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 June 30, 2004
OR
[ ] 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 (IRS Employer Identification No.)
incorporation 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 August 6, 2004, we had issued 775,761,419 shares of common stock, of which
775,761,419 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. 3
Item 2. Management's Discussion and Analysis or Plan of Operation. 13
Item 3. Controls and Procedures. 15
PART II - OTHER INFORMATION
Item 1. Legal Proceedings. 17
Item 2. Changes in Securities. 17
Item 3. Default Upon Senior Securities. 18
Item 4. Submission of Matters to a Vote of Security Holders. 18
Item 5. Other Information. 18
Item 6. Exhibits and Reports on Form 8-K. 18
1
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet - (Unaudited) 3
Consolidated Statements of Income (Loss) (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)
Jun 30, 2004
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 436,412
Accounts receivable, less allowance for doubtful
accounts of $807,818 3,114,756
Prepaid expenses 209,358
Inventory 86,060
Deferred tax asset, less valuation allowance
of $3,860,954 -
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TOTAL CURRENT ASSETS 3,846,586
PROPERTY AND EQUIPMENT, less accumulated
depreciation of $414,638 413,879
OTHER ASSETS
Investment in unconsolidated foreign subsidiary 352,300
Intangible assets 2,778,000
Deposits 49,849
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TOTAL OTHER ASSETS 3,180,149
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TOTAL ASSETS $7,440,614
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LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
CURRENT LIABILITIES
Accounts payable $ 600,385
Notes payable 248,701
Current portion of capital lease obligations 51,989
Loan payable to related party - Charterhouse 361,960
Accrued expenses and other liabilities 68,834
Deferred revenues 17,665
Deferred revenues - related party 16,279
Related party payables 117,500
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TOTAL CURRENT LIABILITIES 1,483,313
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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; 1,000 shares issued and outstanding 1
Additional paid-in capital - Series C Preferred stock 999,999
Common stock, $.00001 par value, 1,500,000,000 shares
authorized; 773,261,419 shares issued and outstanding 7,732
Additional paid-in capital 31,405,406
Stock subscriptions receivable:
Series B Preferred Stock (14,150,000)
Series C Preferred Stock (875,000)
Accumulated deficit (28,655,037)
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TOTAL STOCKHOLDERS' EQUITY 5,957,301
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $7,440,614
==========
See accompanying notes.
3
GLOBETEL COMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (LOSS) (UNAUDITED)
For the For the For the For the
Six Months Ended Six Months Ended Three Months Ended Three Months Ended
June 30, 2004 June 30, 2003 June 30, 2004 June 30, 2003
---------------------------------------------------- ------------------- ------------------ ----------------- -----------------
REVENUES EARNED $ 7,000,419 $ 6,093,111 $ 3,790,085 $ 2,995,456
COST OF REVENUES EARNED 6,853,409 4,247,843 3,688,668 2,126,394
--------------------------------------------------- ------------------- ------------------ ----------------- -----------------
GROSS MARGIN 147,010 1,845,268 101,417 869,062
--------------------------------------------------- ------------------- ------------------ ----------------- -----------------
EXPENSES
Payroll and related taxes 185,965 157,090 109,677 61,049
Consulting and professional fees 439,468 241,916 267,735 124,094
Officers' compensation 682,260 283,085 165,594 141,833
Bad debts 429,031 44,436 30,282 44,436
Investment banking and financing fees 169,066 62,450 146,394 32,390
Investor and public relations 73,904 11,370 73,904 10,056
Research and development 16,277 - 16,277 -
Other operating expenses 77,635 46,152 33,945 2,715
Telephone and communications 34,292 34,820 18,415 14,192
Travel and related expenses 93,427 50,880 49,534 17,577
Rents 31,858 22,200 17,867 11,308
Insurance and employee benefits 44,027 49,540 22,843 25,813
Depreciation and amortization 24,616 22,299 12,900 11,121
--------------------------------------------------- ------------------- ------------------ ----------------- -----------------
TOTAL EXPENSES 2,301,826 1,026,238 965,367 496,584
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INCOME (LOSS) FROM OPERATIONS BEFORE OTHER
INCOME (EXPENSE) AND INCOME TAXES (2,154,816) 819,030 (863,950) 372,478
--------------------------------------------------- ------------------- ------------------ ----------------- -----------------
OTHER INCOME (EXPENSE)
Gain on forgiveness of debt 3,515 - - -
Gain on discontinued operations - 34,365 - 34,365
Interest income 971 141 235 32
Interest expense (10,540) (76,186) (3,589) (40,598)
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NET OTHER INCOME (EXPENSE) (6,054) (41,680) (3,354) (6,201)
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INCOME (LOSS) BEFORE INCOME TAXES (2,160,870) 777,350 (867,304) 366,277
--------------------------------------------------- ------------------- ------------------ ----------------- -----------------
INCOME TAXES
Provision for income taxes - 272,073 - 128,197
Tax benefit from utilization of net
operating loss carryforward - (272,073) - (128,197)
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TOTAL INCOME TAXES - - - -
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NET INCOME (LOSS) $ (2,160,870) $ 777,350 $ (867,304) $ 366,277
=================================================== =================== ================== ================= =================
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING - BASIC 701,417,680 611,024,150 700,064,897 616,663,618
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING - DILUTED 701,417,680 644,445,272 700,064,897 650,084,740
=================================================== =================== ================== ================= =================
NET INCOME (LOSS) PER SHARE - BASIC $ (0.00) $ 0.00 $ (0.00) $ 0.00
NET INCOME (LOSS) PER SHARE - DILUTED $ (0.00) $ 0.00 $ (0.00) $ 0.00
--------------------------------------------------- ------------------- ------------------ ----------------- -----------------
See accompanying notes.
4
GLOBETEL COMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
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For the For the
Six Months Ended Six Months Ended
June 30, 2004 June 30, 2003
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CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (2,160,870) $ 777,350
Adjustments to reconcile net income (loss) to net
cash used by operating activities:
Depreciation and amortization 107,254 101,606
Gain on discontinued operations - (34,366)
Bad debt expense 429,031 -
Common stock exchanged for services 600,566 21,000
Common stock for severance pay - 36,000
(Increase) decrease in assets:
Accounts receivable (450,360) (1,763,138)
Prepaid expenses (209,358) -
Inventory (86,060) -
Deposits (33,714) (38,000)
Deposits on equipment (50,000) -
Deposits to carriers 71,000 -
Increase (decrease) in liabilities:
Accounts payable (270,855) 105,385
Accrued payroll and related taxes - (12,785)
Accrued officers' salaries and bonuses - 193,368
Accrued expenses and other liabilities 1,411 18,917
Deferred revenues (13,863) 16,162
Deferred revenues - related party (10,744) (147,480)
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NET CASH USED BY OPERATING ACTIVITIES (2,076,562) (725,981)
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CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of property and equipment (52,758) (215,515)
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NET CASH USED BY INVESTING ACTIVITIES (52,758) (215,515)
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CASH FLOWS FROM FINANCING ACTIVITIES
Sale of preferred stock - Series A 1,132,060 -
Sale of preferred stock - Series B 850,000 -
Sale of preferred stock - Series C 125,000 -
Payments on capital lease financing (1,322) (2,392)
Proceeds from notes payable and long-term debt 375,000 751,073
Proceeds from related party payables 60,000 144,194
Payments on notes payable and long-term debt (200,000) -
Payments on related party payables - (96,053)
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NET CASH PROVIDED BY FINANCING ACTIVITIES 2,340,738 796,822
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NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS 211,418 (144,674)
CASH AND EQUIVALENTS - BEGINNING 224,994 201,631
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CASH AND EQUIVALENTS - ENDING $ 436,412 $ 56,957
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SUPPLEMENTAL DISCLOSURES
Cash paid during the period for:
Interest $ 10,540 $ 27,932
Income taxes $ - $ -
In addition to amounts reflected above, common stock was issued for:
Settlement of debt $ - $ 294,206
Consulting and professional services $ 600,566 $ 21,000
Employee compensation $ - $ 36,000
Non cash financing activities:
On April 27, 2004, $15,000,000 of Series B preferred stock was issued. A
stock subscription receivable was recorded in the amount of $14,150,000.
On April 27, 2004, $1,000,000 of Series C preferred stock was issued. A
stock subscription receivable was recorded in the amount of $875,000.
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See accompanying notes.
5
GLOBETEL COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
June 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 and GTCC de
Mexico, S.A. de C.V. All adjustments are of a normal recurring nature, except as
otherwise noted below. The results of operations for the three and six months
ended June 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
Three customers accounted for 98% of the Company's sales for the three months
ended June 30, 2004, including 18% attributable to the Brazil network, 44% to
the Mexico network, and 36% to the Philippine network. The customers for these
networks account for 91% of accounts receivable.
The same three customers accounted for 95% of the Company's sales for the six
months ended June 30, 2004, including 20% attributable to the Brazil network,
47% to the Mexico network, and 28% to the Philippine network.
NOTE 3 - ALLOWANCE FOR DOUBTFUL ACCOUNTS
During the three and six months ended June 30, 2004, the Company increased its
allowance for doubtful accounts by $30,283 and $429,031, respectively,
predominantly for the receivables from the Mexico and Brazil networks,
representing a percentage of amounts receivable older than 90 days which have
not been received as of the date of this report.
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, 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
$1,720,000. These amounts were agreed to by the Company and ATC.
6
The investment was structured by the parties and recorded by ATC as a secured
convertible note payable to the Company. The note was interest-bearing at a rate
of 12%. However, neither the Company nor ATC received or paid, respectively, nor
accrued such interest. The note was convertible, at the option of the Company,
at a conversion rate of AUD$ 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 June 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.
As of June 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.
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 still transacting with IPW to
move out of liquidation and be relisted in the Australian Exchange. However, the
outcome of the transaction can not be determined, therefore, the company has
written off $4,301,500 in stock receivable as well as the $1,600,000 in stock it
had in its name.
7
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.
NOTE 7 - ASSET ACQUISITION - SANSWIRE
Asset Purchase Agreement
In March 2004, the Company entered into a binding letter of intent to purchase
substantially all of the 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 on April 15,
2004.
Sanswire's assets consist primarily of its intellectual property and its
proprietary rights in its intellectual property. The Strattelite that they are
developing is similar to a satellite, but it is stationed in the stratosphere
rather than in orbit. Sanswire is a development stage company and as of May 3,
2004, the Stratellites are in the initial development stage. GlobeTel has placed
all of Sanswire'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 ("Shares") of its common stock ("Common Stock") to Sanswire at the
closing and the shares are being held in escrow pending delivery of the final
documents.
Contingent Consideration
An additional 200 million shares will 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.
For purposes of the purchase agreement, a "successful commercial launch" will 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.
Accounting for Purchase Price and Intangible Assets
The purchase price for the Sanswire assets 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) equipment - $32,000; and (b) 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.
Since it is presently unknown whether or not Sanswire 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.
8
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
June 30, 2004, and through the date of this filing. Sanswire's research,
development and testing of the Strattelite technology is continuing as
scheduled, and no event occurred or circumstances known to management exist to
indicate impairment.
Employment Agreements
The Company also entered into three-year employment agreements with four former
Sanswire Technology, Inc. executives. Michael Molen, Jairo Rivera, Brian Keith
and Jane Molen will serve as the Chief Executive Officer, Chief Financial
Officer; Chief Operating Officer and Comptroller of Sanswire-FL, respectively.
Mr. Molen will also receive an earn-out which will be based on value of
Sanswire-FL compared to the Company (exclusive of Sanswire-FL). If the value of
Sanswire-FL is more than 24% of the value of the Company, Mr. Molen will be
entitled to receive stock equal to 10% of GlobeTel common stock outstanding on
the date of valuation. Mr. Molen has the right to select the valuation date and
a mutually agreeable third party will evaluate the value of Sanswire-FL compared
to GlobeTel.
NOTE 8 - LOAN 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.
NOTE 9 -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.
Centerline Communications, LLC.
On June 30, 2004, the Company entered into an operating agreement with Carrier
Services, Inc., a Nevada corporation, also a telecommunications company to form
a limited liability company which shall exist for a period of three years from
the filing of its Articles of Organization unless sooner terminated or dissolved
in accordance with its Articles of Organization or this Agreement.
The purposes of the LLC 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.
No operations or activities were conducted through June 30, 2004.
Sanswire, LLC 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 through June 30, 2004.
Stored Value Card Program Agreement
In June, 2004, the Company entered into an agreement with Bankard 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. Bankard 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.
No operations or activities were conducted through June 30, 2004.
9
NOTE 10 - 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 exclude from the net income (loss)
per common share calculation.
NOTE 11 - 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 Outside 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.
NOTE 12 - 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.
10
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 June 11, 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 Ccard Programs.
Tim Ingram agreed to advance $1 million to GTEL on or before June 25, August 25,
October 25 and December 25, 2004.
The Certificate of Designation for the Series C 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 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. The 1000 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.
NOTE 13 - SUBSEQUENT EVENTS
Contract Agreements
The Company has entered into agreements with several companies to market and
distribute the Company's Stored Value Card Programs.
In July, 2004, the Company entered into with Philippine 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 launched its latest MasterCard approved Stored
Value Card Program, 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. The Bill Express card can be topped up at
selected retail outlets and used wherever the MasterCard and Maestro logos are
featured.
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.
11
Sanswire Demonstration
In July, 2004, Sanswire 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'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.
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 has agreed to advance $1 million to GTEL in four (4)
installments due on or before August 25, September 25, October 25 and November
25, 2004.
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 two years
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.
12
Item 2. Management's Discussion and Analysis or Plan of Operation
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, 10,000,000 shares of series A
Preferred Stock, par value $0.001, 35,000 shares of series B Preferred Stock,
par value $0.001 and 1,000 shares of series C Preferred Stock, par value $0.001.
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 Company's Board of Directors at the time of issuance.
Results of Operations - Comparison of Three Months Ended June 30, 2004 and 2003
Revenues. During the three-month period ended June 30, 2004, our sales were
$3,790,085 compared to sales of $2,995,456 during the same period last year, an
increase of $794,630 or 26.50%. Our revenues continue to be predominantly from
telecommunications minutes going through our Mexico, Philippines and Brazil
networks. Our Mexico network generated $1,674,828 (or 44% of gross sales), while
our Philippine network generated $1,395,434 (or 36% of gross sales) and our
Brazil network generated $715,684 (or 18% of gross sales). The Mexico revenues
reflect a 24.6% 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 $3,688,668 for the
three months ended June 30, 2004, compared to cost of sales of $2,126,394 during
the three months ended June 30, 2003. We expect cost of sales to increase in
future periods only to the extent that our sales volume increases.
Gross Margin. The gross margin decreased to $101,417 or 3% for the three months
ended June 30, 2004 compared to the same period last year when the gross margin
was $869,028 or 29%. 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. 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 June 30,
2004, was $965,367, an increase from $496,584 for the same period in 2003.
Our operating expenses increased substantially due to our current expansion.
Payroll and related taxes increased by over $72,388 because we hired additional
personnel to expand our Stored Value Card Program. We expended $31,957 more in
travel than the same period in 2003, and $143,641 more in professional services
and consulting. We also had increased corporate expenses, $114,005 more in
broker's fees, $63,848 more in investor relations and public relations cost,
$31,228 other operating expenses. Finally, we spent $16,277 in Sanswire-related
costs. 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 and being a public
company.
Income (Loss) from Operations. We had an operating loss of ($863,950) for the
three months ended June 30, 2004, compared to an operating income of $372,444
for the three months ended June 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.
Net Income (Loss). Our net loss for the three months ended June 30, 2004, was
($867,304) compared to a net income of $366,277 during the three months ended
June 30, 2003.
13
Results of Operations - Comparison of Six Months Ended June 30, 2004 and 2003
Revenues. During the six-month period ended June 30, 2004, our sales were
$7,000,419 compared to sales of $6,093,111 during the same period last year, an
increase of $907,308 or 14.90%. Our revenues continued to be predominantly from
telecommunications minutes going through our Mexico, Philippines and Brazil
networks. Our Mexico network generated $3,345,286 (or 47% of gross sales), while
our Philippines network generated $1,974,841 (or 28% of gross sales) and our
Brazil network generated $1,457,932 (or 20% of gross sales).
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 $6,853,409 for the six
months ended June 30, 2004, compared to cost of sales of $4,247,843 during the
six months ended June 30, 2003. We expect cost of sales to increase in future
periods only to the extent that our sales volume increases.
Gross Margin. The gross margin decreased to $147,009 or 2% for the six months
ended June 30, 2004 compared to the same period last year when the gross margin
was $1,845,268 or 30%. 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. 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 June 30,
2004, was $2,301,826, compared to $1,026,238 during the same period in 2003, an
increase of $1,275,588.
Our operating expenses increased substantially due to the expansion mode the
Company is currently undergoing. Payroll and related taxes increased by over
$428,051 because we hired additional personnel to expand our stored value card
program. We expended $42,548 more in travel than the same period in 2003, and
$197,551 more in professional services and consulting. We also had increased
corporate expenses, $106,616 more in broker's fees, $62,534 more in investor
relations and public relations cost, $31,482 other operating expenses. Finally,
we spent $16,277 in Sanswire-related costs. 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 and being a public company.
Income (Loss) from Operations. We had a net ordinary loss of ($2,154,817) for
the six months ended June 30, 2004, compared to net ordinary income of $819,029
for the six months ended June 30, 2003.
Other Income (Expense). Interest income (expense) consists of interest expense
on our borrowings and interest income earned on our cash and cash equivalents
and, for the prior period, receivables from related parties. We recorded
interest income of $971 during the six months ended June 30, 2004, compared to
$141 during the same period in the prior year. Interest expenses during the six
months ended June 30, 2004, were $10,540 compared to $76,186 during the same
period in the prior year.
Net Income (Loss). Our net loss for the six months ended June 30, 2004, was
($2,160,871) compared to a net income of $777,350 during the six months ended
June 30, 2003.
Liquidity and Capital Resources.
As of June 30, 2004, we had $436,412 of cash and cash equivalents compared to
$56,957 as of June 30, 2003.
Our accounts receivable were $3,114,756 as of June 30, 2004, compared to
$3,480,243 during the same time period in 2003. An estimated 91% or $2,836,659
of the June 30, 2004, receivables were attributable to three customers,
including 42% or $1,311,443 related to the Mexico network, 42% or $1,296,338
related to the Brazil network and 7% or $228,878 related to our Philippines
network. We have increased our allowance for doubtful accounts by $30,283 for
the period for these customers.
We had current assets totaling $3,846,586 as of June 30, 2004, compared to
$5,137,200 as of June 30, 2003. The decrease was attributable to the write-off
of receivables in the prior year as discussed in note 3 the financial
statements. Out total assets decreased to $7,440,614 as of June 30, 2004, from
$10,082,109 in the same period in 2003. Likewise, the decrease is attributable
to write-off of long-term receivables as discussed in Note 3 to the financial
statements.
Our total current liabilities decreased to $1,483,312 as of June 30, 2004, a
decrease of $3,311,371 from $4,794,684 as of June 30, 2003. The decrease is
principally due to payments of notes payable, accrued officers' salaries and
related party payables. There were no long-term liabilities as of June 30, 2004
and 2003.
14
Our cash used in operating activities was $2,076,562 for the six months ended
June 30, 2004, compared to $725,981 during the same period in the prior year.
Our investing activities during the six months ended June 30, 2003 totaled
$52,758 compared to $215,515 in the prior year. Cash provided by financing
activities was $2,340,738, principally from the sale of preferred stock, for the
six months ended June 30, 2004, as compared to $796,822 for the same period in
the prior year.
As detailed in the notes to the financial statements, we have sold preferred
shares that will raise a total of $7,000,000 in cash and $10,000,000 in lines of
credit for equipment purchase. We have received $1,250,000 as of the date of
this report. The rest of the funds will be received during the course of the
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 don't 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
During the quarter we entered into a final Asset Purchase Agreement with
Sanswire Technolgoies 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 Notes to Financial Statements and in the Asset Purchase
Agreement, 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.
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 June
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 June 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.
15
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.
The Company is still in the process of assessing the findings of its independent
auditors. As noted above, however, 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. For example, the Company is attempting to add two more
employees to its accounting staff.
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.
16
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 have commenced an
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.
Globetel is 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. Changes in Securities
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.
Series C
On June 11, 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.
The Certificate of Designation for the Series C Preferred Stock was filed with
the State of Delaware on July 30, 2004.
17
Common Stock
Transactions that occurred during the three months ended June 30, 2004, include:
--------------------------------------------------------------------------------
Amount of Securities Cash or Non-Cash
Date Title Sold Persons Consideration
--------------------------------------------------------------------------------
05/11/2004 Common Stock 108,333 Desiree DeKlerk Consulting services
at $6,500
--------------------------------------------------------------------------------
05/12/2004 Common Stock 28,000,000 Sanswire, Inc. Asset purchase at
$2,800,000(1)
--------------------------------------------------------------------------------
05/25/2004 Common Stock 1,352,528 George LeFebvre Additional shares
due for conversion
of debt
--------------------------------------------------------------------------------
05/25/2004 Common Stock 676,264 Michael Isco Additional shares
due for conversion
of debt
--------------------------------------------------------------------------------
05/25/2004 Common Stock 1,352,528 Peter J. Lindemann Additional shares
due for conversion
of debt
--------------------------------------------------------------------------------
(1) Shares for Sanswire Technologies were issued and held in escrow pending the
completion of certain conditions precedent in the Asset Purchase Agreement. Such
shares have not yet been distributed to Sanswire.
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters brought to a vote of security holders during the quarter
ended June 30, 2004.
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(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
(b) Form 8-K.
We did not file a form 8-K in the second quarter ended June 30, 2004.
18
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
/s/ Timothy Huff
Timothy Huff, Chief Executive Officer
Date: August 16, 2004
/s/ Thomas Y. Jimenez
Thomas Y. Jimenez, Chief Financial Officer
Date: August 16, 2004