UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 2005
.....................................................
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _______ to _______
Commission File Number: 0-23532
GLOBETEL COMMUNICATIONS CORP.
(Exact name of registrant as specified in charter)
Delaware 88-0292161
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(State or other jurisdiction of [I.R.S. Employer Identification No.]
incorporation or organization)
9050 Pines Blvd. Suite 110 Pembroke Pines, Florida 33024
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(Address of Principal Executive Offices) (Zip Code)
Issuer's telephone number: (954) 241-0590
Securities registered under Section 12 (b) of the Exchange Act:
Common Stock Par Value $.00001 per share AMEX (American Stock Exchange)
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Title of each class Name of exchange on which registered
Securities registered pursuant to Section 12 (g) of the Exchange Act:
___________________________________________________________
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes. |X| No: |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (ss. 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definite proxy
or information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes |_| No: |X|
1
State issuer's revenues for its most recent fiscal year ended December 31, 2005:
$81,143,838.
As of March 2, 2006, there were 102,808,081 shares of the issuer's common stock
issued and outstanding. Affiliates of the issuer own 9,631,393 shares of the
issuer's issued and outstanding common stock and the remaining 93,176,688 shares
are held by non-affiliates. The aggregate market value of the shares held by
non-affiliates at March 2, 2006, was $265,904,983.
DOCUMENTS INCORPORATED BY REFERENCE:
There are documents incorporated by reference in this Annual Report on Form
10-K, which are identified in Part III, Item 13.
Transitional Small Business Disclosure Format (Check one): Yes |_| No |X|
(*) Affiliates for the purposes of this Annual Report refer to the officers,
directors of the issuer and subsidiaries and/or persons or firms owning 5% or
more of issuer's common stock, both of record and beneficially.
"ANNUAL REPORT ON FORM 10-K/A-1 TO THE UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
FOR THE YEAR ENDED DECEMBER 31, 2005
EXPLANATORY NOTE
GlobeTel is amending its filing on form 10-K made on March 31, 2006 to include
certain information that was omitted from the section "COMPENSATION OF
DIRECTORS" and to include the conformed signature of the auditor on the audit
report. The conformed signature was inadvertently omitted from the filing."
TABLE OF CONTENTS
Item No. Page
------------------------------------------------------------------------
PART I
Item 1. Business 3
Item 1A. Risk Factors 11
Item 2. Properties 12
Item 3. Legal Proceedings 12
Item 4. Submission of Matters to a Vote of Security Holders 13
PART II
Item 5. Market for Registrant's Common Equity, Related
Stockholder Matters and Issuer Purchases of
Equity Securities 14
Item 6. Management's Discussion and Analysis of
Financial Condition and Results of Operation 16
Item 7. Financial Statements and Supplementary Data 22
Item 8. Changes in and Disagreements with
Accountants on Accounting and Financial Disclosure 69
Item 8A. Controls and Procedures 69
Item 8B. Other Information. 70
PART III
Item 9. Directors and Executive Officers of the Registrant 71
Item 10. Executive Compensation 73
Item 11. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters 75
Item 12. Certain Relationships and Related Transactions 76
Item 13. Principal Accountant Fees and Services 76
PART IV
Item 14. Exhibits and Financial Statement Schedules 76
2
PART I
ITEM 1. DESCRIPTION OF BUSINESS
General
GlobeTel Communications Corp. (GlobeTel), a Delaware corporation established in
July 2002, GlobeTel Communications Corp. ("Globetel") is engaged in the business
of providing telecommunication services, primarily involving Internet telephony
using Voice over Internet Protocol ("VoIP") technology and equipment, Stored
Value services, and wireless communications both domestically and
internationally, including Mexico and certain countries in South America, Europe
and Asia. In addition, our subsidiary, Sanswire Networks, LLC, 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. Although through December 31, 2005, only the telecommunications
activities produced revenues, all of our operations are considered to be of
relatively equal importance, based on the anticipation of future revenue
producing activities and substantial investment in assets related to all of our
operations.
On May 6, 2005, by written consent of the majority vote of its shares, the Board
of Directors approved a reverse split of our shares of common stock on a one for
fifteen (1:15) basis, in preparation for our move to the American Stock
Exchange, which occurred on May 23, 2005. All common stock amounts in this
report have been retroactively restated to account for the reverse stock split,
unless otherwise noted.
GlobeTel is authorized to issue up to 150,000,000 shares of Common Stock, par
value $0.00001 per share, and 10,000,000 shares of Preferred Stock, par value
$0.001. There were 1,500,000,000 authorized pre-split shares. Upon reverse
split, they became 100,000,000 authorized shares, and subsequently increased to
150,000,000 in August 2005.
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. The dividends, liquidation
rights and other preferences for each class of Preferred Stock are explained in
Item 7, Financial Statements, Note 26.
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
Corporation subsidiary ("Global"), and (ii) wide area network and local area
network services provided through its NCI Telecom, Inc. subsidiary ("NCI").
Global 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.
When ADGI exchanged all of its outstanding shares of common stock for GlobeTel
common stock, ADGI became a wholly-owned subsidiary of GlobeTel and GlobeTel
began conducting the business formerly conducted by ADGI.
We have a 99% ownership of GTCC de Mexico, S.A. de C.V., a Mexican company
established to represent our 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. GTCC de Mexico is utilized in connection with our
operations in Mexico, including Banco Azteca and Marcatel, as discussed herein.
GlobeTel is currently pursuing other opportunities with additional
telecommunications partners in Mexico. In 2004, we formed wholly-owned
subsidiaries: Sanswire Networks, LLC (Sanswire-FL) for our Stratellite project;
and Centerline Communications, LLC, (Centerline or CLC) and its wholly-owned
subsidiaries, EQ8, LLC, G Link Solutions, LLC, Volta Communications, LLC, and
Lonestar Communications, LLC for the purpose of the recording and managing the
sale of wholesale minutes and related network management functions. In 2005, we
incorporated High Valley Property Ltd. to create a holding company for
international businesses, as well as Globetel Wireless Corp. and Globetel
Wireless Europe GmbH to enable a faster deployment of our wireless networks and
activities across Europe and on a global scale.
In 2004, we acquired a 73.15% interest in Consolidated Global Investments, Ltd.
(CGI), formerly known as Advantage Telecommunications, Ltd. (ATC), an Australian
company. In December 2005, we sold our holdings back to CGI, returning all of
our shares and options in CGI, and retaining a deposit of approximately $1.4
million that was held for CGI.
Business of GlobeTel
We are a telecommunications and financial services company with a broad and
expanding range of both current and contemplated services, product lines, and
projects as described below. Our core products and services are: telephony
services that include international wholesale carrier traffic, networks,
enhanced services - prepaid calling services and IP Telephony. Our non-telephony
products and services include: Stored Value Card Programs and outsourced stored
value services for the international banking and telecommunications community.
Our Super Hub(TM) network is currently in development and it is our intention to
deploy the Stratellites as the most efficient and cost effective means of
interconnecting the Super Hub(TM) network.
3
In our efforts to be on the cutting edge or pioneers in the telecommunication
industry, from time to time, we embark on certain services, product lines and
projects and enter into certain contractual and non-contractual relationships,
which we may subsequently deem unfeasible, impractical, cost prohibitive or
otherwise incompatible with our overall business plans. In such cases, we
disclose the initial intent and anticipated result of the applicable service,
product, project or relationship. We further disclose the current status of each
project and current and/or contemplated changes resulting from the factors
mentioned above.
Super Hubs(TM)
We have consolidated our operations on the development of the Super Hub(TM) and
its application in the maturing foreign markets utilizing VoIP technology.
Further, we have limited our activities in some markets to focus on
opportunities with greater margins.
Each Super Hub(TM) will be interconnected and equipped to provide one-stop
shopping for quality voice and data communications. The Super Hub(TM) 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 IP.
Our intention is to use the Stratellites (discussed below) as the most efficient
and cost-effective means of interconnecting our Super Hubs(TM).
International Wholesale Carrier Traffic
The business of International Wholesale Carrier traffic is a business whereby we
buy and we sell large blocks of calling minutes with particular origination and
termination points. In some instances, we enter into agreements with established
international telephone carriers to deliver international calls into their
domestic telephone networks for termination to the parties being called.
Additionally we purchase a bulk package of minutes to specific destinations and
then resell these minutes in smaller quantities to individual and business
customers. In most instances, our customers prepay for these minutes or post
letters of credit with our bank, securing their purchases.
Beginning in July 2004, we began to migrate these operations from GlobeTel, the
parent company, to our subsidiary, Centerline and its subsidiaries. The
migration was completed in the beginning of September 2004 and international
carrier traffic immediately began to ramp up on the networks. In June of 2005,
we consolidated all of the telecommunication equipment from our Hong Kong switch
into our new switch in Los Angeles, California. Centerline's switch facility in
Los Angeles is now fully operational. There is currently no anticipated
expansion other than some necessary VoIP equipment that will be required.
Centerline's TDM switch - a Nortel DMS-250 SuperNode - has sufficient capability
to handle all of the capacity necessary to achieve $10 million in gross monthly
revenues, or approximately 250 million minutes per month.
Networks
To provide our services, we interconnect with licensed carriers in each country
we desire to provide calling services. In some countries, we place electronic
equipment called a "hub" on the carrier's premises and then interconnect with
their local network. In other countries, we connect directly to the carrier's
hub, which is connected to the local telephone network in that country. We
maintain hubs in Miami, Los Angeles, Monterrey-Mexico, and Sao Paulo-Brazil.
When we establish service to a new country and traffic volume is relatively low,
we create a "virtual" network connection between the two hubs. Virtual networks
have been described as "tunnels" through the Internet.
A virtual network is limited 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 hubs
in the form of a leased high speed line. Leased lines have much greater
traffic-carrying capacity than virtual networks. We are immediately able to
handle a greater volume of calls than the virtual network allows.
We also provide network management services to customers, which includes testing
routes, troubleshooting and service requests.
GlobeTel VoIP
On October 7, 2005, we announced the launch of our flexible, private-label
consumer VoIP platform designed and built specifically for service providers.
The completely customizable solution known as StrateVoIP provides everything
required to turn an existing service provider into a leader in VoIP technology
without the usual obstacles involved in building out a carrier-class VoIP
platform. StrateVoIP is a private-label solution designed for ISPs, cable
companies, telcos, and all other providers desiring to offer VoIP services to
their local markets. The StrateVoIP platform is operated using our proprietary
VoIP software package, which allows clients to design and architect completely
customized calling packages to fit the needs of their specific local markets.
With the StrateVoIP platform clients can utilize their own brand, deliver a
single bill and provide direct customer support to its customers. StrateVoIP's
web administered MIS platform provides each client with an integrated, tested
and operational telephony service, which includes StrateVoIP's customized
network operations support systems, managed switching platforms, live network
interfaces, and IP and TDM carrier interconnects. StrateVoIP provides a unique
sales and marketing strategy via the customizable platform which provides real
time web-based functionality, enabling clients to set up custom calling plans by
country or region with customized rate management for profitability control. The
consumer experience is powered by a variety of devices including wireless and
broadband based VoIP hardware which is completely plug and play, while providing
advanced calling features such as real-time accounting, web and email-based
voicemail, and global "follow-me" services. StrateVoIP has focused on the Latin
American market and began initial testing and deployment in Brazil during the
fourth quarter. Together with our Brazilian partners, the StrateVoIP platform is
in late stages of testing. The retail service will be rolled out initially in
Brazil followed by expansion into the Latin American region.
4
Stored Value Services
In late 2003, we began offering new products and services which we call the
MagicMoney(R) program. The features of the MagicMoney(R) program allow
telecommunications companies and financial institutions worldwide to add true
stored value services to their existing products and create new products, while
maintaining the convenience, security, and acceptability of a MasterCard or
Visa. MagicMoney(R) stored value services include: prepaid long-distance and
international calling services, debit card "electronic bank accounts" and funds
sharing services.
We developed the MagicMoney(R) program as a stored value product to sell into
specific ethnic communities around the world so that overseas foreign workers
remain connected with their family members and friends in their country of
origin. Some of the features that make our product unique are the combination of
such stored value services as inexpensive prepaid calling services, funds
sharing between linked cardholders, electronic banking services and a full
complement of debit card services that are offered anywhere the Maestro and
Cirrus logos are found, which covers between 5 - 8 million merchants and
approximately 1 million ATMs around the world.
Currently, our programs are geared towards Latin American, Indian, Filipino and
Asian market segments linking their overseas family members to home. 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.
We are presently working on a number of MagicMoney(R) projects. By having
developed a comprehensive stored value services platform and system
infrastructure we are able to support a unique range of innovative solutions for
telecommunications companies, financial institutions, credit card processors,
retail outlets, nonprofit organizations and additional businesses in a range of
vertical markets that already have their own existing card programs.
We are now recognized as "an enabler" of stored value applications and
technology. Our suite of stored value applications aid firms with existing card
programs and bring to them flexibility to add ancillary services to their cards.
These ancillary services help firms create new profit centers from current
products, drive new value added benefits for existing cardholders and create new
marketing vehicles for firms to attract new cardholders and grow their
businesses. These new stored value technology based solutions further define our
paradigm shift.
We have developed a wireless access application to enable the cardholders in the
United States to access all of the stored value features and functionally via
their mobile phones using SMS technology.
Enhanced Services - PrePaid Calling Services
Our enhanced services use proprietary software that operates on our switch
interconnected with various customer networks. Pre-paid calling services are the
most widely used enhanced service. Our prepaid calling services allow carrier
customers and reseller customers to sell their own branded prepaid calling cards
in their markets and allows their customers to make both domestic and
international calls.
We are focusing on prepaid calling services and outsourcing the use of our
enhanced services switch. We are a provider and enabler of these services having
expanded our market from telephone companies and prepaid calling card resellers
to financial institutions who wish to create new revenue sources from their
existing bank card customer base by introducing new value added services to
their bank cards.
Agreement with Financial Software & Systems in India
On November 9, 2005, we announced that we have signed an agreement with
Financial Software & Systems (P) Ltd ("FSS") based in Chennai, India. The
purpose of the agreement is to establish a commercial relationship between
GlobeTel and FSS that will enable the parties to work together to market stored
value and money remittance programs, targeting tens of millions of existing
banking customers in the $12 billion Indian remittance market. The Company is
confident that partnership with FSS will provide significant advantages to both
organizations.
5
FSS focuses its business in Electronic Funds Transfer ("EFT") solutions and
outsourced services which power the majority of ATMs and Point-of-Sale ("POS")
terminals in India, controlling most of the Electronic Funds Transfers in the
country. FSS also provides third-party processing as an outsourced application
services for many of the largest banks in India.
The company believes that its relationship with FSS will bring cutting edge
technology solutions to banks and financial institutions in India and across the
globe. FSS is leveraging its extensive domain knowledge in payment processing
and transaction switching across various touch points with highly skilled
software development and implementation resources, world-class IT
infrastructure, and global partnerships.
GlobeTel Wireless, Russian Joint Venture Agreement
As of December 30, 2005, GlobeTel Wireless Corp. ("GTEW") had entered into a
binding agreement to install wireless communications networks in 30 cities
throughout the Russian Federation, providing broadband, VOIP and DECT
technologies. GTEW had entered into an agreement with LLC Internafta
("Internafta") of Moscow, Russia, whereby Internafta will pay to GTEW a series
of four construction payments totaling US$600 million for the installation of an
array of proprietary networks to be installed in Russia's 30 largest cities,
starting with Moscow and St. Petersburg. GTEW will both manage the completed
network and will retain an ongoing 50% interest in the operations of the
network, allowing the Company to enjoy the benefits of the recurring revenue
stream. GlobeTel plans to roll out the network in 3 stages, comprising 10 cities
each, over the next 27 months.
On March 2, 2006 the Company announced that Internafta had requested an
additional delay in the closing of the funding until the week of March 6, 2006.
The Company has provided Internafta and its banks with a significantly expanded
business plan outlining, in detail, the company's program for equipment
manufacturing, delivery, installation, testing, monitoring, staffing, progress
payment requirements, and other pertinent information. Internafta advised the
Company that its funding has been approved by its bank syndicate, subject only
to the bank's final review and analysis of the business plan.
Internafta has informed GlobeTel that its bank recommends that smaller, more
frequent, progress payments be established so that the necessary staged payments
can be delivered to GlobeTel as and when the network is delivered and installed.
These smaller, more frequent, staged payments do not reduce the total capital
value of the agreement with GlobeTel Wireless or change any other terms of the
agreement. GlobeTel will still receive $600 million for deployment of the
network. The exact amount of the new proposed initial deposit, and the size and
timing of the new proposed progress payments, will be discussed and agreed with
GlobeTel once the bank has completed its due diligence and when the bank group
formally accepts the terms of Internafta's proposed banking instrument.
On March 17, 2006, the Company announced that based upon differences between the
Company and Internafta on the financing process, the parties have agreed to
revise their agreement to more accurately reflect the timing of payments
GlobeTel expects to receive for the build out of the 30 city wireless network in
Russia and allow Internafta additional time to begin making payments.
Updates of Disclosed Stored Value Service Agreements & Programs
Banco Azteca Letter of Intent
In February 2005, we signed a Letter of Intent (LOI) with Banco Azteca, the
fifth largest financial institution in Mexico. The agreement with Banco Azteca
would have further cemented our position in Mexico serving the Latin American
Market Segment. The company was working with Banco Azteca to initiate a stage
development that would have enabled 2.5 million existing Banco Azteca debit
cards to be used for prepaid calling. However, based on the business terms
presented, the company has decided not to move forward with this deal.
Bankcard Agreement
In June 2004, we entered into an agreement with Bankcard Inc. (Bankcard), 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
MasterCard and/or VISA card 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.
We and Bankcard are presently working on the deployment of a MasterCard
Electronic Signature based Stored Value Card to be launched in the Philippines,
the Middle East and additional countries in South East Asia.
We are working with Bankcard on technical and systems integration. Creative and
program development is now underway for the co-branded card design, program and
marketing development. Having had the opportunity to address and resolve certain
legal issues relating to Philippine law and United States legal and regulatory
compliance, we were slated to perform the initial launch of this program during
the first quarter of 2006, however, due to additional regulatory requirements,
the launch as been rescheduled for second quarter of 2006.
6
Globe Telecom Memorandum of Agreement
In October 2004, we signed a Memorandum of Agreement (MOA) with Philippine
mobile giant Globe Telecom (Globe) to jointly develop an integrated payment
system that 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 (G-Cash). 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. The
Company is at the end stages of testing the software application to support
G-Cash. Due to regulatory requirements, the project has experienced delays. The
Company is currently in negotiations with several banks who are interested in
participating in the program during fiscal year 2006.
Equitable Card Letter of Understanding
In August 2004, we signed a Letter of Understanding (LOU) with Equitable Card
Network, Inc. for Equitable to enable the Company to issue GlobeTel branded VISA
Electron Cards in the Philippines. We were working with Equitable to define the
nature, type and scope of the relationship we will be forming to issue VISA
Electron cards in the Philippines. However, based upon the business terms
presented, we will not be moving forward with this deal.
Pier One Filipino Seafarers Union
In July 2004, we entered into an agreement with Pier One to develop our Stored
Value Card Program for seafarers. The "Lighthouse Card" will allow Filipino
seafarers to load and remit cash from overseas at special rates. Corresponding
Lighthouse cardholders in the Philippines can then withdraw money from any ATM
in the Philippines and access their account from most locations throughout the
world. This program has been put on hold pending further research of
requirements under Maritime Law.
First Class Professional Agreement
In August 2004, we entered into an agreement with First Class Professional Human
Resources, Inc. (FC Professional), a Philippines corporation based in Manila, to
develop our Stored Value Program for use by its members in Japan. FC
Professional represents approximately 40,000 Filipino workers in Japan. Because
of the difficulty in providing this service in Japan, we have decided not to
continue pursuing this opportunity at this time.
OnQ Program
In July 2004, we announced the launching of our Stored Value Card Program in
Australia, Bill Express, through the 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. Due to unfavorable business conditions, we have
decided to pursue other POS solutions with another vendor.
Timesofmoney.com Memorandum of Understanding
In September 2004, we entered into a Memorandum of Understanding ("MOU") with
Times of Money in which 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. Based upon our recent agreement with
FSS, we will not be going forward with this program.
Englewood Agreement
In May of 2004, we signed a joint venture agreement with Englewood Corporation
whereby ("Englewood") would provide all of its current and future business
opportunities to GlobeTel. This included carrier customers, carrier termination
networks, stored value products and services and value added ATM, debit and
credit card products for both financial and non financial products and services
and the processing capabilities for such transactions on ATM/debit card networks
including but not limited to MasterCard Inc, MasterCard International, VISA and
private banking ATM networks. Through Englewood and its subsidiaries carrier
traffic, foreign termination and stored value card processing capabilities were
underway. However, due to the migration of the wholesale carrier traffic
business to our subsidiary Centerline Communications (switch facility in Los
Angeles), we have decided not to pursue the carrier business aspect of this
deal. Englewood has continued to assist the company in identifying potential
clients on the debit card business and is providing support with the IP
telephony business.
7
Processing Switch Agreement
In August 2004, through Englewood Corporation, we 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 GTE stored value card programs around the
world, as well as other third party cards. Both parties will contribute equally
to the operation of the Miami switch. The switch is expected to be certified to
process MasterCard, Visa, Cirrus, and other independent ATM network
transactions. The switch will be installed and integrated by Englewood
Corporation. Operations were expected to begin by the first quarter of 2006, but
due to regulatory requirements, operations have been rescheduled to begin in the
second quarter 2006.
On July 7, 2005, we announced we had entered into a licensing agreement with
RapidMoney(R) Corporation that allows us to use and modify the RapidMoney(R)
system. We, along with our venture partner, GI, will incorporate the current
RapidMoney(R) funds transfer software applications for merchant Point of Sale
("POS") terminals into the our Stored Value International Remittance Services.
Furthermore, this license allows us and GI to develop additional applications
based on the RapidMoney(R) system that will be deployed in the retail locations
which are offering their Stored Value Card Program services. Located in San
Antonio, Texas, RapidMoney(R) Corporation developed a system for personal money
transfers on easy-to-use POS terminals.
SANSWIRE NETWORKS, LLC ("SANSWIRE")
Sanswire is developing high-altitude airships called Stratellites that support
wireless broadband network, which in turn, will be used to provide wireless
voice, video, and data services. These Stratellites will form strategic nodes
for the Super Hub(TM) Network. 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 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
state-of-the-art energy storage technologies.
In addition to Sanswire's Wireless Broadband Network, proposed
telecommunications uses include cellular, 3G/4G mobile, MMDS, paging, fixed
wireless telephony, HDTV and others.
We believe that we will be able to use the Stratellites as the most efficient
and cost-effective means of interconnecting our Super Hubs(TM).
The Stratellite is being designed to operate at an altitude of between 55,000
and 65,000 feet using GPS coordinates to achieve its on-station position.
Testing of the second Stratellite prototype began in the first quarter of 2006
and will continue through the second quarter. In parallel, we are planning to
develop the Sanswire 3 commercial prototype.
We have had on-going discussions with several groups within the U.S. government
and military concerning the rollout and use of the Stratellite. Further, we are
in discussions with the other corporate and private groups, as well as foreign
governments, all of whom have expressed interest in the development and
commercial viability of the Stratellite.
Sanswire has been contacted by the U.S. Army's Space and Missile Defense Command
(SMDC), which expressed its desire to be involved in the sharing of technology
and information as well as possible involvement in the development of the
Stratellite. In addition to the commercial applications being developed by us,
the SMDC sees several military intelligence gathering and operational
applications for Stratellite-type systems.
On January 18, 2005, we signed a Letter of Intent ("LOI") with the National
Aeronautics and Space Administration ("NASA"). The agreement with NASA's Dryden
Flight Research Center at Edwards Air Force Base in California positions us for
future governmental associations and business development ventures. The LOI will
create a framework for creation of a Space Act Agreement between GTEL, the
developer and provider of the Stratellite, a High Altitude Platform (HAP)
Airship, and NASA Dryden Research Center. The company is currently working with
NASA for flight test support and is also working with the Glenn Research Center
working with subcomponents Photovoltaic Solar cells.
The parties also envision that the agreement will employ provisions for joint
advocacy and proposal development efforts in the pursuit of future new business
opportunities of mutual benefit. The agreement will provide NASA and other
agencies the access to the Stratellite for the installation, integration, and
deployment of NASA sponsored sensors and other projects. Under the proposed
agreement, other government agencies may, in cooperation with NASA Dryden,
utilize the Stratellite for their projects and requirements.
On March 8, 2005, we announced a global strategy for Sanswire. We signed a
Letter of Intent to immediately establish Sanswire Europe S.A., its first
regional operating subsidiary. Sanswire Europe will be a joint venture between
GlobeTel's wholly-owned operating subsidiary, Sanswire Networks, LLC and
Strato-Wireless Ltd. (SWL), in which GlobeTel will own 55% and Strato-Wireless
will own 45% of the shares of the European Venture. The new operation is being
managed by J. Randolph Dumas, a former senior Managing Director at global
investment banking firms. Mr. Dumas provides GlobeTel with decades of business
experience throughout Europe and the Middle East. Mr. Dumas is a member of the
Board of Directors of Globetel.
8
Sanswire Europe was formed to generate government, military and corporate
contracts for Sanswire's Stratellite platforms within Europe. Sanswire Europe
will extend the Sanswire operations into Europe, the Middle East and Africa.
Eventually, other regional Sanswire entities will be created to develop
opportunities in other regions including Asia and Latin America.
On September 6, 2005, Sanswire signed a Letter of Intent ("LOI") with the Center
for Solar Energy and Hydrogen Research Baden-Wuerttemberg (ZSW). The LOI states
that ZSW will provide research and development engineering support under a
Cooperative Research and Development Agreement for the development of a
state-of-the-art solar-electric propulsion system for Sanswire's Stratellite
airship.
On March 1, 2006, we announced that our Sanswire Networks LLC subsidiary had
successfully floated the Sanswire II Technology Demonstrator Airship in
Palmdale, California. This initial testing phase marked the first test of many
currently planned for the program. This first phase will test the integrated
subsystems within the Stratellite. The Sanswire float test followed our
streamlined test procedure in order to validate the envelope integrity with the
Sanswire proprietary lifting system and carbon composite structure. The testing
process was governed by test procedures through a strict Quality Management
System, which ensures both the safety and success of this demonstration.
COMPETITIVE BUSINESS CONDITIONS - SANSWIRE PROJECT
We are aware of other companies that are also developing high altitude platforms
similar in nature to our Stratellite project. However, we currently believe that
the research, development, and, ultimately, the production process to produce
and market the Stratellite are proceeding at a faster rate than our known
competitors. Furthermore, since the Sanswire technology and Stratellite project
are currently in the development stage, there can be no assurance that the
project will successfully complete the development stage and result in a
commercially viable product. Even if a properly functioning, commercially viable
product is established there can be no assurance that revenues will be achieved
from the sales of Stratellites or that the costs to produce such revenues will
not exceed the revenues or that the project will otherwise be profitable.
However, we do believe that the technology and other intangible assets
associated with this project currently have a realizable fair value in excess of
the recorded value of approximately $2.8 million. While the Company is confident
as to the outcome of the project, there can be no assurance that we will be able
to successfully achieve the results we anticipate with this project.
COMPETITIVE BUSINESS CONDITIONS - TELECOMMUNICATIONS SERVICES
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 IP technology and our proprietary systems and products enables us to
provide customers with competitive pricing for telecommunications and stored
value services. Nonetheless, there can be no assurance that we will be able to
successfully compete with major carriers and financial services companies in
present and prospective markets. We are dependent upon local independent
affiliates or associates partners in each market for sales and marketing,
customer service and technical support. 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. While there can be no assurances, we
believe that we will be able to compete in our present and prospective markets.
SOURCES AND AVAILABILITY OF HARDWARE AND SOFTWARE
All equipment used by us is provided by major suppliers and is readily
available. Software to operate the networks is commercially available from
software suppliers and equipment suppliers, and GlobeTel has developed in-house
proprietary software for network applications and stored value products. We are
dependent upon many suppliers of hardware and software. However, we use
equipment from prime manufacturers of equipment including Cisco, Motorola, SUN,
HP and Newbridge Networks, among others.
SOURCES AND AVAILABILITY OF TECHNICAL KNOWLEDGE AND COMPONENT PARTS
The Sanswire project requires a high level of technological knowledge and
adequately functioning component parts and sub-assemblies to continue the
project and achieve commercial viability. We have current and contemplated
arrangements for supply of both internal and external technical knowledge to
provide the intellectual capital to continue with this project. Specifically,
there is a high level of interest and anticipated cooperation from technical
experts within the government, military, and commercial sectors, including NASA.
Similarly, we have current and contemplated arrangements for supply required
component parts, both internally developed, as well as, outsourced from
specialty contractors to provide component parts to continue with this project
in the near term.
9
DEPENDENCE ON A FEW CUSTOMERS
As discussed below in Item 6, Management Discussion and Analysis and Plan of
Operation, we are currently dependent on a limited number of customers. As we
expand our products, services, and markets, we expect to substantially broaden
our customer base and reduce our dependence upon just a few customers.
TRADEMARKS / REGISTRATIONS
GlobeTel is the owner of the following trademarks:
MAGIC MONEY, GLOBETEL and STRATELLITE are internationally registered under the
Madrid Protocol. GLOBETEL and MAGIC MONEY have been filed in the United States,
Brazil and Canada.
GLOBETEL was registered in Mexico by Globe Tel, S.A. de C,V. of Juarez, Mexico
on October 31, 2002.
STRATELLITE has been filed in the United States, Peru, Canada, Mexico, and
Colombia.
SANSWIRE, INVADER and SKYBOT have been filed in the United States; SANSWIRE logo
registration has been filed in the United States, under the Madrid Protocol,
Bahrain, Canada, Mexico, Brazil, Argentina, Chile, Colombia and Peru.
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 associate 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.
RESEARCH AND DEVELOPMENT
Research and development (R&D) costs for 2005 and 2004 in connection with our
Sanswire project were $2,338,120 and $260,085, respectively. Since our
acquisition of the Sanswire assets in April 2005, increasing amounts of time and
resources are devoted to Sanswire, and time and resources are expected to
continue increasing in the near team as our Stratellite project continues and
expands. In 2005, GlobeTel's Wireless R&D expenses amounted to $26,553.
NUMBER OF TOTAL EMPLOYEES AND NUMBER OF FULL-TIME EMPLOYEES
At present we have 65 full-time employees, including our executive officers and
employees of our subsidiaries. We do not believe that we will have difficulty in
hiring and retaining qualified individuals in the fields of Internet telephony
and other communications projects although the market for skilled technical
personnel is highly competitive. Through our Sanswire subsidiary, we hired four
highly skilled engineers in connection with our Stratellite project during 2005.
10
ITEM 1A. RISK FACTORS
FORWARD-LOOKING STATEMENTS AND RISK FACTORS
Certain information included in this Form 10-K and other materials filed or to
be filed by GlobeTel Communications Corp. ("GlobeTel," "we" "us" or "ours") with
the Securities and Exchange Commission (as well as information included in oral
or written statements made from time to time by us, may contain forward-looking
statements about our current and expected performance trends, business plans,
goals and objectives, expectations, intentions, assumptions and statements
concerning other matters that are not historical facts. These statements may be
contained in our filings with the Securities and Exchange Commission, in our
press releases, in other written communications, and in oral statements made by
or with the approval of one of our authorized officers. Words or phrases such as
"believe", "plan", "will likely result", "expect", "intend", "will continue",
"is anticipated", "estimate", "project", "may", "could", "would", "should" and
similar expressions are intended to identify forward-looking statements. These
statements, and any other statements that are not historical facts, are
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995, 15 U.S.C.A. Sections 77Z-2 and 78U-5 (SUPP.
1996), as codified in Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934, as amended from time to time (the
"Act").
Those statements include statements regarding our intent, belief or current
expectations, and those of our officers and directors and the officers and
directors of our subsidiaries as well as the assumptions on which such
statements are based. Prospective investors are cautioned that any such
forward-looking statements are not guarantees of future performance and involve
risks and uncertainties, and that actual results and the timing of certain
events may differ materially from those contemplated by such forward-looking
statements.
In connection with the "safe harbor" provisions of the Act, we are filing the
following summary to identify important factors, risks and uncertainties that
could cause our actual results to differ materially from those projected in
forward-looking statements made by us, or on our behalf. These cautionary
statements are to be used as a reference in connection with any forward-looking
statements. The factors, risks and uncertainties identified in these cautionary
statements are in addition to those contained in any other cautionary
statements, written or oral, which may be made or otherwise addressed in
connection with a forward-looking statement or contained in any of our
subsequent filings with the Securities and Exchange Commission. Because of these
factors, risks and uncertainties, we caution against placing undue reliance on
forward-looking statements. Although we believe that the assumptions underlying
forward-looking statements are reasonable, any of the assumptions could be
incorrect, and there can be no assurance that forward-looking statements will
prove to be accurate. Forward-looking statements speak only as of the date on
which they are made. We do not undertake any obligation to modify or revise any
forward-looking statement to take into account or otherwise reflect subsequent
events, or circumstances arising after the date that the forward-looking
statement was made.
This annual report also contains certain estimates and plans related to the
telecommunications industry in which we operate. The estimates and plans assume
that certain events, trends and activities will occur, of which there can be no
assurance. In particular, we do not know what level of growth will exist, if
any, in the telecommunications industry, and particularly in those domestic and
international markets in which we operate. Our growth will be dependent upon our
ability to compete with larger telecommunications companies, and such factors as
our ability to collect on our receivables and to generate profitable revenues
from operations and/or from the sale of debt or equity securities, of which
there can be no assurance. If our assumptions are wrong about any events, trends
and activities, then our estimates for the future growth of GlobeTel and our
consolidated business operations may also be wrong. There can be no assurance
that any of our estimates as to our business growth will be achieved.
The following risk factors may affect our operating results and the environment
within which we conduct our business. If our projections and estimates regarding
these factors differ materially from what actually occurs, our actual results
could vary significantly from any results expressed or implied by
forward-looking statements. These risk factors include, but are not limited to:
o Changes in general economic, demographic, geopolitical or public
safety conditions which affect consumer behavior and spending,
including the ongoing ramifications of the September 11, 2001
terrorist attacks and the governmental response to those attacks,
including the armed conflict in Iraq or other potential countries;
o Increasing competition in the VoIP segment of the telecommunications
industry;
o Adverse Internet conditions which impact customer traffic on our
Company's networks in general and which cause the temporary
underutilization of available bandwidth;
o Various factors which increase the cost to develop and/or affect the
number and timing of the openings of new networks, including factors
under the influence and control of government agencies and others;
o Fluctuations in the availability and/or cost of local minutes or
other resources necessary to successfully operate our Company's
networks;
o Our Company's ability to raise prices sufficiently to offset cost
increases, including increased costs for local minutes;
o The feasibility and commercial viability of our Stratellite project;
related contemplated funding from third parties to finance the
project, and necessary cooperation with various military and
non-military agencies of the United States government, and similar
agencies of foreign government and telecommunication companies;
o Depth of management and technical expertise and source of
intellectual and technological resources; o Adverse publicity about
us and our business;
o Our current dependence on affiliates in our overseas markets;
o The rate of growth of general and administrative expenses associated
with building a strengthened corporate infrastructure to support our
Company's growing operations;
o Political and economic risks of doing business outside the United
States, relations between our Company and its employees; legal
claims and litigation against the Company;
o The availability, amount, type, and cost of capital for the Company
and the deployment of such capital, including the amounts of planned
capital expenditures;
o Changes in, or any failure to comply with, governmental regulations;
the amount of, and any changes to, tax rates and the success of
various initiatives to minimize taxes; and other risks and
uncertainties referenced in this Annual Report on Form 10-K.
11
This statement, and any other statements that are not historical facts, are
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995, as codified in Section 27A of the Securities Act
of 1933 and Section 21E and the Securities Exchange Act of 1934, as amended from
time to time (the "Act").
ITEM 2. DESCRIPTION OF PROPERTY
We have leased 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 (plus 6% sales tax), and
increases of 4% per year.
In November 2004, we leased additional adjacent space under the same terms and
period as the existing lease, bringing the total monthly office rent to $9,186
(including sales tax).
In June 2005, we negotiated with the landlord to lease an additional 5,000
square feet office on the second floor of our present facility, 9050 Pines
Blvd., Pembroke Pines, Florida 33024. The Company will begin occupancy of this
office in April 2006 and the lease expires in June 2009 with a monthly rent of
$9,186 (including sales tax).
In January 2005, we satisfied our lease obligation at 444 Brickell Avenue, Suite
522, Miami, Florida 33131 and have no further obligation in the property.
We have leased a 66,000 square foot space hanger in Palmdale, California. The
initial lease, between Sanswire Networks, LLC and the City of Los Angeles World
Airports, was for a term of three months, ended July 22, 2005 with a monthly
rent of $19,990. On June 8, 2005 the lease term was amended for fifteen months,
commencing June 8, 2005 through September 7, 2006, with two one-year options.
Concurrently with the signing of the amended lease, the parties entered into a
reimbursement agreement to share the cost of certain improvements.
In January 2005, we signed a lease agreement with the San Bernardino
International Airport Authority for hangar space at the airport in San
Bernardino, CA for the purpose of assembling and storing the Stratellite
prototype. The term of the agreement was January 15, 2005 through March 31,
2005, at a monthly lease rate of $9,767. Three months prepaid rent totaling
$29,302 was paid in December 2004.
Sanswire Technologies, Inc., the company from which we purchased our intangible
assets, had an office space lease in Dekalb County, GA. The lease term was from
April 1, 2004 through March 31, 2005, with monthly rent of $2,628. Although not
directly obligated on this lease, the company paid the monthly rent from May
2004 through March 2005, whereas employees of our subsidiary, Sanswire Networks,
LLC, utilized the premises. The employees have since vacated the premises. The
lease was terminated.
In September 2005, we leased a 2,919 square foot office in Naples, Florida. The
initial lease, between Globetel Wireless Corp., and Decaster Capnole Joint
Venture, is for a term of three years, ending on September 21, 2008 with a
monthly rent of $4,628.33 with increases of 4% per year.
Furthermore, due to our expected growth, including the addition of new
subsidiaries and operations, additional space may be required in various
locations in the United States and abroad in the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
FORMER CONSULTANTS LITIGATION
We are defendant in two lawsuits filed 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). These matters were
subsequently consolidated as a result of an order of the court and now bear the
singular index number 12118/00. The original lawsuits were for breach of
contract. The complaint demands the delivery of 10,000,000 pre-split shares of
ADGI stock to Milo and 10,000,000 to Quattrocchi. GlobeTel was entered into the
action, as ADGI was the predecessor of the Company. The suit also requests an
accounting for the sales generated by the consultants and attorneys fees and
costs for the action.
The lawsuits relate 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 had been repaid.
With regard to the issues related to original index number 12119/00, as a result
of a summary judgment motion, the plaintiffs were granted a judgment in the sum
of $15,000, which has since been paid. The rest of the plaintiff's motion was
denied. The court did not order the delivery of 24,526,000 pre-split shares of
ADGI common stock as the decision on that would be reserved to time of trial.
12
An Answer and Counterclaim had been interposed on both of these actions. The
Answer denies many of the allegations in the complaint and is comprised of
eleven affirmative defenses and five counterclaims alleging damages in the sum
of $1,000,000. The counterclaims in various forms involve breach of contract and
breach of fiduciary duty by the plaintiffs.
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 will be materially adversely affected by the outcome of this proceeding.
Presently, we are continuing our defense and counterclaims in this matter. A
jury was selected on March 3, 2006 in anticipation for a trial; however, the
parties entered into an agreement to proceed before a Judicial Hearing Officer
for a non-jury trial. This case is expected to be assigned to a Judicial Hearing
Officer on or before March 31, 2006 and a new hearing date will be set at that
time.
MEXICO ASSOCIATE AND CUSTOMER LITIGATION
We had a legal action 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 Mexican
tax refunds which they have proposed to turn over to us. We filed a motion in
the Mexican courts which was necessary to formally request that we become the
assigned payee of the tax refund receivable and formally secure the equipment
and to take over the operations of the existing networks.
In February 2005, the customer agreed that proceeds from the network operations
were to be paid totally to GlobeTel, including the customer's portion of the
profit sharing, until the amount they owe us has been fully paid. Upon full
payment, we will begin the sharing profits again in accordance with the
contract.
The Company received a Judgment on February 14, 2005 in the amount of $330,000.
It is not certain of the amounts that, ultimately, will be realized from the
Mexico associate.
This situation with the customer has caused the recording of an allowance for
bad debt against this receivable, for $625,855 in fiscal year 2005 and $938,782
for fiscal year 2004. In addition, during fiscal year 2005, the company was
informed by its lawyers that due to negligence on the part of our customer, we
would not be able to collect an anticipated Mexican sales tax refund of
$382,160. Based on this, we recorded an additional allowance for bad debt for
this amount as of December 31, 2005. However, the Company will pursue litigation
against this customer for the full amount of the Mexican sales tax refund and
believes that it can be successful in its efforts.
PATENT INFRINGEMENT LAWSUIT
A case was filed against the Company for patent infringement. On or about
September 1, 2004, Alexsam, Inc. (Alexsam) filed an action for patent
infringement against us alleging the stored value card and service, the Company
is planning to offer infringes one or more of U.S. Patent No. 6,000,608 (the 608
patent) and U.S. Patent No. 6,189,787 (the 787 patent), allegedly owned by
Alexsam. The actions were filed in the United States District Court, Eastern
District of Texas, styled Alexsam, Inc. vs. Datastream Card Svc., et al. Case
Number 2:03-cv-337. On January 14, 2005, the court dismissed the lawsuit against
us.
On February 8, 2005, the Company filed suit against Alexsam and Robert Dorf
(collectively the defendants) in the United States District Court for the
Southern District of Florida, Civil Action No. 05-60201, seeking a declaratory
judgment from the court that the 608 and 787 patents are invalid, not
enforceable and will not be infringed by our stored value card offering. The
Company is also seeking recovery for damages brought on us by Alexsam, the
owners of Alexsam and Dorf, for breach of confidential disclosure and trust,
intentional interference with business advantage, and for unfair competition
under Sec. 501.204 of the Florida Statutes.
The Company and Alexsam have subsequently settled the dispute. In exchange for
granting a non-exclusive license to GlobeTel for the Patents, GlobeTel withdrew
its motion for attorneys' fees in the Texas Lawsuit and dismissed the Florida
Lawsuit. The License Agreement was made and entered into in September 2005. The
license taken by us extends further to GlobeTel customers, bank partners, third
party financial processors and cardholders, and all those in privity with any of
them, but only to the extent those entities' activities relate to us and its
license.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
ANNUAL MEETING
On August 11, 2005, by written consent of the majority vote of its shares at the
Company's annual meeting, the shareholders re-elected the Company's directors
and approved all proposals. Shareholders re-elected as directors include,
Timothy Huff, Przemyslaw Kostro, Mitchell Siegel, Kyle McMahan, Laina Raveendran
Greene, and Leigh Coleman. Additionally, proposals to ratify Dohan & Co. CPA's
PA as our auditors, increase the number of authorized common shares from 100
million to 150 million (subsequent to the reverse split authorized in the
preceding quarter), and ratify the 2004 employee stock option plan were all
approved.
13
The following table lists the number of votes cast for each matter, including a
separate tabulation with respect to each nominee for office. There were no votes
against and no abstentions. The total number of voting shares was 62,559,026.
Przemyslaw Kostro 62,047,431
Timothy Huff 62,019,756
Laina Raveendran Greene 62,182,817
Leigh Coleman 62,126,151
Mitchell A. Siegel 62,043,609
Kyle McMahan 62,217,392
Ratify the Company's appointment of Dohan and Company,
CPAs, PA as independent auditors of the Company
for the fiscal year ending December 31, 2005 61,865,684
Increase the number of authorized common shares from
100,000,000 (One Hundred Million) to 58,335,831
150,000,000 (One Hundred Fifty Million)
Proposal to approve the 2004 Employee Stock Option Plan 8,164,899(1)
(1) This represents a majority the votes cast on this issue. There were
50,799,309 broker non-votes.
There were no other matters brought to a vote of security holders 2005.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
(a) MARKET PRICE
Our shares of common stock were quoted on the Over-the-Counter Bulletin Board
(OTCBB) quotation system under the symbol "GTEL." Effective May 6, 2005, by
written consent of the majority vote of its shares, the Board of Directors
approved a reverse split of our shares of common stock on a one for fifteen
(1:15) basis, in preparation for our move to the American Stock Exchange, which
occurred on May 23, 2005. All common stock amounts in this report have been
retroactively restated to account for the reverse stock split, unless otherwise
noted. Since its move to AMEX, GlobeTel stock has been traded under the symbol
of "GTE". As of the date of this report, there are approximately 39 market
makers in our common shares.
The following information sets forth the high and low bid price of our common
stock during fiscal 2003, 2004 and 2005 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.
*Value of shares recalculated based on the 1:15 reverse split effective May 25,
2005
CALENDAR 2003 HIGH LOW
Quarter Ended March 31 $0.6600 ($0.0440 pre-split) $0.3000 ($0.0200 pre-split)
Quarter Ended June 30 $0.4350 ($0.0290 pre-split) $0.2265 ($0.0151 pre-split)
Quarter Ended September 30 $0.6000 ($0.0400 pre-split) $0.2850 ($0.0190 pre-split)
Quarter Ended December 31 $1.9650 ($0.1310 pre-split) $0.3750 ($0.0250 pre-split)
CALENDAR 2004
Quarter Ended March 31 $2.9400 ($0.1960 pre-split) $0.7500 ($0.0500 pre-split)
Quarter Ended June 30 $1.9500 ($0.1300 pre-split) $1.2000 ($0.0800 pre-split)
Quarter Ended September 30 $1.9200 ($0.1280 pre-split) $1.0500 ($0.0700 pre-split)
Quarter Ended December 31 $2.1000 ($0.1400 pre-split) $0.1500 ($0.0100 pre-split)
CALENDAR 2005
Quarter Ended March 31 $5.5500 ($0.3700 pre-split) $0.4500 ($0.0300 pre-split)
Quarter Ended June 30 $4.0500 $2.2500 ($0.1500 pre-split)
Quarter Ended September 30 $2.8800 $1.1400
Quarter Ended December 31 $4.3400 $1.2500
14
(b) HOLDERS
As of the date of this report, there were approximately 36,000 beneficial owners
and 1,400 registered holders 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, 2005, our accumulated deficit was $71,614,431. 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 3,183,414 (47,751,200 pre-split) 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 $.225 ($.015 pre-split) or 50% of the closing
market price.
In December 2003, the board of directors authorized the issuance of stock
options totaling 1,088,889 (16,333,333 pre-split) shares to the officers of the
company in return for the forgiveness of $245,000 in accrued salaries through
December 31, 2003. The stock options were exercisable at the lower of $.225
($.015 pre-split) 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 $.225 ($.015 pre-split) and as a result, we issued
4,272,303 (64,084,533 pre-split) shares of common stock in January 2004, in
accordance with the stock option agreements.
In May 2004, the board of directors approved an Officers' Stock Option Grant
Plan, pursuant to which certain officers are entitled to receive stock options,
for each of three years, beginning in 2004 (Year 1). The annual number of option
shares to be issued will be equal to amounts that, after the exercise of such
options, would affect ownership of various percentages of the total shares then
issued and outstanding. The following officers received options for shares in
the following percentages: CEO - 3.0% in each of the three years (total 9.0%);
COO - 2.0% in each of the three years (total 6.0%), CFO - 2.0% in Year 1.5% and
1.5% in each of the following years (total 5.0%), former President - 1.0% in
Year 1.0 and 0.5% in each of the following years (total 2.0%), current President
- 1% in each of the three years (total 3.0%), and CTO - 1.0% in each of the
three years (total 3.0%). The recipient's rights to the options are fully
vested, as of December 31, 2004, although compensation expense is recorded at
the completion of each year. The total of 6,654,197 (99,812,946 pre-split)
option shares were issued for 2004. The stock options are exercisable at the
lower of $.675 ($0.045 pre-split) per share.
In December 2004, we established our 2004 Stock Option Bonus Plan, wherein the
board of directors authorized the issuance of stock options totaling 1,765,833
(26,487,483 pre-split) shares to the officers and employees of the company as
payment of accrued bonuses through December 31, 2004. The stock options are
exercisable at the lower of $.675 ($0.045 pre-split) per share or 50% of the
closing market price at the date of exercise.
In December 2004, the board of directors authorized the issuance of stock
options totaling 247,886 (3,718,279 pre-split) shares to the directors of the
company as payment of accrued board members' stipends through December 31, 2004.
The stock options are exercisable at the lower of $.5865 ($0.0391 pre-split) per
share or 50% of the closing market price on date of exercise.
In January 2005, the option holders exercised their rights to convert a portion
of the stock options pursuant to the Officers Stock Grant Plan, the 2004 Stock
Option Bonus Plan, and the options for accrued directors' stipends into common
stock at $.675 ($0.045 pre-split), and, as a result, we issued 2,000,000
(30,000,000 pre-split) shares of common stock in January 2005, in accordance
with the stock option agreements.
In November 2005, the Company established its 2005 Stock Option Bonus Plan,
wherein the board of directors authorized the issuance of stock options for
restricted shares totaling 1,509,180 (post-split) shares to the officers and
employees of the company as payment of accrued bonuses through December 31,
2005. The stock options are exercisable at $2.12, based on the closing market
price of the Company's free-trading shares on the date the options were granted.
Through the date of this report, none of these options have been exercised.
During 2005, the board of directors authorized the issuance of stock options for
restricted shares totaling 199,490 (pos-split) shares to the directors of the
company as board members' compensation for services through December 31, 2005.
The stock options are exercisable at various amounts, ranging from $1.99 to
$4.35 per share, based on the closing market price of the Company's free-trading
shares on the date the options were granted, except for a now former director
who was issued 37,500 and 30,000 (post-split) options shares at $1.49 and $0.99,
respectively. Through the date of this report, none of these options have been
exercised.
15
In addition to the above parties, the corporate Secretary / general counsel and
the Senior Vice-President were awarded 1% and 2%, respectively, of the total
shares outstanding, at the fair market value of the Company's stock on the date
the options were granted. Also, a board member, Randolph Dumas, was awarded 2.5%
of the total shares outstanding, exercisable at $1.79 per share. A total of
13,992,374 and 6,654,196 (post-split) options shares were granted for 2005.
2004 STOCK OPTIONS EXERCISED IN 2005
During 2005, a total of 1,785,490 (26,782,350 post-split) of stock options
shares were exercised and issued (net of shares used to pay for "cashless"
options"), with payment in cash and common stock subscriptions receivable
totaling $92,906, pursuant to the 2004 Stock Option Bonus Plan, the Officers'
Stock Option Grant Plan, and for accrued board members' stipends, and,
furthermore, these shares were registered by the Company's filing a Form S-8
registration statement. The number of shares registered were allocated to the
individuals exercising the options based a ratio of the number of options held
by each individual to the total number of options held by all individuals.
In addition, certain employees, vendors, professionals and consultants were paid
with common stock (see Note 24 to financial statements) and with stock options
(see Note 25 to financial statements) and certain investment banking and
broker's fees were paid with preferred stock (see Note 26 to financial
statements) in lieu of cash compensation.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
GENERAL
Twelve months ended December 31, 2005 ("Fiscal 2005" or "2005" or "the current
year") compared to twelve months ended December 31, 2004 ("Fiscal 2004" or
"2004" or "the prior year").
RESULTS OF OPERATIONS
REVENUES. During fiscal 2005, our gross sales were $81,143,838, representing an
increase of 179.8% over the prior year when our gross sales were $28,996,213.
Our revenues increased primarily due to revenues from our subsidiary, Centerline
and its subsidiaries, which recorded consolidated revenues of $71,968,367 (or
88.7% of total revenues), consisting primarily of wholesale traffic revenues
(telecommunications minutes) and related network management fees. The remainder
of our revenues continued to be predominantly from telecommunications minutes
going through our Philippines network through September 2005. Thereafter
substantially all of our wholesale traffic revenues were produced through
Centerline.
Our Philippines network generated $7,674,615 (or 9.5% of gross revenues). Other
domestic and international wholesale traffic revenues were $1,388,679 (or 1.7%
of gross revenues).
Additional revenues generated included $109,023 from our Magic Money program as
compared to $69,845 in the prior year and $3,154 from the sale of IP Phones for
the current year as compared to $7,717 in the prior year. No revenues were
generated from our Store Value Card program for the current year as compared to
$9,515 in the prior year.
COST OF SALES. Our cost of sales consists primarily of the wholesale cost of
buying bandwidth purchased by us for resale, collocations costs, technical
services, wages, equipment leases, and the costs of telecommunications
equipment. We had cost of sales of $80,730,141 for fiscal 2005, compared to
$29,187,414 for fiscal 2004. We expect cost of sales to increase in future
periods to the extent that our sales volume increases.
GROSS MARGIN (LOSS). Our gross margin was $413,697 or .5% for fiscal 2005,
compared to a gross loss of ($191,201) or (-0.7%) of total revenues in fiscal
2004, an increase of $604,898 or 316.4%. The increase is primarily due to the
fact that there were higher margins on resale of wholesale minutes related to
the decreased cost of the minutes to terminate.
OPERATING EXPENSES. Our operating expenses consist primarily of payroll and
related taxes, professional and consulting services, expenses for executive and
administrative personnel and insurance, bad debts, investment banking and
financing fees, investor and public relations, research and development, sales
commissions, telephone and communications, facilities expenses, travel and
related expenses, and other general corporate expenses. Our operating expenses
for fiscal 2005 were $30,626,495 compared to fiscal year 2004 operating expenses
of $12,850,250 an increase of $17,776,245 or 138.3%.
The increase is primarily due to an increase in officers' and directors'
compensation to $12,082,809 (including non-cash compensation), from $6,520,206
in the prior year. During fiscal 2005, total officers' and directors'
compensation, included non-cash equity compensation (stock and stock options) of
$10,799,267, compared to $5,805,046 in non-cash compensation during fiscal 2004.
In addition, employee payroll and related taxes for fiscal 2005 were $3,118,676
compared to $1,248,562 compared, an increase of $1,870,114 or 149.8%. This
increase was due to expansion of our operations, facilities and workforce from
30 total employees to 65 during 2005, and included in non-cash equity
compensation (stock and stock options) for employees was $439,818 in fiscal 2005
compared to $438,187 in fiscal 2004.
16
We incurred $6,200,054 of consulting and professional fees, an increase of
$3,993,817 or 181.0% for 2005 (including $4,288,867 in non-cash equity
compensation) compared to $2,206,237 in 2004 (including $325,000 in non-cash
equity compensation). These increases are related to additional services
required to develop and expand our geographical and product markets and
projects, including our Stored Value Program and international markets (such as
Australia, India and Philippines) as well as increased professional fees in
maintaining and expanding a public company, including our move to the American
Stock Exchange. Our consulting and professional fees include such expenses as
computer consulting, technical consulting, accounting and legal fees.
We incurred $2,364,673 of research and development costs for our Sanswire
project and our GlobeTel Wireless business during 2005, compared to $260,085 in
2004, an increase of $2,104,588 or 809.2%. During 2005, 89% of these costs
represent direct expenses of development and building of the airship, as
compared to 60% of direct expenses during 2004. This is due mainly to the fact
that the first prototype airship was completed during 2005.
We incurred $848,880 of sales commission for our Centerline operations during
2005, compared to $404,747 during fiscal 2004, an increase of $444,133 or
109.7%.These commissions are based on the agreement between Carrier Services,
Inc. ("CSI") and the Company where Centerline is to build telecommunication
revenues and a client base, utilizing each party's network and financial
resources and to engage in any other business or activity that is necessary and
proper. Pursuant to the agreement, the Company was 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 was 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 provided for minimum selling requirements of $50 million per year
in revenues for the LLC. If the LLC brought in $50 million in revenues 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 revenues in year two,
CSI would receive another $1 million of the company's publicly traded stock. The
initial term of the agreement was for two years and automatically renewable for
another two years. The parties subsequently modified the agreement to provide
for minimum selling requirements of $25 million in revenues for the LLC. Upon
the LLC achieving in $25 million in revenues, CSI will receive 333,333 (5
million pre-split) shares of the company's publicly traded stock.
During 2005, we incurred $788,985 of investment and broker fees as compared to
$172,106 during 2004. The $616,879 increase is due to 2005 equity funding
related to subscription agreements with investors for 5% convertible notes and
from private placements executed (see note 17).
LOSS FROM OPERATIONS. We had an operating loss of ($30,212,798) for fiscal year
2005 as compared to an operating loss of ($13,041,451) for fiscal 2004,
primarily due to increased operating expenses as described above, including
higher operating costs and expansion of our various programs. We expect that we
will continue to have higher operating costs as we increase our staffing and
continue expanding operations, programs, projects and operating costs related to
our newly acquired subsidiaries.
OTHER INCOME (EXPENSE). We had net other expenses totaling ($1,740,597) during
fiscal year 2005 compared to ($125,418) during fiscal 2004. This variance was
due primarily to a global settlement with a former officer of the company. In
2005 the company had a loss on the settlement of an agreement to deploy
telecommunications in Asia with a related party, Sky China Limited, for
($1,256,873). Also during 2005, the company wrote-off its investment in CGI for
($352,300).
Fiscal year 2004 included $268,397 in net gains on the settlements of
liabilities. Various liabilities, representing disputed obligations, were
settled for amounts less than the previously recorded values, pursuant to
agreements between us and the vendors. We had interest income of $44,368 in
fiscal year 2005 compared to $2,067 in fiscal 2004. Other expense of ($56,804)
in fiscal 2004 was a result of losses realized on the disposition of fixed
assets.
Interest expense for fiscal year 2005 was $175,792 compared to $189,520 for the
prior year. Interest expense decrease was primarily due to a reduction in
accrual of contractual financing charges in connection with the operations of
our Centerline subsidiary. This is also a result of our debt reduction strategy.
NET LOSS. We had a net loss of ($31,953,395) in fiscal year 2005 compared to a
net loss of ($13,166,869) in fiscal 2004. The net loss is primarily attributable
to the increase in the operating expenses as discussed above.
17
LIQUIDITY AND CAPITAL RESOURCES
ASSETS. At December 31, 2005, we had total assets of $20,319,072 compared to
total assets of $6,195,977 as of December 31, 2004.
The current assets at December 31, 2005, were $3,330,778 compared to $2,561,197
at December 31, 2004. As of December 31, 2005, we had $1,228,180 of cash and
cash equivalents compared to $601,559 at December 31, 2004.
The Company had restricted cash of $1,122,000 as of December 31, 2005
representing security for letters of credit to suppliers for MasterCard in the
amount of $1,000,000 in support of the Store Value Card program, a rental
deposit for Los Angeles World Airport related to the Palmdale Hanger occupied by
Sanswire Networks, LLC in the amount of $72,000 and for a wholesale carrier in
the amount of $50,000. No such letters of credit to vendors existed as of
December 31, 2004. The Company anticipates replacing this security with its
restricted stock within the next operating cycle.
Our net accounts receivable, which consisted of 22 customers, were $371,618 as
of December 31, 2005 compared to $1,740,883 as of December 31, 2004. For 2004,
the company wrote-off $1,096,631 of customer receivables deemed to be
uncollectible. Approximately 92% of the December 31, 2004 receivables were
attributable to three customers, including 63% or $773,319 (net of allowance)
related to the Mexico network and 22% or $266,167 (net of allowance) related to
the Brazil network. We have increased our allowance for doubtful accounts by
$1,141,534 for the year, the substantial portion of which relates to two of
these three customers.
Other current assets included $185,960 of prepaid expenses to a related party
ISG Jet, LLC, and $184,434 in prepaid expenses, primarily prepaid minutes with
carriers, compared to $58,900 in 2004; $67,525 inventory of IP Phones in 2005,
compared to $63,976 in 2004, and deposits on equipment purchases and other
current assets of $124,993 in 2005, compared to $88,994 in 2004 related to
additional deposits made for the Mastercard Switch which was not operational as
of December 31, 2005.
Property and Equipment as of December 31, 2005 was $7,028,422 as compared to
$445,756 at December 31, 2004. The variance is due primarily to an increase in
telecommunications equipment in the amount of $6,104,526, which was due
primarily to the acquisition of the new Mastercard switch $5,267,526 and
$837,000 for the acquisition of the new telecommunications switch acquired by
our subsidiary Centerline Communications.
We had other assets totaling $9,959,872 as of December 31, 2005 compared to
$3,189,024 as of December 31, 2004. The variance was attributable primarily to
the acquisition of the Hotzone Wireless intangible assets valued at $7,129,550
(see note 8), and the disposition of the former unconsolidated subsidiary, CGI
for $352,300 (see note 6).
LIABILITIES. At December 31, 2005, we had total liabilities of $9,906,933
compared to total liabilities of $919,400 as of December 31, 2004.
The current liabilities at December 31, 2005 were $5,198,766 compared to
$914,682 at December 31, 2004, an increase of $4,284,084. The increase is
principally due to the current portion of payments due to related party -
Hotzone Wireless for $2,451,834 (see note 8) and to Carrier Services, Inc. for
$901,606 and a payable due to former employee of $237,600 (see note 12)
Long-term liabilities increased to $4,708,167 due to the non-current portion of
the due to a related party - Hotzone Wireless, (see note 8) as compared to
$4,718 as of December 31, 2004, which represented the non-current portion of
capital leases.
CASH FLOWS. Our cash used in operating activities was $12,610,149 compared to
$4,474,874 for the prior year. The increase was primarily due to the increased
level of operations and operating activities and changes in our current assets
and liabilities.
Our cash used in investing activities was $2,084,559 which was mainly attributed
to cash payments made towards the purchase of our Telecommunications switch in
Centerline and the MasterCard Switch, compared to $349,685 in the prior year.
Net cash provided by financing activities was $15,321,329 principally from the
sale of common stock and the conversion of notes and loan payables totaling
$13,271,957, as compared to $5,201,124 in the prior year.
In order for us to pay our operating expenses during 2005 and 2004, including
certain operating expenses for our wholly-owned subsidiaries, Centerline and
Sanswire, and the overall expansion of our operations, we raised $500,000 in
sales of preferred stock in 2005, compared to $5,157,500 in sales of preferred
stock in 2004. We raised $13,271,957 from loans and notes payable related to the
exercise of warrants by convertible note holders and private placements,
compared to $375,000 in the prior year.
As detailed in the financial statements, we have stock subscriptions receivable
for preferred shares that will raise a total of $500,000 in cash in 2006,
primarily in the form of financing provided by Series D preferred shareholders.
In January 2006, we received approximately $6.8 million from the exercise of
warrants by certain investors. With this funding, as well as the additional
funding, we will have the existing capital resources necessary to fund our
operations and capital requirements as presently planned over the next twelve
months.
18
The company anticipates increased cash flows from 2006 sales activities;
however, additional cash will still be needed to support operations. Management
believes it can continue to raise capital from various funding sources, which
when added to budgeted sales and current working capital, will be sufficient to
sustain operations at its current level through January 1, 2007. However, if
budgeted sales levels are not achieved and/or if significant unanticipated
expenditures occur, or if we are unable to obtain the necessary funding, the
company may have to modify its business plan, reduce or discontinue some of its
operations or seek a buyer for all or part of its assets to continue as a going
concern through 2006.
Furthermore, the capital markets have responded favorably to our growth and
business strategies through 2005, particularly as a result of our Stratellite
project, and expected revenue from wireless communication projects and increased
investment is anticipated in the near term.
As reflected in the accompanying financial statements, during the year ended
December 31, 2005, we had a net loss of ($31,953,395) compared to a net loss of
($13,166,869) during 2004. Consequently, there is an accumulated deficit of
($71,614,431) at December 31, 2005 compared to ($39,661,036) at December 31,
2004.
GENERAL
Twelve months ended December 31, 2004 ("Fiscal 2004" or "2004" or "the current
year") compared to twelve months ended December 31, 2003 ("Fiscal 2003" or
"2003" or "the prior year").
RESULTS OF OPERATIONS
REVENUES. During the fiscal 2004, our gross sales were $28,996,213, representing
an increase of 155.4% over the prior year when our gross sales were $11,351,939.
Our revenues increased primarily due to revenues from our subsidiary, Centerline
and its subsidiaries, which recorded consolidated revenues of $18,397,582 (or
63.5% of total revenues), consisting primarily of wholesale traffic revenues
(telecommunications minutes) and related network management fees. The remainder
of our revenues continued to be predominantly from telecommunications minutes
going through our Mexico, Philippines and Brazil networks through June 2004.
Thereafter substantially all of our wholesale traffic revenues were produced
through Centerline.
Our Mexico network generated $4,774,657 (or 16.5% of gross revenues), while our
Philippines network generated $3,234,279 (or 11.2% of gross revenues) and our
Brazil network generated $2,147,119 (or 7.4% of gross revenues). Other domestic
and international wholesale traffic revenues were $18,840,158 (or 65.0% of gross
revenues), including revenues $7,009,903 (or 24.2% of gross revenue) from Mexico
(unrelated to our Mexico network).
Additional revenues generated included $9,515 from our Stored Value Card
program, $69,845 from our Magic Money program and $7,717 from the sale of IP
Phones. There were no sales from these programs in the prior year.
COST OF SALES. Our cost of sales consists primarily of the wholesale cost of
buying bandwidth purchased by us for resale, collocations costs, technical
services, wages, equipment leases, and the costs of telecommunications
equipment. We had cost of sales of $29,187,414 for fiscal 2005, compared to
$8,840,872 for fiscal 2003. We expect cost of sales to increase in future
periods to the extent that our sales volume increases.
GROSS MARGIN (LOSS). Our gross loss was ($191,201) or (0.66%) for fiscal 2004,
compared to gross margin of $2,511,067 or 22.12% of total revenues in fiscal
2003, a decrease of $2,702,268 or (107.6%). The decrease is primarily due to the
fact that there was lower margin on resale of wholesale minutes related to the
increased cost of the minutes to terminate, especially the Mexico network, where
our margin was less than two percent, and initial activities of Centerline,
where our gross margin was minimal or zero. We expect to derive higher margins
once we formally take over the operations of our customer's Mexico network as
described in Part I, Item 3 "Legal Proceedings," and commence sales directly to
the retail market.
OPERATING EXPENSES. Our operating expenses consist primarily of payroll and
related taxes, professional and consulting services, expenses for executive and
administrative personnel and insurance, bad debts, investment banking and
financing fees, investor and public relations, research and development, sales
commissions telephone and communications, facilities expenses, travel and
related expenses, and other general corporate expenses. Our operating expenses
for fiscal 2004 were $12,850,250 compared to fiscal 2003 operating expenses of
$3,805,388, an increase of $9,044,862 or 238%.
The increase is primarily due an increase in officers' and directors'
compensation to $6,520,206, including non-cash compensation, from $595,000 in
the prior year. During fiscal 2004, total officers' and directors' compensation
included non-cash equity compensation (stock and stock options) of $5,805,646,
compared $185,000 in non-cash compensation during fiscal 2003.
In addition, employee payroll and related taxes for fiscal 2004 were $1,248,562
compared to $283,408, an increase of $965,154 or 340.6%. This increase was due
to expansion of our operations, facilities and workforce from 15 total employees
to 30 during 2004. Included in non-cash equity compensation (stock and stock
options) for employees was $438,187 in fiscal 2004, compared to $86,000 in
fiscal 2003. Consulting and professional fees increased by $1,487,250 or 206.9%,
to $2,206,237 in 2004 (including $325,000 in non-cash equity compensation),
compared to $718,987 in 2003 (including $203,607 in non-cash equity
compensation). These increases are related to additional services required to
develop and expand our geographical and product markets and projects, including
our Stored Value Program, our Sanswire Project, and international markets,
primarily in Asia and Australia, as well as increased professional fees in
maintaining and expanding a public company.
19
We incurred $260,865 of research and development costs for our Sanswire
project-development of the Stratellite during fiscal 2004, compared to none in
the prior year, whereas the Sanswire assets were acquired in April 2004.
We incurred $404,747 of sales commissions for our Centerline operations during
fiscal 2004, compared to none in the prior year, whereas the Centerline
operations began in 2004.
LOSS FROM OPERATIONS. We had an operating loss of ($13,041,451) for fiscal 2004
as compared to an operating loss of ($1,294,321) for fiscal 2003, primarily due
to the excess of costs of revenues earned over revenues earned and increased
operating expenses as described above, including reduced margins and higher
operating costs and expansion of our various programs. We expect that we will
continue to have higher operating costs as we increase our staffing and continue
expanding operations, programs, projects and operating costs related to our
newly acquired subsidiaries.
OTHER INCOME (EXPENSE). We had net other expenses totaling ($125,418) during
fiscal 2004 compared to ($4,908,205) during fiscal 2003.
Other income during fiscal 2004 included $268,397 in net gains on the
settlements of liabilities, compared to $26,274 in 2003. Various liabilities,
representing disputed obligations, were settled for amounts less than the
previously recorded values, pursuant to agreements between us and the vendors.
We also reported a net gain of $55,842 in 2003 in connection with the closing of
operations of our St. Louis, Missouri office after accounting adjustments were
made. We had interest income of $2,067 in fiscal 2004 compared to none in fiscal
2003.
Other expense of ($56,804) in fiscal 2004 was a result of losses realized on the
disposition of fixed assets, compared to a loss of ($42,301) in fiscal 2003.
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 with IPW.
Interest expense for fiscal 2004 was ($189,520) compared to ($113,142) during
fiscal 2003. Interest expense increase was primarily due to the accrual of
contractual financing charges in connection with the operations of our
Centerline subsidiary. Other interest charges actually decreased in 2004, as
result in reduction of our total debts.
NET LOSS. We had a net loss of ($13,166,869) in fiscal 2004 compared to a net
loss of ($6,202,526) in fiscal 2003. The net loss is primarily attributable to
the increase in the operating expenses as discussed above.
LIQUIDITY AND CAPITAL RESOURCES
ASSETS. At December 31, 2004, we had total assets of $6,195,977 compared to
total assets of $4,144,231 as of December 31, 2003.
The current assets at December 31, 2004, were $2,561,197, compared to $3,389,421
at December 31, 2003. As of December 31, 2004, we had $601,559 of cash and cash
equivalents compared to $224,994 as of December 31, 2003.
Our net accounts receivable were $1,740,883 as of December 31, 2004, compared to
$3,039,427 at the same point in 2003. Approximately 92% of the December 31, 2004
receivables were attributable to three customers, including 63% or $773,319 (net
of allowance) related to the Mexico network and 22% or $266,167 (net of
allowance) related to the Brazil network. We have increased our allowance for
doubtful accounts by $1,141,534 for the year, the substantial portion of which
relates to two of these three customers.
Other current assets included $58,900 in prepaid expense, primarily prepaid
minutes with carriers, compared to $71,000 in 2003; $63,976 inventory of IP
Phones, compared to none in the prior year; and deposits on equipment purchases
and other current assets of $88,994 compared to none in 2003.
We had other assets totaling $3,189,024 as of December 31, 2004, compared to
$16,135 as of December 31, 2003. The increase was attributable primarily to the
acquisition of the Sanswire intangible assets valued at $2,778,000 and
additional investments of $50,000 in CGI, our unconsolidated foreign subsidiary,
totaling $352,300 as of December 31, 2004.
LIABILITIES. At December 31, 2004, we had total liabilities of $919,400 compared
to total liabilities of $1,908,686 as of December 31, 2003.
20
The current liabilities at December 31, 2004 were $914,682 compared to
$1,908,686 at December 31, 2003, a decrease of $994,004. The decrease is
principally due to payments of notes and loans payable, payment of accounts and
loans payable to related parties with stock, and a reduction in accounts
payable. There were no significant long-term liabilities as of December 31, 2004
and 2003.
CASH FLOWS. Our cash used in operating activities was $4,474,874 for 2004,
compared to $1,389,102 for the prior year. The increase was primarily due to the
increased level of operations and operating activities and changes in our
current assets and liabilities.
Our cash used in investing activities, including acquisitions of property and
equipment investment in CGI, and loans to employees for a total of $349,685
compared to $607,401 cash used in the prior year.
Net cash provided by financing activities was $5,201,124, principally from the
sale of preferred stock, for 2004, as compared to $2,019,686 cash provided in
the previous year, which was principally from the sale of preferred and common
stock and proceeds from notes and loans payable.
In order for us to pay our operating expenses during 2004 and 2003, including
certain operating expenses of our wholly-owned subsidiaries, Sanswire and
Centerline, and the overall expansion of our operations, we raised $5,157,500 in
sales of preferred stock in 2004, compared to $717,140 and $500,000 in sales of
preferred stock and common stock, respectively in 2003. We also raised $60,000
and $144,194 from proceeds from related party payables in 2004 and 2003,
respectively. We generated $375,000 and $784,259 from loans and notes payable in
2004 and 2003, respectively.
As reflected in the accompanying financial statements, during the year ended
December 31, 2004, we had a net loss of ($13,166,869) compared to a net loss of
($6,202,526) during 2003. Consequently, there is an accumulated deficit of
($39,661,036) at December 31, 2004, compared to ($26,494,167) at December 31,
2003.
21
ITEM 7. FINANCIAL STATEMENTS
GLOBETEL COMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005, 2004 AND 2003
TABLE OF CONTENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
CONSOLIDATED FINANCIAL STATEMENTS PAGE
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Consolidated Balance Sheets 23
Consolidated Statements of Operations 25
Consolidated Statements of Cash Flows 26
Consolidated Statements of Stockholders' Equity 28
Notes to Consolidated Financial Statements 33
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
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
GlobeTel Communications Corp. and Subsidiaries
We have audited the accompanying consolidated balance sheet of GlobeTel
Communications Corp. and Subsidiaries (the Company) as of December 31, 2005 and
2004, and the related consolidated statements of operations, cash flows and
stockholders' equity for the years ended December 31, 2005, 2004 and 2003. 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 the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. The Company
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal control
over financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated 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 audit provides 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 Subsidiaries as of December 31, 2005 and 2004, and the
results of their operations and their cash flows for the years ended December
31, 2005, 2004 and 2003, in conformity with U.S. generally accepted accounting
principles.
/s/ Dohan & Co. CPAs
Miami, Florida
March 13, 2006
Member:
Florida Institute of Certified Public Accountants American Institute of
Certified Public Accountants Private Companies and SEC Practices Sections
National and worldwide associations through Accounting Group International
22
GLOBETEL COMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
-----------------------------------------------------------------------------------------------------------------------------
DEC. 31, 2005 DEC. 31, 2004
-----------------------------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,228,180 $ 601,559
Restricted cash 1,122,000 --
Accounts receivable, less allowance for doubtful
accounts of $409,100 and $1,505,731 371,618 1,740,883
Loans to employees 46,068 6,885
Prepaid expenses 184,434 58,900
Prepaid expenses - related party, ISG Jet, LLC 185,960 --
Inventory 67,525 63,976
Deposits on equipment purchase 124,993 88,994
Deferred tax asset, less valuation allowance of
$9,828,700 and $5,163,407 -- --
-----------------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 3,330,778 2,561,197
-----------------------------------------------------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT, NET 7,028,422 445,756
-----------------------------------------------------------------------------------------------------------------------------
OTHER ASSETS
Investment in unconsolidated foreign subsidiary -
Consolidated Global Investments, Ltd. -- 352,300
Intangible assets 9,907,550 2,778,000
Deposits 52,322 50,712
Prepaid expenses -- 8,012
-----------------------------------------------------------------------------------------------------------------------------
TOTAL OTHER ASSETS 9,959,872 3,189,024
-----------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 20,319,072 $ 6,195,977
-----------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
COMMITMENTS AND CONTINGENCIES (NOTES 6, 7, 17, AND 18) -- --
LIABILITIES
CURRENT LIABILITIES
Accounts payable $ 907,208 $ 456,248
Current portion of long-term debt -- 2,846
Due to related party - Carrier Services, Inc. 901,606 --
Due to former employee payable in GTE stock 237,600 --
Due to related party payable in GTE Stock -
Hotzone Wireless, Inc. - short-term portion 2,451,834 --
Accrued officers' and directors' compensation 97,382 198,333
Accrued expenses and other liabilities 545,636 93,436
Deferred revenues -- 46,319
Related party payables 57,500 117,500
-----------------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 5,198,766 914,682
-----------------------------------------------------------------------------------------------------------------------------
LONG-TERM LIABILITIES
Due to related party payable in GTE Stock -
Hotzone Wireless, Inc. 4,708,167 --
Capital lease obligations -- 4,718
-----------------------------------------------------------------------------------------------------------------------------
TOTAL LONG-TERM LIABILITIES 4,708,167 4,718
-----------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES $ 9,906,933 $ 919,400
-----------------------------------------------------------------------------------------------------------------------------
23
STOCKHOLDERS' EQUITY
Series A Preferred stock, $.001 par value, 10,000,000 shares authorized;
0 and 96,500 shares issued and outstanding: -- 97
Additional paid-in capital - Series A Preferred stock -- 697,403
Series B Preferred stock, $.001 par value, 35,000 shares authorized;
0 and 35,000 shares issued and outstanding: -- 35
Additional paid-in capital - Series B Preferred stock -- 14,849,965
Series C Preferred stock, $.001 par value, 5,000 shares authorized;
500 and 750 shares issued and outstanding: -- 1
Additional paid-in capital - Series C Preferred stock -- 749,999
Series D Preferred stock, $.001 par value, 5,000 shares authorized;
1,000 shares issued and outstanding: 1 1
Additional paid-in capital - Series D Preferred stock 999,999 999,999
Common stock, $.00001 par value, 150,000,000 shares authorized;
98,192,101 and 63,389,976 shares issued and outstanding 982 634
Additional paid-in capital 81,570,082 39,889,479
Stock subscriptions receivable:
Series B Preferred Stock -- (11,500,000)
Series D Preferred Stock (500,000) (750,000)
Common Stock (44,494) --
Accumulated deficit (71,614,431) (39,661,036)
-----------------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 10,412,139 5,276,577
-----------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 20,319,072 $ 6,195,977
-----------------------------------------------------------------------------------------------------------------------------
See accompanying notes.
24
GLOBETEL COMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31
--------------------------------------------------------------------------------------------------------------------------
2005 2004 2003
--------------------------------------------------------------------------------------------------------------------------
REVENUES EARNED $ 81,143,838 $ 28,996,213 $ 11,351,939
COST OF REVENUES EARNED 80,730,141 29,187,414 8,840,872
--------------------------------------------------------------------------------------------------------------------------
GROSS MARGIN(LOSS) 413,697 (191,201) 2,511,067
--------------------------------------------------------------------------------------------------------------------------
EXPENSES
Payroll and related taxes 3,118,676 1,248,562 283,408
Consulting and professional fees 6,200,054 2,206,237 718,987
Officers' and directors' compensation 12,082,809 6,520,206 595,000
Bad debts 1,373,458 1,141,534 1,409,994
Investment banking and financing fees 788,985 172,106 223,886
Investor and public relations 550,460 117,856 121,656
Commissions expense - related party Carrier Services, Inc. 848,880 404,747 --
Research and development 2,364,673 260,085 --
Other operating expenses 826,101 156,011 92,715
Telephone and communications 200,129 75,390 69,169
Travel and related expenses 882,557 240,862 95,213
Rents 480,995 126,424 48,607
Insurance and employee benefits 672,700 126,644 102,383
Depreciation and amortization 236,018 53,586 44,370
--------------------------------------------------------------------------------------------------------------------------
TOTAL EXPENSES 30,626,495 12,850,250 3,805,388
--------------------------------------------------------------------------------------------------------------------------
LOSS BEFORE OTHER INCOME (EXPENSE) AND INCOME TAXES (30,212,798) (13,041,451) (1,294,321)
--------------------------------------------------------------------------------------------------------------------------
OTHER INCOME (EXPENSE)
Net gains on settlement of liabilities -- 268,397 26,274
Loss on disposition of property and equipment -- (56,804) (42,301)
Loss on settlement (1,256,873) -- --
Loss on disposition of unconsolidated foreign subsidiary - CGI (352,300) -- --
Loss on equipment deposit -- (149,558) --
Loss on discontinued operations -- -- 55,842
Loss on write-off of receivables and non-readily marketable securities -- -- (4,834,878)
Interest income 44,368 2,067 --
Interest expense (175,792) (189,520) (113,142)
--------------------------------------------------------------------------------------------------------------------------
NET OTHER EXPENSE (1,740,597) (125,418) (4,908,205)
--------------------------------------------------------------------------------------------------------------------------
LOSS BEFORE INCOME TAXES (31,953,395) (13,166,869) (6,202,526)
INCOME TAXES
Provision for income taxes -- -- --
Tax benefit from utilization of net operating loss carryforward -- -- --
--------------------------------------------------------------------------------------------------------------------------
TOTAL INCOME TAXES -- -- --
--------------------------------------------------------------------------------------------------------------------------
NET LOSS ($31,953,395) ($13,166,869) ($ 6,202,526)
--------------------------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
BASIC 75,072,487 49,892,551 41,854,325
DILUTED 75,072,487 49,892,551 41,854,325
--------------------------------------------------------------------------------------------------------------------------
NET LOSS PER SHARE
BASIC ($ 0.426) ($ 0.264) ($ 0.148)
DILUTED ($ 0.426) ($ 0.264) ($ 0.148)
--------------------------------------------------------------------------------------------------------------------------
See accompanying notes
25
GLOBETEL COMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------------------------------------------------------------------
2005 2004 2003
--------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) ($31,953,395) ($13,166,869) ($ 6,202,526)
Adjustments to reconcile net loss to net cash used by operating activities:
Depreciation and amortization 331,543 170,021 227,200
Gain on settlement of liabilities -- (85,337) 26,274
Gain on discontinued operations -- -- 55,842
Loss on settlement 1,256,873 -- --
Loss on disposition of unconsolidated foreign subsidiary - CGI 352,300 -- --
Loss on disposition of fixed assets -- 56,804 42,301
Loss on write-off of receivables and non-readily marketable securities -- -- 4,834,878
Bad debt expense 1,373,458 1,141,534 1,409,994
Common stock exchanged for services 4,930,573 1,558,707 604,510
Common stock exchanged for severence pay 177,397 -- --
Options exchanged for services 10,499,842 5,828,833 --
(Increase) decrease in assets:
Accounts receivable (4,193) -- --
Restricted cash (1,122,000) 211,010 (2,755,602)
Loans to employees (39,183) -- --
Prepaid expenses (117,522) 4,088 (71,000)
Prepaid expenses - related party, ISG Jets, LLC (185,960) -- --
Inventory (3,549) (63,976) --
Other current assets -- -- --
Deposits (1,610) (34,977) 74,486
Increase (decrease) in liabilities:
Accounts payable 451,141 (309,867) 1,111,960
Accounts payable, to be satified with non-readily marketable securities -- -- (974,951)
Due to former employee with GTE stock 237,600 --
Due to related party - Carrier Services and company principal 901,606 --
Accrued officers' salaries and bonuses (100,951) 198,333 --
Accrued expenses and other liabilities 452,200 29,054 426,460
Deferred revenues (46,319) 14,791 (46,106)
Deferred revenues - related party -- (27,023) (152,822)
--------------------------------------------------------------------------------------------------------------------------------
NET CASH USED BY OPERATING ACTIVITIES (12,610,149) (4,474,874) (1,389,102)
--------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of property and equipment (2,021,559) (204,206) (305,101)
Acquisition of Hotzone assets (27,000) -- --
Advances to related party - Sanswire European joint venture -- -- --
Deposit on equipment (36,000) (145,479) (302,300)
--------------------------------------------------------------------------------------------------------------------------------
NET CASH USED BY INVESTING ACTIVITIES (2,084,559) (349,685) (607,401)
--------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Sale of preferred stock - Series A -- 1,057,500 717,140
Sale of preferred stock - Series B 250,000 2,850,000 --
Sale of preferred stock - Series C 250,000 1,000,000 --
Sale of preferred stock - Series D -- 250,000 --
Sale of common stock 6,903,931 -- 500,000
Sale of common stock - exercises of options 48,412 -- --
Proceeds from unconsolidated foreign subsidiary - CGI 1,568,524 -- --
Proceeds from capital lease financing -- 9,554 --
Payments on capital lease financing (4,718) (2,229) (29,674)
Proceeds from notes and loans payable 6,368,026 375,000 784,259
Payments on notes and loans payable (2,846) (398,701) --
Proceeds from related party payables -- 60,000 144,194
Payments on related party payables (60,000) -- (96,053)
--------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 15,321,329 5,201,124 2,019,866
--------------------------------------------------------------------------------------------------------------------------------
NET INCREASE IN CASH AND EQUIVALENTS 626,621 376,565 23,363
CASH AND EQUIVALENTS - BEGINNING 601,559 224,994 201,631
--------------------------------------------------------------------------------------------------------------------------------
CASH AND EQUIVALENTS - ENDING $ 1,228,180 $ 601,559 $ 224,994
--------------------------------------------------------------------------------------------------------------------------------
26
GLOBETEL COMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
SUPPLEMENTAL DISCLOSURES 2005 2004 2003
--------------------------------------------------------------------------------------------------------------------------------
Cash paid during the period for:
Interest $ 730 $ 11,071 $ 95,736
Income taxes $ -- $ -- $ --
In addition to amounts reflected above, common stock was issued for:
Options issued for services $ 10,499,842 $ 5,828,833 $ 10,000
Options issued for settlement of obligations $ 1,256,873 $ -- $ 2,447,732
Shares issued for services $ 4,930,573 $ 1,546,568 $ --
Shares issued for broker's fees (66,667 shares, recorded at par) $ -- $ -- $ --
Shares issued for intangible assets $ -- $ 2,800,000 $ --
Conversion of Series A preferred stock to common stock $ 697,500 $ 1,452,140 $ --
Conversion of Series B preferred stock to common stock $ 8,435,200 $ -- $ --
Conversion of Series C preferred stock to common stock $ 750,000 $ 250,000 $ --
Conversion of notes payable to common stock $ 6,368,026 $ -- $ --
In addition to amounts reflected above, preferred stock was issued for:
Series A preferred stock issued for broker's fees (7,167 shares,
recorded at par) $ -- $ -- $ --
Series B preferred stock issued for broker's fees $ -- $ 150,000 $ --
Series B preferred stock issued for settlement of debt $ -- $ 500,000 $ --
Series B preferred stock issued for equipment $ 4,835,200 $ -- $ --
NON-CASH FINANCING ACTIVITIES:
On July 28, 2004, $1,000,000 of Series D preferred stock was issued. A
stock subscription receivable of $500,00 was outstanding as of
December 31, 2005
See accompanying notes.
27
GLOBETEL COMMUNICATIONS CORP. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2005, 2004, AND 2003
COMMON STOCK
--------------------------------------------------------
ADDITIONAL STOCK
PAID-IN SUBSCRIPTIONS
Description SHARES AMOUNT CAPITAL RECEIVABLE
----------------------------------------------------------------------------------------------------------
Balance, Dec. 31, 2002 40,354,686 404 24,450,106 --
Shares issued for services 1,583,236 16 568,494 --
Options issued for services -- -- 10,000 --
Shares issued for severence pay 80,000 1 35,999 --
Shares issued for extinguishment of debt 2,986,133 29 1,431,055 --
Options issued for extinguishment of debt -- -- 1,016,468 --
Shares issued for cash 1,338,688 13 499,987 --
Shares issued for loan collateral 333,333 3 (3) --
Shares returned for loan collateral (3,127,778) (31) 31 --
Preferred Series A shares issued for cash
and stock subscriptons receivable -- -- -- --
Net loss -- -- -- --
----------- ----------- ----------- -----------
Balance, Dec. 31, 2003 43,548,298 435 28,012,137 --
----------- ----------- ----------- -----------
Shares issued for options exercised 3,963,186 39 (39) --
Shares issued to / for unconsolidated
foreign subsidiary 1,333,333 13 (13) --
Shares issued for services 1,750,977 18 1,546,550 --
Shares issued for Sanswire assets 1,866,667 19 2,799,981 --
Shares issued for Stratodyne assets 133,333 1 (1) --
Preferred Series A shares issued for cash
and stock subscriptions receivable -- -- -- --
Preferred Series A shares issued for
broker's fees -- -- -- --
Shares issued for conversion of Preferred --
Series A shares 10,642,667 107 1,452,033 --
Preferred Series B shares issued for cash
and stock subscriptions receivable -- -- -- --
Preferred Series B shares issued for
extinguishment of debt -- -- -- --
Preferred Series B shares issued for
broker's fees -- -- -- --
Preferred Series C shares issued for cash --
and stock subscriptions receivable -- -- -- --
Shares issued for conversions of
Preferred Series C shares 151,515 2 249,998 --
Preferred Series D shares issued for cash -- -- -- --
Options issued for Board member stipends -- -- 145,313 --
Options issued for services, per 2004
Stock Option Plan -- -- 1,191,937 --
Options issued for services, per Executives %
Stock Option Grant Plan -- -- 4,491,583 --
Net loss -- -- -- --
----------- ----------- ----------- -----------
Balance, Dec. 31, 2004 63,389,976 634 39,889,479 --
----------- ----------- ----------- -----------
Shares issued for options excercised 1,785,490 18 92,888 (44,494)
Shares issued for services 2,232,215 22 4,930,729 --
Shares issued for convertible note payable 4,269,876 43 6,367,983 --
and accrued interest
Shares issued for cash 3,177,916 32 6,903,901 --
Shares issued for brokers fees 66,667 1 (1) --
Shares issued for severence pay 106,977 1 177,396 --
Conversion of amount due to unconsolidated
subsidiary to equity per buy-back agreement -- -- 1,568,524 --
Shares issued for conversion of Preferred
Series A shares 8,911,651 89 697,411 --
Preferred Series B stock subscriptions
receivable paid for with cash and equipment -- -- -- --
Shares issued for conversion of Preferred
Series B shares 12,931,334 129 8,435,070 --
Shares issued for conversion of Preferred
Series C shares 1,320,000 13 749,987 --
Preferred Series D stock subscriptions
receivable paid for with cash -- -- -- --
Options issued for Board member stipends -- -- 85,575 --
Options issued for executive compensation -- -- 55,000 --
Options issued for services, per Executives %
Stock Option Grant Plan -- -- 10,359,267 --
Options issued for settlement of obligations -- -- 1,256,873 --
Net loss -- -- -- --
----------- ----------- ----------- -----------
BALANCE, DEC. 31, 2005 98,192,102 982 81,570,082 (44,494)
=========== =========== =========== ===========
28
SERIES A
--------------------------------------------------------
ADDITIONAL STOCK
PAID-IN SUBSCRIPTIONS
Description SHARES AMOUNT CAPITAL RECEIVABLE
----------------------------------------------------------------------------------------------------------
Balance, Dec. 31, 2002 -- -- -- --
Shares issued for services -- -- -- --
Options issued for services -- -- -- --
Shares issued for severence pay -- -- -- --
Shares issued for extinguishment of debt -- -- -- --
Options issued for extinguishment of debt -- -- -- --
Shares issued for cash -- -- -- --
Shares issued for loan collateral -- -- -- --
Shares returned for loan collateral -- -- -- --
Preferred Series A shares issued for cash
and stock subscriptons receivable 72,000 72 1,092,068 (375,000)
Net loss -- -- -- --
----------- ----------- ----------- -----------
Balance, Dec. 31, 2003 72,000 72 1,092,068 (375,000)
----------- ----------- ----------- -----------
Shares issued for options exercised -- -- -- --
Shares issued to / for unconsolidated
foreign subsidiary -- -- -- --
Shares issued for services -- -- -- --
Shares issued for Sanswire assets -- -- -- --
Shares issued for Stratodyne assets -- -- -- --
Preferred Series A shares issued for cash
and stock subscriptions receivable 70,500 71 1,057,429 375,000
Preferred Series A shares issued for
broker's fees 107,500 107 (107) --
Shares issued for conversion of Preferred
Series A shares (153,500) (153) (1,451,987) --
Preferred Series B shares issued for cash
and stock subscriptions receivable -- -- -- --
Preferred Series B shares issued for
extinguishment of debt -- -- -- --
Preferred Series B shares issued for
broker's fees -- -- -- --
Preferred Series C shares issued for cash
and stock subscriptions receivable -- -- -- --
Shares issued for conversions of
Preferred Series C shares -- -- -- --
Preferred Series D shares issued for cash -- -- -- --
Options issued for Board member stipends -- -- -- --
Options issued for services, per 2004
Stock Option Plan -- -- -- --
Options issued for services, per Executives %
Stock Option Grant Plan -- -- -- --
Net loss -- -- -- --
----------- ----------- ----------- -----------
Balance, Dec. 31, 2004 96,500 97 697,403 --
----------- ----------- ----------- -----------
Shares issued for options excercised -- -- -- --
Shares issued for services -- -- -- --
Shares issued for convertible note payable -- -- -- --
and accrued interest
Shares issued for cash -- -- -- --
Shares issued for brokers fees -- -- -- --
Shares issued for severence pay -- -- -- --
Conversion of amount due to unconsolidated
subsidiary to equity per buy-back agreement -- -- -- --
Shares issued for conversion of Preferred
Series A shares (96,500) (97) (697,403) --
Preferred Series B stock subscriptions
receivable paid for with cash and equipment -- -- -- --
Shares issued for conversion of Preferred
Series B shares -- -- -- --
Shares issued for conversion of Preferred
Series C shares -- -- -- --
Preferred Series D stock subscriptions
receivable paid for with cash -- -- -- --
Options issued for Board member stipends -- -- -- --
Options issued for executive compensation -- -- -- --
Options issued for services, per Executives %
Stock Option Grant Plan -- -- -- --
Options issued for settlement of obligations -- -- -- --
Net loss -- -- -- --
----------- ----------- ----------- -----------
BALANCE, DEC. 31, 2005 -- -- -- --
=========== =========== =========== ===========
29
SERIES B
-------------------------------------------------------
ADDITIONAL STOCK
PAID-IN SUBSCRIPTIONS
Description SHARES AMOUNT CAPITAL RECEIVABLE
----------------------------------------------------------------------------------------------------------
Balance, Dec. 31, 2002 -- -- -- --
Shares issued for services -- -- -- --
Options issued for services -- -- -- --
Shares issued for severence pay -- -- -- --
Shares issued for extinguishment of debt -- -- -- --
Options issued for extinguishment of debt -- -- -- --
Shares issued for cash -- -- -- --
Shares issued for loan collateral -- -- -- --
Shares returned for loan collateral -- -- -- --
Preferred Series A shares issued for cash
and stock subscriptons receivable -- -- -- --
Net loss -- -- -- --
----------- ----------- ----------- -----------
Balance, Dec. 31, 2003 -- -- -- --
----------- ----------- ----------- -----------
Shares issued for options exercised -- -- -- --
Shares issued to / for unconsolidated
foreign subsidiary -- -- -- --
Shares issued for services -- -- -- --
Shares issued for Sanswire assets -- -- -- --
Shares issued for Stratodyne assets -- -- -- --
Preferred Series A shares issued for cash
and stock subscriptions receivable -- -- -- --
Preferred Series A shares issued for
broker's fees -- -- -- --
Shares issued for conversion of Preferred
Series A shares -- -- -- --
Preferred Series B shares issued for cash
and stock subscriptions receivable 35,000 35 14,999,965 (12,150,000)
Preferred Series B shares issued for
extinguishment of debt -- -- -- 500,000
Preferred Series B shares issued for
broker's fees -- -- (150,000) 150,000
Preferred Series C shares issued for cash
and stock subscriptions receivable -- -- -- --
Shares issued for conversions of
Preferred Series C shares -- -- -- --
Preferred Series D shares issued for cash -- -- -- --
Options issued for Board member stipends -- -- -- --
Options issued for services, per 2004
Stock Option Plan -- -- -- --
Options issued for services, per Executives %
Stock Option Grant Plan -- -- -- --
Net loss -- -- -- --
----------- ----------- ----------- -----------
Balance, Dec. 31, 2004 35,000 35 14,849,965 (11,500,000)
----------- ----------- ----------- -----------
Shares issued for options excercised -- -- -- --
Shares issued for services -- -- -- --
Shares issued for convertible note payable -- -- -- --
and accrued interest
Shares issued for cash -- -- -- --
Shares issued for brokers fees -- -- -- --
Shares issued for severence pay -- -- -- --
Conversion of amount due to unconsolidated
subsidiary to equity per buy-back agreement -- -- -- --
Shares issued for conversion of Preferred
Series A shares -- -- -- --
Preferred Series B stock subscriptions
receivable paid for with cash and equipment -- -- -- 5,085,200
Shares issued for conversion of Preferred
Series B shares (35,000) (35) (14,849,965) 6,414,800
Shares issued for conversion of Preferred
Series C shares -- -- -- --
Preferred Series D stock subscriptions
receivable paid for with cash -- -- -- --
Options issued for Board member stipends -- -- -- --
Options issued for executive compensation -- -- -- --
Options issued for services, per Executives %
Stock Option Grant Plan -- -- -- --
Options issued for settlement of obligations -- -- -- --
Net loss -- -- -- --
----------- ----------- ----------- -----------
BALANCE, DEC. 31, 2005 -- -- -- --
=========== =========== =========== ===========
30
SERIES C
---------------------------------------------------------
ADDITIONAL STOCK
PAID-IN SUBSCRIPTIONS
Description SHARES AMOUNT CAPITAL RECEIVABLE
----------------------------------------------------------------------------------------------------------
Balance, Dec. 31, 2002 -- -- -- --
Shares issued for services -- -- -- --
Options issued for services -- -- -- --
Shares issued for severence pay -- -- -- --
Shares issued for extinguishment of debt -- -- -- --
Options issued for extinguishment of debt -- -- -- --
Shares issued for cash -- -- -- --
Shares issued for loan collateral -- -- -- --
Shares returned for loan collateral -- -- -- --
Preferred Series A shares issued for cash
and stock subscriptons receivable -- -- -- --
Net loss -- -- -- --
----------- ----------- ----------- ----------
Balance, Dec. 31, 2003 -- -- -- --
----------- ----------- ----------- ----------
Shares issued for options exercised -- -- -- --
Shares issued to / for unconsolidated
foreign subsidiary -- -- -- --
Shares issued for services -- -- -- --
Shares issued for Sanswire assets -- -- -- --
Shares issued for Stratodyne assets -- -- -- --
Preferred Series A shares issued for cash
and stock subscriptions receivable -- -- -- --
Preferred Series A shares issued for
broker's fees -- -- -- --
Shares issued for conversion of Preferred
Series A shares -- -- -- --
Preferred Series B shares issued for cash
and stock subscriptions receivable -- -- -- --
Preferred Series B shares issued for
extinguishment of debt -- -- -- --
Preferred Series B shares issued for
broker's fees -- -- -- --
Preferred Series C shares issued for cash
and stock subscriptions receivable 1,000 1 999,999 --
Shares issued for conversions of
Preferred Series C shares (250) -- (250,000) --
Preferred Series D shares issued for cash -- -- -- --
Options issued for Board member stipends -- -- -- --
Options issued for services, per 2004
Stock Option Plan -- -- -- --
Options issued for services, per Executives %
Stock Option Grant Plan -- -- -- --
Net loss -- -- -- --
----------- ----------- ----------- ----------
Balance, Dec. 31, 2004 750 1 749,999 --
----------- ----------- ----------- ----------
Shares issued for options excercised -- -- -- --
Shares issued for services -- -- -- --
Shares issued for convertible note payable -- -- -- --
and accrued interest
Shares issued for cash -- -- -- --
Shares issued for brokers fees -- -- -- --
Shares issued for severence pay -- -- -- --
Conversion of amount due to unconsolidated
subsidiary to equity per buy-back agreement -- -- -- --
Shares issued for conversion of Preferred
Series A shares -- -- -- --
Preferred Series B stock subscriptions
receivable paid for with cash and equipment -- -- -- --
Shares issued for conversion of Preferred
Series B shares -- -- -- --
Shares issued for conversion of Preferred
Series C shares (750) (1) (749,999) --
Preferred Series D stock subscriptions
receivable paid for with cash -- -- -- --
Options issued for Board member stipends -- -- -- --
Options issued for executive compensation -- -- -- --
Options issued for services, per Executives %
Stock Option Grant Plan -- -- -- --
Options issued for settlement of obligations -- -- -- --
Net loss -- -- -- --
----------- ----------- ----------- ----------
BALANCE, DEC. 31, 2005 -- -- -- --
=========== =========== =========== ==========
31
SERIES D
--------------------------------------------------------
ADDITIONAL STOCK TOTAL
PAID-IN SUBSCRIPTIONS ACCUMULATED SHAREHOLDERS'
Description SHARES AMOUNT CAPITAL RECEIVABLE DEFECIT EQUITY
------------------------------------------------------------------------------------------------------------------------------------
Balance, Dec. 31, 2002 -- -- -- -- (20,291,641) 4,158,869
Shares issued for services -- -- -- -- -- 568,510
Options issued for services -- -- -- -- -- 10,000
Shares issued for severence pay -- -- -- -- -- 36,000
Shares issued for extinguishment of debt -- -- -- -- -- 1,431,084
Options issued for extinguishment of debt -- -- -- -- -- 1,016,468
Shares issued for cash -- -- -- -- -- 500,000
Shares issued for loan collateral -- -- -- -- -- --
Shares returned for loan collateral -- -- -- -- -- --
Preferred Series A shares issued for cash
and stock subscriptons receivable -- -- -- -- -- 717,140
Net loss -- -- -- -- (6,202,526) (6,202,526)
----------- ----------- ----------- ---------- ----------- ----------
Balance, Dec. 31, 2003 -- -- -- -- (26,494,167) 2,235,545
----------- ----------- ----------- ---------- ----------- ----------
Shares issued for options exercised -- -- -- -- -- --
Shares issued to / for unconsolidated
foreign subsidiary -- -- -- -- -- --
Shares issued for services -- -- -- -- -- 1,546,568
Shares issued for Sanswire assets -- -- -- -- -- 2,800,000
Shares issued for Stratodyne assets -- -- -- -- -- --
Preferred Series A shares issued for cash
and stock subscriptions receivable -- -- -- -- -- 1,432,500
Preferred Series A shares issued for
broker's fees -- -- -- -- -- --
Shares issued for conversion of Preferred
Series A shares -- -- -- -- -- --
Preferred Series B shares issued for cash
and stock subscriptions receivable -- -- -- -- -- 2,850,000
Preferred Series B shares issued for
extinguishment of debt -- -- -- -- -- 500,000
Preferred Series B shares issued for
broker's fees -- -- -- -- -- --
Preferred Series C shares issued for cash
and stock subscriptions receivable -- -- -- -- -- 1,000,000
Shares issued for conversions of
Preferred Series C shares -- -- -- -- -- --
Preferred Series D shares issued for cash 1,000 1 999,999 (750,000) -- 250,000
Options issued for Board member stipends -- -- -- -- -- 145,313
Options issued for services, per 2004
Stock Option Plan -- -- -- -- -- 1,191,937
Options issued for services, per Executives %
Stock Option Grant Plan -- -- -- -- -- 4,491,583
Net loss -- -- -- -- (13,166,869) (13,166,869)
----------- ----------- ----------- ---------- ----------- ----------
Balance, Dec. 31, 2004 1,000 1 999,999 (750,000) (39,661,036) 5,276,577
----------- ----------- ----------- ---------- ----------- ----------
Shares issued for options excercised -- -- -- -- -- 48,412
Shares issued for services -- -- -- -- -- 4,930,751
Shares issued for convertible note payable -- -- -- -- -- 6,368,026
and accrued interest
Shares issued for cash -- -- -- -- -- 6,903,932
Shares issued for brokers fees -- -- -- -- -- --
Shares issued for severence pay -- -- -- -- -- 177,397
Conversion of amount due to unconsolidated
subsidiary to equity per buy-back agreement -- -- -- -- -- 1,568,524
Shares issued for conversion of Preferred
Series A shares -- -- -- -- -- --
Preferred Series B stock subscriptions
receivable paid for with cash and equipment -- -- -- -- -- 5,085,200
Shares issued for conversion of Preferred
Series B shares -- -- -- -- -- --
Shares issued for conversion of Preferred
Series C shares -- -- -- -- -- --
Preferred Series D stock subscriptions
receivable paid for with cash -- -- -- 250,000 -- 250,000
Options issued for Board member stipends -- -- -- -- -- 85,575
Options issued for executive compensation -- -- -- -- -- 55,000
Options issued for services, per Executives %
Stock Option Grant Plan -- -- -- -- -- 10,359,267
Options issued for settlement of obligations -- -- -- -- -- 1,256,873
Net loss -- -- -- -- (31,953,395) (31,953,395)
----------- ----------- ----------- ---------- ----------- ----------
BALANCE, DEC. 31, 2005 1,000 1 999,999 (500,000) (71,614,431) 10,412,139
=========== =========== =========== ========== =========== ==========
32
GLOBETEL COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
NATURE OF OPERATIONS
GlobeTel Communications Corp. ("Globetel") is engaged in the business of
providing telecommunications and financial services. GlobeTel operates business
unites in stored value cards, as a certified MasterCard processor, the sale of
Internet telephony using Voice over Internet Protocol ("VoIP") technology and
equipment, and wireless communications both domestically and internationally,
including Mexico and certain countries in South America, Europe and Asia. In
addition, our subsidiary, Sanswire Networks, LLC, 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. Although
through December 31, 2005, only the telecommunications activities produced
revenues, all of our operations are considered to be of relatively equal
importance, based on the anticipation of future revenue producing activities and
substantial investment in assets related to all of our operations.
ORGANIZATION AND CAPITALIZATION
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 (pre-split) 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.
In May 2005, GlobeTel approved a reverse split of shares of common stock on a
one for fifteen (1:15) basis and changed the number of shares authorized to
100,000,000. In the Company's annual shareholders meeting on August 1, 2005, the
shareholders voted to increase the shares authorized from 100,000,000 to
150,000,000.
All common stock amounts in this report have been retroactively restated to
account for the reverse stock split, unless otherwise noted.
BASIS OF PRESENTATION
The financial statements include the accounts of GlobeTel Communications Corp.
and its wholly-owned subsidiaries: Sanswire Networks, LLC; GlobeTel Wireless
Corp.; GlobeTel Wireless Europe GmbH, a German corporation, 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; High Valley Property Ltd., a British Virgin Islands
corporation; as well as the accounts GTCC de Mexico, S.A. de C.V, which GlobeTel
owns 99% of.
All material inter-company balances and transactions were eliminated in the
consolidation.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
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 as of December 31, 2005. The Company
expects the adoption of this standard will have a material impact on its
financial statements assuming variable interest entities are applicable in the
future.
In November 2004, the FASB issued Statement No. 151, "Inventory Costs", to amend
the guidance in Chapter 4, "Inventory Pricing", of FASB Accounting Research
Bulletin (ARB) No. 43, "Restatement and Revision of Accounting Research
Bulletins", which will become effective for the Company in fiscal year 2006.
Statement 151 clarifies the accounting for abnormal amounts of idle facility
expense, freight, handling costs, and wasted material (spoilage). The Statement
requires that those items be recognized as current-period charges. Additionally,
Statement 151 requires that allocation of fixed production overhead to the costs
of conversion be based on the normal capacity of the production facilities.
Management believes that the adoption of SFAS 151 will not affect the Company's
financial position or results of operations.
33
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary
Assets," an amendment to Opinion No. 29, "Accounting for Nonmonetary
Transactions." Statement No. 153 eliminates certain differences in the guidance
in Opinion No. 29 as compared to the guidance contained in standards issued by
the International Accounting Standards Board. The amendment to Opinion No. 29
eliminates the fair value exception for nonmonetary exchanges of similar
productive assets and replaces it with a general exception for exchanges of
nonmonetary assets that do not have commercial substance. Such an exchange has
commercial substance if the future cash flows of the entity are expected to
change significantly as a result of the exchange. SFAS No. 153 is effective for
nonmonetary asset exchanges occurring in periods beginning after June 15, 2005.
Earlier application is permitted for nonmonetary asset exchanges occurring in
periods beginning after December 16, 2005. Management does not expect adoption
of SFAS No. 153 to have any impact on the Company's financial statements.
In December 2004, the FASB issued SFAS No. 123 (revised 2005) "Share-Based
Payments", which is a revision of SFAS No. 123, "Accounting for Stock-Based
Compensation". SFAS No. 123(R) supersedes APB Opinion No. 25, Accounting for
Stock Issued to Employees and amends SFAS No. 95, "Statement of Cash Flows".
Generally, the approach in SFAS No. 123(R) is similar to the approach described
in SFAS No. 123. However, SFAS No. 123(R) requires all share-based payments to
employees, including grants of employee stock options, to be recognized in the
income statement based on their fair values. Pro forma disclosure is no longer
an alternative. The new standard will be effective for the Company in the first
interim or annual reporting period beginning after December 15, 2005. The
Company expects the adoption of this standard will have a material impact on its
financial statements assuming employee stock options are granted in the future.
The adoptions of these new pronouncements have not and, other than as noted
above, are not expected to have a material effect on the Company's consolidated
financial position or results of operations.
MOVE TO AMERICAN STOCK EXCHANGE
On May 6, 2005, the Board of Directors approved a reverse split of the Company's
shares of common stock on a one for fifteen (1:15) basis, in anticipation of the
Company's move to the American Stock Exchange (AMEX) on May 23, 2005. The AMEX
granted approval for the Company to list is shares on the exchange and the
Company began trading on the AMEX under the symbol GTE on May 23, 2005. All
common stock amounts in this report have been restated to account for the
reverse stock split, unless otherwise noted.
RECLASSIFICATIONS
Certain amounts in the prior year financial statements have been reclassified
for comparative purposes to conform to the current year presentation. There were
no material changes in classifications made to previously issued financial
statements.
CASH AND CASH EQUIVALENTS AND RESTRICTED CASH
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.
Restricted cash represents letters of credit to suppliers for MasterCard in the
amount of $1,000,000 in support of the Stored Value Card program, rental deposit
for Los Angeles World Airport related to the Palmdale Hanger occupied by
Sanswire Networks, LLC in the amount of $72,000 and for a wholesale carrier in
the amount of $50,000.
The company anticipates increased cash flows from 2006 sales activities;
however, additional cash will still be needed to support operations. Management
believes it can continue to raise capital from various funding sources, which
when added to budgeted sales and current working capital, will be sufficient to
sustain operations at its current level through January 1, 2007. However, if
budgeted sales levels are not achieved and/or if significant unanticipated
expenditures occur, or if we are unable to obtain the necessary funding, the
company may have to modify its business plan, reduce or discontinue some of its
operations or seek a buyer for all or part of its assets to continue as a going
concern through 2006.
ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS
Trade and other accounts receivable are reported at face value less any
provisions for uncollectible accounts considered necessary. Accounts receivable
primarily includes trade receivables from customers and, in connections with our
Mexico network, Mexican tax refunds receivable. The Company estimates doubtful
accounts on an item-to-item basis and includes over-aged accounts as part of
allowance for doubtful accounts, which are generally accounts that are
ninety-days or more overdue. When accounts are deemed uncollectible, the account
receivable is charged off and the allowance account is reduced accordingly. Bad
debt expense for the years ended December 31, 2005, 2004 and 2003 were
$1,373,458, $1,141,534, and $1,409,994, respectively.
34
INVENTORY
Inventory is recorded at lower-of-cost-or-market, first-in first-out (FIFO)
basis. Inventory at December 31, 2005 consisted primarily of communications
equipment and component parts related to our wireless operations. Inventory at
December 31, 2004 consisted of IP (Internet Protocol) phones held for resale.
As of December 31, 2005, the Company wrote-off $60,976 of IP phones inventory
considered obsolete and charged this amount against costs of sales.
PROPERTY AND EQUIPMENT
Property and equipment consists of primarily telecommunications equipment,
computer and related equipment and office furniture and fixtures, which are
stated at cost less depreciation and amortization. Depreciation is based on the
estimated useful lives of the assets, ranging from seven years for office
furniture and equipment to five 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.
INTANGIBLE ASSETS
Intangible assets are recorded under the provisions of the Financial Accounting
Standards Board (FASB) Statement No.142 (FAS 142), Goodwill and Other Intangible
Assets. FAS 142 requires that an intangible asset that is acquired either
individually or with a group of other assets (but not those acquired in a
business combination) shall be initially recognized and measured based on its
fair value. Costs of internally developing, maintaining and restoring intangible
assets (including goodwill) that are not specifically identifiable, that have
indeterminate lives, or that are inherent in a continuing business and related
to an entity as a whole, are recognized as an expense when incurred.
An intangible asset with a definite useful life is amortized; an intangible
asset with an indefinite useful life is not amortized until its useful life is
determined to be no longer indefinite. The remaining useful lives of intangible
assets not being amortized are evaluated every reporting period to determine
whether events and circumstance continue to support an indefinite useful life.
An intangible asset that is not subject to amortization shall be tested for
impairment annually or more frequently if events or changes in circumstances
indicate that the asset might be impaired. The impairment test consists of a
comparison of the fair value of the intangible assets with its carrying amount.
If the carrying amount of an intangible asset exceeds its fair value, an
impairment loss shall be recognized in an amount equal to that excess.
It is the Company's policy to test for impairment no less than quarterly. The
Company's intangible assets, which consist primarily of intellectual property,
including technology and know-how, were evaluated by management, initially and
as of December 31, 2005, and determined to have an indefinite useful life and
are not subject to amortization. The Company also tested the assets for
impairment and determined that no adjustment for impairment was necessary as of
December 31, 2005, whereas the fair value of the intangible assets exceed its
carrying amount.
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.
INCOME TAXES
Income taxes are computed under the provisions of the Financial Accounting
Standards Board (FASB) Statement No. 109 (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,
2005, 2004 and 2003, were $265,283, $19,160 and $105,314, respectively, and are
included in "Investor and public relations" in the consolidated statements of
income (loss).
35
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 and accounts receivable. The
Company currently maintains a substantial portion of its day-to-day operating
cash balances at a single financial institution. The Company had cash balances
of $1,098,802, $562,760 (restated from Book to Bank) and $224,994 as of December
31, 2005, 2004 and 2003, respectively, which are in excess of federally insured
limit. As of December 31, 2005, 2004 and 2003, the Company had $898,701,
$462,760 and $124,994, 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.
The company anticipates increased cash flows from 2006 sales activities;
however, additional cash will still be needed to support operations. Management
believes it can raise capital from various funding sources, which when added to
budgeted sales and current working capital, will be sufficient to sustain
operations at its current level through January 1, 2007. However, if budgeted
sales levels are not achieved and / or if significant unanticipated expenditures
occur, or if we are unable to obtain the necessary funding, the company may have
to modify its business plan, reduce or discontinue some of its operations or
seek a buyer for all or part of its assets to continue as a going concern
through 2006.
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 LOSS PER COMMON SHARE
Basic net 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 loss is computed by dividing the net loss by the weighted average
number of common shares outstanding during each period. In periods where losses
are reported, the weighted average number of common shares outstanding excludes
common stock equivalents because their inclusion would be anti-dilutive.
Following is a reconciliation of the numerators and denominators of the basic
and diluted earnings per share computations for the year ended December 31,
2005:
NET LOSS PER COMMON SHARE
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
--------------------------------------------------------------------------------------------------------------
BASIC NET LOSS PER SHARE:
Income (loss) available to common stockholders ($31,953,395) 75,072,487 $ (.4260)
Effect of Dilutive Convertible Preferred Stock and Option -- -- --
DILUTED NET INCOME (LOSS) PER SHARE:
Income (loss) available to common stockholders plus,
assumed conversions and exercises ($31,953,395) 75,072,487 $ (.4260)
Available stock options at December 31, 2005, 2004 and 2003, were anti-dilutive
and therefore were excluded from the net income (loss) per common share
calculation. If all outstanding options, warrants and convertible shares were to
be converted or exercised as of the date of this report, the weighted average
fully diluted shares outstanding would be 95,841,094.
36
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.
STOCK-BASED COMPENSATION
The Company accounts for its stock-based compensation arrangements with
employees in accordance with Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations. As such, compensation expense under fixed term option plans is
recorded at the date of grant only to the extent that the market value of the
underlying stock at the date of grant exceeds the exercise price. In accordance
with SFAS No. 123 "Accounting for Stock-Based Compensation" ("SFAS 123"), since
the Company has continued to apply the principles of APB 25 to employee stock
compensation, pro forma loss and pro forma loss per share information has been
presented as if the options had been valued at their fair values. The Company
recognizes compensation expense for stock options, common stock and other equity
instruments issued to non-employees for services received based upon the fair
value of the services or equity instruments issued, whichever is more reliably
determined. Stock compensation expense is recognized as the stock option is
earned, which is generally over the vesting period of the underlying option.
In December 2002, the FASB issued SFAS No. 148 "Accounting for Stock-Based
Compensation". This statement amends SFAS 123. SFAS 148 provides alternative
methods of transition for companies that voluntarily change to the fair
value-based method of accounting for stock-based employee compensation. In
addition, this statement amends the disclosure requirements of SFAS 123 to
require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based compensation and the effect of
the method used on reported results.
In March 2000, the FASB issued FASB Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation." ("FIN 44") The Company
adopted FIN 44, effective July 1, 2000, with respect to certain provisions
applicable to new awards, option repricings, and changes in grantee status. FIN
44 addresses practice issues related to the application of APB 25. The Company
accounts for stock-based compensation issued to non-employees and consultants in
accordance with the provisions of SFAS 123 and SFAS 148 and EITF No. 96-18,
"Accounting for Equity Instruments that are issued to Other Than Employees for
Acquiring or in Conjunction with Selling, Goods or Services". The measurement
date used is the earlier of either the performance commitment date or the date
at which the equity instrument holder's performance is complete.
Had compensation cost for the Company's stock option plans been determined based
on the fair value at the grant date for awards under those plans, consistent
with the measurement provisions of SFAS 123 and SFAS 148, the Company's net loss
and basic loss per share would have been adjusted as follows:
2005 2004
------------ ------------
Net Loss for the year - as reported ($31,953,395) ($13,166,869)
ADD: Total stock-based compensation
included in net loss, as reported determined under
APB 25, net of related tax effects 10,499,842 5,828,833
DEDUCT: Total Stock-based compensation expense
determined under fair value based method for all awards
net of related tax effects (14,429,334) (5,323,319)
------------ ------------
Net loss for the year- pro forma ($35,882,887) ($12,661,355)
============ ============
The fair value of each option grant has been estimated on the date of the grant
using the Black-Scholes option-pricing model with the following assumptions:
2005 2004 2003
------- ------- ------
Expected dividend yield -- -- --
Expected stock price volatility 50% 300% 150%
Risk-free interest rate 5.0% 2.0% 2.0%
Expected life of options 2 years 2 years 3 years
Block discount applied -- -- --
In December 2005, the FASB issued SFAS No. 123 (revised 2005), Share-Based
Payment, which is a revision of SFAS No. 123, Accounting for Stock-Based
Compensation. SFAS No. 123(R) supersedes APB Opinion No. 25, Accounting for
Stock Issued to Employees and amends SFAS No. 95, Statement of Cash Flows.
Effective for the years on or after December 15, 2005, the Company will
recognize all share-based payments to employees, including grants of employee
stock options, in the statement of operations based on their fair values.
37
NOTE 2. ACCOUNTS RECEIVABLE AND SALES - SIGNIFICANT CONCENTRATIONS OF CREDIT
RISK AND ECONOMIC DEPENDENCE
In 2005 we had approximately 22 customers of which one accounted for 10% of the
Company's sales for 2005, all of which related to the Philippines network. Eight
customers accounted for 98% of sales for 2004 and two customers accounted for
97% of sales for 2003, including 7% attributable to the Brazil network, 41% to
the Mexico (including 17% related to our Mexico network and 24% unrelated to our
network), and 11% to the Philippines network. Four of the customers for the
international networks account for 92% of accounts receivable as of December 31,
2004.
Sales attributable to foreign operations for the year ended December 31, 2005
were $80,182,465 or 99% of total sales; for December 31, 2004, were $28,783,098
or 99% of total sales; and for December 31, 2003 were $11,256,907 or 99% of
total sales The amounts include $71,562,620 or 88% of totals sales and
$7,782,541 or 10% for 2005 for Mexico and the Philippines, respectively. For
prior years, revenues of $2,147,119 or 7% for 2004 and $2,923,981 or 26% for
2003 from Brazil and $11,892,643 or 41% for 2004 and $8,052,143 or 71% 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, $1,903,264 and $1,955,818 during years
ended December 31, 2004 and 2003, 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. There were no such transactions during 2005.
In connection with the Mexico network, $4,485,030 and $5,609,939 during the
years ended December 31, 2004 and 2003, 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. There were no such transactions during 2005.
During the year ended December 31, 2005, the Company increased its allowance for
doubtful accounts by $1,373,458, predominantly for the receivables from the
Mexico and Brazil networks, representing all of the amounts receivable, which
have not been received as of the date of this report. The Company also charged
off the accounts receivable and decreased its allowance account by $2,374,304,
related to the receivables from Mexico and Brazil, resulting in an allowance for
doubtful accounts of $409,100 as of December 31, 2005 primarily attributable to
the portion of the Mexico receivables that are not considered uncollectible as
of the date of this report.
NOTE 3. PREPAID EXPENSES AND EXPENSE-RELATED PARTY
PREPAID EXPENSES
Prepaid expenses include primarily $117,678 of payments made to telecom carriers
for prepaid minutes. For the 2004 the balance was for prepaid leases and
prepayments to telecom carriers.
PREPAID EXPENSE - RELATED PARTY - ISG JET, LLC
On October 11, 2005, the company entered into an arrangement with ISG Jet, LLC
for travel services. The agreement provides the Company with the ability to
utilize executive air travel services at a reduced rate over a two-year period.
The Company made a payment of $185,960, which includes $60,960 in cash and
81,168 shares of the company's common stock, which was valued at $125,000
(valued at $1.54 per share). The Company maintains a prepaid balance that is
being reduced over the term of the agreement, which ends in September 2007. The
Parent company of ISG Jet, LLC is owned by Investor Source Group, LLC, which is
owned 100% by Steven King, Executive Vice President of GlobeTel.
LOANS TO EMPLOYEES
This represents advances made by the Company to non-officer employees for
payment of payroll taxes on stock options exercised during 2005. The company
will recover this amount from the employees during the first quarter of 2006.
38
NOTE 4. DEPOSITS ON EQUIPMENT PURCHASES
This represent payments made for the new MasterCard Switch for $124,993 as of
December 31, 2005, as compared to $88,994 as of December 31, 2004.
NOTE 5. PROPERTY AND EQUIPMENT
PROPERTY AND EQUIPMENT CONSISTED OF THE FOLLOWING: 2005 2004
----------- -----------
Telecommunications equipment $ 1,356,966 $ 566,226
Assets not yet placed in service 5,267,526 - 0 -
Computer and related equipment 468,916 143,802
Office furniture and fixtures 531,972 5,730
----------- -----------
TOTAL PROPERTY AND EQUIPMENT 7,625,380 715,758
Accumulated depreciation (596,958) (270,002)
----------- -----------
Property and equipment, net book value $ 7,028,422 $ 445,756
=========== ===========
Depreciation expense for the years ended December 31, 2005, 2004 and 2003,
amounted to $236,018, $53,586 and $44,370, respectively, as reflected in the
Consolidated Statement of Operations. Depreciation expense included in cost of
sales was $95,525 in 2005, $116,435 in 2004 and $182,774 in 2003.
The total assets above include $5,267,526 of assets not yet placed into service
as of December 31, 2005, primarily consisting of telecommunications equipment
for our Stored Value activities, and, accordingly, no depreciation was recorded
for these assets. These assets are expected to be placed into service during
2006, at which time depreciation will begin to be recognized.
NOTE 6 - INVESTMENT IN AND LOSS ON DISPOSITION OF UNCONSOLIDATED FOREIGN
SUBSIDIARY - CGI
In September 2003, the Company entered into an agreement with Advantage
Telecommunications Ltd. (ATC), n/k/a Consolidated Global Investments, Ltd. (CGI)
an Australian telecommunications corporation where, for a strategic investment
of $1.2 million, the Company would own up to 50% of the stock of CGI, and would
have control of the board of directors of CGI. CGI 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 CGI's telecommunication equipment and network operations in Hong
Kong and England. Subsequently, CGI deconsolidated its subsidiaries and
suspended operations.
As of December 31, 2003, the Company had remitted $302,300 to CGI and CGI's
assignee. The Company remitted an additional $25,000 in February and $25,000 in
March 2004 for a total of $352,300 and as of December 31, 2004 as partial
payment towards the completion of the transaction.
Pursuant to additional modifications of the agreement, the Company issued
1,100,000 (16,500,000 pre-split) restricted shares of the Company's common stock
to CGI to complete the transaction as follows: (a) 666,667 (10,000,000
pre-split) shares, valued at $847,700, were issued to bring the investment
balance to $1.2 million, and (b) an additional 433,333 (6,500,000 pre-split)
shares, valued at $520,000 were issued to bring the investment balance to
$1,720,000. These amounts were agreed to by the Company and CGI.
The investment was structured by the parties and recorded by CGI as a secured
convertible note payable to the Company, bearing interest at a rate of 12%,
convertible, at the option of the Company, at a conversion rate of AUD$ 0.005
per share. However, as agreed by the parties, neither the Company nor CGI
received or paid, respectively, nor accrued such interest.
In May 2004, ATC changed its name to Consolidated Global Investments, Ltd. (CGI)
and all reports and filings were under the name of Consolidated Global
Investments, Ltd., thereafter.
On June 30, 2004, the Company exercised its option to convert the note and was
issued 467,327,745 shares of CGI stock. In addition, the Company took an
assignment from CGI of a note payable to a CGI bank creditor in the amount of
approximately AUD$ 750,000 (US $518,000) for a purchase price of 233,334
(3,500,000 pre-split) restricted shares of the Company's stock, in full payment
of the balance due. Pursuant to an agreement between the Company and CGI, the
Company converted the balance to CGI shares, at a conversion rate of AUD$.005
and on June 30, 2004, the Company was issued 147,968,635 shares of CGI stock.
As a result of the conversions, the Company held a total of 615,296,380 shares
representing an ownership interest in CGI 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.
39
Notwithstanding the Company's 73.15% ownership interest and control of CGI's
Board of Directors, the Company did not consolidate CGI into its accounts,
whereas CGI is a foreign subsidiary of the Company, with no current operations.
Furthermore, the primary asset of CGI as of December 31, 2004, consisted of the
16.5 million shares of the Company's stock. Such consolidation is not required
by generally accepted accounting principles in the United States.
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 $352,300, representing the sum of cash advanced by the Company to
CGI through December 31, 2004.
As of December 31, 2005 and 2004, and CGI's shares were not trading on the
Australian Stock Exchange, or any other exchange. As of December 31, 2004, the
Company was advised that CGI expected the shares to be relisted in the
near-term. The Company intended to make CGI into an operating company, with
operations in telecommunications and Sanswire projects, expanding the Company's
presence in the Asian market, and resulting in the marketability of CGI's stock
and potential income from the subsidiary. Upon the occurrence of such events,
the Company planned to 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 had agreed with the Liquidator of CGI's former UK
subsidiary to acquire telecommunication equipment owned by that former
subsidiary valued by the Company at $128,210. Such agreement was nullified upon
the divestiture described below.
During 2005, CGI sold a total of 610,000 (9,150,000 pre-split) of the GlobeTel
shares it owned, and, from the proceeds, CGI advanced to GlobeTel a net of
$1,449,509 ($1,607,174, less repayments of $157,665) for Sanswire licensing
rights. In consideration of its movement to the American Stock Exchange, the
Company decided to not proceed with its goals to list a company on the
Australian Stock Exchange and decided to divest itself of its interests in CGI.
In December 2005, the parties agreed that: (1) GlobeTel would return all shares
and warrants it held in CGI to CGI, resulting in complete elimination of any
ownership interest in CGI; (2) GlobeTel would not be required to return the
$1,449,509 advanced from CGI; (3) CGI would retain 333,334 (5,000,000 pre-split)
shares of GlobeTel common stock; and (4) CGI would return to GlobeTel 280,000
(4,200,000 pre-split) shares of GlobeTel common stock. As of the date of this
report, a total of 256,666 shares were received from CGI. The Company is
expected to receive the remaining 23,334 shares from CGI during 2006. The shares
returned are to be utilized to satisfy the obligation with CSI (see Note 11).
During 2005, the Company recorded a loss of $352,300 upon disposition of the
former unconsolidated foreign subsidiary, representing the cash invested in CGI
through December 31, 2004. The $1,449,509 retained by the Company was
reclassified to additional paid-in capital, because it represents monies derived
from the sale of the Company stock.
NOTE 7 - ASSET ACQUISITION AND INTANGIBLE ASSETS - 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., a company that is developing a National Wireless Broadband Network
utilizing high-altitude airships called Stratellites that will be used to
provide wireless voice, video, and data services. The definitive purchase
agreement was signed and effective on April 15, 2004.
ASSET PURCHASE AGREEMENT - STRATODYNE, INC.
The Company entered into a purchase agreement, effective August 23, 2004, with
Sanswire Technologies, Inc., 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 Technologies, Inc.
agreement. Stratodyne was the primary contractor for Sanswire Technologies, Inc.
The assets acquired under the Sanswire Technologies, Inc. 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
Technologies Inc.'s and Stratodyne's assets into Sanswire Networks, LLC, its
Florida-based, wholly-owned subsidiary ("Sanswire").
As consideration for the purchase, the Company issued 1,866,667 (28 million
pre-split) shares of its common stock to Sanswire Technologies, Inc. In November
2004, all the final documents were delivered and the relationship was
consummated. In September 2005, pursuant to the Stratodyne agreement, 133,333 (2
million pre-split) shares of the Company's common stock were issued directly to
Stratodyne's principal shareholder. These shares are included in the 1,866,667
(28 million pre-split) shares originally issued to Sanswire Technologies, Inc.,
and, accordingly, the Sanswire Technologies, Inc. shareholders retain only
1,733,334 (26 million pre-split) shares issued and returned the 133,334 (2
million pre-split) of the previously issued shares to the Company. On February
5, 2005, GlobeTel filed a registration statement to register shares associated
with these agreements.
40
CONTINGENT CONSIDERATION
In accordance with the Sanswire and Stratodyne agreements, a total of 1.9
million shares (28 million pre-split) were issued, as discussed in our December
31, 2004, Form 10-KSB. On February 5, 2005, GlobeTel filed a registration
statement to register shares associated with these agreements. An additional
13.3 million (200 million pre-split) shares were to be issued pursuant to the
terms and conditions of the "successful commercial launch" of a commercial
communications platform aboard an airship developed by Sanswire and Stratodyne
by the December 31, 2005 closing date. The Stratodyne agreement provides that
3.3 million (50 million pre-split) of the 13.3 million (200 million pre-split)
additional shares will be issued to Stratodyne or its assignee(s) and the
remaining 10 million (150 million pre-split) shares to Sanswire Technologies,
Inc.
For purposes of the Sanswire Technologies, Inc. purchase agreement as amended, 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. "Successful Commercial Launch" means (a) a launch ("Launch") within
(i) eighteen (18) months after a successful launch by the Company or any of its
affiliates of a prototype airship (dirigible) that was then under construction,
by the Company or any of its affiliates of an airship (dirigible) that is able
to (I) reach and maintain an altitude of at least 65,000 feet, (II) maintain a
position in one GPS coordinate, (III) receive and transmit commercially
acceptable two-way wireless voice and Internet transmissions (collectively,
"Services"), and (b) there is at least one paying customer for the Services
within one year of the Launch, but not later than 30 months from the date of the
launch of the prototype airship then under construction.
As of the date of this report, the conditions precedent to the entitlement to
the issuance of the additional shares have not yet been fulfilled.
ACCOUNTING FOR PURCHASE PRICE OF INTANGIBLE ASSETS
The purchase price for the assets acquired was $2,800,000, based on a value of
$1.50 ($ .10 pre-split) per share for the 1,866,667 (28 million pre-split)
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.
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 13,333,334 (200 million pre-split) contingent shares at fair value
upon issuance of the shares or at such time that the Company may determine that
the issuance of the shares is probable and the value ascribable to the shares is
estimable.
The intangible assets include technology-based, marketing-related, and
contract-related assets. The Company determined that the Sanswire 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 that 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 December 31, 2005, and through the date of
this filing. Sanswire-FL's research, development, testing of, and cooperation
with governmental and commercial entities regarding, the Stratellite technology
is continuing, and no event occurred or circumstances known to management exist
to indicate impairment.
The results of operations of Sanswire Networks, LLC for the year ended December
31, 2005, which are consolidated in the Company's results of operations,
included expenses of $4,300,866 with no sales or costs of sales.
STRATELLITE BUILD-OUT MEMORANDUM OF AGREEMENT (MOA) AND ADVANCES TO SANSWIRE
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 original expected completion of the build-out agreement was
January 15, 2005; the Company agreed to provide funding to complete the
build-out process of the Stratellite prototype; and the Company provided a total
of $200,000.
The Company has provided amounts to or on behalf of Sanswire Networks, LLC in
excess of the above amounts, including approximately $5,027,550 through December
31, 2005, and at total of approximately $5,814,457 through the date of this
report.
41
EMPLOYMENT AGREEMENTS
In connection with the Sanswire Technologies, Inc. asset purchase agreement, the
Company also entered into three-year employment agreements with five former
Sanswire Technologies, 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 Networks, LLC and eliminate redundant
positions. As a result, Mr. Molen accepted the appointment as Chairman of
Sanswire Networks, LLC and was a member of GlobeTel's Board of Directors and
stepped down as CEO of Sanswire Networks, LLC. Effective in 2005, Mr. Molen is
no longer a member of Globetel's Board of Directors. The Company closed the
Sanswire Technologies, Inc. offices in Atlanta and Mr. Sistrunk and Ms. Molen
have separated from the Company.
In connection with the Stratodyne agreement, the Company had entered into a
three-year key employment agreement with Vernon 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 received a salary of no less than $75,000 per year, plus
grants of stock options based on performance evaluations given annually by the
Company. During the first quarter 2005, Mr. Koenig resigned from his position in
the Company and new key employees were employed.
In March 2005, Sanswire entered into employment agreements with certain Sanswire
personnel. In order to attract these key employees, and in connection with these
employment agreements, the Company recorded $300,000 in signing bonuses payable
with GlobeTel stock. However, upon agreement with the Company, the employees
returned the shares and elected to receive stock options for the same number in
shares that would have been issued for the $300,000 at the dates of the
agreements. None of the shares have been exercised as of the date of this
report.
NOTE 8 - ASSET ACQUISITION AND INTANGIBLE ASSETS - HOTZONE
In September 2004, the Company entered into an independent contractor agreement
with Hotzone Wireless, LLC (HotZone), a service provider for
consulting/engineering services related to the Sanswire Stratellite project. The
non-exclusive service provider provided engineering / consulting services,
transmission equipment, and installation and testing of equipment. The term of
the agreement was for six (6) months and was automatically renewable for
additional one (1) year terms after the initial term unless terminated by either
party. As initial compensation, Company paid the service provider $10,000 per
month. This agreement was terminated during fiscal year 2005.
On June 2, 2005, the Company entered into an agreement to acquire assets of
HotZone, an advanced developer of WIMAX and extended range WIFI Systems with
operations in the United States and Europe. The acquisition transaction, which
closed during the three months ended September 30, 2005, was paid with $27,000
cash and provides for a total of 2 million (post split) shares of the Company's
common stock to be issued in increments of 666,667 shares on each of the first,
second, and third anniversary dates of the agreement, assuming that certain
milestones are achieved. Additionally, the HotZone staff is entering into
employment agreements with the Company.
The assets acquired under the HotZone agreement consist primarily of
intellectual property and proprietary rights in intellectual property. As of
September 30, 2005, the Company had placed all of HotZone's tangible assets into
GlobeTel Wireless Corp. (GlobeTel Wireless), its Florida-based, wholly-owned
subsidiary.
ACCOUNTING FOR PURCHASE PRICE AND INTANGIBLE ASSETS
Whereas the milestones for the first year were defined, and the Company believed
that achievement of such milestones for the first year are probable and the
amount payable (with GlobeTel common stock) is measurable, the Company recorded
the amounts during the three months ended September 30, 2005. The purchase price
for the assets acquired was recorded at $2,280,334 based on the $27,000 paid in
cash, plus $2,253,334, which represents the value of 666,667 (post split) shares
of common stock payable on the first anniversary date. The shares were valued at
$ 3.38 per share, based on the value of the Company's free-trading stock on the
agreement date. The Company allocated the purchase price based on the estimated
fair market value of the asset acquired as follows: (a) HotZone tangible assets
$55,910; and (b) HotZone intangible assets - $2,224,424.
Initially, since the milestones to be achieved for the second and third years of
the contract were undefined and it is unknown whether or not such milestones,
even if defined, will be achieved, the Company had not recorded the additional
consideration totaling 1,333,333 (post-split) shares issuable after year one of
the agreement (666,667 issuable for each of years two and three).
42
Subsequently and as of December 31, 2005, the Company and HotZone agreed that
any and all milestones, previously undefined, were in fact achieved. The Company
recorded the additional contingent shares at fair value upon, since the Company
has determine that the issuance of the shares is probable and the value
ascribable to the shares is measurable. Accordingly, as of December 31, 2005,
the Company recorded the additional 1,333,334 (post-split) shares payable, which
were valued at $4,909,665, which represents a based share of 1,333,334
(post-split) shares, value at $3.68 per share, based on the value of the
Company's free-trading stock as of December 31, 2005, and increased the HotZone
intangible asset value accordingly. As of the date of this report, none of the
shares payable to HotZone have been issued. The Company intends to issue the
first tranche of 666,667 shares in the near-term and the remaining shares will
be issued as scheduled.
As of December 31, 2005, the HotZone intangible assets were valued at
$7,129,550. The Company determined that the HotZone 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 that 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
December 31, 2005, and through the date of this filing. GlobeTel Wireless, which
utilizes the intangible assets acquired, has current and pending contracts and
anticipates receiving revenues in the near-term, and no event occurred or
circumstances known to management exist to indicate impairment.
NOTE 9. 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. 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 its 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 the 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 December 31, 2004, the Company believes that the likelihood of
recovering any such amounts is remote.
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.
43
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 10 - LOANS AND ACCOUNTS PAYABLE TO RELATED PARTY - CHARTERHOUSE
In October 2002, the holders of two promissory notes agreed that in lieu of
payment of principal and interest under the loans, each to accept six (6)
million shares (400,000 post-split) of common stock of GlobeTel as payment,
which were paid to the note holders directly by the Company's primary customer
during 2002, who was also a consultant (Charterhouse). Accordingly, the Company
recorded the $300,000, plus interest of $11,960, as a loan payable to
Charterhouse. In January 2003 Charterhouse loaned an additional $50,000, for
total loans payable of $361,960. As of December 31, 2004, these amounts, as well
as $135,000 payable for consultancy services rendered in 2002, were settled for
Series B preferred stock. See Note 26 below.
NOTE 11 - CENTERLINE COMMUNICATIONS, LLC AND DUE TO RELATED PARTY - CSI
CENTERLINE COMMUNICATIONS, LLC.
On June 30, 2004, the Company entered into an operating agreement with Carrier
Services, Inc. ("CSI") a Nevada corporation, also a telecommunications company,
to operate Centerline Communications, LLC, a wholly-owned subsidiary of the
Company.
The purposes of Centerline and its subsidiaries are to build telecommunications
revenue and client base, utilizing each party's network and financial resources
and to engage in any other business or activity that is necessary and proper to
accomplish the above purposes.
Pursuant to the agreement, the Company was 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 was 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 provided for minimum selling requirements of $50 million per year
in revenues for the LLC. If the LLC brought in $50 million in revenues 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 revenues in year two,
CSI would receive another $1 million of the Company's publicly traded stock. The
initial term of the agreement was for two years and automatically renewable for
another two years.
The parties subsequently modified the agreement to provide for minimum selling
requirements of $25 million in revenues for the LLC. Upon the LLC achieving in
$25 million in revenues, CSI will receive 333,333 (5 million pre-split) shares
of the Company's publicly traded stock.
"PARTNER INCENTIVE AND FINANCING AGREEMENTS"
The Company uses the term "partner" in a sense different than the strict legal
definition. Herein, the term "partner" is equivalent to "business associate."
During 2004, the Company, Centerline Communications ("Centerline") and its
subsidiaries entered in "Partner Incentive and Financing Agreements" with
various parties ("Partners") in the business of providing the transmission of
wholesale voice and/or data communications services to domestic and
international destinations utilizing a proprietary call processing platform,
technologies, software and other equipment ("Calling Services") to produce
profitable revenues utilizing the Calling Services of the partners for an
initial term of two (2) years.
The "Partners" were to be compensated on a semi-annual basis with a grant of
equity and cash commissions. These grants and commissions were to be paid out by
Centerline, utilizing cash generated by the operations and stock given by the
Company as part of the original agreement between CSI and the Company, based on
reaching certain revenue and profitability milestones. Upon cessation of the
prior joint business operations of the Company and CSI in February 2005, the
Partner Incentive and Financing Agreements were terminated and no amounts were
paid, due or owing by the Company in connection with these agreements.
DUE TO RELATED PARTY - CSI
The required revenues of $25 million were achieved in January 2005 and CSI
became entitled to the 333,333 (5 million pre-split) shares. As of December 31,
2004, the Company recorded $404,707 due to CSI, computed by applying a ratio,
based on the revenues achieved through December 2004 (approximately $18.4
million) compared to the required $25 million, to the number of shares to be
issued recorded at a price $1.65 ($ .11 pre-split) per share, the closing market
value of the Company's stock as of December 31, 2004.
44
CSI owed the Company a total of $401,723 as of December 31, 2004, consisting of
the amounts due for accounts receivable collected by CSI on behalf of the LLC
and for accounts receivable, pre-paid expenses and accounts payable assumed by
CSI, and payments made by the Company on behalf of CSI, net of any payments made
by CSI on behalf of the Company. The Company offset the $404,707 due to CSI
against the $401,723 due from CSI, to result in a net amount due to CSI of
$3,024 as of December 31, 2004, which was included in accounts payable.
In February 2005, the Company received $516,093 from proceeds of the sales of 3
million pre-split shares (200,000 post split) of the Company's common stock
which was sold by CGI and advanced to GlobeTel (see Note 5 above), from which
$100,000 was paid to CSI and the remaining amounts were held by the Company to
collateralize the amounts due to the Company from CSI. Subsequently, the Company
and CSI agreed to offset the $401,723 owed to GlobeTel against the shares owed
by GlobeTel to CSI.
The Company and CSI mutually decided to conclude and restructure their joint
business operations as of February 6, 2005. Upon completion of the parties
reconciling and agreeing upon the final amount due from CSI, CSI and the Company
agreed that the remaining amount due to CSI will be paid by the Company with
remaining 133,334 (2 million pre-split) shares due to CSI, and the parties
entered into new agreements.
In addition, the Company agreed to issue a total 66,667 (1 million pre-split)
additional shares to CSI for additional revenues of approximately $10 million
generated during the three months ended March 31, 2005. Commissions in the
amount of $162,335 were recorded, based on the value of the Company's
free-trading stock on the dates of issuance of the shares.
The Company entered into two asset purchase agreements with CSI to acquire
telecommunication equipment totaling $837,836. The parties agreed that the
purchase price for this equipment would be paid with (1) 233,333 (3,500,000
pre-split) shares of GlobeTel's common stock; and (2) $286,136 in cash. In
addition, the purchase agreement also required GlobeTel to provide $150,000 for
the reconstruction and establishment of a new telecom switch site in Los
Angeles, CA. GlobeTel has complied with this provision.
The Company also acquired from CSI additional telecommunications equipment
valued at $58,206 and paid with 38,730 (580,950 pre-split) shares of GlobeTel's
common stock.
As partial payment for the above shares, in December 2005, the Company received
$111,325 from proceeds of the sales of 30,000 (450,000 pre-split) shares of the
Company's common stock which was sold by CGI and advanced to GlobeTel (see Note
5 above), which was in turn paid to CSI.
Based on the above transactions, as of December 31, 2005 the balance owed to CSI
includes (1) 336,667 (5,050,000 pre-split) shares of GlobeTel common stock; and
(2) $106,231, related to the asset purchase agreements.
Subsequent to December 31, 2005, and as of the date of this report, the $106,231
cash balance was paid in full, and 226,666 (3,400,000 pre-split) shares of
GlobeTel stock were transferred to CSI (from the GlobeTel shares returned by
CGI; see Note 5 above), and 110,001 (1,650,000 pre-split) shares are currently
owed.
In connection with these CSI arrangements, the Company recorded commission
expenses of $848,880 and $404,747, respectively, for 2005 and 2004.
NOTE 12 - DUE TO FORMER EMPLOYEE IN GTE STOCK
In September 2005, the Company issued a total of 98,983 shares pursuant to a
severance and settlement agreement with a former employee, valued at $177,400,
based on $1.79 per share, the closing price of the shares on the date of the
agreement and registration of the shares. An additional $237,600 of shares are
issuable pursuant to the agreement of which $118,800 is due January 4, 2006 (and
was paid as agreed) and $118,800 is due August 1, 2006. The former employee also
received cash of $55,000 pursuant to the agreement.
NOTE 13. 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 to which they were entitled pursuant to the employment agreement.
45
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
2005, 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 throughout 2005.
In September 2003, the officers agreed to forego their accrued salaries in
exchange for stock options at $.225 (0.015 pre-split) 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. The officers again agreed to forego their accrued salaries in
exchange for stock options at $.225 (0.015 pre-split) 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, 2005, the Company recorded accrued officers' salaries
totaling $97,382 compared to $198,333 for year ending December 31, 2004, which
were subsequently paid in January 2006 and 2005, respectively.
NOTE 14. ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities consisted of the following:
2005 2004
------- -------
Interest 3,105 3,436
Payroll Liabilities 238,243 - 0 -
Rent 22,467 - 0 -
Professional Fees 281,821 90,000
------- -------
ACCRUED EXPENSES AND OTHER LIABILITIES 545,636 93,436
------- -------
NOTE 15. CAPITAL AND OPERATING EQUIPMENT LEASE OBLIGATIONS
Capital lease obligations as of December 31, 2003, consisted of an amount
payable for telecommunications equipment, which was abandoned prior to 2003, and
the liability was subsequently written off in 2004. See Note 21 below regarding
disposition of this obligation.
In March 2005, 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%. The balance
on this obligation had been paid by the Company and there were no lease
obligations recorded as payable as of December 31, 2005.
Interest expense recorded on all capital lease obligations of the Company
amounted to $480, $2,561 and $15,924 for the years ended December 31, 2005, 2004
and 2003, respectively.
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.
46
NOTE 16. NOTES AND LOANS PAYABLE
In January 2003, the Company received a $50,000 loan from Charterhouse. This
loan payable, as well a previous loan of $311,960 was unsecured, non-interest
bearing and have no formal repayment terms. In addition, the Company had an
outstanding account payable to Charterhouse for $135,000 in connection with
consulting services provided in 2002. During 2004, all of the amounts owing to
Charterhouse were paid in full with the issuance of $500,000 of Series B
preferred stock. The $3,040 difference between the total amounts payable and
amount representing the preferred stock issued was expensed in 2004.
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 500,000 post-split (7.5 million - pre-split) 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 $3.75 post-split ($.25 pre-split) 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 $0.6 post-split ($.04 pre-split) and
accordingly, the holder retained / 203,704 (3,055,556 pre-split) shares and
returned 296,297 (4,444,444 pre-split) 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 500,000 (7.5 million - pre-split) 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 $3.75 post-split ($.25 pre-split) 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 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 $0.525 ($.035 pre-split) and accordingly,
the holder retained 233,333 (3,500,000 pre-split) shares and returned 266,667
(4,000,000 pre-split) shares 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 1 million post-split / 15 million pre-split 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 $3.00 post-split / ($.20 pre-split) 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 1 million (15 million pre-split) 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 $3.00 ($.20 pre-split) 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 $.36 ($.024 pre-split) and accordingly, the holder
retained 694,444 (10,416,666 pre-split) shares and returned 1,305,556
(19,583,334 pre-split) shares to the Company.
47
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 1 million (15 million pre-split) 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 $3.00 ($.20 pre-split) 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 1 million (15 million pre-split) 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 $3.00 ($.20 pre-split) 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 notes dated November 25, 2002 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 $0.33 ($.022 pre-split) and accordingly, the holder
retained 740,741 (11,111,112 pre-split) shares and returned 1,259,259
(18,888,888 pre-split) shares to the Company.
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 1 million (15 million pre-split) 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 $0.375 ($.025 pre-split) 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 $0.45
($.03 pre-split) 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) owners,
one of whom is Timothy M. Huff who owns 40% of the entity. Timothy Huff is the
CEO of the Company.
UNSECURED LOANS AND NOTES PAYABLE
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.
In February 2005, 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 payable at 2.5% per annum. The
Company repaid its $40,000 note payable during 2003.
In June 2003, the Company executed a $200,000 promissory note payable to
Commercebank, N.A., due in June 2005, with interest payable at a rate of one
percent over the prime rate, currently 4%. In August 2005, the Company repaid
its $200,000 loan with Commercebank, N.A. in full.
48
LETTER OF CREDIT AND BANK LOAN PAYABLE
As of December 31, 2002, the Company had a $500,000 letter of credit with
Commercebank, N.A., guaranteed by Florida Export Finance Corporation (FEFC) and
$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 presently does not have any existing letters of credit but has the
option of reopening the letter of credit with Commercebank, N.A. should the
needs for it arise.
NOTE 17 - CONVERTIBLE DEBT AND PRIVATE PLACEMENTS
CONVERTIBLE NOTES PAYABLE
In January 2005, the Company entered into financing agreements for convertible
promissory notes payable totaling $1.8 million. Net proceeds of $1,579,487 were
received, after deducting costs and expenses related to the transaction. Under
the agreements the notes were convertible into common stock of the Company at
$1.20 ($.08 pre-split) per share. Prior to any notice of conversion, the Company
had the right to redeem the note(s) at a premium, subject to a 3-day right to
convert by the investor.
In addition, there were two types of warrants to purchase additional shares of
common stock. There were 12,500,000 Class A Warrants (187,500,000 pre-split)
exercisable at $1.80 ($.12 pre-split) per share and Redemption Warrants were to
be provided in the event that the Company sought to redeem more than 50% of the
principal of the note. They were given on the basis of 1,111 warrants for each
$1,000 in principal the Company sought to redeem over $900,000. These Warrants
are identical to the Class A Warrants except that they have an exercise price of
$1.65 ($ .11 pre-split) per share.
In February 2005, the note holders elected to convert all of the notes in the
amount of $1.8 million, plus accrued interest of $5,969. Pursuant to the
conversion, total shares issued were 1,538,308 (or 23,074,615 pre-split)
including 33,333 (500,000 pre-split) shares as commission to a promoter.
At the same time in February 2005, the 12,500,000 Class A Warrants were
exercised at $1.65 ($ .11 pre-split) per share, except for one million shares at
$1.84 ($ .1227 pre-split) as agreed by the parties. Total net proceeds of
$1,442,650 were received and commissions totaling $80,208 were paid.
Upon agreement of the parties, in lieu of the Company exercising its redemption
rights, an additional $1,237,500 was received in connection with the conversion,
increasing the per share price to $2.85 ($ .19 pre-split).
On February 5, 2005, GlobeTel filed a registration statement with the Securities
and Exchange Commission on Form SB-2 to register shares offered, plus additional
shares totaling 75% of the underlying convertible notes and warrants to ensure
that shares are available for conversion under all contingencies.
In addition, on August 31, 2005 the Company entered into subscription agreements
with other investors for 5% convertible notes payable totaling $4.5 million,
with 3 year Class A Warrants to purchase up to an additional $6,818,181 in
common stock. Net proceeds of $4,150,730 were received, after deducting costs
and expenses related to the transaction. The notes amortize at 12.5% per quarter
through September 2007, payable each quarter in cash or common shares.
Under the agreements the notes are convertible into common stock of the Company
at $ 1.65 per share (post-split). Prior to any notice of conversion, the Company
had the right to redeem the note(s) at a premium for cash, subject to a 5-day
right to convert by the investor. The Investors also received one Class A
Warrant to purchase one share of common stock for each share that the notes
would be convertible into had they been converted on the closing date (August
31, 2005) (a total of 2,727,273 shares). The per share exercise price of the
Warrants is $2.50.
In December 2005, the note holders elected to convert all of the notes in the
amount of $4.5 million, plus accrued interest of $62,029. Pursuant to the
conversion, total shares issued were 2,764,883 (post-split). Also in December
2005, the investors exercised outstanding warrants to acquire a total of 272,727
common shares at $2.50 per share for proceeds of $681,818.
PRIVATE PLACEMENTS
On May 9, 2005, the Company entered into a private placement with a number of
accredited investors, whereby these investors have purchased $2,357,960 of our
common shares at a price of $ 2.886 ($ .1924 pre-split), with warrants to
purchase up to an additional 571,924 (8,578,856 pre-split) shares of common
stock at an exercise price of $ 5.0925 ($ .3395 pre-split). However, the
subscription agreement with the investors allows for the price of the warrant to
be adjusted should the Company offer equity securities at a lower price prior to
the Warrants being exercised. As stated below the Company has entered into such
an agreement and will be obligated to adjust the Warrant exercise price. The
Company subsequently registered those shares on Form S-3 which has been declared
effective by the Securities and Exchange Commission.
On May 23, 2005, the Company accepted an additional subscription from one of the
initial investors increasing their investment by $250,000 on the same terms and
conditions as all the other investors.
49
The Company received net proceeds of $2,328,489 from the above transactions,
after fees and costs of $279,471 related to the issuance.
In November and December 2005, the investors exercised outstanding warrants to
acquire a total of 702,108 common shares at $1.65 per share for proceeds of
$1,158,478.
Also, in May 2005, the Company issued an additional 291,317 (4,369,748
pre-split) unrestricted shares to an institutional investor that received shares
for cash in private placements during 2004, pursuant to an anti-dilutive
provision in the original agreement. These shares were recorded at par value. As
previously disclosed, Timothy M. Huff, CEO of GlobeTel, held a 40% interest in
this investment, and accordingly received 116,526 (1,747,899 pre-split) shares.
NOTE 18 - AGREEMENTS
CONSULTING, INVESTMENT ADVISORY AND INVESTMENT 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 180,000 (12.5 million pre-split) 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 833,333 (12.5 million pre-split) 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. (Fordham Financial), 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 should 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 of 2003 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 (Preferred Stock, Series A). Fordham Financial agreed to receive 10%
commission for the raising of the investments. In addition to the commissions
totaling $250,000, Fordham Financial also received 57,500 Preferred Stock,
Series A as additional compensation. Fordham Financial had arranged for
subscriptions of $1,092,140 as of December 31, 2003 and had raised the full
$2,500,000 as of January 31, 2004.
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 would 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. In May 2005, the Company did in fact move to a trading board
of higher standing - the American Stock Exchange (AMEX).
During 2005, the Company issued a total of 820,000 (post-split) shares valued at
$1,230,000 in connection with its arrangements with CMS.
50
STORED VALUE, STRATELLITES, WIRELESS SERVICES 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.
JOINT VENTURE AGREEMENT - ENGLEWOOD CORPORATION
On May 3, 2004, the Company entered into a joint venture agreement and stock
option plan with Englewood Corporation ("Englewood") and respectively with
Joseph Seroussi, an individual ("the agreement"). Under the agreement, Englewood
gives to the Company all of its current and new products and services in the
telephony, financial and non financial services fields; all market contacts and
relationships and existing and future telecommunications; non financial and
financial contracts; and to develop the processing capabilities for transactions
on networks in conjunction with ATM, debit and credit cards including but not
limited to, the financial networks of MasterCard, MasterCard International, VISA
and private banking ATM networks; along with the ability to market such products
and services through strategic partners in various countries around the world.
Subject to the terms and conditions of the Agreement, the Company will earn 100%
of all revenues and profits. During the three-year term of this agreement,
Englewood at its sole discretion may elect to have a third party independent
appraiser, mutually agreed to by both parties, determine the fair market value
of the joint venture. The Englewood portion of the value of the joint venture
will be equal to 20% of the fair market value of the Joint Venture.
At Englewood's sole discretion, Englewood may elect in whole or in part to
exchange in whole or a portion of its interest in the joint venture for cashless
options granted by the Company. The options granted by the company shall be at
$.30 ($.02 pre-split) per share of the Company's common stock. Once exercised,
the options shall be distributed to Englewood over a three-year period in 12
equal parts. Englewood will have piggy back registration rights for a period of
two years following the grant of each block of options.
Additionally, at the time of the Agreement, Seroussi will continue to serve as a
consultant to the Company for a minimum period of three years. Subsequently,
Seroussi and the Company entered in an Agreement whereby Seroussi has given up
his consulting contract and on October 1, 2004, joined the Company as its Chief
Technical Officer. All of the terms and conditions of the Agreement with
Englewood remain the same.
During 2005 and as of the date of this report, no transactions have occurred
that would require recording or disclosure in the Company's financial statements
related to these agreements other than 3 million restricted shares of the
Company's common stock issued for consulting services, valued at $135,000, based
on one-half of the closing price of the stock on date of issuance, and recorded
in 2004.
GLOBETEL WIRELESS NETWORK, PILOT PROGRAM
On August 7, 2005, the Company entered into an agreement to provide a wireless
communication network for a pilot program in Shenzhen, China with Guangdong
Tietong South Communication Co. Ltd, a group company of China Tietong Telecom
Corporation, one of only 6 licensed telecom operators in China. Upon successful
completion of the pilot program, GlobeTel Wireless and its local Chinese
partners will commence a roll out of wireless communication networks throughout
China to deliver voice, data and video applications. The agreement was reached
with Nessociet Inc., an organization working towards the development of next
generation wireless telephony services and NGN Telecom Corporation, the partner
to Guangdong Tietong South Communication Co. Ltd., in marketing VoIP services in
China. The Company will also utilize Nessociet Inc. who has become a reseller of
GlobeTel Wireless networks and equipment in Asia. The Company is planning on
initiating a test pilot in the region in the second quarter of 2006.
During 2005 and as of the date of this report, no transactions have occurred
that would require recording or disclosure in the Company's financial statements
related to this agreement.
JOINT VENTURE AGREEMENT - LEO A. DALY III AND J. RANDOLPH DUMAS
On July 7, 2005, the Company entered into a joint venture agreement that will
lead to the deployment of the Company's Stratellites(TM), throughout Europe, the
Middle East, Africa, and the countries of the former Soviet Union. The joint
venture is between Sanswire Networks LLC, a wholly-owned subsidiary of GlobeTel,
and a venture headed by Leo A. Daly III and J. Randolph Dumas, noted
international businessmen. Sanswire Networks, LLC will own 55% of the joint
venture entity. In September 2005, Mr. Dumas joined the Company's Board of
Directors.
During 2005 and as of the date of this report, no transactions have occurred
that would require recording or disclosure in the Company's financial statements
related to this agreement.
51
JOINT VENTURE AGREEMENT - APOGEO ENTERPRISES CORPORATION
On July 14, 2005, the Company's wholly-owned subsidiary, Sanswire Networks, LLC
had entered into a joint venture agreement to deploy Stratellites(TM) throughout
the country of Colombia. The agreement with Florida-based Apogeo Enterprises
Corporation calls for a total of five Stratellites to be launched over the Latin
American country to build a wireless broadband network that would be the first
of its kind in the world.
The Joint Venture Agreement, signed on July 14, 2005, had a due date 90 days
after signature. Within this timeframe, Apogeo was to provide Sanswire Networks,
LLC with proof of funds. The company presented proof of funds after the 90 day
period. Based on their efforts, Sanswire Networks, LLC decided to maintain a
business relationship with Apogeo by signing a new Joint Venture Agreement on
January 20, 2006. On February 17, 2006, the parties executed an addendum to this
Agreement which states that Apogeo and Sanswire Networks, LLC will agree on the
price per Stratellite to be paid by Apogeo upon execution of a letter of credit
in the amount of no less than $15,000,000.
During 2005 and as of the date of this report, no transactions have occurred
that would require recording or disclosure in the Company's financial statements
related to this agreement.
LICENSING AGREEMENT - RAPIDMONEY(R) CORPORATION
On July 7, 2005, the Company entered into a licensing agreement with
RapidMoney(R) Corporation that allows us to use and modify the RapidMoney(R)
system. GlobeTel, along with its venture partner, Grupo Ingedigit ("GI") of
Caracas, Venezuela, will incorporate the current RapidMoney(R) funds transfer
software applications for merchant Point of Sale ("POS") terminals into the
Company's Stored Value international remittance services. Furthermore, this
license allows GlobeTel and GI to develop additional applications based on the
RapidMoney(R) system that will be deployed in the retail locations which are
offering their Stored Value Card Program services.
During 2005 and as of the date of this report, no transactions have occurred
that would require recording or disclosure in the Company's financial statements
related to this agreement.
ALTVATER GMBH OF GERMANY, ASSET ACQUISITION
On July 7, 2005, GlobeTel entered into a letter of intent to acquire the assets
and operations of Altvater GmbH of Germany (Altvater). Subsequently, an
agreement was signed, but the acquisition has not yet closed as of the date of
this report. Altvater is a wireless communications systems integrator for
HotZone systems in Europe, with core operations in Germany. Altvater GmbH has
existing sales partner relationships in Europe and North Africa. On September
15, 2005, GlobeTel Wireless Corp., through the acquisition of Altvater, formed a
new division, Total investment by Globetel Wireless Corp was $291,476 as of
December 31, 2005. GlobeTel Wireless Europe GmbH financial statements, as of
December 31, 2005 have been included in the consolidated results of the
Company's operations.
GLOBETEL WIRELESS, GERMANY CONTRACT
The Company, through GlobeTel Wireless, is utilizing the HotZone assets and
technology in developing WIMAX wireless systems for deployment in areas the
Company identifies and markets to. Future considerations include the use of the
Company's Stratellites(TM), which will provide radio technology for the wireless
communications that will cover significant geographic areas up to 120,000 square
miles, and, in addition, provide advanced wireless products and services for
terrestrial wide area networks covering rural and city areas. Upon deployment of
the Stratellite(TM), on a region-by-region and country-by-country basis the
communications technology will deliver high speed voice, data and rich streaming
content, as well as other communications possibilities. The Company has
negotiated several contracts for the deployment of WIMAX wireless systems (See
Globetel Wireless Germany Contract and Russian Joint Venture below).
COOPERATIVE RESEARCH AND DEVELOPMENT AGREEMENT
On July 13, 2005, the Company announced that Sanswire Networks, LLC had signed a
Cooperative Research and Development Agreement (CRDA) with Proton Energy
Systems, Inc., a subsidiary of Distributed Energy Systems Corp. Pursuant to the
agreement, Proton will provide assistance in developing a regenerative fuel cell
energy storage system for our high altitude Remotely Operated Airship (ROA), or
Stratellite. Under the agreement, Proton will provide prototype regenerative
fuel cell (RFC) equipment and specialized technical support to Sanswire for our
development and flight-testing of the Stratellite via a series of task
agreements. Sanswire will provide the airship platform for testing and
engineering inputs to tailor the RFC solution.
52
GLOBETEL WIRELESS, GERMANY CONTRACT
On August 1, 2005, GlobeTel Wireless announced that it would install wireless
networks in three German cities. GlobeTel Wireless will provide high-speed
wireless networks for internet connectivity starting with the town of
Kaiserslautern, and continuing with nearby communities. Kaiserslautern is a city
of 100,000 people, located 100 miles South West of Frankfurt. Construction of
the project is scheduled to begin in the 2nd quarter 2006. GlobeTel Wireless is
installing these first Wireless Networks in Germany as part of the roll out plan
to deploy wireless communication networks to non-DSL communities, in identified
geographic markets.
During 2005 and as of the date of this report, no transactions have occurred
that would require recording or disclosure in the Company's financial statements
related to this agreement.
SERVICES AGREEMENT - GLOBAL CROSSING, LTD. (NASDAQ: GLBC)
On October 6, 2005, Global Crossing announced that GlobeTel had selected its
integrated, global IP-based network to offer international cable companies and
Internet Service Providers ("ISPs") a completely customizable VoIP solution for
clients located in Latin America and the Caribbean. As of the date of this
report no transactions have occurred that would require recording or disclosure
in the Company's financial statements.
COOPERATIVE TECHNOLOGIES AGREEMENT - UNIVERSITY OF STUTTGART, GERMANY
On October 12, 2005, the Company announced that Sanswire Networks LLC had signed
an agreement with TAO-Technologies in cooperation with the University of
Stuttgart in Germany. The agreement states that TAO-Technologies, in cooperation
with the University of Stuttgart, will design several next-generation airships
intended for multiple uses. As of the date of this report no transactions have
occurred that would require recording or disclosure in the Company's financial
statements.
GLOBETEL WIRELESS, RUSSIAN JOINT VENTURE AGREEMENT
As of December 30, 2005, GlobeTel Wireless Corp. ("GTEW") has entered into a
binding agreement to install wireless communications networks in 30 cities
throughout the Russian Federation, providing broadband, VOIP and DECt
technologies. GTEW has entered into an agreement with LLC Internafta
("Internafta") of Moscow, Russia, whereby Internafta will pay to GTEW a series
of four construction payments totaling US$600 million for the installation of an
array of proprietary networks to be installed in Russia's 30 largest cities,
starting with Moscow and St. Petersburg. GTEW will both manage the completed
network and will retain an ongoing 50% shareholding in the operations of the
network, allowing the Company to enjoy the significant benefits of the recurring
revenue stream. GlobeTel plans to roll out the network in 3 stages, comprising
10 cities each, over the next 27 months.
On March 2, 2006 the Company announced that Internafta had requested an
additional delay in the closing of the funding until the week of March 6, 2006.
The Company has provided Internafta and its banks with a significantly expanded
business plan outlining, in detail, the company's program for equipment
manufacturing, delivery, installation, testing, monitoring, staffing, progress
payment requirements, and other pertinent information. Internafta advised the
Company that its funding has been approved by its bank syndicate, subject only
to the bank's final review and analysis of the business plan.
Internafta has informed GlobeTel that its bank recommends that smaller, more
frequent, progress payments be established so that the necessary staged payments
can be delivered to GlobeTel as and when the network is delivered and installed.
These smaller, more frequent, staged payments do not reduce the total capital
value of the agreement with GlobeTel Wireless or change any other terms of the
agreement. GlobeTel will still receive $600 million for deployment of the
network. The exact amount of the new proposed initial deposit, and the size and
timing of the new proposed progress payments, will be discussed and agreed with
GlobeTel once the bank has completed its due diligence and when the bank group
formally accepts the terms of Internafta's proposed banking instrument.
On March 17, 2006, the Company announced that based upon differences between the
Company and Internafta on the financing process, the parties have agreed to
revise their agreement to more accurately reflect the timing of payments
GlobeTel expects to receive for the build out of the 30 city wireless network in
Russia and allow Internafta additional time to begin making payments.
During 2005, and as of the date of this report, no transactions have occurred
that would require recording or disclosure in the Company's financial statements
related to this agreement.
AGREEMENT WITH FINANCIAL SOFTWARE & SYSTEMS IN INDIA
On November 9, 2005, the Company signed an agreement with Financial Software &
Systems (P) Ltd. ("FSS") based in Chennai, India. The purpose of the agreement
is to establish a commercial relationship between GlobeTel and FSS that will
enable the parties to work together to market stored value and money remittance
programs, targeting tens of millions of existing banking customers in the $12
billion Indian remittance market.
FSS focuses its business in Electronic Funds Transfer ("EFT") solutions and
outsourced services which power the majority of ATMs and Point-of-Sale ("POS")
terminals in India, controlling most of the Electronic Funds Transfers in the
country. FSS also provides third-party processing as an outsourced application
services for many of the largest banks in India.
The Company believes that its relationship with FSS will bring cutting edge
technology solutions to banks and financial institutions in India and across the
globe. FSS is leveraging its extensive domain knowledge in payment processing
and transaction switching across various touch points with highly skilled
software development and implementation resources, world-class IT
infrastructure, and global partnerships.
53
The Company is currently in the process of establishing an Indian company and
setting up the operations. As of the date of this report, no transactions have
occurred that would require recording or disclosure in the Company's financial
statements related to this agreement.
OTHER AGREEMENTS
Several other agreements, letters of intent, and memorandums of understanding
regarding stored value cards and other telecommunications programs, as well as
the Sanswire project, were entered into during 2005 and through the date of this
report, none of which require the recording of any assets, liabilities, revenues
or expenses.
NOTE 19. COMMITMENTS AND CONTINGENCIES
MEXICO ASSOCIATE AND CUSTOMER LITIGATION
The Company has a legal action against our associate and customer in Mexico for
non-payment of the amount they owe the Company. This customer has substantial
assets, including telecommunications equipment, existing working networks and
Mexican tax refunds which they have proposed to turn over to the Company. The
Company filed a motion in the Mexican courts which was necessary to formally
request that the Company become the assigned payee of the tax refund receivable
and formally secure the equipment and to take over the operations of the
existing networks.
In February 2005, the customer agreed that proceeds from the network operations
were to be paid totally to GlobeTel, including the customer's portion of the
profit sharing, until the amount owed has been fully paid. Upon full payment,
the Company will begin the sharing profits again in accordance with the
contract.
The Company received a judgment on February 14, 2005 in the amount of $330,000.
It is not certain of the amounts that, ultimately, will be realized from the
Mexico associate.
This situation with our customer has caused us to record an allowance for bad
debt expense for the fiscal year ending 2004 in the amount of $938,782 and
record an allowance for bad debt expense for the fiscal year ending 2005 in the
amount of $625,855 and an allowance for bad debt expense for the fiscal year
ending 2005 for a Mexican Tax Refund in the amount of $382,160.
FORMER CONSULTANTS LITIGATION
The Company is a defendant in two lawsuits filed 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). These matters were
subsequently consolidated as a result of an Order of the court and now bear the
singular index number 12118/00. The original lawsuits were for breach of
contract. The complaint demands the delivery of 10,000,000 pre-split shares of
ADGI stock to Milo and 10,000,000 to Quattrocchi. GlobeTel was entered into the
action, as ADGI was the predecessor of the Company. The suit also requests an
accounting for the sales generated by the consultants and attorneys fees and
costs for the action.
The lawsuits relate 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 had been repaid.
With regard to the issues related to original index number 12119/00, as a result
of a summary judgment motion, the plaintiffs were granted a judgment in the sum
of $15,000, which has since been paid. The rest of the plaintiff's motion was
denied. The court did not order the delivery of 24,526,000 pre-split shares of
ADGI common stock as the decision on that would be reserved to time of trial.
An Answer and Counterclaim had been interposed on both of these actions. The
Answer denies many of the allegations in the complaint and is comprised of
eleven affirmative defenses and five counterclaims alleging damages in the sum
of $1,000,000. The counterclaims in various forms involve breach of contract and
breach of fiduciary duty by the plaintiffs.
However, an outcome cannot be projected with any certainty. The Company has not
entered into any settlement negotiations with Mr. Milo and Mr. Quattrocchi and
does not believe that we will be materially adversely affected by the outcome of
this proceeding.
Presently, the Company is continuing its defense and counterclaims in this
matter. A jury was selected on March 3, 2006 in anticipation for a trial;
however, the parties entered into an agreement to proceed before a Judicial
Hearing Officer for a non-jury trial. This case is expected to be assigned to a
Judicial Hearing Officer on or before March 31, 2006 and a new hearing date will
be set at that time.
54
PATENT INFRINGEMENT LAWSUIT
A case was filed against the Company for patent infringement. On or about
September 1, 2004, Alexsam, Inc. (Alexsam) filed an action for patent
infringement against us alleging the stored value card and service the Company
is planning to offer infringes one or more of U.S. Patent No. 6,000,608 (the 608
patent) and U.S. Patent No. 6,189,787 (the 787 patent), allegedly owned by
Alexsam. The actions were filed in the United States District Court, Eastern
District of Texas, styled Alexsam, Inc. vs. Datastream Card Svc., et al. Case
Number 2:03-cv-337. On January 14, 2005, the court dismissed the lawsuit against
the Company.
On February 8, 2005, we filed suit against Alexsam and Robert Dorf (collectively
the defendants) in the United States District Court for the Southern District of
Florida, Civil Action No. 05-60201, seeking a declaratory judgment from the
court that the 608 and 787 patents are invalid, not enforceable and will not be
infringed by our stored value card offering. We are also seeking recovery for
damages brought on us by Alexsam, the owners of Alexsam and Dorf, for breach of
confidential disclosure and trust, intentional interference with business
advantage, and for unfair competition under Sec. 501.204 of the Florida
Statutes.
We and Alexsam have subsequently settled our dispute. In exchange for granting a
non-exclusive license to GlobeTel for the Patents, GlobeTel withdrew its motion
for attorneys' fees in the Texas Lawsuit and dismissed the Florida Lawsuit. The
License Agreement was made and entered into in September 2005. The license taken
by us extends further to our customers, bank partners, third party financial
processors and cardholders, and all those in privity with any of them, but only
to the extent those entities' activities relate to us and its license.
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. 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).
In connection with the Brazilian network operations, the Company recognized
revenues of $136,937, $2,147,119 and $2,923,981 for years ended December 31,
2005, 2004 and 2003, respectively. The cost of sales, substantially all of which
was paid directly to third-party suppliers, was $165,205, $1,996,635 and
$1,993,737, respectively, in 2005, 2004 and 2003.
In June 2005, the Company and TGV discontinued the network operations and do not
intend to recommence such operations in the near term.
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 had been operating in Mexico for several
years and had 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 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 26 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).
55
The Company recognized revenues of $4,774,657 and $8,052,143, respectively, for
the years ended December 31, 2004 and 2003. The cost of sales substantially all
of which was paid directly to third-party suppliers were $4,556,912 in 2004 and
$6,159,401 in 2003. There were no activities in connection with the Mexico
network in 2005 and through the date of this report.
JOINT VENTURE AGREEMENT - TRUESPEED WIRELESS
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 or expenses were ever generated from the joint
venture, nor were there any asset, liability, or equity transactions requiring
recording in the financial statements during the existence of the joint venture.
LEASES AND RENTS
The Company leases office facilities 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. In
November 2004, the Company leased additional adjacent space at the Pembroke
Pines, Florida location under the same terms and period as the existing lease,
bring the total monthly rent to $9,186.
In June 2005, we negotiated with the landlord to lease an additional 5,000
square feet office on the second floor of our present facility, 9050 Pines
Blvd., Pembroke Pines, Florida 33024. The Company will begin occupancy of this
office in April 2006 and the lease expires in June 2009 with a monthly rent of
$9,186 (including sales tax).
In September 2005, the Company leased a 2,919 square foot office in Naples,
Florida. The initial lease, between Globetel Wireless Corp., and Decaster
Capnole Joint Venture, is for a term of three years, ending on September 21,
2008 with a monthly rent of $4,628 with increases of 4% per year.
Our wholly owned subsidiary, Centerline Communications, is leasing approximately
6,519 square feet of office space where the Telecommunications switch is
residing. This facility is at 611 Wilshire Blvd, Suite 500, Los Angeles, CA. The
lease agreement began on May 1, 2005 and runs for seven years until January 31,
2012 at a base rent of $7,497. In addition, our subsidiary is also leasing
approximately 1,975 square feet of administrative office at 5515 Doyle Street,
Suite 12, Emeryville, CA with a base rent of $2,307. The term of the agreement
began on May 1, 2005 and runs until January 31, 2008.
The Company leases a 66,000 square foot space hanger in Palmdale, California.
The initial lease, between Sanswire Networks, LLC and the City of Los Angeles
World Airports, was for a term of three months, ended July 22, 2005 with a
monthly rent of $19,990. On June 8, 2005 the lease term was amended for fifteen
months, commencing June 8, 2005 through September 7, 2006, with two one-year
options. Concurrently with the signing of the amended lease, the parties entered
into a reimbursement agreement to share the cost of certain improvements.
In January 2005, GlobeTel signed a lease agreement with the San Bernardino
International Airport Authority for hangar space at the airport in San
Bernardino, California for the purpose of assembling and storing the Stratellite
prototype. The term of the agreement is from January 15, 2005 through March 31,
2005, at a monthly lease rate of $9,767. Three months prepaid rent totaling
$29,302 was paid in December 2005. The agreement provides that with the consent
of the lessor we may remain on a month-to-month basis. The Company remained in
the space on a month-to-month basis until moving to its new facility in
Palmdale, California as described above.
GlobeTel formerly leased facilities at 444 Brickell Avenue, Suite 522, Miami,
Florida 33131. The Company was under a five-year lease expiring April 2005, with
a monthly rent of $3,463. In January of 2005 the Company satisfied its lease
obligation related to this office.
Sanswire Technologies, Inc., the company from which we purchased our Sanswire
Networks, LLC intangible assets, had an office space lease in Dekalb County,
Georgia. The lease term was from April 1, 2005 through March 31, 2005, with
monthly rent of $2,628. Although not directly obligated on this lease, the
Company paid the monthly rent from May 2004 through March 2005, whereas
employees of our subsidiary, Sanswire Networks, LLC, utilized the premises. The
employees have since vacated the premises.
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.
56
Future minimum rental payments required under the above operating leases
subsequent to the year ended December 31, 2005 are as follows:
2006 $ 515,022
2007 415,520
2008 427,486
2009 377,454
2010 and thereafter 276,969
----------
$2,012,451
==========
Rent expense for 2005, 2004 and 2003 were $480,995, $126,424 and $48,607,
respectively.
NOTE 20. RELATED PARTY TRANSACTIONS
Related party transactions, other than those discussed in the notes above and
below, include the following.
RELATED PARTY PAYABLES
As of December 31, 2005 and 2004, related party payables were $57,500 and
$117,500, respectively. The balances represent short-term, non-interest bearing
loans by officers 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 2003, the Company issued
266,667 (4 million pre-split) shares in complete settlement of the balance due.
SETTLEMENT WITH FORMER OFFICER AND DIRECTOR
In September 2005, the Company issued a total of 82,887 (1,243,305 pre-split)
shares pursuant to a severance agreement with Leigh Coleman, a former President
and Director, valued at $123,750, based on the closing price of the shares on
the dates of issuance. In addition, a total of 81,481 options to purchase common
shares, valued at $55,000 based on the option exercise price (adjusted for 1:15
reverse stock split) per the 2004 Employee Stock Bonus Plan.
LOSS ON SETTLEMENT WITH FORMER AFFILIATE
In September 2005, the Company entered into a settlement agreement with Sky
China, Ltd., an Australian company that Mr. Coleman is affiliated with. Mr.
Coleman was a former President and member of the Board of Directors for
Globetel. The Company and Sky China, Ltd. entered into an agreement in 2004 to
joint venture with the company for telecommunications services in Australia and
Asia, and, in 2004, issued 200,000 (3 million pre-split) shares of common stock
valued at $135,000. Pursuant to the settlement, the Company granted Sky China
Ltd. options to acquire 1,543,176 (post-split) shares valued at $1,256,873,
based on $0.8150 per share, the intrinsic value of the option share on the date
of the agreement.
NOTE 21 - NET GAINS ON SETTLEMENT OF LIABILITIES AND DISCONTINUED OPERATIONS
During the years ended December 31, 2004 and 2003 the Company recorded net gains
on settlement of debts totaling $268,397and $26,274, respectively, as discussed
below. There were no similar material transactions recorded in 2005.
EQUIPMENT VENDOR
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 2003.
ACCOUNTS PAYABLE
During 2004, the Company had included in accounts payable certain disputed
amounts payable to creditors totaling $14,823. 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, and, accordingly, recognized a
gain in 2004.
57
PROFESSIONAL SERVICES PROVIDER AND NOTE HOLDER
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, all of which was paid prior to December 31, 2004, the remaining
balance of the above obligations referred to above will be considered fully
satisfied without the necessity of further payments. The balance of $183,060 was
written off and a gain recorded in 2004 whereas the amounts due under the
settlement are paid in full and all conditions fulfilled.
CAPITAL LEASE OBLIGATIONS
As of December 31, 2003, the Company had a balance due of $53,311 of principal
on capital lease obligation and $15,924 in accrued interest. The equipment
securing the obligation was abandoned prior to the 2003, 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 nor assigns have sought collection from the Company
for over one year, and, accordingly the Company has recorded a gain of $69,235
in 2004.
FORMER EMPLOYEES OF DISCONTINUED OPERATING DIVISION
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. The Company agreed to return the
customer deposits made by the St. Louis clients. The Company recorded a gain of
$55,842 in 2003 in connection with these transactions, based on the excess of
the liabilities extinguished over the assets given up by the Company.
Three terminated employees were issued a total of 80,000 (1.2 million pre-split)
free-trading shares of the Company's stock as severance pay. The Company charged
$36,000 to expense in 2003 based on an amount equal to the average bid and asked
price of the Company's shares on the date of issuance. The Company had a
recorded balance due of $16,279 to terminated employees. However, during the
three months ended September 30, 2005, the Company determined, and the former
employees agreed, that any and all amounts due to or payable on behalf of the
employees had been satisfied and no additional amounts were owed.
FORMER CONSULTANTS
Certain former consultants of the Company were granted a judgment in the sum of
$15,000, as described in Note 19 above. 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 2005, for the $15,000
subsequently determined payable.
NOTE 22 - 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 management's 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 2004 we recorded a loss on
disposition of property and equipment of $56,804.
Similarly, in 2003, a loss of $42,301 was recorded in connection with abandoned
obsolete equipment.
NOTE 23. INCOME TAXES
Deferred income taxes and benefits for 2005 and 2004 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 carry-forwards that give rise to significant portions
of deferred tax assets and liabilities consist of the following:
58
CURRENT
PERIOD
2004 CHANGES 2005
----------- ----------- -----------
Deferred tax assets:
Accrued compensation $ 345,533 $ 855,601 $ 1,201,134
Allowance for doubtful accounts 171,254 (335,749) (164,495)
Consulting services elected as start-up costs
under IRC Sec. 195(b) 671,758 598,370 1,270,128
Accumulated depreciation (10,521) 252 (10,269)
Net operating loss carryforwards 3,985,383 3,546,818 7,532,201
----------- ----------- -----------
5,163,407 4,665,292 9,828,699
Valuation allowance (5,163,407) (4,665,292) (9,828,699)
----------- ----------- -----------
Net deferred tax asset $ -- $ -- $ --
=========== =========== ===========
A reconciliation of income benefit provided at the federal statutory rate of 15%
to income tax benefit is as follows:
2005 2004
----------- -----------
Income tax benefit at federal statuatory rate $(3,546,818) $ (930,379)
Accrued salaries 1,201,134 27,505
Allowance for doubtful accounts (164,495) (107,345)
Depreciation (10,269) (7,179)
Losses not benefited 2,520,448 1,017,398
----------- -----------
-- --
=========== ===========
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 2005, the Company had net operating loss carry-forwards (including
those of its successor due to accounting for the reincorporation as an "F"
reorganization under the Internal Revenue Code) of approximately $50,214,672,
which expire at various dates through 2021.
59
NOTE 24. COMMON STOCK TRANSACTIONS
During the year ended December 31, 2003, the Company issued the following shares
of Common stock, all of which shares are stated in pre-split amounts:
* PLEASE REFER TO NOTE ON PAGE 63.
Date Issued Shares Consideration Valuation Relationship
--------------- ---------- ----------------------- ----------- ------------------------------------
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 corp. 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
for loan collateral
60
During the year ended December 31, 2004, the Company issued the following shares
of Common stock, all of which shares are stated in pre-split amounts:
DATE ISSUED SHARES CONSIDERATION VALUATION RELATIONSHIP
----------------- ------------ -------------------------------------------------- ------------- -----------------------------------
Jan. 15, 2004 4,500,000 Exercised Stock Options * Chief Executive Officer / Director
Jan. 15, 2004 5,166,666 Exercised Stock Options * Chief Financial Officer
Jan. 15, 2004 2,000,000 Exercised Stock Options * Director/Former President
Jan. 15, 2004 9,000,000 Exercised Stock Options * Chief Operating Officer / Director
President / Director / Former
Jan. 15, 2004 1,000,000 Exercised Stock Options * Consultant
Jan. 15, 2004 2,666,667 Exercised Stock Options * Vendor
Feb. 3, 2004 3,202,180 Exercised Stock Options * Chief Executive Officer / Director
Feb. 3, 2004 1,243,847 Exercised Stock Options * Chief Financial Officer
Feb. 3, 2004 2,003,106 Exercised Stock Options * Chief Operating Officer / Director
Feb. 3, 2004 6,410,513 Exercised Stock Options * Employee
Feb. 3, 2004 1,458,333 Exercised Stock Options * Accountant
Feb. 4, 2004 20,796,483 Exercised Stock Options * Director/Former President
Feb. 4, 2004 16,500,000 Investment in Unconsolidated Foreign Subsidiary * Investee
Feb. 5, 2004 3,500,000 Investment in Unconsolidated Foreign Subsidiary * Creditor of Investee
Feb. 17, 2004 9,100,000 Consulting Services 425,000 Director (COB) / Former Consultant
May 11, 2004 108,333 Marketing Services 6,500 Consultant
Shareholders of Selling
May 12, 2004 28,000,000 Sanswire Assets Acquisition 2,800,000 Corporation
May 25, 2004 1,352,528 Investment Banking Fees 67,626 Investment Banker
May 25, 2004 676,264 Investment Banking Fees 33,813 Investment Banker
May 25, 2004 1,352,528 Investment Banking Fees 67,626 Investment Banker
July 29, 2004 1,500,000 Compensation 144,000 Employee
July 29, 2004 500,000 Compensation 48,000 Employee
July 29, 2004 500,000 Compensation 48,000 Employee
President / Former Consultant (as
Aug. 12, 2004 2,000,000 Consulting Services 192,000 Nominee)
Chief Technology Officer / Former
Aug. 12, 2004 2,000,000 Consulting Services 192,000 Consultant (as Nominee)
Aug. 12, 2004 175,000 Compensation 7,000 Employee
Sep. 28, 2004 2,000,000 Stratodyne Assets Acquisition * Shareholder of Selling Corporation
Preferred Series-A Shareholder /
Nov. 4, 2004 7,800,000 Convert Pfd. Ser. A (received as broker fee). * Investment Banker
Nov. 4, 2004 5,200,000 Convert Pfd. Ser. A * Preferred Series-A Shareholders
Preferred Series-A Shareholder /
Nov. 17, 2004 26,000,000 Convert Pfd. Ser. A (received as broker fee). * Investment Banker
Nov. 17, 2004 20,800,000 Convert Pfd. Ser. A * Preferred Series-A Shareholders
Nov. 17, 2004 10,920,000 Convert Pfd. Ser. A 157,500 Preferred Series-A Shareholders
Nov. 18, 2004 1,560,000 Convert Pfd. Ser. A 22,500 Preferred Series-A Shareholders
Nov. 19, 2004 9,360,000 Convert Pfd. Ser. A 135,000 Preferred Series-A Shareholders
Nov. 23, 2004 7,800,000 Convert Pfd. Ser. A 112,500 Preferred Series-A Shareholders
Nov. 24, 2004 1,560,000 Convert Pfd. Ser. A 22,500 Preferred Series-A Shareholders
Nov. 30, 2004 9,360,000 Convert Pfd. Ser. A 135,000 Preferred Series-A Shareholders
Dec. 1, 2004 31,200,000 Convert Pfd. Ser. A 450,000 Preferred Series-A Shareholders
Dec. 3, 2004 1,560,000 Convert Pfd. Ser. A 22,500 Preferred Series-A Shareholders
Dec. 8, 2004 6,240,000 Convert Pfd. Ser. A 90,000 Preferred Series-A Shareholders
Dec. 10, 2004 12,480,000 Convert Pfd. Ser. A 180,000 Preferred Series-A Shareholders
Dec. 28, 2004 6,240,000 Convert Pfd. Ser. A 90,000 Preferred Series-A Shareholders
Dec. 30, 2004 1,560,000 Convert Pfd. Ser. A 22,500 Preferred Series-A Shareholders
Return of shares originally issued for Sanswire Shareholders of Selling
Dec. 31, 2004 (28,000,000) and Stratodyne Assets (2,800,000) Corporations
Shareholders of Selling
Dec. 31, 2004 26,000,000 Reissuance of shares for Sanswire Assets 2,600,000 Corporation
Dec. 31, 2004 2,000,000 Reissuance of shares for Stratodyne Assets 200,000 Shareholder of Selling Corporation
Dec. 31, 2004 3,000,000 Consulting Services 135,000 Consultant
Dec. 31, 2004 3,000,000 Consulting Services 135,000 Consultant
Dec. 31, 2004 500,000 Consulting Services 22,500 Consultant
Dec. 31, 2004 500,000 Consulting Services 22,500 Consultant
61
During the year ended December 31, 2005, the Company issued the following shares
of Common stock, all of which shares are stated in post-split amounts:
DATE ISSUED SHARES CONSIDERATION VALUATION RELATIONSHIP
--------------- ----------- ------------------------------------------------ ------------- --------------------------------------
2/9/2005 208,000 Converted Preferred Series A $36,000 Preferred Series-A Shareholders
2/14/2005 520,000 Converted Preferred Series A $90,000 Preferred Series-A Shareholders
2/18/2005 84,500 Converted Preferred Series A Shares Received * Broker / Preferred Series-A
as Broker Fee Shareholders
2/24/2005 251,421 Converted Notes Payable and Accrued Interest $301,706 Convertible Note Holder
2/24/2005 471,415 Converted Notes Payable and Accrued Interest $565,698 Convertible Note Holder
2/24/2005 157,138 Converted Notes Payable and Accrued Interest $188,566 Convertible Note Holder
2/24/2005 33,333 Broker Fee * Broker / Convertible Note Holder
2/24/2005 625,000 Convert Note Payable and Accrued Interest $750,000 Convertible Note Holder
2/25/2005 1,575,833 Converted Preferred Series A Shares Received * Broker / Preferred Series-A
as Broker Fee Shareholders
2/25/2005 33,333 Broker Fee * Broker / Convertible Note Holder
3/3/2005 1,040,000 Converted Preferred Series A $180,000 Preferred Series-A Shareholders
3/3/2005 33,333 Exercised Warrants $61,325 Broker / Convertible Note Holder
3/3/2005 260,417 Exercised Warrants $429,688 Convertible Note Holder turned
Stockholder
3/3/2005 86,806 Exercised Warrants $143,229 Convertible Note Holder turned
Stockholder
3/3/2005 138,889 Exercised Warrants $229,165 Convertible Note Holder turned
Stockholder
3/6/2005 80,555 Exercised Warrants $132,916 Convertible Note Holder turned
Stockholder
3/7/2005 485,333 Converted Preferred Series A Shares Received * Preferred Series-A Shareholders
as Broker Fee
3/7/2005 - Converted Preferred Series A - Additional $9,000 Preferred Series-A Shareholders
Proceeds
3/7/2005 66,667 Exercised Warrants $110,000 Convertible Note Holder turned
Stockholder
3/10/2005 66,667 Exercised Warrants $110,000 Convertible Note Holder turned
Stockholder
3/11/2005 80,000 Consulting Services $358,200 Consultant / Legal Counsel
3/11/2005 80,000 Consulting Services $358,200 Former Consultant / Current
Executive Vice President
3/11/2005 200,000 Costs of Sales $450,000 Vendor
3/14/2005 66,667 Exercised Warrants $110,000 Convertible Note Holder turned
Stockholder
3/14/2005 500,000 Exercised Stock Options * CEO
3/14/2005 280,216 Exercised Stock Options * CFO
3/21/2005 369,022 Exercised Stock Options * COO
3/21/2005 172,065 Exercised Stock Options * CTO
3/21/2005 100,000 Exercised Stock Options * Former Director
3/22/2005 37,832 Exercised Stock Options * Employee
3/22/2005 10,378 Exercised Stock Options * Employee
3/22/2005 8,211 Exercised Stock Options * Employee
3/22/2005 7,738 Exercised Stock Options * Employee
3/22/2005 6,388 Exercised Stock Options * Employee
3/22/2005 8,097 Exercised Stock Options * Employee
3/22/2005 1,363 Exercised Stock Options * Employee
3/22/2005 945 Exercised Stock Options * Employee
3/22/2005 1,052 Exercised Stock Options * Employee
3/22/2005 310 Exercised Stock Options * Employee
3/28/2005 211,734 Exercised Stock Options * Employee
4/6/2005 - Exercised Warrants - Additional Proceeds $1,347,500 Convertible Note Holder turned
Stockholder
4/12/2005 33,333 Exercised Warrants $61,325 Convertible Note Holder turned
Stockholder
4/15/2005 8,892 Exercised Stock Options * Employee
4/15/2005 8,527 Exercised Stock Options * Employee
4/15/2005 8,715 Exercised Stock Options * Director
4/15/2005 5,790 Exercised Stock Options * Employee
4/15/2005 6,151 Exercised Stock Options * Employee
4/ 27/2005 12,897 Exercised Stock Options * Senior Vice President
5/4/2005 174,790 Additional Shares Issued per Anti-dilutive Convertible Note Holder turned
Agreement * Stockholder
5/6/2005 291,317 Additional Shares Issued per Anti-dilutive Convertible Note Holder turned
Agreement * Stockholder
5/12/2005 103,950 Stock for Cash $300,000 Investors
5/12/2005 346,500 Stock for Cash $1,000,000 Investors
5/12/2005 86,667 Stock for Cash $250,120 Investors
5/12/2005 86,667 Stock for Cash $250,120 Investors
5/12/2005 17,325 Stock for Cash $50,000 Investors
5/12/2005 86,625 Stock for Cash $250,000 Investors
5/12/2005 6,930 Stock for Cash $20,000 Investors
5/12/2005 27,720 Stock for Cash $80,000 Investors
5/12/2005 3,333 Stock for Cash $9,620 Investors
5/12/2005 3,333 Stock for Cash $9,620 Investors
5/12/2005 34,650 Stock for Cash $100,000 Investors
5/12/2005 13,333 Stock for Cash $38,480 Investors
5/17/2005 650,000 Converted Preferred Series A $112,500 Preferred Series-A Shareholders
5/27/2005 86,625 Stock for Cash $250,000 Investors
5/27/2005 250,000 Consulting Services $905,000 Former Consultant - Corporation owned
by current Executive Vice President
6/8/2005 350,000 Consulting Services $969,500 Consultant/Legal Counsel
6/13/2005 22,500 Shares Received as Converted Preferred Series A * Broker/Preferred Series-A Shareholders
6/13/2005 2,444,167 Converted Preferred Series A Shares Received * Broker/Preferred Series-A Shareholders
as Broker Fee
6/14/2005 4,353 Exercised Stock Options * Employee
6/27/2005 33,334 Sales Commissions $100,000 Affiliate
6/30/2005 170,000 Legal Services $493,000 Consultant/Legal Counsel
7/5/2005 14,815 Exercised Stock Options * Consultant
7/5/2005 8,334 Employment Signing Bonus $25,000 Employee of Sanswire
7/5/2005 1,000 Services - Performance bonus $3,000 Employee of Sanswire
7/5/2005 334 Services - Performance bonus $1,000 Employee of Sanswire
7/5/2005 334 Services - Performance bonus $1,000 Employee of Sanswire
7/5/2005 334 Services - Performance bonus $1,000 Employee of Sanswire
7/5/2005 334 Services - Performance bonus $1,000 Employee of Sanswire
7/5/2005 334 Services - Performance bonus $1,000 Employee of Sanswire
7/5/2005 334 Services - Performance bonus $1,000 Employee of Sanswire
7/5/2005 334 Services - Performance bonus $1,000 Employee of Sanswire
7/5/2005 334 Services - Performance bonus $1,000 Employee of Sanswire
7/5/2005 334 Services - Performance bonus $1,000 Employee of Sanswire
7/5/2005 334 Services - Performance bonus $1,000 Employee of Sanswire
7/5/2005 334 Services - Performance bonus $1,000 Employee of Sanswire
7/5/2005 334 Services - Performance bonus $1,000 Employee of Sanswire
8/5/2005 20,001 Sales Commissions $37,402 Affiliate / Vendor
8/5/2005 13,333 Sales Commissions $24,933 Affiliate / Vendor
9/6/2005 38,730 Equipment Purchase $58,206 Affiliate / Vendor
9/8/2005 100,000 Conversion of Preferred Series C to Common $150,000 Relation to Investment
Stock Banker/Consultant
9/8/2005 720,000 Conversion of Preferred Series C to Common $1,080,000 Investment Banker / Consultant
Stock
9/8/2005 3,166 Services - Performance bonus $4,750 Employee of Sanswire
9/8/2005 133,334 Employment Signing Bonus $200,000 Employee
9/13/2005 98,983 Employment Severance Agreement $177,400 Former Employee
9/27/2005 185,185 Board Member Referral Fee $275,926 Consultant / Board Member
9/30/2005 1,881,317 Converted Preferred Series A $270,000 Preferred Series-A Shareholders
9/30/2005 36,667 Officer Salary Adjustment $55,000 Former President / Director
9/30/2005 33,611 Officer Salary Adjustment $50,000 Former President / Director
9/30/2005 12,500 Director Fees $18,750 Former President / Director
10/7/2005 350,000 Consulting Services $458,500 Corporation Owned by Former Consultant
/ Current Executive Vice President
11/2/2005 28,201 Exercised stock options $53,300 Employee
11/17/2005 500,000 Conversion of Preferred Series C $250,000 Chief Operating Officer
11/28/2005 9,333 Exercised Warrants $15,399 Stockholder / Warrant Holder
11/28/2005 2,333 Exercised Warrants $3,849 Stockholder / Warrant Holder
11/28/2005 60,638 Exercised Warrants $100,053 Stockholder / Warrant Holder
11/28/2005 4,851 Exercised Warrants $8,004 Stockholder / Warrant Holder
11/28/2005 72,765 Exercised Warrants $120,062 Stockholder / Warrant Holder
11/28/2005 2,333 Exercised Warrants $3,849 Stockholder / Warrant Holder
11/28/2005 69,546 Exercised Warrants $114,751 Stockholder / Warrant Holder
11/29/2005 72,766 Exercised Warrants $120,064 Stockholder / Warrant Holder
11/30/2005 19,404 Exercised Warrants $32,017 Stockholder / Warrant Holder
12/1/2005 242,550 Exercised Warrants $400,208 Stockholder / Warrant Holder
12/2/2005 24,255 Exercised Warrants $40,021 Stockholder / Warrant Holder
12/2/2005 60,667 Exercised Warrants $100,101 Stockholder / Warrant Holder
12/5/2005 60,667 Exercised Warrants $100,101 Stockholder / Warrant Holder
12/8/2005 1,857,350 Conversion of Note Payable and Accrued Interest $3,064,628 Convertible Note Holder turned
Stockholder
12/8/2005 306,860 Conversion of Note Payable and Accrued Interest $506,319 Convertible Note Holder turned
Stockholder
12/16/2005 100,000 Exercised Warrants $250,000 Stockholder / Warrant Holder
12/19/2005 100,000 Exercised Warrants $250,000 Stockholder / Warrant Holder
12/21/2005 72,727 Exercised Warrants $181,818 Stockholder / Warrant Holder
12/22/2005 81,168 Travel Services $125,000 Corporation Owned by Former Consultant
/ Current Executive Vice President
12/27/2005 291,961 Conversion of Note Payable and Accrued Interest $481,736 Convertible Note Holder turned
Stockholder
12/31/2005 12,931,334 Conversion of Preferred Series B $8,435,200 Preferred Stockholder
12/31/2005 308,712 Conversion of Note Payable and Accrued Interest $509,375 Convertible Note Holder turned
Stockholder
12/27/2005 21,429 Officer Salary $60,000 Chief Executive Officer / Director
12/27/2005 19,643 Officer Salary $55,000 Chief Financial Officer
12/27/2005 9,821 Officer Salary $27,500 Corp. Secretary / Director
12/27/2005 19,643 Officer Salary $55,000 Chief Operating Officer
12/27/2005 19,643 Officer Salary $55,000 Chief Technology Officer
12/27/2005 19,643 Officer Salary $55,000 Former Chief Operating
Officer / Director
12/27/2005 9,821 Officer Salary $27,500 Senior Vice-President of Finance
62
* The valuation amounts of the above common stock transactions are based on the
amounts that common stock and related additional paid-capital were increased
(decreased) upon recording of each transaction. For exercises of stock options,
no values are indicated, whereas the options were valued and the additional
paid-in capital account was increased upon the original issuance (grant) of the
options and no additional charges were recorded upon exercise of the options.
For conversions of preferred stock, the valuation indicated is the recorded
amount of the preferred stock upon original issuance of the preferred shares,
which amount was reclassified to common stock and related additional paid-in
capital upon conversion. Where preferred stock was originally issued for
broker's fees (instead of cash) and, accordingly, no monetary compensation was
received or recorded by the Company for the preferred shares issued, the listed
common stock valuation is also zero.
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. Through December 31, 2004, issuance of
restricted shares (Rule 144) were 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.
Effective January 1, 2005, the Company adopted the policy of valuing all shares
of common stock issued in consideration for services at the closing price of the
shares on the date of issuance or date of Board approval or agreement, if
earlier, regardless of whether the shares are issued or restricted or
free-trading, except for instances where the closing price is based on
contractual agreements.
Shares issued (retired) for loan collateral were recorded at par value.
63
NOTE 25. STOCK OPTIONS
During the year ended December 31, 2003, the Company issued the following
options to acquire Common stock, all of which share amounts below are pre-split:
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 Former 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 (pre-split) 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 (pre-split) 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 (pre-split) per share.
All of the above stock options were subsequently exercised in January 2004.
During the year ended December 31, 2004, the Company issued the following
options to acquire Common stock, all of which share amounts below are pre-split:
Date Issued Shares Consideration Valuation Relationship
----------------- ---------- ----------------------------- ---------- --------------------------------------------
December 31, 2004 479,778 Accrued Board Member Stipends 18,750 Chief Executive Officer/Director
December 31, 2004 479,778 Accrued Board Member Stipends 18,750 Director (COB)/Former Consultant
December 31, 2004 479,778 Accrued Board Member Stipends 18,750 Chief Operating Officer/Director
December 31, 2004 479,778 Accrued Board Member Stipends 18,750 Director/Former President
December 31, 2004 479,778 Accrued Board Member Stipends 18,750 President/Director/Former Consultant
December 31, 2004 479,778 Accrued Board Member Stipends 18,750 Director/Former President of Subsidiary
December 31, 2004 479,778 Accrued Board Member Stipends 18,750 Director
December 31, 2004 359,833 Accrued Board Member Stipends 14,065 Chief Financial Officer
December 31, 2004 4,444,444 Bonus 200,000 Chief Executive Officer/Director
December 31, 2004 3,888,889 Bonus 175,000 Chief Financial Officer
December 31, 2004 3,888,889 Bonus 175,000 Chief Operating Officer/Director
December 31, 2004 694,444 Bonus 31,250 Chief Technology Officer/Former Consultant
December 31, 2004 833,333 Bonus 37,500 Senior Vice-President
December 31, 2004 2,777,778 Bonus 125,000 President/Director/Former Consultant
December 31, 2004 1,444,444 Bonus 65,000 Employee
December 31, 2004 2,444,444 Bonus 110,000 Employee
December 31, 2004 670,556 Bonus 30,175 Employee
December 31, 2004 530,556 Bonus 23,875 Employee
December 31, 2004 500,000 Bonus 22,500 Employee
December 31, 2004 412,720 Bonus 18,572 Employee
December 31, 2004 523,144 Bonus 23,541 Employee
December 31, 2004 88,040 Bonus 3,962 Employee
December 31, 2004 281,250 Bonus 12,656 Employee
December 31, 2004 61,040 Bonus 2,747 Employee
December 31, 2004 68,000 Bonus 3,060 Employee
December 31, 2004 20,000 Bonus 900 Employee
December 31, 2004 550,922 Bonus 24,791 Employee of Subsidiary
December 31, 2004 83,333 Bonus 3,750 Former Employee of Subsidiary
December 31, 2004 374,078 Bonus 16,834 Employee of Subsidiary
December 31, 2004 574,533 Bonus 25,854 Employee of Subsidiary
December 31, 2004 397,456 Bonus 17,886 Former Employee of Subsidiary
December 31, 2004 277,778 Bonus 12,500 Employee of Subsidiary
December 31, 2004 133,333 Bonus 6,000 Employee of Subsidiary
December 31, 2004 116,667 Bonus 5,250 Employee of Subsidiary
December 31, 2004 185,189 Bonus 8,334 Employee of Subsidiary
December 31, 2004 222,222 Amount owed for services 10,000 Accountant
December 31, 2004 31,519,878 Officer Stock Option Grant 1,418,394 Chief Executive Officer / Director
December 31, 2004 21,013,252 Officer Stock Option Grant 945,596 Chief Operating Officer / Director
December 31, 2004 15,759,939 Officer Stock Option Grant 709,197 Chief Financial Officer
December 31, 2004 10,506,626 Officer Stock Option Grant 472,798 Director/Former President
December 31, 2004 10,506,626 Officer Stock Option Grant 472,798 President / Director / Former Consultant
December 31, 2004 10,506,626 Officer Stock Option Grant 472,798 Chief Technology Officer / Former Consultant
64
According to option agreements in connection with the above shares, the option
prices were the lower of $0.675 ($ .045 pre-split) 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 that were exercised were issued at $0.675 ($
..045 pre-split) per share.
During the year ended December 31, 2005, the Company issued the following
options to acquire Common stock, all of which shares are stated in post-split
amounts:
Date Issed Shares Consideration Valuation Relationship
---------- --------- ---------------------------- ---------- -------------------------------------------------
9/27/2005 81,481 Additional stock options per $ 55,000 Former President / Director settlement agreement.
9/27/2005 1,542,176 Settlement Agreement $1,256,873 Consultant / Affiliate of Former President
12/9/2005 37,500 Director Bonus $ 55,875 Former Director
12/9/2005 30,000 Director Severance $ 29,700 Former Director
12/31/2005 2,945,763 Officer Stock Option Grant $1,988,390 Chief Executive Officer / Director
12/31/2005 1,963,842 Officer Stock Option Grant $1,325,593 Chief Operating Officer /Director
12/31/2005 1,472,882 Officer Stock Option Grant $ 994,195 Chief Financial Officer
12/31/2005 490,961 Officer Stock Option Grant $ 331,398 Director/Former President
12/31/2005 981,921 Officer Stock Option Grant $ 662,797 Chief Technology Officer /Former Consultant
12/31/2005 981,921 Officer Stock Option Grant $ 662,797 Chief Operating Officer
12/31/2005 2,454,803 Officer Stock Option Grant $4,394,097 Director
The above scheduled stock options include only those recorded at intrinsic value
(see Note 1 above). Other stock options with no intrinsic value (i.e., not
discounted) are discussed below, but are not required to be recorded in the
financial statement.
EXECUTIVE STOCK OPTIONS PLAN
In May 2004, the board of directors approved an Officers' Stock Option Grant
Plan, pursuant to which certain officers are entitled to receive stock options,
for each of three years, beginning in 2004 (Year 1). The annual number of option
shares to be issued will be equal to amounts that, after the exercise of such
options, would affect ownership of various percentages of the total shares then
issued and outstanding. The following officers received options for restricted
shares in the following percentages: CEO - 3% in each of the three years (total
9%); COO - 2% in each of the three years (total 6%), CFO - 2.0% in Year 1 and
1.5% in each of the following years (total 5.0%), Director and former President
- 1.0% in Year 1 and .5% in each of the following years (total 2%), current
President - 1% in each of the three years (total 3%), and CTO - 1% in each of
the three years (total 3%). The recipient's rights to the options will are fully
vested as of December 31, 2004, although compensation expense is recorded at the
completion of each year. The total of 6,654,166 (99,812,946 pre-split) option
shares issuable for 2004. The stock options are exercisable at the lower of $
0.675 ($.045 pre-split) per share, based on one-half of the average closing
market price for the shares during the ten day period prior to the vesting date
of December 31, 2004, or 50% of the closing market price on the date of
exercise.
In addition to the above parties, the Corporate Secretary / general counsel and
the Senior Vice-President were awarded 1% and 2%, respectively, of the total
shares outstanding, at the fair market value of the Company's stock on the date
the options were granted. Also, a board member, Randolph Dumas, was awarded 2.5%
of the total shares outstanding, exercisable at $1.79 per share at the date of
issuance. A total of 13,992,374 options shares were granted for 2005.
STOCK OPTION BONUS PLANS
In December 2004, the Company established its 2004 Stock Option Bonus Plan,
wherein the board of directors authorized the issuance of stock options for
restricted shares totaling 1,765,832 (26,487,483 pre-split) shares to the
officers and employees of the company as payment of accrued bonuses through
December 31, 2004. The stock options are exercisable at the lower of $0.675
($.045 pre-split) per share, based on one-half of the average closing market
price for the shares during the ten-day period prior to the vesting date of
December 31, 2004, or 50% of the closing market price on the date of exercise.
In December 2004, the board of directors authorized the issuance of stock
options for restricted shares totaling 247,885 (3,718,279 pre-split) shares to
the directors of the company as payment of accrued board members' stipends
through December 31, 2004. The stock options are exercisable at the lower of
$0.5865 ($.0391 pre-split) per share or 50% of the closing market price on date
of exercise.
In November 2005, the Company established its 2005 Stock Option Bonus Plan,
wherein the board of directors authorized the issuance of stock options for
restricted shares totaling 1,509,180 (post-split) shares to the officers and
employees of the company as payment of accrued bonuses through December 31,
2005. The stock options are exercisable at $2.12, based on the closing market
price of the Company's free-trading shares on the date the options were granted.
Through the date of this report, none of these options have been exercised.
During 2005, the board of directors authorized the issuance of stock options for
restricted shares totaling 199,490 (post-split) shares to the directors of the
company as board members' compensation for services through December 31, 2005.
The stock options are exercisable at various amounts, ranging from $1.99 to
$4.35 per share, based on the closing market price of the Company's free-trading
shares on the date the options were granted, except for a now former director
who was issued 37,500 and 30,000 (post-split) options shares at $1.49 and $0.99,
respectively. Through the date of this report, none of these options have been
exercised.
All of the options granted during 2005, unless otherwise discounted as noted
above, were exercisable based on the closing market price of the Company's
free-trading shares. Accordingly, whereas through December 31, 2005 the Company
expenses stock options only at intrinsic value (per APB 25 - see Note 1 above),
no expense was recorded for shares exercised based on the closing price of the
Company's free-trading shares at the date granted.
65
2004 STOCK OPTIONS EXERCISED IN 2005
During 2005, a total of 1,785,490 (26,782,350 post-split) of the above options
shares were exercised and issued (net of shares used to pay for "cashless"
options"), with payment in cash and common stock subscriptions receivable
totaling $92,906, pursuant to the 2004 Stock Option Bonus Plan, the Officers'
Stock Option Grant Plan, and for accrued board members' stipends, and,
furthermore, these shares were registered by the Company's filing a Form S-8
registration statement. The number of shares registered were allocated to the
individuals exercising the options based a ratio of the number of options held
by each individual to the total number of options held by all individuals.
NOTE 26 - PREFERRED STOCK
SERIES A
In October 2003, the Company entered into an agreement with Fordham Financial
Management Inc. to raise funds. 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 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, plus 100,000
Shares.
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 had been subscribed as
of January 31, 2005, and the $2,250,000 ($2,500,000 total less 10% commission)
had been received as of February 6, 2005.
During 2004, preferred shareholders converted a total 153,500 shares into
10,642,666 (159,640,000 pre-split) of the Company's common stock, based on
conversation ratio of 1,040 common shares for each preferred share owned, in
accordance with the formula described above. The Company had remaining 96,500
Series A Preferred Shares issued and outstanding, representing $697,500
subscribed, as of December 31, 2004. During 2005, the preferred shareholders
converted a total all of the remaining 96,500 Series A Preferred shares into
8,911,651 (pre-split) shares of the Company's common stock.
SERIES B
On April 27, 2004, the Company agreed to sell 1,000 shares of Series B Preferred
Stock of GlobeTel Communications Corp. (GTE) to Caterham Financial Management,
Ltd., a Malaysian company (Caterham), for a total investment of $15 million. The
Company intended 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, 2005.
With respect to the $5 million in working capital, Caterham had agreed to
advance $1 million to GlobeTel Communications on May 7, July 1, September 1,
November 1 and December 31 of 2004. 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 GlobeTel Communications 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 their Series B Preferred Stock into
the Company's common stock during this time period. In March 2005 the Company
and Caterham amended the agreement to revise voting rights to specify that
provided at least 85% of the Series B Preferred Stock remains outstanding, the
holders of the Series B Preferred Stock, voting as a group, will have voting
rights equal to 50% plus one shares of the Company's authorized shares of common
stock for a period up to and including April 30, 2005. Thereafter the holders
shall have one vote for each share of common stock for which the Series B
Preferred Stock may be converted, regardless of the percentage of Series B
Preferred Stock outstanding.
66
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"). In March 2005, the Company and Caterham
amended the agreement to revise conversion rights to provide issuance of 369,467
(5,542,000 pre-split) shares of GlobeTel common stock. 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 had subscribed and received $3,350,000 as of December 31, 2004 (net
of $11.5 million of subscriptions receivable). A total of $2,850,000 was
received from Caterham; an amount representing $500,000 was issued to
Charterhouse in settlement of outstanding obligations (see Note 10 above). In
addition an amount representing $150,000, was issued as a broker's fee.
In January 2005 an additional $250,000 was received from Caterham. The remaining
amount of the subscription receivable was subsequently received during 2005 in
the form of $4,835,200 of telecommunication equipment - the data switch in
connection with the Stored Value Card program.
In December 2005, the Company entered into an agreement with Caterham wherein
all 35,000 Series A Preferred shares were converted into 12,931,334 post-split
shares of GlobeTel common stock in full settlement of all obligations of the
parties.
SERIES C
On April 27, 2004, the Company agreed to sell 1,000 shares of Series C Preferred
Stock of GlobeTel Communications Corp. ("GTE") to Tim Ingram, a Hong Kong based
investment banker, for a total investment of $1 million. The Company intended to
use this $1 million investment for working capital and purchase of equipment
necessary to expand the Company's Stored Value Card Programs.
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 GTE'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 GlobeTel Communications 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 GlobeTel Communications common stock. Each 1,000
shares of Series C Preferred Stock will represent 2% of the GlobeTel
Communications 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 GlobeTel Communications 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 GlobeTel Communications 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 GlobeTel Communications' common stock.
Ingram agreed to advance $1 million to GlobeTel Communications 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. In December 2004, Mr.
Ingram converted his preferred shares into 151,515 (2,272,727 pre-split) common
shares, recorded at the then current market price of $1.65 ($ .11 pre-split) per
common share, for a total of $250,000.
On August 20, 2004, the Company agreed to sell 500 shares of Series C Preferred
Stock of GlobeTel Communications Corp. ("GTE") 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
is using this $500,000 investment for working capital and purchase of equipment
for Sanswire Networks, LLC, necessary to launch the prototype of the
Stratellite.
The purchase price was 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 December 31, 2004, the Company has received the full
$500,000 as agreed upon.
In September 2005, Mr. Taboada converted all 500 shares of Series C Preferred
Stock into 820,000 (12,300,000 pre-split) shares of the Company's common stock
based on 1% of the then outstanding total of the Company's common stock, as
agreed upon by the parties.
67
On October 22, 2004, the Company agreed to sell 250 shares of Series C Preferred
Stock of GlobeTel Communications Corp. ("GTE") to Lawrence Lynch for a total
investment of $250,000. Mr. Lynch, an individual investor, is also the current
Chief Operating Officer of the Company. The Company used this $250,000
investment for working capital and purchase of equipment necessary to expand the
Company's stored value card programs.
In November 2005, Mr. Lynch converted all 250 shares of Series C Preferred Stock
into 500,000 (7,500,000 pre-split) shares of the Company's common stock.
As of December 31, 2005, the there were no subscriptions receivable for Series C
preferred stock, all shares were converted into Company common stock, and the
Company does not anticipate issuing any additional shares in connection with
this preferred stock series.
SERIES D
On July 28, 2004, the Company agreed to sell 1,000 shares of Series D Preferred
Stock of GlobeTel Communications Corp. ("GTE") to Mitchell A. Siegel, former
Chief Operating Officer and current Vice President and Director 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) quarterly
installments beginning August 2004. The agreement was subsequently modified for
the installment period to be semi-annual and to begin in October 2004. Mr.
Siegel has remitted the initial $250,000, and in June 2005, remitted the second
$250,000.
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 GTE's authorized
shares of common stock for a period of three years from the first closing date.
For a period of two years after the first closing date, the Series D Preferred
Stock shall not be convertible into shares of GTE 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 GTE common stock. The 1000 shares of Series D Preferred
Stock will represent 2% of the GTE 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 GTE 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 GTE 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 GTE's
common stock.
The Company expects to receive the remaining $500,000 in stock subscriptions
receivable from Mr. Siegel in the near term.
NOTE 27. SEGMENTS AND RELATED INFORMATION
During the 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 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 results of
the respective business units, segregated into telecommunications services
(international wholesale carrier traffic, networks, prepaid calling services,
internet telephony, stored value services and Super Hubs(TM) and the Sanswire
Stratellite project. The "Unallocated" column includes expenses incurred by and
net other income realized by the parent corporation, GlobeTel, including
corporate operating expenses, not specifically allocated to either operating
segment.
68
2005 TELECOM SANSWIRE UNALLOCATED TOTALS
------------------------------------------- ------------ ------------ ------------ ------------
Revenues Earned $ 81,135,194 -- $ 8,644 $ 81,143,838
Cost of Revenue Earned 80,721,806 -- 8,335 80,730,141
------------ ------------ ------------ ------------
GROSS MARGIN(LOSS) 413,388 -- 309 413,697
------------ ------------ ------------ ------------
Expenses 2,355,398 4,300,866 23,970,231 30,626,495
Loss Before Other Income (Expense) and
Income Taxes (1,942,010) (4,300,866) (23,969,922) (30,212,798)
Other Income (Expenses) (1,740,594) -- (3) (1,740,597)
------------ ------------ ------------ ------------
Loss Before Income Taxes (3,682,604) (4,300,866) (23,969,925) (31,953,395)
------------ ------------ ------------ ------------
Income Taxes -- -- -- --
------------ ------------ ------------ ------------
NET LOSS ($ 3,682,604) ($ 4,300,866) ($23,969,925) ($31,953,395)
------------ ------------ ------------ ------------
2004 TELECOM SANSWIRE UNALLOCATED TOTALS
------------------------------------------- ------------ ------------ ------------ ------------
Revenues Earned $ 28,996,213 -- -- $ 28,996,213
Cost of Revenue Earned 29,187,414 -- -- 29,187,414
------------ ------------ ------------ ------------
GROSS MARGIN(LOSS) (191,201) -- -- (191,201)
------------ ------------ ------------ ------------
Expenses 901,076 746,827 11,202,347 12,850,250
Loss Before Other Income (Expense) and
Income Taxes (1,092,277) (746,827) (11,202,347) (13,041,451)
Other Income (Expenses) (379,511) 254,093 (125,418)
------------ ------------ ------------ ------------
Loss Before Income Taxes (1,471,788) (746,827) (10,948,254) (13,166,869)
------------ ------------ ------------ ------------
Income Taxes -- -- -- --
------------ ------------ ------------ ------------
NET LOSS ($ 1,471,788 ($ 746,827) ($10,948,254) ($13,166,869)
============ ============ ============ ============
NOTE 28 - SUBSEQUENT EVENTS
In January 2006, investors exercised all of the outstanding 2,727,273 Class A
Warrants at $2.50 per share for gross proceeds of $6,818,183. The Company also
agreed to issue the investors a total of 1,935,606 new warrants with an exercise
price of $4.00 per share, and the warrants expire on August 31, 2008.
On March 23, 2006, the Company announced that J. Randolph Dumas, Vice Chairman,
has been elected Chairman of the Board of Directors, succeeding Sir Christopher
Meyer, who remains with the Company as Chairman of the GlobeTel International
Advisory Board.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
ITEM 8A. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
As required by Rule 13a-15 under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), the Company carried out an evaluation under the
supervision and with the participation of the Company's management, including
the Chief Executive Officer and President and the Chief Financial Officer, of
the effectiveness of the Company's disclosure controls and procedures as of
December 31, 2005. In designing and evaluating the Company's disclosure controls
and procedures, the Company and its management recognize that there are inherent
limitations to the effectiveness of any system of disclosure controls and
procedures, including the possibility of human error and the circumvention or
overriding of the controls and procedures. Accordingly, even effective
disclosure controls and procedures can only provide reasonable assurance of
achieving their desired control objectives. Additionally, in evaluating and
implementing possible controls and procedures, the Company's management was
required to apply its reasonable judgment. Furthermore, in the course of this
evaluation, management considered certain internal control areas, including
those discussed below, in which we have made and are continuing to make changes
to improve and enhance controls. Based upon the required evaluation, the Chief
Executive Officer and the Chief Financial Officer concluded that as of December
31, 2005, the Company's disclosure controls and procedures were effective (at
the "reasonable assurance" level mentioned above) to ensure that information
required to be disclosed by the Company in the reports it files or submits under
the Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commission's rules and forms.
69
From time to time, the Company and its management have conducted and will
continue to conduct further reviews and, from time to time put in place
additional documentation, of the Company's disclosure controls and procedures,
as well as its internal control over financial reporting. The Company may from
time to time make changes aimed at enhancing their effectiveness, as well as
changes aimed at ensuring that the Company's systems evolve with, and meet the
needs of, the Company's business. These changes may include changes necessary or
desirable to address recommendations of the Company's management, its counsel
and/or its independent auditors, including any recommendations of its
independent auditors arising out of their audits and reviews of the Company's
financial statements. These changes may include changes to the Company's own
systems, as well as to the systems of businesses that the Company has acquired
or that the Company may acquire in the future and will, if made, be intended to
enhance the effectiveness of the Company's controls and procedures. The Company
is also continually striving to improve its management and operational
efficiency and the Company expects that its efforts in that regard will from
time to time directly or indirectly affect the Company's disclosure controls and
procedures, as well as the Company's internal control over financial reporting.
As the Company moves successfully forward along its various product lines, new
people have joined the Company while others have been assigned new and expanding
responsibilities. In addition to establishing up-to-date financial controls
throughout the Company to reflect this new organization and expanding market
development, GlobeTel has updated various standards and compliance measures to
reflect its emerging global presence.
This includes a strict adherence to the Foreign Corrupt Practices act, an
updated and enhanced Code of Conduct and Business Ethics as well as its
Corporate Governance Statement. We have made significant changes in the
Company's internal controls that have affected the internal controls subsequent
to the date of the evaluation. We have established a financial reporting
controls committee, which meets quarterly to address corporate financial issues.
We have added two more employees to its accounting staff, including an
experienced full-time Controller and Accountant. Additionally, we have purchased
a financial reporting software tool to help analyze financial data and to
expedite the consolidation and reporting process. We have purchased a new
integrated accounting system which will be implemented during the first quarter
of 2006. In addition, the Company hired a consultant to perform an internal
control review for the purpose of evaluating the Company's internal controls. As
a result, additional controls and procedures were implemented. The Company has
also restructured departmental responsibilities and instituted a budgeting
process.
ITEM 8B. OTHER INFORMATION
BOARD APPOINTMENTS AND RESIGNATIONS
On August 30, 2005, Leigh Coleman, a director of the Company, resigned effective
August 18, 2005. There were no disputes with the Company.
The Board of Directors appointed Jonathan Leinwand to the Board of Directors
effective August 18, 2005. Mr. Leinwand is also our general counsel.
On September 16, 2005, the Company named Sir Christopher Meyer, KCMG, as
Chairman of its Board of Directors. The appointment of Sir Christopher, 61,
increased the number of independent Directors to three among a total of seven
Board members.
On October 7, 2005, Przemyslaw Kostro resigned as a director of the Company. Mr.
Kostro had no disputes with the Company.
On November 29, 2005, Mr. J. Randolph Dumas was appointed to the position of
Executive Vice Chairman and Director. In this new function, Mr. Dumas will be
expanding on his previous role as a joint venture partner in Sanswire Europe.
On December 8, 2005, Ms. Laina Raveendran Greene, a director of the Company,
resigned her position on the Board of Directors effectively immediately, for
personal reasons. Ms. Greene had no disputes with the Company.
On January 5, 2006, the Company announced the appointment of Michael P.
Castellano to the Board of Directors. As an independent director, Mr. Castellano
will fulfill the role as Chairman of GlobeTel's Audit Committee as a qualified
financial expert under Sarbanes-Oxley. He will also serve on GlobeTel's
Compensation and Nominating Committees.
On January 11, 2006, the Company announced the appointment of Dorian B. Klein to
its Board of Directors. Mr. Klein also serves on GlobeTel's Audit, Compensation
and Nominating Committees.
On February 17, 2006, the Company announced that Sir Christopher Meyer, its
Non-Executive Chairman, had requested a change in his status, effective March
19, 2006, to that of an Independent Director. As a result of his current
professional obligations and commitments in the U.K., Sir Christopher had
advised the Board that he felt unable to commit the time to the Chairmanship of
GlobeTel that the company's shareholders had the right to expect.
70
On March 20, 2006, Sir Christopher Meyer elected to step down completely from
GlobeTel's Board, after further considering the time that he had available to
devote to the Company.
On March 23, 2006, the Company announced that J. Randolph Dumas, Vice Chairman,
has been elected Chairman of the Board of Directors, succeeding Sir Christopher
Meyer, who remains with the Company as Chairman of the GlobeTel International
Advisory Board.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
Name Age Position Term
--------------------- --- ---------------------------------- --------
J. Randolph Dumas 59 Executive Vice Chairman One Year
Dorian Klein 47 Director One Year
Kyle McMahan 48 Director One Year
Michael P. Castellano 64 Director One Year
Timothy M. Huff 41 Chief Executive Officer & Director One Year
Mitchell A. Siegel 59 Vice President & Director One Year
Jonathan Leinwand 35 Secretary to the Board, Director One Year
Thomas Y. Jimenez 47 Chief Financial Officer One Year
Lawrence Lynch 54 Chief Operating Officer One Year
Joseph Seroussi 56 Chief Technical Officer One Year
Steven King 38 Senior Vice President One Year
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.
Sir Christopher Meyer, Chairman, was first elected to the Board of Directors in
September 2005. Sir Christopher joined the British Diplomatic Service where he
quickly rose through the ranks through a succession of increasingly responsible
positions in key countries around the world, starting in Moscow, and then Madrid
and later, in London, where he served as Head of the Soviet Section of the
Foreign Office. He then became Chief Speech Writer to the Foreign Secretary,
working for three Foreign Secretaries: Lord James Callaghan (later Prime
Minister); Anthony Crosland; and Lord David Owen. From there, Sir Christopher
was posted to Brussels where he was active in the UK's representation to the
European Union (EU) specializing in trade policy and later returned to Moscow in
1982 as Political Counselor. Upon returning to London, he was appointed to the
position of Foreign Office Spokesman and Press Secretary to the Foreign
Secretary (similar to the U.S. Secretary of State), later Lord Geoffrey Howe of
Aberavon. From 1988-1989, Sir Christopher was a Visiting Fellow at Harvard
University's Centre for International Affairs and, upon completion, was named
Minister for Trade Policy in Washington D.C. Shortly thereafter, he was
appointed Deputy Head of Mission at the Embassy in Washington. Upon returning to
London, he served two years as Government Spokesman and Press Secretary to
then-Prime Minister, John Major, prior to his appointment as U.K. Ambassador to
the Federal Republic of Germany in Bonn. In 1997, Sir Christopher was appointed
Ambassador to the U.S., the most senior position in the U.K. Diplomatic Service,
where he served until 2003, the longest single tenure since World War II.
On March 20, 2006, Sir Christopher Meyer elected to step down completely from
GlobeTel's Board, after further considering the time that he had available to
devote to the Company. However, on March 23, 2006, Sir Christopher Meyer decided
to accept a new role as Chairman of the Company's newly-formed International
Advisory Board.
On March 23, 2006, the Company announced that J. Randolph Dumas, Vice Chairman,
has been elected Chairman of the Board of Directors, succeeding Sir Christopher
Meyer, as of March 20, 2006.
71
J. Randolph Dumas, Vice Chairman, became the Managing Partner of Sanswire
Europe, a partnership with Sanswire LLC, in July 2005. Having joined GlobeTel in
November 2005, he has served as a member of the Board of Directors of GlobeTel
Communications since December 2005. Mr. Dumas served as a Naval Aviation Officer
during the Viet Nam War Era and, later, served as a briefing officer within the
Central Intelligence Agency in Washington D.C. before attending The Wharton
School where he completed his MBA degree in finance in 1977. Currently, a
resident of London, England - he has lived and worked in Europe for the past 25
years. He became a senior Managing Director at Salomon Brothers International
Limited where he was responsible for the firm's European corporate finance,
mortgage securities and real estate investment banking businesses for a number
of years. Subsequently, Mr. Dumas founded and became the Managing Partner of two
prominent private equity firms: Dumas West & Co. (a 50:50 partnership with the
"Baby Bell" telecommunications company, US West) and Rubikon Partners, a firm
focusing on European leveraged buyouts founded by Mr. Dumas, Dr. Henry
Kissinger, Thomas F. McLarty III (President Clinton's Chief of Staff) and Leo A.
Daly III. Mr. Dumas has had extensive experience working in virtually every
business sector and in every country within Europe, Asia and in much of the
Middle East. He maintains strong relationships in these countries at the highest
levels.
Michael P. Castellano is a certified public accountant with more than 40 years
of experience in the financial sector. His distinguished career includes
executive positions in corporate accounting, finance, and administration at
renowned companies such as Avis, Inc., E.F. Hutton, Inc., and Fidelity
Investments. At Fidelity, he held the positions of Vice President and Corporate
Controller and was later appointed Senior Vice President and Chief Accounting
Officer of the Fidelity Institutional Group. Later assignments included the
positions of Executive Vice President and Chief Administrative Officer at Kobren
Insight Group where he became a member of the Board of Directors in 1997. He was
also a director and head of the Audit Committee for Puradyn Filter Technologies
from 2001 through 2005 and ResortQuest International, a New York Stock Exchange
listed property management company, from 2002 until November 2003 when it was
acquired by Gaylord Entertainment. Mr. Castellano currently serves as a director
and chairman of the Audit Committees of Sona Mobile and Sun Capital Advisers
Trust.
Dorian Klein has more than 25 years of professional experience in international
finance and investments. He has a distinguished record as an investment banker
having worked for more than 20 years in New York, London and Tokyo, including
roles as Managing Director and Head of European Structured and Principal Finance
at Merrill Lynch in London and as Managing Director and Head of Asset Finance at
Bankers Trust in London. He also headed the Tokyo office of a highly successful
boutique investment bank that he co-founded with his colleagues from Paine
Webber during the 80s. During his career as an international investment banker,
Mr. Klein structured or executed more than 500 complex securities transactions,
in both public and private markets, involving every type of debt and equity
security. Mr. Klein is currently the Managing Partner of Rubikon Partners, a
private equity firm specializing in mid-cap European buy-ins and buy-outs, which
he co-founded together with Dr. Henry Kissinger, the Hon. Thomas McLarty, Leo A.
Daly and J. Randolph Dumas. He has also been a private investor in several
European technology companies, including several in fields which are directly
relevant to the business strategy of GlobeTel. Mr. Klein is also currently on
the Boards of Investitori Associati (the largest Italian private equity fund)
and Holding.com (a Dutch company with high-tech holdings throughout Europe). Mr.
Klein is an alumnus of Yale University (BA in Mathematics) and the Harvard
Business School (MBA in Finance).
Kyle McMahan has served on our Board of Directors since May 2005. 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.
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.
Mitchell A. Siegel, Director, Senior Vice President, has served in this capacity
since August 2004. Previously he held the position of Chief Executive Officcer,
Vice President 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
City College of New York - Bernard Baruch School of Finance.
Mr. Leinwand joined GlobeTel as General Counsel in June 2005 and became a
director in August 2005. Prior to joining Globetel, he was in private practice
since 1996 concentrating in the areas of corporate and securities law,
representing a number of public companies. As part of his practice, Mr. Leinwand
also served as a deal-maker for several US and foreign corporations arranging
strategic alliances and funding both in the US and abroad. Mr. Leinwand
graduated from the University of Miami with honors degrees in Political Science
and Communications and graduated cum laude from the University of Miami School
of Law.
72
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. Previously, Mr. Jimenez was a partner in certified public
accounting firm in the New York City area. Mr. Jimenez graduated from Cleveland
State University with a degree in Business Administration.
(B) COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934 requires that our officers
and directors, and persons who own more that ten percent of a registered class
of our equity securities, to file reports of ownership and changes in ownership
with the Securities and Exchange Commission and with any exchange on which the
Company's securities are traded. Officers, directors and persons owning more
than ten percent of such securities are required by Commission regulation to
file with the Commission and furnish the Company with copies of all reports
required under Section 16(a) of the Exchange Act. Based solely upon our review,
we did not disclose any failures to file reports under Section 16(a) of the
Exchange Act.
The audit committee consists of three directors of which one, Michael
Castellano, is a financial expert under Sarbanes-Oxley and the two directors,
Dorian Klein and Kyle McMahan are independent directors. Mr. Castellano also
fulfills an important role as Chairman of GlobeTel's separately designated Audit
Committee. Mr. Castellano succeeds Laina Raveendran Greene, who stepped down
from the Board in December 2005 for personal reasons.
ITEM 10. EXECUTIVE COMPENSATION.
----------------------------------------------------------------------------------------
ANNUAL COMPENSATION
(a) (b) (c) (d) (e)
------------------------------- ------- -------------- --------------- -----------------
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OTHER ANNUAL
COMPENSATION
($) ($) ($)
------------------------------- ------- -------------- --------------- -----------------
Timothy M. Huff, CEO/Director 2005 200,000 (a) 300,000 (b) 50,000 (d)
Timothy M. Huff, CEO 2004 200,000 (a) 200,000 (b) 18,750 (d)
Timothy M. Huff, CEO 2003 175,000 (a) 0 0
Mitchell A. Siegel, Sr. 2005 120,000 (a) 262,500 (b) 55,000 (d)
VP/Director
Mitchell A. Siegel, COO 2004 175,000 (a) 175,000 (b) 18,750 (d)
Mitchell A. Siegel, COO 2003 150,000 (a) 0 0
Stephen King, Sr VP 2005 47,682 (a) 143,338 (b) 12,500 (d)
Thomas Y. Jimenez, CFO 2005 120,000 (a) 262,500 (b) 55,000 (d)
Thomas Y. Jimenez, CFO 2004 175,000 (a) 175,000 (b) 14,063 (d)
Thomas Y. Jimenez, CFO 2003 150,000 (a) 0 0
Lawrence E. Lynch, COO 2005 120,000 (a) 218,750 (b) 55,000
Lawrence E. Lynch, Sr. VP 2004 37,500 (a) 37,500 (b) 0
Since August 2004
Joseph Seroussi, CTO 2005 120,000 (a) 218,750 (b) 55,000
Joseph Seroussi, CTO 2004 25,000 (a) 31,250 (b) 0
Since November 2004
Sir Christopher Meyer, 2005 0 25,000 (d)
Chairman
Przemyslaw L. Kostro, Former 2005 0 0 18,750 (d)
Chairman
Przemyslaw L. Kostro, 2004 0 0 443,750 (d)
Chairman
Przemyslaw L. Kostro Chairman 2003 0 0 0
J. Randolph Dumas, Vice 2005 62,500 6,250
Chairman
Jonathan Leinwand, Secretary 2005 95,262 142,188 18,750
Laina Green, Director 2005 0 0 19,000 (d)
Jerrold R. Hinton, Director/ 2005 0 100,000 (d)
Former President
Jerrold R. Hinton, Director/ 2004 0 18,750 (d)
Former President
Jerrold R. Hinton, Director/ 2003 100,000 (a) 0 0
Former President
Leigh A. Coleman President 2005 49,220 (a) 72,417 (b) 0
Since to May 2005
Leigh A. Coleman President 2004 70,780 (a) 0 (b) 50,031 (d)
Since June 2004
Vivian Manevich, CAO Through 2005 0 (c) 0 0
Dec. 2002
Vivian Manevich, CAO Through 2004 0 (c) 0 0
Dec. 2002
Vivian Manevich, CAO Through 2003 0 (c) 0 0
Dec. 2002
Michael Molen, Director 2005 0 0 18,520 (d)
Michael Molen, Director 2004 0 0 0 (d)
Since April 2004
Kyle McMahan, Director 2005 0 0 25,000 (d)
Kyle McMahan, Director 2004 0 0 18,750 (d)
Since May 2004
-------------------------------------------------------------------------------------
LONG TERM COMPENSATION
AWARDS PAYOUTS
(a) (f) (g) (h) (i)
------------------------------- ------------------ ------------- ----------- --------
NAME AND PRINCIPAL POSITION SECURITIES
UNDERLYING ALL
RESTRICTED STOCK OPTIONS/ LTIP OTHER
AWARDS SARS PAYOUTS COMP.
($) (#) ($) ($)
------------------------------- ------------------ ------------- ----------- --------
Timothy M. Huff, CEO/Director 1,988,390 (e) 0
Timothy M. Huff, CEO 1,418,394 (e) 0
Timothy M. Huff, CEO 0 0 0 0
Mitchell A. Siegel, Sr. 1,325,593 (e) 0 0 0
VP/Director
Mitchell A. Siegel, COO 945,596 (e) 0 0 0
Mitchell A. Siegel, COO 0 0 0 0
Stephen King, Sr VP 0 (e) 0 0 0
Thomas Y. Jimenez, CFO 994,195 (e) 0 0 0
Thomas Y. Jimenez, CFO 709,197 (e) 0 0 0
Thomas Y. Jimenez, CFO 0 0 0 0
Lawrence E. Lynch, COO 662,797 (e) 0 0 0
Lawrence E. Lynch, Sr. VP 0 0 0 0
Since August 2004
Joseph Seroussi, CTO 662,797 (e) 0 0 0
Joseph Seroussi, CTO 472,798 (e) 0 0 0
Since November 2004
Sir Christopher Meyer, 0 0 0 0
Chairman
Przemyslaw L. Kostro, Former 0 0 0 0
Chairman
Przemyslaw L. Kostro, 0 0 0 0
Chairman
Przemyslaw L. Kostro Chairman 0 0 0 0
J. Randolph Dumas, Vice 4,394,097 (e) 0 0 0
Chairman
Jonathan Leinwand, Secretary 0 (e) 0 0 0
Laina Green, Director 85,575 (e) 0 0 0
Jerrold R. Hinton, Director/ 331,398 (e) 0 0 0
Former President
Jerrold R. Hinton, Director/ 472,798 (e) 0 0 0
Former President
Jerrold R. Hinton, Director/ 0 0 0 0
Former President
Leigh A. Coleman President 0 0 0 0
Since to May 2005
Leigh A. Coleman President 472,798 (e) 0 0 0
Since June 2004
Vivian Manevich, CAO Through 0 0 0 0
Dec. 2002
Vivian Manevich, CAO Through 0 0 0 0
Dec. 2002
Vivian Manevich, CAO Through 0 0 0 0
Dec. 2002
Michael Molen, Director 0 0 0 0
Michael Molen, Director 0 0 0 0
Since April 2004
Kyle McMahan, Director 0 0 0 0
Kyle McMahan, Director 0 0 0 0
Since May 2004
73
(a) Effective January 1, 2002, GlobeTel entered into a three-year employment
agreements with its key management. Effective 2005, the agreements were renewed
automatically on a year-to-year basis.
For the year 2002, the agreements provided 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 former President, as described below,
which called for a salary of $100,000 per annum through 2003.
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 increased to $200,000 for its CEO, $175,000 each
for its CFO and COO, $120,000 for the Controller (formerly the CAO) and $110,000
for its VP of Network Operations. Also, GlobeTel hired a new President at an
annual compensation of $125,000 in June 2005, a Senior Vice President (Sr. VP)
at an annual compensation of $100,000 in August 2005, and a Chief Technology
Officer (CTO) at an annual compensation of $125,000 in November 2005.
Accrued but unpaid base compensation of $82,500 for the CEO, $57,500 for the CFO
and $58,333 for the COO (a total of $198,333) were owed as of December 31, 2004.
These amounts were paid in January 2005.
In 2005, the base compensation remained at $200,000 for its CEO. The CFO, COO,
CTO and General Counsel all had base compensation of $175,000. The Company also
entered into employment contracts with the Executive Vice Chairman (EVC) and
Senior Vice President (SVP) of Finance. The EVC agreement called for annual
salaries of $250,000 plus signing bonuses equal to 2.5% of the outstanding
shares of the company as of December 31, 2005. The EVC is also entitled to stock
salary in stock options totaling $750,000 per year for three years at $1.21 per
share. The SVP Finance agreement calls for annual salaries of $195,000 plus
bonuses amounting to 2% of the outstanding shares of the Company's stock at the
end of the year, payable in the form of stock options.
(b) In addition to the base compensation, the employment agreements provide for
payment of bonuses that at a minimum equal the executives' base compensation,
unless otherwise agreed to by the executives. As of December 31, 2003 and 2002,
the executives all agreed not to receive bonuses they are entitled to pursuant
to the employment agreements. For 2004, the executives received bonuses as
entitled to under the agreements. The bonuses received were equal to the amount
of gross compensation received during 2004. All executive bonuses for 2004 were
included in the Employee Stock Option Plan (see Note 24 to financial statements)
and paid with stock options.
In 2005, the bonuses were awarded at the recommendation of management and
approved by the board of directors. All executive bonuses for 2005 were included
in the Employee Stock Options Plan and paid with stock options.
(c) Vivian Manevich served as the CAO through 2002. Thereafter, Ms. Manevich
accepted a non-executive position in the Company, and, accordingly, any and all
compensation for 2003, 2004 and 2005 was included in employee payroll and none
of her compensation was included in executive compensation.
(d) In 2005, The Company's Directors received stipends of $6,250 per quarter.
The CFO, COO and SVP of Finance who are required to attend and present to the
board receive stipends of $3,125 per quarter. The Chairman of the Board has
stipends of $25,000 per quarter.
Non-executive directors' stipends were paid with cash, while executive
directors' stipends were paid in stock options. Further, the board members
approved the issuance of bonuses to the members at the end of the year amounting
to 100% of the stipends earned during the year, which were paid in stock
options.
In 2004, the then Chairman received additional stock compensation of $425,000,
for services rendered providing assistance in expanding our business and
services world-wide and in obtaining funding for us.
(e) Pursuant to an Officers' Stock Option Grant plan approved by the Board (see
Note 22 to financial statements), certain officers are entitled to receive stock
options in amounts which, after the exercise of such options, would effect
ownership of various percentages of the total shares then issued and
outstanding. The following officers received options for restricted shares in
the following percentages for 2005: CEO - 3%, former COO and current SVP - 2%,
CFO - 1.5%, current COO - 1%, CTO - 1%, SVP of Finance - 2% and General Counsel
- .75%.
The schedule below indicates the number of shares received upon exercise and the
aggregate dollar value realized upon exercise in 2005 by officers and directors
pursuant to the above plans.
74
SHARES EXERCISE
NAME POSITION (POST-SPLIT) VALUATION
------------------------------ -------------------------------- --------------- ----------
HUFF, TIMOTHY Chief Executive Officer/Director 500,000 $ 900,000
COLEMAN, LEIGH A Former President 211,734 $ 381,121
JIMENEZ, THOMAS Y Chief Financial Officer 280,216 $ 504,389
SIEGEL, MITCHELL A Senior VP/Director 369,022 $ 664,240
LYNCH, LAWRENCE E Chief Operating Officer 12,897 $ 29,020
SEROUSSI, JOSEPH Chief Technical Officer 172,065 $ 309,717
HINTON, JERROLD Former President/Former Director 100,000 $ 180,000
MOLEN, MICHAEL Former Director 8,715 $ 15,687
--------------- ----------
TOTAL - OFFICERS & DIRECTORS 1,654,649 2,984,174
=============== ==========
COMPENSATION OF DIRECTORS
In Section 10, the last paragraph entitled "COMPENSATION OF DIRECTORS" should be
replaced in its entirety with
The Company compensated the Directors using cash and stock options. Directors
fees are $25,000 per annum (paid quarterly). Upon their election as a member of
the board of directors, each non-employee director received 25,000 stock
options. These options granted to our directors vest as follows: options to
purchase 100% of the shares vest as of first anniversary of date of grant. We
reimburse our directors for all out-of-pocket expenses incurred in the
performance of their duties as directors.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
COMMON STOCK
At the date of this report, we had 102,808,081 common shares issued and
outstanding. The table below sets forth the share ownership of our executive
officers and directors, individually and as a group. No other person is the
beneficial owner of more than 5% of our issued and outstanding common shares.
AMOUNT AND NATURE OF PERCENTAGE
TITLE OF CLASS NAME AND ADDRESS OF BENEIFICAL OWNER BENEIFICAL OWNERWHIP OF CLASS (1)
-------------- ----------------------------------------------------- ----------------------- ------------
Common Stock Sir Christopher Meyer, Chairman 17,908 shares 0.02%
9050 Pines Blvd. Suite 110 Pembroke Pines, FL 33024
Common Stock Przemyslaw L. Kostro, Former Chairman 606,667 shares 0.59%
9050 Pines Blvd. Suite 110 Pembroke Pines, FL 33024
Common Stock J.Randolph Dumas, Vice Chairman 185,185 shares 0.18%
9050 Pines Blvd. Suite 110 Pembroke Pines, FL 33024
Common Stock Timothy M. Huff, CEO 2,440,920 shares 2.36%
9050 Pines Blvd. Suite 110 Pembroke Pines, FL 33024
Common Stock Jerrold R. Hinton, Former Director / President 1,677,367 (2) shares 1.63%
9050 Pines Blvd. Suite 110 Pembroke Pines, FL 33024
Common Stock Leigh A. Coleman, Former President 345,935 shares 0.34%
9050 Pines Blvd. Suite 110 Pembroke Pines, FL 33024
Common Stock Mitchell A. Siegel, Board, Sr. VP 1,807,882 (3) shares 1.76%
9050 Pines Blvd. Suite 110 Pembroke Pines, FL 33024
Common Stock Thomas Y. Jimenez, CFO 934,369 (4) shares 0.91%
9050 Pines Blvd. Suite 110 Pembroke Pines, FL 33024
Common Stock Lawrence E. Lynch, COO since August 2004 532,502 shares 0.52%
9050 Pines Blvd. Suite 110 Pembroke Pines, FL 33024
Common Stock Joseph Seroussi, CTO 325,747 shares 0.32%
9050 Pines Blvd. Suite 110 Pembroke Pines, FL 33024
Common Stock Stephen King, Sr. VP 9,822 shares 0.01%
9050 Pines Blvd. Suite 110 Pembroke Pines, FL 33024
Common Stock Jonathan Leinwand, Director & General Counsel 19,643 shares 0.02%
9050 Pines Blvd. Suite 110 Pembroke Pines, FL 33024
Common Stock Michael Molen, Former Director 8,715 shares 0.01%
9050 Pines Blvd. Suite 110 Pembroke Pines, FL 33024 ------------------------------------
Total of all Officers and Directors as a Group 8,912,662 8.67%
Common Stock unconsolidated foreign 0ubsidary - CGI 613,333 shares 0.60%
9050 Pines Blvd. Suite 110 Pembroke Pines, FL 33024
Common Stock Joe Monterosso, Principal of Related Party, CSI 105,398 shares 0.10%
------------------------------------
9050 Pines Blvd. Suite 110 Pembroke Pines, FL 33024
Subtotal - Affiliates 9,631,393 9.37%
------------------------------------
Subtotal - Non-Affiliates 93,176,688 90.63%
------------------------------------
TOTAL OUTSTANDING 102,808,081 100.00%
(1) Based on 102,808,081 shares issued and outstanding on March 3, 2006.
(2) The shares beneficially owned by Jerrold R. Hinton 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) The shares beneficially owned by Mitchell A. Siegel include 551,964 shares
owned of record by Mr. Siegel's spouse, Mrs. Vivian Manevich-Siegel, a former
company officer, which are deemed beneficially owned by Mr. Siegel.
(4) The shares beneficially owned by Thomas Y. Jimenez, include 667 shares owned
of record by Mr. Jimenez's spouse.
75
SERIES D PREFERRED STOCK
At the date of this report, we had 1,000 shares of Series D Preferred Stock
issued and outstanding. The table below sets forth the share ownership of our
executive officers and directors, individually and as a group. No other person
is the beneficial owner of more than 5% of our issued and outstanding Series D
Preferred Stock shares
Amount and Nature of Percentage
Title of Class Name and Address of Beneficial Owner Beneficial Ownership of Class
-------------- ---------------------------------------------- -------------------- --------
Series D
Preferred Stock Mitchell A. Siegel, COO 1,000 shares 100.00%
9050 Pines Blvd. Suite 110
Pembroke Pines, FL 33024
Total of all Officers and Directors as a Group 1,000 100.00%
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
See Item 7, Notes 24 and 25 Common Stock Transactions and Stock Option,
respectively, to the Notes to Consolidated Financial Statements.
ITEM 13. PRINCIPAL ACCOUNTANT FEES AND SERVICES
AUDIT FEES
Dohan and Company CPAs billed approximately $66,303 for professional services
rendered for the audit of our annual financial statements for fiscal year 2005.
This also included reviews of the financial statements included in our Forms
10-Q for the fiscal year and assistance in filing various proxy statements. For
fiscal year 2004, the amount paid for the same services was $74,024.
The above fees were pre-approved by the audit committee based on estimated
budgets presented to the audit committee.
PART IV
ITEM 14. EXHIBITS
(A) EXHIBITS
EXHIBIT NO. DESCRIPTION
3.1 Articles of Incorporation (filed as Exhibits 3.1, 3.2 and 3.3 to
the Company's Registration Statement on Form 10-SB and
incorporated herein by reference)
3.2 Bylaws (filed as Exhibit 3.4 to the Company's Registration
Statement on Form 10-SB and incorporated Herein by reference)
Material Contracts-Consulting Agreements and Employment
Agreements (filed as Exhibits to Registration 10.1 Statements on
Form S-8 and post-effective amendments thereto and incorporated
herein by reference)
10.1 Asset Purchase Agreement between the Company and Sanswire,
Inc.(incorporated by reference)
10.2 Asset Purchase Agreement between the Company and Stratodyne,Inc.
(incorporated by reference)
10.3 Subscriptions Agreements between the Company and Preferred Series
A,B,C, and D shareholders (incorporated by reference)
31.1 Certification of Chief Executive Officer required by Rule
13a-14(a)/15d-14(a)
31.2 Certification of Chief Financial Officer required by Rule
13a-14(a)/15d-14(a)
32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, As Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, As Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.1 Safe Harbor Compliance Statement for Forward-Looking Statements
filed herewith
76
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this annual report to be signed on
its behalf by the undersigned, thereunto duly authorized.
GLOBETEL COMMUNICATIONS CORP.
/s/ Timothy Huff
Timothy M. Huff, CEO
Miami, Florida
Dated: March 31, 2006
In accordance with the requirements of the Exchange Act, the registrant has
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
GLOBETEL COMMUNICATIONS CORP.
REGISTRANT
/s/ Timothy Huff
Timothy Huff, Chief Executive Officer and Director
Dated: March 31, 2006
/s/ J. Randolph Dumas
J. Randolph Dumas, Chairman
Dated: March 31, 2006
/s/ Michael P. Castellano
Michael P. Castellano,
Chairman of the Audit Committee and Director
Dated: March 31, 2006
/s/ Dorian Klein
Dorian Klein, Director
Dated: March 31, 2006
/s/ Kyle McMahan
Kyle McMahan, Director
Dated: March 31, 2006
/s/ Jonathan Leinwand
Jonathan Leinwand, Director, Corporate Counsel
Dated: March 31, 2006
/s/ Mitchell A. Siegel
Mitchell A. Siegel, Sr. VP and Director
Dated: March 31, 2006
/s/ Thomas Y. Jimenez
Thomas Y. Jimenez, Chief Financial Officer
Dated: March 31, 2006
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