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U.S. Securities and Exchange Commission
Washington, D.C. 20549
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FORM 10-QSB
(Mark One)
|X| Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended December 31, 2004
or
|_| Transition Report Pursuant to Section 13 of 15(d) of the Securities
Exchange Act of 1934
For the Transition Period From to
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Commission File number 0-024828
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GLOBAL NATIONAL COMMUNICATIONS CORP.
(Exact name of small business issuer as specified in its charter)
NEVADA N/A
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
2/F Hang Wei Bldg.
Road 2
North Hi-Tech Park
Shenzhen, Guang9dong
Peoples Republic of China
(Address of principal executive offices)
(949) 855-6688
(Issuer's telephone number)
------------
Check 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 |_| No |X|
As of February 10, 2005 there were 22,000,000 shares of Common Stock
outstanding. Transitional Small Business Disclosure Format
Yes |_| No |X|
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INDEX
PART I. FINANCIAL INFORMATION (unaudited)
Item 1. Consolidated Financial Statements: (unaudited)
Consolidated Balance Sheets as of December 31, 2004 and September 30,
2004
Consolidated Statements of Operations for the Three Months Ended
December 31, 2004
Consolidated Statements of Cash Flows for Three Months Ended December
31, 2004
Notes to the Condensed Financial Statements
Item 2. Management's Discussion and Analysis or Plan of Operations
Item 3. Controls and Procedures
PART II. OTHER INFORMATION
Item 1. Legal Proceeding
Item 2. Changes In Securities and Small Business Issuer Purchases of Equity
Securities
Item 3. Defaults Upon Senior Securities
Item 4. Submission Of Maters To a vote Of Security Holders
Item 5. Other Information
SIGNATURES
Item 1. Financial Statements.
Global National Communications Corporation and Subsidiary
Consolidated Balance Sheets
December 31, 2004
Assets December 31, September 30,
------ 2004 2004
------------- -------------
Current Assets
Cash and Cash Equivalents US$ 197,735 US$ 367,763
Accounts Receivable, Net of Provision 8,754,357 6,736,756
Other Receivable, Net of Provision 1,818,111 1,793,643
Short Term Investment 12,077 12,077
Prepayments 30,099 25,341
Deferred Expenses 77,984 141,703
Inventory 4,025,120 2,694,454
------------- -------------
Total Current 14,915,483 11,771,736
Fixed Assets
Property, Plant and Equipment 4,638,777 4,588,648
Less: Accumulated Depreciation (985,584) (880,459)
------------- -------------
Fixed Assets, Net 3,653,193 3,708,189
Other Assets
Loans Receivable 1,674,013 1,427,757
Intangible Assets, Net of Accumulated Amortization 11,942 11,942
Deferred Assets 64,033 68,918
------------- -------------
Total Other 1,749,988 1,508,617
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Total Assets US$ 20,318,664 US$ 16,988,542
============= =============
Liabilities and Shareholders' Equity
Current Liabilities
Bank Loans US$ 6,964,477 US$ 7,393,221
Accounts Payable 1,847,587 2,626,039
Advances from Customers 1,204,432 478,196
Other Payables 2,878,090 1,999,377
Accrued Expenses 995,820 64,630
------------- -------------
Total Current Liabilities 13,890,406 12,561,463
Long-Term Liabilities
Long-Term Liabilities 160,938 179,907
Deferred Grant 458,696 458,696
------------- -------------
Total Liabilities 14,510,040 13,200,066
Shareholders' Equity
Common Stock, Par Value, $.00001, 100,000,000 Shares
Authorized, 22,000,000 issued and Outstanding 220 200
Paid In Capital 16,665,262 14,665,282
Reserves 527,156 425,929
Retained Earnings (Deficit) (11,384,014) (11,302,935)
------------- -------------
5,808,624 3,788,476
------------- -------------
Total Liabilities and Shareholders' Equity US$ 20,318,664 US$ 16,988,542
============= =============
1
Global National Communications Corporation and Subsidiary
Consolidated Statements of Operations
For The Quarters Ended December 31, 2004 and 2003
2004 Q1 2003 Q1
----------- -----------
Sales US$ 4,371,815 US$ 4,320,346
Cost of Sales 3,623,224 3,391,744
----------- -----------
Gross Profit 748,591 928,602
Expenses:
Selling and Distribution Expenses 54,125 23,854
General and Administrative Expenses 178,702 130,706
Bad Debt Expense 364,497 19,573
Research and Development 92,675 33,128
----------- -----------
Total Expenses 689,999 207,261
Operating Income 58,592 721,341
Financial Expenses (36,023) (58,368)
Other Income 20,394 5,775
Non-Operating Expenses (3,515) (8,656)
----------- -----------
Income (Loss) Before Provision for Income Taxes 39,448 660,092
Provision for Income Taxes 19,300 49,507
----------- -----------
Net Income (Loss) US$ 20,148 US$ 610,585
=========== ===========
Earnings Per Share
Basic and Diluted $ 0.00 $ 0.01
=========== ===========
Weighted Average Number of Common Shares Outstanding
Basic and Diluted 21,000,000 79,690,000
=========== ===========
2
Global National Communications Corporation and Subsidiary
Consolidated Statements of Changes in Shareholders' Equity
For The Quarters Ended December 31, 2004 and 2003
Number Retained
of Common Paid in Earnings Shareholders'
Shares Stock Capital Reserves (Deficit) Equity
----------- ----------- ----------- ----------- ----------- -----------
Beginning Balance
September 30, 2003 (1) US$ 79,690,000 797 2,414,662 189,101 (40,420) 2,564,140
Net Income (Loss) -- -- -- -- 610,585 610,585
Additions to Reserve -- -- -- 109,654 (109,654) --
- -------------------------------------------------------------------------------------------------------------------------
Ending Balance
December 31, 2003 79,690,000 797 2,414,662 298,755 460,511 3,174,725
=========================================================================================================================
Beginning Balance -
September 30, 2004 (2) 20,000,000 200 14,623,065 425,929 (11,302,935) 3,746,259
As Originally Reported
Prior Period Adjustments -- -- 42,217 -- -- 42,217
Issuance of Common Stock 2,000,000 20 1,999,980 -- -- 2,000,000
Net Income (Loss) -- -- -- -- 20,148 20,148
Additions to Reserve -- -- -- 101,227 (101,227) --
- -------------------------------------------------------------------------------------------------------------------------
Ending Balance -
December 31, 2004 US$ 22,000,000 220 16,665,262 527,156 (11,384,014) 5,808,624
=========================================================================================================================
(1) All share and per share amounts have been restated to reflect a 5 for 1
forward split which was effective October 25, 2004
(2) Reflects cancellation of shares and share issuances as disclosed in the
Form 10-KSB at September 30, 2004
3
Global National Communications Corporation and Subsidiary
Consolidated Statements of Cash Flows
For The Quarters Ending December 31, 2004 and 2003
2004 2003
---------- ----------
Cash Flows from Operating Activities
Net Income (Loss) US$ 20,148 US$ 610,585
Adjustments to reconcile net income (loss) to net cash
from operating activities:
Bad Debt Expense 364,497 19,573
Depreciation 105,125 38,662
Changes in Assets and Liabilities:
Accounts Receivable (1,670,854) 1,249,871
Other Receivables (735,712) (347,496)
Inventory (1,330,666) 889,118
Prepayments (4,758) (87,347)
Deferred Expenses 63,719 (13,305)
Deferred Assets 4,885 10,696
Accounts and Other Payables 100,261 (294,389)
Advances from Customers 726,236 (176,427)
Accrued Expenses 931,190 264,902
---------- ----------
Net Cash Flows from Operating Activities (1,425,929) 2,164,443
Cash Flows from Investing Activities
Acquisition of Property and Equipment (50,129) (1,799,742)
Cash Purchase of Short Term Investment -- (60,386)
Increase in Loans Receivable (246,257) 785,024
---------- ----------
Net Cash Flows from Investing Activities (296,386) (1,075,104)
Cash Flows from Financing Activities
Proceeds from Borrowings -- 13,215
Proceeds from Issuance of Common Stock 2,000,000 --
Repayment of Borrowings (447,713) (966,184)
---------- ----------
Net Cash flows from Financing Activities 1,552,287 (952,969)
Net Increase (Decrease) in Cash (170,028) 136,370
Cash - Beginning of Period - Restated 367,763 1,761,902
---------- ----------
Cash - End of Period US$ 197,735 US$ 1,898,272
========== ==========
Supplemental Cash Flow Disclosures:
Taxes (Paid) Refunds (69,252) 53,529
========== ==========
Interest Paid (36,023) (58,368)
========== ==========
4
GLOBAL NATIONAL COMMUNICATIONS CORPORATION AND SUBSIDIARY
(FORMERLY ZEOLITE MINING CORPORATION)
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
1. ORGANIZATION AND PRINCIPAL ACTIVITIES
Global National Communications Corp. was organized under the laws of the British
Virgin Islands. Global's wholly owned subsidiary is Shenzhen Guonuo Industrial
Company Ltd., ("SGIC") a Peoples Republic of China ("PRC") Company. Located in
Shezhen Hi-Tech Park, PRC, SGIC was incorporated in Guangdong province of the
PRC on May 26, 1998. The Company has an approved operating period until July 9,
2014.
SGIC is a manufacturer of telecommunications devices, digital television parts,
MP3 recorders and accessories. Their major market is in the PRC.
2. BASIS OF PRESENTATION
The condensed consolidated financial statements of Global National
Communications Corporation ("Global") and Subsidiaries (the "Company") included
herein have been prepared by the Company, without audit, pursuant to the rules
and regulations of the Securities and Exchange Commission (the "SEC"). Certain
information and footnote disclosures normally included in financial statements
prepared in conjunction with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations, although the
Company believes that the disclosures are adequate to make the information
presented not misleading. These condensed consolidated financial statements
should be read in conjunction with the annual audited financial statements and
the notes thereto included in the Company's annual report on Form 10-KSB, and
other reports filed with the SEC.
The accompanying unaudited interim financial statements reflect all adjustments
of a normal and recurring nature which are, in the opinion of management,
necessary to present fairly the financial position, results of operations and
cash flows of the Company for the interim periods presented. The results of
operations for these periods are not necessarily comparable to, or indicative
of, results of any other interim period or for the fiscal year taken as a whole.
3. RECENT PRONOUNCEMENTS
In November 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 151 "Inventory Costs -
an amendment of ARB No. 43, Chapter 4" ("SFAS 151"). This statement amends the
guidance in ARB No. 43, Chapter 4, "Inventory Pricing," to clarify the
accounting for abnormal amounts of idle facility expense, freight, handling
costs, and wasted material (spoilage). SFAS 151 requires that those items be
recognized as current-period charges. In addition, this Statement requires that
allocation of fixed production overheads to costs of conversion be based upon
the normal capacity of the production facilities. The provisions of SFAS 151 are
effective for fiscal years beginning after June 15, 2005. As such, the Company
is required to adopt these provisions at the beginning of the fiscal year ended
September 30, 2006. The Company is currently evaluating the impact of SFAS 151
on its consolidated financial statements.
5
GLOBAL NATIONAL COMMUNICATIONS CORPORATION AND SUBSIDIARY
(FORMERLY ZEOLITE MINING CORPORATION)
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
In December 2004, the FASB issued SFAS No. 152 "Accounting for Real Estate
Time-Sharing Transactions - an amendment of FASB Statements No. 66 and 67"
("SFAS 152"). This statement amends FASB Statement No. 66 "Accounting for Sales
of Real Estate" to reference the financial accounting and reporting guidance for
real estate time-sharing transactions that is provided in AICPA Statement of
Position 04-2 "Accounting for Real Estate Time-Sharing Transactions" ("SOP
04-2"). SFAS 152 also amends FASB Statement No. 67 "Accounting for Costs and
Initial Rental operations of Real Estate Projects" to state that the guidance
for incidental operations and costs incurred to sell real estate projects does
not apply to real estate time-sharing transactions, with the accounting for
those operations and costs being subject to the guidance in SOP 04-2. The
provisions of SFAS 152 are effective in fiscal years beginning after June 15,
2005. As such, the Company is required to adopt these provisions at the
beginning of the fiscal year ended September 30, 2006. The Company is currently
evaluating the impact of SFAS 152 on its consolidated financial statements.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary Assets
- - an amendment of APB Opinion No. 29" ("SFAS 153"). SFAS 153 replaces the
exception from fair value measurement in APB Opinion No. 29 for nonmonetary
exchanges of similar productive assets with a general exception from fair value
measurement for exchanges of nonmonetary assets that do not have commercial
substance. A nonmonetary exchange has commercial substance if the future cash
flows of the entity are expected to change significantly as a result of the
exchange. SFAS 153 is effective for all interim periods beginning after June 15,
2005. As such, the Company is required to adopt these provisions at the
beginning of the fiscal quarter ended September 30, 2005. The Company is
currently evaluating the impact of SFAS 152 on its consolidated financial
statements.
In December 2004, the FASB issued SFAS No. 123R, "Share-Based Payment" ("SFAS
123R"). SFAS 123R revises FASB Statement No. 123 "Accounting for Stock-Based
Compensation" and supersedes APB Opinion No. 25 "Accounting for Stock Issued to
Employees". SFAS 123R requires all public and non-public companies to measure
and recognize compensation expense for all stock-based payments for services
received at the grant-date fair value, with the cost recognized over the vesting
period (or the requisite service period). SFAS 123R is effective for non-small
business issuers for all interim periods beginning after June 15, 2005. SFAS
123R is effective for small business issuers for all interim periods beginning
after December 15, 2005. As such, the Company is required to adopt these
provisions at the beginning of the fiscal quarter ended September 30, 2005.
Retroactive application of the provisions of SFAS 123R to the beginning of the
fiscal year that includes the effective date is permitted, but not required. The
Company is currently evaluating the impact of SFAS 123R on its consolidated
financial statements.
6
GLOBAL NATIONAL COMMUNICATIONS CORPORATION AND SUBSIDIARY
(FORMERLY ZEOLITE MINING CORPORATION)
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
4. CURRENT VULNERABILITY DUE TO CERTAIN CONCENTRATIONS
SGIC faces a number of risks and challenges since its operations are in the PRC.
The Company's operations in the PRC are subject to special considerations and
significant risks not typically associated with companies in North America and
Western Europe. The Company's results may be adversely affected by changes in
the political and social conditions in the PRC, and by changes in governmental
policies with respect to laws and regulations, anti-inflationary measures,
currency conversion and remittance abroad, and rates and methods of taxation,
among other things.
5. ISSUANCE OF COMMON STOCK
On November 15, 2004, the Company issued 2,000,000 shares of restricted common
stock at a price of $1 per share for total of $2,000,000 in cash.
6. PRIOR PERIOD ADJUSTMENT
The Company's financial statements have been restated to reflect the correction
of an error in the reporting of the cash balances at September 30, 2004. The
Company had erroneously under reported the cash balance in one of its accounts
in connection with the merger and recapitalization. The effect of the correction
was to increase cash and additional paid in capital at September 30, 2004 by
$42,217. The correction had no impact on net income or earning per share at
September 30, 2004 or December 31, 2004.
7
PART I
FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following is management's discussion and analysis of certain significant
factors which have affected the Company's financial position and operating
results during the periods included in the accompanying consolidated financial
statements, as well as information relating to the plans of the Company's
management. This report includes forward-looking statements. Generally, the
words "believes", "anticipates", "may", "will", "should", "expect", "intend",
"estimate", "continue", and similar expressions or the negative thereof or
comparable terminology are intended to identify forward-looking statements. Such
statements are subject to certain risks and uncertainties, including the matters
set forth in this report or other reports or documents that the Company files
with the Securities and Exchange Commission from time to time, which could cause
actual results or outcomes to differ materially from those projected. Undue
reliance should not be placed on these forward-looking statements, which speak
only as of the date hereof. The Company undertakes no obligation to update these
forward-looking statements.
The following discussion and analysis should be read in conjunction with the
Company's consolidated financial statements and the related notes thereto and
other financial information contained elsewhere in this document. All amounts
are presented in United States dollars.
General Overview:
On August 12, 2004, Zeolite Mining Corporation, a Nevada corporation
("Zeolite"), entered into a Stock Exchange Agreement and Plan of Reorganization
(the "Agreement"), as amended on September 30, 2004, by and among its principal
shareholders, Alan Brandys ("Brandys") and Douglas Hopper ("Hopper")
(collectively, the "Zeolite Shareholders"), Global National Communications
Corporation, a British Virgin Island corporation ("Global BVI"), and all of the
shareholders of Global (the "Global Shareholders"), wherein Zeolite agreed to
issue to the Global Shareholders 49,000,000 shares of its common stock in
exchange for all of the issued and outstanding shares of Global BVI (the "Global
Acquisition"). The Global Acquisition closed on September 30, 2004, as a result
of which Global BVI became a wholly-owned subsidiary of Zeolite. All share and
per share amounts presented herein have been adjusted to reflect a five-for-one
forward stock split effective October 25, 2004.
At the closing of the transaction, Brandys and Hopper resigned as officers and
directors of Zeolite and Wang Hanqing, Wu Wenbin, Peng Xiaoyan and Charles Shao
were appointed to the board of directors to replace Brandys and Hopper. In
addition, Wang Hanqing, Wu Wenbin and Peng Xiaoyan were also appointed officers
of Zeolite.
8
On October 1, 2004, the board of directors of Zeolite changed Zeolite's fiscal
year end from June 30 to September 30 to conform to the fiscal year end of
Global BVI. On October 15, 2004, shareholders holding a majority of the
outstanding shares of Zeolite's common stock executed a written consent
approving an amendment to Zeolite's articles of incorporation to change its name
from Zeolite Mining Corporation to Global National Communications Corporation.
The name change was effective November 18, 2004.
Global National Communications Corporation, including, when the context so
requires, Global BVI and Guonuo Shenzhen Industrial Company Ltd. (as described
below), is referred to herein as the "Company".
The acquisition of Global BVI by Zeolite was accounted for as a recapitalization
of Global BVI, pursuant to which the accounting basis of Global BVI continued
unchanged subsequent to the effective date of the transaction. Accordingly, the
pre-transaction consolidated financial statements of Global BVI are the
historical financial statements of Zeolite, with the shareholders' equity
section of the balance sheet of Global BVI reconfigured to reflect the capital
structure of Zeolite.
In conjunction with the Global Acquisition, Zeolite also agreed to issue an
aggregate of 20,310,000 shares of common stock for financial consulting
services, consisting of 7,250,000 shares of common stock to Yarek Bartosz,
6,500,000 shares of common stock to Lucky Ocean Group Ltd., 5,000,000 shares of
common stock to Maple Leaf Enterprises, and 1,560,000 shares of common stock to
Wilfred Yu (collectively, the "Investor Shareholders"). With respect to such
shares, 2,500,000 shares issued to the Investor Shareholders were placed in
escrow, to be released to the Investor Shareholders if Zeolite, through the
efforts of the Investor Shareholders, obtained a commitment for a financing (a
"Qualified Financing") within 60 days of the closing of the transaction. A
Qualified Financing was defined as a cash investment of at least $2,000,000 in
Zeolite in the form of Zeolite common stock or preferred stock with a minimum
price per share of $0.20. In the event that the Investor Shareholders did not
obtain a commitment for a Qualified Financing within 60 days of closing, then
the Global Shareholders were entitled to acquire the 2,500,000 escrowed shares
in consideration of $0.20 per share.
As of June 30, 2004, Zeolite had 30,690,000 shares of common stock issued and
outstanding. In conjunction with the Global Acquisition, the Zeolite
Shareholders returned 25,000,000 shares of Zeolite common stock owned by them to
Zeolite, which were cancelled.
On November 12, 2004, the Global Shareholders and the Investor Shareholders
returned a total of 55,000,000 shares of common stock to the Company, consisting
of 36,140,000 shares owned by the Global Shareholders and 18,860,000 shares
owned by the Investor Shareholders. The 55,000,000 shares that were returned to
the Company were cancelled.
9
On October 1, 2004, the board of directors of Zeolite changed Zeolite's fiscal
year end from June 30 to September 30 to conform to the fiscal year end of
Global BVI. On October 15, 2004, shareholders holding a majority of the
outstanding shares of Zeolite's common stock executed a written consent
approving an amendment to Zeolite's articles of incorporation to change its name
from Zeolite Mining Corporation to Global National Communications Corporation.
The name change was effective November 18, 2004.
Global National Communications Corporation, including, when the context so
requires, Global BVI and Guonuo Shenzhen Industrial Company Ltd. (as described
below), is referred to herein as the "Company".
The acquisition of Global BVI by Zeolite was accounted for as a recapitalization
of Global BVI, pursuant to which the accounting basis of Global BVI continued
unchanged subsequent to the effective date of the transaction. Accordingly, the
pre-transaction consolidated financial statements of Global BVI are the
historical financial statements of Zeolite, with the shareholders' equity
section of the balance sheet of Global BVI reconfigured to reflect the capital
structure of Zeolite.
In conjunction with the Global Acquisition, Zeolite also agreed to issue an
aggregate of 20,310,000 shares of common stock for financial consulting
services, consisting of 7,250,000 shares of common stock to Yarek Bartosz,
6,500,000 shares of common stock to Lucky Ocean Group Ltd., 5,000,000 shares of
common stock to Maple Leaf Enterprises, and 1,560,000 shares of common stock to
Wilfred Yu (collectively, the "Investor Shareholders"). With respect to such
shares, 2,500,000 shares issued to the Investor Shareholders were placed in
escrow, to be released to the Investor Shareholders if Zeolite, through the
efforts of the Investor Shareholders, obtained a commitment for a financing (a
"Qualified Financing") within 60 days of the closing of the transaction. A
Qualified Financing was defined as a cash investment of at least $2,000,000 in
Zeolite in the form of Zeolite common stock or preferred stock with a minimum
price per share of $0.20. In the event that the Investor Shareholders did not
obtain a commitment for a Qualified Financing within 60 days of closing, then
the Global Shareholders were entitled to acquire the 2,500,000 escrowed shares
in consideration of $0.20 per share.
As of June 30, 2004, Zeolite had 30,690,000 shares of common stock issued and
outstanding. In conjunction with the Global Acquisition, the Zeolite
Shareholders returned 25,000,000 shares of Zeolite common stock owned by them to
Zeolite, which were cancelled.
On November 12, 2004, the Global Shareholders and the Investor Shareholders
returned a total of 55,000,000 shares of common stock to the Company, consisting
of 36,140,000 shares owned by the Global Shareholders and 18,860,000 shares
owned by the Investor Shareholders. The 55,000,000 shares that were returned to
the Company were cancelled.
10
The previously described stock transactions were all deemed effective and
recorded as of September 30, 2004. Accordingly, a net of 1,450,000 shares of
common stock were issued to the Investor Shareholders, consisting of the
20,310,000 shares originally issued, less the 18,860,000 shares returned and
cancelled. The Company recorded a charge to operations of $12,186,000 at
September 30, 2004 to reflect the estimated fair market value of the shares of
common stock (4,062,000 pre-split shares; 20,310,000 post-split shares) issued
to the Investor Shareholders in conjunction with the Global Acquisition.
Effective November 15, 2004, the Company sold 2,000,000 shares of common stock
at $1.00 per share for an aggregate purchase price of $2,000,000, consisting of
1,000,000 shares sold to Yarek Bartosz and 1,000,000 shares sold to Dong Chen,
who are related parties, thus satisfying the requirement for a Qualified
Financing as noted above. Accordingly, the 2,500,000 escrow shares were
classified as issued and outstanding shares in the consolidated financial
statements at September 30, 2004.
The Company conducts its operations through Global BVI's wholly-owned
subsidiary, Guonuo Shenzhen Industrial Company Ltd. ("GSIC"). GSIC was organized
in Guangdong Province of the People's Republic of China ("China" or the "PRC")
on May 26, 1998, and has an approved operating period through July 9, 2014. GSIC
designs and manufactures electrical power monitoring systems, computer
components, telecommunications devices, digital television components, MP3
recorders and accessories. GSIC sells its products primarily in the PRC. GSIC's
sales are to both original equipment manufacturers and under its own brand name.
GSIC's facilities are located in the Shenzhen Hi-Tech Park.
GSIC faces a number of risks and challenges since its operations are located in
the PRC. GSIC's operations in the PRC are subject to special considerations and
significant risks not typically associated with companies in North America and
Western Europe. The Company's consolidated results of operations and financial
condition may be adversely affected by changes in, among other factors, the
political and social conditions in the PRC, and by changes in the government
policies with respect to laws and regulations, anti-inflationary measures,
currency exchange rates, currency conversion and remittance abroad, and rates
and methods of taxation.
Critical Accounting Policies:
The Company prepares its consolidated financial statements in accordance with
accounting principles generally accepted in the United States of America. The
preparation of these financial statements requires the use of estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amount of revenues and expenses during the reporting
period. Management periodically evaluates the estimates and judgments made.
Management bases its estimates and judgments on historical experience and on
various factors that are believed to be reasonable under the circumstances.
Actual results may differ from these estimates as a result of different
assumptions or conditions.
The following critical accounting policies affect the more significant judgments
and estimates used in the preparation of the Company's consolidated financial
statements.
Revenues:
The Company recognizes product sales generally at the time the product is
shipped and title passes to the customer and collectibility is reasonably
assured. Revenues are presented net of any sales tax or value added tax.
Shipping and handling costs are included either in general and administrative
expenses or in selling and distribution expenses.
11
Accounts Receivable and Other Receivables:
The Company typically extends credit to its customers. In order to determine the
value of the Company's accounts receivable, the Company records a provision for
doubtful accounts to cover estimated credit losses. Management reviews and
adjusts this allowance periodically based on historical experience and its
evaluation of the collectibility of outstanding accounts receivables. The
Company evaluates the credit risk of its customers by analyzing its accounts
receivables aging, utilizing, among other factors, historical data, the
customer's financial condition, general economic conditions and estimates of
future performance. The Company applies similar procedures to determine the
value of the Company's other receivables.
The Company typically records a full allowance for accounts receivable that have
been outstanding in excess of one year. For accounts receivable that have been
outstanding for less than one year, the Company determines an appropriate
allowance based on the age of the accounts receivable after consideration of any
specific circumstances.
Inventories:
Inventories are stated at the lower of cost or net realizable value. Cost is
calculated on the weighted-average basis and includes all costs to acquire and
other costs incurred in bring the inventories to their present location and
condition. The Company evaluates the net realizable value of its inventories on
a regular basis and records a provision for loss to reduce the computed
weighted-average cost if it exceeds the net realizable value.
Income Taxes:
The Company records a tax provision to reflect the expected tax payable on
taxable income in the applicable jurisdiction for the period, using tax rates
enacted or substantially enacted at the balance sheet date, and any adjustment
to tax payable in respect of previous periods. A valuation allowance is provided
for the amount of deferred tax assets that, based on available evidence, are not
expected to be realized.
Impairment of Long-Lived Assets:
The Company's long-lived assets consist of property, plant and equipment and
certain intangible assets. In assessing the impairment of such assets, the
Company periodically makes assumptions regarding the estimated future cash flows
and other factors to determine the fair value of the respective assets. If these
estimates or the related assumptions indicate that the carrying amount may not
be recoverable, the Company records impairment charges for these assets at such
time.
Results of Operations:
Three Months Ended December 31, 2004 and 2003:
Net Sales. Net sales increased by $51,469 or 1.2% to $4,371,815 for the three
months ended December 31, 2004, as compared to $4,320,346 for the three months
ended December 31, 2003. During the three months ended December 31, 2003 and
2004, there were no sales to related parties, and sales to individual related
parties did not account for 10% or more of sales.
Sales mix by product line for the three months ended December 31, 2004 and 2003
is summarized as follows:
Three Months Ended December 31,
---------------------------------------------
2004 2003
--------------------- ---------------------
$ % $ %
--------- --------- --------- ---------
Sales category
Electronic products 1,408,196 32.2 585,470 13.6
Circuit boards 1,276,197 29.2 1,972,104 45.6
Computer parts 661,329 15.1 1,163,407 26.9
Cell phones 1,003,420 23.0 -- --
Other products 22,673 0.5 599,365 13.9
--------- --------- --------- ---------
Total 4,371,815 100.0 4,320,346 100.0
========= ========= ========= =========
The three months ended December 31, 2004 was a transition period for the
Company. During this quarter, the Company began to concentrate on the marketing
of its branded Personal Handy System ("PHS") cell phone product. The Company
expects that sales of this product will increase substantially over the next
year, and that gross margins for this product will be higher than for the
Company's traditional OEM products, thus resulting in improved operating
performance.
12
Gross Profit. Gross profit was $748,591 or 17.1% of net sales for the three
months ended December 31, 2004, as compared to gross profit of $928,602 or 21.5%
of net sales for the three months ended December 31, 2003, a decrease of
$180,011 or 19.4%. Although net sales remained relatively unchanged in 2004 as
compared to 2003, the Company experienced a decrease in both gross profit and
gross margin in 2004 as compared to 2003 primarily a result of a change in the
sales mix. The Company experienced a significant decrease in the sales of
computer parts and other products in 2004 as compared to 2003, which had gross
margins of 26% and 24%, respectively, in 2003, and experienced a significant
increase in the sales of electronic products and cell phones in 2004 as compared
to 2003, which had gross margins of 15% and 17%, respectively, in 2004.
Selling and Distribution Expenses. Selling and distribution expenses increased
by $30,271 or 126.9% to $54,125 for the three months ended December 31, 2004, as
compared to $23,854 for the three months ended December 31, 2003. The increase
in selling and distribution expenses in 2004 as compared to 2003 was primarily
as a result of increased personnel and personnel-related expenses related to the
launch of the Company's PHS cell phone product. The major components of selling
and distribution expenses are salesmen's compensation, travel expenses,
transportation expense and maintenance expense. The Company records a
maintenance provision for PHS after-sales service of 0.5% of PHS net sales,
which was equivalent to approximately $12,500 for the three months ended
December 31, 2004.
General and Administrative Expenses. General and administrative expenses
increased by $47,996 or 36.7% to $178,702 for the three months ended December
31, 2004, as compared to $130,706 for the three months ended December 31, 2003,
as a result of increased administrative personnel and personnel-related costs,
in particular associated with the launch of the Company's PHS cell phone
product, and audit fees. The major components of general and administrative
expenses are audit fees, management compensation, and personnel and
personnel-related costs.
Bad Debt Expense. Bad debt expense, which is calculated based primarily on the
age of outstanding accounts receivable, was $364,497 or 8.3% of net sales for
the three months ended December 31, 2004, as compared to $19,573 or 0.5% of net
sales for the three months ended December 31, 2003. On an annual basis, bad debt
expense was 3.8% of net sales in 2004 and 8.8% of net sales in 2003. As a result
of an increase in the average days outstanding of accounts receivable during the
three months ended December 31, 2004, the Company increased its provision for
doubtful accounts accordingly. The Company is implementing additional procedures
to monitor and control accounts receivable and attempt to reduce bad debt
expense in future periods.
Research and Development Expenses. Research and development expenses were
$92,675 for the three months ended December 31, 2004, as compared to $33,128 for
the three months ended December 31, 2003, an increase of $59,547 or 179.7%, as a
result of increased product development activities.
Depreciation and Amortization Expense. Depreciation and amortization expense
included in costs and expenses was $105,125 for the three months ended December
31, 2004, as compared to $38,662 for the three months ended December 31, 2003,
as a result of the acquisition of fixed assets in 2003 to support increased
business activities.
Income from Operations. As a result of the aforementioned factors, income from
operations was $58,592 for the three months ended December 31, 2004, as compared
to income from operations of $721,341 for the three months ended December 31,
2003.
13
Financial Expenses. Financial expenses were $36,023 for the three months ended
December 31, 2004, as compared to $58,386 for the three months ended December
31, 2003. The decrease in financial expenses in 2004 as compared to 2003 was
primarily a result of an increase in interest income, which more than offset an
increase in interest expense as a result of increased borrowings.
Other Income. Other income was $20,394 for the three months ended December 31,
2004, as compared to $5,775 for the three months ended December 31, 2003.
Non-Operating Expenses. Non-operating expenses were $3,515 for the three months
ended December 31, 2004, as compared to $8,656 for the three months ended
December 31, 2003.
Income Before Provision for Income Taxes. As a result of the aforementioned
factors, income before provision for income taxes was $39,448 for the three
months ended December 31, 2004, as compared to income before provision for
income taxes of $660,092 for the three months ended December 31, 2003.
Provision for Income Taxes. The provision for income taxes, which is computed on
a per country basis, was $19,300 for the three months ended December 31, 2004,
as compared to $49,507 for the three months ended December 31, 2003.
China has a preferential tax policy for high-tech enterprises that provides for
income taxes to be cancelled for the first two profitable years and to be
reduced by 50% for the subsequent three years. Accordingly, for the three months
ended December 31, 2004 and 2003, SGIC was subject to a tax rate of 15%, reduced
by a tax holiday of 7.5%, resulting in a net tax rate of 7.5%. This tax holiday
will expire in 2005.
Net Income. As a result of the aforementioned factors, net income was $20,148
for the three months ended December 31, 2004, as compared to net income of
$610,585 for the three months ended December 31, 2003.
Financial Condition - December 31, 2004:
Liquidity and Capital Resources:
Operating. The Company's operations utilized cash resources of $1,425,929 for
the three months ended December 31, 2004, as compared to generating cash
resources of $2,164,443 for the three months ended December 31, 2003, primarily
as a result of cash utilized in 2004 to support increases to accounts receivable
and inventories. At December 31, 2004, the Company had cash and cash equivalents
of $197,735, as compared to cash and cash equivalents of $367,763 at September
30, 2004. The Company had working capital of $1,025,077 at December 31, 2004, as
compared to a working capital deficiency of $789,727 at September 30, 2004,
reflecting current ratios of 1.07:1 and 0.94:1, respectively. The improvement in
working capital during the three months ended December 31, 2004 was primarily a
result of the sale of $2,000,000 of common stock in November 2004, as described
herein, offset in part by an increase in the provision for doubtful accounts
during such period of $364,497.
Net accounts receivable increased to $8,754,357 at December 31, 2004, as
compared to $6,736,756 at September 30, 2004, an increase of $2,017,601 or
29.9%, as a result of an increase in the average days outstanding of accounts
receivable. Accounts receivable are typically outstanding for a longer period of
time in China than in the United States.
14
Inventories increased to $4,025,120 at December 31, 2004, as compared to
$2,694,454 at September 30, 2004, an increase of $1,330,666 or 49.4%, primarily
as a result of raw materials purchased to support new orders.
The Company anticipates that its working capital resources are adequate to fund
anticipated costs and expenses for the remainder of the fiscal year ending
September 30, 2005.
Investing. During the three months ended December 31, 2004, the Company utilized
$296,386 in investing activities, the major components of which were the
acquisition of property and equipment of $50,129 and an increase in loans
receivable of $246,257. During the three months ended December 31, 2003, the
Company utilized $1,075,104 in investing activities, the major components of
which were the acquisition of property and equipment of $1,799,742 and an
increase in short-term investments of $60,386, offset by a decrease in loans
receivable of $785,024.
Financing. During the three months ended December 31, 2004, the Company
generated $1,552,287 from financing activities, consisting of the net proceeds
from the sale of 2,000,000 shares of common stock for $2,000,000, offset by the
repayment of borrowings of $447,713. During the three months ended December 31,
2003, the Company utilized $952,969 in financing activities, consisting of the
net repayments of borrowings.
At December 31, 2004, the Company does not have any material commitments for
capital expenditures or have any transactions, obligations or relationships that
could be considered off-balance sheet arrangements.
Inflation and Currency Matters:
In the most recent decade, the Chinese economy has experienced periods of rapid
economic growth as well as relatively high rates of inflation, which in turn has
resulted in the periodic adoption by the Chinese government of various
corrective measures designed to regulate growth and contain inflation. The
success of the Company depends in substantial part on the continued growth and
development of the Chinese economy.
Foreign operations are subject to certain risks inherent in conducting business
abroad, including price and currency exchange controls, and fluctuations in the
relative value of currencies. The Company conducts virtually all of its business
in China and, accordingly, the sale of its products is settled primarily in RMB.
As a result, devaluation or currency fluctuation of the RMB against the USD
would adversely affect the Company's financial performance when measured in USD.
Although prior to 1994 the RMB experienced significant devaluation against the
USD, the RMB has remained fairly stable since then. In addition, the RMB is not
freely convertible into foreign currencies, and the ability to convert the RMB
is subject to the availability of foreign currencies. Effective December 1,
1998, all foreign exchange transactions involving the RMB must take place
through authorized banks or financial institutions in China at the prevailing
exchange rates quoted by the People's Bank of China.
15
As China has been admitted as a member of the World Trade Organization, the
central government of China is expected to adopt a more rigorous approach to
partially deregulate currency conversion restrictions, which may in turn
increase the exchange rate fluctuation of the RMB. Should there be any major
change in the central government's currency policies, the Company does not
believe that such an action would have a detrimental effect on the Company's
operations, since the Company conducts virtually all of its business in China,
and the sale of its products is settled in RMB.
Although prior to 1994 the RMB experienced significant devaluation against the
USD, the RMB has remained fairly stable since then. The exchange rate was
approximately US$1.00 to RMB 8.28 at December 31, 2004 and September 30, 2004.
Quantitative and Qualitative Disclosures about Market Risk:
The Company does not have any market risk with respect to such factors as
commodity prices, equity prices, and other market changes that affect market
risk sensitive investments. A 10 point basis change in the Company's average
debt interest rate would not have a material effect on the Company's results of
operations.
With respect to foreign currency exchange rates, the Company does not believe
that a devaluation or fluctuation of the RMB against the USD would have a
detrimental effect on the Company's operations, since the Company conducts
virtually all of its business in China, and the sale of its products and the
purchase of raw materials and services are settled in RMB. The effect of a
devaluation or fluctuation of the RMB against the USD would affect the Company's
results of operations, financial position and cash flows, when presented in USD
(based on a current exchange rate) as compared to RMB.
As the Company's debt obligations are primarily short-term in nature, with fixed
interest rates, the Company does not have any risk from an increase in market
interest rates. However, to the extent that the Company arranges new borrowings
in the future, an increase in market interest rates would cause a commensurate
increase in the interest expense related to such borrowings.
Recent Accounting Pronouncements:
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity". SFAS No. 150
establishes standards for how an issuer classifies and measures in its statement
of financial position certain financial instruments with characteristics of both
liabilities and equity. SFAS No. 150 requires that an issuer classify a
financial instrument that is within its scope as a liability (or an asset in
some circumstances) because that financial instrument embodies an obligation of
the issuer. SFAS No. 150 is effective for financial instruments entered into or
modified after May 31, 2003 and otherwise is effective at the beginning of the
first interim period beginning after June 15, 2003. SFAS No. 150 is to be
implemented by reporting the cumulative effect of a change in accounting
principle for financial instruments created before the issuance date of SFAS No.
150 and still existing at the beginning of the interim period of adoption.
Restatement is not permitted. The adoption of SFAS No. 150 did not have a
significant effect on the Company's financial statement presentation or
disclosures.
In December 2004, the FASB issued SFAS No. 123(R), "Share-Based Payment". SFAS
No. 123(R) revises SFAS No. 123, "Accounting for Stock-Based Compensation" and
supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees". SFAS
No. 123(R) focuses primarily on the accounting for transactions in which an
entity obtains employee services in share-based payment transactions. SFAS No.
123(R) requires companies to recognize in the statement of operations the cost
of employee services received in exchange for awards of equity instruments based
on the grant-date fair value of those awards (with limited exceptions). SFAS No.
123(R) is effective as of the first interim or annual reporting period that
16
begins after June 15, 2005 for non-small business issuers and after December 15,
2005 for small business issuers. Accordingly, the Company will adopt SFAS No.
123(R) in its quarter ending March 31, 2006. The Company is currently evaluating
the provisions of SFAS No. 123(R) and has not yet determined the impact, if any,
that SFAS No. 123(R) will have on its financial statement presentation or
disclosures.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" ("FIN 45"). FIN 45 elaborates on the existing disclosure
requirements for most guarantees, including loan guarantees such as standby
letters of credit. It also clarifies that at the time a company issues a
guarantee, the company must recognize an initial liability for the fair market
value of the obligations it assumes under that guarantee and must disclose that
information in its interim and annual financial statements. The initial
recognition and measurement provisions of FIN 45 apply on a prospective basis to
guarantees issued or modified after December 31, 2002. The Company implemented
the disclosure provisions of FIN 45 in its September 30, 2003 consolidated
financial statements, and the measurement and recording provisions of FIN No. 45
effective October 1, 2003.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"), which clarifies the application of
Accounting Research Bulletin No. 51, "Consolidated Financial Statements",
relating to consolidation of certain entities. In December 2003, the FASB issued
a revised version of FIN 46 ("FIN 46R") that replaced the original FIN 46. FIN
46R requires identification of a company's participation in variable interest
entities ("VIEs"), which are defined as entities with a level of invested equity
that is not sufficient to fund future activities to permit it to operate on a
standalone basis. For entities identified as a VIE, FIN 46R sets forth a model
to evaluate potential consolidation based on an assessment of which party to the
VIE (if any) bears a majority of the exposure to its expected losses, or stands
to gain from a majority of its expected returns. FIN 46R also sets forth certain
disclosures regarding interests in VIEs that are deemed significant, even if
consolidation is not required. The Company is not currently participating in, or
invested in any VIEs, as defined in FIN 46R. Accordingly, the implementation of
the provisions of FIN 46R did not have a significant effect on the Company's
consolidated financial statement presentation or disclosures.
17
Item 3. Controls And Procedures
(a) Evaluation of Disclosure Controls and Procedures.
Our Chief Executive Officer and Principal Accounting Officer, after
evaluating our disclosure controls and procedures (as defined in the rules and
regulation of the Securities and Exchange Commission under the Exchange Act as
of the end of the period covered by this Quarterly Report on Form 10-QSB, have
concluded that as of such date, our disclosure controls and procedures were
effective to ensure that information we are required to disclose in reports that
we file or submit under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in Securities and Exchange Commission
rules and forms.
(b) Changes in Internal Controls.
During the period covered by the Quarterly Report on Form 10-QSB, there
were no significant changes in our internal controls over financial reporting or
in other factors that have materially affected, or are reasonably likely to
materially affect, our internal controls over financial reporting.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings.
None
Item 2. Unregistered Sales of Securities and Use of Proceeds.
On November 15, 2004, we sold 2,000,000 shares of Common Stock for
$1.00 per share, for an aggregate purchase price of $2,000,000. The
shares were sold to Yarek Bartosz and Dong Chen. The shares were sold
pursuant to an exemption provided by Section 4(2) of the Securities Act
of 1933, as amended.
Item 3. Defaults Upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders.
None
Item 5. Other Information.
None
Item 6. Exhibits.
(a) Exhibits:
31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002
32.1 Certification pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GLOBAL NATIONAL COMMUNICATIONS CORP.
Dated: February 22, 2005
/s/ Wang Hanqing
---------------------------------------------
Name: Wang Hanqing
Title: President, Principal Executive Officer
19