UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-QSB
(Mark one)
[ X ] QUARTERLY REPORT UNDER 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 EXCHANGE ACT
For the transition period from ____________ to _____________
Commission file number 0-23532
GLOBETEL COMMUNICATIONS CORP.
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(Exact name of small business issuer as specified in its charter)
Delaware 88-0292161
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(State or other jurisdiction of incorporation (IRS Employer Identification No.)
or organization)
9050 Pines Blvd. Suite 110 Pembroke Pines, Fl 33024
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(Address of principal executive offices)
954-241-0590
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(Issuer's telephone number)
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 12, 2004, we had issued 781,936,419 shares of common stock, of
which 781,936,419 shares were outstanding.
Transitional Small Business Disclosure Format (Check one): Yes __ No _X_
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION Page
Item 1. Financial Statements .............................................. 2
Item 2. Management's Discussion and Analysis or Plan of Operations ........ 19
Item 3. Controls and Procedures ........................................... 22
PART II - OTHER INFORMATION
Item 1. Legal Proceedings ................................................. 23
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds ....... 23
Item 3. Defaults Upon Senior Securities ................................... 25
Item 4. Submission of Matters to a Vote of Security Holders ............... 25
Item 5. Other Information ................................................. 25
Item 6. Exhibits .......................................................... 25
1
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet - (Unaudited) .................................. 3
Consolidated Statements of Operations (Unaudited) ......................... 4
Consolidated Statements of Cash Flows (Unaudited) ......................... 5
Notes to Consolidated Financial Statements (Unaudited) .................... 6
2
GLOBETEL COMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (Unaudited)
September 30, 2004
ASSETS
CURRENT ASSETS
Cash and cash equivalents ...................... $ 293,284
Accounts receivable, less allowance for
doubtful accounts of $1,438,713 .............. 2,271,131
Receivable from related party - CSI ............ 152,896
Prepaid expenses ............................... 441,061
Inventory ...................................... 84,660
Deposits on equipment purchase and
other current assets ......................... 8,400
Deferred tax asset, less valuation
allowance of $4,693,477 ...................... --
----------
TOTAL CURRENT ASSETS ........................ 3,251,432
----------
PROPERTY AND EQUIPMENT, less accumulated
depreciation of $232,783 ...................... 351,587
----------
OTHER ASSETS
Investment in unconsolidated
foreign subsidiary - CGI ..................... 352,300
Intangible assets - Sanswire ................... 2,778,000
Deposits ....................................... 49,564
----------
TOTAL OTHER ASSETS .......................... 3,179,864
----------
TOTAL ASSETS ......................................... $6,782,883
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
CURRENT LIABILITIES
Accounts payable ............................... $ 478,425
Current portion of capital lease obligations ... 2,789
Accounts payable to related party - Charterhouse 135,000
Loan payable to related party - Charterhouse ... 361,960
Accrued expenses and other liabilities ......... 45,000
Deferred revenues .............................. 11,669
Accrued officers' salaries and bonuses ......... 150,833
Related party payables ......................... 117,500
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TOTAL CURRENT LIABILITIES ................... 1,303,176
----------
LONG-TERM LIABILITIES
Capital lease obligations ...................... 5,451
----------
TOTAL LONG-TERM LIABILITIES ................. 5,451
----------
TOTAL LIABILITIES ........................... 1,308,627
----------
STOCKHOLDERS' EQUITY
Series A Preferred stock, $.001 par value,
10,000,000 shares authorized;
150,000 shares issued and outstanding 150
Additional paid-in capital - Series A
Preferred stock 2,224,050
Series B Preferred stock, $.001 par value,
35,000 shares authorized;
35,000 shares issued and outstanding: 35
Additional paid-in capital - Series B
Preferred stock 14,999,965
Series C Preferred stock, $.001 par value,
5,000 shares authorized;
750 shares issued and outstanding: 1
Additional paid-in capital - Series C
Preferred stock 1,499,999
Series D Preferred stock, $.001 par value,
5,000 shares authorized;
250 shares issued and outstanding: 1
Additional paid-in capital - Series D
Preferred stock 999,999
Common stock, $.00001 par value, 1,500,000,000
shares authorized; 781,936,419 shares issued
and outstanding 7,819
Additional paid-in capital 32,036,320
Stock subscriptions receivable:
Series B Preferred Stock (13,150,000)
Series C Preferred Stock (1,150,000)
Series D Preferred Stock (750,000)
Accumulated deficit (31,244,083)
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TOTAL STOCKHOLDERS' EQUITY 5,474,256
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 6,782,883
===========
See accompanying notes.
3
GLOBETEL COMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
For the For the For the For the
Nine Months Nine Months Three Months Three Months
Ended Ended Ended Endede
Sept 30, 2004 Sept 30,2003 Sept 30,2004 Sept 30, 2003
REVENUES EARNED ............................................ $ 14,509,624 $ 8,905,232 $ 7,509,206 $ 2,812,121
COST OF REVENUES EARNED .................................... 14,524,807 6,451,431 7,709,650 2,203,587
------------ ------------ ------------ ------------
GROSS MARGIN (LOSS) ..................................... (15,183) 2,453,801 (200,444) 608,534
EXPENSES
Payroll and related taxes............................ 482,082 235,470 296,117 78,380
Consulting and professionalfees ..................... 1,129,202 454,737 651,594 212,820
Officers' compensation............................... 1,215,676 399,705 533,416 116,620
Bad debts............................................ 1,074,516 88,872 645,486 44,436
Investment banking and financing fees ............... 169,066 195,557 -- 133,107
Investor and public relations........................ 101,509 111,772 27,605 100,402
Research and development - Sanswire ................. 76,586 -- 60,309 --
Other operating expenses ............................ 116,872 81,658 39,125 35,506
Telephone and communications......................... 54,565 52,597 20,273 17,776
Travel and related expenses.......................... 144,244 72,069 50,816 21,190
Rents................................................ 70,140 33,715 38,282 11,516
Insurance and employee benefits...................... 80,148 80,157 36,120 30,616
Depreciation and amortization........................ 39,733 32,653 15,117 10,355
----------- ------------ ----------- ------------
TOTAL EXPENSES............................................... 4,754,339 1,838,962 2,414,260 812,724
----------- ------------ ----------- ------------
INCOME (LOSS) FROM OPERATIONS BEFORE
OTHER INCOME (EXPENSE) AND INCOME TAXES .................... (4,769,522) 614,839 (2,614,704) (204,190)
----------- ------------ ----------- ------------
OTHER INCOME (EXPENSE)
Net gains on settlement of liabilities ............. 85,337 91,085 81,823 91,085
Gain (loss) on disposition of property and equipment (56,804) -- (56,804) --
Gain on discontinued operations..................... -- 34,365 -- --
Loss on reduction in fair value of receivables and
marketable securities............................. -- (4,834,878) -- (4,834,878)
Interest income..................................... 1,612 188 641 47
Interest expense.................................... (10,540) (95,736) -- (19,550)
----------- ------------ ----------- ------------
NET OTHER INCOME (EXPENSE) .................. 19,605 (4,804,976) 25,660 (4,763,296)
----------- ------------ ----------- ------------
LOSS BEFORE INCOME TAXES .................................. (4,749,917) (4,190,137) (2,589,044) (4,967,486)
----------- ------------ ----------- ------------
INCOME TAXES
Provision for income taxes -- -- -- --
Tax benefit from utilization of
net operating loss carryforward ................... -- -- -- --
----------- ------------ ----------- ------------
TOTAL INCOME TAXES -- -- -- --
------------ ------------ ----------- ------------
NET LOSS ................................................... $ (4,749,917) $ (4,190,137) $(2,589,044) $ (4,967,486)
============ ============ =========== ============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING (BASIC AND DILUTED)........................... 723,949,873 621,259,294 704,099,680 636,697,207
============ ============ =========== ============
NET LOSS PER SHARE (BASIC AND DILUTED)..................... $ (0.01) $ (0.01) $ (0.00) $ (0.01)
============= ============ =========== ============
See accompanying notes.
4
GLOBETEL COMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the For the
Nine Months Nine Months
Ended Ended
Sept 30, 2004 Sept 30, 2003
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss ................................................................. $(4,749,917) $(4,190,137)
Adjustments to reconcile net loss to net cash used by operating
activities:
Depreciation and amortization ..................................... 133,002 150,846
Net gains on settlement of liabilities ............................ (85,337) (91,085)
Loss (gain) on disposition of property and equipment .............. 56,804 --
Gain on discontinued operations ................................... (34,365)
Loss on reduction in value of receivables and marketable securities -- 4,834,878
Bad debt expense .................................................. 1,074,516 --
Common stock exchanged for services and compensation .............. 1,231,567 430,009
(Increase) decrease in assets:
Accounts receivable ............................................... (252,220) (2,082,219)
Due from related party - CSI ...................................... (152,896) --
Prepaid expenses .................................................. (441,061) --
Inventory ......................................................... (84,660) --
Deposits .......................................................... (33,829) (38,000)
Deposits on equipment ............................................. (58,000) --
Deposits to carriers .............................................. 71,000 --
Increase (decrease) in liabilities:
Accounts payable .................................................. (275,549) 18,763
Accrued payroll and related taxes ................................. -- (12,785)
Accrued officers' salaries and bonuses ............................ 150,833 272,118
Accrued expenses and other liabilities ............................ (22,423) 11,657
Deferred revenues ................................................. (19,859) 16,162
Deferred revenues - related party ................................. (27,023) (184,350)
----------- -----------
NET CASH USED BY OPERATING ACTIVITIES ............................. (3,485,052) (898,508)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of property and equipment .................................... (73,018) (252,950)
Proceeds from note receivable ............................................ -- (40,000)
----------- -----------
NET CASH USED BY INVESTING ACTIVITIES ............................. (73,018) (292,950)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Sale of preferred stock - Series A ....................................... 1,132,060 --
Sale of preferred stock - Series B ....................................... 1,850,000 --
Sale of preferred stock - Series C ....................................... 350,000 --
Sale of preferred stock - Series D ....................................... 250,000 --
Sale of common stock ..................................................... -- 375,000
Proceeds from capital lease financing .................................... 9,554 --
Payments on capital lease financing ...................................... (1,553) (28,477)
Proceeds from notes payable and long-term debt ........................... 375,000 734,259
Proceeds from related party payables ..................................... 60,000 285,279
Payments on notes payable and long-term debt ............................. (398,701) --
Payments on related party payables ....................................... -- (96,053)
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES ......................... 3,626,360 1,270,008
----------- -----------
NET INCREASE IN CASH AND EQUIVALENTS ........................................... 68,290 78,550
CASH AND EQUIVALENTS - BEGINNING ............................................... 224,994 201,631
----------- -----------
CASH AND EQUIVALENTS - ENDING .................................................. $ 293,284 $ 280,181
=========== ===========
SUPPLEMENTAL DISCLOSURES Cash paid during the period for:
Interest $ 11,295 $ 95,736
Income taxes $ -- $ --
In addition to amounts reflected above, common stock was issued for:
Settlement of debt $ -- $ 1,246,086
Consulting, professional and employee compensation $ 1,231,567 $ 430,009
Other non-cash transactions:
Stock options issued for accrued officers' salaries $ -- $ 683,368
Non-cash financing activities:
On April 27, 2004, $15,000,000 of Series B preferred stock was issued.
A stock subscription receivable of $13,150,000 was outstanding as of
September 30, 2004.
On April 27, 2004, $1,500,000 of Series C preferred stock was issued.
A stock subscription receivable of $1,100,000 was outstanding as of
September 30, 2004.
On July 28, 2004, $1,000,000 of Series D preferred stock was issued. A
stock subscription receivable of $750,000 was outstanding as of
September 30, 2004.
See accompanying notes.
5
GLOBETEL COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
September 30, 2004
NOTE 1 - BASIS OF PRESENTATION
Interim financial statements
The accompanying unaudited financial statements reflect all adjustments, which,
in the opinion of management, are necessary for a fair presentation of the
financial position and the results of operations for the interim periods
presented. The financial statements include the accounts of GlobeTel
Communication Corp. and its wholly owned subsidiaries, Sanswire, LLC, GTCC de
Mexico, S.A. de C.V, and Centerline Communications, LLC, and its wholly-owned
subsidiaries, EQ8, LLC, EnRoute Telecom, LLC, G Link Solutions, LLC, Volta
Communications, LLC, and Lonestar Communications, LLC. All adjustments are of a
normal recurring nature, except as otherwise noted below. The results of
operations for the three and nine months ended September 30, 2004, are not
necessarily indicative of the results to be expected for the year ending
December 31, 2004.
Certain financial information and footnote disclosures which are normally
included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America, but which are not
required for interim reporting purposes, have been condensed or omitted. The
accounting policies followed by the Company are set forth in Note 1 to the
Company's consolidated financial statements in its annual report on Form 10-KSB
for the year ended December 31, 2003. The accompanying financial statements
should be read in conjunction with the financial statements and notes.
NOTE 2 - ACCOUNTS RECEIVABLE AND SALES - SIGNIFICANT CONCENTRATIONS OF CREDIT
RISK AND ECONOMIC DEPENDENCE
Six customers accounted for 88% of the Company's sales for the three months
ended September 30, 2004, including 9% attributable to the Brazil network, 19%
to the Mexico network, and 17% to the Philippine network. The customers for
these international networks account for 95% of accounts receivable as of
September 30, 2004.
The same six customers accounted for 92% of the Company's sales for the nine
months ended September 30, 2004, including 15% attributable to the Brazil
network, 33% to the Mexico network, and 22% to the Philippine network.
NOTE 3 - ALLOWANCE FOR DOUBTFUL ACCOUNTS
During the three and nine months ended September 30, 2004, the Company increased
its allowance for doubtful accounts by $645,486 and $1,074,516, respectively,
predominantly for the receivables from the Mexico and Brazil networks,
representing a percentage of amounts receivable which have not been received as
of the date of this report.
6
NOTE 4 - INVESTMENT IN UNCONSOLIDATED FOREIGN SUBSIDIARY
In September 2003, the Company entered into an agreement with Advantage
Telecommunications Ltd. (ATC), an Australian telecommunications corporation,
where, for a strategic investment of $1.2 million, the Company would own up to
50% of the stock of ATC, and would have control of the board of directors of
ATC. ATC had operations in England and Hong Kong and had points of presence
(POP) in over 15 countries. The agreement was subsequently modified to where the
investment of $1.2 million would be for the purchase of ATC's telecommunication
equipment and network operations of ATC's subsidiaries in Hong Kong and England.
Subsequently, ATC deconsolidated its subsidiaries and suspended operations.
As of June 30, 2004, and September 30, 2004, the Company had remitted $352,300
to ATC and ATC's assignee as partial payment towards the completion of the
transaction. Pursuant to additional modifications of the agreement, the Company
issued 16,500,000 restricted shares of the Company's common stock to ATC to
complete the transaction as follows: (a) 10,000,000 shares, valued at $847,700,
were issued to bring the investment balance to $1.2 million, and (b) an
additional 6,500,000 shares, valued at $520,000 were issued to bring the
investment balance to $1,720,000. These amounts were agreed to by the Company
and ATC.
The investment was structured by the parties and recorded by ATC as a
secured convertible note payable to the Company. The note was interest bearing
at a rate of 12%. However, neither the Company nor ATC received or paid,
respectively, nor accrued such interest. The note was convertible, at the option
of the Company, at a conversion rate of AUD$ 0.005 per share.
On June 30, 2004, the Company exercised its option to convert the note and was
issued 467,327,745 shares of ATC stock. In addition, the Company took an
assignment from ATC of a note payable to an ATC bank creditor in the amount of
approximately AUD$ 750,000 (US $518,000) for a purchase price of 3,500,000
restricted shares of the Company's stock, in full payment of the balance due.
Pursuant to an agreement between the Company and ATC, the Company converted the
balance to ATC shares, at a conversion rate of AUD$.005 and on June 30, 2004,
the Company was issued 147,968,635 shares of ATC stock.
As a result of the conversions, the Company held a total of 615,296,380 shares
representing an ownership interest in ATC of 73.15%. In addition, as a result of
and pursuant to the terms of conversion, the Company received options to acquire
an additional 467,327,809 shares by June 30, 2007 at AUD$ 0.005 per share.
Notwithstanding the Company's 73.15% ownership interest and control of ATC's
Board of Directors, the Company has not consolidated ATC into its accounts,
whereas ATC is a foreign subsidiary of the Company, with no current operations.
Furthermore, the primary asset of ATC as of September 30, 2004, consists of the
16.5 million shares of the Company's stock.
The Company's stock issuances described above were recorded at par value, and
the carrying value of the Company's investment in the unconsolidated foreign
subsidiary is $352,000, representing the sum of cash advanced by the Company to
ATC through September 30, 2004.
As of September 30, 2004, ATC's shares were not trading on the Australian Stock
Exchange, nor any other exchange. However, ATC expects the shares to be relisted
in the near-term. The Company intends to make ATC into an operating company,
expanding the Company's presence in the Asian market, and resulting in the
marketability of ATC's stock and potential income from the subsidiary. Upon the
occurrence of such events, the Company may adjust the carrying value of and/or
consolidate the subsidiary in accordance with generally accepted accounting
principles used in the United States.
In addition, the Company has agreed with the Liquidator of ATC's former UK
subsidiary to acquire telecommunication equipment owned by that former
subsidiary valued by the Company at $128,210.
In May 2004, Advantage Telecommunications Ltd. changed its name to Consolidated
Global Investments, Ltd. (CGI) and all reports and filings are now under the
name of Consolidated Global Investments, Ltd.
7
NOTE 5 - NON-READILY-MARKETABLE EQUITY SECURITIES, AVAILABLE FOR SALE
Network Sales - Charterhouse Investment Holdings, Ltd.
In May 2002, the Company entered into a Network Purchase Agreement with IP World
Ltd., (IPW) an Australian corporation to build as many as five (5) networks to
be located in different countries throughout the world. As payment for each
network the Company agreed to accept 64 million shares of IPW stock, at an
agreed-upon value of $ .10 (US) per share, in full payment of the promissory
note for the Brazil and Philippines networks. The IPW shares were not listed for
sale on the Australian Stock Exchange (ASX) or any other domestic or
international securities exchange. At the time, the Company was informed that
such listing was imminent, and the Company would be able to sell all or a
portion of the IPW shares.
The above agreements and transactions were facilitated by and through
Charterhouse Consultancy Service, Ltd, a Nevis corporation, and it's successor
corporation, Charterhouse Investment Holdings Ltd., a Malaysian corporation
(collectively known as "Charterhouse"), and Global VoIP (GVoIP), a Delaware
Corporation, of which Timothy Huff, the Company's current CEO was a 99% owner
and officer. Although Mr. Huff, by and through GVoIP, originally functioned as
consultant to Charterhouse, neither Mr. Huff nor GVoIP were directly compensated
for participating in the agreements and transactions described above and below.
Instead, Mr. Huff became an officer and a Director of the Company and assigned
any and all interest GVoIP had to the Company without compensation. GVoIP was
dissolved immediately thereafter.
In connection with agreements between Charterhouse and the Company, Charterhouse
paid for the two networks sold to date by the transfer of shares in IPW to the
Company. In that connection, Charterhouse maintained 70 million IPW shares in
escrow for the Company, and, accordingly, the Company was deemed beneficial
owner of the shares.
As of June 30, 2003, the Company had included in its current assets, $1,600,000
in non-readily marketable, available-for-sale equity securities, which represent
16 million shares of IP World (IPW) unrestricted stock, valued at $.10 per
share, held in the company's name and $4,301,500 in non-readily marketable,
available for sale equity securities, due from a related party, Charterhouse,
which represent 70 million shares of IPW restricted stock valued at $.06145 per
share, held by Charterhouse on the Company's behalf.
As of September 30, 2003, IP World Ltd. was in liquidation and was no longer
listed in the Australian Exchange. The Company is no longer transacting with IPW
to move out of liquidation and be relisted in the Australian Exchange.
Therefore, the Company charged off $4,301,500 in stock receivable as well as the
$1,600,000 in stock it had in its name during the three months ended September
30, 2003. As of September 30, 2004, the Company believes that the likelihood of
recovering any such amounts is remote .
NOTE 6 - LETTERS OF CREDIT AND NOTES PAYABLE
The Company has available up to $500,000 for letters of credit with
Commercebank, N.A., which is guaranteed by Florida Export Finance Corporation
(FEFC). As of December 31, 2002, a $200,000 letter of credit was issued to the
Mexican telecom provider that provides local connectivity. In March 2003, the
Company issued another $100,000 to the same Mexican telecom provider. The
remaining $200,000 was used by the Company as collateral for its $200,000 loan
with Commercebank, N.A., the funds of which were used to purchase the telecom
equipment used in the Brazil operations.
The letters of credit issued to the Mexican telecom provider have been cancelled
by the provider and have been returned. The Company is in the process of
negotiating with their bank to renew the letters of credit for use in future
transactions.
During the three months ended September 30, 2004, the Company paid its $200,000
loan with Commercebank, N.A. in full.
8
NOTE 7 - ASSET ACQUISITION - SANSWIRE
Asset Purchase Agreement -Sanswire Technologies, Inc.
In March 2004, the Company entered into a binding letter of intent to purchase
certain assets of Sanswire Technologies, Inc. and its subsidiary, Sanswire, Inc.
(collectively, "Sanswire"), a company that is developing a National Wireless
Broadband Network utilizing high-altitude airships called Stratellites that will
be used to provide wireless voice, video, and data services. The definitive
purchase agreement was signed and effective on April 15, 2004.
Asset Purchase Agreement - Stratodyne, Inc.
The Company entered into a purchase agreement, was signed and effective August
23, 2004, with Sanswire, Stratodyne, Inc. and its principal shareholder, Vern
Koenig, for certain assets of Stratodyne and under substantially the same terms,
conditions and consideration as the original Sanswire purchase agreement. The
"Stratodyne" agreement supplements the original "Sanswire" agreement. Stratodyne
was the primary contractor for Sanswire.
The assets acquired under the Sanswire and Stratodyne agreements consist
primarily of intellectual property and proprietary rights in intellectual
property. The Stratellite, which is presently in the development stage, is
similar to a satellite, but it is stationed in the stratosphere rather than in
orbit. As of September 30, 2004, the Company has placed all of Sanswire's and
Stratodyne's assets into Sanswire Networks, LLC, its Florida-based, wholly-owned
subsidiary ("Sanswire-FL").
As consideration for the sale of the assets, the Company issued 28 million
shares of its common stock to Sanswire, pursuant to the Sanswire agreement, at
the closing, and the shares were being held in escrow pending delivery of the
final documents. In November 2004 all the final documents were delivered and the
relationship was consummated. In September 2004, pursuant to the Stratodyne
agreement, 2 million shares of the Company's common stock were issued directly
to Stratodyne's principal shareholder. These shares are included in the 28
million shares originally issued to Sanswire, and, accordingly, the Sanswsire
shareholders will maintain only 26 million shares issued and return 2 million of
the previously issued shares to the Company.
Contingent Consideration
In accordance with the Sanswire agreement, an additional 200 million shares were
to be issued pursuant to the terms and conditions of the "successful commercial
launch" of a commercial communications platform aboard an airship by the
December 31, 2005 closing date. The Stratodyne agreement provides that 50
million of the 200 million additional shares will be issued to Stratodyne or its
assignee(s) and the remaining 150 million shares to Sanswire Technologies, Inc.
For purposes of the Sanswire purchase agreement, a "successful commercial
launch" was to be deemed to have occurred if all the conditions in the agreement
have been satisfied and all other conditions deemed material by GlobeTel are
satisfied, as determined by GlobeTel in its sole discretion. A "successful
commercial launch" will occur if (i) an airship (dirigible) is flown for a
period of 90 consecutive days at an approximate altitude of 70,000 feet, without
technical difficulty, (ii) a customer is able to receive both voice and Internet
services at the same time when it uses the "Stratellite service", at a
customer-premises equipment (CPE) cost of approximately $100, and (iii) at least
250,000 paying customers must be able to use the Stratellite service based on
agreed upon engineering specifications. For these purposes, it is also assumed
that the cost of each airship used in the Stratellite service will not exceed $3
million, the cost of each tracking earth station will not exceed $7 million and
that each earth station (if more than one) will have the ability to cover
several deployed airships at one time. If the cost of any airship or earth
station exceeds $3 million or $7 million, respectively, at the time that the
"commercial launch" is being implemented, the project will not be deemed to be
commercially viable and a "successful commercial launch" will not have occurred.
The Stratodyne agreement modified the definition of a "successful" commercial
launch by eliminating the CPE cost provisions described in (ii) above, and
eliminated all of the provisions of (iii) above, except that it is assumed that
the cost of each airship used in the Stratellite service will not exceed $3
million. The other provisions above remain the same in the Stratodyne agreement.
Accounting for Purchase Price and Intangible Assets
The purchase price for the assets acquired was $2,800,000, based on a value of $
.10 per share for the 28 million Company shares issued in the transaction. The
Company allocated the purchase price based on the estimated fair market value of
the asset acquired as follows: (a) Sanswire equipment - $32,000; and (b)
Sanswire and Stratodyne intangible assets - $2,768,000. In addition, the Company
recorded an additional $10,000 to the purchase price to account for estimated
cost of issuing and registering the shares for public sale in connection with
this transaction. Sanswire-FL's assets, liabilities, results of operations and
cash flows are consolidated in these financial statements.
9
NOTE 7 - ASSET ACQUISITION - SANSWIRE (CONTINUED)
Since it is presently unknown whether or not Sanswire and Stratodyne will
achieve the above referenced results required to be entitled to the contingent
consideration, no amount for such contingent consideration was recorded as a
liability or included in the allocation of the purchase price. The Company will
record the 200 million contingent shares at fair value upon issuance of the
shares or at such time that the Company may determine that the issuance of the
shares is probable and the value ascribable to the shares is estimable.
The intangible assets include technology-based, marketing-related, and
contract-related assets. The Company determined that the intangible assets have
an indefinite life, and, accordingly, are not subject to amortization. Instead,
the Company tests the asset for impairment at each reporting period, and upon
the occurrence of any significant event which may affect the carrying value of
the assets. The Company tested the assets for impairment and determined that no
impairment existed and no adjustment to the carrying value was required as of
September 30, 2004, and through the date of this filing. Sanswire-FL's research,
development and testing of the Stratellite technology is continuing as
scheduled, and no event occurred or circumstances known to management exist to
indicate impairment.
The results of operations Sanswire-FL for the three and nine months ended
September 30, 2004, which are consolidated in the Company's results of
operations, included expenses of $231,666 and $355,836, respectively, with no
sales or costs of sales.
Sanswire Demonstration
In July 2004, Sanswire-FL successfully demonstrated the wireless communications
capabilities of the Stratellites during a two-day event at the Company's Atlanta
headquarters. In order to best replicate the high-altitude flying conditions of
its Stratellites, Sanswire mounted its wireless transmission platform on a
specialized, high-altitude jet helicopter that was held in one geostationary
position at an altitude of nearly three miles above the demonstration area. The
successful proof-of-concept demonstrations provided the Company with additional
information that it will use to launch its first Stratellite into the
stratosphere.
The first of the two-day event was a private demonstration for Sanswire-FL's
international partners. Day two was open to the public and media. A series of
antennas were mounted to the platform that received a wireless signal from an
earth station and retransmitted the live signal to the demonstration area on the
ground, allowing the Company to demonstrate the voice and data capabilities of
the high-altitude wireless platform. The GPS guidance system was tested by using
the system to guide and provide a holding coordinate for the aircraft.
Stratellite Build-Out Memorandum of Agreement (MOA)
An MOA between the Company and Mr. Koenig dated August 23, 2004 stated the
following: Mr. Koenig agreed to resume and expedite the build-out of the
prototype of the Stratellite; the Stratellite is a proprietary technology
acquired by the company as part of the asset purchase agreement with Sanswire;
when completed, the prototype will be used for demonstration and testing for
commercial use; the expected completion of the build-out agreement is January
15, 2005; Company agreed to provide funding to complete the build-out process of
the Stratellite prototype; and the Company agreed to provide a total of $200,000
due as follows:
August 23, 2004 $70,000
September 23, 2004 $50,000
October 25, 2004 $30,000
November 23, 2004 $30,000
The above amounts scheduled to be advanced to date were paid timely. The Company
has provided amounts to or on behalf of Sanswire-FL in excess of the above
amounts, including approximately $300,000 through September 30, 2004, and an
additional approximately $60,000 through the date of the filing of this
quarterly report.
10
NOTE 7 - ASSET ACQUISITION - SANSWIRE (CONTINUED)
Employment Agreements
In connection with the Sanswire asset purchase agreement, the Company also
entered into three-year employment agreements with five former Sanswire
Technology, Inc. executives. Michael Molen, Jairo Rivera, Brian Keith, Keith
Sistrunk and Jane Molen were to serve as the Chief Executive Officer, Chief
Financial Officer; Chief Operating Officer, Chief Technology Officer and
Comptroller of Sanswire-FL, respectively. Mr. Molen was to receive an earn-out
based on value of Sanswire-FL compared to the Company (exclusive of
Sanswire-FL). If the value of Sanswire-FL was less than 24% of the value of the
Company, Mr. Molen would be entitled to receive stock equal to 10% of GlobeTel
common stock outstanding on the date of valuation. Mr. Molen had the right to
select the valuation date and a mutually agreeable third party will evaluate the
value of Sanswire-FL compared to GlobeTel.
During the three months ended September 30, 2004, the Company decided to
restructure the operations of Sanswire, LLC and eliminate redundant positions.
As a result, Mr. Molen has accepted the appointment as Chairman and stepped down
as CEO of Sanswire, LLC. The Company closed the offices in Atlanta and Mr.
Sistrunk and Ms. Molen have separated from the Company.
In connection with the Stratodyne agreement, the Company entered into a
three-year key employment agreement with Vern Koenig, Stratodyne's principal
shareholder, to perform services including, but not limited, to
telecommunications services and other services that Mr. Koenig serves as
Sanswire-FL's Chief Design Engineer, and is responsible for development of the
Stratellite. Mr. Koenig will receive a salary of no less than $75,000 per year,
plus grants of stock options based on performance evaluations given annually by
the Company
Independent Contractor Agreement
In September 2004, the Company entered into an agreement with Hotzone Wireless,
LLC, a service provider for consulting/engineering services related to the
Sanswire Stratellite project. The non-exclusive service provider will provide
engineering/consulting services, transmission equipment, and installation and
testing of equipment.
The term of the agreement is for six (6) months and shall automatically renew
for additional one (1) year terms after the initial term unless terminated by
either party. As initial compensation, Company will pay the service provider
$10,000 per month.
11
NOTE 8 - CENTERLINE COMMUNICATIONS, LLC.
Centerline Communications, LLC.
On June 30, 2004, the Company entered into an operating agreement with Carrier
Services, Inc. ("CSI") a Nevada corporation, also a telecommunications company
to operate Centerline Communications, LLC, a wholly-owned subsidiary of the
Company.
The purposes of Centerline and its subsidiaries are to build telecommunications
revenue and client base, utilizing each party's network and financial resources
and to engage in any other business or activity that is necessary and proper to
accomplish the above purposes.
Pursuant to the agreement, the Company is responsible for all costs associated
with the operation and maintenance of the Prepaid Calling Card Platform, all
expenses related to funding, staffing, technical support, customer service,
equipment, and credit facilities. CSI is responsible for all costs and
responsibilities associated with operation of the termination network, providing
network facilities for the termination of carrier traffic, administer and
operate the termination network, including subscriber accounts and tracking of
minutes, all training and salary expenses of its sales personnel, all marketing
expenses connected with the sale of the calling services and all other
organizations related expense in any foreign base operation in which the LLC is
operating.
The agreement provides for minimum selling requirements of $50 million per year
for the LLC. This revenue must be profitable. If the LLC brings in $50 million
at the end of the first year of operation, CSI will receive $1 million of the
company's publicly traded stock. If CSI repeats the $50 million in profitable
revenue in year two, CSI will receive another $1 million of the company's
publicly traded stock.
The initial term of the agreement shall be two years and automatically renewable
for another two years.
The results of operations for the three months ended September 30, 2004 of
Centerline and its subsidiaries, which are consolidated in the company's results
of operations, is summarized as follows:
Revenues $3,989,997
Costs of revenues 3,962,142
-----------
Gross margin 27,855
Expenses 4,449
-----------
Net income $ 23,406
===========
"Partner Incentive and Financing Agreements"
The Company uses the term "partner" in a sense different than the strict legal
definition. The Company, Centerline and its subsidiaries entered in "Partner
Incentive and Financing Agreements" with various parties ("Partners") in the
business of providing the transmission of wholesale voice and/or data
communications services to domestic and international destinations utilizing a
proprietary call processing platform, technologies, software and other equipment
("Calling Services") to produce profitable revenues utilizing the Calling
Services of the partners for an initial term of two (2) years.
The Partners shall be compensated on a semi-annual basis with a grant of equity
and cash commissions. These grant and commission will be paid out by Centerline,
utilizing cash generated by the operations and stock given by the Company as
part of the original agreement between Centerline and the Company.
Six (6) months after the date of the agreement, Partner will be granted an
option to purchase shares of publicly traded common stock of the Company
("Shares"). The grant shall be calculated pursuant to the terms of the Partner's
stock option agreement, which is based on a predetermined stock strike price for
the first six months of operation, and the formula used for the remaining three
periods shall be 75% of the stock price at the grant date. Vested shares would
be exercisable by Partner every six (6) months during the term of the agreement
and for a period of thirty (30) days following the termination of this
agreement.
The amount of the stock grant is calculated as follows:
For each $1,000,000 of revenue generated in a 12 month period, Partner shall be
entitled to an option for a grant of 25,000 shares of common stock of GTEL. For
each additional $1,000,000 revenues generated after the first $5,000,000,
Partner shall be entitled to an option for a grant of 50,000 shares of common
stock of GTEL. In the event that revenues exceed $10,000,000 in the 12 month
period, Partner shall receive an additional options for a grant of 20,000 shares
of common stock of GTEL for each additional $1,000,000 of revenue generated in
excess of $10,000,000.
12
NOTE 8 - CENTERLINE COMMUNICATIONS, LLC. (CONTINUED)
The agreement provides for cash incentive bonuses based on revenues generated
pursuant to the parties' agreements. This grant is in addition to the stock
option grant described above. So long as the Partner continues to produce
profitable Calling Services revenues during the term of the agreement, and the
Partner is not in breach of the parties' agreements, the cash bonus earned shall
be paid as follows:
For each $1,000,000 of revenue generated in a 12 month period, Partner shall be
entitled to receive a cash bonus of $15,000. For each additional $1,000,000
revenues generated above the first $5,000,000 revenue, the Partner shall be
entitled to receive a cash bonus of $35,000. In the event that revenues exceed
$10,000,000 in the 12-month period, Partner shall receive an additional cash
bonus of $20,000 for each additional $1,000,000 of revenue generated above
$10,000,000.
As further inducement for the Partners to generate profitable revenues utilizing
their Calling Services, the Company, through Centerline and its subsidiaries,
shall provide accounts receivable financing for customers and advance payments
for vendors while Partner retains 100% of its profit margin. The Partner shall
provide credit terms to qualified customers of the Partner, and the
determination of qualified customers shall remain within the sole discretion of
Centerline. Centerline or its subsidiaries shall provide necessary prepayments
to its vendors where required. Prepayment shall preferably take the form of a
letter of credit, or through an established escrow account and/or cash
prepayment. The determination of the nature and amount of vendor prepayment
shall remain within the sole discretion of Centerline. The Partner agrees to
repay Centerline for all funds advanced by it for the benefit of Partner's
Calling Services customers and/or vendors within the agreed terms.
Centerline shall acquire equipment necessary to facilitate Calling Services from
Partner's customer or to Partner's vendors. Equipment purchase shall be subject
to approval of Centerline's management. Centerline will continue to expand the
network to grow its family of vendors during the term of the agreement and make
all Centerline vendors' excess capacity available to Partner. Partner will be
granted the use of Centerline's TDM and/or VoIP switching facilities. Network
use is included in the .00025 per minute fee. Partners agree to sell network
directly to Centerline at their best wholesale price where vendors are not
financed/secured by Partner pursuant to the agreement. In addition, Centerline
will retain the right to purchase excess termination provided by Partners at
Partner's cost and Centerline will share with Partner margin generated by
Centerline sales utilizing Partner's vendors on a 50/50 basis.
Profit margin on all traffic terminated through Partner's network from Partner's
customers, less an operating fee of .00025 per minute, shall be paid to Partner
on a monthly basis following receipt of payment from Partner's customers. In the
event Partner customer purchases network from Centerline, the parties agree that
Centerline will share with partner the margin, on a 50/50 basis.
The wholly-owned subsidiaries of Centerline that are subject to the Partner
Incentive and Financing Agreements as of the date of this filing are EQ8, LLC,
EnRoute Telecom, LLC, G Link Solutions, LLC, Volta Communications, LLC, and
Lonestar Communications, LLC. For three months ended September 30, 2004, only
Volta Communications, LLC and Lonestar Communications, LLC had operations, which
are consolidated in the operations of Centerline above.
In conjunction with each Partner Incentive and Financing Agreement, Management
Agreements were executed, wherein the Partners will provide general management
for the respective subsidiaries of Centerline in connection with the
development, marketing and implementation of the business operations of
Centerline's respective subsidiaries.
No transactions arose pursuant to the above agreements which would require
amounts to be recorded by the Company for the three months ended September 30,
2004.
NOTE 9 - LOAN AND ACCOUNTS PAYABLE TO RELATED PARTY - CHARTERHOUSE
In January 2003, the Company received a $50,000 loan from Charterhouse. This
loan payable as well as the previous $311,960 payable are unsecured,
non-interest bearing and have no formal repayment terms.
In addition, as of September 30, 2004, the company has an outstanding account
payable to Charterhouse for $135,000 in connection with consulting services
provided in 2002.
NOTE 10 - LEASE OBLIGATIONS
Office equipment lease
During the nine months ended September 30, 2004, the Company entered into a
lease agreement for office equipment, under which the Company must pay $279 per
month, plus sales tax, for a period of 39 months. The Company expects to have
use of the equipment for the substantial portion of its useful life and the
lease provides for a bargain purchase option, wherein the company may acquire
ownership of the asset at the end of the lease for 10% of its fair market value.
Accordingly, the lease transaction was recorded as a capital lease obligation
and ascribed an initial value to the asset and principal amount due on the lease
of $9,554, based on the present value of the monthly payments with an imputed
interest rate of 8%.
Telecommunications equipment lease
In July 2004, the Company entered into a lease agreement for telecommunications
collocation equipment, under which they made a down payment and other fees
totaling $37,635 and must pay $3,778 for 24 months. Since the transaction does
not qualify as a capital lease, the company charges the monthly payments to cost
of sales and amortizes the prepayment to cost of sales over the period of the
lease.
13
NOTE 11 - AGREEMENTS
Consulting and Investment Banking Agreement
In October 2003, the Company entered into an agreement with Fordham Financial to
raise $2,500,000 resulting in issuance of circular offering dated October 17,
2003. Fordham Financial agreed to receive 10% commission for the raising of the
funds. Fordham Financial had subscriptions of $1,092,140 as of December 31,
2003, and had raised the full $2,500,000 as of January 31, 2004.
Investment Advisory Agreement
On August 16, 2004, the Company entered into an investment advisory agreement
with Charles Morgan Securities, Inc. (CMS) for term ending on December 31, 2005.
CMS will render consulting services related to business development, corporate
planning, investment and securities matters, including the Company's applying
for trading on a higher listed exchange. As compensation for services, the
Company will pay a one-time fee of 500 shares of Preferred Class C stock,
convertible into 1% of the common shares of the Company after a one year holding
period. Pursuant to the agreement, the compensation is not considered earned
until when and if the advisor accomplishes the moving of the Company's stock
from trading on the OTCBB to another trading board of higher standing by
December 31, 2005.
Website Redesign
In July 2004, the Company engaged Ecisive to provide the redesign of its website
plus the back office assistance in integrating the Company's back office
operations to the public site. Ecisive is a well established marketing and
design firm with major Fortune 500 corporate customers.
Sanswire, LLC - Australian Project
On April 14, 2004, the Company entered into an agreement with Australian based
individuals, Michael Terry, E. John Hardy and Robert Johnson to form a new
company to be domiciled in Australia. The new company will have the following
distribution: GlobeTel - 45%, Mr. Terry - 30%, Mr. Hardy - 12.5% and Mr. Johnson
- 12.5%.
The purpose of the new corporation is to deploy the StratelliteTM technology and
other GlobeTel international services in the Australian and New Zealand markets.
Messrs. Terry, Hardy & Johnson will undertake initial capital raising to fund
the launch of the StratelliteTM technology in Australia while GlobeTel will
enter into a license agreement with the new company to provide its StratelliteTM
technology and GlobeTel services under terms and conditions agreed upon.
No operations or activities were conducted during the three and nine month ended
September 30, 2004 and through the date of this report.
Stored Value Card and Other Telecommunications Programs Agreements
In June 2004, the Company entered into an agreement with Bankcard Inc., a member
of the RCBC Group, one of the largest private commercial bank and financial
institutions in the Philippines to introduce a stored value card program for
domestic and international use. Bankcard will be able to issue a Visa and
MasterCard card program that will offer Overseas Filipino Workers and Filipinos
in foreign countries, convenient, risk free and low cost international funds
transfer and discounted long distance calling services.
This agreement was facilitated by Four Star Consulting, a Manila,
Philippine-based consulting group who was paid a fee of $10,000.
In July 2004, the Company entered into two separate agreements with SMSaging.
Inc. and Movil+, which are SMS and Wireless specialists, who will partner with
the Company to provide the technical support needed to launch initiatives
related to certain features of the Stored Value Program in the 4th Quarter 2004.
In July 2004, the Company signed a Letter of Intent with Marcatel, S.A. de C.V.
and Netel, S.A. de C.V., for the purpose of initiating a project for the
marketing and issuance of stored value cards ("Stored Value Cards") in Mexico.
Marcatel is a Mexican corporation, fully licensed to provide telephone and
telecommunication services in the country of Mexico, and wants to add Stored
Value Cards to its diverse products and services. Netel is a Mexican corporation
specialized in the development and marketing of telecommunications products and
services with the necessary expertise for the adequate placement of these
products and services in the country of Mexico.
In July 2004, the Company entered into with Philippine social entrepreneur Illac
Diaz, founder of Pier One, to launch GTEL's Stored Value Card Program for
seafarers in the Philippines. The new "Lighthouse Card" will allow Filipino
seafarers to load and remit cash from overseas at special rates. Lighthouse
cardholders in the Philippines can then withdraw their money from any ATM in the
Philippines and access their account from most locations throughout the world.
Also in July 2004, the Company announced the launching of its Stored Value Card
Program in Australia, Bill Express, through its Australian distributor, OnQ,
with over 8,000 points of sale throughout Australia. The new prepaid debit style
product was designed to provide a customer with a convenient alternative to cash
that is secure and easy to manage. However, the program has been put on hold
pending resolution of technical issues. There is no indication when the program
will be restarted.
14
NOTE 11 - AGREEMENTS (CONTINUED)
In August 2004 the Company entered into an agreement with First Class
Professional Human Resources, Inc. (FC Professional), a Philippines corporation
based in Manila, to launch the GTEL Stored Value Program in Japan to its
members. FC Professional represents approximately 40,000 Filipino workers in
Japan. It is a member association of FAME (Federated Associations of Manpower
Exporters) which represents over 75% of the millions of Overseas Filipino
Workers. The remittance program, an application of GTEL's Stored Value Program,
will provide a low cost, easy to use, convenient, risk free remittance
capability while adding significant other benefits to users of the program.
These benefits will include low cost international calling and loyalty
discounts.
In August 2004, the Company entered into an agreement to join with Grupo
Ingedigit C.A. ("GI"), a certified MasterCard third party transaction processor
and the leading electronic financial transactions services backbone provider for
the banking industry in Venezuela, establishing a new venture in Miami, Florida
providing domestic and worldwide financial transaction processing services. This
domestic venture combined with GI's current international processing
capabilities will support on its own network all the Magic Money and other
private label GTEL stored value card programs around the world, as well as other
third party cards. Both parties are contributing equally to the installation and
operation of the Miami switch. The switch is expected to be certified to process
MasterCard, Visa, Cirrus, and other independent ATM network transactions.
Operations are expected to begin before the end of the year.
In August 2004, the Company signed a Letter of Understanding with Equitable Card
Network, Inc. for Equitable to enable the Company to issue GlobeTel branded,
VISA Electron Cards in the Philippines.
In September 2004, the Company entered into a Memorandum of Understanding (MOU)
with Timesofmoney.com in which www.timesofmoney.com would provide direct deposit
facilities to 54 banks and issue prepaid cards in India for GTEL cardholders.
TimesofMoney.com is a comprehensive, online financial super mall, founded by The
Times of India Group, the largest media group in India. It hosts the offerings
of best-in-class banks and financial institutions and its product portfolio
spans credit cards, loans, mutual funds, tax filing and NRI services. The
company is a leading financial portal and has emerged as the backbone of the
Banking Industry for online remittances.
NOTE 12 - EARNINGS (LOSS) PER SHARE
Per share information is computed based on the weighted average number of common
shares outstanding (basic and diluted) during the period. Available stock
options were anti-dilutive and therefore were excluded from the net income
(loss) per common share calculation.
NOTE 13 - STOCK OPTIONS
During the year ended December 31, 2003, the Company issued the following
options to acquire common stock:
Date Issued Shares Consideration Valuation Relationship
September 26, 2003 2,206,667 Satisfaction of debt 33,100 Former President
September 26, 2003 17,600,000 Accrued salary 264,200 Former President
September 26, 2003 8,944,467 Accrued salary 134,167 Chief Executive Officer
September 26, 2003 7,444,467 Accrued salary 111,667 Chief Operating Officer
September 26, 2003 7,444,467 Accrued salary 111,667 Chief Financial Officer
September 26, 2003 4,111,133 Accrued salary 61,667 Controller
December 18, 2003 6,666,667 Officer salary 100,000 Former President
December 18, 2003 5,333,333 Officer salary 80,000 Chief Operating Officer
December 18, 2003 3,333,333 Salary 50,000 Controller
December 18, 2003 1,000,000 Officer salary 15,000 President
December 18, 2003 1,666,667 Accounting services 25,000 Accountants
December 18, 2003 2,666,667 Network services 40,000 Vendor
According to option agreements in connection with the above shares, the option
prices were the lower of $ .015 per share or one-half of the closing market
price on the last reported sale or closing price on the date of the agreement.
The above options were issued at $.015 per share and were issued in "cashless
exercises". Accordingly, the option shares actually issued were reduced by the
number of shares required to pay for the options as $ .015 per share. All of the
stock options were subsequently exercised in January 2004.
15
NOTE 14 - PREFERRED STOCK
Recent Sales of Unregistered Securities
The following information is given with regard to unregistered securities issued
and/or sold by us during the past two years, including the dates and amounts of
securities sold; the persons or class of persons to whom we sold the securities;
the consideration received in connection with such sales and if the securities
were issued or sold other than for cash, the description of the transaction and
the type and amount of consideration received.
Series B
On April 27, 2004, the Company agreed to sell 1,000 shares of Series B Preferred
Stock of GlobeTel Communications Corp. ("GTEL") to Caterham Financial
Management, Ltd., a Malaysian company ("Caterham"), for a total investment of
$15 million. The Company intends to use $5 million of this investment for
working capital and $10 million to purchase two Stored Value Card Data switches.
The agreement was later modified so that the total number of shares is 35,000
for the same investment convertible into the same amount of common stock as
agreed upon on April 27, 2004.
With respect to the $5 million in working capital, Caterham has agreed to
advance $1 million to GTEL on May 7, July 1, September 1, November 1 and
December 31. The Agreement provides that Caterham has a 10 day grace period, in
which to make any scheduled payments. With respect to the Master Card Data
switches, Caterham has agreed to advance an aggregate of $5 million to GTEL to
purchase a Stored Value Card Data Switch, which will be located in Miami,
Florida and subsequently a second switch will be installed in the Company's Hong
Kong operations.
The Certificate of Designation for the Series B Preferred Stock was filed with
the State of Delaware on July 30, 2004.
Except for voting rights and conversion rights, each share of Series B Preferred
Stock shall have rights that are identical to shares of the Company's common
stock. The Series B Preferred Stock issued to Caterham and its nominees will
have voting rights equal to 50% plus one share of the Company's authorized
shares of common stock for a period of three years beginning on the first
closing date an ending three years thereafter, provided that Caterham and/or its
nominee have not converted more than 15% of its/their Series B Preferred Stock
into the Company's common stock during this time period.
Beginning on the first anniversary after the first closing date and expiring two
years thereafter, Caterham and its nominees may convert (in whole or in part)
its Series B Preferred Stock into GlobeTel common stock. Each 1,000 share
increment of Series B Preferred Stock, as a class, issued to Caterham and its
nominees shall be convertible into that number of shares of the Company's common
stock equal to 1% of GlobeTel then issued and outstanding shares (the "Aggregate
Conversion Shares") as determined on the date in which Caterham, or one of its
nominees, first converts its Series B Preferred Stock into the Company's common
stock (the "First Conversion Date"). Each holder of the Series B Preferred Stock
will receive shares of GlobeTel aggregate conversion shares based on his
pro-rata ownership of the Series B Preferred Stock. Three years after the first
closing date, all of the shares of GlobeTel's Series B Preferred Stock which
have not converted into GTEL common stock will be automatically converted into
shares of GlobeTel's common stock.
Series C
On July 30, 2004, the Company filed a Certificate of Designation for Series C
Preferred Stock with the State of Delaware.
Provided that the preferred shares have not been converted, the Holders of the
Series C Preferred Stock, voting as a group, will have voting rights equal to
the current conversion share amount at the time of the vote of GTEL's authorized
shares of common stock for a period of three years from the first closing date.
For a period of one year after the First Closing Date, the Series C Preferred
Stock shall not be convertible into shares of GTEL common stock. Beginning on
the first anniversary of the First Closing Date and for a period of two years
thereafter, Tim Ingram may convert (in whole or part) its Series C Preferred
Stock into GTEL common stock. Each 1,000 shares of Series C Preferred Stock will
represent 2% of the GTEL common in their converted state. The Series C Preferred
Stock shall be convertible in at least 100 share increments, each increment, at
the time of conversion, will represent one tenth of 2% of the issued and
outstanding shares of GTEL common stock. On the third anniversary of the First
Closing Date, all shares of Series C Preferred Stock owned by Tim Ingram will
automatically be converted into GTEL common stock (to the extent such shares
have not been converted into common stock prior to this date). Except for the
aforementioned voting rights and conversion rights, each share of Series C
Preferred Stock shall have rights that are identical to that of GTEL's common
stock.
16
NOTE 14 - PREFERRED STOCK (CONTINUED)
On April 27, 2004, the Company agreed to sell 1,000 shares of Series C Preferred
Stock of GlobeTel Communications Corp. ("GTEL") to Tim Ingram, a Hong Kong based
investment banker, for a total investment of $1 million. The Company intends to
use this $1 million investment for working capital and purchase of equipment
necessary to expand the Company's Stored Value Card Programs.
Tim Ingram agreed to advance $1 million to GTEL on or before June 25, August 25,
October 25 and December 25, 2004. Mr. Ingram advanced $250,000 to the Company on
June 25, 2004 as agreed, and 250 shares of Series C Preferred Stock were issued.
Subsequently, Mr. Ingram notified the Company that he will not be funding the
remaining $750,000 and instead agreed to assign the remaining amount to other
groups wanting to invest in the Company.
On August 20, 2004, the Company agreed to sell 500 shares of Series C Preferred
Stock of GlobeTel Communications Corp. ("GTEL") to Paul E. Taboada for a total
investment of $500,000. Mr. Taboada, an individual investor, has also been
providing consulting services for the Company for over four years. The Company
intends to use this $500,000 investment for working capital and purchase of
equipment for Sanswire, LLC, necessary to launch the prototype of the
Stratellite.
The purchase price shall be payable in five (5) installments of $100,000,
payable no later than August 30, 2004, September 30, 2004, October 30, 2004,
November 30, 2004, and December 30, 2004. The Purchaser has a three-day cure
period to remit the monthly payments.
As of the date of this report, the Company has received $300,000 as agreed upon
and expects to receive the remaining $200,000 before the established time
periods.
On October 22, 2004, the Company agreed to sell 250 shares of Series C Preferred
Stock of GlobeTel Communications Corp. ("GTEL") to Lawrence Lynch for a total
investment of $250,000. Mr. Lynch, an individual investor, is also an employee
of the Company. The Company intends to use this $250,000 investment for working
capital and purchase of equipment necessary to expand the Company's stored value
card programs.
The $250,000 investment was received by the Company on October 25, 2004.
Preferred Stock Series D
On July 28, 2004, the Company agreed to sell 1,000 shares of Series D Preferred
Stock of GlobeTel Communications Corp. ("GTEL") to Mitchell A. Siegel, Chief
Operating Officer of the Company. The Company intends to use $1 million of this
investment for working capital and purchase of equipment necessary to expand the
Company's stored value card programs.
Mitchell A. Siegel agreed to advance $1 million to GTEL in four (4) installments
beginning August 2004. The agreement was subsequently modified for the
installment period to begin in October 2004. Mr. Siegel has remitted the initial
$250,000 and expects to remit the remaining amounts within the established
timetable.
The Certificate of Designation for the Series D Preferred Stock was filed with
the State of Delaware on July 30, 2004.
Provided that the preferred shares have not been converted, the Holders of the
Series D Preferred Stock, voting as a group, will have voting rights equal to
the current conversion share amount at the time of the vote of GTEL's authorized
shares of common stock for a period of three years from the first closing date.
For a period of two years after the First Closing Date, the Series D Preferred
Stock shall not be convertible into shares of GTEL common stock. Beginning on
the second anniversary of the First Closing Date and for a period of one year
thereafter, Mitchell A. Siegel may convert (in whole or part) its Series D
Preferred Stock into GTEL common stock. The 1000 shares of Series D Preferred
Stock will represent 2% of the GTEL common in their converted state. The Series
D Preferred Stock shall be convertible in at least 100 share increments, each
increment, at the time of conversion, will represent one tenth of 2% of the
issued and outstanding shares of GTEL common stock. On the third anniversary of
the First Closing Date, all shares of Series D Preferred Stock owned by Mitchell
A. Siegel will automatically be converted into GTEL common stock (to the extent
such shares have not been converted into common stock prior to this date).
Except for the aforementioned voting rights and conversion rights, each share of
Series D Preferred Stock shall have rights that are identical to that of GTEL's
common stock.
17
NOTE 15 - NET GAIN ON SETTLEMENTS OF LIABILITIES
During the three months ended September 30, 2004, the Company recorded a net
gain on settlement of debts totaling $81,823, as discussed below. The Company
had a recorded balance due of $53,072 of principal on capital lease obligation
and $15,924 in accrued but unpaid interest. The equipment securing the
obligation was abandoned prior to the current year, after the lessee's refusal
to accept return of the equipment in settlement of the obligation. The Company
does not believe it has an obligation to repay the recorded balance, and neither
the original lessee or assigns have sought collection from the company for over
one year.
The Company had included in accounts payable certain disputed amounts
payable to creditors totaling $11,548. The Company does not believe it has
obligations to pay the recorded balances, and the vendors have not sought
collection from the company for over one year.
The Company had a recorded balance due of $16,279 to former employees of NCI, a
former operating division. During the three month ended September 30, 2004, the
Company determined, and the former employees agreed, that any and all amount to
or payable on behalf of the employees have been satisfied and no additional
amounts are owed.
Certain former consultants of the Company were granted a judgment in the sum of
$15,000, as described in Part II - Other Information, Item 1. Legal Proceedings.
All disputed amounts allegedly payable to the consultants were written off and a
gain was reported in prior periods. A loss on settlement of liabilities was
recorded during the three months ended September 30, 2004, for the $15,000
subsequently determined payable.
In addition, the Company has recorded accounts payables to a former provider of
professional services totaling $333,060 and a note payable of $50,000 to an
individual, a principal of the professional services firm. The Company entered
into an arrangement with the parties, which states that upon payment of a total
of $200,000, $100,000 of which has been paid to date ($50,000 during the three
month ended September 30, 2004 and $50,000 thereafter), the remaining balance of
the above obligations referred to above will be considered fully satisfied
without the necessity of further payments. This is anticipated to occur on
approximately December 15, 2004, as the result of further payments of $50,000
each expected to be made approximately November 15 and December 15, 2004. No
gain was reported pursuant to this arrangement during the three months ended
September 30, 2004. The balance of $233,060 is expected to be written off and a
gain recorded in the following quarter when the amounts due under the settlement
are paid in full and all conditions fulfilled.
NOTE 16 - LOSS ON PROPERTY AND EQUIPMENT DISPOSITIONS
As of September 30, 2004, the Company evaluated its property and equipment,
including telecommunications equipment, located both within and outside of the
United States, and office furniture and equipment ascribed to our various
domestic office locations maintained from 2000 through September 30, 2004.
Certain assets were abandoned, based on our determination that such assets have
no economic value, due to such factors as technological obsolescence,
non-functioning of assets, lack of salvage in excess of costs to dispose, and
non-recoverability of assets located in geographical markets and areas in which
we are no longer active. During the three months ended we recorded a loss on
disposition of property and equipment of $56,804.
NOTE 17 - SUBSEQUENT EVENTS AND CONTINGENCIES
In October 2004, the Company signed a Memorandum of Understanding with Financial
Software and Systems Pvt. Limited (FSS), an Indian company, agreeing to work
together to develop and market Electronic Money Remittance Program, including
the Company's use of FSS's services in processing in certain markets and being a
product development partner for POS.
In October 2004, the Company signed a Memorandum of Agreement (MOA) with
Philippine mobile giant Globe Telecom (Globe) to jointly develop an integrated
payment system which will combine the Company's stored value card payment
processing capabilities with Globe's SMS applications technology. The purpose of
this program is to allow the Company's stored value cardholders to send money
directly to family and friends through their Globe Mobile Phone. With this new
technology, the SMS/text recipient is then able to withdraw funds from major
Filipino retail outlet chains. Globe Telecom is the second largest cellular
phone operator in the Philippines with over 10 million subscribers. Globe, and
its experienced leadership team has consistently won awards in Asia for their
development and deployment of cutting edge technology for value added SMS
applications. In 2004, Globe was awarded Best-Managed Asian Telecom and Most
Innovative SMS Application respectively by Asia's leading financial and industry
publication.
18
Item 2. Management's Discussion and Analysis or Plan of Operations
This Form 10-QSB and other statements issued or made from time-to-time by us
contain statements which may constitute "Forward-Looking Statements" within the
meaning of the Securities Act of 1933, as amended and the Securities Exchange
Act of 1934 by the Private Securities Litigation Reform Act of 1995, 15 U.S.C.A.
Sections 77Z-2 and 78U-5 (SUPP. 1996). Those statements include statements
regarding our intent, belief or current expectations, and those of our officers
and directors and the officers and directors of our subsidiaries as well as the
assumptions on which such statements are based. Prospective investors are
cautioned that any such forward-looking statements are not guarantees of future
performance and involve risks and uncertainties, and that actual results and the
timing of certain events may differ materially from those contemplated by such
forward-looking statements.
Forward-looking statements include, but are not limited to, statements about our
plans, objectives, expectations, intentions and assumptions and other statements
that are not historical facts. Words like "expect", "anticipate", "intend",
"plan", "believe", "seek", "estimate" and similar expressions identify
forward-looking statements.
Overview
GlobeTel Communications Corp. (Globetel), a Delaware corporation established in
July 2002, is engaged in the business of providing telecommunication services,
primarily involving Internet telephony using Voice over Internet Protocol
("VoIP") equipment. We are authorized to issue up to 1,500,000,000 shares of
Common Stock, par value $0.00001 per share and 10,000,000 shares total of
preferred stock. The preferred stock is a so-called "blank check" preferred,
meaning that its terms such as dividends, liquidation and other preferences, are
to be fixed by the Board of Directors at the time of issuance.
Through September 30, 2004, the Preferred Shares included the following: Series
A Preferred Stock, par value $0.001, 250,000 shares authorized, issued and
outstanding; Series B Preferred Stock, par value $0.001, 35,000 shares
authorized, issued and outstanding; Series C Preferred Stock, par value $0.001,
5,000 shares authorized, 750 shares issued and outstanding; and Series D
Preferred Stock, par value $0.001, 5,000 shares authorized, 250 shares issued
and outstanding
Results of Operations - Comparison of Three Months Ended September 30, 2004 and
2003
Revenues. During the three-month period ended September 30, 2004, our sales were
$7,509,206 compared to sales of $2,812,121 during the same period last year, an
increase of $4,697,085 or 167%. Our revenues increased primarily due to revenues
from our subsidiary, Centerline and its subsidiaries, which recorded
consolidated revenues of $3,989,997 (or 53% of total revenues). The remainder of
our revenues continue to be predominantly from telecommunications minutes going
through our Mexico, Philippines and Brazil networks. Our Mexico network
generated $1,402,078 (or 19% of gross revenues), while our Philippine network
generated $1,259,438 (or 17% of gross revenues) and our Brazil network generated
$651,954 (or 9% of gross revenues). The Mexico revenues reflect a 28% decrease
compared to the same period last year, resulting from decreased billing rates.
Cost of Sales. Our cost of sales consists primarily of the wholesale cost of
buying bandwidth purchased by us for resale, costs of telecommunication
equipment and technical services. We had cost of sales of $7,709,650 for the
three months ended September 30, 2004, compared to cost of sales of $2,203,587
during the three months ended September 30, 2003. We expect cost of sales to
increase in future periods to the extent that our sales volume increases.
Gross Margin (Loss). We had a negative margin of ($200,444) (-2.7%) for the
three months ended September 30, 2004 compared to the same period last year when
the gross margin was $608,534 or 21.6%. The decrease in gross margin is
attributable to the increased cost of the minutes to terminate, especially the
Mexico network, where our margin is less than two percent, and initial
activities of Centerline. We expect to derive higher margins once we formally
take over the operations of our customer's Mexico network as described in Part
II, Item 1 "Legal Proceedings."
Operating Expenses. Our operating expenses consist primarily of payroll and
related taxes, expenses for executive and administrative personnel, facilities
expenses, professional and consulting service expenses, travel and other general
corporate expenses. Our operating expenses for the three months ended September
30, 2004, were $2,414,260, an increase from $812,724 for the same period in
2003.
Our operating expenses increased substantially due to our current expansion.
Payroll and related taxes increased by $296,117 because we hired additional
personnel to expand our Stored Value Card Program. Officers' compensation
increased by $416,796, primarily from accrued but unpaid officers' compensation
of $150,833 and non-cash stock compensation of $192,000. We expended $29,626
more in travel than the same period in 2003 and $438,774 more in professional
services and consulting fees. We also had increased $601,050 in estimated bad
debt expense related to our Mexico and Brazil networks. Finally, we spent
$60,304 in Sanswire-related costs, including development of our Stratellite. Our
expenses in the future may increase in absolute dollars as we continue to expand
our network termination locations worldwide and incur additional costs related
to the growth of our business, including our subsidiaries, and the costs of
maintaining a public company.
19
Operating Loss from Operations. We had an operating loss of
($2,614,704) for the three months ended September 30, 2004, compared to an
operating loss of $204,190 for the three months ended September 30, 2003. The
loss was a result of reduced margin and higher operating costs related to the
expansion of our Stored Value Card Program. We expect that we will continue to
have higher operating costs as we increase our staffing and continue expanding
operations and distributing our Stored Value Card Program and operating costs
related to our newly acquired subsidiaries.
Other Income/Expenses. We recorded net gains on settlement of liabilities of
$81,823 during the three months ended September 30, 2004 compared to $91,085
during the three months ended September 30, 2003. We recorded losses on
disposition of property and equipment of $56,804 during the three months ended
September 30, 2004. We recorded a one-time loss of $4,834,878 on reduction in
fair value of receivables and marketable securities, related to IPW, during the
three months ended September 30, 2003. Interest income (expense) consists of
interest expense on our borrowings and interest income earned on our cash and
cash equivalents.
Net Loss. Our net loss for the three months ended September 30, 2004, was
($2,589,044) compared to a net loss of ($4,967,486) during the three months
ended September 30, 2003.
Results of Operations - Comparison of Nine Months Ended September 30, 2004 and
2003
Revenues. During the nine-month period ended September 30, 2004, our sales were
$14,509,624 compared to sales of $8,905,232 during the same period last year, an
increase of $5,604,392 or 63%. Our revenues increased primarily due to revenues
from our subsidiary, Centerline and its subsidiaries, which recorded
consolidated revenues of $3,989,997 (or 27% of total revenues). The remainder of
our revenues continued to be predominantly from telecommunications minutes going
through our Mexico, Philippines and Brazil networks. Our Mexico network
generated $4,712,778 (or 32% of gross revenues), while our Philippines network
generated $3,234,279 (or 22% of gross revenues) and our Brazil network generated
$2,109,886 (or 15% of gross revenues).
Cost of Sales. Our cost of sales consists primarily of the wholesale cost of
buying bandwidth purchased by us for resale, costs of telecommunication
equipment and technical services. We had cost of sales of $14,524,807 for the
nine months ended September 30, 2004, compared to cost of sales of $6,451,431
during the nine months ended September 30, 2003. We expect cost of sales to
increase in future periods to the extent that our sales volume increases.
Gross Margin (Loss). We had a negative margin of ($15,183) (-0.01%) for the nine
months ended September 30, 2004 compared to the same period last year when the
gross margin was $2,453,801 or 27.6%. The decrease in gross margin is
attributable to the increased cost of the minutes to terminate, especially the
Mexico network, where our margin is substantially lesser than the previous year,
and initial activities of Centerline. We expect to derive higher margins once we
formally take over the operations of our customer's Mexico network as described
in Part II, Item 1 "Legal Proceedings."
Operating Expenses. Our operating expenses consist primarily of payroll and
related taxes, expenses for executive and administrative personnel, facilities
expenses, professional and consulting service expenses, travel and other general
corporate expenses. Our operating expenses for the six months ended September
30, 2004, were $4,754,339, an increase from $1,838,962 for the same period in
2003.
Our operating expenses increased substantially due to our current expansion.
Payroll and related taxes increased by $246,612 because we hired additional
personnel to expand our Stored Value Card Program. Officers' compensation
increased by $815,972, primarily from accrued but unpaid officers' compensation
of $150,833 and non-cash stock compensation of $617,000. We expended $72,174
more in travel than the same period in 2003 and $674,6465 more in professional
services and consulting fees. We also had increased $985,644 in estimated bad
debt expense related to our Mexico and Brazil networks. Finally, we spent
$75,586 in Sanswire-related costs, including development of our Stratellite. Our
expenses in the future may increase in absolute dollars as we continue to expand
our network termination locations worldwide and incur additional costs related
to the growth of our business, including our subsidiaries, and the costs of
maintaining a public company.
Income (Loss) from Operations. We had a net ordinary loss of ($4,769,522) for
the nine months ended September 30, 2004, compared to net ordinary income of
$614,839 for the nine months ended September 30, 2003.
Other Income (Expense). We recorded gains on settlement of liabilities of
$85,337 during the three months ended September 30, 2004, compared to $91,085
during the nine months ended September 30, 2003. We recorded losses on
disposition of property and equipment of $56,804 during the three months ended
September 30, 2004, compared to gains on disposition of assets of $34,365 in the
prior year. We recorded a one-time loss of $4,834,879 on reduction in fair value
of receivables and marketable securities, related to IPW, during the nine months
ended September 30, 2003. Interest income (expense) consists of interest expense
on our borrowings and interest income earned on our cash and cash equivalents.
Net Income (Loss). Our net loss for the nine months ended September 30, 2004,
was ($4,749,917) compared to a net income of $4,190,137 during the nine months
ended September 30, 2003.
20
Liquidity and Capital Resources.
As of September 30, 2004, we had $293,284 of cash and cash equivalents compared
to $280,181 as of September 30, 2003.
Our net accounts receivable were $2,271,131 as of September 30, 2004, compared
to $3,799,324 at the same period in 2003. An estimated 94% of the September 30,
2004 receivables were attributable to three customers, including 51% or
$1,164,478 (net of allowance) related to the Mexico network and 43% or $965,500
(net of allowance) related to the Brazil network. We have increased our
allowance for doubtful accounts by $1,074,516 for the period for these
customers.
We had current assets totaling $3,251,432 as of September 30, 2004, compared to
$4,119,505 as of September 30, 2003. The decrease was attributable to the
write-off of receivables in the prior year as discussed in Note 5 of the
financial statements. Out total assets increased to $6,782,883 as of September
30, 2004, from $4,751,109 for the same period in 2003, due to the acquisition of
the Sanswire intangible assets valued at $2,778,000 and investment in CGI, our
unconsolidated foreign subsidiary, of $352,300, partially offset by the decrease
in accounts receivable as discussed above.
Our total current liabilities decreased to $1,303,176 as of September 30, 2004,
a decrease of $656,638 from $1,959,814 as of September 30, 2003. The decrease is
principally due to payments of notes payable and accrued officers' salaries.
There were no significant long-term liabilities as of September 30, 2004 and
2003.
Our cash used in operating activities was $3,485,052 for the nine months ended
September 30, 2004, compared to $898,508 during the same period in the prior
year. Our investing activities during the nine months ended September 30, 2004
totaled $73,018 compared to $ 292,950 in the prior year. Cash provided by
financing activities was $3,626,360, principally from the sale of preferred
stock, for the nine months ended September 30, 2004, as compared to $1,270,008
for the same period in the prior year.
As detailed in the financial statements, we have sold preferred shares that will
raise a total of approximately $20 million in cash. We have received $4,874,200
as of the date of this report. The rest of the funds will be received during the
course of the current year and following year. With this funding, we will have
the existing capital resources necessary to fund our operations and capital
requirements as presently planned over the next twelve months. However, if we do
not receive the full amount, then we may not have the existing capital resources
or credit lines available that are sufficient to fund our operations and capital
requirements and therefore we may have to pursue additional funds through the
issuance of debt and/or equity instruments.
Contracts and Contingencies and Commitments
Sanswire
During the nine months ended September 30, 2004 we entered into final Asset
Purchase Agreements with Sanswire Technologies and Stratodyne to purchase
certain assets related to their "Stratellite" program. This included certain
intellectual property. The agreement called for the issuance of 28 million
shares of our common stock as consideration for the assets acquired. We intend
to register such securities on behalf of Sanswire. We will receive no proceeds
from any such offering. Based upon certain milestones as described in the Note 7
to the Financial Statements and in the Asset Purchase Agreements, we may be
obligated to issue another 200 million shares of our common stock. There can be
no assurance that such milestones will be met and the stock will be issued. The
contingencies expire on January 31, 2005, but may be extended by agreement of
the parties.
Investment Advisory Agreement
On August 16, 2004, we entered into an investment advisory agreement with
Charles Morgan Securities, Inc. (CMS) for term ending on December 31, 2005. CMS
will render consulting services related to business development, corporate
planning, investment and securities matters, including the Company's applying
for trading on a higher listed exchange. As compensation for services, the
Company will pay a one-time fee of 500 shares of Preferred Class C stock,
convertible into 1% of the common shares of the Company after a one year holding
period. Pursuant to the agreement, the compensation is not considered earned
until when and if the advisor accomplishes the moving of the Company's stock
from trading on the OTCBB to another trading board of higher standing by
December 31, 2005. There can be no assurance that such movement to a higher
board will be accomplished and that the Preferred Class C Stock will be issued.
The contingency expires on December 31, 2005, but may be extended by agreement
of the parties.
21
Item 3. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As required by Rule 13a-15 under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), the Company carried out an evaluation under the
supervision and with the participation of the Company's management, including
the Chief Executive Officer and President and the Chief Financial Officer, of
the effectiveness of the Company's disclosure controls and procedures as of
September 30, 2004. In designing and evaluating the Company's disclosure
controls and procedures, the Company and its management recognize that there are
inherent limitations to the effectiveness of any system of disclosure controls
and procedures, including the possibility of human error and the circumvention
or overriding of the controls and procedures. Accordingly, even effective
disclosure controls and procedures can only provide reasonable assurance of
achieving their desired control objectives. Additionally, in evaluating and
implementing possible controls and procedures, the Company's management was
required to apply its reasonable judgment. Furthermore, in the course of this
evaluation, management considered certain internal control areas, including
those discussed below, in which we have made and are continuing to make changes
to improve and enhance controls. Based upon the required evaluation, the Chief
Executive Officer and the Chief Financial Officer concluded that as of September
30, 2004, the Company's disclosure controls and procedures were effective (at
the "reasonable assurance" level mentioned above) to ensure that information
required to be disclosed by the Company in the reports it files or submits under
the Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commission's rules and forms.
From time to time, the Company and its management have conducted and will
continue to conduct further reviews and, from time to time put in place
additional documentation, of the Company's disclosure controls and procedures,
as well as its internal control over financial reporting. The Company may from
time to time make changes aimed at enhancing their effectiveness, as well as
changes aimed at ensuring that the Company's systems evolve with, and meet the
needs of, the Company's business. These changes may include changes necessary or
desirable to address recommendations of the Company's management, its counsel
and/or its independent auditors, including any recommendations of its
independent auditors arising out of their audits and reviews of the Company's
financial statements. These changes may include changes to the Company's own
systems, as well as to the systems of businesses that the Company has acquired
or that the Company may acquire in the future and will, if made, be intended to
enhance the effectiveness of the Company's controls and procedures. The Company
is also continually striving to improve its management and operational
efficiency and the Company expects that its efforts in that regard will from
time to time directly or indirectly affect the Company's disclosure controls and
procedures, as well as the Company's internal control over financial reporting.
For the year ended December 31, 2003, the Company's independent auditors, Dohan
and Company, CPA's, P.A. ("Dohan") advised management and the Board of Directors
by a letter dated March 30, 2004, that in connection with its audit of the
Company's consolidated financial statements for the year ended December 31,
2003, it noted certain matters involving internal control and its operation that
it considered to be a material weakness under standards established by the
American Institute of Certified Public Accountants. Reportable conditions are
matters coming to an independent auditors' attention that, in their judgment,
relate to significant deficiencies in the design or operation of internal
control and could adversely affect the organization's ability to record,
process, summarize, and report financial data consistent with the assertions of
management in the financial statements. Further, a material weakness is a
reportable condition in which the design or operation of one or more internal
control components does not reduce to a relatively low level the risk that
errors or fraud in amounts that would be material in relation to the financial
statements being audited may occur and not be detected within a timely period by
employees in the normal course of performing their assigned functions. Dohan
advised management and the Board of Directors that it considered the following
to constitute material weaknesses in internal control and operations: (i) the
Company's failure to adequately staff its finance group to effectively control
the increased level of transaction activity, address the complex accounting
matters and manage the increased financial reporting complexities and (ii) the
Company's current monthly close process does not mitigate the risk that material
errors could occur in the books, records and financial statements, and does not
ensure that those errors would be detected in a timely manner by the Company's
employees in the normal course of performing their assigned functions. Dohan
noted that these matters were considered by it during its audit and did not
modify the opinion expressed in its independent auditor's report dated March 30,
2004.
As noted above, the Company has made and is continuing to make changes in its
controls and procedures, including its internal control over financial
reporting, aimed at enhancing their effectiveness and ensuring that the
Company's systems evolve with, and meet the needs of, the Company's business. As
further noted above, the Company is also continually striving to improve its
management and operational efficiency and the Company expects that its efforts
in that regard will from time to time directly or indirectly affect the
Company's controls and procedures, including its internal control over financial
reporting. Toward these ends, the Company has added two more employees to its
accounting staff and has increased the utilization of its outside accounting
consultants.
Changes in Internal Control Over Financial Reporting
There have been no significant changes in the Company's internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of the evaluation.
22
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
We are a defendant in a lawsuit file by Matthew Milo and Joseph Quattrocchi, two
former consultants, filed in the Supreme Court of the State of New York
(Richmond County, Case no. 12119/00 and 12118/00). This lawsuit relates to
consulting services that were provided by Mr. Milo and Mr. Quattrocchi and a
$50,000 loan advanced by these individuals, dated May 14, 1997, of which $35,000
has been repaid.
We entered into an agreement with Mr. Milo and Mr. Quattrocchi as consultants on
June 25, 1998. The agreement was amended on August 15, 1998. On November 30,
1998, both Mr. Milo and Mr. Quattrocchi resigned from their positions as
consultants to our company without fulfilling all of their obligations under
their consulting agreement. We issued 3 million shares each to Mr. Milo and Mr.
Quattrocchi as consideration under the consulting agreement. We have taken the
position that Mr. Milo and Mr. Quattrocchi received compensation in excess of
the value of the services that they provided and the amounts that they advanced
as loans.
Mr. Milo and Mr. Quattrocchi disagreed with our position and commenced
action against us that is pending in the Supreme Court of the State of New York.
Mr. Milo and Mr. Quattrocchi claim that they are entitled to an additional
24,526,000 shares of our common stock as damages under the consulting agreement
and to the repayment of the loan balance. We believe that we have meritorious
defenses to the Milo and Quattrocchi action, and we have counterclaims against
Mr. Milo and Mr. Quattrocchi. However, we cannot project an outcome with any
certainty. We have not entered into any settlement negotiations with Mr. Milo
and Mr. Quattrocchi and we do not believe that we would be materially adversely
affected by the outcome of this proceeding.
With regard to index number 12119/00, as a result of a summary judgment motion,
the plaintiffs were granted a judgment in the sum of $15,000. The rest of the
plaintiff's motion was denied. The court did not order the delivery of
24,526,000 shares of ADGI common stock as the decision on that would be reserved
to time of trial.
An Answer and Counterclaim had been interposed on both of these actions. The
Answer denies many of the allegations in the complaint and is comprised of
eleven affirmative defenses and five counterclaims alleging damages in the sum
of $1,000,000. The counterclaims in various forms involve breach of contract and
breach of fiduciary duty by the plaintiffs.
For the most part, the summary judgment motions that plaintiffs brought clearly
stated that their theories of recovery and the documents that they will rely on
in prosecuting the action.
It is still difficult to evaluate the likelihood of
an unfavorable outcome at this time in light of the fact that there has been no
testimony with regard to the actions. However, the plaintiffs have prevailed
with regard to their claim of $15,000 as a result of the lawsuit bearing index
Number 12119/00.
We are taking legal actions against our associate and customer in Mexico
for non-payment of the amount they owe us. This customer has substantial assets,
including telecommunications equipment, existing working networks and Mexico tax
refunds which they have proposed to turn over to us. The motion filed in the
Mexican courts was necessary to formally request that Globetel become the
assigned payee of the tax refund receivable and formally secure the equipment
and to take over the operations of the existing networks.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Series B Preferred Stock
On April 27, 2004, we agreed to sell 1,000 shares of Series B Preferred Stock of
GlobeTel Communications Corp. ("GTEL") to Caterham Financial Management, Ltd., a
Malaysian company ("Caterham"), for a total of $15 million investment. We intend
to use $5 million of this investment for working capital and $10 million to
purchase two Stored Value Card Data switches.
The agreement was later modified so that the total number of shares is 35,000
for the same investment convertible into the same amount of common stock as
agreed upon on April 27, 2004.
With respect to the $5 million in working capital, Caterham has agreed to
advance $1 million to GTEL on May 7, July 1, September 1, November 1 and
December 31. The agreement provides that Caterham has a 10-day grace period, in
which to make any scheduled payments. With respect to the MasterCard Data
switches, Caterham has agreed to advance an aggregate of $5 million to GTEL to
purchase a Stored Value Card Data switch, which will be located in Miami,
Florida and subsequently a second switch will be installed in our Hong Kong
operations.
The Certificate of Designation for the Series B Preferred Stock was filed with
the State of Delaware on July 30, 2004.
23
Series C
On April 27, 2004, we agreed to sell 1,000 shares of Series C Preferred Stock of
GlobeTel Communications Corp. ("GTEL") to Tim Ingram, a Hong Kong based
investment banker, for a total of $1 million investment. We intend to use $1
million of this investment for working capital and purchase of equipment
necessary to expand the Company's stored value card programs.
Tim Ingram has agreed to advance $1 million to GTEL in four (4) installments due
on or before June 25, August 25, October 25 and December 25, 2004.
Subsequent to Mr. Ingram's initial remittance of $250,000, Mr. Ingram notified
the Company that he will not be funding the remaining $750,000 and instead
agreed to assign the remaining amount to other groups wanting to invest in the
Company.
The Certificate of Designation for the Series C Preferred Stock was filed with
the State of Delaware on July 30, 2004.
On August 20, 2004, the Company agreed to sell 500 shares of Series C Preferred
Stock of GlobeTel Communications Corp. ("GTEL") to Paul E. Taboada for a total
investment of $500,000. Mr. Taboada, an individual investor, has also been
providing consulting services for the Company for over four years. The Company
intends to use this $500,000 investment for working capital and purchase of
equipment for Sanswire, LLC, necessary to launch the prototype of the
Stratellite.
The purchase price shall be payable in five (5) installments of $100,000,
payable no later than August 30, 2004, September 30, 2004, October 30, 2004,
November 30, 2004, and December 30, 2004. The Purchaser has a three-day cure
period to remit the monthly payments.
As of the date of this report, the Company has received $300,000 as agreed upon
and expects to receive the remaining $200,000 before the established time
periods.
On October 22, 2004, the Company agreed to sell 250 shares of Series C Preferred
Stock of GlobeTel Communications Corp. ("GTEL") to Lawrence Lynch for a total
investment of $250,000. Mr. Lynch, an individual investor, is also an employee
of the Company. The Company intends to use this $250,000 investment for working
capital and purchase of equipment necessary to expand the Company's stored value
card programs.
The $250,000 investment was received by the Company on October 25, 2004.
Series D
On July 28, 2004, the Company agreed to sell 1,000 shares of Series D Preferred
Stock of GlobeTel Communications Corp. ("GTEL") to Mitchell A. Siegel, Chief
Operating Officer of the Company. The Company intends to use $1 million of this
investment for working capital and purchase of equipment necessary to expand the
Company's stored value care programs.
Mitchell A. Siegel agreed to advance $1 million to GTEL in four (4) installments
beginning August 2004. The agreement was since modified and the installment
period began in October 2004. Mr. Siegel has remitted the initial $250,000 and
expects to remit the remaining amounts within the established timetable.
The Certificate of Designation for the Series D Preferred Stock was filed with
the State of Delaware on July 30, 2004.
Common Stock
Transactions that occurred during the three months ended September 30, 2004,
include:
----------------------------------------------------------------------------------------------------
Amount of Securities Cash or Non-Cash
Date Title Sold Persons Consideration
----------------------------------------------------------------------------------------------------
07/29/2004 Common Stock 1,500,000 James Kimble Services at $144,000 (1)
07/29/2004 Common Stock 500,000 Behzad Saba Services at $ 48,000 (1)
07/29/2004 Common Stock 500,000 Daniel Montgomery Services at $ 48,000 (1)
08/12/2004 Common Stock 2,000,000 Leigh A. Coleman Services at $192,000 (1)
08/12/2004 Common Stock 2,000,000 Joseph Seroussi Services at $192,000 (1)
08/18/2004 Common Stock 175,000 James Ontiveros Services at $7,000 (2)
09/28/2004 Common Stock 2,000,000 Vernon Koenig Stradoyne Acquisition(2)
(1) These share were registered pursuant to SEC Form S-8 Registration filed on
July 22, 2004
(2) These shares have not been registered through the date of this filing.
24
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
The Company's Annual Meeting of Shareholders was held on August 27, 2004 in Ft.
Lauderdale, Florida. With over 91% favorable votes from all shareholders
entitled to vote, the seven (7) nominees for the Board of Directors were elected
and the appointment of Dohan & Company, CPAs, P.A. of Miami as the independent
registered auditors for the year ending December 31, 2004 was ratified.
The Directors elected for a one-year term ending at the next shareholders
meeting in 2005 are Przemyslaw Kostro, Timothy M. Huff, Mitchell A. Siegel,
Jerrold R. Hinton, Leigh A. Coleman, Michael K. Molen and Kyle McMahan.
There were no other matters brought to a vote of security holders during the
quarter ended September 30, 2004.
Item 5. Other Information
None
Item 6. Exhibits
(a) Exhibits:
Exhibit No. Document Description
31.1 Certification of the Chief Executive Officer, pursuant to
Rule 13a - 14(a) / 15d - 14(a) of the Sarbanes-Oxley
Act of 2002
31.2 Certification of the Chief Financial Officer, pursuant to
Rule 13a - 14(a) / 15d - 14(a) of the Sarbanes-Oxley
Act of 2002
32.1 Certification of the Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
32.2 Certification of the Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
25
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant has
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
GLOBETEL COMMUNICATIONS CORP.
Registrant
Date: November 15, 2004
/s/ Timothy Huff
Timothy Huff, Chief Executive Officer
Date: November 15, 2004
/s/ Thomas Y. Jimenez
Thomas Y. Jimenez, Chief Financial Officer
Date: : November 15, 2004