Registration Statement No. _________
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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GLOBETEL COMMUNICATIONS CORP.
(Name of Small Business Issuer in Its Charter)
Delaware 4899 88-0292161
-------------------------------- ----------------------------- -----------------------
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification No.)
9050 Pines Blvd. Suite 110
Pembroke Pines, FL 33324
(954) 241-0590
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(Address and telephone number
of principal executive offices)
Timothy Huff
Chief Executive Officer
9050 Pines Blvd. Suite 110
Pembroke Pines, FL 33324
(954) 241-0590
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(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copies to:
Jonathan Leinwand
Jonathan D. Leinwand, P.A.
12955 Biscayne Blvd., Suite 402
North Miami, FL 33181
(305) 981-4524
(954) 252-4265 Fax
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Approximate Date of Commencement of Proposed Sale to the Public: As soon
as practicable after this Registration Statement is effective.
CALCULATION OF REGISTRATION FEE
=====================================================================================================================
Title of Each Class Proposed Maximum Proposed Maximum
of Securities to be Amount Offering Price Per Aggregate Offering Amount of
Registered to be Registered (1) Share(2) Price (2) Registration Fee(2)
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Common Stock, par value
$0.00001 per share 78,874,900 $0.1580 $12,462,234 $1,466.80
=====================================================================================================================
(1) This Registration Statement also covers an indeterminate number of shares
of GlobeTel Communications Corp. common stock that may be issuable by
reason of stock splits, stock dividends, or other adjustment provisions of
the Agreement in accordance with Rule 416 of the Securities Act of 1933.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(f) of the Securities Act of 1933, as amended.
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell securities and we are not soliciting offers to buy these securities in
any state where the offer or sale is not permitted.
ii
PRELIMINARY PROSPECTUS
GLOBETEL COMMUNICATIONS CORP.
78,874,900 SHARES
COMMON STOCK
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Up to 26,000,000 shares (the "Shares") of common stock of GlobeTel
Communications Corp. are being offered by certain persons who may become
stockholders of GlobeTel upon the distribution via a stock dividend to the
shareholders of Sanswire Technologies Inc. Additionally, up to 52,874,900 shares
are being offered by certain persons (the "Investors') who may convert certain
convertible notes and warrants, as more fully described below, into shares of
Globetel common stock.
The terms of our Asset Purchase Agreement with Sanswire Technologies
called for the issuance and registration of 26 million shares of our Common
Stock. Sanswire has indicated that it intends to distribute such stock to their
shareholders as a stock dividend. We purchased certain assets from Sanswire
Technologies Inc. including the intellectual property related to its
Stratellite, a high altitude airship that can be used as a communications
platform.
The terms of the subscription agreement with the Investors calls for
the registration of the shares underlying the convertible notes and warrants
plus an additional number of shares equal to 75% of the underlying shares to
ensure that a sufficient number of shares are available for conversion under all
contingencies.
We will not receive any of the proceeds of any sales of the stock
registered pursuant to this registration statement.
Our common stock is currently quoted on the Over the Counter Bulletin
Board Market. Our trading symbol is "GTEL".
----------------
The purchase of the securities offered through this prospectus involves a
high degree of risk. See section entitled "Risk Factors" on pages 4-7.
No underwriter or person has been engaged to facilitate the sale of shares
of common stock in this offering. The Securities being registered on this
Registration Statement are to be offered on a delayed or continual basis
pursuant to Rule 415 under the Securities Act of 1933. The offering will
terminate for the Securities registered hereby 24 months after the accompanying
registration statement is declared effective by the Securities and Exchange
Commission.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
iii
TABLE OF CONTENTS
PAGE
Summary ......................................................................3
Risk Factors .................................................................4
Use of Proceeds ..............................................................8
Plan of Distribution ........................................................10
Legal Proceedings ...........................................................11
Management ..................................................................12
Security Ownership of Certain Beneficial Owners and Management ..............13
Description of Securities ...................................................14
Dividend Policy .............................................................17
Experts .....................................................................17
Indemnification of Directors and Officers ...................................17
Business ....................................................................18
Management's Discussion and Analysis of Financial Condition .................27
Description of Property .....................................................30
Related Transactions ........................................................30
Market for Our Common Stock .................................................31
Executive Compensation ......................................................32
Changes in and Disagreements with Accountants ...............................35
Where You Can Find More Information .........................................36
Index to Financial Statements ...............................................34
iv
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The Date Of This Prospectus Is January 31, 2005
PROSPECTUS SUMMARY
All references in this prospectus to "we", "us", "ours" and "GlobeTel" are
intended to refer to GlobeTel Communications Corp.
This summary highlights selected information from this registration
statement. It does not contain all of the information that may be important to
you. You should carefully read the entire document and the other documents
referred to in this registration statement. Together, these documents will give
you all the information that investors should consider before investing in our
common stock.
Our Business
We are engaged in the business of (i) sale of telecommunication services
primarily involving Internet telephony using Voice over Internet
Protocol("VoIP"), and (ii) wide area network and local area network services.
Corporate Information
We were incorporated under the laws of the State of Nevada as Terra West
Homes, Inc. on January 16, 1979. On March 15, 1995, our name was changed to
"American Diversified Group, Inc." ("ADGI"). During the year ended December 31,
2001, our business activities included (i) sale of telecommunication services
primarily involving Internet telephony using VoIP through its Global Transmedia
Communications Corporation subsidiary ("Global"), and (ii) wide area network and
local area network services through its NCI Telecom, Inc. subsidiary ("NCI"). As
of July 1, 2002, Global and NCI were merged into the Company.
On July 24, 2002, the Company's stockholders approved a plan for the
exchange of all outstanding shares of ADGI for an equal number of shares of
GlobeTel Communications Corp. ("GlobeTel"). Prior to that approval, GlobeTel was
a wholly owned Delaware corporate subsidiary of ADGI. Subsequently, ADGI was
merged into GlobeTel, which is now conducting the business formerly conducted by
ADGI. Our principal executive offices are located at 9050 Pines Blvd., Suite
110, Pembroke Pines, Florida 33024, and our telephone number is (954) 241-0590.
Offering Summary
Offering Price: Prevailing market price
Securities Being Offered: 78,874,900 shares of common stock.
Securities Outstanding 944,849,146 shares of common stock were issued
Prior to the Offering: and outstanding as of the date of this
prospectus.
Use of Proceeds: The shares being registered were issued pursuant
to an asset purchase agreement between us and
Sanswire Technologies Inc., wherein we purchased
certain assets of Sanswire. We will not receive
any proceeds from the sale of the shares offered
herein.
1
FORWARD-LOOKING STATEMENTS
This registration statement contains, and incorporates by reference, some
forward-looking statements about our financial condition, results of operation
and business. These are not historical facts. They include expressions about our
o confidence,
o strategies and expressions about earnings,
o new and existing programs and services,
o relationships,
o opportunities,
o technology, and
o market conditions.
You can identify these statements by looking for
o terms like "expect," believe" or "anticipate," or
o expressions of confidence like "strong" or "on-going," or
o similar expressions or statements that are variations of the above
terms.
These forward-looking statements involve certain risks and uncertainties.
Actual results may differ materially from those predicted in the forward-looking
statements. This can happen because of uncertainties such as
o whether the transactions described in this registration statement
can be completed as planned,
o whether our existing management will continue in place,
o future economic conditions, and
o other risks described in this registration statement and in our
annual, quarterly and current reports that are incorporated into it
by reference.
Stockholders are cautioned not to place too much reliance on
forward-looking statements. We do not have any obligation to update any
forward-looking statements at any time.
AVAILABLE INFORMATION
We are subject to the Securities Exchange Act of 1934, as amended (the
"Exchange Act") and to the regulations adopted by the Securities and Exchange
Commission (the "Commission") under the Exchange Act, dealing with disclosure of
information about us. We comply by filing reports, proxy and information
statements and other information with the Commission.
2
Copies of the above material can be obtained from the Public Reference
Section of the Commission at 450 Fifth Street, N.W., Judiciary Plaza,
Washington, D.C., 20549 at prescribed rates. The Commission maintains a site on
the World Wide Web at http://www.sec.gov that contains reports, proxy statements
and information statements and other information regarding companies like us
that make electronic filings with the Commission.
Our common stock is quoted on the Over-the-Counter Bulletin Board("OTCBB")
maintained by the National Association of Securities Dealers, Inc. ("NASD"). The
NASD and/or certain of its affiliates or divisions (including the OTCBB) may
retain certain material related to us.
Statements contained in this Registration Statement or in any document
incorporated into this Registration Statement by reference, describing the
contents of any contract or other document, are not necessarily complete. For
that reason, reference is made to the copy of the contract or other document
that is included as an exhibit to a report or statement filed by us with the
Commission. All descriptions of contracts or other documents are qualified by
this reference to the same document filed as an exhibit.
SUMMARY
The following is a summary of certain information contained in other
places in this Registration Statement. In most cases the information in those
other places is more detailed than this summary, so the summary should be
regarded as a convenience only, and Stockholders should refer to the detailed
information and should not rely on this summary. Stockholders are urged to read
this Registration Statement, and in particular the section entitled "Risk
Factors," carefully and in its entirety. Unless clearly indicated otherwise
references in this Registration Statement to corporations refer to those
corporations and their direct and indirect subsidiaries.
GLOBETEL
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 operate in four primary areas: 1) VoIP carrier
traffic; 2) International calling cards and money remittance (Magic Money); 3)
VoIP telephony (Magic Phone); and 4) high altitude wireless communications
platforms through our Stratellite project.
GlobeTel is authorized to issue up to 1,500,000,000 shares of Common Stock, par
value $0.00001 per share, and 10,000,000 shares of 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 our Board of Directors at the time of issuance. We have four classes of
preferred shares outstanding (A, B, C, and D shares). Each has different
conversion and liquidation rights.
We were previously a wholly-owned subsidiary of American Diversified Group, Inc.
(ADGI). At a special meeting of stockholders of ADGI held on July 24, 2002, the
stockholders of ADGI approved a plan (the "Plan") for the exchange of all
outstanding shares of ADGI for an equal number of shares of GlobeTel.
ADGI was incorporated under the laws of the State of Nevada as Terra West Homes,
Inc. on January 16, 1979. On March 15, 1995, its name was changed to "American
Diversified Group, Inc." During the period ended July 24, 2002, ADGI's business
activities included (i) sale of telecommunication services primarily involving
Internet telephony using VoIP through its Global Transmedia Communications
3
Corporation subsidiary ("Global"), and (ii) wide area network and local area
network services provided through its NCI Telecom, Inc. subsidiary ("NCI").
Global Transmedia was acquired by ADGI on February 19, 2000, and NCI was
acquired on June 29, 2000. During 2002, Global and NCI were merged with and into
ADGI, with ADGI as the surviving corporation.
RISK FACTORS
An investment in our common stock involves a high degree of risk. You should
carefully consider the risks described below and the other information in this
prospectus and any other filings we may make with the United States Securities
and Exchange Commission in the future before investing in our common stock. If
any of the following risks occur, our business, operating results and financial
condition could be seriously harmed. The trading price of our common stock could
decline due to any of these risks, and you may lose all or part of your
investment. An investment in our common stock may involve additional risks and
uncertainties not described below.
We Face Intense Competition And May Be Unable To Compete Successfully With Our
Competitors.
The telecommunications industry is highly competitive, rapidly evolving and
subject to constant technological change and to intense marketing by different
providers of functionally similar services. There are many companies in the
United States and in Canada engaged in the sale of telecommunication services.
Since there are few, if any, substantial barriers to entry, except in those
markets that have not been subject to governmental deregulation, we expect that
new competitors are likely to enter our markets. Most, if not all, of our
competitors are significantly larger and have substantially greater market
presence and longer operating history as well as greater financial, research and
development, manufacturing, technical, operational, marketing, personnel and
other resources than us.
Our use of VOIP technology should enable us to provide customers with
competitive pricing for their telecommunications needs. Nevertheless, there can
be no assurance that we will be able to successfully compete with major carriers
including other VOIP telephony providers and traditional phone companies, in
present and prospective markets. These markets include Venezuela, Mexico,
Brazil, the Caribbean, Malaysia and Australia. In particular, we do not know
what level of growth to expect in the telecommunications industry, and
particularly in those Voice over Internet Protocol markets in which GlobeTel
operated.
Our business strategy is to provide competitive pricing from small to mid-sized
businesses and individuals to increase our customer base and pursuing large
multi-national corporations which operate in a number of our markets. We are
dependent upon local independent affiliates or partners in each market for sales
and marketing, customer service and technical support to terminate and originate
our IP telephony services. This marketing strategy should minimize our
dependency on any single market and/or group of customers and lessen our costs
and expedite our entry into markets. There can be no assurance that we will be
able to successfully compete in our present and prospective markets.
Our competition also includes large telecommunications equipment manufacturers
as well as small independent value added resellers/integrators in each market,
which includes every major city in the United States. All of the large
telecommunications equipment manufacturers that compete with us are
significantly larger, have substantially greater market presence and longer
operating history as well as greater financial, technical, operational,
marketing, personnel and other resources than we do.
4
If We are Unable to Collect Receivables from Our Two Largest Customers, Our
Assets, Revenues and Cash Flow will be Adversely Affected.
The majority of our revenues and assets are dependent upon three major
customers. While we believe that our receivables from our major customers are
collectible, the inability to collect these receivables, should it happen, would
materially adversely affect our assets, revenues and cash flow in the future.
Issuance of Additional Shares Will Have a Dilutive Effect on Holdings of
Existing Stockholders.
We presently have commitments to issue additional common shares as per the terms
of the four series of preference shares outstanding. Additionally, we have a
contingent commitment to issue an additional 200 million shares pursuant to our
agreement with Sanswire Technologies. Additionally, we could issue some or all
of our authorized but unissued shares, and in some cases we could do that
without stockholder approval, diluting the holdings of existing stockholders.
Also, issuance of additional shares could under some circumstances make more
difficult, or frustrate, a hostile takeover of GlobeTel.
We Depend On Our Intellectual Property, And If We Are Unable To Protect Our
Intellectual Property, We May Be Unable To Compete And Our Business May Fail.
Our products rely on our proprietary technology, and we expect that future
technological advancements made by us will be critical to sustain market
acceptance of our products. Therefore, we believe that the protection of our
intellectual property rights is, and will continue to be, important to the
success of our business. Consequently, our ability to compete effectively will
depend, in part, on our ability to protect our proprietary technology, system
designs and manufacturing processes. Unauthorized parties may attempt to copy or
otherwise obtain and use our products or technology. Monitoring unauthorized use
of our intellectual property is difficult, and we cannot be certain that the
steps we may take will prevent unauthorized use of our technology. In addition,
the measures we undertake may not be sufficient to adequately protect our
proprietary technology and may not preclude competitors from independently
developing products with functionality or features similar to those of our
product.
We have obtained an authority as an international telecommunications carrier
under Section 214 of the Communications Act by the Federal Communications
Commission. Our practice has been to enter into relationships with established
licensed carriers in each market, as opposed to becoming a licensed carrier
ourselves.
Our Future Plans Could Be Harmed If We Are Unable To Attract Or Retain Key
Personnel.
If we develop a prototype that we believe is marketable, we will require a
significant increase in the number of employees. Our future success, therefore,
will depend, in part, on attracting and retaining additional qualified
management and technical personnel. We do not know whether we will be successful
in hiring or retaining qualified personnel. Our inability to hire qualified
personnel on a timely basis, or the departure of key employees, could harm our
expansion and commercialization plans.
We have at present 21 full-time employees, including our executive officers and
two consultants. We do not believe that we will have difficulty in hiring and
retaining qualified individuals in the field of Internet telephony, although the
market for skilled technical personnel is highly competitive.
5
Additionally, we are reliant a small number of people with in-depth knowledge of
our Stratellite project. It is not known what type of delays would ensue should
key members of the Stratellite team become unavailable.
We Are Dependent On Third Party Suppliers For The Development And Supply Of Key
Components For Our Products. If Those Suppliers Are Unable To Provide Sufficient
Components, Our Business Will Suffer.
Although all equipment used by us is provided by major suppliers and is readily
available, software to operate the network is commercially available from
software suppliers and equipment suppliers, and we have the technical expertise
and ability to develop in-house software as needed for network applications and
new telecommunications products, a current or future supplier's failure to
develop and supply components to us, or the quantity needed, will harm our
ability to manufacture our product. In addition, to the extent the processes
that our suppliers use to manufacture components are proprietary, we may be
unable to obtain comparable components from alternative suppliers. We use
equipment from all major telecommunication equipment manufacturers such as
Cisco, Motorola and Newbridge Networks, among others.
The Market Price of Our Equity Securities May Fluctuate.
The market price of our common stock may fluctuate significantly in
response to numerous factors, some of which are beyond our control, including
the following:
o actual or anticipated fluctuations in our operating results;
o changes in market valuations of other technology companies,
particularly those that sell products used in telecommunication
services;
o announcements by us or our competitors of significant technical
innovations, acquisitions, strategic partnerships, joint ventures or
capital commitments;
o introduction of technologies or product enhancements that reduce the
need for VoIP systems;
o the loss of one or more key suppliers; and
o departures of key personnel.
Our Stock Price May Become Volatile Due To A Number Of Factors, Subjecting Us To
the Possibility of Litigation That May Be Costly And Drain Our Resources.
Our stock price may be volatile due to numerous factors, including those
listed above. In addition, the stock market has recently experienced extreme
volatility that often has been unrelated to the performance of particular
companies. These market fluctuations may cause our stock price to fall
regardless of our performance. In the past, companies that have experienced
volatility in the market price of their stock have been the subject of
securities class action litigation. Such litigation often results in substantial
costs and a diversion of management's attention and resources and, should we
become involved in such litigation, could harm our business, prospects, and
results of operations or financial condition.
Existing or Probable Governmental Regulations May Adversely Affect Our Business
6
In February 1997, the United States and approximately 70 other countries
of the World Trade Organization ("WTO") signed an agreement committing to open
their telecommunications markets to competition and foreign ownership beginning
in January 1998. These countries account for approximately 90% of world
telecommunications traffic. The WTO agreement provides us, and all companies in
our industry, with significant opportunities to compete in markets where access
was previously either denied or extremely limited. However, the right to offer
telecommunications services is subject to governmental regulations and therefore
our ability to establish ourselves in prospective markets is subject to the
actions of the telecommunications authorities in each country. In the event that
new regulations are adopted that limit the ability of companies such as us to
offer VOIP telephony services and other services, we could be materially
adversely affected.
We May be Subject To The "Penny Stock" Rules Which May Negatively Affect Your
Ability To Sell Our Securities Or The Price You Could Receive.
If we are subject to penny stock rules, your ability to sell our
securities or the price you receive may be adversely affected. The Securities
and Exchange Commission has adopted rules that regulate broker-dealer practices
in connection with transactions in "penny stocks." Penny stocks generally are
equity securities with a price of less than $5.00 per share (other than
securities registered on certain national securities exchanges or quoted on the
Nasdaq system, provided that the system which provides current price and volume
information with respect to transactions in such securities). The penny stock
rules require broker-dealers to deliver, prior to any transaction in a penny
stock, certain information to their customers and to comply with other
requirements which may have the effect of reducing the level of trading activity
in a penny stock and make it more difficult to sell such stock.
7
Item 4. Use of Proceeds.
We will not receive any proceeds from any sale of the shares being registered
under this Prospectus.
Item 5. Determination of Offering Price.
The shares offered on this Registration will be sold from time-to-time pursuant
to Rule 415 and that then prevailing market price or at such price that may be
negotiated in a private transaction between the buyer and the seller of the
securities.
Item 7. Selling Security Holders.
An aggregate of 78,874,900 shares of common stock are being registered
in this offering for the account of the selling stockholders.
26,000,000 million shares are being registered on behalf of Sanswire
Technologies Inc., pursuant to our Asset Purchase Agreement with that company.
We purchased certain assets from Sanswire including the Stratellite project.
Concerning the common stock being registered for the Investors, We
entered into a Subscription Agreement and Convertible Note, pursuant to which we
are obligated to register shares underlying the Note and certain warrants. The
Note has a face value of $1,800,000 and is convertible into common shares at
$.08 per share. The subscription also called for the issuance of Class A
Warrants exchangeable for 12,500,000 shares and Redemption Warrants,
excercisable only upon certain contingencies for up to 999,900 shares (the
"Financing").
The Investors have the right to participate in any subsequent offer or
sale to, or exchange with any third party of common stock or any securities
convertible, exercisable or exchangeable into Class A common stock, except under
certain circumstances, until 365 days after the effectiveness of this
Registration Statement.
The Class A Warrants have a one (1) year term and an exercise price
equal to $.11 per share. The Warrants are exercisable for 12,500,000 shares of
our common.
Any Notice of Redemption given in connection with an amount of
principal in excess of one-half the initial principal amount of the Note must be
delivered together with common stock purchase warrants ("Redemption Warrants")
identical to the Class A Warrants issued to the Holder of the Note at or about
the issue date of the Note, except that the Purchase Price per share of Common
Stock shall be $0.11 and the exercise period shall commence on the issue date of
the Redemption Warrant. The Common Stock issuable upon exercise of the
Redemption Warrant must be included for unrestricted, unlegended, public resale
without transfer restrictions as of the date Notice of Redemption is given. One
thousand one hundred and eleven (1,111) Redemption Warrants will be issued and
delivered for each one thousand dollars ($1,000) of Note principal being
redeemed in excess of one-half the original principal amount of this Note.
As part of the Financing, we agreed to file a registration statement
with the Securities and Exchange Commission covering the resale of the Common
Stock and Warrant Stock. We agreed to bear expenses in connection with the
registration and sale of these shares. See "Plan of Distribution." If this
registration statement is not declared effective by the Securities and Exchange
Commission on or prior to the 120th day after January 24, 2005, we shall pay an
amount as liquidated damages to each Investor equal to 2% per month of the
Investor's initial investment.
8
Concerning the common stock being registered for the placement agent,
we issued Warrants to purchase 1,000,000 shares of common stock as partial
payment to the placement agents for services they performed in connection with
the Financing.
The following table sets forth the names of the selling stockholders,
the number of shares of common stock the selling stockholders beneficially own,
the number of shares which may be offered for resale pursuant to this
prospectus, and the number of shares that will be owned by the selling
stockholders after the completion of this offering.
Prior to January 24, 2005, there were 941,576,419 shares of common
stock outstanding. The shares offered by this prospectus may be offered from
time to time, in whole or in part, by the selling stockholders or their
transferees. Other than the transactions described above, there have been no
material transactions between Globetel and the selling stockholders during the
past three years
The information included below is based upon information provided by
the selling stockholders. Because the selling stockholders may offer all, some
or none of their shares, we cannot provide a definitive estimate as to the
number of shares that the selling stockholders will hold after the offering.
Beneficial ownership is calculated in accordance with the rules of the
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person, shares of common stock subject to options or
warrants held by that person that are currently exercisable or become
exercisable within 60 days following January 24, 2005, are deemed outstanding.
Unless otherwise indicated, the persons and entities named in the table have
sole voting and investment power with respect to all shares beneficially owned,
subject to community property laws where applicable.
----------------------------------- --------------------------------- -------------------------------- -----------------------
Selling Shareholder Shares Before Offering Shares to Be Sold Pursuant to Shares After Offering
Offering (2)
----------------------------------- ---------------------- -------------------------------- ---------------------------------
Sanswire Technologies, Inc. (1) 26,000,000 26,000,000 0
----------------------------------- ---------------------- -------------------------------- ---------------------------------
Longview Equity Fund LP (3) 11,562,438 11,562,438 0
----------------------------------- ---------------------- -------------------------------- ---------------------------------
Longview International Equity 3,854,148 3,854,148 0
Fund LP (3)
----------------------------------- ---------------------- -------------------------------- ---------------------------------
ALPHA CAPITAL
AKTIENGESELLSCHAFT (4) 15,416,580 15,416,580 0
----------------------------------- ---------------------- -------------------------------- ---------------------------------
Longview Fund LP (5) 6,166,635 6,166,635 0
----------------------------------- ---------------------- -------------------------------- ---------------------------------
Westor Online Inc. (6) 1,000,000 1,000,000 0
----------------------------------- ---------------------- -------------------------------- ---------------------------------
(1) Sanswire intends to distribute the securities to its shareholders as a
stock dividend. There are approximately 400 shareholders of Sanswire
Technologies. After the distribution Sanswire will hold no shares of
Globetel Common Stock.
(2) The number of shares to be sold is less than the number being registered
as we are registering an extra number of shares to cover contingent
obligations contained in the Subscription Agreement and Note with the
Investors.
(3) Wayne H. Coleson, CEO of Redwood Grove Capital Management, LLC, the
investment manager of this selling security holder, has voting and
investment control over the securities that this selling security holder
beneficially owns. The maximum number of shares to be sold by the investor
cannot exceed 4.99% pursuant to a contractually stipulated ownership
restriction.
(4) Konrad Ackerman, the investment manager of this selling security holder,
has voting and investment control over the securities that this selling
security holder beneficially owns. The maximum number of shares to be sold
by the investor cannot exceed 4.99% pursuant to a contractually stipulated
ownership restriction.
(5) Peter T. Benz, the investment manager of this selling security holder, has
voting and investment control over the securities that this selling
security holder beneficially owns. The maximum number of shares to be sold
by the investor cannot exceed 4.99% pursuant to a contractually stipulated
ownership restriction.
(6) Richard Bach, the investment manager of this selling security holder, has
voting and investment control over the securities that this selling
security holder beneficially owns.
9
Item 8. Plan of Distribution.
The selling stockholders of the common stock of Globetel and any of their
pledgees, assignees and successors-in-interest may, from time to time, sell any
or all of their shares of common stock on any stock exchange, market or trading
facility on which the shares are traded or in private transactions. These sales
may be at fixed or negotiated prices. The selling stockholders may use any one
or more of the following methods when selling shares:
o ordinary brokerage transactions and transactions in which the
broker-dealer solicits purchasers;
o block trades in which the broker-dealer will attempt to sell
the shares as agent but may position and resell a portion of
the block as principal to facilitate the transaction;
o purchases by a broker-dealer as principal and resale by the
broker-dealer for its account;
o an exchange distribution in accordance with the rules of the
applicable exchange;
o privately negotiated transactions;
o settlement of short sales;
o broker-dealers may agree with the selling stockholders to sell
a specified number of such shares at a stipulated price per
share;
o a combination of any such methods of sale;
o through the writing or settlement of options or other hedging
transactions, whether through an options exchange or
otherwise; or
o any other method permitted pursuant to applicable law.
The selling stockholders may also sell shares under Rule 144 under the
Securities Act of 1933, as amended (the "SECURITIES ACT"), if available, rather
than under this prospectus.
Broker-dealers engaged by the selling stockholders may arrange for
other brokers-dealers to participate in sales. Broker-dealers may receive
commissions or discounts from the selling stockholders (or, if any broker-dealer
acts as agent for the purchaser of shares, from the purchaser) in amounts to be
negotiated. The Selling Stockholders do not expect these commissions and
discounts to exceed what is customary in the types of transactions involved.
In connection with the sale of our common stock or interests
therein,the selling stockholders may enter into hedging transactions with
broker-dealers or other financial institutions, which may in turn engage in
short sales of the common stock in the course of hedging the positions they
assume. The selling stockholders may also sell shares of our common stock short
and deliver these securities to close out their short positions, or loan or
10
pledge the common stock to broker-dealers that in turn may sell these
securities. The selling stockholders may also enter into option or other
transactions with broker-dealers or other financial institutions or the creation
of one or more derivative securities which require the delivery to such
broker-dealer or other financial institution of shares offered by this
prospectus, which shares such broker-dealer or other financial institution may
resell pursuant to this prospectus (as supplemented or amended to reflect such
transaction).
The selling stockholders and any broker-dealers or agents that are involved in
selling the shares may be deemed to be "underwriters" within the meaning of the
Securities Act in connection with such sales. In such event, any commissions
received by such broker-dealers or agents and any profit on the resale of the
shares purchased by them may be deemed to be underwriting commissions or
discounts under the Securities Act. The selling stockholders have informed the
Company that it does not have any agreement or understanding, directly or
indirectly, with any person to distribute the common stock.
The Company is required to pay certain fees and expenses incurred by the Company
incident to the registration of the shares.
Item 9. 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.
We have been sued by Alexsam, Inc. who alleges that we infringe on their patent
for stored value cards in the case: Alexsam, Inc. v. FSV Payment Systems, Ltd,
MBC Direct LLC; Next Estate Communications, Inc.; Simon Property Group, Inc.;
11
Interactive Communications International, Inc.; Globetel Communications Corp.;
One Global Finance, Inc.; Gailileo Processing Inc.; American Express Travel
Related Services Company, Inc.; and ITC Financial Services, LLC. The case was
filed in the United States District Court for the Eastern District of Texas
(Marshall Division) and is Case number 02-03 CV-337.
This case has been dismissed, but the Plaintiff still has the right to appeal.
Item 10. Directors, Executive Officers, Promoters and Control Persons.
Name Age Position Term
Przemyslaw L. Kostro 42 Chairman, Director One Year
Timothy M. Huff 40 Chief Executive Officer
& Director One Year
Jerrold R. Hinton, PhD 63 Director One Year
Leigh A. Coleman 56 President & Director One Year
Mitchell A. Siegel 58 Chief Operating Officer
& Director One Year
Michael Molen 48 Director One Year
Kyle McMahan 47 Director One Year
Thomas Y. Jimenez 46 Chief Financial Officer
All directors hold office until the next annual meeting of our stockholders and
until their successors have been elected and shall qualify. Officers serve at
the discretion of our Board of Directors.
Przemyslaw L. Kostro, Chairman, was first elected to the Board of Directors in
November 2001. From November 2001 to April 2002, Mr. Kostro also served as the
CEO of GlobeTel before relinquishing the position to our current CEO. Over the
past five years, Mr. Kostro has been an attorney engaged in international law,
and has been providing professional and consulting services to several large and
mid-sized entities in Europe. During the past year, he has been providing
services to assist us in expanding our business and services world-wide.
Timothy M. Huff, Director, Chief Executive Officer, joined GlobeTel in October
1999, and has served as CEO and as a member of the Board of Directors since
April 2002. Prior to joining GlobeTel, Mr. Huff spent over five years owning and
operating several successful private telecom companies. Mr. Huff has over
eighteen years experience in international telecom business that included
working with Sprint and MCI International, where he was involved in the
construction of MCI's first international gateways.
Leigh Coleman, President, joined the company in September 2003. Mr. Coleman was
CEO of a major division for an internationally recognized Dutch public company
based in the United States. In 2001, Mr. Coleman was CEO of an Australian public
company specializing in IP PBX applications and CP equipment before joining
GlobeTel. Mr. Coleman has a Masters in Business Administration, and has lectured
in Strategic Management at Curtin University in Australia. He has focused on
growing companies and international business development since 1986.
12
Jerrold R. Hinton, Director, has served on the Board of Directors since March
1995. He had previously served as chief executive officer, President and
Chairman of the Board from March 1995 to November 2001. Dr. Hinton, a graduate
of Florida State University, holds bachelors, masters and doctorate degrees in
management, engineering and real estate. From 1992 to early 1995, prior to
joining the company, Dr. Hinton served as an officer of United Biomedical, Inc.,
a private company.
Mitchell A. Siegel, Director, Chief Operating Officer, has served in this
capacity and as a member of the Board of Directors since May 2002. Since 1996,
he was a consultant to Global Transmedia Communications Corporation and was
instrumental in defining our role as a licensed telecommunications company. Mr.
Siegel graduated from American University, holding a Bachelors Degree in
Business Administration and has completed Masters Degree courses in finance at
C.C. N.Y - Bernard Baruch School of Finance.
Michael Molen has been nominated to serve on our Board of Directors. Since 1995
he has served in various capacities for Sanswire Technologies, Inc., including
chairman, chief executive officer and director. He currently serves as chief
executive officer of Sanswire Technologies, Inc. He has been nominated to serve
on the Company's Board of Directors in accordance with the terms of the
Company's asset purchase agreement with Sanswire Technologies, Inc.
Kyle McMahan has been nominated to serve on our Board of Directors. From 1989 to
2003, Mr. McMahan served as chief executive officer of Southern Mortgage
Reporting, Inc., a credit reporting agency. From April 2001 through September
2003 he served as chairman of INFO 1 Co., Inc., a company that organized,
planned and financed the startup of new businesses in the credit reporting
industry. Mr. McMahan has served as a board member of The Mortgage Bankers
Association of Georgia and The National Credit Reporting Association. He has
been nominated to serve on the Company's Board of Directors in accordance with
the terms of the Company's asset purchase agreement with Sanswire Technologies,
Inc.
Thomas Y. Jimenez, CPA, Chief Financial Officer, has served as our CFO since
joining the Company in October 1999. For the three years prior to joining the
Company, Mr. Jimenez was a consultant to various telecommunications companies,
running their financial department and assisted in building networks in
different countries. Mr. Jimenez graduated from Cleveland State University with
a degree in Business Administration.
Audit Committee
The audit committee consists of directors Kyle McMahan and Jerrold Hinton.
Audit Committee Financial Expert
Both Mr. McMahan and Mr. Hinton qualify as financial experts for the purposes of
the audit committee, based upon their extensive business experience.
Item 11. Security Ownership of Certain Beneficial Owners and Management.
At January 31, 2005, we had 944,849,146 shares issued and outstanding. The table
below sets forth the share ownership of our executive officers and directors,
individually and as a group, and the executive officers of GlobeTel. No other
person is the beneficial owner of more than 5% of our issued and outstanding
shares
13
-----------------------------------------------------------------------------------------------------------------------------
Title of Class Name and Address of Beneficial Owner Amount and Nature Of Percentage
BeneficialOwnership of Class(1)
-----------------------------------------------------------------------------------------------------------------------------
Common Stock Przemyslaw L. Kostro, Chairman,
9050 Pines Blvd. Suite 110 Pembroke Pines, FL 9,100,000 shares .96%
-----------------------------------------------------------------------------------------------------------------------------
Common Stock Timothy M. Huff, CEO,
9050 Pines Blvd. Suite 110 Pembroke Pines, FL 33024 26,744,467 shares 2.83%
-----------------------------------------------------------------------------------------------------------------------------
Common Stock Jerrold R. Hinton, PhD., Board Member
9050 Pines Blvd. Suite 110 Pembroke Pines, FL 33024 26,562,358 shares (2) 2.81%
-----------------------------------------------------------------------------------------------------------------------------
Common Stock Mitchell A. Siegel, COO, (3)
9050 Pines Blvd. Suite 110 Pembroke Pines, FL 33024 12,777,800 shares 1.35%
-----------------------------------------------------------------------------------------------------------------------------
Common Stock Leigh Coleman, President
9050 Pines Blvd. Suite 110 Pembroke Pines, FL 33024 500,000 shares 0.05%
-----------------------------------------------------------------------------------------------------------------------------
Common Stock Thomas Y. Jimenez, CFO,
9050 Pines Blvd. Suite 110 Pembroke Pines, FL 33024 9,517,634 shares 1.00%
-----------------------------------------------------------------------------------------------------------------------------
Common Stock Vivian Manevich, Controller, (3)
9050 Pines Blvd. Suite 110 Pembroke Pines, FL 33024 7,679,466 shares .81%
-----------------------------------------------------------------------------------------------------------------------------
Common Stock Kyle McMahan 0 0%
9050 Pines Blvd. Suite 110 Pembroke Pines, FL
-----------------------------------------------------------------------------------------------------------------------------
Common Stock Michael Molen
9050 Pines Blvd. Suite 110 Pembroke Pines, FL 33024 0 0%
-----------------------------------------------------------------------------------------------------------------------------
Common Stock All executive officers and directors of the
Company as a group (seven persons) 92,881,725 shares 9.83%
----------------------------------------------------------------------------------------------------------------------------
(1) Based upon 944,849,146 shares issued and outstanding on January 31,
2005
(2) The shares owned beneficially by Jerrold R. Hinton also include
50,000 shares owned of record by Higher Ground, a corporation
controlled by Mr. Hinton, which may be deemed beneficially owned by
Mr. Hinton.
(3) Mitch Siegel is married to Vivian Manevich.
Item 12. Description of Securities.
General
We have authorized capital stock of 1.51 billion shares, of which 1.5 billion
shares are designated as common stock, $0.00001 par value and 10 million shares
are designated as preferred stock, $0.001 par value. 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 our Board of Directors at
the time of issuance. At this time we have designated four series' of Preferred
shares each having different voting, conversion and liquidation rights. As of
the date of this prospectus, we have 944,849,146 shares of common stock issued
and approximately 24,000 shareholders.
Common Stock
All shares are fully paid and non-assessable. All shares are equal to each other
with respect to voting, liquidation, and dividend rights. Special shareholder
meetings may be called by the Board of Directors, the Chairman of the Board, the
President or any Vice-President. Holders of shares are entitled to one vote at
any shareholder's meeting for each share they own as of the record date set by
14
the board of directors. Holders of shares are entitled to receive such dividends
as may be declared by the board of directors out of funds legally available
therefore, and upon liquidation are entitled to participate in a distribution of
assets available for such distribution to shareholders. There are no conversion,
preemptive, redemption or other subscription rights or privileges with respect
to any share, except for registration rights granted to a certain number of
shareholders. Reference is made to our certificate of incorporation and bylaws
as well as to the applicable statutes of the State of Delaware for a more
complete description of the rights and liabilities of holders of shares. It
should be noted that our bylaws may be amended by the board of directors without
notice to the shareholders. Our shares do not have cumulative voting rights,
which mean that the holders of more than fifty percent (50%) of the shares
voting for election of directors may elect all the directors if they choose to
do so. In such event, the holders of the remaining shares aggregating less than
fifty percent (50%) will not be able to elect directors. Holders of our common
stock have no pre-emptive rights, no conversion rights and there are no
redemption provisions applicable to our common stock.
Preferred Stock
Series A
In October 2003, the Company entered into an agreement with Fordham Financial
Management Inc. to raise funds to finance the ATC transaction. In accordance
with the agreement, the investors will receive preferred shares convertible into
common stock upon investment. An Offering Circular was made available to
investors on October 17, 2003. As part of the offering, the Company agreed to
pay its investment banking consultant, Fordham Financial Management, Inc. a 10%
commission.
The offering was for maximum of 150,000 shares ("Shares") of Series A
Convertible Redeemable Preferred Stock, par value $.001 per share ("Series A
Preferred"). The shares have a liquidation preference of $16.67 per share and
each share is convertible into a number of shares of common stock determined by
dividing the number of shares of common stock outstanding as of the date of
conversion by three, and dividing the result of that calculation by 250,000. The
Company may redeem the Shares at $.001 per share at any time after the second
anniversary of the date of issuance. Such redemption would be effectively
require the investor to convert his shares at that time or lose the entire
amount of his investment.
The full amount of $2,500,000 has been subscribed as of January 31, 2004, and
the funds, less commission of $250,000 and legal and incidental costs of
$25,800, were received as of February 6, 2004. Additionally, Fordham Financial
Management received 100,000 of the Series A shares. As of January 24, 2005,
153,500 or 61.40% of the Series A shares have been converted.
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 of $15 million
investment. 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.
15
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
The Certificate of Designation for the Series C Preferred Stock was filed with
the State of Delaware on July 30, 2004. 5,000 shares have been authorized.
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.
16
Series D
The Certificate of Designation for the Series C Preferred Stock was filed with
the State of Delaware on July 30, 2004. 5,000 shares have been authorized
The Series D shares have a liquidation value of $10.00 per share. The Shares are
convertible after two years from date of issuance into shares of Globetel Common
Shares on the basis of 1,000 Series C shares shall equal 2% of the Common shares
issued and outstanding at the time of conversion. All shares must be converted
by the third anniversary of the date of first issuance of the shares or the
shares shall automatically convert.
The shares shall have voting rights equal to the number of common shares into
which the preference shares may be converted at the time of any vote.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our common stock. We
currently intend to retain future earnings, if any, to finance the expansion of
our business. As a result, we do not anticipate paying any cash dividends in the
foreseeable future. Our certificate of incorporation contains no provisions as
to dividends and distributions.
Item 13. Interest of Named Experts and Counsel.
The validity of our shares of common stock offered hereunder will be
passed upon for us by Jonathan D. Leinwand, P.A., North Miami, Florida.
The audited financial statements and schedule included in this prospectus
and elsewhere in the registration statement have been audited by Dohan and
Company CPAs, P.A., independent Registered Public Accountants, as indicated in
their reports with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in giving said reports.
Item 14. Disclosure of Commission Position on Indemnification for Securities Act
Liabilities.
The Company's Certificate of Incorporation includes certain provisions
permitted pursuant to the Delaware General Corporation Law ("DGCL") whereby
officers and directors of the Company shall be indemnified against certain
liabilities to the Company or its shareholders. The Certificate of Incorporation
also limits to the fullest extent permitted by the DGCL a director's liability
to the Company or its stockholders for monetary damages for breach of fiduciary
duty of care as a director, including gross negligence, except liability for (i)
breach of the director's duty of loyalty to the Company or its shareholders,
(ii) acts or omissions not in good faith or which involve intentional misconduct
or knowing violation of the laws, (iii) under Section 174 of the DGCL (relating
to unlawful payments of dividends or unlawful stock repurchases or redemptions)
or (iv) any transaction from which the director derives an improper personal
benefit. This provision of the Company's Certificate of Incorporation has no
effect on the availability of equitable remedies, such as injunction or
rescission. The Company believes that these provisions will facilitate the
Company's ability to continue to attract and retain qualified individuals to
serve as directors and officers of the Company.
Limitations on Liability of Directors.
17
Under Section 145 of the Delaware General Corporation Law, a corporation may
indemnify a director, officer, employee or agent of the corporation (or a person
who is or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise) against expenses (including attorneys' fees), judgments, fines
and amounts paid in settlement actually and reasonably incurred by the person if
he acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the corporation and, with respect to any
criminal action or proceeding, had no reasonable cause to believe his conduct
was unlawful. In the case of an action brought by or in the right of a
corporation, the corporation may indemnify a director, officer, employee or
agent of the corporation (or a person who is or was serving at the request of
the corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise) against
expenses (including attorneys' fees) actually and reasonably incurred by him if
he acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the corporation, except that no indemnification
may be made in respect of any claim, issue or matter as to which such person
shall have been adjudged to be liable to the corporation unless and only to the
extent a court finds that, in view of all the circumstances of the case, such
person is fairly and reasonably entitled to indemnity for such expenses as the
court shall deem proper.
We have adopted a provision which requires us to indemnify and hold harmless any
person involved in any action, suit or proceeding because that person is or was
a director or officer of ours. This provision does not, however, require us to
indemnify an officer or director in a proceeding they initiate without the
authorization of our directors.
Insurance for Directors and Officers.
Under Delaware law, a corporation may obtain insurance on behalf of its
directors and officers against liabilities incurred by them in those capacities.
We have adopted a provision which permits us to maintain insurance to protect us
and our directors and officers against expenses, liabilities and losses whether
or not we would have the power to indemnify these persons under Delaware law. We
intend to have in place after the closing of this offering a directors' and
officers' liability and company reimbursement liability insurance policy.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the small business
issuer pursuant to the foregoing provisions, or otherwise, the small business
issuer has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the small business issuer of
expenses incurred or paid by a director, officer or controlling person of the
small business issuer in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the small business issuer will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
Item 16. Description of Business.
We are a Delaware corporation incorporated on July 24, 2004 and are engaged in
the business of (i) sale of telecommunication services primarily involving
Internet telephony using Voice over Internet Protocol ("VoIP"), and (ii) wide
area network and local area network services.
18
We are engaged in the business of providing international telecommunication
services to individuals, corporations and carriers using Voice over Internet
Protocol. The following discusses each of our business segments.
Internet Telephony
Our business is the transmission of telephone calls using Internet facilities.
The transmission method is called VoIP, which stands for Voice over Internet
Protocol.
Internet Protocol or IP, is not ideal for voice transmission. The "protocol"
defines the means by which digital transmissions are broken into small pieces,
called "packets," and the packets are sent to, or received from, the desired
location. IP does not require that the packets all take the same path through
the Internet, or that they arrive in the same sequence in which they were sent.
When they do arrive, they are reassembled in correct order and presented to the
user. The users see this when browsing the Internet, as the "thermometer" on the
browser shows the packets arriving until all are present and the Web page is
presented. This process of reassembling out-of-order packets is called
"buffering."
Applying buffering to VoIP calls results in an unacceptable delay between the
time the "sender" speaks and the time the "receiver" hears what's been spoken.
It's been compared to two-way radio transmissions between the earth and the
moon, where radio waves take more than a second to reach their destination. The
earthbound speaker speaks for, say, 3 seconds, and 1.5 seconds after he stops,
his speech begins to be heard on the moon. The listener requires 3 seconds to
hear what was said, and makes his reply. 1.5 seconds later the reply begins to
be heard on earth. The speaker has waited 1.5 plus 3 plus 1.5 seconds, a total
of six seconds, to hear the reply. The delay while VoIP packets are reassembled
in correct order produces exactly the same sort of delay.
The VoIP solution to this problem is simple in theory but hard to put into
practice. The solution is simply to have the transmitted sequence of packets all
follow the same path through the Internet so that they arrive in the same
sequence in which they were transmitted. This eliminates the need for buffering
and allows VoIP telephone conversations to take place just as they do on wired
telephones.
The difficulty is that, without special arrangements, the public Internet cannot
be used in a manner that avoids buffering. IP was designed for data, not voice
transmissions. Data transmissions are not seriously impacted by buffering, as
you notice when you view a Web page. Sometimes it snaps right up, other times
there are waits of a few seconds. How long it takes depends on the volume of
data traffic over the multiple paths that the different IP packets take in their
trip from sender to receiver. If one path is congested, IP quickly routes some
packets via another, less congested path. The resulting buffering time is not a
serious inconvenience for data, but is a real problem for voice transmissions.
Networks
To provide our services without buffering delays, we arrange with licensed
communications carriers in each desired country to place electronic equipment,
called a "hub," on the carrier's premises. The hub is connected to the regular
telephone network in that country. We maintain similar hubs in New York City,
Miami and Los Angeles in the United States. The hubs are connected by one of two
kinds of network, either of which allows VoIP packets to be received in the same
order they were transmitted, avoiding any buffering.
The first method, used when we first establish service to a new country and
traffic volume is relatively low, is to create a "virtual" network connection
between the two hubs. Virtual networks have been described as "tunnels" through
the Internet. These "tunnels" create "reserved" Internet bandwidth that is used
only by the parties at the ends of the "tunnel," so there is no congestion
caused by other Internet users sending and receiving traffic through the
"tunnel."
19
A virtual network is limited as to the amount of traffic it can handle. When the
limit begins to be approached, we make arrangements with one of several major
Internet service providers who maintain a physical connection between the United
States and the desired country, in the form of a leased high-speed line. Leased
lines have much greater traffic-carrying capacity than virtual networks. We
connect our hubs to the leased line at both ends and are immediately able to
handle a greater volume of calls than the virtual network allows. At present we
have virtual networks serving callers in Venezuela, the United Kingdom,
Australia, China, Philippines and Malaysia and physical networks serving
customers in Hong Kong, Brazil and Mexico. Within each country served, depending
on traffic volume within the country, we may establish subsidiary hubs in other
major cities, fed from the principal hub.
Enhanced Services Platform
Our Enhanced Services Platform, or ESP, is a proprietary software package that
runs on our hubs and provides a group of enhanced messaging features to users of
our networks. These services include:
o Call waiting, call forwarding, conference calling, voice mail;
o Voice to e-mail. This feature permits customers to dial a local number
and have e-mail messages in his or her e-mail inbox read aloud by the
ESP, over the phone. Customers may also dictate a reply over the phone,
which the ESP will record and transmit to the e-mail sender as a voice
attachment to a reply message.
o "Follow me" service. This feature allows customers to "program" the ESP
to have calls forwarded to another location. o Fax service. This
feature allows customers to send and receive faxes from their phones
over our facilities.
o Calling card services. These allow customers to use pre-paid calling
cards purchased from a Web site or from a local vendor to place calls
over our facilities. After obtaining a calling card and getting a
personal identification number (PIN), customers dial their local access
number and enter their PIN to place calls.
A number of the features provided by the ESP mirror services that are available
to persons using regular telephone lines, but that are not generally available
for VoIP calls.
International Customers--Purchase and Resale of Telephony Minutes
Because calls to other countries must terminate at the called residential or
business telephone number, which can be reached only through the facilities of
an authorized local telephone carrier, we enter into an agreement with an
established international telephone carrier as our "partner" in each of the
countries we serve, usually the same carrier that hosts our hub in that country.
Under these agreements, we purchase a bulk "package" of minutes that we are
entitled to use for calls between the United States and the countries in
question. We then resell these minutes at a profit to individual and business
customers. Most of our customers either prepay for these minutes or post letters
of credit with our bank securing their transaction, by means of prepaid calling
cards which are issued by the local carrier, who collects the revenue and
divides it with us. The revenue retained by the carrier pays for our bulk
purchase of minutes.
20
Stored Value Cards
In late 2003, we began offering a new international telecommunications and
financial services program which we call the Magic Money Card Program
("Program"). The Magic Money Card is a true stored value debit card offering
prepaid long distance and international calling services along with a host of
non-telephony services in each country that it is offered. We developed the
Magic Money Card as a stored value product to sell into specific ethnic
communities in the United States which connects them with their families in
their home countries. We provide them with such stored value services as
inexpensive prepaid calling services, money remittance services, electronic
banking services and a full complement of debit card services that are offered
anywhere the Maestro and Cirrus logos are found, which covers over 20 million
merchants and 1 million ATMs around the world.
At the moment, our programs are geared towards the ethnic communities of Latin
Americans and Asians living in the U.S. and tying them to their home countries.
One of our key goals is to tap into the multi-billion dollar money remittance
market while providing all of the other financial and non-financial services not
commonly available to these ethnic groups and not found in competitors'
programs.
The Magic Money Card services are available to our cardholders in all of the
countries that are registered on our network. We are able to issue Magic Money
Cards to each cardholder in their respective country and cardholders are able to
link services and features with other cardholders. Additionally, with our
telephone networks and international carrier agreements, we are able to offer
them access to our calling network through each local carrier participating in
the Program.
To connect these overseas network "spokes" to the main "hub" of the Program in
the United States, we enter into relationships with local banks to act as a
depository for the cardholder's funds in the U.S. and provide us with a bank
identification number (BIN) with MasterCard to issue domestic Magic Money Cards
to be registered on our network ("BIN Bank Program"). The BIN Bank Program
proposal is fee based whereby the bank will act as a depository for Magic Money
Card cardholder's funds, receiving the benefits of these deposits while
receiving a monthly fee from us for each active Magic Money Card cardholder in
the U.S. and, independently, the bank will receive a portion of the fees
collected by MasterCard for each service rendered to Magic Money Card
cardholders. There are no administrative services required or expenses incurred
by the bank nor are there any financial risks as we and our in-country partners
will be providing all of the MasterCard processing services. We, along with our
in-country partners, will be providing customer service to the Magic Money Card
cardholders.
For example, one of our major market is Mexico. We have a carrier services
agreement and are providing prepaid calling services to one of the licensed
Mexican telephone companies. Our program is able to connect Mexicans working in
the U.S. with their families in Mexico providing an inexpensive way for families
to stay in touch and for Mexican workers in this country to send money home to
their families. We have developed the same business relationships in Venezuela,
Brazil and Colombia. In Asia, we are forming relationships with banks and
carriers in the Philippines, Hong Kong, Australia, and the U.K.
Super Hubs(TM)
Our strategic plan is to install a worldwide VoIP network, which will consist of
regional centers, which we refer to as VoIP International Super Hubs(TM), or
simply Super Hubs(TM), strategically located around the world. Each Super
Hub(TM) controls network activity regionally, for example in South America or in
East Asia, and is connected directly to a United States point of presence (PoP).
We have consolidated our operations to focus on the Super Hub(TM) and our
enhanced services platform to market to maturing foreign markets, utilizing VoIP
technology. Further, we have limited our activities in some markets to focus on
opportunities with greater margins. VoIP technology continues to be the most
cost effective and efficient alternative to traditional circuit switching
technology.
21
Each Super Hub(TM) will be interconnected and equipped with our enhanced
services platform to provide one-stop shopping for quality voice communications,
e-mail, voicemail, faxing, etc. The Super Hub(TM), with the enhanced services
platform, makes the network unique in its design. It will not be built on the
conventional, hub-and-spoke connection but will instead follow a high
connectivity, multi-route design only available by using VoIP.
Sanswire Networks LLC
In April, 2004, we completed the purchase of certain assets of Sanswire
Technologies Inc. and formed a new subsidiary, Sanswire Networks LLC.
Sanswire 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. A Stratellite is similar to a satellite, but is
stationed in the stratosphere rather than in orbit. At an altitude of only 13
miles, each Stratellite will have clear line-of-site to an entire major
metropolitan area and should allow subscribers to easily communicate in "both
directions" using readily available wireless devices. Each Stratellite will be
powered by a series of solar powered hybrid electric motors and other
regenerative fuel cell technologies.
In addition to Sanswire's National Wireless Broadband Network, proposed
telecommunications uses include cellular, 3G/4G mobile, MMDS, paging, fixed
wireless telephony, HDTV and others.
We strongly believe that we will be able to use the Stratellites as the most
efficient and cost-effective means of interconnecting our Super Hubs(TM).
However, the technology for the Stratellites is new and we do not know if all of
this technology can and will be developed for commercial use.
Competitive Business Conditions
The telecommunications industry is highly competitive, rapidly evolving and
subject to constant technological change and to intense marketing by different
providers of functionally similar services. Since there are few, if any,
substantial barriers to entry, except in those markets that have not been
subject to governmental deregulation, we expect that new competitors are likely
to enter our markets. Most, if not all, of our competitors are significantly
larger and have substantially greater market presence and longer operating
history as well as greater financial, technical, operational, marketing,
personnel and other resources than we do. Our use of VoIP technology and
proprietary enhanced services platform enables us to provide customers with
competitive pricing for their telecommunications needs. Nevertheless, there can
be no assurance that we will be able to successfully compete with major carriers
including other VoIP telephony providers and traditional phone companies, in
present and prospective markets. These markets include Mexico, Brazil,
Venezuela, Colombia, Australia, the Philippines Hong Kong and Malaysia.
GlobeTel's business strategy is to provide competitive pricing to small to
mid-sized businesses and individuals to increase our customer base and we are
pursuing large multi-national corporations which operate in a number of our
markets. We are dependent upon local independent affiliates or associates
partners in each market for sales and marketing, customer service and technical
support to terminate and originate our IP telephony services. This marketing
strategy should minimize our dependency on any single market and/or group of
customers and lessen our costs and expedite our entry into markets. There can be
no assurance that we will be able to successfully compete in our present and
prospective markets.
22
Sources and Availability of Hardware and Software
All equipment used by GlobeTel is provided by major suppliers and is readily
available. Software to operate the network is commercially available from
software suppliers and equipment suppliers, and GlobeTel has developed in-house
proprietary software for network applications and new telecommunications
products. We are not dependent upon any supplier of hardware or software. We use
equipment from major telecommunication equipment manufacturers such as Cisco,
Motorola and Newbridge Networks, among others.
Regulatory Matters
Carriers seeking to provide international telecommunication services are
required by Section 214 of the Telecommunications Act to obtain authorization
from the Federal Communications Commission to provide those services. We have
applied for and obtained the required authorization.
Our operations in foreign countries must comply with applicable local laws in
each country we serve. The communications carrier with which we "partner" in
each country is licensed to handle international call traffic, and takes
responsibility for all local law compliance. For that reason we do not believe
that compliance with foreign laws will affect our operations or require us to
incur any significant expense.
Effect of Existing or Probable Governmental Regulations
In February 1997, the United States and approximately seventy (70) other
countries of the World Trade Organization (WTO) signed an agreement committing
to open their telecommunications markets to competition and foreign ownership
beginning in January 1998. These countries account for approximately 90% of
world telecommunications traffic. The WTO agreement provides us and all
companies in our industry with significant opportunities to compete in markets
where access was previously either denied or extremely limited. However, the
right to offer telecommunications services is subject to governmental
regulations and therefore our ability to establish ourselves in prospective
markets is subject to the actions of the telecommunications authorities in each
country. In the event that new regulations are adopted that limit the ability of
companies such as ourselves to offer VoIP telephony services and other services,
we could be materially adversely affected.
Item 17. Management's Discussion and Analysis or Plan of Operation.
You should read the following discussion and analysis of our financial condition
and results of operations in conjunction with our financial statements, the
notes to the financial statements and the other financial information contained
elsewhere in this prospectus.
This Registration Statement and other statements issued or made from time to
time by GlobeTel 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, 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.
23
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. The Company is authorized to issue up to 1,500,000,000
shares of Common Stock, par value $0.00001 per share, and 10,000,000 shares of
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.
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 continues 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
24
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.
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
25
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.
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.
26
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.
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.
Twelve months ended December 31, 2003 ("Fiscal 2003") compared to twelve months
ended December 31, 2002 ("Fiscal 2002")
Results of Operations
Revenues. During the fiscal 2003, our gross sales were $11,351,939, representing
a decrease of 2.9% over the same period in the prior year when our gross sales
were $11,689,573. This decrease is primarily because there were no related party
transactions in fiscal 2003 as compared to fiscal 2002, when related party
transactions totaling $5,717,150 were reported.
27
Our gross sales, compared to the prior year when excluding related party
transactions, actually increased by $5,379,516 or 90.07%.
Our two main customers were the source of over 93% of all revenues. Our customer
utilizing the Mexico network generated $7,569,007 or 67% of gross sales and our
customer utilizing the Brazil network generated $3,043,348, or 26% of gross
sales.
We did not have income from international sales during fiscal 2003, compared to
2002 when we had international sales totaling 49% of total sales, representing
revenues related to the network sales and services to related parties
(Charterhouse) domiciled outside of the United States.
Cost of Sales. Our cost of sales consists primarily of the wholesale cost of
buying bandwidth purchased by us for resale, technical services, rents and the
costs of depreciation of telecommunications equipment. We had cost of sales of
$8,840,872 for fiscal 2003, compared to $6,566,944 for fiscal 2002. We expect
cost of sales to increase in future periods to the extent that our sales volume
increases.
Gross Margin. Our gross margin was $2,511,067 or 22.12% for fiscal 2003,
compared to $5,122,629 or 43.5% of total revenues in fiscal 2002, a decrease of
$2,611,562 or 51%. The decrease is primarily due to the fact that there was a
higher margin resulting from the related party transactions in fiscal 2002. The
gross margin for non-related party transaction is 22% for 2003 and 16% for 2002.
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 fiscal 2003 were $3,805,388
compared to fiscal 2002 operating expenses of $3,492,894, an increase of
$292,494 or 8%. The increase is primarily due to an increase in bad debts
resulting from our networks in Mexico and Brazil, totaling $1,409,994. When
excluding bad debt expense, our actual operating expenses decreased by 22% from
the previous year, primarily because of substantially reduced consulting and
brokers' fees paid in fiscal 2003. (See Note 11 and Note 12 to the Notes to
Financial Statements with respect to consulting agreements executed in January
2002, and August 2002, respectively, for investment banking services).
Our operating expenses are expected to further decrease as a percentage of
revenues in future periods because our existing operating infrastructure will
allow increases in revenues without having to incrementally add operating
expenses. However, our expenses 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 $1,294,321 for fiscal
2003 as compared to operating income of $1,629,735 in fiscal 2002. The results
of operations of the company were directly impacted by the bad debt recognized
in fiscal 2003 as discussed above and in the prior year, we had higher margins
resulting from the related party transactions, also as previously discussed
above. (See Note 3 to the Notes to Financial Statements).
Other Income (Expense).
We had net other expenses totaling $4,908,205 during fiscal 2003 compared to
$308,441 during fiscal 2002.
Other income during fiscal 2003 resulted from a gain of $26,274 by paying a
vendor a lesser amount than what was recorded in the books as settlement for
providing equipment that did not function as purported. We also reported a net
gain of $55,842 in connection with the closing of operations of our St. Louis,
Missouri office after accounting adjustments were made.
28
We did not have interest income in fiscal 2003 compared to $6,528 in fiscal
2002. This amount was substantially all the other income in fiscal 2002.
Other expense of $4,834,878 in fiscal 2003 was as a result of the write-off of
assets and liabilities resulting from the transactions in Australia and a loss
of $42,301 resulting from the disposal of defective equipment. For fiscal 2002,
other expenses included $247,379 associated with the reincorporation of the
company and loss of $43,488 on forgiveness of accrued interest receivable from
officers. Interest expense for fiscal 2003 was $113,142 compared to $24,102
during fiscal 2002. Interest expense increases were due to substantially more
notes and loans payable in fiscal 2003.
Net Income (Loss). We had a net loss of $6,202,526 in fiscal 2003 compared to
net income of $1,321,294 during fiscal 2002. The net loss is primarily
attributable to the writing-off of our assets, specifically, the IPW stock which
we are rendering without value as it is presently in liquidation and not listed
in the Australian Exchange and the recording of bad debts or write-offs of
accounts receivable.
In order for us to pay our operating expenses during 2003 and 2002, including
certain operating expenses of our then wholly-owned subsidiaries, we raised
$500,000 and $24,500 from the sale of common stock in 2003 and 2002 respectively
and raised $144,194 and $8,593 from proceeds from related party payables in 2003
and 2002, respectively. We generated $784,259 from loans and notes payable in
2003 and $1,922,488 in 2002. During 2003, we also raised a net amount of
$717,140 from the sales of preferred stock.
Liquidity and Capital Resources
At December 31, 2003, we had total assets of $4,144,231 compared to total assets
of $8,344,884 as of December 31, 2002. The current assets at December 31, 2003,
were $3,691,721 compared to $3,549,450 at December 31, 2002.
The decrease in total assets was primarily due to the write-off of receivables
related to the related party transactions totaling $4,301,500 as discussed in
Note 3 of the Notes to the Financial Statements. The increase in current assets
is primarily attributable to an increase in accounts receivable to $3,093,427
(net of an allowance for doubtful accounts of $378,787) at year end 2003,
compared to $1,747,819 (net of an allowance for doubtful accounts of $1,094,420)
at year end 2002. Further, we had made deposits totaling $302,300 for purchase
of equipment and $71,000 as prepayment to our carriers in fiscal 2003. Finally,
we recorded a write-off of $1,600,000 in non-readily marketable securities,
available-for-sale as also discussed in Note 3 of the Notes to the Financial
Statements.
Our total current liabilities were $1,908,686 at December 31, 2003, compared to
$4,131,015 at December 31, 2002. The decrease in current liabilities was
primarily a result of writing-off accounts payable, to be satisfied with
non-readily marketable securities as discussed in Note 3 of the Notes to the
Financial Statements, paying off notes payable and paying off accrued officers'
salaries by issuances of stock options.
Accounts payable increased from $639,323 to $871,241 primarily due to costs
associated with operations of the network.
As of December 31, 2002, we had long-term notes payable to our former chairman,
totaling $55,000 that we satisfied in 2003 by issuing common stock totaling
4,000,000 shares. We do not have any other long-term liabilities as of December
31, 2003.
We had a negative cash flow from operations of $1,389,102 in 2003 compared to
$1,038,461 in 2002. The significant change was primarily due to the increased
level of operations and operating activities.
We used $607,401 for investing activities in 2003 compared to $74,290 in 2002.
The increase is due to deposits and purchase of equipment.
29
Net cash provided by financing activities increased substantially in 2003 to
$2,019,866 from $1,282,149 in 2002. The increase was principally due to proceeds
from sales of common and preferred stock and financing and notes payable. As
reflected in the accompanying financial statements, during the year ended
December 31, 2003, we had a net loss of $6,202,526 compared to a net income of
$1,321,294 during 2002. Consequently, there is an accumulated deficit of
$26,494,164 at December 31, 2003, compared to $20,291,641 at December 31, 2002.
Item 18. Description of Property.
We lease facilities at 9050 Pines Blvd., Suite 110, Pembroke Pines, Florida
33024, as of April 1, 2004. For this new facility, the lease will expire in June
2009, with an initial monthly rent of $5,462, and increases of 4% per year. The
condition of our leased facility is deemed to be satisfactory for our business
operations for the foreseeable future.
Item 19. Certain Relationships and Related Transactions.
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 of $15 million investment. Przemyslaw
Kostro, the Chairman of the Board of our Company, is also a director of Caterham
Financial Management, Ltd.
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.
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.
The Company also received a $250,000 investment from Lawrence Lynch, who joined
the Company in August 2004 as Vice President of Operations for 200 shares of
Series C Preferred Stock, filed with the State of Delaware on July 30, 2004.
Five thousand shares have been authorized.
30
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.
Finally, The Company received a $250,000 investment from Mitchell A. Siegel,
currently the Chief Operating Officer of the Company and also a member of the
Company's Board of Directors. Mr. Siegel's of $250,000 is for 250 shares of
Series D Preferred Stock.
The Certificate of Designation for the Series D Preferred Stock was filed with
the State of Delaware on July 30, 2004. Five thousand shares have been
authorized.
The Series D shares have a liquidation value of $10.00 per share. The Shares are
convertible after two years from date of issuance into shares of Globetel Common
Shares on the basis of 1,000 Series C shares shall equal 2% of the Common shares
issued and outstanding at the time of conversion. All shares must be converted
by the third anniversary of the date of first issuance of the shares or the
shares shall automatically convert.
The shares shall have voting rights equal to the number of common shares into
which the preference shares may be converted at the time of any vote.
Item 20. Market for Common Equity and Related Stockholder Matters.
We currently trade our common stock with the Over the Counter Bulletin Board
(OTCBB). However, we can provide no assurance that our common stock will
continue to be traded on the OTCBB market or if traded, that a public market
will continue to exist.
The following information sets forth the high and low bid price of our common
stock during fiscal 2003 and 2002 and was obtained from the National Quotation
Bureau. The quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission and may not represent actual transactions.
High Low
CALENDAR 2002
Quarter Ended March 31, $.0690 $.0185
Quarter Ended June 30, $.0530 $.0250
Quarter Ended September 30, $.0510 $.0250
Quarter Ended December 31, $.0500 $.0295
31
CALENDAR 2003
Quarter Ended March 31, $.0440 $.0200
Quarter Ended June 30, $.0290 $.0151
Quarter Ended September 30, $.0400 $.0190
Quarter Ended December 31, $.1310 $.0250
CALENDAR 2004
Quarter Ended March 31, $.1960 $.0500
Quarter Ended June 30, $.1300 $.0800
Quarter Ended September 30, $.1200 $.0800
Quarter Ended December 31, $.1300 $.0700
(b) Holders
As of January 24, 2005, there were approximately 24,000 beneficial owners of our
common stock.
(c) Dividends
We have never paid a dividend and do not anticipate that any dividends will be
paid in the near future. We currently have no funds from which to pay dividends
and as of December 31, 2003 and our accumulated deficit was $26,494,167. We do
not expect that any dividends will be paid for the foreseeable future.
(d) Securities Authorized for Issuance Under Equity Compensation Plans
In September 2003, the board of directors authorized the issuance of stock
options totaling 47,751,200 shares to the officers of the company in return for
the forgiveness of $683,168 in accrued salaries and $33,100 in other accrued
expenses through December 31, 2002. The stock options were exercisable at the
lower of $.015 per share or 50% of the closing market price.
In December 2003, the board of directors authorized the issuance of stock
options totaling 16,333,333 shares to the officers of in return for the
forgiveness of $245,000 in accrued salaries through December 31, 2003. The stock
options were exercisable at the lower of $.015 per share or 50% of the closing
market price.
On January 8, 2004, the officers exercised their rights to convert the stock
options into common stock at $.015 and as a result, we issued 64,084,533 shares
of common stock in January 2004, in accordance with the stock option agreements.
Item 21. Executive Compensation.
Long Term Compensation
32
--------------------------------------------
Annual Compensation Awards Payouts
------------------------------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
---------------------------------------------------------------------------------------------------------------------------------
Name and Principal Position Year Salary Bonus Other Annual Restricted Securities LTIP All
Compensation Stock Award Underlying Payouts other
Options/SAR compensation
---------------------------------------------------------------------------------------------------------------------------------
($) ($) ($) ($) (#) ($) ($)
---------------------------------------------------------------------------------------------------------------------------------
Przemyslaw L. Kostro 2003 0 0 0 0 0 0 0
Chairman since Nov. 2001
---------------------------------------------------------------------------------------------------------------------------------
Przemyslaw L. Kostro 2002 0 0 0 0 0 0 0
Chairman since Nov. 2001
---------------------------------------------------------------------------------------------------------------------------------
Przemyslaw L. Kostro 2001 0 0 0 0 0 0 0
Chairman since Nov. 2001
CEO, Nov 2002 - July 2002
---------------------------------------------------------------------------------------------------------------------------------
Timothy M. Huff 2003 $175,000(a) 0 0 0 0 0 0
CEO
---------------------------------------------------------------------------------------------------------------------------------
Timothy M. Huff 2002 $150,000(a) 0 0 0 0 0 0
CEO
---------------------------------------------------------------------------------------------------------------------------------
Jerrold R. Hinton 2003 $100,000(a) 0 0 0 0 0 0
President
---------------------------------------------------------------------------------------------------------------------------------
Jerrold R. Hinton CEO, 2002 $100,000(a) 0 0 0 0 0 0
President
---------------------------------------------------------------------------------------------------------------------------------
Jerrold R. Hinton CEO, 2001 $100,000(a) 0 0 0 0 0 0
President
---------------------------------------------------------------------------------------------------------------------------------
Mitchell A. Siegel 2003 $150,000(a) 0 0 0 0 0 0
COO
---------------------------------------------------------------------------------------------------------------------------------
Mitchell A. Siegel 2002 $125,000(a) 0 0 0 0 0 0
COO
---------------------------------------------------------------------------------------------------------------------------------
Thomas Y. Jimenez 2003 $150,000 (a) 0 0 0 0 0 0
CFO
---------------------------------------------------------------------------------------------------------------------------------
Thomas Y. Jimenez 2002 $125,000 (a) 0 0 0 0 0 0
CFO
---------------------------------------------------------------------------------------------------------------------------------
Thomas J. Craft, Jr., 2002 0 0 0 0 0 0 0
Secretary, Counsel and a
Director until November 2001
---------------------------------------------------------------------------------------------------------------------------------
Thomas J. Craft, Jr., 2001 0 0 $46,250 0 0 0 0
Secretary, Counsel and a
Director until November 2001
---------------------------------------------------------------------------------------------------------------------------------
Vivian Manevich 2002 $75,000 0 0 0 0 0 0
CAO
---------------------------------------------------------------------------------------------------------------------------------
Vivian Manevich, President,
Director Global 2001 $75,000 0 0 0 0 0 0
---------------------------------------------------------------------------------------------------------------------------------
(a)
Effective January 1, 2002, GlobeTel entered into a three-year employment
agreements with its key management. For the year 2002, the agreements
provide for annual compensation of $150,000 for its Chief Executive Officer
(CEO), $125,000 each for its Chief Financial Officer (CFO) and Chief
Operating Officer(COO) and $75,000 each for its Chief Administrative Officer
(CAO) and VP of Network Operations. Further, there remained an employment
with its President, as described below, which calls for annual salaries of
$100,000 per annum. In addition to the base compensation, the employment
agreements provide for payment of bonuses that at a minimum equal the
executives' base compensation.
As of December 31, 2003 and 2002, the executives all agreed not to receive
bonuses they are entitled to pursuant to the employment agreements.
In 2003, the base compensation increased to $175,000 for its CEO, $150,000
each for its CFO and COO, $90,000 each for its CAO and VP of Network
Operations. In 2004, the base compensation increases to $200,000 for its
CEO, $175,000 each for its CFO and COO, $120,000 for its CAO and $110,000
for its VP of Network Operations. Bonuses for each year will also be equal
to the base salaries as a minimum, unless otherwise agreed to by the
executives.
Item 22. Financial Statements.
33
GLOBETEL COMMUNICATIONS CORP. AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
TABLE OF CONTENTS
Page
INDEPENDENT AUDITORS' REPORT F-1
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets F-2
Consolidated Statements of Income (Loss) F-5
Consolidated Statements of Cash Flows F-6
Consolidated Statements of Stockholders' Equity F-8
Notes to Consolidated Financial Statements F-9
Dohan and Company 7700 North Kendall Drive, #200
Certified Public Accountants Miami, Florida 33156-7564
A Professional Association Telephone: (305) 274-1366
Facsimile: (305) 274-1368
e-Mail: info@uscpa.com
Web site: www.uscpa.com
INDEPENDENT AUDITORS' REPORT
Board of Directors
GlobeTel Communications Corp. and Subsidiary
Pembroke Pines, Florida
We have audited the accompanying consolidated balance sheets of GlobeTel
Communications Corp. and Subsidiary, as of December 31, 2003 and 2002, and the
related consolidated statements of income (loss), cash flows, and stockholders'
equity for the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of GlobeTel
Communications Corp. and Subsidiary, as of December 31, 2003 and 2002, and the
results of its operations and its cash flows for the years then ended in
conformity with accounting principles generally accepted in the United States of
America.
/s/ Dohan and Company, CPAs, P.A.
March 30, 2004,
Miami, Florida
Member:
Florida Institute of Certified Public Accountants
American Institute of Certified Public Accountants
Private Companies and SEC Practice Sections
Accounting Group International
Offices in Principal Cities World-Wide
F-1
GLOBETEL COMMUNICATIONS CORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31, 2003
2003
-----------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 224,994
Accounts receivable, less allowance for
doubtful accounts of $378,787 3,093,427
Deposits to carriers 71,000
Deposits on equipment 302,300
Deferred taxes (less valuation allowance
of $3,104,649) --
-----------
TOTAL CURRENT ASSETS 3,691,721
-----------
PROPERTY AND EQUIPMENT, NET 436,375
OTHER ASSETS
Deposits 16,135
-----------
TOTAL OTHER ASSETS 16,135
-----------
TOTAL ASSETS $ 4,144,231
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 871,241
Current portion of capital lease obligations 53,311
Notes payable 438,700
Loans payable to related party 361,960
Loans payable 10,000
Accrued expenses and other liabilities 57,423
Deferred revenues 31,528
Due to former employees 27,023
Related party payables 57,500
-----------
TOTAL CURRENT LIABILITIES 1,908,686
-----------
LONG-TERM LIABILITIES --
-----------
TOTAL LONG-TERM LIABILITIES --
-----------
TOTAL LIABILITIES 1,908,686
-----------
COMMITMENTS AND CONTINGENCIES (NOTES 3 and 14) --
STOCKHOLDERS' EQUITY
Preferred stock, $.001 par value,
10,000,000 shares authorized; 72,000 issued 72
Additional paid-in capital - Preferred stock 1,092,068
Common stock, $.00001 par value,
1,500,000,000 shares authorized;
653,224,471 shares issued and outstanding 6,532
Additional paid-in capital 28,006,040
Stock subscription receivable
(4) Preferred stock ( 375,000) Accumulated deficit (26,494,167)
-----------
TOTAL STOCKHOLDERS' EQUITY 2,235,545
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 4,144,231
===========
See accompanying notes.
F-2
GLOBETEL COMMUNICATIONS CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
For the Years Ended December 31,
2003 2002
------------- -------------
REVENUES
Sales $ 11,351,939 $ 5,972,423
Sales - related parties -- 5,717,150
------------- -------------
Total sales 11,351,939 11,689,573
------------- -------------
Cost of sales 8,840,872 6,407,944
Cost of sales - related parties -- 159,000
------------- -------------
Total cost of sales 8,840,872 6,566,944
------------- -------------
GROSS MARGIN 2,511,067 5,122,629
------------- -------------
EXPENSES
Payroll and related taxes 283,408 138,485
Professional fees 694,530 539,713
Officers' salaries and bonuses 595,000 730,000
Consulting and brokers' fees 199,167 1,230,800
Bad debts 1,409,994 445,147
Other operating expenses 160,609 95,353
Telephone and communications 69,169 56,408
Advertising and marketing 105,314 15,987
Travel and related expenses 95,213 73,433
Rents 46,231 40,971
Insurance and employee benefits 102,383 82,568
Depreciation and amortization 44,370 44,029
------------- -------------
TOTAL EXPENSES 3,805,388 3,492,894
------------- -------------
INCOME (LOSS) BEFORE OTHER INCOME (EXPENSE)
AND INCOME TAXES (1,294,321) 1,629,735
------------- -------------
OTHER INCOME (EXPENSE)
Gain on discontinued operations 55,842 --
Gain on forgiveness of debt 26,274 --
Interest income -- 6,528
Interest expense (113,142) (24,102)
Reincorporation expenses -- (247,379)
Loss on forgiveness of accrued interest
receivable from officers -- (43,488)
Loss on disposal of equipment (42,301) --
Write-off of non-readily marketable,
available-for-sale equity securities (4,834,878) --
------------- -------------
NET OTHER INCOME (EXPENSE) (4,908,205) (308,441)
------------- -------------
NET INCOME (LOSS) BEFORE INCOME TAXES (6,202,526) 1,321,294
------------- -------------
INCOME TAXES
Provision for income taxes -- (528,518)
Tax benefit from utilization of net
operating loss carryforwards -- 528,518
------------- -------------
TOTAL INCOME TAXES -- --
------------- -------------
NET INCOME (LOSS) $ (6,202,526) $ 1,321,294
============= =============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING
BASIC 627,814,875 501,679,301
DILUTED 627,814,875 505,617,703
============= =============
NET INCOME (LOSS) PER SHARE
BASIC $ (0.01) $ 0.00
DILUTED $ (0.01) $ 0.00
============= =============
See accompanying notes.
F-3
GLOBETEL COMMUNICATIONS CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31,
2003 2002
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $(6,202,526) $ 1,321,294
Adjustments to reconcile net income
(loss) to net cash used by operating activities:
Depreciation and amortization 227,200 134,262
Bad debt expenses 1,409,994 --
Gain on discontinuance of operation 55,842 --
Gain on debt forgiveness 26,274 --
Loss on write-off of asset 4,834,878 --
Loss on sale of equipment 42,301 --
Common stock exchanged for severance pay 36,000 --
Common stock exchanged for services 568,510 1,690,800
Property and equipment used in cost of sales -- 233,191
Non-readily marketable, available-for-sale
equity securities due from related party -
Charterhouse Investment -- (4,051,500)
Non-readily marketable, available-for-
sale equity securities -- (1,600,000)
(Increase) decrease in assets:
Accounts receivable (2,755,602) (1,446,047)
Accounts receivable, related party -- 872,248
Prepaid expenses (71,000) --
Deposits 74,486 37,301
Increase (decrease) in liabilities:
Accounts payable 1,111,960 299,202
Accounts payable, to be satisfied with
non-readily marketable, available-for-
for sale equity securities (974,951) 632,451
Accrued payroll and related taxes (12,785) (133,075)
Accrued officers' payroll and bonuses -- 541,569
Accrued expenses and other liabilities 439,245 250,330
Deferred revenues (46,106) (4,837)
Deferred revenues - related party (152,822) 184,350
----------- -----------
NET CASH USED BY OPERATING ACTIVITIES (1,389,102) (1,038,461)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of property and equipment (305,101) (77,512)
Deposit on equipment (302,300) --
Payments for related party
receivables (net) -- 3,222
----------- -----------
NET CASH USED BY INVESTING ACTIVITIES (607,401) (74,290)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Sale of common stock 500,000 24,500
Sale of preferred stock 717,140 --
Payments on capital lease financing (29,674) (6,029)
Proceeds from notes and loans payable 784,259 1,922,488
Payments on notes and loans payable -- (650,000)
Proceeds from related party payables 144,194 8,593
Payments on related party payables (96,053) (17,403)
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 2,019,866 1,282,149
----------- -----------
NET INCREASE IN CASH AND EQUIVALENTS 23,363 169,398
CASH AND EQUIVALENTS - BEGINNING 201,631 32,233
----------- -----------
CASH AND EQUIVALENTS - ENDING $ 224,994 $ 201,631
=========== ===========
SUPPLEMENTAL DISCLOSURES Cash paid during the period for:
Interest $ 113,142 $ 24,102
Income taxes $ -- $ --
In addition to amounts reflected above, common stock was issued for:
Options issued for services $ 10,000 $ --
Options issued for settlement
of debt $ 1,016,648 $ --
Settlement of debt $ 1,431,084 $ 10,000
Non-readily marketable, available-
for-sale equity securities
due from related party in payment
of notes and accounts receivable $ -- $ 4,301,500
Non-readily marketable, available-
for-sale equity securities - due
from related party, received in
payment of notes and accounts
receivable $ -- $ 1,600,000
=========== ===========
See accompanying notes.
F-4
GLOBETEL COMMUNICATIONS CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common Stock Preferred Stock
-------------------------------- -------------------------------------------
Additional Additional Stock Total
Paid-in Paid-in Subscription Accumulated Stockholders'
Description Shares Amount Capital Shares Amount Capital Receivable Deficit Equity
----------- ------ ----------- -------- ------- ---------- ------------ ------------ -------------
Balance, Dec. 31, 2001 467,276,945 $4,673 $22,720,537 - $ - $ - $ - $(21,612,935) $ 1,112,275
Shares issued
for services 71,220,000 712 1,690,088 - - - - - 1,690,800
Shares issued for
extinguishment of debt 673,338 7 9,993 - - - - - 10,000
Shares issued for cash 750,000 7 24,493 - - - - - 24,500
Shares issued for loan
collateral 75,000,000 750 (750) - - - - - -
Adjustment for actual
number of shares
issued for Global
acquisition (9,600,000) (96) 96 - - - - - -
Net income - - - - - - - 1,321,294 1,321,294
----------- ------ ----------- -------- ------- ---------- ------------ ------------ -------------
Balance, Dec. 31, 2002 605,320,283 6,053 24,444,457 - - - - (20,291,641) 4,158,869
----------- ------ ----------- -------- ------- ---------- ------------ ------------ -------------
Common Stock Preferred Stock
-------------------------------- -------------------------------------------
Additional Additional Stock Total
Paid-in Paid-in Subscription Accumulated Stockholders'
Description Shares Amount Capital Shares Amount Capital Receivable Deficit Equity
----------- ------ ----------- -------- ------- ---------- ------------ ------------ -------------
Shares issued
for services 23,748,533 237 568,273 - - - - - 568,510
Options issued
for services - - 10,000 - - - - - 10,000
Shares issued
for severance pay 1,200,000 12 35,988 - - - - - 36,000
Shares issued for
extinguishment of debt 44,792,000 448 1,430,636 - - - - - 1,431,084
Options issued for
extinguishment of debt - - 1,016,468 - - - - - 1,016,468
Shares issued for cash 20,080,321 201 499,799 - - - - - 500,000
Shares issued for loan
collateral 5,000,000 50 ( 50) - - - - - -
Shares returned for loan
collateral (46,916,666) (469) 469 - - - - - -
Preferred shares issued
for cash - - - 72,000 72 1,092,068 ( 375,000) - 717,140
Net loss - - - - - - - (6,202,526) (6,202,526)
----------- ------ ----------- -------- ------- ----------- ------------ ------------ -------------
Balance, Dec. 31, 2003 653,224,471 $6,532 $28,006,040 72,000 $ 72 $1,092,068 $ ( 375,000) $(26,494,167) $ 2,235,545
=========== ====== =========== ======== ======= ========== ============ ============ =============
See accompanying notes.
F-5
GLOBETEL COMMUNICATIONS CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
Nature of Operations
GlobeTel is engaged in the business of providing telecommunication services,
primarily involving Internet telephony using Voice over Internet Protocol
("VoIP") technology and equipment.
Organization and Capitalization
GlobeTel Communications Corp. ("GlobeTel") was organized in July 2002, under the
laws of the State of Delaware. Upon its incorporation, GlobeTel was a
wholly-owned subsidiary of American Diversified Group, Inc. (ADGI). ADGI was
organized January 16, 1979, under the laws of the State of Nevada. ADGI had two
other wholly-owned subsidiaries, Global Transmedia Communications Corporation
(Global), a Delaware corporation, and NCI Telecom, Inc. (NCI), a Missouri
corporation.
On July 1, 2002, both Global and NCI were merged into ADGI. On July 24, 2002,
ADGI stockholders approved a plan of reincorporation for the exchange of all
outstanding shares of ADGI for an equal number of shares of GlobeTel.
Subsequently, ADGI was merged into GlobeTel, which is now conducting the
business formerly conducted by ADGI and its subsidiaries, and all references to
ADGI in these financial statements now apply to GlobeTel interchangeably.
In July 2002, pursuant to the reincorporation, the Company authorized the
issuance of up to 1,500,000,000 shares of common stock, par value of $0.00001
per share and up to 10,000,000 shares of preferred stock, par value of $0.001
per share.
Basis of Presentation
The Company has a 99% ownership of GTCC de Mexico, S.A. de C.V., a Mexican
company established to represent its interests in Mexico. The remaining 1% is
owned by the Company's Mexican lawyer who is representing the Company in all
matters of the operations in Mexico.
The financial statements for periods prior to the merger and reincorporation
include the consolidated accounts of ADGI and its two then wholly-owned
subsidiaries, Global and NCI, all of which together and individually are
referred to as the Company.
All material intercompany balances and transactions were eliminated in the
consolidation.
Reclassifications
Certain amounts in the prior year financial statements have been reclassified
for comparative purposes to conform to the current year presentation.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments with an original
maturity of three months or less at the date of purchase to be cash equivalents.
Property and Equipment
Property and equipment consists of telecommunications equipment, office
furniture and equipment, and vehicles which are stated at cost. Depreciation is
based on the estimated useful lives of the assets, ranging from five years for
office furniture and equipment and vehicles to seven years for
telecommunications equipment, using the straight-line method. Expenditures for
maintenance and repairs are charged to expense as incurred. Major improvements
are capitalized. Gains and losses on disposition of property and equipment are
included in income as realized.
Revenue Recognition
Revenues for voice, data, and other services to end-users are recognized in the
month in which the service is provided. Amounts invoiced and collected in
advance of services provided are recorded as deferred revenue. Revenues for
carrier interconnection and access are recognized in the month in which the
service is provided.
Sales of telecommunications networks are recognized when the networks are
delivered and accepted by the customer. Sales of computer hardware, equipment,
and installation are recognized when products are shipped to customers.
Provisions for estimated returns and allowances are provided for in the same
period the related sales are recorded. Revenues on service contracts are
recognized ratably over applicable contract periods. Amounts billed and
collected before services are performed are included in deferred revenues.
F-6
Income Taxes
Income taxes are computed under the provisions of the Financial Accounting
Standards Board (FASB) Statement 109 No. (SFAS 109), Accounting for Income
Taxes. SFAS 109 is an asset and liability approach that requires the recognition
of deferred tax assets and liabilities for the expected future tax consequences
of the difference in events that have been recognized in the Company's financial
statements compared to the tax returns.
Advertising and Marketing Costs
Advertising and marketing costs are charged to operations in the period
incurred. Advertising and marketing expense for the years ended December 31,
2003 and 2002, were $105,314 was $15,987, respectively.
Fair Value of Financial Instruments
Financial instruments, including cash, receivables, securities, accounts
payable, and notes payable are carried at amounts which reasonably approximate
their fair value due to the short-term nature of these amounts or due to
variable rates of interest which are consistent with market rates.
Concentrations of Credit Risk and Economic Dependence
Financial instruments, which potentially subject the Company to a concentration
of credit risk, are cash and cash equivalents, accounts receivable, and
non-readily marketable securities equity securities. The Company currently
maintains its day-to-day operating cash balances at a single financial
institution. The Company had cash balances of $224,994 and $201,631 as of
December 31, 2003 and 2002, respectively, which are in excess of federally
insured limit. As of December 31, 2003 and 2002, the Company had $137,705 and
$111,565, respectively, in excess of federally insured limits.
The Company operates worldwide. Consequently, the Company's ability to collect
the amounts due from customers may be affected by economic fluctuations in each
of the geographical locations in which the Company provides its services,
principally Central and South America and Asia. The Company is dependent upon
certain major customers, key suppliers, and contractual agreements, the absence
of which may affect the Company's ability to operate its telecommunications
business at current levels.
Recently Issued Accounting Pronouncements
In April 2002, FASB issued Statements of Financial Accounting Standards No. 145,
"Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No.
13, and Technical Corrections" ("SFAS 145"). SFAS 145 eliminates the requirement
that gains and losses from the extinguishment of debt be aggregated and, if
material, classified as an extraordinary item, net of the related income tax
effect and eliminates an inconsistency between the accounting for sale-leaseback
transactions and certain lease modifications that have economic effects that are
similar to sale-leaseback transactions. Generally, SFAS 145 is effective for
transactions occurring after May 15, 2002.
In June 2002, FASB issued Statements of Financial Accounting Standards No. 146,
"Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS 146")
that nullifies Emerging Issues Task Force No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(Including Certain Costs Incurred in a Restructuring)" ("EITF 94-3"). SFAS 146
requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred, whereby EITF 94-3 had
recognized the liability at the commitment date to an exit plan. The provisions
of this statement are effective for exit or disposal activities that are
initiated after December 31, 2002 with earlier application encouraged.
In December 2002, FASB issued Statements of Financial Accounting Standards No.
148, "Accounting for Stock-Based Compensation - Transition and Disclosure - an
amendment of FASB Statement No. 123" ("SFAS 148"). SFAS 148 amends FASB
Statement No. 123 to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. In addition, SFAS 148 amends the disclosure requirements of FASB
Statement No. 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. SFAS 148 is
effective for fiscal years ending after December 15, 2002.
F-7
In November 2002, the FASB issued FASB Interpretation ("FIN") No. 45,
"Guarantors Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees and Indebtedness of Others", an interpretation of FIN No. 5,
57 and 107, and rescission of FIN No. 34, "Disclosure of Indirect Guarantees of
Indebtedness of Others". FIN 45 elaborates on the disclosures to be made by the
guarantor in its interim and annual financial statements about its obligations
under certain guarantees that it has issued. It also requires that a guarantor
recognize, at the inception of a guarantee, a liability for the fair value of
the obligation undertaken in issuing the guarantee. The initial recognition and
measurement provisions of this interpretation are applicable on a prospective
basis to guarantees issued or modified after December 31, 2002; while, the
provisions of the disclosure requirements are effective for financial statements
of interim or annual periods ending after December 15, 2002.
In April 2003, FASB issued Statements of Financial Accounting Standards No. 149
"Amendment of Statement 133 on Derivative Instruments and Hedging Activities"
("SFAS 149"). SFAS 149 amends and clarifies financial accounting and reporting
for derivative instruments, including certain derivative instruments embedded in
other contracts and for hedging activities under FASB Statement No. 133
"Accounting for Derivative Instruments and Hedging Activities". SFAS 149 is
generally effective for contracts entered into or modified after June 30, 2003.
In May 2003, FASB issued Statements of Financial Accounting Standards No. 150
"Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity" ("SFAS 150"). SFAS 150 establishes standards for how an
issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. SFAS 150 is effective for
financial instruments entered into or modified after May 31, 2003.
In December 2003, the Financial Accounting Standards Board (FASB) issued a
revised Interpretation No. 46, "Consolidation of Variable Interest Entities"
(FIN 46R). FIN 46R addresses consolidation by business enterprises of variable
interest entities and significantly changes the consolidation application of
consolidation policies to variable interest entities and, thus improves
comparability between enterprises engaged in similar activities when those
activities are conducted through variable interest entities. The Company does
not hold any variable interest entities.
The adoption of these new pronouncements did not or are not expected to have a
material effect on the Company's consolidated financial position or results of
operations.
Use of Estimates
The process of preparing financial statements in conformity with generally
accepted accounting principles in the United States requires the use of
estimates and assumptions regarding certain types of assets, liabilities,
revenues, and expenses. Such estimates primarily relate to unsettled
transactions and events as of the date of the financial statements. Accordingly,
upon settlement, actual results may differ from estimated amounts.
Net Income (Loss) Per Common Share
Basic net income (loss) per common share has been computed based upon the
weighted average number of shares of common stock outstanding during each
period. The basic net income (loss) is computed by dividing the net income
(loss) by the weighted average number of common shares outstanding during each
period. Available stock options at December 31, 2003, were anti-dilutive and
therefore were excluded from the net income (loss) per common share calculation.
Following is a reconciliation of the numerators and denominators of the basic
and diluted earnings per share computations for the year ended December 31,
2002:
Income Shares Per-Share
(Numerator) (Denominator) Amount
------------- ------------- ---------
Basic Net Income per Share:
Income available to
common stockholders $ 1,321,294 501,679,301 $ .00
======
Effect of Dilutive Convertible
Notes - 3,938,402
------------- -------------
Diluted Net Income per Share:
Income available to common
stockholders plus assumed
conversions $ 1,321,294 505,617,703 $ .00
============= ============= ======
Impairment of Long-Lived Assets
The Company follows FASB Statement No. 144 (SFAS 144), "Accounting for the
Impairment of Long-Lived Assets." SFAS 144 requires that long-lived assets to be
held and used are reviewed for impairment whenever events or changes in
circumstances indicate that the related carrying amount may not be recoverable.
When required, impairment losses on assets to be held and used are recognized
based on the fair value of the asset. Long-lived assets to be disposed of, if
any, are reported at the lower of carrying amount or fair value less cost to
sell.
F-8
NOTE 2. ACCOUNTS RECEIVABLE AND SALES - SIGNIFICANT CONCENTRATIONS OF CREDIT
RISK AND ECONOMIC DEPENDENCE
Two customers accounted for 97% of the Company's sales for 2003 and three
customers accounted for 92.58% of the Company's sales for 2002. One of the
Company's customers, Global VOIP, deemed an affiliate based on common control,
accounted for $2,100,000 or 17.85% of the Company's sales for 2002.
Charterhouse Investment Holdings, Ltd., a shareholder and related party,
accounted for $5,717,150 or 48.60% of the Company's sales for 2002.
Sales attributable to foreign operations for the year ended December 31, 2003,
were $11,256,907 or 99% of total sales and $5,204,778 or 44.24% of total sales
for December 31, 2002. The amounts include $2,979,286 or 26% for 2003 and
$1,978,910 or 16.82% for 2002 from Brazil and $8,089,013 or 71% for 2003 and
$3,225,878 or 27.42% from Mexico. Revenue is attributable to these countries,
since calls either originate or terminate in these countries. All transactions
were accounted for in U.S. currency, and no gain or loss was recorded on
fluctuations in foreign currency.
In connection with the Brazil network, $1,955,818 and $916,629 during years
ended December 31, 2003 and 2002, respectively, was paid by our Brazilian
network customer directly to a local provider of network termination services,
and, accordingly, the accounts receivable due from the customer was reduced by
the same amounts.
In connection with the Mexico network, $5,609,939 and $2,674,552 during the
years ended December 31, 2003 and 2002, respectively, was paid by our Mexico
network customer directly to a local provider of network termination services,
and, accordingly, the accounts receivable due from the customer was reduced by
the same amounts.
NOTE 3. NON-READILY MARKETABLE AVAILABLE-FOR-SALE EQUITY SECURITIES
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. Pursuant to the
agreement, the Company built and provided to IPW a network capable of
terminating up to a minimum of four million minutes of monthly international
voice traffic to and from the country of Brazil (Brazil Network) and a network
capable of terminating up to a minimum of four million minutes of monthly
international voice traffic to and from the country of the Philippines
("Philippines Network"). The terms of this agreement are substantially the same
as the terms of the Brazil Network agreement.
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, 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.
F-9
Service and Installation Agreements
In June 2002, the Company entered into a one-year service agreement with IP
World Ltd. for $240,000, related to servicing the Brazil network, the revenues
from which are recognized ratably over the term of the agreement, beginning in
July 2002. Revenue of $120,000 was initially recognized in connection with this
agreement.
In July 2002, the Company also entered into an installation and one-year service
agreement with IP World Ltd. for $300,000 ($60,000 for installation and $240,000
for maintenance), related to the Philippines network. The revenues from
installation were recorded during 2002. The revenues from maintenance services
were recognized ratably over the term of the agreement, beginning in October
2002. Revenue of $60,000 for maintenance services was initially recognized
during 2002.
In 2003, the Company continued to report revenues for the agreement for the
first and second quarter of the year. Upon writing off the receivable as
discussed above, no further revenue was recognized by the Company.
NOTE 4 - Deposit on Equipment
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 in
over 15 countries. The agreement was subsequently modified to where our
investment of $1.2 million would be for purchase of the ATC's telecommunication
equipment and network operations in Hong Kong and England.
As of December 31, 2003, the Company had remitted $302,300 to ATC and ATC's
assignee as partial payment towards the purchase of the assets. The asset
purchase was consummated in February 2004 upon the payment of the balance of the
amount agreed upon in restricted shares of the Company's restricted common stock
totaling 16,500,000 shares, valued at a total of $897,700. The issuance of the
shares, based on an average of $.0544 per share, completes the Company's
purchase of ATC's assets totaling $1.2 million.
NOTE 5. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
2003 2002
--------- ---------
Telecommunications equipment $ 706,892 $ 476,808
Office furniture and equipment 154,169 185,682
Vehicles -- 12,440
--------- ---------
861,061 674,930
Accumulated depreciation (424,686) (271,900)
--------- ---------
Property and equipment,
net book value $ 436,375 $ 403,030
========= =========
Total depreciation expense for the years ended December 31, 2003 and 2002
amounted to $227,200 and $134,262, respectively. Included in cost of sales is
$182,830 in 2003 and $90,233 in 2002.
Certain telecommunications equipment acquired by the Company, capitalized in
property and equipment, and placed into service in 2001 was recorded as cost of
sales during 2002. This equipment was ultimately utilized in constructing the
network built for IPW, and the net book value of the equipment, $233,191 (cost
of $353,500, less $110,309 accumulated depreciation) was included in cost of
sales during 2002. The Company initially depreciated this equipment because at
the time the equipment was purchased, the Company did not anticipate using this
equipment in the construction of the IPW networks, or any networks to be
produced and sold to any customers.
NOTE 6. BUSINESS MERGERS
Prior to GlobeTel taking over the operations of ADGI, ADGI had two operating,
wholly-owned subsidiaries, Global and NCI. The two companies were merged into
ADGI as of July 1, 2002 and on July 24, 2002 ADGI stockholders approved a plan
of reincorporation for the exchange of all outstanding shares of ADGI for an
equal number of shares of GlobeTel Communications Corp. ("GlobeTel").
NOTE 7. ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities consisted of the following:
2003 2002
----------- -----------
Professional fees $ 35,000 $ 28,600
Interest 22,423 20,100
----------- -----------
$ 57,423 $ 48,700
=========== ===========
F-10
NOTE 8. MISCELLANEOUS RECEIVABLE
In September 1999, the Company was awarded a judgment against Imaging Systems
Synergies, Inc. (ISS) in the amount of $125,000. However, the Company is
uncertain if it will be successful in recovering any damages against ISS. There
has been an allowance for uncollectibility for the entire $125,000. During 2003,
the Company determined that this amount is unrecoverable and therefore wrote-off
the balance.
NOTE 9. CAPITAL LEASE OBLIGATIONS
Capital lease obligations consisted of the following:
2003 2002
-------- --------
$ 53,311 $ 82,984
Current obligations under
capital leases (53,311) (82,984)
-------- --------
Long-term obligations under
capital leases $ -- $ --
======== ========
Future minimum lease payments under capital leases for years subsequent to
December 31, 2003 are as follows:
2004 $ 104,026
Amount representing interest (50,715)
-----------
Present value of future minimum lease payments $ 53,311
===========
Interest expense recorded on all capital lease obligations of the Company
amounted to $15,924 and $11,704 for the years ended December 31, 2003 and 2002,
respectively. The assets subject to the above capital lease obligations consist
primarily of telecommunications equipment.
NOTE 10. ACCRUED OFFICERS' SALARIES AND BONUSES
Effective January 1, 2002, GlobeTel entered into three-year employment
agreements with its key management. For the year 2002, the agreements provide
for annual compensation of $150,000 for its Chief Executive Officer (CEO),
$125,000 each for its Chief Financial Officer (CFO) and Chief Operating Officer
(COO) and $75,000 each for its Chief Administrative Officer (CAO) and VP of
Network Operations. Further, there remained an employment contract with its
President, as described below, which calls for annual salaries of $100,000 per
annum. In addition to the base compensation, the employment agreements provide
for payment of bonuses that at a minimum equal the executives' base
compensation. As of December 31, 2002, the executives all agreed not to receive
bonuses they were entitled to pursuant to the employment agreement.
In 2003, the base compensation increased to $175,000 for its CEO, $150,000 each
for its CFO and COO, $90,000 each for its CAO and VP of Network Operations. In
2004, the base compensation increases to $200,000 for its CEO, $175,000 each for
its CFO and COO, $120,000 for its CAO and $110,000 for its VP of Network
Operations. Bonuses for each year will also be equal to the base salaries as a
minimum, unless otherwise agreed to by the executives.
From October 1, 1996, through December 31, 2003, the Company had an employment
agreement with its President wherein the Company agreed to pay compensation of
$100,000 annually. In September 2003, the Company's president resigned effective
December 31, 2003 but remained as a member of the board of directors of the
Company.
Pursuant to the above employment agreements, the Company recorded accrued
officers' salaries totaling $519,168 as of December 31, 2002.
In September 2003, the officers agreed to forego their accrued salaries in
exchange for stock options at $.015 per share or 50% of the market price as of
the exercise date. The officers subsequently exercised their stock options in
January 2004.
As of December 31, 2003, the Company recorded accrued officers salaries totaling
$245,000, which the officers again agreed to forego their accrued salaries in
exchange for stock options at $.015 per share or 50% of the market price as of
the exercise date. The officers subsequently exercised their stock options in
January 2004.
F-11
NOTE 11. NOTES PAYABLE AND LOAN DUE TO CONSULTANT/CUSTOMER
Secured Promissory Notes Payable
On April 9, 2002, the Company executed a $250,000 secured promissory note
payable to an unrelated third party, due April 9, 2003, with interest payable
monthly at a rate of 12.5% per annum. The note was collateralized with 8 million
unrestricted shares of the Company's common stock, plus additional shares to be
issued should the loan-to-value ratio drop below 65%. The note also provided for
an accommodation fee of 1 million shares of ADGI shares payable to the lender
which was paid by GVoIP. Pursuant to the note's prepayment option, in May 2002,
the principal balance was paid by Global VoIP and $250,000 was offset against
the accounts receivable balance due to the Company from Global VoIP.
On April 9, 2002, the Company executed a $100,000 secured promissory note
payable to another unrelated third party, due April 9, 2003, with interest
payable monthly at a rate of 12.5% per annum. The note was collateralized with
3.2 million unrestricted shares of the Company's common stock, plus additional
shares to be issued should the loan-to-value ratio drop below 65%. The note also
provided for an accommodation fee of 400,000 shares of ADGI shares payable to
the lender which was paid by GVoIP. Pursuant to the note's prepayment option, in
May 2002, the principal balance was paid by Global VoIP and $100,000 was offset
against the accounts receivable balance due to the Company from Global VoIP.
On June 24, 2002, the Company executed a $150,000 secured promissory note
payable to an unrelated third party, due December 24, 2002, with interest
payable upon the due date of the principal of the loan at a rate of 15% per
annum. The note is collateralized with 10 million unrestricted shares of the
Company's common stock, which was provided by Charterhouse. The note also
provided for an accommodation fee of $3,750, which was paid to the lender during
2002 by the Company.
On June 24, 2002, the Company executed another $150,000 secured promissory note
payable to an unrelated third party, due December 24, 2002, with interest
payable upon the due date of the principal of the loan at a rate of 15% per
annum. The note is collateralized with 10 million unrestricted shares of the
Company's common stock, which was provided by Charterhouse. The note also
provided for an accommodation fee of $3,750, which was paid to lender by the
Company during 2002.
In October 2002, the holders of the above two promissory notes agreed that in
lieu of payment of principal and interest under the loans, each agreed to accept
six (6) million shares of common stock of GlobeTel as payment, which were paid
to the note holders directly by the Company's primary customer who was also a
consultant. Accordingly, the Company recorded the $300,000, plus interest of
$11,960, as a loan payable to that consultant/customer.
Convertible Subordinated Notes
On August 21, 2002, the Company executed a $125,000 convertible subordinated
promissory note payable to an unrelated third party, due August 21, 2003, with
interest payable monthly at a rate of 12% per annum. The note is collateralized
with 7.5 million shares of the Company's common stock, which were issued by the
Company and held in escrow under the agreement. The Company recorded the
issuance of these shares at par value. The note is convertible into shares of
the Company's common stock at the option of the holder in whole or in part, in
accordance with the terms of the note. The conversion price for this note in
effect on any conversion date shall be the lesser of $.25 or 75% of the per
share market value price as of the close of business on the conversion date. Any
conversion pursuant to this agreement shall be for a minimum principal of
$10,000 and until the first day of the month preceding the maturity date of this
note, the holder may not, during any 30-day period, convert more than the
greater of $100,000 of the principal amount of this note, or 10% of the
preceding month's trading value of the common stock as reported by the principal
market in which the common stock is traded.
In July 2003, the holder exercised his right to convert the debt into shares of
the Company's common stock in accordance with the terms of the note. The
conversion rate was determined to be $.04 and accordingly, the holder retained
3,055,556 shares and returned 4,444,444 to the Company.
On August 27, 2002, the Company executed a $125,000 convertible subordinated
promissory note payable to an unrelated third party, due August 27, 2003, with
interest payable monthly at a rate of 12% per annum. The note is collateralized
with 7.5 million shares of the Company's common stock, which were issued by the
Company and held in escrow under the agreement. The Company recorded the
issuance of these shares at par value. The note is convertible into shares of
the company's common stock at the option of the holder in whole or in part, in
accordance with the terms of the note. The conversion price for this note in
effect on any conversion date shall be the lesser of $.25 or 75% of the per
share market value price as of the close of business on the conversion date. Any
conversion pursuant to this agreement shall be for a minimum principal of
$10,000 and until the first day of the month preceding the maturity date of this
note, the holder may not, during any 30-day period, convert more than the
greater of $100,000 of the principal amount of this note, or 10% of the
preceding month's trading value of the common stock as reported by the principal
market in which the common stock is traded.
F-12
In December 2003, the holder exercised his right to convert the debt into shares
of the Company's common stock in accordance with the terms of the note. The
conversion rate was determined to be $.035 and accordingly, the holder retained
3,500,000 shares and returned 4,000,000 to the Company.
On October 22, 2002, the Company executed a $125,000 convertible subordinated
promissory note payable to an unrelated third party, due October 22, 2003, with
interest payable monthly at a rate of 12% per annum. The note is collateralized
with 15 million shares of the Company's common stock, which were issued by the
Company and held in escrow under the agreement. The Company recorded the
issuance of these shares at par value. The note is convertible into shares of
the Company's common stock at the option of the holder in whole or in part, in
accordance with the terms of the note. The conversion price for this note in
effect on any conversion date shall be the lesser of $.20 or 75% of the per
share market value price as of the close of business on the conversion date. Any
conversion pursuant to this agreement shall be for a minimum principal of
$10,000 and until the first day of the month preceding the maturity date of this
note, the holder may not, during any 30-day period, convert more than the
greater of $100,000 of the principal amount of this note, or 10% of the
preceding month's trading value of the common stock as reported by the principal
market in which the common stock is traded.
On November 18, 2002, the Company executed a $125,000 convertible subordinated
promissory note payable to an unrelated third party, due November 18, 2003, with
interest payable monthly at a rate of 12% per annum. The note is collateralized
with 15 million shares of the Company's common stock, which were issued by the
Company and held in escrow under the agreement. The Company recorded the
issuance of these shares at par value. The note is convertible into shares of
the Company's common stock at the option of the holder in whole or in part, in
accordance with the terms of the note. The conversion price for this note in
effect on any conversion date shall be the lesser of $.20 or 75% of the per
share market value price as of the close of business on the conversion date. Any
conversion pursuant to this agreement shall be for a minimum principal of
$10,000 and until the first day of the month preceding the maturity date of this
note, the holder may not, during any 30-day period, convert more than the
greater of $100,000 of the principal amount of this note, or 10% of the
preceding month's trading value of the common stock as reported by the principal
market in which the common stock is traded.
The October 22 and November 18 notes were from the same investor, and in July
2003, the holder exercised the right to convert the debt into shares of the
Company's common stock in accordance with the terms of the note. The conversion
rate was determined to be $.024 and accordingly, the holder retained 10,416,666
shares and returned 19,583,334 to the Company.
On November 25, 2002, the Company executed a $125,000 convertible subordinated
promissory note payable to an unrelated third party, due November 25, 2003, with
interest payable monthly at a rate of 12% per annum. The note is collateralized
with 15 million shares of the Company's common stock, which were issued by the
Company and held in escrow under the agreement. The Company recorded the
issuance of these shares at par value. The note is convertible into shares of
the Company's common stock at the option of the holder in whole or in part, in
accordance with the terms of the note. The conversion price for this note in
effect on any conversion date shall be the lesser of $.20 or 75% of the per
share market value price as of the close of business on the conversion date. Any
conversion pursuant to this agreement shall be for a minimum principal of
$10,000 and until the first day of the month preceding the maturity date of this
note, the holder may not, during any 30-day period, convert more than the
greater of $100,000 of the principal amount of this note, or 10% of the
preceding month's trading value of the common stock as reported by the principal
market in which the common stock is traded.
Also on November 25, 2002, the Company executed a second $125,000 convertible
subordinated promissory note payable to an unrelated third party, due November
25, 2003, with interest payable monthly at a rate of 12% per annum. The note is
collateralized with 15 million shares of the company's common stock, which were
issued by the company and held in escrow under the agreement. The company
recorded the issuance of these shares at par value. The note is convertible into
shares of the company's common stock at the option of the holder in whole or in
part, in accordance with the terms of the note. The conversion price for this
note in effect on any conversion date shall be the lesser of $.20 or 75% of the
per share market value price as of the close of business on the conversion date.
Any conversion pursuant to this agreement shall be for a minimum principal of
$10,000 and until the first day of the month preceding the maturity date of this
note, the holder may not, during any 30-day period, convert more than the
greater of $100,000 of the principal amount of this note, or 10% of the
preceding month's trading value of the common stock as reported by the principal
market in which the common stock is traded.
Both the November 25 notes were from the same investor, and in July 2003, the
holder exercised the right to convert the debt into shares of the Company's
common stock in accordance with the terms of the note. The conversion rate was
determined to be $.022 and accordingly, the holder retained 11,111,112 shares
and returned 18,888,888 to the Company.
F-13
On November 5, 2002, the Company executed a second $125,000 convertible
subordinated promissory note payable to an unrelated third party, due November
5, 2003, with interest payable monthly at a rate of 12% per annum. The note is
collateralized with 15 million shares of the Company's common stock, which were
issued by the Company and held in escrow under the agreement. The Company
recorded the issuance of these shares at par value. The note is convertible into
shares of the Company's common stock at the option of the holder in whole or in
part, in accordance with the terms of the note. The conversion price for this
note is of $.025 per share. The note holder also received a common stock
purchase warrant giving them the right to purchase 5 million shares of the
company's common stock at the price of $.03 per share. Subsequent to the
execution of this note, additional amounts of $85,528 were received from the
note holder, bringing the total balance to $210,528.
In May 2003, the holder and the Company agreed that the balance of $210,528 be
converted into shares of the Company's common stock and as a result the
collateralized shares were then issued to the holder. In addition, it was agreed
upon that the holder's 15 million shares are non-dilutable for 18 months from
April 1, 2003. Further, the holder of the note is comprised of three (3) owner,
one of whom is Timothy M. Huff who owns 40% of the entity. Timothy Huff is the
CEO of the Company.
NOTE 12 - NOTES AND LOANS PAYABLE, UNSECURED
In February 2003, the Company executed two unsecured promissory notes payable,
each for $100,000 (to fund operations and pay operating expenses), to an
unrelated third party, which is also a secured promissory note holder. Each note
was originally due in May 2003, and included interest payable monthly at a rate
of 25% per annum. The Company and the note holder subsequently agreed to extend
due dates of the loans on a month-to-month basis under the same interest rate.
The notes remain outstanding as of the date of this report. However, in February
2004, the Company paid both notes.
In February 2003, the Company executed a $40,000 promissory note payable to
another party, due on demand with interest and payable at a rate of 2.5% per
annum. In June 2003, the Company executed a $200,000 promissory note payable to
Commercebank, N.A., due in June 2004, with interest payable at a rate of one
percent over the prime rate, currently 4%.
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 balance of $311,960, is unsecured,
non-interest bearing and provided for no formal repayment terms.
NOTE 13. RELATED PARTY TRANSACTIONS
Related party payables
As of December 31, 2003 and 2002, related party payables are as follows:
2003 2002
-------- --------
Corporation owned by consultant $ -- $ 24,990
Officers -- 33,100
Consultant and officer 57,500 57,500
IPW -- 18,491
-------- --------
Related party payables $ 57,500 $134,081
======== ========
The 2003 balance represents a short-term loan by an officer of the Company, due
on demand.
Notes Payable - Stockholder
As of December 31, 2002, the Company was obligated under a convertible
promissory note payable to a stockholder and former director for $55,000,
principally representing advances to the Company. In fiscal 2003, the Company
issued 4 million shares in complete settlement of the balance due.
NOTE 14. COMMITMENTS AND CONTINGENCIES
Litigation
Globetel is in the process of taking legal actions against its associate and
customer in Mexico, GTCC Qualnet Mexico, for non-payment of amounts owed and
non-payment to carrier in Mexico. The customer, however, has been cooperating
and continues to work with the Company. The customer has Mexican tax refunds
receivable and the Company has filed a motion to be the first assigned payee to
receive the tax refunds which the customer expects to receive in the second
quarter of 2004. The customer also has telecommunications equipment and existing
working networks and customers, which the Company is taking over its operations.
The Company and the customer, through the court system, are working towards
continuing the operations together reaping the full benefits of the working
network until the loan has been paid in full.
As a result of the non-payment and because the outcome of the motion cannot be
determined, the Company wrote off $648,812 of accounts receivables as bad debts.
The Company is presently in a dispute with two former consultants who resigned
as consultants to the Company prior to December 31, 1998. The remaining balance
of a loan payable of $15,000 originally advanced by the consultants was
written-off based on the belief that such loans had been satisfied based in part
on the consideration given in the consulting agreement. The Company has taken
the position that it owes no further compensation to the consultants, and
further that the loans from these two individuals have been satisfied, as a
result of the consideration given to the consultants, the consultants'
resignation and their failure to provide services required under the consulting
agreement. The agreement provided for the arbitration in the event of any
dispute. As of the date of this report, the Company cannot predict the outcome
of any legal proceeding or arbitration, or whether, as a result of any such
proceeding or arbitration, the Company will be required to issue additional
common stock as consideration or repay any loans.
F-14
Letters of Credit
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.
Service Provider Agreement - Brazil Network
On March 23, 2002, GlobeTel signed a memorandum of understanding with a company
called Trans Global Ventures, Inc. (TGV), a company based in Miami, to form a
joint venture to be registered as an LLC (Limited Liability Company) in the
State of Florida to build out a VoIP network in Brazil offering call origination
including but not limited to prepaid calling and 800 number calling as well as
access to GlobeTel's Enhanced Services Platform technology.
TGV has been operating in Brazil and had networks with a capacity of 3 million
minutes per month in Rio de Janeiro, Sao Paulo and Belo Horizonte. Initially,
the venture was to be based on a 50/50 ownership between the two companies.
Subsequently, the memorandum of understanding was modified to give GlobeTel 80%
ownership, a percentage determined based on the investments to be made by the
Company in the venture. Ultimately, however, both companies determined that TGV
acting as a service provider would best serve the needs of each company, and
therefore both companies agreed to terminate the memorandum of understanding and
accordingly, the LLC was never formed.
Under the service provider agreement, for service provided, TGV shall be
entitled to receive 20% of the project income, defined as: the revenues from the
Brazil network, less direct costs of sales for operating this network, less
other costs allocated to this project (based on multiplying total operating
expenses by the percentage of Brazil network sales to total Company revenues for
the year).
The Brazilian network operated at a ramp-up rate during the first six months of
2002, and upon delivery of equipment during this period, the network began
operating at capacity of approximately 4 million minutes per month starting in
July 2002. The network continued to operate at or near capacity throughout the
year and still continues to operate as of the date of this filing.
The Company recognized revenues of $3,043,348 and $1,976,135 for December 31,
2003 and 2002, respectively. The cost of sales, substantially all of which was
paid directly to third-party suppliers, were $1,955,818 in 2003 and of $916,628
in 2002.
Service Provider Agreement - Mexico Network
On June 26, 2002, GlobeTel signed a memorandum of understanding with Qualnet
Telecom, LLC for a joint venture to be known as GlobeTel Qualnet LLC, to be
registered as an LLC (Limited Liability Company) in the State of Florida. The
purpose of the venture was to build out a VoIP network in Mexico for call
termination throughout the country that will have initial capacity to transport
8 million minutes per month.
Qualnet has been operating in Mexico for several years and has contracts with
various Mexican telecom companies. GlobeTel's role in the agreement was to
provide financing and equipment to build the network. The agreement was for
GlobeTel to have 80% ownership of the venture and Qualnet 20%, and accordingly
GlobeTel committed 80% of the funding of the venture in the form of working
capital, equipment and guarantees for the issuance of letters of credit as
required by the Mexican telecom companies.
Since Qualnet already had points of presence in several cities in Mexico and
since they had an established customer base, installation of the equipment and
ramping up of the traffic required substantially less time than if the network
was to be built from the ground up. As a result, the venture was able to operate
within several weeks and was able to fill the network near capacity.
The network continued to operate at capacity throughout the year and it was
subsequently determined that each party would be better served by continuing to
do business with Qualnet as a service provider. Both parties agreed not to
proceed with the joint venture, and accordingly, the LLC was never formed and
the parties signed an agreement not to pursue the joint venture agreement as
contemplate in the memorandum of agreement dated June 26th 2002.
Under the service provider agreement, for services provided, Qualnet shall be
entitled to receive 20% of the project income, defined as: the revenues from the
Mexico network, less direct costs of sales for operating this network, less
other costs allocated to this project (based on multiplying total operating
expenses by the percentage of Mexico network sales to total Company revenues for
the year).
The Company recognized revenues of $7,596,007 for the year ended December 31,
2003 and $3,198,502 for 2002. The cost of sales which substantially was paid
directly to third-party suppliers were $6,029,939 in 2003 and $2,674,552 in
2002.
The network is currently still operating at or near capacity and the
relationship continues as that of a service provider. However, as described
above, the Company is in the process of taking over the operations of the
network and if successful, will control all income and expenses of the
operations.
F-15
Joint Venture Agreement
On September 19, 2002, the Company entered into a joint venture agreement with
TrueSpeed Wireless, Inc., a Nevada corporation based in Aliso Viejo, California.
The venture is incorporated in Nevada as TrueSpeed Wireless International, Inc.
and the structure of the joint venture is based on 50% ownership by GlobeTel and
50% ownership by TrueSpeed Wireless, Inc. The purpose of the joint venture shall
be for the deployment of the wireless technology services currently being
deployed by TrueSpeed Wireless, Inc. and to market and distribute high-speed
wireless data communications.
The venture had not been able to secure contracts in targeted countries and as
of December 2003, both companies agreed to dissolve the joint venture. No
revenues were generated from the joint venture during 2003 and 2002.
Leases and Rents
GlobeTel currently leases facilities at 444 Brickell Avenue, Suite 522, Miami,
Florida 33131. The Company is under a five-year lease expiring April 2005, with
a present monthly rent of $3,463. In order to provide sufficient space for
equipment and personnel for their operations, the Company leased another office
facility at 9050 Pines Blvd., Suite 110, Pembroke Pines, Florida 33024, as of
April 1, 2004. This lease will expire in June 2009, and has an initial monthly
rent of $5,462 with increases of 4% per year.
The Company had operations in Hackensack, N.J. which ceased operations in
February 2001. The Company moved out of the facility in March 2001, and since
the lessee found new tenants for the office, was released from the lease. The
Company is still in debt with the landlord, the amount of which is included in
accounts payable.
Effective November 2001, the Company signed a sub-lease agreement for the Jersey
City facility with a customer /consultant of the Company. Pursuant to the
sublease agreement, the customer/consultant has maintained the obligation of the
monthly rent of $1,600, and at January 31, 2003, the lease expired and the
Company has no further obligation to the lessee.
Future minimum rental payments required under the above operating leases
subsequent to the year ended December 31 are as follows:
2004 $ 74,328
2005 80,707
2006 69,530
2007 72,311
2008 and thereafter 113,542
-----------
$ 410,418
===========
Rent expense for 2003 and 2002 was $46,231 and $40,971, respectively.
NOTE 15. CONSULTING AND INVESTEMENT BANKING AGREEMENTS
On August 15, 2002, the Company entered into an agreement with Charles Morgan
Securities, Inc. ("Charles Morgan") to provide consulting services for a period
of 12 months, including arranging for funding, assisting with corporate and
business planning, advice regarding potential mergers and acquisitions, private
placements of the Company's stock, and other related services.
The agreement provided that the Company pay Charles Morgan a monthly fee of
$5,000 from August to January 2003, and $10,000 thereafter for the next six
months. The Company also paid an engagement fee of $30,000 upon initial funding.
In accordance with the agreement, the Company also paid Charles Morgan a total
of 2.7 million shares of common stock of the Company for services provided in
fiscal 2002 and 1.3 million shares in fiscal 2003, for a total of 4 million
shares.
In addition to the shares described above, in August 2002, Charles Morgan
received 12.5 million restricted shares (Rule 144) in connection with arranging
for the convertible subordinated notes payable above. The Company valued the
shares at $250,000, based on one-half of the closing bid price of the Company's
shares on the date of issuance and charged this amount to consulting expense.
Pursuant to the agreement, Charles Morgan received an additional 12.5 million
restricted shares (Rule 144) for arranging additional financing of $500,000
during the quarter ending December 31, 2002.
During the third quarter 2002, Global VoIP, a principal customer and related
party to the Company, paid Charles Morgan $35,000 for the initial monthly fee of
$5,000 and the engagement fee of $30,000. This amount, was offset against the
remaining accounts receivable balance owed by Global VoIP to the Company.
In January 2003, Fordham Financial Management, Inc., an investment banking firm,
based in New York City, assumed all functions and responsibilities of Charles
Morgan Securities to provide consulting services. Under the agreement, the
Company was obliged to pay a monthly fee of $10,000. In June 2003, the firm and
the Company agreed to suspend the monthly fee until both parties agree it will
resume. The Company paid total fees of $40,000 during the six months ended June
30, 2003. Pursuant to agreement, the Company issued 4.9 million restricted
shares of the Company's common stock as payment for services rendered.
The Company charged $51,250 to expense during the three months ended September
30, 2003, based on an amount equal to one-half of the average bid and asked
price of the Company's shares on the date of issuance. No further payments were
made in the fourth quarter as it relates to this 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
investments. 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.
F-16
NOTE 16 - GAIN(LOSS) ON DISPOSITION OF ASSETS AND SETTLEMENT OF LIABILITIES
At December 2003, the Company settled with one its vendors to pay a lesser
amount for the purchase of equipment that ultimately did not function as
purported. Likewise, the Company wrote off other long-term outstanding
liabilities for purchase of equipment that also did not function properly. The
settlement and write-off resulted in a gain of $26,274.
In June 2003, the Company ceased operations of its St. Louis, Missouri office.
As part of the termination agreement with the employees of the St. Louis office,
the employees were authorized to maintain and service the existing clients and
keep the property and equipment of that office, and the Company agreed to return
the customer deposits made by the St. Louis clients. The Company recorded a gain
of $55,842 in connection with these transactions.
Three terminated employees were issued a total of 1.2 million free-trading
shares of the Company's stock as severance pay. The Company charged $36,000 to
expense based on an amount equal to the average bid and asked price of the
Company's shares on the date of issuance.
NOTE 17. BAD DEBT AND DEPOSIT WRITE-OFF
During 2003, the Company wrote-off $1,409,994 as bad debts, predominantly from
the receivables from the Mexico and Brazil networks, representing amounts
receivable older than 90 days which have not been received as of the date of
this report. During 2002, the Company recorded as a bad debt write-off the
$283,051 remaining balance due from Sigma Online (Sigma), an Indian company. In
addition, the Company charged a $50,000 deposit given to Sigma, related to its
India projects, to cost of sales. Whereas the expected payment source of the
accounts receivable balance was Sigma's anticipated revenues from operating
networks in India, the company deemed this balance uncollectible and the deposit
of no realizable value, since it does not contemplate establishing such networks
in India in the near term, due to the highly unstable political atmosphere in
that country.
NOTE 18. REINCORPORATION EXPENSES
Reincorporation expenses of $247,429 incurred during the year ended December 31,
2002, include legal, professional and shareholder communications costs related
to the merger and related transaction described in Note 6 above.
NOTE 19. INCOME TAXES
Deferred income taxes and benefits for 2003 and 2002 are provided for certain
income and expenses, which are recognized in different periods for tax and
financial reporting purposes. The tax effects (computed at 15%) of these
temporary differences and carryforwards that give rise to significant portions
of deferred tax assets and liabilities consist of the following:
2002 Changes 2003
----------- ----------- -----------
Deferred tax assets:
Accrued officers' compensation $ 452,000 $ (314,995) $ 137,005
Allowance for doubtful accounts 437,768 (380,950) 56,818
Consulting services elected as start-up
costs under IRC Sec. 195 (b) 43,793 807,464 851,257
Reincorporation expenses amortized
Under IRC Sec. 248 -- 25,975 25,975
Accumulated depreciation -- (376,829)
Net operating loss carryforwards 1,369,715 1,040,708 2,410,423
----------- ----------- -----------
2,303,276 801,373 3,104,649
Valuation allowance (2,303,276) (801,373)
----------- ----------- -----------
Net deferred tax asset $ -- $ -- $ --
=========== =========== ===========
A reconciliation of income benefit provided at the federal statutory rate of 15%
to income tax benefit follows:
2003 2002
----------- -----------
Income tax benefit computed at federal
statutory rate $ (930,379) $ 198,194
Accrued officers' salaries 27,505 80,326
Allowance for doubtful accounts (107,345) 46,198
Depreciation (7,179) (3,440)
Losses not benefited (benefited) 1,017,398 (321,278)
----------- -----------
$ -- $ --
=========== ===========
The Company has accumulated net operating losses, which can be used to offset
future earnings. Accordingly, no provision for income taxes is recorded in the
financial statements. A deferred tax asset for the future benefits of net
operating losses and other differences is offset by a 100% valuation allowance
due to the uncertainty of the Company's ability to utilize the losses. These net
operating losses begin to expire in the year 2021.
At the end of 2002, the Company had net operating loss carryforwards (of its
successor due to accounting for the reincorporation as an "F" reorganization
under the Internal Revenue Code) of approximately $5,758,191 which expire at
various dates through 2021.
F-17
NOTE 20. COMMON STOCK TRANSACTIONS
During the year ended December 31, 2002, the Company issued the following shares
of Common stock:
Date Issued Shares Consideration Valuation Relationship
February 12, 2002 5,500,000 Consulting services $ 92,500 Consultant/Customer
March 25, 2002 10,000,000 Investment banking 250,000 Consultant
June 26, 2002 20,000,000 Consulting 600,000 Consultant/Customer
June 26, 2002 60,000,000 Network performance - Charterhouse customer
guarantee
July 9, 2002 1,000,000 Investment banking 30,000 Consulting
July 9, 2002 1,000,000 Investment banking 30,000 Consulting
July 9, 2002 3,000,000 Consulting 90,000 Consultant/Customer
August 22, 2002 5,837,500 Brokers' fees 116,750 Consultant
August 22, 2002 412,500 Brokers' fees 8,250 Consultant
August 26, 2002 250,000 Sale of stock 7,000 Invest/Legal Counsel
August 28, 2002 6,250,000 Investment banking 125,000 Consultant
August 28, 2002 7,500,000 Loan Collateral - Note Holder
September 3, 2002 7,500,000 Loan Collateral - Note Holder
September 30, 2002 2,220,000 Consulting 33,300 Consultant/Customer
November 7, 2002 15,000,000 Loan Collateral - Note Holder
November 11, 2002 500,000 Sale of stock 17,500 Invest/Legal Counsel
December 6, 2002 12,500,000 Brokers' fees 250,000 Consultant
December 6, 2002 15,000,000 Loan Collateral - Note Holder
December 6, 2002 30,000,000 Loan Collateral - Note Holder
December 30, 2002 1,000,000 Consulting 15,000 Consultant
December 31, 2002 2,000,000 Consulting 40,000 Consultant
December 31, 2002 500,000 Consulting 10,000 Consultant
December 31, 2002 673,338 Satisfaction of debt 10,000 Investor
F-18
During the year ended December 31, 2003, the Company issued the following shares
of Common stock:
March 14, 2003 2,200,000 Consulting services $ 22,000 Consultant
March 14, 2003 1,800,000 Investment banking 18,000 Consultant
May 7, 2003 1,100,000 Consulting services 11,550 Consultant
May 7, 2003 900,000 Investment banking 9,450 Consultant
May 22, 2003 2,500,000 Loan Collateral - Note Holder
May 22, 2003 2,500,000 Loan Collateral - Note Holder
May 22, 2003 15,000,000 Conversion of debt 239,206 Investor
May 29, 2003 4,000,000 Satisfaction of debt 55,000 Shareholder/
Former director
July 18, 2003 200,000 Severance pay 6,000 Employee
July 18, 2003 500,000 Severance pay 15,000 Employee
July 18, 2003 500,000 Severance pay 15,000 Employee
July 18, 2003 450,000 Legal services 13,500 Legal counsel/
former corporate secretary
July 18, 2003 800,000 Consulting services 24,000 Consultant/employee
July 18, 2003 12,844,000 Conversion of debt 256,880 Investor
August 5, 2003 20,080,321 Sale of stock 500,000 Investor/consultant
August 5, 2003 - Marketing services 100,402 Investor/consultant
August 8, 2003 3,400,000 Consulting services 102,000 Consultant/employee
August 28, 2003 (42,916,666) Return of shares issued - Note Holders
for loan collateral
August 28, 2003 - Conversion of debt 125,000 Investor
August 28, 2003 - Conversion of debt 250,000 Investor/consultant
August 28, 2003 - Conversion of debt 125,000 Investor
August 28, 2003 - Conversion of debt 250,000 Investor
September 3, 2003 944,444 Consulting services 11,806 Consultant
September 3, 2003 900,000 Consulting services 11,250 Consultant
September 3, 2003 1,100,000 Consulting services 13,750 Consultant
September 3, 2003 3,847,222 Consulting services 49,090 Consultant
September 29, 2003 656,687 Consulting services 8,211 Consultant
October 9, 2003 4,281,333 Additional shares due - Investor
For Conversion of debt
October 9, 2003 3,650,000 Consulting services 73,000 Consultant/employee
October 9, 2003 2,000,000 Officer's salary 40,000 Chief Financial Officer
December 31, 2003 7,500,000 Officer's salary 112,500 Chief Executive Officer
December 31, 2003 1,166,667 Officer's salary 17,500 Chief Financial Officer
December 31, 2003 (4,000,000) Return of shares issued - Note Holder
or loan collateral
In connection with the above, for certain issuances of shares, Forms S-8 have
been filed with the Securities and Exchange Commission relative to such
issuances of stock. The shares issued were valued by the Company based upon the
average bid and asked price of the shares on the date of issuance. The value of
these shares was charged to expense unless they were in consideration for future
services, in which case they were recorded as deferred consulting fees.
For other issuances of shares during the periods described above, the Company
issued restricted shares (Rule 144) of its common stock to consultants and
officers for services to the Company. Issuance of restricted shares (Rule 144)
are valued, due to limitations in current marketability, by the Company based
upon half of the average bid and asked price of the Company's shares on the date
of issuance, unless the services provided were valued at another amount as
agreed upon between the parties.
Shares issued (retired)for loan collateral were recorded at par value.
F-19
NOTE 21. 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.
The above option shares 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.
Options Pursuant to Convertible Promissory Notes
On December 16, 2002, the Company filed an SB-2 registration statement to
register shares pursuant to the convertible promissory notes as described in
Note 11. During 2003, the Company and its lenders decided to wait until the
waiting period is over, thereby eliminating the need to file the SB-2
registration statement.
NOTE 22 - PREFERRED STOCK
In October 2003, the Company entered into an agreement with Fordham Financial
Management Inc. to raise funds to finance the ATC transaction. In accordance
with the agreement, the investors will receive preferred shares convertible into
common stock upon investment. An Offering Circular was made available to
investors on October 17, 2003.
The offering was for maximum of 150,000 shares ("Shares") of Series A
Convertible Redeemable Preferred Stock, par value $.001 per share ("Series A
Preferred"). The shares have a liquidation preference of $16.67 per share and
each share is convertible into a number of shares of Common Stock determined by
dividing the number of shares of Common Stock outstanding as of the date of
conversion by three, and dividing the result of that calculation by 250,000. The
Company may redeem the Shares at $.001 per share at any time after the second
anniversary of the date of issuance. Such redemption would he effectively
require the investor to convert his shares at that time or lose the entire
amount of his investment.
As part of the offering, the Company agreed to pay its investment banking
consultant, Fordham Financial Management, Inc. a 10% commission.
The Company had $1,200,000 subscribed as of December 31, 2003, and had received
$717,140 ($1,200,000 less related expenses of $107,860 and $375,000 of
subscriptions receivable). The full amount of $2,500,000 has been subscribed as
of January 31, 2004, and the full $2,500,000 investments had been received as of
February 6, 2004.
In May and June 2003, the Company applied for a loan with a financing company
that brokers the transaction with several major European banks. The loans were
to be collateralized with preferred stock, which the banks can only convert in
the case of a default by the Company. As of September 30, 2003, the transaction
had not been consummated and the Company withdrew its application and the
preferred stock totaling 1,194,356 shares that were being held in escrow were
cancelled.
F-20
NOTE 23 - SUBSEQUENT EVENTS
In March 2004, the Company entered into a binding letter of intent to purchase
substantially all of the assets of Sanswire Technologies, Inc., 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 agreement is subject to the completion of due diligence,
which is expected to be finalized during the second quarter of 2004. The
agreement would require an advance of $150,000 working capital to Sanswire and
initial issuance of 28,000,000 shares of common stock. There will be additional
incentives in the agreement that will be based on the performance of Sanswire
and its technology.
NOTE 24. SEGMENTS AND RELATED INFORMATION
During the prior year 2001, the Company adopted FASB Statement No. 131 (SFAS No.
131), "Disclosures about Segments of an Enterprise and Related Information,"
which changes the way the Company reports information about its operating
segments. The company's two segments, Global and NCI had separate management
teams and infrastructures that offer different services during 2001.
During the year ended December 2002, the Company merged the infrastructure and
the management teams and operated as one company. NCI's operations represented
less than 2% of gross revenues in 2002, and accordingly segment information is
not presented for 2002 as well as for 2003.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies. All inter-segment sales prices are
market based. The Company evaluates performance based on operating earnings of
the respective business units.
F-21
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
------------
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)
------------
TOTAL STOCKHOLDERS' EQUITY ....................................... 5,474,256
------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ................................ $ 6,782,883
============
See accompanying notes.
F-22
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
F-23
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.
F-24
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.
F-25
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
F-26
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 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.
F-27
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.
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 StratellitesTM 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.
F-28
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.
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.
F-29
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 StratellitesTM, 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
F-30
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.
Employment Agreements - Sanswire Networks, LLC
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.
NOTE 8 - CENTERLINE COMMUNICATIONS, LLC.
Centerline Communications, LLC.
F-31
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.
F-32
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.
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.
F-33
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%.
F-34
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.
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.
F-35
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.
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
F-36
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.
F-37
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.
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.
F-38
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.
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
F-39
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.
F-40
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.
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.
F-41
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.
F-42
WHERE YOU CAN FIND MORE INFORMATION
We have filed a registration statement on Form SB-2 under the Securities
Act of 1933 with the Securities and Exchange Commission with respect to the
shares of our common stock offered by this prospectus. This prospectus is filed
as a part of the registration statement and does not contain all of the
information contained in the registration statement and exhibits and reference
is hereby made to such omitted information. Statements made in this registration
statement are summaries of the terms of these referenced contracts, agreements
or documents and are not necessarily complete. Reference is made to each exhibit
for a more complete description of the matters involved and these statements
shall be deemed qualified in their entirety by the reference.
You may inspect the registration statement and exhibits and schedules filed with
the Securities and Exchange Commission at the Securities and Exchange
Commission's principle office in Washington, D.C. Copies of all or any part of
the registration statement may be obtained from the Public Reference Section of
the Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, D.C.
20549. The Securities and Exchange Commission also maintains a web site
(http://www.sec.gov) that contains reports, proxy statements and information
regarding registrants that file electronically with the Commission. For further
information pertaining to us and our common stock offered by this prospectus,
reference is made to the registration statement.
You should rely only on the information contained in this prospectus. We have
not authorized any other person to provide you with different information. If
anyone provides you with different or inconsistent information, you should not
rely on it. We are not making an offer to sell these securities in any
jurisdiction where the offer or sale is not permitted. The information in this
document may only be accurate on the date of this document.
34
Item 23. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure.
We have had no changes in or disagreements with our accountants during the
periods for which financial statements are included herein.
PART II. INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 24. LIMITATION ON LIABILITY; INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's Certificate of Incorporation includes certain provisions
permitted pursuant to the Delaware General Corporation Law ("DGCL") whereby
officers and directors of the Company shall be indemnified against certain
liabilities to the Company or its shareholders. The Certificate of Incorporation
also limits to the fullest extent permitted by the DGCL a director's liability
to the Company or its stockholders for monetary damages for breach of fiduciary
duty of care as a director, including gross negligence, except liability for (i)
breach of the director's duty of loyalty to the Company or its shareholders,
(ii) acts or omissions not in good faith or which involve intentional misconduct
or knowing violation of the laws, (iii) under Section 174 of the DGCL (relating
to unlawful payments of dividends or unlawful stock repurchases or redemptions)
or (iv) any transaction from which the director derives an improper personal
benefit. This provision of the Company's Certificate of Incorporation has no
effect on the availability of equitable remedies, such as injunction or
rescission. The Company believes that these provisions will facilitate the
Company's ability to continue to attract and retain qualified individuals to
serve as directors and officers of the Company.
Limitations on Liability of Directors.
Under Section 145 of the Delaware General Corporation Law, a corporation may
indemnify a director, officer, employee or agent of the corporation (or a person
who is or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise) against expenses (including attorneys' fees), judgments, fines
and amounts paid in settlement actually and reasonably incurred by the person if
he acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the corporation and, with respect to any
criminal action or proceeding, had no reasonable cause to believe his conduct
was unlawful. In the case of an action brought by or in the right of a
corporation, the corporation may indemnify a director, officer, employee or
agent of the corporation (or a person who is or was serving at the request of
the corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise) against
expenses (including attorneys' fees) actually and reasonably incurred by him if
he acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the corporation, except that no indemnification
may be made in respect of any claim, issue or matter as to which such person
shall have been adjudged to be liable to the corporation unless and only to the
extent a court finds that, in view of all the circumstances of the case, such
person is fairly and reasonably entitled to indemnity for such expenses as the
court shall deem proper.
We have adopted a provision which requires us to indemnify and hold harmless any
person involved in any action, suit or proceeding because that person is or was
a director or officer of ours. This provision does not, however, require us to
indemnify an officer or director in a proceeding they initiate without the
authorization of our directors.
Insurance for Directors and Officers.
Under Delaware law, a corporation may obtain insurance on behalf of its
directors and officers against liabilities incurred by them in those capacities.
We have adopted a provision which permits us to maintain insurance to protect us
and our directors and officers against expenses, liabilities and losses whether
or not we would have the power to indemnify these persons under Delaware law. We
intend to have in place after the closing of this offering a directors' and
officers' liability and company reimbursement liability insurance policy.
35
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The estimated costs of this offering are as follows:
Securities and Exchange Commission registration fee $ 1,467
Transfer Agent Fees $ 0
Accounting fees and expenses $ 1,500
Legal fees and expenses $12,500
Blue Sky fees and expenses $ 0
Miscellaneous $ 0
-------
Total $15,467
-------
We will pay all expenses of this offering listed above.
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
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.
----------------------------------------------------------------------------------------------------------------
Amount of Securities Cash or Non-Cash
Date Title Sold Persons Consideration
----------------------------------------------------------------------------------------------------------------
03/14/2003 Common Stock 2,200,000 Mandalay Industries, Inc. Services valued at $22,000
----------------------------------------------------------------------------------------------------------------
03/14/2003 Common Stock 1,800,000 Fordham Fin. Mgmt.Inc. Broker fees valued at $18,000
----------------------------------------------------------------------------------------------------------------
05/07/2003 Common Stock 1,100,000 Mandalay Industries,Inc. Services valued at $11,550
----------------------------------------------------------------------------------------------------------------
05/07/2003 Common Stock 900,000 Fordham Fin. Mgmt. Inc. Broker fees valued at $18,000
----------------------------------------------------------------------------------------------------------------
05/22/2003 Common Stock 2,500,000 Clay Realty, Inc. Loan collateral
----------------------------------------------------------------------------------------------------------------
05/22/2003 Common Stock 2,500,000 Brantridge Holdings Loan collateral
----------------------------------------------------------------------------------------------------------------
05/22/2003 Common Stock 9,000,000 Infinity Capital Partners Conversion of debt
60% of $239,206
----------------------------------------------------------------------------------------------------------------
05/22/2003 Common Stock 6,000,000 Timothy M. Huff Conversion of debt
40% of $239,206
36
----------------------------------------------------------------------------------------------------------------
Amount of Securities Cash or Non-Cash
Date Title Sold Persons Consideration
----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
05/22/2003 Common Stock 4,000,000 Gerard Harryman Settlement of debt of $55,000
----------------------------------------------------------------------------------------------------------------
07/18/2003 Common Stock 12,844,000 Michael Terry Conversion of debt of $256,880
----------------------------------------------------------------------------------------------------------------
9/03/2003 Common Stock 944,444 Charles Morgan Securities Services valued at $11,806
----------------------------------------------------------------------------------------------------------------
09/03/2003 Common Stock 900,000 Fordham Fin. Mgmt. Inc. Services valued at $11,250
----------------------------------------------------------------------------------------------------------------
09/03/2003 Common Stock 1,100,000 Mandalay Industries, Inc. Services valued at $13,750
----------------------------------------------------------------------------------------------------------------
09/03/2003 Common Stock 3,847,222 Mandalay Industries, Inc. Services valued at $84,950
----------------------------------------------------------------------------------------------------------------
09/29/2003 Common Stock 656,867 Charles Morgan Securities Services valued at $8,211
----------------------------------------------------------------------------------------------------------------
10/09/2003 Common Stock 4,281,333 Michael Terry Additional shares due
for conversion of debt
----------------------------------------------------------------------------------------------------------------
10/09/2003 Common Stock 3,650,000 Leigh A. Coleman Consulting services at $73,000
----------------------------------------------------------------------------------------------------------------
10/09/2003 Common Stock 2,000,000 Thomas Y. Jimenez Officer's salary at $40,000
----------------------------------------------------------------------------------------------------------------
12/31/2003 Common Stock 7,500,000 Timothy M. Huff Officer's salary at $112,500
----------------------------------------------------------------------------------------------------------------
12/31/2003 Common Stock 1,166,667 Thomas Y. Jimenez Officer's salary at $17,500
----------------------------------------------------------------------------------------------------------------
01/15/2004 Common Stock 4,500,000 Timothy M. Huff Conversion of stock options
----------------------------------------------------------------------------------------------------------------
01/15/2004 Common Stock 5,166,666 Thomas Jimenez Conversion of stock options
----------------------------------------------------------------------------------------------------------------
01/15/2004 Common Stock 2,000,000 Jerrold R. Hinton Conversion of stock options
----------------------------------------------------------------------------------------------------------------
01/15/2004 Common Stock 9,000,000 Mitchell A. Siegel Conversion of stock options
----------------------------------------------------------------------------------------------------------------
01/15/2004 Common Stock 1,000,000 Leigh A. Coleman Conversion of stock options
----------------------------------------------------------------------------------------------------------------
01/15/2004 Common Stock 2,666,667 Marcelino Z. Reyes Conversion of stock options
----------------------------------------------------------------------------------------------------------------
02/03/2004 Common Stock 3,202,180 Timothy M. Huff Conversion of stock options
----------------------------------------------------------------------------------------------------------------
02/03/2004 Common Stock 1,243,847 Thomas Y. Jimenez Conversion of stock options
----------------------------------------------------------------------------------------------------------------
02/03/2004 Common Stock 2,003,106 Mitchell A. Siegel Conversion of stock options
----------------------------------------------------------------------------------------------------------------
02/03/2004 Common Stock 6,410,513 Vivian Manevich Conversion of stock options
----------------------------------------------------------------------------------------------------------------
02/03/2004 Common Stock 1,458,333 John A. Coniglio Conversion of stock options
----------------------------------------------------------------------------------------------------------------
02/04/2004 Common Stock 20,796,483 Jerrold R. Hinton Conversion of stock options
----------------------------------------------------------------------------------------------------------------
02/04/2004 Common Stock 16,500,000 Advantage Telecom Asset purchase at $825,000
----------------------------------------------------------------------------------------------------------------
02/05/2004 Common Stock 3,500,000 Newhaven Nominees Asset purchase at $175,000
----------------------------------------------------------------------------------------------------------------
02/17/2004 Common Stock 9,100,000 Przemyslaw Kostro Board compensation at $425,000
----------------------------------------------------------------------------------------------------------------
05/11/2004 Common Stock 108,333 Desiree DeKlerk Consulting services at $6,500
----------------------------------------------------------------------------------------------------------------
05/12/2004 Common Stock 28,000,000 Sanswire Asset purchase at $2,800,000
----------------------------------------------------------------------------------------------------------------
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
----------------------------------------------------------------------------------------------------------------
07/29/2004 Common Stock 1,500,000 James E. Kimble Employee services at $135,000
----------------------------------------------------------------------------------------------------------------
07/29/2004 Common Stock 500,000 Daniel Montgomery Employee services at $45,000
----------------------------------------------------------------------------------------------------------------
07/29/2004 Common Stock 500,000 Ben Saba Employee services at $45,000
----------------------------------------------------------------------------------------------------------------
09/28/2004 Preferred Stock
Series D 250 Mitchell A. Siegel $250,000 purchase of preferred stock
----------------------------------------------------------------------------------------------------------------
11/30/2004 Preferred Stock
Series C 250 Lawrence Lynch $250,000 purchase of preferred stock
----------------------------------------------------------------------------------------------------------------
01/24/2005 Convertible Notes Longview Equity Fund LP
And Warrants Alpha Capital
Aktiengesellschaft
Longview International
Equity Fund LP
Longview Fund LP $1,800,000
----------------------------------------------------------------------------------------------------------------
The Company relied upon the exemption provided in Section 4 (2) under the Act in
connection with each of the above transactions. Shares were issued to officers
and directors of the Company and its subsidiaries for services, in connection
with the acquisition of Global, upon the conversion of debt into equity by
present and former officers/directors and to an entity controlled by our
president, to third party consultants who provided services to the Company
and Global, and in connection with the private placement to accredited investors
who were members of the family of an officer of Global and to one third party
accredited investor.
37
ITEM 27. EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------ -----------
3.1 Certificate of Incorporation of GlobeTel Communications Corp.
(Incorporated by reference)
3.2 By-Laws of GlobeTel Communications Corp. (Incorporated by
reference)
5.1 Opinion of Jonathan D. Leinwand, P.A.
23.1 Consent of Dohan and Company, CPAs
23.2 Consent of Jonathan D. Leinwand, P.A. (included in Exhibit
5.1)
10.1 Asset Purchase Agreement Between Globetel and Sanswire
Technologies Inc.
10.2 Subscription Agreement between Globetel Communications, Corp.,
and Longview Fund, LP, Longview Equity Fund, LP, and Longview
International Equity Fund, LP, and Alpha Capital
Aktiengesellshcaft, dated January 24, 2005 (including the
following items: Exhibit A: Form of Class A Warrant; Exhibit
B: Escrow Agreement; (not including the following items:
Attachment 1: Disclosure Schedule; Exhibit C: Form of Legal
Opinion; Exhibit D: Form of Public Announcement on Form 8-K;
Schedule 5(d): Additional Issuances; Schedule 5(s):
Capitalization; Schedule 9(e) Use of Proceeds; and Schedule
11.1: Other Securities to be Registered). (Incorporated by
reference to the Form 8-K filed January 25, 2004)
UNDERTAKINGS
The undersigned registrant hereby undertakes:
(1) To file, during any period in which it offers or sells
securities, a post-effective amendment to this registration statement
to:
(i) Include any prospectus required by Sections
10(a)(3) of the Securities Act of 1933 (the "Act");
(ii) Reflect in the prospectus any facts or events
arising after the effective date of the Registration Statement
(or the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental
change in the information set forth in the Registration
Statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar
value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form
of prospectus filed with the Commission pursuant to Rule
424(b) if, in the aggregate, the changes in volume and price
represent no more than 20 percent change in the maximum
aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective Registration
Statement;
(iii) Include any additional or changed material
information on the plan of distribution;
(2) That, for the purpose of determining any liability under
the Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
bona fide offering thereof.
38
(3) To remove from registration by means of a post-effective
amendment any of the securities that remain unsold at the end of the
offering.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the small business
issuer pursuant to the foregoing provisions, or otherwise, the small business
issuer has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the small business issuer of
expenses incurred or paid by a director, officer or controlling person of the
small business issuer in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the small business issuer will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
39
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, in the City of Pembroke
Pines, State of Florida on January 31, 2005.
GLOBETEL COMMUNICATIONS CORP.
REGISTRANT
/S/ TIMOTHY M. HUFF
By Timothy M. Huff, Chief Executive Officer
In accordance with the requirements of the Securities Act of 1933, this
registration statement was signed by the following persons in the capacities and
on the dates stated:
/s/ Timothy M. Huff January 31, 2005
---------------------------------
Timothy M. Huff, Chief Executive
Officer and Director
/s/ Thomas Y. Jimenez January 31, 2005
---------------------------------
Thomas Y. Jimenez, Chief
Financial Officer
/s/ Jerrold R. Hinton January 31, 2005
---------------------------------
Jerrold R. Hinton, Director
/s/ Przemyslaw L. Kostro January 31, 2005
---------------------------------
Przemyslaw L. Kostro, Director
/s/ Mitchell A. Siegel January 31, 2005
---------------------------------
Mitchell A. Siegel, Director
/s/ Leigh A. Coleman January 31, 2005
---------------------------------
Leigh A. Coleman, Director
/s/ Michael Molen January 31, 2005
---------------------------------
Michael Molen, Director
/s/ Kyle McMahan January 31, 2005
---------------------------------
Kyle McMahan, Director
40