a
capital lease agreement for the acquisition of property and equipment amounting
to $38,002.
During the nine months ended September 30, 2004, $6,250 of notes payable were
converted into 25,000 shares of common stock.
See accompanying summary of accounting principles and
notes to consolidated financial statements.
6
GLOBAL ENTERTAINMENT HOLDINGS/EQUITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2004 and 2003
(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.,
(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, 2004
are not necessarily indicative of the results that may be expected for the year
ended December 31, 2004. The December 31, 2003 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, 2003.
7
NOTE 3 - COMMITMENTS AND CONTINGENCIES
The Company and its subsidiaries are not directly involved in internet gaming.
However, the Company has entered into contract 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 March 24, 2004, the Company signed a two year service and equipment agreement
with an internet services provider. The agreement calls for monthly recurring
fees of $33,951 and monthly equipment payments of $11,043 for the term of the
agreement.
NOTE 4 - LONG-TERM DEBT
In April 2004, the Company entered into a financing agreement with an unrelated
party and a licensee by which the unrelated party advanced the Company $300,000
and the licensee advanced $200,000. The notes are payable in monthly
installments of $18,295 and $9,229, including interest at 12% and 10%,
respectively, and are due September 2005 and April 2006, respectively.
The proceeds of the notes were used for working capital and as down payment on
the settlement agreement discussed below in Note 9.
Additionally, pursuant to the agreement entered into on March 24, 2004, to
facilitate our entry into the internet security service industry, the Company
acquired computer equipment through a long-term debt obligation in the amount of
$234,580. This obligation is payable in monthly installments of $11,043,
including interest at 12% and is due April 2006.
Included in the current portion of long term debt is $12,731 due to a related
party.
NOTE 5 - INCOME TAXES
No provision for income taxes has been reflected for the nine months ended
September 30, 2004 as the company has sufficient net operating loss carry
forwards to offset taxable income. As of September 30, 2004, the valuation
allowance offsets the total net deferred tax asset balance.
NOTE 6 - STOCK BASED COMPENSATION
In accordance with Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation", (SFAS 123), the Company has elected
to account for stock options issued to employees under Accounting Principles
Board Opinion No. 25, (APB 25), and related interpretations. The Company
accounts for stock options issued to consultants and for other services in
accordance with SFAS 123.
Statement of Financial Accounting Standards No. 123, "Accounting for Stock Based
Compensation" ("SFAS 123" as amended by FASB Statements No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure" ("SFAS 148")), provides an
alternative to APB 25 in accounting for stock based compensation issued to
employees. SFAS 123 provides for a fair value based method of accounting for
8
employee stock options and similar equity instruments. However, for companies
that continue to account for stock based compensation arrangements under APB 25,
SFAS 123 requires disclosure of the pro forma effect on net income and earnings
per share as if the fair value based method prescribed by SFAS 123 had been
applied. The Company intends to continue to account for stock based compensation
arrangements under APB No. 25 and has adopted the pro forma disclosure
requirements of SFAS 123.
Had compensation expense been recorded for the Company's awards based on fair
value as calculated using the "Black Scholes" Model at the grant dates
consistent with the methodologies of SFAS No. 123, the Company's reported net
income (loss) available to common shareholders and earnings per share would have
been reduced to the pro forma amounts indicated below:
Three months ended 9/30 Nine months ended 9/30
2004 2003 2004 2003
----------- ----------- ----------- -----------
Net income (loss) available to common
shareholders:
As reported $ (258,347) $ (972,266) $ (563,727) $(1,641,843)
Deduct stock based compensation (7,441) (7,191) (23,323) (21,573)
----------- ----------- ----------- -----------
Pro forma $ (265,788) $ (979,457) $ (587,050) $(1,663,416)
----------- ----------- ----------- -----------
Basic earnings (loss) per share:
Common share as reported (0.03) (0.09) (0.06) (0.16)
Common share pro forma (0.03) (0.09) (0.06) (0.16)
Diluted earnings (loss) per share:
Common share as reported (0.03) (0.09) (0.06) (0.16)
Common share pro forma (0.03) (0.09) (0.06) (0.16)
Under SFAS 123, the value of options granted during 2004 and 2003 was estimated
on the date of grant using the Black Scholes model with the following
assumptions: Risk-free interest rate 4% for 2004 and 2003, dividend yield - 0%
for 2004 and 2003, volatility 98.7% and 86% for 2004 and 2003, and a remaining
life of the option ranging from 6 to 10 years for 2004 and 2003.
NOTE 7 - ECONOMIC DEPENDENCE
Two licensees accounted for 96% of consolidated net revenues for the nine month
period ending September 30, 2004. In the corresponding period of fiscal year
2003 85.6% of consolidated revenues were accounted for by these two licensees.
Effective August 1, 2004, one of the licensees, which accounted for 8.3% of our
revenues, ceased using our software. Management has evaluated the impact of the
loss of this licensee and determined that it will not have a materially adverse
impact on our financial position. The loss of the remaining licensee would
adversely impact our ability to continue as a going concern.
NOTE 8 - SEGMENT INFORMATION
The Company groups its business into two geographic segments: The United States
of America and Curacao, Netherlands Antilles.
9
Software
Management Development
and Marketing (Netherlands
Services (USA) Antilles) Total
-------------- ------------ -----------
Nine Months Ended September 30, 2004
- ------------------------------------
Revenues $ -- $ 3,161,334 $ 3,161,334
Net Loss (1,604,193) 1,040,466 (563,727)
Total Assets 504,303 1,811,745 2,316,048
Depreciation and Amortization* 120,905 804,988 925,893
Nine Months Ended September 30, 2003
- ------------------------------------
Revenues $ -- $ 3,118,463 $ 3,118,463
Net Loss (1,768,593) 126,750 (1,641,843)
Total Assets 433,354 2,330,893 2,764,247
Depreciation and Amortization* 28,020 794,841 822,861
Three Months Ended September 30, 2004
- ------------------------------------
Revenues $ -- $ 942,684 $ 942,684
Net Loss (670,989) 412,642 (258,347)
Total Assets 500,356 1,815,692 2,316,048
Depreciation and Amortization* 52,390 274,569 326,959
Three Months Ended September 30, 2003
- ------------------------------------
Revenues $ -- $ 804,792 $ 804,792
Net Loss (815,331) (156,935) (972,266)
Total Assets 433,354 2,330,893 2,764,247
Depreciation and Amortization* 251,248 9,256 260,504
*includes amounts charged to cost of sales
NOTE 9 - SETTLEMENT AGREEMENT
On November 27, 2002, the Company filed a complaint against a shareholder and
former officer for counts of breach of fiduciary duty, fraud, conversion,
business defamation, misappropriation, and declaratory relief.
On March 25, 2004, the Company entered into a settlement agreement in relation
to this matter. The agreement provides for total consideration in cash and
non-interest bearing notes payable of $644,000. As part of the settlement, the
Company received 2,859,919 shares of its common stock which has been cancelled.
The settlement resulted in a loss of approximately $28,000 which was recognized
in the December 31, 2003 financial statements.
NOTE 10 - LIQUIDITY
During the nine month period ended September 30, 2004, the Company incurred a
substantial loss. Historically, the Company has relied on operating cash flow. A
substantial decrease in revenues could impact the funds from operating cash flow
and jeopardize our ability to meet current obligations. In addition, the Company
has a working capital deficit of $668,157 including debt payments of $662,730
and capital lease obligations of $77,295. Management is implementing various
cost saving programs as a result of these factors and believes that third party
financing may be available to continue as a going concern.
10
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 provide business development support and administrative assistance for
technology-driven subsidiaries that license, develop and host interactive
digital entertainment software applications. Currently our product line is
focused on the online gaming sector. 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 telephony
based gaming software. Other services offered to licensees include custom
software development and website design services. IGW derives its revenues from
licensing fees, software royalties and consulting services.
Prevail Online, Inc., ("Prevail") our wholly owned subsidiary, a Colorado
corporation, is inactive and during the nine months ended September 30, 2004,
had no revenues.
Through IGW, 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 players. Our online
Sportsbook, Racebook and Casino software systems are complemented by the player
Loyalty software, the Webmaster Affiliate software and the Call Center software.
11
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.
Outlook
- -------
Revenues for the remainder of 2004 are expected to be flat in comparison to 2003
levels. Primarily, this results from a restructuring of our contracts to remove
seasonality from our revenue stream. This has shifted revenues from the fourth
quarter of the year into the second and third quarters. In addition, a licensee
who represents eight percent of our revenues has ceased using our software as of
August 1, 2004. 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 influence our long term liquidity.
In an effort to maintain and grow our revenues, we are pursuing several avenues.
Primarily, we are midway through the rewrite, enhancement and expansion of our
entire wagering product lines and administration platforms using today's new
technology. This will result in a more feature rich and robust offering which we
anticipate will enhance our ability to present a much better product in relation
to our competitors. We have expanded customized programming to meet specific
licensee needs and we have developed multi-currency functionality. We are
tailoring our products to address the needs of the European and South Asian
market. We have invested in equipment and service agreements to offer
distributed denial of service attack mitigation solutions. Finally, we have
taken steps to reduce our costs to keep such costs in line with revenues.
Specifically to spur revenue growth, we have entered and/or are negotiating to
enter into Value Added Reseller (VAR) arrangements with other technology
vendors. We will be releasing a new suite of casino gaming products in the
fourth quarter of this year and we released a poker product during the quarter
ended September 30, 2004. We are in the final stages of releasing a wireless
wagering product and we have entered into a business development agreement with
an established European marketing firm.
Stock Repurchase - Settlement Agreement
- ---------------------------------------
On November 27, 2002, we filed a complaint against a shareholder and former
officer. On March 25, 2004, we entered into a settlement agreement with the
former officer and several entities in relation to this matter. Under the terms
of the agreement, we redeemed and cancelled 2,859,919 shares of our common stock
for total consideration in cash and non-interest bearing notes payable of
$644,000.
Investment in Internet Security Services
- ----------------------------------------
In an effort to expand our service offerings and to provide our licensees with a
more secure internet presence, we have invested in systems and technology in the
internet security solution sector. Although this activity is in the development
stage and yielded nominal revenue for us during the quarter ended September 30,
12
2004, we anticipate additional revenues from this product offering commencing in
the fourth quarter of 2004.
At September 30, 2004, our Statement of Operations includes $210,012 of direct
expenses relating to this activity, and $22,520 of depreciation on equipment
used in this activity. All costs, except depreciation, travel and interest, are
included in our cost of sales. We have purchased $272,867 of equipment relating
to this activity, of which $234,580 was purchased under a note payable at 12%
due in 24 installments of $11,043 per month.
In addition to the expenses and note payable mentioned above, we have entered
into contracts for bandwidth, network management and hosting facilities totaling
$32,480 per month. At September 30, 2004, these contracts had twenty months
remaining, for a total obligation of $649,600. We have notified the holder of
one of these contracts (our network management contract) that we have voided the
portion of the contract which relates to network management, under the "failure
to perform" provisions of the service level agreement. This contract represents
$491,640. Since the date of cancellation, network management has been performed
utilizing internal resources. Through September 30, 2004, we do not anticipate
any impact from this contract cancellation on our financial statements.
The Board has directed management to obtain outside financing and/or investment
with respect to our internet security services activity by February 28, 2005. At
that date, we will no longer fund this activity. We anticipate funding an
additional $124,000 in direct expenses associated with this activity through
February 28, 2005.
Results of Operations
- ---------------------
Revenues for the three and nine months ended September 30, 2004 and 2003 were
composed of the following elements:
Three months ended 9/30 Nine months ended 9/30
2004 2003 2004 2003
---------- ---------- ---------- ----------
Contract Income $ 850,384 $ 687,247 $2,943,155 $2,700,143
License Fees -- 19,100 23,268 91,600
Bandwidth Services 88,300 78,159 190,911 252,589
Other Revenue 4,000 20,286 4,000 74,131
---------- ---------- ---------- ----------
Total $ 942,684 $ 804,792 $3,161,334 $3,118,463
Contract income increased $243,012 for the nine months ended September 30, 2004
compared to 2003 and $163,137 for the three months ended September 30, 2004
compared to 2003. This increase results from a restructuring of our contract
with a major licensee, which effectively reduced the seasonality of our revenue
stream. Comparative revenues in the fourth quarter will be lower as a result of
this contract restructuring.
License fees are earned when a product is initially installed. There were fewer
new product installations in 2004 than in 2003, which resulted in lower license
fees.
13
The decrease in other revenue represents the discontinuation of marketing
services which occurred in 2003. Other Revenue for the three and nine months
ended September 30, 2004, is attributable to our new internet security solution
activity.
The following amounts compose cost of sales for each period:
Three months ended 9/30 Nine months ended 9/30
2004 2003 2004 2003
---------- ---------- ---------- ----------
Amortization of
Proprietary Software $ 159,218 $ 159,091 $ 504,381 $ 497,853
Bandwidth 64,923 56,452 245,042 232,620
Software support and maintenance 22,209 37,765 75,707 88,875
Salaries 202,701 485,349 806,421 1,474,324
Internet Security Services 124,892 -- 210,012 --
Marketing Services and Other -- 2,262 -- 24,376
---------- ---------- ---------- ----------
Total $ 573,943 $ 740,919 $1,841,563 $2,318,048
Cost of sales decreased $166,976 for the three months ended September 30, 2004
and $476,484 for the nine months ended September 30, 2004 compared to 2003. The
majority of this decrease is lower personnel costs. Salaries decreased $282,648
and $667,903 for the three months and nine months, respectively, ended September
30, 2004 compared to 2003. A portion of that decrease resulted from the
capitalization of salaries and related expenses into Software Development.
Internet security services, as described earlier, is a new product offering. We
are focusing on mitigation of distributed denial of service attacks. There were
no costs associated with this activity in the prior periods, as this product was
rolled out in the quarter ended September 30, 2004. The costs of $124,892 for
the three months ended September 30, 2004 and $210,012 for the nine months ended
September 30, 2004, are for bandwidth, network management and hosting facilities
associated with this product line.
Expenses decreased $433,747 from $1,025,011 to $591,264 for the three months
ended September 30, 2004 compared to 2003 and decreased $626,556 from $2,431,434
to $1,804,878 for the nine months ended September 30, 2004 compared to 2003.
These decrease resulted from reduced professional fees, advertising and
marketing expenses, administration expenses and wage expenses. Professional fees
decreased as a result of lower legal and accounting services.
Administrative expenses are composed of the following:
Three months ended 9/30 Nine months ended 9/30
2004 2003 2004 2003
--------- --------- --------- ---------
Communications $ 16,278 $ 20,746 $ 48,778 $ 91,417
Insurance 11,929 50,441 33,180 84,734
Repairs & Maintenance 1,132 2,573 3,418 14,273
Supplies 10,973 38,466 30,268 86,987
Utilities 723 17,519 3,267 45,208
Other 7,961 30,520 25,896 (8,859)
--------- --------- --------- ---------
Total $ 48,996 $ 160,265 $ 144,807 $ 313,760
14
The reduced administrative expenses, primarily communications, insurance and
supplies, resulted from cost cutting efforts. Utilities were reduced as a result
of the move of our Curacao hosting facilities in August 2003. We have actively
implemented cost cutting measures throughout the past seven quarters.
Advertising and marketing decreased $17,333 for the nine months ended September
30, 2004 compared to the nine months ended September 30, 2003, primarily from
the reduction of participation in trade shows. Advertising and marketing
increased $23,607 for the three months ended September 30, 2004 compared to
2003. This increase resulted from a trade show in which we participated and the
engagement of a European marketing partner to represent our product in the
European markets.
During 2003 we accrued $58,000 in anticipation of a contract cancellation costs
in connection with the move of our hosting facilities. In July, 2004 we
concluded the contract cancellation and recorded the reversal of the reserve, as
we did not have to pay the cancellation fee. Accordingly, expenses are reduced
by this amount under moving and relocation expense.
Interest expense increased $18,043 to $36,430 from $18,387 for the three months
ending September 30, 2004 compared to 2003, and $41,910 to $80,333 from $38,423
for the nine months ending September 30, 2004 compared to 2003. The higher
interest expense is due to the new debt incurred in the past twelve months.
Interest income declined as a result of the retirement of the note created on
the conversion of an account receivable to an interest bearing note receivable
during 2002, which was paid off during the first quarter of 2003.
Liquidity and Capital Resources
- -------------------------------
Prior to June 2004, we did not have any material commitments for capital
expenditures. However, in connection with the release of our internet security
service offering, we have entered into substantial commitments for bandwidth and
network services.
We have committed to continue to fund this offering of internet security
services through February 28, 2005, or when outside funding becomes available.
There is no guarantee, however, that we will be successful in securing the
funding and if not, whether or not we are able to reduce or transfer our
contract obligations, totaling approximately $649,600, which we have entered
into in connection with this product offering.
Our principal source of short term liquidity is operating cash flow. A
substantial decrease in revenues could impact the funds from operating cash flow
and jeopardize our ability to meet current obligations. We do not have a credit
line or any alternative means of short term funding. Management is taking steps
to correct this situation and we believe that third party financing may be
available to continue as a going concern.
Net cash provided from operating activities was $403,321 for the nine months
ended September 30, 2004 as compared to $402,324 for the nine months ended
September 30, 2003.
15
Net cash used in investing activities in the amount of $424,051 and $518,879 for
the nine months ended September 30, 2004 and 2003, respectively, represented
primarily the purchase of fixed assets and the capitalization of software
development costs in both periods.
During the nine month period ended September 30, 2004, cash used in financing
activities amounted to $176,919, compared to $8,795 used in the nine months
ended September 30, 2003. The $176,919 of funds used primarily resulted from the
purchase of our common stock, payments on capital lease obligations and notes
payable totaling $676,919 offset by the proceeds from new loans in the amount of
$500,000.
The following table summarizes our contractual obligations at September 30, 2004
by period:
- ----------------------------------------------------------------------------------------------------------------
More than 5
Total Less than 1 year 1-3 years 3-5 years years
- ----------------------------------------------------------------------------------------------------------------
Long-Term Debt 967,060 662,730 304,330 -- --
- ----------------------------------------------------------------------------------------------------------------
Capital Lease Obligations 156,506 77,295 79,211 -- --
- ----------------------------------------------------------------------------------------------------------------
Operating Leases 1,129,275 489,511 531,001 108,763 --
- ----------------------------------------------------------------------------------------------------------------
Purchase Obligations 617,493 389,996 227,497 -- --
- ----------------------------------------------------------------------------------------------------------------
Other Long-Term Liabilities
Reflected on the Registrant's
Balance Sheet under GAAP -- -- -- -- --
- ----------------------------------------------------------------------------------------------------------------
Total 2,870,334 1,619,532 1,142,039 108,763 --
- ----------------------------------------------------------------------------------------------------------------
Operating leases include a real estate lease of the executive offices located in
Miami, Florida, without offset for sub-lease income.
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, 2003. The accounting policies used in preparing our
interim 2004 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.
16
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 contract
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.
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. No material charges associated with doubtful
accounts have been recorded in the past three quarters
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.
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 changes in internal controls and
procedures since the date of the evaluation.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
NONE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Reference is made to the Company's Proxy Statement dated October 1, 2004. The
Proxy Statement was filed in connection with the Company's annual shareholders
meeting which was held on October 20, 2004. 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 5,703,930 shares were represented with respect to this matter, with
voting on each specific nominee as follows:
BROKER
Board Nominees FOR AGAINST WITHHELD NON-VOTES
- -------------- --- ------- -------- ---------
Bryan Abboud 5,701,130 -0- 2,800 --
James Doukas 5,701,130 -0- 2,800 --
Thomas Glaza 5,701,130 -0- 2,800 --
Dave Outhwaite 5,701,130 -0- 2,800 --
Dave Stein 5,701,130 -0- 2,800 --
2.PROPOSAL NO. 2:
To ratify and approve the selection by the Board of Directors of Mahoney Cohen &
Company, CPA, P.C. as the Company's independent accountants for the current
year;
All matters submitted to a voter were approved by the shareholders. A total of
5,702,330 votes were represented with a total of 5,701,130 shares voting for the
proposal, 1,200 shares voting against the proposal, and no broker non-votes or
shares abstaining from voting.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) The following exhibits are included herewith:
Exhibits marked with an asterisk have been filed previously with the Commission
and incorporated herein by reference.
EXHIBIT NO. DOCUMENT
----------- --------
Exhibit 3.1 * Articles of Incorporation
Exhibit 3.2 * By-Laws
Exhibit 22.1 Proxy Statement on Schedule 14A filed on September 30,
2004 is incorporated herein by reference.
Exhibit 31.1 Certification of CEO Pursuant to Section 302 of
Sarbanes-Oxley Act of 2002
Exhibit 31.2 Certification of CFO Pursuant to Section 302 of
Sarbanes-Oxley Act of 2002
Exhibit 32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(b) The Company did not file any reports on Form 8-K during the quarter for
which this form is filed.
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 15, 2004
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