SEC 10-Q: Quarterly Report (Management's Discussion)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis compares the operating results of the Company for the three months and the six months ended June 30, 1997, which include the operations of Global-InSync, Inc. ("InSync") and Speech Solutions, Inc. ("Speech Solutions") acquired in the last quarter of 1996, with the three months and the six months ended June 30, 1996. Also included is a discussion and analysis of the Company's financial condition and liquidity as of June 30, 1997. The information and comparative data presented herein reflect the elimination of Nevcor's aggregator operations.
THE QUARTER ENDED JUNE 30, 1997 (UNAUDITED) AS COMPARED WITH THE QUARTER
ENDED JUNE 30, 1996 (UNAUDITED).
NET SALES. Net sales increased by $8,082,699 (324%) from $2,496,516 to $10,579,215 in the quarter ended June 30, 1997. The net sales of InSync and Speech Solutions for the quarter ended June 30, 1997 were $5,080,704 and $11,702, respectively. The balance of $ 2,990,293 is attributable to increases in the net sales of Natcom and Vircom.
GROSS PROFIT. The Company's gross profit for the quarter ended June 30, 1997 increased to $1,489,259 from $419,254, a 355% increase. Overall gross profit as a percentage of net sales for the quarters ended June 30, 1997 and June 30, 1996 amounted to 14.1% and 16.8%, respectively. The decrease in gross profit resulted primarily from lower gross profit margins as a result of the transition from the computer distribution to the value added systems integration business.
OPERATING EXPENSES. Operating expenses for the quarter ended June 30, 1997 rose to $1,413,044 from $1,158,233, a 22% increase, with $1,119,672 of the increase in operating expenses attributable to the operations of InSync and Speech Solutions.
PROVISION FOR INCOME TAX CREDITS. The benefit for income taxes was $21,675 for the quarter ended June 30, 1997, compared to a benefit of $310,420 for the same period in 1996. The deferred tax benefit is based on deferred tax assets which are considered realizable.
NET INCOME (LOSS) PER COMMON SHARE. As a result of the factors discussed above, the net loss from continuing operations for the quarter ended June 30, 1997 was ($36, 124) and
net earnings per share were $.00, as compared to a net loss of ($465,630) and net loss per common share of ($.15) from continuing operations for the same period in 1996.
THE SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED) AS COMPARED WITH THE SIX MONTHS
ENDED JUNE 30, 1996 (UNAUDITED).
NET SALES. Net sales increased by $12,472,552 (206%) from $6,051,787 to $18,524,339 in the first six months of 1997. The net sales of InSync and Speech Solutions for the first six months of 1997 were $9,309,065 and $25,385, respectively. The balance of $3,138,102 is attributable to increases in the net sales of Natcom and Vircom.
GROSS PROFIT. The Company's gross profit for the first six months of 1997 increased to $2,030,593 from $954,057, a 213% increase. Overall gross profit as a percentage of net sales for the first six months ending June 30, 1997 and 1996 amounted to 11% and 16%, respectively. The decrease in gross profit resulted primarily from lower gross profit margins as a result of the transition from the computer distribution to the value added systems integration business.
OPERATING EXPENSES. Operating expenses for the first six months of 1997 rose to $3,840,641 from $2,118,155 for the same period in 1996, a 181% increase, with $1,841,808 of operating expenses attributable to the operations of InSync and Speech Solutions. The balance represents additional expenditure in sales, marketing and administrative personnel, along with expenditures in integrating acquired operations. Other expenses did not change significantly.
PROVISION FOR INCOME TAX CREDITS. The benefit for income taxes was $767,905 for the first six months of 1997, compared to a benefit of $483,183 for the same period in 1996. The deferred tax benefit is based on deferred tax assets which are considered realizable.
NET INCOME (LOSS) PER COMMON SHARE. As a result of the factors discussed above, the net loss from continuing operations for the six months of 1997 was ($1,279,842) and net loss per share was ($.16), as compared to a net loss of ($724,774) and net loss per common share of ($.23) from continuing operations for the same period in 1996.
FINANCIAL CONDITION AND LIQUIDITY
The Company's cash balance as of June 30, 1997 was $127,137 and its working capital amounted to 223,622. Net cash used in operating activities during the six months ended June 30, 1997 was $81,565. The decrease in the Company's cash position and cash flow is a result of the six month loss from continuing operations of $1,279,842 and the loss for the same period from discontinued operations in the amount of $2,495,602.
On August 7, 1997, the Company adopted a plan to dispose of the aggregator business of its Nevcor subsidiary due to the decision by NEC Technologies Group, Inc. ("NEC") to eliminate its two-tier system of distribution. NEC product accounted for approximately 70% of the Company's Nevcor subsidiary's net sales, for the six months ended June 30, 1997. The
reporting of the NEC sales has been eliminated as a result of the discontinuance of these operations. The Company has sought to offset the effect of the discontinued operations by increasing its presence in higher margin areas of the reseller and systems integration business and diversifying its product line. The Company has become an authorized reseller for other vendors and has added the InSync line, in an ongoing effort to reduce its dependence on any single supplier. In light of the discontinuance of Nevcor's aggregator operations, revenues from which carried a low gross margin due to the highly competitive nature of the computer aggregating business, the discontinuance of the Nevcor aggregator operations is expected to enable the Company to increase its overall gross margin.
Management further expects to be able to minimize the effect of the discontinuance of Nevcor's aggregator business by increasing the value added systems integration business at its other and new subsidiaries.
On April 1, 1997 all of the Company's subsidiaries except Speech Solutions entered into renegotiated factoring agreements with a financial institution whereby the subsidiaries sell their trade receivables, with recourse. The term of the factoring agreements is one year, with automatic renewals from year to year, unless terminated earlier upon 60-days notice.
Effective August 15, 1997 the Company will be winding down its relationship with Finova Capital Corp. ("Financial Institution") which has provided the Nevcor, Vircom and Natcom subsidiaries with an $8,000,000 inventory floorplanning credit line. This floor plan and credit line was primarily established to support the now discontinued aggregator business. The Company's intention is to phase out the credit line completely by the end of the year. In its ongoing efforts to increase margins and profitability, the Company does not anticipate replacing the credit line.
The Company does not have significant commitments for capital expenditures as of June 30, 1997 and no significant commitments are anticipated for the remainder of the 1997 calendar year.
Since inception, the Company has been actively engaged in making acquisitions, as a result of which the Company has the commitments described below.
As previously reported, the Company is required to make certain contingent payments relating to the acquisition of Amcom (Nevcor). In connection with the litigation as described below, the Company is seeking to negotiate a revised schedule of the contingent payments.
The acquisition of Natcom requires the Company to make the following future payments: $79,000 due at the end of each of the six quarters following September 28, 1996; and $80,000 due September 28, 1998, subject to available earnings before taxes. In March 1997, the purchase price was further increased to include $212,658, payable in six monthly installments of $35,443, commencing in July 1997, as well as certain payments payable based on achieving
certain sales goals. These payments have been subjected to certain adjustments for prior income taxes payable by the sellers
Future commitments for the Company's acquisition of the InSync business include a promissory note, guaranteed by the Company, for $1,486,084, (the "First Note") bearing interest at 9% per annum and a second promissory note, guaranteed by the Company, for $470,000 ("the Second Note"). Under the terms of the First Note, interest did not accrue until March 16, 1997. Payments under the First Note are to be made 45 days after the close of each fiscal quarter, commencing with the quarter ended June 30, 1997, in the amount of 2% of InSync's net sales. If, at the end of each subsequent 12-month period beginning with the 12 months ending June 30, 1998, the sum of the quarterly Note payments is less than the interest accrued over the previous four quarters, plus 10% of the original principal amount, an adjustment payment will be made to cover any shortfall. The Second Note contains substantially the same terms as the First Note, except that payments do not commence until the earlier of December 31, 2001, or upon payment in full of the First Note.
Future commitments to seller for the Company's acquisition of the Speech Solutions assets include three payments of $31,250, payable on April 15, 1997, July 15, 1997 and October 15, 1997. These payments are Speech Solutions obligations. Due to Speech Solution's failure to achieve its forecasted results it has not made the April or the July payments. In addition, the Company is required to pay the seller an earn-out amount equal to 3% of Speech Solutions' gross sales during the five years following the October 18, 1996 acquisition date. The earn-out is EBIT tested and payable 45 days after each calendar quarter. To date, due to insufficient EBIT, no earn-out payments have been made.
The Company has experienced reduced cash flow in 1997 due to the operating losses incurred in the first and second quarters. The Company expects that income and cash flow anticipated from operations during the remainder of 1997, together with existing financing arrangements and working capital, will be sufficient to fund the Company's operations at existing levels. However, if Global's operating levels and future growth exceed its financial resources, or if anticipated improvements in operating results and cash flow do not occur, the Company will be required to seek additional credit and financing facilities, either through institutional financing or the issuance of debt or equity security in the private or public market. There is no assurance that such credit or financing arrangements will be available on acceptable terms if needed.
INFLATION. The impact of inflation on the Company's operations has not been significant to date. There can be no assurance that a high rate of inflation in the future would not have an adverse effect on the Company's operations.
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